SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
COMMISSION REGISTRANT; STATE OF INCORPORATION; I. R. S. EMPLOYER
FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
----------- ---------------------------------- -----------------
1-6788 THE UNITED ILLUMINATING COMPANY 06-0571640
(a Connecticut Corporation)
157 Church Street
New Haven, Connecticut 06506
Telephone: (203) 499-2000
1-15995 UIL HOLDINGS CORPORATION 06-1541045
(a Connecticut Corporation)
157 Church Street
New Haven, Connecticut 06506
Telephone: (203) 499-2000
NONE
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of UIL Holdings Corporation's only class
of common stock, as of September 30, 2000, was 14,321,177.
The number of shares outstanding of The United Illuminating Company's only
class of common stock, as of September 30, 2000 was 100.
- 1 -
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NUMBER
------
Item 1. Financial Statements. 4
UIL HOLDINGS CORPORATION
Consolidated Statement of Income for the three and
nine months ended September 30, 2000 and 1999. 4
Consolidated Balance Sheet as of September 30, 2000
and December 31, 1999. 5
Consolidated Statement of Cash Flows for the three and
nine months ended September 30, 2000 and 1999. 7
THE UNITED ILLUMINATING COMPANY
Statement of Income for the three and nine months ended
September 30, 2000 and 1999. 8
Balance Sheet as of September 30, 2000 and December 31,
1999. 9
Statement of Cash Flows for the three and nine months
ended September 30, 2000 and 1999. 11
UIL HOLDINGS CORPORATION\THE UNITED ILLUMINATING COMPANY
Notes to Financial Statements. 12
- Statement of Accounting Policies 12
- Capitalization 13
- Short-term Credit Arrangements 14
- Income Taxes 15
- Supplementary Information 17
- Commitments and Contingencies 19
- Capital Expenditure Program 19
- Nuclear Insurance Contingencies 19
- Other Commitments and Contingencies 19
- Connecticut Yankee 19
- Hydro-Quebec 20
- Environmental Concerns 20
- Site Decontamination, Demolition and
Remediation Costs 20
- Nuclear Fuel Disposal and Nuclear Plant
Decommissioning 21
- Segment Information 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 23
UIL HOLDINGS CORPORATION
- Major Influences on Financial Condition 23
- Capital Expenditure Program 25
- Liquidity and Capital Resources 25
- Subsidiary Operations 26
- Results of Operations 27
- Looking Forward 34
THE UNITED ILLUMINATING COMPANY 37
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 37
- 2 -
<PAGE>
INDEX
PART II. OTHER INFORMATION
PAGE
NUMBER
------
Item 1. Legal Proceedings. 38
Item 6. Exhibits and Reports on Form 8-K. 38
SIGNATURES 41
- 3 -
<PAGE>
<TABLE>
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES (NOTE G) $247,054 $220,527 $646,098 $577,608
------------- ------------- ------------ -------------
OPERATING EXPENSES
Operation
Fuel and energy 74,164 51,433 214,503 123,815
Capacity purchased 683 8,428 3,587 26,168
Other 78,458 57,774 196,971 158,125
Maintenance 6,076 5,820 16,895 21,279
Depreciation (Note G) 8,397 13,352 24,567 48,464
Amortization of regulatory assets 17,874 11,444 24,467 24,934
Income taxes (Note F) 18,357 25,773 47,574 55,549
Other taxes (Note G) 11,441 12,918 33,658 38,399
------------- ------------- ------------ -------------
Total 215,450 186,942 562,222 496,733
------------- ------------- ------------ -------------
OPERATING INCOME 31,604 33,585 83,876 80,875
------------- ------------- ------------ -------------
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds used during construction 138 347 564 614
Other-net (Note G) (2,678) 1,043 (2,254) 903
Non-operating income taxes (Note F) 1,731 1,017 2,983 2,057
------------- ------------- ------------ -------------
Total (809) 2,407 1,293 3,574
------------- ------------- ------------ -------------
INCOME BEFORE INTEREST CHARGES 30,795 35,992 85,169 84,449
------------- ------------- ------------ -------------
INTEREST CHARGES
Interest on long-term debt 9,540 9,829 28,659 32,219
Interest on Seabrook obligation bonds owned by the company (1,618) (1,711) (4,853) (5,133)
Dividend requirement of mandatorily redeemable securities 1,123 1,203 3,529 3,609
Other interest (Note G) 2,026 1,407 3,052 4,083
Allowance for borrowed funds used during construction (554) (327) (1,296) (1,098)
------------- ------------- ------------ -------------
10,517 10,401 29,091 33,680
Amortization of debt expense and redemption premiums 571 594 1,710 1,885
------------- ------------- ------------ -------------
Net Interest Charges 11,088 10,995 30,801 35,565
------------- ------------- ------------ -------------
NET INCOME 19,707 24,997 54,368 48,884
Premium on preferred stock redemptions - - - 53
Dividends on preferred stock - - - 66
------------- ------------- ------------ -------------
INCOME APPLICABLE TO COMMON STOCK $19,707 $24,997 $54,368 $48,765
============= ============= ============ =============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,070 14,056 14,072 14,049
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,112 14,058 14,087 14,051
EARNINGS PER SHARE OF COMMON STOCK - BASIC AND DILUTED $1.40 $1.78 $3.86 $3.47
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $0.72 $0.72 $2.16 $2.16
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 4 -
<PAGE>
<TABLE>
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
(Thousands of Dollars)
<CAPTION>
September 30, December 31,
2000 1999*
---- -----
(Unaudited)
<S> <C> <C>
Utility Plant at Original Cost
In service $915,609 $1,007,065
Less, accumulated provision for depreciation 443,286 532,409
------------- --------------
472,323 474,656
Construction work in progress 34,963 25,708
Nuclear fuel 23,395 21,101
------------- --------------
Net Utility Plant 530,681 521,465
------------- --------------
Other Property and Investments
Investment in generation facility 89,847 83,494
Nuclear decommissioning trust fund assets 34,090 28,255
Other 18,381 20,098
------------- --------------
142,318 131,847
------------- --------------
Current Assets
Unrestricted cash and temporary cash investments 8,446 39,099
Restricted cash 33,212 29,223
Accounts receivable
Customers, less allowance for doubtful
accounts of $1,500 and $1,800 60,434 56,057
Other, less allowance for doubtful accounts
of $698 and $508 119,698 53,612
Accrued utility revenues 23,375 25,019
Fuel, materials and supplies, at average cost 10,657 9,259
Prepayments 5,342 3,056
Other 9,353 4,801
------------- --------------
Total 270,517 220,126
------------- --------------
Deferred Charges
Goodwill 24,721 4,827
Unamortized debt issuance expenses 7,473 8,688
Other 1,622 1,272
------------- --------------
Total 33,816 14,787
------------- --------------
Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Nuclear plant investments-above market 502,906 518,268
Income taxes due principally to book-tax
differences 146,744 166,965
Long-term purchase power contracts-above market 132,347 144,406
Connecticut Yankee 30,583 37,013
Unamortized redemption costs 22,574 22,314
Unamortized cancelled nuclear projects 7,901 8,780
Displaced worker protection costs 4,021 5,746
Uranium enrichment decommissioning cost 990 1,040
Other 30,318 5,453
------------- --------------
Total 878,384 909,985
------------- --------------
$1,855,716 $1,798,210
============= ==============
</TABLE>
*Derived from audited financial statements
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 5 -
<PAGE>
<TABLE>
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)
<CAPTION>
September 30, December 31,
2000 1999*
---- -----
(Unaudited)
<S> <C> <C>
Capitalization (Note B)
Common stock equity
Common stock $291,342 $292,006
Paid-in capital 2,424 2,253
Capital stock expense (2,170) (2,170)
Unearned employee stock ownership plan equity (8,548) (9,261)
Retained earnings 199,446 175,470
--------------- ---------------
482,494 458,298
Company-obligated mandatorily redeemable securities of
subsidiary holding solely parent company debentures - 50,000
Long-term debt
Long-term debt 604,837 605,641
Investment in Seabrook obligation bonds (82,635) (87,413)
--------------- ---------------
Net long-term debt 522,202 518,228
--------------- ---------------
Total 1,004,696 1,026,526
--------------- ---------------
Noncurrent Liabilities
Purchase power contract obligation 132,347 144,406
Nuclear decommissioning obligation 34,090 28,255
Connecticut Yankee contract obligation 23,134 27,056
Pensions accrued 4,964 19,026
Obligations under capital leases 15,830 16,131
Other 10,833 10,394
--------------- ---------------
Total 221,198 245,268
--------------- ---------------
Current Liabilities
Current portion of long-term debt 859 25,000
Notes payable 80,342 17,131
Accounts payable 34,325 49,069
Accounts payable - APS customers 93,656 56,220
Dividends payable 10,127 10,125
Taxes accrued 9,369 2,570
Interest accrued 13,805 8,433
Obligations under capital leases 398 375
Other accrued liabilities 62,924 39,421
--------------- ---------------
Total 305,805 208,344
--------------- ---------------
Customers' Advances for Construction 1,872 1,867
--------------- ---------------
Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Accumulated deferred investment tax credits 14,881 15,157
Deferred gains on sale of property 15,901 15,901
Customer refund 21,693 18,381
Other 503 2,543
--------------- ---------------
Total 52,978 51,982
--------------- ---------------
Deferred Income Taxes (FUTURE TAX LIABILITIES OWED
TO TAXING AUTHORITIES) 269,167 264,223
Commitments and Contingencies (Note L)
--------------- ---------------
$1,855,716 $1,798,210
=============== ===============
</TABLE>
*Derived from audited financial statements
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 6 -
<PAGE>
<TABLE>
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $19,707 $24,997 $54,368 $48,884
------------- ------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26,999 21,200 60,625 62,918
Deferred income taxes 1,416 3,023 7,042 6,838
Deferred income taxes - generation asset sale - - - (70,222)
Deferred investment tax credits - net (103) (190) (276) (571)
Amortization of nuclear fuel 1,979 1,978 5,772 6,658
Allowance for funds used during construction (693) (674) (1,860) (1,712)
CTA and SBC expense deferral (7,888) - (32,904) -
Amortization of deferred return - 3,146 - 9,439
Changes in:
Accounts receivable - net (45,817) (22,178) (70,463) (11,643)
Fuel, materials and supplies (975) (42) (1,398) 170
Prepayments (1,889) (1,985) (2,286) 1,777
Accounts payable 32,673 16,015 22,692 (847)
Interest accrued (2,399) (2,462) 5,372 3,951
Taxes accrued (3,119) 6,967 6,799 11,777
Taxes accrued - generation asset sale - (17,555) - 17,556
Other assets and liabilities 2,404 15,933 (1,156) (20,800)
------------- ------------ ------------ ------------
Total Adjustments 2,588 23,176 (2,041) 15,289
------------- ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,295 48,173 52,327 64,173
------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock (347) 284 219 853
Notes payable 66,080 (5,550) 63,211 (43,758)
Securities redeemed and retired:
Preferred stock - - - (4,299)
Company-obligated mandatorily redeemable securities of
subsidiary holding solely parent debentures (50,000) - (50,000) -
Long-term debt - - (25,750) (211,202)
Premium on preferred stock redemptions - - - (53)
Lease obligations (95) (88) (279) (259)
Dividends
Preferred stock - - - (116)
Common stock (10,135) (10,114) (30,390) (30,329)
------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,503 (15,468) (42,989) (289,163)
------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unregulated businesses - (20,156) - (95,248)
Net cash received from sale of generation assets - - - 270,590
Plant expenditures, including nuclear fuel (18,085) (9,770) (40,780) (26,296)
Investment in debt securities - - 4,778 5,447
------------- ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (18,085) (29,926) (36,002) 154,493
------------- ------------ ------------ ------------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD 9,713 2,779 (26,664) (70,497)
BALANCE AT BEGINNING OF PERIOD 31,945 51,225 68,322 124,501
------------- ------------ ------------ ------------
BALANCE AT END OF PERIOD 41,658 54,004 41,658 54,004
LESS: RESTRICTED CASH 33,212 35,999 33,212 35,999
------------- ------------ ------------ ------------
BALANCE: UNRESTRICTED CASH $8,446 $18,005 $8,446 $18,005
============= ============ ============ ============
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $10,173 $9,919 $18,732 $24,402
============= ============ ============ ============
Income taxes $20,000 $33,900 $32,600 $91,850
============= ============ ============ ============
</TABLE>
Note: Cash Flows from Operating Activities for the nine months ended
September 30, 1999 were reduced by the current income tax effects of
the generation asset sale in the amount of $52,666.
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 7 -
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
STATEMENT OF INCOME
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES (NOTE G) $201,127 $199,071 $546,116 $532,271
------------- ------------- ------------ -------------
OPERATING EXPENSES
Operation
Fuel and energy 74,164 51,433 214,503 123,815
Capacity purchased 683 8,428 3,587 26,168
Other 36,338 36,651 104,478 112,328
Maintenance 6,076 5,820 16,895 21,279
Depreciation (Note G) 7,263 12,375 21,508 45,732
Amortization of regulatory assets 17,874 11,444 24,467 24,934
Income taxes (Note F) 19,153 25,910 48,051 57,286
Other taxes (Note G) 11,073 12,918 32,942 38,399
------------- ------------- ------------ -------------
Total 172,624 164,979 466,431 449,941
------------- ------------- ------------ -------------
OPERATING INCOME 28,503 34,092 79,685 82,330
------------- ------------- ------------ -------------
OTHER INCOME AND (DEDUCTIONS)
Allowance for equity funds used during construction 138 347 564 614
Other-net (Note G) 1,536 773 2,750 2,071
Non-operating income taxes (Note F) 1,719 1,017 2,970 2,057
------------- ------------- ------------ -------------
Total 3,393 2,137 6,284 4,742
------------- ------------- ------------ -------------
INCOME BEFORE INTEREST CHARGES 31,896 36,229 85,969 87,072
------------- ------------- ------------ -------------
INTEREST CHARGES
Interest on long-term debt 9,540 9,829 28,659 32,219
Interest on Seabrook obligation bonds owned by the company (1,618) (1,711) (4,853) (5,133)
Interest on debt of associated company 1,134 1,215 3,565 3,646
Other interest (Note G) 1,636 1,407 2,661 4,083
Allowance for borrowed funds used during construction (554) (327) (1,296) (1,098)
------------- ------------- ------------ -------------
10,138 10,413 28,736 33,717
Amortization of debt expense and redemption premiums 571 594 1,710 1,885
------------- ------------- ------------ -------------
Net Interest Charges 10,709 11,007 30,446 35,602
------------- ------------- ------------ -------------
NET INCOME 21,187 25,222 55,523 51,470
Premium on preferred stock redemptions - - - 53
Dividends on preferred stock - - - 66
------------- ------------- ------------ -------------
INCOME APPLICABLE TO COMMON STOCK $21,187 $25,222 $55,523 $51,351
============= ============= ============ =============
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 8 -
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
BALANCE SHEET
ASSETS
(Thousands of Dollars)
<CAPTION>
September 30, December 31,
2000 1999*
---- -----
(Unaudited)
<S> <C> <C>
Utility Plant at Original Cost
In service $915,609 $1,007,065
Less, accumulated provision for depreciation 448,147 537,270
------------- --------------
467,462 469,795
Construction work in progress 34,963 25,708
Nuclear fuel 23,395 21,101
------------- --------------
Net Utility Plant 525,820 516,604
------------- --------------
Other Property and Investments
Nuclear decommissioning trust fund assets 34,090 28,255
Other 7,409 39,237
------------- --------------
41,499 67,492
------------- --------------
Current Assets
Unrestricted cash and temporary cash investments 3,121 34,969
Restricted cash 3,281 2,339
Accounts receivable
Customers, less allowance for doubtful
accounts of $1,500 and $1,800 60,434 56,057
Other 92,705 124,722
Accrued utility revenues 23,375 25,019
Fuel, materials and supplies, at average cost 9,408 9,126
Prepayments 5,079 2,780
------------- --------------
Total 197,403 255,012
------------- --------------
Deferred Charges
Unamortized debt issuance expenses 7,473 8,688
Other 1,120 1,163
------------- --------------
Total 8,593 9,851
------------- --------------
Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Nuclear plant investments-above market 502,906 518,268
Income taxes due principally to book-tax differences 146,744 166,965
Long-term purchase power contracts-above market 132,347 144,406
Connecticut Yankee 30,583 37,013
Unamortized redemption costs 22,574 22,314
Unamortized cancelled nuclear projects 7,901 8,780
Displaced worker protection costs 4,021 5,746
Uranium enrichment decommissioning cost 990 1,040
Other 30,318 5,453
------------- --------------
Total 878,384 909,985
------------- --------------
$1,651,699 $1,758,944
============= ==============
</TABLE>
*Derived from audited financial statements
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 9 -
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
BALANCE SHEET
CAPITALIZATION AND LIABILITIES
(Thousands of Dollars)
<CAPTION>
September 30, December 31,
2000 1999*
---- -----
(Unaudited)
<S> <C> <C>
Capitalization (Note B)
Common stock equity
Common stock $1 $292,006
Paid-in capital 253,119 2,253
Capital stock expense - (2,170)
Unearned employee stock ownership plan equity - (9,261)
Retained earnings 212,259 197,000
--------------- ---------------
465,379 479,828
Long-term debt
Long-term debt 604,837 656,147
Investment in Seabrook obligation bonds (82,635) (87,413)
--------------- ---------------
Net long-term debt 522,202 568,734
--------------- ---------------
Total 987,581 1,048,562
--------------- ---------------
Noncurrent Liabilities
Purchase power contract obligation 132,347 144,406
Nuclear decommissioning obligation 34,090 28,255
Connecticut Yankee contract obligation 23,134 27,056
Pensions accrued 4,964 19,026
Obligations under capital leases 15,830 16,131
Other 10,833 10,394
--------------- ---------------
Total 221,198 245,268
--------------- ---------------
Current Liabilities
Current portion of long-term debt 859 25,000
Notes payable - 17,000
Accounts payable 36,225 51,935
Dividends payable 20,000 10,125
Taxes accrued 7,932 2,382
Interest accrued 13,773 8,433
Obligations under capital leases 398 375
Other accrued liabilities 35,426 26,592
--------------- ---------------
Total 114,613 141,842
--------------- ---------------
Customers' Advances for Construction 1,872 1,867
--------------- ---------------
Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Accumulated deferred investment tax credits 14,881 15,157
Deferred gains on sale of property 15,901 15,901
Customer refund 21,693 18,381
Other 6,142 8,182
--------------- ---------------
Total 58,617 57,621
--------------- ---------------
Deferred Income Taxes (FUTURE TAX LIABILITIES OWED
TO TAXING AUTHORITIES) 267,818 263,784
Commitments and Contingencies (Note L)
--------------- ---------------
$1,651,699 $1,758,944
=============== ===============
</TABLE>
*Derived from audited financial statements
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 10 -
<PAGE>
<TABLE>
THE UNITED ILLUMINATING COMPANY
STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $21,187 $25,222 $55,523 $51,471
------------- ------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25,864 20,222 57,566 60,186
Deferred income taxes 1,526 3,008 6,130 6,580
Deferred income taxes - generation asset sale - - - (70,222)
Deferred investment tax credits - net (103) (190) (276) (571)
Amortization of nuclear fuel 1,979 1,978 5,772 6,658
Allowance for funds used during construction (693) (674) (1,860) (1,712)
CTA and SBC expense deferral (7,888) - (32,904) -
Amortization of deferred return - 3,146 - 9,439
Changes in:
Accounts receivable - net 40,155 (35,759) 27,640 (104,541)
Fuel, materials and supplies (134) 135 (282) (654)
Prepayments (1,812) (2,084) (2,299) 1,611
Accounts payable (248) (2,475) (15,710) (21,060)
Interest accrued (2,431) (2,462) 5,340 3,951
Taxes accrued (4,033) 7,067 5,550 13,718
Taxes accrued - generation asset sale - (17,555) - 17,556
Other assets and liabilities 40,191 14,934 43,216 (27,663)
------------- ------------ ------------ ------------
Total Adjustments 92,373 (10,709) 97,883 (106,724)
------------- ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 113,560 14,513 153,406 (55,253)
------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock (30,273) 284 (29,707) 853
Notes payable (6,500) (3,000) (17,000) (37,000)
Securities redeemed and retired:
Preferred stock - - - (4,299)
Long-term debt (50,506) - (76,256) (211,202)
Premium on preferred stock redemptions - - - (53)
Lease obligations (95) (88) (279) (259)
Dividends
Preferred stock - - - (116)
Common stock (10,135) (10,114) (30,390) (30,329)
------------- ------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (97,509) (12,918) (153,632) (282,405)
------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash received from sale of generation assets - - - 270,590
Plant expenditures, including nuclear fuel (13,769) (6,964) (35,458) (19,854)
Investment in debt securities - - 4,778 5,447
------------- ------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (13,769) (6,964) (30,680) 256,183
------------- ------------ ------------ ------------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD 2,282 (5,369) (30,906) (81,475)
BALANCE AT BEGINNING OF PERIOD 4,120 21,478 37,308 97,584
------------- ------------ ------------ ------------
BALANCE AT END OF PERIOD 6,402 16,109 6,402 16,109
LESS: RESTRICTED CASH 3,281 2,339 3,281 2,339
------------- ------------ ------------ ------------
BALANCE: UNRESTRICTED CASH $3,121 $13,770 $3,121 $13,770
============= ============ ============ ============
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $9,818 $9,920 $18,377 $24,403
============= ============ ============ ============
Income taxes $20,000 $33,900 $32,600 $91,850
============= ============ ============ ============
</TABLE>
Note: Cash Flows from Operating Activities for the nine months ended
September 30, 1999 were reduced by the current income tax effects of
the generation asset sale in the amount of $52,666.
The accompanying Notes to Financial Statements
are an integral part of the financial statements.
- 11 -
<PAGE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS
HOLDING COMPANY FORMATION
On July 20, 2000, UIL Holdings Corporation (UIL Holdings) became the parent
company of a holding company system as a result of the corporate restructuring
of The United Illuminating Company (UI) and its direct and indirect
non-regulated subsidiaries. UI has become a wholly-owned subsidiary of UIL
Holdings, and each share of the common stock of UI has been converted into a
share of common stock of UIL Holdings. All of UI's interests in all of its
direct and indirect non-regulated subsidiaries have been transferred to UIL
Holdings and, to the extent new businesses are subsequently acquired or
commenced, they will also be financed and owned by UIL Holdings.
BASIS OF PRESENTATION
The consolidated financial statements of UIL Holdings and its wholly-owned
direct subsidiaries, UI and United Resources, Inc. (URI), have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). The Notes to Financial Statements apply to both UIL Holdings and UI. UIL
Holdings Consolidated Financial Statements include the accounts of UIL Holdings
and its wholly-owned subsidiaries, UI and URI. UIL Holdings prior period
consolidated financial statements have been prepared from UI's prior period
consolidated financial statements, except that amounts have been reclassified to
reflect UIL Holdings structure. 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 the rules and regulations of the SEC.
UIL Holdings and UI believe that the disclosures are adequate to make the
information presented not misleading. The UIL Holdings' consolidated financial
statements and UI financial statements should be read in conjunction with the
consolidated financial statements and the notes to consolidated financial
statements included in UI's annual report on Form 10-K for the year ended
December 31, 1999. Such notes are supplemented as follows:
(A) STATEMENT OF ACCOUNTING POLICIES
NUCLEAR DECOMMISSIONING TRUSTS
External trust funds are maintained to fund the estimated future
decommissioning costs of the nuclear generating units in which UI has an
ownership interest. These costs are accrued as a charge to depreciation expense
over the estimated service lives of the units and are recovered in rates on a
current basis. UI paid $3 million into the decommissioning trust funds for
Seabrook Unit 1 and Millstone Unit 3 in the first nine months of each of 2000
and 1999. At September 30, 2000, UI's shares of the trust fund balances, which
included accumulated earnings on the funds, were $25.2 million and $8.8 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 UIL Holdings' Consolidated
Balance Sheet and UI's Balance Sheet.
COMPREHENSIVE INCOME
Comprehensive income for the nine months ended September 30, 2000 and 1999
is equal to net income as reported.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" will become effective for UIL Holdings in the first quarter of 2001.
UI has a contract with a power marketer that includes a financially settled
contract for differences related to certain call rights of the power marketer
and put rights of UI with respect to UI's entitlements in Seabrook Unit 1 and
Millstone Unit 3. This contract will terminate at the earlier of December 31,
2003 or the date that UI sells its
- 12 -
<PAGE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
interests in these units. Application of the new accounting standard will
require the recognition of UI's future obligation for financial settlements
under this contract. However, since the costs of this contract are considered in
the Competitive Transition Assessment (CTA) mechanism, there is currently no
income statement effect. The adoption of this accounting statement will not have
any impact on UIL Holdings' results of operations and is not expected to have a
material impact on UIL Holdings' financial condition.
(B) CAPITALIZATION
COMMON STOCK
UIL Holdings had 14,321,177 shares of its common stock, without par value,
outstanding at September 30, 2000, of which 251,465 shares were unallocated
shares held by The United Illuminating Company 401(k)/Employee Stock Ownership
Plan (KSOP) and not recognized as outstanding for accounting purposes.
UI has entered into an arrangement under which it loaned $11.5 million to
the KSOP. The trustee for the KSOP used the funds to purchase shares of UI
common stock in open market transactions. On July 20, 2000, effective with the
formation of the holding company structure, unallocated shares held by the KSOP
were converted into shares of UIL Holdings common stock. The shares will be
allocated to employees' KSOP accounts, as the loan is repaid, to cover a portion
of the required KSOP contributions. The loan will be repaid by the KSOP over a
twelve-year period, using employer contributions and UIL Holdings dividends paid
on the unallocated shares of the stock held by the KSOP. As of September 30,
2000, 251,465 shares, with a fair market value of $12.9 million, had been
purchased by the KSOP and had not been committed to be released or allocated to
KSOP participants.
In 1990, UI's Board of Directors and the shareowners approved a stock
option plan for officers and key employees of UI. Options to purchase 3,500
shares of stock at an exercise price of $30 per share, 7,800 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 and remained outstanding
at September 30, 2000. No options were exercised during the nine months ended
September 30, 2000. Effective with the formation of the holding company
structure on July 20, 2000, all outstanding options were converted into options
to purchase an equivalent number of shares of UIL Holdings common stock.
On March 22, 1999, UI's Board of Directors approved a stock option plan for
directors, officers and key employees of UI. The plan provides for the awarding
of options to purchase up to 650,000 shares of UI's common stock over periods of
from one to ten years following the dates when the options are granted. The
exercise price of each option cannot be less than the market value of the stock
on the date of the grant. On June 28, 1999, UI's shareowners approved the plan.
Effective with the formation of the holding company structure on July 20, 2000,
all outstanding options were converted into options to purchase an equivalent
number of shares of UIL Holdings common stock. Options to purchase 8,575 shares
of stock at an exercise price of $43.21875 were exercised during the nine months
ended September 30, 2000. Options and reload options to purchase 6,300 shares of
stock at an exercise price of $43.50 per share, 132,000 shares of stock at an
exercise price of $43.21875 per share, 186,900 shares of stock at an exercise
price of $39.40625 per share, 2,170 shares of stock at an exercise price of
$53.1250, 382 shares of stock at an exercise price of $52.6875, 1,000 shares of
stock at an exercise price of $50.3125 and 407 shares of stock at an exercise
price of $53.0625 have been granted and remained outstanding at September 30,
2000.
RETAINED EARNINGS RESTRICTION
The indenture under which UI has issued $200 million principal amount of
Notes places limitations on UI related to the payment of cash dividends on its
common stock and the purchase or redemption of its common stock. Retained
earnings in the amount of $132.9 million were free from such limitations at
September 30, 2000.
- 13 -
<PAGE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
LONG-TERM DEBT
On December 16, 1999, UI borrowed $25 million from the Business Finance
Authority of the State of New Hampshire (BFA), representing the proceeds from
the issuance by the BFA of $25 million principal amount of tax-exempt Pollution
Control Refunding Revenue Bonds (PCRRBs). UI is obligated, under its borrowing
agreement with the BFA, to pay to a trustee for the PCRRBs' bondholders such
amounts as will be required to pay, when due, the principal of and the premium,
if any, and interest on the PCRRBs. The PCRRBs will mature in 2029, and their
interest rate is fixed at 5.4% for the three-year period ending December 1,
2002. At December 31, 1999, these proceeds were held by a trustee and were
recognized as cash and long-term debt on UI's Balance Sheet. On January 15,
2000, UI used the proceeds of this $25 million borrowing to redeem and repay $25
million of 8.0%, 1989 Series A, Pollution Control Revenue Bonds, an outstanding
series of tax-exempt bonds on which UI also had a payment obligation to a
trustee for the bondholders. Expenses associated with this transaction,
including redemption premiums totaling $750,000 and other expenses of
approximately $417,000, were paid by UI.
On August 9, 2000, UI initiated the redemption process for $50 million of 9
5/8% Preferred Capital Securities, Series A, due 2025. These securities were
issued by United Capital Funding Partnership L. P., a Delaware limited
partnership, in April 1995. The securities were redeemed on September 25, 2000
at $25.00 per share, plus accrued dividends to the redemption date of $0.160417
per share.
(E) SHORT-TERM CREDIT ARRANGEMENTS
On June 26, 2000, UI entered into a Money Market Loan arrangement with
Chase Manhattan Bank. On September 29, 2000, this arrangement was transferred to
UIL Holdings. This is an uncommitted short-term borrowing arrangement under
which Chase Manhattan Bank may make loans totaling up to $150 million to UIL
Holdings for fixed maturities from one day up to six months. Chase Securities,
Inc. acts as an agent and sells the loans to investors. The fixed interest rates
on the loans are determined based on conditions in the financial markets at the
time of each loan. As of September 30, 2000, UIL Holdings had loans totaling $30
million outstanding under this arrangement.
UI's $60 million revolving credit agreement with a group of banks was
terminated on August 3, 2000. UI had no short-term borrowings outstanding under
this facility at that time.
On August 3, 2000, UIL Holdings entered into a revolving credit agreement
with the same group of banks. The borrowing limit of this facility is $97.5
million. The facility permits UIL Holdings to borrow funds at a fluctuating
interest rate determined by the prime lending market in New York, and also
permits UIL Holdings to borrow money for fixed periods of time specified by UIL
Holdings at fixed interest rates determined by the Eurodollar interbank market
in London. If a material adverse change in the business, operations, affairs,
assets or condition, financial or otherwise, or prospects of UIL Holdings and
its subsidiaries, on a consolidated basis, should occur, the banks may decline
to lend additional money to UIL Holdings under this revolving credit agreement,
although borrowings outstanding at the time of such an occurrence would not then
become due and payable. As of September 30, 2000, UIL Holdings had $50 million
in short-term borrowings outstanding under this facility.
- 14 -
<PAGE>
<TABLE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(F) INCOME TAXES
UIL HOLDINGS CORPORATION
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C>
Income tax expense consists of:
Income tax provisions:
Current
Federal $12,416 $17,404 $30,612 $93,197
State 2,897 4,519 7,213 24,250
------------ ------------ ------------ ------------
Total current 15,313 21,923 37,825 117,447
------------ ------------ ------------ ------------
Deferred
Federal 1,124 2,802 6,202 (48,842)
State 292 221 840 (14,542)
------------ ------------ ------------ ------------
Total deferred 1,416 3,023 7,042 (63,384)
------------ ------------ ------------ ------------
Investment tax credits (103) (190) (276) (571)
------------ ------------ ------------ ------------
Total income tax expense $16,626 $24,756 $44,591 $53,492
============ ============ ============ ============
Income tax components charged as follows:
Operating expenses $18,357 $25,773 $47,574 $55,549
Other income and deductions - net (1,731) (1,017) (2,983) (2,057)
------------ ------------ ------------ ------------
Total income tax expense $16,626 $24,756 $44,591 $53,492
============ ============ ============ ============
The following table details the components
of the deferred income taxes:
Tax gain on sale of generation assets $ - $ - $ - $ (70,222)
Seabrook sale/leaseback transaction 576 686 (3,419) (3,478)
Pension benefits 2,488 579 5,583 2,684
Accelerated depreciation (1,674) 1,251 (2,379) 3,751
Tax depreciation on unrecoverable plant investment 22 1,186 68 3,560
Unit overhaul and replacement power costs (454) (240) (1,363) 1,978
Conservation and load management (27) (410) (80) (2,155)
Postretirement benefits (100) (265) (284) (963)
Loss from disposition of property - - (1,420) -
Displaced worker protection costs (225) 43 (688) 2,258
Bond redemption costs (256) (253) (329) (761)
Cancelled nuclear project (117) (117) (350) (350)
Restructuring costs (1,398) - 1,267 -
SBC and CTA expense deferral 3,145 - 13,120 -
Other - net (564) 563 (2,684) 314
------------ ------------ ------------ ------------
Deferred income taxes - net $1,416 $3,023 $7,042 ($63,384)
============ ============ ============ ============
</TABLE>
- 15 -
<PAGE>
<TABLE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
THE UNITED ILLUMINATING COMPANY
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C>
Income tax expense consists of:
Income tax provisions:
Current
Federal $13,003 $17,537 $31,824 $94,793
State 3,008 4,538 7,403 24,649
------------ ------------ ------------ ------------
Total current 16,011 22,075 39,227 119,442
------------ ------------ ------------ ------------
Deferred
Federal 1,213 2,790 5,461 (49,046)
State 313 218 669 (14,596)
------------ ------------ ------------ ------------
Total deferred 1,526 3,008 6,130 (63,642)
------------ ------------ ------------ ------------
Investment tax credits (103) (190) (276) (571)
------------ ------------ ------------ ------------
Total income tax expense $17,434 $24,893 $45,081 $55,229
============ ============ ============ ============
Income tax components charged as follows:
Operating expenses $19,153 $25,910 $48,051 $57,286
Other income and deductions - net (1,719) (1,017) (2,970) (2,057)
------------ ------------ ------------ ------------
Total income tax expense $17,434 $24,893 $45,081 $55,229
============ ============ ============ ============
The following table details the components
of the deferred income taxes:
Tax gain on sale of generation assets $ - $ - $ - $ (70,222)
Seabrook sale/leaseback transaction 576 686 (3,419) (3,478)
Pension benefits 2,488 579 5,583 2,684
Accelerated depreciation (1,674) 1,251 (2,379) 3,751
Tax depreciation on unrecoverable plant investment 22 1,186 68 3,560
Unit overhaul and replacement power costs (454) (240) (1,363) 1,978
Conservation and load management (27) (410) (80) (2,155)
Postretirement benefits (100) (265) (284) (963)
Loss from disposition of property - - (1,420) -
Displaced worker protection costs (225) 43 (688) 2,258
Bond redemption costs (256) (253) (329) (761)
Cancelled nuclear project (117) (117) (350) (350)
Restructuring costs (1,398) - 1,267 -
SBC and CTA expense deferral 3,145 - 13,120 -
Other - net (454) 548 (3,596) 56
------------ ------------ ------------ ------------
Deferred income taxes - net $1,526 $3,008 $6,130 ($63,642)
============ ============ ============ ============
</TABLE>
- 16 -
<PAGE>
<TABLE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(G) SUPPLEMENTARY INFORMATION
UIL HOLDINGS CORPORATION
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C>
Operating Revenues
------------------
Utility
Retail $160,028 $191,056 $457,697 $498,985
Wholesale 20,511 3,669 59,083 22,938
Proceeds from Millstone Unit 3 settlement 14,960 - 14,960 -
Other 5,628 4,346 14,376 10,348
Non-regulated business unit revenues 45,927 21,456 99,982 45,337
------------- ------------- ------------- -------------
Total Operating Revenues $247,054 $220,527 $646,098 $577,608
============= ============= ============= =============
Utility Sales by Class (megawatt-hours)
--------------------------------------
Retail
Residential 535,409 604,600 1,543,702 1,581,672
Commercial 657,897 663,457 1,808,518 1,808,369
Industrial 298,806 323,782 870,002 885,041
Other 10,445 11,803 33,945 35,852
------------- ------------- ------------- -------------
1,502,557 1,603,642 4,256,167 4,310,934
Wholesale 663,649 62,040 1,932,945 920,623
------------- ------------- ------------- -------------
Total Sales by Class 2,166,206 1,665,682 6,189,112 5,231,557
============= ============= ============= =============
Depreciation
------------
Plant in Service-regulated utility $6,256 $11,347 $18,506 $37,918
Nonutility property-unregulated 1,134 977 3,059 2,732
Amortization of Conservation and
Load Management Costs - (50) - 4,786
Nuclear Decommissioning 1,007 1,078 3,002 3,028
------------- ------------- ------------- -------------
$8,397 $13,352 $24,567 $48,464
============= ============= ============= =============
Other Taxes
-----------
Charged to:
Operating:
State gross earnings $6,480 $7,704 $18,035 $19,456
Local real estate and personal property 3,612 4,062 11,310 14,737
Payroll taxes 1,349 1,152 4,313 4,206
------------- ------------- ------------- -------------
11,441 12,918 33,658 38,399
Nonoperating and other accounts 197 140 476 432
------------- ------------- ------------- -------------
Total Other Taxes $11,638 $13,058 $34,134 $38,831
============= ============= ============= =============
Other Income and (Deductions) - net
-----------------------------------
Interest income $197 $294 $808 $1,423
Equity earnings from Connecticut Yankee 574 197 817 521
Miscellaneous other income and (deductions) - net (3,449) 552 (3,879) (1,041)
------------- ------------- ------------- -------------
Total Other Income and (Deductions) - net ($2,678) $1,043 ($2,254) $903
============= ============= ============= =============
Other Interest Charges
----------------------
Notes Payable $702 $698 $1,217 $2,341
Other 1,324 709 1,835 1,742
------------- ------------- ------------- -------------
Total Other Interest Charges $2,026 $1,407 $3,052 $4,083
============= ============= ============= =============
</TABLE>
- 17 -
<PAGE>
<TABLE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
THE UNITED ILLUMINATING COMPANY
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C>
Operating Revenues
------------------
Retail $160,028 $191,056 $457,697 $498,985
Wholesale 20,511 3,669 59,083 22,938
Proceeds from Millstone Unit 3 settlement 14,960 - 14,960 -
Other 5,628 4,346 14,376 10,348
------------- ------------- ------------- -------------
Total Operating Revenues $201,127 $199,071 $546,116 $532,271
============= ============= ============= =============
Sales by Class (megawatt-hours)
------------------------------
Retail
Residential 535,409 604,600 1,543,702 1,581,672
Commercial 657,897 663,457 1,808,518 1,808,369
Industrial 298,806 323,782 870,002 885,041
Other 10,445 11,803 33,945 35,852
------------- ------------- ------------- -------------
1,502,557 1,603,642 4,256,167 4,310,934
Wholesale 663,649 62,040 1,932,945 920,623
------------- ------------- ------------- -------------
Total Sales by Class 2,166,206 1,665,682 6,189,112 5,231,557
============= ============= ============= =============
Depreciation
------------
Plant in Service-regulated utility $6,256 $11,347 $18,506 $37,918
Amortization of Conservation and
Load Management Costs - (50) - 4,786
Nuclear Decommissioning 1,007 1,078 3,002 3,028
------------- ------------- ------------- -------------
$7,263 $12,375 $21,508 $45,732
============= ============= ============= =============
Other Taxes
-----------
Charged to:
Operating:
State gross earnings $6,480 $7,704 $18,035 $19,456
Local real estate and personal property 3,589 4,062 11,243 14,737
Payroll taxes 1,004 1,152 3,664 4,206
------------- ------------- ------------- -------------
11,073 12,918 32,942 38,399
Nonoperating and other accounts 197 140 476 432
------------- ------------- ------------- -------------
Total Other Taxes $11,270 $13,058 $33,418 $38,831
============= ============= ============= =============
Other Income and (Deductions) - net
-----------------------------------
Interest income $197 $294 $808 $1,423
Equity earnings from Connecticut Yankee 574 197 817 521
Miscellaneous other income and (deductions) - net 765 282 1,125 127
------------- ------------- ------------- -------------
Total Other Income and (Deductions) - net $1,536 $773 $2,750 $2,071
============= ============= ============= =============
Other Interest Charges
----------------------
Notes Payable $636 $698 $1,151 $2,341
Other 1,000 709 1,510 1,742
------------- ------------- ------------- -------------
Total Other Interest Charges $1,636 $1,407 $2,661 $4,083
============= ============= ============= =============
</TABLE>
- 18 -
<PAGE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(L) COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURE PROGRAM
UIL Holdings' continuing capital expenditure program is presently estimated
at $359 million, excluding UI's allowance for funds used during construction
(AFUDC), for 2000 through 2004.
NUCLEAR INSURANCE CONTINGENCIES
The Price-Anderson Act, currently extended through August 1, 2002, limits
public liability resulting from a single incident at a nuclear power plant. The
first $200 million of liability coverage is provided by purchasing the maximum
amount of commercially available insurance. Additional liability coverage will
be provided by an assessment of up to $83.9 million per incident, levied on each
of the nuclear units licensed to operate in the United States, subject to a
maximum assessment of $10 million per incident per nuclear unit in any year. In
addition, if the sum of all public liability claims and legal costs resulting
from any nuclear incident exceeds the maximum amount of financial protection,
each reactor operator can be assessed an additional 5% of $83.9 million, or $4.2
million. The maximum assessment is adjusted at least every five years to reflect
the impact of inflation. With respect to each of the two operating nuclear
generating units in which UI has an interest, UI 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, UI estimates its maximum liability would be $17.8
million per incident. However, any assessment would be limited to $2.1 million
per incident per year.
The Nuclear Regulatory Commission requires each operating nuclear
generating unit to obtain property insurance coverage in a minimum amount of
$1.06 billion and to establish a system of prioritized use of the insurance
proceeds in the event of a nuclear incident. The system requires that the first
$1.06 billion of insurance proceeds be used to stabilize the nuclear reactor to
prevent any significant risk to public health and safety and then for
decontamination and cleanup operations. Only following completion of these tasks
would the balance, if any, of the segregated insurance proceeds become available
to the unit's owners. For each of the two operating nuclear generating units in
which UI has an interest, UI 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. Under
those circumstances, the nuclear insurance pools that provide this coverage may
levy assessments against the insured owner companies if pool losses exceed the
accumulated funds available to the pool. The maximum potential assessments
against UI with respect to losses occurring during current policy years are
approximately $3.0 million.
OTHER COMMITMENTS AND CONTINGENCIES
CONNECTICUT YANKEE
On December 4, 1996, the Board of Directors of the Connecticut Yankee
Atomic Power Company (Connecticut Yankee) voted unanimously to retire the
Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial
operation. UI has a 9.5% stock ownership share in Connecticut Yankee. The power
purchase contract under which UI had purchased its 9.5% entitlement to the
Connecticut Yankee Unit's power output permits Connecticut Yankee to recover
9.5% of all of its costs from UI. In December of 1996, Connecticut Yankee filed
decommissioning cost estimates and amendments to the power contracts with its
owners with the Federal Energy Regulatory Commission (FERC). Based on regulatory
precedent, this filing requested confirmation that Connecticut Yankee 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. On April 7, 2000, Connecticut
Yankee reached a settlement agreement with the Connecticut Department of Public
Utility Control (DPUC) and the Connecticut Office of Consumer Counsel (two of
the intervenors in the FERC proceeding). This agreement was
- 19 -
<PAGE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
submitted to the FERC, which approved it in all respects on July 26, 2000; and
it became effective on August 1, 2000. The agreement allows Connecticut Yankee
to earn a return on equity of 6% and stipulates a new decommissioning cost
estimate for the Connecticut Yankee Unit for purposes of FERC-approved
decommissioning cost collections by Connecticut Yankee through the power
contracts with the unit's owners.
UI's estimate of its remaining share of Connecticut Yankee costs, including
decommissioning, less return of investment (approximately $7.5 million) and
return on investment (approximately $3.0 million) at September 30, 2000, is
approximately $23.1 million. This estimate, which is subject to ongoing review
and revision, has been recorded as an obligation and a regulatory asset on UI's
Balance Sheet.
HYDRO-QUEBEC
UI is a participant in the Hydro-Quebec transmission intertie facility
linking New England and Quebec, Canada. Phase I of this facility, which became
operational in 1986 and in which UI has a 5.45% participating share, has a 690
megawatt equivalent capacity value; and Phase II, in which UI has a 5.45%
participating share, increased the equivalent capacity value of the intertie
from 690 megawatts to a maximum of 2000 megawatts in 1991. UI is obligated to
furnish a guarantee for its participating share of the debt financing for the
Phase II facility. As of September 30, 2000, UI's guarantee liability for this
debt was approximately $5.7 million.
ENVIRONMENTAL CONCERNS
In complying with existing environmental statutes and regulations and
further developments in areas of environmental concern, including legislation
and studies in the fields of water quality, hazardous waste handling and
disposal, toxic substances, and electric and magnetic fields, UI may incur
substantial capital expenditures for equipment modifications and additions,
monitoring equipment and recording devices, and it may incur additional
operating expenses. The total amount of these expenditures is not now
determinable.
SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS
UI has estimated that the total cost of decontaminating and demolishing its
Steel Point Station and completing requisite environmental remediation of the
site will be approximately $11.3 million, of which approximately $8.6 million
had been incurred as of September 30, 2000, and that the value of the property
following remediation will not exceed $6.0 million. As a result of a 1992 DPUC
retail rate decision, beginning January 1, 1993, UI has been recovering through
retail rates $1.075 million of the remediation costs per year. The remediation
costs, property value and recovery from customers will be subject to true-up in
UI's next retail rate proceeding based on actual remediation costs and actual
gain on UI's disposition of the property.
UI has been remediating an area of PCB contamination at a site, bordering
the Mill River in New Haven, that contains transmission facilities and the
deactivated English Station generation facilities. The excavation of
contaminated soils and post-remediation monitoring is complete. In addition, UI
is currently replacing the bulkhead that surrounds this site, at an estimated
cost of $13.5 million. Of this amount, $4.2 million represents the portion of
the costs to protect UI's transmission facilities and will be capitalized as
plant in service. The remaining estimated cost of $9.3 million was expensed in
1999. UI has conveyed to an unaffiliated entity, Quinnipiac Energy, LLC, (QE)
the entire English Station site, reserving to UI permanent easements for the
operation of its transmission facilities on the site. UI has funded 61%
(approximately $1.2 million) of the environmental remediation costs that will be
incurred by QE to bring the site into compliance with applicable Connecticut
minimum standards.
UI closed on the sale of its Bridgeport Harbor Station and New Haven Harbor
Station generating plants in compliance with Connecticut's electric utility
industry restructuring legislation on April 16, 1999. Environmental assessments
performed in connection with the marketing of these plants indicate that
substantial remediation expenditures will be required in order to bring the
plant sites into compliance with applicable Connecticut minimum
- 20 -
<PAGE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
standards. The purchaser of the plants has agreed to undertake and pay for the
major portion of this remediation. However, UI will be responsible for
remediation of the portions of the plant sites that have been retained by it.
(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 $565 million (in 2000 dollars) as the
decommissioning cost estimate for Seabrook Unit 1, of which UI's share would be
approximately $99 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 nine months of 2000 was $2.5 million. UI's share of the fund at
September 30, 2000 was approximately $25.2 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 $619 million (in 2000 dollars), of which UI's
share would be approximately $23 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 nine months of 2000 was $0.5 million. UI's share of the fund at
September 30, 2000 was approximately $8.8 million. The current decommissioning
cost estimate for the Connecticut Yankee Unit, assuming the prompt removal and
dismantling of the unit, is $463 million, of which UI's share would be $44
million. Through September 30, 2000, $218 million has been expended for
decommissioning. The projected remaining decommissioning cost is $245 million,
of which UI's share would be $23.2 million. The decommissioning trust fund for
the Connecticut Yankee Unit is also managed by NU. For UI's 9.5% equity
ownership in Connecticut Yankee, decommissioning costs of $1.8 million were
funded by UI during the first nine months of 2000, and UI's share of the fund at
September 30, 2000 was $30.9 million.
- 21 -
<PAGE>
UIL HOLDINGS CORPORATION
THE UNITED ILLUMINATING COMPANY
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(P) SEGMENT INFORMATION
UIL Holdings has one reportable operating segment, that of regulated
generation, distribution and sale of electricity. The accounting policies used
for that segment do not differ from those used for nonreportable operating
segments. Revenues from inter-segment transactions are not material, and all of
UIL Holdings' revenues are derived in the United States.
The following tables reconcile the total assets, revenue from external
customers and income (loss) before income taxes of the reportable segment with
the total amounts for UIL Holdings:
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(000's)
Total Assets -UI $1,651,699 $1,758,944
Other 204,017 39,266
-------- ---------
Total Assets - UIL Holdings $1,855,716 $1,798,210
========= =========
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 2000 QUARTER ENDED SEPTEMBER 30, 1999
-------------------------------- --------------------------------
TOTAL TOTAL
UI OTHER UIL HOLDINGS UI OTHER UIL HOLDINGS
-- ----- ------------ -- ---- ------------
(000's)
<S> <C> <C> <C> <C> <C> <C>
Revenue from
External Customers $201,127 $45,927 $247,054 $199,071 $21,456 $220,527
Income (Loss)
Before Income Taxes $38,621 $(2,288) $36,333 $50,115 $(362) $49,753
</TABLE>
<TABLE>
<CAPTION>
YEAR TO DATE SEPTEMBER 30, 2000 YEAR TO DATE SEPTEMBER 30, 1999
------------------------------- -------------------------------
TOTAL TOTAL
UI OTHER UIL HOLDINGS UI OTHER UIL HOLDINGS
-- ----- ------------ -- ---- ------------
(000's)
<S> <C> <C> <C> <C> <C> <C>
Revenue from
External Customers $546,116 $99,982 $646,098 $532,271 $45,337 $577,608
Income (Loss)
Before Income Taxes $100,604 $(1,645) $98,959 $106,699 $(4,323) $102,376
</TABLE>
- 22 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
UIL HOLDINGS CORPORATION
MAJOR INFLUENCES ON FINANCIAL CONDITION
UIL Holdings' financial condition will continue to be dependent on the
level of UI's utility retail sales and UI's ability to control expenses, as well
as on the performance of the non-regulated businesses of UIL Holdings'
subsidiaries. The two primary factors that affect utility sales volume are
economic conditions and weather.
UIL Holdings' financial status and financing capability will continue to be
sensitive to many other factors, including conditions in the securities markets,
economic conditions, interest rates, the level of UIL Holdings' income and cash
flow, and legislative and regulatory developments, including the cost of
compliance with increasingly stringent environmental legislation and
regulations.
On December 31, 1996, the DPUC completed a financial and operational review
of UI and ordered a five-year incentive regulation plan for the years 1997
through 2001 (the Rate Plan). The Rate Plan accelerated the amortization and
recovery of unspecified assets during 1999-2001 if UI's common equity return on
regulated utility investment exceeds 10.5% after recording the amortization.
UI's authorized return on regulated utility common equity during the period is
11.5%. Earnings above 11.5%, on an annual basis, are to be utilized one-third
for customer price reductions, one-third to increase amortization of assets, and
one-third retained as earnings.
The Rate Plan includes a provision that it may be reopened and modified
upon the enactment of electric utility restructuring legislation in Connecticut.
On October 1, 1999, the DPUC issued a decision establishing UI's standard offer
customer rates, commencing January 1, 2000, at a level 10% below 1996 rates, as
directed by the Restructuring Act described in detail below. These standard
offer customer rates are in effect for the period 2000-2001 and supersede the
rate reductions for this period that were included in the Rate Plan. The
decision also reduced the required amount of accelerated amortization in 2000
and 2001. Under this decision, all other components of the Rate Plan are
expected to remain in effect through 2001. The Connecticut Office of Consumer
Counsel, the statutory representative of consumer interests in public utility
matters, has appealed the DPUC's standard offer decision to the Connecticut
Superior Court, challenging the DPUC's determination of UI's average
fully-bundled prices in 1996 rates from which a 10% reduction is required by the
Restructuring Act. UI and the Connecticut Attorney General are contesting this
court challenge of the DPUC's decision. UI is unable to predict, at this time,
the outcome of this Superior Court appeal.
In April 1998, Connecticut enacted Public Act 98-28 (the Restructuring
Act), a massive and complex statute designed to restructure the State's
regulated electric utility industry. As a result of the Act, the business of
generating and selling electricity directly to consumers is opened to
competition. These business activities are separated from the business of
delivering electricity to consumers, also known as the transmission and
distribution business. The business of delivering electricity remains with the
incumbent franchised utility companies (including UI), which continue to be
regulated by the DPUC as Distribution Companies.
Under the Restructuring Act, effective July 1, 2000, all of UI's customers
are able to choose their power supply providers. On and after January 1, 2000,
UI is required to offer fully-bundled "standard offer" electric service, under
regulated rates, to all customers who do not choose alternate power supply
providers. Under current regulatory provisions, UI's financial condition is not
affected materially by whether customers choose alternate suppliers to UI's
standard offer electric service. The standard offer rates must include the
fully-bundled price of generation, transmission and distribution services, the
competitive transition assessment, the systems benefits charge and the
conservation and renewable energy charges. The fully-bundled standard offer
rates must also be at least 10% below the average fully-bundled prices in 1996.
On December 28, 1999, UI and Enron Power Marketing, Inc. (EPMI) entered
into a Wholesale Power Supply Agreement, a PPA Entitlements Transfer Agreement
and related agreements documenting a four-year standard offer power supply
arrangement and the assumption of all of UI's long-term purchased power
agreements, effective January 1, 2000. Under these agreements, EPMI supplies the
generation services needed by UI to meet its standard
- 23 -
<PAGE>
offer obligations for the four-year standard offer period at a fixed price. The
agreements with EPMI also include a financially settled contract for differences
related to certain call rights of EPMI and put rights of UI with respect to UI's
entitlements in Seabrook Unit 1 and in Millstone Unit 3, and UI's provision to
EPMI of certain ancillary products and services associated with those nuclear
entitlements, which provisions terminate at the earlier of December 31, 2003 or
the date that UI sells its nuclear interests. The agreements do not restrict
UI's right to sell to third parties UI's ownership interests in those nuclear
generation units or the generated energy actually attributable to its ownership
interests.
Another major component of the Restructuring Act is the collection, by
Distribution Companies, of a "competitive transition assessment," a "systems
benefits charge," an "energy conservation and load management program charge"
and a "renewable energy investment charge." The competitive transition
assessment represents costs that have been reasonably incurred by, or will be
incurred by, Distribution Companies to meet their public service obligations as
electric companies, and that will likely not otherwise be recoverable in a
competitive generation and supply market. These costs include above-market
long-term purchased power contract obligations, regulatory asset recovery and
above-market investments in power plants (so-called stranded costs). The systems
benefits charge represents public policy costs, such as generation
decommissioning and displaced worker protection costs. Beginning in 2000, a
Distribution Company must collect the competitive transition assessment, the
systems benefits charge, the energy conservation and load management program
charge and the renewable energy investment charge from all Distribution Company
customers.
The Restructuring Act requires that UI must attempt to divest its ownership
interests in its nuclear-fueled power plants prior to 2004 in order to recover
any stranded costs associated with its power plants. On October 1, 1998, in its
"unbundling plan" filing with the DPUC under the Restructuring Act, and in other
regulatory dockets, UI stated that it plans to divest its nuclear generation
ownership interests (17.5% of Seabrook Unit 1 in New Hampshire and 3.685% of
Millstone Station Unit 3 in Connecticut) by the end of 2003, in accordance with
the Restructuring Act. On April 19, 2000, the DPUC approved UI's plan for
divesting its ownership interest in Millstone Unit 3 by participating in an
auction process for all three of the generating units at Millstone Station to be
conducted by a consultant selected by the DPUC. On April 26, 2000, the DPUC
selected J. P. Morgan & Co. to conduct this auction, which was concluded on
August 7, 2000 when the DPUC and J. P. Morgan & Co. announced that Dominion
Resources, Inc. had agreed to purchase Millstone Units 1 and 2, and 93.47% of
Millstone Unit 3 for $1.298 billion. The purchase price agreed to for UI's
ownership interest in Unit 3, which is subject to adjustments for expenditures
and eventualities prior to the date of closing on the sale, is approximately $31
million, exclusive of nuclear fuel. UI's share of the proceeds from the sale of
the nuclear fuel inventory at the date of closing on the sale is estimated to be
approximately $2.5 million. It is currently estimated that requisite regulatory
approvals will be received and the sale will be consummated on or about April 1,
2001. The divestiture process for Seabrook Unit 1 has not yet been determined.
On March 24, 1999, UI applied to the DPUC for a calculation of UI's
stranded costs that will be recovered by it in the future through the
competitive transition assessment under the Restructuring Act. In a decision
dated August 4, 1999, the DPUC determined that UI's stranded costs total $801.3
million, consisting of $160.4 million of above-market long-term purchased power
contract obligations, $153.3 million of generation-related regulatory assets
(net of related tax and accounting offsets), and $487.6 million of above-market
investments in nuclear generating units (net of $26.4 million of gains from
generation asset sales and other offsets related to generation assets). The DPUC
decision provides that these stranded cost amounts are subject to true-ups,
adjustments and potential additional future offsets, including the results of
UI's divestiture of its ownership interests in Millstone Unit 3 and Seabrook
Unit 1, in accordance with the Restructuring Act. UI has amortized less than the
expected level of regulatory assets related to stranded costs during the first
nine months of 2000, due to timing differences and higher than anticipated costs
associated with providing standard offer service to customers. Since stranded
costs are intended to be trued-up annually, UI continues to anticipate recovery
through the competitive transition assessment of these unamortized costs.
- 24 -
<PAGE>
CAPITAL EXPENDITURE PROGRAM
UIL Holdings' 2000-2004 estimated capital expenditure program, excluding
UI's allowance for funds used during construction, is presently budgeted as
follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- -----
(000's)
<S> <C> <C> <C> <C> <C> <C>
UI
Distribution and Transmission $36,569 $60,496 $40,707 $30,735 $48,737 $217,244
Nuclear Generation (1) 3,177 2,838 - - - 6,015
Nuclear Fuel (1) 10,986 6,498 - - - 17,484
------ ------ ------ ------ ------ -------
Total UI $50,732 $69,832 $40,707 $30,735 $48,737 $240,743
------ ------ ------ ------ ------ -------
URI
Xcelecom $53,667 $ 6,697 $ 7,337 $12,906 $ 6,677 $ 87,284
American Payment Systems 835 3,313 2,015 2,415 2,415 10,993
United Capital Investments 5,930 12,650 1,400 - - 19,980
------ ------ ------ ------ ------ -------
Total URI $60,432 $22,660 $10,752 $15,321 $ 9,092 $118,257
------ ------ ------ ------ ------ -------
Total UIL Holdings $111,164 $92,492 $51,459 $46,056 $57,829 $359,000
======= ====== ====== ====== ====== =======
</TABLE>
(1) Assumes that the sale of UI's interest in Millstone Unit 3 and Seabrook
Unit 1 will be completed by April 1, 2001 and December 31, 2001,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, UIL Holdings had $41.7 million of cash and temporary
cash investments, a decrease of $26.7 million from the corresponding balance at
December 31, 1999. The components of this decrease, which are detailed in the
Consolidated Statement of Cash Flows, are summarized as follows:
(Millions)
Balance, December 31, 1999 $68.3
----
Net cash provided by operating activities 52.3
Net cash provided by (used in) financing activities:
- Financing activities, excluding dividend payments (12.5)
- Dividend payments (30.4)
Investment in debt securities 4.8
Cash invested in plant, including nuclear fuel (40.8)
------
Net Change in Cash (26.6)
------
Balance, September 30, 2000 $41.7
=====
- 25 -
<PAGE>
UIL Holdings' capital requirements are presently projected as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C>
Cash on Hand - Beginning of Year (1) $39.1 $ - $ - $ - $ -
Internally Generated Funds less Dividends (2) 81.0 85.0 93.0 85.0 81.0
----- ---- ---- ---- ----
Subtotal 120.1 85.0 93.0 85.0 81.0
Less:
Capital Expenditures (2)
UI 50.7 69.8 40.7 30.7 48.7
URI 60.5 22.7 10.8 15.3 9.1
----- ---- ---- ---- ----
Total 111.2 92.5 51.5 46.0 57.8
Cash Available to pay Debt Maturities and Redemptions 8.9 (7.5) 41.5 39.0 23.2
Less:
Maturities and Mandatory Redemptions - - 100.0 100.0 -
Optional Redemptions 75.0 - - - -
Repayment of Short-Term Borrowings 17.0 - - - -
----- ----- ----- ----- -----
External Financing Requirements (Surplus) (2) $83.1 $7.5 $58.5 $61.0 $(23.2)
==== === ==== ==== =====
</TABLE>
(1) Excludes $2.3 million Seabrook Unit 1 operating deposit and restricted cash
of American Payment Systems, Inc. of $26.9 million.
(2) Internally Generated Funds less Dividends, Capital Expenditures and
External Financing Requirements are estimates based on current earnings and
cash flow projections. All of these estimates are subject to change due to
future events and conditions that may be substantially different from those
used in developing the projections. No estimates are included herein to
reflect the potential proceeds from future nuclear asset sales.
All capital requirements that exceed available cash will have to be
provided by external financing. Although there is no commitment to provide such
financing from any source of funds, other than a $97.5 million revolving credit
agreement with a group of banks, future external financing needs are expected to
be satisfied by the issuance of additional short-term and long-term debt. The
continued availability of these methods of financing will be dependent on many
factors, including conditions in the securities markets, economic conditions,
and future income and cash flow.
See Item 1, "Notes to Financial Statements," Note (E) for a discussion of
UIL Holdings' and UI's short-term credit arrangements.
SUBSIDIARY OPERATIONS
On July 20, 2000, the corporate restructuring of UI and its direct and
indirect non-regulated subsidiaries into a holding company structure was
completed. In the holding company structure, UI has become a wholly-owned
subsidiary of UIL Holdings, and UI's interests in URI and all of its direct and
indirect non-regulated subsidiaries have been transferred to UIL Holdings.
UI is a regulated operating electric public utility, established in 1899,
that delivers electricity and provides energy-related services to more than
314,000 customers in the greater New Haven, Connecticut, and greater Bridgeport,
Connecticut, areas.
URI serves as the parent corporation for several non-regulated businesses,
each of which is incorporated separately to participate in business ventures
that will provide long-term rewards to UIL Holdings shareowners. URI has four
wholly-owned subsidiaries. American Payment Systems, Inc. manages a national
network of agents for the processing of bill payments made by customers of UI
and other companies. Another subsidiary of URI, United Capital
- 26 -
<PAGE>
Investments, Inc., and its subsidiaries, invest in business ventures. A third
URI subsidiary, Xcelecom, Inc. (formerly known as Precision Power, Inc.) and its
subsidiaries, provide electrical and voice-data-video design, construction,
systems integration and services to customers in New England and the neighboring
Mid-Atlantic region. URI's fourth subsidiary, United Bridgeport Energy, Inc., is
a passive investor in a merchant wholesale electric generating facility located
in Bridgeport, Connecticut.
RESULTS OF OPERATIONS
GENERAL IMPACTS OF CREATION OF A HOLDING COMPANY ON FINANCIAL REPORTS
---------------------------------------------------------------------
As a result of the formation of UIL Holdings Corporation noted above, all
subsidiary results are consolidated. For example, revenues from the
non-regulated operating companies are reported as revenues, instead of being
subordinated to UI and reported as "other net income." This change particularly
relates to revenues, operation and maintenance expense, depreciation expense,
interest charges, other net income and income taxes. Income from non-regulated
passive investments continues to be reported in "other net income." All periods
reported herein have been reclassified for consolidated reporting, with no
impact on earnings.
GENERAL IMPACTS OF CONNECTICUT'S RESTRUCTURING ACT ON FINANCIAL REPORTS
-----------------------------------------------------------------------
On April 16, 1999, UI completed the sale of its operating fossil-fueled
generating plants that was required by Connecticut's electric utility industry
restructuring legislation. On October 1, 1999, the Department of Public Utility
Control (DPUC) issued its decision establishing UI's standard offer customer
rates, commencing January 1, 2000, at a level 10% below 1996 rates (about 6%
below 1999 rates), as directed by Connecticut's Restructuring Act. As a result
of these two and other associated events, the "geography" of UI's costs,
particularly with respect to comparisons between the quarters of 2000 and the
quarters of 1999, and the quarterly pattern of revenues and earnings comparing
2000 to 1999 have changed. This particularly relates to regulated retail pricing
patterns, wholesale revenue and expense, other operating revenues, retail
purchased energy and fossil fuel expenses, operation and maintenance expense,
depreciation and property taxes. For example, increased purchased energy
expenses in 2000 are more than offset by portions of the decreases in
miscellaneous operation and maintenance expense, depreciation and property taxes
due to the sale of generating plants. The results of these changes are explained
below, and in the "Quarterly Earnings Pattern for 2000" portion of the LOOKING
FORWARD section.
THIRD QUARTER OF 2000 VS. THIRD QUARTER OF 1999
-----------------------------------------------
Earnings for the third quarter of 2000 reflect the pattern change mentioned
above. Earnings were $19.7 million, or $1.40 per share (on both a basic and
diluted basis), down $5.3 million, or $.38 per share, from the third quarter of
1999. Excluding a one-time item recorded in the third quarter of 2000, earnings
from operations (on both a basic and diluted basis) were $16.7 million or $1.19
per share, down $8.3 million, or $.59 per share, from the third quarter of 1999.
The earnings from operations contributed by UI's operations, excluding the
Nuclear Division, were $1.04 per share in the third quarter of 2000. The Nuclear
Division contributed $.25 per share, for a total UI contribution of $1.29 per
share, compared to $1.80 per share in the third quarter of 1999. URI lost $.10
per share in the third quarter of 2000, compared to a loss of $.02 per share in
the third quarter of 1999. All earnings per share numbers are based on UIL
Holdings shares.
The one-time item recorded in the third quarter of 2000 was: EPS
---------------- ----------------------------------------------- --------------
2000 Quarter 3 Proceeds from the Millstone Unit 3 litigation
settlement(pre-sharing) $ .64
Sharing on Proceeds from the Millstone Unit 3
settlement (.43)
----
Net $ .21
---------------- ----------------------------------------------- --------------
This one-time item recorded in the third quarter of 2000 as other operating
revenue was a cash receipt, in the amount of $14.9 million before-tax, in
settlement of litigation over costs associated with an extended unplanned
shutdown of the Millstone Unit 3 nuclear generating unit.
- 27 -
<PAGE>
UI Earnings from Operations
---------------------------
Overall, retail revenue decreased by $31.0 million in the third quarter of
2000 compared to the third quarter of 1999.
------------------------------------------------------------- -----------------
Total From
Retail Revenues: $ millions Operations
------------------------------------------------------------- -----------------
Revenue from:
------------------------------------------------------------- -----------------
Estimate of operating Distribution Division component of
"weather corrected" retail sales growth, up 2.6% 1.7
------------------------------------------------------------- -----------------
Estimate of operating Distribution Division component of
weather effect on retail sales (12.1)
------------------------------------------------------------- -----------------
Estimate of operating Distribution Division component of
price reduction (6.4)
------------------------------------------------------------- -----------------
Sharing revenues from operations (1.6)
------------------------------------------------------------- -----------------
Other retail price reduction, mix of sales and other (7.3)
------------------------------------------------------------- -----------------
TOTAL RETAIL REVENUE FROM OPERATIONS (25.7)
------------------------------------------------------------- -----------------
Sharing revenues from one-time item (5.3)
------------------------------------------------------------- -----------------
TOTAL RETAIL REVENUE (31.0)
------------------------------------------------------------- -----------------
Retail fuel and energy expense increased by $22 million in the third
quarter of 2000 compared to the third quarter of 1999. UI's operating
fossil-fueled generation units were sold on April 16, 1999, and UI receives, and
will receive through 2003, its standard offer service requirements through
purchased power agreements. These costs are recovered through the Generation
Service Charge (GSC) portion of unbundled rates.
Wholesale sales margin increased by $16.3 million in the third quarter of
2000 compared to the third quarter of 1999. Margin from the Nuclear Division,
which was incorporated in retail rates in 1999, increased by $14.8 million. UI's
operating nuclear assets, Seabrook Unit 1 and Millstone Unit 3, supply power
solely to the wholesale market in 2000. Overall, the Nuclear Division produced
earnings of $.25 per share in the third quarter of 2000, reflecting the
wholesale sales margin less operations and maintenance and other costs,
including taxes. See the LOOKING FORWARD section for more details. There was a
wholesale sales margin loss of $1.5 million from general wholesale activities in
the third quarter of 1999.
Other operating revenues increased by $1.3 million in the third quarter of
2000 compared to the third quarter of 1999. Other operating revenues include
transmission revenues from the New England Power Pool (NEPOOL), which increased
by $0.9 million in the third quarter of 2000 compared to the third quarter of
1999, and were offset by an increase in transmission operation expense.
UI's operating expenses for operations, maintenance and purchased capacity
decreased by $7.8 million in the third quarter of 2000 compared to the third
quarter of 1999. The principal components of these expense changes include:
- 28 -
<PAGE>
$millions
---------------------------------------------------------------------- ---------
Capacity expense:
---------------------------------------------------------------------- ---------
Cogeneration (see Note A) (6.8)
---------------------------------------------------------------------- ---------
Other purchases (0.9)
---------------------------------------------------------------------- ---------
TOTAL CAPACITY EXPENSE (7.7)
--------------------------------------------------------------------- ----------
Operating Distribution Division O&M expense:
---------------------------------------------------------------------- ---------
1999 fossil generation unit operating and maintenance costs (0.2)
---------------------------------------------------------------------- ---------
Pension and other employee benefit costs (2.5)
---------------------------------------------------------------------- ---------
NEPOOL transmission expense 0.9
---------------------------------------------------------------------- ---------
Other (1.7)
---------------------------------------------------------------------- ---------
TOTAL OPERATING DISTRIBUTION DIVISION (3.5)
---------------------------------------------------------------------- ---------
Other unbundled components of O&M expense:
---------------------------------------------------------------------- ---------
Nuclear Division (see Note B) (1.0)
---------------------------------------------------------------------- ---------
Conservation and Load Management and Renewable Energy (see Note B) 4.4
---------------------------------------------------------------------- ---------
TOTAL OTHER COMPONENTS 3.4
---------------------------------------------------------------------- ---------
TOTAL O&M EXPENSE (7.8)
---------------------------------------------------------------------- ---------
Note A: UI's wholesale purchased power agreements were assumed by
Enron Power Marketing, Inc. as part of agreements for Enron to
supply the power needed by UI to meet its standard offer
obligations until the end of the four-year standard offer period
and the power needed to serve UI's special contract customers for
the remaining contract terms. UI has created a regulatory asset
and liability to reflect this transaction, and the regulatory
asset is being amortized as part of the Competitive Transition
Assessment (CTA). The amortization for the third quarter of 2000
of about $6.7 million is included in the "Amortization of
regulatory assets" line of the income statement.
Note B: Nuclear Division operation and maintenance expenses are
incurred in the production of energy for the wholesale market and
are reflected in the Nuclear Division results. These expenses
decreased by $1.0 million in the third quarter of 2000 compared
to the third quarter of 1999. Conservation and load management
and renewable energy costs are pass-through costs recovered in
unbundled rates.
Other taxes for UI decreased by $1.8 million in the third quarter of 2000
compared to the third quarter of 1999. About $1.2 million of the decrease was a
Gross Earnings tax reduction from lower retail sales. The rest was primarily a
decrease in property taxes due principally to the generating plant sale in April
of 1999.
Depreciation expense for UI decreased by $5.1 million in the third quarter
of 2000 compared to the third quarter of 1999. All of this decrease was due to
the shifting of depreciation on nuclear plant stranded assets from depreciation
expense to amortization of regulatory assets.
Amortization of regulatory assets increased by $6.4 million in the third
quarter of 2000 compared to the third quarter of 1999. With three exceptions,
these costs, as recorded in 2000, are associated solely with either the
Competitive Transition Assessment (CTA) or the Systems Benefits Charge (SBC).
The exceptions are described in the following paragraph. The CTA and SBC
amortization components in the third quarter of 2000 amounted to $13.6 million
(pre-tax) and were: nuclear assets (from depreciation) $5.1 million, purchased
power contracts (in place of purchased power expense) $6.7 million, displaced
worker costs $0.6 million, and other $1.2 million. However, because the result
of these amortizations produced returns on both the CTA and SBC below the 11.5%
return allowed, about $8.2 million (before-tax) of amortization was deferred for
the third quarter of 2000. The elimination (completed in 1999) of $3.1 million
(after-tax) of amortization of Seabrook Nuclear Station deferred return also
reduced amortization expense in the third quarter of 2000 compared to the third
quarter of 1999.
- 29 -
<PAGE>
The exceptions noted in the previous paragraph are amortizations that apply
to the operating Distribution Division. They include the amortization of Retail
Access assets, $0.1 million (pre-tax), and accelerated amortizations (both
scheduled and "sharing" amortization). On December 31, 1996, the Connecticut
Department of Public Utility Control issued an order that implemented a
five-year Rate Plan to reduce UI's regulated retail prices and accelerate the
recovery of certain "regulatory assets." According to the Rate Plan, under which
UI is currently operating, "accelerated" amortization of past regulated utility
investments is scheduled for every year that the Rate Plan is in effect,
contingent upon UI earning a 10.5% return on regulated utility common equity.
Beginning in 2000, these accelerated amortizations are charged to the operating
Distribution Division, although they reduce CTA plant costs and rate base. About
$2.2 million (after-tax) of accelerated amortization was charged in the third
quarter of 2000, compared to about $3.0 million (after-tax) in the third quarter
of 1999, for a decrease of $0.8 million. Additionally, $10.1 million
(before-tax, $8.8 million after-tax) of sharing amortization was recorded in the
third quarter of 2000 compared to $5.0 million (after-tax) that was recorded in
the third quarter of 1999.
Interest charges for UI, including "Dividend requirement of mandatorily
redeemable securities," continued on a downward trend, decreasing by $1.4
million in the third quarter of 2000, compared to the third quarter of 1999.
This decrease was applied to the various unbundled components in 2000.
URI Earnings from Operations
----------------------------
Overall, the consolidated non-regulated businesses operating under the
parent, URI, after corporate parent-allocated interest, lost approximately $1.5
million, or $.10 per share, in the third quarter 2000, compared to losses of
about $0.2 million, or $.02 per share, in the third quarter of 1999. Operation
expenses for the URI businesses, including cost of goods sold, selling and
administrative expenses, increased by $20.0 million in the third quarter of
2000, compared to the third quarter of 1999, almost entirely as the result of
companies acquired by URI's subsidiary Xcelecom, Inc. (formerly known as
Precision Power, Inc.). Depreciation expense for the URI businesses increased by
$0.2 million.
Interest charges for URI increased by $1.7 million in the third quarter of
2000, compared to the third quarter of 1999. The results of each of the
subsidiaries of URI for the third quarter of 2000, as presented below, reflect
the allocation of debt costs from the parent based on a capital structure,
including an equity component, and an interest rate deemed to be appropriate for
that type of business.
American Payment Systems, Inc. (APS) earned approximately $0.5 million, or
$.03 per share, in the third quarter of 2000, about the same level it earned in
the third quarter of 1999.
Xcelecom, Inc. earned approximately $0.6 million, or $.04 per share, in the
third quarter of 2000, compared to a loss of approximately $0.8 million, or $.06
per share, in the third quarter of 1999. The improvement was the result of cost
reduction efforts and acquisitions.
On May 11, 1999, URI's subsidiary United Bridgeport Energy, Inc. (UBE),
increased its 4% passive investment in Bridgeport Energy LLC (BE) to 33 1/3%.
The second phase of BE's merchant wholesale electric generating project went
into commercial operation in July 1999, adding 180 megawatts of generation
capacity for a total of 520 megawatts. UBE lost approximately $1.6 million, or
$.11 per share, in the third quarter of 2000, compared to earnings of about $0.4
million, or $.03 per share, in the third quarter of 1999. The third quarter 2000
loss was the result of mild weather that depressed energy sales prices, high gas
prices that further reduced margins, and a contract termination charge
completing the elimination of a contractual liability that will benefit UBE's
earnings in future periods.
United Capital Investments, Inc. (UCI) lost $.01 per share in the third
quarter of 2000 compared to a break even in the third quarter of 1999.
URI, the holding company for all non-regulated businesses, lost $0.05 per
share in the third quarter of 2000, compared to a loss of $.02 per share for the
third quarter of 1999. Some financial leveraging, and strategic and
administrative costs for the subsidiaries of URI are retained by the holding
company.
- 30 -
<PAGE>
FIRST NINE MONTHS OF 2000 VS. FIRST NINE MONTHS OF 1999
-------------------------------------------------------
Earnings for the first nine months of 2000 were $54.4 million, or $3.86 per
share (on both a basic and diluted basis), up $5.6 million, or $.39 per share,
from the first nine months of 1999. Excluding one-time items recorded in both
periods, earnings from operations (on both a basic and diluted basis) were up
$5.3 million, or $.37 per share, from the first nine months of 1999. The
earnings from operations contributed by UI's operations, excluding the Nuclear
Division, were $3.24 per share in the first nine months of 2000. The Nuclear
Division contributed $.64 per share, for a total UI contribution of $3.88 per
share, compared to $3.61 per share in the first nine months of 1999. URI, on a
consolidated basis, lost $.08 per share in the first nine months of 2000,
compared to a loss of $.18 per share in the first nine months of 1999. All
earnings per share numbers are based on UIL Holdings shares.
The one-time item recorded in the first nine months of 2000 was: EPS
----------------- ------------------------------------------------ -------------
2000 Quarter 2 Impairment loss on property in North Haven $(.15)
----------------- ------------------------------------------------ -------------
2000 Quarter 3 Proceeds from the Millstone Unit 3 litigation
settlement (pre-sharing) $ .64
Sharing on proceeds from the Millstone Unit 3
litigation settlement $(.43)
----
Net $ .21
----------------- ------------------------------------------------ -------------
The one-time item recorded in the first nine months of 1999 was: EPS
----------------- ------------------------------------------------ -------------
1999 Quarter 1 Purchased power expense refund $ .12
Sharing due to refund $(.08)
-----
Net $ .04
----------------- ------------------------------------------------ -------------
The one-time item recorded in the third quarter of 2000 as other operating
revenue was a cash receipt, in the amount of $14.9 million before-tax, in
settlement of litigation over costs associated with an extended unplanned
shutdown of the Millstone Unit 3 nuclear generating unit.
On June 14, 2000, the Connecticut Department of Public Utility Control
approved a sale of property by UI to Souwestcon Properties, Inc., a wholly-owned
subsidiary of URI. The sale price of the property was $1.2 million, and the
property had a book value of $4.7 million. As a result of the transaction, UI
recognized an impairment loss of $3.5 million (before-tax) or $2.1 million
(after-tax) in June 2000.
UI Earnings from Operations
---------------------------
Overall, retail revenue decreased by $41.3 million in the first nine months
of 2000, compared to the first nine months of 1999.
<TABLE>
<CAPTION>
------------------------------------------------------------ ------------ ---------- -------
From From
Retail Revenues: $ millions Operations One-time Total
------------------------------------------------------------ ------------ ---------- -------
<S> <C> <C> <C>
Revenue from:
------------------------------------------------------------ ------------ ---------- -------
Sharing: for 1999 one-time item - 1.0 1.0
------------------------------------------------------------ ------------ ---------- -------
Sharing: for 2000 one-time item (5.3) (5.3)
------------------------------------------------------------ ------------ ---------- -------
Estimate of operating Distribution Division component of
"real" retail sales growth, up 1.7% 1.3 - 1.3
------------------------------------------------------------ ------------ ---------- -------
Estimate of operating Distribution Division component of
"leap year day" retail sales growth, up 0.3% 0.6 - 0.6
------------------------------------------------------------ ------------ ---------- -------
Estimate of operating Distribution Division component of
weather effect on retail sales (12.4) - (12.4)
------------------------------------------------------------ ------------ ---------- -------
Estimate of operating Distribution Division component of
price reduction (12.7) - (12.7)
------------------------------------------------------------ ------------ ---------- -------
Sharing revenues from operations (1.6) (1.6)
------------------------------------------------------------ ------------ ---------- -------
Other retail price reduction, mix of sales and other (12.2) - (12.2)
------------------------------------------------------------ ------------ ---------- -------
TOTAL RETAIL REVENUE (37.0) (4.3) (41.3)
------------------------------------------------------------ ------------ ---------- -------
</TABLE>
- 31 -
<PAGE>
Retail fuel and energy expense increased by $95.8 million in the first nine
months of 2000 compared to the first nine months of 1999. UI's operating
fossil-fueled generation units were sold on April 16, 1999, and UI receives, and
will receive through 2003, its standard offer service requirements through
purchased power agreements. These costs are recovered through the Generation
Service Charge (GSC) portion of unbundled rates.
Wholesale sales margin increased by $43.9 million in the first nine months
of 2000 compared to the first nine months of 1999. Margin from the Nuclear
Division, which was incorporated in retail rates in 1999, increased by $43.3
million. UI's operating nuclear assets, Seabrook Unit 1 and Millstone Unit 3,
supply power solely to the wholesale market in 2000. Overall, the Nuclear
Division produced earnings of $.64 per share in the first nine months of 2000,
reflecting the wholesale sales margin less operations and maintenance and other
costs, including taxes. See the LOOKING FORWARD section for more details. There
was margin loss of $0.6 million from general wholesale activities in the first
nine months of 1999.
Other operating revenues increased by $4.0 million in the first nine months
of 2000 compared to the first nine months of 1999. Other operating revenues
include transmission revenues from the New England Power Pool (NEPOOL), which
increased by $3.6 million in the first nine months of 2000 compared to the first
nine months of 1999. These were partly offset by an increase in transmission
operation expense of $2.9 million.
UI's operating expenses for operations, maintenance and purchased capacity
decreased by $34.8 million in the first nine months of 2000 compared to the
first nine months of 1999. The principal components of these expense changes
include:
$millions
---------------------------------------------------------------------- ---------
Capacity expense:
---------------------------------------------------------------------- ---------
Cogeneration (see Note A) (20.9)
---------------------------------------------------------------------- ---------
Other purchases (1.7)
---------------------------------------------------------------------- ---------
TOTAL CAPACITY EXPENSE (22.6)
---------------------------------------------------------------------- ---------
Operating Distribution Division O&M expense:
---------------------------------------------------------------------- ---------
1999 fossil generation unit operating and maintenance costs (7.2)
---------------------------------------------------------------------- ---------
Pension and other employee benefit costs (7.5)
---------------------------------------------------------------------- ---------
NEPOOL transmission expense 2.9
---------------------------------------------------------------------- ---------
Other (8.1)
---------------------------------------------------------------------- ---------
TOTAL OPERATING DISTRIBUTION DIVISION (19.9)
---------------------------------------------------------------------- ---------
Other unbundled components of O&M expense:
---------------------------------------------------------------------- ---------
Nuclear Division (see Note B) (5.1)
---------------------------------------------------------------------- ---------
Conservation and Load Management, Renewable Energy and System
Benefits (see Note B) 12.8
---------------------------------------------------------------------- ---------
TOTAL OTHER COMPONENTS 7.7
---------------------------------------------------------------------- ---------
TOTAL O&M EXPENSE (34.8)
---------------------------------------------------------------------- ---------
Note A: UI's wholesale purchased power agreements were assumed by
Enron Power Marketing, Inc. as part of agreements for Enron to
supply the power needed by UI to meet its standard offer
obligations until the end of the four-year standard offer period
and the power needed to serve UI's special contract customers for
the remaining contract terms. UI has created a regulatory asset
and liability to reflect this transaction, and the regulatory
asset is being amortized as part of the CTA. The amortization for
the first nine months of 2000 of about $20.0 million is included
in the "Amortization of regulatory assets" line of the income
statement.
Note B: Nuclear Division operation and maintenance expenses are
incurred in the production of energy for the wholesale market and
are reflected in the Nuclear Division results. About $2.5 million
of the reduction was due to the absence of
- 32 -
<PAGE>
refueling outage costs incurred in the first six months of 1999.
Conservation and load management and renewable energy costs are
pass-through costs recovered in unbundled rates.
Other taxes for UI decreased by $4.7 million in the first nine months of
2000, compared to the first nine months of 1999. About $1.4 million of the
decrease was a Gross Earnings tax reduction from lower revenues. About $4.0
million of the decrease was primarily a decrease in property taxes due
principally to the generating plant sale in April of 1999.
Depreciation expense decreased by $23.9 million in the first nine months of
2000 compared to the first nine months of 1999. About $15.3 million of the
decrease was due to the shifting of depreciation on nuclear plant stranded
assets from depreciation expense to amortization of regulatory assets. About
$4.8 million of the decrease was due to the completion of depreciation of
conservation assets in the first half of 1999, and another $2.8 million was due
to the generation asset sale in 1999. Other UI depreciation expenses decreased
by $1.3 million.
Amortization of regulatory assets decreased by $0.5 million in the first
nine months of 2000 compared to the first nine months of 1999. With three
exceptions, these costs, as recorded in 2000, are associated solely with either
the CTA or the SBC. The exceptions are described in the following paragraph. The
CTA and SBC amortization components in the first nine months of 2000 amounted to
$38.8 million (pre-tax) and were: nuclear assets (from depreciation) $15.4
million, purchased power contracts (in place of purchased power expense) $20.1
million, displaced worker costs $1.9 million, and other $1.4 million. However,
because the result of these amortizations produced returns on both the CTA and
SBC below the 11.5% return allowed, $32.2 million (before-tax) of amortization
was deferred for the first nine months of 2000. The elimination (completed in
1999) of $9.4 million (after-tax) of amortization of Seabrook Nuclear Station
deferred return also reduced amortization expense in the first nine months of
2000 compared to the first nine months of 1999.
The exceptions noted in the previous paragraph are amortizations that apply
to the operating Distribution Division. They include the amortization of Retail
Access assets, $1.0 million (pre-tax), and accelerated amortizations (both
scheduled and "sharing" amortization). On December 31, 1996, the Connecticut
Department of Public Utility Control issued an order that implemented a
five-year Rate Plan to reduce UI's regulated retail prices and accelerate the
recovery of certain "regulatory assets." According to the Rate Plan, under which
UI is currently operating, "accelerated" amortization of past regulated utility
investments is scheduled for every year that the Rate Plan is in effect,
contingent upon UI earning a 10.5% return on regulated utility common equity.
Beginning in 2000, these accelerated amortizations are charged to the operating
Distribution Division, although they reduce CTA plant costs and rate base. About
$6.7 million (after-tax) of accelerated amortization was charged in the first
nine months of 2000, compared to about $9.1 million (after-tax) in 1999, for a
decrease of $2.4 million. Additionally, $10.1 million (before-tax, $8.8 million
after-tax) of sharing amortization was recorded in the first nine months of 2000
compared to $5.5 million (after-tax) that was recorded in the first nine months
of 1999.
Interest charges for UI, including "Dividend requirement of mandatorily
redeemable securities," continued on a downward trend, decreasing by $8.6
million in the first nine months of 2000, compared to the first nine months of
1999. Most of the reduction in UI's interest charges occurred after the
generation asset sale, which was completed on April 16, 1999. UI used proceeds
received from the sale of plant to pay off $205 million of debt. The decrease in
UI's interest charges was applied to the various unbundled components in 2000.
URI Earnings from Operations
----------------------------
Overall, the consolidated non-regulated businesses operating under the
parent, URI, after corporate parent-allocated interest, lost approximately $1.1
million, or $.08 per share, in the first nine months of 2000, compared to losses
of about $2.6 million, or $.18 per share, in the first nine months of 1999.
Operation expenses for the URI businesses, including cost of goods sold, selling
and administrative expenses, increased by $46.7 million in the first nine months
of 2000, compared to the first nine months of 1999, almost entirely as the
result of incorporating acquired companies. Other taxes for URI increased by
$0.7 million, reflecting the expansion of these businesses. Depreciation expense
for the URI businesses increased by $0.3 million.
- 33 -
<PAGE>
Interest charges for URI increased by $5.4 million in the first nine months
of 2000, compared to the first nine months of 1999. The results of each of the
subsidiaries of URI for the first nine months of 2000, as presented below,
reflect the allocation of debt costs from the parent based on a capital
structure, including an equity component, and an interest rate, deemed to be
appropriate for that type of business.
APS earned approximately $1.8 million, or $.13 per share, in the first nine
months of 2000, reflecting an increase of $1.0 million, or $.07 per share, over
the first nine months of 1999.
Xcelecom, Inc. earned approximately $0.7 million, or $.05 per share, in the
first nine months of 2000, compared to a loss of approximately $2.4 million, or
$.17 per share, in the first nine months of 1999. The improvement was the result
of cost reduction efforts and acquisitions.
On May 11, 1999, URI's subsidiary United Bridgeport Energy, Inc. (UBE),
increased its 4% passive investment in Bridgeport Energy LLC (BE) to 33 1/3%.
The second phase of BE's merchant wholesale electric generating project went
into commercial operation in July 1999, adding 180 megawatts of generation
capacity for a total of 520 megawatts. UBE lost approximately $2.7 million, or
$.19 per share, in the first nine months of 2000, compared to earnings of about
$0.8 million, or $.06 per share, in the first nine months of 1999. The 2000 loss
was the result of mild weather that depressed energy sales prices, high gas
prices that further reduced margins, an extended shutdown throughout the first
half of the year, and a contract termination charge completing the elimination
of a contractual liability that will benefit UBE's earnings in future periods.
UCI earned $.08 per share in the first nine months of 2000, compared to a
loss of $.05 per share in the first nine months of 1999.
URI, the holding company for all non-regulated businesses, lost $0.15 per
share in the first nine months of 2000, compared to a loss of $.08 per share for
the first nine months of 1999. Some financial leveraging, and strategic and
administrative costs for the subsidiaries of URI are retained by the holding
company.
LOOKING FORWARD
(THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT
TO UNCERTAINTIES WITH RESPECT TO IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CURRENTLY EXPECTED, INCLUDING GENERAL
ECONOMIC CONDITIONS, LEGISLATIVE AND REGULATORY CHANGES, DEMAND FOR ELECTRICITY
AND OTHER PRODUCTS AND SERVICES, CHANGES IN ACCOUNTING PRINCIPLES, POLICIES OR
GUIDELINES, AND OTHER ECONOMIC, COMPETITIVE, GOVERNMENTAL AND TECHNOLOGICAL
FACTORS AFFECTING THE OPERATIONS, MARKETS, PRODUCTS, SERVICES AND PRICES OF UI
AND URI'S SUBSIDIARIES. READERS ARE CAUTIONED THAT UIL HOLDINGS REGARDS SPECIFIC
NUMBERS AS ONLY THE "MOST LIKELY" TO OCCUR WITHIN A RANGE OF POSSIBLE VALUES.)
ALL EARNINGS PER SHARE NUMBERS ARE BASED ON UIL HOLDINGS SHARES.
Five-year Rate Plan
-------------------
On December 31, 1996, the Connecticut Department of Public Utility Control
(DPUC) issued an order (the Order) that implemented a five-year regulatory
framework (Rate Plan) to reduce UI's regulated retail prices and accelerate the
recovery of certain "regulatory assets," beginning with deferred conservation
costs. UI has operated under the terms of this Order since January 1, 1997. The
Order's schedule of price reductions and accelerated amortizations was based on
a DPUC pro-forma financial analysis that anticipated UI would be able to
implement such changes and earn an allowed annual return on common equity
invested in regulated utility assets of 11.5% over the period 1997 through 2001.
The Order established a set formula to share (see "Sharing Implementation"
below) any regulated utility income that would produce a return above the 11.5%
level: one-third to be applied to customer price reductions, one-third to be
applied to additional amortization of regulatory assets, and one-third to be
retained by shareowners. Regulated utility income for this purpose is inclusive
of earnings from operations and one-time items.
- 34 -
<PAGE>
Sharing Implementation
----------------------
"Sharing" in any particular year will result only if UI's regulated
operating Distribution Division exceeds its allowed return of 11.5% on regulated
utility common equity. Regulated utility earnings will not likely ever exceed
the sharing level before the third quarter of any year that "sharing" is in
effect. Assuming the sharing level of earnings is exceeded in the third quarter
of any particular year, then earnings in the third quarter that exceed that
level and all positive regulated utility earnings recorded in the fourth quarter
of that year will be subject to "sharing."
A look at 2000; continued growth of non-regulated operating businesses value
----------------------------------------------------------------------------
On January 1, 2000, UI completed the restructuring process required by the
Connecticut electric utility industry restructuring legislation enacted in 1998,
and its regulated business became an electricity delivery business. All
customers are now seeing at least a 10% reduction in their electric rates from
1996 levels.
The framework of the current Rate Plan, including the "sharing" mechanism,
is expected to continue at least through 2001. Regulatory decisions during 1999
did not alter UI's allowed return of 11.5% on regulated utility equity, and did
not impinge on UI's ability to achieve that return.
On July 24, 2000 and October 23, 2000, UIL Holdings estimated its year 2000
earnings would be in the range of $4.25-$4.35 per share. The October 23 estimate
contained a revised mix of UI and URI earnings. UIL Holdings maintains this
estimate at this time. This range reflects growth in earnings per share from
operations of 16% to 19% over 1999 results of $3.67 per share.
If UI were to earn 11.5% on regulated utility equity, including the Nuclear
Division, that level of earnings would generate $3.35-$3.45 per share for UIL
Holdings. The operation of UI's nuclear entitlements at the high availability
rates experienced in the first nine months of 2000 have produced additional
earnings, and are expected to produce additional earnings for the year, although
a seven-week refueling outage began on October 21, 2000 for the Seabrook nuclear
generating unit.
It is expected that sharing will be reduced from the 1999 levels, due to
mandates in the 1998 restructuring legislation. UIL Holdings expects sharing to
contribute no more than $.45-$.55 per share to earnings in 2000, exclusive of
one-time items.
UIL Holdings' non-regulated businesses, under the parent URI, are expected
to impact earnings by $.00-$(.10) per share in 2000. This compares to the
previous estimate made on July 24, 2000 of $.25-$.30 per share. The principal
reason for the drop in the estimate is the third quarter results of UBE,
including weak sales results due to mild weather conditions and high gas prices,
and to the contract termination charge taken in that quarter. Those results have
reduced UBE's earnings estimate for the year to a loss of $.15-$.20 per share
from the previous estimate of a positive $.05 per share.
APS is expected to contribute about $.10-$.15 per share to UIL Holdings
earnings in 2000, consistent with the July 24, 2000 estimate.
Xcelecom, Inc. is expected to be profitable in the fourth quarter of 2000,
resulting in UIL Holdings earnings for the year of $.08-$.10 per share.
UCI is expected to contribute about $.08-$.10 per share to UIL Holdings
earnings for the year. URI, the holding company for the non-regulated
subsidiaries, is expected to lose approximately $.20 per share for the year,
reflecting financial leverage and ongoing strategic and administrative costs
associated with UIL Holdings' efforts to continue growing the non-regulated
businesses. As stated previously, as a result of management's continued
confidence in the potential of the non-regulated businesses, UIL Holdings is
evaluating further investments in this area. Near-term losses could be incurred
due to these new growth initiatives, if the potential for future benefits
warrants such losses.
- 35 -
<PAGE>
Quarterly Earnings Pattern for 2000
-----------------------------------
The quarterly earnings pattern for 2000 will be somewhat smoother than the
earnings pattern for 1999. The primary reason is the new regulated utility
pricing structure set by the Department of Public Utility Control (DPUC),
effective January 1, 2000, to implement standard offer customer rates at a level
10% below 1996 rates.
Overall, the implementation of the new rates will produce a retail price
reduction of about 6% compared to 1999 retail revenues, excluding any further
reduction resulting from earnings sharing. In 2000, all of the unbundled rate
components, except for the component attributable to the operating Distribution
Division, reflect fixed pricing within each rate class. That is, the seasonality
previously associated with historical underlying costs of those rate components,
the largest of which is the CTA for recovery of stranded costs, has been
eliminated. Only the operating Distribution Company component maintains a
seasonal pricing structure, and that component is expected to produce an average
price for the year of about 4.2 cents per kilowatthour.
UI is allowed to earn an 11.5% return on the equity portions of CTA and the
SBC rate base (the latter is minimal). For the most part, the regulatory assets
that are being recovered through the CTA are being amortized on a straight-line
basis. If CTA revenues do not produce the allowed return, then deferred
accounting is used to "true-up" to the allowed return. This true-up adjusts for
sales volume fluctuations as well as pricing factors. A similar adjustment, on a
much less significant scale, applies to the SBC component. The generation
service, conservation and renewables charges are pass-through charges. The only
retail sales volume fluctuations that flow to net income are those that apply to
the operating Distribution Division component of rates. Thus, a 1% sales volume
increase will produce additional sales margin of about $2.4 million in 2000,
whereas it produced additional sales margin of about $6.0 million in 1999.
The other UI earnings component that can vary significantly is the Nuclear
Division component. UI's operating nuclear assets, Seabrook Unit 1 and Millstone
Unit 3, are supplying power solely to the wholesale market beginning in 2000.
Unit outages, whether scheduled or unscheduled, will result in lowered sales,
and unscheduled outages could result in higher maintenance expenses.
Actual 2000 results may vary depending on changes due to weather, economic
conditions, sales mix (the usage pattern of the Distribution Division's retail
customers) and UIL Holdings' ability to control expenses, as well as the
performance of URI and other unanticipated events.
UIL Holdings' current overall estimate of earnings per share from
operations for 2000 is $4.25-$4.35 and the estimates of quarterly results are as
follows:
Earnings per share from operations:
Estimated Actual
Quarter 2000 Range 1999
------- ---------- ----
1 $1.20 (Actual) $ .66
2 $1.41 (Actual) .99
3 $1.19 (Actual) 1.78
4 $ .45 - $ .55 .24
----
$3.67
A look at 2001; continued growth of non-regulated operating businesses value
----------------------------------------------------------------------------
Currently, UIL Holdings is estimating earnings for 2001 to be in the range
of $4.05-$4.25 per share. UI is expected to produce earnings in 2001 of
$3.75-$3.85 per share. Sharing in the regulated utility is not currently
expected to produce any significant earnings in 2001. The largest single
influence on this forecasted downturn in UI's earnings from 2000 is additional
scheduled non-cash amortization. The non-regulated businesses are expected to
produce earnings in 2001 of $.30-$.45 per share. APS's traditional contracted
walk-in payments business should produce earnings at or above the 2000 level,
but its total earnings should decrease from the 2000 level by about 25% to
$.08-$.10 per share. This decrease is due to higher selling and other costs that
are expected to be incurred to significantly increase the number of agents and
introduce new products. Xcelecom's earnings are expected to be
- 36 -
<PAGE>
$.40-$.50 per share, reflecting a full year's impact of the acquisitions
completed in 2000. Passive investments, including UCI and UBE, are currently
expected to break even in 2001, but could experience substantial variation,
depending on financial and energy market conditions. URI's financial leverage,
strategic and administrative costs are expected to offset some of these earnings
and should reduce total URI earnings by $.20-$.30 per share.
THE UNITED ILLUMINATING COMPANY
The United Illuminating Company is a wholly-owned subsidiary of UIL
Holdings Corporation (UIL Holdings). Refer to UIL Holdings' "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
information relating to the following:
Major Influences on Financial Condition
Capital Expenditure Program
Liquidity and Capital Resources
Results of Operations
Looking Forward
This discussion should be read in conjunction with UI's annual report on Form
10-K for the year ended December 31, 1999, UI's current report on Form 8-K filed
March 22, 2000, UI's quarterly reports on Form 10-Q for the fiscal quarters
ended March 31, 2000 and June 30, 2000, UI's current report on Form 8-K filed
July 21, 2000, UIL Holdings' current report on Form 8-K filed July 21, 2000, and
the financial statements and "Notes to Financial Statements" in Item 1 of this
quarterly report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Each of UIL Holdings and UI believes that it has no material quantitative
or qualitative exposure to market risk associated with activities in derivative
financial instruments, other financial instruments or derivative commodity
instruments.
- 37 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See UI's Quarterly Reports (Form 10-Q) for the quarterly periods ending
March 31, 2000 and June 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description
---------- ------- -----------
<S> <C> <C>
(3) 3.1f Copy of Certificate Amending Certificate of Incorporation of The
United Illuminating Company, dated July 21, 2000, amending Exhibit
3.1a.*
(3) 3.3 Copy of Certificate of Incorporation of UIL Holdings Corporation, as
amended through July 20, 2000.
(3) 3.4 Copy of ByLaws of UIL Holdings Corporation, as amended through
July 20, 2000.
(10) 10.21b+ Copy of First Amendment, made as of the close of business on
July 20, 2000, to The United Illuminating Company Phantom Stock
Option Agreement, dated as of February 23, 1998, between The United
Illuminating Company and Nathaniel D. Woodson, amending Exhibit
10.21**.
(10) 10.23b+ Copy of First Amendment to The United Illuminating Company 1990
Stock Option Plan, as previously amended through August 22, 1994,
effective immediately prior to the close of business on July 20,
2000, amending Exhibit 10.23***.
(10) 10.23c+ Copy of Instrument of Assumption of Stock Option Plans, made as of
10.24a+ July 21, 2000, between UIL Holdings Corporation and The United
Illuminating Company, with respect
to Exhibits 10.23***, 10.23b and
10.24****.
(10) 10.25c+ Copy of Second Amendment to The United Illuminating Company
Non-Employee Directors Common Stock and Deferred Compensation Plan,
as previously amended and restated through December 13, 1999, made
as of the close of business on July 20, 2000, amending Exhibit
10.25a#.
(10) 10.25d+ Copy of Instrument of Assignment and Assumption of Non-Employee
Directors Common Stock and Deferred Compensation Plan, made as of
July 21, 2000, between The United Illuminating Company and UIL
Holdings Corporation, with respect to Exhibits 10.25a#, 10.25b## and
10.25c.
(10) 10.28+ Copy of Employment Agreement, made as of June 12, 2000, between The
United Illuminating Company and Gregory E. Sages.
</TABLE>
- 38 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Table Item Exhibit
Number Number Description
---------- ------- -----------
<S> <C> <C> <C> <C>
(10) 10.29+ Copy of Employment Agreement, made as of June 26, 2000, between The
United Illuminating Company and Susan E. Allen.
(10) 10.30+ Copy of Resolution adopted by the Board of Directors of The United
Illuminating Company on June 26, 2000, and effective at the close of
business on July 20, 2000, amending Section 7 of each of the
Employment Agreement Exhibits 10.12a###, 10.13a###, 10.14a###,
10.15a###, 10.16a###, 10.17a###, 10.18###, 10.19a###, 10.20a**,
10.28 and 10.29.
(10) 10.31+ Copy of UIL Holdings Corporation Change in Control Severance Plan.
(10) 10.32+ Copy of UIL Holdings Corporation Non-Employee Directors Change in
Control Severance Plan.
(21) 21b List of subsidiaries of UIL Holdings Corporation, superseding
Exhibit 21a####.
(27) 27 Financial Data Schedule.
</TABLE>
----------------------------------
+ Management contract or compensatory plan or arrangement.
* Filed with Annual Report (Form 10-K) of The United Illuminating Company for
fiscal year ended December 31, 1995.
** Filed with Quarterly Report (Form 10-Q) of The United Illuminating Company
for fiscal quarter ended March 31, 1998.
*** Filed with Annual Report (Form 10-K) of The United Illuminating Company for
fiscal year ended December 31, 1996.
**** Filed with Quarterly Report (Form 10-Q) of The United Illuminating Company
for fiscal quarter ended March 31, 1999.
# Filed March 29, 1996, with proxy material for Annual Meeting of the
Shareowners of The United Illuminating Company.
## Filed with Annual Report (Form 10-K) of The United Illuminating Company for
fiscal year ended December 31, 1999.
### Filed with Quarterly Report (Form 10-Q) of The United Illuminating Company
for fiscal quarter ended September 30, 1997.
#### Filed with Quarterly Report (Form 10-Q) of The United Illuminating Company
and UIL Holdings Corporation for fiscal quarter ended June 30, 2000.
- 39 -
<PAGE>
(b) Reports on Form 8-K.
UIL HOLDINGS CORPORATION:
Item Financial
Reported Statements Date of Report
-------- ---------- --------------
5 None July 20, 2000
THE UNITED ILLUMINATING COMPANY:
Item Financial
Reported Statements Date of Report
-------- ---------- --------------
5 None July 20, 2000
- 40 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE UNITED ILLUMINATING COMPANY
Date 11/14/2000 Signature /s/ Robert L. Fiscus
--------------- -------------------------------------------
Robert L. Fiscus
Vice Chairman of the Board of Directors
and Chief Financial Officer
- 41 -
<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.
UIL HOLDINGS CORPORATION
Date 11/14/2000 Signature /s/ Robert L. Fiscus
----------------- ----------------------------------------
Robert L. Fiscus
Vice Chairman of the Board of Directors
and Chief Financial Officer
- 42 -
