SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -----------
Commission file number 1-6788
THE UNITED ILLUMINATING COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0571640
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
157 Church Street, New Haven, Connecticut 06506
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-499-2000
None
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's only class of common
stock, as of June 30, 1997, was 14,101,291.
- 1 -
<PAGE>
INDEX
Part I. FINANCIAL INFORMATION
PAGE
NUMBER
------
Item 1. Financial Statements. 3
Consolidated Statement of Income for the three and six months
ended June 30, 1997 and 1996. 3
Consolidated Balance Sheet as of June 30, 1997 and
December 31, 1996. 4
Consolidated Statement of Cash Flows for the three and six
months ended June 30, 1997 and 1996. 6
Notes to Consolidated Financial Statements. 7
- Statement of Accounting Policies 7
- Capitalization 8
- Income Taxes 10
- Short-term Credit Arrangements 11
- Supplementary Information 12
- Fuel Financing Obligations and Other Lease Obligations 13
- Commitments and Contingencies 13
- Capital Expenditure Program 13
- Nuclear Insurance Contingencies 13
- Other Commitments and Contingencies 14
- Connecticut Yankee 14
- Hydro-Quebec 14
- Voluntary Early Retirement and Separation Programs 14
- Property Taxes 14
- Site Decontamination, Demolition and Remediation Costs 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
- Subsidiary Operations 21
- Results of Operations 21
- Looking Forward 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 30
Item 6. Exhibits and Reports on Form 8-K. 31
SIGNATURES 32
- 2 -
<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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES (NOTE G) $163,774 $168,790 $344,099 $339,650
------------- ------------- ------------ ------------
OPERATING EXPENSES
Operation
Fuel and energy 39,020 33,759 93,941 65,395
Capacity purchased 10,922 11,309 21,839 21,948
Early retirement program charges - 860 - 8,087
Other 39,619 40,593 76,909 76,981
Maintenance 10,659 10,043 19,894 18,942
Depreciation 23,614 16,360 40,706 32,652
Amortization of cancelled nuclear project and deferred return 3,439 3,439 6,879 6,879
Income taxes (Note E) 712 12,661 12,027 25,273
Other taxes (Note G) 13,097 13,895 27,062 28,580
------------- ------------- ------------ ------------
Total 141,082 142,919 299,257 284,737
------------- ------------- ------------ ------------
OPERATING INCOME 22,692 25,871 44,842 54,913
------------- ------------- ------------ ------------
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds used during construction 138 200 342 382
Other-net (Note G) 725 (259) 1,506 (466)
Non-operating income taxes 1,522 1,549 2,939 2,818
------------- ------------- ------------ ------------
Total 2,385 1,490 4,787 2,734
------------- ------------- ------------ ------------
INCOME BEFORE INTEREST CHARGES 25,077 27,361 49,629 57,647
------------- ------------- ------------ ------------
INTEREST CHARGES
Interest on long-term debt 15,876 16,303 32,248 32,793
Interest on Seabrook obligation bonds owned by the company (1,691) - (3,382) -
Other interest (Note G) 852 693 1,618 1,278
Allowance for borrowed funds used during construction (353) (352) (839) (744)
------------- ------------- ------------ ------------
14,684 16,644 29,645 33,327
Amortization of debt expense and redemption premiums 648 631 1,326 1,310
------------- ------------- ------------ ------------
Net Interest Charges 15,332 17,275 30,971 34,637
------------- ------------- ------------ ------------
MINORITY INTEREST IN PREFERRED SECURITIES 1,203 1,203 2,406 2,406
------------- ------------- ------------ ------------
NET INCOME 8,542 8,883 16,252 20,604
Discount on preferred stock redemptions - (1,826) (19) (1,826)
Dividends on preferred stock 52 96 103 227
------------- ------------- ------------ ------------
INCOME APPLICABLE TO COMMON STOCK $8,490 $10,613 $16,168 $22,203
============= ============= ============ ============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,101 14,101 14,101 14,100
EARNINGS PER SHARE OF COMMON STOCK $0.61 $0.75 $1.15 $1.57
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $0.72 $0.72 $1.44 $1.44
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 3 -
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEET
ASSETS
(Thousands of Dollars)
<CAPTION>
June 30, December 31,
1997 1996*
------- -----------
(Unaudited)
<S> <C> <C>
Utility Plant at Original Cost
In service $1,852,251 $1,843,952
Less, accumulated provision for depreciation 621,602 585,646
--------------- ---------------
1,230,649 1,258,306
Construction work in progress 42,575 40,998
Nuclear fuel 28,249 23,010
--------------- ---------------
Net Utility Plant 1,301,473 1,322,314
--------------- ---------------
Other Property and Investments 30,520 26,081
--------------- ---------------
Current Assets
Cash and temporary cash investments 17,251 6,394
Accounts receivable
Customers, less allowance for doubtful
accounts of $1,800 and $2,300 56,491 63,722
Other 22,427 38,367
Accrued utility revenues 28,591 29,139
Fuel, materials and supplies, at average cost 21,051 22,010
Prepayments 4,199 3,608
Other 202 110
--------------- ---------------
Total 150,212 163,350
--------------- ---------------
Deferred Charges
Unamortized debt issuance expenses 6,103 6,580
Other 2,506 1,485
--------------- ---------------
Total 8,609 8,065
--------------- ---------------
Regulatory Assets (future amounts due from customers
through the ratemaking process)
Income taxes due principally to book-tax differences 282,994 289,672
Connecticut Yankee 57,894 64,851
Deferred return - Seabrook Unit 1 31,464 37,757
Unamortized redemption costs 25,248 25,063
Unamortized cancelled nuclear projects 12,711 13,297
Uranium enrichment decommissioning cost 1,313 1,377
Other 6,894 9,068
--------------- ---------------
Total 418,518 441,085
--------------- ---------------
$1,909,332 $1,960,895
=============== ===============
</TABLE>
*Derived from audited financial statements
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 4 -
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(THOUSANDS OF DOLLARS)
<CAPTION>
June 30, December 31,
1997 1996*
---- ----
(Unaudited)
<S> <C> <C>
Capitalization (Note B)
Common stock equity
Common stock $284,579 $284,579
Paid-in capital 772 772
Capital stock expense (2,182) (2,182)
Retained earnings 152,709 156,847
--------------- ---------------
435,878 440,016
Preferred stock 4,421 4,461
Minority interest in preferred securities 50,000 50,000
Long-term debt
Long-term debt 721,937 826,527
Investment in Seabrook obligation bonds (66,847) (66,847)
--------------- ---------------
Net Long-term debt 655,090 759,680
Total 1,145,389 1,254,157
--------------- ---------------
Noncurrent Liabilities
Pensions accrued 50,246 49,205
Connecticut Yankee contract obligation 47,106 54,752
Obligations under capital leases 17,027 17,193
Nuclear decommissioning obligation 14,521 12,851
Other 5,171 4,815
--------------- ---------------
Total 134,071 138,816
--------------- ---------------
Current Liabilities
Current portion of long-term debt 142,135 69,900
Notes payable 35,641 10,965
Accounts payable 43,403 68,058
Dividends payable 10,204 10,205
Taxes accrued 2,404 503
Interest accrued 22,972 13,835
Obligations under capital leases 327 315
Other accrued liabilities 32,556 36,091
--------------- ---------------
Total 289,642 209,872
--------------- ---------------
Customers' Advances for Construction 1,863 1,888
--------------- ---------------
Regulatory Liabilities (future amounts owed to customers
through the ratemaking process)
Accumulated deferred investment tax credits 16,766 17,147
Other 2,040 1,811
--------------- ---------------
Total 18,806 18,958
--------------- ---------------
Deferred Income Taxes (future tax liabilities owed 319,561 337,204
to taxing authorities)
Commitments and Contingencies (Note L)
--------------- ---------------
$1,909,332 $1,960,895
=============== ===============
* 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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $8,542 $8,883 $16,252 $20,604
------------ ---------- ------------ ------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 24,701 17,469 43,055 34,819
Deferred income taxes (7,737) (5,421) (10,965) (9,148)
Deferred investment tax credits - net (191) (191) (381) (381)
Amortization of nuclear fuel 1,309 1,586 2,877 2,486
Allowance for funds used during construction (491) (552) (1,181) (1,126)
Amortization of deferred return 3,146 3,146 6,293 6,293
Early retirement costs accrued - 860 - 8,087
Changes in:
Accounts receivable - net 10,494 (6,346) 23,171 (4,042)
Fuel, materials and supplies 1,034 (1,737) 959 (1,304)
Prepayments (2,623) 3,231 591 (1,285)
Accounts payable (5,512) 8,288 (24,655) (9,113)
Interest accrued 6,743 8,240 9,137 9,962
Taxes accrued (8,628) (7,192) 1,901 5,231
Other assets and liabilities (4,258) 2,104 (3,516) (5,875)
------------ ---------- ------------ ------------
Total Adjustments 17,987 23,485 47,286 34,604
------------ ---------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,529 32,368 63,538 55,208
------------ ---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock - 40 - 40
Long-term debt - 7,500 - 7,500
Notes payable (18,948) 15,000 24,676 35,000
Securities redeemed and retired:
Preferred stock - (6,045) (40) (6,045)
Long-term debt - - (32,585) (10,800)
Discount on preferred stock redemption - 1,826 19 1,826
Lease obligations (78) (72) (154) (142)
Dividends
Preferred stock (52) (175) (104) (306)
Common stock (10,153) (10,152) (20,306) (20,093)
------------ ---------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (29,231) 7,922 (28,494) 6,980
------------ ---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Plant expenditures, including nuclear fuel (9,735) (10,380) (24,187) (21,534)
------------ ---------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (9,735) (10,380) (24,187) (21,534)
------------ ---------- ------------ ------------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD (12,437) 29,910 10,857 40,654
BALANCE AT BEGINNING OF PERIOD 29,688 15,814 6,394 5,070
------------ ---------- ------------ ------------
BALANCE AT END OF PERIOD $17,251 $45,724 $17,251 $45,724
============ ========== ============ ============
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $9,754 $8,582 $20,759 $23,583
============ ========== ============ ============
Income taxes $14,073 $22,450 $17,773 $26,625
============ ========== ============ ============
</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, 1996. Such notes are supplemented as
follows:
(A) STATEMENT OF ACCOUNTING POLICIES
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
The weighted average AFUDC rates applied in the first six months of 1997
and 1996 were 8.0% and 8.5%, 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 $1,285,000 and $1,065,000 in the first six
months of 1997 and 1996, respectively, into the decommissioning trust funds for
Seabrook Unit 1 and Millstone Unit 3. At June 30, 1997, the Company's shares of
the trust fund balances, which included accumulated earnings on the funds, were
$10.3 million and $4.3 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.
INTEREST RATE AND FUEL PRICE MANAGEMENT
The Company utilizes interest rate and fuel oil price management
instruments to manage interest rate and fuel oil price risk. Interest rate swap
agreements have been entered into that effectively convert the interest rates on
$225 million of variable rate term loan borrowings to fixed rate borrowings.
Amounts receivable or payable under these swap agreements are accrued and
charged to interest expense. The Company enters into basic fuel oil price
management instruments to help minimize fuel oil price risk by fixing the future
price for fuel oil used for generation. Amounts receivable or payable under
these instruments are recognized in income when realized.
At June 30, 1997, the Company had entered into swap agreements for 890,000
barrels of fuel oil, for the period July 1 through December 31, 1997, at a
weighted average price of $15.71 per barrel. The Company also has call options
for 299,997 barrels of fuel oil at $19.25 per barrel for the remainder of 1997
and call options for 240,000 barrels of fuel oil at a weighted average price of
$18.29 per barrel for the first quarter of 1998.
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". This statement, which is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, establishes simplified standards for computing and presenting earnings
per share (EPS). It requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and
disclosure of the calculation of each EPS amount. The Company does not
anticipate that adoption of the standard will have a significant impact on
reported EPS.
(B) CAPITALIZATION
(A) COMMON STOCK
The number of shares outstanding of the Company's common stock, no par
value, at June 30, 1997 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. The Connecticut Department of Public Utility
Control (DPUC) has 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, 188,200 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 remained outstanding at June 30, 1997.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement, which became
effective beginning in calendar year 1996, established 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. The statement allows entities to continue to measure compensation
expense in accordance with the prior authoritative literature, APB No. 25,
"Accounting for Stock Issued to Employees", but requires that pro forma net
income and earnings per share be disclosed for each year for which an income
statement is presented as if SFAS No. 123 had been applied. The accounting
requirements of this statement are effective for transactions entered into
beginning January 1, 1996. However, pro forma disclosures must include the
effects of all awards granted after January 1, 1995. As of June 30, 1997, the
Company had no compensation plan to which this statement would apply. The
Company has not elected to adopt the expense recognition provisions of SFAS No.
123.
The Company has entered into an arrangement under which it will loan up to
$15 million to The United Illuminating Company Employee Stock Ownership Plan
("ESOP"). The trustee for the ESOP will use the funds to purchase shares of the
Company's common stock in open market transactions. The shares will be allocated
to employees' ESOP accounts, as the loan is repaid, to cover a portion of the
Company's required ESOP contributions. The loan will be repaid by the ESOP over
a twelve-year period, using the Company contributions and dividends paid on the
unallocated shares of the stock held by the ESOP. As of July 31, 1997, 197,400
shares had been purchased by the ESOP.
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<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(B) RETAINED EARNINGS RESTRICTION
The indenture under which $200 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 $94.5
million were free from such limitations at June 30, 1997.
(C) PREFERRED STOCK
On February 3, 1997, the Company purchased at a discount on the open
market, and canceled, 403 shares of its $100 par value 4.35%, Series A preferred
stock. The shares, having a par value of $40,300, were purchased for $21,271,
creating a net gain of $19,029.
(D) LONG-TERM DEBT
On December 30, 1996, the Company transferred $51.3 million to a trustee
under an escrow agreement. The funds, which were invested in Treasury Notes,
were used to pay $50 million principal amount of 7% Notes that matured on
January 15, 1997 plus accrued interest.
On February 15, 1997, the Company repaid $10.8 million principal amount of
maturing 9.44% First Mortgage Bonds, Series B, and redeemed, at a premium of
$185,328, the remaining $21.6 million outstanding principal amount of 9.44%
First Mortgage Bonds, Series B, issued by Bridgeport Electric Company, a
wholly-owned subsidiary of the Company that was merged with and into the Company
in September 1994.
On July 30, 1997, the Company borrowed $98.5 million from the Business
Finance Authority of the State of New Hampshire (BFA), representing the proceeds
from the issuance by the BFA of $98.5 million principal amount of tax-exempt
Pollution Control Refunding Revenue Bonds (PCRRBs). The Company is obligated,
under its borrowing agreement with the BFA, to pay to a trustee for the PCRRBs'
bondholders such amounts as will pay, when due, the principal of and the
premium, if any, and interest on the PCRRBs. The PCRRBs will mature in 2027, and
their interest rate can be adjusted periodically to reflect prevailing market
conditions. The PCRRBs were issued at an initial interest rate of 3.75%, which
is being adjusted weekly. The Company will use the proceeds of this $98.5
million borrowing to cause the redemption and repayment of $25 million of 9
3/8%, 1987 Series A, Pollution Control Revenue Bonds, $43.5 million of 10 3/4%,
1987 Series B, Pollution Control Revenue Bonds, and $30 million of Adjustable
Rate, 1990 Series A, Solid Waste Disposal Revenue Bonds, three outstanding
series of tax-exempt bonds on which the Company also has a payment obligation to
a trustee for the bondholders. Expenses associated with this transaction,
including redemption premiums totaling $2,055,000 and other expenses of
approximately $1,500,000, are being borne by the Company.
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<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<CAPTION>
Three Months Ended Six Months Ended
(E) INCOME TAXES June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Income tax expense consists of: (000's) (000's)
<S> <C> <C> <C> <C>
Income tax provisions:
Current
Federal $5,381 $12,577 $15,447 $24,045
State 1,737 4,147 4,987 7,939
------------ ------------ ------------ ------------
Total current 7,118 16,724 20,434 31,984
------------ ------------ ------------ ------------
Deferred
Federal (5,945) (3,494) (7,999) (5,680)
State (1,792) (1,927) (2,966) (3,468)
------------ ------------ ------------ ------------
Total deferred (7,737) (5,421) (10,965) (9,148)
------------ ------------ ------------ ------------
Investment tax credits (191) (191) (381) (381)
------------ ------------ ------------ ------------
Total income tax expense ($810) $11,112 $9,088 $22,455
============ ============ ============ ============
Income tax components charged as follows:
Operating expenses $712 $12,661 $12,027 $25,273
Other income and deductions - net (1,522) (1,549) (2,939) (2,818)
------------ ------------ ------------ ------------
Total income tax expense ($810) $11,112 $9,088 $22,455
============ ============ ============ ============
The following table details the components of the
deferred income taxes:
Fossil fuel decommissioning reserve ($7,002) - ($7,002) -
Seabrook sale/leaseback transaction (2,586) (2,622) (5,172) (5,244)
Conservation and load management (3,161) (353) (4,091) (490)
Accelerated depreciation 1,460 1,374 2,919 2,748
Tax depreciation on unrecoverable plant investment 1,231 1,244 2,463 2,488
Unit overhaul and replacement power costs 2,589 (575) 1,386 (2,010)
Deferred fossil fuel costs - 153 (686) 665
Postretirement benefits (148) (729) (292) (797)
Pension benefits 52 (1,785) 109 (4,004)
Other - net (172) (2,128) (599) (2,504)
------------ ------------ ------------ ------------
Deferred income taxes - net ($7,737) ($5,421) ($10,965) ($9,148)
============ ============ ============ ============
</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 that
currently extends to December 10, 1997. The borrowing limit of this facility is
$75 million. The facility permits the Company to borrow funds at a fluctuating
interest rate determined by the prime lending market in New York, and also
permits the Company to borrow money for fixed periods of time specified by the
Company at fixed interest rates determined by the Eurodollar interbank market in
London, or by bidding, at the Company's option. If a material adverse change in
the business, operations, affairs, assets or condition, financial or otherwise,
or prospects of the Company and its subsidiaries, on a consolidated basis,
should occur, the banks may decline to lend additional money to the Company
under this revolving credit agreement, although borrowings outstanding at the
time of such an occurrence would not then become due and payable. As of June 30,
1997, the Company had $30 million of short-term borrowings outstanding under
this facility.
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<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(G) SUPPLEMENTARY INFORMATION
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
(000's) (000's)
<S> <C> <C> <C> <C>
Operating Revenues
Retail $146,044 $154,965 $296,525 $313,523
Wholesale - capacity 2,525 1,712 4,782 3,502
- energy 14,195 11,462 41,273 21,258
Other 1,010 651 1,519 1,367
-------------- -------------- -------------- --------------
Total Operating Revenues $163,774 $168,790 $344,099 $339,650
============== ============== ============== ==============
Sales by Class(MWH's)
Retail
Residential 412,503 418,063 910,774 942,084
Commercial 543,243 551,206 1,083,701 1,110,215
Industrial 292,456 283,523 561,590 554,475
Other 11,971 11,925 24,248 23,966
-------------- -------------- -------------- --------------
1,260,173 1,264,717 2,580,313 2,630,740
Wholesale 565,903 482,762 1,496,138 849,501
-------------- -------------- -------------- --------------
Total Sales by Class 1,826,076 1,747,479 4,076,451 3,480,241
============== ============== ============== ==============
Other Taxes
Charged to:
Operating:
State gross earnings $5,496 $6,365 $11,228 $12,899
Local real estate and personal property 6,154 6,294 12,291 12,531
Payroll taxes 1,447 1,236 3,543 3,150
-------------- -------------- -------------- --------------
13,097 13,895 27,062 28,580
Nonoperating and other accounts 139 264 232 396
-------------- -------------- -------------- --------------
Total Other Taxes $13,236 $14,159 $27,294 $28,976
============== ============== ============== ==============
Other Income and (Deductions) - net
Interest and dividend income $306 $337 $926 $641
Equity earnings from Connecticut Yankee 242 403 688 749
Loss from subsidiary companies (362) (864) (895) (1,555)
Miscellaneous other income and (deductions) - net 539 (135) 787 (301)
-------------- -------------- -------------- --------------
Total Other Income and (Deductions) - net $725 ($259) $1,506 ($466)
============== ============== ============== ==============
Other Interest Charges
Notes Payable $623 $387 $1,200 $715
Other 229 306 418 563
-------------- -------------- -------------- --------------
Total Other Interest Charges $852 $693 $1,618 $1,278
============== ============== ============== ==============
</TABLE>
- 12 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(K) FUEL FINANCING OBLIGATIONS AND OTHER LEASE OBLIGATIONS
The Company has a Fossil Fuel Supply Agreement with a financial institution
providing for financing up to $37.5 million in fossil fuel purchases. Under this
agreement, the financing entity may acquire and/or store natural gas, coal and
fuel oil for sale to the Company, and the Company may purchase these fossil
fuels from the financing entity at a price for each type of fuel that reimburses
the financing entity for the direct costs it has incurred in purchasing and
storing the fuel, plus a charge for maintaining an inventory of the fuel
determined by reference to the fluctuating interest rate on thirty-day,
dealer-placed commercial paper in New York. The Company is obligated to insure
the fuel inventories and to indemnify the financing entity against all
liabilities, taxes and other expenses incurred as a result of its ownership,
storage and sale of fossil fuel to the Company. This agreement currently extends
to August 1998. At June 30, 1997, approximately $20.9 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 $196.0 million, excluding AFUDC, for 1997 through 2001.
NUCLEAR INSURANCE CONTINGENCIES
The Price-Anderson Act, currently extended through August 1, 2002, limits
public liability resulting from a single incident at a nuclear power plant. The
first $200 million of liability coverage is provided by purchasing the maximum
amount of commercially available insurance. Additional liability coverage will
be provided by an assessment of up to $75.5 million per incident, levied on each
of the nuclear units licensed to operate in the United States, subject to a
maximum assessment of $10 million per incident per nuclear unit in any year. In
addition, if the sum of all public liability claims and legal costs resulting
from any nuclear incident exceeds the maximum amount of financial protection,
each reactor operator can be assessed an additional 5% of $75.5 million, or
$3.775 million. The maximum assessment is adjusted at least every five years to
reflect the impact of inflation. With respect to each of the three nuclear
generating units in which the Company has an interest, the Company will be
obligated to pay its ownership and/or leasehold share of any statutory
assessment resulting from a nuclear incident at any nuclear generating unit.
Based on its interests in these nuclear generating units, the Company estimates
its maximum liability would be $23.2 million per incident. However, any
assessment would be limited to $3.1 million per incident per year.
The NRC requires each nuclear generating unit to obtain property insurance
coverage in a minimum amount of $1.06 billion and to establish a system of
prioritized use of the insurance proceeds in the event of a nuclear incident.
The system requires that the first $1.06 billion of insurance proceeds be used
to stabilize the nuclear reactor to prevent any significant risk to public
health and safety and then for decontamination and cleanup operations. Only
following completion of these tasks would the balance, if any, of the segregated
insurance proceeds become available to the unit's owners. For each of the three
nuclear generating units in which the Company has an interest, the Company is
required to pay its ownership and/or leasehold share of the cost of purchasing
such insurance. Although each of these units has purchased $2.75 billion of
property insurance coverage, representing the limits of coverage currently
available from conventional nuclear insurance pools, the cost of a nuclear
incident could exceed available insurance proceeds. In addition, two of the
nuclear insurance pools that provide portions of this coverage may levy
assessments against the insured owner companies if pool losses exceed the
accumulated funds available to the pool. The maximum potential assessments
against the Company with respect to losses occurring during current policy years
are approximately $7.5 million.
- 13 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OTHER COMMITMENTS AND CONTINGENCIES
CONNECTICUT YANKEE
On December 4, 1996, the Board of Directors of the Connecticut Yankee
Atomic Power Company (Connecticut Yankee) voted unanimously to retire the
Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial
operation. The Company has a 9.5% stock ownership share in Connecticut Yankee
and relied on the Connecticut Yankee Unit for approximately 3.7% of the
Company's 1995 total generating resources. The power purchase contract under
which the Company has purchased its 9.5% entitlement to the Connecticut Yankee
Unit's power output permits Connecticut Yankee to recover 9.5% of all of its
costs from UI. Connecticut Yankee has filed revised decommissioning cost
estimates and amendments to the power contracts with its owners with the Federal
Energy Regulatory Commission (FERC). The preliminary estimate of the amount of
future payments for the closing, decommissioning and recovery of the remaining
investment in the Connecticut Yankee Unit is approximately $763 million. Based
on regulatory precedent, Connecticut Yankee believes it will continue to collect
from its owners its decommissioning costs, the unrecovered investment in the
Connecticut Yankee Unit and other costs associated with the permanent shutdown
of the Connecticut Yankee Unit. UI expects that it will continue to be allowed
to recover all FERC-approved costs from its customers through retail rates. The
Company's estimate of its remaining share of costs, less return of investment
(approximately $10 million) and return on investment (approximately $7.6
million) at June 30, 1997, is approximately $47.1 million. This estimate, which
is subject to ongoing review and revision, has been recorded by the Company as a
regulatory asset and an obligation on the Consolidated Balance Sheet.
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, increased the capacity value of the
intertie from 690 megawatts to a maximum of 2000 megawatts in 1991. A ten-year
Firm Energy Contract, which provides for the sale of 7 million megawatt-hours
per year by Hydro-Quebec to the New England participants in the Phase II
facility, became effective on July 1, 1991. The Company is obligated to furnish
a guarantee for its participating share of the debt financing for the Phase II
facility. As of June 30, 1997, the Company's guarantee liability for this debt
was approximately $7.8 million.
VOLUNTARY EARLY RETIREMENT AND SEPARATION PROGRAMS
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. The employees accepting
the offer will terminate employment on or before December 30, 1997.
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
- 14 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 vigorously contesting each of these
actions by the City's tax assessor. In January 1996, the Connecticut Superior
Court granted the Company's motion for summary judgment against the City
relative to the earliest tax year at issue, 1991-1992, ruling that, after
January 31, 1992, the tax assessor had no statutory authority to revalue
personal property listed and valued on the Company's tax list for the tax year
1991-1992. This Superior Court decision, which would also have been applicable
to and defeated the assessor's valuation increases for the two subsequent tax
years, 1992-1993 and 1993-1994, was appealed by the City. On April 11, 1997, the
Connecticut Supreme Court reversed the Superior Court's decisions in this and
two other companion cases involving other taxpayers, ruling that the tax
assessor had a three-year period in which to audit and revalue personal property
listed and valued on the Company's tax list for the tax year 1991-1992. It is
currently anticipated that all of the pending cases for all of the tax years in
dispute will now be scheduled for trial in the Superior Court relative to the
Company's claim that the tax assessor's increases in personal property tax
assessments for the three earliest years were unlawful for other reasons and
relative to the vigorously contested issue, for all of the tax years, as to the
reasonableness of the tax assessor's valuation method, both as to amount and
methodology. It is the present opinion of the Company that the ultimate outcome
of this dispute will not have a significant impact on the long-term financial
position of the Company.
SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS
The Company has estimated that the total cost of decontaminating and
demolishing its decommissioned and demolished Steel Point Station and completing
requisite environmental remediation of the site will be approximately $11.3
million, of which approximately $7.8 million had been incurred as of June 30,
1997, and that the value of the property following remediation will not exceed
$6.0 million. As a result of a 1992 Connecticut Department of Public Utility
Control retail rate decision, beginning January 1, 1993, the Company has been
recovering through retail rates $1.075 million of the remediation costs per
year. The remediation costs, property value and recovery from customers will be
subject to true-up in the Company's next retail rate proceeding based on actual
remediation costs and actual gain on the Company's disposition of the property.
(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 $451 million (in 1997 dollars) as the
decommissioning cost estimate for Seabrook Unit 1, of which the Company's share
would be approximately $79 million. This estimate assumes the prompt removal and
dismantling of the unit at the end of its estimated 36-year energy producing
life. Monthly decommissioning payments are being made to the state-managed
decommissioning trust fund. UI's share of the decommissioning payments made
during the first half of 1997 was $1,042,000. UI's share of the fund at June 30,
1997 was approximately $10.3 million.
Connecticut has enacted a law requiring the operators of nuclear generating
units to file periodically with the DPUC their plans for financing the
decommissioning of the units in that state. The current decommissioning cost
estimate for Millstone Unit 3 is $463 million (in 1997 dollars), of which the
Company's share would be approximately $17 million. This estimate assumes the
prompt removal and dismantling of the unit at the end of its estimated 40-year
energy producing life. Monthly decommissioning payments, based on these cost
estimates, are being made to a decommissioning trust fund managed by Northeast
Utilities (NU). UI's share of the Millstone Unit 3 decommissioning payments made
during the first half of 1997 was $243,000. UI's share of the fund at June 30,
1997 was approximately $4.3 million. The decommissioning trust fund for the
Connecticut Yankee Unit is also managed by NU. For the
- 15 -
<PAGE>
THE UNITED ILLUMINATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company's 9.5% equity ownership in Connecticut Yankee, decommissioning costs of
$944,000 were funded by UI during the first half of 1997, and UI's share of the
fund at June 30, 1997 was $22.3 million. The current decommissioning cost
estimate for the Connecticut Yankee Unit, assuming the prompt removal and
dismantling of the unit commencing in 1997, is $436 million, of which UI's share
would be $41 million.
- 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 its 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. Annual growth in total operation and maintenance
expense, excluding one-time items and cogeneration capacity purchases, has
averaged less than 1.5% during the past 5 years. The Company hopes to continue
to restrict this average to less than the rate of inflation in future years (see
"Looking Forward").
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 will be the
success of the Company's efforts to implement the regulatory framework ordered
by the DPUC at the end of 1996. On December 31, 1996, the DPUC completed a
financial and operational review of the Company and ordered a five-year
incentive regulation plan for the years 1997-2001. The DPUC did not change the
retail base rates charged to customers. Its order increased amortization of the
Company's conservation and load management program investments during 1997-1998,
accelerated the recovery of unspecified regulatory assets during 1999-2001,
reduced the level of conservation adjustment mechanism revenues in retail rates,
provided a reduction in customer bills through a surcredit in each of the five
plan years, and accepted the Company's proposal to modify the operation of the
fossil fuel clause mechanism. The Company's authorized return on common equity
was reduced from 12.4% to 11.5%. Earnings above 11.5%, on an annual basis, are
to be utilized one-third for customer bill reductions, one-third to increase
amortization of regulatory assets, and one-third retained as earnings. The DPUC
did not order the accelerated depreciation of the Company's Seabrook Unit 1
plant investment costs and the establishment of a performance-based regulation
mechanism measured by customer satisfaction surveys and reliability of service
indices, which the Company had proposed. As a result of the DPUC's order,
customer bills are expected to be reduced on average by 3% in 1997-1999, 4% in
the year 2000, and 5% in the year 2001 (all compared to 1996). Also, earnings
from utility operations will be reduced from the levels requested by the
Company, such that it appears unlikely that the Company will be able to achieve
its 4% growth goal going forward.
Federal legislation has fostered competition in the wholesale electric
power market, as has a FERC rulemaking requiring electric utilities to furnish
transmission service to all buyers and sellers in the marketplace. In its
rulemaking, the FERC stated that state regulatory commissions should address the
issue of recovery by electric utilities of the costs of existing facilities that
would be stranded by retail access. The legislatures and regulatory commissions
in several states have considered or are considering "retail access". This, in
general terms, means the transmission by an electric utility of energy produced
by another entity over the utility's transmission and distribution system to a
retail customer in the utility's own service territory. A retail access
requirement would have the effect of permitting retail customers to purchase
electric capacity and energy, at the election of such customers, from the
electric utility in whose service area they are located or from any other
electric utility, independent power producer or power marketer. In 1995, the
Connecticut Legislature established a task force to review these issues and to
make recommendations on electric industry restructuring within Connecticut. The
task force concluded its work in December 1996, and issued a report and related
recommendations. In its 1997 session, the Connecticut legislature drafted, but
failed to bring to a vote, comprehensive legislation that would have introduced
retail access in Connecticut over a period of several years, with provision for
the recovery of stranded costs.
Although the Company is unable to predict the future effects of competitive
forces in the electric utility industry, competition could result in a change in
the regulatory structure of the industry, and costs that have traditionally been
- 17 -
<PAGE>
recoverable through the ratemaking process may not be recoverable in the future.
This effect could have a material impact on the financial condition and/or
results of operations of the Company.
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, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71)) that are not applicable to other businesses in
general. These accounting rules allow regulated utilities, where appropriate, to
defer the income statement impact of certain costs that are expected to be
recovered in future regulated service rates and to establish regulatory assets
on balance sheets for such costs. The effects of competition or a change in the
cost-based regulatory structure could cause the operations of the Company, or a
portion of its assets or operations, 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, or a portion of
its assets or operations, were to cease meeting these criteria, accounting
standards for businesses in general would become applicable and immediate
recognition of any previously deferred costs, or a portion of deferred costs,
would be required in the year in which the criteria are no longer met, if such
deferred costs are not recoverable in that portion of the business that
continues to meet the criteria for the application of SFAS No. 71. 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 1997-2001 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>
1997 1998 1999 2000 2001 Total
---- ---- ---- ---- ---- -----
(000's)
<S> <C> <C> <C> <C> <C> <C>
Production $9,498 $14,153 $24,332 $10,752 $17,741 $76,476
Distribution 13,060 12,588 13,041 13,298 13,059 65,046
Transmission 626 1,118 2,425 3,752 1,300 9,221
Other 6,939 3,219 1,196 997 13,301 949
------ ------ ------ ------ ------ -------
Subtotal 30,123 31,078 40,995 28,799 33,050 164,044
Nuclear Fuel 7,612 11,208 965 11,924 221 31,930
------ ------ ------ ------ ------ -------
TOTAL EXPENDITURES $37,735 $42,286 $41,960 $40,723 $33,270 $195,974
====== ====== ====== ====== ======
Rate Base and Other Selected Data
AFUDC (Pre-tax) 2,051 2,228 1,624 1,886 1,161
Depreciation
Book Plant 53,239 56,497 57,722 57,959 57,862
Conservation 10,223 10,223 8,906 6,312 4,332
Decommissioning 2,235 2,328 2,435 2,547 2,660
Additional Required
Amortization (pre-tax) (1)
Conservation Assets 6,400 13,000 (3,517) (6,312) (4,332)
Other Regulatory Assets 0 0 20,300 49,500 54,500
Amortization of Deferred
Return on Seabrook Unit 1
Phase-In (after tax) 12,586 12,586 12,586 0 0
Estimated Rate Base
(end of period) 1,183,674 1,132,169 1,067,561 1,026,295 958,657
</TABLE>
(1) Additional amortization of pre-1997 conservation costs and other
unspecified regulatory assets, as ordered by the DPUC in its
December 31, 1996 Order, provided that common equity return on
utility investment exceeds 10.5% after recording the additional
amortization.
Note:Capital Expenditures and their effect on certain capital related
items are estimates subject to change due to future events and
conditions that may be substantially different than those used in
developing the projections.
- 19 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $17.3 million of cash and temporary cash
investments, an increase of $10.9 million from the balance at December 31, 1996.
The components of this increase, which are detailed in the Consolidated
Statement of Cash Flows, are summarized as follows:
(Millions)
--------
Balance, December 31, 1996 $ 6.4
----
Net cash provided by operating activities 63.6
Net cash provided by (used in) financing activities:
- Financing activities, excluding dividend payments (8.1)
- Dividend payments (20.4)
Cash invested in plant, including nuclear fuel (24.2)
----
Net increase 10.9
----
Balance, June 30, 1997 $17.3
====
The Company's capital requirements are presently projected as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C>
Cash on Hand - Beginning of Year $ 6.4 $ 24.2 $ - $ - $ -
Internally Generated Funds less Dividends 87.9 111.0 110.9 113.5 105.9
---- ----- ----- ----- -----
Subtotal 94.3 135.2 110.9 113.5 105.9
Less:
Capital Expenditures 37.7 42.3 41.9 40.7 33.3
---- ----- ----- ----- -----
Cash Available to pay Debt Maturities and Redemptions 56.6 92.9 69.0 72.8 72.6
Less:
Maturities and Mandatory Redemptions 10.8 104.6 105.0 155.5 81.0
Optional Redemptions 21.6 - - - -
---- ----- ----- ----- ----
External Financing Requirements $(24.2) $ 11.3 $ 36.0 $ 82.7 $8.4
===== ===== ===== ===== ====
</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 from those used in
developing the projections.
All of the Company's capital requirements that exceed available cash will
have to be provided by external financing. Although the Company has no
commitment to provide such financing from any source of funds, other than a $75
million revolving credit agreement with a group of banks, described below, the
Company expects to be able to satisfy its external financing needs by issuing
additional short-term and long-term debt, and by issuing preferred stock or
common stock, if necessary. The continued availability of these methods of
financing will be dependent on many
- 20 -
<PAGE>
factors, including conditions in the securities markets, economic conditions,
and the level of the Company's income and cash flow.
The Company has a revolving credit agreement with a group of banks, which
currently extends to December 10, 1997. The borrowing limit of this facility is
$75 million. The facility permits the Company to borrow funds at a fluctuating
interest rate determined by the prime lending market in New York, and also
permits the Company to borrow money for fixed periods of time specified by the
Company at fixed interest rates determined by the Eurodollar interbank market in
London, or by bidding, at the Company's option. If a material adverse change in
the business, operations, affairs, assets or condition, financial or otherwise,
or prospects of the Company and its subsidiaries, on a consolidated basis,
should occur, the banks may decline to lend additional money to the Company
under this revolving credit agreement, although borrowings outstanding at the
time of such an occurrence would not then become due and payable. As of June 30,
1997, the Company had $30 million of short-term borrowings outstanding under
this facility.
SUBSIDIARY OPERATIONS
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.
URI has three wholly-owned subsidiaries. The largest URI subsidiary,
American Payment Systems, Inc., manages a national network of agents for the
processing of bill payments made by customers of other utilities. 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 62%
partner in the energy center for a city hall and office tower complex. A URI
subsidiary, Precision Power, Inc., provides power-related equipment and services
to the owners of commercial buildings and industrial facilities.
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 into its
unregulated subsidiary ventures, and, at June 30, 1997, $27 million had been so
invested.
RESULTS OF OPERATIONS
SECOND QUARTER OF 1997 VS. SECOND QUARTER OF 1996
- -------------------------------------------------
Earnings for the second quarter of 1997 were $8.5 million, or $.61 per
share, down $2.1 million, or $.14 per share, from the second quarter of 1996.
Earnings from operations, which exclude one-time items and accelerated
amortization of costs attributable to one-time items, decreased by $4.2 million,
or $.30 per share, in the second quarter of 1997 compared to the second quarter
of 1996. The one-time item recorded in the second quarter of 1997, is an income
tax expense reduction of $6.7 million, or $.48 per share, that makes provision
for the cumulative deferred tax benefits associated with the future
decommissioning of fossil fuel generating plants.
In an order by the Connecticut Department of Public Utility Control (DPUC)
issued on December 31, 1996, the Company was instructed to accelerate the
amortization of regulatory assets by as much as $4.1 million (after-tax), or
$.29 per share, in 1997, provided that the return on utility common stock equity
exceeds 10.5 percent for the year. The Company currently projects that, with the
one-time tax benefit mentioned above, the full 1997 amortization amount can be
charged and the 1997 return on utility common stock equity will still equal or
exceed 10.5 percent. Therefore, the full amount was charged in the second
quarter of 1997.
Retail operating revenues decreased by about $8.9 million in the second
quarter of 1997 compared to the second quarter of 1996:
- 21 -
<PAGE>
. A retail kilowatt-hour sales decrease of 0.4% from the prior year reduced
retail revenues by $0.9 million and sales margin (revenue less fuel expense
and revenue-based taxes) by $0.8 million. The kilowatt-hour sales decrease
was due to a mild 1997 second quarter compared to a warmer than normal 1996
second quarter partly offset by one less holiday in the second quarter of
1997. There was no discernible "real" (i.e. not attributable to abnormal
weather, or holidays) kilowatt-hour sales change in the second quarter of
1997 compared to the second quarter of 1996.
. Reductions in customer bills, as agreed to by the Company and the DPUC in
December 1996, decreased retail revenues by about $6.8 million, including
suspension of the fuel adjustment clause (FAC) mechanism that reduced
revenues by $2.2 million. This was consistent with the Company's
expectations, as previously reported in the Company's Quarterly Report
(Form 10-Q) for the fiscal quarter ended March 31, 1997. Other reductions
in customer bills, due to rate mix and contract pricing, amounted to $1.2
million.
Wholesale "capacity" revenues increased $0.8 million in the second quarter
of 1997 compared to the second quarter of 1996. Wholesale "energy" revenues,
which increased during the second quarter of 1997 compared to the second quarter
of 1996 as a result of nuclear generating unit outages in the region, are a
direct offset to wholesale energy expense and do not contribute to sales margin.
Retail fuel and energy expenses increased by $2.5 million in the second
quarter of 1997 compared to the second quarter of 1996. These expenses increased
by $3.7 million due to the need to purchase more expensive energy to replace
generation by the Connecticut Yankee nuclear generating unit, which ran at
nearly full capacity in the second quarter of 1996, and an unplanned eight-day
extension of a Seabrook nuclear generating unit refueling outage that increased
the Company's cost by about $0.7 million. The Seabrook unit was returned to
service on June 28, 1997. For more on the status of the Connecticut Yankee and
Millstone Unit 3 nuclear generating units, see the LOOKING FORWARD section.
Retail fuel and energy expenses decreased in the second quarter of 1997 compared
to the second quarter of 1996 by about $1.2 million, due primarily to reduced
fossil fuel prices. Under current DPUC regulations, these reductions were used
to mitigate the adverse impact on revenues of the suspension of the FAC
mechanism.
Operating expenses for operations, maintenance and purchased capacity
charges increased by $0.6 million in the second quarter of 1997 compared to the
second quarter of 1996:
. Purchased capacity expense decreased $0.4 million due to lower expenses at
the retired Connecticut Yankee nuclear generating unit.
. Operation and maintenance expense increased by $1.0 million. General
increases at the Seabrook and Millstone 3 nuclear generating units, $1.0
million and $1.5 million respectively, were partly offset by about $0.7
million in savings from a reduction in the number of Company employees. The
increase at Millstone Unit 3 was, additionally, partly offset by the
reversal of a portion of a 1996 provision in "Other income (deductions)".
Depreciation expense, exclusive of any accelerated amortization of CL&M
costs, increased by $0.9 million in the second quarter of 1997 compared to the
second quarter of 1996. Income taxes, exclusive of the effects of one-time
items, changed based on changes in taxable income and tax rates.
Other net income increased slightly in the second quarter of 1997 compared
to the second quarter of 1996, due to a small improvement in earnings (reduction
in losses) from unregulated subsidiaries. The Company's largest unregulated
subsidiary, American Payment Systems, lost about $185,000 (after-tax) in the
second quarter of 1997, an improvement of $104,000 over second quarter 1996
losses of about $289,000, and an improvement over first quarter 1997 losses of
about $241,000.
- 22 -
<PAGE>
Interest charges continued their downward trend, decreasing by $1.9 million
in the second quarter of 1997 compared to the second quarter of 1996 as a result
of the Company's refinancing program and strong cash flow. Also, total preferred
dividends (net-of-tax) decreased slightly in the second quarter of 1997 compared
to the second quarter of 1996 as a result of purchases of preferred stock by the
Company in 1996.
SIX MONTHS OF 1997 VS. SIX MONTHS OF 1996
- -----------------------------------------
Earnings for the first six months of 1997 were $16.2 million, or $1.15 per
share, down $6.0 million, or $.42 per share, from the first six months of 1996.
Earnings from operations, which exclude one-time items and accelerated
amortization of costs attributable to one-time items, decreased by $12.3
million, or $.88 per share, in the first six months of 1997 compared to the
first six months of 1996. The one-time item recorded in the first six months of
1997, an income tax expense reduction of $6.7 million, or $.48 per share, makes
provision for the cumulative deferred tax benefits associated with the future
decommissioning of fossil fuel generating plants. The one-time items recorded in
the first six months of 1996 were: a gain of $1.8 million (after-tax), or $.13
per share, from the repurchase of preferred stock at a discount to par value,
charges of $8.1 million ($4.7 million after-tax), or $.34 per share, reflecting
the estimated costs of early retirements as part of 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.
In an order by the Connecticut Department of Public Utility Control (DPUC)
issued on December 31, 1996, the Company was instructed to accelerate the
amortization of regulatory assets by as much as $4.1 million (after-tax), or
$.29 per share, in 1997, provided that the return on utility common stock equity
exceeds 10.5 percent for the year. The Company currently projects that, with the
one-time tax benefit mentioned above, the full 1997 amortization amount can be
charged and the 1997 return on utility common stock equity will still equal or
exceed 10.5 percent. Therefore, the full amount was charged in the second
quarter of 1997.
Retail operating revenues decreased by about $17.0 million in the first six
months of 1997 compared to the first six months of 1996:
. A retail kilowatt-hour sales decrease of 1.9% from the prior year
decreased retail revenues by $6.0 million and sales margin (revenue less
fuel expense and revenue-based taxes) by $4.8 million. Sales decreased
about 1.2% from milder than normal weather during the first six months of
1997 compared to the more severe than normal weather experienced during the
first six months of 1996, and about 0.6% due to the leap year day in 1996.
There was no discernible "real" (i.e. not attributable to abnormal weather
or leap year) kilowatt-hour sales change in the first six months of 1997
compared to the first six months of 1996.
. Reductions in customer bills, as agreed to by the Company and the DPUC in
December 1996, decreased retail revenues by about $8.8 million, including
suspension of the fuel adjustment clause (FAC) mechanism that reduced
revenues by $1.3 million. This was consistent with the Company's
expectations, as previously reported in the Company's Quarterly Report
(Form 10-Q) for the fiscal quarter ended March 31, 1997. Other reductions
in customer bills, due to rate mix and contract pricing, decreased retail
revenues by about $2.2 million.
Wholesale "capacity" revenues increased slightly in the first six months of
1997 compared to the first six months of 1996. Wholesale "energy" revenues,
which increased during the first six months of 1997 compared to the first six
months of 1996 as a result of nuclear generating unit outages in the region, are
a direct offset to wholesale energy expense and do not contribute to sales
margin.
Retail fuel and energy expenses increased by $8.5 million in the first six
months of 1997 compared to the first six months of 1996. These expenses
increased by $7.6 million due to the need to purchase more expensive energy to
replace generation by nuclear generating units: by the Connecticut Yankee unit,
which ran at nearly full capacity
- 23 -
<PAGE>
in the first six months of 1996, by Millstone Unit 3, which ran at nearly full
capacity in the first quarter of 1996, and from an unplanned eight-day extension
of a Seabrook nuclear generating unit refueling outage in the second quarter of
1997 that increased the Company's cost by about $0.7 million. The Seabrook unit
was returned to service on June 28, 1997. Millstone Unit 3 was taken out of
service on March 30, 1996 and Connecticut Yankee was taken out of service on
July 23, 1996. For more on the status of the Connecticut Yankee and Millstone
Unit 3 units, see the LOOKING FORWARD section. Retail fuel and energy expenses
increased in the first six months of 1997 compared to the first six months of
1996 by about $2.0 million, due primarily to higher fossil fuel prices over the
six-month period. Under current DPUC regulations, these costs are not passed on
to customers through the FAC.
Operating expenses for operations, maintenance and purchased capacity
charges increased by $2.2 million in the first six months of 1997 compared to
the first six months of 1996:
. Purchased capacity expense was slightly lower.
. Operation and maintenance expense increased by $2.3 million. General
increases at the Seabrook and Millstone 3 nuclear generating units, $1.5
million and $2.5 million respectively, were partly offset by about $1.7
million in savings from a reduction in the number of Company employees. The
increase at Millstone Unit 3 was, additionally, partly offset by the
reversal of a portion of a 1996 provision in "Other income (deductions)".
Depreciation expense, exclusive of any accelerated amortization of CL&M
costs, increased by $1.7 million in the first six months of 1997 compared to the
first six months of 1996. Income taxes, exclusive of the effects of one-time
items, changed based on changes in taxable income and tax rates.
Other net income increased by $0.9 million in the first six months of 1997
compared to the first six months of 1996 due to a small improvement in earnings
(reduction in losses) from unregulated subsidiaries. The Company's largest
unregulated subsidiary, American Payment Systems, lost about $426,000
(after-tax) in the first six months of 1997, an improvement of $103,000 over the
first six months 1996 losses of about $529,000.
Interest charges continued their significant decline, decreasing by $3.6
million, or 10 percent, in the first six months of 1997 compared to the first
six months of 1996 as a result of the Company's refinancing program and strong
cash flow. Also, total preferred dividends (net-of-tax) decreased slightly in
the first six months of 1997 compared to the first six months of 1996 as a
result of purchases of preferred stock by the Company in 1996.
LOOKING FORWARD
(THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT
TO UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CURRENTLY EXPECTED. READERS ARE CAUTIONED THAT THE COMPANY REGARDS SPECIFIC
NUMBERS AS ONLY THE "MOST LIKELY" TO OCCUR WITHIN A RANGE OF POSSIBLE VALUES.)
On December 31, 1996, the DPUC issued an order (the Order) that implemented
a 5-year rate plan that would reduce rates and accelerate the recovery of
certain "regulatory" assets beginning with deferred conservation costs. The
Order's schedule of rate reductions and accelerated amortizations was based on a
DPUC pro forma financial analysis that anticipated the Company would earn an
allowed return on common stock equity invested in utility rate base of 11.5%
over the period 1997 to 2001. The Order established a set formula to share
income that produces a return above the 11.5% level: one-third applied to
customer bill reductions, one-third applied to more rapid amortization of
regulatory assets, and one-third retained by shareowners. If the Company were to
achieve an 11.5% return on common stock equity from its utility investment, then
earnings from utility operations would be in the $3.30-$3.40 range for 1997 and
succeeding years as well.
- 24 -
<PAGE>
There is no assurance that the Company will achieve the 11.5% return on
common stock equity from its utility investment allowed by the DPUC in the
Order. Utility income is greatly affected by weather-related sales, fossil fuel
prices, nuclear generating unit availability, and interest rates...all items
over which the Company has little control, although the Company is actively
engaged in hedging its exposure to fluctuating fuel costs and interest rates. If
the Company's return on utility equity were to fall below 10.5%, it would not be
required to implement any accelerated amortization of regulatory assets.
As a result of the Order, it is anticipated that retail revenues for 1997
will decrease from 1996 levels. A reduction of about $15 million will be due to
reductions in customer bills as agreed to by the Company and the DPUC in
December 1996. (These reductions will be partially offset by about $3 million in
conservation spending reductions. New conservation spending is no longer
capitalized, and changes in conservation expense, relative to the assumptions
used by the DPUC in the Order, will be reflected in retail rates through the
operation of the Conservation Adjustment Mechanism.)
Also, as part of the Order, the operation of the Company's long-standing
fuel adjustment clause mechanism (FAC) that allowed for recovery in retail rates
of changes in fossil fuel costs was suspended within a broad range of fuel
prices. Revenues will decline by about $6 million in 1997 compared to 1996 due
to this suspension of the FAC. While the Company stands to benefit if the prices
that the Company pays for its oil purchases fall below about $15 a barrel,
current prices are above that level. Although the Company cannot predict the
direction that fossil fuel prices will take in 1997 or 1998 and whether it can
mitigate entirely this loss of FAC revenue, it is actively engaged in hedging to
limit the Company's exposure to increases in fossil fuel prices.
It should be noted that, although the Order was for the five-year period
1997-2001 and the Company agreed that it would begin to implement the multi-year
plan, it did not agree to commit to the five-year period. In addition, the DPUC,
in the Order, acknowledged that the Order could be revisited in the light of any
new legislation. The Connecticut legislature did not pass an electric utility
restructuring bill in the 1997 legislative session, but it is expected such
legislation will be reintroduced in 1998.
The Company's revenues are also dependent on the level of retail sales. The
two primary factors that affect retail sales volume are economic conditions and
weather. Overall, 1996 weather was milder than normal; however, 1996 also had a
leap year day. These two factors were offsetting in their impact on retail sales
and, therefore, the actual retail sales for 1996 of 5,340 gigawatt-hours should
be considered about "normal" for that year. On this basis, the Company
experienced about 1% of "real" sales growth in 1996 (i.e. exclusive of weather
and leap year factors) over "normal" 1995 sales. A similar level of growth in
1997 from all customer groups would add about $6 million to sales margin
(revenue less fuel expense and revenue-based taxes) and would offset the revenue
loss expected from the ramping down and eventual shutdown of Allied Signal
Company's manufacturing facilities (approx. .8 % of 1996 sales). Year-to-date
net retail sales are less than those in 1996, due principally to weather-related
factors. It cannot be assumed that 1997 retail sales will match those of 1996.
No significant change in wholesale capacity sales revenue was anticipated
for 1997. However, price has strengthened in short-term markets due to regional
outages of nuclear generating plants, and the Company has increased revenue by
$1.3 million from such sales in the first half of 1997. The strength of these
markets for the remainder of the year and into 1998 will depend on the timing of
the return to service of the nuclear units at Millstone Station and how the
capacity and energy markets of the new New England Power Pool bidding system
perform.
The Company has dealt with the potential loss of customers as a result of
self-generation, relocation or discontinuation of operations by successfully
negotiating 55 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 this customer's electricity requirements
(about 1% of total 1997 retail sales) commencing sometime in early 1998.
Additional multi-year customer contracts may be signed in the future. While
providing cost reduction and price stability for customers and helping the
Company maintain its customer base for the long term, these contracts
- 25 -
<PAGE>
are expected to cause reductions in retail revenue that have averaged $2-$3
million per year, incrementally, in the recent past.
The Company expects that generating output from its ownership shares in
nuclear generating units (Seabrook Unit 1, Millstone Unit 3, and Connecticut
Yankee) will be significantly less in 1997 than in 1996. Seabrook Unit 1
operated at a nearly 97% capacity factor in 1996, well above the assumed
"normal" 90% level between refueling outages. A more normal level of Seabrook
Unit 1 operation in 1997, and the downtime for a 50-day refueling outage in the
second quarter of 1997, will cause the Company to purchase or generate energy
using higher cost fuels, leading to about a $3 million increase in fuel expense
for the year, net of replacement fuel provision accrued between scheduled
refueling outages. The costs of the refueling outage will also contribute to an
expected $4 million increase in operations and maintenance expense for Seabrook
in 1997 over 1996 levels, which is less than the Company's total cost of the
outage because the Company accrues an on-going provision for routine plant
outage costs.
Millstone Unit 3 was taken out of service on March 30, 1996, and will
remain shut down pending a comprehensive Nuclear Regulatory Commission (NRC)
inquiry into the conformity of the unit and its operations with all applicable
NRC regulations and standards. Relative to 1996, the loss of low cost energy
from this unit for all of 1997 should add about $1.5 million to the Company's
fuel expense. It is not likely that Unit 3 will return to service before
year-end 1997, but when it does commence generating, the Company's sales margin
will improve from a fuel expense decline of about $500,000, partly offset by
replacement fuel provision of about $100,000, for every month of normal
operation. The increased costs of correcting deficiencies resulting from the
NRC's inquiry are now estimated to add $3.5 million to the Company's expenses in
1997 for its 3.7% ownership share, according to Northeast Utilities, the Unit's
majority and operating owner. This amount is in addition to an already escalated
expense level for 1996. The Company anticipates that, once NRC deficiencies are
corrected and Unit 3 is returned to service, operating costs should ramp down to
more normal levels for an efficient and safe nuclear unit of this class. On
August 7, 1997, the Company and eight of the other nine minority, non-operating
joint owners of Millstone Unit 3 filed a demand for arbitration against The
Connecticut Light and Power Company and Western Massachusetts Electric Company,
the subsidiaries of Northeast Utilities (NU) who are joint owners of the unit
and have contracted with the minority joint owners to operate it, as well as
lawsuits against NU and its trustees. The nine non-operating joint owners, who
together own about 19.5% of the unit, claim that NU and its subsidiaries failed
to comply with NRC regulations, failed to operate Millstone Station in
accordance with good utility operating practice and concealed their failures
from the non-operating joint owners and the NRC. The arbitration and lawsuits
seek to recover costs of purchasing replacement power and increased operation
and maintenance costs resulting from the shutdown of Millstone Unit 3.
The Connecticut Yankee unit was taken out of service on July 23, 1996 and,
by decision of the Board of Directors of that company in December of 1996, has
been retired. Relative to 1996, the loss of low cost energy from this unit for
all of 1997 (it operated at virtually 100% output in 1996 before shutting down)
should add about $4.5 million to the Company's fuel expense. This increased fuel
expense is expected to be offset by a ramping down of Connecticut Yankee's
operating expenses that are now expected to decrease by about $5.5 million for
the entire year 1997 ( from $18.3 million in 1996 to $12.8 million in 1997).
These expenses are expected to continue to decline by substantial amounts before
leveling out at $5-$6 million per year after 1999 until decommissioning is
complete. However, the ability of the Company to recover its ownership share of
future costs associated with the retirement of the Connecticut Yankee unit will
be dependent upon the outcome of pending regulatory filings with the Federal
Energy Regulatory Commission.
To summarize, the total incremental impact of nuclear generating unit
outages on the Company's expense levels anticipated for 1997 relative to 1996 is
currently estimated as an increase of about $9 million in fuel expense and $2
million in operation and purchased capacity expense. This amount would be
equivalent to about $.45 per share.
- 26 -
<PAGE>
Another major factor affecting the Company's earnings prospects will be the
Company's ability to control operating expenses. The Company offered voluntary
early retirement programs and a voluntary severance program to union, nonunion
and management employees in 1996. The cost of these programs resulted in a 1996
pre-tax charge of $23 million and should lead to a 1997 employee reduction of
230 employees from a level of approximately 1,300 employees at year-end 1995. A
portion of the resulting personnel cost savings occurred in 1996, but the
majority of the savings will be realized as the Company's process re-engineering
efforts are completed over the next several years. Incremental savings from
personnel reductions of $4 million in 1997 ($1.7 million realized in the first
six months) and another $6 million in 1998 are estimated. Other process
re-engineering savings are anticipated over this time frame as well.
On June 30, 1997, the Company's unionized employees accepted a new
five-year agreement, amending and extending the existing agreement that was
scheduled to remain in effect through May 15, 1998. The new agreement provides
for, among other things, 2% annual wage increases beginning in May 1998, and
annual lump sum bonuses of 2.5% of base annual straight time wages (not
cumulative). These provisions will restrict the growth of the Company's
bargaining unit base wage expense to about $500,000 per year. The agreement also
provides for job security for longer term bargaining unit employees, and will
allow the Company some flexibility in adjusting work methods, as part of its
ongoing process re-engineering efforts.
Anticipated depreciation expense should increase by $2-3 million in 1997
from 1996 levels, a slower rate of increase than in prior years because 1996
capital spending of $45 million (excluding nuclear fuel) was at its lowest level
in over 15 years, and also because new conservation spending is no longer
capitalized and depreciated.
The Company expects continued reductions in annual interest expense of
about $8-9 million to a 1997 level of $61-62 million, at current rates. This
reduction is due to refinancings of Company debt in 1996 and 1997, as well as a
significant repayment of debt in 1996 and 1997 made possible by the Company's
excellent cash flow position. In fact, although the Company had no net change in
retained earnings in 1996, it was able to improve its equity ratio from 31.7% to
33.2% as a result of debt reduction. The anticipated 1997 interest expense level
is about 45% below the 1989 level and would mark the eighth consecutive year of
net interest expense decline.
In the fall of 1996, using proceeds of a lower cost bank term loan, the
Company was successful in purchasing $67 million of the approximately $200
million principal amount of outstanding Seabrook Lease Obligation Bonds, to hold
in its own account. The interest income that the Company receives from its $67
million investment in these bonds appears on the income statement as a credit to
interest expense, partially offsetting the interest expense incurred on the
Seabrook Lease Obligation Bonds.
The Company expects an improvement in unregulated subsidiary earnings in
1997 compared to the results of 1996, due partly to non-recurrence of one-time
pre-tax charges incurred in 1996 totaling $4.3 million and, also, the
achievement of a near "break-even" level in earnings from subsidiary operations,
which would result in an increase in pre-tax income of $3-$4 million. In the
near term, the Company's investments in these subsidiaries are unlikely to have
a major positive effect on earnings, but the Company continues to believe that
these investments will contribute to future earnings growth.
As announced in a press release dated July 1, 1997, the Company will loan
up to $15 million to the Company's Employee Stock Ownership Plan ("ESOP") for
the purpose of purchasing shares of the Company's common stock in open-market
transactions. As of July 31, 1997, approximately 200,000 shares had been
purchased by the ESOP. Based on this number of shares purchased, the net effect
will be to increase earnings per share by about $.01 in 1997 and by an
additional $.02 per share in 1998. At the current price of about $35 per share,
the Company's ESOP could purchase about 230,000 additional shares, approximately
doubling the earnings per share impacts. The earnings per share impact will
gradually reverse, to no net change at the end of the 12-year period, as the
shares are allocated to employees' ESOP accounts and the loan is repaid.
- 27 -
<PAGE>
The Company expects that 1997 quarterly earnings from operations will
follow a pattern similar to that of 1996, with third quarter earnings
contributing over half of the annual total. Summer seasonal retail sales and
summer pricing are the predominant factors contributing to this pattern.
In order to achieve the DPUC-allowed 11.5% return on common stock equity
from utility operations, the Company will have to compensate in the last half of
1997 for increased nuclear generation costs and lower first half sales. Although
sales in the third quarter are highly weather-sensitive and could add greatly to
annual earnings, and although management has intensified its efforts to reduce
costs in the second-half of 1997, it will be difficult to achieve a $3.30-3.40
level in earnings per share from operations. The one-time tax benefit taken in
the second quarter of 1997, however, makes this earnings target a more
reasonable prospect for total earnings for the year.
Looking forward to 1998, the Company is expecting significant expense
declines from a number of sources. From the nuclear generating units, it is
expected that operation and maintenance expenses associated with Seabrook Unit 1
and Connecticut Yankee should decline by a total of about $10 million; if
Millstone Unit 3 returns to service, the expense associated with that unit
should decline as well. Seabrook Unit 1 should have no refueling outage in 1998
and, if it operates at normal 90% availability, fuel expense should decline by
about $1.4 million, net of replacement fuel provision accrual between scheduled
refueling outages; if Millstone Unit 3 returns to service, fuel expense should
decline by $400,000 for every month of operation, net of fuel provision of
$100,000 per month...up to $5 million for the year. As noted above, personnel
costs should decline by about $6 million from reductions in personnel. Interest
costs are expected to continue to decline by about $7 million from reductions in
interest rates and repayment of debt, reaching a level (about $54 million) last
experienced in 1984. While there will probably be some decline in 1997 retail
revenues due to bill reductions (no net sales growth is anticipated, as Yale
University begins to cogenerate a portion of its electricity requirements), and
while other factors may increase costs (e.g. wage increases, depreciation), the
substantial expense reductions identified above should allow earnings from
operations to increase into the above-11.5% return on common stock equity
"sharing" range of the DPUC Order and above the $3.40 per share level.
Although the $2.88 indicated annual common dividend level for 1996
represented a payout of 100% of total 1996 earnings, the Company's cash flow
remains, and is expected to remain, very strong. Net cash provided by operating
activities was $144.8 million in 1996, nearly 3.6 times the common dividend
payout, one of the highest such "coverage" levels in the utility industry. The
DPUC Order will limit earnings from utility operations such that further
dividend increases may have to be delayed for several years. However, the Order
should allow the Company to recover some of its regulatory assets more rapidly,
help it prepare for competition in the electric industry, and help maintain its
cash flow at its excellent current level through the end of the decade. If the
Company is able to grow income and earnings into the "sharing" range in 1998,
the common stock dividend payout ratio at the current dividend rate would be
close to 80%.
On February 5, 1997, the Board of Directors of the Company, at a special
meeting, reaffirmed the quarterly common stock dividend at the indicated annual
rate of $2.88 per share, seeking to assure investors of the security of that
dividend level. However, the ability to maintain this dividend level, or to
declare future dividend increases, will depend upon the level of the Company's
future earnings and cash flow, which are dependent upon many factors and events
affecting the Company's financial condition and outlook that cannot be known or
predicted at this time.
One such event concerns legal proceedings involving a personal property tax
dispute with the City of New Haven (the City). An April 1997 Connecticut Supreme
Court ruling allows the City to reassess property values on the Company's
equipment in each tax year from 1990 to 1996. The decision did not, however,
approve any assessment valuation methodology or amount, and the Company is
vigorously contesting these issues, for all of the tax years, in lower court
proceedings. It remains the present opinion of the Company that the ultimate
outcome of this dispute will not have a significant impact on the long-term
financial position of the Company.
- 28 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See the Company's Quarterly Report (Form 10-Q) for the fiscal quarter ended
March 31, 1997.
- 29 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description
---------- ------- -----------
<C> <C> <C>
(10) 10.9d Notice, dated April 22, 1997, of The United Illuminating
Company's intention to extend term of Transmission Line
Agreement dated January 13, 1966 Exhibit 10.9a*, as supplemented
and modified by Letter Agreement dated March 28, 1985 Exhibit
10.9c**
(12), (99) 12 Statement Showing Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements (Twelve Months Ended June
30, 1997 and Twelve Months Ended December 31, 1996, 1995, 1994,
1993 and 1992).
(27) 27 Financial Data Schedule
</TABLE>
- -----------------------
* Filed with Registration Statement No. 2-60849, effective July 24, 1978.
** Filed with Annual Report (Form 10-K) for fiscal year ended December 31,
1991.
(b) Reports on Form 8-K.
None
- 30 -
<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 08/12/97 Signature /s/ Robert L. Fiscus
---------------------- -------------------------------
Robert L. Fiscus
President and
Chief Financial Officer
- 31 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description Page No.
---------- ------- -----------
<C> <C> <C>
(10) 10.9d Notice, dated April 22, 1997, of The
United Illuminating Company's intention to
extend term of Transmission Line Agreement
dated January 13, 1966 Exhibit 10.9a*, as
supplemented and modified by Letter Agreement
dated March 28, 1985 Exhibit 10.9c**
(12), (99) 12 Statement Showing Computation of Ratios of
Earnings to Fixed Charges and Ratios of
Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements
(Twelve Months Ended June 30, 1997 and
Twelve Months Ended December 31, 1996, 1995,
1994, 1993 and 1992).
(27) 27 Financial Data Schedule
</TABLE>
- -----------------------
* Filed with Registration Statement No. 2-60849, effective July 24, 1978.
** Filed with Annual Report (Form 10-K) for fiscal year ended December 31,
1991.
EXHIBIT 10.9d
(LETTERHEAD OF THE UNITED ILLUMINATING COMPANY)
CERTIFIED MAIL/
RETURN RECEIPT REQUESTED
- ------------------------
April 22, 1997
National Railroad Passenger Corp.
60 Massachusetts Ave., N.E.
Washington, DC 20002
NOTICE
The undersigned THE UNITED ILLUMINATING COMPANY, a corporation
organized and existing under the laws of the State of Connecticut, (hereinafter
called "Power Company") acting herein by Robert L. Fiscus, its President
hereunto duly authorized, hereby gives you, as successor to The Trustees of the
Property of The New York, New Haven and Hartford Railroad Company, Debtor,
(hereinafter called "New Haven Trustees") written notice of the Power Company's
election to exercise its right and option to extend for a term of forty (40)
years beyond May 4, 2000, that certain Transmission Line Agreement, made on the
13th day of January, 1966 between the New Haven Trustees and the Power Company
(hereinafter called the "Agreement"), solely with respect to the land
(hereinafter called the "Extension Land") described in Paragraphs (2), (4) and
(5) of Section (a) of Article I of the Agreement. This written notice is given
pursuant to the provisions of Section (a) of Article VI of that certain
agreement between the Power Company and National Railroad Passenger Corporation,
dated March 28, 1985; and the Power Company will be pleased to commence
discussions with you at your
<PAGE>
convenience concerning the rental to be payable by the Power Company during the
extended term of the Agreement with respect to the Extension Land. All
communications in this regard should be directed to the Power Company at 157
Church Street, New Haven, Connecticut 06506-0901, Attention: Real Estate Manager
IN WITNESS WHEREOF, the Power Company has caused this instrument to be
executed and sealed on the 22nd day of April, 1997.
THE UNITED ILLUMINATING COMPANY
By /s/ Robert L. Fiscus
-----------------------------
Robert L. Fiscus
President
Witnesses:
/s/ Camille C. Costelli
- -------------------------------
/s/ Francine J. Turbert
- -------------------------------
ATTEST:
/s/ Charles J. Pepe
- -------------------------------
Charles J. Pepe
Assistant Secretary
cc: Real Estate Dept. (National Railroad Passenger Corp.)
<PAGE>
STATE OF CONNECTICUT )
: ss. New Haven, April 23 , 1997
COUNTY OF NEW HAVEN )
Personally appeared Robert L. Fiscus , President of The United Illuminating
Company, signer and sealer of the within and foregoing instrument, and
acknowledged the same to be the free act and deed of said The United
Illuminating Company and his free act and deed as its President, before me.
/s/ George W. Miller
------------------------------
Notary Public
My Commission Expires: Sept. 30, 1997
<TABLE>
EXHIBIT 12
PAGE 1 OF 2
THE UNITED ILLUMINATING COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<CAPTION>
TWELVE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income $56,768 $40,481 $46,795 $50,393 $39,096 $34,744
Federal income taxes 19,276 22,342 34,551 41,951 35,252 24,335
State income taxes 16,878 4,645 6,216 12,976 8,506 6,056
Fixed charges 109,449 97,928 88,093 83,994 80,097 79,931
----------- ----------- ----------- ----------- ----------- ------------
Earnings available for fixed charges $202,371 $165,396 $175,655 $189,314 $162,951 $145,066
=========== =========== =========== =========== =========== ============
FIXED CHARGES
Interest on long-term debt $88,666 $80,030 $73,772 $63,431 $66,305 $65,760
Other interest 12,882 12,260 10,301 16,723 9,534 9,890
Interest on nuclear fuel burned 2,963 928 - - - -
One third of rental charges 4,938 4,710 4,020 3,840 4,258 4,281
----------- ----------- ----------- ----------- ----------- ------------
$109,449 $97,928 $88,093 $83,994 $80,097 $79,931
=========== =========== =========== =========== =========== ============
RATIO OF EARNINGS TO FIXED
CHARGES 1.85 1.69 1.99 2.25 2.03 1.81
=========== =========== =========== =========== =========== ============
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 12
PAGE 2 OF 2
THE UNITED ILLUMINATING COMPANY
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(IN THOUSANDS)
<CAPTION>
TWELVE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Net income $56,768 $40,481 $46,795 $50,393 $39,096 $34,744
Federal income taxes 19,276 22,342 34,551 41,951 35,252 24,335
State income taxes 16,878 4,645 6,216 12,976 8,506 6,056
Fixed charges 109,449 97,928 88,093 83,994 80,097 79,931
----------- ----------- ----------- ---------- ---------- -----------
Earnings available for combined fixed
charges and preferred stock
dividend requirements $202,371 $165,396 $175,655 $189,314 $162,951 $145,066
=========== =========== =========== ========== ========== ===========
FIXED CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS
Interest on long-term debt $ 88,666 $ 80,030 $73,772 $63,431 $66,305 $65,760
Other interest 12,882 12,260 10,301 16,723 9,534 9,890
Interest on nuclear fuel burned 2,963 928 - - - -
One third of rental charges 4,938 4,710 4,020 3,840 4,258 4,281
Preferred stock dividend requirements (1) 7,100 7,197 6,223 2,778 699 388
----------- ----------- ----------- ---------- ---------- -----------
$116,549 $105,125 $94,316 $86,772 $80,796 $80,319
=========== =========== =========== ========== ========== ===========
RATIO OF EARNINGS TO FIXED
CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS 1.74 1.57 1.86 2.18 2.02 1.81
=========== =========== =========== ========== ========== ===========
</TABLE>
(1) Preferred Stock Dividends increased to reflect the pre-tax earnings required
to cover such dividend requirements.
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,301,473
<OTHER-PROPERTY-AND-INVEST> 30,520
<TOTAL-CURRENT-ASSETS> 150,212
<TOTAL-DEFERRED-CHARGES> 427,127
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,909,332
<COMMON> 284,579
<CAPITAL-SURPLUS-PAID-IN> (1,410)
<RETAINED-EARNINGS> 152,709
<TOTAL-COMMON-STOCKHOLDERS-EQ> 435,878
0
4,421
<LONG-TERM-DEBT-NET> 655,090
<SHORT-TERM-NOTES> 35,641
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 142,135
0
<CAPITAL-LEASE-OBLIGATIONS> 17,027
<LEASES-CURRENT> 327
<OTHER-ITEMS-CAPITAL-AND-LIAB> 618,813
<TOT-CAPITALIZATION-AND-LIAB> 1,909,332
<GROSS-OPERATING-REVENUE> 344,099
<INCOME-TAX-EXPENSE> 12,027
<OTHER-OPERATING-EXPENSES> 287,230
<TOTAL-OPERATING-EXPENSES> 299,257
<OPERATING-INCOME-LOSS> 44,842
<OTHER-INCOME-NET> 4,787
<INCOME-BEFORE-INTEREST-EXPEN> 49,629
<TOTAL-INTEREST-EXPENSE> 30,971
<NET-INCOME> 16,252
103
<EARNINGS-AVAILABLE-FOR-COMM> 16,168
<COMMON-STOCK-DIVIDENDS> 20,306
<TOTAL-INTEREST-ON-BONDS> 56,694
<CASH-FLOW-OPERATIONS> 63,538
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
