+ 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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NUMBER 1-15052
UIL HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1541045
(State or other jurisdiction of
incorporation or organization (I.R.S. Employer Identification No.)
157 CHURCH STREET, NEW HAVEN, CONNECTICUT 06506
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-499-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, no par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
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The aggregate market value of the registrant's voting stock held by
non-affiliates on June 30, 2004 was $702,057,731 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 July 1, 2004.
The number of shares outstanding of the registrant's only class of common stock,
as of February 11, 2005 was 14,638,613.
DOCUMENTS INCORPORATED BY REFERENCE
Part of this Form 10-K into
Document which document is incorporated
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DEFINITIVE PROXY STATEMENT III
FOR ANNUAL MEETING OF THE
SHAREHOLDERS TO BE HELD
ON MAY 11, 2005
UIL HOLDINGS CORPORATION
FORM 10-K
DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
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Glossary..................................................................4
PART I
Item 1. Business.......................................................7
General........................................................7
Utility Business...................................................7
Franchises.....................................................8
Regulation.....................................................8
Rates..........................................................8
Power Supply Arrangements.....................................10
Arrangements with Other Industry Participants.................10
New England Power Pool and ISO-New England.................10
Middletown/Norwalk Transmission Project....................11
Hydro-Quebec...............................................11
Environmental Regulation......................................11
Non-Utility Businesses............................................12
Xcelecom, Inc.................................................12
United Capital Investments, Inc...............................14
Cross-Sound Cable Company, LLC.............................14
Zero Stage Capital.........................................15
Ironbridge Mezzanine Fund..................................15
United Bridgeport Energy, Inc.................................15
American Payment Systems, Inc.................................15
Financing.........................................................16
Employees.........................................................16
Item 2. Properties....................................................16
Transmission and Distribution Plant...............................16
Administrative and Service Facilities.............................16
Item 3. Legal Proceedings.............................................17
Item 4. Submission of Matters to a Vote of Security Holders...........17
Executive Officers................................................17
PART II
Item 5. Market for UIL Holdings' Common Equity and Related
Stockholder Matters...........................................19
Item 6. Selected Financial Data.......................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................22
Overview and Strategy.............................................22
Major Influences on Financial Condition...........................24
UIL Holdings Corporation......................................24
The United Illuminating Company...............................24
Xcelecom, Inc.................................................28
United Capital Investments, Inc...............................31
United Bridgeport Energy, Inc.................................33
American Payment Systems, Inc.................................34
Liquidity and Capital Resources...................................35
Financial Covenants...........................................36
2005 Capital Resource Projections.............................38
Contractual and Contingent Obligations........................42
Critical Accounting Policies......................................43
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TABLE OF CONTENTS (CONTINUED)
PART II (CONTINUED)........ PAGE
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Off-Balance Sheet Arrangements....................................47
New Accounting Standards..........................................47
Results of Operations.............................................48
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..63
Item 8. Financial Statements and Supplementary Data..................64
Consolidated Financial Statements.................................64
Statement of Income for the Years 2004, 2003 and 2002..........64
Statement of Comprehensive Income for the Years 2004,
2003 and 2002..................................................64
Statement of Cash Flows for the Years 2004, 2003 and 2002......65
Balance Sheet as of December 31, 2004 and 2003.................66
Statement of Changes in Shareholders' Equity for the Years
2004, 2003 and 2002............................................68
Notes to Consolidated Financial Statements........................69
Statement of Accounting Policies...............................69
Capitalization.................................................80
Regulatory Proceedings.........................................84
Short-Term Credit Arrangements.................................89
Income Taxes...................................................91
Supplementary Information......................................94
Pension and Other Benefits.....................................95
Unamortized Cancelled Nuclear Project.........................100
Lease Obligations.............................................101
Commitments and Contingencies.................................102
Other Commitments and Contingencies.......................102
Connecticut Yankee Atomic Power Company................102
Hydro-Quebec...........................................105
Environmental Concerns.................................105
Claim of Enron Power Marketing, Inc....................107
Claim of Dominion Energy Marketing, Inc................107
Independent System Operator - New England..............108
Cross-Sound Cable Company, LLC.........................108
Xcelecom, Inc..........................................109
Fair Value of Financial Instruments...........................110
Quarterly Financial Data (Unaudited)..........................111
Segment Information...........................................112
Goodwill and Other Intangible Assets..........................114
Discontinued Operations.......................................115
Related Party Transactions....................................116
Extraordinary Gain............................................117
Report of Independent Registered Public Accounting Firm..............118
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures........................120
Item 9A. Controls and Procedures....................................120
Item 9B. Other Information..........................................121
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TABLE OF CONTENTS (CONTINUED)
PART III PAGE
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Item 10. Directors and Executive Officers...........................121
Item 11. Executive Compensation.....................................121
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............121
Item 13. Certain Relationships and Related Transactions.............122
Item 14. Principal Accounting Fees and Services.....................122
PART IV
Item 15. Exhibits, Financial Statement Schedules....................123
Signatures...........................................................128
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GLOSSARY OF TERMS AND ABBREVIATIONS
ABO (Accumulated Benefit Obligation) - the actuarial present value of benefits
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(whether vested or nonvested) attributed by the pension benefit formula to
employee service rendered before a specified date and based on employee service
and compensation prior to that date. The accumulated benefit obligation differs
from the projected benefit obligation in that the ABO excludes consideration of
future compensation levels.
AFUDC (Allowance for Funds Used During Construction) - the cost of utility
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equity and debt funds used to finance construction projects that is capitalized
as part of construction cost.
BFMCC (Bypassable Federally Mandated Congestion Costs) - a federally mandated
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charge, as defined by Connecticut restructuring legislation, related to the
supply of electricity.
C&LM (ASSESSMENT/CHARGE) (Conservation and Load Management) - statutory
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assessment on utility retail customer bills placed in a State of Connecticut
fund used to support energy conservation and load management programs.
CTA (Competitive transition assessment) - the component of electric utility
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retail customer bills, in the State of Connecticut, to recover allowable
Stranded Costs as determined by the DPUC.
CDEP Connecticut Department of Environmental Protection.
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DISTRIBUTION DIVISION The operating division of the utility that provides
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distribution services to the utility's retail electric customers and manages
all components including the C&LM, CTA, GSC and REI. Excludes transmission
operations.
DOE United States Department of Energy.
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DPUC (Connecticut Department of Public Utility Control) - state agency that
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regulates certain ratemaking, services, accounting, plant and operations of
Connecticut utilities.
EPA United States Environmental Protection Agency.
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EPS Earnings per share.
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ESOP Employee Stock Ownership Plan.
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FASB (Financial Accounting Standards Board) - a rulemaking organization that
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establishes financial accounting and reporting standards.
FERC (Federal Energy Regulatory Commission) - federal agency that regulates
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interstate transmission and wholesale sales of electricity and related matters.
FIN FASB Interpretation Number.
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GAAP Generally accepted accounting principles in the United States of America.
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GSC Generation services charge, as determined by the DPUC, represents the rate
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charged to retail customers for the generation service purchased at wholesale
and delivered by UI as part of fully bundled services.
ISO-NE (ISO-New England Inc.) - an independent entity contracting with NEPOOL
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as an independent system operator to operate the regional bulk power system
(generation and ancillary products, and transmission) in New England.
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ITC Investment tax credit.
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KV (kilovolt) - 1000 volts. A volt is a unit of electromotive force.
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KVA (kilovoltampere) - 1,000 voltamperes. A voltampere is the basic unit of
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apparent power of a circuit.
KW (kilowatt) - 1,000 watts.
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KWH (kilowatthour) - the basic unit of electric energy equal to one kilowatt of
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power supplied to or taken from an electric circuit steadily for one hour.
KSOP 401(k)/Employee Stock Ownership Plan.
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LIBOR London Interbank Offered Rate.
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MVA (megavoltampere) - 1,000 kilovoltamperes.
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MW (Megawatt) - 1,000 kilowatts.
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NBFMCC (Non-Bypassable Federally Mandated Congestion Costs) - a federally
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mandated charge, as defined by Connecticut restructuring legislation, related to
the reliability of supply delivered by the electric system.
NEPOOL (New England Power Pool) - entity operating in accordance with the New
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England Power Pool Agreement, as amended, as approved by the FERC, to provide
economic, reliable operation of the bulk power system in the New England region.
O&M (Operation and maintenance) - Costs incurred in running the daily business
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activities and maintaining the infrastructure.
OPEB (Other post-retirement benefits) - Benefits (other than pension) consisting
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principally of health care and life insurance paid to retired employees and
their dependents.
PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical
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equipment up to the late-1970s. Now classified as a hazardous chemical.
RCRA The federal Resource Conservation and Recovery Act.
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REI (Renewable Energy Investment) - statutory assessment on utility retail
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customer bills which is transferred to a State of Connecticut fund to support
renewable energy projects.
RTO (Regional Transmission Organization) - organization jointly proposed by
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ISO-NE and the New England transmission owners to strengthen the independent
oversight of the region's bulk power system and wholesale electricity
marketplace. The FERC has approved the RTO and its implementation date of
February 1, 2005.
SMD (Standard market design) - marketplace changes implemented by ISO-NE
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including the implementation of a transmission congestion management system and
a multi-settlement system.
SBC Systems benefits charge on utility retail customer bills representing public
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policy costs such as generation decommissioning and displaced worker protection
costs, as determined by the DPUC.
SEC United States Securities and Exchange Commission.
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SFAS (Statement of Financial Accounting Standards) - accounting and financial
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reporting rules issued by the FASB.
STANDARD OFFER UI's obligation under Connecticut Public Act 98-28 (the
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Restructuring Act) to offer retail service to its customers under a regulated
"standard offer" to each customer who does not choose an alternate electricity
supplier.
STRANDED COSTS Costs, as determined by the DPUC, including above-market
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long-term purchased power obligations, regulatory assets, and above-market
investments in power plants, that are recoverable from retail customers.
TRANSMISSION DIVISION The operating division of the utility that provides
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transmission services and manages all related transmission operations.
TSO (Transitional Standard Offer) - UI's obligation under Connecticut Public Act
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03-135, subsequently amended in part by Public Act 03-221, to offer a regulated
"transitional standard offer" retail service to each customer who does not
choose an alternate electricity supplier.
VEBA (Voluntary Employee Benefit Association Trust) - trust accounts for health
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and welfare plans for future payments to employees, retirees or their
beneficiaries.
WATT - A unit of electrical power equal to one joule per second.
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PART I
ITEM 1. BUSINESS.
GENERAL
UIL Holdings Corporation (UIL Holdings) was formed in July 2000 and is an exempt
public utility holding company under the provisions of the Public Utility
Holding Company Act of 1935. Through its various subsidiaries, UIL Holdings
operates in two principal lines of business: utility and non-utility. The
utility business consists of the electric transmission and distribution
operations of The United Illuminating Company (UI). The non-utility business
consists of the operations of Xcelecom, Inc. (Xcelecom) and two entities, United
Capital Investments, Inc. (UCI) and United Bridgeport Energy, Inc. (UBE), which
hold minority ownership interests in their respective investments. The
non-utility businesses also included the operations of American Payment Systems,
Inc. (APS) until the completion of its sale to CheckFree Corporation (CheckFree)
on June 22, 2004. UIL Holdings is headquartered in New Haven, Connecticut, where
its senior management maintains offices and is responsible for overall planning,
operating and financial functions.
UIL Holdings files electronically with the Securities and Exchange Commission
(SEC) required reports on Form 8-K, Form 10-Q and Form 10-K; proxy materials;
ownership reports for insiders as required by Section 16 of the Securities and
Exchange Act of 1934; and registration statements on Forms S-3 and S-8, as
necessary. The public may read and copy any materials UIL Holdings has filed
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, DC 20549. The public may also obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. Copies of UIL Holdings' annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to these reports filed with the SEC may be requested, viewed, or downloaded
on-line free of charge at www.uil.com.
UIL Holdings makes available on its website (www.uil.com) the charters of its
Corporate Governance and Nominating Committee, Compensation and Executive
Development Committee and Audit Committee, as well as its corporate governance
guidelines.
Due to financial information required by Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," UIL Holdings has also divided its business into operating segments
for financial reporting purposes. See PART II, Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note (M),
Segment Information," of this Form 10-K, which is hereby incorporated by
reference.
UTILITY BUSINESS
UI is a regulated operating electric public utility established in 1899. It is
engaged principally in the purchase, transmission, distribution and sale of
electricity for residential, commercial and industrial purposes in a service
area of about 335 square miles in the southwestern part of the State of
Connecticut. The population of this area is approximately 730,000, which
represents approximately 21% of the population of the State. The service area,
largely urban and suburban, includes the principal cities of Bridgeport
(population approximately 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 2004
retail electric revenues, approximately 45% were derived from residential sales,
41% from commercial sales, 13% from industrial sales and 1% from street lighting
and other sales. UI's retail electric revenues vary by season, with the highest
revenues typically in the third quarter of the year reflecting seasonal rates,
hotter weather and air conditioning use. For additional information regarding
UI's revenues refer to PART II, Item 6, "Selected Financial Data," of this Form
10-K which is hereby incorporated by reference. In connection with the 1998
restructuring
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legislation relating to the regulated electric utility industry in Connecticut,
UI divested its ownership interests in generation facilities, a process which
was completed in 2002 with the sale of UI's interests in the Seabrook Station
nuclear generating plant.
FRANCHISES
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 over, on and under public highways and grounds, and
the power of eminent domain. These franchises are subject to alteration,
amendment or revocation by the Connecticut legislature, and revocation by the
Connecticut Department of Public Utility Control (DPUC) under circumstances
specified by statute, and subject to certain approvals, permits and consents of
public authorities and others prescribed by statute.
REGULATION
UI is subject to regulation by several regulatory bodies, including the DPUC,
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, the condition of
plant, equipment and the manner of operation in relation to the safety, adequacy
and suitability to provide service to customers, including efficiency, and the
location and construction of certain electric facilities. The Federal Energy
Regulatory Commission (FERC) approves UI's transmission revenue requirements,
which are collected through UI's transmission retail rates.
The location and construction of certain electric facilities, including electric
transmission lines and bulk substations, are subject to regulation by the
Connecticut Siting Council with respect to environmental compatibility and
public need.
UI is a "public utility" within the meaning of Part II of the Federal Power Act
and is subject to regulation by the FERC, which has jurisdiction with respect to
interconnection and coordination of facilities, wholesale electric service
rates, transmission tariffs and accounting procedures, among other things. See
"Arrangements with Other Industry Participants."
Connecticut Yankee Atomic Power Company, in which UI has a 9.5% common stock
ownership interest, is subject to the jurisdiction of the United States Nuclear
Regulatory Commission and the FERC. The Connecticut Yankee nuclear unit was
retired in 1996 and is currently being decommissioned. See PART II, Item 8,
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note (J), Commitments and Contingencies - Other Commitments and
Contingencies - Connecticut Yankee," of this Form 10-K, which is hereby
incorporated by reference.
RATES
UI's retail electric service rates are subject to regulation by the DPUC. UI's
present general retail rate structure consists of various rate and service
classifications covering residential, commercial, industrial and street lighting
services.
Utilities are entitled by Connecticut law to charge rates that are sufficient to
allow them an opportunity to cover their reasonable operating and capital costs,
to attract needed capital and maintain their financial integrity, while also
protecting relevant public interests.
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The primary revenue components of UI's retail customer bills as of January 1,
2005 are as follows:
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Authorized Average
Return on Price Per
Unbundled Revenue Component Description Equity KWH (10)
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Distribution The process of delivering electricity through local
lines to the customer's home or business. 10.45% (1) $0.0353
- ------------------------------------- ---------------------------------------------------------- ------------- -------------
Transmission The process of delivering electricity over high voltage 10.75% (2) $0.0054
lines to local distribution lines.
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Competitive Transition Assessment Component of retail customer bills to recover Stranded 10.45% $0.0134
(CTA) (3) Costs as determined by the DPUC.
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Generation Services Charge The rate charged, as determined by the DPUC, to retail None $0.0469
(GSC) (4) customers for the generation services purchased at
wholesale by UI for transitional standard offer
customers.
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Bypassable Federally Mandated Federally mandated charge, as defined by Connecticut None $0.0109
Congestion Costs (BFMCC) (5) restructuring legislation, related to the supply of
electricity.
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Systems Benefits Charge (SBC) Charges on retail customer bills representing public 10.45% (6) $0.0005
policy costs such as generation decommissioning and
displaced worker protection costs, as determined by the
DPUC.
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Conservation & Load Management Statutory assessment on retail customer bills placed in None $0.0022
(C&LM) (7) a State of Connecticut fund used to support energy
conservation and load management programs.
- ------------------------------------- ---------------------------------------------------------- ------------- -------------
Non-Bypassable Federally Mandated Federally mandated charge, as defined by Connecticut None $0.0110
Congestion Costs (NBFMCC) (8) restructuring legislation, related to the reliability of
supply delivered by the electric system.
- ------------------------------------- ---------------------------------------------------------- ------------- -------------
Renewable Energy Investment Statutory assessment on retail customer bills which is None $0.0007
(REI)(9) transferred to a State of Connecticut fund to support
renewable energy projects.
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Purchase Power Adjustment Clause Adjustment to special contract rates. None $0.0003
(PPAC)
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(1) DPUC authorized return on equity. Earnings above 10.45% will be
shared 50% to customers and 50% to shareholders.
(2) FERC authorized return on equity.
(3) UI earns the authorized distribution return on equity on CTA rate base. UI
defers or accrues additional amortization to achieve the authorized return
on equity on unamortized CTA rate base. The DPUC approved a financing
order under which State of Connecticut rate reduction bonds were issued,
which increased the CTA, and decreased the C&LM and REI by offsetting
amounts, with no impact on income statement results.
(4) This rate also includes a procurement fee to UI for providing transitional
standard offer service and an opportunity to earn an additional incentive
procurement fee if UI meets certain pricing thresholds. Except for the
fees, GSC has no impact on income statement results as revenue collected
equals expense incurred (which is referred to as a "pass-through" in this
filing on Form 10-K).
(5) BFMCC has no impact on financial results as BFMCC billing is a
"pass-through". It is "bypassable" because it may not be charged to
customers if they choose to buy their electricity from an alternate
supplier.
(6) UI earns the authorized distribution return on equity on SBC rate base. UI
defers or accrues additional amortization to achieve the authorized return
on equity on unamortized SBC rate base.
(7) UI has the opportunity to earn a nominal "incentive" for managing the C&LM
programs. Except for the incentive, C&LM has no impact on income statement
results, as C&LM billing is a "pass-through".
(8) NBFMCC has no impact on financial results as NBFMCC billing is a "pass
through". The rate is estimated based on a DPUC decision dated December
22, 2004.
(9) REI has no impact on income statement results as REI billing is a
"pass-through".
(10) The total average price per KWH is $0.1266.
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For further information refer to PART II, Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note (C),
Regulatory Proceedings," of this Form 10-K, which information is hereby
incorporated by reference.
POWER SUPPLY ARRANGEMENTS
Pursuant to Connecticut's 1998 electric industry restructuring legislation (the
1998 Legislation), UI's retail electricity customers are able to choose their
electricity supplier. Through December 31, 2003, UI was required to offer fully
bundled retail service under a regulated "standard offer" rate to each customer
who did not choose an alternate electricity supplier, and to provide back-up
power supply service to customers whose alternate electricity supplier failed to
provide generation services for reasons other than the customers' failure to pay
for such services. Beginning January 1, 2004 and continuing through December 31,
2006, UI is required to offer retail service under a regulated "transitional
standard offer" rate to each customer who does not choose an alternate
electricity supplier.
On December 28, 2001, UI entered into an agreement with Virginia Electric and
Power Company, subsequently assigned to its affiliate Dominion Energy Marketing
(Dominion), for the supply of all of UI's standard offer generation service
needs from January 1, 2002 through December 31, 2003. Dominion is also
contracted to supply all of UI's generation service requirements through 2008
for certain customers who entered into long-term special contracts with UI prior
to the enactment of the 1998 Legislation. For further information refer to PART
II, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (J), Commitments and Contingencies - Claim of
Dominion Energy Marketing, Inc.," of this Form 10-K, which information is hereby
incorporated by reference.
On October 22, 2003, UI entered into an agreement with PSEG Energy Resources &
Trade LLC (PSEG) for the supply of all of UI's transitional standard offer (TSO)
generation service needs, excluding requirements for special contract customers,
from January 1, 2004 through December 31, 2006, the end of the transitional
standard offer period in Connecticut.
For further information regarding power supply arrangements, refer to PART II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," of this Form 10-K, which information is hereby incorporated by
reference.
ARRANGEMENTS WITH OTHER INDUSTRY PARTICIPANTS
NEW ENGLAND POWER POOL AND ISO-NEW ENGLAND
UI has been a member of the New England Power Pool (NEPOOL) since 1971. NEPOOL
was formed to assure reliable and economic operation of the bulk power system in
the New England region.
The NEPOOL membership includes entities engaged in the electricity business in
New England. NEPOOL has contracted with an independent entity, ISO New England
Inc. (ISO-NE), for the operation of the regional bulk power system, to ensure
that the bulk power system will continue to be operated in accordance with the
reliability objectives of NEPOOL, the North America Reliability Council (NERC),
and the Northeast Power Coordinating Council (NPCC) and also to ensure that the
wholesale power markets will be competitive and non-discriminatory. Various
energy, capacity, and ancillary services products are purchased in the NEPOOL
market; in addition, participants may enter into bilateral contracts for
purchase/sale of these products.
On March 1, 2003, NEPOOL and ISO-NE implemented substantial marketplace changes,
referred to as standard market design (SMD), as approved by the FERC. These SMD
changes included the implementation of a transmission congestion management
system and a multi-settlement system. The SMD processes employed in New England
are based on systems that are currently operational in the Pennsylvania-New
Jersey-Maryland control area.
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On March 24, 2004, the FERC conditionally approved ISO-NE's joint proposal with
the New England Transmission Owners (TOs) for the creation of a Regional
Transmission Organization (RTO). The creation of an RTO for New England (RTO-NE)
will strengthen the independent oversight of the region's bulk power system and
wholesale electricity marketplace. UI is a party to all of the agreements that
establish RTO-NE and a signatory to the joint RTO filing with the FERC. RTO-NE
commenced operation effective February 1, 2005. As a member of RTO-NE, UI is
eligible for the FERC's participation incentive adder (50 basis points above the
approved transmission base return on equity) for joining RTO-NE. The 50 basis
point participation adder is applicable to UI's pool transmission facilities
(PTF). The common base ROE of 12.8% requested by the TOs became effective on
February 1, 2005 when RTO-NE commenced operation. All of the TOs, including UI,
will be able to earn the common base ROE of 12.8% plus the 50 basis point
participation adder (or 13.3%) on their PTF and the common base ROE of 12.8% on
their non-PTF, subject to refund, pending a final FERC decision on the justness
and reasonableness of the common base ROE.
MIDDLETOWN/NORWALK TRANSMISSION PROJECT
UI, together with The Connecticut Light and Power Company (CL&P), has filed with
the Connecticut Siting Council (CSC) an application for a Certificate of
Environmental Compatibility and Public Need to construct a 345-kiloVolt
transmission line from Middletown, Connecticut to Norwalk, Connecticut. This
project is expected to improve the reliability of the transmission system in
southwest Connecticut. The two companies are working together for permitting,
and will each construct, own and operate its respective portion of the
transmission line and related facilities. UI will construct, own, and operate
transmission and substation facilities comprising approximately 20% of the total
project. For further information see PART II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Major Influences
on Financial Condition - The United Illuminating Company," which information is
hereby incorporated by reference.
HYDRO-QUEBEC
UI is a participant in the Hydro-Quebec transmission tie facility linking New
England and Quebec, Canada. UI has a 5.45% participating share in this facility,
which has a maximum 2,000 megawatt equivalent generation capacity value.
ENVIRONMENTAL REGULATION
The National Environmental Policy Act requires that detailed statements of the
environmental effect of UI's facilities be prepared in connection with the
issuance of various federal permits and licenses. Federal agencies are required
by that Act to make an independent environmental evaluation of the facilities as
part of their actions during proceedings with respect to these permits and
licenses.
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. 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.
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.
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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, which are
subject to these regulations. A testing program has been implemented to detect
leakage from any of these tanks, and substantial costs may be incurred for
future actions taken to prevent tanks from leaking, to remedy any contamination
of groundwater, and to modify, remove and/or replace older tanks in compliance
with federal and state regulations.
In accordance with applicable regulations, UI has disposed of residues from
operations at landfills. In recent years it has been determined that such
disposal practices, under certain circumstances, can cause groundwater
contamination. Although UI has no 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 prior to seeking regulatory recovery.
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 ongoing 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.
Additional discussion regarding environmental issues may be found in PART II,
Item 8 of this Form 10-K under the caption, "Financial Statements and
Supplementary Data" - Notes to Consolidated Financial Statements - Note (J),
Commitments and Contingencies - Site Decontamination, Demolition and Remediation
Costs," which information is hereby incorporated by reference.
NON-UTILITY BUSINESSES
UIL Holdings 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 incremental earnings to UIL Holdings'
shareowners.
XCELECOM, INC.
Xcelecom and its subsidiaries operate in two primary lines of business in
certain regional markets of the Eastern United States. The specialty
construction trade services line of business, which accounts for approximately
90% of Xcelecom's annual revenues, provides general and specialty electrical,
mechanical and voice-data-video design, construction, and related services.
The computer network system integration services line of business provides
computer system local and wide area network integration design, installation
and consulting services. Xcelecom's subsidiaries include Allan Electric Co.,
Inc. (Allan), Brite-Way Electrical Contractors, Inc. (Brite-Way), JBL
Electric, Inc. and The Datastore, Incorporated, all in New Jersey, Orlando
Diefenderfer Electrical Contractors, Inc., in Pennsylvania, 4Front Systems,
Inc. and Datanet Services, Inc. in North Carolina, J. E. Richards, Inc. in
Maryland, Terry's Electric, Inc., in Florida, and Johnson Electric Co., Inc.
(Johnson), M. J. Daly & Sons, Inc. and McPhee Electric Ltd., LLC (McPhee),
all in Connecticut. In January 2005, Allan and Brite-Way were combined
and Johnson was merged into McPhee in an effort to gain operating
efficiencies. Xcelecom also owns and operates two heating and cooling energy
centers, through its Thermal Energies, Inc. subsidiary, providing service
to two of New Haven, Connecticut's largest office and government complexes.
Xcelecom is the ninth largest provider of electrical contracting services in the
United States according to ENGINEERING NEWS RECORD magazine. Xcelecom provides a
broad range of services including designing, building, maintaining and servicing
electrical, data communications and utilities systems for commercial, industrial
and residential customers. Xcelecom's electrical contracting services include
design of the electrical distribution systems
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within a building or complex, procurement and installation of wiring and
connection to power sources, end-use equipment and fixtures, as well as
long-term contract maintenance. Xcelecom's mechanical contracting services
include the design, procurement and installation systems for heating,
ventilation, air conditioning, refrigeration and clean room ventilation systems,
along with plumbing, process and fire protection piping systems. Xcelecom's
customer base is diverse and includes general contractors, property managers
and developers, corporations, government agencies and municipalities, utilities,
gaming facilities and homeowners. Xcelecom provides these specialty
construction trade services in most major markets along the U.S. Eastern
seaboard.
Demand for Xcelecom's specialty construction trade services is driven by
construction and renovation activity levels, as well as changes to local and
national electrical codes. Xcelecom's service and maintenance revenues, derived
from service calls and routine maintenance contracts, tend to be recurring and
less sensitive to economic fluctuations than those derived from its specialty
construction trade services. Service and maintenance is supplied on a long-term
and per-call basis. Long-term service and maintenance is provided through
contracts that require the customer to pay an annual or semi-annual fee for
periodic diagnostic services at a specific discount from standard prices for
repair and replacement services. Per-call service and maintenance is initiated
when a customer requests emergency repair service.
The computer network systems integration business line is a full-service
provider of enterprise-wide network solutions. Specialties include design,
installation, management and support of a variety of network needs ranging from
point-to-point data and communications installations to complex wide area data
and communication networks. Xcelecom's clients include medium-size local and
regional businesses, leading healthcare and educational facilities, and selected
Fortune 100 technology, financial services and pharmaceutical companies.
Xcelecom's computer network systems integration business operates primarily in
certain regional markets in the Eastern United States.
Xcelecom manages operations based on business lines. Within the specialty
construction trade services business line, the subsidiaries are managed by two
corporate-based senior operating officers reporting directly to Xcelecom's
President. The computer network system integration services business line
reports directly to a corporate-based senior operating officer, who in turn
reports directly to the President. This operating structure provides a platform
for strong operating and financial controls, allows for efficient management of
the business, and fosters implementation of best practices across the
organization. This structure also provides the ability to manage certain
customer and vendor relationships above the local level. Utilizing this
structure enables Xcelecom to continue to expand the services and expertise it
offers in each market by using specialized technical and marketing skills to
maintain and strengthen relationships with general contractors and other
customers; build positive relationships with engineers, architects and key
suppliers; and continuously improve project execution, sales, administrative,
safety, and training practices.
MARKET DATA
Using the most recently available data from F. W. Dodge, the largest provider of
project news, plans and analysis services for construction professionals in the
United States and Canada, it is estimated that the electrical contracting
industry, Xcelecom's primary source of revenues, generated annual revenues in
excess of $80 billion in 2004. The electrical contracting industry is highly
fragmented, with more than 70,000 companies, most of which are small,
owner-operated businesses. The most recent ranking of U.S. electrical
contractors by the Engineering News Record magazine indicates that there are
only 11 U.S. electrical contractors with revenues in excess of $200 million. F.
W. Dodge data indicates total non-residential construction industry revenues in
the markets served by Xcelecom have grown at an average compound rate of
approximately two percent from 1997 through 2004. This includes a decline in the
market from 2001 to 2003 of over 13 percent, where commercial and industrial
construction spending was down due to the slowdown in the U.S. economy during
that period. Xcelecom's revenues amounted to $337 million, $294 million, and
$310 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Xcelecom had a backlog of contractually obligated work to be completed as of
December 31, 2004 of approximately $199 million, as compared with backlog of
approximately $147 million as of December 31, 2003. This increase in backlog is
predominantly due to a number of new contract awards in the latter part of 2004.
The overall expected
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gross margin related to the year end 2004 backlog is slightly higher, in
percentage terms, than the expected gross margin percentage carried in
the year end 2003 backlog balance. There has been a shift in the
composition of backlog from time to time, based on market demand and economic
trends in Xcelecom's geographic markets. At December 31, 2004, the backlog of
work was predominantly for education and commercial projects. On a project size
basis, 19% of the backlog is attributable to projects with values of $0.5
million or less, 75% is attributable to projects with values between $0.5
million and $5 million, and 6% is attributable to projects with values in excess
of $5 million. On a regional basis, 76% of this backlog is attributable to the
Northeast, with the remaining 24% attributable to the mid-Atlantic and Southeast
regions.
COMPETITION
The specialty construction trade services and computer network systems
integration industries are highly fragmented and competitive. In the specialty
construction trade services business line, most of Xcelecom's competitors are
small, owner-operated companies that typically operate in limited geographic
areas. However, Xcelecom also faces competition from several larger regional and
national firms, some of which are publicly owned. Competition is based primarily
on price, technical capability, workforce size and ability, and experience and
reputation.
The computer network systems integration industry is intensely competitive.
Competition is based primarily on price, product availability, speed of
delivery, credit availability, the ability to tailor specific solutions to
customer needs, and quality and breadth of product lines. Within the business
line, there is also competition from numerous large publicly owned entities,
including technology and telecommunications companies, along with smaller
regional and local owner-operated entities. These marketers and resellers
include national direct marketers and national and regional resellers, including
value-added resellers and specialty retailers, aggregators, distributors,
national computer retailers, computer superstores, Internet-only computer
providers, consumer electronics and office supply superstores and mass
merchandisers. Product manufacturers, in particular, have increased their
efforts to sell directly to the business customer, particularly larger corporate
customers and, thus, have become more of a competitive threat than in the past.
Certain competitors have longer operating histories and greater financial,
technical, marketing and other resources than Xcelecom. In addition, some of
these competitors may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Many current and
potential competitors also have greater name recognition, engage in more
extensive promotional activities and offer more attractive terms to customers.
Additionally, some of Xcelecom's competitors have lower operating cost
structures, allowing them to profitably employ more aggressive pricing
strategies. Decreasing prices of Xcelecom's products and services offerings will
require Xcelecom to sell a greater number of products and services to achieve
the same level of net sales and gross profit, and to effectively manage its
fixed and variable overhead costs to maintain a similar level of earnings before
interest and taxes. In the future, competition may be encountered from new
market entrants. There can be no assurance that Xcelecom will be able to compete
effectively with current or future competitors or that the competitive pressures
will not have a material adverse effect on Xcelecom's business, results of
operations and financial condition.
Further discussion regarding Xcelecom's business may be found in PART II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K, which information is hereby incorporated by
reference.
UNITED CAPITAL INVESTMENTS, INC.
UCI was established to make passive or minority interest investments and its
investments include:
CROSS-SOUND CABLE COMPANY, LLC (CROSS-SOUND) - UCI has a 25% interest in
Cross-Sound, which owns and operates a 330-megawatt transmission line (cable)
connecting Connecticut and Long Island under Long Island Sound. UCI has
provided an equity infusion of $10 million to Cross-Sound and UIL Holdings
loaned $24.8 million, including capitalized interest, to Cross-Sound.
TransEnergieUS Ltd., the project developer and majority owner, is a
-14-
Delaware corporation and a subsidiary of TransEnergie HQ Inc., the transmission
affiliate of Hydro-Quebec (HQ). The cable has been operating commercially since
June 2004, under the terms of a settlement agreement with various parties,
including the Connecticut Department of Environmental Protection and the DPUC.
Although the settlement agreement allows for commercial operation of the cable,
such status is contingent upon the satisfaction of certain provisions set forth
in the agreement. Following execution of the settlement agreement, the existing
contract Cross-Sound has with the Long Island Power Authority for the entire
capacity of the transmission line has been amended, subject to formal approval
by the New York State Comptroller, to increase the overall term of the
agreement from 20 years to 28 years by means of adding an initial three-year
period at the current reduced rates, and an additional five years to the end of
the contract term, at full rates.
See PART II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Major Influences on Financial Condition,"
and Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (J) Commitments and Contingencies - Cross-Sound
Cable Company, LLC," for further information regarding Cross-Sound.
ZERO STAGE CAPITAL - UCI has invested $3.2 million in Zero Stage VI, a Small
Business Investment Company (SBIC) fund targeting the Northeast region of the
United States. Due to the nature of its investments and market conditions, the
carrying value of Zero Stage VI has decreased substantially since the end of
2000, and in the first quarter of 2004 UCI wrote down the carrying value to zero
as the liabilities of the fund are in excess of the market value of its assets.
UCI has also invested $4 million in Zero Stage VII, a national technology
venture capital fund. In July 2004, UCI funded its remaining capital commitment
of $0.5 million to Zero Stage VII, which represented UCI's final payment of
amounts committed to the Zero Stage funds. UCI received an ordinary course of
business distribution of $0.1 million from Zero Stage VII in 2004. The carrying
value of UCI's investment in Zero Stage VII as of December 31, 2004 was $2.8
million. UIL Holdings views these funds as an opportunity to earn returns, as
well as a means of promoting local economic development.
IRONBRIDGE MEZZANINE FUND - In 2001, UCI committed $1 million to Ironbridge
Mezzanine Fund, of which it has funded $0.6 million as of December 31, 2004. UCI
expects to fund the remaining capital commitment in 2005. Ironbridge is a
regional SBIC fund committed to investing a portion of its capital in women and
minority-owned businesses and businesses located in low and moderate income
areas. The carrying value of UCI's investment in Ironbridge Mezzanine Fund as of
December 31, 2004 was $0.5 million.
UCI has no current plans to make additional minority interest investments.
UNITED BRIDGEPORT ENERGY, INC.
UBE holds a 33 1/3% ownership interest in Bridgeport Energy LLC (BE), the owner
of a gas-fired 520 MW merchant wholesale electric generating facility located in
Bridgeport, Connecticut. The remainder of BE is owned, and the facility is
operated, by an affiliate of Duke Energy. BE began commercial operation in 1999
and sells energy and generation capacity into the wholesale market. The plant
has an agreement through August 2018 with Duke Energy Trading and Marketing
(DETM), a joint venture between Duke Energy and Exxon Mobil, which gives DETM
the right to deliver natural gas to the facility and market all of the
electricity generated by the facility. DETM reimburses BE under a formula based
on the difference between gas costs and electric prices. As of December 31,
2004, UBE's investment in BE had a carrying value of $76.5 million.
See PART II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Major Influences on Financial Condition -
United Bridgeport Energy, Inc.," of this Form 10-K for further information
regarding BE.
AMERICAN PAYMENT SYSTEMS, INC.
On June 22, 2004, UIL Holdings completed the sale of APS to CheckFree, pursuant
to the purchase agreement entered into between the parties on December 16, 2003.
CheckFree did not acquire APS' telephony assets, which
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included APS' 51% ownership interest in CellCards of Illinois, LLC (CCI). On
February 13, 2004, CCI was sold to an independent third party for book value,
excluding transaction costs.
As a result of the events described above, the results of APS are included in
discontinued operations in the accompanying consolidated statements of income
included herein, for all periods presented. For further information regarding
the sale of APS refer to PART II, Item 8 of this Form 10-K under the caption,
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note (O), Discontinued Operations," which information is hereby
incorporated by reference.
FINANCING
Information regarding UIL Holdings' capital requirements and resources and its
financings and financial commitments may be found in PART II, Item 7 of this
Form 10-K under the caption, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," which
information is hereby incorporated by reference.
EMPLOYEES
As of December 31, 2004, UIL Holdings and its subsidiaries had a total of 2,882
employees, consisting of 29 in UIL Holdings, 829 in UI and 2,024 in the
non-utility subsidiaries. Of the 829 UI employees, 365 were members of Local
470-1, Utility Workers Union of America, AFL-CIO. UI and its unionized employees
entered into a three-year agreement which expires on May 15, 2005. Of the 2,024
employees of the non-utility subsidiaries, 2,022 were employed by Xcelecom and
its subsidiaries and 2 by UCI. Certain of Xcelecom's subsidiaries have
collective bargaining agreements that cover, in the aggregate, approximately
1,694 employees. Substantially all of these collective bargaining agreements
contain "no-strike" clauses. Xcelecom has not experienced any significant
strikes or work stoppages.
ITEM 2. PROPERTIES.
TRANSMISSION AND DISTRIBUTION PLANT
The transmission lines of UI consist of approximately 102 circuit miles of
overhead lines and approximately 15 circuit miles of underground lines, all
operated at 345 KV or 115 KV and located within or immediately adjacent to the
territory served by UI. These transmission lines are part of the New England
transmission grid. A major portion of UI's transmission lines is constructed on
railroad rights-of-way pursuant to two Transmission Line Agreements. One of the
agreements expired in May 2000 and a new agreement was reached in June 2003 and
applied retroactively. The new agreement expires in May 2030 and will be
automatically extended for up to two successive renewal periods of 15 years
each, unless UI provides timely written notice of its election to reject the
automatic extension. The other agreement will expire in May 2040.
UI owns and operates 25 bulk electric supply substations with a capacity of
1,784 MVA, and 24 distribution substations with a capacity of 121 MVA. UI has
3,008 pole-line miles of overhead distribution lines and 131 conduit-bank miles
of underground distribution lines.
See PART II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," of this
Form 10-K concerning the estimated cost of additions to UI's transmission and
distribution facilities, which information is hereby incorporated by reference.
ADMINISTRATIVE AND SERVICE FACILITIES
Both UIL Holdings' and UI's corporate headquarters are located in New Haven,
Connecticut. Additionally, UI occupies several facilities within its service
territory for administrative and operational purposes.
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Xcelecom leases office space in Hamden, Connecticut, which is the site of its
corporate headquarters. Xcelecom's operating subsidiaries own or lease real
property, buildings and equipment in Connecticut, Florida, Maryland, New Jersey,
North Carolina and Pennsylvania necessary for the management and operation of
their businesses.
ITEM 3. LEGAL PROCEEDINGS.
There were no legal proceedings required to be reported under this item.
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, 2004.
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(1) POSITION EFFECTIVE DATE
- ---- ----- -------- --------------
Nathaniel D. Woodson 63 Chairman of the Board of Directors, President March 22, 1999
and Chief Executive Officer
Louis J. Paglia 47 Executive Vice President and Chief Financial July 1, 2002
Officer(2)
Susan E. Allen 45 Vice President Investor Relations, Corporate August 28, 2000
Secretary and Assistant Treasurer(3)
Charles J. Pepe 56 Treasurer and Assistant Secretary(4) August 28, 2000
Gregory W. Buckis 44 Vice President and Controller(5) June 30, 2003
Richard J. Nicholas 49 Executive Vice President and Chief Financial (2)
Officer(2)
Deborah C. Hoffman 50 Vice President of Audit Services and Chief (6)
Compliance Officer (6)
- -----------------------
(1) As of December 31, 2004
(2) As previously disclosed in UIL Holdings' filing on Form 8-K dated December
21, 2004, Louis J. Paglia will leave UIL Holdings in 2005 in connection with the
reorganization of UIL Holdings' Finance organization. Following a transition
period during the first quarter of 2005, Richard J. Nicholas will assume the
role of Executive Vice President and Chief Financial Officer of UIL Holdings, in
addition to his current role as Vice President, Finance and Chief Financial
Officer of UI.
(3) As previously disclosed in UIL Holdings' filing on Form 8-K dated December
21, 2004, in connection with the reorganization of UIL Holdings' Finance
organization, Susan E. Allen, in addition to her current responsibilities, will
assume the role of Treasurer of both UIL Holdings and UI following the
retirement of Charles J. Pepe in 2005.
(4) As previously disclosed in UIL Holdings' filing on Form 8-K dated December
21, 2004, Charles J. Pepe will retire in 2005 following the reorganization of
UIL Holdings' Finance organization.
(5) As previously disclosed in UIL Holdings' filing on Form 8-K dated
December 21, 2004, in connection with the reorganization of UIL Holdings'
Finance organization, Gregory W. Buckis, in addition to his current
responsibilities, will assume the role of Vice President and Controller of UI
in 2005.
(6) As previously disclosed in UIL Holdings' filing on Form 8-K dated
December 21, 2004, in connection with the reorganization of UIL Holdings'
Finance organization, Deborah C. Hoffman, currently UIL Holdings' Director of
Internal Audit, will be promoted to Vice President of Audit Services and Chief
Compliance Officer in 2005.
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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 and
persons chosen to become executive officers have entered into employment
agreements, some of which may be modified to reflect the revised
responsibilities described above. 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 Chairman of the Board of Directors,
President and Chief Executive Officer of The United Illuminating Company during
the period January 1, 2000 to January 31, 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 July 1, 2000.
LOUIS J. PAGLIA. Mr. Paglia served as Executive Vice President and Chief
Financial Officer of ECredit.com, Inc. from 2000 to 2001. Mr. Paglia
joined UIL Holdings Corporation in April 2002 and has served as Executive
Vice President and Chief Financial Officer since July 1, 2002.
Mr. Paglia will leave UIL Holdings in 2005 in connection with the
reorganization of UIL Holdings' Finance organization.
SUSAN E. ALLEN. Ms. Allen served as Director Finance and Corporate Secretary
Administration of The United Illuminating Company from January 1, 2000 to June
25, 2000. She has served as Vice President Investor Relations, Corporate
Secretary and Assistant Treasurer of The United Illuminating Company since June
26, 2000 and of UIL Holdings Corporation since August 28, 2000. In addition to
her current roles of Vice President Investor Relations and Corporate Secretary
of both The United Illuminating Company and UIL Holdings Corporation, Ms. Allen
will assume the role of Treasurer of both entities following the retirement of
Charles J. Pepe in 2005.
CHARLES J. PEPE. Mr. Pepe served as Assistant Treasurer and Assistant Secretary
of The United Illuminating Company during the period January 1, 2000 to June 25,
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. Mr. Pepe will retire in 2005 following the reorganization of
UIL Holdings' Finance organization.
GREGORY W. BUCKIS. Mr. Buckis served as Vice President of Administration and
Group Controller for Science Applications International Corporation from January
1, 2000 to September 11, 2000. He served as Vice President and Controller for
the NASDAQ Stock Market Inc. from September 12, 2000 to June 29, 2003. He has
served as Vice President and Controller of UIL Holdings Corporation since June
30, 2003. In addition to his current role, Mr. Buckis will assume the role of
Vice President and Controller of The United Illuminating Company during 2005.
RICHARD J. NICHOLAS. Mr. Nicholas served as Assistant Vice President -
Regulatory Affairs and Public Policy of Southern New England Telecommunications
Corp. from January 1, 2000 to March 2000. From March 2000 to April 2001, Mr.
Nicholas was an independent consultant to the telecommunications industry. Mr.
Nicholas joined UIL Holdings in May 2001 and served as Vice President and Chief
Operating Officer of United Capital Investments until January 2002. He served as
Vice President - Corporate Development and Administration of UIL Holdings,
President of United Capital Investments and President of United Bridgeport
Energy from January 2002 to November 2002. Mr. Nicholas has served as Vice
President, Finance and Chief Financial Officer of The United Illuminating
Company since November 2002. In addition to his current role, Mr. Nicholas will
assume the role of Executive Vice President and Chief Financial Officer of UIL
Holdings during 2005.
DEBORAH HOFFMAN. Ms. Hoffman served as Director of Internal Audit of The United
Illuminating Company during the period January 1, 2000 to June 2000. She has
served as Director of Internal Audit of UIL Holdings since June 2000. Ms.
Hoffman will be promoted to Vice President of Audit Services and Chief
Compliance Officer in 2005.
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PART II
ITEM 5. MARKET FOR UIL HOLDINGS' COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
UIL Holdings' Common Stock is traded on the New York Stock Exchange, where the
high and low closing sale prices during 2004 and 2003 were as follows:
2004 SALE PRICE 2003 SALE PRICE
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $50.53 $44.75 $37.70 $31.01
Second Quarter 49.38 41.95 45.65 34.67
Third Quarter 50.10 44.99 40.77 34.98
Fourth Quarter 54.08 49.45 46.07 36.12
Quarterly dividends on the Common Stock have been paid since 1900. The quarterly
cash dividends declared in 2004 and 2003 were at a rate of $0.72 per share.
UIL Holdings expects to continue its policy of paying regular cash dividends,
although there is no assurance as to the amount of future dividends because they
depend on future earnings, capital requirements, and financial condition.
Further information regarding payment of dividends is provided in Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," of this Form 10-K.
As of December 31, 2004, there were 10,209 Common Stock shareowners of record.
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EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
-------------------------- --------------------------- ------------------------ ----------------------------
Equity Compensation
Plans Approved by
Security Holders 786,282 (1) $47.32 (2) 301,669 (3)
Equity Compensation
Plans Not Approved by
Security Holders None - -
Total 786,282 (1) $47.32 (2) 301,669 (3)
(1) Includes 669,653 shares to be issued upon exercise of outstanding options,
90,229 performance shares to be issued upon satisfaction of applicable
performance and service requirements, and 26,400 shares of restricted stock
subject to applicable service requirements.
(2) Weighted average exercise price is applicable to outstanding options only.
(3) Includes 30,364 shares authorized for issuance under the UIL Holdings
Deferred Compensation Plan, which is a non-qualified benefit plan.
UIL Holdings did not issue any unregistered shares during the fourth quarter of
2004. UIL Holdings has disclosed issuances of unregistered securities made
earlier in 2004 in its quarterly filings on Forms 10-Q and 10-Q/A.
UIL Holdings did not repurchase any shares of its common stock during the fourth
quarter of 2004.
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ITEM 6. SELECTED FINANCIAL DATA
2004 2003 2002 2001 2000
==================================================================================================================================
Financial Results of Operation ($000's)
Sales of electricity
Utility
Retail
Residential $ 312,072 $ 273,230 $ 281,307 $ 266,585 $ 252,730
Commercial 281,667 248,257 256,077 254,842 242,075
Industrial 87,400 82,087 91,129 95,250 96,955
Other 10,415 10,311 10,512 10,501 10,587
------------- ------------ ------------- ------------- -------------
Total Retail 691,554 613,885 639,025 627,178 602,347
Wholesale 24,446 24,591 58,249 61,570 67,990
Other operating revenues 48,027 31,144 30,259 26,070 34,354
Non-utility businesses 337,260 294,057 310,063 312,642 138,491
------------- ------------ ------------- ------------- -------------
Total operating revenues $1,101,287 $ 963,677 $1,037,596 $1,027,460 $ 843,182
------------- ------------ ------------- ------------- -------------
Operating income $ 87,990 $ 88,957 $ 124,702 $ 144,594 $ 146,673
============= ============ ============= ============= =============
Income from Continuing Operations, net of tax $ 36,918 $ 29,537 $ 45,751 $ 59,563 $ 58,723
Discontinued Operations, net of tax (Note O) (2) 49,824 (6,251) (1,804) (200) 2,034
Extraordinary Gain, net of tax (Note Q) (2) 203 - - - -
------------- ------------ ------------- ------------- -------------
Net Income $ 86,945 $ 23,286 $ 43,947 $ 59,363 $ 60,757
==================================================================================================================================
FINANCIAL CONDITION ($000'S)
Property, Plant and Equipment in service - net $ 511,735 $ 512,327 $ 471,670 $ 499,470 $ 503,340
Deferred charges and regulatory assets 864,975 895,640 813,299 839,161 897,504
Assets of discontinued operations - 121,627 123,005 123,610 110,329
Total Assets (1) 1,787,608 1,898,166 1,768,759 1,876,264 1,880,076
Current portion of long-term debt 4,286 - 100,000 100,000 -
Net long-term debt excluding current portion 491,174 495,460 370,432 498,557 522,221
Net common stock equity 548,397 492,774 482,352 499,995 479,045
==================================================================================================================================
COMMON STOCK DATA
Average number of shares outstanding - basic (000's) 14,390 14,291 14,239 14,097 14,073
Number of shares outstanding at year-end (000's) 14,506 14,315 14,272 14,116 14,077
Earnings per share - basic:
Continuing Operations $ 2.57 $ 2.07 $ 3.22 $ 4.22 $ 4.18
Discontinued Operations (Note O) (2) $ 3.46 $ (0.44) $ (0.13) $ (0.01) $ 0.14
Extraordinary Gain (Note Q) (2) $ 0.01 $ - $ - $ - $ -
------------- ------------ ------------- ------------- -------------
Net Earnings $ 6.04 $ 1.63 $ 3.09 $ 4.21 $ 4.32
Earnings per share - diluted
Continuing Operations $ 2.56 $ 2.07 $ 3.21 $ 4.20 $ 4.17
Discontinued Operations (Note O) (2) $ 3.44 $ (0.44) $ (0.13) $ (0.01) $ 0.14
Extraordinary Gain (Note Q) (2) $ 0.01 $ - $ - $ - $ -
------------- ------------ ------------- ------------- -------------
Net Earnings $ 6.01 $ 1.63 $ 3.08 $ 4.19 $ 4.31
Book value per share $ 37.80 $ 34.42 $ 33.80 $ 35.42 $ 34.03
Dividends declared per share $ 2.88 $ 2.88 $ 2.88 $ 2.88 $ 2.88
Market Price:
High $ 54.08 $ 46.07 $ 58.53 $ 52.42 $ 55.13
Low $ 41.95 $ 31.01 $ 29.06 $ 44.25 $ 38.13
Year-end $ 51.30 $ 45.10 $ 34.87 $ 51.30 $ 49.75
==================================================================================================================================
OTHER FINANCIAL AND STATISTICAL DATA (UTILITY ONLY)
Sales by class (millions of kWh's)
Residential 2,347 2,262 2,247 2,120 2,057
Commercial 2,604 2,502 2,466 2,476 2,403
Industrial 957 952 1,022 1,082 1,146
Other 44 47 46 46 48
------------- ------------ ------------- ------------- -------------
Total 5,952 5,763 5,781 5,724 5,654
------------- ------------ ------------- ------------- -------------
Number of retail customers by class (average)
Residential 289,057 288,405 287,632 286,331 284,955
Commercial 28,956 29,687 29,757 29,889 29,776
Industrial 1,497 1,595 1,630 1,707 1,725
Other 1,307 1,306 1,267 1,250 1,207
------------- ------------ ------------- ------------- -------------
Total 320,817 320,993 320,286 319,177 317,663
------------- ------------ ------------- ------------- -------------
Average price per kilowatt hour by class (cents)
Residential 13.30 12.08 12.52 12.57 12.29
Commercial 10.82 9.92 10.39 10.29 10.07
Industrial 9.13 8.62 8.92 8.80 8.46
Revenues - retail sales per kWh (cents) 11.62 10.65 11.05 10.96 10.65
==================================================================================================================================
(1) Reflects reclassification of accrued asset removal costs from accumulated
depreciation to regulatory liabilities for all years presented.
(2) Note refers to the Notes to the Consolidated Financial Statements included
in Item 8. "Financial Statements and Supplementary Data."
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CERTAIN STATEMENTS CONTAINED HEREIN, REGARDING MATTERS THAT ARE NOT HISTORICAL
FACTS, ARE FORWARD-LOOKING STATEMENTS (AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995). THESE INCLUDE STATEMENTS REGARDING MANAGEMENT'S
INTENTIONS, PLANS, BELIEFS, EXPECTATIONS OR FORECASTS FOR THE FUTURE. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON THE CORPORATION'S EXPECTATIONS AND
INVOLVE RISKS AND UNCERTAINTIES; CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, GENERAL ECONOMIC CONDITIONS,
LEGISLATIVE AND REGULATORY CHANGES, CHANGES IN DEMAND FOR ELECTRICITY AND OTHER
PRODUCTS AND SERVICES, UNANTICIPATED WEATHER CONDITIONS, CHANGES IN ACCOUNTING
PRINCIPLES, POLICIES OR GUIDELINES, AND OTHER ECONOMIC, COMPETITIVE,
GOVERNMENTAL, AND TECHNOLOGICAL FACTORS AFFECTING THE OPERATIONS, MARKETS,
PRODUCTS, SERVICES AND PRICES OF THE CORPORATION'S SUBSIDIARIES. FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN SPEAK ONLY AS OF THE DATE HEREOF AND THE CORPORATION
UNDERTAKES NO OBLIGATION TO REVISE OR UPDATE SUCH STATEMENTS TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS OR CIRCUMSTANCES.
OVERVIEW AND STRATEGY
UIL Holdings Corporation (UIL Holdings) operates in two principal lines of
business: utility and non-utility. The utility business consists of the electric
transmission and distribution operations of The United Illuminating Company
(UI). The non-utility business consists of the operations of Xcelecom, Inc.
(Xcelecom) and two entities, United Capital Investments, Inc. (UCI) and United
Bridgeport Energy, Inc. (UBE), which hold minority ownership interests in their
respective investments. The non-utility businesses also included the operations
of American Payment Systems, Inc. (APS) until the completion of its sale to
CheckFree Corporation (CheckFree) on June 22, 2004.
As a result of Connecticut's 1998 electric industry restructuring legislation,
UI divested its ownership interests in generation facilities. Subsequently, UIL
Holdings invested the proceeds of the sale of UI's generation facilities in
non-utility businesses to offset the expected reduction in utility earnings
resulting from this restructuring. Some of these investments have not generated
expected results due to a number of factors including the following: a slow
economy resulting in less construction business with lower margins for Xcelecom,
poor investment market conditions offsetting the value of UCI's passive
investments and high natural gas prices affecting the value of UBE. UIL
Holdings' overall corporate strategy is to create shareholder value by actively
managing the UI and Xcelecom operating businesses to maximize earnings and cash
flow. UIL Holdings plans to improve the value of both the utility and
non-utility businesses and investments through operating and strategic
initiatives designed to improve results and increase value. In particular, UIL
Holdings plans to actively manage its costs, capitalize on synergies within the
Xcelecom operating segment to improve performance, and evaluate the possible
restructuring or refinancing of certain of the passive investments.
THE UNITED ILLUMINATING COMPANY
UI, the utility operating unit of UIL Holdings, is a transmission and
distribution electric utility whose primary objective is to provide high-quality
customer service, including the reliable, cost-effective delivery of electricity
to its customers in the 17 towns or cities in which it operates. To provide
reliable service, management will prudently invest in, and maintain, its
transmission and distribution infrastructure. As such, UI, together with The
Connecticut Light and Power Company (which also provides electric transmission
and distribution service in Connecticut) has applied for siting approval to
construct a major transmission upgrade in southwest Connecticut.
UI plans to manage operating and maintenance costs to optimize return on equity,
earnings and cash flow. While revenues are expected to remain level, earnings
from UI's CTA component are expected to decline over time due to the planned
amortization of, and resulting reduction in, UI's stranded cost rate base. UI's
investment in its transmission and distribution infrastructure may not offset
the decline of the stranded cost rate base.
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XCELECOM, INC.
Xcelecom, the non-utility operating unit of UIL Holdings, is an electrical and
mechanical contractor and voice-data-video design company that operates in the
eastern portion of the United States. Xcelecom was built through a series of
acquisitions from 1999 to 2002. Xcelecom's primary objective is to continue to
improve its operating performance in the markets that it serves. Xcelecom
expects to improve performance, in part, by capitalizing on synergies throughout
its network of subsidiaries, including best practices for safety and risk
management, project management and estimation, information systems, cross-sales
development and cash management and banking. Through these and other
initiatives, Xcelecom plans to manage operating costs to maximize earnings and
cash flow that will be used to meet substantially all of the operating and most
contractual commitments of its business.
Xcelecom has expanded its business by pursuing an aggressive acquisition
program. Due to the effects of the economic downturn on Xcelecom's business and
a lack of desirable acquisition prospects, Xcelecom has curtailed its
acquisition program. Xcelecom currently does not intend to grow materially
through acquisitions in the foreseeable future; however, it will continually
evaluate acquisition prospects that could complement and expand its existing
business platforms.
UNITED CAPITAL INVESTMENTS, INC.
As a minority owner in Cross-Sound Cable Company, LLC (Cross-Sound), UCI will
continue to work to maximize the value of its investment in Cross-Sound. To
achieve this objective, UCI will support the majority owner and project
developer, TransEnergieUS Ltd., in efforts to achieve permanent commercial
operation of the Cross-Sound cable.
UCI is a limited partner in three investment funds; its equity participation in
such funds ranges from 3%-7%. Two funds are venture capital funds that invest in
emerging growth companies, of which one is also licensed by the U.S. Small
Business Administration (SBA) as a Small Business Investment Company (SBIC). The
third fund is also an SBIC that focuses on mezzanine financing while also
investing a portion of its capital in women and minority-owned small businesses
and businesses located in low and moderate income areas. As a mezzanine fund, it
provides growth and acquisition capital to privately held businesses committed
to sustainable long-term growth; its focus on more mature companies means that
UCI's investment is subject to somewhat less risk, and also smaller potential
returns, in comparison to the venture capital funds.
UNITED BRIDGEPORT ENERGY, INC.
Within the constraints applicable to being a minority owner of Bridgeport
Energy, LLC (BE), UBE will continue to work to maximize the commercial value of
the plant by promoting efficient operations, working to increase the installed
capacity revenues, and reviewing financial data to ensure the accuracy and
integrity of such information.
-23-
MAJOR INFLUENCES ON FINANCIAL CONDITION
UIL HOLDINGS CORPORATION
UIL Holdings' financial condition and financing capability will be dependent on
many factors, including the level of income and cash flow of UIL Holdings'
subsidiaries, conditions in the securities markets, economic conditions,
interest rates, legislative and regulatory developments, and the ability to
retain key personnel.
The loss of key personnel or the inability to hire and retain qualified
employees could have an adverse effect on the business, financial condition and
results of operations for UIL Holdings and its operating subsidiaries, UI and
Xcelecom. These operations depend on the continued efforts of their respective
current and future executive officers, senior management and management
personnel. UIL Holdings cannot guarantee that any member of management at the
corporate or subsidiary level will continue to serve in any capacity for any
particular period of time. In an effort to enhance UIL Holdings' ability to
attract and retain qualified personnel, UIL Holdings continually evaluates the
overall compensation packages offered to all levels of employees.
In the fourth quarter of 2004, UIL Holdings' Board of Directors approved a plan
to reorganize UIL Holdings' Finance organization to reduce costs, improve
process flow and better support its core utility operations. Following the sale
of APS earlier in 2004, the strategic core of UIL Holdings has returned to its
utility operations, along with the non-utility operations of Xcelecom. As a
result, the accounting, treasury and corporate planning functions of UI and the
holding company will be combined in an effort to gain operating efficiencies. In
connection with this reorganization, UIL Holdings recorded employee termination
costs in the fourth quarter of 2004 amounting to $2 million, which equated to
approximately $0.08 per share, after-tax. These costs are expected to be paid
within the first half of 2005. On an annualized basis, this reorganization is
expected to yield consolidated after-tax cost savings of approximately $0.04 per
share, although the impact to 2005 will be somewhat lower due to the timing of
employee departures.
THE UNITED ILLUMINATING COMPANY
UI is an electric transmission and distribution utility whose structure and
operations are significantly affected by legislation and regulation. UI's rates
and authorized return on equity are regulated by the Federal Energy Regulation
Commission (FERC) and the Connecticut Department of Public Utility Control
(DPUC). Legislation and regulatory decisions implementing legislation establish
a framework for UI's operations. Primary factors affecting UI's financial
results, in addition to legislation and regulation, are operational matters such
as sales volume, major weather disturbances, ability to control expenses, and
capital expenditures. UI expects significant growth in its capital investment in
transmission, and has applied for siting approval to construct a major
transmission line in southwest Connecticut.
LEGISLATION
State legislation has significantly restructured the electric utility industry
in Connecticut. The primary restructuring legislation includes Public Act 98-28
(the 1998 Restructuring Legislation) and Public Act 03-135, as amended in part
by Public Act 03-221 (collectively, the 2003 Restructuring Legislation). Since
2000, UI's retail customers have been able to choose their electricity
suppliers. The 2003 Restructuring Legislation requires that UI offer a
"transitional standard offer" rate during the period January 1, 2004 - December
31, 2006 to retail customers who do not choose an alternate electric supplier.
The 2003 Restructuring Legislation provides for UI to recover its costs of
acquiring and providing generation services, and directed the DPUC to establish
each electric distribution company's transitional standard offer rates.
As part of the restructuring pursuant to the 1998 Restructuring Legislation,
UI's distribution and transmission rates were "unbundled" on customers' bills,
which also included separate charges as of January 1, 2000 for a competitive
transition assessment (CTA), generation services charge (GSC), conservation and
load management (C&LM) charge,
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renewable energy investment (REI) charge, and systems benefits charge (SBC). As
of January 1, 2004, federally-mandated congestion costs, defined by the 2003
Restructuring Legislation to include the costs of regional standard market
design, are also identified separately on customers' bills. The 2003
Restructuring Legislation makes other changes to the 1998 Restructuring
Legislation, such as the imposition of renewable portfolio standards, the
support of the development of renewable energy resources, and supplier of last
resort service after the transitional standard offer period ends, and a
requirement that any new rate case filings include a four-year rate plan
proposal.
The 2003 Restructuring Legislation provides for UI to collect a fee of
$0.0005/kilowatt-hour from transitional standard offer service customers,
beginning January 1, 2004, as compensation for providing transitional standard
offer service. This fee is included in the amounts charged to transitional
standard offer customers, and is excluded by the legislation from determinations
of whether UI's rates are just and reasonable. For 2004, this generated
approximately $3 million in revenue. The 2003 Restructuring Legislation also
provides for the DPUC to establish an incentive plan for the procurement of
long-term contracts for transitional standard offer service that compares UI's
actual average contract price to a regional average price for electricity,
making adjustments as deemed appropriate by the DPUC. If UI's price is lower
than the average, the legislation provides for the plan to allocate
$0.00025/kilowatt-hour of transitional standard offer service to the
distribution company. The DPUC has not yet established an incentive plan or made
any determination with respect to the incentive fee.
REGULATION
In December 2003, the DPUC established UI's transitional standard offer rates
that became effective January 1, 2004, in accordance with the 2003 Restructuring
Legislation. During 2004, the DPUC has continued its implementation of other
provisions of the 2003 Restructuring Legislation.
The DPUC's decision establishing the transitional standard offer rates
determined that UI's rates complied in all respects with the 2003 Restructuring
Legislation. The transitional standard offer rates increased the GSC charged to
customers for generation services compared to the previous standard offer GSC,
modified the CTA (for some retail rates), and provided for the collection of
federally mandated congestion costs. The GSC rate changes reflect an increase,
compared to the 2003 GSC, in the cost of generation services and related market
costs, as well as a reduction in the "adder" included in the GSC (charge in
excess of expected cost). The GSC for the transitional standard offer is
designed to collect all of the costs of procuring and providing transitional
standard offer service. Distribution and transmission rates remain unchanged
from the levels established in September 2002.
On September 26, 2002, the DPUC had reduced UI's customer rates in UI's retail
customer ratemaking (Rate Case) proceeding. The DPUC's decision provided for a
$30.9 million reduction in UI's annual revenue requirements, including (1) a
$20.3 million reduction to UI's customer rates (a 3% reduction), (2) $2 million
to be applied annually for additional funding of conservation programs, (3) $8.3
million to be applied annually for accelerated amortization to reduce stranded
costs, and (4) $0.3 million to be applied to a combination of uncollectibles,
taxes and rate base changes. The final Rate Case decision established rates on
the basis of an authorized return on equity of 10.45%, excluding UI's investment
in transmission rate base. The decision further provided that earnings above the
authorized return would be shared 50% to customers and 50% to net income, with
the customers' share divided equally between bill reductions and an accelerated
amortization of stranded costs. The Rate Case decision recognizes that the
revenue requirements determination for transmission, including the applicable
return on equity, is within the jurisdiction of the FERC. UI's authorized return
on equity for transmission is 10.75%.
On February 18, 2004, the DPUC issued a final decision related to UI's request
for recovery of increased pension and post-retirement benefits expenses. As a
result of this decision, a subsequent appeal by the Office of Consumer Counsel
(OCC) to the Connecticut Superior Court and a DPUC reversal of the February 18,
2004 decision, UI was allowed to recover approximately $1.8 million, or $0.08
per share, for the period from February 18, 2004 through June 24, 2004. UI
ceased recovery of the increased pension and post-retirement benefits expenses
effective June 24, 2004. UI has taken substantial actions in 2003 and 2004 to
mitigate the effect of these increased pension and post-retirement benefits
expenses and also to reduce the increases themselves through contributing $74
million in cash to the pension plan since the docket was initially reopened in
November 2002. These actions, along with better
-25-
performance of pension fund investments and improved sales growth, have allowed
UI to largely mitigate the effect of the increased pension and post-retirement
benefits expenses through the end of 2004.
On June 23, 2004, the DPUC approved UI's request to amend its Purchased Power
Adjustment Clause rate component to allow UI to apply the clause to special
contract customers. The DPUC also approved a Purchased Power Adjustment rate of
$0.000264 per kWh to be applied against special contract load to reflect the
increased cost to serve these customers. This decision will allow UI to recover
changes in the cost to procure energy as it relates to special contract
customers through the GSC. The decision does not explicitly order the accounting
for the increased costs of $0.8 million related to UI's special contract
customers for the period from January 1, 2004 through June 22, 2004 (the day
before the effective date of the final decision). The actual costs for that
period to procure power for UI's special contracts will flow through the annual
CTA/SBC Reconciliation filing for 2004. The 1998 Restructuring Legislation and
the 2003 Restructuring Legislation provide that the distribution company is
entitled to recover its full cost of procuring power for customers who do not
choose an alternate supplier.
On December 22, 2004, the DPUC issued a final decision increasing the
non-bypassable Federally Mandated Congestion Costs (NBFMCC) charge UI is
authorized to collect from customers. The NBFMCC charge relates to "congestion
costs" associated with not having adequate transmission infrastructure to move
energy from the generating sources to the consumer. Because the purpose of the
NBFMCC charge is for the electric distribution company to recover its actual
NBFMCC costs on a pass-through basis, the DPUC decision provided for a true-up
of NBFMCC costs and revenues on a semi-annual basis and an adjustment of the
associated amounts deferred for future recovery. The charge originally
established for 2004 was based upon estimates that were made in 2003, and
reflected estimated NBFMCC lower than were actually incurred. The decision
increases the NBFMCC charge from $0.001652 per kWh to $0.012099 per kWh,
effective January 1, 2005. This increase will enable UI to recover both the
forecasted ongoing NBFMCC costs and the $14.4 million deficit that has resulted
from the current charge being below the incurred costs.
OPERATIONS
In implementing the 1998 Restructuring Legislation, UI established a
Distribution Division and other "unbundled" components for accounting purposes,
to reflect other unbundled components on customer bills. Initially, the
Distribution Division included both transmission and distribution. UI has now
separated transmission and distribution into separate divisions for accounting
purposes. Changes to income and expense items related to transmission and
distribution have an immediate net income and earnings per share impact, while
changes to items in "other unbundled utility components" do not. The other
components are the CTA, the SBC, the GSC, the C&LM charge, and REI charge. The
CTA and SBC both earned an 11.5% return on the equity portion of their
respective rate bases until the September 26, 2002 effective date of the Rate
Case decision, and 10.45% thereafter in accordance with that decision. Those
returns were achieved either by accruing additional amortization expenses, or by
deferring such expenses, as required to achieve the authorized return.
Amortization expenses in the CTA and SBC components impact earnings indirectly
through changes to rate base. The GSC, C&LM and REI are essentially pass-through
components (revenues are matched to recover costs). Except for the procurement
fee in the GSC previously discussed, and a small management fee earned in the
C&LM component, expenses are either accrued or deferred or revenues are
transferred such that there is no net income associated with these three
unbundled components.
UI's CTA collection recovers costs that have been reasonably incurred, or will
be incurred, to meet its public service obligations and that will likely not
otherwise be recoverable in a competitive market. These "stranded costs" include
above-market long-term purchased power contract obligations, regulatory asset
recovery and above-market investments in power plants. Subject to future
regulatory changes to the CTA rate, significant load growth, or to the level of
amortization, CTA revenues are expected to remain relatively constant, with
amortization increasing over time as the earnings trend downward due to the
decreasing CTA rate base. A significant amount of UI's earnings is generated by
the authorized return on the equity portion of as yet unamortized stranded costs
in the CTA rate base. UI's earnings per share attributable to CTA for the years
ended December 31, 2004, 2003 and 2002 were $0.94, $1.00, and $1.27,
respectively. A significant portion of UI's cash flow from operations is also
generated from those
-26-
earnings and from the recovery of the CTA rate base. Cash flow from operations
related to CTA for the years ended December 31, 2004, 2003 and 2002 amounted to
$26 million, $36 million and $45 million, respectively. The CTA rate base has
declined from year to year for a number of reasons, including: amortization of
stranded costs, the sale of the nuclear units, and adjustments made through the
annual DPUC review process. The original rate base component of stranded costs,
as of January 1, 2000, was $433 million. It has since declined to $413 million
at year-end 2000, $373 million at year-end 2001, $303 million at year-end 2002,
$279 million at year-end 2003, and $267 million at year-end 2004. The 2004
result is subject to DPUC review, pursuant to an annual review of UI's CTA
revenues and expenses, and may be adjusted in accordance with that review.
During July 2003, the DPUC issued an order requiring that the reduction of CTA
rate base utilizing excess GSC revenues be discontinued pursuant to the 2003
Restructuring Legislation. UI's CTA earnings will decrease while, based on UI's
current projections, cash flow will remain fairly constant until stranded costs
are fully amortized between 2013 and 2015, depending primarily upon the DPUC's
future decisions which could affect future rates of stranded cost amortization.
The primary Distribution Division operational factors affecting UI's financial
results are sales volume, ability to control expenses and capital expenditures.
Retail electric sales volume can be significantly affected by economic
conditions and weather. The level of economic growth can be reflected in many
ways: job growth or workforce reductions, plant relocations into or out of UI
territory, and facilities expansions or contractions, all of which can affect
demand for electricity. The weather can also have an impact on expenses,
dependent on the level of work required as a result of storms or other extreme
conditions. UI's major expense components are (1) purchased power; (2)
amortization of stranded costs; (3) wages and benefits; (4) depreciation; and
(5) regional network service (RNS) transmission costs.
On October 22, 2003, UI entered into an agreement with PSEG Energy Resources &
Trade LLC (PSEG) for the supply of all of UI's transitional standard offer
generation service needs, excluding requirements for special contract customers,
from January 1, 2004 through December 31, 2006, the end of the transitional
standard offer period. UI continues to purchase generation services pursuant to
a December 28, 2001 agreement with Dominion Energy Marketing (Dominion) to
supply special contract customers through December 31, 2008. While purchased
power expenses are a pass-through expense in terms of the regulatory methodology
which facilitates how customers fund these costs (collected from customers in
the GSC and as federally mandated congestion costs), UI is a principal in its
relationships with these suppliers, and is the primary obligor in these
arrangements. The contract with PSEG contains numerous financial assurances,
including a guaranty from PSEG's parent company, PSEG Power, various credit
requirements, including maintaining a minimum Moody's credit rating of Baa3 or
equivalent, and a letter of credit to secure performance through the initial
stages of the contract. UI is also required to maintain a minimum credit rating
of Baa3 or equivalent. UI's current Moody's credit rating is Baa2, which is one
level above the required minimum.
Prior to January 1, 2004, UI purchased generation services to supply standard
offer service pursuant to the agreement with Dominion. UI's agreement with
Dominion replaced an earlier wholesale power agreement and other related
agreements with Enron Power Marketing, Inc. (EPMI). Refer to Note (J),
"Commitments and Contingencies," of the Notes to Consolidated Financial
Statements for further information.
In order to maintain and improve its electricity delivery system and to provide
quality customer service, UI is required to spend a significant amount each year
on capital projects in the Distribution and Transmission Divisions. A large
portion of the funds required for capital projects is provided internally
through the recovery of depreciation and from amortization of stranded costs,
and the remainder must be financed externally. For more information, see
"Liquidity and Capital Resources" included later in this item of this Form 10-K.
UI, together with The Connecticut Light and Power Company (CL&P), has filed with
the Connecticut Siting Council (CSC) an application for a Certificate of
Environmental Compatibility and Public Need to construct a 345-kiloVolt
transmission line from Middletown, Connecticut, to Norwalk, Connecticut. This
project is expected to improve the reliability of the transmission system in
southwest Connecticut. The two companies are working together for permitting,
and will each construct, own and operate its respective portion of the
transmission line and related facilities. UI will construct, own, and operate
transmission and substation facilities comprising approximately 20%
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of the total project. UI's current estimate for its share of the project cost
is approximately $180 million (excluding allowance for funds used during
construction). The CSC has requested, and UI and CL&P have granted, a six-month
extension of the date for CSC's final decision to April 2005. Based on the
current projected schedule of construction, and barring any delays in approval
by the CSC, the project is expected to be completed in 2009. Other governmental
permitting, together with approvals from ISO-New England (ISO-NE), will be
required for the project. The total project cost and timing of completion could
change depending on final CSC decision specifications and timing and other
permit requirements. UI's costs for the project are expected to be included in
and recovered through transmission rates under FERC jurisdiction.
UI is dependent on the knowledge, training and abilities of its workforce.
Retaining key employees and maintaining the ability to attract new employees are
important to both UI's operational and financial performance. A significant
portion of UI's workforce, including many workers with specialized skills
maintaining and servicing the electrical infrastructure, will be eligible to
retire over the next five years. Such highly skilled individuals cannot be
quickly replaced due to the technically complex work they perform and the time
it takes to hire and train replacements. The inability to retain or replace
these employees could have an adverse effect on UI's financial condition and
results of operations. In recognition of this situation, UI has several
recruiting and training initiatives underway to mitigate the expected future
attrition and maintain the skill sets required to service customers. The current
agreement between UI and its unionized employees, which covers approximately 45%
of UI's workforce, expires in May 2005. The inability to enter into a new
agreement could have an adverse effect on UI's operations.
RISK MANAGEMENT AND INSURANCE
UI's primary risk management and insurance exposures include bodily injury,
property damage, fiduciary responsibility, and injured workers' compensation. UI
is insured for general liability, automobile liability, property loss, fiduciary
liability and workers' compensation liability. UI's general liability and
automobile liability programs provide insurance coverage for third party
liability claims for bodily injury (including "pain and suffering") and property
damage, subject to a deductible. Losses up to the deductible amounts are accrued
based upon our estimates of the liability for claims incurred and an estimate of
claims incurred but not reported. UI reviews the general liability reserves
quarterly to ensure the adequacy of those reserves. The reserve is based on
historical claims, business events, industry averages and actuarial studies.
Insurance liabilities are difficult to assess and estimate due to unknown
factors such as claims incurred but not reported and awards greater than
expected; therefore, reserve adjustments may become necessary as cases unfold.
UI insures its property subject to deductibles depending on the type of
property. UI's fiduciary liability program and workers' compensation program
provide insurance coverage, subject to deductibles as well. As with other
companies, UI has seen significant increases in its workers' compensation
premiums in the past several years.
XCELECOM, INC.
The principal factors affecting the financial results of Xcelecom and its
subsidiaries are (1) construction and technology spending; (2) competition; (3)
fixed-priced contract estimation and bidding; (4) work-related hazards and
insurance; (5) attracting and retaining management expertise; (6) overall
liquidity and ability to obtain surety bonding, and (7) risks of attaining
required labor productivity levels to meet or exceed contract estimates.
Additional risk factors include general economic conditions, the pace of
technological changes, recoverability and potential for impairment of goodwill,
and collectibility of receivables.
More than half of Xcelecom's business involves the installation of electrical,
mechanical and integrated network information systems in newly constructed and
renovated buildings and plants. Downturns in levels of construction starts and
business spending can have a material adverse effect on Xcelecom's business,
financial condition and results of operations. In addition, Xcelecom's business
is subject to seasonal variations in operations and demand that affect the
construction business, particularly in new construction. Quarterly results may
also be affected by regional economic conditions. Accordingly, Xcelecom's
performance in any particular quarter may not be indicative of the results that
can be expected for any other quarter or for the entire year. The competitive
bidding process for new business contracts normally intensifies during economic
downturns, leading to lower profit margins and an
-28-
increased potential for project cost overruns or losses. One of Xcelecom's
subsidiaries serves the region affected by the hurricanes that hit the
Southeast during 2004. The long-term impact of the hurricane damage on this
market will not be known for some time.
Xcelecom's contracts are generally awarded on the basis of competitive bids. The
final terms and prices of those contracts are frequently negotiated with the
customer. Although contract terms vary considerably, most are made on either a
fixed price or unit price basis in which Xcelecom agrees to do the work for a
fixed amount for the entire project (fixed price) or for units of work performed
(unit price), although services are sometimes performed on a cost-plus or time
and materials basis. Xcelecom's most significant cost drivers are the cost of
labor, including employee benefits, the cost of products and materials, and the
cost of casualty insurance. These costs may vary from the costs originally
estimated. Variations from estimated contract costs along with other risks
inherent in performing fixed price and unit price contracts may result in actual
revenue and gross profits for a project differing from those originally
estimated and could result in losses on projects. Depending on the size of a
particular project, variations from estimated project costs could have a
significant impact on operating results for any fiscal quarter or year.
Hazards related to Xcelecom's industry include, but are not limited to,
electrocutions, fires, mechanical failures, and transportation accidents. These
hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment, and may result in suspension of
operations. Xcelecom's third-party insurance is subject to large deductibles for
which reserves are established. Xcelecom believes its insurance and provisions
for self-insurance of deductibles are adequate to cover reasonably foreseeable
losses and liabilities. Losses impacting self-insurance provisions or exceeding
insurance limits could impact Xcelecom's operating results. One of Xcelecom's
subsidiaries has been affected by the 2004 hurricanes in Florida and expects
recovery from insurance policies for physical premises damage and is pursuing
claims for business interruption. Settlement of these claims is expected by the
second quarter of 2005.
The loss of key personnel or the inability to hire and retain qualified
employees could have an adverse effect on Xcelecom's business, financial
condition and results of operations. Xcelecom's operations depend on the
continued efforts of current and future executive officers, senior management
and management personnel at the companies which have been acquired. Xcelecom
took certain steps to mitigate the risk of loss of key personnel of acquired
companies, including the use of earn-out payments, promissory notes, and
covenant not to compete agreements. There is no guarantee that any member of
management of Xcelecom or any of its subsidiaries will continue in their
capacity for any particular period of time.
Billings under fixed price contracts are generally based upon achieving certain
benchmarks and will only be accepted by the customer once those benchmarks have
been met. An allowance for doubtful accounts is maintainedfor collection issues
related to accounts receivable . Inherent in the assessment of the allowance for
doubtful accounts are certain judgments and estimates including, among others,
customers' access to capital, customers' willingness to pay, general economic
conditions and the ongoing relationships with customers.
Surety market conditions are currently difficult as a result of significant
losses incurred by many sureties in recent periods, both in the construction
industry as well as in certain large corporate bankruptcies. As a result, less
bonding capacity is available in the market and terms have become more
restrictive. Further, under standard terms in the surety market, sureties issue
bonds on a project by project basis, and can decline to issue bonds at any time.
Historically, approximately one third of Xcelecom's construction-related
business has required bonds. While Xcelecom has enjoyed a longstanding
relationship with its surety, current market conditions, as well as changes in
the surety's assessment of Xcelecom's operating and financial risk, could cause
the surety to decline to issue bonds for future projects. If that were to occur,
Xcelecom could do more business that does not require bonds, post other forms of
collateral for project performance such as letters of credit or cash, and seek
bonding capacity from other sureties. There can be no assurance that such
alternatives could be easily achieved. Accordingly, if Xcelecom were to
experience an interruption in the availability of bonding capacity, its
operating results could be adversely impacted.
-29-
Xcelecom's profitability is primarily driven by labor costs. The ability to
perform contracts at acceptable margins depends on the ability to deliver
substantial labor productivity. There can be no assurance that productivity will
continue at acceptable levels for a particular period of time. Any loss of
productivity could adversely affect the margins on existing contracts or the
ability to obtain new contracts.
Historically, a significant amount of Xcelecom's growth has come through
acquisitions. From July of 1999 to Xcelecom's last significant acquisition in
April of 2002, Xcelecom made 12 acquisitions. Xcelecom currently does not intend
to grow materially through acquisitions in the foreseeable future; however, it
will continually evaluate acquisition prospects to complement and expand its
existing business platforms. The timing, size or success of any acquisition
effort and the associated potential capital commitments cannot be predicted.
Each acquisition involves a number of risks. These risks include the diversion
of management's attention from existing businesses to integrating the operations
and personnel of the acquired business; possible adverse effects on operating
results during the integration process; and possible inability to achieve the
intended objectives of the combination. If future acquisitions do not perform as
expected, Xcelecom may be required to write-off some or all of the value of any
goodwill and intangible assets associated with the acquisitions. Financial
results may also be impacted by the degree of integration of acquisitions,
including the ability to achieve synergies over the network of subsidiaries.
Xcelecom's revenue growth over the past several years has been generated
principally through acquisitions. In December 2004, Xcelecom acquired Datanet
Services, Inc. (DSI) in North Carolina. This relatively small acquisition
complements Xcelecom's existing operations in North Carolina and provides the
opportunity to expand both service offerings and the geographical area served.
The acquisition of DSI is expected to add approximately $22 million in revenues
in 2005.
The computer technology industry in general has begun to see the start of an
improving business environment in the United States. Xcelecom's systems
integration business generally experiences the positive effects of an economic
rebound prior to Xcelecom's other lines of business. Xcelecom sales in its
computer network systems integration line of business can be dependent on demand
for specific technology categories offered through particular vendor partners,
and any change in demand for, or supply of, such technology or change in
relationships with such partners could have a material adverse effect on
Xcelecom's sales if it fails to react in a timely manner to such changes or
manage such relationships. One crucial measure of performance, gross profit as a
percentage of net sales, can fluctuate due to numerous factors, including
changes in prices from suppliers, reductions in the amount of supplier
reimbursements that are made available, changes in customer mix, the relative
mix of products sold during the period, general competitive conditions, the
availability of opportunistic purchases and opportunities to increase market
share. In addition, expense levels, including the costs and salaries incurred in
connection with the hiring of sales and technical services personnel, are based,
in part, on anticipated sales. Therefore, Xcelecom may not be able to reduce
spending in a timely manner to compensate for any unexpected sales or margin
shortfalls.
As a result of the factors mentioned above, comparisons of Xcelecom's quarterly
financial results should not be relied upon as an indication of future
performance.
COST DRIVERS
As a service business, Xcelecom's cost structure is highly variable. Primary
costs include labor, materials and insurance. Approximately 49.6% of costs are
derived from labor and related expenses. For the years ended December 31, 2004,
2003 and 2002, labor-related expenses totaled $137.3 million, $122.7 million and
$122.6 million, respectively.
Approximately 34.9% of Xcelecom's costs incurred are for materials installed on
projects and equipment and other products sold to customers. This component of
the expense structure is variable based on the demand for services. Costs are
generally incurred for materials once work begins on a project or a customer
order is received. Materials are ordered when needed, shipped directly to the
jobsite or customer facility, and installed within 30 days. Materials consist of
commodity-based items such as conduit, pipe, data cabling, wire and fuses as
well as specialty items such as fixtures, switchgear, switches and routers,
servers and control panels. For the years ended December 31, 2004,
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2003 and 2002, material and equipment expenses totaled $117.2 million, $149.7
million and $165.0 million, respectively.
REGULATIONS
Xcelecom's operations are subject to various federal, state and local laws and
regulations, including:
- - licensing requirements applicable to electricians, steamfitters and plumbers;
- - building, mechanical and electrical codes;
- - regulations relating to consumer protection, including those governing
residential service agreements; and
- - regulations relating to worker safety and protection of the environment.
Xcelecom believes it has all licenses required to conduct operations and is in
substantial compliance with applicable regulatory requirements. Failure to
comply with applicable regulations could result in substantial fines or
revocation of operating licenses or an inability to perform government work.
Many state and local regulations governing electricians, steamfitters and
plumbers require permits and licenses to be held by individuals. In some cases,
a required permit or license held by a single individual may be sufficient to
authorize specified activities for all employees who work in the state or county
that issued the permit or license. It is Xcelecom's policy to ensure that, where
possible, any permits or licenses that may be material to its operations in a
particular geographic area are held by multiple Xcelecom employees within that
area.
RISK MANAGEMENT AND INSURANCE
The primary risks in Xcelecom's operations include health, bodily injury,
property damage, and injured workers' compensation. Xcelecom is insured for
workers' compensation, automobile liability, general liability and
employee-related health care claims, subject to large deductibles. A general
liability program provides coverage for bodily injury and property damage
neither expected nor intended. Losses up to the deductible amounts are accrued
based upon our estimates of the liability for claims incurred and an estimate of
claims incurred but not reported. The accruals are derived from actuarial
studies, known facts, historical trends and industry averages. Xcelecom believes
such accruals to be adequate. However, insurance liabilities are difficult to
assess and estimate due to unknown factors, including the severity of an injury,
the determination of liability in proportion to other parties, the number of
claims incurred but not reported and the effectiveness of Xcelecom's safety
programs. Therefore, if actual experience differs from the assumptions used in
the actuarial valuation, adjustments to the reserve may be required and would be
recorded in the period that the experience becomes known.
UNITED CAPITAL INVESTMENTS, INC.
UCI has a 25% interest in Cross-Sound Cable Company, LLC (Cross-Sound), which
owns and operates a 330-megawatt transmission line (cable) connecting
Connecticut and Long Island under the Long Island Sound. In January 2002, the
CSC granted a certificate of environmental compatibility and public need to
construct the cable. In the spring of 2002 the cable was installed, and after
installation it was determined that several sections of the cable in New Haven
Harbor were not buried to the depths required by the permits issued. The
authorized depth was not achieved due to the obstruction of rock ledge,
sediment and other more movable types of obstruction.
In June 2003, Cross-Sound submitted a request for a certificate of permission
to modify the existing permit and filed a new permit application with the
Connecticut Department of Environmental Protection (CDEP) seeking to operate
the cable as installed in its current location through December 31, 2007. Also
in June 2003, a Connecticut legislative moratorium on installing new gas and
utility lines across Long Island Sound was enacted, which precluded the CDEP
from considering applications related to submarine cables under Long Island
Sound for a year.
Following the August 2003 blackout that affected the Northeast region of the
United States, the federal Department of Energy (DOE) issued an Emergency Order
allowing immediate operation of the Cross-Sound cable, and subsequently issued a
new Order for the cable to operate until all appropriate actions to prevent
future power outages
-31-
in the region were identified and implemented. The cable operated pursuant to
the Emergency Order until the order was terminated in May 2004. The cable then
ceased operations for approximately seven weeks.
In June 2004, legislation in Connecticut was signed into law extending the
moratorium for another year. This legislation also allowed for a waiver of the
moratorium by means of an applicant receiving unanimous approval from certain
specified legislative and regulatory officials. In June 2004, Cross-Sound
obtained a waiver of the Connecticut moratorium by means of a settlement
agreement that was executed by Cross-Sound, the CDEP, the DPUC, Long Island
Power Authority, Long Island Lighting Company d/b/a LIPA (LILCO/LIPA), and
Northeast Utilities Service Company, as agent for The Connecticut Light and
Power Company (CL&P). This allowed immediate commercial operation of the cable.
Continuation of commercial operation is contingent upon the satisfaction of
certain conditions in the settlement agreement which include: (1) Cross-Sound
coming into compliance with permit conditions as directed by the CDEP; (2)
LILCO/LIPA and CL&P reaching an agreement by October 1, 2004 for the replacement
of an existing transmission line (the "1385 line" which is otherwise unrelated
to the Cross-Sound cable) and implementing such replacement on a schedule
approved by the CDEP; and (3) Cross-Sound, CL&P and LILCO/LIPA committing a
collective amount of $6 million, of which Cross-Sound's commitment is $2
million, to a research and restoration fund for the Long Island Sound to be
administered jointly by the States of New York and Connecticut.
On June 25, 2004, Cross-Sound submitted a request for a certificate of
permission to the CDEP in which it sought permission to change its methods of
burying the cable so as to fully achieve the currently required burial depth.
The CDEP approved the request, and on June 28, 2004, the Cross-Sound cable began
transmitting power in accordance with the settlement agreement.
Cross-Sound has satisfied the provisions of the settlement agreement for which
it is responsible. Specifically, the remediation work required in the federal
navigation channel in New Haven Harbor to bring the Cross-Sound cable into
compliance with the permit conditions set forth by the CDEP was completed in
January 2005. The remediation required consisted of achieving the originally
required burial depth in those areas deemed as "soft spots," meaning the
obstructions which originally prevented achievement of such depth could
generally be removed without the use of techniques such as blasting. The cost of
this remediation amounted to $4 million. The Cross-Sound cable was brought
off-line for approximately 12 hours each day during the remediation activities.
The permit conditions did not require the original burial depth to be achieved
in the area where rock ledge obstruction prevented meeting the original burial
depth until such time that the United States Army Corp of Engineers is
authorized to deepen the federal navigation channel in the New Haven Harbor.
During the third quarter of 2004, CL&P and LILCO/LIPA reached the necessary
agreements, as required by the settlement agreement, for the replacement of the
existing 1385 line. Such agreements included a schedule for implementation,
which has been approved by the CDEP. Implementation of this replacement plan,
which is not within Cross-Sound's control, is now the final step to satisfy the
provisions of the settlement agreement.
In late September 2004, Cross-Sound funded its $2 million commitment to the
research and restoration fund for the Long Island Sound, as required by the
settlement agreement. CL&P and LILCO/LIPA have also funded their commitments of
$2 million each.
UCI's 25% share of the actual project cost for the Cross-Sound cable was $34.3
million as of December 31, 2004. UCI has provided an equity contribution of $10
million to Cross-Sound and UIL Holdings loaned $24.8 million, including
capitalized interest, to Cross-Sound. In addition, two guarantees have been
provided by UIL Holdings and UCI totaling $3.8 million, in support of
Hydro-Quebec's guarantees to third parties in connection with the construction
of the project (see "Notes to Consolidated Financial Statements - Note (J),
Commitments and Contingencies - Cross-Sound Cable Company, LLC," for further
discussion of these guarantees). UCI will be responsible for 25% of any
additional capital needs of the project.
With the completion of all provisions of the settlement agreement for which
Cross-Sound is responsible, the loan from UIL Holdings may be refinanced with
external project financing.
-32-
Following execution of the settlement agreement, the existing contract
Cross-Sound has with the Long Island Power Authority for the entire capacity of
the transmission line has been amended, subject to formal approval by the New
York State Comptroller, to increase the overall term of the agreement from 20
years to 28 years by means of adding an initial three-year period at the
current reduced rates, and an additional five years to the end of the contract
term, at full rates.
UCI's investments in the venture funds in which it holds equity interests were
viewed as an opportunity to earn reasonable returns and promote local economic
development. Due to the nature of its investments and market conditions, the
carrying value of the Zero Stage VI fund has decreased substantially since the
end of 2000 and in the first quarter of 2004 UCI wrote down the carrying value
to zero, as the liabilities of the fund are in excess of the market value of its
assets. In July 2004, UCI funded its remaining capital commitment of $0.5
million to Zero Stage VII. There has been no material change since December 31,
2003 in the carrying value of the Ironbridge Mezzanine Fund, which is the other
venture fund in which UCI holds an equity interest.
UNITED BRIDGEPORT ENERGY, INC.
UBE holds a 33 1/3% ownership interest in Bridgeport Energy LLC (BE), the owner
of a gas-fired 520 MW merchant wholesale electric generating facility located in
Bridgeport, Connecticut. The principal factors which affect the financial
condition of UBE are natural gas prices, Connecticut energy prices, maintenance
costs and installed capability (ICAP) revenues. As UBE holds a minority interest
in BE, there are additional risk factors associated with the activities of the
majority owner, an affiliate of Duke Energy.
The majority owner of BE is an affiliate of Duke Energy. Another affiliate of
Duke Energy owns a 60% interest in Duke Energy Trading and Marketing (DETM),
which is a joint venture with Exxon Mobil Corporation. BE has an agreement
through August 2018 with DETM that gives DETM the right to deliver natural gas
to the facility and market all the electricity generated by the facility. DETM
reimburses BE under a formula based on the difference between gas costs and
electric prices.
Although routine maintenance is performed on the plant on a regular basis, from
time to time the plant must be brought offline for a major overhaul. The next
major overhaul is planned for 2005. Under an existing maintenance contract, the
plant has begun incurring some of these costs, and they are being accrued until
the outage occurs. BE had sufficient cash to fund these costs in 2004; however,
based on current estimates, BE will require additional capital from the owners
to cover the additional costs in 2005 when the outage occurs. Based on current
projections, UBE's additional capital requirement is expected to be $6 million.
UBE has provided a capital contribution of $2 million in February 2005. UBE and
the majority owner plan to fund the additional capital requirements either
through further capital contributions or through a secured loan to the plant on
market terms.
The ICAP market is designed to offer an incentive to maintain availability of
adequate generating capacity. BE receives ICAP revenues from energy marketers
based on the plant's installed capacity. The plant began initial operation with
a multi-year contract for ICAP. Since the contract ended in 2002, BE has only
been able to sell its ICAP in the forward month market at a much lower price,
reducing ICAP revenues by approximately 75% to 85%. The FERC has directed ISO-NE
to develop a Locational ICAP Market, with the intent to provide higher capacity
payments to generators within designated congestion areas. The FERC has delayed
the decision on Locational ICAP until June 2005 to allow more time to study the
issue, with any decision expected to become effective in January 2006. The full
impact of Locational ICAP is not known at this time.
The majority owner of BE has filed with the FERC an application for
"Reliability Must Run" (RMR) status, which, if approved, could significantly
increase BE's revenues in 2005. UBE agrees with the majority owner that RMR
would be beneficial to BE, but objected because certain aspects of proposed
related transactions between the majority owner and its affiliates, including
DETM, are not in the best interests of BE. Therefore, in the first quarter of
2005, UBE notified the majority owner that it will pursue its contractual rights
to sell its 33 1/3% interest to the majority owner at fair market value. The
majority owner has responded to UBE's notice, asserting
-33-
that the contractual preconditions for such a sale have not been met. UBE and
the majority owner have commenced a dispute resolution process to resolve this
disagreement over the sale rights.
Results at UBE continue to be hampered by high natural gas prices that drive
down both margins and sales volumes at BE, as well as the absence of a viable
capacity market to provide incentive for generating plants to remain available.
Although natural gas prices have remained at elevated levels in recent years,
DOE Annual Energy Outlook projections show improving conditions in the future.
In addition, RMR status and Locational ICAP are expected to provide compensation
to the plant for its availability Based on these projections, no conditions were
noted to give rise to an impairment with respect to the current $76.5 million
carrying value of UBE's investment in BE. UBE will continue to monitor its
investment in BE for recoverability, as changes in the projections considered
could have a negative impact on the carrying value of the investment in the
future.
As the majority owner of BE, Duke Energy's affiliate is responsible for the
daily operations and administration of the plant, including all accounting and
financial reporting functions of BE. As a minority interest owner, UBE relies on
the financial reports provided by BE to record its appropriate share of income
or losses of BE. During 2004, results at BE have been negatively impacted by a
number of accounting adjustments related to prior years. The impact of these
adjustments on UBE's results for the year ended December 31, 2004 was $0.4
million. In the third quarter of 2004, Duke Energy paid UBE $0.3 million to
reimburse UBE for the impact of an adjustment related to property taxes that
dated back to a period in which UBE was only a 4% owner of BE. The completion of
the annual independent audit of BE's 2003 financial statements is still pending,
and there could be additional adjustments as a result of the audit. UBE
conducted an audit of BE during 2004 and is discussing its findings with the
majority owner. Resolution of these issues is expected in 2005 and could
potentially have a favorable impact on the results of operations of UBE and may
reduce the amount of capital required from UBE in 2005.
AMERICAN PAYMENT SYSTEMS, INC.
As a result of the completion of the sale of APS to CheckFree on June 22, 2004,
UIL Holdings is no longer subject to the operating risk factors that affected
the financial results of APS in prior reporting periods. UIL Holdings' exposure
regarding APS is now governed by the indemnity provisions of the Stock Purchase
Agreement pursuant to which APS was sold to CheckFree. Those provisions require
UIL Holdings to indemnify CheckFree for breaches of the representations and
warranties contained in the agreement (subject to certain limitations), as well
as certain specified matters relating to the operations of APS prior to the
sale.
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LIQUIDITY AND CAPITAL RESOURCES
UIL Holdings generates its capital resources primarily through operations. At
December 31, 2004, UIL Holdings had $40.2 million of unrestricted cash and
temporary cash investments. This represents an increase of $11.6 million from
the corresponding balance at December 31, 2003. The components of this increase,
which are detailed in the Consolidated Statement of Cash Flows, are summarized
as follows:
(In Millions)
-------------
Balance, December 31, 2003 $28.6
--------------
Net cash provided by operating activities of continuing operations 99.4
Net cash provided by (used in) investing activities of continuing operations:
- Acquisition of Electric System Work Center facility (16.2)
- Cash invested in plant (48.9)
- Changes in restricted cash (1) 1.1
- Deferred payments in prior acquisitions (3.0)
- Acquisition of business, net of cash acquired (0.5)
- Loan to Cross-Sound Cable Project (0.8)
--------------
(68.3)
--------------
Net cash (used in) financing activities of continuing operations:
- Financing activities, excluding dividend payments (51.4)
- Dividend payments (41.3)
--------------
(92.7)
Net cash provided by discontinued operations: 73.2
Net Change in Cash 11.6
--------------
Balance, December 31, 2004 $40.2
==============
(1) As of December 31, 2004, UIL Holdings had $0.3 million in restricted cash
related to future debt payments of Xcelecom.
The net change in UIL Holdings' unrestricted cash position at December 31, 2004,
as compared to December 31, 2003, was due to a combination of cash provided by
operating activities of continuing operations, as well as the proceeds provided
by discontinued operations due to the completion of the sale of APS in June
2004. Cash provided by operating activities of continuing operations was driven
mainly by the utility business and was sufficient to cover the payment of UIL
Holdings' quarterly dividends payments totaling $41 million, funding of $18.6
million to the UI pension and post-retirement plans, and various investing
activities, including UI's purchase of the Electric System Work Center facility
for $16.2 million in January 2004. Cash provided by discontinued operations was
primarily due to $116 million of proceeds received for the sale of APS, which
was utilized to payoff $65 million in short-term borrowings, to pay for $14
million of costs associated with the sale of APS and to fund the $31 million
portion of the estimated income tax payments made in 2004 related to the gain on
the sale of APS. In the event that UIL Holdings were to incur capital losses
during the next three years that could not be offset with current period capital
gains, such losses could be carried back to 2004 for income tax purposes and
applied against the APS capital gain. This scenario would result in UIL Holdings
receiving a refund of 2004 income taxes paid.
UIL Holdings also accesses capital through both long-term and short-term
financing arrangements. Total long-term debt outstanding as of December 31, 2004
was $495.5 million, which was unchanged from year-end 2003. During 2004, Moody's
Investors Service (Moody's) lowered UIL Holdings' Issuer Rating from Baa1 to
Baa3 through two
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different downgrades of one level each in the first and third quarters of 2004,
respectively. Concurrent with the UIL Holdings' downgrades, Moody's also
downgraded UI's Issuer Rating and senior unsecured debt rating from A3 at the
beginning of 2004 to the current rating of Baa2. At the time of the second
downgrade in the third quarter of 2004, Moody's stated that the outlook for
the ratings of both UIL Holdings and UI is stable. UIL Holdings believes the
financial impact of the ratings changes is minimal, as other than the re-pricing
of $27.5 million of pollution control revenue bonds on February 1, 2005, neither
UIL Holdings nor UI expects to issue or refinance any long-term debt prior to
December 2007. UIL Holdings and Xcelecom also have short-term credit facilities
totaling $100 million and $30 million, respectively. The following table
presents a summary of the amounts available under these credit facilities as of
December 31, 2004:
UIL HOLDINGS XCELECOM
---------------------------------------------------------------
(in millions)
Credit lines available $100 $30
Less: Credit line advances outstanding 8 -
Less: Credit facility supporting standby
letters of credit - 5
Less: Credit facility supporting capital
equipment funding - 1
---------------------------------------------------------------
Available Credit $ 92 $24
===============================================================
All capital requirements that exceed available cash will have to be provided by
external financing. Although there is no commitment to provide such financing
from any source of funds, other than the short-term credit facilities discussed
above, future external financing needs are expected to be satisfied by the
issuance of additional short-term and long-term debt. The continued availability
of these methods of financing will be dependent on many factors, including
conditions in the securities markets, economic conditions, and future income and
cash flow. See Part II, Item 8, "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note (B), Capitalization and Note
(D), Short-Term Credit Arrangements" of this Form 10-K for a discussion of UIL
Holdings' financing arrangements.
FINANCIAL COVENANTS
UIL Holdings and its subsidiaries are required to comply with certain covenants
in connection with their respective loan agreements. The covenants are normal
and customary in bank and loan agreements. The covenants below describe only the
financial covenants in the agreements.
UIL HOLDINGS
Under the Note Purchase Agreement in connection with the 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, issued by UIL Holdings, UIL Holdings is required to (i) maintain a
ratio of consolidated debt to consolidated capital of not greater than 65% (debt
ratio); (ii) maintain a ratio of consolidated earnings available for interest
charges to consolidated interest charges for any period of four consecutive
fiscal quarters of at least 2.00 to 1.00 (interest coverage ratio); and (iii)
maintain consolidated net worth of at least $345 million plus 25% of
consolidated net income on a cumulative basis for each fiscal quarter for which
consolidated net income is positive. At December 31, 2004, UIL Holdings' debt
ratio was 49%; its interest coverage ratio was 7.61 to 1.00; and it had
consolidated net worth in excess of the requirement in the amount of $149.7
million.
Under the terms of the Note Purchase Agreement, an event of default shall occur
if UIL Holdings, UI, Xcelecom, or the direct parent of the non-utility
subsidiaries defaults on indebtedness in the aggregate principal amount of at
least $10 million due to (i) a default in payment or payments due on the
indebtedness, or (ii) default in the performance of or compliance with any term
or condition of the indebtedness, which could result in the requirement that
such indebtedness be repaid, or (iii) the occurrence of any event or condition
that could require the purchase or repayment of the indebtedness prior to
maturity.
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The revolving credit agreement described in Part II, Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note (D), Short-Term Credit Arrangements," of this Form 10-K, requires that UIL
Holdings (i) maintain a ratio of consolidated debt to consolidated capital, as
of the last day of each March, June, September and December, of not greater than
0.65 to 1.00; (ii) shall not cause the debt of UIL Holdings (excluding debt of
its subsidiaries) to exceed $200 million in the aggregate principal amount
outstanding at any time; and (iii) shall not permit the ratio of consolidated
earnings available for interest charges to consolidated interest charges,
determined on the last day of each March, June, September and December and for
the preceding four fiscal quarters, to be less than 2.00 to 1.00 (interest
coverage ratio). At December 31, 2004, UIL Holdings' consolidated debt to
consolidated capital ratio was 0.49 to 1.00; its aggregate principal debt
outstanding (excluding debt of its subsidiaries) was $83 million; and its
interest coverage ratio was 7.61 to 1.00.
Under the terms of the Revolving Credit Agreement, an event of default shall
occur if UIL Holdings or UI defaults on indebtedness in the aggregate principal
amount of at least $10 million due to (i) a default in payment or payments due
on the indebtedness, or (ii) default in the performance of or compliance with
any term or condition of the indebtedness, which could result in the requirement
that such indebtedness be repaid, or (iii) the occurrence of any event or
condition that could require the purchase or repayment of the indebtedness prior
to maturity.
There are no dividend restrictions or ratings triggers in connection with the
above agreements.
UI
Under the Note Purchase Agreement in connection with the 4.42% Senior Notes,
Series A, due December 12, 2007, in the principal amount of $74 million, and
4.89% Senior Notes, Series B, due December 12, 2009, in the principal amount of
$51 million, and the Note Purchase Agreement in connection with the 3.95% Senior
Notes, due December 9, 2008, in the principal amount of $100 million, UI is
required to (i) maintain a ratio of consolidated debt to consolidated capital of
not greater than 65% (debt ratio); and (ii) maintain a ratio of consolidated
earnings available for interest charges to consolidated interest charges for any
period of four consecutive fiscal quarters of at least 2.00 to 1.00 (interest
coverage ratio). As of December 31, 2004, UI's debt ratio was 53%; and its
interest coverage ratio was 6.38 to 1.00.
Under the terms of the Note Purchase Agreements, an event of default shall occur
if UI defaults on indebtedness in the aggregate principal amount of at least $10
million due to (i) a default in payment or payments due on the indebtedness, or
(ii) default in the performance of or compliance with any term or condition of
the indebtedness, which could result in the requirement that such indebtedness
be repaid, or (iii) the occurrence of any event or condition that could require
the purchase or repayment of the indebtedness prior to maturity.
There are no ratings triggers in connection with the above agreements.
XCELECOM
Xcelecom's revolving credit agreement, described in Part II, Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note (D), Short-Term Credit Arrangements," of this Form 10-K, requires that
Xcelecom maintain the following financial coverage ratios: (1) the ratio of
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) to consolidated fixed charges (fixed charge coverage ratio) of at least
1.25 to 1.00; (2) the ratio of consolidated liabilities to consolidated net
worth (liabilities to net worth ratio) of 1.00 to 1.00 or less; (3) the ratio of
consolidated debt, including inter-company debt, to consolidated EBITDA
(leverage ratio) of 3.50 to 1.00 or less; and (4) the ratio of consolidated debt
to consolidated EBITDA (senior leverage ratio) of 2.00 to 1.00 or less. At
December 31, 2004, Xcelecom's fixed charge coverage ratio was 4.20 to 1.00;
liabilities to net worth ratio was 0.44 to 1.00; leverage ratio was 1.92 to
1.00; and senior leverage ratio was 1.33 to 1.00. All borrowings outstanding
under this agreement are secured solely by assets of Xcelecom and its
subsidiaries.
There are no ratings triggers in connection with the above agreement.
-37-
2005 CAPITAL RESOURCE PROJECTIONS
The amount of UIL Holdings' quarterly per share cash dividend in 2005 is
expected to be equal to the cash dividend of $0.72 per share paid in each
quarter of 2004. UIL Corporate (which refers to the holding company level of UIL
Holdings) will continue to be entirely dependent on dividends from its
subsidiaries and from external borrowings to provide the cash necessary for debt
service, to pay administrative costs, to meet other contractual obligations that
cannot be met by the non-utility subsidiaries, and to pay common stock dividends
to UIL Holdings' shareholders. As UIL Corporate's sources of cash are limited to
dividends from its subsidiaries and external borrowings, the ability to maintain
future cash dividends at the level currently paid to shareholders will be
dependent upon 1) growth in the earnings of UI, 2) the ability of Xcelecom and
UIL Holdings' minority interest investments to begin providing dividends to UIL
Corporate, or 3) a reduction in the number of shares outstanding.
In order to achieve long-term growth in earnings, UI will need to increase its
rate base through capital investments. Without substantial additions to the rate
base, UI's earnings will gradually decline over time due to the amortization of
the CTA rate base. UIL Holdings' current strategy for Xcelecom and the minority
interest investments calls for those entities to be largely cash self-sufficient
in 2005. However, the ability of these entities, particularly the minority
interest investments, to improve earnings, cash flow, and their ability to
dividend cash to UIL Corporate without causing harm to their own operations or
financial conditions cannot be assured. See the "Major Influences on Financial
Condition" section of this Item 7 for more information.
UIL Holdings and its subsidiaries will continue their efforts to improve the
earnings and cash flow position of UIL Holdings, to strengthen its financial
position, and reduce its dividend to earnings payout ratio.
The following table represents UIL Holdings' unaudited projected sources and
uses of capital for 2005:
(In Millions)
--------------
Cash balance (unrestricted), December 31, 2004 $40.2
--------------
Cash to be provided by operating activities of continuing operations:
Utility 93.3
Non-Utility 9.2
--------------
Net cash projected to be provided by operating activities of continuing 102.5
operations
--------------
Cash to be provided by (used in) investing activities of continuing
operations:
Utility uses in investing activities (58.4)
Utility proceeds from sale/leaseback of Electric System Work Center
facility 16.2
Non-Utility uses in investing activities (13.3)
Non-Utility proceeds from repayment of loan to Cross-Sound 24.0
--------------
Net cash projected to be (used in) investing activities of continuing
operations (31.5)
--------------
Cash to be (used in) financing activities of continuing operations:
Payment of common stock dividend (41.8)
Payment for long-term debt maturities (6.1)
--------------
Net cash projected to be provided by (used in) financing activities of
continuing operations (47.9)
--------------
Projected cash balance (unrestricted), December 31, 2005 $63.3
==============
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UI
UI's cash flow from operating activities is its primary source of capital and
liquidity. UI is expected to continue to generate strong cash flow from
operating activities in 2005, currently projected to be in excess of $90
million. UI is expected to dividend an amount equal to its net income to UIL
Holdings in 2005, currently projected to be $40 - $41 million. Funds from
operations will also be used to finance approximately $59 million of capital
expenditures that are required for UI to maintain and improve its electrical
delivery systems, improve reliability of the system and provide superior
customer service. In addition, UI is currently planning to contribute a total of
$17 million to its pension and post-retirement benefits plans during 2005. UI is
considering a sale/leaseback transaction of its Electric System Work Center
property, which would require prior regulatory approval and would yield proceeds
of approximately $16 million, if completed. In the event that funds from
operations and proceeds from the anticipated sale/leaseback transaction are not
sufficient to finance the entire capital expenditure program, it is expected
that a portion of UI's existing cash on hand, which amounted to approximately
$36 million as of December 31, 2004, would be utilized.
The following table summarizes UI's estimated capital expenditures for 2005:
2005
----
(in Millions)
Projected UI Capital Expenditures
Distribution
Recloser Program (1) $ 5.7
Transformers 4.9
New loads/service 4.5
Cables 3.5
Poles 1.6
Substations 1.0
Other 11.4
--------------
Distribution Subtotal 32.6
--------------
Transmission
Middletown/Norwalk Project (2) 10.1
Other 5.2
--------------
Transmission Subtotal 15.3
--------------
Information Technology 8.9
Other 1.6
--------------
Total Projected UI Capital Expenditures $58.4
==============
(1) The Recloser Program is an initiative to improve reliability of the
electrical distribution system.
(2) This amount represents UI's current estimate based upon the proposed
configuration of the transmission lines. There has been opposition to the
planned configuration as proposed, particularly the overhead portions, and
it has yet to be approved by the Connecticut Siting Council. If the project
is approved in a form different than proposed, these estimates will change
accordingly. UI's current total estimated cost for this project is expected
to be $180 million, with the completion of the project anticipated to be in
2009. Funding for this project is expected to come from internally generated
funds in the early stages, with the potential use of debt, either short-term
or long-term, for the later stages of the project.
XCELECOM
The primary source of capital and liquidity for Xcelecom has been, and is
expected to continue to be, cash generated by operating activities. Xcelecom
maintains a revolving credit facility that may be utilized, among other things,
to
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meet short-term liquidity needs in the event cash generated by operating
activities is insufficient. Changes in short-term interest rates may have an
effect on borrowing costs, positively or negatively, related to this facility.
Xcelecom may also increase liquidity through additional infusions of equity or
inter-company debt from UIL Holdings. Xcelecom is not expected to dividend funds
to UIL Holdings in 2005.
Short-term liquidity is also impacted by the type and length of construction
contracts in place. During economic downturns, such as the 2001 through 2003
period, construction contracts trend away from short-cycle contracts toward
larger long-term infrastructure and public sector contracts. Performance of long
duration contracts typically requires working capital until initial billing
milestones are achieved. While Xcelecom strives to maintain a net over-billed
position with its customers, there can be no assurance that a net over-billed
position can be maintained. Xcelecom's net over-billings, defined as the balance
sheet accounts billings in excess of costs and estimated earnings on uncompleted
contracts less cost and estimated earnings in excess of billings on uncompleted
contracts, were $7.6 million and $7 million as of December 31, 2004 and December
31, 2003, respectively.
Xcelecom believes that current cash balances and borrowing capacity available
under lines of credit, combined with cash expected to be generated from
operations, will be sufficient to provide short-term and foreseeable long-term
liquidity and meet expected capital expenditure requirements. However,
Xcelecom's ability to generate positive cash flow at its historical levels could
be adversely impacted by numerous risks, including economic cycles, competition,
cost overruns on fixed price projects, and reductions in collections. Such
reductions in cash flow, together with the financial and other covenants in
Xcelecom's credit facility agreements, could limit its ability to borrow
additional funds. Additionally, failing to comply with those covenants could
result in an event of default, which, if not cured or waived, could have a
material adverse affect on Xcelecom.
Long-term liquidity requirements can be expected to be met through cash
generated from operating activities, the revolving credit facility, and if
necessary long-term capitalization efforts of UIL Holdings. Over the long term,
Xcelecom's primary revenue risk factor continues to be the level of demand for
non-residential construction services, which is in turn influenced by
macroeconomic trends including interest rates and governmental economic policy.
In order to provide protection against negative demand cycles in private sector
construction services, Xcelecom has increased its participation, and its backlog
of contracts, in the public sector, and continues efforts to expand its computer
systems network integration business line and the service content of all
business lines.
Many customers require subcontractors to post performance and payment bonds
issued by a surety. These bonds provide a guarantee to the customer that
Xcelecom will perform under the terms of a contract and that it will pay
subcontractors and vendors. If Xcelecom fails to perform under a contract or to
pay subcontractors and vendors, the customer may demand that the surety make
payments or provide services under the bond. Xcelecom must reimburse the surety
for any expenses or outlays it incurs. Xcelecom has maintained a relationship
with the same surety since inception in 1999. To date, Xcelecom has not had any
situation in which its surety has been required to incur expenses on Xcelecom's
behalf. As of December 31, 2004, the expected cost to complete projects covered
by surety bonds was approximately $43 million.
The underwriter of Xcelecom's casualty insurance programs requires Xcelecom to
post a letter of credit as collateral. This is common in the insurance industry.
To date, there have been no amounts drawn under this letter of credit. At
December 31, 2004, the letter of credit in place to collateralize insurance
programs amounted to $5 million.
MINORITY INTEREST INVESTMENTS AND UIL CORPORATE
UIL Holdings' current strategy and projections call for its minority interest
investments to be largely cash self-sufficient in 2005, with the exception of
any funding required for the planned major plant overhaul at BE. As noted in the
"Major Influences on Financial Condition - United Bridgeport Energy, Inc."
section of this Item 7, UBE will require additional capital from UIL Corporate,
amounting to as much as $6 million, to cover costs in 2005 related to a
scheduled major plant overhaul at BE. UBE has provided a capital contribution of
$2 million in February 2005, which UIL Corporate funded through use of
short-term borrowings. UBE and the majority owner of BE plan to fund
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the additional capital requirements of BE either through further capital
contributions or through a secured loan to the plant on market terms.
UCI is currently expected to be cash neutral in 2005, as Cross-Sound is expected
to generate sufficient cash to fund its operations in 2005. With the completion
of remediation work to bring the Cross-Sound cable into compliance with CDEP
permit conditions in January 2005, there will be less uncertainty concerning the
operations of the cable. This may provide the opportunity for Cross-Sound to
refinance the $24.8 million loan from UIL Holdings with external project
financing. If this were to occur, UIL Corporate would likely be cash positive
for 2005.
Absent the refinancing of the $24.8 million loan from UIL Holdings to
Cross-Sound, UIL Corporate will be dependent upon dividends from its
subsidiaries and from external borrowings to provide the cash necessary for debt
service, to pay administrative costs, to meet other contractual obligations that
cannot be met by the non-utility subsidiaries, and to pay common stock dividends
to UIL Holdings' shareholders.
-41-
CONTRACTUAL AND CONTINGENT OBLIGATIONS
The following are contractual and contingent obligations of UIL Holdings and its
subsidiaries as of December 31, 2004.
(IN MILLIONS)
2005 2006 2007 2008 2009 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Debt Maturities:
UIL Holdings $4.3 $4.3 $4.3 $ 4.3 $ 4.3 $ 53.5 $75.0
UI - - 74.0 100.0 51.0 195.5 420.5
-------- --------- -------- -------- -------- ------------- ---------
Total $4.3 $4.3 $78.3 104.3 $55.3 $249.0 $495.5
======== ========= ======== ======== ======== ============= =========
Contractual Obligations:
UIL Holdings
Interest on Long-Term Debt (1) $ 5.3 $ 5.0 $ 4.7 $ 4.4 $ 4.1 $ 5.6 $29.1
Purchase Orders (2) 0.3 - - - - - 0.3
UI
Lease Payments 11.3 11.5 12.0 12.2 12.3 47.1 106.4
Interest on Long-Term Debt (1) 14.9 14.9 14.9 11.7 7.7 101.7 165.8
Purchase Orders (2) 8.3 - - - - - 8.3
Pension Contribution (3) 17.4 - - - - - 17.4
UBE
BE Capital Requirement 6.0 - - - - - 6.0
UCI
Ironbridge 0.4 - - - - - 0.4
Xcelecom
Earn-Out Payments (4) 3.8 1.3 2.4 - - - 7.5
Promissory Note Payments (5) 3.8 - 0.2 - - - 4.0
Non-Compete Payments (6) 1.0 0.1 - - - 1.1
Notes Payable 1.8 0.8 0.5 0.4 0.4 - 3.9
Lease Payments 2.0 1.3 0.8 0.9 0.9 1.6 7.5
Purchase Orders (2) 43.9 - - - - - 43.9
-------- --------- -------- -------- -------- ------------- ---------
Total $120.2 $34.9 $35.5 $29.6 $25.4 $156.0 $401.6
======== ========= ======== ======== ======== ============= =========
As of December 31, 2004
-----------------------
(In Millions)
Guarantees:
UI-Hydro-Quebec (7) $3.3
UCI-Hydro-Quebec (8) $3.7
Letters of Credit:
Xcelecom (9) $5.0
Cross-Sound (10) $0.3
ISO-NE (11) $0.4
(1) Amounts represent interest payments on long-term debt outstanding at
December 31, 2004. Interest payments will change if additional long-term
debt is issued, or if current long-term debt is refinanced at different
rates, in the future.
(2) Amounts represent contractual obligations for material and services on
order at December 31, 2004 but not yet delivered.
(3) The total contributions to pension and post-retirement benefits plans for
2005 is estimated at $17.4 million. The actual contributions may differ
depending on the allowed maximum contribution for tax purposes and
fluctuations in the discount rate and return on plan assets. Contribution
projections beyond 2005 are not provided due to the volatility of the
factors mentioned.
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(4) Xcelecom's earn-out payments are payable to the former owners of certain
acquired companies and are contingent on various future financial results
of each company. The actual payments may vary from these estimated amounts.
(5) Xcelecom's promissory note payments are amounts payable to the former
owners of certain acquired companies. Several of the promissory notes have
provisions that allow Xcelecom to set-off amounts that become due to
Xcelecom pursuant to indemnities from the former owners of those acquired
companies.
(6) Xcelecom's non-compete payments are amounts payable to the former owners of
certain acquired companies.
(7) UI is obligated to furnish a guarantee for its participating share of the
debt financing for one phase of the Hydro-Quebec transmission tie facility
linking New England and Quebec, Canada. See Item 8, "Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note
(J), Commitments and Contingencies - Hydro-Quebec," of this Form 10-K for
further information.
(8) This amount represents UCI's and UIL Holdings' collective guarantee to
Hydro-Quebec in support of Hydro-Quebec's guarantees to third parties in
connection with the construction of the project. See Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note (J), Commitments and Contingencies - Cross-Sound Cable
Company, LLC," of this Form 10-K for further information.
(9) This amount represents Xcelecom's letter of credit in support of certain
insurance programs. See Item 8, "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note (D), Short-Term
Credit Arrangements," of this Form 10-K, which information is hereby
incorporated by reference.
(10) This amount represents UCI's participating share of Cross-Sound's letter of
credit to regulatory agencies.
(11) This amount represents UI's performance guarantee for participation in the
ISO-NE program to secure energy resources in Southwestern Connecticut. See
Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note (J), Commitments and
Contingencies - Independent System Operator - New England," of this Form
10-K for further information.
In general, UI purchases all of the electric power it sells to customers from
two fixed price (per KWH) sources, PSEG and Dominion. UI expects that these
suppliers will meet the requirements of its customers. The power to be purchased
from 2005 to 2008 under the existing agreements with PSEG and Dominion is
estimated to cost approximately $0.7 billion. UI will be obligated to pay only
for power actually delivered by its suppliers. UI recovers prudently incurred
purchase power costs pursuant to rate provisions approved by the DPUC. UI does
not foresee any material risks to the recovery of its costs from the terms of
the contract and rate structure. Refer to Part I, Item 1, "Business - Power
Supply Arrangements," and Part II, Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note (J),
Commitments and Contingencies - Claim of Dominion Energy Marketing, Inc.," of
this Form 10-K for further information.
CRITICAL ACCOUNTING POLICIES
UIL Holdings' Consolidated Financial Statements are prepared based on certain
critical accounting policies that require management to make judgments and
estimates that are subject to varying degrees of uncertainty. Investors need to
be aware of these policies and how they impact UIL Holdings' financial reporting
to gain a more complete understanding of UIL Holdings' Consolidated Financial
Statements as a whole, as well as management's related discussion and analysis
presented herein. While UIL Holdings believes that these accounting policies are
grounded on sound measurement criteria, actual future events can and often do
result in outcomes that can be materially different from these estimates or
forecasts.
ACCOUNTING FOR REGULATED PUBLIC UTILITIES - SFAS NO. 71
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 certain deferred tax assets and
-43-
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 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.
ACCOUNTING FOR PENSIONS AND OTHER POST-RETIREMENT BENEFITS
UIL Holdings accounts for its pension and post-retirement benefit plans in
accordance with SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No.
106, "Employers' Accounting for Post-retirement Benefits other than Pensions."
In applying these accounting practices, assumptions are made regarding the
valuation of benefit obligations and the performance of plan assets. Delayed
recognition of differences between actual results and those assumed allows for a
smoother recognition of changes in benefit obligations and plan performance over
the working lives of the employees who benefit under the plans. The primary
assumptions are as follows:
o Discount rate - this rate is used to determine the current value of
future benefits. This rate is adjusted based on movement of long-term
interest rates.
o Expected return on plan assets - the expected return is based upon a
combination of historical performance and anticipated future returns
for a portfolio reflecting the mix of equity, debt and other
investments included in plan assets.
o Average wage increase - projected annual pay increases, which are used
to determine the wage base used to project employees' pension benefits
at retirement.
o Health care cost trend rate - projections of expected increases in
health care costs.
These assumptions are the responsibility of management, in consultation with its
outside actuarial and investment advisors. A variance in the discount rate,
expected return on assets or average wage increase could have a significant
impact on pension costs, assets and obligations recorded under SFAS No. 87. A
variance in the health care cost trend assumption could have a significant
impact on post-retirement medical expense recorded under SFAS 106.
As of December 31, 2004, UIL Holdings changed its discount rate assumption that
was used to estimate 2005 pension expense from 6.00% to 5.75% to reflect the
reduction in the rate of return for long-term fixed-income securities, which
serves as the basis for this assumption. UIL Holdings plans to continue using 8%
as the expected return on plan assets for 2005, based on projections of future
expected performance developed in conjunction with UIL Holdings' actuaries and
investment advisors.
There is a significant possibility that the assumptions listed above will be
revised over time as economic and market conditions change. Changes in those
assumptions could have a material impact on pension and post-retirement
expenses. For example, if there had been a 0.25% change in the discount rate
assumed at 6% to estimate 2004 pension expense, the pension expense would have
increased or decreased inversely by $0.8 million; if there had been a 1% change
in the expected return on assets, the pension expense would have increased or
decreased inversely by $2.5 million.
The projected, long-term average wage increase is being maintained at 4.5% in
2005. In 2002, due to increases in projected health care costs, UIL Holdings
increased its health care cost trend rate and assumed such cost increases would
decline over the next several years and then level off. The 2005 health care
cost trend rate assumption for pre-65 retirees is 12%. For 2005, the health care
cost trend rate assumption for post-65 retirees is 6.5%.
UIL Holdings' 2004 pension and post-retirement benefits expenses were
$10.3 million and $5.2 million, respectively.
-44-
The assumptions are used to predict the net periodic expense on a look-forward
basis. To the extent actual investment earnings, actual wage increases and other
items differ from the assumptions, a gain or loss is created, and subsequently
amortized into expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, UIL Holdings adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement modified the accounting and reporting
of goodwill and intangible assets. Under this standard, UIL Holdings no longer
amortizes its existing goodwill. In addition, UIL Holdings is required to
measure goodwill for impairment annually or more frequently if circumstances
indicate possible impairment.
SFAS No. 142 requires goodwill to be allocated to reporting units and measured
for impairment under a two-step test at least annually unless events trigger an
earlier assessment. Goodwill attributable to UIL Holdings' reporting units was
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Fair value was determined by applying discounted cash flows
to revenue and profit forecasts and comparing those estimated fair values with
carrying values, which includes the allocated goodwill. If the estimated fair
value is less than the carrying value, a second step is performed to compute the
amount of impairment by determining an "implied fair value" of goodwill. Implied
fair value is determined by allocating the assets and liabilities with anything
left unallocated being goodwill. Due to the completion of the sale of APS in
June 2004, Xcelecom is the only reporting unit of UIL Holdings to which goodwill
is allocated. As of December 31, 2004, such testing indicated that there was no
impairment related to the Xcelecom reporting unit.
Significant estimates were used to calculate the fair value of Xcelecom for the
purpose of measuring goodwill for impairment. Such estimates include estimates
of future cash flows, future short-term and long-term growth rates, weighted
average cost of capital and estimates of market multiples for each of the
reportable units. A 1% change in the discount rate impacts the implied fair
value of goodwill at December 31, 2004 for Xcelecom by approximately $4 million.
This level of change in valuation would not trigger an impairment charge. UIL
Holdings subjected the testing analysis to a broad range of possible outcomes
and scenarios, and in each case the determinations noted above were confirmed.
Under SFAS No. 142, entities are also required to determine the useful life of
other intangible assets and amortize the value over the useful life. Such
intangible assets are required to be tested for impairment in a manner similar
to goodwill. In accordance with SFAS No. 142, UIL Holdings has determined the
useful life of other intangible assets and is amortizing the value over the
useful life. In 2004, other intangible assets were tested and no impairment was
found.
UNBILLED REVENUE
At the end of each accounting period, UI accrues an estimated amount for
services rendered but not billed. Through the end of 2003, the calculation was
based upon UI's system requirements or kilowatt-hour usage less distribution
losses and UI use for a given period, reduced by kilowatt-hours already billed
to customers (requirements method). Beginning in the first quarter of 2004, UI
began utilizing a new customer accounting software package integrated with the
network meter reading system to estimate unbilled revenue (installation method).
This allows for the calculation of unbilled revenue on a customer-by-customer
basis, utilizing actual daily meter readings at the end of each month to
calculate consumption and pricing for each customer. A significant portion of
utility retail kilowatt-hour consumption is now read through the network meter
reading system. For those customers still requiring manual meter readings,
consumption is estimated based upon historical usage and actual pricing for each
customer.
This implementation of the new system addressed above provides a more precise
method of calculating estimated unbilled revenue at the customer level in that
the system can consider changes to rates, prices, devices, registers, meter
reading results and other installation specific data. It also mitigates the
potential variability inherent in the requirements method from estimating
distribution losses. The installation method remains sensitive to numerous
factors, any of which can have a significant impact on the estimate of unbilled
revenue, such as estimated
-45-
consumption for those customers not a part of the network meter reading system,
changes in or problems with metering, seasonality, price changes and billing
adjustments. Conversion to the new system resulted in a change in estimate that
yielded a non-recurring increase to unbilled revenue of approximately $2.6
million and consolidated earnings per share of approximately $0.07 during the
first quarter of 2004.
PERCENT-OF-COMPLETION ACCOUNTING
Xcelecom believes its most critical accounting policy is revenue recognition
from long-term contracts for which Xcelecom uses the percentage-of-completion
method of accounting. Percentage-of-completion accounting is one of the
prescribed methods of accounting for long-term contracts in accordance with
accounting principles generally accepted in the United States of America and,
accordingly, the primary method used for revenue recognition within Xcelecom's
industry. Percentage-of-completion is measured principally by comparing the
percentage of costs incurred to date for each contract to the estimated total
costs for each contract at completion. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses become known.
Application of percentage-of-completion accounting results in the recognition of
costs and estimated earnings in excess of billings on uncompleted contracts
within the balance sheet. Costs and estimated earnings in excess of billings on
uncompleted contracts reflected on the balance sheet arise when revenues have
been recognized but the amounts cannot be billed under the terms of the
contracts. Such amounts are recoverable from customers based on various measures
of performance, including achievement of certain milestones, completion of
specified units, or completion of the contract. Due to uncertainties inherent
within estimates employed to apply percentage-of-completion accounting, it is
possible that estimates will be revised as project work progresses. Application
of percentage-of-completion accounting requires that the impact of those revised
estimates be reported in the financial statements prospectively.
Xcelecom completes most projects within one year. Service and maintenance work
is frequently provided under agreements which are renewable annually. Revenues
are recognized on service and time and material work when services are
performed. Work performed under a construction contract generally provides that
the customers accept completion of progress to date and provide compensation for
services rendered measured in terms of units installed, hours expended or some
other measure of progress. Revenues from construction contracts are recognized
on the percentage-of-completion method as described above.
In general contracts are considered to be substantially complete upon departure
from the work site and acceptance by the customer. Contract costs include all
direct material and labor costs and those indirect costs related to specific
contract performance, such as indirect labor, supplies, and tools. Changes in
job performance, job conditions, estimated contract costs and profitability and
final contract settlements may result in revisions to costs and income, and the
effects of these revisions are recognized in the period in which the revisions
are determined. Provisions for total estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
Based on the significant amount of assets recorded by UIL Holdings for both the
utility and non-utility businesses, monitoring of these assets for impairment
losses is critical. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," 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 costs
allowed. 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. As described in "Accounting for Regulated Public Utilities - SFAS
No. 71" earlier in this section, determination that certain regulatory assets no
longer qualify for accounting as such could have a material impact on both UI's
and UIL Holdings' financial condition. At December 31, 2004, UI did not have any
assets that were impaired under this standard.
-46-
UIL Holdings has significant amounts invested in companies accounted for under
the provisions of Accounting Principles Board Opinion No. 18, "The Equity Method
of Accounting for Investments in Common Stock" (APB No. 18). UIL Holdings
monitors these investments for impairment under the provisions of APB No. 18.
With respect to long-lived assets of the non-utility businesses, certain
assumptions must be made to project the future discounted cash flows resulting
from the use and eventual disposition of such long-lived assets. Examples of
such assumptions include the estimated useful life of the asset, projections of
future revenues and costs associated with the asset, projections of certain
market conditions, estimates of future commodity prices, and assumptions
regarding the outcome of certain legislative and regulatory processes. Although
management believes the assumptions made measuring the recoverability of assets
were reasonable based on the most currently available data at the time, there
can be no assurance that actual results will match estimates. Differences in the
actual outcome of events, as compared to the assumptions made, could have a
material effect on financial condition.
The most significant long-lived assets of the non-utility businesses are UBE's
$76.5 million investment in BE, and the $35.3 million combined carrying value of
UIL Holdings' loan to, and UCI's investment in, Cross-Sound. Both assets were
reviewed for impairment under the provisions of APB No. 18 as of December 31,
2004. With respect to UBE, based on natural gas and electricity forward price
projections derived from the most recent DOE Annual Energy Outlook report,
combined with estimated incremental revenues from RMR and Locational ICAP, no
conditions were noted to give rise to impairment. If there were a 0.25% change
in the discount rate assumed, the valuation would increase or decrease inversely
by approximately $1.4 million. This level of change in valuation would not
trigger an impairment charge. The combined carrying value of UIL Holdings' loan
to, and UCI's investment in, Cross-Sound was evaluated for impairment under the
assumption that all provisions of the settlement agreement under which the cable
has been granted commercial operating status would be satisfied, thus making the
commercial operating status of the cable permanent. Cross-Sound has agreements
in place, with an overall term of 28 years, for the entire capacity of the
cable, the expected cash flows from which are in excess of the carrying value of
the asset. If there were a 0.25% change in the discount rate assumed, the
valuation would increase or decrease inversely by approximately $0.7 million.
This level of change in valuation would not trigger an impairment charge. For
further discussion regarding BE and Cross-Sound, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Major
Influences."
OFF-BALANCE SHEET ARRANGEMENTS
UIL Holdings and its subsidiaries occasionally enter into guarantee contracts in
the ordinary course of business. At the time a guarantee is provided, an
analysis is performed to assess the expected financial impact, if any, based on
the likelihood of certain events occurring that would require UIL Holdings to
perform under such guarantee. Subsequent analysis is performed on a periodic
basis to assess the impact of any changes in events or circumstances. If such an
analysis results in an amount that is inconsequential, no liability is recorded
on the balance sheet related to the guarantee. As of December 31, 2004, UIL
Holdings had certain guarantee contracts outstanding for which no liability has
been recorded in the Consolidated Financial Statements (see Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note (J), Commitments and Contingencies," of this Form 10-K for further
discussion of such guarantees).
NEW ACCOUNTING STANDARDS
UIL Holdings reviews new accounting standards to determine the expected
financial impact, if any, that the adoption of each such standard will have. As
of the filing of this Annual Report on Form 10-K, there were no new accounting
standards issued that were projected to have a material impact on UIL Holdings'
consolidated financial position, results of operations or liquidity. Refer to
Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (A), Statement of Accounting Policies - New
Accounting Standards," for further discussion regarding new accounting
standards.
-47-
RESULTS OF OPERATIONS
2004 VS. 2003
- -------------
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: 2004 VS. 2003
- --------------------------------------------------------------
UIL Holdings' earnings from continuing operations for 2004 increased by $7.4
million, or $0.50 per share, compared to 2003. UIL Holdings reported earnings
from extraordinary items of $0.2 million, or $0.01 per share in 2004. Net income
from discontinued operations, including the gain on the sale of APS, increased
by $56 million, or $3.90 per share, compared to the 2003 net loss of $6.2
million, or $0.44 per share. Total earnings in 2004, including extraordinary
items and discontinued operations, increased by $63.6 million, or $4.41 per
share, as compared to 2003.
The increase in earnings from continuing operations was mainly due to various
non-recurring gains at UI related to a change in accounting estimate adjustment
to unbilled revenues, a settlement by ISO-NE related to a review of the
allocation of New England Power Pool transmission revenues to member companies,
the resolution of tax and other post-closing issues related to UI's sale of
Seabrook Station, and the impact of final decisions by the DPUC regarding the
disposition of proceeds from UI's investment in nuclear generating facilities.
Results at UI also benefited from lower interest charges, the DPUC's decision
allowing partial recovery of increased pension and post-retirement benefits
expenses from February 18, 2004 through June 24, 2004, and an increase in
kilowatt-hour consumption as compared to 2003. Improved results from Xcelecom's
electrical contracting business also contributed to the increase in earnings
from 2003.
The table below represents a comparison of UIL Holdings' net income and earnings
per share (EPS) for 2004 and 2003.
- ---------------------------------------------------------------------------------------------------------------------
2004 more (less) than 2003
----------------------------
Year Ended Year Ended
December 31, December 31,
2004 2003 Amount Percent
- ------------------------------------------------- ------------------ ------------------ ---------------- ------------
NET INCOME (IN MILLIONS EXCEPT PERCENTS
AND PER SHARE AMOUNTS)
UI $46.5 $38.7 $7.8 20%
Non-Utility (9.6) (9.2) (0.4) (4)%
----- ------ ------
TOTAL NET INCOME FROM CONTINUING
OPERATIONS 36.9 29.5 7.4 25%
Discontinued Operations 49.8 (6.2) 56.0 903%
Extraordinary Gain 0.2 0.0 0.2 100%
----- ------ ------
TOTAL NET INCOME $86.9 $23.3 $63.6 273%
===== ====== ======
EPS
UI $3.23 $2.71 $0.52 19%
Non-Utility (0.66) (0.64) (0.02) 3%
------ ------ ------
TOTAL EPS FROM CONTINUING
OPERATIONS - BASIC 2.57 2.07 0.50 24%
Discontinued Operations 3.46 (0.44) 3.90 886%
Extraordinary Gain 0.01 0.00 0.01 100%
----- ------ ------
TOTAL EPS - BASIC $6.04 $1.63 $4.41 271%
===== ====== ======
TOTAL EPS - DILUTED (NOTE A) $6.01 $1.63 $4.38 269%
===== ====== ======
- ------------------------------------------------- ------------------ ------------------ ---------------- ------------
Note A: Reflecting the effect of dilutive stock options, performance shares and
restricted stock. Such dilution does not impact the extraordinary gain, but
dilutes the 2004 earnings from continuing operations by $0.01 per share and
dilutes earnings from discontinued operations by $0.02 per share.
-48-
The following table presents a line-by-line breakdown of revenue and expenses
from UIL Holdings' Consolidated Statement of Income by subsidiary, including
comparisons between 2004 and 2003. Significant variances are explained in the
discussion and analysis of individual subsidiary results that follow.
YEAR ENDED DECEMBER 31, 2004 MORE (LESS)
(IN MILLIONS) 2004 2003 THAN 2003
- ------------- -------- -------- ---------
OPERATING REVENUES
UI from operations $ 764.1 $669.6 $94.5
Xcelecom 337.2 294.0 43.2
Minority Interest Investment & Other 0.0 0.1 (0.1)
-------- -------- --------
TOTAL OPERATING REVENUES $1,101.3 $963.7 $137.6
======== ======== ========
FUEL AND ENERGY EXPENSES - UI $ 377.9 $272.7 $105.2
======== ======== ========
OPERATION AND MAINTENANCE EXPENSES
UI $ 190.4 $185.5 $4.9
Xcelecom 330.1 290.0 40.1
Minority Interest Investment & Other 5.5 3.2 2.3
-------- -------- --------
TOTAL OPERATION AND MAINTENANCE EXPENSES $ 526.0 $478.7 $47.3
======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSES
UI $ 28.7 $28.3 $0.4
Xcelecom 3.5 3.5 0.0
-------- -------- --------
Subtotal depreciation 32.2 31.8 0.4
Amortization of regulatory assets (UI) 34.6 49.2 (14.6)
Amortization Xcelecom 1.3 1.2 0.1
-------- -------- --------
TOTAL DEPRECIATION AND AMORTIZATION EXPENSES $ 68.1 $82.2 $(14.1)
======== ======== ========
TAXES - OTHER THAN INCOME TAXES
UI - State gross earnings tax $ 25.3 $25.8 $(0.5)
UI - other 14.2 13.5 0.7
Xcelecom 1.8 1.8 0.0
-------- -------- --------
TOTAL TAXES - OTHER THAN INCOME TAXES $ 41.3 $41.1 $ 0.2
======== ======== ========
-49-
YEAR ENDED DECEMBER 31, 2004 MORE (LESS)
(IN MILLIONS) 2004 2003 THAN 2003
- ------------- -------- -------- ---------
OTHER INCOME (DEDUCTIONS)
UI $6.6 $5.3 $1.3
Xcelecom 0.9 0.5 0.4
Minority Interest Investment & Other 1.0 (0.4) 1.4
-------- -------- --------
TOTAL OTHER INCOME (DEDUCTIONS) $8.5 $5.4 $3.1
======== ======== ========
INTEREST CHARGES
UI $14.2 $20.7 $(6.5)
UI - Amortization: debt expense, redemption premiums 1.4 1.3 0.1
Xcelecom 0.6 0.6 0.0
Minority Interest Investment & Other 6.6 6.6 0.0
-------- -------- --------
TOTAL INTEREST CHARGES $22.8 $29.2 $(6.4)
======== ======== ========
INCOME TAXES
UI $37.8 $39.5 $(1.7)
Xcelecom 0.3 (0.9) 1.2
Minority Interest Investment & Other (7.4) (5.1) (2.3)
-------- -------- --------
TOTAL INCOME TAXES $30.7 $33.5 $(2.8)
======== ======== ========
INCOME (LOSSES) FROM EQUITY INVESTMENTS
UI $0.3 $0.3 $0.0
Minority Interest Investment & Other (6.4) (2.4) (4.0)
-------- -------- --------
TOTAL INCOME (LOSSES) FROM EQUITY INVESTMENTS $(6.1) $(2.1) $(4.0)
======== ======== ========
NET INCOME
UI $46.5 $38.7 $7.8
Xcelecom 0.5 (1.7) 2.2
Minority Interest Investment & Other (10.1) (7.5) (2.6)
-------- -------- --------
SUBTOTAL NET INCOME FROM CONTINUING OPERATIONS 36.9 29.5 7.4
Discontinued Operations 49.8 (6.2) 56.0
Extraordinary Gain - Xcelecom 0.2 0.0 0.2
-------- -------- --------
TOTAL NET INCOME $86.9 $23.3 $63.6
======== ======== ========
-50-
THE UNITED ILLUMINATING COMPANY RESULTS OF OPERATIONS: 2004 VS. 2003
- ---------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
2004 more (less) than 2003
--------------------------
Year Ended Year Ended
December 31, December 31,
2004 2003 Amount Percent
- -------------------------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS
Total UI - basic $3.23 $2.71 $0.52 19%
====== ====== ======
Total UI - diluted (Note A) $3.22 $2.71 $0.51 19%
====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
RETAIL SALES* 5,952 5,763 189 3%
UNBILLED ADJUSTMENT* (NOTE B) (46) - (46) (1)%
LEAP YEAR ADJUSTMENT* (NOTE C) (16) - (16) -
WEATHER IMPACT* (NOTE D) - (47) 47 1%
- -------------------------------------------------------------------------------------------------------------------
RETAIL SALES - NORMALIZED* 5,890 5,716 174 3%
- -------------------------------------------------------------------------------------------------------------------
* Millions of kilowatt-hours
Note A: Reflecting the effect of dilutive stock options, performance shares and
restricted stock.
Note B: 46 million kilowatt-hour non-recurring adjustment
associated with a change in accounting estimate to unbilled revenue
recognized in the first quarter of 2004. Percentage change reflects
impact to total retail sales.
Note C: 16 million kilowatt-hour adjustment to reflect the impact of leap year
in 2004. Percentage change reflects impact to total retail sales.
Note D: Percentage change reflects impact to total retail sales.
UI's net income was $46.5 million, or $3.23 per share, in 2004, compared to
$38.7 million, or $2.71 per share, in 2003. The results for 2004 were improved
as compared to 2003 due to an increase in kilowatt-hour volume consumption
mainly attributable to economic growth, although the benefits of this growth
were mitigated by milder weather in 2004 as compared to 2003. The results of
2004 also included various non-recurring items which had a net positive impact
to earnings of approximately $0.31 per share. These non-recurring items were
attributable to (1) a change in the accounting estimate for unbilled revenues
resulting from the implementation of a new integrated software package which
provides a more precise estimate of unbilled revenue, $0.07 per share positive
impact, (2) a settlement by ISO-NE related to a review of the allocation of New
England Power Pool transmission revenues to member companies, $0.08 per share
positive impact, (3) the resolution of post-closing issues and DPUC decisions
related to UI's sale of Seabrook Station, $0.11 per share positive impact, (4) a
fourth quarter true-up of insurance reserves, including worker's compensation
and general liability insurance, based on an analysis of claim activity by an
independent actuary, $0.06 per share positive impact, (5) the recovery
of increased pension and post-retirement benefits costs through June 24, 2004,
$0.08 per share positive impact, (6) the reversal of certain reserves following
the resolution of prior year Internal Revenue Service audits, $0.06 per share
positive impact, (7) the write-off of a net operating loss receivable from the
State of New Hampshire, $0.06 per share negative impact, (8) costs associated
with the previously announced restructuring of the UIL and UI Finance
organizations, $0.05 per share negative impact, and (9) an increase to
uncollectible reserves, $0.04 per share negative impact. These net favorable
variances were partially offset by higher operating expenses.
Overall, UI's revenue increased by $94.5 million, from $669.6 million in 2003 to
$764.1 million in 2004. Retail revenue increased $77.7 million due mainly to an
overall increase in kilowatt-hour volume of 3%, along with the impact of an
average 9.9% price increase effective January 1, 2004 resulting from the
transitional standard offer final decision (see "Major Influences on Financial
Condition - The United Illuminating Company - Regulation," for further
discussion). The price increase allowed UI to collect certain federally mandated
charges from customers to offset higher costs of procuring energy (see fuel and
energy expense discussion below). Of the overall 3% increase in kilowatt-hour
volume, approximately 1%, or 46 million kilowatt-hours, is attributable to the
non-recurring adjustment associated with a change in accounting estimate to
unbilled revenue recognized in the first quarter of 2004. Milder weather in
2004, as compared to 2003, reduced kilowatt-hour volume by approximately 1%, or
47 million kilowatt-hours. Wholesale revenue decreased by $0.1 million, as
compared to 2003, due to lower market prices in the New England wholesale
market. Other revenues increased $16.9 million as compared to the prior year,
-51-
primarily due to the settlement adjustment from ISO-NE and the reclassification
of $12.8 million from retail to other revenue representing net activity reducing
the GSC "bank" for the year.
Retail fuel and energy expense increased by $103.6 million from 2003. The
increase was primarily due to increased supplier costs providing transitional
standard offer service. UI received electricity to satisfy its transitional
standard offer retail customer service requirements through a fixed-price
purchased power agreement. These costs are recovered through the GSC portion of
UI's unbundled retail customer rates. UI's wholesale energy expense in 2004
increased by $1.6 million compared to 2003.
UI's operation and maintenance (O&M) expenses increased by $4.9 million, from
$185.5 million in 2003 to $190.4 million in 2004. The increase was attributable
to a variety of factors including increases in labor, employee benefits, GSC
procurement fees and bad debt expenses, partially offset by lower pension
expense. The increase in bad debt expense has been largely driven by higher
customer bills due to kilowatt-hour consumption and rates, along with the
difficulties many customers are facing in dealing with their overall higher
energy costs. Costs associated with the restructuring of the UIL Holdings and UI
Finance organizations in 2004 also contributed to the increase in O&M expenses.
Amortization of regulatory assets decreased by $14.6 million in 2004 as compared
to 2003. The primary reason for the reduction was due to a DPUC order in July
2003 requiring that the amortization of CTA rate base utilizing excess GSC
revenues be discontinued. Pursuant to the DPUC final decision in the
transitional standard offer proceedings, such excess GSC revenues are now banked
and used primarily to offset monthly working capital differences between the
cost of providing transitional standard offer service and the revenue collected
from customers.
Other income increased by $1.3 million in 2004, as compared to 2003, mainly due
to the reduction of reserves associated with UI's investment in Seabrook Station
resulting from a March 2004 DPUC decision and the resolution of tax and other
post-closing issues related to its sale of approximately $2.5 million. These
items were partially offset by $1 million of contributions made for housing
credits and the $0.6 million write-off of a net operating loss receivable from
the State of New Hampshire.
Interest charges decreased by $6.4 million in 2004, as compared to the prior
year, due to the refinancing of certain UI debt issues late in 2003 at lower
interest rates and the reversal of reserves due to the resolution of prior year
Internal Revenue Service audits.
-52-
NON-UTILITY BUSINESSES RESULTS OF OPERATIONS: 2004 VS. 2003
- ------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
2004 more (less) than 2003
--------------------------
Year Ended Year Ended
December 31, December 31,
2004 2003 Amount Percent
----------------------------------------------------------------------------------------------------------------------
EPS
Operating Business
Xcelecom $0.04 $(0.12) $0.16 133%
Minority Interest Investments
UBE (0.24) (0.15) (0.09) (60)%
UCI (0.05) (0.05) 0.00 -
-------- -------- --------
Subtotal Minority Interest
Investments (0.29) (0.20) (0.09) (45)%
UIL Corporate (Note A) (0.41) (0.32) (0.09) (28)%
-------- --------
TOTAL NON-UTILITY EPS FROM CONTINUING
OPERATIONS (0.66) (0.64) (0.02) (3)%
Discontinued Operations 3.46 (0.44) 3.90 886%
Extraordinary Gain 0.01 0.00 0.01 100%
-------- -------- --------
TOTAL NON-UTILITY EPS - BASIC $2.81 $(1.08) $3.89 360%
======== ======== ========
TOTAL NON-UTILITY EPS - DILUTED (NOTE B) $2.79 $(1.08) $3.87 358%
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
Note A: Includes interest charges on intercompany debt and strategic and
administrative costs of the non-utility holding company.
Note B: Reflecting the effect of dilutive stock options, performance shares
and restricted stock. Such dilution does not impact the earnings from
continuing operations or the extraordinary gain, but dilutes the 2004
earnings from discontinued operations by $0.02 per share.
The consolidated non-utility businesses reported a loss from continuing
operations, including unallocated holding company costs, of $9.6 million, or
$0.66 per share, in 2004, an increased loss of $0.4 million, or $0.02 per share,
compared to 2003. Improved results at Xcelecom, which were mainly attributable
to the performance of the electrical contracting business, were more than offset
by increased unallocated holding company costs and higher losses at UBE, as
compared to 2003. The non-utility businesses also reported an after-tax
extraordinary gain of $0.2 million, or $0.01 per share, in 2004. Net income from
discontinued operations for 2004, including the $46.2 million after-tax gain on
the sale of APS, net of transaction costs, amounted to $49.8 million, or $3.46
per share, compared to a loss of $6.2 million, or $0.44 per share, in 2003.
Operating revenue for the non-utility businesses increased by $43.1 million, or
15% compared to 2003. The increase in revenues was primarily from Xcelecom.
Operating expenses in 2004 for the non-utility businesses increased $42.5
million, or 14% from 2003, as expenses at Xcelecom rose due to the increase in
business. Losses from equity investments increased by $4 million, mainly due to
poor performance at BE.
The results of each of the non-utility subsidiaries for 2004 and 2003, 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
appropriate for that type of business. The capital structure for all of the
non-utility subsidiaries is 100% equity as of January 1, 2004. In 2003 the
capital structure of UBE was 70% debt. UIL Holdings absorbs interest charges on
the equity portion of its investments in its subsidiaries to the extent those
investments are financed with debt. UIL Holdings may incur other corporate level
expenses necessary to manage its investments from time to time.
-53-
The following is a detailed explanation of the change in results between 2004
and 2003 for each of UIL Holdings' non-utility businesses.
NON-UTILITY BUSINESSES
XCELECOM, INC.
Xcelecom reported net income from continuing operations of $0.5 million, or
$0.04 per share, in 2004, compared to a loss of $1.7 million, or $0.12 per share
in 2003. The improvement in earnings from 2003 was mainly due to an improvement
in revenues among all geographic regions of the electrical contracting business,
as well as the absence of $0.08 per share of losses incurred on two large
projects in the prior year. These improvements were partially offset by the
absence of income recognized in the prior year related to the completion of a
large contract. The aforementioned results of 2004 exclude an extraordinary gain
of $0.2 million, or $0.01 per share, due to the determination of the actual
amount of deferred acquisition payments to be paid in connection with a prior
acquisition. The resolution of this contingent consideration resulted in the
reversal of the excess portion of the related liability that was recognized at
the time of the acquisition, and in accordance with generally accepted
accounting principles, was reported as an extraordinary gain.
Although overall revenues at Xcelecom increased from 2003, the gross margin on
those revenues (defined as revenues divided by cost of sales) declined. Revenues
from the electrical contracting business increased from $250 million in 2003, to
$303 million in 2004, while the gross margin on those revenues decreased from
14.6% in 2003 to 13.3% in 2004. Revenues from the computer network systems
integration line of business declined from $42 million in 2003 to $33 million in
2004, while the gross margin on those revenues increased from 19.5% in 2003 to
22.8% in 2004.
During the fourth quarter of 2004, Xcelecom completed an acquisition in its
systems integration line of business for $0.5 million in cash, plus earn-out
provisions over the next five year period. This acquisition had no material
effect on 2004 earnings. Although Xcelecom still does not intend to grow
materially though acquisitions in the near future, this acquisition supports
Xcelecom's strategy of expanding existing business platforms and capitalizing on
synergies among the businesses to improve operating efficiencies.
Xcelecom's backlog of work to be completed as of December 31, 2004 amounted to
$199 million, an increase of $51 million, or 35%, over comparable year-end 2003
levels. While backlog has grown at virtually all of Xcelecom's construction
operating entities, the composition of this backlog is weighted more towards
larger, longer-term projects than pre-recession levels, which have historically
produced lower margins than smaller, faster paced projects.
MINORITY INTEREST INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC.
UBE owns a 33 1/3% interest in Bridgeport Energy, LLC (BE). UBE lost $3.5
million, or $0.24 per share in 2004, compared to losses of $2.2 million, or
$0.15 per share in 2003. Lower energy prices due to weather, high natural gas
prices and the absence of a viable capacity market to provide incentive for
generating plants to remain available continued to negatively impact results.
Results for 2004 have also been affected by approximately $0.4 million of
pre-tax accounting adjustments related to prior years. These factors were
partially offset by the elimination of interest expenses in 2004 as a result of
the restructuring of UIL Holdings' intercompany loan to UBE to 100% equity
beginning in 2004. The improvements recognized at UBE related to this
restructuring had no effect on overall UIL Holdings' results, as all
intercompany transactions are eliminated in consolidation.
Although energy and natural gas prices continue to hamper the results of BE, the
plant did not require any capital contributions from UBE during 2004.
-54-
UNITED CAPITAL INVESTMENTS, INC.
UCI lost $0.8 million, or $0.05 per share in 2004, compared to a loss of $0.6
million, or $0.05 per share in 2003. The increased loss from the prior year was
primarily due to a loss incurred at Cross-Sound as a result of the Cross-Sound
cable being offline for a significant portion of the fourth quarter of 2004
while remediation work was being conducted. The remediation work, which was
conducted in the New Haven navigation channel section of the Long Island Sound,
was required to bring the Cross-Sound cable into compliance with permit
conditions set forth by the CDEP and was completed in January 2005. UCI's 25%
share of Cross-Sound's income reduced 2004 earnings by $0.3 million, or $0.02
per share, in 2004, compared to increasing 2003 earnings by a nominal amount.
The impact of the loss at Cross-Sound was partially offset by lower valuation
losses from other passive investments. See the "Major Influences on Financial
Condition" section of this Item 7 for more information.
Cross-Sound did not require additional capital funding from its owners during
2004.
UIL CORPORATE
UIL Holdings retains certain costs at the holding company level which are not
allocated to the various non-utility subsidiaries. These costs generally include
interest charges and strategic and other administrative costs. UIL Holdings'
unallocated costs amounted to $5.8 million, after-tax, or $0.41 per share, in
2004, compared to $4.7 million, after-tax, or $0.32 per share, in 2003. The
increased costs were mainly due to administrative expenses, such as stock-based
compensation expense and costs associated with complying with the requirements
of the federal Sarbanes Oxley Act, as well as the unallocated portion of costs
associated with the reorganization of UIL Holdings' Finance organization.
Unallocated costs at UIL Corporate were partially offset by after-tax interest
income earned on the loan to Cross-Sound totaling $0.5 million, or $0.04 per
share, and $0.4 million, or $0.03 per share, for the years ended December 31,
2004 and 2003, respectively. See the "Major Influences on Financial Condition -
United Capital Investments" section of this Item 7 for more information
regarding the loan to Cross-Sound.
DISCONTINUED OPERATIONS
On June 22, 2004, UIL Holdings completed the sale of APS to CheckFree, pursuant
to the purchase agreement entered into between the parties on December 16, 2003.
APS, and its 51% ownership interest in CellCards of Illinois, LLC (CCI), were
classified as discontinued operations in the fourth quarter of 2003. On February
13, 2004, CCI was sold to an independent third party for book value, excluding
transaction costs.
The results of discontinued operations for 2004, including the gain on the sale
of APS, amounted to earnings of $49.8 million, or $3.46 per share. The overall
after-tax gain on the sale, net of all transaction costs incurred, was $46
million, or $3.20 per share. However, the after-tax effect of the sale, net of
transaction costs, for 2004 was $3.21 per share, as certain transaction costs
were incurred in the fourth quarter of 2003. Post-closing review procedures
related to the sale were completed during the third quarter of 2004.
Discontinued operations reported a loss of $6.2 million, or $0.44 per share, in
2003.
-55-
2003 VS. 2002
- -------------
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: 2003 VS. 2002
- --------------------------------------------------------------
UIL Holdings' earnings from continuing operations for 2003 decreased by $16.2
million, or $1.15 per share, compared to 2002. The net loss from discontinued
operations increased by $4.4 million, or $0.31 per share, from the 2002 net loss
of $1.8 million, or $0.13 per share. Total earnings for 2003, including
discontinued operations, decreased by $20.6 million, or $1.46 per share.
Several major factors contributed to the decline in earnings from continuing
operations, including the absence of income from the nuclear division due to the
sale of the Seabrook nuclear generating station (Seabrook) in November 2002,
effects of the DPUC's 2002 Rate Case decision for UI, increased pension and
post-retirement benefits costs, and a slow economic recovery affecting the
non-utility businesses. Results of discontinued operations were affected by an
impairment charge of $4.9 million, after-tax, taken in the fourth quarter of
2003. This impairment charge was mainly a result of UIL Holdings' reassessment
of the value of APS' telephony assets as a stand-alone operation after
announcing the pending sale of APS, excluding the telephony assets.
The table below represents a comparison of UIL Holdings' net income and earnings
per share (EPS) for 2003 and 2002.
- -----------------------------------------------------------------------------------------------------------------------
2003 more (less) than 2002
--------------------------
Year Ended Year Ended
December 31, December 31,
2003 2002 Amount Percent
----------------------------------------------------------------------------------------------------------------------
NET INCOME (IN MILLIONS EXCEPT PERCENTS)
UI $38.7 $48.1 ($9.4) (20)%
Nuclear Division - 5.8 (5.8) (100)%
Non-Utility (9.2) (8.2) (1.0) (12)%
-------- -------- --------
TOTAL NET INCOME FROM CONTINUING
OPERATIONS $29.5 $45.7 $(16.2) (35)%
Discontinued Operations (6.2) (1.8) (4.4) (244)%
-------- -------- --------
TOTAL NET INCOME $23.3 $43.9 $20.6 (47)%
======== ======== ========
EPS
UI $2.71 $3.38 $(0.67) (20)%
Nuclear Division - 0.41 (0.41) (100)%
Non-Utility (0.64) (0.57) (0.07) (12)%
-------- -------- --------
TOTAL EPS FROM CONTINUING
OPERATIONS - BASIC $2.07 $3.22 $(1.15) (35)%
Discontinued Operations (0.44) (0.13) (0.31) (238)%
-------- -------- --------
TOTAL EPS - BASIC $1.63 $3.09 $(1.46) (47)%
======== ======== ========
TOTAL EPS - DILUTED (NOTE A) $1.63 $3.08 $(1.45) (47)%
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------
Note A: Reflecting the effect of dilutive stock options and restricted
stock. Such dilution does not impact 2003 earnings, but dilutes the
2002 earnings from continuing operations by $0.01 per share.
-56-
The following table presents a line-by-line breakdown of revenue and expenses
from UIL Holdings' Consolidated Statement of Income by subsidiary, including
comparisons between 2003 and 2002. Significant variances are explained in the
discussion and analysis of individual subsidiary results that follow.
YEAR ENDED DECEMBER 31, 2003 MORE
(IN MILLIONS) 2003 2002 (LESS) THAN 2002
- ------------- ---- ---- ----------------
OPERATING REVENUES
UI from operations, before sharing $669.6 $ 691.3 $(21.7)
UI sharing from operations - (6.6) 6.6
Nuclear - 42.8 (42.8)
Xcelecom 294.0 310.0 (16.0)
Minority Interest Investment & Other 0.1 0.1 0.0
------ --------- --------
TOTAL OPERATING REVENUES $963.7 $1,037.6 $(73.9)
====== ========= ========
FUEL AND ENERGY EXPENSES
UI $272.7 $ 263.1 $ 9.6
Nuclear 0.0 6.1 (6.1)
------ --------- --------
TOTAL FUEL AND ENERGY EXPENSES $272.7 $ 269.2 $ 3.5
====== ========= ========
OPERATION AND MAINTENANCE EXPENSES
UI $185.5 $ 176.7 $ 8.8
Nuclear - 23.8 (23.8)
Xcelecom 290.0 301.1 (11.1)
Minority Interest Investment & Other 3.2 3.6 (0.4)
------ --------- --------
TOTAL OPERATION AND MAINTENANCE EXPENSES $478.7 $ 505.2 $(26.5)
====== ========= ========
DEPRECIATION AND AMORTIZATION EXPENSES
UI $ 28.3 $ 27.4 $ 0.9
Nuclear - 1.2 (1.2)
Xcelecom 3.5 3.2 0.3
Minority Interest Investment & Other 0.1 0.0 0.1
------ --------- --------
Subtotal depreciation 31.9 31.8 0.1
Amortization of regulatory assets (UI) 49.2 59.5 (10.3)
Amortization Xcelecom 1.2 1.3 (0.1)
------ --------- --------
TOTAL DEPRECIATION AND AMORTIZATION EXPENSES $ 82.3 $ 92.6 $(10.3)
====== ========= ========
TAXES - OTHER THAN INCOME TAXES
UI - State gross earnings tax $ 25.8 $ 28.3 $ (2.5)
UI - other 13.5 15.8 (2.3)
Nuclear - other - 0.4 (0.4)
Xcelecom 1.8 1.5 0.3
------ --------- --------
TOTAL TAXES - OTHER THAN INCOME TAXES $ 41.1 $ 46.0 $ (4.9)
====== ========= ========
-57-
YEAR ENDED DECEMBER 31, 2003 MORE
(IN MILLIONS) 2003 2002 (LESS) THAN 2002
- ------------- ---- ---- ----------------
OTHER INCOME AND (DEDUCTIONS)
UI $ 5.3 $ 2.9 $ 2.4
Xcelecom 0.5 0.7 (0.2)
Minority Interest Investment & Other (0.4) (1.3) 0.9
------ ------ -------
TOTAL OTHER INCOME AND (DEDUCTIONS) $ 5.4 $ 2.3 $ 3.1
====== ====== =======
INTEREST CHARGES
UI $20.7 $33.8 $(13.1)
UI - Interest on Seabrook obligation bonds owned by UI - (5.1) 5.1
UI - Amortization: debt expense, redemption premiums 1.3 1.9 (0.6)
Nuclear - 1.5 (1.5)
Xcelecom 0.6 1.3 (0.7)
Minority Interest Investment & Other 6.6 5.7 0.9
------ ------ -------
TOTAL INTEREST CHARGES $29.2 $39.1 $ (9.9)
====== ====== =======
INCOME TAXES
UI $39.5 $38.9 $ 0.6
Nuclear - 4.0 (4.0)
Xcelecom (0.9) 0.9 (1.8)
Minority Interest Investment & Other (5.1) (6.3) 1.2
------ ------ -------
TOTAL INCOME TAXES $33.5 $37.5 $ (4.0)
====== ====== =======
INCOME (LOSSES) FROM EQUITY INVESTMENTS
UI $ 0.3 $ 0.8 $ (0.5)
Minority Interest Investment & Other (2.4) (5.4) 3.0
------ ------ -------
TOTAL INCOME (LOSSES) FROM EQUITY INVESTMENTS $(2.1) $(4.6) $ 2.5
====== ====== =======
NET INCOME
UI $38.7 $48.1 $ (9.4)
Nuclear - 5.8 (5.8)
Xcelecom (1.7) 1.4 (3.1)
Minority Interest Investment & Other (7.5) (9.6) 2.1
------ ------ -------
SUBTOTAL NET INCOME FROM CONTINUING OPERATIONS 29.5 45.7 (16.2)
Discontinued Operations (6.2) (1.8) (4.4)
------ ------ -------
TOTAL NET INCOME $23.3 $43.9 $(20.6)
====== ====== =======
-58-
THE UNITED ILLUMINATING COMPANY RESULTS OF OPERATIONS: 2003 VS. 2002
- ---------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
2003 more (less) than 2002
--------------------------
Year Ended Year Ended
December 31, December 31,
2003 2002 Amount Percent
----------------------------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS
UI before Nuclear Division and Sharing $2.71 $3.90 $(1.19) (31)%
Sharing 0.00 (0.52) 0.52 100%
----- ------ -------
Subtotal UI excluding Nuclear 2.71 3.38 (0.67) (20)%
Nuclear Division 0.00 0.41 (0.41) (100)%
----- ------ -------
Total UI - basic $2.71 $3.79 $(1.08) (29)%
===== ====== =======
Total UI - diluted (Note A) $2.71 $3.78 $(1.07) (28)%
===== ====== =======
- -----------------------------------------------------------------------------------------------------------------------
RETAIL SALES (MILLIONS OF KWH) 5,763 5,781 (18) -
- -----------------------------------------------------------------------------------------------------------------------
Note A: Reflecting the effect of dilutive stock options and restricted stock.
UI EXCLUDING THE NUCLEAR DIVISION
Excluding the Nuclear Division, UI's net income was $38.7 million, or $2.71 per
share, in 2003, compared to $48.1 million, or $3.38 per share, in 2002. The 2002
earnings of $3.38 per share included an adjustment of $0.78 per share for
earnings which were in excess of the allowed 11.50% return on equity. In
accordance with the DPUC earnings sharing mechanism, the $0.78 per share was
allocated, or "shared," equally between shareowners, customers, and to reduce
stranded costs, resulting in a reduction of 2002 net income by $0.52 per share.
On a pre-sharing basis, earnings per share decreased by $1.19 per share,
primarily due to effects of the DPUC's 2002 Rate Case decision, which reduced
authorized return on utility common stock equity by the DPUC from 11.50% to
10.45%, effective September 26, 2002, reduced overall rates by 3%, and increased
stranded cost amortization. UI had also been affected by increased pension and
post-retirement benefit costs that had not been included for recovery in rates.
The effect of those additional costs on earnings was somewhat mitigated by
short-term actions taken by UI.
-59-
Overall, UI's total revenue decreased by $15.1 million, from $684.7 million in
2002 to $669.6 million in 2003. The decrease was primarily attributable to lower
retail revenue which was negatively impacted by weather as compared to 2002. The
decrease in retail revenue was mitigated by the absence of sharing in 2003, as
well as higher wholesale revenue as compared to 2002.
Retail fuel and energy expense increased by $9.2 million in 2003, compared to
2002. UI received electricity to satisfy its standard offer retail customer
service requirements through a fixed-price purchased power agreement. These
costs are recovered through the GSC portion of UI's unbundled retail customer
rates. UI's financial results are not materially affected by its customers'
selection of alternate suppliers to provide generation service. UI's wholesale
energy expense increased by $0.4 million, but these costs are recovered from
customers through the CTA.
UI's O&M expenses increased by $8.8 million, from $176.7 million in 2002 to
$185.5 million in 2003. The increase was due primarily to increased pension and
post-retirement expenses of $13.0 million, offset by decreased environmental
remediation costs of $3.2 million and a decrease in other expenses of $1.0
million.
Amortization of regulatory assets decreased by $10.3 million in 2003 compared to
2002. The primary reasons for the reduction were due to a DPUC order in July
2003 requiring that the amortization of CTA rate base utilizing excess GSC
revenues be discontinued until further determination and the absence of 2002
sharing amortization.
Other taxes (excluding State gross earnings tax) decreased by $2.3 million, from
$15.8 million in 2002 to $13.5 million in 2003. The decrease was due to lower
property taxes in 2003 as a result of the sale of Seabrook Station in November
2002.
Other income increased by $2.4 million in 2003, compared to 2002, primarily due
to interest income due to a higher level of short-term investments throughout
2003.
Interest charges decreased by $8.6 million, from $30.6 million in 2002 to $22
million in 2003. Overall, the decrease was due to the refinancing of certain UI
debt issues and the termination of the Seabrook Lease Obligation Bonds in
connection with the sale of UI's interest in Seabrook Station on November 1,
2002.
-60-
NUCLEAR DIVISION
The remaining operation assets of the Nuclear Division (Seabrook Station) were
sold on November 1, 2002. The Nuclear Division contributed net income of $5.8
million, or $0.41 per share, in 2002.
NON-UTILITY BUSINESSES RESULTS OF OPERATIONS: 2003 VS. 2002
- ------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
2003 more (less) than 2002
--------------------------
Year Ended Year Ended
December 31, December 31,
2003 2002 Amount Percent
----------------------------------------------------------------------------------------------------------------------
EPS
Operating Business
Xcelecom $(0.12) $ 0.10 $(0.22) (220)%
Minority Interest Investments
UBE (0.15) (0.07) (0.08) (114)%
UCI (0.05) (0.31) 0.26 84%
------- ------- -------
Subtotal Minority Interest
Investments (0.20) (0.38) 0.18 47%
UIL Corporate (Note A) (0.32) (0.29) (0.03) (10)%
------- ------- -------
TOTAL NON-UTILITY EPS FROM CONTINUING
OPERATIONS (0.64) (0.57) (0.07) (12)%
Discontinued Operations (0.44) (0.13) (0.31) (238)%
------- ------- -------
TOTAL NON-UTILITY EPS - BASIC $(1.08) $(0.70) $(0.38) (54)%
======= ======= =======
TOTAL NON-UTILITY EPS - DILUTED (NOTE B) $(1.08) $(0.70) $(0.38) (54)%
======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------
Note A: Includes interest charges on intercompany debt and strategic and
administrative costs of the non-utility holding company.
Note B: Reflecting the effect of dilutive stock options and restricted stock.
The consolidated non-utility businesses reported a loss from continuing
operations, including unallocated holding company costs, of $9.2 million, or
$0.64 per share, in 2003, an increased loss of $1.0 million, or $0.07 per share,
compared to a loss of $8.2 million, or $0.57 per share, in 2002. The slow
economic recovery in the East Coast region had a negative impact on the results
of Xcelecom, which was the primary driver for the decrease in earnings from
continuing operations as compared to 2002. Results at UBE were hampered by the
effects of high natural gas prices and lower installed capability revenues. The
decreases at Xcelecom and UBE were partially offset by lower losses from
continuing operations at UCI for 2003, due to the absence of an impairment
charge which affected 2002, and improved valuations of minority interest
investments. Results from discontinued operations for 2003 amounted to a loss of
$6.2 million, or $0.44 per share, compared to a loss of $1.8 million, or $0.13
per share in 2002. The increased loss from discontinued operations was mainly
due to an impairment charge recognized in the fourth quarter of 2003 related to
APS' telephony assets.
Operating revenue for the non-utility businesses decreased by $16 million, or
5%. All of the decrease in revenues came from Xcelecom. Total operating expenses
for the non-utility businesses decreased by $10.9 million, or 3%, due to the
decrease in business at Xcelecom. Losses from equity investments decreased by $3
million, or 56%, due to lower valuation losses and the absence of an impairment
charge recognized in 2002.
The results of each of the non-utility subsidiaries for 2003 and 2002, 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
appropriate for that type of business. The targeted capital structures for each
of the non-utility subsidiaries are:
-61-
100% equity for UCI, 65% equity and 35% debt for Xcelecom for all periods prior
to the second quarter of 2002 and 100% equity beginning in the second quarter of
2002, and 30% equity and 70% debt for UBE through the end of 2003 and 100%
equity beginning in 2004. UIL Holdings absorbs interest charges on the equity
portion of its investments in its subsidiaries to the extent those investments
are financed with debt. UIL Holdings may incur other corporate level expenses
necessary to manage its investments from time to time.
The following is a detailed explanation of the change in results between 2002
and 2003 for each of UIL Holdings' non-utility businesses.
NON-UTILITY BUSINESSES
XCELECOM, INC.
Xcelecom lost $1.7 million, or $0.12 per share, in 2003, compared to earnings of
$1.4 million, or $0.10 per share in 2002. A slow economic recovery in the East
Coast region was the primary driver for the lower results in 2003. This had
caused contract postponements and cancellations, increased competition for fewer
jobs, and decreasing project margins. Executive severance costs also affected
performance at Xcelecom in 2003 (by approximately $0.03 per share).
Additionally, the completion of several large, profitable non-recurring
contracts in 2002 that had not been replaced with comparable contracts in 2003
contributed to the earnings decline. The negative earnings impact of these items
was partly offset by improved performance in the systems integration division in
2003 as compared to 2002.
MINORITY INTEREST INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC.
UBE owns a 33 1/3% interest in Bridgeport Energy, LLC (BE). UBE lost $2.2
million, or $0.15 per share, in 2003, compared to losses of $1.0 million, or
$0.07 per share in 2002. UBE results were hampered by high natural gas prices
which kept both margins and sales levels low at BE in 2003, resulting in a $0.06
per share decline in earnings from energy revenues as compared to 2002.
Installed capability revenues reduced 2003 earnings by $0.21 per share compared
to 2002. The absence of a non-recurring insurance benefit of $0.05 per share
recognized in 2002 also contributed to the decline in earnings from the prior
year. These decreases were partially offset by the absence of major overhaul
expenses in 2003, which amounted to $0.25 per share in 2002.
UNITED CAPITAL INVESTMENTS, INC.
UCI lost $0.6 million, or $0.05 per share in 2003, compared to a loss of $4.4
million, or $0.31 per share, in 2002. An impairment of UCI's investment in
Gemini Networks, Inc., a broadband fiber-optic business, caused a one-time
charge of $0.16 per share in 2002. The remaining improvement in earnings from
2002 of $0.15 per share was due to better performance of minority interest
investments and reduced administrative costs. UCI recorded $0.1 million in
income from the Cross-Sound Cable project in 2003 based on the terms of an
interim operating agreement.
UIL CORPORATE
UIL Holdings retains certain costs at the holding company level which are not
allocated to the various non-utility subsidiaries. These costs generally include
interest charges and strategic and other administrative costs. UIL Holdings'
unallocated costs amounted to $4.7 million, after-tax, or $0.32 per share, in
2003, compared to $4.2 million, after-tax, or $0.29 per share, in 2002. The
increased costs were due to increased administrative expenses in 2003.
-62-
DISCONTINUED OPERATIONS
On June 22, 2004, UIL Holdings completed the sale of APS to CheckFree, pursuant
to the purchase agreement entered into between the parties on December 16, 2003.
APS, and its 51% ownership interest in CellCards of Illinois, LLC (CCI), were
classified as discontinued operations in the fourth quarter of 2003. On February
13, 2004, CCI was sold to an independent third party for book value, excluding
transaction costs.
Net loss from discontinued operations amounted to $6.2 million, or $0.44 per
share, in 2003, compared to a net loss of $1.8 million, or $0.13 per share in
2002. The results of 2003 were affected by an after-tax impairment charge of
$4.9 million, or $0.34 per share. This impairment charge was a result of UIL
Holdings' reassessment of the value of APS' telephony assets as a stand-alone
operation after announcing the pending sale of the remainder of APS. In addition
to the impairment charge, transaction costs incurred in 2003 associated with the
sale of APS amounted to $0.2 million, after-tax, or $0.01 per share. The results
of 2003 were also affected by other non-recurring charges totaling $1.0 million,
after-tax, or $0.07 per share. These charges were comprised of a write-down of
equipment values, a liability associated with vacated leased property, and a
loss on the sale of the investment in Bill Matrix. In accordance with SFAS No.
144, depreciation of assets classified as "held for sale" was ceased as of
December 16, 2003. As such, 2003 depreciation and amortization expense was $0.1
million, after-tax, lower than it would have been if the assets of APS had been
depreciated through the end of 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
UIL Holdings' and UI's primary market risk is the interest rate risk that occurs
in the refinancing of fixed rate debt at maturity and in the remarketing of
multi-annual tax-exempt bonds. The weighted average remaining fixed rate period
of outstanding long-term debt obligations of UIL Holdings and UI as of December
31, 2004 is 3.3 years, at an average interest rate of 4.1%. Given the term of
the fixed rate debt, UIL Holdings believes that it has no material quantitative
or qualitative exposure to market risk. In addition, historically, UI has been
able to include its interest costs in revenue requirements for recovery through
rates.
UIL Holdings and Xcelecom have short-term revolving credit agreements that
permit borrowings for fixed periods of time at fixed interest rates determined
by the London Interbank Offered Rate (LIBOR), and also borrowings at fluctuating
interest rates determined by the prime lending market. Changes in LIBOR or the
prime lending market will have an impact on interest expense, but due to the
relatively low level of short-term borrowings under these credit facilities, the
impact of changes in short-term interest rates is not expected to be material.
Market risk also represents the risks of changes in the value of a financial
instrument, derivative or non-derivative, caused by fluctuation in interest
rates, and equity prices. UIL Holdings does not have any derivative instruments
or any material investments in financial instruments at this time.
-63-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2004, 2003 and 2002
(Thousands except per share amounts)
2004 2003 2002
---- ---- ----
OPERATING REVENUES (NOTE F)
Utility $ 764,027 $ 669,620 $ 727,533
Non-utility businesses 337,260 294,057 310,063
----------- ---------- -----------
Total Operating Revenues 1,101,287 963,677 1,037,596
----------- ---------- -----------
OPERATING EXPENSES
Operation
Fuel and energy (Note F) 377,905 272,673 269,195
Operation and maintenance 526,021 478,720 505,162
Depreciation and amortization (Note F) 68,086 82,239 92,567
Taxes - other than income taxes (Note F) 41,285 41,088 45,970
----------- ---------- -----------
Total Operating Expenses 1,013,297 874,720 912,894
----------- ---------- -----------
OPERATING INCOME FROM CONTINUING OPERATIONS 87,990 88,957 124,702
----------- ---------- -----------
OTHER INCOME AND (DEDUCTIONS), NET (NOTE F) 8,591 5,383 2,265
----------- ---------- -----------
INTEREST CHARGES, NET
Interest on long-term debt 20,252 25,590 40,582
Interest on Seabrook Lease Obligation Bonds owned by UI - - (5,122)
Other interest, net (Note F) 1,049 2,403 1,717
----------- ---------- -----------
21,301 27,993 37,177
Amortization of debt expense and redemption premiums 1,490 1,267 1,969
----------- ---------- -----------
Interest Charges, net 22,791 29,260 39,146
----------- ---------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 73,790 65,080 87,821
----------- ---------- -----------
INCOME TAXES (NOTE E) 30,735 33,450 37,478
----------- ---------- -----------
INCOME FROM CONTINUING OPERATIONS OF CONSOLIDATED COMPANIES 43,055 31,630 50,343
INCOME (LOSSES) FROM EQUITY INVESTMENTS (6,137) (2,093) (4,592)
----------- ---------- -----------
INCOME FROM CONTINUING OPERATIONS 36,918 29,537 45,751
DISCONTINUED OPERATIONS, NET OF TAX (NOTE O) 49,824 (6,251) (1,804)
EXTRAORDINARY GAIN, NET OF TAX (NOTE Q) 203 - -
----------- ---------- -----------
NET INCOME $ 86,945 $ 23,286 $ 43,947
=========== ========== ===========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,390 14,291 14,239
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,473 14,304 14,282
EARNINGS PER SHARE OF COMMON STOCK - BASIC:
CONTINUING OPERATIONS $ 2.57 $ 2.07 $ 3.22
DISCONTINUED OPERATIONS $ 3.46 $ (0.44) $ (0.13)
EXTRAORDINARY GAIN $ 0.01 $ - $ -
----------- ---------- -----------
NET EARNINGS $ 6.04 $ 1.63 $ 3.09
EARNINGS PER SHARE OF COMMON STOCK - DILUTED:
CONTINUING OPERATIONS $ 2.56 $ 2.07 $ 3.21
DISCONTINUED OPERATIONS $ 3.44 $ (0.44) $ (0.13)
EXTRAORDINARY GAIN $ 0.01 $ - $ -
---------- ---------- -----------
NET EARNINGS $ 6.01 $ 1.63 $ 3.08
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, 2004, 2003 and 2002
(Thousands except per share amounts)
2004 2003 2002
---- ---- ----
NET INCOME $ 86,945 $ 23,286 $ 43,947
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain (loss) on marketable securities (Note A) - - (519)
Minimum pension liability (Note A) (77) 26,198 (26,694)
----------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS) (77) 26,198 (27,213)
----------- ---------- ----------
COMPREHENSIVE INCOME (NOTE A) $ 86,868 $ 49,484 $ 16,734
=========== ========== ==========
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
-64-
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(THOUSANDS OF DOLLARS)
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 86,945 $ 23,286 $ 43,947
----------- ----------- ----------
Adjustments to reconcile net income
to net cash provided by operating activities:
(Income) loss from discontinued operations, net of tax (49,824) - -
Extraordinary (gain) loss, net of tax (Note Q) (203) 6,251 1,804
Depreciation and amortization 46,679 59,472 65,972
Purchase power contract amortization (Note F) 22,897 24,034 24,014
Purchase Power above market fuel expense credit (Note F) (22,897) (24,034) (24,014)
Deferred income taxes 8,985 17,715 67,716
Future tax benefits (Note E) 6,800 36,976 (45,192)
Stock-based compensation expense (Note A) 2,562 728 -
Deferred investment tax credits - net (430) (387) (564)
Amortization of nuclear fuel - - 4,640
Allowance for funds used during construction (1,761) (2,491) (2,220)
Undistributed Income (Losses) from Equity Investments 6,137 2,093 4,592
Changes in:
Accounts receivable - net (31,129) 8,529 14,307
Materials and supplies (962) (425) 100
Prepayments (630) 521 998
Accounts payable 37,466 (7,492) 1,878
Interest accrued (2,205) (1,098) 3,139
Taxes accrued 10,659 (14,100) 1,767
Prepaid Pension (16,738) (45,000) -
Other assets (17,177) 15,565 (27,887)
Other liabilities 14,184 (10,877) 4,379
----------- ----------- ----------
Total Adjustments 12,413 65,980 95,429
----------- ----------- ----------
Cash provided by Continuing Operations 99,358 89,266 139,376
Cash provided by (used in) Discontinued Operations 3,375 (403) 8,249
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 102,733 88,863 147,625
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (463) - (7,691)
Non-utility passive investments - - (5,126)
Net proceeds from sale of generation facilities - - 79,214
Loan to Cross-Sound Cable Project (826) (23,986) -
Deferred payments in prior acquisitions (2,980) (2,757) (4,967)
Plant expenditures, including nuclear fuel (48,952) (52,309) (52,909)
Acquisition of Electric System Work Center facility (16,210) - -
Redemption of investment in Seabrook Lease Obligation Bonds - - 80,794
Investment (retirement) in debt securities, net - - 5,043
Changes in restricted cash 1,092 4,595 (2,348)
----------- ----------- ----------
Cash provided by (used in) Continuing Operations (68,339) (74,457) 92,010
Cash provided by (used in) Discontinued Operations 69,886 (119) (10,824)
----------- ----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,547 (74,576) 81,186
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of:
Common stock 7,684 1,371 6,132
Long-term debt - 98,711 125,000
(Purchase) sale of pollution control revenue refunding bonds - 25,000 (25,000)
Notes payable (59,007) 14,411 7,195
Long-term debt securities redeemed and retired - (100,000) (100,000)
Termination of Seabrook Lease Obligation - - (208,900)
Expenses of issuances - (2,765) (526)
Lease obligations - (473) (509)
Payment of common stock dividend (41,347) (41,137) (40,917)
----------- ----------- ----------
Cash (used in) Continuing Operations (92,670) (4,882) (237,525)
Cash provided by Discontinued Operations (59) 299 2,575
----------- ----------- ----------
NET CASH (USED IN) FINANCING ACTIVITIES (92,729) (4,583) (234,950)
----------- ----------- ----------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD 11,551 9,704 (6,139)
BALANCE AT BEGINNING OF PERIOD 28,614 18,910 25,049
----------- ----------- ----------
BALANCE AT END OF PERIOD $ 40,165 $ 28,614 $ 18,910
=========== =========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $ 22,799 $ 28,079 $ 36,782
=========== =========== ==========
Income taxes $ 35,661 $ 3,000 $ 12,800
=========== =========== ==========
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
-65-
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 2004 and 2003
ASSETS
(Thousands of Dollars)
2004 2003
---- ----
Current Assets
Unrestricted cash and temporary cash investments $ 40,165 $ 28,614
Restricted cash 291 1,384
Utility accounts receivable less allowance of $2,600 and $1,654 62,801 54,780
Other accounts receivable less allowance of $1,334 and $1,648 102,832 80,532
Unbilled revenues 39,750 32,246
Materials and supplies, at average cost 5,421 4,458
Deferred and refundable income taxes 4,355 24,944
Prepayments 2,083 1,451
Current assets of discontinued operations held for sale - 103,697
Other 380 1,323
---------------- ----------------
Total Current Assets 258,078 333,429
---------------- ----------------
Investments
Investment in United Bridgeport Energy facility 76,512 82,090
Other 24,191 20,283
---------------- ----------------
Total Investments 100,703 102,373
---------------- ----------------
Property, Plant and Equipment at original cost
In service 786,369 784,409
Less, accumulated depreciation 274,634 272,082
---------------- ----------------
511,735 512,327
Construction work in progress 52,117 36,467
---------------- ----------------
Net Property, Plant and Equipment 563,852 548,794
---------------- ----------------
Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Nuclear plant investments-above market 416,060 436,505
Income taxes due principally to book-tax differences 85,322 98,116
Long-term purchase power contracts-above market 71,920 88,024
Connecticut Yankee 47,565 51,579
Unamortized redemption costs 18,523 19,325
Other 56,966 43,259
---------------- ----------------
Total Regulatory Assets 696,356 736,808
---------------- ----------------
Deferred Charges
Goodwill 70,496 68,554
Unamortized debt issuance expenses 7,537 6,670
Prepaid Pension 49,510 43,927
Long-term receivable - Cross-Sound Cable Project 24,812 23,986
Other long-term receivable 15,991 13,575
Other 273 2,120
---------------- ----------------
Total Deferred Charges 168,619 158,832
---------------- ----------------
Long-term assets of discontinued operations held for sale - 17,930
---------------- ----------------
Total Assets $ 1,787,608 $ 1,898,166
================ ================
The accompanying Notes to the Consolidated Financial
Statements are an integral part of the financial statements.
-66-
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 2004 and 2003
LIABILITIES AND CAPITALIZATION
(Thousands of Dollars)
2004 2003
---- ----
Current Liabilities
Notes payable $ 13,462 $ 65,161
Current portion of long-term debt 4,286 -
Accounts payable 75,278 36,729
Dividends payable 10,444 10,299
Accrued liabilities 66,147 62,487
Deferred revenues - non-utility businesses 18,821 14,957
Interest accrued 4,153 6,358
Taxes accrued 5,033 6,655
Obligations under capital leases - 14,815
Current liabilities of discontinued operations held for sale - 94,267
---------------- ---------------
Total Current Liabilities 197,624 311,728
---------------- ---------------
Noncurrent Liabilities
Purchase power contract obligation 71,920 88,024
Pension accrued 6,425 8,166
Connecticut Yankee contract obligation 47,565 47,213
Long-term notes payable 2,587 10,478
Other 18,937 17,574
---------------- ---------------
Total Noncurrent Liabilities 147,434 171,455
---------------- ---------------
Deferred Income Taxes, Net(FUTURE TAX LIABILITIES OWED
TO TAXING AUTHORITIES) 345,482 345,676
---------------- ---------------
Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Accumulated deferred investment tax credits 12,383 12,813
Deferred gains on sale of property 33,044 33,679
Asset removal cost 7,217 14,071
Other 4,853 19,589
---------------- ---------------
Total Regulatory Liabilities 57,497 80,152
---------------- ---------------
Long-term liabilities of discontinued operations held for sale - 921
---------------- ---------------
Commitments and Contingencies (Note J)
Capitalization (Note B)
Net long-term debt 491,174 495,460
Common Stock Equity
Common stock (no par value, 14,505,896 and 14,314,599
shares outstanding at December 31, 2004 and 2003) 304,347 297,321
Paid-in capital 6,989 4,413
Capital stock expense (2,170) (2,170)
Unearned employee stock ownership plan equity (4,512) (5,461)
Unearned compensation (640) (335)
Accumulated other comprehensive loss (573) (496)
Retained earnings 244,956 199,502
---------------- ---------------
Net Common Stock Equity 548,397 492,774
Total Capitalization 1,039,571 988,234
---------------- ---------------
Total Liabilities and Capitalization $ 1,787,608 $ 1,898,166
================ ===============
The accompanying Notes to the Consolidated Financial Statements are an
integral part of the financial statements.
-67-
UIL HOLDINGS CORPORATION
Consolidated Statement of Changes in Shareholders' Equity
December 31, 2004, 2003 and 2002
(Thousands of Dollars)
Accumulated
Capital Unearned Other
Common Stock Paid-in Stock ESOP Unearned Comprehensive Retained
SHARES(a) AMOUNT CAPITAL EXPENSE EQUITY COMPENSATION INCOME (LOSS) EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 14,115,781 $291,788 $2,760 ($2,170) ($7,361) $ - $519 $214,459 $499,995
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 2002 43,947 43,947
Cash dividends on common
stock - $2.88
per share (41,029) (41,029)
Issuance of 128,359 shares
common stock - no par value 128,359 4,713 764 5,477
Unrealized loss on investment
(net of tax benefit of $344) (519) (519)
Minimum pension liability
adjustment (net of
deferred tax benefit of $17,703) (26,694) (26,694)
Allocation of benefits - ESOP 27,940 225 950 1,175
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 14,272,080 296,501 3,749 (2,170) 6,411) - (26,694) 217,377 482,352
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 2003 23,286 23,286
Cash dividends on common
stock - $2.88 per share (41,161) (41,161)
Issuance of 14,579 shares
common stock - no par value 14,579 820 24 844
Stock based compensation 611 115 726
Unearned stock compensation (450) (450)
Minimum pension liability
adjustment (net of deferred
tax expense of $18,802) 26,198 26,198
Allocation of benefits - ESOP 27,940 29 950 979
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 14,314,599 297,321 4,413 (2,170) (5,461) (335) (496) 199,502 492,774
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 2004 86,945 86,945
Cash dividends on common
stock - $2.88 per share (41,491) (41,491)
Issuance of 163,354 shares
common stock - no par value 163,354 7,026 392 7,418
Stock based compensation 1,964 311 2,275
Unearned stock compensation (616) (616)
Minimum pension liability
adjustment (net of deferred
tax benefit of $71) (77) (77)
Allocation of benefits - ESOP 27,943 220 949 1,169
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2004 14,505,896 $304,347 $6,989 ($2,170) ($4,512) ($640) ($573) $244,956 $548,397
- ------------------------------------------------------------------------------------------------------------------------------------
(a) There were 30,000,000 shares authorized in 2004, 2003 and 2002.
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
-68-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) STATEMENT OF ACCOUNTING POLICIES
UIL Holdings Corporation (UIL Holdings) was formed in July 2000 and is an exempt
public utility holding company under the provisions of the Public Utility
Holding Company Act of 1935. Through its various subsidiaries, UIL Holdings
operates in two principal lines of business: utility and non-utility. The
utility business consists of the electric transmission and distribution
operations of The United Illuminating Company (UI). The non-utility business
consists of the operations of Xcelecom, Inc. (Xcelecom) and two entities United
Capital Investments, Inc. (UCI) and United Bridgeport Energy, Inc. (UBE), which
hold minority ownership interests in their respective investments. The
non-utility businesses also included the operations of American Payment Systems,
Inc. (APS) until the completion of its sale to CheckFree Corporation (CheckFree)
on June 22, 2004. UIL Holdings is headquartered in New Haven, Connecticut, where
its senior management maintains offices and is responsible for overall planning,
operating and financial functions.
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 subsidiaries. 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 to the
current year presentation.
REGULATORY ACCOUNTING
Generally accepted accounting principles for regulated entities in the United
States of America allow UI to give accounting recognition to the actions of
regulatory authorities in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." In accordance with SFAS No. 71, UI has deferred
recognition of costs (a regulatory asset) or has recognized obligations (a
regulatory liability) if it is probable that such costs will be recovered or
obligations relieved in the future through the ratemaking process. 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), "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. In addition to the Regulatory Assets
and Liabilities separately identified on the Consolidated Balance Sheet, there
are other regulatory assets and liabilities such as certain deferred tax
liabilities. UI also has obligations under long-term power contracts, the
recovery of which is subject to regulation. If UI, or a portion of its assets
or operations, were to cease meeting the criteria for application of these
accounting rules, accounting standards for businesses in general would become
applicable and immediate recognition of any previously deferred costs would be
required in the year in which the criteria are no longer met, if such deferred
costs are not recoverable in the portion of the business that
-69-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
continues to meet the criteria for application of SFAS No. 71. UI expects to
continue to meet the criteria for application of SFAS No. 71 for the foreseeable
future. If a change in accounting were to occur, 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 costs of current repairs,
major maintenance projects and minor replacements, are charged to appropriate
operating expense accounts as incurred. The original cost of utility property,
plant and equipment retired or otherwise disposed of and the cost of removal,
less salvage, are charged to the accumulated provision for depreciation. 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.
UI accrues for estimated costs of removal for certain of its plant-in-service.
Such removal costs are included in the approved rates used to depreciate these
assets. At the end of the service life of the applicable assets, the accumulated
depreciation in excess of the historical cost of the asset provides for the
estimated cost of removal. In accordance with SFAS No. 143, "Accounting for
Asset Retirement Obligations," UI's accrued costs of removal have been
reclassified to a regulatory liability. The amount of accrued costs of removal
reclassified to a regulatory liability as of December 31, 2003 totaled $14.1
million and was based upon UI's best estimate developed from its previous
depreciation studies. In the third quarter of 2004, a new independent third
party study was completed to update UI's cost of removal accrual and amounts to
be accrued in future years. Based on the results of this study and activity
during 2004, accrued costs of removal as of December 31, 2004 totaled $7.2
million.
UIL Holdings' property, plant and equipment as of December 31, 2004 and 2003
was comprised as follows:
2004 2003
---- ----
(In Thousands)
Utility:
Transmission plant $144,340 $141,870
Distribution plant 494,527 497,233
General plant 54,402 59,662
Software 56,432 51,147
Other plant 1,842 1,847
-------------------------
Subtotal 751,543 751,759
Non-utility business units 34,826 32,650
-------------------------
Total property, plant & equipment 786,369 784,409
Less accumulated depreciation:
Utility 250,430 251,100
Non-utility business units 24,204 20,982
-------------------------
Subtotal accumulated depreciation 274,634 272,082
-------------------------
511,735 512,327
Construction work in progress 52,117 36,467
-------------------------
Net property, plant & equipment $563,852 $548,794
=========================
-70-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
DEPRECIATION
Provisions for depreciation on utility plant for book purposes are computed on a
straight-line basis, using estimated service lives. For utility plant other than
software, service lives are determined by independent engineers and subject to
review and approval by the DPUC. Software service life is based upon
management's estimate of useful life. 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 2004, 2003 and 2002
were approximately 4.2%, 4.5%, and 3.8%, 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.
Depreciation of assets classified as "held for sale" ceases on the date the
assets meet the criteria to be classified as such (see Discontinued Operations
section of this footnote, and Note (O)).
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.
REVENUES
Regulated utility revenues for UI are based on authorized rates applied to each
customer's use of electricity. These retail rates are approved by the DPUC and
can be changed only through formal proceedings. Transmission revenues are
federally regulated by the FERC.
At the end of each accounting period, the estimated amount of revenues for
services rendered but not billed is accrued. Prior to January 1, 2004, UI
estimated its accrual for unbilled revenue based upon its system requirements
less an estimated loss factor. Beginning in the first quarter of 2004, UI began
utilizing a new customer accounting software package integrated with the network
meter reading system to estimate unbilled revenue. This allows for the
calculation of unbilled revenue on a customer-by-customer basis, utilizing
actual daily meter readings at the end of each month to calculate consumption
and pricing for each customer. A significant portion of utility retail
kilowatt-hour consumption is now read through the network meter reading system.
For those customers still requiring manual meter readings, consumption is
estimated based upon historical usage and actual pricing for each customer.
Conversion to the new methodology resulted in a non-recurring increase to
unbilled revenue of approximately $2.6 million and a non-recurring increase to
consolidated earnings per share of approximately $0.07 during the first quarter
of 2004.
Revenues from construction contracts entered into by Xcelecom are recognized on
a percentage-of-completion method. Percentage-of-completion accounting is one of
the prescribed methods of accounting for long-term contracts in accordance with
accounting principles generally accepted in the United States of America and,
accordingly, the primary method used for revenue recognition within Xcelecom's
industry. Percentage-of-completion is measured principally by the percentage of
costs incurred to date for each contract
-71-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
compared to the estimated total costs for each contract at completion.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses become known.
Application of percentage-of-completion accounting results in the recognition of
costs and estimated earnings in excess of billings on uncompleted contracts
within the balance sheet. Costs and estimated earnings in excess of billings on
uncompleted contracts reflected on the balance sheet arise when revenues have
been recognized but the amounts cannot be billed under the terms of the
contracts. Such amounts are recoverable from customers based on various measures
of performance, including achievement of certain milestones, completion of
specified units, or completion of the contract. As of December 31, 2004 and
2003, approximately $11.2 million and $8 million, respectively, of costs and
estimated earnings in excess of billings on uncompleted contracts were included
in Unbilled Revenues on the Consolidated Balance Sheet.
Construction contracts often contain provisions under which customers can hold
back or "retain" a portion of billed amounts until the contract or certain
milestones are completed and accepted by the customer. Amounts billed by
Xcelecom but not paid by customers pursuant to retainage provisions in
construction contracts totaled $14 million and $10.1 million as of December 31,
2004 and 2003, respectively, and were included in Other Accounts Receivable on
the Consolidated Balance Sheet.
Revenues generated by other business units are recognized when earned, generally
when the earnings process is complete and an exchange has taken place.
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
Prior to the sale of its 17.5% ownership interest in Seabrook Station, UI was
required to maintain an operating deposit with the project disbursing agent for
operating expenses. With the sale, these funds were placed in escrow to cover
operating expenses accrued at the time of sale. Such funds were restricted for
use and totaled $1.1 million at December 31, 2003. There were no restricted
funds remaining at December 31, 2004.
Xcelecom maintained restricted cash, related to future debt payments, of $0.3
million at both December 31, 2004 and 2003.
INVESTMENTS
UI's investment in the Connecticut Yankee Atomic Power Company (Connecticut
Yankee), a retired nuclear generating company in which UI has a 9.5% stock
interest, is accounted for on an equity basis. This net investment amounted to
$4.1 million and $4.4 million at December 31, 2004 and 2003, respectively. In
2004, the DPUC issued a final decision requiring UI to reclassify its investment
in Connecticut Yankee from regulatory assets to other investments, effective as
of the date of the decision. As such, UI's investment in Connecticut Yankee is
included on the Consolidated Balance Sheet in Other Investments as of December
31, 2004 and in Regulatory Assets as of December 31, 2003. The Connecticut
Yankee nuclear unit was retired in 1996 and is currently being decommissioned.
See Note (J), "Commitments and Contingencies - Other Commitments and
Contingencies - Connecticut Yankee Atomic Power Company."
UIL Holdings (through UCI and UBE) accounts for certain minority interest
investments, such as Cross-Sound Cable Company, LLC, Bridgeport Energy, LLC
(BE), Zero Stage and Ironbridge, using the equity accounting method under
-72-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
the provisions of Accounting Principles Board Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock" (APB No. 18).
UIL Holdings received dividends from equity investees of $0.5 million, $1.3
million and $1.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
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 and recorded an investment and realized a
gain of approximately $3.1 million, which represented the fair 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 $0.2 million. As of December
31, 2001, APS recorded an investment and unrealized gain of approximately $0.9
million in comprehensive income, which represented the difference between the
market price of the shares as of December 31, 2001 and the conversion price. The
secured convertible note was repaid in May 2002.
NOTES RECEIVABLE
In January 2004, all telephony assets of APS were transferred to one of UIL
Holdings' non-utility subsidiaries. One of the assets transferred was a loan
receivable related to the acquisition of Point of Sale Activation (POSA)
technology in 2002. In connection with the acquisition of the POSA technology,
APS loaned money to the vendor from which the technology was acquired.
Subsequently, the vendor defaulted under the loan and the remaining loan balance
was restructured as part of the foreclosure procedures. As consideration for an
accelerated payment schedule, APS agreed to forgive a portion of the outstanding
loan balance, bringing the restructured amount due to $1 million. As of June 30,
2004, the principal balance of the restructured loan was paid.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, UIL Holdings adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement modifies the accounting and reporting
of goodwill and intangible assets. Under this standard, UIL Holdings is no
longer amortizing its existing goodwill. In addition, UIL Holdings is required
to measure goodwill for impairment annually or more frequently if circumstances
indicate a possible impairment. SFAS No. 142 requires goodwill to be allocated
to reporting units (Xcelecom) and measured for impairment under a two-step test
at least annually unless events trigger an earlier assessment.
UIL Holdings has completed the necessary tests to determine if impairment
existed under the prescribed standard and has determined that there was no
goodwill impairment related to Xcelecom. A goodwill impairment charge of $7.2
million was recorded during the fourth quarter of 2003 to bring the carrying
value of goodwill associated with APS' telephony assets in line with estimated
fair value. This impairment charge is included in the results of discontinued
operations.
-73-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Under SFAS No. 142, UIL Holdings has determined the useful life of other
intangible assets and is amortizing the value over the useful life. Other
intangible assets are required to be tested for impairment in a manner similar
to goodwill. In 2004 and 2003, other intangible assets were not impaired.
For further information regarding this standard, see Note (N), "Goodwill and
Other Intangible Assets," to the Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including environmental studies, are charged to
expense as incurred and are generally not material.
PENSION AND OTHER POST-RETIREMENT BENEFITS
UIL Holdings accounts for pension plan costs in accordance with the provisions
of SFAS No. 87, "Employers' Accounting for Pensions."
UIL Holdings accounts for other post-retirement benefits, consisting principally
of health and life insurance, under the provisions of SFAS No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions."
IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
requires the recognition of impairment losses on long-lived assets when the book
value of an asset exceeds the sum of the expected future undiscounted cash flows
that result from the use of the asset and its eventual disposition. If
impairment arises, then the amount of any impairment is measured based on
discounted cash flows. 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 costs allowed. 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, 2004 and December 31, 2003, UI did
not have any assets that were impaired under this standard.
In assessing potential impairment of the carrying value of investments accounted
for under the equity method, UIL Holdings follows the guidance in APB No. 18.
Based on natural gas and electricity forward price projections derived from the
most recent Department of Energy Annual Outlook report, combined with estimated
incremental revenues from Reliability Must Run status and Locational installed
capability revenues, no conditions were noted to give rise to an impairment of
UBE's $76.5 million investment in BE.
As of December 31, 2004, the combined carrying value of UIL Holdings' loan to,
and UCI's investment in, Cross-Sound was $35.3 million. There was no impairment
related to this investment as of December 31, 2004 or 2003. UCI's share of the
Cross-Sound cable project was evaluated for impairment under the assumption that
all provisions of the settlement agreement under which the cable has been
granted commercial operating status would be satisfied, thus making the
commercial operating status of the cable permanent. Cross-Sound has agreements
in place, with an overall term of 28 years, for the entire capacity of the
cable, the expected cash flows from which are in excess of the carrying value of
the asset.
A pre-tax impairment loss of $1.0 million was recorded during the fourth quarter
of 2003 to bring the carrying value of APS' telephony assets in line with their
estimated fair value. In accordance with the provisions of SFAS No. 144, this
impairment charge excluded goodwill, which is accounted for under the
requirements of SFAS No. 142 (see
-74-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
"Goodwill and Other Intangible Assets" section of Note (A) and Note (N)). This
impairment loss is included in the results of discontinued operations.
DISCONTINUED OPERATIONS
SFAS No. 144 also addresses the accounting for, and disclosure of, long-lived
assets to be disposed of by sale. Under SFAS No. 144, when a long-lived asset or
group of assets (disposal group) meets certain criteria set forth in the
statement, including a commitment by the company to a plan to sell the
long-lived asset (disposal group) within one year:
o the long lived-asset (disposal group) will be measured at the lower of
its carrying value or fair value less costs to sell, and will be
classified as held for sale on the Consolidated Balance Sheet;
o the long-lived asset (disposal group) shall not be depreciated
(amortized) while it is classified as held for sale; and
o the related operations of the long-lived asset (disposal group) will be
reported as discontinued operations in the consolidated statement of
operations, with all comparable periods restated.
At December 31, 2003, APS met the criteria set forth in SFAS No. 144 to be
classified as held for sale and on June 22, 2004, UIL Holdings completed the
sale of APS (see Note (O)).
-75-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
EARNINGS PER SHARE
The following table presents a reconciliation of the basic and diluted earnings
per share calculations for the years 2004, 2003 and 2002:
INCOME APPLICABLE TO AVERAGE NUMBER OF EARNINGS
COMMON STOCK SHARES OUTSTANDING PER SHARE
------------ ------------------ ---------
(In Thousands, except per share amounts)
2004
- ----
Basic earnings from continuing operations $36,918 14,390 $2.57
Basic earnings from discontinued operations 49,824 14,390 3.46
Basic earnings from extraordinary items 203 14,390 0.01
----------------------- ---------------------- -------------
Basic earnings 86,945 14,390 6.04
Effect of dilutive securities (1) - 83 (0.03)
----------------------- ---------------------- -------------
Diluted earnings $86,945 14,473 $6.01
======================= ====================== =============
2003
- ----
Basic earnings from continuing operations $29,537 14,291 $2.07
Basic earnings from discontinued operations (6,251) 14,291 (0.44)
----------------------- ---------------------- -------------
Basic earnings 23,286 14,291 1.63
Effect of dilutive securities (1) - 13 -
----------------------- ---------------------- -------------
Diluted earnings $23,286 14,304 $1.63
======================= ====================== =============
2002
- ----
Basic earnings from continuing operations $45,751 14,239 $3.22
Basic earnings from discontinued operations (1,804) 14,239 (0.13)
----------------------- ---------------------- -------------
Basic earnings 43,947 14,239 3.09
Effect of dilutive securities (1) - 43 (0.01)
----------------------- ---------------------- -------------
Diluted earnings $43,947 14,282 $3.08
======================= ====================== =============
(1) Reflecting the effect of dilutive stock options, performance shares and
restricted stock. Dilutive securities dilute earnings from continuing
operations by $0.01 per share in 2004 and 2002, but did not dilute
earnings from continuing operations in 2003. Dilutive securities did
not impact the earnings from extraordinary items. Dilutive securities
dilute the earnings from discontinued operations by $0.02 per share in
2004, but did not impact the earnings from discontinued operations in
2003 or 2002.
Stock options to purchase 292,909, 500,766 and 229,700 shares of common stock
were outstanding during 2004, 2003 and 2002, respectively, but were not included
in the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares.
-76-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
STOCK-BASED COMPENSATION
Effective January 1, 2003, UIL Holdings adopted the fair value recognition
provisions, under the prospective method, of SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (SFAS No. 148), an
amendment of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123). Under this statement, UIL Holdings has recorded compensation expense
prospectively for stock options granted, modified, or settled after January 1,
2003. UIL Holdings records compensation expense related to stock options based
on the most recently available fair-value estimates calculated by an independent
party utilizing the binomial option-pricing model. No compensation expense was
recorded prior to January 1, 2003, as UIL Holdings accounted for employee
stock-based compensation in accordance with Accounting Principles Board (APB)
No. 25, "Accounting for Stock Issued to Employees," (APB No. 25) as permitted by
SFAS 123.
In the first quarter of 2004, UIL Holdings decided to cease granting new stock
options, other than new grants pursuant to the "reload" feature of the UIL
Holdings 1999 Amended and Restated Stock Plan (Plan). Although new stock options
will not be granted, compensation expense related to options granted after
January 1, 2003, including any new stock options granted under the "reload"
feature of the Plan, will continue to be recorded ratably over the vesting
periods associated with such options. There were 80,987 stock options granted
during 2004 at an average exercise price of $47.90, nearly all of which were
granted pursuant to the "reload" feature of the Plan. In 2004, UIL Holdings
implemented a performance-based long-term incentive arrangement under the Plan
pursuant to which certain members of management have the opportunity to earn a
pre-determined number of "performance" shares of stock, the number of which is
predicated upon the achievement of various pre-defined performance measures.
These "performance" shares of stock vest over a three-year cycle with the actual
issuance of stock following the end of each three-year cycle. A new three-year
cycle begins in January of each year. UIL Holdings records compensation expense
for these "performance" shares ratably over the three-year period, based on the
value of the expected payout at the end of each year relative to the performance
measures achieved. There was a target amount of 90,886 performance shares
granted during 2004 at a weighted average market price of $44.47, of which 657
performance shares were subsequently forfeited.
On March 22, 2004, UIL Holdings granted 13,200 shares of restricted stock to
directors at which time the average market price was $46.67 per share. On March
25, 2003, UIL Holdings granted 13,200 shares of restricted stock to directors at
which time the average market price was $34.11 per share. Such shares were
granted pursuant to the Plan. Compensation expense for this restricted stock is
recorded ratably over the three-year vesting period for such restricted stock.
-77-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table illustrates the effect on net income and earnings per share
as if the fair value based method had been applied to all outstanding and
unvested awards in each period.
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Income, as reported $86,945 $23,286 $43,947
Add: Stock-based compensation expense included
in reported net income, net of related tax effects 1,509 362 -
Deduct: Total stock-based compensation determined
under fair value based method for all stock option
grants, net of related tax effect
(2,114) (930) (1,764)
------------------------------------------------------
Pro forma net income $86,340 $22,718 $42,183
------------------------------------------------------
Earnings per share:
Basic - as reported $ 6.04 $ 1.63 $ 3.09
------------------------------------------------------
Basic - proforma $ 6.00 $ 1.59 $ 2.96
------------------------------------------------------
Diluted - as reported $ 6.01 $ 1.63 $ 3.08
------------------------------------------------------
Diluted - proforma $ 5.97 $ 1.59 $ 2.95
------------------------------------------------------
COMPREHENSIVE INCOME
Comprehensive income for 2004 included net income less an after-tax minimum
pension liability adjustment of approximately $0.1 million (net of $0.1 million
deferred tax benefit) related to the non-qualified pension plans.
Comprehensive income for 2003 included the reversal of approximately $26.2
million, after-tax, of a minimum pension liability adjustment recorded in 2002.
UIL Holdings was able to reverse this adjustment as the market value of the UI
Pension Plan assets exceeded the accumulated benefit obligation of the plan at
the end of 2003, primarily due to a $45 million contribution made to the pension
plan on December 31, 2003. The remaining $0.5 million other comprehensive loss
could not be reversed, as it relates to the non-qualified pension plan which
cannot be funded due to personal tax consequences to its participants.
Comprehensive income in 2002 included a pre-tax loss of $44.4 million (after-tax
$26.7 million) representing the minimum pension liability regarding the UI
pension plans, calculated in accordance with the requirements of SFAS No. 87. In
addition, UIL Holdings reversed an unrealized pre-tax gain of $0.9 million
(after-tax $0.5 million) recorded in 2001 on a convertible note receivable that
was repaid in May 2002.
RESTRUCTURING CHARGES
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. Costs covered by the standard include lease
termination costs and certain employee severance
-78-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. In the fourth quarter of 2004, UIL
Holdings recorded employee termination costs associated with the reorganization
of UIL Holdings' Finance organization amounting to $2 million, which equated to
approximately $0.08 per share, after-tax. These costs are reflected in the line
Operation and Maintenance expenses in the Consolidated Statement of Income, and
on a segment reporting basis, $1.2 million of these costs are reflected in the
results of UI, with the remaining $0.8 million of unallocated costs residing
in UIL Corporate. These costs are expected to be paid within the first half
of 2005.
NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued a new staff position FAS 109-1, "Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004." In this staff position, the FASB has indicated that the qualified
production activities deduction authorized under the American Jobs Creation Act
of 2004 should be treated as a special deduction, as opposed to a tax rate
reduction, in accordance with SFAS No. 109. The guidance also states that the
special deduction should be considered in measuring deferred taxes when
graduated tax rates are a significant factor and in assessing whether a
valuation allowance is necessary as required by SFAS No. 109. UIL Holdings will
apply the guidance in this staff position in accounting for any qualified
production activities deductions to which it is entitled. UIL Holdings does not
anticipate that the application of this staff position will have a material
impact on its financial condition, results of operations or liquidity. Under the
guidelines of the American Jobs Creation Act of 2004, the operations of UIL
Holdings' utility subsidiary will not qualify for this deduction and any
qualified production activities deductions for the non-utility subsidiaries are
not expected to be material.
The FASB has issued Interpretation No. 46R (FIN 46R), "Consolidation of Variable
Interest Entities," an interpretation of Accounting Research Bulletin (ARB) 51,
which replaces the same titled FASB Interpretation No. 46 issued in January
2003. The provisions of FIN 46R are effective for all variable interest
entities, as defined by ARB 51. The primary objectives of FIN 46R are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights (variable interest entities or VIEs) and
how to determine when and which business enterprise should consolidate the VIE
(the primary beneficiary). UIL Holdings does not have any VIEs, and therefore
the adoption of this standard has not had, nor is it expected to have, any
impact on UIL Holdings' consolidated financial position, results of operations
or liquidity.
The FASB has issued a new staff position FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," which provides guidance on the accounting for the
effects of the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act). The Act introduces prescription drug benefits under Medicare
(Medicare Part D), as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Act introduces a subsidy of 28 percent of an
individual beneficiary's annual prescription drug cost between $250 and $5,000
subject to allowable retiree Medicare costs. The Act is effective for claims on
or after January 15, 2006. As discussed in Note (G), "Pension and Other
Benefits," the accounting for the federal subsidy does not have any impact on
the calculation of UI's post-retirement health care benefit obligation, as UI
does not provide prescription drug benefits for Medicare eligible employees in
its post-retirement healthcare plans.
SFAS No. 123 (Revised), "Share-Based Payment" (SFAS No. 123R), which is a
revision of SFAS No. 123 and supersedes APB No. 25, was issued by the FASB in
December 2004. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. As noted in the "Stock-Based Compensation" section of this Note (A),
effective January 1, 2003, UIL Holdings adopted the fair value recognition
provisions of SFAS No. 123 under the prospective method, as permitted by SFAS
No. 148. The provisions of SFAS No. 123R will become effective for UIL Holdings
as of July 1, 2005, at which time UIL Holdings will not have any unvested stock
options outstanding for which compensation expense has not been
-79-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
recognized in the consolidated financial statements. As such, adoption of this
statement is not expected to have a material impact on UIL Holdings'
consolidated financial position, results of operations or liquidity.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" (SFAS No.
151), an amendment of ARB No. 43. This statement amends ARB No. 43 to clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials should be recognized as current period charges. In addition,
SFAS No. 151 requires that allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of production facilities. The
provisions of this statement are to be applied prospectively, and the statement
is effective for fiscal years beginning after June 15, 2005, with earlier
application permitted for inventory costs incurred in fiscal years beginning
after November 2004. Adoption of this statement is not expected to have a
material impact on UIL Holdings' consolidated financial position, results of
operations or liquidity, as the only inventory-related items held by UIL
Holdings and its subsidiaries are materials and supplies used in the operating
and construction activities of UI and Xcelecom, respectively. UIL Holdings and
its subsidiaries do not engage in manufacturing or production activities.
The FASB has issued SFAS No. 153, "Exchanges of Nonmonetary Assets" (SFAS No.
153), an amendment of APB Opinion No. 29 (APB No. 29). The guidance in APB No.
29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged, although such guidance
included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have a commercial substance. A nonmonetary exchange is considered to
have commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
statement are to be applied prospectively, and the statement is effective for
fiscal periods beginning after June 15, 2005, with earlier application permitted
for nonmonetary asset exchanges occurring in fiscal periods beginning after
December 2004. Adoption of this statement is not expected to have a material
impact on UIL Holdings' consolidated financial position, results of operations
or liquidity, as UIL Holdings and its subsidiaries generally do not enter into
nonmonetary asset exchange transactions.
(B) CAPITALIZATION
COMMON STOCK
UIL Holdings had 14,638,613 shares of its common stock, no par value,
outstanding at December 31, 2004 and 14,475,259 shares of its common stock, no
par value, outstanding at December 31, 2003, of which 132,717 shares and 160,660
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, 2004 and 2003, respectively.
UI has an arrangement under which it loaned $11.5 million to the KSOP. Prior to
the formation of UIL Holdings, the trustee for the KSOP used the funds to
purchase 328,300 shares of UI common stock in open market transactions. On July
20, 2000, effective with the formation of a 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.
Compensation expense is recorded when shares are committed to be allocated based
on the fair market value of the stock. The loan will be repaid by the KSOP over
a 12-year period ending October 1, 2009, using employer contributions and UIL
Holdings' dividends paid on the unallocated shares of the stock held by the
KSOP. Dividends on allocated shares are charged to retained earnings. As of
December 31, 2004, 132,717 shares, with a fair market value of $6.8 million, had
been purchased by the KSOP and had not been committed to be released or
allocated to KSOP participants.
On June 28, 1999, UI's shareowners approved a stock option plan for directors,
officers and key employees of UI, providing for the grant of options to purchase
up to 650,000 shares of common stock over periods from one to ten
-80-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
years following the dates of grant. The exercise price of each option cannot be
less than the market value of the stock on the date of the grant. Effective with
the formation of the holding company structure on July 20, 2000, all options
were converted into options to purchase shares of UIL Holdings' common stock. On
March 25, 2002, the Board of Directors recommended to the shareowners that the
plan be amended to increase the maximum number of shares of UIL Holdings' common
stock for which stock options may be granted from 650,000 to 1,350,000, and to
increase the limit on the number of shares that may be covered by options
granted in any one year to any employee from 50,000 to 150,000. The shareowners
approved this amendment at the UIL Holdings Annual Meeting on May 15, 2002. On
March 24, 2003, the Board of Directors recommended to the shareowners that the
1999 Stock Option Plan be amended and restated as the UIL Holdings Corporation
1999 Amended and Restated Stock Plan (Plan). Under the Plan, a maximum of
1,350,000 shares of UIL Holdings' common stock is authorized for issuance upon
exercise or grant, as applicable, of stock options, stock appreciation rights
(SARS), restricted stock, restricted stock units, performance shares and other
awards (collectively, Awards). No more than 200,000 shares of stock may be
issued pursuant to Awards of restricted stock, restricted stock units and
performance share awards. Shareowners approved the Plan at the UIL Holdings
Annual Meeting on May 14, 2003.
Stock option transactions for 2004, 2003 and 2002 are as follows:
WEIGHTED
AVERAGE
NUMBER OPTION PRICE EXERCISE
OF OPTIONS PER SHARE PRICE
-------------- ------------- ----------
Balance - December 31, 2001 492,007 $30.00-$53.13 $42.55
Granted 302,017 (1) $52.16-$57.99 $56.30
Forfeited (21,633) $39.41-$56.61 $50.66
Exercised (185,937) $30.00-$45.18 $41.18
--------------
Balance - December 31, 2002 586,454 $39.41-$57.99 $49.77
Granted 310,914 (1) $36.13-$44.65 $36.26
Forfeited - - -
Exercised (12,883) $39.41 $39.41
--------------
Balance - December 31, 2003 884,485 $36.13-$57.99 $45.17
Granted 80,987 (1) $45.42-$50.30 $47.90
Forfeited (57,945) $36.13-$56.61 $41.75
Exercised (237,874) $36.13-$48.55 $40.98
--------------
Balance - December 31, 2004 669,653 $36.13-$57.99 $47.28
==============
Exercisable at December 31, 2002 223,698 $39.41-$57.99 $46.37
Exercisable at December 31, 2003 374,249 $39.41-$57.99 $47.84
Exercisable at December 31, 2004 367,889 $36.13-$57.99 $50.76
(1) One-third of the options granted become exercisable on each of the first
three anniversaries of the grant date, with the exception of reload grants,
for which the entire grant becomes exercisable six months from the grant
date.
-81-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The fair values of stock options granted has been estimated on the date of grant
using the binomial option-pricing model using the weighted average assumptions
below. The binomial option-pricing model is appropriate for valuing options on
stocks with high dividend yields, such as UIL Holdings.
2004 2003 2002
---- ---- ----
Risk-free interest rate 4.18% 4.31% 5.40%
Expected volatility 28.39% 24.65% 22.53%
Expected lives 6.59 years 7.20 years 6.80 years
Expected dividend yield 6.70% 6.37% 6.01%
The weighted average fair value of options granted during 2004, 2003 and 2002
were $9.04, $6.25, and $9.71 per share, respectively. As of December 31, 2004,
2003 and 2002, the weighted average remaining contractual lives for those
options outstanding were 6.0 years, 7.2 years, and 6.8 years, respectively.
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. At December 31, 2004, all 80,000 phantom stock options were
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. On February 23, 2008, any
unexercised phantom stock options will expire. Compensation expense related to
the phantom stock is recognized on a mark-to-market basis. Compensation expense
of $0.5 million was recognized in 2004, due to an increase in the stock price
during the year. There was no income or expense recognized in 2003 related to
these phantom stock options, as the prevailing market price did not exceed the
phantom stock option price. Income of $0.5 million was recognized in 2002 with
regard to phantom stock options due to a decrease in the stock price during
2002, which resulted in a reduction in previously recognized cumulative expense.
-82-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
LONG-TERM DEBT
DECEMBER 31,
2004 2003
---- ----
(In Thousands)
Pollution Control Revenue Refunding Bonds:
3.00%, 1996 Series, due June 1, 2026 (1) $ 7,500 $ 7,500
2.05%, 1997 Series, due July 1, 2027 (2) 27,500 27,500
3.50%, 1997 Series, due July 1, 2027 (3) 71,000 71,000
3.25%, 1999 Series, due December 1, 2029 (4) 25,000 25,000
Auction Rate, 2003 Series, due October 1, 2033 (5) 64,460 64,460
Notes:
4.42% Senior Notes, Series A, due December 12, 2007 74,000 74,000
3.95% Senior Notes, due December 9, 2008 100,000 100,000
4.89% Senior Notes, Series B, due December 12, 2009 51,000 51,000
7.23% Senior Notes, Series A, due February 15, 2011 30,000 30,000
7.38% Senior Notes, Series B, due February 15, 2011 45,000 45,000
--------------- ---------------
Long-Term Debt 495,460 495,460
Less:
Current portion of long-term debt 4,286 -
--------------- ---------------
Net Long-Term Debt $491,174 $495,460
=============== ===============
(1) The interest rate on these Bonds was fixed at 4.35% on February 1, 1999 for
the five-year period ending February 1, 2004. On February 2, 2004, the
interest rate was reset from 4.35% to 3.00% for a five-year period ending
February 1, 2009.
(2) The interest rate on these Bonds was fixed at 3.75% on February 1, 2002 for
the two-year period ending February 1, 2004. On February 2, 2004, the
interest rate was reset from 3.75% to 2.05% for a one-year period ending
February 1, 2005. On February 1, 2005, the interest rate was reset from
2.05% to 3.65% for a five-year period ending February 1, 2010.
(3) The interest rate on these Bonds was fixed at 4.55% on February 1, 1999 for
a five-year period ending February 1, 2004. On February 2, 2004, the
interest rate was reset from 4.55% to 3.50% for a five-year period ending
February 1, 2009.
(4) The interest rate on these Bonds was fixed at 3.25% on February 5, 2003 for
a four-year, ten-month period ending December 3, 2007.
(5) The interest rate on these Bonds is reset through an auction held every 35
days. On December 31, 2004, the interest rate on the Bonds was 1.75%.
On February 2, 2004, the interest rate on $7.5 million principal amount of
Pollution Control Revenue Refunding Bonds, 1996 Series, due June 1, 2026, issued
by the Connecticut Development Authority (CDA), was reset from 4.35% to 3.00%.
The new interest rate will remain in effect for a five-year period to February
1, 2009. UI is obligated, under its borrowing agreement with the CDA, to pay to
the CDA an amount equal to the principal and interest on the Bonds. Interest is
payable semi-annually on August 1st and February 1st.
On February 2, 2004, the interest rate on $98.5 million principal amount of
Pollution Control Revenue Refunding Bonds, 1997 Series, due July 1, 2027, issued
by the BFA, was reset. The interest rate on $27.5 million principal
-83-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
amount of the Bonds was reset from 3.75% to 2.05% for a one-year period to
February 1, 2005, and on February 1, 2005, the interest rate was reset from
2.05% to 3.65% for a five-year period to February 1, 2010. The interest rate on
$71 million principal amount of the Bonds was reset from 4.55% to 3.50% for a
five-year period to February 1, 2009. UI is obligated, under its borrowing
agreement with the BFA, to pay to the BFA an amount equal to the principal and
interest on the Bonds. Interest is payable semi-annually on August 1st and
February 1st.
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:
2005 2006 2007 2008 2009
---- ---- ---- ---- ----
(In Thousands)
Maturities $4,286 $4,286 $78,286 $104,286 $55,286
(C) REGULATORY PROCEEDINGS
RATE CASE
On September 26, 2002, the DPUC issued a final decision in UI's retail customer
ratemaking (Rate Case) proceeding. The decision provides for a $30.9 million
reduction in UI's annual revenue requirements, including (1) a $20.3 million
reduction to UI's customer rates, (2) $2.0 million to be applied annually for
additional funding of conservation programs, (3) $8.3 million to be applied
annually to reduce stranded costs, and (4) $0.3 million to be applied to a
combination of uncollectibles, taxes and rate base changes. In accordance with
the decision, and after converting from a revenue requirements basis to stranded
cost treatment, UI recorded accelerated amortization of stranded costs of $5.6
million before-tax ($4.7 million after-tax) in the fourth quarter of 2002, and
reduced customer rates by 3% overall and is continuing accelerated amortization
at $1.4 million before-tax ($1.2 million after-tax) per quarter as of January 1,
2003. The rate reductions, approved by the DPUC, are applied with no significant
rate design changes, although the generation services charge (GSC) component of
customers' rates was increased and the competitive transition assessment (CTA)
component was decreased in a dollar amount equal to the GSC increase. The final
Rate Case decision established rates on the basis of an authorized return on
equity of 10.45% for non-transmission rate base. Earnings above the authorized
return are to be shared 50% to customers and 50% to net income, with the
customers' share divided equally between bill reductions and an accelerated
amortization of stranded costs. The Rate Case decision recognizes that the
revenue requirements determination for transmission, including the applicable
return on equity, is within the jurisdiction of the FERC. UI's authorized return
on equity for transmission is 10.75%.
On January 8, 2003, in a reopened proceeding requested by UI, the DPUC issued a
decision making a technical change to the Rate Case decision, approving UI's
proposed revenue transfer of $3.9 million annually from CTA to the delivery
component of rates beginning with the September 26, 2002 effective date and
continuing until the decision in UI's next rate case proceeding.
On February 18, 2004, the DPUC issued a final decision related to UI's request
for recovery of increased pension and post-retirement benefits expenses. As a
result of this decision, a subsequent appeal by the Office of Consumer Counsel
(OCC) to the Connecticut Superior Court and a DPUC reversal of the February 18,
2004 decision, UI was allowed to recover approximately $1.8 million, or $0.08
per share, for the period from February 18, 2004 through June 24, 2004. UI
ceased recovery of the increased pension and post-retirement benefits expenses
effective June 24, 2004. UI has taken substantial actions in 2003 and 2004 to
mitigate the effect of these increased pension and post-retirement benefits
expenses and also to reduce the increases themselves through contributing $74
million in cash to the pension plan since the docket was initially reopened in
November 2002. These actions, along with better
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
performance of pension fund investments and improved sales growth, have allowed
UI to largely mitigate the effect of the increased pension and post-retirement
benefits expenses through the end of 2004.
PUBLIC ACT 98-28
In April 1998, the Connecticut legislature enacted Public Act 98-28 (the
Restructuring Act), a statute designed to restructure the regulated electric
utility industry. As a result of the Restructuring Act, the business of selling
electricity directly to consumers has been opened to competition since January
2000. The business of delivering electricity remains with the incumbent
franchised utility companies (including UI).
A major component of the Restructuring Act is the collection, by distribution
companies, of a "CTA," a "systems benefits charge (SBC)," an "energy
conservation and load management (C&LM) program charge" and a "renewable energy
investment (REI) charge." The CTA represents costs that have been reasonably
incurred, or will be incurred, by distribution companies to meet their public
service obligations, 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 (stranded costs). The SBC represents
public policy costs, such as generation decommissioning and displaced worker
protection costs. Beginning in 2000, UI has collected the CTA, the SBC, the C&LM
charge and the REI charge from customers. The DPUC has an annual proceeding to
review UI's collection of the CTA and SBC for the prior year, and to establish
the applicable CTA charge and SBC for the next year. Because of overcollection
of SBC revenues in 2002, and an expectation that such revenues would exceed
systems benefits charge costs in 2003 and 2004, the DPUC had ordered that UI's
SBC on customers' bills be reduced for 2004.
Under the Restructuring Act, all Connecticut electricity customers are able to
choose their electricity suppliers. Through December 31, 2003, UI was required
to offer retail service to its customers under a regulated "standard offer" rate
to each customer who did not choose an alternate electricity supplier, even
though UI is no longer in the business of power generation. UI was also required
under the Restructuring Act to provide back-up power supply service to customers
whose alternate electricity supplier failed to provide power supply services for
reasons other than the customers' failure to pay for such services. On December
28, 2001, UI entered into an agreement with Virginia Electric and Power Company,
which was subsequently assigned to its affiliate Dominion Energy Marketing, for
the supply of all of UI's standard offer generation service needs from January
1, 2002 through December 31, 2003, and for the supply of all of UI's generation
service requirements for special contract customers through 2008.
In June 2003, the Connecticut General Assembly enacted Public Act 03-135,
subsequently amended in part by Public Act 03-221, to provide for electric
distribution companies to provide "transitional standard offer service,"
beginning January 1, 2004 and continuing through December 31, 2006, to each
customer who does not choose an alternate energy supplier. On October 22, 2003,
UI entered into an agreement with PSEG Energy Resources & Trade LLC (PSEG) for
the supply of all of UI's transitional standard offer generation service needs,
excluding requirements for special contract customers, from January 1, 2004
through December 31, 2006, the end of the transitional standard offer period in
Connecticut. The 2003 legislation also makes other changes to restructuring on a
going forward basis, including a provision for information on "federally
mandated congestion costs" to be on customer bills. In addition, the legislation
requires that any new rate case filings include a four-year rate plan. The
legislation also provides for the electric distribution companies to recover
their costs of procuring and providing transitional standard offer service.
Public Act 03-135 provides for a fee of $0.0005 per kilowatt-hour to be
collected by the electric distribution company as further compensation for the
procurement of transitional standard offer supply. Renewable energy portfolio
standards also became effective as of January 1, 2004, pursuant to the
legislation, for generation services provided to retail customers. UI has
included the requirement to meet these standards for transitional standard offer
customers in its power supply agreement, consistent with statutory requirements.
The legislation is being implemented through several DPUC proceedings. In
December 2003, the
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
DPUC established UI's transitional standard offer rates, which became effective
January 1, 2004, in accordance with the 2003 Restructuring Legislation.
SALE OF NUCLEAR GENERATION
The Restructuring Act required that, in order for UI to recover any stranded
costs, it must attempt to divest its ownership interests in two nuclear-fueled
power plants prior to 2004.
The sale of UI's 3.685% 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 before settlement of its decommissioning obligation. On February
27, 2003, the DPUC issued a final decision on the Millstone Divestiture Plan
Disposition of Proceeds authorizing UI to reduce its stranded cost balances by
$15.4 million.
The sale of UI's 17.5% interest in Seabrook Station and the termination of the
sale/leaseback of a portion of its interest in Seabrook Unit 1 was consummated
on November 1, 2002. In compliance with the Restructuring Act, the net-of-tax
gain on these transactions, after adjusting for transaction costs and
sale-related costs, was used to reduce UI's stranded costs. In UI's compliance
filing with the DPUC on April 30, 2003, UI reported a net-of-tax gain of
approximately $5 million. A final decision was issued on March 3, 2004,
approving UI's calculation without modification. As a result, UI reduced its
reserves by approximately $1.4 million during the first quarter of 2004. In the
second quarter of 2004, UI also reduced certain expense reserves by $1.1 million
related to the sale due to the resolution of tax and other post-closing issues.
These true-ups and other subsequent post-closing adjustments will be included
for approval in the 2004 annual CTA/SBC reconciliation to be filed with the DPUC
in the first quarter of 2005.
OTHER REGULATORY MATTERS
DEPARTMENT OF PUBLIC UTILITY CONTROL
UI generally has several regulatory proceedings open and pending at the DPUC at
any given time. Examples of such proceedings include an annual DPUC review and
reconciliation of UI's CTA and SBC revenues and expenses, dockets to consider
specific restructuring or electricity market issues, consideration of specific
rate or customer issues, and review of conservation programs. In a specific
restructuring docket, the DPUC, on October 20, 2004, issued a final decision
with respect to the framework for developing a process to lead to electric
suppliers' offering an alternative transition standard offer as contemplated in
Public Act 03-135. UI's management does not expect there to be any material
effect on UI's earnings or financial condition as a result of an alternative
transitional standard offer.
On October 20, 2004, the DPUC issued a final decision requiring electric
distribution companies to enter into contracts for the purchase of long-term
renewable energy. In accordance with the terms of this decision, UI will be
required to enter into such contracts by July 1, 2007, and will be required to
provide status reports to the DPUC at defined intervals beginning in July 2005,
until such time that at least 100 megawatts of renewable energy has been
procured statewide. This decision is not expected to have a material impact on
UI's results of operations or financial condition.
On December 22, 2004, the DPUC issued a final decision increasing the
non-bypassable Federally Mandated Congestion Costs (NBFMCC) charge UI is
authorized to collect from customers. The NBFMCC charge relates to "congestion
costs" associated with not having adequate transmission infrastructure to move
energy from the generating sources to the consumer. Because the purpose of the
NBFMCC charge is for the electric distribution company to recover its actual
NBFMCC costs on a pass-through basis, the DPUC decision provided for a true-up
of NBFMCC costs and revenues on a semi-annual basis and an adjustment of the
associated amounts deferred for future
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
recovery. The charge originally established for 2004 was based upon estimates
that were made in 2003, and reflected estimated NBFMCC lower than were actually
incurred. The decision increases the NBFMCC charge from $0.001652 per kWh to
$0.012099 per kWh, effective January 1, 2005. This increase will enable UI to
recover both the forecasted ongoing NBFMCC costs and the $14.4 million deficit
that has resulted from the current charge being below the incurred costs.
Public Act 03-6 of the June 30, 2003 special session and Public Act 03-1 of the
September 8, 2003 special session of the Connecticut General Assembly provide,
for the period February 1, 2003 through July 31, 2005, for certain of the funds
collected by electric distribution companies from retail customers in the C&LM
charge to be transferred to the general funds of the state. The legislation
provides that the transfer of funds would not occur provided that the C&LM and
REI funds are securitized for two fiscal years beginning July 1, 2003, through
the state's issuance of rate reduction bonds secured by customer revenue
streams. On October 28, 2003, the DPUC issued a financing order providing for
the issuance of rate reduction bonds by the State of Connecticut, adjustment of
the C&LM and REI charges, and an increase in the corresponding CTA charge on
customers' bills.
The rate reduction bonds were issued by the state during the second quarter of
2004. The amounts collected through the CTA for servicing of the rate reduction
bonds are not revenue to UI. As a result, the securitization will have the
effect of reducing UI's revenue by approximately $6.5 million annually, with
such amounts to be utilized for debt service for the state's rate reduction
bonds. Absent securitization, these amounts would otherwise have been utilized
for C&LM or REI expenditures. UI's management does not expect there to be any
material effect on UI's earnings or financial condition as a result of such
securitization.
On June 23, 2004, the DPUC approved UI's request to amend its Purchased Power
Adjustment Clause rate component to allow UI to apply the clause to special
contract customers. The DPUC also approved a Purchased Power Adjustment rate of
$0.000264 per kWh to be applied against special contract load to reflect the
increased cost to serve these customers. This decision will allow UI to recover
changes in the cost to procure energy as it relates to special contract
customers through the generation services charge (GSC). The decision does not
explicitly order the accounting for the increased costs of $0.8 million related
to UI's special contract customers for the period from January 1, 2004 through
June 22, 2004 (the day before the effective date of the final decision). The
actual costs for that period to procure power for UI's special contracts will
flow through the annual CTA/SBC Reconciliation filing for 2004. The 1998 and
2003 restructuring legislation (PA 98-28 and PA 03-135, as amended in part by PA
03-221) provides that the distribution company is entitled to recover its full
cost of procuring power for customers who do not choose an alternate supplier.
TAX CREDITS RELATED TO THE SALE OF GENERATION
On March 3, 2003, the Internal Revenue Service (IRS) issued proposed regulations
that would allow electric utilities to return certain tax benefits pertaining to
divested generation assets to customers. Specifically, these regulations deal
with accumulated deferred investment tax credits (ADITC) and excess deferred
federal income taxes (EDFIT) associated with generation assets.
UI had been previously ordered by the DPUC to seek a Private Letter Ruling (PLR)
from the IRS requesting permission to immediately flow-through to customers $3.2
million of ADITC and $0.2 million of EDFIT relating to its formerly owned
fossil-fueled generating stations. In addition to the sale of its fossil-fueled
generating stations, UI also had ADITC in the amount of $4.7 million relating to
the sale of its ownership interest in the Millstone Unit 3 nuclear generating
facility.
While the proposed regulations, as written, do allow electric utilities to
return ADITC and EDFIT to customers, the utility may do so only at the same rate
that would have been permitted if the generation assets remained public utility
property, not immediately, as had been sought in UI's PLR request.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Although the IRS has not officially responded to UI's PLR request, these
proposed regulations provide authoritative guidance with respect to the IRS'
position as to the treatment of these tax benefits. The IRS allowed for the
submission of written comments during a public comment period ended June 2,
2003, as well as at a public hearing that was held at the IRS National Office on
June 25, 2003. To date, the IRS has not issued final regulations with respect to
this matter. In the event the final regulations remain in their current form,
there would be no resulting material impact on UI's earnings or cash flow.
BRIDGEPORT RESCO GENERATING FACILITY
Effective January 1, 2003, UI began selling its energy entitlement from its
long-term purchase power contract with the Bridgeport RESCO generating facility
into the New England wholesale market at market prices. To the extent that UI
receives revenue from these sales that exceeds the amount it pays to Bridgeport
RESCO for this energy on a cumulative basis, the difference is used to adjust
the above-market portion of purchase power expense recovered through UI's CTA.
This methodology has been approved by the DPUC, with all relevant data and
calculations subject to review in the annual CTA reconciliation docket. To the
extent that expenses paid for this energy exceed revenues on a cumulative basis,
UI would advise the DPUC and propose an alternative recovery mechanism. This
arrangement will end on December 31, 2008.
EXCESS GSC
Public Act 03-135 requires the DPUC to allocate the proceeds of the electric
distribution company's retail adder (excess GSC revenues over GSC costs) to the
utility's cost of procuring power, then to mitigate the increase in cost
relative to the existing standard offer that would be recovered from the
customer and then to stranded cost recovery. As a result, the DPUC ordered UI to
cease any further application of the retail adder toward accelerated stranded
cost reduction, pending DPUC determination of the use of the funds in future
proceedings. Until such review, UI was to "bank" such excess GSC amounts in a
liability account. On December 18, 2003, the DPUC issued a final decision on the
Transitional Standard Offer docket which, among other things, ordered UI to
amortize $3.6 million of the banked amount over the next three years, with the
remainder to be used to offset temporary cash flow shortfalls resulting from the
difference between the GSC collected from customers through rates and the
monthly cost for transitional standard offer supply. Due to UI incurring greater
than anticipated NBFMCC charges, UI has paid significantly more for purchased
power than it has collected from customers, resulting in a negative bank of $6.2
million as of December 31, 2004. As previously noted, on December 22, 2004, the
DPUC issued a final decision increasing the NBFMCC charge UI is authorized to
collect from customers. This will enable UI to recover both the forecasted
ongoing NBFMCC costs and the deficit that has resulted from the current charge
being below the incurred costs.
FEDERAL ENERGY REGULATORY COMMISSION
UI has constructed transmission facilities to connect the 330-megawatt
transmission cable, connecting Connecticut and Long Island under Long Island
Sound, owned by Cross-Sound Cable Company, LLC (Cross-Sound) to the New England
Power Pool (NEPOOL) transmission grid. Cross-Sound has paid UI $2.6 million for
the construction costs. The FERC has clarified that UI will not be required to
reimburse Cross-Sound for any of the construction monies received. A request by
Cross-Sound for a rehearing was rejected by the FERC. In September 2004, the
FERC approved a settlement agreement reached by Cross-Sound and UI related to
annual facilities charges. Cross-Sound has paid all amounts outstanding related
to construction and the settlement agreement.
UI is required to file information regarding Regional Network Service
transmission on an annual basis with the FERC.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
REGIONAL TRANSMISSION ORGANIZATION FOR NEW ENGLAND
On March 24, 2004, the FERC conditionally approved ISO-NE's joint proposal with
the New England Transmission Owners (TOs) for the creation of a Regional
Transmission Organization (RTO). The creation of an RTO for New England (RTO-NE)
will strengthen the independent oversight of the region's bulk power system and
wholesale electricity marketplace. UI is a party to all of the agreements that
establish RTO-NE and a signatory to the joint RTO filing with the FERC. RTO-NE
commenced operation effective February 1, 2005. As a member of RTO-NE, UI is
eligible for the FERC's participation incentive adder (50 basis points above the
approved transmission base return on equity) for joining RTO-NE. The 50 basis
point participation adder is applicable to UI's pool transmission facilities
(PTF). The common base ROE of 12.8% requested by the TOs became effective on
February 1, 2005 when RTO-NE commenced operation. All of the TOs, including UI,
will be able to earn the common base ROE of 12.8% plus the 50 basis point
participation adder (or 13.3%) on their PTF and the common base ROE of 12.8% on
their non-PTF, subject to refund, pending a final FERC decision on the justness
and reasonableness of the common base ROE.
(D) 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,
2004, UIL Holdings did not have any borrowings outstanding under this
arrangement.
On July 29, 2004, UIL Holdings entered into a revolving credit agreement with a
group of banks that extends to July 28, 2007. The borrowing limit of this
facility is $100 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, 2004,
UIL Holdings had $8 million of short-term borrowings outstanding under this
arrangement.
On July 30, 2004, Xcelecom amended its existing revolving credit agreement with
two banks to extend the term to June 30, 2005. This agreement, as amended,
provides for a $30 million revolving loan facility available to meet working
capital needs, and up to $5 million in capital equipment needs, and to support
standby letters of credit issued by Xcelecom in the normal course of its
business. Capital equipment loans under this facility can be converted to
amortizing term loans with a maturity of up to four years. This agreement also
provides for the payment of interest at a rate, at the option of Xcelecom, based
on the agent bank's prime interest rate or LIBOR. All borrowings outstanding
under this agreement are secured solely by assets of Xcelecom and its
subsidiaries. As of December 31, 2004, Xcelecom did not have any borrowings
outstanding under the revolving working capital balance under this facility.
Xcelecom had $0.9 million of capital equipment funding that had been converted
to term notes outstanding and standby letters of credit of $5 million
outstanding at December 31, 2004 under the facility.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Information with respect to short-term borrowings of UIL Holdings and Xcelecom
are as follows:
2004 2003 2002
---- ---- ----
($ In Thousands)
UIL HOLDINGS
- ------------
Maximum aggregate principal amount of short-term borrowings
outstanding at any month-end $67,500 $64,500 $50,000
Average aggregate short-term borrowings outstanding during the year* $30,866 $32,471 $19,771
Weighted average interest rate* 1.7% 1.8% 2.3%
Principal amounts outstanding at year-end $ 8,000 $64,500 $39,000
Annualized interest rate on principal amounts outstanding at year-end 3.3% 1.9% 2.1%
Fees* $ 515 $ 462 $ 365
XCELECOM
- --------
Maximum aggregate principal amount of short-term borrowings
outstanding at any month-end $ 4,630 $ 4,740 $13,965
Average aggregate short-term borrowings outstanding during the year* $ 2,267 $ 2,175 $ 6,804
Weighted average interest rate* 3.6% 2.5% 2.6%
Principal amounts outstanding at year-end - - $ 3,050
Annualized interest rate on principal amounts outstanding at year-end - - 3.1%
Fees* $ 156 $ 157 $ 119
*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.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(E) INCOME TAXES
2004 2003 2002
---- ---- ----
(In Thousands)
Income tax expense for continuing operations consists of:
Income tax provisions:
Current
Federal $ 17,180 $ 11,151 $ (24,524)
State 5,001 4,971 (5,150)
-------------- -------------- --------------
Total current 22,181 16,122 (29,674)
-------------- -------------- --------------
Deferred
Federal 8,422 16,401 56,363
State 563 1,314 11,353
-------------- -------------- --------------
Total deferred 8,985 17,715 67,716
-------------- -------------- --------------
Investment tax credits (431) (387) (564)
-------------- -------------- --------------
Total income tax expense for continuing operations $ 30,735 $ 33,450 $ 37,478
============== ============== ==============
Income tax components charged as follows:
Operating tax expense $ 33,812 $ 36,130 $ 39,454
Nonoperating tax expense (3,077) (2,680) (1,976)
-------------- -------------- --------------
Total income tax expense $ 30,735 $ 33,450 $ 37,478
============== ============== ==============
The following table details the components
of the deferred income tax provision:
Gain on sale of utility property (19) (51) (280)
Seabrook sale/leaseback transaction - - 8,525
Seabrook sale/leaseback - operating tax benefit 1,112 - -
Seabrook lease buyout (1,626) - 28,156
Seabrook II Sale - - (1,885)
Pension benefits 2,584 11,238 2,189
Accelerated depreciation 3,112 6,646 (335)
Tax depreciation on unrecoverable plant investment - - 34,805
Interest Expense - taxes 780 - -
New Hampshire NOL 253 - -
Conservation and load management (107) (107) (107)
Displaced worker protection costs 222 (353) (956)
Bond redemption costs (1,026) (1,026) (1,026)
Cancelled nuclear project - (300) (467)
Restructuring costs (8) (538) (538)
Regulatory deferrals 6,202 2,345 1,570
Other - net (2,494) (139) (1,935)
-------------- -------------- --------------
Deferred income tax provision - net $ 8,985 $ 17,715 $ 67,716
============== ============== ==============
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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:
2004 2003 2002
---- ---- ----
(In Thousands)
Computed tax at federal statutory rate $23,679 $22,046 $29,130
Increases (reductions) resulting from:
ITC taken into income (430) (387) (564)
Allowance for equity funds used during construction (392) (531) (433)
Amortization of regulatory asset 4,780 7,925 11,345
Book depreciation in excess of non-normalized tax depreciation 130 (150) (3,000)
State income taxes, net of federal income tax benefits 3,616 4,085 4,033
Other items - net (648) 462 (3,033)
--------------------------------------------------
Total income tax expense $30,735 $33,450 $37,478
==================================================
Book income from continuing operations before income taxes $67,653 $62,987 $83,229
==================================================
Effective income tax rates 45.4% 53.1% 45.0%
==================================================
As a result of the sale of UI's interests in Seabrook Station and the
termination of the associated Seabrook Lease Obligation on November 1, 2002, UIL
Holdings incurred a net operating loss (NOL) for federal income tax purposes for
the year 2002 of approximately $78 million that was carried forward to the years
2003 and 2004. During the year 2003, approximately $27 million of the NOL
carryforward was utilized, leaving a balance of $51 million of unutilized NOL
that was carried forward and fully utilized against taxable income in 2004.
Legislation enacted in Connecticut on February 28, 2003 imposed a 20% surcharge
on the corporation business tax for the year 2003. This surcharge, which was
made retroactive to January 1, 2003, effectively increased the statutory rate of
Connecticut corporation business tax from 7.5% to 9.0% for the year 2003. Due to
this change, the combined effective statutory federal and state income tax rate
for UIL Holdings' Connecticut-based entities increased slightly from 39.875% to
40.85% for the year 2003.
In addition, legislation was also enacted in Connecticut on August 16, 2003 that
imposed a 25% surcharge on the corporation business tax for the year 2004. This
surcharge increased the statutory rate of Connecticut corporation business tax
from 7.5% to 9.375% for the year 2004. Due to this change, the combined
effective statutory federal and state income tax rate for UIL Holdings'
Connecticut-based entities increased slightly from 40.85% for the year 2003 to
41.094% for the year 2004.
The effective income tax rate for the year ended December 31, 2004 was 45.4% as
compared to 53.1% for the year ended December 31, 2003. The changes in the 2004
rates are due primarily to (1) the utilization of approximately $1 million of
state income tax credits associated with the Connecticut Corporation Business
Tax for the year 2004, (2) non-recurring adjustments to deferred income tax
reserves associated with CTA during 2003 and (3) differences in the amounts of
book depreciation in excess of non-normalized tax depreciation.
At December 31, 2004, UIL Holdings had non-current deferred tax liabilities for
taxable temporary differences of $372 million and non-current deferred tax
assets for deductible temporary differences of $27 million, resulting in a net
non-current deferred tax liability of $345 million. UIL Holdings had current
deferred tax assets of $4 million at December 31, 2004. UIL Holdings did not
have any current deferred tax liabilities at December 31, 2004. The
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
following table summarizes UIL Holdings' deferred tax assets and liabilities for
the years ended December 31, 2004 and 2003:
2004 2003
-------------------------- ----------------------
(in thousands)
Deferred income tax assets:
SFAS No. 109 gross-up effect on deferred Federal ITC $ 9,507 $ 11,979
Post-retirement benefits 4,825 4,431
2002 NOL carry-forward - 8,216
Other 16,618 14,805
-------------------------- ----------------------
30,950 39,431
-------------------------- ----------------------
Deferred income tax liabilities:
Plant basis differences 179,726 190,695
Accelerated depreciation timing differences 116,869 113,354
CTA revenue adjustment 20,130 13,928
Seabrook lease buyout 26,346 27,971
Pension 15,913 13,164
Bridgeport Energy basis difference 4,255 4,255
Other 8,838 9,303
-------------------------- ----------------------
372,077 372,670
-------------------------- ----------------------
Deferred income taxes - net $341,127 $333,239
========================== ======================
SFAS No. 109, "Accounting for Income Taxes," requires that all current deferred
tax assets and liabilities within each particular tax jurisdiction be offset and
presented as a single amount in the Consolidated Balance Sheet. A similar
procedure is followed for all non-current deferred tax assets and liabilities.
Amounts in different tax jurisdictions cannot be offset against each other. The
amount of deferred income taxes as of December 31, included on the following
lines of the Consolidated Balance Sheet, is as follows:
2004 2003
---- ----
Assets:
Deferred and refundable income taxes $ 4,355 $ 12,437
Liabilities:
Deferred income taxes 345,482 345,676
-------- --------
Deferred income taxes - net $341,127 $333,239
======== ========
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(F) SUPPLEMENTARY INFORMATION - CONTINUING OPERATIONS
2004 2003 2002
---- ---- ----
(In Thousands)
OPERATING REVENUES
- ------------------
Utility
Retail $ 691,554 $ 613,885 $ 639,025
Wholesale 24,446 24,591 58,249
Other 48,027 31,144 30,259
Non-utility business unit revenues
Xcelecom 337,192 294,036 310,044
Other 68 21 19
------------- ------------- ------------
Total Operating Revenues $1,101,287 $ 963,677 $1,037,596
============= ============= ============
FUEL AND ENERGY
- ---------------
Fuel and Energy Expense $ 400,802 $ 296,707 $ 293,209
Purchase Power above market fuel expense credit (1) (22,897) (24,034) (24,014)
------------- ------------- ------------
Total Fuel and Energy Expense $ 377,905 $ 272,673 $ 269,195
============= ============= ============
DEPRECIATION AND AMORTIZATION
- -----------------------------
Utility property, plant, and equipment $ 28,728 $ 28,274 $ 26,336
Non-utility business property, plant and equipment 3,530 3,540 3,155
Nuclear Decommissioning - - 2,241
------------- ------------- ------------
Total Depreciation 32,258 31,814 31,732
------------- ------------- ------------
Amortization of nuclear plant regulatory assets 9,790 20,197 30,690
Amortization of purchase power contracts (1) 22,897 24,034 24,014
Amortization of other CTA regulatory assets 1,063 1,109 1,336
Amortization of cancelled plant - 850 1,172
------------- ------------- ------------
Subtotal CTA Amortization 33,750 46,190 57,212
Amortization of intangibles 1,246 1,236 1,297
Amortization of other regulatory assets 832 2,999 2,326
------------- ------------- ------------
Total Amortization 35,828 50,425 60,835
------------- ------------- ------------
Total Depreciation and Amortization $ 68,086 $ 82,239 $ 92,567
============= ============= ============
TAXES - OTHER THAN INCOME TAXES
- -------------------------------
Operating:
Connecticut gross earnings $ 25,259 $ 25,842 $ 28,293
Local real estate and personal property 10,216 9,027 11,726
Payroll taxes 5,810 6,219 5,951
------------- ------------- ------------
Total Taxes - Other than Income Taxes $ 41,285 $ 41,088 $ 45,970
============= ============= ============
OTHER INCOME AND (DEDUCTIONS), NET
- ----------------------------------
Interest income $ 1,802 $ 1,197 $ 679
Allowance for funds used during construction 1,760 2,491 2,220
Seabrook reserve reduction 2,661 - -
GSC procurement fee 2,622 - -
Miscellaneous other income and (deductions) - net (254) 1,695 (634)
------------- ------------- ------------
Total Other Income and (Deductions), net $ 8,591 $ 5,383 $ 2,265
============= ============= ============
OTHER INTEREST, NET
- -------------------
Notes Payable $ 538 $ 612 $ 459
Other 511 1,791 1,258
------------- ------------- ------------
Total Other Interest, net $ 1,049 $ 2,403 $ 1,717
============= ============= ============
(1) The amortization of this regulatory asset is a cash neutral item, as there
is an offsetting liability which is relieved through a credit to fuel and
energy expense.
-94-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(G) PENSION AND OTHER BENEFITS
UI's qualified pension plan covers substantially all of its employees, the
employees of UIL Holdings and APS, and certain management employees of Xcelecom
and UCI. APS and Xcelecom employees no longer accrue benefits under the plan,
but any benefits accrued to them, through April 2003 for APS, and December 2003
for Xcelecom, remain in the plan. Effective June 22, 2004, with the completion
of the sale of APS, those active APS employees who had not vested in the amount
of their benefits accrued through April 2003 were granted full vesting in those
benefits. 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 for these plans for 2004, 2003 and 2002 was $10.3 million,
$17.5 million, and $6.7 million, respectively.
According to SFAS No. 132 (Revised), "Employer's Disclosure about Pensions and
Other Post-retirement Benefits," disclosures pertaining to The United
Illuminating Company Pension Plan (the "Pension Plan") include investment
strategy, asset allocation mix, contributions, the assumptions for the expected
rate of return on assets, measurement dates, accumulated benefit obligation
levels for all pension plans and ten years of projected pension benefit
payments. UI set forth an investment policy to delegate the oversight and
management of pension assets and procedures for monitoring and control. UI has
engaged Frank Russell Trust Company as the trustee and investment manager to
assist in areas of asset allocation and rebalancing, portfolio strategy
implementation, and performance monitoring and evaluation.
The goals of the asset investment strategy are to:
o Achieve long-term capital growth while maintaining sufficient liquidity
to provide for current benefit payments and Pension Plan operating
expenses.
o Provide a total return that, over the long-term, provides sufficient
assets to fund Pension Plan liabilities subject to an appropriate level
of risk, contributions and pension expense.
o Maximize the return on assets, over the long-term, by investing
primarily in equities. The inclusion of additional asset classes with
differing rates of return, volatility and correlation are utilized to
reduce risk by providing diversification relative to equities.
o Diversify investments within asset classes to maximize preservation of
principal and minimize over-exposure to any one investment, thereby
minimizing the impact of losses in single investments.
The Pension Plan will maintain compliance with the Employee Retirement Income
Security Act of 1974 (ERISA) as amended, and any applicable regulations and
laws.
The Pension and Benefits Committee of the Board of Directors (Pension Committee)
that oversees the investment of Pension Plan assets in conjunction with
management has conducted a review of the Investment Strategies and Policies of
the Pension Plan. This included a review of the strategic asset allocation,
including the relationship of Pension Plan assets to Pension Plan liabilities
and portfolio structure. The Pension Committee has maintained the 2004 target
asset allocation for 2005 for both the pension and other post-retirement
employee benefit funds, as detailed below:
Target
------
Equity securities 65%
Debt securities 25%
Other 10%
-95-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The above allocations may be revised by the Pension Committee.
Funding policy for the Pension Plan is to make annual contributions that satisfy
the minimum funding requirements of ERISA but that do not exceed the maximum
deductible limits of the Internal Revenue Code. These amounts are determined
each year as a result of an actuarial valuation of the Pension Plan. In 2002,
$12.2 million was contributed for the 2002 funding requirements of the Pension
Plan. In 2003, a $45 million contribution was made to the Pension Plan, which
increased the total plan assets to a level which exceeded the accumulated
benefit obligations and thereby reduced the Other Comprehensive Loss of $26.5
million, after-tax, recorded in 2002. In 2004, UI contributed $16.7 million to
the Pension Plan, the entire amount of which was attributable to the 2003 plan
year for income tax purposes.
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 non-qualified supplemental plan. The cash surrender value of
these policies is included in Other Investments on the Consolidated Balance
Sheet.
The contribution to the Pension Plan for 2005 is expected to be approximately
$7.8 million, assuming that the amount will be equal to, or less than, the
maximum contribution allowable per the Internal Revenue Code. The Accumulated
Benefit Obligation as of December 31, 2004 for the qualified and non-qualified
plans is $266.2 million and $6.1 million, respectively.
There is potential variability to the pension expense calculation depending on
changes in certain assumptions: if there had been a 0.25% change in the discount
rate assumed at 6% to estimate 2004 pension expense, the pension expense would
have increased or decreased inversely by $0.8 million; if there had been a 1%
change in the expected return on assets, the pension expense would have
increased or decreased inversely by $2.5 million.
In addition to providing pension benefits, UI also provides other
post-retirement benefits (OPEB), consisting principally of health care and life
insurance benefits, for retired employees and their dependents. Employees whose
sum of age and years of service at the 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. UI is expected to
contribute approximately $9.6 million in 2005 to fund OPEB.
The FASB has issued a new staff position FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," which provides guidance on the accounting for the
effects of the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act). The Act introduces prescription drug benefits under Medicare
(Medicare Part D), as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Act introduces a subsidy of 28 percent of an
individual beneficiary's annual prescription drug cost between $250 and $5,000
subject to allowable retiree Medicare costs. The Act is effective for claims on
or after January 15, 2006. The accounting for the federal subsidy does not have
any impact on the calculation of UI's post-retirement health care benefit
obligation, as UI does not provide prescription drug benefits for Medicare
eligible employees in its post-retirement health care plans.
For funding purposes, UI established a Voluntary Employees' Benefit Association
Trust (VEBA) to fund OPEB for UI's union employees. The funding strategy for the
VEBA is to select funds that most clearly mirror the pension allocation
strategy. Approximately 43% 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 Pension Plan to fund OPEB
for UI's non-union employees who retire on or after January 1, 1994. In 2002, UI
contributed $0.8 million to the 401(h) account. UI did not make a contribution
to the 401(h) account in 2003. The
-96-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
401(h) account was closed at the end of 2003, as the benefit payments exceeded
the ability to make additional contributions and the account effectively became
a revolving account. UI did not make contributions to the union VEBA in 2003 or
2002. In 2004, UI contributed $1.9 million to the union VEBA. Plan assets for
the union VEBA consist primarily of equity and fixed-income securities. There
is potential variability in the calculation of OPEB plan expenses depending on
changes in certain assumptions: if there had been a 0.25% change in the discount
rate assumed, the OPEB plan expenses would have increased or decreased inversely
by $0.1 million; if there had been a 1% change in the expected return on VEBA
assets, the OPEB plan expenses would have increased or decreased inversely by
$0.2 million.
To develop the expected long-term rate of return on assets assumption, UI
considered the current level of expected returns on risk-free investments
(primarily government bonds), the historical level of the risk premium
associated with the other asset classes in which the portfolio is invested and
the expectations for future returns of each asset class. The expected return for
each asset class was then weighted based on the target asset allocation to
develop the expected long-term rate of return on assets assumption for the
portfolio. This resulted in the selection of the 8.0% return on plan assets.
The projected, long-term average wage increase was maintained at 4.5% in 2004.
In 2002, due to increases in projected health care costs, UIL Holdings increased
its health care cost trend rate and assumed such cost increases would decline
over the next several years and then level off. The health care cost trend rate
assumption for pre-65 retirees is 12%, declining by 1% annually to a
steady-state growth rate of 5.5%. The health care cost trend rate assumption for
post-65 retirees is 6.5%, declining by 0.5% annually to a long-term rate of
5.0%.
In accordance with SFAS No. 87, "Employers' Accounting for Pensions" (SFAS No.
87) and SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other
Than Pensions" (SFAS No. 106), UI utilizes an alternative method to amortize
prior service costs and unrecognized gains and losses. UI amortizes prior
service costs for both the Pension Plan and OPEB plan on a straight-line basis
over the average remaining service period of participants expected to receive
benefits. UI utilizes an alternative method to amortize unrecognized actuarial
gains and losses related to the Pension and OPEB plan over the lesser of the
average remaining service period or ten years. Normally, there is a corridor of
between zero and ten percent for the greater of the accumulated post-retirement
benefit obligation and the market value of the assets prior to capturing gains
and losses. However, for capturing the amortization of OPEB unrecognized gains
and losses, there is no corridor due to the low dollar amount.
-97-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table represents the change in benefit obligation, change in plan
assets and the respective funded status of UI's pension and post-retirement
plans as of December 31, 2004 and 2003.
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
2004 2003 2004 2003
---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION (in Thousands)
Benefit obligation at beginning of year $309,173 $272,938 $52,512 $48,341
Service cost 5,950 6,214 923 777
Interest cost 18,016 17,820 3,055 3,154
Participant contributions N/A N/A 814 437
Amendments - (1,333) - -
Actuarial (gain) loss 9,584 30,318 2,307 3,687
Settlements, curtailments and other - (98) - -
Benefits paid (including expenses) (21,264) (16,686) (3,747) (3,884)
----------------------------------------------------------------
Benefit obligation at end of year $321,459 $309,173 $55,864 $52,512
================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beg. of year $259,410 $186,613 $16,963 $16,388
Actual return on plan assets 26,567 44,251 1,915 2,961
Employer contributions 17,667 45,233 3,601 1,060
Participant contributions N/A N/A 814 437
Benefits paid (including expenses) (21,264) (16,687) (3,747) (3,883)
----------------------------------------------------------------
Fair value of plan assets at end of year $282,380 $259,410 $19,546 $16,963
================================================================
Funded Status at December 31:
Projected benefits (less than) greater than
plan assets $39,079 $49,763 $36,318 $35,549
Unrecognized prior service cost (6,641) (7,701) 1,377 1,557
Unrecognized transition asset (obligation) 524 1,578 (7,761) (8,819)
Unrecognized net gain (loss) from past
experience (77,792) (81,318) (17,554) (16,927)
----------------------------------------------------------------
(Prepaid)/accrued benefit obligation $(44,830) $(37,678) $12,380 $11,360
================================================================
Amounts recognized in the Consolidated Balance
Sheet consist of:
Prepaid benefit cost $(49,532) $(43,927) $ - $ -
Accrued benefit liability 6,102 8,166 12,380 11,360
Intangible asset (427) (1,093) - -
Accumulated other comprehensive income (973) (824) - -
----------------------------------------------------------------
Net amount recognized $(44,830) $(37,678) $12,380 $11,360
================================================================
The following weighted average actuarial assumptions were used in calculating
the benefit obligations at December 31:
Discount rate 5.75% 6.00% 5.75% 6.00%
Average wage increase 4.50% 4.50% N/A N/A
Pre-65 healthcare trend rate(current yr) N/A N/A 12.00% 13.00%
Pre-65 healthcare trend rate (2012+) N/A N/A 5.50% 5.50%
Post-65 healthcare trend rate(current yr) N/A N/A 6.50% 7.00%
Post-65 healthcare trend rate (2008+) N/A N/A 5.00% 5.00%
-98-
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
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands)
Components of net periodic benefit cost:
Service cost $ 5,950 $ 6,214 $ 923 $ 777
Interest cost 18,016 17,820 3,055 3,154
Expected return on plan assets (20,048) (14,180) (1,310) (1,211)
Amortization of:
Prior service costs 1,060 1,179 (180) (180)
Transition obligation (asset) (1,054) (1,054) 1,058 1,058
Actuarial (gain) loss 6,591 7,514 1,693 1,631
Settlements and curtailments - 1 - -
----------------------------------------------------------------
Net periodic benefit cost $10,515 $17,494 $5,239 $5,229
================================================================
The following actuarial weighted average
assumptions were used in calculating
net periodic benefit cost:
Discount rate 6.00% 6.75% 6.00% 6.75%
Average wage increase 4.50% 4.50% N/A N/A
Return on plan assets 8.00% 8.00% 8.00% 8.00%
Pre-65 health care trend rate (current year) N/A N/A 13.00% 14.00%
Pre-65 health care trend rate (2012+) N/A N/A 5.50% 5.50%
Post-65 health care trend rate (current year) N/A N/A 7.00% 7.50%
Post-65 health care trend rate (2009+) N/A N/A 5.00% 5.00%
N/A - not applicable
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 $ 611 $ (488)
Accumulated post-retirement benefit obligation $7,489 $(6,156)
The following table summarizes the expected future benefit payments to be paid:
YEAR PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
---- ---------------- ------------------------------
(in Thousands)
2005 $ 19,532 $ 2,940
2006 17,708 3,138
2007 18,144 3,168
2008 19,146 3,231
2009 22,451 3,390
2010 - 2014 113,001 18,544
-99-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UI has a 401(k)/Employee Stock Ownership Plan (KSOP) in which substantially all
of its employees and the employees of UIL Holdings and UCI are eligible to
participate. The KSOP enables employees to defer receipt of a portion of their
compensation, up to statutory limits, 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. Through December 31, 2002, the matching contribution equaled 50 cents
for each dollar of the employee's compensation deferred, but not more than 3
3/8% of the employee's annual salary. As of January 1, 2003, the matching
contribution to the KSOP is 100% of the first 3% of employee compensation
deferred and 50% of the next 2% deferred. The maximum match is 4% of annual
salary and all matching contributions continue to be made in the form of UIL
Holdings' common stock. Matching contributions to the KSOP during 2004, 2003 and
2002 were $2.2 million, $2.1 million and $1.7 million, respectively.
UIL Holdings pays dividends on the shares of stock in the KSOP to the
participant and UIL Holdings receives a tax deduction for the dividends paid.
Prior to 2003, to distribute this tax benefit to participants, contributions
made to the KSOP were equal to 25% of the dividends paid to each participant.
These contributions amounted to $0.3 million in 2002 and 2001. Commencing in
2003, UIL Holdings ceased making such contributions and does not plan to make
such contributions in the future.
Certain of 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.
In December of 2001, Xcelecom established the Xcelecom, Inc. 401(k) Plan. Upon
establishment, Xcelecom merged each of the separate subsidiary non-union
retirement plans into this single company-wide plan in a staged manner.
Beginning on January 1, 2002, non-union employees of Xcelecom's subsidiaries
merged into this plan became eligible to participate upon completing six months
of service and attaining age 21. Participants become vested in matching
contributions immediately upon entry into the plan. Xcelecom makes matching
contributions equal to 100% of the first 3% of employee salary deferred and 50%
of any salary deferrals that exceed 3% but do not exceed 5% of the participant's
compensation. Matching contributions to the Xcelecom 401(k) during 2004, 2003
and 2002 were $0.6 million, $0.6 million and $1 million, respectively.
Certain of Xcelecom's subsidiaries maintained separate defined contribution
employee retirement plans for part or all of 2002, pending merger 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.
(H) 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 a 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. This
decision allows UI to retain the Seabrook Unit 2/CCBT amounts for ratemaking
purposes, with the accumulated CCBT credits not deducted from the 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. Unit 2 was sold on
November 1, 2002. As a result of reducing its remaining unamortized investment
in Seabrook Unit 2 with related proceeds from the sale, UI's investment has been
fully amortized. A final decision was issued in March 2004 approving UI's
calculation without modification.
-100-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(I) 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. Prior to January 20, 2004, UI leased its Electric System Work
Center (ESWC) facility, and recognized such lease as a capital lease. On January
20, 2004, UI exercised the $16 million purchase option in connection with the
capital lease for the ESWC facility.
The gross amount of assets recorded under the capital lease for the ESWC
facility and the related obligation as of December 31, 2003 was $14.8 million.
UIL Holdings did not have any other capital leases as of December 31, 2004 or
2003.
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
leases of office space and facilities, railroad rights of way and a wide variety
of equipment. The most significant operating lease is that of UI and UIL
Holdings' corporate headquarters. Most of the operating leases for office space
and facilities contain options to either 1) purchase the leased space for a
stipulated amount at the end of the initial lease term, or 2) renew the lease at
the end of the initial lease term, at the then fair value, or stipulated
amounts, as defined in the lease, for periods ranging from 1 to 15 years. The
future minimum lease payments under these operating leases are estimated to be
as follows:
(In Thousands)
2005 $ 13,362
2006 12,760
2007 12,857
2008 13,002
2009 13,203
2010 - after 48,725
----------------
Total $113,909
================
Rental payments charged to operating expenses in 2004, 2003 and 2002, including
rental payments for its corporate headquarters, were as follows:
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------------------------------------------------
(in Thousands)
Rental payments $13,118 $14,509 $13,710
Less: Sublease rental payments received 380 712 685
------------------------------------------------------
Rental payments charged to operating expenses $12,738 $13,797 $13,025
======================================================
-101-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(J) COMMITMENTS AND CONTINGENCIES
OTHER COMMITMENTS AND CONTINGENCIES
CONNECTICUT YANKEE ATOMIC POWER COMPANY
UI has a 9.5% stock ownership share in the Connecticut Yankee Atomic Power
Company (Connecticut Yankee), the carrying value of which was $4.1 million as of
December 31, 2004. On December 4, 1996, the Board of Directors of Connecticut
Yankee voted unanimously to retire the Connecticut Yankee nuclear plant (the
Connecticut Yankee Unit) from commercial operation. A decision by the FERC that
became effective on August 1, 2000 allows Connecticut Yankee to collect, through
the power contracts with the unit's owners, the FERC-approved decommissioning
costs, other costs associated with the permanent shutdown of the Connecticut
Yankee Unit, the unrecovered investment in the Connecticut Yankee Unit, and a
return on equity of 6%. Connecticut Yankee may recover 9.5% of these costs from
UI.
Connecticut Yankee updates its cost to decommission the unit annually, or as
needed, and provides UI with a projected recovery schedule depicting annual
costs expected to be billed to UI, including a return on investment over the
term of the projected recovery period. The present value of these costs is
calculated using UI's weighted average cost of capital and, after consideration
of recoverability, recorded as a Connecticut Yankee Contract Obligation and a
corresponding regulatory asset. At December 31, 2004, UI has regulatory approval
to recover in future rates $21.3 million of its regulatory asset for Connecticut
Yankee over a term ending in 2007. The remaining portion of the regulatory
asset, as of December 31, 2004, was $26.2 million, which consists of costs
subject to a regulatory review and approval process and reflects the present
value of the revenue requirements to fund the increased costs described in the
following paragraphs. The regulatory review and approval process may extend the
recovery period beyond 2007. Although UI believes full regulatory recovery is
probable because these costs are similar in nature to the costs for which UI
already has regulatory approval to recover in future rates, the actual amounts
subject to recovery may be different.
CURRENT COST ESTIMATE
- ---------------------
As part of the Connecticut Yankee April 2000 rate case settlement with the FERC,
remaining decommissioning costs were originally estimated at $436 million. The
original estimate was updated in November 2002 to increase the estimated
decommissioning costs by approximately $130 million. The $130 million increase
stemmed primarily from additional security costs, increased insurance costs and
other factors. In December 2003 the estimate was increased by an additional $265
million, reflecting the fact that Connecticut Yankee is now directly managing
the work necessary to complete decommissioning of the plant following
termination of the contractor that had been managing such work in July 2003.
Consequently, the total current cost estimate of approximately $831 million
(2003 Estimate) represents an aggregate increase of approximately $395 million
over the April 2000 FERC rate case settlement amount. The above financial
information has been adjusted to 2003 dollars.
UI's share of the estimated increased cost of $395 million over the 2000 FERC
settlement is approximately $37.5 million. This increase will not impact current
period earnings, as the amounts will be deferred on UI's balance sheet pending
resolution of the litigation and regulatory proceedings described herein.
Ultimately, if this issue is resolved favorably, the costs will be recovered in
rates and therefore would not likely have a financial impact on UI's results of
operations. If the outcome is not favorable, there could be a material negative
impact to UI's results of operations.
-102-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
BECHTEL LITIGATION
- ------------------
Connecticut Yankee terminated its decommissioning contract with Bechtel Power
Corporation (Bechtel) in July 2003 due to Bechtel's history of incomplete and
untimely performance of decommissioning work. In June 2003, Bechtel filed a
complaint against Connecticut Yankee in Connecticut Superior Court, asserting a
number of claims, including wrongful termination. In August 2003, Connecticut
Yankee filed a counterclaim, including counts for breach of contract, negligent
misrepresentation and breach of duty of good faith and fair dealing. Connecticut
Yankee is now managing the decommissioning process and continues to prosecute
its counterclaims for excess completion costs and other damages against Bechtel
in Connecticut Superior Court. Discovery is underway and a trial has been
scheduled for May 2006. The 2003 Estimate does not include any allowance for
cost recovery in this matter.
On June 18, 2004, Bechtel filed a Pre-Judgment Remedy Application ("PJR")
requesting a $93 million garnishment of the Decommissioning Trust ("Trust"),
Connecticut Yankee shareholder payments to the Trust and any proceeds from the
fuel disposal contract litigation pending between Connecticut Yankee and the U.
S. Department of Energy (DOE), as well as attachment of any Connecticut Yankee
assets, including real property located in Haddam Neck, Connecticut. On July 16,
2004, Connecticut Yankee filed its objection to the PJR, including challenging
the legal availability of the remedies requested by Bechtel. On July 20, 2004
the Court allowed the DPUC to intervene in the PJR proceeding for the limited
purpose of objecting to Bechtel's requested garnishment of the Trust and related
payments. On August 26, 2004, the Court held oral arguments on the legal
availability of the remedies requested by Bechtel but has not issued a decision.
An evidentiary hearing on the other PJR issues began on October 19, 2004. On
November 1, 2004, the Judge in the PJR proceedings signed a Stipulation reached
between Connecticut Yankee and Bechtel. In the Stipulation Bechtel agrees: (a)
to waive and relinquish its right to seek prejudgment attachment of the Trust or
any future payments into the Trust, including any proceeds of Connecticut
Yankee's currently pending litigation with the DOE regarding spent fuel storage
costs; and (b) not to file in any forum any additional or amended applications
for prejudgment remedy or other preliminary relief seeking to attach or garnish
any assets of Connecticut Yankee or of any of its shareholders or power
purchasers. Further, Bechtel amends its Application to provide that it seeks
only: (i) to attach real property owned by Connecticut Yankee in Connecticut
with a value of up to $7.9 million; and (ii) to garnish a portion of the stream
of monthly payments to be made through June 2007 to Connecticut Yankee under the
wholesale power contracts between Connecticut Yankee and its power purchasers,
up to an aggregate amount of $41.7 million. In the proposed Stipulation it is
further agreed that any attachment of the real property authorized by the Court
will not prevent Connecticut Yankee from continuing plant decommissioning, and
Connecticut Yankee will be entitled to continue with all deconstruction,
demolition, decontamination, remediation and related activities. This
Stipulation does not constitute an admission of liability by Connecticut Yankee,
nor an acknowledgement of any damage calculation in any respect, and is not
admissible in any subsequent legal or administrative proceeding not related to
enforcement of the Application, including any alternative dispute resolution
proceedings. The parties have not reached agreement as to whether the real
property and the purchaser payments referenced above may be lawfully attached or
garnished. Connecticut Yankee and the DPUC continue to dispute that the assets
may be lawfully attached or garnished and the parties have agreed to submit
these legal issues to the Court for decision.
FERC MATTERS
- ------------
2004 RATE CASE FILING
- ---------------------
Connecticut Yankee filed the 2003 Estimate with the FERC as part of a July 1,
2004 rate application (the Filing) seeking additional funding to complete the
decommissioning project and for storage of spent fuel through 2023. The Filing
was required as part of the terms of Connecticut Yankee's April 2000 rate case
settlement agreement with the FERC and requests that new rates take effect on
January 1, 2005. The Filing includes proposed increased decommissioning charges,
based on the 2003 Estimate, as well as $4.0 million and $2.4 million of new
charges for
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
pension and post-retirement benefits (other than pensions), respectively.
The proposed $93 million annual decommissioning collection represents a
significant increase in annual charges compared to the existing
FERC-approved decommissioning collection rate of $16.7 million per year that had
been approved as part of the April 2000 rate case settlement. The Filing
proposes extending the collection period for decommissioning from June 30, 2007
to December 31, 2010.
Notices of intervention or protest were filed in July and August at the FERC by
several utility parties and by non-utility parties including the DPUC, the OCC,
the Massachusetts Attorney General, the Massachusetts Department of
Telecommunications and Energy, the Rhode Island Attorney General, and the Maine
Public Advocate. Bechtel Power Corporation also filed a motion to intervene and
protest.
On August 30, 2004, FERC issued an order: (1) accepting for filing Connecticut
Yankee's proposed new charges for decommissioning, pension expense and
post-retirement benefits (other than pensions) expense; (2) suspending the
revised charges for a period of five months, to February 1, 2005, at which time
the proposed rates went into effect subject to refund; (3) establishing hearing
procedures, to commence with a pre-hearing conference before an administrative
law judge (ALJ) in September 2004; (4) denying the request of the DPUC and OCC
for an accelerated hearing schedule and for a bond or other security for
potential refunds; (5) denying the declaratory ruling requested by the DPUC and
OCC (see paragraph below), and (6) granting Bechtel's motion to intervene as
well as allowing the interventions by the other applying parties including UI
and the other Connecticut Yankee power purchasers. The hearing is scheduled to
begin on June 1, 2005. The process of resolving the matters in the Filing is
likely to be contentious and lengthy.
FERC ORDER ON REQUEST FOR DECLARATORY ORDER
- -------------------------------------------
On June 10, 2004, the DPUC and the OCC filed a petition (Petition) with the FERC
seeking a declaratory order that Connecticut Yankee can recover all
decommissioning costs from its wholesale purchasers, but that those purchasers
may not recover in their retail rates any costs that the FERC might determine to
have been imprudently incurred. Connecticut Yankee, as well as its wholesale
purchasers, responded in opposition to the Petition, indicating that the order
sought by the DPUC and OCC would violate the Federal Power Act and decisions of
the U.S. Supreme Court, other federal and state courts, and the FERC. As noted
above, the FERC rejected this petition as part of its initial ruling on
Connecticut Yankee's rate filing. The DPUC and OCC filed a petition for
rehearing on the matter which is pending before the FERC. Connecticut Yankee
filed a motion on October 14, 2004 requesting permission to respond, as well as
a response to the rehearing petition.
DOE LITIGATION
- --------------
To the extent that the new estimates described above are related to spent fuel
storage, they could be affected by the outcome of an ongoing dispute between the
DOE and several utilities and states. Under the Nuclear Waste Policy Act of 1982
(the Act), the DOE is required to design, license, construct and operate a
permanent repository for high-level radioactive waste and spent nuclear fuel.
The Act requires the DOE to provide for the disposal of spent nuclear fuel and
high-level waste from commercial nuclear plants through contracts with the
owners. In return for payment of established disposal fees, the federal
government was required to take title to and dispose of the utilities'
high-level waste and spent nuclear fuel beginning no later than January 1998.
After the DOE announced that its first high-level waste repository will not be
in operation earlier than 2010, several utilities and states obtained a judicial
declaration that the DOE has a statutory responsibility to take title to and
dispose of high-level waste and spent nuclear fuel beginning in January 1998.
Although the federal government now concedes that its failure to begin disposing
of high-level waste and spent nuclear fuel in January 1998 constituted a breach
of contract, it continues to dispute that the entities with which it had
contracts are entitled to damages.
-104-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Connecticut Yankee, together with two other New England-based owners of shutdown
nuclear generating plants, is seeking recovery of damages stemming from the
breach by the DOE under the 1983 contracts that were mandated by the U.S.
Congress under the High Level Waste Act for purposes of disposal of spent fuel
and high-level waste, including greater than class C waste. The trial for the
damage claim, which had been pending in the Federal Court of Claims since March
1998, commenced on July 12, 2004 and ended August 31, 2004. The court heard
closing arguments on January 24, 2005 and the final post-trial briefs are
scheduled to be filed on February 18, 2005.
The amount of the claim for damages incurred through 2010, net of adjustments
made as part of the trial record, is approximately $186-$198 million depending
on the discount rate applied. In addition, incremental continuing damages that
will be incurred for periods beyond 2010 are being sought based on an annual
dollar value. The 2003 Estimate discussed above does not include an allowance
for recovery of damages in this matter. The Department of Justice submitted a
motion to the court during the damage trial which raises the issue of whether
Connecticut Yankee's pre-1983 spent fuel fee obligation of approximately $155
million should be treated as an offset to any payment of damages. The Court's
ruling on that matter is expected to be issued in the same time frame as its
overall ruling in the case, which is expected in the spring of 2005.
HYDRO-QUEBEC
UI is a participant in the Hydro-Quebec transmission tie facility linking New
England and Quebec, Canada. UI has a 5.45% participating share in this facility,
which in aggregate has a maximum 2000 megawatt equivalent generation capacity
value. UI is obligated to furnish a guarantee for its participating share of the
debt financing for one phase of this facility. The original guarantee was
entered into in April 1991 in the amount of $11.7 million. The amount of this
guarantee is reduced monthly, proportionate with principal paid on the
underlying debt. As of December 31, 2004, UI's guarantee for this debt was
approximately $3.3 million.
ENVIRONMENTAL CONCERNS
In complying with existing environmental statutes and regulations and further
developments in areas of environmental concern, including legislation and
studies in the fields of water quality, hazardous waste handling and disposal,
toxic substances, and electric and magnetic fields, UIL Holdings and its
wholly-owned direct and indirect subsidiaries may incur substantial capital
expenditures for equipment modifications and additions, monitoring equipment and
recording devices, and it may incur additional operating expenses. The total
amount of these expenditures is not now determinable. Environmental damage
claims may also arise from the operations of UIL Holdings' subsidiaries.
Significant environmental issues known to UIL Holdings at this time are
described below.
SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS
- ------------------------------------------------------
As a result of a 1992 DPUC retail rate decision, since January 1, 1993, UI had
been recovering through retail rates $1.1 million per year of environmental
remediation costs for the demolition and decontamination of its Steel Point
Station property in Bridgeport. As a result of the Rate Case decision dated
September 26, 2002, UI recovered the remaining $3 million of these costs ratably
during the 2002 through 2004 time period. Except for capping contaminated soils
that are legally allowed to remain on site, this amount reflects the remaining
costs to remediate the property. Final costs will be offset by any sale price
realized, and will be subject to regulatory true-up upon disposition of the
property. UI is also replacing portions of the bulkhead at the Steel Point
Station property. The work is expected to cost approximately $7.4 million and is
currently expected to be completed in 2005. UI is entitled to reimbursement of
the bulkhead costs from the City of Bridgeport pursuant to UI's contract with
the City. The cost estimates for the remediation and bulkhead are based on the
most current information available. Actual remediation and bulkhead replacement
costs may be higher, or lower, than what is currently estimated.
-105-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Subsequent to the demolition of Steel Point Station, the adjacent East Main
Street Substation was removed at the request of the City of Bridgeport and UI
expanded the Congress Street Substation to replace it. As of December 31, 2004,
UI is entitled to $8.9 million from the City of Bridgeport for such removal and
expansion. An additional $1.4 million of costs related to the Substation are
transmission assets recoverable through regional transmission rates. In the
event that UI is unable to reach a negotiated agreement with the City of
Bridgeport, UI will move forward with previously initiated arbitration
proceedings to collect these funds from the City.
A site on the Mill River in New Haven was conveyed by UI to an unaffiliated
entity, Quinnipiac Energy LLC (QE), reserving to UI permanent easements for the
operation of its transmission facilities on the site. At the time of the sale, a
fund of approximately $1.9 million, an amount equal to the then-current estimate
for remediation, was placed in escrow for purposes of bringing soil and
groundwater on the site into environmental compliance. Approximately $0.8
million of the escrow fund remains unexpended. UI also required that QE obtain
an insurance policy to provide coverage for limited remediation cost overruns.
QE's environmental consultant reports that approximately $1.9 million of
remediation remains to be performed. The City of New Haven has foreclosed on the
property, as QE is not current with property tax payments and the foreclosure
sale is scheduled in May 2005. UI could be required by applicable environmental
laws to finish remediating any ground contamination at the site if it is
determined that QE has not performed appropriate environmental remediation at
the site and the following events occur (1) insurance proceeds are not adequate
to cover remediation cost overruns or (2) the property is sold through a
foreclosure sale.
On April 16, 1999, UI closed on the sale of its Bridgeport Harbor Station and
New Haven Harbor Station generating plants in compliance with Connecticut's
electric utility industry restructuring legislation. Environmental assessments
performed in connection with the marketing of these plants indicate that
substantial remediation expenditures will be required in order to bring the
plant sites into compliance with applicable minimum Connecticut environmental
standards. The purchaser of the plants agreed to undertake and pay for the
remediation of the purchased properties. With respect to the portion of the New
Haven Harbor Station site that UI retained, UI has performed an additional
environmental analysis, indicating that approximately $3.2 million in
remediation expenses will be incurred. Actual remediation costs may be higher,
or lower, than what is currently estimated. The required remediation is
virtually all on transmission-related property; and UI accrued these estimated
expenses during the third quarter of 2002.
UI sold property to Bridgeport Energy LLC (BE) on April 16, 1999. In connection
with the sale of the property, UI entered into an environmental indemnity
agreement with BE, in which UBE holds a minority interest, to provide
indemnification related to certain environmental conditions specific to the site
where BE's generation facilities were constructed. Because of soil management
and other environmental remediation activities that were performed during
construction of the generation facilities, UI does not regard its exposure under
the environmental indemnity agreement as material.
From 1961 to 1976, UI owned a parcel of property in Derby, Connecticut, on which
it operated an oil-fired electric generating unit. For several years, the
Connecticut Department of Environmental Protection (CDEP) has been monitoring
and remediating a migration of fuel oil contamination from a neighboring parcel
of property into the adjacent Housatonic River. Although, based on its own
investigation to date, UI believes it has no responsibility for this
contamination, if regulatory agencies determine that UI is responsible for the
cost of these remediation activities, UI may experience substantial costs, no
estimate of which is currently available.
ELECTRIC SYSTEM WORK CENTER
- ---------------------------
UI's January 2004 purchase of its Electric System Work Center property, located
in Shelton, Connecticut, caused a review under the CDEP's Transfer Act Program.
Under this review, the CDEP had an opportunity to examine the current
environmental conditions at the site and direct remediation, or further
remediation, of any areas of concern. At the conclusion of its review, the CDEP
elected not to oversee any further site investigation or remediation at the site
and directed UI to undertake any necessary evaluation and/or remediation
(verification work) using an
-106-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
independent Licensed Environmental Professional (LEP). UI has hired an LEP and
has submitted a schedule to the CDEP for the verification work. Implementation
of the verification work is not expected to have a material impact on the
financial condition of UI.
UTILITY OPERATIONS
- ------------------
With respect to UI's general operations, UI received a Notice of Violation (NOV)
from the CDEP, dated September 22, 2004. This NOV alleges that UI is not in
compliance with inspection, recordkeeping and labeling requirements under
certain state and federal waste and used oil regulations. UI has corrected the
deficiencies and believes it is in compliance with the cited regulations.
Although the CDEP may elect to seek penalties for the alleged violations, which
can be up to $25,000, per incident, per day for non-compliance, UI has no reason
to believe that the CDEP will pursue penalty assessment under a consent order in
connection with the NOV. No fines have been assessed in connection with this
NOV. Any such financial penalties related to this NOV, if pursued by the CDEP,
are not expected to have a material impact on the financial condition of UI.
CLAIM OF ENRON POWER MARKETING, INC.
UI had a wholesale power agreement and other agreements with Enron Power
Marketing, Inc. (EPMI) (the Agreements). Following EPMI's bankruptcy filing on
December 2, 2001, UI terminated the Agreements in accordance with their terms,
effective January 1, 2002, in reliance upon provisions of the Bankruptcy Code
that permit termination of such contracts. The Agreements permitted UI to
calculate its gains and losses resulting from the termination, and globally to
net these gains and losses against one another, and against any other amounts
that UI owed to EPMI under the Agreements, to arrive at a single sum. EPMI,
however, commenced on January 31, 2003 an adversary proceeding against UI and
UIL Holdings in the EPMI bankruptcy. UIL Holdings was sued as the guarantor of
UI's financial obligations under the Agreements. EPMI contends that UI was not
entitled to offset, against any losses UI suffered from the termination of the
Agreements, any amounts owing to EPMI for power delivered to UI after the date
EPMI filed for bankruptcy. The amount of the allegedly improper setoff that EPMI
seeks to recover in the adversary proceeding is approximately $8.2 million, plus
interest and attorneys' fees. The bankruptcy court has referred this and other
similar cases to mediation and stayed the cases while mediation is conducted.
During mediation sessions, EPMI indicated it has theories for increasing the
amount of its claims against UI. In the event that UI is determined to owe EPMI
a portion or all of the amount claimed, UI will seek appropriate treatment of
such amount through the regulatory process.
CLAIM OF DOMINION ENERGY MARKETING, INC.
On December 28, 2001, UI entered into an agreement with Virginia Electric and
Power Company, which was subsequently assigned to its affiliate Dominion Energy
Marketing, Inc. (DEMI), for the supply of all of UI's standard offer generation
service needs from January 1, 2002 through December 31, 2003, and for the supply
of all of UI's generation service requirements for special contract customers
through 2008 (Power Supply Agreement or PSA). In December 2004, UI received a
letter from DEMI claiming that under the terms of this agreement, DEMI should
not have been responsible for a currently estimated amount of $8.2 million, plus
interest, of certain "CT Reliability COS" charges related to Reliability Must
Run agreements between ISO-NE and NRG (the owner of power plants located in
Connecticut that were formerly owned by Northeast Utilities). DEMI claims that
such charges are fixed operation and maintenance costs and not "Transmission
Congestion Costs," for which DEMI would be responsible under the terms of the
PSA. DEMI has indicated that it does not intend to terminate the PSA prior to
resolution of the dispute, but the parties have not agreed to a dispute
resolution process. On February 14, 2005, DEMI filed a complaint in Connecticut
District Court that seeks the court's interpretation of the contract and an
order compelling UI to pay the claimed damages. UI does not believe that the
court has jurisdiction, as the dispute pertains to a contract that was approved
by, and falls under jurisdiction of, the FERC. UI believes its interpretation of
the PSA is
-107-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
correct. If UI is unable to recover these amounts from DEMI, UI would
seek recovery of these amounts through the regulatory process.
INDEPENDENT SYSTEM OPERATOR - NEW ENGLAND
On April 16, 2004, UI announced its participation in the ISO-NE program to
secure emergency energy resources in Southwestern Connecticut. Under the
four-year contract, UI has committed to a load reduction of 30 megawatts when
requested by ISO-NE. UI has partnered with several large customers who have
agreed to reduce their electricity demand when the region's electric grid is
stressed. The agreement was approved by the FERC in May 2004. As part of the
agreement, UI provided a performance guarantee for the commitment of $0.7
million in the form of a letter of credit in the event UI was unable to reduce
demand when requested by ISO-NE. Through the end of October 2004, UI was not
required to perform under the $0.7 million letter of credit. In October 2004,
the letter of credit was reduced to $0.4 million, representing UI's remaining
performance guarantee under the agreement, and the term was extended until
October 31, 2005. No liability has been recorded in the UIL Holdings'
consolidated balance sheet as of December 31, 2004 for this guarantee provided
under this letter of credit. The probability that the letter of credit would be
utilized is very low due to the fact that the customers that UI has partnered
with for this program are among UI's largest, thus reducing the likelihood of
nonperformance in terms of both the requested kWh reductions and the ability to
pay any financial penalties. Furthermore, if the letter of credit were to be
utilized to cover nonperformance of UI's customers, the amount paid by UI would
be recovered directly from the customers who did not perform by deducting the
amount from the funds that would be remitted to such customers for their
performance in this program.
CROSS-SOUND CABLE COMPANY, LLC
UCI's 25% share of the actual project cost for the Cross-Sound cable was $34.3
million as of December 31, 2004. UCI has provided an equity infusion of $10
million to Cross-Sound and UIL Holdings loaned $24.8 million, including
capitalized interest, to Cross-Sound. In addition, UIL Holdings and UCI have
provided two guarantees, in the amounts of $2.5 million and $1.3 million, in
support of Hydro-Quebec's (HQ) guarantees to third parties in connection with
the construction of the project.
The $2.5 million guarantee is in support of an HQ guarantee to the Long Island
Power Authority (LIPA) to provide for damages in the event of a delay in the
date of achieving commercial operation. There had been a delay in achieving the
originally agreed upon date of commercial operation, primarily due to a
Connecticut legislative moratorium on installing new gas and utility lines
across Long Island Sound, which precluded the CDEP from considering applications
related to submarine cables under Long Island Sound. UCI believes action or
inaction of governmental, regulatory or judicial bodies qualify as events beyond
the party's control and performance under the guarantee is not required.
Further, as discussed below, on June 24, 2004 Cross-Sound executed a settlement
agreement allowing for immediate commercial operation of the cable. Although
retaining commercial operating status is contingent upon the satisfaction of
certain provisions of the settlement agreement, no liability has been recorded
related to this guarantee as UIL Holdings expects all provisions to be satisfied
in accordance with the agreement.
The $1.3 million guarantee is in support of an agreement under which Cross-Sound
is providing compensation to shell fishermen for all losses, including loss of
income, as a result of the installation of the cable (Shellfish Agreement). The
payments to the fishermen are being made over a 10-year period, and the
obligation under this guarantee reduces proportionately with each payment made.
As of December 31, 2004, the remaining amount of the guarantee was $1.2 million.
UIL Holdings has completed a probability weighted analysis based on the
likelihood of certain events occurring that would cause UIL Holdings to be
required to perform under this guarantee. This analysis resulted in a liability
amount that was inconsequential, and as such, no liability has been recorded in
UIL Holdings' Consolidated Balance Sheet as of December 31, 2004.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In the event that Cross-Sound could not meet any obligations that are supported
by the previously mentioned guarantees, it is expected that such obligation
would be funded by capital contributions from the owners, who are affiliates of
the guarantors, in amounts in proportion to their respective ownership shares of
Cross-Sound. As such, UCI does not expect to be required to perform under the
guarantee.
On June 24, 2004, Cross-Sound reached a settlement agreement with various
regulatory authorities and other parties with an interest in the cable that
allowed for immediate commercial operation of the cable. Following execution of
the settlement agreement, the existing contract Cross-Sound has with the Long
Island Power Authority for the entire capacity of the transmission line has
been amended, subject to formal approval by the New York State Comptroller, to
increase the overall term of the agreement from 20 years to 28 years by means
of adding an initial three-year period at the current reduced rates, and an
additional five years to the end of the contract term, at full rates.
Although the settlement agreement allows for commercial operation of the cable,
such status is contingent upon the satisfaction of certain provisions set forth
in the agreement. In particular, Cross-Sound was required to bring the cable
into compliance with permit conditions as directed by the CDEP. This remediation
was completed in January 2005 and consisted primarily of achieving the
originally required burial depth in those areas deemed as "soft spots," meaning
the obstructions which originally prevented achievement of such depth were able
to be removed without the use of techniques such as blasting. The cost of this
remediation amounted to $4 million. Additionally, the settlement agreement calls
for the parties to fund a collective amount of $6 million, of which
Cross-Sound's commitment is $2 million, to a research and restoration fund for
the Long Island Sound. Cross-Sound funded its $2 million commitment in September
2004.
With completion of all provisions of the settlement agreement for which
Cross-Sound is responsible, the loan from UIL Holdings may be refinanced with
external project financing. UCI will be responsible for 25% of any additional
cost of project completion over the estimated amount.
XCELECOM, INC.
Xcelecom, through one of its subsidiaries, has filed suit in New Jersey Superior
Court against M. J. Paquet (Paquet), a general contractor doing business in the
state of New Jersey, and Paquet's surety, United States Fidelity & Guaranty
Company. Paquet is the general contractor on a project with the New Jersey
Department of Transportation and one of Xcelecom's subsidiaries is the
electrical subcontractor on the project. The project is substantially complete
with minor items remaining. Xcelecom alleges in its suit, among other causes of
action, breach of contract, failure to comply with New Jersey's Prompt Pay Act,
and breach of trust. Xcelecom seeks to recover approximately $2 million in
overdue payments, plus damages for delay and failure by Paquet to comply with
New Jersey state law. Paquet has asserted numerous defenses to the suit, as well
as various counterclaims. Pleadings are closed and discovery is in process.
Xcelecom intends to vigorously pursue its suit against Paquet and its surety,
and to defend against Paquet's counterclaims. Paquet has announced it was
ceasing operations and the State of New Jersey withdrew two contracts it awarded
to Paquet earlier in 2004. Xcelecom does not believe there is a likelihood of an
adverse outcome as a result of Paquet's counterclaims, and as such, no amount
has been accrued for this matter in the financial statements. There has been no
reserve established against the receivable of approximately $2 million, as
Xcelecom expects to collect the entire amount due on this contract, either
directly from Paquet, or through the payment and performance bonds of Paquet's
surety.
-109-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of UIL Holdings' financial instruments are as follows:
2004 2003
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(In Thousands) (In Thousands)
Unrestricted cash and temporary cash investments $ 40,165 $ 40,165 $ 28,614 $ 28,614
Long-term debt (1)(2) $495,460 $507,248 $495,460 $511,184
(1) The fair value of UIL Holdings' long-term debt is estimated by investment
bankers based on market conditions at December 31, 2004 and 2003, respectively.
(2) See Note (B), "Capitalization - Long-Term Debt."
-110-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(L) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2004 and 2003 are set forth below:
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------
(In Thousands, Except Per Share Amounts)
2004
- ----
Operating Revenues $249,427 $260,735 $323,420 $267,705
Operating Income from Continuing Operations 16,526 22,192 35,501 13,771
Income from Continuing Operations 5,692 10,366 16,319 4,541
Income from Discontinued Operations (Note O) 1,443 48,365 16 -
Extraordinary Gain, net of tax (Note Q) - - - 203
Net Income 7,135 58,731 16,335 4,744
Earnings Per Share on Common Stock - Basic: (1)
Continuing Operations $ 0.40 $ 0.72 $ 1.13 $ 0.32
Discontinued Operations (Note O) 0.10 3.37 - -
Extraordinary Gain (Note Q) - - - 0.01
Net Earnings $ 0.50 $ 4.09 $ 1.13 $ 0.33
Earnings Per Share on Common Stock - Diluted: (2)
Continuing Operations $ 0.39 $ 0.72 $ 1.13 $ 0.32
Discontinued Operations (Note O) 0.10 3.36 - -
Extraordinary Gain (Note Q) - - - 0.01
Net Earnings $ 0.49 $ 4.08 $ 1.13 $ 0.33
2003
- ----
Operating Revenues $234,239 $230,621 $269,703 $229,114
Operating Income from Continuing Operations 19,030 16,694 36,277 16,956
Income from Continuing Operations 5,518 5,005 16,601 2,413
Income from Discontinued Operations (Note O) (252) (703) 351 (5,647)
Net Income 5,266 4,302 16,952 (3,234)
Earnings Per Share on Common Stock - Basic: (1)
Continuing Operations $ 0.39 $ 0.35 $ 1.16 $ 0.17
Discontinued Operations (Note O) (0.02) (0.05) 0.03 (0.40)
Net Earnings $ 0.37 $ 0.30 $ 1.19 $ (0.23)
Earnings Per Share on Common Stock - Diluted: (2)
Continuing Operations $ 0.39 $ 0.35 $ 1.16 $ 0.17
Discontinued Operations (Note O) (0.02) (0.05) 0.03 (0.40)
Net Earnings $ 0.37 $ 0.30 $ 1.19 $ (0.23)
(1) Based on weighted average number of shares outstanding each quarter.
(2) Based on weighted average number of shares outstanding each quarter.
Reflecting the effect of dilutive stock options, performance shares and
restricted stock.
-111-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(M) SEGMENT INFORMATION
As described in Note (O), "Discontinued Operations," to the Consolidated
Financial Statements, the sale of APS was completed in June 2004 and its results
of operations are reported as discontinued operations. Accordingly, UIL Holdings
now has two segments, UI, its regulated electric utility business engaged in the
purchase, transmission, distribution and sale of electricity, and Xcelecom, its
non-utility, indirect, wholly-owned subsidiary, which provides specialized
contracting services in the electrical, mechanical, communications and data
network infrastructure industries. Revenues from inter-segment transactions are
not material. All of UIL Holdings' revenues are derived in the United States.
The following table reconciles certain segment information with that provided in
UIL Holdings' Consolidated Financial Statements. In the table, Other includes
the information for the remainder of UIL Holdings' non-utility businesses,
including minority interest investments, administrative costs, and inter-segment
eliminations.
-112-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(M) SEGMENT INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 2004
-------------------------------------------------
ELIMINATIONS
UI XCELECOM AND OTHER TOTAL
---------- ---------- ------------ ----------
Operating Revenues $ 764,027 $ 337,192 $ 68 $1,101,287
Fuel and Energy 377,905 - - 377,905
Operation and maintenance 190,377 330,070 5,574 526,021
Depreciation and amortization 63,310 4,776 - 68,086
Taxes - other than income taxes 39,435 1,827 23 41,285
---------- ---------- ---------- -----------
Operating Income From Continuing Operations 93,000 519 (5,529) 87,990
---------- ---------- ---------- -----------
Other Income and (Deductions), net 6,663 902 1,026 8,591
---------- ---------- ---------- -----------
Interest Expense, net 15,571 575 6,645 22,791
---------- ---------- ---------- -----------
Income From Continuing Operations
Before Income Tax 84,092 846 (11,148) 73,790
Income taxes 37,830 352 (7,447) 30,735
---------- ---------- ---------- -----------
Income From Continuing Operations of
Consolidated Companies 46,262 494 (3,701) 43,055
Income (Losses) from Equity Investments 249 - (6,386) (6,137)
---------- ---------- ---------- -----------
Income From Continuing Operations 46,511 494 (10,087) 36,918
Discontinued Operations, Net of Tax - - 49,824 49,824
Extraordinary Gain, Net of Tax - 203 - 203
---------- ---------- ---------- -----------
Net Income $ 46,511 $ 697 $ 39,737 $ 86,945
========== ========== ========== ===========
Total Assets $1,475,782 $ 197,234 $114,592 $1,787,608
---------- ---------- ---------- -----------
FOR THE YEAR ENDED DECEMBER 31, 2003
-------------------------------------------------
ELIMINATIONS
UI XCELECOM AND OTHER TOTAL
----------- ---------- ------------ -----------
Operating Revenues $ 669,620 $294,036 $ 21 $ 963,677
Fuel and Energy 272,673 - - 272,673
Operation and maintenance 185,457 290,022 3,241 478,720
Depreciation and amortization 77,463 4,776 - 82,239
Taxes - other than income taxes 39,310 1,756 22 41,088
----------- ---------- ---------- -----------
Operating Income From Continuing Operations 94,717 (2,518) (3,242) 88,957
----------- ---------- ---------- -----------
Other Income and (Deductions), net 5,209 475 (301) 5,383
----------- ---------- ---------- -----------
Interest Expense, net 22,055 575 6,630 29,260
----------- ---------- ---------- -----------
Income From Continuing Operations
Before Income Tax 77,871 (2,618) (10,173) 65,080
Income taxes 39,519 (938) (5,131) 33,450
----------- ---------- ---------- -----------
Income From Continuing Operations of
Consolidated Cmpanies 38,352 (1,680) (5,042) 31,630
Income (Losses) from Equity Investments 317 - (2,410) (2,093)
----------- ---------- ---------- -----------
Income From Continuing Operations 38,669 (1,680) (7,452) 29,537
Discontinued Operations, Net of Tax - - (6,251) (6,251)
----------- ---------- ---------- -----------
Net Income $ 38,669 $ (1,680) $(13,703) $ 23,286
=========== ========== ========== ===========
---------- ---------- ---------- -----------
Total Assets $1,492,144 $ 178,906 $227,116 (1) $1,898,166
---------- ---------- ---------- -----------
(1)Includes assets of discontinued operations held for sale of $121,627.
FOR THE YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------
ELIMINATIONS
UI XCELECOM AND OTHER TOTAL
----------- ---------- ------------ -----------
Operating Revenues $ 727,533 $310,044 $ 19 $1,037,596
Fuel and Energy 269,195 - - 269,195
Operation and maintenance 200,531 301,141 3,490 505,162
Depreciation and amortization 88,115 4,452 92,567
Taxes - other than income taxes 44,488 1,482 - 45,970
----------- ---------- ---------- -----------
Operating Income From Continuing Operations 125,204 2,969 (3,471) 124,702
----------- ---------- ---------- -----------
Other Income and (Deductions), net 2,927 732 (1,394) 2,265
----------- ---------- ---------- -----------
Interest Expense, net 32,084 1,314 5,748 39,146
----------- ---------- ---------- -----------
Income From Continuing Operations
Before Income Tax 96,047 2,387 (10,613) 87,821
Income taxes 42,921 947 (6,390) 37,478
----------- ---------- ---------- -----------
Income From Continuing Operations of
Consolidated Companies 53,126 1,440 (4,223) 50,343
Income (Losses) from Equity Investments 818 - (5,410) (4,592)
----------- ---------- ---------- -----------
Income From Continuing Operations 53,944 1,440 (9,633) 45,751
Discontinued Operations, Net of Tax - - (1,804) (1,804)
----------- ---------- ---------- -----------
Net Income $ 53,944 $ 1,440 $(11,437) $ 43,947
=========== ========== ========== ===========
----------- ---------- ---------- -----------
Total Assets $1,391,231 $195,721 $181,807 (2) $1,768,759
----------- ---------- ---------- -----------
(2)Includes assets of discontinued operations held for sale of $123,005.
-113-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(N) GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 2004, and 2003, UIL Holdings maintains $70.5 million and
$68.6 million, respectively, of goodwill related to Xcelecom that is no longer
being amortized, and $3.7 million and $2.7 million, at December 31, 2004 and
2003, respectively, of identifiable intangible assets that continue to be
amortized.
A summary of UIL Holdings' goodwill as of December 31, 2004 is as follows:
(Thousands of Dollars) Total
--------------
Balance, January 1, 2003 $66,957
Goodwill acquired during the year ended December 31, 2003 1,597
--------------
Balance, December 31, 2003 68,554
Goodwill acquired during the year ended December 31, 2004 1,942
--------------
Balance, December 31, 2004 $70,496
==============
As of December 31, 2004 and 2003, UIL Holdings' intangible assets and related
accumulated amortization consisted of the following:
As of December 31, 2004
--------------------------------------------
Accumulated Net
(Thousands of Dollars) Gross Amortization Balance
--------------------------------------------
Intangible assets subject to amortization:
Non-compete agreements $3,455 $3,442 $13
Backlog 256 256 -
------------ ------------------ ------------
Total $3,711 $3,698 $13
============================================
As of December 31, 2003
--------------------------------------------
Accumulated Net
(Thousands of Dollars) Gross Amortization Balance
--------------------------------------------
Intangible assets subject to amortization:
Non-compete agreements $2,485 $2,178 $307
Backlog 256 256 -
--------------------------------------------
Total $2,741 $2,434 $307
============================================
The intangible asset balance is included in Other Deferred Charges on the
Consolidated Balance Sheet.
UIL Holdings recorded amortization expense of $1.3 million, $1.2 million and
$1.2 million for years ended December 31, 2004, 2003 and 2002, respectively,
related to these intangible assets. Assuming there are no acquisitions or
dispositions that occur in the future, the remaining intangible assets will be
fully amortized in 2005.
-114-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(O) DISCONTINUED OPERATIONS
On June 22, 2004, UIL Holdings completed the sale of APS to CheckFree
Corporation (CheckFree), a leading provider of financial electronic commerce
services and products, pursuant to the purchase agreement entered into between
the parties on December 16, 2003. Accordingly, the results of discontinued
operations for the nine months ended September 30, 2004 included the after-tax
gain, net of transaction costs and post-closing adjustments, of $46.2 million
recognized from the sale of APS. Post-closing review procedures were completed
during the third quarter of 2004 and the resulting adjustments net to an
insignificant increase in the gain on the sale of APS. The difference between
the overall gain and the reported gain for the year ended December 31, 2004 was
due to transaction costs incurred in the fourth quarter of 2003. Total
transaction costs associated with the sale of APS amounted to approximately $14
million and included $8.1 million paid to cover amounts owed to employees of APS
based on a long-term incentive plan and retention bonuses.
CheckFree did not acquire APS' telephony assets, which included a 51% ownership
interest in CellCards of Illinois, LLC (CCI). Following execution of the
agreement to sell APS, management determined that the telephony business was not
part of UIL Holdings' overall strategic business focus, and therefore authorized
the sale of APS' telephony assets. On February 13, 2004, CCI was sold for book
value, excluding transaction costs, to an independent third party.
As a result of the aforementioned events, the APS segment was considered to be a
"disposal group" held for sale as defined in SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets." Accordingly, the assets and liabilities of APS
have been categorized as "held for sale" in the accompanying Consolidated
Balance Sheet and the assets of APS ceased being depreciated as of December 16,
2003. As of December 31, 2003, approximately $32.1 million of cash, $57.7
million of settlement assets and $13.8 million of other current assets were
included in the line item Current Assets of Discontinued Operations Held for
Sale on the Consolidated Balance Sheet and approximately $84.6 million of
settlement liabilities and $9.7 million of other current liabilities were
included in the line item Current Liabilities of Discontinued Operations Held
for Sale on the Consolidated Balance Sheet. The related asset carrying values
were not required to be adjusted, as the carrying amounts were lower than the
estimated fair values less costs to sell. The results of operations of APS for
all periods presented have been reported as discontinued operations in the
accompanying Consolidated Statements of Income and Consolidated Statements of
Cash Flows.
-115-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
A summary of the discontinued operations of APS for the years ended December 31
follows (in thousands):
2004 2003 2002
---- ---- ----
Net operating revenues $36,659 $109,570 $93,426
====================================================
Impairment loss (1) $ - $ (8,220) $ -
====================================================
Operating income (loss) (2) $ 5,508 $ 1,082 $(3,376)
====================================================
Income (loss) before income taxes (2) $ 4,941 $(10,249) $(3,019)
Income tax (expense) benefit (2) (1,469) 3,998 1,215
----------------------------------------------------
Income (loss) from discontinued operations,
net of tax, excluding gain on sale 3,472 (6,251) (1,804)
Gain on sale of discontinued operations, net
of tax (3) 46,352 - -
----------------------------------------------------
Net loss from discontinued operations $49,824 $ (6,251) $(1,804)
====================================================
(1) Impairment charges of $1 million and $7.2 million were recorded in 2003 to
bring the carrying values of APS' telephony assets and goodwill associated with
such telephony assets, respectively, in line with their estimated fair values.
(2) Excludes transaction costs and related income tax impact, which are included
in the gain on sale of discontinued operations. (3) Gain on sale of discontinued
operations is reported net of transaction costs of $14 million and net of income
taxes of $32 million.
(P) RELATED PARTY TRANSACTIONS
Arnold L. Chase, a Director of UIL Holdings since June 28, 1999, holds a
beneficial interest in the building known as 157 Church Street, where UI leases
office space for its corporate headquarters. UI's lease payments for this office
space for the years ended December 31, 2004, 2003 and 2002 totaled $9.4 million,
$8.7 million and $7.8 million, respectively.
UCI invested a total of $3.9 million in 2000 and 2001 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. In June 2002, UCI
wrote its investment in Gemini down to one dollar, because the
telecommunications sector had suffered substantial losses in value, and because
UCI concluded that Gemini was unlikely to continue its network development in
the absence of additional financing. In December 2003, Gemini completed a
restructuring transaction in connection with which the Chase family came to own
100% of the equity of Gemini. In connection with that transaction, UCI received
a cash payment in May 2004 of approximately $17,500 in exchange for its
ownership interest in Gemini.
Cross-Sound, in which UCI holds a 25% minority interest investment, leases a
parcel of land from UI. Cross-Sound's lease payments to UI for this parcel
amount to $0.1 million on an annual basis.
In connection with certain of the acquisitions of Xcelecom, certain of
Xcelecom's subsidiaries have entered into a number of related party lease
arrangements for facilities with the former owners of companies acquired (or
persons or entities related thereto), some of whom are current employees of
Xcelecom. These lease agreements are for periods generally ranging from three to
five years. Xcelecom's payments related to these lease arrangements totaled $1.6
million , $2 million and $2 million for the years ended December 31, 2004, 2003
and 2002, respectively.
-116-
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Q) EXTRAORDINARY GAIN
In accordance with SFAS No. 141, "Business Combinations" (SFAS No. 141), at the
time of a prior acquisition, Xcelecom had recorded a liability for an amount
equal to the excess fair value of the acquired net assets over the cost of such
acquisition. This amount was not recognized as an extraordinary gain at the time
of the acquisition, as there was a provision in the acquisition agreement that
would result in an additional cost element if certain earning milestones were
achieved in future years (earnout provision). The agreement also called for
cancellation of such provision if cumulative earnings fell below a specified
threshold. The earnings of the acquired company fell below the specified
threshold, thus eliminating the earnout provision. SFAS No. 141 states that when
the amount of contingent consideration to be issued or issuable in a business
combination is resolved, the amount initially recognized as a liability that
exceeds the fair value of the total consideration issued or issuable shall be
allocated on a pro rata basis to reduce the amounts assigned to assets acquired,
in accordance with the standard, and any remaining excess shall be recognized as
an extraordinary gain. In accordance with SFAS No. 141, Xcelecom recognized an
extraordinary gain of $0.2 million in the fourth quarter of 2004, net of income
taxes of $0.1 million.
-117-
PRICEWATERHOUSE COOPERS
- -------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
300 Atlantic Street
Stamford, CT 06901
Telephone (203) 539 3000
Facsimile (813) 207 3999
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of UIL Holdings Corporation:
We have completed an integrated audit of UIL Holdings Corporation's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
- ------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a) present fairly, in all material respects, the
financial position of UIL Holdings Corporation and its subsidiaries at December
31, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
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 our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in the Report of
Management in Internal Control over Financial Reporting appearing under Item 9a,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in INTERNAL CONTROL -
INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
-118-
December 31, 2004, based on criteria established in INTERNAL CONTROL -
INTEGRATED FRAMEWORK issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Stamford, Connecticut
February 11, 2005
-119-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not Applicable
ITEM 9A. CONTROLS AND PROCEDURES.
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
UIL Holdings maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its periodic reports to the
Securities and Exchange Commission (SEC) is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to UIL Holdings'
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure based on
the definition of "disclosure controls and procedures" in Rule 13a-15(e) and
Rule 15d-15(e) under the Securities Exchange Act of 1934. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Also, through
United Capital Investments, Inc. and United Bridgeport Energy, Inc., UIL
Holdings has minority investments in certain other entities. As UIL Holdings
does not control or manage these entities, its disclosure controls and
procedures with respect to such entities are necessarily substantially more
limited than those it maintains with respect to its subsidiaries.
UIL Holdings carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and its
Chief Financial Officer, of the effectiveness of the design and operation of UIL
Holdings' disclosure controls and procedures as of December 31, 2004. Based on
the foregoing, UIL Holdings' Chief Executive Officer and Chief Financial Officer
concluded that its disclosure controls and procedures were effective as of
December 31, 2004.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in UIL Holdings' internal control over financial
reporting during the quarter ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, UIL Holdings' internal
control over financial reporting.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of UIL Holdings is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. UIL Holdings' internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of UIL Holdings; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America; (3) provide
reasonable assurance that receipts and expenditures of UIL Holdings are being
made only in accordance with authorization of management and directors of UIL
Holdings; and (4) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of assets that could
have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves,
monitoring (including internal auditing practices) and actions taken to correct
deficiencies as identified.
-120-
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of UIL Holdings' internal control over
financial reporting as of December 31, 2004. Management based this assessment on
criteria for effective internal control over financial reporting described in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
determined that, as of December 31, 2004, UIL Holdings maintained effective
internal control over financial reporting.
PricewaterhouseCoopers LLP, UIL Holdings' independent registered public
accounting firm who audited the consolidated financial statements of UIL
Holdings included in this report has audited management's assessment of the
effectiveness of internal control over financial reporting as of December 31,
2004 as stated in their report which appears herein.
ITEM 9B. OTHER INFORMATION.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The information appearing under the captions "ELECTION OF DIRECTORS" and
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in UIL Holdings
Corporation's (UIL Holdings') definitive Proxy Statement for the Annual Meeting
of the Shareowners to be held on May 11, 2005, which Proxy Statement will be
filed with the Securities and Exchange Commission on or about April 7, 2005, is
incorporated by reference in partial answer to this item. See also "EXECUTIVE
OFFICERS," following Part I, Item 4 herein. The UIL Holdings Code of Ethics for
the Chief Executive Officer, Presidents, and Senior Financial Officers is
available on UIL Holdings' website (www.uil.com), and is included as Exhibit 14
-----------
to this filing on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "EXECUTIVE COMPENSATION,"
"OPTIONS/SAR GRANTS IN LAST FISCAL YEAR," "STOCK OPTION EXERCISES IN 2004 AND
YEAR-END OPTION VALUES," "LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR,"
"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 for the Annual Meeting
of the Shareowners to be held on May 11, 2005, which Proxy Statement will be
filed with the Securities and Exchange Commission on or about April 7, 2005, is
incorporated by reference in answer to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information appearing under the captions "PRINCIPAL SHAREOWNERS" and "STOCK
OWNERSHIP OF DIRECTORS AND OFFICERS" in UIL Holdings' definitive Proxy Statement
for the Annual Meeting of the Shareowners to be held on May 11, 2005, which
Proxy Statement will be filed with the Securities and Exchange Commission on or
about April 7, 2005, is incorporated by reference in partial answer to this
item. The information appearing in Item 5, "Market for UIL Holdings' Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities -
Equity Compensation Plan Information," is incorporated by reference in partial
answer to this item.
-121-
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 2004, UI's lease payments to CFCALP totaled $9.4 million.
A subsidiary of UIL Holdings, Inc., United Capital Investments, Inc. (UCI),
invested $3.9 million in 2000 and 2001 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. In June 2002, UCI wrote its investment
in Gemini down to one dollar, because the telecommunications sector had suffered
substantial losses in value, and because UCI concluded that Gemini was unlikely
to continue its network development in the absence of additional financing. In
December 2003, Gemini completed a restructuring transaction in connection with
which the Chase family came to own 100% of the equity of Gemini. In connection
with that transaction, UCI received a cash payment in May 2004 of approximately
$17,500 in exchange for its ownership interest in Gemini.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information appearing under the caption "BOARD OF DIRECTORS REPORT OF THE
AUDIT COMMITTEE" in UIL Holdings' definitive Proxy Statement for the Annual
Meeting of the Shareowners to be held on May 11, 2005, which Proxy Statement
will be filed with the Securities and Exchange Commission on or about April 7,
2005, is incorporated by reference in answer to this item.
-122-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(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, 2004, 2003 and 2002
Consolidated statement of comprehensive income for the years ended
December 31, 2004, 2003 and 2002
Consolidated statement of cash flows for the years ended
December 31, 2004, 2003 and 2002
Consolidated Balance Sheet, December 31, 2004 and 2003
Consolidated statement of changes in shareholders' equity for the
years ended December 31, 2004, 2003 and 2002
Notes to consolidated financial statements
Report of independent registered public accounting firm
Financial Statement Schedule (see S-1)
Schedule II - Valuation and qualifying accounts for the years
ended December 31, 2004, 2003 and 2002.
-123-
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
June 30, 2002.
(3) Filed with UI Registration Statement No. 33-40169, effective August 12,
1991.
(4) Filed with UI Registration Statement No. 2-57275, effective October 19,
1976.
(5) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1995.
(6) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1996.
(7) Filed with UI Registration Statement No. 2-60849, effective July 24, 1978.
(8) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1991.
(9) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June
30, 1997.
(10) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 2002.
(11) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 1997.
(12) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1999.
(13) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June
30, 2001.
(14) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended March
31, 1998.
(15) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended June
30, 1999.
(16) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 2001.
(17) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
2000.
(18) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended March
31, 2003.
(19) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
2003.
(20) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended March
31, 2004.
(21) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended June
30, 2004.
(22) Filed with UIL Current Report (Form 8-K) dated November 8, 2004.
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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
- -------- ------- --------- -----------
(2) 2** (19) Copy of Stock Purchase Agreement by and among UIL Holdings Corporation,
United Resources, Inc. and CheckFree Corporation, dated December 16, 2003.
(Exhibit 2)
(2) 2.1a (21) Copy of First Amendment to Stock Purchase Agreement by and among UIL
Holdings Corporation, United Resources, Inc. and CheckFree Corporation,
dated December 16, 2003. (Exhibit 2.1a)
(2) 2.1b (21) Copy of Second Amendment to Stock Purchase Agreement by and among UIL
Holdings Corporation, United Resources, Inc. and CheckFree Corporation,
dated December 16, 2003. (Exhibit 2.1b)
(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 July 22,
2002. (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)
(10) 10.1 (4) Copy of Stockholder Agreement, dated as of July 1, 1964, among the various
stockholders of Connecticut Yankee Atomic Power Company, including The
United Illuminating Company. (Exhibit 5.1-1)
(10) 10.2a (4) Copy of Power Contract, dated as of July 1, 1964, between Connecticut
Yankee Atomic Power Company and The United Illuminating Company.
(Exhibit 5.1-2)
(10) 10.2b (5) Copy of Additional Power Contract, dated as of April 30, 1984, between
Connecticut Yankee Atomic Power Company and The United Illuminating
Company. (Exhibit 10.2f)
(10) 10.2c (6) Copy of 1987 Supplementary Power Contract, dated as of April 1, 1987,
supplementing Exhibits 10.2a and 10.2b. (Exhibit 10.2c)
(10) 10.2d (6) Copy of 1996 Amendatory Agreement, dated as of December 4, 1996, amending
Exhibits 10.2b and 10.2c. (Exhibit 10.2d)
(10) 10.2e (6) Copy of First Supplement to 1996 Amendatory Agreement, dated as of
February 10, 1997, supplementing Exhibit 10.2d. (Exhibit 10.2e)
(10) 10.3 (4) Copy of Capital Funds Agreement, dated as of September 1, 1964, between
Connecticut Yankee Atomic Power Company and The United Illuminating
Company. (Exhibit 5.1-3)
(10) 10.4 (7) Copy of Capital Contributions Agreement, dated October 16, 1967, between
The United Illuminating Company and Connecticut Yankee Atomic Power
Company. (Exhibit 5.1-5)
(10) 10.5a (7) Copy of Transmission Line Agreement, dated January 13, 1966, between the
Trustees of the Property of The New York, New Haven and Hartford Railroad
Company and The United Illuminating Company. (Exhibit 5.4)
(10) 10.5b (8) Notice, dated April 24, 1978, of The United Illuminating Company's
intention to extend term of Transmission Line Agreement dated January 13,
1966, Exhibit 10.5a. (Exhibit 10.9b)
(10) 10.5c (8) Copy of Letter Agreement, dated March 28, 1985, between The United
Illuminating Company and National Railroad Passenger Corporation,
supplementing and modifying Exhibit 10.5a. (Exhibit 10.9c)
-125-
Exhibit
Table Exhibit Reference
Item No. No. No. Description
- -------- ------- --------- -----------
(10) 10.5d (9) Copy of Notice, dated April 22, 1997, of The United Illuminating Company's
intention to extend term of Transmission Line Agreement, Exhibit 10.5a, as
supplemented and modified by Exhibit 10.5c. (Exhibit 10.9d)
(10) 10.5e (19) Copy of Transmission Line Agreement, dated May 15, 2003, between the State
of Connecticut Department of Transportation and The United Illuminating
Company, amending and restating Exhibit 10.5a. (Exhibit 10.5e)
(10) 10.6a (10) Copy of Agreement and Supplemental Agreement, effective June 9, 2002,
between The United Illuminating Company and Local 470-1, Utility Workers
Union of America, AFL-CIO. (Exhibit 10.7d)
(10) 10.7* (22) Copy of Employment Agreement, dated as of November 8, 2004, between UIL
Holdings Corporation and Charles J. Pepe. (Exhibit 10.11)
(10) 10.8* (22) Copy of Performance Share Agreement for Annual Performance Shares, dated as
of November 8, 2004, between UIL Holdings Corporation and Charles J. Pepe.
(Exhibit 10.12)
(10) 10.9* (22) Copy of Employment Agreement, dated as of November 8, 2004, between UIL
Holdings Corporation and Nathaniel D. Woodson. (Exhibit 10.1)
(10) 10.10* (22) Copy of Performance Share Agreement for Annual Performance Shares, dated as
of November 8, 2004, between UIL Holdings Corporation and Nathaniel D. Woodson.
(Exhibit 10.2)
(10) 10.11* (22) Copy of Performance Share Agreement for TSR Performance Shares, dated as of
November 8, 2004, between UIL Holdings Corporation and Nathaniel D. Woodson.
(Exhibit 10.3)
(10) 10.12a* (14) 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) 10.12b* (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) 10.13* (22) Copy of Employment Agreement, dated as of November 8, 2004, between UIL
Holdings Corporation and Susan E. Allen. (Exhibit 10.9)
(10) 10.14* (22) Copy of Performance Share Agreement for Annual Performance Shares, dated as
of November 8, 2004, between UIL Holdings Corporation and Susan E.
Allen. (Exhibit 10.10)
(10) 10.15* (22) Copy of Employment Agreement, dated as of November 8, 2004, between UIL
Holdings Corporation and Louis J. Paglia. (Exhibit 10.4)
(10) 10.16* (22) Copy of Performance Share Agreement for Annual Performance Shares, dated as
of November 8, 2004, between UIL Holdings Corporation and Louis J.
Paglia. (Exhibit 10.5)
(10) 10.17* (22) Copy of Performance Share Agreement for TSR Performance Shares, dated as of
November 8, 2004, between UIL Holdings Corporation and Louis J. Paglia.
(Exhibit 10.6)
(10) 10.18* (22) Copy of Employment Agreement, dated as of November 8, 2004, between UIL
Holdings Corporation and Gregory W. Buckis. (Exhibit 10.7)
(10) 10.19* (22) Copy of Performance Share Agreement for Annual Performance Shares, dated as
of November 8, 2004, between UIL Holdings Corporation and Gregory W.
Buckis. (Exhibit 10.8)
(10) 10.20a* (6) Copy of The United Illuminating Company 1990 Stock Option Plan, as amended on
December 20, 1993, January 24, 1994 and August 22, 1994. (Exhibit 10.18*)
-126-
Exhibit
Table Exhibit Reference
Item No. No. No. Description
- -------- ------- --------- -----------
(10) 10.20b* (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) 10.20c* (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 10.20a* and 10.20b*.
(Exhibit 10.23c+ and 10.24a+)
(10) 10.21* (18) Copy of UIL Holdings Corporation 1999 Amended and Restated Stock Plan, as
Amended and Restated effective March 24, 2003. (Exhibit 10.16c*)
(10) 10.22* (16) Copy of UIL Holdings Corporation Change In Control Severance Plan (As
Amended and Restated Effective September 24, 2001). (Exhibit 10.21+)
(10) 10.23* (17) Copy of Non-Employee Directors' Common Stock and Deferred Compensation Plan
of UIL Holdings Corporation, as amended through December 31, 2000.
(Exhibit 10.19*)
(10) 10.24* (1) Copy of UIL Holdings Corporation Non-Employee Directors Change in Control
Severance Plan. (Exhibit 10.32+)
(10) 10.25* (18) Copy of UIL Holdings Corporation Deferred Compensation Plan, as originally
adopted effective January 27, 2003, reflecting amendments through
March 24, 2003. (Exhibit 10.20*)
(10) 10.26* (20) Copy of UIL Holdings Corporation Senior Executive Incentive Compensation
Program. (Exhibit 10.19*)
(10) 10.27a* Copy of UIL Holdings Corporation Executive Incentive Compensation Program.
(10) 10.27b* Copy of First Amendment to UIL Holdings Corporation Executive Incentive
Compensation Program.
(10) 10.28* Copy of Form of Annual Performance Share Agreement under the UIL Holdings
Corporation 1999 Amended and Restated Stock Plan.
(14) 14 (19) Copy of UIL Holdings Corporation Code of Ethics for the Chief Executive
Officer, Presidents, and Senior Financial Officers. (Exhibit 14)
(21) 21 (2) List of subsidiaries of UIL Holdings Corporation. (Exhibit 21a)
(23) 23 Consent of Independent Accountants.
(31) 31.1 Certification of Periodic Financial Report.
(31) 31.2 Certification of Periodic Financial Report.
(32) 32 Certification of Periodic Financial Report.
- ----------------------
* Management contract or compensatory plan or arrangement.
** UIL Holdings agrees to furnish supplementary a copy of any omitted
schedules to this Agreement to the Securities and Exchange Commission upon
request.
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.
-127-
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: FEBRUARY 22, 2005
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 February 22, 2005
- -------------------------------------
(Nathaniel D. Woodson)
(Principal Executive Officer)
Executive Vice President and
/s/ Louis J. Paglia Chief Financial Officer February 22, 2005
- -------------------------------------
(Louis J. Paglia)
(Principal Financial and
Accounting Officer)
/s/ John F. Croweak Director February 22, 2005
- -------------------------------------
(John F. Croweak)
/s/ F. Patrick McFadden, Jr. Director February 22, 2005
- -------------------------------------
(F. Patrick McFadden, Jr.)
/s/ Betsy Henley-Cohn Director February 22, 2005
- -------------------------------------
(Betsy Henley-Cohn)
/s/ James A. Thomas Director February 22, 2005
- -------------------------------------
(James A. Thomas)
/s/ David E.A. Carson Director February 22, 2005
- -------------------------------------
(David E.A. Carson)
/s/ John L. Lahey Director February 22, 2005
- -------------------------------------
(John L. Lahey)
/s/ Marc C. Breslawsky Director February 22, 2005
- -------------------------------------
(Marc C. Breslawsky)
-128-
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thelma R. Albright Director February 22, 2005
- -------------------------------------
(Thelma R. Albright)
/s/ Arnold L. Chase Director February 22, 2005
- -------------------------------------
(Arnold L. Chase)
/s/ Daniel J. Miglio Director February 22, 2005
- -------------------------------------
(Daniel J. Miglio)
/s/ William F. Murdy Director February 22, 2005
- -------------------------------------
(William F. Murdy)
-129-
UIL HOLDINGS CORPORATION
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 2004 and 2003
(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):
2004 $ 3,302 $ 9,257 $ - $ 8,625 $ 3,934
2003 $ 3,184 $ 6,253 $ - $ 6,135 $ 3,302
S-1