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 SEPTEMBER 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
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Commission file number 1-6788
THE UNITED ILLUMINATING COMPANY
(Exact name of registrant as specified in its charter)
Connecticut
(State or other jurisdiction of 06-0571640
incorporation or organization) (I.R.S. Employer Identification No.)
157 Church Street, New Haven, Connecticut 06506
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-499-2000
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 September 30, 1996, was 14,101,291.
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<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 nine months ended
September 30, 1996 and 1995. 3
Consolidated Balance Sheet as of September 30, 1996 and December 31, 1995. 4
Consolidated Statement of Cash Flows for the three and nine months ended
September 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 11
- Short-term Credit Arrangements 12
- Supplementary Information 13
- Fuel Financing Obligations and Other Lease Obligations 14
- Commitments and Contingencies 14
- Capital Expenditure Program 14
- Other Commitments and Contingencies 14
- Hydro-Quebec 14
- Voluntary Early Retirement and Separation Programs 14
- Site Remediation Costs 15
- Property Taxes 15
- Nuclear Fuel Disposal and Nuclear Plant Decommissioning 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 17
- Major Influences on Financial Condition 17
- Capital Expenditure Program 19
- Liquidity and Capital Resources 20
- Results of Operation 21
- Outlook 24
Part II. OTHER INFORMATION
Item 5 . Other Events 28
- Nuclear Generation 28
Item 6. Exhibits and Reports on Form 8-K. 31
SIGNATURES 32
</TABLE>
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<PAGE>
<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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues (Note G) $209,167 $200,308 $548,817 $529,135
------------ ------------ ------------ -------------
Operating Expenses
Operation
Fuel and energy 48,825 36,459 114,220 107,867
Capacity purchased 11,851 11,600 33,799 35,986
Early retirement program charges 14,946 - 23,033 -
Other 36,269 36,171 113,250 106,615
Maintenance 9,112 7,797 28,054 25,155
Depreciation 16,866 15,374 49,518 46,086
Amortization of cancelled nuclear project and deferred return 3,440 3,440 10,319 10,319
Income taxes (Note E) 18,449 26,319 43,722 49,802
Other taxes (Note G) 14,943 15,717 43,523 45,204
------------ ------------ ------------ -------------
Total 174,701 152,877 459,438 427,034
------------ ------------ ------------ -------------
Operating Income 34,466 47,431 89,379 102,101
------------ ------------ ------------ -------------
Other Income and (Deductions)
Allowance for equity funds used during construction 165 - 547 -
Other-net (Note G) (89) (1,433) (555) (2,671)
Non-operating income taxes 1,669 343 4,487 3,084
------------ ------------ ------------ -------------
Total 1,745 (1,090) 4,479 413
------------ ------------ ------------ -------------
Income Before Interest Charges 36,211 46,341 93,858 102,514
------------ ------------ ------------ -------------
Interest Charges
Interest on long-term debt 16,270 16,137 49,063 46,671
Other interest (Note G) 483 2,078 1,761 8,264
Allowance for borrowed funds used during construction (286) (712) (1,030) (1,989)
------------ ------------ ------------ -------------
16,467 17,503 49,794 52,946
Amortization of debt expense and redemption premiums 637 1,100 1,947 3,410
------------ ------------ ------------ -------------
Net Interest Charges 17,104 18,603 51,741 56,356
------------ ------------ ------------ -------------
Minority Interest in Preferred Securities 1,203 1,203 3,609 2,379
------------ ------------ ------------ -------------
Net Income 17,904 26,535 38,508 43,779
Discount on preferred stock redemptions (14) (191) (1,840) (2,183)
Dividends on preferred stock 52 131 279 1,198
------------ ------------ ------------ -------------
Income Applicable to Common Stock $17,866 $26,595 $40,069 $44,764
============ ============ ============ =============
Average Number of Common Shares Outstanding 14,101 14,087 14,101 14,087
Earnings per share of Common Stock $1.27 $1.89 $2.84 $3.18
Cash Dividends Declared per share of Common Stock $0.72 $0.705 $2.16 $2.115
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of the financial statements.
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<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEET
ASSETS
(Thousands of Dollars)
<CAPTION>
September 30, December 31,
1996 1995*
---- ----
(Unaudited)
<S> <C> <C>
Utility Plant at Original Cost
In service $1,836,993 $1,809,925
Less, accumulated provision for depreciation 571,268 532,015
----------------- -----------------
1,265,725 1,277,910
Construction work in progress 38,142 41,817
Nuclear fuel 23,178 25,967
----------------- -----------------
Net Utility Plant 1,327,045 1,345,694
----------------- -----------------
Other Property and Investments 34,368 27,388
----------------- -----------------
Current Assets
Cash and temporary cash investments 36,186 5,070
Accounts receivable
Customers, less allowance for doubtful
accounts of $2,600 and $6,300 74,549 63,987
Other 19,758 14,547
Accrued utility revenues 29,003 28,318
Fuel, materials and supplies, at average cost 22,738 22,249
Prepayments 8,342 3,051
Other 228 55
----------------- -----------------
Total 190,804 137,277
----------------- -----------------
Deferred Charges
Unamortized debt issuance expenses 6,726 7,577
Other 1,750 2,377
----------------- -----------------
Total 8,476 9,954
----------------- -----------------
Regulatory Assets (future amounts due from customers
through the ratemaking process)
Income taxes due principally to book-tax differences 344,940 358,168
Deferred return - Seabrook Unit 1 40,904 50,343
Unamortized cancelled nuclear projects 13,590 24,620
Unamortized redemption costs 21,312 22,244
Uranium enrichment decommissioning costs 1,409 1,505
Other 8,474 8,424
----------------- -----------------
Total 430,629 465,304
----------------- -----------------
$1,991,322 $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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<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)
<CAPTION>
September 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 166,463 156,877
----------------- -----------------
449,632 439,981
Preferred stock 4,461 10,539
Minority interest in preferred securities 50,000 50,000
Long-term debt 780,598 845,684
----------------- -----------------
Total 1,284,691 1,346,204
----------------- -----------------
Noncurrent Liabilities
Obligations under capital leases 17,274 17,508
Nuclear decommissioning obligation 12,074 10,317
Other 4,769 4,090
----------------- -----------------
Total 34,117 31,915
----------------- -----------------
Current Liabilities
Current portion of long-term debt 95,171 40,800
Notes payable - -
Accounts payable 35,749 45,401
Dividends payable 10,205 10,072
Taxes accrued 16,972 5,297
Pensions accrued 51,466 33,832
Interest accrued 16,378 14,506
Obligations under capital leases 309 291
Other accrued liabilities 41,064 26,769
----------------- -----------------
Total 267,314 176,968
----------------- -----------------
Customers' Advances for Construction 1,872 2,655
----------------- -----------------
Regulatory Liabilities (future amounts owed to customers
through the ratemaking process)
Accumulated deferred investment tax credits 17,338 17,909
Other 1,811 1,990
----------------- -----------------
Total 19,149 19,899
----------------- -----------------
Deferred Income Taxes (future tax liabilities owed
to taxing authorities) 384,179 407,976
Commitments and Contingencies (Note L)
----------------- -----------------
$1,991,322 $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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<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $17,904 $26,535 $38,508 $43,779
------------ ----------- ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 17,915 16,925 52,734 50,646
Deferred income taxes (1,421) 10,010 (10,569) 11,061
Deferred investment tax credits - net (190) (190) (571) (571)
Amortization of nuclear fuel 1,604 3,848 4,090 11,295
Allowance for funds used during construction (451) (712) (1,577) (1,989)
Amortization of deferred return 3,146 3,146 9,439 9,439
Changes in:
Accounts receivable - net (11,731) 2,679 (15,773) 2,656
Fuel, materials and supplies 815 (27) (489) (1,043)
Prepayments (4,006) (4,059) (5,291) 3,278
Accounts payable (539) (16,733) (9,652) (12,936)
Interest accrued (8,090) (9,354) 1,872 (1,819)
Taxes accrued 6,444 4,156 11,675 5,113
Early retirement costs accrued 14,946 - 23,033 -
Other assets and liabilities 19,745 4,571 13,870 (73)
------------ ----------- ------------ ------------
Total Adjustments 38,187 14,260 72,791 75,057
------------ ----------- ------------ ------------
Net Cash provided by Operating Activities 56,091 40,795 111,299 118,836
------------ ----------- ------------ ------------
Cash Flows from Financing Activities
Common stock - 192 40 192
Long-term debt - 150,000 7,500 150,000
Preferred securities of subsidiary - - - 50,000
Notes payable (35,000) (175,850) - (67,000)
Securities redeemed and retired:
Preferred stock (33) (500) (6,078) (34,161)
Long-term debt (7,725) - (18,525) (116,133)
Discount on preferred stock redemption 14 191 1,840 2,183
Expenses of issue (275) - (275) (1,831)
Lease obligations (74) (68) (216) (1,099)
Dividends
Preferred stock (52) (137) (358) (1,813)
Common stock (10,153) (9,931) (30,246) (29,582)
------------ ----------- ------------ ------------
Net Cash provided by (used in) Financing Activities (53,298) (36,103) (46,318) (49,244)
------------ ----------- ------------ ------------
Cash Flows from Investing Activities
Plant expenditures, including nuclear fuel (12,331) (11,111) (33,865) (38,428)
------------ ----------- ------------ ------------
Net Cash used in Investing Activities (12,331) (11,111) (33,865) (38,428)
------------ ----------- ------------ ------------
Cash and Temporary Cash Investments:
Net change for the period (9,538) (6,419) 31,116 31,164
Balance at beginning of period 45,724 49,015 5,070 11,432
------------ ----------- ------------ ------------
Balance at end of period $36,186 $42,596 $36,186 $42,596
============ =========== ============ ============
Cash paid during the period for:
Interest (net of amount capitalized) $24,377 $26,529 $47,960 $54,699
============ =========== ============ ============
Income taxes $14,200 $11,800 $40,825 $26,450
============ =========== ============ ============
</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 nine months of 1996
and 1995 were 8.50% and 7.44%, 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 $1.6 million and $1.4 million in the first
nine months of 1996 and 1995, respectively, into the decommissioning trust funds
for Seabrook Unit 1 and Millstone Unit 3. At September 30, 1996, the Company's
shares of the trust fund balances, which included accumulated earnings on the
funds, were $8.5 million and $3.6 million for Seabrook Unit 1 and Millstone Unit
3, respectively. These fund balances are included in "Other Property and
Investments" and the accrued decommissioning obligation is included in
"Noncurrent Liabilities" on the 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 currently have any assets that are impaired under this new standard.
However, future developments in the utility industry, including the effects of
deregulation and increasing competition, could change this conclusion.
(B) CAPITALIZATION
(a) Common Stock
The number of shares outstanding of the Company's common stock, no par
value, at September 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 September 30,
1996. Options to purchase 1,200 shares of stock at an exercise price of $30.75
per share were exercised during the first nine 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
requirements of this statement are effective for transactions entered into in
1996. However, pro forma disclosures must include the effects of all awards
granted after January 1, 1995. As of September 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 $108
million were free from such limitations at September 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
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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.
On August 8, 1996, the Company purchased at a discount on the open market,
and canceled, 332 shares of its $100 par value 4.72%, Series B preferred stock.
The shares, having a par value of $33,200, were purchased for $19,488, creating
an after-tax gain of $13,712.
(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.
On October 25, 1996, the Company borrowed $75 million under a Term Loan
Agreement with a group of banks for a five-year period. The Company pays
interest on the borrowing at a floating rate equal to the three-month London
Interbank Borrowing Rate plus 0.55%. The Company has entered into two separate
interest rate swap agreements that effectively convert the interest rate on $50
million of the Company's floating rate 1996 Term Loan to a fixed annual interest
rate of 7.005% for the five- year period and the interest rate on the remaining
$25 million to a fixed annual interest rate of 6.675% for a three-year period..
The Company used proceeds from the $75 million Term Loan borrowing to
purchase $66,847,000 principal amount of Seabrook Lease Obligation Bonds, which
were issued in connection with the sale and leaseback of Seabrook Unit 1 in
1990. The Bonds were purchased at a premium through a tender offer that expired
on October 22, 1996. The Company paid 103.9% of principal amount for $16,997,000
principal amount of 9.76% Seabrook Lease Obligation Bonds (due 2006) and 107.17%
of principal amount for $49,850,000 principal amount of the 10.24% Seabrook
Lease Obligation Bonds (due 2020). The premiums and other transaction expenses
will be amortized over the remaining life of the Bonds. The Company intends to
hold the Bonds until maturity and will report the investment as an offset to
long-term debt on its balance sheet.
(C) RATE-RELATED REGULATORY PROCEEDINGS
A major factor affecting the Company's earnings prospects beyond 1996 will
be the success of the Company's efforts to implement a regulatory framework
similar to the plan filed with the DPUC in March of 1996, which proposed price
stability and incentive regulation. The Company's ability to achieve its goal of
4% annual earnings growth from operations is dependent upon having the ability
to earn an adequate return in its utility business.The
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DPUC, in its "Draft Decision" dated October 7, 1996, approved certain elements
of the Company's proposal but modified other elements, such that the proposed
five-year regulatory plan, which the Company considers is voluntary on its part,
was not acceptable to the Company. On October 23, 1996, the Company filed a
counterproposal with the DPUC that incorporated several of the proposals that
are in the Draft Decision, most notably the provision for rate decreases of 3-5%
over the five-year duration of the plan, and reinstated the Company's commitment
to added Seabrook depreciation. The Company also offered an earnings sharing
mechanism that would benefit shareowners and customers alike if actual results
were better than those forecasted by the Company. The Company also objected to
the DPUC proposed 11.25% five-year level of allowed return on utility equity as
being too low relative to the rest of the industry and relative to recent DPUC
decisions. The Company offered a counterproposal based on an 11.9% return level.
The DPUC issued a second draft decision, denominated "Draft Decision 2," on
November 12, 1996. Draft Decision 2, which did not acknowledge the Company's
counterproposal, stated that:
"after a detailed review of UI's financial and operational records and
its proposal to address expected over earnings, the Department concludes
that for the five-year period from 1997 through 2001, the Company is likely
to earn significantly more than its required return on equity. The
Company's total bills to ratepayers could be reduced an average of 3 to 5%
and additional amortizations of regulatory assets totaling more than $102
million net of tax could be taken. The reduction to customer bills can be
accomplished through implementation of the following adjustments to the
Company's proposed performance based incentive regulation plan: 1) through
a reduction to current CAM charges of roughly $15 to $24 million (2.3 to
3.6%) annually; and 2) through a modification to the FAC that shifts more
risk to the Company and eliminates expected charges to ratepayers. These
adjustments are predicated on an 11.5% ROE found reasonable by the
Department. Given the Company's current and expected financial and
operating prognosis, the Rate Plan found appropriate in this Decision would
enable the Company to operate successfully, maintain its financial
integrity, attract capital and compensate its investors for the use of
their money and the risks assumed even as the electric industry transitions
towards a much more competitive environment."
The Company has not completed its review of Draft Decision 2, but it will
respond to the DPUC prior to November 21, 1996. The current DPUC schedule calls
for the issuance of a final decision on November 27, 1996.
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<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
<CAPTION>
Three Months Ended Nine Months Ended
(E) INCOME TAXES September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income tax expense consists of: (000's) (000's)
Income tax provisions:
Current
Federal $13,887 $11,107 $37,932 $25,984
State 4,504 5,049 12,443 10,244
------------ ------------ ----------- ------------
Total current 18,391 16,156 50,375 36,228
------------ ------------ ----------- ------------
Deferred
Federal (585) 6,924 (6,265) 9,536
State (836) 3,086 (4,304) 1,525
------------ ------------ ----------- ------------
Total deferred (1,421) 10,010 (10,569) 11,061
------------ ------------ ----------- ------------
Investment tax credits (190) (190) (571) (571)
------------ ------------ ----------- ------------
Total income tax expense $16,780 $25,976 $39,235 $46,718
============ ============ =========== ============
Income tax components charged as follows:
Operating expenses $18,449 $26,319 $43,722 $49,802
Other income and deductions - net (1,669) (343) (4,487) (3,084)
------------ ------------ ----------- ------------
Total income tax expense $16,780 $25,976 $39,235 $46,718
============ ============ =========== ============
The following table details the components of the deferred income taxes:
Pension benefits ($5,298) ($335) ($9,302) ($1,125)
Seabrook sale/leaseback transaction 1,575 1,650 (3,669) (3,706)
Accelerated depreciation 1,374 2,274 4,122 6,822
Tax depreciation on unrecoverable plant investment 1,244 1,727 3,732 5,181
Unit overhaul and replacement power costs (641) - (2,651) -
Conservation and load management (464) 227 (954) 543
Deferred fossil fuel costs (263) (45) 402 22
Postretirement benefits 126 (312) (671) (920)
Alternative minimum tax - 3,661 - 3,661
Other - net 926 1,163 (1,578) 583
------------ ------------ ----------- ------------
Deferred income taxes - net ($1,421) $10,010 ($10,569) $11,061
============ ============ =========== ============
</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
September 30, 1996, the Company had no short-term borrowings outstanding under
this facility. The Company expects to replace this revolving credit agreement
with a new but similar credit facility by year-end.
- 12 -
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(G) SUPPLEMENTARY INFORMATION
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(000's) (000's)
<S> <C> <C> <C> <C>
Operating Revenues
Retail $184,450 $188,770 $497,973 $488,424
Wholesale - capacity 1,784 1,560 5,286 4,816
- energy 22,097 9,257 43,355 33,625
Other 836 721 2,203 2,270
-------------- -------------- -------------- --------------
Total Operating Revenues $209,167 $200,308 $548,817 $529,135
============== ============== ============== ==============
Sales by Class(MWH's)
Retail
Residential 490,460 531,914 1,432,544 1,425,453
Commercial 609,643 632,603 1,719,858 1,721,186
Industrial 304,451 300,718 858,926 849,015
Other 11,931 11,860 35,897 36,188
-------------- -------------- -------------- --------------
1,416,485 1,477,095 4,047,225 4,031,842
Wholesale 759,416 402,154 1,608,917 1,399,761
-------------- -------------- -------------- --------------
Total Sales by Class 2,175,901 1,879,249 5,656,142 5,431,603
============== ============== ============== ==============
Other Taxes
Charged to:
Operating:
State gross earnings $7,608 $8,093 $20,507 $20,926
Local real estate and personal property 6,106 6,283 18,637 19,713
Payroll taxes 1,229 1,341 4,379 4,563
Other - - - 2
-------------- -------------- -------------- --------------
14,943 15,717 43,523 45,204
Nonoperating and other accounts 78 124 474 416
-------------- -------------- -------------- --------------
Total Other Taxes $15,021 $15,841 $43,997 $45,620
============== ============== ============== ==============
Other Income and (Deductions) - net
Interest and dividend income $283 $1,415 $924 $2,134
Equity earnings from Connecticut Yankee 331 359 1,080 1,095
Loss from subsidiary companies (579) (1,491) (2,134) (3,503)
Miscellaneous other income and (deductions) - net (124) (1,716) (425) (2,397)
-------------- -------------- -------------- --------------
Total Other Income and (Deductions) - net ($89) ($1,433) ($555) ($2,671)
============== ============== ============== ==============
Other Interest Charges
Notes Payable $167 $1,876 $882 $7,354
Other 316 202 879 910
-------------- -------------- -------------- --------------
Total Other Interest Charges $483 $2,078 $1,761 $8,264
============== ============== ============== ==============
</TABLE>
- 13 -
<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 November 1997. At September 30, 1996, approximately $9.4 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 $299.0 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 September 30, 1996, the Company's guarantee liability for this
debt was approximately $8.2 million.
Voluntary Early Retirement and Separation 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
nine 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 and a
Voluntary Separation Plan to virtually all of its employees. A total of 163
employees accepted one or the other of these plans. In the third quarter of
1996, the Company recognized a charge to earnings of $14.9 million ($8.7
million, after-tax) to reflect the cost of these plans.
- 14 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Site Remediation Costs
The Company has estimated that the cost of environmental remediation of its
decommissioned and demolished Steel Point Station property in Bridgeport will be
approximately $11.3 million, of which approximately $7.4 million had been
incurred as of September 30, 1996, and that the value of the property following
remediation 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, 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, and the case has been scheduled for argument before the Supreme
Court in December 1996. 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 nine months of 1996 was $1.2 million. UI's share of the fund at
September 30, 1996 was approximately $8.5 million.
- 15 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Connecticut has enacted a law requiring the operators of nuclear generating
units to file periodically with the DPUC their plans for financing the
decommissioning of the units in that state. 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 nine months of
1996 was $365,000. UI's share of the fund at September 30, 1996 was
approximately $3.6 million. For the Company's 9.5% equity ownership in
Connecticut Yankee, decommissioning costs of $1.0 million were funded by UI
during the first nine months of 1996, and UI's share of the fund at September
30, 1996 was $18.7 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.
- 16 -
<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.
A major factor affecting the Company's earnings prospects beyond 1996 will
be the success of the Company's efforts to implement a regulatory framework
similar to the plan filed with the DPUC in March of 1996, which proposed price
stability and incentive regulation. The Company's ability to achieve its goal of
4% annual earnings growth from operations is dependent upon having the ability
to earn an adequate return in its utility business.The DPUC, in its "Draft
Decision" dated October 7, 1996, approved certain elements of the Company's
proposal but modified other elements, such that the proposed five-year
regulatory plan, which the Company considers is voluntary on its part, was not
acceptable to the Company. On October 23, 1996, the Company filed a
counterproposal with the DPUC that incorporated several of the proposals that
are in the Draft Decision, most notably the provision for rate decreases of 3-5%
over the five-year duration of the plan, and reinstated the Company's commitment
to added Seabrook depreciation. The Company also offered an earnings sharing
mechanism that would benefit shareowners and customers alike if actual results
were better than those forecasted by the Company. The Company also objected to
the DPUC proposed 11.25% five-year level of allowed return on utility equity as
being too low relative to the rest of the industry and relative to recent DPUC
decisions. The Company offered a counterproposal based on an 11.9% return level.
The DPUC issued a second draft decision, denominated "Draft Decision 2," on
November 12, 1996. Draft Decision 2, which did not acknowledge the Company's
counterproposal, stated that:
"after a detailed review of UI's financial and operational records and
its proposal to address expected over earnings, the Department concludes
that for the five-year period from 1997 through 2001, the Company is likely
to earn significantly more than its required return on equity. The
Company's total bills to ratepayers could be reduced an average of 3 to 5%
and additional amortizations of regulatory assets totaling more than $102
million net of tax could be taken. The reduction to customer bills can be
accomplished through implementation of the following adjustments to the
Company's proposed performance based incentive regulation plan: 1) through
a reduction to current CAM charges of roughly $15 to $24 million (2.3 to
3.6%) annually; and 2) through a modification to the FAC that shifts more
risk to the Company and eliminates expected charges to ratepayers. These
adjustments are predicated on an 11.5% ROE found reasonable by the
Department. Given the Company's current and expected financial and
operating prognosis, the Rate Plan found appropriate in this Decision would
enable the Company to operate successfully, maintain its financial
integrity, attract capital and compensate its investors for the use of
their money and the risks assumed even as the electric industry transitions
towards a much more competitive environment."
The Company has not completed its review of Draft Decision 2, but it will
respond to the DPUC prior to November 21, 1996. The current DPUC schedule calls
for the issuance of a final decision on November 27, 1996.
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
- 17 -
<PAGE>
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.
- 18 -
<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>
(In thousands) 1996 1997 1998 1999 2000 Total
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Production (1) $16,891 $15,171 $14,077 $32,533 $12,656 $91,328
Distribution 18,762 19,956 19,236 18,996 20,112 97,062
Transmission 3,542 3,360 5,436 5,304 5,256 22,898
Conservation and
Load Management 9,819 7,224 6,011 5,685 5,685 34,424
Other 5,145 6,014 4,217 3,976 3,589 22,941
------ ------ ------ ------ ------ -------
Subtotal 54,159 51,725 48,977 66,494 47,298 268,653
Nuclear Fuel 5,365 8,298 2,943 10,500 3,196 30,302
------ ------ ------ ------ ------ -------
Total Expenditures $59,524 $60,023 $51,920 $76,994 $50,494 $298,955
====== ====== ====== ====== ====== =======
AFUDC (Pre-tax) $2,393 $2,815 $2,606 $2,502 $3,305
Book Depreciation 63,688 65,883 69,346 72,756 71,749
Nuclear Decommissioning 2,523 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
Estimated Rate Base
(end of period) $1,198,020 $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>
- 19 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $36.2 million of cash and temporary
cash investments, an increase of $31.1 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 111.3
Net cash provided by (used in) financing activities:
- Financing activities, excluding dividend payments (15.7)
- Dividend payments (30.6)
Cash invested in plant, including nuclear fuel (33.9)
----
Net increase 31.1
----
Balance, September 30, 1996 $36.2
=====
</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 $ 31 $ 1 $ - $ -
Internally Generated Funds less Dividends 100 95 101 99 84
--- --- --- -- --
Subtotal 105 126 102 99 84
Less:
Capital Expenditures 59 60 52 77 50
--- --- --- -- --
Cash Available to pay Debt Maturities and Redemptions 46 66 50 22 34
Less:
Maturities and Mandatory Redemptions 11 65 116 116 156
Optional Preferred Stock Purchases 4 - - - -
--- --- --- --- ---
External Financing Requirements $(31) $ (1) $ 66 $ 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
- 20 -
<PAGE>
dependent on many 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
September 30, 1996, the Company had no short-term borrowings outstanding under
this facility. The Company expects to replace this revolving credit agreement
with a new but similar credit facility by year-end.
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 September 30, 1996, $27 million had been so invested.
RESULTS OF OPERATIONS
Third Quarter of 1996 Vs. Third Quarter of 1995
- -----------------------------------------------
Earnings for the third quarter of 1996 were $17.9 million, or $1.27 per
share, down $8.7 million, or $.62 per share, from the third quarter of 1995.
Earnings from operations, which exclude one-time items, were $26.5 million, or
$1.88 per share, for the third quarter of 1996, down $1.5 million, or $.12 per
share, from the third quarter of 1995. The one-time item recorded in the third
quarter of 1996 was a charge of $8.7 million (after-tax), or $.61 per share,
from early retirement and voluntary severance programs. The one-time items,
recorded in the third quarter of 1995, were: a one-time charge of $1.6 million
(after-tax), or $.12 per share, reflecting the effects of legislated future
state income tax rate reductions, which reduced future tax benefits on plant
previously written off, and a minor gain.
Retail operating revenues decreased by about $4.3 million in the third
quarter of 1996 compared to the third quarter of 1995:
- 21 -
<PAGE>
. A retail kilowatt-hour sales decrease of 4.1% from the prior year
decreased retail revenues by $7.7 million and sales margin (revenue less
fuel expense and revenue-based taxes) by $6.0 million. The Company's
calculation of the impact of weather on kilowatt-hour sales indicates that
sales decreased in the third quarter of 1996, which was cooler than normal,
compared to the third quarter of 1995, which was hotter than normal, by
about 4.9%. This would indicate that there was a "real" (i.e. not
attributable to abnormal weather) kilowatt-hour sales increase of about
0.7% in the third quarter of 1996 compared to the third quarter of 1995.
. Other factors increased retail revenues by $3.4 million: $2.0 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 $1.4
million increase from "pass through" charges for certain expense changes,
including increases in fuel costs.
Wholesale "capacity" revenues increased slightly in the third quarter of
1996 compared to the third 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, increased during
the third quarter of 1996 compared to the third quarter of 1995.
Retail fuel and energy expenses decreased by a net $0.5 million in the
third quarter of 1996 compared to the third quarter of 1995. Expenses increased
$2.1 million due to lower nuclear unit generation. Lower generation from the
Connecticut Yankee and Millstone Unit 3 nuclear generating units was partly
offset by higher generation from the Seabrook nuclear generating unit. For more
on the status of the operation of the Connecticut Yankee and Millstone Unit 3
units, see the Outlook section. Expenses decreased by $2.2 million from the
lower cost of nuclear fuel at the Seabrook unit. Decreases in expenses due to
lower sales volume were partially offset by higher fossil fuel prices, the
latter being "pass through" charges to revenue.
Operating expenses for operations, maintenance and purchased capacity
charges increased by $1.7 million in the third quarter of 1996 compared to the
third quarter of 1995:
. Purchased capacity expense increased slightly.
. Operation and maintenance expense increased by $1.4 million. A provision
for maintenance expenses associated with generating plant overhauls and
refueling outages added $1.1 million, other nuclear unit maintenance costs
increased $0.7 million, other fossil plant costs increased $0.4 million,
and general expenses increased $0.7 million. Employment costs decreased by
$1.5 million, due to savings from the Bargaining Unit Voluntary Early
Retirement Program implemented in January of 1996 and also to decreases in
other employment related costs.
Other operating expenses decreased slightly in the third quarter of 1996
compared to the third quarter of 1995, from lower taxes, partly offset by higher
depreciation expense.
Other net income increased by about $1.3 million in the third quarter of
1996 compared to the third quarter of 1995 primarily because of the absence of
expenses, associated with cancelled construction projects, which were recorded
in 1995.
Interest charges continued their significant decline, decreasing by $1.9
million in the third quarter of 1996 compared to the third 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 third quarter of 1996
compared to the third quarter of 1995 as a result of purchases of preferred
stock by the Company.
- 22 -
<PAGE>
Nine Months of 1996 Vs. Nine Months of 1995
- -------------------------------------------
Earnings for the first nine months of 1996 were $40.1 million, or $2.84 per
share, down $4.7 million, or $.34 per share, from the first nine months of 1995.
Earnings from operations, which exclude one-time items, were $52.4 million, or
$3.72 per share for the first nine months of 1996, up $8.2 million, or $.57 per
share, from the first nine months of 1995. The one-time items recorded in the
first nine months of 1996 were: a gain of $1.8 million (after-tax), or $.13 per
share, from the purchase of preferred stock by the Company at a discount to par
value, charges of $23.0 million ($13.4 million after-tax), or $.95 per share,
reflecting the estimated costs of early retirements and voluntary separations as
part of 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 items recorded in
the first nine months of 1995 were: a charge of $.12 per share, taken in the
third quarter of 1995 and reflecting the effects of legislated future state
income tax rate reductions, which reduced future tax benefits on plant
previously written off, and gains of $.15 per share from the purchase of
preferred stock by the Company at a discount to par value.
Retail operating revenues increased by about $9.5 million in the first
nine months of 1996 compared to the first nine months of 1995:
. A retail kilowatt-hour sales increase of 0.4% from the prior year
increased retail revenues by $0.8 million and sales margin (revenue less
fuel expense and revenue-based taxes) by $0.4 million. The Company's
calculation of the impact of weather on kilowatt-hour sales indicates that
sales decreased by about 1.2% in the first nine months of 1996 compared to
the first nine months of 1995. Weather was deemed to be severe compared to
normal over the first nine months of 1995 and mild compared to normal over
the first nine months of 1996. Retail kilowatt-hour sales also increased by
0.4% due to the leap year day in 1996. This indicates that there was a
"real" (i.e. not attributable to abnormal weather or leap year)
kilowatt-hour sales increase of about 1.1% in the first nine months of 1996
compared to the first nine months of 1995.
. Other factors increased retail revenues by $8.7 million: $5.1 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 $3.6
million increase from "pass through" charges for certain expense changes,
including increases in fuel costs.
Wholesale "capacity" revenues increased slightly in the first nine months
of 1996 compared to the first nine 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, increased
during the first nine months of 1996 compared to the first nine months of 1995.
Retail fuel and energy expenses decreased by $3.4 million in the first nine
months of 1996 compared to the first nine months of 1995. A decrease of $7.3
million was due to lower nuclear fuel prices, primarily at the Seabrook nuclear
generating unit. Lower nuclear unit generation, due to the shutdowns at the
Connecticut Yankee and Millstone 3 nuclear generating units, increased fuel and
energy expense by $1.4 million. For more on the status of the operation of these
units, see the Outlook section. Other fuel and energy expenses increased from
the higher kilowatt-hour generation to meet sales volume and increases in "pass
through" charges, including fossil fuel costs.
Operating expenses for operations, maintenance and purchased capacity
charges increased by $6.0 million in the first nine months of 1996 compared to
the first nine months of 1995:
. Purchased capacity expense was $2.2 million lower, reflecting the absence
of the added refueling outage costs incurred by the Connecticut Yankee
nuclear generating unit during the first and second quarters of 1995.
- 23 -
<PAGE>
. Operation and maintenance expense increased by $8.2 million. A provision
for maintenance expenses associated with generating plant overhauls and
refueling outages added $4.4 million, and the expensing of previously
capitalized costs associated with software purchases and development added
$1.3 million. Employment costs increased by $0.7 million due to increases
in employee compensation, not additional employees. Other costs increased
by $1.8 million.
Other operating expenses increased in the first nine months of 1996
compared to the first nine months of 1995, from higher depreciation expense and
income taxes (excluding the income tax effects of one-time items).
Interest charges continued their significant decline, decreasing by $5.6
million in the first nine months of 1996 compared to the first nine 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
nine months of 1996 compared to the first nine months of 1995 as a result of the
purchases of preferred stock by the Company.
OUTLOOK
(All statements in this Outlook section are "forward looking" statements within
the meaning of the Securities Exchange Act of 1934.)
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 of about
$3.70 per share in 1996 (subject to a number of factors described below).
However, the Company has taken substantial charges in 1996 to help it reduce
future costs, prepare for expected future competition, and minimize the need for
any future layoffs. One-time charges, for early retirement and voluntary
severances (the Plans), taken in the first nine months of 1996 amounted to $.95
per share. These were offset by some relatively minor gains, and total one-time
items had a net negative impact of $.88 per share. It is possible, therefore,
that total earnings for the year 1996 could fall below $3.00 per share. The most
recent Plans, implemented in the third quarter of 1996, are likely to produce
annual cost savings of about $8 million, which may not be fully realized until
1998. A total of 163 employees (of a total workforce of 1,233 at the end of
September 1996) participated in the Plans implemented in the third quarter of
1996.
The 1996 quarterly earnings from operations has followed 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. Under normal conditions,
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, as they did in both the third quarters of 1995 and 1996.
The Company had 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 Department of Public Utility Control (DPUC)
partially offset by competitive pricing and other price reduction mechanisms.
These factors have increased retail revenues by $5.1 million in the first nine
months of 1996 compared to the first nine months of 1995. Increases in the
fourth quarter of 1996 compared to the fourth quarter of 1995 likely will be
minimal.
The Company has dealt with the possible loss of customers as a result of
cogeneration, relocation or discontinuation of operations by successfully
negotiating twenty-eight multi-year contracts with major customers, including
its largest customer, Yale University, which is constructing a cogeneration unit
that will produce approximately one-half of its 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 is considering alternative means of providing for its power
supply requirements at a lower cost. In this connection, the Company has
recently solicited proposals from qualified entities that may afford UI lower
- 24 -
<PAGE>
and more certain costs and risk mitigation with respect to its power supply by
having the qualified entity accept an assignment of the electrical output from
UI's existing generating resources for a five-year period beginning in May of
1997 in exchange for the entity's commitment to supply all of UI's retail
electric load requirements at a fixed wholesale price during that period. The
Company is unable to predict whether it will receive any proposals in response
to this solicitation or whether any proposals that it does receive will result
in an arrangement of the sort described or any similar arrangement.
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 severe compared to "normal",
providing additional sales margin (revenue less fuel expense and revenue-based
taxes) of about $5.1 million, of which $3.8 million was attributable to the
first nine months of 1995. Weather for the last three months of 1995 was also
severe compared to normal which produced additional sales margin of about $1.3
million that would not be expected to recur in 1996. The Company expects "real"
retail kilowatt-hour sales growth in a range of 0.5% to 1.5% for the last three
months of 1996 compared to the last three months of 1995. A 1% "real"
kilowatt-hour sales growth in this period would produce additional sales margin
of about $1.2 million over last year.
The Company had expected that higher generating output from the nuclear
units (no refueling outages planned for the Seabrook Unit or Millstone Unit 3 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 actually
realized. However, there were virtually no associated sales margin savings in
the third quarter of 1996 compared to the third quarter of 1995 because of the
shutdowns of the Connecticut Yankee and Millstone Unit 3 nuclear generating
units in 1996. (See Part II. Other Information, Item 5. Other Events.) On
average, over a normal operating cycle, which would include a refueling outage
and other unscheduled outages, the impact on sales margin of the shutdown of
these units would amount to about $0.5 million per month for each unit.
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
operations. The Connecticut Yankee Unit was taken out of service on July 23,
1996. As a result of an evaluation being completed by the owners of the unit, it
is possible that a permanent shutdown of the plant could occur. If this is the
case, then UI should experience cost reductions in the future. However, the
impact in the long run would depend on prices for replacement power, load growth
in the Company's service territory, the cost and timing associated with the
decommissioning of the plant, and revenue recovery allowed by the Federal Energy
Regulatory Commission and the DPUC. For the fourth quarter of 1996 compared to
the fourth quarter of 1995, replacement power costs will likely increase; by
about $1.5 million for the Millstone Unit 3, and by about $2 million for the
Connecticut Yankee Unit, as both units ran at almost full capacity in the 1995
period. This would have a negative earnings impact of $.06 and $.08 per share,
respectively, but could be partially offset by reductions in replacement power
costs and nuclear fuel prices of as much as $2.5 million, or $.10 per share, if
the Seabrook Unit runs at normal generating levels. The Seabrook Unit was
shutdown for an eight week refueling outage in the fourth quarter of 1995.
Overall, for the year 1996 compared to 1995, the impact of generating output
from the nuclear units and lower nuclear fuel prices should improve sales margin
within the range originally expected. It is not possible, at this time, for UI
to estimate the impact that the Millstone Unit 3 and the Connecticut Yankee Unit
shutdowns may have on fourth quarter operating and maintenance expenses.
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 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 not accounted for in the first quarter.
Savings from this VERP began accruing in the
- 25 -
<PAGE>
second quarter of 1996 and should amount to at least $1 million for the year.
The Company's most recent early retirement and severance plans, implemented in
the third quarter of 1996, are not expected to reduce expenses significantly in
the fourth quarter of 1996. It is anticipated that, overall, and barring
unforeseen events, operations and maintenance expenses for the fourth quarter of
1996 compared to the fourth quarter of 1995 will be approximately $2 million
higher.
Depreciation expense should increase by $5-$6 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 (C&LM) program costs. This estimate is somewhat higher than previous
estimates because the book depreciation lives of 1996 C&LM programs has been
reduced, by the Connecticut Department of Public Utility Control (DPUC), from
five to three years. An adjustment to account for the year-to-date impact was
made in the third quarter of 1996.
The Company expects continued reductions in interest expense of about $7
million from the 1995 level of $77 million to about $70 million. This 1996
interest expense level would be 38% below the 1989 level and would mark the
seventh consecutive year of interest expense decline. The Company recently
completed a tender offer for a portion of the Seabrook Lease Obligation Bonds
that will provide a going-forward savings of about $1.5 million per year, in
addition to savings expected from continued reduction of debt due to the
Company's strong cash flow.
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.
A major factor affecting the Company's earnings prospects beyond 1996 will
be the success of the Company's efforts to implement a regulatory framework
similar to the plan filed with the DPUC in March of 1996, which proposed price
stability and incentive regulation. The Company's ability to achieve its goal of
4% annual earnings growth from operations is dependent upon having the ability
to earn an adequate return in its utility business.The DPUC, in its "Draft
Decision" dated October 7, 1996, approved certain elements of the Company's
proposal but modified other elements, such that the proposed five-year
regulatory plan, which the Company considers is voluntary on its part, was not
acceptable to the Company. On October 23, 1996, the Company filed a
counterproposal with the DPUC that incorporated several of the proposals that
are in the Draft Decision, most notably the provision for rate decreases of 3-5%
over the five-year duration of the plan, and reinstated the Company's commitment
to added Seabrook depreciation. The Company also offered an earnings sharing
mechanism that would benefit shareowners and customers alike if actual results
were better than those forecasted by the Company. The Company also objected to
the DPUC proposed 11.25% five-year level of allowed return on utility equity as
being too low relative to the rest of the industry and relative to recent DPUC
decisions. The Company offered a counterproposal based on an 11.9% return level.
The DPUC issued a second draft decision, denominated "Draft Decision 2," on
November 12, 1996. Draft Decision 2, which did not acknowledge the Company's
counterproposal, stated that:
"after a detailed review of UI's financial and operational records and
its proposal to address expected over earnings, the Department concludes
that for the five-year period from 1997 through 2001, the Company is likely
to earn significantly more than its required return on equity. The
Company's total bills to ratepayers could be reduced an average of 3 to 5%
and additional amortizations of regulatory assets totaling more than $102
million net of tax could be taken. The reduction to customer bills can be
accomplished through implementation of the following adjustments to the
Company's proposed performance based incentive regulation plan: 1) through
a reduction to current CAM charges of roughly $15 to $24 million (2.3 to
3.6%) annually; and 2) through a modification to the FAC that shifts more
risk to the Company and eliminates expected charges to ratepayers. These
adjustments are predicated on an 11.5% ROE found reasonable by the
Department. Given the Company's current and expected financial and
operating prognosis, the Rate Plan found appropriate in this Decision
- 26 -
<PAGE>
would enable the Company to operate successfully, maintain its financial
integrity, attract capital and compensate its investors for the use of
their money and the risks assumed even as the electric industry transitions
towards a much more competitive environment."
The Company has not completed its review of Draft Decision 2, but it will
respond to the DPUC prior to November 21, 1996. The current DPUC schedule calls
for the issuance of a final decision on November 27, 1996.
- 27 -
<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.
On August 15, 1996, Northeast Utilities announced the appointment of Bruce
Kenyon as President and Chief Executive Officer of Northeast Utilities' Nuclear
Operations, effective September 3, 1996. Mr. Kenyon, who had been President and
Chief Operating Officer of South Carolina Electric & Gas Company, announced on
September 18, 1996 that three executives loaned from unaffiliated utility
companies would lead the recovery of the three Millstone Station units. Each of
the three executives, including Mr. John Paul Cowan who has assumed
- 28 -
<PAGE>
responsibility for Millstone Unit 3, has been loaned to Northeast Utilities for
a six-month period, which can be extended by mutual agreement. This management
reorganization will likely impact the corrective action program for Millstone
Unit 3 outlined in Northeast Utilities' July 2, 1996 response to the NRC, since
Mr. Kenyon made it the first priority of the loaned recovery officers to
reassess the activities then underway and related scheduling issues.
On October 24, 1996, the NRC announced that an independent NRC review had
concluded that the work environment and management failures were the source of a
high volume of employee concerns and allegations related to safety of plant
operations and harassment and intimidation of employees at Millstone Station.
Concurrently, the NRC issued an order directing Northeast Utilities to devise
and implement a compliance plan for handling safety concerns raised by Millstone
Station employees, and for assuring an environment free from retaliation and
discrimination, and ordering Northeast Utilities to contract for an independent
third party to oversee its corrective action program for the employee concerns
program. Admiral David Goebel, who has been selected by Mr. Kenyon to serve as
Vice President for Nuclear Oversight, will have responsibility for NU's response
to this NRC order.
Although UI's management anticipates that all of the above-described
problems with respect to Millstone Unit 3 will be resolved, and although UI
cannot, at this time, predict how long it will take to resolve them, or when the
NRC will allow the unit to return to service, a protracted delay seems likely.
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. CY has not been refueled and it remains out of service. An economic
study by the owners comparing the costs of continuing to operate CY over the
remaining period of its operating license, which expires in 2007, to the costs
of shutting down the unit permanently and incurring replacement power costs for
the same period has been completed and additional evaluations regarding the
effects of shutting down the unit are ongoing. It is possible that the economic
study and additional evaluations
- 29 -
<PAGE>
will result in a decision to retire the unit; a final decision is expected to be
made by Connecticut Yankee Atomic Power Company's Board of Directors during the
fourth quarter of 1996.
UI's equity investment in Connecticut Yankee Atomic Power Company is
approximately $10 million, and the purchased capacity from CY represents 3.7% of
the Company's 1995 total generating resources. The preliminary estimate of the
sum of future payments for the closing, decommissioning and recovery of the
remaining investment in CY, assuming permanent shutdown, is approximately $800
million, of which UI's 9.5% ownership share would be approximately $76 million.
The power purchase contract under which UI purchases its 9.5% entitlement to
CY's power output will permit Connecticut Yankee Atomic Power Company to recover
UI's share of these costs from UI. If the Connecticut Yankee Atomic Power
Company's Board of Directors decision results in a permanent shutdown of CY,
Connecticut Yankee Atomic Power Company will likely file revised decommissioning
cost estimates and amendments to the power contracts with its owners, including
UI, with the Federal Energy Regulatory Commission (FERC). Based on regulatory
precedent, Connecticut Yankee Atomic Power Company believes it will continue to
collect from its power purchasers its decommissioning costs, the owners'
unrecovered investments in Connecticut Yankee Atomic Power Company and other
costs associated with the permanent shutdown of CY. UI expects that it will
continue to be allowed to recover all FERC-approved costs from its customers
through retail rates.
As a result of CY's being 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, if the owners decide not to retire
CY, incremental direct costs will be incurred to correct the plant's
safety-related problems, and the Company will be responsible for 9.5% of these
costs.
- 30 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
(a) Exhibits.
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description
---------- ------- -----------
<C> <C> <C>
(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
September 30, 1996 and Twelve Months Ended December 31, 1995,
1994, 1993, 1992 and 1991).
(27) 27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None
- 31 -
<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 11/l4/96 Signature /s/ Robert L. Fiscus
--------------- ----------------------------------
Robert L. Fiscus
President and
Chief Financial Officer
- 32 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description Page No.
---------- ------- ----------- --------
<C> <C> <C>
(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 September 30, 1996 and Twelve
Months Ended December 31, 1995, 1994, 1993,
1992 and 1991).
(27) 27 Financial Data Schedule
</TABLE>
<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, Sept. 30,
------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income $55,550 $56,768 $40,481 $46,795 $50,393 $45,122
Federal income taxes 20,844 19,276 22,342 34,551 41,951 38,098
Stae income taxes 12,647 16,878 4,645 6,216 12,976 9,346
Fixed charges 107,548 109,449 97,928 88,093 83,994 80,003
----------- ----------- ----------- ----------- ------------ ------------
Earnings available for fixed charges $196,589 $202,371 $165,396 $175,655 $189,314 $172,569
=========== =========== =========== =========== ============ ============
FIXED CHARGES
Interest on long-term debt $90,296 $88,666 $80,030 $73,772 $63,431 $65,823
Other interest 9,847 12,882 12,260 10,301 16,723 9,987
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 4,193
----------- ----------- ----------- ----------- ------------ ------------
$107,548 $109,449 $97,928 $88,093 $83,994 $80,003
=========== =========== =========== =========== ============ ============
RATIO OF EARNINGS TO FIXED
CHARGES 1.83 1.85 1.69 1.99 2.25 2.16
=========== =========== =========== =========== ============ ============
</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, Sept. 30,
-----------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income $55,550 $56,768 $40,481 $46,795 $50,393 $45,122
Federal income taxes 20,844 19,276 22,342 34,551 41,951 38,098
State income taxes 12,647 16,878 4,645 6,216 12,976 9,346
Fixed charges 107,548 109,449 97,928 88,093 83,994 80,003
----------- ----------- ----------- ----------- ----------- ------------
Earnings available for combined fixed
charges and preferred stock
dividend requirements $196,589 $202,371 $165,396 $175,655 $189,314 $172,569
=========== =========== =========== =========== =========== ============
FIXED CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS
Interest on long-term debt $ 90,296 $ 88,666 $ 80,030 $ 73,772 $ 63,431 $ 65,823
Other interest 9,847 12,882 12,260 10,301 16,723 9,987
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 4,193
Preferred stock dividend requirements(1) 7,260 7,100 7,197 6,223 2,778 841
----------- ----------- ----------- ----------- ----------- ------------
$114,808 $116,549 $105,125 $94,316 $86,772 $80,844
=========== =========== =========== =========== =========== ============
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS 1.71 1.74 1.57 1.86 2.18 2.13
=========== =========== =========== =========== =========== ============
</TABLE>
(1) Preferred Stock Dividends increased to reflect the pre-tax earnings to
cover such dividend requirements.
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,327,045
<OTHER-PROPERTY-AND-INVEST> 34,368
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<OTHER-ASSETS> 0
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0
4,461
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0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 643,877
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<OTHER-INCOME-NET> 4,479
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<NET-INCOME> 38,508
279
<EARNINGS-AVAILABLE-FOR-COMM> 40,069
<COMMON-STOCK-DIVIDENDS> 30,458
<TOTAL-INTEREST-ON-BONDS> 64,997
<CASH-FLOW-OPERATIONS> 111,299
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.84
</TABLE>
