SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to_____________
Commission file number 1-6788
THE UNITED ILLUMINATING COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0571640
(State or other jurisdiction of incorporation (I.R.S. Identification No.)
or organization)
157 CHURCH STREET, NEW HAVEN, CONNECTICUT 06506
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-499-2000
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
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
--- ---
The number of shares outstanding of the issuer's only class of common
stock, as of June 30, 1996, was 14,101,291.
- 1 -
<PAGE>
<TABLE>
INDEX
PART I. FINANCIAL INFORMATION
<CAPTION>
PAGE
NUMBER
<S> <C>
Item 1. Financial Statements. 3
Consolidated Statement of Income for the three and six months ended June 30, 1996 and 1995. 3
Consolidated Balance Sheet as of June 30, 1996 and December 31, 1995. 4
Consolidated Statement of Cash Flows for the three and six months ended June 30, 1996 and 1995. 6
Notes to Consolidated Financial Statements. 7
- Statement of Accounting Policies 7
- Capitalization 8
- Rate-related Regulatory Proceedings 9
- Income Taxes 10
- Short-term Credit Arrangements 11
- Supplementary Information 12
- Fuel Financing Obligations and Other Lease Obligations 13
- Commitments and Contingencies 13
- Capital Expenditure Program 13
- Other Commitments and Contingencies 13
- Hydro-Quebec 13
- Early Retirement Programs 13
- Site Remediation Costs 13
- Property Taxes 14
- Nuclear Fuel Disposal and Nuclear Plant Decommissioning 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16
- Major Influences on Financial Condition 16
- Capital Expenditure Program 17
- Liquidity and Capital Resources 18
- Results of Operation 19
- Outlook 22
PART II. OTHER INFORMATION
Item 5 . Other Events 25
- Nuclear Generation 25
Item 6. Exhibits and Reports on Form 8-K. 27
SIGNATURES 28
</TABLE>
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<TABLE>
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED STATEMENT OF INCOME
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES (NOTE G) $168,790 $163,429 $339,650 $328,827
------------ ------------ ------------ -------------
OPERATING EXPENSES
Operation
Fuel and energy 33,759 34,510 65,395 71,408
Capacity purchased 11,309 11,443 21,948 24,386
Early retirement program charges 860 - 8,087 -
Other 40,593 35,674 76,981 70,444
Maintenance 10,043 10,553 18,942 17,358
Depreciation 16,360 15,359 32,652 30,712
Amortization of cancelled nuclear project and deferred return 3,439 3,439 6,879 6,879
Income taxes (Note E) 12,661 11,409 25,273 23,483
Other taxes (Note G) 13,895 14,507 28,580 29,487
------------ ------------ ------------ -------------
Total 142,919 136,894 284,737 274,157
------------ ------------ ------------ -------------
OPERATING INCOME 25,871 26,535 54,913 54,670
------------ ------------ ------------ -------------
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds used during construction 200 - 382 -
Other-net (Note G) (259) (946) (466) (1,238)
Non-operating income taxes 1,549 1,750 2,818 2,741
------------ ------------ ------------ -------------
Total 1,490 804 2,734 1,503
------------ ------------ ------------ -------------
INCOME BEFORE INTEREST CHARGES 27,361 27,339 57,647 56,173
------------ ------------ ------------ -------------
INTEREST CHARGES
Interest on long-term debt 16,303 14,931 32,793 30,534
Other interest (Note G) 693 3,045 1,278 6,186
Allowance for borrowed funds used during construction (352) (689) (744) (1,277)
------------ ------------ ------------ -------------
16,644 17,287 33,327 35,443
Amortization of debt expense and redemption premiums 631 1,102 1,310 2,310
------------ ------------ ------------ -------------
Net Interest Charges 17,275 18,389 34,637 37,753
------------ ------------ ------------ -------------
MINORITY INTEREST IN PREFERRED SECURITIES 1,203 1,176 2,406 1,176
------------ ------------ ------------ -------------
NET INCOME 8,883 7,774 20,604 17,244
Discount on preferred stock redemptions (1,826) (1,992) (1,826) (1,992)
Dividends on preferred stock 96 334 227 1,067
------------ ------------ ------------ -------------
INCOME APPLICABLE TO COMMON STOCK $10,613 $9,432 $22,203 $18,169
============ ============ ============ =============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,101 14,087 14,100 14,087
EARNINGS PER SHARE OF COMMON STOCK $0.75 $0.67 $1.57 $1.29
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $0.72 $0.705 $1.44 $1.41
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of the financial statements.
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<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEET
ASSETS
(Thousands of Dollars)
<CAPTION>
June 30, December 31,
1996 1995*
---- -----
(Unaudited)
<S> <C> <C>
Utility Plant at Original Cost
In service $1,824,652 $1,809,925
Less, accumulated provision for depreciation 556,835 532,015
----------------- -----------------
1,267,817 1,277,910
Construction work in progress 40,813 41,817
Nuclear fuel 24,154 25,967
----------------- -----------------
Net Utility Plant 1,332,784 1,345,694
----------------- -----------------
Other Property and Investments 33,575 27,388
----------------- -----------------
Current Assets
Cash and temporary cash investments 45,724 5,070
Accounts receivable
Customers, less allowance for doubtful
accounts of $7,350 and $6,300 69,306 63,987
Other 13,270 14,547
Accrued utility revenues 32,386 28,318
Fuel, materials and supplies, at average cost 23,553 22,249
Prepayments 4,336 3,051
Other 152 55
----------------- -----------------
Total 188,727 137,277
----------------- -----------------
Deferred Charges
Unamortized debt issuance expenses 6,976 7,577
Other 1,718 2,377
----------------- -----------------
Total 8,694 9,954
----------------- -----------------
Regulatory Assets (future amounts due from customers
through the ratemaking process)
Income taxes due principally to book-tax differences 348,363 358,168
Deferred return - Seabrook Unit 1 44,050 50,343
Unamortized cancelled nuclear projects 24,034 24,620
Unamortized redemption costs 21,314 22,244
Uranium enrichment decommissioning costs 1,441 1,505
Other 9,339 8,424
----------------- -----------------
Total 448,541 465,304
----------------- -----------------
$2,012,321 $1,985,617
================= =================
*Derived from audited financial statements
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
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<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)
<CAPTION>
June 30, December 31,
1996 1995*
---- ----
(Unaudited)
<S> <C> <C>
Capitalization (Note B)
Common stock equity
Common stock $284,579 $284,542
Paid-in capital 772 769
Capital stock expense (2,182) (2,207)
Retained earnings 158,750 156,877
---------------- ----------------
441,919 439,981
Preferred stock 4,494 10,539
Minority interest in preferred securities 50,000 50,000
Long-term debt 788,070 845,684
---------------- ----------------
Total 1,284,483 1,346,204
---------------- ----------------
Noncurrent Liabilities
Obligations under capital leases 17,354 17,508
Nuclear decommissioning obligation 12,198 10,317
Other 4,524 4,090
---------------- ----------------
Total 34,076 31,915
---------------- ----------------
Current Liabilities
Current portion of long-term debt 95,171 40,800
Notes payable 35,000 -
Accounts payable 36,288 45,401
Dividends payable 10,205 10,072
Taxes accrued 10,528 5,297
Pensions accrued 38,191 33,832
Interest accrued 24,468 14,506
Obligations under capital leases 303 291
Other accrued liabilities 33,373 26,769
---------------- ----------------
Total 283,527 176,968
---------------- ----------------
Customers' Advances for Construction 1,871 2,655
---------------- ----------------
Regulatory Liabilities (future amounts owed to customers
through the ratemaking process)
Accumulated deferred investment tax credits 17,528 17,909
Other 1,812 1,990
---------------- ----------------
Total 19,340 19,899
---------------- ----------------
Deferred Income Taxes (future tax liabilities owed
to taxing authorities) 389,024 407,976
Commitments and Contingencies (Note L) - -
---------------- ----------------
$2,012,321 $1,985,617
================ ================
* Derived from audited financial statements
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
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<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $8,883 $7,774 $20,604 $17,244
------------ ---------- ------------ ------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17,469 16,830 34,819 33,721
Deferred income taxes (5,421) 982 (9,148) 1,051
Deferred investment tax credits - net (191) (191) (381) (381)
Amortization of nuclear fuel 1,586 3,390 2,486 7,447
Allowance for funds used during construction (552) (689) (1,126) (1,277)
Amortization of deferred return 3,146 3,146 6,293 6,293
Changes in:
Accounts receivable - net (6,346) 2,503 (4,042) (23)
Fuel, materials and supplies (1,737) (236) (1,304) (1,016)
Prepayments 3,231 12,574 (1,285) 7,337
Accounts payable 8,288 5,128 (9,113) 3,797
Interest accrued 8,240 8,956 9,962 7,535
Taxes accrued (7,192) (5,233) 5,231 957
Early retirement costs accrued 860 - 8,087 -
Other assets and liabilities 2,104 (3,900) (5,875) (4,644)
------------ ---------- ------------ ------------
Total Adjustments 23,485 43,260 34,604 60,797
------------ ---------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 32,368 51,034 55,208 78,041
------------ ---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock 40 - 40 -
Long-term debt 7,500 - 7,500 -
Preferred securities of subsidiary - 50,000 - 50,000
Notes payable 15,000 (19,150) 35,000 108,850
Securities redeemed and retired:
Preferred stock (6,045) (33,661) (6,045) (33,661)
Long-term debt - - (10,800) (116,133)
Discount on preferred stock redemption 1,826 1,992 1,826 1,992
Expenses of issue - (1,831) - (1,831)
Lease obligations (72) (367) (142) (1,031)
Dividends
Preferred stock (175) (929) (306) (1,676)
Common stock (10,152) (9,931) (20,093) (19,651)
------------ ---------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 7,922 (13,877) 6,980 (13,141)
------------ ---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Plant expenditures, including nuclear fuel (10,380) (15,392) (21,534) (27,317)
------------ ---------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (10,380) (15,392) (21,534) (27,317)
------------ ---------- ------------ ------------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD 29,910 21,765 40,654 37,583
BALANCE AT BEGINNING OF PERIOD 15,814 27,250 5,070 11,432
------------ ---------- ------------ ------------
BALANCE AT END OF PERIOD $45,724 $49,015 $45,724 $49,015
============ ========== ============ ============
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $8,582 $8,638 $23,583 $28,170
============ ========== ============ ============
Income taxes $22,450 $11,350 $26,625 $14,650
============ ========== ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The consolidated financial statements of the Company and its wholly-owned
subsidiary, United Resources, Inc., have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The statements reflect
all adjustments that are, in the opinion of management, necessary to a fair
statement of the results for the periods presented. All such adjustments are of
a normal recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make the
information presented not misleading. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes to consolidated financial statements included in the annual report on Form
10-K for the year ended December 31, 1995. Such notes are supplemented as
follows:
(A) STATEMENT OF ACCOUNTING POLICIES
RECLASSIFICATION OF PREVIOUSLY REPORTED AMOUNTS
Certain amounts previously reported have been reclassified to conform with
current year presentations.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The weighted average AFUDC rates applied in the first six months of 1996
and 1995 were 8.50% and 7.67%, respectively, on a before-tax basis.
CASH AND CASH EQUIVALENTS
For cash flow purposes, the Company considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash equivalents.
NUCLEAR DECOMMISSIONING TRUSTS
External trust funds are maintained to fund the estimated future
decommissioning costs of the nuclear generating units in which the Company has
an ownership interest. These costs are accrued as a charge to depreciation
expense over the estimated service lives of the units and are recovered in rates
on a current basis. The Company paid $1,065,000 and $924,000 in the first half
of 1996 and 1995, respectively, into the decommissioning trust funds for
Seabrook Unit 1 and Millstone Unit 3. At June 30, 1996, the Company's shares of
the trust fund balances, which included accumulated earnings on the funds, were
$8.8 million and $3.5 million for Seabrook Unit 1 and Millstone Unit 3,
respectively. These fund balances are included in "Other Property and
Investments" and the accrued decommissioning obligation is included in
"Noncurrent Liabilities" on the Company's Consolidated Balance Sheet.
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of". This standard, which is effective for the
1996 calendar year, 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
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
impairment loss when a regulator excludes all or part of a cost from rates, even
if the regulator allows the company to earn a return on the remaining allowable
costs. Under this standard, the probability of recovery and the recognition of
regulatory assets under the criteria of SFAS No. 71 must be assessed on an
ongoing basis. Since the Company is recovering all of its costs through rates,
it does not have any assets that are impaired under this new standard.
(B) CAPITALIZATION
(A) COMMON STOCK
The number of shares outstanding of the Company's common stock, no par
value, at June 30, 1996 was 14,101,291.
In 1990, the Company's Board of Directors and the shareowners approved a
stock option plan for officers and key employees of the Company. The plan
provides for the awarding of options to purchase up to 750,000 shares of the
Company's common stock over periods of from one to ten years following the dates
when the options are granted. On June 5, 1991, the Connecticut Department of
Public Utility Control (DPUC) approved the issuance of 500,000 shares of stock
pursuant to this plan. The exercise price of each option cannot be less than the
market value of the stock on the date of the grant. Options to purchase 17,799
shares of stock at an exercise price of $30 per share, 190,600 shares of stock
at an exercise price of $30.75 per share, 600 shares of stock at an exercise
price of $31.1875 per share, 4,000 shares of stock at an exercise price of
$35.625 per share, 34,332 shares of stock at an exercise price of $39.5625 per
share, and 5,000 shares of stock at an exercise price of $42.375 per share have
been granted by the Board of Directors and remain outstanding at June 30, 1996.
Options to purchase 1,200 shares of stock at an exercise price of $30.75 per
share were exercised during the first six months of 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement, which is
effective for calendar year 1996, establishes financial accounting and reporting
standards for stock-based employee compensation plans, such as stock purchase
plans, stock options, restricted stock, and stock appreciation rights. The
statement defines the methods of determining the fair value of stock-based
compensation and requires the recognition of compensation expense for book
purposes. However, the statement allows entities to continue to measure
compensation expense in accordance with the prior authoritative literature, APB
No. 25, "Accounting for Stock Issued to Employees", but requires pro forma net
income and earnings per share be disclosed for each year for which an income
statement is presented as if SFAS No. 123 were applied. The accounting
provisions of SFAS No. 123 apply to the Company's stock option plan and affect
options granted in the year of adoption. As of June 30, 1996, there were no
options granted to which this statement would apply. The Company has not elected
to adopt the expense recognition provisions of SFAS No. 123.
(B) RETAINED EARNINGS RESTRICTION
The indenture under which $250 million principal amount of Notes are issued
places limitations on the payment of cash dividends on common stock and on the
purchase or redemption of common stock. Retained earnings in the amount of $99.0
million were free from such limitations at June 30, 1996.
(C) PREFERRED STOCK
On June 4, 1996, the Company purchased at a discount on the open market,
and canceled, 53,450 shares of its $100 par value preferred stock. The shares
purchased consisted of 2,950 shares of its 4.35%, Series A, 12,500 shares of its
4.72%, Series B and 38,000 shares of its 5 5/8%, Series D, preferred stock. The
shares, having a par value of $5,345,000, were purchased for $3,816,169,
creating an after-tax gain of $1,528,831.
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 7, 1996, the Company purchased at a discount on the open market,
and canceled, 7,000 shares of its $100 par value 4.35%, Series A preferred
stock. The shares, having a par value of $700,000, were purchased for $402,730,
creating an after-tax gain of $297,270.
(E) LONG-TERM DEBT
On February 15, 1996, the Company repaid $10.8 million principal amount of
maturing 9.44% First Mortgage Bonds issued by Bridgeport Electric Company, a
wholly-owned subsidiary of the Company that was merged with and into the Company
in September 1994.
On June 26, 1996, the Company borrowed $7.5 million from the Connecticut
Development Authority (CDA), representing the proceeds from the issuance by the
CDA of $7.5 million principal amount of tax-exempt Pollution Control Revenue
Bonds (PCRBs). The Company is obligated, under its borrowing agreement with the
CDA, to pay to a trustee for the PCRBs' bondholders such amounts as will pay,
when due, the principal of and the premium, if any, and interest on the PCRBs.
The PCRBs will mature in 2026, and their interest rate can be adjusted
periodically to reflect prevailing market conditions. The PCRBs were issued at
an initial interest rate of 3.3%, which is being adjusted weekly. On July 15,
1996, the Company used the proceeds of this $7.5 million borrowing to cause the
redemption and repayment of $7.5 million principal amount of 9 1/2% PCRBs issued
by the CDA in 1986.
(C) RATE-RELATED REGULATORY PROCEEDINGS
In March 1996, the Company filed with the Connecticut Department of Public
Utility Control (DPUC), for its approval, a proposed price stability and
incentive regulation plan. The purpose of this plan is to help address the
challenges of an increasingly competitive electric utility industry and to help
position the Company to face and meet these challenges. The Company has
proposed, as part of the plan, to have no increase in base rates charged to
retail customers through December 31, 2001, to afford its customers additional
price stability during this period by modifying the operation of the fossil fuel
adjustment clause mechanism in retail rates so that customers can expect that
this clause will not affect their bills, to depreciate its Seabrook plant
investment more rapidly during this period, and to establish a performance-based
ratemaking mechanism in which performance will be measured by customer
satisfaction and reliability of service, all subject to a minimum and maximum
return on common equity. The plan also proposes a mechanism for the Company to
increase its support of economic development activities on a local and statewide
basis. This plan is designed to allow the Company to continue the application of
SFAS No. 71 and to recover its costs of providing service through rates. The
Company expects a decision on this plan to be made during 1996.
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<TABLE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<CAPTION>
Three Months Ended Six Months Ended
(E) INCOME TAXES June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income tax expense consists of: (000's) (000's)
Income tax provisions:
Current
Federal $12,577 $6,573 $24,045 $14,877
State 4,147 2,295 7,939 5,195
------------ ------------ ------------ ------------
Total current 16,724 8,868 31,984 20,072
------------ ------------ ------------ ------------
Deferred
Federal (3,494) 1,648 (5,680) 2,612
State (1,927) (666) (3,468) (1,561)
------------ ------------ ------------ ------------
Total deferred (5,421) 982 (9,148) 1,051
------------ ------------ ------------ ------------
Investment tax credits (191) (191) (381) (381)
------------ ------------ ------------ ------------
Total income tax expense $11,112 $9,659 $22,455 $20,742
============ ============ ============ ============
Income tax components charged as follows:
Operating expenses $12,661 $11,409 $25,273 $23,483
Other income and deductions - net (1,549) (1,750) (2,818) (2,741)
------------ ------------ ------------ ------------
Total income tax expense $11,112 $9,659 $22,455 $20,742
============ ============ ============ ============
The following table details the components of the deferred income taxes:
Seabrook sale/leaseback transaction ($2,622) ($2,678) ($5,244) ($5,356)
Pension benefits (1,785) (403) (4,004) (790)
Unit overhaul and replacement power costs (575) - (2,010) -
Accelerated depreciation 1,374 2,274 2,748 4,548
Tax depreciation on unrecoverable plant investment 1,244 1,727 2,488 3,454
Deferred fossil fuel costs 153 264 665 67
Conservation and load management (353) 98 (490) 316
Postretirement benefits (729) (289) (797) (608)
Other - net (2,128) (11) (2,504) (580)
------------ ------------ ------------ ------------
Deferred income taxes - net ($5,421) $982 ($9,148) $1,051
============ ============ ============ ============
</TABLE>
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(F) SHORT-TERM CREDIT ARRANGEMENTS
The Company has a revolving credit agreement with a group of banks, which
currently extends to December 11, 1996. The borrowing limit of this facility is
$75 million. The facility permits the Company to borrow funds at a fluctuating
interest rate determined by the prime lending market in New York, and also
permits the Company to borrow money for fixed periods of time specified by the
Company at fixed interest rates determined by the Eurodollar interbank market in
London, or by bidding, at the Company's option. If a material adverse change in
the business, operations, affairs, assets or condition, financial or otherwise,
or prospects of the Company and its subsidiaries, on a consolidated basis,
should occur, the banks may decline to lend additional money to the Company
under this revolving credit agreement, although borrowings outstanding at the
time of such an occurrence would not then become due and payable. As of June 30,
1996, the Company had $35 million of short-term borrowings outstanding under
this facility.
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<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(G) SUPPLEMENTARY INFORMATION
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(000's) (000's)
<S> <C> <C> <C> <C>
Operating Revenues
Retail $154,965 $149,234 $313,523 $299,654
Wholesale - capacity 1,712 1,587 3,502 3,256
- energy 11,462 11,797 21,258 24,368
Other 651 811 1,367 1,549
------------- -------------- -------------- --------------
Total Operating Revenues $168,790 $163,429 $339,650 $328,827
============= ============== ============== ==============
Sales by Class(MWH's)
Retail
Residential 418,063 399,222 942,084 893,539
Commercial 551,206 546,564 1,110,215 1,088,583
Industrial 283,523 283,811 554,475 548,297
Other 11,925 11,999 23,966 24,328
------------- -------------- -------------- --------------
1,264,717 1,241,596 2,630,740 2,554,747
Wholesale 482,762 480,171 849,501 997,607
------------- -------------- -------------- --------------
Total Sales by Class 1,747,479 1,721,767 3,480,241 3,552,354
============= ============== ============== ==============
Other Taxes
Charged to:
Operating:
State gross earnings $6,365 $6,392 $12,899 $12,833
Local real estate and personal property 6,294 6,718 12,531 13,430
Payroll taxes 1,236 1,396 3,150 3,222
Other - 1 - 2
------------- -------------- -------------- --------------
13,895 14,507 28,580 29,487
Nonoperating and other accounts 264 126 396 292
------------- -------------- -------------- --------------
Total Other Taxes $14,159 $14,633 $28,976 $29,779
============= ============== ============== ==============
Other Income and (Deductions) - net
Interest and dividend income $337 $389 $641 $719
Equity earnings from Connecticut Yankee 403 398 749 736
Loss from subsidiary companies (864) (1,215) (1,555) (2,012)
Miscellaneous other income and (deductions) - net (135) (518) (301) (681)
------------- -------------- -------------- --------------
Total Other Income and (Deductions) - net ($259) ($946) ($466) ($1,238)
============= ============== ============== ==============
Other Interest Charges
Notes Payable $387 $2,672 $715 $5,478
Other 306 373 563 708
------------- -------------- -------------- --------------
Total Other Interest Charges $693 $3,045 $1,278 $6,186
============= ============== ============== ==============
</TABLE>
- 12 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(K) FUEL FINANCING OBLIGATIONS AND OTHER LEASE OBLIGATIONS
The Company has a Fossil Fuel Supply Agreement with a financial institution
providing for financing up to $37.5 million in fossil fuel purchases. Under this
agreement, the financing entity may acquire and/or store natural gas, coal and
fuel oil for sale to the Company, and the Company may purchase these fossil
fuels from the financing entity at a price for each type of fuel that reimburses
the financing entity for the direct costs it has incurred in purchasing and
storing the fuel, plus a charge for maintaining an inventory of the fuel
determined by reference to the fluctuating interest rate on thirty-day,
dealer-placed commercial paper in New York. The Company is obligated to insure
the fuel inventories and to indemnify the financing entity against all
liabilities, taxes and other expenses incurred as a result of its ownership,
storage and sale of fossil fuel to the Company. This agreement currently extends
to August 1997. At June 30, 1996, approximately $8.5 million of fossil fuel
purchases were being financed under this agreement.
(L) COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURE PROGRAM
The Company's continuing capital expenditure program is presently estimated
at approximately $311.2 million, excluding AFUDC, for 1996 through 2000.
OTHER COMMITMENTS AND CONTINGENCIES
HYDRO-QUEBEC
The Company is a participant in the Hydro-Quebec transmission intertie
facility linking New England and Quebec, Canada. Phase II of this facility, in
which UI has a 5.45% participating share, has increased the capacity value of
the intertie from 690 megawatts to a maximum of 2000 megawatts. A ten-year Firm
Energy Contract, which provides for the sale of 7 million megawatt-hours per
year by Hydro-Quebec to the New England participants in the Phase II facility,
became effective on July 1, 1991. The Company is obligated to furnish a
guarantee for its participating share of the debt financing for the Phase II
facility. As of June 30, 1996, the Company's guarantee liability for this debt
was approximately $8.4 million.
EARLY RETIREMENT PROGRAMS
On May 22, 1995, the Company and the union representing approximately 695
of its operating, maintenance and clerical employees agreed on a three-year
contract, effective May 16, 1995. As part of this agreement, the Company offered
a voluntary early retirement program to 74 employees, who had until January 31,
1996 to accept. The early retirement offer was accepted by 64 employees, and the
Company recognized a charge to earnings in January 1996 of $7.2 million ($4.2
million, after-tax). The employees accepting the offer retired during the first
six months of 1996. In June 1996, the Company recognized an additional charge to
earnings of $0.9 million ($0.5 million, after tax) to reflect additional early
retirement costs.
In July 1996, the Company offered a Voluntary Early Retirement Plan (VERP)
and a Voluntary Separation Plan (VSP) to virtually all of its employees. The
election period for both plans is July 31, 1996 through September 13, 1996. The
Company has established a cap of 220 employees who will be allowed to accept
this offer.
SITE REMEDIATION COSTS
The Company has estimated that the cost of environmental remediation of its
decommissioned Steel Point Station property in Bridgeport will be approximately
$11.3 million, and that the value of the property following remediation
- 13 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will not exceed $6 million. In its 1992 decision on UI's application for retail
rate increases, the DPUC provided for additional revenues to be recovered from
customers, in the amount of $4.3 million of the difference, during the period
1993-1996, subject to true-up in the Company's next retail rate proceeding based
on actual remediation costs and actual gain on the Company's disposition of the
property.
PROPERTY TAXES
On November 2, 1993, the Company received "updated" personal property tax
bills from the City of New Haven (the City) for the tax year 1991-1992,
aggregating $6.6 million, based on an audit by the City's tax assessor. On May
7, 1994, the Company received a "Certificate of Correction....to correct a
clerical omission or mistake" from the City's tax assessor relative to the
assessed value of the Company's personal property for the tax year 1994-1995,
which certificate purports to increase said assessed value by approximately 53%
above the tax assessor's valuation at February 28, 1994, generating tax claims
of approximately $3.5 million. On March 1, 1995, the Company received notices of
assessment changes relative to the assessed value of the Company's personal
property for the tax year 1995-1996, which notices purport to increase said
assessed value by approximately 48% over the valuation declared by the Company,
generating tax claims of approximately $3.5 million. On May 11, 1995, the
Company received notices of assessment changes relative to the assessed values
of the Company's personal property for the tax years 1992-1993 and 1993-1994,
which notices purport to increase said assessed values by approximately 45% and
49%, respectively, over the valuations declared by the Company, generating tax
claims of approximately $4.1 million and $3.5 million, respectively. On March 8,
1996, the Company received notices of assessment changes relative to the
assessed value of the Company's personal property for the tax year 1996-1997,
which notices purport to increase said assessed value by approximately 57% over
the valuations declared by the Company and are expected to generate tax claims
of approximately $3.8 million. The Company is contesting each of these actions
by the City's tax assessor vigorously. On January 9, 1996, the Connecticut
Superior Court granted the Company's motion for summary judgment against the
City relative to the "updated" personal property tax bills for the tax year
1991-1992. The City appealed to the Appellate Court from the Superior Court
decision, which decision would also be applicable to and defeat the valuation
increases for the tax years 1992-1993 and 1993-1994 if it is sustained on
appeal. In June 1996, the Connecticut Supreme Court transferred this appeal to
its docket. It is the present opinion of the Company that the ultimate outcome
of this dispute will not have a significant impact on the financial position of
the Company.
(M) NUCLEAR FUEL DISPOSAL AND NUCLEAR PLANT DECOMMISSIONING
New Hampshire has enacted a law requiring the creation of a
government-managed fund to finance the decommissioning of nuclear generating
units in that state. The New Hampshire Nuclear Decommissioning Financing
Committee (NDFC) has established $432 million (in 1996 dollars) as the
decommissioning cost estimate for Seabrook Unit 1, of which the Company's share
would be approximately $76 million. This estimate assumes the prompt removal and
dismantling of the Unit at the end of its estimated 36-year energy producing
life. Monthly decommissioning payments are being made to the state-managed
decommissioning trust fund. UI's share of the decommissioning payments made
during the first half of 1996 was $821,000. UI's share of the fund at June 30,
1996 was approximately $8.8 million.
Connecticut has enacted a law requiring the operators of nuclear generating
units to file periodically with the DPUC their plans for financing the
decommissioning of the units in that state. Current decommissioning cost
estimates for Millstone Unit 3 and the Connecticut Yankee Unit are $478 million
(in 1996 dollars) and $375 million (in 1996 dollars), respectively, of which the
Company's share would be approximately $18 million and $36 million,
respectively. These estimates assume the prompt removal and dismantling of each
unit at the end of its estimated 40-year energy producing life. Monthly
decommissioning payments, based on these cost estimates, are being made to
decommissioning trust funds managed by Northeast Utilities. UI's share of the
Millstone Unit 3 decommissioning payments made during the first half of 1996 was
$244,000. UI's share of the fund at June 30, 1996 was approximately
- 14 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$3.5 million. For the Company's 9.5% equity ownership in Connecticut Yankee,
decommissioning costs of $684,000 were funded by UI during the first half of
1996, and UI's share of the fund at June 30, 1996 was $18.0 million.
The Financial Accounting Standards Board (FASB) has issued an exposure
draft related to the accounting for the closure and removal costs of long-lived
assets, including nuclear plant decommissioning. If the proposed accounting
standard were adopted, it may result in higher annual provisions for
decommissioning to be recognized earlier in the operating life of nuclear units
and an accelerated recognition of the decommissioning obligation. The FASB will
be deliberating this issue, and the resulting final pronouncement could be
different from that proposed in the exposure draft.
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MAJOR INFLUENCES ON FINANCIAL CONDITION
The Company's financial condition will continue to be dependent on the
level of retail and wholesale sales and the Company's ability to control
expenses. The two primary factors that affect sales volume are economic
conditions and weather. Since 1990, annual growth in total operation and
maintenance expense, excluding one-time items and cogeneration capacity
purchases, has averaged less than 1.0%. The Company hopes to continue to
restrict this average to less than the rate of inflation in future years (see
"Outlook").
The Company's financial status and financing capability will continue to be
sensitive to many other factors, including conditions in the securities markets,
economic conditions, interest rates, the level of the Company's income and cash
flow, and legislative and regulatory developments, including the cost of
compliance with increasingly stringent environmental legislation and regulations
and competition within the electric utility industry.
The electric utility industry is being subjected to increasing competition.
Currently, the Company's electric service rates are subject to regulation and
are based on the Company's costs. Therefore, the Company, and most regulated
utilities, are subject to certain accounting standards (Statement of Financial
Accounting Standards No. 71 (SFAS No. 71), "Accounting for the Effects of
Certain Types of Regulation") that are not applicable to other businesses in
general. These accounting rules allow regulated utilities, where appropriate, to
defer the income statement impact of certain costs that are expected to be
recovered in future regulated service rates and to establish regulatory assets
on balance sheets for such costs. The effects of competition could cause the
operations of the Company, or a portion thereof, to cease meeting the criteria
for application of these accounting rules. While the Company expects to continue
to meet these criteria in the foreseeable future, if the Company were to cease
meeting these criteria, 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 this
change in accounting were to occur, it would have a material adverse effect on
the Company's earnings and retained earnings in that year and could have a
material adverse effect on the Company's ongoing financial condition as well.
In March 1996, the Company filed with the Connecticut Department of Public
Utility Control (DPUC), for its approval, a proposed price stability and
incentive regulation plan. The purpose of this plan is to help address the
challenges of an increasingly competitive electric utility industry and to help
position the Company to face and meet these challenges. The Company has
proposed, as part of the plan, to have no increase in base rates charged to
retail customers through December 31, 2001, to afford its customers additional
price stability during this period by modifying the operation of the fossil fuel
adjustment clause mechanism in retail rates so that customers can expect that
this clause will not affect their bills, to depreciate its Seabrook plant
investment more rapidly during this period, and to establish a performance-based
ratemaking mechanism in which performance will be measured by customer
satisfaction and reliability of service, all subject to a minimum and maximum
return on common equity. The plan also proposes a mechanism for the Company to
increase its support of economic development activities on a local and statewide
basis. This plan is designed to allow the Company to continue the application of
SFAS No. 71 and to recover its costs of providing service through rates. The
Company expects a decision on this plan to be made during 1996.
- 16 -
<PAGE>
CAPITAL EXPENDITURE PROGRAM
The Company's 1996-2000 capital expenditure program, excluding allowance
for funds used during construction (AFUDC) and its effect on certain capital
related items, is presently budgeted as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 Total
---- ---- ---- ---- ---- -----
(000's)
<S> <C> <C> <C> <C> <C> <C>
Production (1) $19,440 $15,171 $14,077 $32,533 $12,656 $93,877
Distribution 22,272 19,956 19,236 18,996 20,112 100,572
Transmission 2,436 3,360 5,436 5,304 5,256 21,792
Conservation and
Load Management 9,819 7,224 6,011 5,685 5,685 34,424
Other 14,860 6,014 4,217 3,976 3,589 32,656
------- ------ ------ ------ ------ ------
Subtotal: 68,827 51,725 48,977 66,494 47,298 283,321
Nuclear Fuel 2,987 8,298 2,943 10,500 3,196 27,924
------ ------ ------ ------- ------ ------
Total Expenditures $71,814 $60,023 $51,920 $76,994 $50,494 $311,245
======== ======== ======== ======== ======== ========
AFUDC (Pre-tax) $2,626 $2,815 $2,606 $2,502 $3,305
Book Depreciation 62,299 65,883 69,346 72,756 71,749
Decommissioning 2,162 2,271 2,364 2,472 2,588
Amortization of Deferred
Return on Seabrook Unit 1
Phase-In (after tax) 12,586 12,586 12,586 12,586 0
Estimated Rate Base
(end of period) $1,193,616 $1,167,980 $1,137,109 $1,125,596 $1,094,268
(1) Steel Point Station environmental remediation costs of $3,793 are included
in 1996.
</TABLE>
- 17 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $45.7 million of cash and temporary cash
investments, an increase of $40.6 million from the balance at December 31, 1995.
The components of this increase, which are detailed in the Consolidated
Statement of Cash Flows, are summarized as follows:
<TABLE>
<CAPTION>
(Millions)
<S> <C>
Balance, December 31, 1995 $ 5.1
-----
Net cash provided by operating activities 55.2
Net cash provided by (used in) financing activities:
- Financing activities, excluding dividend payments 27.3
- Dividend payments (20.4)
Cash invested in plant, including nuclear fuel (21.5)
-----
Net increase 40.6
Balance, June 30, 1996 $45.7
=====
</TABLE>
The Company's capital requirements are presently projected as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C>
Cash on Hand - Beginning of Year $ 5 $ 18 $ - $ - $ -
Internally Generated Funds less Dividends 100 95 101 99 84
--- --- --- --- ---
Subtotal 105 113 101 99 84
Less:
Capital Expenditures 72 60 52 77 50
--- --- --- --- ---
Cash Available to pay Debt Maturities and Redemptions 33 53 49 22 34
Less:
Maturities and Mandatory Redemptions 11 65 116 116 156
Optional Preferred Stock Purchases 4 - - - -
-- --- --- --- ---
External Financing Requirements $(18) $ 12 $ 67 $ 94 $122
=== === === === ===
</TABLE>
Note: Internally Generated Funds less Dividends, Capital Expenditures and
External Financing Requirements are estimates based on current earnings
and cash flow projections and are subject to change due to future events
and conditions that may be substantially different than those used in
developing the projections.
All of the Company's capital requirements that exceed available cash will
have to be provided by external financing. Although the Company has no
commitment to provide such financing from any source of funds, other than a $75
million revolving credit agreement with a group of banks, described below, the
Company expects to be able to satisfy its external financing needs by issuing
additional short-term and long-term debt and by issuing preferred stock or
common stock if necessary. The continued availability of these methods of
financing will be dependent on many
- 18 -
<PAGE>
factors, including conditions in the securities markets, economic conditions,
and the level of the Company's income and cash flow.
The Company has a revolving credit agreement with a group of banks, which
currently extends to December 11, 1996. The borrowing limit of this facility is
$75 million. The facility permits the Company to borrow funds at a fluctuating
interest rate determined by the prime lending market in New York, and also
permits the Company to borrow money for fixed periods of time specified by the
Company at fixed interest rates determined by the Eurodollar interbank market in
London, or by bidding, at the Company's option. If a material adverse change in
the business, operations, affairs, assets or condition, financial or otherwise,
or prospects of the Company and its subsidiaries, on a consolidated basis,
should occur, the banks may decline to lend additional money to the Company
under this revolving credit agreement, although borrowings outstanding at the
time of such an occurrence would not then become due and payable. As of June 30,
1996, the Company had $35 million of short-term borrowings outstanding under
this facility.
UI has one wholly-owned subsidiary, United Resources, Inc. (URI), that
serves as the parent corporation for several unregulated businesses, each of
which is incorporated separately to participate in business ventures that will
complement and enhance UI's electric utility business and serve the interests of
the Company and its shareholders and customers. Two other wholly-owned
subsidiaries, United Energy International, Inc. and Research Center, Inc. were
dissolved in April 1996.
Four wholly-owned subsidiaries of URI have been incorporated. Souwestcon
Properties, Inc. (SPI) participated as a 25% partner in the ownership of a
medical hotel building in New Haven. The building has been sold; and SPI was
dissolved in April 1996. Another wholly-owned subsidiary of URI, Thermal
Energies, Inc., is participating in the development of district heating and
cooling facilities in the downtown New Haven area, including the energy center
for an office tower and participation as a 37% partner in the energy center for
a city hall and office tower complex. A URI subsidiary named Precision Power,
Inc. provides power-related equipment and services to the owners of commercial
buildings and industrial facilities. A URI subsidiary named American Payment
Systems, Inc. manages agents and equipment for electronic data processing of
bill payments made by customers of utilities, including UI, at neighborhood
businesses.
The Board of Directors of the Company has authorized the investment of a
maximum of $27 million, in the aggregate, of the Company's assets in all of
URI's ventures, and, at June 30, 1996, $27 million had been so invested.
RESULTS OF OPERATIONS
SECOND QUARTER OF 1996 VS. SECOND QUARTER OF 1995
Earnings for the second quarter of 1996 were $10.6 million, or $.75 per
share, up $1.2 million, or $.08 per share, from the second quarter of 1995.
Earnings from operations, which exclude one-time items, were $10.1 million, or
$0.72 per share, for the second quarter of 1996, up $2.7 million, or $.19 per
share, from the second quarter of 1995. The one-time items recorded in the
second quarter of 1996 were: a gain of $1.8 million (after-tax), or $.13 per
share, from the purchase of the Company's preferred stock at a discount to par
value, a charge of $0.9 million ($0.5 million after-tax), or $.04 per share,
reflecting early retirement charges not covered by the first quarter amount, and
a charge of $1.4 million ($0.8 million after-tax), or $.06 per share, for the
cumulative loss on an office space sublease. The one-time item recorded in the
second quarter of 1995 was a gain of $2.0 million (after-tax), or $.14 per
share, from the purchase of the Company's preferred stock at a discount to par
value.
Retail operating revenues increased by about $5.7 million in the second
quarter of 1996 compared to the second quarter of 1995:
. A retail kilowatt-hour sales increase of 1.9% from the prior year
increased retail revenues by $2.6 million and sales margin (revenue less
fuel expense and revenue-based taxes) by $2.1 million. The Company's
calculation of the impact of weather on kilowatt-hour sales indicates that
sales increased in both the second
- 19 -
<PAGE>
quarter of 1996 and the second quarter of 1995 by about the same amount
(0.5%) due to hotter than normal weather. This would indicate that there
was a "real" (i.e. not attributable to abnormal weather) kilowatt-hour
sales increase of about 2.0% in the second quarter of 1996 compared to the
second quarter of 1995. A longer term perspective indicates that "real"
kilowatt-hour sales growth is about 1%.
. Retail revenues also increased by $3.1 million: $1.6 million from the
recovery, through the Conservation Adjustment Mechanism, of previously
recorded and projected conservation program costs mandated by the
Department of Public Utility Control (DPUC), partially offset by
competitive pricing and other price reduction mechanisms, and a net $1.5
million increase from "pass through" charges for certain expense changes,
including increases in fuel costs.
Wholesale "capacity" revenues increased slightly in the second quarter of
1996 compared to the second quarter of 1995. Wholesale "energy" revenues are a
direct offset to wholesale energy expense and do not contribute to sales margin.
These energy revenues, as well as the associated fuel expense, decreased during
the second quarter of 1996 compared to the second quarter of 1995.
Retail fuel and energy expenses decreased by $0.4 million in the second
quarter of 1996 compared to the second quarter of 1995. A decrease of $2.7
million was due to higher nuclear unit generation and lower nuclear energy
prices: higher generation from the Seabrook and Connecticut Yankee nuclear
generating units more than offset the shutdown of the Millstone Unit 3 nuclear
generating unit. The latter unit was also out of service for a refueling outage
in the second quarter of 1995. For more on the status of the operation of
Millstone Unit 3, see the OUTLOOK section. Increases in kilowatt-hour generation
to meet sales volume and increases in other fuel and energy expenses, including
"pass through" charges, largely offset the nuclear fuel expense savings.
Operating expenses for operations, maintenance and purchased capacity
charges increased by $2.9 million in the second quarter of 1996 compared to the
second quarter of 1995:
. Purchased capacity expense decreased slightly.
. Operation and maintenance expense increased by $3.0 million. A provision
for maintenance expenses associated with generating plant overhauls and
refueling outages added $1.8 million, and the expensing of accumulated
costs associated with software purchases and development added $1.3
million. Employment costs increased by $1.0 million, due to increases in
employee compensation that were partly offset by the beginning of savings
from the Bargaining Unit Voluntary Early Retirement Program implemented in
January of 1996. Savings in generating plant maintenance also offset some
of these increases.
Other operating expenses increased in the second quarter of 1996 compared
to the second quarter of 1995, from higher depreciation expense and income
taxes.
Interest charges continued their significant decline, decreasing by $1.5
million in the second quarter of 1996 compared to the second quarter of 1995 as
a result of the Company's refinancing program and strong cash flow. Also, total
preferred dividends (net-of-tax) decreased slightly in the second quarter of
1996 compared to the second quarter of 1995 as a result of purchases of
preferred stock by the Company.
SIX MONTHS OF 1996 VS. SIX MONTHS OF 1995
Earnings for the first six months of 1996 were $22.2 million, or $1.57 per
share, up $4.0 million, or $.28 per share, from the first six months of 1995.
Earnings from operations, which exclude one-time items, were $25.9 million, or
$1.84 per share for the first six months of 1996, up $9.7 million, or $.69 per
share, from the first six months of 1995. The one-time items recorded in the
first six months of 1996 were: a gain of $1.8 million (after-tax), or $.13 per
share, from the purchase of the Company's preferred stock at a discount to par
value, charges of $8.1 million ($4.7 million after-tax), or $.34 per share,
reflecting the estimated costs of early retirements as part of
- 20 -
<PAGE>
the Company's on-going organization review and cost reduction program, and a
charge of $1.4 million ($0.8 million after-tax), or $.06 per share, for the
cumulative loss on an office space sublease. The one-time item recorded in the
first six months of 1995 was a gain of $2.0 million (after-tax), or $.14 per
share, from the purchase of the Company's preferred stock at a discount to par
value. Retail operating revenues increased by about $13.9 million in the first
six months of 1996 compared to the first six months of 1995:
. A retail kilowatt-hour sales increase of 3.0% from the prior year
increased retail revenues by $8.5 million and sales margin (revenue less
fuel expense and revenue-based taxes) by $6.8 million. The Company's
calculation of the impact of weather on kilowatt-hour sales indicates that
sales increased by about 1.0% in the first six months of 1996 compared to
the first six months of 1995 due to more severe weather. Milder than normal
weather decreased sales in the first six months of 1995 while more severe
than normal weather increased sales in the first six months of 1996. Retail
kilowatt-hour sales also increased by 0.7% due to the leap year day in
1996. This indicates that there was a "real" (i.e. not attributable to
abnormal weather or the 1996 leap year day) kilowatt-hour sales increase of
about 1.4% in the first six months of 1996 compared to the first six months
of 1995. A longer term perspective indicates that "real" retail
kilowatt-hour sales growth is about 1%.
. Retail revenues also increased by $5.4 million: $3.2 million from the
recovery, through the Conservation Adjustment Mechanism, of previously
recorded and projected conservation program costs mandated by the
Department of Public Utility Control (DPUC), partially offset by
competitive pricing and other price reduction mechanisms, and a net $2.2
million increase from "pass through" charges for certain expense changes,
including increases in fuel costs.
Wholesale "capacity" revenues increased slightly in the first six months of
1996 compared to the first six months of 1995. Wholesale "energy" revenues are a
direct offset to wholesale energy expense and do not contribute to sales margin.
These energy revenues, as well as the associated fuel expense, decreased during
the first six months of 1996 compared to the first six months of 1995.
Retail fuel and energy expenses decreased by $2.9 million in the first six
months of 1996 compared to the first six months of 1995. A decrease of $5.9
million was due to higher nuclear unit generation and lower nuclear energy
prices: higher generation from the Seabrook and Connecticut Yankee nuclear
generating units (Connecticut Yankee had a refueling outage that took place in
the first and second quarters of 1995) more than offset the shutdown of the
Millstone Unit 3 nuclear generating unit which began on March 30, 1996 and is
continuing. The latter unit was also out of service for a refueling outage in
the second quarter of 1995. For more on the status of the operation of Millstone
Unit 3, see the OUTLOOK section. Increases in kilowatt-hour generation to meet
sales volume and increases in other fuel and energy expenses, including "pass
through" charges, partially offset the nuclear fuel expense savings.
Operating expenses for operations, maintenance and purchased capacity
charges increased by $4.3 million in the first six months of 1996 compared to
the first six months of 1995:
. Purchased capacity expense was $2.4 million lower, reflecting the absence
of the added refueling outage costs incurred by the Connecticut Yankee
nuclear generating unit during the first six months of 1995.
. Operation and maintenance expense increased by $6.7 million. A provision
for maintenance expenses associated with generating plant overhauls and
refueling outages added $3.3 million, and the expensing of accumulated
costs associated with software purchases and development added $1.3
million. Employment costs increased by $2.2 million due to increases in
employee compensation, not additional employees.
- 21 -
<PAGE>
Other operating expenses increased in the first six months of 1996 compared
to the first six months of 1995, from higher depreciation expense and income
taxes.
Interest charges continued their significant decline, decreasing by $3.6
million in the first six months of 1996 compared to the first six months of 1995
as a result of the Company's refinancing program and strong cash flow. Also,
total preferred dividends (net-of-tax) decreased slightly in the first six
months of 1996 compared to the first six months of 1995 as a result of the
purchases of preferred stock by the Company.
OUTLOOK
The Company's long term earnings goal is to achieve growth in earnings per
share FROM OPERATIONS of 4% annually from the 1992 level of $3.17 per share. The
Company exceeded the goal in 1995 and anticipates exceeding the goal in 1996
(subject to a number of factors described below). However, THE COMPANY RECENTLY
OFFERED ITS EMPLOYEES ANOTHER VOLUNTARY EARLY RETIREMENT PLAN (VERP) AND A
VOLUNTARY SEPARATION PLAN (VSP). ONE-TIME CHARGES, WHICH ARE ANTICIPATED TO BE
ESTIMATED AND TAKEN IN THE THIRD QUARTER OF 1996 FOR THESE PLANS, COULD AMOUNT
TO EARNINGS PER SHARE IMPACTS OF $.50 TO $1.00. THIS WOULD PUT THE TOTAL
ONE-TIME CHARGES FOR EARLY RETIREMENT AND SEPARATION PLANS FOR 1996 IN THE $.85
TO $1.35 PER SHARE RANGE, AND NET EARNINGS, INCLUDING THESE CHARGES, COULD SLIP
BELOW $3.00 PER SHARE FOR THE YEAR. THE NEW PLANS ARE LIKELY TO PRODUCE ANNUAL
COST SAVINGS OF $7 MILLION TO $15 MILLION, WHICH MAY NOT BE FULLY REALIZED UNTIL
1998. Age and service qualifications restrict eligibility for the new VERP; but
virtually all of the Company's full-time and part-time regular employees are
eligible for the VSP. A maximum of 220 employees (of a total workforce of about
1300) will be permitted to accept the plans, which are designed to prepare the
Company for a more competitive environment and minimize the need for any future
layoffs.
The 1996 quarterly earnings from operations will follow a pattern similar
to that of 1995, with significantly higher earnings in the third quarter when
compared to other quarters. Summer seasonal retail sales and summer pricing are
the predominant factors contributing to this pattern. The Company should earn
approximately half of its income from operations in the third quarter; and
weather factors can have a significant impact on sales in that quarter.
The Company anticipated that retail revenues for all of 1996 would increase
by about $5 million as a result of the recovery, through the Conservation
Adjustment Mechanism, of previously recorded and projected conservation costs
mandated by the DPUC, partially offset by competitive pricing and other price
reduction mechanisms. These factors increased retail revenues by $3.2 million in
the first six months of 1996 compared to the first six months of 1995, and they
should lead to a further increase in retail revenues of about $1.8 million over
the last two quarters of 1996 compared to the same period last year. The Company
has dealt with the possible loss of customers as a result of cogeneration,
relocation or discontinuation of operations by successfully negotiating nineteen
multi-year contracts with major customers, including its largest customer, which
is constructing a cogeneration unit that will produce approximately one-half of
the customer's electricity requirements by 1998. These contracts provide cost
reduction and price stability for the customers while helping the Company
maintain its customer base for the long term.
The Company's earnings will continue to be very sensitive to the level of
retail sales. The two primary factors that affect sales volume are economic
conditions and weather. Overall, 1995 weather was more severe than "normal,"
providing additional sales margin of about $5.1 million. Weather for the first
six months of 1995 was milder than normal, which reduced sales margin by $1.1
million while weather for the last six months of 1995 was more severe than
normal which produced additional sales margin of about $6.3 million. The Company
expects "real" retail kilowatt-hour sales growth in a range of 0.5% to 1.5% for
the last six months of 1996 compared to the last six months of 1995. A 1% "real"
kilowatt-hour sales growth in this period would produce additional sales margin
of about $2.5 million over last year.
- 22 -
<PAGE>
The Company had expected that higher generating output from the nuclear
units (no refueling outages planned for the Seabrook or Millstone units in 1996)
and lower nuclear fuel prices would have added $4-$5 million to sales margin
(through lower retail fuel and energy expense) in 1996 compared to 1995, if
normal operating assumptions were met. These savings were skewed towards the
first six months of 1996 in which $5.9 million of savings were realized.
However, Millstone Unit 3 was taken out of service on March 30, 1996, and will
remain shut down pending a comprehensive Nuclear Regulatory Commission (NRC)
review of its operations. (See Item 5. Other Events.) The shutdown of this unit
reduces UI's sales margin by about $0.5 million per month from anticipated
normal operating levels. Also, a similar sales margin reduction can be expected
to result from the unexpected shutdown of the Connecticut Yankee nuclear unit on
July 23, 1996. (See Item 5. Other Events.) The Company's share of the Millstone
Unit 3 and Connecticut Yankee nuclear units is 41 megawatts and 53 megawatts,
respectively. Because the dates when Millstone Unit 3 and the Connecticut Yankee
unit will return to service cannot be predicted, the Company is unable, at this
time, to estimate the sales margin reduction that will result, during the last
six months of 1996, from these unanticipated events. Also, the DPUC is currently
investigating options regarding "pass through" clauses related to fossil and
nuclear fuel expenses that might affect future sales margin.
Another major factor affecting the Company's earnings will be the Company's
ability to control expenses. As part of a new labor contract between the Company
and its union employees (the Bargaining Unit) covering the period May 16, 1995 -
May 16, 1998, and in conjunction with the Company's cost savings programs, a
Bargaining Unit Voluntary Early Retirement Program was initiated and resulted in
a one-time charge of $.30 per share taken in the first quarter of 1996. An
additional one-time charge of $.04 per share was incurred in the second quarter
of 1996 for early retirement costs. Savings from this early retirement program
began in the second quarter of 1996 and should amount to at least $1 million for
the year. Despite these savings, the Company anticipates that its operation and
maintenance expense for all of 1996 will increase compared to 1995 as a result
of several new initiatives designed to prepare the Company for future
competitive challenges: marketing programs for enhancing sales, training
programs to prepare all employees for competition, and regulatory programs to
help prepare the Company financially for survival in a competitive and,
potentially, restructured industry. These programs will likely add about $3
million to operation and maintenance expense in the last six months of 1996.
Additionally, expenses at the Millstone Unit 3 nuclear unit are now expected to
increase by about $1.5 million in the last six months of 1996 compared to the
last six months of 1995, principally to fulfill NRC requirements. Currently,
estimates are that the 1996 operation and maintenance expense impact of the
unscheduled outage of the Connecticut Yankee nuclear unit will be minimal.
The Company has worked diligently during the second quarter of 1996 to
return 250 megawatts of generation capacity, a portion of which was in
deactivated reserve and the remainder on unscheduled outage, to operation in
Connecticut as part of an effort to offset the unexpected shutdown of the
Millstone nuclear units and help insure that adequate generation is available in
Connecticut to supply expected summer peak demand.
The Company currently expects that the overall impact of the nuclear unit
outages and the Company's efforts to ensure adequate generation availability are
not sufficient to cause a shortfall in 1996 earnings per share from the
previously announced 4 percent growth goal. The Company also expects to maintain
adequate cash flow after expense and dividends to fully fund capital
expenditures and continue to pay down debt.
Depreciation expense should increase by $4-$5 million in 1996 from 1995
levels. Somewhat more than half of this increase is due to anticipated normal
plant additions, and the rest to the recovery of conservation and load
management program costs. The DPUC is reviewing the depreciation lives of these
programs and may further accelerate the recovery period.
The Company expects continued reductions in interest expense of about $8
million from the 1995 level of $77 million to about $69 million. This 1996
interest expense level would be 39% below the 1989 level and would mark the
seventh consecutive year of interest expense decline.
- 23 -
<PAGE>
The Company no longer expects a significant improvement in unregulated
subsidiary earnings compared to the results of 1995, partly due to costs
associated with the rapid growth of the American Payment Systems, Inc.
subsidiary. In the near term, the Company's investments in these subsidiaries
are unlikely to have a positive effect on earnings; but the Company believes
that these investments will contribute to future earnings growth.
In March 1996, the Company filed with the Connecticut Department of Public
Utility Control (DPUC), for its approval, a proposed price stability and
incentive regulation plan. The purpose of this plan is to help address the
challenges of an increasingly competitive electric utility industry and to help
position the Company to face and meet these challenges. The Company has
proposed, as part of the plan, to have no increase in base rates charged to
retail customers through December 31, 2001, to afford its customers additional
price stability during this period by modifying the operation of the fossil fuel
adjustment clause mechanism in retail rates so that customers can expect that
this clause will not affect their bills, to depreciate its Seabrook plant
investment more rapidly during this period, and to establish a performance-based
ratemaking mechanism in which performance will be measured by customer
satisfaction and reliability of service, all subject to a minimum and maximum
return on common equity. The plan also proposes a mechanism for the Company to
increase its support of economic development activities on a local and statewide
basis. This plan is designed to allow the Company to continue the application of
SFAS No. 71 and to recover its costs of providing service through rates. The
Company expects a decision on this plan to be made during 1996.
Note: This discussion contains forecast information items that
are "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934. All such forward-looking
information is necessarily only estimated. Actual results
could differ from those projected as a result of future
economic conditions, weather, developments in the legislative,
regulatory and competitive environments in which the Company
operates and other circumstances that could affect anticipated
revenues and costs.
- 24 -
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Events
Nuclear Generation
On March 30, 1996, Millstone Unit 3, a 1,154-MW nuclear generating unit
located in Waterford, Connecticut, in which the Company has a 3.685% joint
ownership interest, was taken out of service following an engineering evaluation
that determined that four safety-related valves would not be able to perform
their design function during certain postulated events. On April 4, 1996, the
Nuclear Regulatory Commission ("NRC") issued a letter to the Northeast Utilities
service company subsidiary that operates Millstone Unit 3, requesting that
Northeast Utilities submit, prior to restarting the unit, information describing
the actions taken to ensure that future operation of Millstone Unit 3 will be
conducted in accordance with the terms and conditions of its operating license,
NRC regulations, and the plant's Updated Final Safety Analysis Report
(collectively, "Applicable Requirements"). The letter also requires that certain
specific technical issues be resolved to the NRC's satisfaction prior to
restarting the unit.
The NRC's April 4, 1996 letter concerning Millstone Unit 3 superseded an
earlier letter, dated March 7, 1996, pursuant to which the NRC had requested
information regarding the plans and schedule for ensuring that the future
operation of the unit would be conducted in accordance with the Applicable
Requirements. The NRC's April 4, 1996 letter stated that, since the earlier
letter, programmatic issues and design deficiencies had been identified at
Millstone Unit 3 that are similar in nature to those previously identified at
Millstone Units 1 and 2, two other nuclear generating units at the Millstone
Station that are owned by operating subsidiaries of Northeast Utilities and are
also operated by a service company subsidiary of Northeast Utilities. Although
Millstone Unit 3 was designed and constructed more recently than Millstone Units
1 and 2, under more stringent licensing requirements, the NRC has since
indicated, in a letter dated May 21, 1996, that it plans to monitor closely the
actions taken to address the concerns at each of the Millstone units.
The NRC's May 21, 1996 letter also requested that it be provided with a
comprehensive list of design and configuration deficiencies identified at
Millstone Unit 3, together with a description of corrective actions to be taken,
or planned to be taken, in response thereto and a detailed description of the
plan for completion of the work required to respond to the NRC's April 4, 1996
request.
On June 6, 1996, the NRC issued a letter stating that it had concluded that
the corrective action program at Millstone Station is not currently effective in
resolving identified deficiencies and that none of the generating units at the
Station may be restarted until the effectiveness of this program is
demonstrated. This letter also outlined certain inspection activities that the
NRC plans to undertake before any of the units are restarted.
On June 28, 1996, the NRC issued a letter stating that Millstone Station
had been placed on the NRC's "watch list" as a Category 3 facility. The NRC
deems Category 3 plants as having significant weaknesses that warrant
maintaining the plant in shutdown condition until it is demonstrated that
adequate programs have been established and implemented to ensure substantial
improvement.
On July 2, 1996, the service company subsidiary of Northeast Utilities
filed an 800-page document with the NRC, responding to the NRC's April 4, 1996
request and outlining a revised corrective action program in response to the
criticism in the NRC's June 6, 1996 letter. This filing identified approximately
1,200 design and configuration discrepancies at Millstone Unit 3, about half of
which Northeast Utilities management expects will have to be resolved before the
unit can be returned to service. Although Northeast Utilities management
anticipates resolving these items over the course of the summer of 1996, it has
stated that it will not seek to restart Millstone Unit 3 until late in September
1996 at the earliest; and it has also stated that it cannot, at this time,
predict the results of the NRC's review of the filed documentation or its
inspection activities, how long it will take to demonstrate to the NRC the
effectiveness of the revised corrective action program, or when the NRC will
allow the unit to return to service.
- 25 -
<PAGE>
While Millstone Unit 3 is out of service, the Company is incurring
incremental replacement power costs estimated at approximately $500,000 per
month, and experiencing an adverse impact on net earnings per share of
approximately $.02 per month. In addition to the costs of replacement power,
incremental direct costs will be incurred to address issues raised by the NRC
relative to Millstone Unit 3, and the Company may be responsible for its 3.685%
joint ownership share of these costs.
On March 7, 1996, the NRC requested information regarding the plans and
schedule for ensuring that the future operation of Connecticut Yankee Atomic
Power Company's 582-MW nuclear generating unit ("CY") located in Haddam,
Connecticut, will be conducted in accordance with the Applicable Requirements.
Connecticut Yankee Atomic Power Company is owned in part by the Company (9.5%),
and the Company is entitled to 9.5% of CY's generating capacity and energy
output. CY is operated by a service company subsidiary of Northeast Utilities,
the largest owner (49%) of Connecticut Yankee Atomic Power Company. A timely
response to the NRC request was filed by CY.
On May 17, 1996, the NRC issued a letter stating that recent inspections of
CY revealed issues that were similar to those previously identified at Millstone
Station, and requested that CY submit a comprehensive list of design and
configuration deficiencies identified at CY, together with a description of the
actions taken in response to the deficiencies. On May 30, 1996, CY filed with
the NRC the information requested. On July 23, 1996, CY was taken out of service
following an engineering evaluation that determined that safety-related air
cooling system pipes could crack if the plant should lose its outside source of
electric power. On August 1, 1996, an NRC inspection team issued a report that
confirmed the deficiencies identified by CY in its May 30, 1996 submittal and
"identified a number of significant deficiencies in the engineering calculations
and analyses which were relied upon to ensure the adequacy of the design of key
safety systems" at the plant; and on August 12, 1996, the NRC asked Northeast
Utilities to respond within 30 days to new concerns raised by the inspection
team. On August 8, 1996, Northeast Utilities management had announced that, in
order to avail itself of additional time to resolve all of the plant's
safety-related issues permanently, CY would advance by six weeks the
commencement of a refueling outage that had been scheduled to begin in September
of 1996. As a result of this decision, it is currently estimated that CY will
remain out of service until November of 1996.
While CY is out of service, the Company will incur incremental replacement
power costs estimated at approximately $500,000 per month, and experience an
adverse impact on net earnings per share of approximately $.02 per month. In
addition, incremental direct costs will be incurred to correct the problems, and
the Company will be responsible for 9.5% of these costs.
- 26 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
(a) Exhibits.
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description
---------- ------- -----------
<C> <C> <C>
(3) 3.1c Copy of Certificate Amending Certificate of Incorporation by
Action of Board of Directors, dated July 16, 1996.
(10) 10.20* Copy of Directors' Deferred Compensation Plan of The United
Illuminating Company.**
(10) 10.21* Copy of The United Illuminating Company 1996 Long Term Incentive
Program.
(12), (99) 12 Statement Showing Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements (Twelve Months Ended
June 30, 1996 and Twelve Months Ended December 31, 1995, 1994,
1993, 1992 and 1991).
(27) 27 Financial Data Schedule
</TABLE>
* Management contract or compensatory plan or arrangement.
** Filed March 29, 1996, with proxy material for the Annual Meeting of the
Shareowners.
(b) Reports on Form 8-K.
None
- 27 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE UNITED ILLUMINATING COMPANY
Date August 13, 1996 Signature /s/ Robert L. Fiscus
---------------------- -------------------------------
Robert L. Fiscus
President and
Chief Financial Officer
- 28 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description Page No.
---------- ------- ----------- --------
<C> <C> <C>
(3) 3.1c Copy of Certificate Amending Certificate of
Incorporation by Action of Board of Directors,
dated July 16, 1996.
(10) 10.20 Copy of Directors' Deferred Compensation Plan
of The United Illuminating Company.**
(10) 10.21 Copy of The United Illuminating Company 1996
Long Term Incentive Program.
(12),(99) 12 Statement Showing Computation of Ratios
of Earnings to Fixed Charges and Ratios of
Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements (Twelve
Months Ended June 30, 1996 and Twelve Months
Ended December 31, 1995, 1994, 1993, 1992 and
1991).
(27) 27 Financial Data Schedule
</TABLE>
* Management contract or compensatory plan or arrangement.
** Filed March 29, 1996, with proxy material for the Annual Meeting of the
Shareowners.
EXHIBIT 3.1c
THE UNITED ILLUMINATING COMPANY
(A SPECIALLY CHARTERED STOCK CORPORATION)
CERTIFICATE AMENDING CERTIFICATE OF INCORPORATION
BY ACTION OF BOARD OF DIRECTORS
1. The name of the corporation is THE UNITED ILLUMINATING COMPANY (the
"Company").
2. The Certificate of Incorporation of the Company is amended only by the
following resolution of the Board of Directors, acting alone:
RESOLVED: That, 60,450 shares of the Company's class of preferred
stock of the par value of $100 per share having been purchased by the Company
and canceled, pursuant to Section 33-351(a) of the General Statutes of
Connecticut, Revision of 1958, as amended, the authorized amount of said class
of preferred stock shall be and it hereby is reduced by $6,045,000, to
$111,994,400, consisting of a class of 1,119,944 shares of the par value of $100
per share, and that, pursuant to Section 33-352(a) of the General Statutes of
Connecticut, Revision of 1958, as amended, the first paragraph of ARTICLE I.
AUTHORIZED AMOUNT OF PREFERRED STOCK. of subsection 3(b) of the Certificate of
Incorporation be and it hereby is amended to read as follows:
The authorized amount of preferred stock subject to these Articles (herein
called the Preferred Stock), unless increased in accordance with the
provisions hereof, shall be $171,994,400, consisting of a class of
1,119,944 shares of the par value of $100 per share and a class of
2,400,000 shares of the par value $25 per share. Shares of either class
may, subject to the provisions of these Articles, be issued from time to
time in one or more series in such amounts, on such terms and for such
consideration as may be determined and authorized by the Board of
Directors. The series designation, dividend rate, redemption prices, and
other special rights, if any, of each series of the Preferred Stock shall
be determined and authorized by the Board of Directors.
3. The above resolution was adopted by the Company's Board of Directors,
acting alone, pursuant to Sections 33-341(d) and 33-352(a) of the General
Statutes of Connecticut (Revision of 1958).
The number of affirmative Directors' votes required to adopt the above
resolutions was seven. The number of Directors' votes in favor of adoption of
each of the above resolutions was twelve.
WE, THE UNDERSIGNED, being the President and Chief Financial Officer
and the Treasurer and Secretary of The United Illuminating Company, hereby
declare, under penalties of false statement, that the statements made in the
foregoing certificate are true.
Dated at New Haven, Connecticut, this 16th day of July 1996.
THE UNITED ILLUMINATING COMPANY
/s /Robert L. Fiscus______________________
Robert L. Fiscus
President and Chief Financial Officer
/s/ Kurt Mohlman_______________________
Kurt Mohlman
Treasurer and Secretary
EXHIBIT 10.21
THE UNITED ILLUMINATING COMPANY
1996 LONG-TERM INCENTIVE PROGRAM
I. PURPOSE
The purpose of The United Illuminating Company 1996 Long-Term Incentive
Program is (i) to promote the long-term success of The United
Illuminating Company by attracting, retaining and providing financial
incentives to key employees who are in a position to make significant
contributions toward that success, (ii) to link the interests of these
key employees to the interests of the shareholders, and (iii) to
encourage these key employees to maintain proprietary interests in the
Company and achieve extraordinary job performance levels.
II. DEFINITIONS
When used herein, each of the following terms shall have the
corresponding meaning set forth below unless a different meaning is
plainly required by the context in which a term is used:
"Board" shall mean the Board of Directors of the Company.
"Common Stock Performance" shall mean a value determined
pursuant to the formula prescribed in Section V(c) hereof.
"Company" shall mean The United Illuminating Company and/or
any subsidiaries adopting the Program with approval of the
Board.
"Contingent Performance Shares" shall mean a number of share
units, each equivalent to one share of the Company's Common
Stock, credited to a Participant's Performance Share Account
on a conditional basis at the beginning of a Performance
Period, pursuant to Section V(a) hereof.
-1-
<PAGE>
"Effective Date" shall mean January 1, 1996; the date as of
which the first Performance Period commenced and Contingent
Performance Shares were granted to Participants and the
Program became effective.
"Key Employees" shall mean those employees of the Company who
are identified by the Board as being in a position to make
significant contributions to the growth and long-term success
of the Company.
"Long-Term Incentive Award" shall mean an award earned by a
Participant pursuant to Section V(c) hereof.
"Market Price" shall mean the average of the closing prices
(or bid prices if no closing prices are available) of the
stock in question as reported on the composite tape for New
York Stock Exchange listed securities (or other comparable
source for securities not listed on the New York Stock
Exchange), during the applicable full calendar month.
"Minimum Stock Ownership Requirement" means a number of shares
of the Company's Common Stock that the Board determines, from
time to time, should be owned beneficially by a person holding
a specified officership position in the Company. A Performance
Share shall be deemed to be a beneficially-owned share of
Common Stock for purposes of satisfying an officer's Minimum
Stock Ownership Requirement.
"Participant" shall mean a Key Employee who is selected for
participation in the Program for a specific Performance Period
pursuant to Section V(b) hereof.
"Peer Group" shall mean those comparable companies that are
selected by the Board as members of a comparison group for a
Performance Period, pursuant to Section V(b) hereof.
"Performance Period" shall mean a three-year period over which
the Company's Common Stock Performance will be measured and
the Participant's Long-Term Incentive Award may be earned. An
initial three-year Performance Period commenced on the
Effective Date, and a new three-year "Performance Period" will
commence on January 1, 1997 and every year thereafter to and
including the Termination Date. Performance Periods will
overlap.
"Performance Share" means a share unit, equivalent to one
share of the Company's Common Stock, credited to a Key
Employee's Performance Share Account.
-2-
<PAGE>
"Performance Share Account" means the unfunded memorandum
account maintained by the Company to record the credits of
Contingent Performance Shares and Performance Shares with
respect to a Key Employee.
"Performance Share Value" on a particular date means the
average of the high and low per share sale prices of the
Company's Common Stock on the New York Stock Exchange, as
reported on the composite tape or, if there is no sale on such
date, then such average price on the last previous date on
which a sale is reported.
"Performance Shares Earned Percentages" shall mean the
percentages applicable to potential percentile rankings of the
Company's Common Stock Performance among the Common Stock
Performances of the Peer Group for a Performance Period, for
purposes of calculating Long-Term Incentive Awards, determined
pursuant to Section V(c) hereof.
"Program" shall mean The United Illuminating Company 1996
Long-Term Incentive Program.
"Termination Date" shall mean January 1, 2005; the date as of
which the last Performance Period will commence, the last
Contingent Performance Shares may be granted to Participants
and the Program terminates with respect to the further
granting of Contingent Performance Shares.
The "Total Shareholder Return" on a share of a Company's
Common Stock for a Performance Period means a sum of money
calculated by the following formula (with appropriate
adjustment for changes in capital structure due to stock
dividends, stock splits, recapitalizations, mergers or other
events having a significant distorting effect):
1) subtracting the Market Price of a share of such
Common Stock for the last full calendar month prior
to the beginning of the Performance Period from the
Market Price of a share of such Common Stock for the
last full calendar month of the Performance Period;
and
(2) adding to the positive or negative result obtained in
step (1) the sum of all cash dividends declared by
the Company with respect to a share of its Common
Stock during the Performance Period.
-3-
<PAGE>
III. ADMINISTRATION OF THE PROGRAM
The Program shall be administered by the Board. The Board may adopt
rules and practices for carrying out the Program and may take such
action in the administration of the Program not inconsistent with the
terms hereof as it shall deem appropriate. Such rules and practices
shall be considered as incorporated into this Program by reference. All
questions of interpretation and construction of the Program, and of the
existence and extent of any rights arising by reason of the Program,
and of the intent and meaning of the provisions of any instrument or
document used in connection with the Program, shall be determined by
the Board. The Board shall determine (i) the eligibility requirements
and the identity of the Participants, if any, for each Performance
Period; (ii) the Contingent Performance Shares grants for each
Performance Period; (iii) the Peer Group for each Performance Period;
(iv) the Performance Shares Earned Percentages for each Performance
Period; (v) the Long-Term Incentive Awards for each Performance Period;
and (vi) such other matters as may be necessary or appropriate in
connection with the administration of the Program consistent and in
accordance with the provisions hereof. The Board may delegate some or
all of its authority with respect to the Program to a Committee
appointed by the Board. No member of the Board or Committee who is a
Participant in the Program shall vote on, act upon or decide any matter
relating to such member or such member's rights or benefits under the
Program.
-4-
<PAGE>
IV. SELECTION OF PARTICIPANTS
During the initial Performance Period, and at or prior to the
commencement of the fourth month of each subsequent Performance Period,
after having received the recommendations of the Chief Executive
Officer of the Company, the Board may, but shall not be required to,
identify one or more persons as Key Employees and select one or more of
such Key Employees as Participants in the Program for that Performance
Period. No person shall at any time have a right to be identified as a
Key Employee or selected as a Participant for any Performance Period
nor, having been so identified and selected for one Performance Period,
shall such person have a right to be identified as a Key Employee or
selected as a Participant for any other Performance Period. The fact
that a person is identified as a Key Employee and selected as a
Participant for any Performance Period shall not mean that such person
will necessarily receive a Long-Term Incentive Award for that
Performance Period.
V. GRANTING OF CONTINGENT PERFORMANCE SHARES; DETERMINATION OF
PARTICIPANTS' LONG-TERM INCENTIVE AWARDS; REINVESTMENT OF PERFORMANCE
SHARE DIVIDENDS
(a) During the initial Performance Period, and at or prior to the
commencement of the fourth month of each subsequent Performance
Period, the Board will grant to each Participant in the Program
for that Performance Period a number of Contingent Performance
Shares as a part of, or all of, the Participant's contingent and
performance-based compensation.
-5-
<PAGE>
(b) During the initial Performance Period, and at or prior to the
commencement of the fourth month of each subsequent Performance
Period for which the Board selects one or more Participants, the
Board will select a Peer Group of comparable companies. When
selecting the membership of a Peer Group for a Performance
Period, the Board shall not be bound by any decisions regarding
the composition of any Peer Group selected for a prior or
overlapping Performance Period.
(c) As soon as practicable after the end of each Performance Period,
the Long-Term Incentive Award earned by each Participant in the
Program for such Performance Period will be determined by the
Board and accounted for as follows:
(A) The Company's Common Stock Performance shall be ranked
among the Common Stock Performances of the Peer Group for that
Performance Period. The Common Stock Performance of a company
shall be measured by dividing the Total Shareholder Return on a
share of such company's Common Stock by the Market Price of a
share of such company's Common Stock for the last full month
prior to the beginning of the Performance Period (with
appropriate adjustment for changes in capital structure due to
stock dividends, stock splits, recapitalizations, mergers or
other events having a significant distorting effect).
(B) Using the percentile ranking of the Company's Common Stock
Performance among the Common Stock Performances of the Peer
Group, each Participant shall be determined to have earned a
Long-Term Incentive Award consisting of a number of Performance
-6-
<PAGE>
Shares equal to the whole number nearest to the product of such
Participant's Contingent Performance Shares for the Performance
Period multiplied by the applicable Performance Shares Earned
Percentage for that Performance Period. The Performance Shares
Earned Percentages for the three-year Performance Period
beginning January 1, 1996 (and for subsequent Performance Periods
if the Board takes no action to change the percentages) are as
follows:
Percentile Rank
of Company among Performance Shares
Peer Group Companies Earned Percentages
-------------------- ------------------
Below 30 0
30th + 15%
40th + 25%
50th + 50%
60th + 65%
70th + 80%
80th + 90%
90th + 100%
No Long-Term Incentive Awards will be earned if the
Company's Common Stock Performance ranks below the minimal
percentile performance threshold for the Performance Period.
The Board may change the Performance Shares Earned
Percentages scale, including the minimal percentile
performance threshold, for any subsequent Performance
Period.
-7-
<PAGE>
(C) The Performance Share Account of each Participant shall be
credited with the number of such Participant's Long-Term
Incentive Award Performance Shares.
(d) In the event of any change in the number of outstanding shares of
the Company's Common Stock by reason of a stock dividend or stock
split, recapitalization, merger, consolidation, combination or
exchange of shares, stock issue, or other similar event, the
Board may make such adjustments as it deems equitable in the
number of Contingent Performance Shares and/or Performance Shares
in the Performance Share Accounts of the Participants to give
effect to the change in the number of outstanding shares.
(e) If a Participant's employment is terminated due to death, total
disability, or retirement prior to the end of a Performance
Period, the Participant or his or her estate shall be entitled to
receive a pro-rata share of the Long-Term Incentive Award that
would have been earned by such Participant if employment had
continued to the end of the Performance Period. Proration of a
Long-Term Incentive Award in such an event shall be calculated by
multiplying the Long-Term Incentive Award deemed earned by a
fraction, the numerator of which will be the number of calendar
months that have been completed during the Performance Period
prior to the termination of the Participant's employment and the
denominator of which will be the total number of months, both
completed and uncompleted, in the Performance Period.
-8-
<PAGE>
If a Participant's employment is terminated for any reason other
than those described above, the Participant's right to any
Long-Term Incentive Award for any Performance Period then in
progress will be forfeited, unless the Board determines
otherwise.
(f) On each dividend payment date with respect to the Company's
Common Stock, the Performance Share Account of each Key Employee
shall be credited with an additional number of whole and
fractional Performance Shares, computed to one decimal place,
equal to the product of the dividend per share then payable,
multiplied by the number of Performance Shares then credited to
share sale prices of the Company's Common Stock on the New York
Stock Exchange, as reported on the composite tape, on such
dividend payment date or, if there is no sale on such date, then
such average price on the last previous date on which a sale is
reported.
VI. PAYMENT FOR LONG-TERM INCENTIVE AWARD PERFORMANCE SHARES
(a) An employee of the Company shall have the right to be paid in
cash the Performance Share Value of one or more, or all, of the
Performance Shares in his or her Performance Share Account at any
time and/or from time to time; PROVIDED, HOWEVER, that no officer
of the Company may request payment of the Performance Share Value
of a Performance Share that is required to satisfy his or her
Minimum Stock Ownership Requirement; AND PROVIDED, FURTHER, that
if the employee requesting payment is an officer of the Company
who has not satisfied his or her Minimum Stock Ownership
-9-
<PAGE>
Requirement on the date that he or she requests payment, he or
she shall have the right to be paid the Performance Share Value
of not more than fifty per cent (50%) of the number of
Performance Shares in his or her Performance Share Account. A
request for payment of the Performance Share Value of any
Performance Share shall be made to the Treasurer of the Company;
and the Performance Share Value of said Performance Share shall
be calculated as of the date that the request is received in the
office of the Treasurer. The payment of the Performance Share
Value of a Performance Share shall cancel such Performance Share.
(b) The Performance Share Value of all of the Performance Shares in
an employee's Performance Share Account on and as of the date of
termination of his or her employment for any reason shall be paid
to the employee, or his or her personal representative, on or as
soon as practicable following such employment termination date.
VII. MISCELLANEOUS
(a) Assignments and Transfers.
The rights and interests of an employee under the Program may
not be assigned, encumbered, or transferred; provided however,
-10-
<PAGE>
that in the event of an employee's death, any sum payable
hereunder shall be paid to the executor or administrator of
the Participant's estate.
(b) Program Creates No Employment Rights.
Neither the establishment of the Program nor any action taken
thereunder shall be construed as creating a contract of
employment, or as a term or provision of any such contract, or
as giving any employee any right to be retained in the employ
of the Company.
(c) Nature of Participant's Interest.
Any sum payable to a Participant under the Program shall
constitute solely a general, unsecured liability of the
Company, payable exclusively out of the Company's general
assets; and in no event shall the Company be obligated to
segregate any funds or assets to secure the payment of any
such sum. No action pursuant to the Program shall confer upon
any person any right, title, or interest in any assets of the
Company.
(d) Amendment, Suspension or Termination of Program.
The Board may amend, suspend or terminate the Program at any
time; provided, however, that once a Performance Period has
commenced, except as provided in Section VII(e) hereof,
Sections V and VI hereof shall remain in effect with respect
to the Contingent Performance Shares granted for that
Performance Period.
(e) Change of Circumstances.
In the event of a corporate change of control, reorganization,
merger or other event making it difficult or impractical to
continue the Program, the Board may (1) revoke the grant of
-11-
<PAGE>
outstanding Contingent Performance Shares, (2) accelerate the
earning of Long-Term Incentive Awards, or (3) take such other
action as it may determine to be appropriate.
(f) Applicable Law.
The interpretation of the provisions hereof and the
administration of the Program shall be governed by the laws of
Connecticut.
Adopted by the Board on
June 24, 1996
Kurt Mohlman
Treasurer & Secretary
-12-
<TABLE>
THE UNITED ILLUMINATING COMPANY EXHIBIT 12
PAGE 1 OF 2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<CAPTION>
TWELVE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
EARNINGS
<S> <C> <C> <C> <C> <C> <C>
Net income $55,550 $56,768 $40,481 $46,795 $50,393 $53,753
Federal income taxes 20,844 19,276 22,342 34,551 41,951 42,827
State income taxes 12,647 16,878 4,645 6,216 12,976 13,813
Fixed charges 107,548 109,449 97,928 88,093 83,994 81,685
------------- ------------ ------------- ------------- ------------- ---------------
Earnings available for fixed charges $196,589 $202,371 $165,396 $175,655 $189,314 $192,078
============= ============ ============= ============= ============= ===============
FIXED CHARGES
Interest on long-term debt $90,296 $88,666 $80,030 $73,772 $63,431 $65,690
Other interest 9,847 12,882 12,260 10,301 16,723 12,045
Interest on nuclear fuel burned 2,440 2,963 928 - - -
One third of rental charges 4,965 4,938 4,710 4,020 3,840 3,950
------------- ------------ ------------- ------------- ------------- ---------------
$107,548 $109,449 $97,928 $88,093 $83,994 $81,685
============= ============ ============= ============= ============= ===============
RATIO OF EARNINGS TO FIXED
CHARGES 1.83 1.85 1.69 1.99 2.25 2.35
============= ============ ============= ============= ============= ===============
</TABLE>
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY EXHIBIT 12
PAGE 2 OF 2
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(In Thousands)
<CAPTION>
TWELVE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
EARNINGS
<S> <C> <C> <C> <C> <C> <C>
Net income $55,550 $56,768 $40,481 $46,795 $50,393 $53,753
Federal income taxes 20,844 19,276 22,342 34,551 41,951 42,827
State income taxes 12,647 16,878 4,645 6,216 12,976 13,813
Fixed charges 107,548 109,449 97,928 88,093 83,994 81,685
----------- ----------- ----------- ------------ ----------- -----------
Earnings available for combined fixed
charges and preferred stock
dividend requirements $196,589 $202,371 $165,396 $175,655 $189,314 $192,078
=========== =========== =========== ============ =========== ===========
FIXED CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS
Interest on long-term debt $ 90,296 $ 88,666 $ 80,030 $73,772 $63,431 $ 65,690
Other interest 9,847 12,882 12,260 10,301 16,723 12,045
Interest on nuclear fuel burned 2,440 2,963 928 - - -
One third of rental charges 4,965 4,938 4,710 4,020 3,840 3,950
Preferred stock dividend requirements(1) 7,260 7,100 7,197 6,223 2,778 1,004
----------- ----------- ----------- ------------ ----------- -----------
$114,808 $116,549 $105,125 $94,316 $86,772 $82,689
=========== =========== =========== ============ =========== ===========
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS 1.71 1.74 1.57 1.86 2.18 2.32
=========== =========== =========== ============ =========== ===========
(1) Preferred Stock Dividends increased to reflect the pre-tax earnings required
to cover such dividend requirements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,332,784
<OTHER-PROPERTY-AND-INVEST> 33,575
<TOTAL-CURRENT-ASSETS> 188,727
<TOTAL-DEFERRED-CHARGES> 457,235
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,012,321
<COMMON> 284,579
<CAPITAL-SURPLUS-PAID-IN> (1,410)
<RETAINED-EARNINGS> 158,750
<TOTAL-COMMON-STOCKHOLDERS-EQ> 441,919
0
4,494
<LONG-TERM-DEBT-NET> 788,070
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 35,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 95,171
0
<CAPITAL-LEASE-OBLIGATIONS> 17,354
<LEASES-CURRENT> 303
<OTHER-ITEMS-CAPITAL-AND-LIAB> 630,010
<TOT-CAPITALIZATION-AND-LIAB> 2,012,321
<GROSS-OPERATING-REVENUE> 339,650
<INCOME-TAX-EXPENSE> 25,273
<OTHER-OPERATING-EXPENSES> 259,464
<TOTAL-OPERATING-EXPENSES> 284,737
<OPERATING-INCOME-LOSS> 54,913
<OTHER-INCOME-NET> 2,734
<INCOME-BEFORE-INTEREST-EXPEN> 57,647
<TOTAL-INTEREST-EXPENSE> 34,637
<NET-INCOME> 20,604
227
<EARNINGS-AVAILABLE-FOR-COMM> 22,203
<COMMON-STOCK-DIVIDENDS> 20,305
<TOTAL-INTEREST-ON-BONDS> 65,516
<CASH-FLOW-OPERATIONS> 55,208
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
