SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NUMBER 1-15995
UIL HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1541045
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
157 CHURCH STREET, NEW HAVEN, CONNECTICUT 06506
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-499-2000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
REGISTRANT TITLE OF EACH CLASS WHICH REGISTERED
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UIL Holdings Corporation Common Stock, no par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates on January 31, 2003 was $463,898,614 computed on the basis of the
average of the high and low sale prices of said stock reported in the listing of
composite transactions for New York Stock Exchange listed securities, published
in The Wall Street Journal on February 3, 2003.
The number of shares outstanding of the registrant's only class of common stock,
as of January 31, 2003 was 14,460,680.
DOCUMENTS INCORPORATED BY REFERENCE
Part of this Form 10-K into
Document which document is incorporated
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DEFINITIVE PROXY STATEMENT,
DATED APRIL 4, 2003, FOR ANNUAL
MEETING OF THE SHAREHOLDERS TO BE
HELD ON MAY 14, 2003. III
UIL HOLDINGS CORPORATION
FORM 10-K
DECEMBER 31, 2002
TABLE OF CONTENTS
PAGE
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Glossary...................................................................3
PART I
Item 1. Business......................................................6
General.............................................................6
The United Illuminating Company.....................................6
Franchises.......................................................6
Regulation.......................................................6
Rates............................................................7
Power Supply Arrangements........................................7
Arrangements with Other Industry Participants....................7
New England Power Pool and ISO-New England...................7
Hydro-Quebec.................................................8
United Resources, Inc...............................................8
American Payment Systems, Inc....................................8
Xcelecom, Inc....................................................9
United Capital Investments, Inc..................................9
Cross-Sound Cable Company, LLC...............................9
Zero Stage Capital...........................................9
Ironbridge Mezzanine Fund....................................9
Souwestcon Properties, Inc..................................10
Bill Matrix.................................................10
United Bridgeport Energy, Inc...................................10
Financing..........................................................10
Employees..........................................................10
Item 2. Properties...................................................10
The United Illuminating Company....................................10
Transmission and Distribution Plant.............................10
Administrative and Service Facilities...........................11
Environmental Regulation........................................11
United Resources, Inc..............................................12
Item 3. Legal Proceedings.............................................12
Item 4. Submission of Matters to a Vote of Security Holders...........12
Executive Officers.....................................................12
PART II
Item 5. Market for UIL Holdings' Common Equity and Related
Stockholder Matters..........................................13
Item 6. Selected Financial Data.......................................15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................16
Overview and Strategy..............................................16
Major Influences on Financial Condition............................18
UIL Holdings Corporation........................................18
The United Illuminating Company.................................18
American Payment Systems, Inc...................................20
Xcelecom, Inc...................................................21
United Capital Investments, Inc.................................22
United Bridgeport Energy, Inc...................................23
Capital Expenditure Program........................................24
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TABLE OF CONTENTS (CONTINUED)
PAGE
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PART II (CONTINUED)
Liquidity and Capital Resources....................................25
Financial Covenants.............................................26
Contractual and Contingent Obligations..........................29
Critical Accounting Practices......................................30
New Accounting Standards...........................................32
Results of Operations..............................................32
Looking Forward....................................................47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....49
Item 8. Financial Statements and Supplementary Data...................51
Consolidated Financial Statements..................................51
Statement of Income for the Years 2002, 2001 and 2000...........51
Statement of Comprehensive Income for the Years 2002, 2001
and 2000......................................................51
Statement of Cash Flows for the Years 2002, 2001 and 2000.......52
Balance Sheet as of December 31, 2002 and 2001..................53
Statement of Changes in Shareholders' Equity for the Years
2002, 2001 and 2000...........................................55
Notes to Consolidated Financial Statements.........................56
Statement of Accounting Policies................................56
Capitalization..................................................63
Rate-Related Regulatory Proceedings.............................67
Short-Term Credit Arrangements..................................70
Income Taxes....................................................72
Supplementary Information.......................................74
Pension and Other Benefits......................................75
Unamortized Cancelled Nuclear Project...........................78
Lease Obligations...............................................78
Commitments and Contingencies...................................79
Other Commitments and Contingencies.........................79
Connecticut Yankee.......................................79
Hydro-Quebec.............................................80
Environmental Concerns...................................80
Site Decontamination, Demolition and Remediation Costs...80
Claim of Enron Power Marketing, Inc......................81
Cross-Sound..............................................82
Fair Value of Financial Instruments.............................82
Quarterly Financial Data (Unaudited)............................83
Segment Information.............................................83
Goodwill and Other Intangible Assets............................84
Report of Independent Accountants......................................86
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..................................88
PART III
Item 10. Directors and Executive Officers.............................88
Item 11. Executive Compensation.......................................88
Item 12. Security Ownership of Certain Beneficial Owners and
Management...............................................88
Item 13. Certain Relationships and Related Transactions...............88
PART IV
Item 14. Controls and Procedures......................................89
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................89
Signatures.............................................................94
Certifications.........................................................96
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GLOSSARY OF TERMS AND ABBREVIATIONS
ABO (Accumulated Benefit Obligation) - the actuarial present value of benefits
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(whether vested or nonvested) attributed by the pension benefit formula to
employee service rendered before a specified date and based on employee service
and compensation prior to that date. The accumulated benefit obligation differs
from the projected benefit obligation in that it includes no assumptions about
future compensation levels.
AFUDC (Allowance for Funds Used During Construction) - the cost of utility
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equity and debt funds used to finance construction projects that is capitalized
as part of construction cost.
C&LM (ASSESSMENT) (CHARGE) (Conservation and Load Management) - statutory
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assessment on utility retail customer bills placed in a State of Connecticut
fund used to support energy conservation and load management programs.
CTA Competitive transition assessment on electric utility retail customer bills
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to recover allowable Stranded Costs as determined by the DPUC.
DEP Connecticut Department of Environmental Protection.
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DISTRIBUTION DIVISION The operating division of the utility that provides
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transmission and distribution services to the utility's retail electric
customers and manages all UI divisions and rate components including the C&LM,
CTA, GSC, REI and Nuclear Division.
DOE United States Department of Energy.
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DPUC (Connecticut Department of Public Utility Control) - state agency that
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regulates certain ratemaking, services, accounting, and operations of
Connecticut utilities.
EPA United States Environmental Protection Agency.
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EPS Earnings per share.
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ESOP Employee Stock Ownership Plan.
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FASB (Financial Accounting Standards Board) - a rulemaking organization that
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establishes financial accounting and reporting standards.
FERC (Federal Energy Regulatory Commission) - federal agency that regulates
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interstate transmission and wholesale sales of electricity and related matters.
FIN FASB Interpretation Number
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GAAP Generally accepted accounting principles in the United States of America.
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GSC Generation services charge, as determined by the DPUC, represents the rate
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charged to retail customers for the power purchased from wholesale generators.
ISO-NE (ISO-New England Inc.) - an independent entity contracting with NEPOOL
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as an independent system operator to operate the regional bulk power system
(generation and ancillary products, and transmission) in New England.
ITC Investment tax credit.
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KV (kilovolt) - 1000 volts. A volt is a unit of electromotive force or electric
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pressure.
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KVA (kilovoltampere) - 1,000 voltamperes. A voltampere is the basic unit of
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apparent power of a circuit.
KW (kilowatt) - 1,000 watts.
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KWH (kilowatthour) - the basic unit of electric energy equal to one kilowatt of
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power supplied to or taken from an electric circuit steadily for one hour.
KSOP 401(k)/Employee Stock Ownership Plan.
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LIBOR London Interbank Offered Rate.
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MW (Megawatt) - 1,000 kilowatts.
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NEPOOL (New England Power Pool) - entity operating in accordance with the New
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England Power Pool Agreement, as amended, as approved by the FERC, to provide
economic, reliable operation of the bulk power system in the New England region.
NRC (Nuclear Regulatory Commission) - federal agency that regulates operation of
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nuclear power facilities.
OPEB Benefits consisting principally of health care and life insurance paid to
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retired employees and their dependents.
PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical
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equipment up to the late-1970s. Now classified as a hazardous chemical.
POSA (Point-Of-Sale-Activation) - technology to provide real-time processing of
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prepaid transactions such as cellular and long distance telephone cards.
PREPAID STORED VALUE CARDS Prepaid and re-loadable value cards that can be
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purchased and re-loaded at APS agent locations and used at retail locations
accepting credit cards and any ATM worldwide.
PREPAID TELEPHONY PRODUCTS Prepaid telecommunication products offering the
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services of nationally recognized providers, such as wireless, long distance,
home dial tone, internet and phone cards.
RCRA The federal Resource Conservation and Recovery Act.
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REI (Renewable Energy Investment) - statutory assessment on utility retail
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customer bills that are transferred to a State of Connecticut fund to support
renewable energy projects.
SBC Systems benefits charge on utility retail customer bills representing public
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policy costs such as generation decommissioning and displaced worker protection
costs, as determined by the DPUC.
SEC United States Securities and Exchange Commission.
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SFAS (Statement of Financial Accounting Standards) - accounting and financial
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reporting rules issued by the FASB.
STANDARD OFFER UI's obligation under Connecticut Public Act 98-28 (the
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Restructuring Act) to offer retail service to its customers under a regulated
"standard offer" to each customer who does not choose an alternate electricity
supplier.
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STRANDED COSTS Costs, as determined by the DPUC, including above-market
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long-term purchased power obligations, regulatory assets, and above-market
investments in power plants, that are recoverable from retail customers.
VEBA (Voluntary Employee Benefit Association Trust) - trust accounts for health
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and welfare plans for future payments to employees, retirees or their
beneficiaries.
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PART I
ITEM 1. BUSINESS.
GENERAL
UIL Holdings Corporation (UIL Holdings) has been the parent holding company for
The United Illuminating Company (UI) and United Resources, Inc. (URI) since July
2000. URI serves as the parent company for UIL Holdings' four non-utility
businesses, each of which is wholly-owned. URI's four subsidiaries are American
Payment Systems, Inc. (APS), Xcelecom, Inc. (Xcelecom), United Capital
Investments, Inc. (UCI), and United Bridgeport Energy, Inc. (UBE). UIL Holdings
is headquartered in New Haven, Connecticut, where its senior management
maintains offices and is responsible for overall planning, operating and
financial functions. UIL Holdings is an exempt public utility holding company
under the provisions of the Public Utility Holding Company Act of 1935.
THE UNITED ILLUMINATING COMPANY
UI is a regulated operating electric public utility established in 1899. It is
engaged principally in the purchase, transmission, distribution and sale of
electricity for residential, commercial and industrial purposes in a service
area of about 335 square miles in the southwestern part of the State of
Connecticut. The population of this area is approximately 730,000, which
represents approximately 21% of the population of the State. The service area,
largely urban and suburban, includes the principal cities of Bridgeport
(population approximately 140,000) and New Haven (population approximately
124,000) and their surrounding areas. Situated in the service area are retail
trade and service centers, as well as large and small industries producing a
wide variety of products, including helicopters and other transportation
equipment, electrical equipment, chemicals and pharmaceuticals. Of UI's 2002
retail electric revenues, approximately 44% were derived from residential sales,
40% from commercial sales, 14% from industrial sales and 2% from other sales.
UI's retail electric revenues are affected seasonally, primarily dependent upon
the weather, with highest revenues typically in the third quarter of the year
reflecting hotter weather and air conditioning use. In connection with the
restructuring in Connecticut of the regulated electric utility industry, UI was
required to divest its ownership interests in generation facilities, which was
completed in 2002 with the sale of the Seabrook Station generating plant.
FRANCHISES
Subject to the power of alteration, amendment or revocation by the Connecticut
legislature, and revocation by the Connecticut Department of Public Utility
Control (DPUC) under circumstances specified by statute, and subject to certain
approvals, permits and consents of public authorities and others prescribed by
statute, UI has valid franchises to engage in the purchase, transmission,
distribution and sale of electricity in the area served by it, the right to
erect and maintain certain facilities over, on and under public highways and
grounds, and the power of eminent domain.
REGULATION
UI is subject to regulation by several regulatory bodies, including the DPUC,
which has jurisdiction with respect to, among other things, retail electric
service rates, accounting procedures, certain dispositions of property and
plant, mergers and consolidations, the issuance of securities, the condition of
plant, equipment and the manner of operation in relation to the safety, adequacy
and suitability to provide service to customers, including efficiency, and the
location and construction of certain electric facilities. The DPUC consists of
five Commissioners, appointed by the Governor of Connecticut with the advice and
consent of the Connecticut legislature.
The location and construction of certain electric facilities, including electric
transmission lines, bulk substations and generation, is subject to regulation by
the Connecticut Siting Council with respect to environmental compatibility and
public need.
UI is a "public utility" within the meaning of Part II of the Federal Power Act
and is subject to regulation by the Federal Energy Regulatory Commission (FERC),
which has jurisdiction with respect to interconnection and
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coordination of facilities, wholesale electric service rates, transmission
tariffs and accounting procedures, among other things. See "Arrangements with
Other Industry Participants."
Connecticut Yankee Atomic Power Company, in which UI has a 9.5% common stock
ownership interest, is subject to the jurisdiction of the United States Nuclear
Regulatory Commission and the FERC. The Connecticut Yankee nuclear unit was
retired in 1996 and is currently being decommissioned. See PART II, Item 8,
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note (J), Commitments and Contingencies - Other Commitments and
Contingencies - Connecticut Yankee."
RATES
UI's retail electric service rates are subject to regulation by the DPUC. UI's
present general retail rate structure consists of various rate and service
classifications covering residential, commercial, industrial and street lighting
services.
Utilities are entitled by Connecticut law to charge rates that are sufficient to
allow them an opportunity to cover their reasonable operating and capital costs,
to attract needed capital and maintain their financial integrity, while also
protecting relevant public interests.
See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note (C), Rate-Related Regulatory
Proceedings."
POWER SUPPLY ARRANGEMENTS
Pursuant to Connecticut's electric industry restructuring legislation, UI's
retail electricity customers are able to choose their electricity supplier.
Through December 31, 2003, UI is required to offer fully bundled retail service
under a regulated "standard offer" rate to each customer who does not choose an
alternate electricity supplier, and to provide back-up power supply service to
customers whose alternate electricity supplier fails to provide generation
services for reasons other than the customers' failure to pay for such services.
On December 28, 2001, UI entered into an agreement with Virginia Electric and
Power Company for the supply of all of UI's standard offer generation service
needs from January 1, 2002 through December 31, 2003, and for the supply of all
of UI's generation service requirements for special contract customers through
2008.
The Connecticut General Assembly, in its session that began in January 2003, is
considering whether to extend the standard offer beyond 2003 and, if so, under
what terms, and is also considering whether to make other changes to
Connecticut's restructuring legislation.
ARRANGEMENTS WITH OTHER INDUSTRY PARTICIPANTS
NEW ENGLAND POWER POOL AND ISO-NEW ENGLAND
UI has been a member of the New England Power Pool (NEPOOL) since 1971. NEPOOL
was formed to assure reliable and economic operation of the bulk power system in
the New England region.
The NEPOOL membership includes entities engaged in the electricity business in
New England, including power marketers and brokers, independent power producers
and load aggregators. NEPOOL has contracted with an independent entity, ISO New
England Inc. (ISO-NE), for the operation of the regional bulk power system, to
assure that the bulk power system will continue to be operated in accordance
with the NEPOOL objectives and also to assure that the wholesale power markets
will be workably competitive and non-discriminatory. Various energy, capacity,
and ancillary services products are purchased in the NEPOOL market; in addition,
participants may enter into bilateral contracts for purchase/sale of these
products.
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On or about March 1, 2003, NEPOOL and ISO-NE plan to begin implementation of
substantial marketplace changes, sometimes referred to as standard market design
(SMD), as approved by the FERC. These SMD changes will include the
implementation of a transmission congestion management system and a
multi-settlement system. The SMD processes that will be employed in New England
are based on the proven systems that are currently operational in the
Pennsylvania-New Jersey-Maryland control area.
Currently, the New England transmission owners, including UI, are discussing the
possibility of forming a New England-only Regional Transmission Organization
with ISO-NE and other power pool stakeholders. Approval of the FERC would be
required for the formation and operation of such Regional Transmission
Organization.
HYDRO-QUEBEC
UI is a participant in the Hydro-Quebec transmission intertie facility linking
New England and Quebec, Canada. UI has a 5.45% participating share in Phase I
and Phase II of this facility, which in aggregate have a maximum 2000 megawatt
equivalent generation capacity value.
UNITED RESOURCES, INC.
URI serves as the parent corporation for several non-utility businesses, each of
which is incorporated separately to participate in business ventures that are
intended to provide incremental earnings to UIL Holdings' shareowners. URI,
which is not itself an operating company, has four wholly-owned subsidiaries.
AMERICAN PAYMENT SYSTEMS, INC.
APS provides a variety of financial products and services throughout the United
States through its network of approximately 10,000 retailers (agents) in
locations in grocery stores, pharmacies, banks and check-cashing stores in 47
states. APS's products and services are targeted at persons who do not have
banking relationships or are infrequent users of non-cash methods of payment.
These products and services include: (1) walk-in bill payments; (2) prepaid
telephony products; and (3) prepaid stored value cards.
APS's principal service is the walk-in bill payment service. APS has two primary
walk-in bill payment segments. The first is the "contracted bill payment"
segment where APS has a contractual relationship with the biller. The second is
the "non-contracted bill payment" segment where APS does not have a contractual
relationship with the biller. APS is one of the country's leading walk-in bill
payment service providers, processing more than 98 million payments annually,
totaling approximately $10 billion. In the contracted walk-in bill payment
segment, APS has contractual arrangements with many major electric, gas and
telecommunication companies. APS's contractual arrangements are typically for a
period of three to five years. In August 2002, APS signed a multi-year contract
with BellSouth, which is expected to be APS's largest client, representing
approximately 20% of APS's estimated contracted payment transaction volume for
2003. In the contracted bill payment segment, APS charges the contracted client
a transaction fee and compensates the agent either through a commission or
allowing the agent to charge the consumer a fee. In the non-contracted bill
payment segment, the agent charges the consumer a fee for processing the bill
payment, and a portion of the fee is retained by the agent and the remainder is
forwarded to APS, as required by the contractual relationship APS has with the
agent.
APS recruits, trains and provides equipment and software in order for the agents
to accept bill payments from the consumers on behalf of the billers. The agents
either scan the bills or manually enter the consumers' bill information into a
terminal and collects either cash, check or money orders from the consumers
paying their bills and then supplies the consumers with computer printed
receipts. The bill payment and transaction information is transmitted by the
agents to APS which, in the case of contracted bill payments, transmits the
information directly to the billers and for the non-contracted bill payment to
bill-payment consolidators that have a direct link with the billers for credit
to the consumers' account. The agents make daily deposits to either their own
bank account or an APS bank account. In the case of the former, APS has
authorization to debit the agents' bank account to collect the deposits. Then
APS consolidates the funds and transfers the appropriate amount to the billers
or bill consolidators for final payment to
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the billers. APS maintains approximately 1,100 bank accounts nationwide to
facilitate the bill payment process. Expenses associated with the maintenance
and monitoring of these accounts are one of the major expenses of APS.
APS's subsidiaries include APS Card Services, Inc. (CSI), which is 100% owned,
and CellCards of Illinois, LLC (CCI), which is currently 51% owned. CSI has been
organized by APS to market a prepaid stored value card to consumers through the
APS agent network. CCI, in which APS acquired its ownership interest in April
2001, sells prepaid long distance telephone service, prepaid telephone calling
cards and prepaid wireless telephone service in check cashing and convenience
store locations nationwide, as well as through APS's network of agents. APS has
the option (a call option) to purchase the remaining 49% of CCI beginning in May
2004, at a price to be determined by a formula based on future sales and
earnings performance. The other owners of CCI have the option (a put option) to
require APS to purchase such remaining 49%, beginning in May 2004, or earlier if
certain change of control events or management changes occur. The put and call
options together provide a synthetic forward option for the purchase of the
remaining 49% of CCI by APS. For more information regarding this commitment,
refer to Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - 'Capital Expenditure Program' and
'Liquidity and Capital Resources - Contractual and Contingent Obligations'." In
June 2002, APS launched a new technology, point of sale activation (POSA), to
provide agents with the capability of real-time processing of prepaid telephone
transactions for CCI and other distributors and to eliminate the need for agents
to carry activated prepaid telecommunication inventory.
XCELECOM, INC.
Xcelecom and its subsidiaries provide general and specialty electrical,
mechanical and voice-data-video design, construction, systems integration and
related services (collectively, specialty contracting) in regional markets of
the Eastern United States. The Xcelecom subsidiaries include Allan Electric Co.,
Inc., Brite-Way Electrical Contractors, Inc., JBL Electric, Inc. and The
Datastore, Incorporated, all in New Jersey, Orlando Diefenderfer Electrical
Contractors, Inc., in Pennsylvania, 4Front Systems, Inc., in North Carolina, J.
E. Richards, Inc. and Richards Electric, Inc., in Maryland, Terry's Electric,
Inc., in Florida, and Johnson Electric Co., Inc., M. J. Daly & Sons, Inc.,
McPhee Electric Ltd., LLC and McPhee Utility Power and Signal, Ltd., all in
Connecticut. Xcelecom also owns and operates two heating and cooling energy
centers, through its Thermal Energies, Inc. subsidiary, providing service to two
of New Haven, Connecticut's largest office and government complexes.
UNITED CAPITAL INVESTMENTS, INC.
UCI was established to make minority ownership interest investments, and its
investments include:
CROSS-SOUND CABLE COMPANY, LLC (CROSS-SOUND) - UCI has a 25% interest in
Cross-Sound, which owns and proposes to operate a 330-megawatt transmission line
(cable) connecting Connecticut and Long Island under Long Island Sound.
TransEnergieUS Ltd., the project developer and majority owner, is a Delaware
corporation and a subsidiary of TransEnergie HQ Inc., the transmission affiliate
of Hydro-Quebec (HQ). Cross-Sound has a twenty-year contract with the Long
Island Power Authority for the entire capacity of the transmission line.
The cable has been installed; however, the cable is not yet in operation pending
the resolution of permit issues. See PART II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Major Influences
on Financial Condition."
ZERO STAGE CAPITAL - UCI has invested $3.2 million in Zero Stage VI, a Small
Business Investment Company (SBIC) fund targeting the Northeast. UCI has also
funded $3 million of a $4 million commitment to Zero Stage VII, a national
technology venture capital fund. UCI expects to invest the final $1 million in
Zero Stage VII in 2003. Along with the opportunity to earn returns, UIL Holdings
views these funds as a means of promoting local economic development. These
funds have made no distributions to date. Due to the type of investments and
market conditions, the value of these funds has decreased substantially over the
past two years.
IRONBRIDGE MEZZANINE FUND - In 2001, UCI committed $1 million to Ironbridge
Mezzanine Fund, of which it has funded $0.3 million as of December 31, 2002. UCI
expects to fund the remaining capital commitment over the next
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several years. Ironbridge is a regional SBIC fund committed to investing a
portion of its capital in women-and-minority-owned businesses and businesses
located in low and moderate income areas.
SOUWESTCON PROPERTIES, INC. (SPI) - SPI owns a parcel of land in North Haven,
Connecticut that is under contract for sale for $0.8 million. An impairment loss
of $0.4 million was expensed in 2002 to adjust the book value of this property
to reflect the sales price.
BILL MATRIX - UCI has a $1 million investment in Bill Matrix, a provider of a
bill payment by phone service. APS has a joint marketing agreement with this
company.
UCI has no current plans to make additional minority ownership interest
investments.
UNITED BRIDGEPORT ENERGY, INC.
UBE holds a 33 1/3% ownership interest, as a minority investor, in Bridgeport
Energy LLC (BE), the owner of a gas-fired 520 MW merchant wholesale electric
generating facility located in Bridgeport, Connecticut. BE is co-owned and the
facility is operated by an affiliate of Duke Energy. BE began commercial
operation in 1999 and sells energy and generation capacity into the wholesale
market. The plant has an agreement through August 2018 with Duke Energy Trading
and Marketing (DETM) that gives DETM the right to deliver natural gas to the
facility and market all the electricity generated by the facility. DETM
reimburses BE under a formula based on the difference between gas costs and
electric prices. As of December 31, 2002, UBE's investment in BE has a carrying
value of $83.7 million.
FINANCING
See PART II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources,"
regarding UIL Holdings' capital requirements and resources and its financings
and financial commitments.
EMPLOYEES
As of December 31, 2002, UIL Holdings and its subsidiaries had a total of 2,890
employees, consisting of 27 in UIL Holdings, 808 in UI and 2,055 in URI and its
subsidiaries. Of the 808 UI employees, 350 were members of a union. Following a
work stoppage by UI's unionized employees from May 16, 2002 to June 9, 2002, UI
and the union entered into a three-year agreement. Of the 2,055 employees of URI
and its subsidiaries, 243 were employed by APS, 1,810 by Xcelecom and its
subsidiaries, and 2 by UCI. Certain of Xcelecom's subsidiaries have collective
bargaining agreements that cover, in the aggregate, approximately 926 employees.
Substantially all of these collective bargaining agreements contain "no-strike"
clauses. Xcelecom has not experienced any significant strikes or work stoppages
and believes its relations with employees covered by collective bargaining
agreements are good.
ITEM 2. PROPERTIES.
THE UNITED ILLUMINATING COMPANY
TRANSMISSION AND DISTRIBUTION PLANT
The transmission lines of UI consist of approximately 102 circuit miles of
overhead lines and approximately 17 circuit miles of underground lines, all
operated at 345 KV or 115 KV and located within or immediately adjacent to the
territory served by UI. These transmission lines are part of the New England
transmission grid. A major portion of UI's transmission lines is constructed on
railroad right-of-way pursuant to two Transmission Line Agreements. One of the
agreements expired in May 2000. UI is currently negotiating a new agreement.
Until negotiations are complete, the parties have agreed to adhere to the terms
of the expired agreement and to put any new agreement into effect retroactively.
The other agreement will expire in May 2040.
- 10 -
UI owns and operates 25 bulk electric supply substations with a capacity of
1,784,170 KVA, and 27 distribution substations with a capacity of 132,270 KVA.
UI has 3,233 pole-line miles of overhead distribution lines and 130 conduit-bank
miles of underground distribution lines.
See PART II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Expenditure Program" concerning
the estimated cost of additions to UI's transmission and distribution
facilities.
ADMINISTRATIVE AND SERVICE FACILITIES
UI occupies several facilities within its service territory for administrative
and operational purposes. They include Connecticut Financial Center located at
157 Church Street, New Haven, Connecticut, Electric System Work Center located
at 810 Bridgeport Avenue, Shelton, Connecticut, East Shore located at 1
Waterfront Street, New Haven, Connecticut, and Electric System North Haven Work
Center located at 15 Middletown Avenue, North Haven, Connecticut.
ENVIRONMENTAL REGULATION
The National Environmental Policy Act requires that detailed statements of the
environmental effect of UI's facilities be prepared in connection with the
issuance of various federal permits and licenses. Federal agencies are required
by that Act to make an independent environmental evaluation of the facilities as
part of their actions during proceedings with respect to these permits and
licenses.
Under the federal Toxic Substances Control Act (TSCA), the Environmental
Protection Agency (EPA) has issued regulations that control the use and disposal
of polychlorinated biphenyls (PCBs). PCBs had been widely used as insulating
fluids in many electric utility transformers and capacitors manufactured before
TSCA prohibited any further manufacture of such PCB equipment. Fluids with a
concentration of PCBs higher than 500 parts per million and materials (such as
electrical capacitors) that contain such fluids must be disposed of through
burning in high temperature incinerators approved by the EPA. Presently, no
transformers having fluids with levels of PCBs higher than 500 parts per million
are known by UI to remain in service in its system.
Under the federal Resource Conservation and Recovery Act (RCRA), the generation,
transportation, treatment, storage and disposal of hazardous wastes are subject
to regulations adopted by the EPA. Connecticut has adopted state regulations
that parallel RCRA regulations but are more stringent in some respects. UI has
complied with the notification and application requirements of present
regulations, and the procedures by which UI handles, stores, treats and disposes
of hazardous waste products have been revised, where necessary, to comply with
these regulations.
RCRA also regulates underground tanks storing petroleum products or hazardous
substances, and Connecticut has adopted state regulations governing underground
tanks storing petroleum and petroleum products that, in some respects, are more
stringent than the federal requirements. UI currently owns eight underground
storage tanks, which are used primarily for gasoline and fuel oil, that are
subject to these regulations. A testing program has been installed to detect
leakage from any of these tanks, and substantial costs may be incurred for
future actions taken to prevent tanks from leaking, to remedy any contamination
of groundwater, and to modify, remove and/or replace older tanks in compliance
with federal and state regulations.
In the past, UI has disposed of residues from operations at landfills, as most
other industries have done. In recent years it has been determined that such
disposal practices, under certain circumstances, can cause groundwater
contamination. Although UI has no knowledge of the existence of any such
contamination, if UI or regulatory agencies determine that remedial actions must
be taken in relation to past disposal practices, UI may experience substantial
costs prior to seeking regulatory recovery.
In complying with existing environmental statutes and regulations and further
developments in these and other areas of environmental concern, including
legislation and studies in the fields of water and air quality, hazardous waste
handling and disposal, toxic substances, and electric and magnetic fields, UI
may incur substantial capital expenditures for
- 11 -
equipment modifications and additions, monitoring equipment and recording
devices, and it may incur additional operating expenses. Litigation expenditures
may also increase as a result of scientific investigations, and speculation and
debate, concerning the possibility of harmful health effects of electric and
magnetic fields. The total amount of these expenditures is not now determinable.
See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note (J), Commitments and Contingencies -
Site Decontamination, Demolition and Remediation Costs" regarding these issues.
UNITED RESOURCES, INC.
APS currently leases office space in Hamden, Connecticut, which is the site of
its corporate headquarters and also the corporate headquarters for its
subsidiary CSI. APS and CSI will move into office space in Wallingford,
Connecticut on or about May 1, 2003. APS's other subsidiary, CCI, leases office
space in Chicago, Illinois.
Xcelecom leases office space in Hamden, Connecticut, which is the site of its
corporate headquarters. Xcelecom's operating subsidiaries own or lease real
property, buildings and equipment in Connecticut, Florida, Maryland, New Jersey,
North Carolina and Pennsylvania necessary for the management and operation of
their general and specialty electrical, mechanical and voice-data-video design,
construction, systems integration and related services.
ITEM 3. LEGAL PROCEEDINGS.
While neither UIL Holdings nor any of its subsidiaries is a party, UCI's 25%
interest in Cross-Sound will be affected by the outcome of pending legal
proceedings concerning the licensing of Cross-Sound's transmission line
connecting Connecticut and Long Island. See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Major
Influences on Financial Condition."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2002.
EXECUTIVE OFFICERS
The names and ages of all executive officers of UIL Holdings and all such
persons chosen to become executive officers, all positions and offices with UIL
Holdings held by each such person, and the period during which he or she has
served as an officer in the office indicated, are as follows:
NAME AGE* POSITION EFFECTIVE DATE
- ---- --- -------- --------------
Nathaniel D. Woodson 61 Chairman of the Board of March 22, 1999
Directors, President and
Chief Executive Officer
Louis J. Paglia 45 Executive Vice President and July 1, 2002
Chief Financial Officer
Susan E. Allen 43 Vice President Investor Relations, August 28, 2000
Corporate Secretary and
Assistant Treasurer
Charles J. Pepe 54 Treasurer and Assistant Secretary August 28, 2000
- -----------------------
*As of December 31, 2002
There is no family relationship between any director, executive officer, or
person nominated or chosen to become a director or executive officer of UIL
Holdings. All executive officers of UIL Holdings hold office at the pleasure of
UIL Holdings' Board of Directors. All of the above executive officers have
entered into employment agreements.
- 12 -
There is no arrangement or understanding between any executive officer of UIL
Holdings and any other person pursuant to which such officer was selected as an
officer.
A brief account of the business experience during the past five years of each
executive officer of UIL Holdings is as follows:
NATHANIEL D. WOODSON. Mr. Woodson served as President of The United Illuminating
Company during the period February 23, 1998 to May 19, 1998; President and Chief
Executive Officer during the period May 20, 1998 to December 30, 1998; and
Chairman of the Board of Directors, President and Chief Executive Officer of The
United Illuminating Company during the period December 31, 1998 to January 31,
2001. He has served as Chairman of the Board of Directors and Chief Executive
Officer of The United Illuminating Company since February 1, 2001 and Chairman
of the Board of Directors, President and Chief Executive Officer of UIL Holdings
Corporation since its inception on March 22, 1999.
LOUIS J. PAGLIA. Mr. Paglia served as Senior Vice President and Treasurer of TIG
Holdings, Inc. during the period January 1, 1998 to June 1998, and Executive
Vice President, Chief Financial Officer and Treasurer during the period June
1998 to 1999. He served as Executive Vice President and Chief Financial Officer
of ECredit.com, Inc. from 1999 to 2001. Mr. Paglia joined UIL Holdings
Corporation in April 2002 and has served as Executive Vice President and Chief
Financial Officer since July 1, 2002.
SUSAN E. ALLEN. Ms. Allen served as Manager of Financing and Corporate Secretary
Administration of The United Illuminating Company during the period January 1,
1998 to June 30, 1999 and Director Finance and Corporate Secretary
Administration of The United Illuminating Company from July 1, 1999 to June 25,
2000. She has served as Vice President Investor Relations, Corporate Secretary
and Assistant Treasurer of The United Illuminating Company since June 26, 2000
and of UIL Holdings Corporation since August 28, 2000.
CHARLES J. PEPE. Mr. Pepe served as Assistant Treasurer and Assistant Secretary
of The United Illuminating Company during the period January 1, 1998 to June 25,
2000. He has served as Treasurer and Assistant Secretary of The United
Illuminating Company since June 26, 2000 and of UIL Holdings Corporation since
August 28, 2000.
PART II
ITEM 5. MARKET FOR UIL HOLDINGS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
UIL Holdings' Common Stock is traded on the New York Stock Exchange, where the
high and low closing sale prices during 2002 and 2001 were as follows:
2002 SALE PRICE 2001 SALE PRICE
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $58.10 $51.65 $51.23 $44.25
Second Quarter 58.53 52.75 50.29 45.65
Third Quarter 56.35 35.35 49.47 45.70
Fourth Quarter 35.50 29.06 52.42 47.27
Quarterly dividends on the Common Stock have been paid since 1900. The quarterly
dividends declared in 2002 were at a rate of 72 cents per share.
As of December 31, 2002, there were 11,195 Common Stock shareowners of record.
- 13 -
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- -----------------------------------------------------------------------------------------
Equity Compensation
Plans Approved by
Security Holders 586,454 $49.77 572,811
Equity Compensation
Plans Not Approved
by Security Holders None - -
Total 586,454 $49.77 572,811
- 14 -
ITEM 6. SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
====================================================================================================================================
FINANCIAL RESULTS OF OPERATION ($000'S)
Sales of electricity
Utility
Retail
Residential $ 281,307 $ 266,585 $ 252,730 $ 271,605 $ 262,974
Commercial 256,077 254,842 242,075 256,246 254,765
Industrial 91,129 95,250 96,955 100,437 102,201
Other 10,512 10,501 10,587 11,308 11,667
---------- ----------- ---------- ----------- ----------
Total Retail 639,025 627,178 602,347 639,596 631,607
Wholesale 58,249 61,570 67,990 24,334 44,948
Other operating revenues 30,259 26,070 34,354 16,045 9,636
Non-utility businesses 403,489 371,028 176,164 70,755 61,900
----------- ----------- ---------- ----------- ----------
Total operating revenues 1,131,022 1,085,846 880,855 750,730 748,091
----------- ----------- ---------- ----------- ----------
Operating income 121,326 144,705 149,946 156,595 149,103
----------- ----------- ---------- ----------- ----------
Net income 43,947 59,363 60,757 52,224 45,072
Premium (Discount) on preferred stock redemption - - - 53 (21)
Preferred and preference stock dividends - - - 66 201
----------- ----------- ---------- ----------- ----------
Income applicable to common stock $ 43,947 $ 59,363 $ 60,757 $ 52,105 $ 44,892
====================================================================================================================================
FINANCIAL CONDITION AND CASH FLOW ($000'S)
Property, Plant and Equipment in service - net $ 467,671 $ 493,342 $ 495,850 $ 482,836 (1) $ 1,181,053
Deferred charges and regulatory assets 829,443 846,969 898,605 924,772 (1) 371,674
Total Assets 1,780,811 1,863,931 1,868,554 1,798,210 1,941,160
Current portion of long-term debt 100,000 100,000 - 25,000 66,202
Net long-term debt excluding current portion 395,432 498,557 522,221 518,228 664,510
Preferred stock & company-obligated mandatorily redeemable
securities of subsidiaries holding solely parent debentures - - - 50,000 54,299
Net common stock equity 482,352 499,995 479,045 458,298 445,507
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities, less dividends ($000's) $ 91,401 $ 85,533 $ 60,842 $ 57,907 $ 71,566
Capital expenditures, excluding AFUDC $ 57,305 $ 47,370 $ 54,191 $ 34,772 $ 38,040
====================================================================================================================================
COMMON STOCK DATA
Average number of shares outstanding - basic (000's) 14,239 14,097 14,073 14,052 14,018
Number of shares outstanding at year-end (000's) 14,272 14,116 14,077 14,063 14,035
Earnings per share - basic $3.09 $4.21 $4.32 $3.71 $3.20
Earnings per share - diluted $3.08 $4.19 $4.31 $3.71 $3.20
Book value per share $33.80 $35.42 $34.03 $32.59 $31.74
Dividends declared per share $2.88 $2.88 $2.88 $2.88 $2.88
Market Price:
High $58.53 $52.42 $55.13 $53.19 $53.75
Low $29.06 $44.25 $38.13 $39.31 $42.63
Year-end $34.87 $51.30 $49.75 $51.38 $51.50
====================================================================================================================================
OTHER FINANCIAL AND STATISTICAL DATA (UTILITY ONLY) (UNAUDITED)
Sales by class (millions of kWh's)
Residential 2,247 2,120 2,057 2,054 1,925
Commercial 2,466 2,476 2,403 2,388 2,324
Industrial 1,022 1,082 1,146 1,162 1,155
Other 46 46 48 48 48
----------- ----------- ---------- ----------- ----------
Total 5,781 5,724 5,654 5,652 5,452
----------- ----------- ---------- ----------- ----------
Number of retail customers by class (average)
Residential 287,632 286,331 284,955 282,986 281,591
Commercial 29,757 29,889 29,776 29,757 29,468
Industrial 1,630 1,707 1,725 1,746 1,752
Other 1,267 1,250 1,207 1,185 1,172
----------- ----------- ---------- ----------- ----------
Total 320,286 319,177 317,663 315,674 313,983
----------- ----------- ---------- ----------- ----------
Average price per kilowatt hour by class (cents)
Residential 12.52 12.57 12.29 13.22 13.66
Commercial 10.39 10.29 10.07 10.73 10.96
Industrial 8.92 8.80 8.46 8.64 8.85
Revenues - retail sales per kWh 11.05 10.96 10.65 11.31 11.58
====================================================================================================================================
(1) Reflects reclassification of $518.3 million of nuclear assets from plant
in-service to regulatory asset.
- 15 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CERTAIN STATEMENTS CONTAINED HEREIN, REGARDING MATTERS THAT ARE NOT HISTORICAL
FACTS, ARE FORWARD-LOOKING STATEMENTS (AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995). SUCH FORWARD-LOOKING STATEMENTS INCLUDE RISKS
AND UNCERTAINTIES; CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED THEREBY, DUE TO IMPORTANT FACTORS INCLUDING, BUT NOT
LIMITED TO, 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 THE SUBSIDIARIES OF UIL HOLDINGS CORPORATION
(UIL HOLDINGS). FORWARD-LOOKING STATEMENTS INCLUDED HEREIN SPEAK ONLY AS OF THE
DATE HEREOF, AND UIL HOLDINGS UNDERTAKES NO OBLIGATION TO REVISE OR UPDATE SUCH
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS OR CIRCUMSTANCES.
OVERVIEW AND STRATEGY
UIL Holdings Corporation (UIL Holdings) is the parent holding company for The
United Illuminating Company (UI) and United Resources, Inc. (URI). UIL Holdings
is an exempt public utility holding company under the provisions of the Public
Utility Holding Company Act of 1935. In connection with the restructuring in
Connecticut of the regulated electric utility industry, UI was required to
divest its ownership interests in generation facilities. As explained below,
UI's earnings are also expected to decline as recovery of stranded costs is
completed. In the next several years, despite a gradual decline, UI is expected
to provide the majority of UIL Holdings' earnings and cash flow. UIL Holdings'
strategy has been to invest in non-utility businesses that could generate
earnings to replace an anticipated decline in the earnings of UI resulting from
the divestiture of its generation assets. As of December 31, 2002, UIL Holdings
has invested $269 million in URI. URI serves as the parent company for UIL
Holdings' four non-utility businesses, each of which is wholly-owned. URI's four
subsidiaries are American Payment Systems, Inc. (APS), Xcelecom, Inc.
(Xcelecom), United Capital Investments, Inc. (UCI), and United Bridgeport
Energy, Inc. (UBE).
UI is a regulated operating electric public utility established in 1899. It is
engaged principally in the purchase, transmission, distribution and sale of
electricity for residential, commercial and industrial purposes in a service
area of about 335 square miles in the southwestern part of the State of
Connecticut. The service area is mature, with modest growth both in the number
of customers and use of electricity. Situated in the service area, which is
primarily urban and suburban, are retail trade and service centers, as well as
large and small industries producing a wide variety of products, including
helicopters and other transportation equipment, electrical equipment, chemicals
and pharmaceuticals. Of UI's 2002 retail electric revenues, approximately 44%
were derived from residential sales, 40% from commercial sales, 14% from
industrial sales and 2% from other sales.
Over the next five years UI will significantly increase capital spending for
transmission projects. This is driven primarily by the need to provide
additional transmission capacity in Southwest Connecticut, which is one of the
most congested, or transmission constrained, areas in the United States. These
projects will enhance network reliability and provide for future growth and the
resultant demand on the electric infrastructure in Southwest Connecticut.
Transmission projects are subject to various legal and regulatory approvals,
which have not yet been obtained and which could affect the scope, timing and
cost of the projects.
On January 15, 2003, the Federal Energy Regulatory Commission (FERC) issued a
Notice of Proposed Rulemaking that, if adopted, will provide for incentive rates
of return on certain transmission projects. This proposal is intended to
encourage investment in transmission infrastructure and enhance the
interoperability of the electric grid across large regions. UI is evaluating the
opportunity for enhancing its overall return by participating in the
transmission projects in Southwest Connecticut described above, as well as
possible participation in the formation and operation of a New England Regional
Transmission Organization.
APS provides a variety of financial products and services throughout the United
States through its network of approximately 10,000 retailers (agents) in
locations in grocery stores, pharmacies, banks and check-cashing stores in
- 16 -
47 states. APS's products and services are targeted at persons who do not have
banking relationships, or are infrequent users of non-cash methods of payment.
These products and services include: (1) walk-in bill payments; (2) prepaid
telephony products; and (3) prepaid stored value cards.
APS's principal objective is to be a leading provider of financial products and
services to cash payment consumers in the United States. Its business strategies
to achieve this objective are to (1) establish contracts with new billers; (2)
continue to expand its agent network; (3) increase non-contracted bill payments;
(4) further develop and cross-sell new products, services and technologies
including prepaid stored value cards, prepaid telephony products and point of
sale activation; and (5) improve operational efficiencies.
Xcelecom and its subsidiaries provide general and specialty electrical,
mechanical and voice-data-video design, construction, systems integration and
related services (collectively, specialty contracting) in regional markets of
the Eastern United States. Xcelecom also owns and operates two heating and
cooling energy centers, through its Thermal Energies, Inc. subsidiary, that
provide service to two of New Haven, Connecticut's largest office and government
complexes. All of Xcelecom's subsidiaries, except Thermal Energies, Inc., have
been obtained through acquisitions.
Xcelecom's principal objective is to be a leader in each of its local and
regional markets. Its business strategy to achieve this objective is to provide
a wide spectrum of specialty contracting services in each local market within
its regional markets through its network of subsidiaries, diversifying revenue
across business lines, geography, service type, contract type and client base.
Xcelecom provides design, construction, operations and maintenance services for
the electrical, fire protection, structured cabling and voice-data-video network
system integration needs of its clients in the financial, pharmaceutical,
education, biomedical, industrial and entertainment industries in regional
markets located, primarily, along the Interstate-95 corridor from Boston to
Florida. Most of Xcelecom's workforce is unionized and each of its subsidiaries
is managed locally; however, Xcelecom provides cost-effective bonding,
procurement and insurance for its subsidiaries. In addition, Xcelecom utilizes a
number of financial, operational, development and integration initiatives across
its network of subsidiaries to achieve more desirable results, including best
practices for safety and risk management, project management and estimation,
information systems, cross-sales development and cash management and banking.
Over the last several years, Xcelecom has expanded its business by pursuing an
aggressive acquisition program. Due to the effects of the economic downturn on
Xcelecom's business, in addition to the lack of available and potentially
desirable acquisitions, Xcelecom plans to slow the pace of its acquisition
program. This may result in Xcelecom not completing any acquisitions in 2003.
UCI has a 25% interest in Cross-Sound Cable Company, LLC (Cross-Sound), which
owns and proposes to operate a 330-megawatt transmission line connecting
Connecticut and Long Island under Long Island Sound. TransEnergieUS Ltd., the
project developer and majority owner, is a Delaware corporation and a subsidiary
of TransEnergie HQ Inc., the transmission affiliate of Hydro-Quebec (HQ).
UCI also has minority ownership interest investments in two Small Business
Investment Company (SBIC) venture capital funds and a SBIC fund that invests a
portion of its capital in women-and-minority owned small businesses and
businesses located in low and moderate income areas. A UCI subsidiary owns a
parcel of land in North Haven, Connecticut that is under a contract for sale.
UBE holds a 331/3% ownership interest, as a minority investor, in Bridgeport
Energy LLC (BE), the owner of a gas-fired 520 MW merchant wholesale electric
generating facility located in Bridgeport, Connecticut. BE is co-owned and the
facility is operated by an affiliate of Duke Energy. The facility began
commercial operation in 1999 and sells energy and generation capacity into the
wholesale market.
- 17 -
MAJOR INFLUENCES ON FINANCIAL CONDITION
UIL HOLDINGS CORPORATION
UIL Holdings' financial condition and financing capability will be dependent on
many factors, including the level of income and cash flow of UIL Holdings'
subsidiaries, conditions in the securities markets, economic conditions,
interest rates, legislative and regulatory developments and regulations and the
ability to retain key personnel.
The loss of key personnel or the inability to hire and retain qualified
employees could have an adverse effect on the business, financial condition and
results of operations for UIL Holdings' operating subsidiaries: UI, Xcelecom and
APS. These operations depend on the continued efforts of its current and future
executive officers, senior management and management personnel. Xcelecom has
acquired a number of companies in the past. The success of these acquisitions is
dependent on the continued involvement of the operating management of these
entities. UIL Holdings cannot guarantee that any member of management at the
corporate or subsidiary level will continue to serve in any capacity for any
particular period of time. If UIL Holdings were to lose a number of key
personnel, its operations could be adversely affected.
THE UNITED ILLUMINATING COMPANY
UI is an electric transmission and distribution utility, whose rates and allowed
return on equity are regulated by the FERC and the Connecticut Department of
Public Utility Control (DPUC). The primary factors affecting the financial
results of UI are sales volume and ability to control expenses. The two primary
factors that affect electric utility sales volume are economic conditions and
weather. The major expense components are (1) purchased power; (2) amortization
of stranded costs; (3) wages and benefits; (4) depreciation; and (5) interest.
In November 2001, as directed by the DPUC, UI filed a retail customer rate case
application and supporting schedules and pre-filed testimony with the DPUC (Rate
Case). The DPUC issued a final decision in the Rate Case proceeding that became
effective on September 26, 2002. The decision provides for a $30.9 million
reduction in UI's annual revenue requirements, including (1) a $20.3 million
reduction to UI's customer rates, (2) $2.0 million to be applied annually for
additional funding of conservation programs, (3) $8.3 million to be applied
annually to reduce stranded costs, and (4) $0.3 million to be applied to a
combination of uncollectibles, taxes and rate base changes. Customer rates were
reduced by 3.0% overall. The final Rate Case decision establishes rates on the
basis of an authorized return on equity of 10.45%, excluding UI's investment in
transmission facilities. Earnings above the authorized return are to be shared
50% to customers and 50% to retained earnings, with the customers' share divided
equally between bill reductions and an accelerated amortization of stranded
costs. The Rate Case decision did not adopt or impose a multi-year rate plan.
The Rate Case decision recognizes that the revenue requirements determination
for transmission investment, including the applicable return on equity, is
within the jurisdiction of the FERC. UI's authorized return on equity for
transmission investment is 10.75%.
Following a work stoppage by UI's unionized employees from May 16, 2002 to June
9, 2002, UI and the Union entered into a three-year contract that provides for
average annual wage increases of 4.8%. In addition to wage and salary increases,
the cost of health care and pension benefits have increased and are expected to
continue to increase in the future.
On November 27, 2002, UI filed with the DPUC a request that the DPUC reopen the
Rate Case decision to adjust UI's revenue requirements for increased pension and
postretirement benefits expenses in 2003 in excess of the amount approved in the
Rate Case. Pension and postretirement benefits expenses are expected to increase
dramatically above levels approved in the Rate Case decision due to poor equity
market performance and the current historically low level of interest rates,
both of which have increased UI's pension and postretirement benefits expenses.
On January 22, 2003, the DPUC reopened the Rate Case proceeding for the limited
purpose of determining whether there are changed conditions sufficient to
warrant consideration of UI's revenue requirements for pension and
postretirement benefits expenses in 2003. In February 2003, UI updated the
estimate of its 2003 expense for these benefits to true-up asset values and
certain census data for the 2002 plan year and to reflect updated assumptions.
As a result, the adjustment to revenue requirements sought by UI has increased
to $15.5
- 18 -
million. The DPUC has submitted interrogatories relating to the reopened docket
and held a technical meeting on February 27, 2003. If the DPUC determines not
to address the additional revenue requirements associated with the pension and
postretirement benefits expenses, UI intends to initiate a new rate case
proceeding as soon as practicable. Absent any other actions, the additional
pension and postretirement benefits expenses will prevent UI from earning its
authorized 10.45% rate of return on equity in 2003.
In April 1998, the Connecticut legislature enacted Public Act 98-28 (the
Restructuring Act), a statute designed to restructure the regulated electric
utility industry. Under the Restructuring Act, all Connecticut electricity
customers are able to choose their electricity suppliers. Through December 31,
2003, UI is required to offer retail service to its customers under a regulated
"standard offer" rate to each customer who does not choose an alternate
electricity supplier, even though UI is no longer in the business of power
generation. UI is also required under the Restructuring Act to provide back-up
power supply service to customers whose alternate electricity supplier fails to
provide power supply services for reasons other than the customers' failure to
pay for such services. On December 28, 2001, UI entered into an agreement with
Virginia Electric and Power Company (VEPCO) for the supply of all of UI's
standard offer generation service needs from January 1, 2002 through December
31, 2003, and for the supply of all of UI's generation service requirements for
special contract customers through 2008. As a result of the implementation of
standard market design in New England in 2003, the price of generation in
transmission-constrained areas may increase. Until December 31, 2003, such costs
are included in the contractual price paid by UI under its contract with VEPCO.
The Connecticut General Assembly, in its session that began in January 2003, is
considering whether to extend the standard offer beyond 2003 and, if so, under
what terms, and is also considering whether to make other changes to the 1998
restructuring legislation. If standard offer requirements are extended, UI would
attempt to enter into a long-term power supply agreement similar to the current
agreement, consistent with statutory requirements that are expected to be
determined by mid-2003.
UI's agreement with VEPCO for standard offer generation service replaces an
earlier wholesale power agreement and other related agreements with Enron Power
Marketing, Inc. (EPMI), originally intended to supply all of the power needed to
meet UI's standard offer obligations until the end of the standard offer period
(the Agreements). Following EPMI's bankruptcy filing on December 2, 2001, UI
terminated the Agreements in accordance with their terms, effective January 1,
2002, in reliance upon provisions of the Bankruptcy Code that permit termination
of such contracts. The Agreements permitted UI to calculate its gains and losses
resulting from the termination, and globally to net these gains and losses
against one another, and against any other amounts that UI owed to EPMI under
the Agreements, to arrive at a single sum. EPMI, however, commenced on January
31, 2003 an adversary proceeding against UI and UIL Holdings in the EPMI
bankruptcy, ENRON POWER MARKETING, INC. V. THE UNITED ILLUMINATING COMPANY, ET
AL., ADVERSARY PROCEEDING NO. 03-02065 (Bankr. S.D.N.Y.). UIL Holdings was sued
as the guarantor of UI's financial obligations under the Agreements. EPMI
contends that UI was not entitled to offset, against any losses UI suffered from
the termination of the Agreements, any amounts owing to EPMI for power delivered
to UI after the date EPMI filed for bankruptcy. The amount of the allegedly
improper setoff that EPMI seeks to recover in the adversary proceeding is
approximately $8.2 million, plus interest and attorneys' fees. In the event that
UI is determined to owe EPMI a portion or all of such amount for power delivered
after EPMI filed for bankruptcy, UI will seek recovery of such amount through
the regulatory process.
Under the Restructuring Act, UI is allowed to collect a competitive transition
assessment (CTA) to recover costs that have been reasonably incurred, or will be
incurred to meet its public service obligations, and that will likely not
otherwise be recoverable in a competitive 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). A significant amount of UI's earnings are generated
by the allowed return on the equity portion of the CTA rate base. The CTA rate
base earns exactly that return, no more and no less, by adjustments made to
amortization expense in each period. A significant portion of UI's cash flow
from operations is also generated from those earnings and from the recovery of
the CTA rate base. CTA rate base has declined from year to year for a number of
reasons including: amortization of CTA rate base components, the sale of the
nuclear units, and any adjustments made through the annual DPUC true-up process.
The original rate base component of stranded costs, as of January 1, 2000, was
$433 million. It has since declined to $413 million at year-end 2000, $373
million in 2001, and $309 million at year-end 2002. Of the $64 million decrease
from 2001 to 2002, approximately $43 million was due to the sale of UI's
interests in Seabrook Station. The 2002 result is subject to
- 19 -
DPUC review during 2003 and may be adjusted in accordance with that review.
From 2003 on, CTA rate base will likely decline at an accelerating rate due to
increasing levels of amortization. UI's CTA earnings will decrease while, based
on UI's current projections, cash flow will remain fairly constant until
stranded costs are fully amortized by 2010.
In order to maintain and improve its transmission and distribution system and to
provide quality customer service, UI is required to spend a significant amount
each year on capital projects. A large portion of the funds required for capital
projects is provided internally through the recovery of depreciation and from
amortization of stranded costs. The remainder must be financed externally. For
more information, see "Capital Expenditure Program" and "Liquidity and Capital
Resources."
AMERICAN PAYMENT SYSTEMS, INC.
The three primary risk factors affecting the financial results of APS and its
subsidiaries are (1) the ability to recruit and retain agents, (2) the ability
to manage and control agent fraud to ensure that the agents are depositing the
funds collected from the consumers in a timely fashion and (3) the maintenance
of internal control systems and procedures to account for the movement of
significant amounts of cash from the agents to APS and on to the biller, on
whose behalf the funds are collected. An additional risk factor is the
recoverability and potential for impairment of goodwill.
APS has a formal program in place to recruit and train agents. The two key
elements of APS's agent retention program are: (1) offering multiple products
(i.e. walk-in bill payments, prepaid stored value cards, prepaid telephony
products) increases the agents' commission income, and (2) providing efficient
and reliable technology to interface with APS on transaction processing.
Upon acceptance of bill payments by its agents, APS guarantees the payments to
the billers. Accordingly, APS is at risk for the amount of the payments until it
collects such amounts from its agents. APS receives daily reports from agents
with respect to cash collected and deposited into APS-owned and agent-owned bank
accounts (field accounts). Cash is swept from the field accounts to APS's
concentration account on a daily basis and a substantial portion of the high
dollar volume accounts are reconciled on a daily basis. Any variation between
cash receipts and amounts deposited in the field accounts are investigated by
APS on a daily basis. APS self-insures its agent fraud risk.
APS's ability to make accurate banking transactions is critical to conducting
its business and eliminating risk. APS reviews its internal control systems and
procedures to make continual improvements in those systems and procedures to
ensure that these controls are maintained in an effective manner. Advances in
technology are investigated and implemented to the extent that they will improve
the existing internal control systems and procedures.
APS intends to reduce banking fees by reducing the number of bank accounts it
maintains and, instead, requiring agents to deposit payments into their own bank
accounts. Agents who maintain their own bank accounts are contractually
obligated to hold the collected funds in trust for the benefit of the biller.
This strategy will result in a delay of monitoring timely deposits by the agent,
which may increase agent fraud risk. The processing of bill payments also
requires APS to implement and maintain a rigorously controlled record-keeping
system, which is dependent on the employment of a reliable and secure
information technology system. APS is subject to numerous state and federal
banking regulations and is required in states where it conducts business to have
and maintain money transmitter licenses. Other factors affecting the financial
results of APS and its subsidiaries are the pace of technological changes,
competition, compliance with federal and state money transmission laws, and
attracting and retaining management expertise.
APS's subsidiaries include APS Card Services, Inc. (CSI), which is 100% owned,
and CellCards of Illinois, LLC (CCI), which is currently 51% owned. CSI has been
organized by APS to market a prepaid stored value card to consumers through the
APS agent network. CCI, in which APS acquired its ownership interest in April
2001, sells prepaid long distance telephone service, prepaid telephone calling
cards and prepaid wireless telephone service in check cashing and convenience
store locations nationwide, as well as through APS's network of agents. APS has
the
- 20 -
option (a call option) to purchase the remaining 49% of CCI beginning in May
2004, at a price to be determined by a formula based on future sales and
earnings performance. The other owners of CCI have the option (a put option) to
require APS to purchase such remaining 49%, beginning in May 2004, or earlier if
certain change of control events or management changes occur. The put and call
options together provide a synthetic forward option for the purchase of the
remaining 49% of CCI by APS.
APS acquired point of sale activation (POSA) technology from a vendor. In
conjunction with this technology acquisition, APS entered into a Loan and
Security Agreement with this vendor. Under this agreement, APS made three loans
to the vendor and its affiliates totaling $3.0 million. In the fourth quarter
2002, APS declared the borrower in default of all loans and seized the
borrower's accounts receivable, inventory, assignment of contracted arrangements
with the borrower's retailer network, and POSA terminals for a value of
approximately $1.2 million. APS is negotiating the sale of the collateral seized
to CCI, and APS expects to receive a note from CCI as payment. APS expects the
sale to be completed by the end of the first quarter 2003. As part of the
foreclosure, the remaining outstanding loan balance of $1.8 million was
restructured. The Amended and Restated Loan Agreement matures on November 19,
2006. APS has established an appropriate reserve against the remaining loan
balance with regard to the collectibility of the loan.
XCELECOM, INC.
The principal factors affecting the financial results of Xcelecom and its
subsidiaries are (1) construction spending; (2) competition; (3) fixed-priced
contract estimation and bidding; (4) work-related hazards and insurance; (5)
attracting and retaining management expertise; and (6) risks related to
management of internal growth. Additional risk factors include general economic
conditions, the pace of technological changes, recoverability and potential for
impairment of goodwill, and collectibility of receivables.
More than half of Xcelecom's business is the installation of electrical,
mechanical and integrated network information systems in newly constructed and
renovated buildings and plants. Downturns in levels of construction starts can
have a material adverse effect on Xcelecom's business, financial condition and
results of operations. In addition, Xcelecom's business is subject to seasonal
variations in operations and demand that affect the construction business,
particularly in new construction. Quarterly results may also be affected by
regional economic conditions. Accordingly, Xcelecom's performance in any
particular quarter may not be indicative of the results that can be expected for
any other quarter or for the entire year.
The specialty contracting construction services business is highly fragmented
and competitive. A majority of Xcelecom's revenues are derived from projects
requiring competitive bids; however, an invitation to bid is often conditioned
upon prior experience, technical capability and financial strength. Xcelecom
competes with national, regional and local companies, many of which are small,
owner-operated entities that operate in a limited geographic area. Competitive
factors in the specialty contracting construction services business include: (1)
the availability of qualified and/or licensed personnel; (2) reputation for
integrity and quality; (3) safety record; (4) cost structure; (5) relationships
with customers; (6) geographic diversity; (7) the ability to control project
costs; (8) experience in specialized markets; (9) the ability to obtain surety
bonding; (10) adequate working capital; and (11) access to bank credit. The
competitive bidding process for new business contracts may also intensify during
economic downturns and result in lower potential profit margins and an increased
potential for project cost overruns, resulting in losses.
Xcelecom believes that current cash balances and borrowing capacity available
under lines of credit, combined with cash expected to be generated from
operations, will be sufficient to provide short-term and foreseeable long-term
liquidity and meet expected capital expenditure requirements. However,
Xcelecom's ability to generate positive cash flow at its historical levels in
the future could be adversely impacted by numerous risks, including economic
cycles, competition, cost overruns on fixed price projects, and reductions in
collections. Such reductions in cash flow, together with the financial and other
covenants in Xcelecom's credit facility agreements, could limit its ability to
borrow additional funds. Additionally, failing to comply with those covenants
could result in an event of default, which, if not cured or waived, could have a
material adverse affect on Xcelecom.
- 21 -
Many customers, particularly in connection with new construction, require
Xcelecom to post performance and payment bonds issued by a financial institution
known as a surety. These bonds provide a guarantee to the customer that Xcelecom
will perform under the terms of a contract and that it will pay subcontractors
and vendors. If Xcelecom fails to perform under a contract or to pay
subcontractors and vendors, the customer may demand that the surety make
payments or provide services under the bond. Xcelecom must reimburse the surety
for any expenses or outlays it incurs. To date, Xcelecom has not had any
significant reimbursements to its surety for bond-related costs, and it believes
that it is unlikely that it will have to fund claims under its surety
arrangements in the foreseeable future.
Xcelecom currently generates, and expects to continue to generate, a large
proportion of its revenues under fixed price contracts. Variations from
estimated contract costs along with other risks inherent in performing fixed
price contracts may result in actual revenue and gross profits for a project
differing from those originally estimated and could result in losses on
projects. Depending upon the size of a particular project, variations from
estimated contract costs can have a significant impact on Xcelecom's operating
results for any fiscal quarter or year.
Hazards related to Xcelecom's industry include, but are not limited to,
electrocutions, fires, mechanical failures, and transportation accidents. These
hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment, and may result in suspension of
operations. Xcelecom's third-party insurance is subject to large deductibles for
which reserves are established. Accordingly, Xcelecom self-insures for this
exposure. Xcelecom believes its insurance and provisions for self-insurance of
deductibles are adequate to cover all losses and liabilities. Losses impacting
self-insurance provisions or exceeding insurance limits could impact Xcelecom's
operating results.
Historically, a significant amount of Xcelecom's growth has come through
acquisitions. From July of 1999 to Xcelecom's last significant acquisition in
April of 2002, Xcelecom has made 12 acquisitions. Xcelecom currently does not
intend to grow materially through acquisitions in the foreseeable future;
however, it will continually evaluate acquisition prospects to complement and
expand its existing business platforms. The timing, size or success of any
acquisition effort and the associated potential capital commitments cannot be
predicted. Each acquisition involves a number of risks. These risks include the
diversion of management's attention from existing businesses to integrating the
operations and personnel of the acquired business; possible adverse effects on
operating results during the integration process; and possible inability to
achieve the intended objectives of the combination. If future acquisitions do
not perform as expected, Xcelecom may be required to write-off some or all of
the value of any goodwill and intangible assets associated with the
acquisitions. Financial results may also be impacted depending on the degree of
integration of acquisitions, including the ability to achieve synergies over the
network of subsidiaries. Xcelecom's revenue growth over the past several years
has been generated principally through acquisitions. Without significant
acquisition activity, and in the absence of economic improvement in regional
markets in which it operates, Xcelecom does not expect any material growth in
revenues in 2003.
Xcelecom had a backlog as of December 31, 2002 of approximately $108 million,
compared with comparable backlog, including the effects of 2002 acquisitions, of
approximately $125 million as of December 31, 2001.
UNITED CAPITAL INVESTMENTS, INC.
UCI's investments in the venture funds described at "Overview and Strategy"
above were viewed as an opportunity to earn an appropriate return and a means of
promoting local economic development. Due to the type of investments and market
conditions, the value of the Zero Stage VI fund has decreased substantially in
2002 and 2001. The other two funds have been established more recently and are
not yet fully invested. These funds have experienced a smaller decrease in
value, principally due to fund management fees and syndication costs.
The Cross-Sound project has been opposed on environmental, safety, and economic
concerns by a number of public officials and private groups who have
participated actively in governmental permitting proceedings relative to the
project. In January 2002, the Connecticut Siting Council (CSC) granted a
certificate of environmental compatibility and public need to construct the
cable. The Connecticut Attorney General and the City of New Haven appealed the
CSC's decision to the Connecticut Superior Court. In August 2002, the Superior
Court upheld the CSC's decision,
- 22 -
and the Connecticut Attorney General has appealed the Superior Court's decision.
That appeal has been briefed and is pending at the Connecticut Supreme Court.
UCI management believes that the CSC decision will be upheld on appeal, although
there can be no assurance that it will.
The project received all necessary permits prior to the cable being installed in
the spring of 2002. After installation, it was determined that several sections
of the cable in New Haven Harbor do not currently meet the burial depths
required by the permits. The authorized depth was not achieved due to the
obstruction of rock ledge, sediment and other more movable types of obstruction,
such as tree stumps and metal plate debris. The Department of Environmental
Protection (DEP) and United States Army Corp of Engineers have raised no
environmental or navigational concerns related to operation of the cable as
currently buried; however, the DEP has indicated that the permit depth must be
reached before commercial operation can begin. Cross-Sound is developing
proposals for achieving the required burial depth. However, the DEP could
determine that a new permitting process is required for some or all of the work.
Moreover, a Connecticut legislative moratorium on installing new gas and utility
lines across Long Island Sound, which is in effect until June 2003, could impact
the permitting process. There is discussion in the Connecticut legislature on
extending this moratorium. Work in New Haven Harbor is prohibited from
mid-January through March and from June through September, due to concerns
related to fish and shellfish.
In January 2003, Cross-Sound sought to modify its DEP permit. The requested
modifications would change the burial depth requirement to provide that current
burial is acceptable and would allow operation of the cable while Cross-Sound
works to meet the permit depth requirements. The DEP refused to consider the
request, citing the legislative moratorium. Cross-Sound then filed in
Connecticut Superior Court a request that the court issue an order requiring the
DEP to consider the request for permit modification without regard to the
moratorium, which Cross-Sound asserts does not apply to the Cross-Sound request.
The Superior Court heard argument in February 2003, and a decision is expected
by the end of the first quarter 2003.
As of December 31, 2002, UCI's 25% share of the actual project cost for the
Cross-Sound cable was $31.1 million. UCI provided a guarantee to Hydro-Quebec
for UCI's participating share of the construction costs, and UIL Holdings
provided a separate guarantee of UCI's obligation. The bulk of the project costs
had been financed through the constructor of the project. As of December 31,
2002, UCI's 25% share of the estimated total final cost of the project is $34.6
million. In December 2002, UCI provided an equity infusion of $2.9 million. In
February 2003, UCI provided an additional equity infusion of $6.9 million, and
UIL Holdings loaned the project $22.7 million to repay the constructor
financing. The guarantees described above were terminated when the constructor
financing was repaid. New guarantees of $3.8 million, in support of
Hydro-Quebec's guarantees to third parties in connection with the construction
of the project have been provided. Upon commercial operation, the UIL Holdings'
loan is expected to be refinanced with external project financing. UCI will be
responsible for 25% of any additional cost of project completion over the
estimated amount.
UCI has no current plans to make additional minority ownership interest
investments.
UNITED BRIDGEPORT ENERGY, INC.
Due to the relatively low wholesale price for electricity and generation
capacity during the past two years, UBE's investment in BE has not produced the
returns initially anticipated. BE projects 2003 operating income to be near
breakeven. This estimate reflects the uncertainty of energy and capacity
pricing, as new market rules are instituted and further refined. The facility is
located in a transmission-constrained area and may benefit from the
implementation of standard market design changes in New England. Although BE's
projections for 2003 are expected to be near breakeven, UBE is projecting a loss
for 2003, reflecting intercompany financing costs. See "Looking Forward - United
Resources, Inc. (URI) Earnings Estimates for 2003 - URI Minority Ownership
Interest Investments - United Bridgeport Energy, Inc."
- 23 -
CAPITAL EXPENDITURE PROGRAM
UIL Holdings' 2003-2007 estimated capital expenditure program is budgeted as
follows:
2003 2004 2005 2006 2007 TOTAL
---- ---- ---- ---- ---- -----
(In Millions)
UI
Distribution $24.9 $23.9 $22.0 $22.7 $22.3 $115.8
Transmission 13.0 5.9 8.4 0.7 0.6 28.6
Southwest Connecticut Reliability Project (1) 4.1 12.1 41.9 36.6 0.7 95.4
Information Technology 17.7 1.6 4.2 0.1 0.1 23.7
Real Estate 8.9 16.0 - - - 24.9
Other 4.8 9.6 6.4 4.6 4.2 29.6
------------------------------------------------------------
Total UI 73.4 69.1 82.9 64.7 27.9 318.0
URI
APS
Capital Expenditures 6.7 6.1 6.0 6.0 6.0 30.8
CCI Acquisition Expenditures (2) - 2.2 6.2 6.2 - 14.6
BellSouth Expenditures 1.0 - - - - 1.0
Other 0.3 - - - - 0.3
------------------------------------------------------------
APS Subtotal 8.0 8.3 12.2 12.2 6.0 46.7
Xcelecom
Capital Expenditures 2.5 2.6 2.6 2.6 2.6 12.9
Acquisition Expenditures - - - - - -
Earn-Out Payments (3) 2.5 3.1 3.3 3.8 1.9 14.6
Promissory Note Payments (4) 3.7 3.3 3.3 - 0.1 10.4
Non-Compete Payments (5) 1.1 1.1 1.0 0.1 - 3.3
------------------------------------------------------------
Xcelecom Subtotal 9.8 10.1 10.2 6.5 4.6 41.2
UCI
Cross-Sound (6) 29.6 - - - - 29.6
Other 1.3 0.2 0.2 - - 1.7
------------------------------------------------------------
UCI Subtotal 30.9 0.2 0.2 - - 31.3
Total URI 48.7 18.6 22.6 18.7 10.6 119.2
------------------------------------------------------------
Total UIL Holdings $122.1 $87.7 $105.5 $83.4 $38.5 $437.2
============================================================
(1) These amounts represent UI's current estimates based upon the proposed
configuration of the transmission lines. There is opposition to the project
as proposed, and it has yet to be approved by the Connecticut Siting
Council. If the project is approved in a form different than proposed,
these estimates will change accordingly.
(2) APS has the option (a call option) to purchase the remaining 49% of CCI
beginning in May 2004, at a price to be determined by a formula based on
future sales and earnings performance. The other owners of CCI have the
option (a put option) to require APS to purchase such remaining 49%,
beginning in May 2004, or earlier if certain change of control events or
management changes occur. The put and call options together provide a
synthetic forward option for the purchase of the remaining 49% of CCI by
APS. The purchase price may be adjusted up or down as a result of actual
performance.
(3) Xcelecom's earn-out payments are payable to the former owners of certain
acquired companies and are contingent on various future financial results
of each company. The actual payments may vary from these estimated amounts.
(4) Xcelecom's promissory note payments are amounts payable to the former
owners of certain acquired companies. Several of the promissory notes have
indemnification provisions that may cause the principal balance to change.
- 24 -
(5) Xcelecom's non-compete payments are amounts payable to the former owners of
certain acquired companies.
(6) The Cross-Sound expenditure consists of an equity contribution of $6.9
million and a loan of $22.7 million.
LIQUIDITY AND CAPITAL RESOURCES
UIL Holdings' capital requirements are presently projected as follows:
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
(In Millions)
Unrestricted Cash and Temporary Cash Investments on
Hand - Beginning of Year (1) $ 20.6 $ - $ - $ - $ -
Funds from Operations before Dividends (2) 115.1 115.5 148.9 134.6 145.7
Less Common Dividends (3) 41.1 41.1 41.2 41.2 41.3
Plus Net Cash (after-tax) from sale of Seabrook (4) 42.8 - - - -
-------------------------------------------------------
Subtotal 137.4 74.4 107.7 93.4 104.4
Less:
Capital Expenditures (2)
UI 73.4 69.1 82.9 64.7 27.9
URI 48.7 18.6 22.6 18.7 10.6
-------------------------------------------------------
Total Capital Expenditures 122.1 87.7 105.5 83.4 38.5
Cash Available/(Required) to pay Debt Maturities
and Redemptions 15.3 (13.3) 2.2 10.0 65.9
Less:
Maturities and Mandatory Redemptions 100.0 - 4.3 4.3 78.3
External Financing Requirements (Surplus) (2) 84.7 13.3 2.1 (5.7) 12.4
-------------------------------------------------------
Plus:
Issuance of Long-term Debt 100.0 - - - -
-------------------------------------------------------
(Increase) Decrease in Short-Term Investments 25.0 - - - -
Increase (Decrease) in Short-Term Borrowings (40.3) 13.3 2.1 (5.7) 12.4
-------------------------------------------------------
Short-Term Borrowings - End of Year (5) $5.0 $18.3 $20.4 $14.7 $27.1
=======================================================
(1) Excludes restricted cash in UI of $5.6 million, APS of $40.4 million and
Xcelecom of $0.4 million.
(2) "Funds from Operations before Dividends," "Capital Expenditures" and
"External Financing Requirements (Surplus)" are estimates based on current
earnings, dividend levels and cash flow projections. All of these estimates
are subject to continual review by the UIL Holdings' Board of Directors and
change due to future events and conditions that may be substantially
different from those used in developing the projections.
(3) Based on current cash projections, UIL Holdings expects that, at its
quarterly reviews of the dividend, maintenance of the annual dividend of
$2.88 per share will be justified, absent adverse events that materially
affect projected results.
(4) The sale of UI's interests in Seabrook Station was completed on November 1,
2002. This amount represents the remaining cash income tax benefit expected
to be realized in 2003.
(5) The short-term borrowing balance at December 31, 2002 was $45.3 million.
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 $100 million revolving credit agreement
that UIL Holdings has with a group of banks, a $35 million revolving credit
agreement that Xcelecom has with two banks, and a $10 million revolving credit
agreement that APS has with a bank, future external financing
- 25 -
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 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
- - Note (B), Capitalization and Note (D), Short-Term Credit Arrangements" for a
discussion of UIL Holdings' credit arrangements.
At December 31, 2002, UIL Holdings had $67.0 million of cash and temporary cash
investments, of which $46.4 million is restricted cash; the majority of
restricted cash is funds collected by APS's agents that have not been forwarded
to APS's clients. This represents a decrease of $19.1 million from the
corresponding balance at December 31, 2001. The components of this decrease,
which are detailed in the Consolidated Statement of Cash Flows, are summarized
as follows:
(In Millions)
-------------
Balance, December 31, 2001 $86.1
--------------
Net cash provided by (used in ) operating activities:
Net cash provided by operating activities
before net settlements 147.4
Net settlements (1) (15.1)
--------------
132.3
--------------
Net cash provided by (used in) investing activities:
- - Investment in debt securities, net 5.0
- - Cash invested in plant, including nuclear fuel (57.3)
- - Acquisition of businesses, net of cash acquired (13.8)
- - Acquisition of pollution control refunding revenue bonds (25.0)
- - Investment in non-utility business (5.4)
- - Redemption of investment in Seabrook Lease Obligation Bonds 80.8
- - Net proceeds from sale of generation facilities 79.2
- - Deferred payments in prior acquisitions (5.0)
--------------
58.5
--------------
Net cash provided by (used in) financing activities:
- - Financing activities, excluding dividend payments and
termination of Seabrook Lease Obligation 39.9
- - Dividend payments (40.9)
- - Termination of Seabrook Lease Obligation (208.9)
--------------
(209.9)
Net Change in Cash (19.1)
--------------
Balance, December 31, 2002 $67.0
==============
(1) The net settlements reflected above as a component of cash provided by
operating activities represent the change in net accounts receivable due
from APS's agents, as well as net payables due to APS's clients.
FINANCIAL COVENANTS
UIL Holdings and its subsidiaries are required to comply with certain covenants
in connection with their respective loan agreements. The covenants include those
that are normal and customary in bank and loan agreements. The covenants below
describe only the financial covenants in the agreements.
UIL HOLDINGS
Under the Note Purchase Agreement in connection with the 7.23% Senior Notes,
Series A, due February 15, 2011, in the principal amount of $30 million, and
7.38% Senior Notes, Series B, due February 15, 2011, in the principal amount
- 26 -
of $45 million, issued by UIL Holdings, UIL Holdings is required to (i) maintain
a ratio of consolidated debt to consolidated capital of not greater than 65%
(debt ratio); (ii) maintain a ratio of consolidated earnings available for
interest charges to consolidated interest charges for any period of four fiscal
quarters of at least 2.00 to 1.00 (interest coverage ratio); and (iii) maintain
consolidated net worth of at least $345 million plus 25% of consolidated net
income on a cumulative basis for each fiscal quarter for which consolidated net
income is positive. At December 31, 2002, UIL Holdings' debt ratio was 55%; its
interest coverage ratio was 2.98 to 1.00; and it had consolidated net worth in
excess of the requirement in the amount of $111.5 million.
Under the terms of the Note Purchase Agreement, an event of default shall occur
if UI, URI, APS or Xcelecom defaults on indebtedness in the aggregate principal
amount of at least $10 million due to (i) a default in payment or payments due
on the indebtedness, or (ii) default in the performance of or compliance with
any term or condition of the indebtedness, or (iii) the occurrence of any event
or condition that would require the purchase or repayment of the indebtedness
prior to maturity.
The revolving credit agreement described in Part II, Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note (D), Short-Term Credit Arrangements," requires that UIL Holdings (i)
maintain a ratio of consolidated debt to consolidated capital, as of the last
day of each March, June, September and December, of not greater than 0.65 to
1.00; and (ii) shall not cause the debt of UIL Holdings (excluding debt of its
subsidiaries) to exceed $200 million in the aggregate principal amount
outstanding at any time. At December 31, 2002, UIL Holdings' consolidated debt
to consolidated capital ratio was 0.55 to 1.00; and its aggregate principal debt
outstanding (excluding debt of its subsidiaries) was $140.7 million (including
an inter-company loan from to UI to UIL Holdings).
Under the terms of the Revolving Credit Agreement, an event of default shall
occur if UI or URI defaults on indebtedness in the aggregate principal amount of
at least $10 million due to (i) a default in payment or payments due on the
indebtedness, or (ii) default in the performance of or compliance with any term
or condition of the indebtedness, or (iii) the occurrence of any event or
condition that would require the purchase or repayment of the indebtedness prior
to maturity.
There are no dividend restrictions, ratings or stock triggers in connection with
the above agreements.
UI
Under the Note Purchase Agreement in connection with the 4.42% Senior Notes,
Series A, due December 12, 2007, in the principal amount of $74 million, and
4.89% Senior Notes, Series B, due December 12, 2009, in the principal amount of
$51 million, issued by UI, UI is required to (i) maintain a ratio of
consolidated debt to consolidated capital of not greater than 65% (debt ratio);
and (ii) maintain a ratio of consolidated earnings available for interest
charges to consolidated interest charges for any period of four fiscal quarters
of at least 2.00 to 1.00 (interest coverage ratio). As of December 31, 2002,
UI's debt ratio was 54%; and its interest coverage ratio was 3.91 to 1.00.
The indenture under which UI has issued $100 million principal amount of Notes
places limitations on UI relative to the payment of cash dividends on its common
stock, which is wholly-owned by UIL Holdings, and the purchase or redemption of
said common stock. Retained earnings in the amount of $68.9 million were free
from such limitations at December 31, 2002.
There are no ratings or stock triggers in connection with the above agreement or
indenture.
APS
The revolving credit agreement APS has with a bank, described in Part II, Item
8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (D), Short-Term Credit Arrangements," requires that
APS maintain certain financial covenants. APS did not comply with the
consolidated tangible net worth covenant under this agreement and received a
waiver of non-compliance from the bank. All borrowings outstanding under this
agreement are secured solely by assets of APS and its subsidiaries.
- 27 -
APS is engaged in negotiations with a bank for a new credit agreement. As
stated in the bank's commitment letter, APS would be required to maintain the
following financial covenant and coverage ratios: (1) consolidated tangible net
worth of at least $12 million; (2) the ratio of consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) to consolidated fixed
charges (fixed charge coverage ratio) of at least 1.20 to 1.00; and (3) the
ratio of consolidated debt to consolidated EBITDA (leverage ratio) of 2.00 to
1.00 or less. At December 31, 2002 under the terms of the commitment letter,
APS's consolidated tangible net worth was $13.3 million; its fixed charge
coverage ratio was 2.79 to 1.00; and its leverage ratio was 0.37 to 1.00.
Borrowings under this credit agreement, which is expected to be completed by
March 10, 2003, will be secured solely by the assets of APS and its
subsidiaries.
There are no ratings or stock triggers in connection with the above agreement.
XCELECOM
The revolving credit agreement Xcelecom has with two banks described in Part II,
Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (D), Short-Term Credit Arrangements," requires that
Xcelecom maintain the following financial coverage ratios: (1) the ratio of
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) to consolidated fixed charges (fixed charge coverage ratio) of at least
1.25 to 1.00; (2) the ratio of consolidated liabilities to consolidated net
worth (liabilities to net worth ratio) of 1.00 to 1.00 or less; (3) the ratio of
consolidated debt, including inter-company debt, to consolidated EBITDA
(leverage ratio) of 3.50 to 1.00 or less; and (4) the ratio of consolidated debt
to consolidated EBITDA (senior leverage ratio) of 2.00 to 1.00 or less. At
December 31, 2002, Xcelecom's fixed charge coverage ratio was 1.87 to 1.00;
liabilities to net worth ratio was 0.42 to 1.00; leverage ratio was 2.59 to
1.00; and senior leverage ratio was 1.43 to 1.00. All borrowings outstanding
under this agreement are secured solely by assets of Xcelecom and its
subsidiaries.
There are no ratings or stock triggers in connection with the above agreement.
- 28 -
CONTRACTUAL AND CONTINGENT OBLIGATIONS
The following are contractual and contingent obligations of UIL Holdings and its
subsidiaries as of December 31, 2002.
(IN MILLIONS)
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Debt Maturities:
UIL Holdings $ - $ - $4.3 $4.3 $ 4.3 $ 62.1 $ 75.0
UI 100.0 - - - 74.0 246.5 420.5
----------------------------------------------------------------
Total $100.0 $ - $4.3 $4.3 $78.3 $308.6 $495.5
================================================================
Contractual Obligations:
UI
Lease Payments (1) $10.8 $25.2 $10.0 $10.1 $10.9 $51.1 $118.1
UCI
Zero Stage 1.0 - - - - - 1.0
Ironbridge 0.3 0.2 0.2 - - - 0.7
APS
CCI (2) - 2.2 6.2 6.2 - - 14.6
BellSouth (3) 1.0 - - - - - 1.0
Lease Payments 1.0 1.1 1.2 0.3 0.3 2.0 5.9
Other 0.3 - - - - 0.3
Xcelecom
Earn-Out Payments (4) 2.5 3.1 3.3 3.8 1.9 - 14.6
Promissory Note Payments (5) 3.7 3.3 3.3 - 0.1 - 10.4
Non-Compete Payments (6) 1.1 1.1 1.0 0.1 - - 3.3
Notes Payable 1.0 1.0 0.7 0.4 0.3 1.0 4.4
Lease Payments 1.7 1.4 1.1 0.5 0.1 0.3 5.1
----------------------------------------------------------------
Total $24.4 $38.6 $27.0 $21.4 $13.6 $54.4 $179.4
================================================================
As of December 31, 2002
-----------------------
(In Millions)
Guarantees:
UI-Hydro-Quebec $4.4
UCI-Hydro-Quebec (7) $31.1
Letters of Credit:
Xcelecom (8) $5.1
APS (9) $1.4
Cross-Sound (10) $0.3
(1) Includes anticipated buyout option payment in 2004 in connection with the
Electric System Work Center property.
(2) APS has the option (a call option) to purchase the remaining 49% of CCI
beginning in May 2004, at a price to be determined by a formula based on
future sales and earnings performance. The other owners of CCI have the
option (a put option) to require APS to purchase such remaining 49%,
beginning in May 2004, or earlier if certain change of control events or
management changes occur. The put and call options together provide a
synthetic forward option for the purchase of the remaining 49% of CCI by
APS. The purchase price may be adjusted up or down as a result of actual
performance.
(3) This amount represents the final payment for installing and converting the
BellSouth retailer network to APS's bill payment platform, of which URI is
a guarantor.
(4) Xcelecom's earn-out payments are payable to the former owners of certain
acquired companies and are contingent on various future financial results
of each company. The actual payments may vary from these estimated amounts.
- 29 -
(5) Xcelecom's promissory note payments are amounts payable to the former
owners of certain acquired companies. Several of the promissory notes have
indemnification provisions that may cause the principal balance to change.
(6) Xcelecom's non-compete payments are amounts payable to the former owners of
certain acquired companies.
(7) This amount represents UCI's guarantee to Hydro-Quebec in connection with
UCI's participating share of the construction financing of the Cross-Sound
project. UIL Holdings provided a separate guarantee of UCI's obligation.
These guarantees of $31.1 million were terminated as of February 28, 2003,
and replaced with guarantees of $3.8 million, in support of Hydro-Quebec's
guarantees to third parties in connection with construction of the project.
(8) This amount represents Xcelecom's letters of credit that support certain
insurance and acquisition related obligations, $2.0 million of which is
recorded on the Consolidated Balance Sheet and included in Promissory Note
Payments above, $1.4 million of which is included in the Consolidated
Balance Sheet under the caption Accrued Liabilities, and $1.7 million of
which supports contingent obligations for potential growth in insurance
claim reserves for which Xcelecom is obligated and certain potential
deferred performance based payments, included in the Earn-out Payments
above, for one of Xcelecom's acquisitions. See Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note (D), Short-Term Credit Arrangements."
(9) This amount represents APS's letter of credit that is recorded on the
Consolidated Balance Sheet. See Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note (D),
Short-Term Credit Arrangements."
(10) This amount represents UCI's participating share of Cross-Sound's letter of
credit to regulatory agencies.
CRITICAL ACCOUNTING PRACTICES
UIL Holdings' financial condition and results of operations are impacted by the
methods, assumptions and estimates used in the application of critical
accounting practices. The following accounting practices are particularly
important to the financial condition or results of operations of UIL Holdings,
and require estimates or other judgments of matters inherently uncertain.
Changes in the estimates or other judgments included within these accounting
practices could result in a significant change to the information presented in
the financial statements.
ACCOUNTING FOR REGULATED PUBLIC UTILITIES - SFAS NO. 71
Generally accepted accounting principles for regulated entities in the United
States of America allow UI to give accounting recognition to the actions of
regulatory authorities in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." In accordance with SFAS No. 71, UI has deferred
recognition of costs (a regulatory asset) or has recognized obligations (a
regulatory liability) if it is probable that such costs will be recovered or
obligations relieved in the future through the ratemaking process. In addition
to the Regulatory Assets and Liabilities separately identified on the
Consolidated Balance Sheet, there are other regulatory assets and liabilities
such as certain deferred tax liabilities. UI also has obligations under
long-term power contracts, the recovery of which is subject to regulation. If
UI, or a portion of its assets or operations, were to cease meeting the criteria
for application of these accounting rules, accounting standards for businesses
in general would become applicable and immediate recognition of any previously
deferred costs, or a portion of deferred costs, would be required in the year in
which the criteria are no longer met, if such deferred costs are not recoverable
in the portion of the business that continues to meet the criteria for
application of SFAS No. 71.
ACCOUNTING FOR PENSIONS AND OTHER POSTRETIREMENT BENEFITS
UIL Holdings accounts for its pension and postretirement benefit plans in
accordance with SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No.
106, "Employers' Accounting for Postretirement Benefits other than Pensions." In
applying these accounting practices, assumptions are made regarding the
valuation of benefit obligations and the performance of plan assets. Delayed
recognition of differences between actual results and those assumed allows for a
smoothed recognition of changes in benefit obligations and plan performance over
the working lives of the employees who benefit under the plans. The primary
assumptions are as follows:
- 30 -
o Discount rate - this rate is used to determine the current value of
future benefits. This rate is adjusted based on movement of long-term
interest rates.
o Expected return on plan assets - the expected return is based upon a
combination of historical performance and anticipated future returns
for a portfolio reflecting the mix of equity, debt and other
investments included in plan assets.
o Average wage increase - projected annual pay increases, which are used
to determine the wage base used to project employees' pension benefits
at retirement.
o Health care cost trend rate - projections of expected increases in
health care costs.
These assumptions are the responsibility of management, in consultation with its
outside actuarial and investment advisors. A variance in the discount rate,
expected return on assets or average wage increase could have a significant
impact on pension costs, assets and obligations recorded under SFAS No. 87. A
variance in the health care cost trend assumption could have a significant
impact on postretirement medical expense recorded under SFAS 106.
As of December 31, 2002, UIL Holdings changed its discount rate from 7.25% to
6.75% to reflect the reduction in the rate of return for long-term fixed-income
securities, which serves as the basis for this assumption. UIL Holdings has also
reduced its expected return on plan assets from 9.5% to 8.0% for 2003, based on
projections of future expected performance developed in conjunction with UIL
Holdings actuaries and investment advisors. The 8.0% expected rate of return
more closely reflects the expected future performance of the current pension
asset portfolio over the long term.
The projected, long-term average wage increase is being maintained at 4.5% in
2003. Due to increases in projected health care costs, UIL Holdings increased
its health care cost trend rate to 14%, declining by 1.0% annually to a
steady-state growth rate of 5.0%. For 2002, the health care cost trend rate
assumption was a 7.5% growth rate, declining by 0.5% annually to a long-term
rate of 4.5%.
UIL Holdings' 2002 pension and postretirement benefits expenses were $6.7
million and $3.0 million, respectively. The estimates for UIL Holdings' 2003
pension and postretirement benefits expenses are $17.5 million and $5.2 million,
respectively, based on the revised assumptions noted above.
The assumptions are used to predict the net periodic expense on a look-forward
basis. To the extent actual investment earnings, actual wage increases and other
items differ from the assumptions, a gain or loss is created, and subsequently
amortized into expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, UIL Holdings adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement modified the accounting and reporting
of goodwill and intangible assets. Under this new standard, UIL Holdings is no
longer amortizing its existing goodwill. In addition, UIL Holdings was required
to measure goodwill for impairment effective January 1, 2002 as part of the
transition provisions.
SFAS No. 142 requires goodwill to be allocated to reporting units and measured
for impairment under a two-step test. Goodwill attributable to each of UIL
Holdings' reporting units was tested for impairment by comparing the fair value
of each reporting unit with its carrying value. Fair value was determined using
discounted cash flows. As of December 31, 2002, such testing indicated that
there was no impairment at the consolidated UIL Holdings level. These impairment
tests were required to be performed at adoption of SFAS No. 142 and at least
annually thereafter. Significant estimates used in the methodologies include
estimates of future cash flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market multiples for each of
the reportable units. UIL Holdings subjected the testing analysis to a broad
range of possible outcomes and scenarios, and in each case the determination of
no impairment at the consolidated UIL Holdings level was confirmed.
- 31 -
Under SFAS No. 142, entities are also required to determine the useful life of
other intangible assets and amortize the value over the useful life. Such
intangible assets are required to be tested for impairment in a manner similar
to goodwill. In accordance with SFAS No. 142, UIL Holdings has determined the
useful life of other intangible assets and is amortizing the value over the
useful life. In 2002, other intangible assets were tested and no impairment was
found.
UNBILLED REVENUE
At the end of each accounting period, UI accrues an estimated amount for
services rendered but not billed. The calculation is primarily based upon UI's
system requirements or kilowatt-hour usage for a given period, reduced by
kilowatt-hours already billed to customers. Certain factors are taken into
account in the calculation of unbilled revenue, any of which can have a
significant impact, such as changes in or problems with metering, the number of
days in a billing cycle, seasonality, price changes and billing adjustments.
ACCOUNTING FOR RECEIVABLES DUE FROM APS'S AGENTS
Given the substantial amounts of cash transferred in APS's bill payment
business, agent losses is a significant risk. While APS has controls to monitor
and manage that risk, the possibility of agent losses exists. Insurance coverage
for such risks is prohibitively expensive or unavailable. Therefore, APS
self-insures this risk. A loss reserve equal to the estimate of expected annual
loss due to agent losses is developed based on past history and APS management's
expectation of future results.
PERCENT-OF-COMPLETION ACCOUNTING
Xcelecom believes its most critical accounting policy is revenue recognition
from long-term contracts for which Xcelecom uses the percentage-of-completion
method of accounting. Percentage-of-completion accounting is one of the
prescribed methods of accounting for long-term contracts in accordance with
accounting principles generally accepted in the United States of America and,
accordingly, the primary method used for revenue recognition within Xcelecom's
industry. Percentage-of-completion is measured principally by the percentage of
costs incurred to date for each contract to the estimated total costs for each
contract at completion. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses become known. Application of
percentage-of-completion accounting results in the recognition of costs and
estimated earnings in excess of billings on uncompleted contracts within the
balance sheet. Costs and estimated earnings in excess of billings on uncompleted
contracts reflected on the balance sheet arise when revenues have been
recognized but the amounts cannot be billed under the terms of the contracts.
Such amounts are recoverable from customers based on various measures of
performance, including achievement of certain milestones, completion of
specified units, or completion of the contract. Due to uncertainties inherent
within estimates employed to apply percentage-of-completion accounting, it is
possible that estimates will be revised as project work progresses. Application
of percentage-of-completion accounting requires that the impact of those revised
estimates be reported in the financial statements prospectively.
NEW ACCOUNTING STANDARDS
See the discussion included in Item 8, "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note (A), Statement of
Accounting Policies."
RESULTS OF OPERATIONS
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: 2002 ACTUAL EARNINGS VS.
- -------------------------------------------------------------------------
PREVIOUS ESTIMATE
- -----------------
Net Income for UIL Holdings Corporation (UIL Holdings) was $43.9 million in
2002, or $3.09 per share. This was higher than the $2.95-$3.05 per share range
estimated in UIL Holdings' earnings release dated November 12, 2002.
Improvements at UI, excluding the Nuclear Division, were partially offset by
additional costs recorded in the Nuclear Division resulting from a January 13,
2003 DPUC draft decision related to the sale of Millstone Unit 3 that
- 32 -
occurred in March of 2001. See the Nuclear Division section below for an
explanation of these costs. The improvements in UI's earnings were due primarily
to lower than expected expenses and higher revenues. The results of UIL
Holdings' non-utility businesses, under URI, were at the bottom of the range
estimated for those units.
2002 VS. 2001
- -------------
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: 2002 VS. 2001
- --------------------------------------------------------------
UIL Holdings' earnings for 2002 decreased by $15.5 million, or $1.12 per share,
compared to 2001. The decrease in earnings was due to an $0.86 per share
decrease in non-utility businesses under URI, a $0.03 per share decrease at UI,
excluding the Nuclear Division, and a $0.23 per share decrease in Nuclear
Division earnings.
The table below represents a comparison of UIL Holdings' Net Income and Earnings
Per Share (EPS) for 2002 and 2001.
- --------------------------------------------------------------------------------------------------
2002 more (less) than 2001
Twelve Months Twelve Months ---------------------------
Ended Ended
Dec. 31, 2002 Dec. 31, 2001 Amount Percent
- --------------------------------------------------------------------------------------------------
NET INCOME (IN MILLIONS EXCEPT PERCENTS)
UI $48.1 $48.0 $0.1 - -
Nuclear Division 5.8 9.1 (3.3) (36)%
United Resources (Non-Utility) (10.0) 2.3 (12.3) - -
------ ----- -------
TOTAL NET INCOME FROM OPERATIONS $43.9 $59.4 $(15.5) (26)%
EPS FROM OPERATIONS
UI $3.38 $3.41 $(0.03) - -
Nuclear Division 0.41 0.64 (0.23) (36)%
United Resources (Non-Utility) (0.70) 0.16 (0.86) - -
------ ---- -----
TOTAL EPS - BASIC $3.09 $4.21 $(1.12) (27)%
==== ==== ====
TOTAL EPS - DILUTED (NOTE A) $3.08 $4.19 $(1.11) (26)%
==== ==== ====
- --------------------------------------------------------------------------------------------------
Note A: Reflecting the effect of unexercised dilutive stock options.
- 33 -
The following table is a line-by-line breakdown of certain line items of UIL
Holdings' Consolidated Statement of Income by subsidiary, including comparisons
between 2002 and 2001. Significant variances are explained in the individual
subsidiary sections that follow.
YEAR ENDED DECEMBER 31, 2002 MORE
(IN MILLIONS - UNAUDITED) 2002 2001 (LESS) THAN 2001
- ------------------------- ---- ---- ----------------
OPERATING REVENUE
UI from operations, before sharing $691.3 $669.5 $21.8
UI sharing from operations (6.6) (3.9) (2.7)
Nuclear 42.8 49.2 (6.4)
Xcelecom 310.0 312.6 (2.6)
APS 93.7 58.6 35.1
Minority Ownership Interest Investment & Other (0.2) (0.2) 0.0
-------------------------------------------
TOTAL OPERATING REVENUE $1,131.0 $1,085.8 $45.2
===========================================
FUEL AND ENERGY EXPENSE
UI $263.1 $265.0 ($1.9)
Nuclear 6.1 6.9 (0.8)
-------------------------------------------
TOTAL FUEL AND ENERGY EXPENSE $269.2 $271.9 ($2.7)
===========================================
OPERATION AND MAINTENANCE EXPENSE
UI $176.7 $154.5 $22.2
Nuclear 23.8 22.7 1.1
Xcelecom 301.1 292.2 8.9
APS 92.8 55.1 37.7
Minority Ownership Interest Investment & Other 3.3 3.5 (0.2)
-------------------------------------------
TOTAL OPERATION AND MAINTENANCE EXPENSE $597.7 $528.0 $69.7
===========================================
DEPRECIATION AND AMORTIZATION
UI $27.4 $27.4 $0.0
Nuclear 1.2 1.5 (0.3)
Xcelecom 3.2 1.7 1.5
APS 2.9 2.2 0.7
Minority Ownership Interest Investment & Other (0.1) 1.0 (1.1)
-------------------------------------------
Subtotal depreciation 34.6 33.8 0.8
Amortization of regulatory assets (UI) 59.5 58.9 0.6
Amortization Xcelecom 1.3 3.7 (2.4)
Amortization APS 0.7 0.6 0.1
Amortization Minority Ownership Interest
Investment & Other 0.0 (0.9) 0.9
-------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $96.1 $96.1 $0.0
===========================================
TAXES - OTHER THAN INCOME TAXES
UI - State gross earnings tax $28.3 $26.7 $1.6
UI - other 15.8 15.4 0.4
Nuclear - other 0.4 1.2 (0.8)
Xcelecom 1.5 1.5 0.0
APS 0.7 0.6 0.1
Minority Ownership Interest Investment & Other 0.0 (0.3) 0.3
-------------------------------------------
TOTAL TAXES - OTHER THAN INCOME TAXES $46.7 $45.1 $1.6
===========================================
- 34 -
YEAR ENDED DECEMBER 31, 2002 MORE
(IN MILLIONS - UNAUDITED) 2002 2001 (LESS) THAN 2001
- ------------------------- ---- ---- ----------------
OTHER INCOME AND (DEDUCTIONS)
UI $3.8 $3.5 $0.3
Nuclear 0.0 0.2 (0.2)
Xcelecom 0.7 0.7 0.0
APS 0.5 (0.3) 0.8
Minority Ownership Interest Investment & Other (6.8) 2.3 (9.1)
----------------------------------------------
TOTAL OTHER INCOME AND (DEDUCTIONS) ($1.8) $6.4 ($8.2)
==============================================
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
UI $117.7 $121.3 ($3.6)
Nuclear 11.2 17.0 (5.8)
Xcelecom 3.7 14.2 (10.5)
APS (2.9) (0.2) (2.7)
Minority Ownership Interest Investments & Other (10.2) (1.2) (9.0)
----------------------------------------------
TOTAL EBIT $119.5 $151.1 ($31.6)
==============================================
INTEREST CHARGES
UI $33.8 $37.5 ($3.7)
UI - Interest on Seabrook obligation bonds owned by UI (5.1) (6.3) 1.2
UI - Amortization: debt expense, redemption premiums 2.0 2.2 (0.2)
Nuclear 1.5 1.9 (0.4)
Xcelecom 1.3 3.3 (2.0)
APS 0.1 0.0 0.1
Minority Ownership Interest Investment & Other 5.7 4.9 0.8
----------------------------------------------
TOTAL INTEREST CHARGES $39.3 $43.5 ($4.2)
==============================================
INCOME TAXES
UI $38.9 $39.8 ($0.9)
Nuclear 4.0 6.1 (2.1)
Xcelecom 0.9 4.7 (3.8)
APS (1.2) 0.0 (1.2)
Minority Ownership Interest Investment & Other (6.3) (2.4) (3.9)
----------------------------------------------
TOTAL INCOME TAXES $36.3 $48.2 ($11.9)
==============================================
NET INCOME
UI $48.1 $48.0 $0.1
Nuclear 5.8 9.1 (3.3)
Xcelecom 1.4 6.2 (4.8)
APS (1.8) (0.2) (1.6)
Minority Ownership Interest Investment & Other (9.6) (3.7) (5.9)
----------------------------------------------
TOTAL NET INCOME $43.9 $59.4 ($15.5)
==============================================
- 35 -
The United Illuminating Company Results of Operations: 2002 vs. 2001
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
2002 more (less) than 2001
Twelve Months Twelve Months --------------------------
Ended Ended
Dec. 31, 2002 Dec. 31, 2001 Amount Percent
- ---------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
UI before Nuclear Division and Sharing $3.90 $3.72 $0.18 5%
Sharing (0.52) (0.31) (0.21) (68)%
---- ---- ----
Subtotal UI excluding Nuclear 3.38 3.41 (0.03) (1)%
Nuclear Division 0.41 0.64 (0.23) (36)%
---- ---- ------
Total UI EPS from operations $3.79 $4.05 $(0.26) (6)%
==== ==== ======
RETAIL SALES (MILLIONS OF KWH) 5,781 5,724 57 1%
- ---------------------------------------------------------------------------------------------------
UI EXCLUDING THE NUCLEAR DIVISION
Excluding the Nuclear Division, UI's net income was $48.1 million, or $3.38 per
share, in 2002, compared to $48.0 million, or $3.41 per share, in 2001. The
decrease of $0.03 per share was due to the increase in the average number of
shares outstanding. On a pre-sharing basis, earnings per share increased by
$0.18 per share, reflecting higher revenues and lower amortization expense,
partially offset by higher expenses. Higher sharing, reflected in a revenue
reduction and increased accelerated amortization reduced earnings by $0.21 per
share.
The details below explain the variances for all of UI, excluding the Nuclear
Division. It should be noted that changes to income and expense items in the
Distribution Division have an immediate net income and earnings per share
impact, while changes to those items in "other unbundled utility divisions" do
not. The other divisions are the Competitive Transition Assessment (CTA), the
Systems Benefits Charge (SBC), the Generation Services Charge (GSC), the
Conservation and Load Management program assessment (C&LM), and the Renewable
Energy Investment Fund charge (REI). The CTA and SBC both earned an 11.5% return
on the equity portion of their respective rate bases until the September 26,
2002 effective date of the Rate Case decision, and 10.45% thereafter in
accordance with that decision. Those returns were achieved either by accruing
additional amortization expenses, or by deferring such expenses, as required to
achieve the authorized return. Amortization expenses in the CTA and SBC
divisions impact earnings indirectly through changes to rate base. The GSC, C&LM
and REI are pass-through divisions. Except for a small management fee earned in
the C&LM division, expenses are either accrued or deferred or revenues are
transferred such that there is no net income associated with these three
unbundled divisions.
- 36 -
Overall, UI's total revenue increased by $19.1 million, from $665.6 million in
2001 to $684.7 million in 2002. Details of this change in revenue are as
follows:
From
In Millions Operations
- --------------------------------------------------------------------------------
Revenue Increase/(Decrease)
- --------------------------------------------------------------------------------
REVENUE FROM DISTRIBUTION DIVISION:
Estimate of operating Distribution Division component of
"weather normalized" retail sales growth, 0.6% $1.3
Estimate of operating Distribution Division component of
weather effect on retail sales, 1.1% 3.2
Impact of mix of sales on average price and other 6.1
Sharing (2.7)
---
TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION 7.7
RETAIL REVENUE FROM OTHER UTILITY DIVISIONS (NOTE A) 4.1
----
TOTAL UI RETAIL REVENUE 11.8
OTHER OPERATING REVENUE INCREASE (DECREASE)
NEPOOL transmission revenues 4.0
Other 0.2
---
TOTAL UI OTHER OPERATING REVENUES 4.2
UI WHOLESALE REVENUE 3.1
---
TOTAL UI REVENUES $19.1
====
- --------------------------------------------------------------------------------
Note A: The impact of increased retail sales on the retail revenues of the
other utility divisions was partially offset by a 0.7% reduction in
electricity sales and a corresponding $2.4 million revenue reduction
resulting from the resolution of a station service dispute with a
generating plant owner.
Retail fuel and energy expense decreased by $4.1 million in 2002, compared to
2001. UI has received, and expects to receive through 2003, electricity to
satisfy its standard offer retail customer service requirements through a
fixed-price purchased power agreement. These costs are recovered through the GSC
portion of UI's unbundled retail customer rates. It should be noted that a small
number of customers have selected alternate suppliers to provide generation
services, but this has no effect on UI's financial results. UI's wholesale
energy expense increased by $2.2 million, but these costs are recovered from
customers through the CTA.
UI's O&M expenses increased by $22.2 million, from $154.5 million in 2001 to
$176.7 million in 2002. The principal components of these expense changes
included:
- --------------------------------------------------------------------------------
Increase/
In Millions (Decrease)
- --------------------------------------------------------------------------------
Operating Division:
- --------------------------------------------------------------------------------
Net pension expense and post retirement benefits (Note A) $6.6
Environmental remediation 3.2
NEPOOL transmission expense 2.4
Other 5.9
----
TOTAL OPERATING DISTRIBUTION DIVISION $18.1
NON-DISTRIBUTION O&M 4.1
----
TOTAL O&M EXPENSE $22.2
====
- --------------------------------------------------------------------------------
- 37 -
Note A: The increase in pension expense reflects the lower returns being
generated since approximately the beginning of 2000 by the equity
investments held by the UI pension plan, a portion of which must be
recognized immediately with the remainder deferred and amortized
over time. These returns, when combined with the lower market value of
the assets in the pension fund and the increase in projected
liabilities caused by lower discount rates, may, depending on the
actual performance of the fund, require increased cash contributions
to the pension fund in the future.
Amortization of regulatory assets, as booked, increased by $0.6 million in 2002
compared to 2001. The principal components of these changes were:
- --------------------------------------------------------------------------------
Increase (Decrease) In Millions As Booked After-tax
- --------------------------------------------------------------------------------
AMORTIZATION OF REGULATORY ASSETS:
- --------------------------------------------------------------------------------
Accelerated amortization in Distribution Division $(9.5) $(8.3)
Sharing amortization in Distribution Division 1.9 1.5
Amortization in CTA and SBC 8.2 4.7
--- ---
TOTAL AMORTIZATION OF REGULATORY ASSETS $0.6 $(2.1)
=== ====
- --------------------------------------------------------------------------------
Note: "As booked" presents amounts as they appear on the income statement.
After-tax amounts are provided because only part of the as booked amounts
are tax deductible.
Other pre-tax income increased by $0.3 million in 2002 compared to 2001.
Interest charges decreased by $2.7 million in 2002 compared to 2001. About $1.5
million of this decrease was due to the net redemption of the Seabrook lease
obligation bonds resulting from the sale of Seabrook Station on November 1,
2002.
NUCLEAR DIVISION
The Nuclear Division contributed net income of $5.8 million, or $0.41 per share,
in 2002 compared to $9.1 million, or $0.64 per share, in 2001. The overall
earnings decline was $0.23 per share. The Seabrook nuclear generating unit was
sold on November 1, 2002. The absence of two months of earnings (post sale)
reduced earnings by $0.14 per share compared to 2001. In addition, a draft
decision on the Millstone Divestiture Plan - Disposition of Proceeds issued by
the DPUC on January 13, 2003, approved most of the accounting treatment proposed
by UI but disallowed certain expenses that were applied to reduce net proceeds
from the sale of Millstone Unit 3, which was sold in March 2001. UI submitted to
the DPUC its exceptions to the draft decision in support of partial recovery of
these costs and expects to take a similar position with regard to Seabrook
Station. In the fourth quarter of 2002, UI accounted for the regulatory risk
associated with the recovery of the expenses related to the sales of both
Millstone Unit 3 and Seabrook Station, consistent with its position in the
written exceptions filed with the DPUC. The combination of the accounting
treatment of these expenses, improved unit performance and lower general O&M
expense in October of 2002 compared to October 2001 reduced earnings by $0.09
per share. On February 27, 2003 the DPUC issued a decision on the Millstone
Divestiture Plan, subject to appeal. The decision will not have a material
impact on 2003 results.
- 38 -
United Resources, Inc. Results of Operations: 2002 vs. 2001
- ------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
2002 more (less) than 2001
Twelve Months Twelve Months --------------------------
Ended Ended
Dec. 31, 2002 Dec. 31, 2001 Amount Percent
- -----------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
Operating Businesses
American Payment Systems, Inc. (APS) $(0.13) $(0.01) $(0.12) - -
Xcelecom, Inc. (Xcelecom) 0.10 0.44 (0.34) (77)%
---- ---- ----
SUBTOTAL OPERATING BUSINESSES (0.03) 0.43 (0.46) (107)%
Minority Ownership Interest Investments
United Bridgeport Energy, Inc. (UBE) (0.07) 0.26 (0.33) (127)%
United Capital Investments, Inc. (UCI) (0.31) (0.28) (0.03) - -
---- ---- ------
SUBTOTAL MINORITY OWNERSHIP INTEREST
INVESTMENTS (0.38) (0.02) (0.36) - -
URI HEADQUARTERS (NOTE A) (0.29) (0.25) (0.04) - -
---- ---- ----
TOTAL NON-UTILITY EPS FROM OPERATIONS $(0.70) $0.16 $(0.86) - -
==== ==== ====
- -----------------------------------------------------------------------------------------------------
Note A: Includes interest charges on intercompany debt and strategic and
administrative costs of the non-utility holding company.
Overall, the consolidated non-utility businesses operating under the parent,
URI, lost approximately $10.0 million, or $0.70 per share, in 2002, compared to
earnings of about $2.3 million, or $0.16 per share, in 2001. Operating revenue
for the URI businesses increased by $32.5 million, or 8.8%. All of the increase
in revenues came from APS. Expenses for the URI businesses, including losses on
minority ownership interest investments but excluding income taxes, increased by
$53.8 million, and income taxes decreased by $8.9 million.
The results of each of the subsidiaries of URI for 2002 and 2001, as presented
below, reflect the allocation of debt costs from the parent based on a capital
structure, including an equity component, and an interest rate deemed
appropriate for that type of business. The targeted capital structures for each
of URI's subsidiaries are: 100% equity for APS and UCI, 65% equity and 35% debt
for Xcelecom for all periods prior to the second quarter of 2002 and 100% equity
beginning in the second quarter of 2002, and 30% equity and 70% debt for UBE.
See the Xcelecom section for an explanation on the change to Xcelecom's capital
structure. URI absorbs interest charges on the equity portion of its investments
in its subsidiaries to the extent those investments are financed with debt. URI
may incur other expenses necessary to manage its investments from time to time.
The following is a detailed explanation of the 2002-2001 variances by URI
subsidiary.
URI OPERATING BUSINESSES
AMERICAN PAYMENT SYSTEMS, INC.
APS lost $1.8 million, or $0.13 per share, in 2002, compared to a loss of $0.2
million, or $0.01 per share, in 2001. The increased loss of $0.12 per share was
due to expenses that were incurred to expand the infrastructure of the
organization in order to enhance the bill payment business and introduce and
sell new products and services, such as prepaid stored value cards and prepaid
telephony products, partly offset by an increase of $.02 per share due to the
change in accounting for goodwill mandated by Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In addition,
APS incurred infrastructure and installation costs associated with a multi-year
contract with BellSouth, and a $0.05 per share loss recorded in the fourth
quarter of 2002 to write
- 39 -
own a portion of an outstanding loan APS had made to the entities from which APS
acquired the point of sale activation technology.
XCELECOM, INC.
Xcelecom earned $1.4 million, or $0.10 per share, in 2002, compared to $6.2
million, or $0.44 per share in 2001. Higher loss reserve charges relating to
projects at several Xcelecom subsidiaries reduced earnings by about $0.05 per
share in 2002 compared to 2001. Also, as with other companies in the
construction and systems integration industries, there is a very evident decline
in economic activity in Xcelecom's markets. Xcelecom is experiencing customer
postponements and cancellations of projects, a reduction in new project orders,
a continuing slowdown in spending for technology by its customers, and increased
competition for fewer jobs, resulting in both lower demand and lower margins.
Additionally, the completion of several large, non-recurring contracts in 2001
that have not been replaced has contributed to the earnings decline. The
negative earnings impact of these items, about $0.57 per share in 2002 compared
to 2001, was partly offset by an increase of about $0.06 per share from
acquisitions made during 2001 and 2002, and an increase of $0.15 per share due
to the change in accounting for goodwill mandated by SFAS No. 142, "Goodwill and
Other Intangible Assets." The negative impact was also partly offset by the
conversion, in the second quarter of 2002, to a 100% equity capital structure
from the 65% equity and 35% intercompany debt structure used previously. This
conversion contributed $0.07 per share to Xcelecom in 2002, but was offset by an
earnings decrease in URI Headquarters, which received less interest income from
Xcelecom.
URI MINORITY OWNERSHIP INTEREST INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC.
UBE owns a 33 1/3% interest in Bridgeport Energy, LLC (BE). UBE lost $1.0
million, or $0.07 per share in 2002, compared to earnings of $3.7 million, or
$0.26 per share in 2001. Of the $0.33 per share decrease, $0.13 was due to lower
energy sales revenues, $0.04 was due to lower installed capability (ICAP)
revenues, about $0.25 was due to overhaul costs in 2002, and $0.04 was due to
higher operating expenses. Offsetting the negative earnings impact of these
items was an improvement of $0.08 per share due to lower interest and
administrative charges, and a non-recurring benefit of $0.05 per share due to an
insurance credit. In 2001, UBE had an agreement with Duke Energy Trading and
Marketing (an affiliate of the majority owner) that effectively eliminated UBE's
operating and margin risks. There was no such agreement in 2002.
UNITED CAPITAL INVESTMENTS, INC.
UCI lost $4.4 million, or $0.31 per share in 2002, compared to a loss of $3.9
million, or $0.28 per share in 2001. An impairment of UCI's investment in Gemini
Networks, Inc., (Gemini) a broadband fiber-optic business, caused a $0.16 per
share loss. That write-off reflected the generally depressed economic conditions
in the telecommunications industry that worsened in the second quarter of 2002,
and an associated inability of Gemini to access capital markets to continue its
network build-out. The offsetting variance was due to lower losses on other
minority ownership interest investments.
URI HEADQUARTERS
URI Headquarters incurred an after-tax loss of $4.2 million, or $0.29 per share,
in 2002, compared to a loss of $3.4 million, or $0.25 per share, in 2001. The
results of each of the subsidiaries of URI, as presented above, reflect interest
expense on allocated debt from URI, based on a capital structure, including an
equity component, and an interest rate deemed appropriate for that type of
business. Some unallocated interest charges and strategic and administrative
costs for the subsidiaries of URI are retained by the parent URI. The increase
in losses at URI Headquarters reflects additional administrative expenses
incurred for managing investments. Lower interest income from the
reclassification of Xcelecom's intercompany debt to equity, beginning in the
second quarter of 2002, was mostly offset by lower interest charges from reduced
interest rates.
- 40 -
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: 2001 ACTUAL EARNINGS
- ---------------------------------------------------------------------
Net Income for UIL Holdings Corporation (UIL Holdings) was $59.4 million in
2001, or $4.21 per share. URI's Xcelecom, Inc. (Xcelecom) subsidiary experienced
significant earnings growth in 2001, offsetting the losses in some of URI's
minority ownership interest investments.
2001 VS. 2000
- -------------
UIL Holdings Corporation Results of Operations: 2001 vs. 2000
- --------------------------------------------------------------
Compared to 2000 net income of $60.8 million, or $4.32 per share, UIL Holdings'
2001 earnings decreased by $1.4 million, or $0.11 per share. The reduction was
due primarily to the absence of net one-time gains of $0.9 million, or $0.06 per
share, recorded in 2000, to higher amortization of regulatory assets as mandated
for 2001 in UI's retail electric Rate Plan, and to lower investment returns on
UI's pension plan assets resulting from poor financial market conditions. These
reductions were offset, in large part, by improved Nuclear Division performance
due to shorter outages in 2001 compared to 2000, and by an improvement at the
non-utility businesses to more than twelve times the income earned in 2000. The
non-utility business improvement was driven by Xcelecom's acquisition strategy,
which was partially offset by losses in some of URI's minority ownership
interest investments.
The total impact of poor financial market performance on UIL Holdings' 2001
earnings was about $0.50 per share. Absent this factor, UIL Holdings would have
earned about $4.71 per share in 2001, or a 9% increase over 2000 earnings.
The table below represents a comparison of UIL Holdings' Net Income and Earnings
Per Share for 2001 and 2000.
- -----------------------------------------------------------------------------------------------
2001 more (less) than 2000
Year Ended Year Ended ---------------------------
(In Thousands except per share data) Dec. 31, 2001 Dec. 31, 2000 Amount Percent
- -----------------------------------------------------------------------------------------------
NET INCOME
UI from Operations $48,036 $53,370 $(5,334) (10.0)%
Nuclear Division 9,003 6,347 2,656 41.8%
United Resources (Non-Utility) 2,324 182 2,142 1176.9%
------- ------- ------
TOTAL NET INCOME FROM OPERATIONS 59,363 59,899 (536) (0.9)%
UI from One-time Items 0 858 (858) (100.0)%
------- ------- ------
TOTAL NET INCOME $59,363 $60,757 $(1,394) (2.3)%
====== ====== =====
EARNINGS PER SHARE
UI from Operations $3.41 $3.80 $(0.39) (10.3)%
Nuclear Division 0.64 0.45 0.19 42.2%
United Resources (Non-Utility) 0.16 0.01 0.15 1500.0%
---- ---- ----
TOTAL EPS FROM OPERATIONS 4.21 4.26 (0.05) (1.2)%
UI from One-time Items 0.00 0.06 (0.06) (100.0)%
---- ---- ----
TOTAL EPS - BASIC $4.21 $4.32 $(0.11) (2.5)%
==== ==== ====
TOTAL EPS - DILUTED (NOTE A) $4.19 $4.31 $(0.12) (2.8)%
==== ==== ====
- -----------------------------------------------------------------------------------------------
Note (A): Reflecting the effect of dilutive stock options. See Item 8,
"Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note (A), Statement of Accounting Policies -
Earnings per Share, and Note (B), Capitalization - Common Stock."
- 41 -
The following is a line-by-line tabular summary of some lines of UIL Holdings'
income statement, including comparisons between 2001 and 2000 by subsidiary.
Significant variances are explained in the individual subsidiary sections that
follow.
- ------------------------------------------------------------------------------------------------------
Year Ended Year Ended 2001 more (less) than 2000
----------------------------
(In Thousands) Dec. 31, 2001 Dec. 31, 2000 Amount Percent
- ------------------------------------------------------------------------------------------------------
OPERATING REVENUE
UI from operations, before sharing $669,476 $651,136 $18,340 2.8%
UI sharing from operations (3,864) (12,701) 8,837 (69.6%)
UI one-time items 0 9,642 (9,642) (100.0%)
Nuclear Division 49,206 56,614 (7,408) (13.1%)
URI 371,028 176,164 194,864 110.6%
--------- ------- -------
Total $1,085,846 $880,855 $204,991 23.3%
========== ======== ========
FUEL AND ENERGY EXPENSE
UI $264,954 $273,979 ($9,025) (3.3%)
Nuclear Division 6,953 8,174 (1,221) (14.9%)
--------- -------- ---------
Total $271,907 $282,153 ($10,246) (3.6%)
======== ======== =========
OPERATION AND MAINTENANCE EXPENSE
UI $154,460 $139,390 $15,070 10.8%
Nuclear Division 22,700 32,980 (10,280) (31.2%)
URI 350,797 163,617 187,180 114.9%
------- ------- -------
Total $527,957 $335,987 $191,970 57.3%
======== ======== ========
DEPRECIATION AND AMORTIZATION
UI $27,448 $26,847 $601 2.2%
Nuclear Division 1,485 1,714 (229) (13.3%)
URI 3,878 3,278 600 76.7%
------- ------- -------
Subtotal depreciation 32,811 31,839 972 12.0%
Amortization 63,317 37,874 25,443 61.6%
------- ------ -------
Total depreciation and amortization $96,128 $69,713 $26,415 37.9%
======= ======= =======
TAXES - OTHER THAN INCOME TAXES
UI - Connecticut gross earnings tax $26,661 $23,715 $2,946 12.4%
UI - other 15,440 16,896 (1,456) (8.6%)
Nuclear Division - other 1,222 1,409 (187) (13.2%)
URI - other 1,826 1,036 790 20.4%
------- ------- ------
Total $45,149 $43,056 $2,093 (7.0%)
======= ======= ======
INTEREST CHARGES
UI $31,034 $31,661 ($627) (2.0%)
Nuclear Division 1,777 2,111 (334) (15.8%)
URI 10,728 10,727 1 0.0%
------ ------- ------
Total $43,539 $44,499 ($960) (2.2%)
======= ======= ======
INCOME TAXES
UI $39,840 $43,416 ($3,576) (7.3%)
Nuclear Division 6,091 4,173 1,918 46.0%
URI 2,260 440 1,820 374.3%
------- ------- -----
Total $48,191 $48,029 $162 0.1%
======= ======= ====
- ------------------------------------------------------------------------------------------------------
- 42 -
United Illuminating Results of Operations: 2001 vs. 2000
- ---------------------------------------------------------
Results for 2001 for UI, excluding the Nuclear Division and one-time items,
decreased by $0.39 per share compared to 2000. The Nuclear Division earned $0.64
per share in 2001, an increase of $0.19 per share compared to 2000.
- ----------------------------------------------------------------------------------------------------
2001 more (less) than 2000
Year Ended Year Ended --------------------------
Dec. 31, 2001 Dec. 30, 2000 Amount Percent
- ----------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
UI excluding Nuclear Division and Sharing $3.72 $4.81 $(1.09) (22.7)%
Sharing (0.31) (1.01) 0.70 - -
---- ---- ----
Subtotal UI excluding Nuclear 3.41 3.80 (0.39) (10.3)%
Nuclear Division 0.64 0.45 0.19 42.2%
---- ---- ----
Total UI EPS from operations $4.05 $4.25 $(0.20) (4.7)%
==== ==== ====
RETAIL GWH SALES (MILLIONS OF KWH) 5,724 5,654 70 1.3%
- ----------------------------------------------------------------------------------------------------
UI EXCLUDING THE NUCLEAR DIVISION
Excluding the Nuclear Division, UI's net income from operations was $48.0
million, or $3.41 per share, in 2001 compared to $53.4 million, or $3.80 per
share, in 2000. The $0.39 per share decrease was due primarily to the $8.0
million increase on a pre-tax basis ($6.8 million after-tax) in accelerated
amortization expense that went into effect on January 1, 2001 as part of the
retail electric Rate Plan, and to a $13.1 million decrease in pre-tax earnings
($7.7 million after-tax) as a result of lower investment returns on UI's pension
plan assets. These increased costs caused almost all of UI's pre-sharing
earnings reduction in 2001 compared to 2000, and were partly offset by an
attendant $0.70 per share reduction in "sharing." In 2001, earnings for the
Distribution Division that exceeded 11.5%, on an annual basis, were "shared,"
one-third for customer bill reductions, one-third to accelerate amortization of
assets, and one-third retained as earnings.
The details below explain the variances for all of UI excluding the Nuclear
Division. It should be noted that changes to income and expense items in the
Distribution Division had an immediate net income impact in 2001, while changes
to those items in "other unbundled utility divisions" did not. Those divisions
include the Competitive Transition Assessment (CTA) and the Systems Benefits
Charge (SBC), both of which earned an 11.5% return on the equity portion of
their respective rate bases. That return was achieved by either accruing
additional amortization expenses, or by deferring such expenses, as required.
Amortization expenses in those divisions impacted earnings indirectly through
changes to rate base. The "other unbundled utility divisions" also include the
Generation Service Charge (GSC), the Conservation and Load Management (C&LM)
charge, and the Renewables charge. Those were pass-through charges. Except for a
small management fee earned in the C&LM division, expenses were either accrued
or deferred such that there was no net income associated with those divisions.
Overall, UI's total revenue increased by $17.5 million in 2001, from $648.1
million in 2000 to $665.6 million in 2001. Details of this change in revenue
are:
- 43 -
In Millions
- --------------------------------------------------------------------------------------------
From From
Retail Revenue Increase/(Decrease) Operations One-Time Items Total
- --------------------------------------------------------------------------------------------
Revenue from Distribution Division:
Estimate of operating Distribution Division component of
"weather corrected" retail sales growth, 0.2% $0.5 $0.5
Estimate of operating Distribution Division component of
weather effect on retail sales, 1.4% 4.1 4.1
Impact of Leap Year 2000, (0.3)% (0.8) (0.8)
Impact of mix of sales on average price and other 0.3 0.3
Sharing revenues 8.8 $5.3 14.1
----- ---- ----
TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION 12.9 5.3 18.2
REVENUE FROM OTHER UNBUNDLED UTILITY DIVISIONS 6.6 - - 6.6
----- ---- ----
TOTAL UI RETAIL REVENUE 19.5 5.3 24.8
Other Operating Revenue Increase (Decrease)
NEPOOL transmission revenues 6.3 6.3
Other transmission 1.0 1.0
Millstone Unit 3 litigation settlement (2000) (15.0) (15.0)
Other (0.5) - - (0.5)
--- ------ ---
TOTAL UI OTHER OPERATING REVENUES 6.8 (15.0) (8.2)
UI WHOLESALE PASS-THROUGH REVENUE 0.9 - - 0.9
--- ------ ---
TOTAL UI REVENUES $27.2 $(9.7) $17.5
==== === ====
- --------------------------------------------------------------------------------------------
Retail fuel and energy expense decreased by $9.7 million in 2001 compared to
2000. UI has received, and expects to receive through 2003, electricity to
satisfy its standard offer retail customer service requirements through
fixed-price purchased power agreements. These costs are recovered through the
GSC portion of UI's unbundled retail customer rates. It should be noted that a
small number of customers have selected alternate suppliers to provide
generation services, but this has no effect on UI's financial results. UI's
wholesale energy expense increased by $0.6 million, but these costs are passed
on to customers through the CTA.
UI's operation and maintenance expense increased by $15.1 million, from $139.4
million in 2000 to $154.5 million in 2001. The principal components of these
expense changes included:
In Millions
- --------------------------------------------------------------------------------
Increase/
Operating Distribution Division: (Decrease)
- --------------------------------------------------------------------------------
Investment returns on UI's pension plan assets (Note A) $13.1
NEPOOL transmission expense 4.5
Severance costs 4.5
Other (1.4)
---
TOTAL OPERATING DISTRIBUTION DIVISION $20.7
O&M AND CAPACITY FROM OTHER UNBUNDLED UTILITY DIVISIONS (5.6)
---
TOTAL O&M EXPENSE $15.1
====
- --------------------------------------------------------------------------------
Note A: This cost increase reflects deteriorating conditions in the financial
markets over the past twenty-one months.
Amortization of regulatory assets increased in 2001 compared to 2000 by $22.4
million ($12.7 million after-tax). The principal components of this change were:
- 44 -
In Millions
- --------------------------------------------------------------------------------
Increase in Amortization of regulatory assets: As Booked After-tax
- --------------------------------------------------------------------------------
Distribution Division:
Accelerated amortization $8.0 $6.8
"Sharing" from operations (5.7) (4.9)
--- ---
TOTAL DISTRIBUTION DIVISION 2.3 1.9
Amortization in CTA and SBC 23.5 13.8
---- ----
AMORTIZATION OF REGULATORY ASSETS EXCL./ ONE-TIME 25.8 15.7
One-time "Sharing" amortization (3.4) (3.0)
--- ---
TOTAL AMORTIZATION OF REGULATORY ASSETS $22.4 $12.7
==== ====
- --------------------------------------------------------------------------------
NUCLEAR DIVISION
The Nuclear Division contributed net income of $9.0 million, or $0.64 per share,
in 2001 compared to $6.3 million, or $0.45 per share, in 2000. The earnings
improvement was driven by O&M expense reductions of $10.3 million in 2001
compared to 2000. About $3.5 million of the reduction occurred at the Seabrook
nuclear generating unit, primarily due to the absence of major outage costs
incurred at the end of 2000; and $6.8 million of the reduction occurred at the
Millstone Unit 3 nuclear generating unit, primarily due to the sale of that unit
on March 31, 2001. Wholesale sales margin (revenues less energy expense)
decreased by $6.2 million in 2001 compared to 2000. Wholesale sales revenues
decreased by about $7.4 million in 2001 compared to 2000. Revenues for Seabrook
increased by $3.1 million, but revenues for Millstone Unit 3 decreased by $10.5
million as a result of its sale. Energy expense decreased by $1.2 million, due
to a $1.5 million decrease at Millstone partly offset by a $0.3 million increase
at Seabrook.
UI's ownership share of Millstone Unit 3 was sold on March 31, 2001. There was
no direct impact on financial results in 2001, and net-of-tax proceeds from the
sale that were in excess of the market value of the plant, as set by the DPUC,
were credited to the CTA plant balances and rate base. That amount was
approximately $15.3 million and is subject to true-up by the DPUC.
United Resources Results of Operations: 2001 vs. 2000
- ------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
2001 more (less) than 2000
Year Ended Year Ended --------------------------
Dec. 31, 2001 Dec. 31, 2000 Amount Percent
- ------------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC AND DILUTED)
Operating Businesses
American Payment Systems, Inc. (APS) $(0.01) $0.15 $(0.16) (107)%
Xcelecom, Inc. (Xcelecom) 0.44 0.15 0.29 193%
---- ---- ----
SUBTOTAL OPERATING BUSINESSES 0.43 0.30 0.13 43%
Minority Ownership Interest Investments
United Bridgeport Energy, Inc. (UBE) 0.26 (0.19) 0.45 - -
United Capital Investments, Inc. (UCI) (0.28) 0.11 (0.39) (355)%
---- ---- ----
SUBTOTAL MINORITY OWNERSHIP INTEREST
INVESTMENTS (0.02) (0.08) 0.06 - -
URI HEADQUARTERS (NOTE A) (0.25) (0.21) (0.04) (19)%
---- ---- ----
TOTAL NON-UTILITY EPS FROM OPERATIONS $0.16 $0.01 $0.15 1500%
==== ==== ----
- ------------------------------------------------------------------------------------------------------
Note (A): Includes financial leveraging, strategic and administrative costs of
the non-utility business units.
- 45 -
Overall, the consolidated non-utility businesses operating under the parent,
URI, earned approximately $2.3 million, or $0.16 per share in 2001 compared to
about $0.2 million, or $0.01 per share in 2000. Operating revenue for the URI
businesses increased by $194.9 million, or 111%, from $176.2 million in 2000 to
$371.0 million in 2001. Expenses for the URI businesses, including cost of goods
sold, selling and administrative expenses, increased by $187.2 million in 2001
compared to 2000. Operating revenue and expense increases were due primarily to
the acquisition of other companies.
The results of each of the subsidiaries of URI for 2001, 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. The targeted capital structures for each
of URI's subsidiaries for 2001 were: 100% equity for APS and UCI, 65% equity and
35% debt for Xcelecom, and 30% equity and 70% debt for UBE. URI absorbs interest
charges on the equity portion of its investments in its subsidiaries to the
extent those investments are financed with debt. URI may incur other expenses
necessary to manage its investments from time to time.
The following is a detailed explanation of these variances by URI subsidiary.
URI OPERATING BUSINESSES
AMERICAN PAYMENT SYSTEMS, INC.
APS lost $0.01 per share in 2001 compared to earnings of $0.15 per share in
2000. Earnings at the core business improved by $0.04 per share year-over-year,
to $0.19 per share, but overall earnings decreased due to higher business
development and selling expenses, including the marketing, sales and information
technology staffing and infrastructure associated primarily with the
implementation of APS's strategic growth plans. Overall, the number of
transactions processed by APS increased by 5% in 2001 compared to 2000, and
revenues increased by 55%, from $37.9 million to $58.6 million.
XCELECOM, INC.
Xcelecom earned $0.44 per share in 2001 compared to $0.15 per share in 2000. The
increase was due primarily to acquisitions made by Xcelecom during 2001 and an
overall improvement in profitability from 1.6% to 2% of sales. Operating revenue
increased by $174 million from $138 million in 2000 to $312 million in 2001, due
primarily to acquisitions but also to a 14.8% growth in "same-store" sales.
URI MINORITY OWNERSHIP INTEREST INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC.
UBE contributed $0.26 per share in 2001 compared to a loss of $0.19 per share in
2000. The loss in 2000 was due to 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. In
2001, UBE entered into an agreement with Duke Energy Trading and Marketing that
effectively eliminated the operating and margin risks that occurred in 2000,
resulting in the improved performance. See the "Looking Forward" section for
more information on issues involving UBE's Installed Capacity revenues.
UNITED CAPITAL INVESTMENTS, INC.
UCI lost $0.28 per share in 2001 compared to earnings of $0.11 per share in
2000. The loss in 2001 was due to losses on minority ownership interest
investments. The earnings in 2000 were due to unrealized gains on minority
ownership interest investments.
- 46 -
URI HEADQUARTERS
URI Headquarters incurred an after-tax loss of $3.4 million, or $0.25 per share,
in 2001 compared to a loss of $2.8 million, or $0.21 per share, in 2000. The
results of each of the subsidiaries of URI, as presented above, reflect interest
expense on allocated debt from URI, based on a capital structure, including an
equity component, and an interest rate deemed to be appropriate for that type of
business. Some financial leveraging and strategic and administrative costs for
the subsidiaries of URI are retained by the parent URI. The loss increase at URI
Headquarters reflects additional administrative expenses incurred for managing
investments.
LOOKING FORWARD
A LOOK AT 2003
- --------------
UIL HOLDINGS' CONSOLIDATED EARNINGS ESTIMATES FOR 2003
UIL Holdings is reaffirming its earnings guidance for 2003 of $2.45-$2.65 per
share.
UIL Holdings' current earnings range estimate for 2003 is less than UIL
Holdings' current dividend rate of $2.88 per common share. However, UIL Holdings
continues to have strong cash flow from operations. This strong cash flow comes
primarily from UI, and includes, in addition to strong cash flow from the
Distribution Division, the accelerated recovery of stranded costs built into the
CTA rate base. UIL Holdings' non-utility subsidiary, Xcelecom, also generated
positive cash from operations in 2002. These internally generated cash flows are
being used by UIL Holdings to pay its dividends to shareowners and to fund most,
if not all, of its investing activities, including its utility capital
expenditure program. UIL Holdings may borrow funds for its investment program to
finance short-term needs from time to time, but expects to keep such borrowings
at a reasonable level.
Based on current cash projections, UIL Holdings expects that, at its quarterly
reviews of the dividend, maintenance of the annual dividend of $2.88 per share
will be justified, absent adverse events that materially affect projected
results.
THE UNITED ILLUMINATING COMPANY (UI)
UI EARNINGS ESTIMATES FOR 2003
If UI were to earn in 2003 the 10.45% return on regulated utility common stock
equity allowed in the Rate Case decision, that level of earnings would generate
$2.45-$2.60 per share for UIL Holdings. Earning this level will be a challenge
for UI under the terms of the DPUC's Rate Case decision, and expense reductions
will be required if UI's increased pension and postretirement benefits expenses
are not addressed by the DPUC. Since any changes UI makes to its operations to
lower expenses must take into account the interests of customers, there is no
assurance that UI will achieve the authorized return on equity.
UI has contracted with Virginia Electric and Power Company for the supply, on a
fixed-price basis, of all of UI's retail customer standard offer service
requirements through December 31, 2003, and for the supply of all of UI's
special contract customer service requirements through 2008. This arrangement is
intended to protect UI's retail customers and UIL Holdings' shareowners from
market and pricing volatility.
The only retail electricity sales volume fluctuations that directly impact UI's
net income when they occur are those that apply to the operating Distribution
Division component of rates. Thus, a 1% sales volume increase in retail
electricity sales in 2003 compared to 2002 would produce additional sales margin
of about $2.2 million ($2.1 million after gross earnings tax). However, retail
electric sales and Distribution Division revenues were significantly higher than
anticipated in 2002, because of weather and other factors that may or may not
occur in 2003.
- 47 -
Several DPUC proceedings that are either currently under way or that are
scheduled or likely to occur in 2003 could materially affect the earnings and
cash flow estimates for UI in 2003 or beyond. These include, but are not limited
to:
o UI Rate Case Reopening for Pension and Postretirement Expense.
o Seabrook Disposition of Proceeds.
o Annual CTA/SBC Reconciliation. This will be the normal annual true-up of
accounting for the CTA.
See PART II, Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note (C), Rate-Related Regulatory
Proceedings" for details.
UNITED RESOURCES, INC. (URI) EARNINGS ESTIMATES FOR 2003
Earnings from UIL Holdings' non-utility businesses, under the parent
wholly-owned subsidiary URI, are expected to range from losses of $0.05 per
share to earnings of $0.10 per share in 2003. Overall, the expected range is an
improvement from the 2002 level, due primarily to the absence in 2003 of costs
that were incurred in 2002 in each of URI's businesses. These costs are
described in the following URI subsidiary sections.
URI OPERATING BUSINESSES
AMERICAN PAYMENTS SYSTEMS, INC. (APS)
APS is expected to earn $0.15-$0.20 per share for UIL Holdings in 2003. This
improvement from the 2002 loss of $0.13 per share is due to the addition of a
major new customer, cross selling of APS products and services through its agent
base, reduction of bank fees by converting the agents from APS-owned bank
accounts to agent-owned bank accounts, and operational efficiencies.
XCELECOM, INC.
Earnings for Xcelecom are expected to be approximately $0.20-$0.35 per share for
UIL Holdings in 2003. This improvement from the 2002 earnings of $0.10 per share
is due primarily to the absence of a $0.16 per share loss reserve charge, taken
in the first quarter of 2002, for a specific contract. As with other companies
in the construction and systems integration industries, Xcelecom is experiencing
customer postponements and cancellations of projects, a reduction in new project
orders, a continuing slowdown in spending for technology by its customers, and
increased competition for fewer jobs, resulting in both lower demand and lower
margins. Xcelecom is taking action to offset the negative impact of these items
by working to reduce operating and overhead related costs. Generally, the
economic activity of the construction markets in which Xcelecom participates
lags the general economy by six to eighteen months, both in economic downturns
and recoveries. A return to growth in Xcelecom's primary markets is therefore
likely to lag any general upturn in the economy, and the timing of any recovery
remains uncertain. The 2003 earnings estimate assumes no material difference in
economic conditions in Xcelecom's markets between 2003 and 2002.
Xcelecom has no current plans for acquisitions, and the earnings estimate for
2003 reflects this. However, Xcelecom will consider opportunities for
acquisitions if there is a significant potential to earn a premium return on its
investments, to the extent such investments are available.
URI MINORITY OWNERSHIP INTEREST INVESTMENTS
Losses from URI's minority ownership interest investments, including United
Bridgeport Energy, Inc. (UBE) and United Capital Investments, Inc. (UCI), and
from URI Headquarters' costs, are expected to be $0.40-$0.45 per share in 2003.
URI Headquarters' costs include interest expense on intercompany loans from URI
to UBE, based on a capital structure, including an equity component, and an
interest rate deemed appropriate for that type of business. Some unallocated
corporate and administrative costs for the subsidiaries of URI are retained by
the parent URI.
- 48 -
UNITED BRIDGEPORT ENERGY, INC.
The earnings estimate for UBE for 2003 is a loss of $0.10-$0.15 per share,
compared to a loss of $0.07 per share in 2002. This estimate reflects
essentially breakeven operations at the project level, but UBE's estimated loss
includes financing costs. The 2003 estimate reflects significantly lower
installed capability (ICAP) revenues than those recorded in 2002, as a result of
the termination of a long-term contract, but it also reflects the absence of
overhauls that occurred in 2002.
BE will continue to market ICAP in the open market, and UBE will share in any
proceeds from that activity. The results will be subject to market conditions
for ICAP. UBE believes that there may be opportunities to improve earnings from
increased energy revenues under the new standard market design to be implemented
in New England in March 2003.
UNITED CAPITAL INVESTMENTS, INC.
UCI is expected to break even in 2003, reflecting no net investment income or
losses. This is an improvement from the losses in 2002 of $0.31 per share, due
principally to the absence of the $0.16 per share impairment loss taken by UCI
in the second quarter of 2002.
UIL HOLDINGS' QUARTERLY EARNINGS PATTERN FOR 2003
- -------------------------------------------------
The 2003 quarterly earnings pattern for UIL Holdings is expected to be somewhat
different than the 2002 pattern primarily because UI's rate decision was
effective September 26, 2002, and Seabrook Station was sold on November 1, 2002.
These factors will lower earnings in the first three quarters of 2003 compared
to the first three quarters of 2002. The absence of expenses associated with
regulatory risk that UIL Holdings recorded in the Nuclear Division in the fourth
quarter of 2002 will increase earnings in the fourth quarter of 2003 compared to
the fourth quarter of 2002.
Actual 2003 results may vary from estimates depending on factors that could
affect some or all of UIL Holdings' businesses to varying degrees. The factors
are discussed in the "Major Influences on Financial Condition" section, and
their impacts can change from quarter to quarter.
UIL Holdings' current overall estimate of earnings per share from operations for
2003 is a range of $2.45-$2.65. The estimates of quarterly results are as
follows:
Earnings per share from operations:
Estimated Actual
Quarter 2003 Range* 2002
------- ---------- ----
1 $0.25-$0.35 $0.68
2 $0.40-$0.50 $0.64
3 $1.30-$1.40 $1.53
4 $0.40-$0.50 $0.24
----
$3.09
* Quarterly high and low range estimates are not additive, that is, the sums of
the low and high range values should not be construed as representing any
estimate other than UIL Holdings' annual estimate of $2.45-$2.65 per share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
UIL Holdings 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.
- 49 -
Interest rate risk occurs in refinancing of fixed rate debt at maturity and
remarketing of multi-annual tax-exempt bonds. Historically, UI has been able to
include its interest costs in revenue requirements for recovery through rates.
- 50 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
2002 2001 2000
---- ---- ----
OPERATING REVENUES (NOTE F)
Utility $ 727,533 $ 714,818 $ 704,691
Non-utility businesses 403,489 371,028 176,164
------------ ------------ ------------
Total Operating Revenues 1,131,022 1,085,846 880,855
------------ ------------ ------------
OPERATING EXPENSES
Operation
Fuel and energy 269,195 271,907 282,153
Operation and maintenance 597,700 527,957 335,987
Depreciation and amortization (Note F) 96,129 96,128 69,713
Taxes - other than income taxes (Note F) 46,672 45,149 43,056
------------ ------------ ------------
Total Operating Expenses 1,009,696 941,141 730,909
------------ ------------ ------------
OPERATING INCOME 121,326 144,705 149,946
------------ ------------ ------------
OTHER INCOME AND (DEDUCTIONS), NET (NOTE F) (1,871) 6,388 3,339
------------ ------------ ------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 119,455 151,093 153,285
------------ ------------ ------------
INTEREST CHARGES, NET
Interest on long-term debt 40,582 42,848 38,199
Interest on Seabrook Lease Obligation
Bonds owned by UI (5,122) (6,319) (6,470)
Dividend requirement of mandatorily
redeemable securities - - 3,529
Other interest, net (Note F) 1,816 4,854 5,253
------------ ------------ ------------
37,276 41,383 40,511
Amortization of debt expense and redemption premiums 1,969 2,156 3,988
------------ ------------ ------------
Interest Charges, net 39,245 43,539 44,499
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 80,210 107,554 108,786
------------ ------------ ------------
INCOME TAXES (NOTE E) 36,263 48,191 48,029
------------ ------------ ------------
NET INCOME AND INCOME APPLICABLE TO COMMON STOCK $43,947 $59,363 $60,757
============ ============ ============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,239 14,097 14,073
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,282 14,159 14,098
EARNINGS PER SHARE OF COMMON STOCK - BASIC $3.09 $4.21 $4.32
EARNINGS PER SHARE OF COMMON STOCK - DILUTED $3.08 $4.19 $4.31
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $2.88 $2.88 $2.88
- ---------------------------------------------------------------------------------------------------------------
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(THOUSANDS OF DOLLARS)
2002 2001 2000
---- ---- ----
NET INCOME $ 43,947 $ 59,363 $ 60,757
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gain (loss) on marketable securities
(net of tax benefit of $344) (519) 519 -
Minimum pension liability adjustment (net of tax benefit of $17,703) (26,694) - -
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (27,213) 519 -
------------ ------------ ------------
COMPREHENSIVE INCOME (NOTE A) $ 16,734 $ 59,882 $ 60,757
============ ============ ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
- 51 -
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(THOUSANDS OF DOLLARS)
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 43,947 $ 59,363 $ 60,757
------------- ------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 75,688 81,134 66,068
Deferred income taxes 67,692 (18,053) 10,435
Future tax benefits (Note E) (45,192) - -
Deferred investment tax credits - net (564) (658) (735)
Amortization of nuclear fuel 4,640 5,497 6,521
Allowance for funds used during construction (2,220) (1,913) (2,609)
CTA and SBC regulatory deferral (3,935) (2,016) (23,098)
Changes in:
Accounts receivable - net 14,316 (24,707) (12,066)
Materials and supplies 1,383 (5,722) (457)
Prepayments 744 (408) 181
Settlement assets (4,888) 25,639 (37,627)
Accounts payable 1,792 (13,046) (5,194)
Interest accrued 3,139 2,591 95
Taxes accrued 812 1,844 1,275
Settlement obligations (10,193) (3,036) 39,337
Other assets and liabilities (14,843) 19,600 (1,524)
------------- ------------- -------------
Total Adjustments 88,371 66,746 40,602
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 132,318 126,109 101,359
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (13,849) (22,995) (49,371)
Non-utility passive investments (5,396) (3,773) -
Net proceeds from sale of generation facilities 79,214 32,314 -
Deferred payments in prior acquisitions (4,967) (1,475) (41)
Plant expenditures, including nuclear fuel (57,305) (47,370) (54,191)
Purchase of pollution control refunding revenue bonds (25,000) - -
Redemption of investment in Seabrook Lease Obligation Bonds 80,794 1,928 4,778
Investment (retirement) in debt securities, net 5,043 (3,090) -
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 58,534 (44,461) (98,825)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of:
Common stock 6,132 2,536 517
Long-term debt 125,000 75,000 -
Notes payable 9,770 (78,056) 93,568
Long-term debt securities redeemed and retired (100,000) (665) (26,609)
Company obligated mandatory redeemable securities of
subsidiary holding solely parent debentures - - (50,000)
Termination of Seabrook Lease Obligation (208,900) - -
Expenses of issuances (526) (825) -
Lease obligations (509) (405) (376)
Payment of common stock dividend (40,917) (40,576) (40,517)
------------- ------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (209,950) (42,991) (23,417)
------------- ------------- -------------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD (19,098) 38,657 (20,883)
BALANCE AT BEGINNING OF PERIOD 86,096 47,439 68,322
------------- ------------- -------------
BALANCE AT END OF PERIOD 66,998 86,096 47,439
LESS: RESTRICTED CASH 46,430 56,596 33,202
------------- ------------- -------------
BALANCE: UNRESTRICTED CASH AND TEMPORARY CASH INVESTMENTS $ 20,568 $ 29,500 $ 14,237
============= ============= =============
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $ 36,782 $ 37,980 $ 35,252
============= ============= =============
Income taxes $ 12,800 $ 64,300 $ 36,900
============= ============= =============
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
- 52 -
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 2002 and 2001
ASSETS
(Thousands of Dollars)
2002 2001
---- ----
Current Assets
Unrestricted cash and temporary cash investments $ 20,568 $ 29,500
Restricted cash 46,430 56,596
Utility accounts receivable less allowance of $1,654 and $1,500 58,171 58,607
Other accounts receivable less allowance of $2,471 and $1,522 94,161 102,533
Settlement assets 44,770 39,882
Unbilled revenues 38,403 35,737
Materials and supplies, at average cost 6,203 14,528
Prepayments 2,348 3,299
Other 1,105 1,005
------------ ------------
Total Current Assets 312,159 341,687
------------ ------------
Other Property and Investments
Investment in United Bridgeport Energy facility 83,677 92,059
Nuclear decommissioning trust fund assets - 26,269
Marketable securities - 3,954
Investment in debt securities 25,000 -
Other 13,450 6,575
------------ ------------
Total Other Property and Investments 122,127 128,857
------------ ------------
Property, Plant and Equipment at original cost
In service 755,281 914,085
Less, accumulated depreciation 287,610 420,743
------------ ------------
467,671 493,342
Construction work in progress 49,411 32,103
Nuclear fuel - 20,973
------------ ------------
Net Property, Plant and Equipment 517,082 546,418
------------ ------------
Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Nuclear plant investments-above market 456,950 477,396
Income taxes due principally to book-tax differences 69,115 86,114
Long-term purchase power contracts-above market 100,379 112,250
Connecticut Yankee 33,821 21,291
Unamortized redemption costs 18,245 21,172
Other 40,804 44,752
------------ ------------
Total Regulatory Assets 719,314 762,975
------------ ------------
Deferred Charges
Goodwill - net of amortization of $4,758 76,093 63,456
Unamortized debt issuance expenses 4,509 5,208
Long-term receivable 10,766 10,280
Other 18,761 5,050
------------ ------------
Total Deferred Charges 110,129 83,994
------------ ------------
Total Assets $1,780,811 $1,863,931
============ ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
- 53 -
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002 AND 2001
LIABILITIES AND CAPITALIZATION
(Thousands of Dollars)
2002 2001
---- ----
Current Liabilities
Notes payable $ 46,315 $ 33,215
Current portion of long-term debt 100,000 100,000
Accounts payable 44,007 40,213
Settlement obligations 82,659 92,851
Dividends payable 10,275 10,163
Accrued liabilities 72,723 91,062
Deferred revenues - non-utility businesses 25,553 12,312
Taxes accrued 7,314 6,373
Interest accrued 7,457 11,119
Obligations under capital leases 473 438
------------ ------------
Total Current Liabilities 396,776 397,746
------------ ------------
Noncurrent Liabilities
Purchase power contract obligation 100,379 112,250
Pension accrued 44,857 -
Nuclear decommissioning obligation - 26,269
Connecticut Yankee contract obligation 28,442 14,969
Long-term notes payable 14,408 12,788
Obligations under capital leases 14,815 15,288
Other 13,680 13,689
------------ ------------
Total Noncurrent Liabilities 216,581 195,253
------------ ------------
Deferred Income Taxes (FUTURE TAX LIABILITIES OWED
TO TAXING AUTHORITIES) 225,904 221,727
------------ ------------
Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Accumulated deferred investment tax credits 13,201 13,764
Deferred gains on sale of property 33,130 29,827
Customer refund 6,820 3,657
Other 10,615 3,405
------------ ------------
Total Regulatory Liabilities 63,766 50,653
------------ ------------
Commitments and Contingencies (Note L)
Capitalization (Note B)
Long-term debt
Long-term debt 395,432 579,264
Investment in Seabrook Lease Obligation Bonds - (80,707)
------------ ------------
Net long-term debt 395,432 498,557
------------ ------------
Common Stock Equity
Common stock (no par value, 14,272,080 and 14,115,781
shares outstanding at December 31, 2002 and 2001) 296,501 291,788
Paid-in capital 3,749 2,760
Capital stock expense (2,170) (2,170)
Unearned employee stock ownership plan equity (6,411) (7,361)
Other comprehensive income (loss) (26,694) 519
Retained earnings 217,377 214,459
------------ ------------
Net Common Stock Equity 482,352 499,995
Total Capitalization 877,784 998,552
------------ ------------
Total Liabilities and Capitalization $ 1,780,811 $ 1,863,931
============ ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
- 54 -
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
DECEMBER 31, 2002, 2001 AND 2000
(THOUSANDS OF DOLLARS)
CAPITAL UNEARNED OTHER
COMMON STOCK PAID-IN STOCK ESOP COMPREHENSIVE RETAINED
SHARES (A) AMOUNT CAPITAL EXPENSE EQUITY INCOME EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1999 14,062,502 $292,006 $2,253 $(2,170) $(9,261) $ - $175,470 $458,298
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 2000 60,757 60,757
Cash dividends on common stock
- $2.88 per share (40,527) (40,527)
Issuance of 4,616 shares common stock
- no par value 4,616 163 32 195
Retirement of 18,361 shares common
stock- no par value (18,361) (827) (827)
Allocation of benefits - ESOP 27,940 198 951 1,149
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2000 14,076,697 291,342 2,483 (2,170) (8,310) - 195,700 479,045
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 2001 59,363 59,363
Cash dividends on common stock
- $2.88 per share (40,604) (40,604)
Issuance of 11,144 shares common stock
- no par value 11,144 446 40 486
Unrealized gain on investment (net of
tax expense of $344) 519 519
Allocation of benefits - ESOP 27,940 237 949 1,186
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 14,115,781 291,788 2,760 (2,170) (7,361) 519 214,459 499,995
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for 2002 43,947 43,947
Cash dividends on common stock
- $2.88 per share (41,029) (41,029)
Issuance of 128,359 shares common stock
- no par value 128,359 4,713 764 5,477
Unrealized loss on investment (net of tax
benefit of $344) (519) (519)
Minimum pension liability adjustment (net
of tax benefit of $17,703) (26,694) (26,694)
Allocation of benefits - ESOP 27,940 225 950 1,175
- ------------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 14,272,080 $296,501 $3,749 $(2,170) $(6,411) $(26,694) $217,377 $482,352
- ------------------------------------------------------------------------------------------------------------------------------------
(a) There were 30,000,000 shares authorized in 2002, 2001 and 2000.
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
- 55 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) STATEMENT OF ACCOUNTING POLICIES
UIL Holdings Corporation (UIL Holdings) has been the parent holding company for
The United Illuminating Company (UI) and United Resources, Inc. (URI) since July
2000. URI serves as the parent company for UIL Holdings' four non-utility
businesses, each of which is wholly-owned. URI's four subsidiaries are American
Payment Systems, Inc. (APS), Xcelecom, Inc. (Xcelecom), United Capital
Investments, Inc. (UCI), and United Bridgeport Energy, Inc. (UBE). UIL Holdings
is headquartered in New Haven, Connecticut, where its senior management
maintains offices and is responsible for overall planning, operating and
financial functions. UIL Holdings is an exempt public utility holding company
under the provisions of the Public Utility Holding Company Act of 1935.
ACCOUNTING RECORDS
The accounting records for UI are maintained in accordance with the uniform
systems of accounts prescribed by the Federal Energy Regulatory Commission
(FERC) and the Connecticut Department of Public Utility Control (DPUC).
The accounting records of UIL Holdings' non-utility subsidiaries are maintained
in conformity with accounting principles generally accepted in the United States
of America.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of UIL Holdings and
its wholly-owned direct subsidiaries, UI and URI. Intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to use
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain amounts previously reported have been reclassified to conform to the
current year presentation.
REGULATORY ACCOUNTING
Generally accepted accounting principles for regulated entities in the United
States of America allow UI to give accounting recognition to the actions of
regulatory authorities in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." In accordance with SFAS No. 71, UI has deferred
recognition of costs (a regulatory asset) or has recognized obligations (a
regulatory liability) if it is probable that such costs will be recovered or
obligations relieved in the future through the ratemaking process. The
Restructuring Act enacted in Connecticut in 1998 provides for UI to recover
previously deferred costs through ongoing assessments to be included in future
regulated service rates. See Note (C), "Rate-Related Regulatory Proceedings" for
a discussion of the recovery of UI's stranded costs associated with the
generation portion of its assets and operations, as well as a discussion of the
regulatory decisions that provide for such recovery. In addition to the
Regulatory Assets and Liabilities separately identified on the Consolidated
Balance Sheet, there are other regulatory assets and liabilities such as certain
deferred tax liabilities. UI also has obligations under long-term power
contracts, the recovery of which is subject to regulation. If UI, or a portion
of its assets or operations, were to cease meeting the criteria for application
of these accounting rules, accounting standards for businesses in general would
become applicable and immediate recognition of any previously deferred costs, or
a portion of deferred costs, would be required in the year in which the criteria
are no longer met, if such deferred costs are not recoverable in the portion of
the business that continues to meet the criteria for application of SFAS No. 71.
UI expects to continue to meet the criteria for application of SFAS No. 71 for
the foreseeable future. If a change in
- 56 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
accounting were to occur, it could have a material adverse effect on UI's
earnings and retained earnings in that year and could have a material adverse
effect on UI's ongoing financial condition as well.
PROPERTY, PLANT AND EQUIPMENT
The cost of additions to property, plant and equipment and the cost of renewals
and betterments are capitalized. Cost consists of labor, materials, services and
certain indirect construction costs, including an allowance for funds used
during construction in the case of utility plant. The cost of current repairs
and minor replacements is charged to appropriate operating expense accounts. The
original cost of utility property, plant and equipment retired or otherwise
disposed of and the cost of removal, less salvage, are charged to the
accumulated provision for depreciation. Upon disposal or retirement of
depreciable non-utility businesses' property, the appropriate plant accounts and
accumulated depreciation are reduced by the related costs. Any resulting gain or
loss is recognized in the income statement.
UIL Holdings' property, plant and equipment as of December 31, 2002 and 2001 was
comprised as follows:
2002 2001
---- ----
(In Thousands)
Utility:
Nuclear plant $ - $196,852
Transmission plant 151,674 151,280
Distribution plant 460,590 443,773
General plant 52,605 46,162
Software 30,271 29,292
Other plant 1,841 2,302
-------------------------
Subtotal 696,981 869,661
Non-utility business units 58,300 44,424
-------------------------
$755,281 $914,085
=========================
DEPRECIATION
Provisions for depreciation on utility plant for book purposes are computed on a
straight-line basis, using estimated service lives determined by independent
engineers. One-half year's depreciation is taken in the year of addition and
disposition of utility plant, except in the case of major operating units on
which depreciation commences in the month they are placed in service and ceases
in the month they are removed from service. The aggregate annual provisions for
depreciation for the years 2002, 2001 and 2000 were approximately 4.08%, 3.28%
and 3.05%, respectively, of the original cost of depreciable property.
Depreciation on non-utility businesses' plant for book purposes is recorded on a
straight-line basis over the estimated useful lives of the assets, which range
from three to seven years.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," UIL Holdings has
provided deferred taxes for all temporary book-tax differences using the
liability method. The liability method requires that deferred tax balances be
adjusted to reflect enacted future tax rates that are anticipated to be in
effect when the temporary differences reverse. In accordance with generally
accepted accounting principles for regulated industries, UI has established a
regulatory asset for the net revenue requirements to be recovered from customers
for the related future tax expense associated with certain of these temporary
differences.
- 57 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For ratemaking purposes, UI normalizes all investment tax credits (ITC) related
to recoverable plant investments except for the ITC related to Seabrook Unit 1,
which was taken into income in accordance with provisions of a 1990 DPUC retail
rate decision.
REVENUES
Regulated utility revenues for UI are based on authorized rates applied to each
customer's use of electricity. These retail rates are approved by the DPUC and
can be changed only through formal proceedings. Transmission revenues are
federally regulated by the FERC. At the end of each accounting period, the
estimated amount of revenues for services rendered but not billed is accrued.
Revenues from construction contracts entered into by Xcelecom are recognized on
a percentage-of-completion method. Under this method, revenue is recognized
based on the percentage of costs incurred and accrued to date to the estimated
total cost to complete these contracts. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Revenues generated by other business units are recognized when earned.
CASH AND TEMPORARY CASH INVESTMENTS
For cash flow purposes, UIL Holdings considers all highly liquid debt
instruments with a maturity of three months or less at the date of purchase to
be cash and temporary cash investments.
RESTRICTED CASH
Prior to the sale of its 17.5% ownership interest in Seabrook Station, UI was
required to maintain an operating deposit with the project disbursing agent for
operating expenses. The operating deposit was $3.2 million at December 31, 2001.
With the sale, these funds were placed in escrow to cover operating expenses
accrued at the time of sale. Such funds are restricted for use and totaled $5.6
million at December 31, 2002.
APS maintains separate bank accounts for holding cash received from clients'
customers before the amounts are transferred to clients. The amount of this
restricted cash at December 31, 2002 and 2001 was $40.4 million and $53.0
million, respectively.
Xcelecom maintained restricted cash, related to future debt payments, of $0.4
million at December 31, 2002 and 2001, respectively.
SETTLEMENT ASSETS AND OBLIGATIONS
Accounts receivable due from APS's agents and clients, as well as payables due
to APS's agents and clients, are classified as settlement assets and
obligations, respectively. The majority of these assets and liabilities result
from timing differences between APS's agents collecting funds from consumers
making the payments and depositing the funds collected into APS's bank accounts.
Additionally, settlement assets and obligations arise due to APS's reporting of
transactions to its clients prior to fulfilling the payment obligation.
INVESTMENTS
UI's investment in the Connecticut Yankee Atomic Power Company, a retired
nuclear generating company in which UI has a 9.5% stock interest, is accounted
for on an equity basis. This net investment amounted to $5.4 million and $6.3
million at December 31, 2002 and 2001, respectively, and is included on the
Consolidated Balance Sheet as a regulatory
- 58 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
asset. The Connecticut Yankee nuclear unit was retired in 1996 and is currently
being decommissioned. See Note (J), "Commitments and Contingencies - Other
Commitments and Contingencies - Connecticut Yankee."
UCI accounts for certain minority ownership interest investments, such as
Cross-Sound, UBE, Zero Stage and Ironbridge, using the equity accounting method.
The results of operations of these investments are reflected in Other Income and
(Deductions) on the Consolidated Statement of Income. Bill Matrix is accounted
for using the cost method of accounting.
On December 2, 2002, UI purchased the $25 million principal amount of Pollution
Control Refunding Revenue Bonds, 1999 Series, due December 1, 2029, issued by
the Business Finance Authority of the State of New Hampshire. See Note B ,
"Capitalization" for further discussion.
MARKETABLE SECURITIES
UIL Holdings accounts for its investment securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." This
statement requires the classification of debt and equity securities into one of
three categories: held to maturity, available for sale, or trading. The
statement also provides guidelines on accounting for debt and equity securities
in accordance with their classifications.
During 2001, Anthem Insurance Companies, Inc. (Anthem) completed a conversion
from a mutual company, owned by policyholders, to a publicly traded company,
owned by shareholders. As a result of this conversion, UIL Holdings received
62,435 shares of Anthem common stock, a portion of which was allocated to
employees based on the employees' share of the premiums paid to Anthem during
the period used to determine the number of shares issued to UIL Holdings. At
December 31, 2001, the closing price for Anthem common stock was $49.50 per
share. UIL Holdings recorded an investment and realized gain of approximately
$3.1 million, which represented the value of the shares at December 31, 2001. In
January 2002, UIL Holdings sold the 62,435 shares of Anthem common stock at a
price of $50.66 and recorded a realized gain of approximately $72,000.
On August 9, 2001, APS entered into a secured convertible note agreement with Q
Comm International, Inc. (Q Comm), in the amount of $0.2 million. As of December
31, 2001, APS recorded an investment and unrealized gain of approximately $0.9
million in comprehensive income, which represented the difference between the
market price of the shares as of December 31, 2001 and the conversion price. The
secured convertible note was repaid in May 2002 and an unrealized loss was
recognized in comprehensive income to offset the unrecognized gain as of
December 31, 2001.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, UIL Holdings adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." This statement modifies the accounting and reporting
of goodwill and intangible assets. Under this new standard, UIL Holdings is no
longer amortizing its existing goodwill. In addition, UIL Holdings was required
to measure goodwill for impairment effective January 1, 2002 as part of the
transition provisions. SFAS No. 142 required goodwill to be allocated to
reporting units (Xcelecom and APS) and measured for impairment under a two-step
test.
UIL Holdings has completed the necessary test to determine if impairment existed
under the prescribed standard and has determined that there was no goodwill
impairment. As required by SFAS No. 142, goodwill shall be tested for impairment
annually or more frequently if circumstances indicate a possible impairment.
Under SFAS No. 142, UIL Holdings has determined the useful life of other
intangible assets and is amortizing the value over the useful life. Other
intangible assets are required to be tested for impairment in a manner similar
to goodwill. In 2002, other intangible assets were not impaired.
- 59 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For further information regarding this standard, see Note (N), "Goodwill and
Other Intangible Assets," to the consolidated financial statements.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, including environmental studies, are charged to
expense as incurred.
PENSION AND OTHER POSTRETIREMENT BENEFITS
UIL Holdings accounts for pension plan costs in accordance with the provisions
of SFAS No. 87, "Employers' Accounting for Pensions."
UIL Holdings accounts for other postretirement benefits, consisting principally
of health and life insurance, under the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
URANIUM ENRICHMENT OBLIGATION
Under the Energy Policy Act of 1992 (Energy Act), UI was assessed for its
proportionate share of the costs of the decontamination and decommissioning of
uranium enrichment facilities operated by the Department of Energy (DOE). The
Energy Act imposes an overall cap of $2.25 billion on the obligation assessed to
the nuclear utility industry and limits the annual assessment to $150 million
each year over a 15-year period. UI recovered these assessments in rates as a
component of fuel expense. Accordingly, UIL Holdings recognized the unrecovered
costs as a regulatory asset on its Consolidated Balance Sheet.
As a result of the sale of UI's ownership and leasehold interest in Seabrook
Station on November 1, 2002, the buyer is obligated to pay such decontamination
and decommissioning fund fees, including but not limited to all annual special
invoices issued on and after the closing date by the DOE, as contemplated by its
regulation at 10 C.F.R. part 766 implementing sections 1801, 1802, and 1803 of
the Atomic Energy Act.
NUCLEAR DECOMMISSIONING TRUSTS
External trust funds were maintained to fund the estimated future
decommissioning costs of the nuclear generating units in which UI had an
ownership interest. These costs were accrued as a charge to depreciation expense
over the estimated service lives of the units and were recovered in rates on a
current basis. UI paid $2.2 million and $3.3 million into the decommissioning
trust fund for Seabrook Unit 1 in 2002 and 2001, respectively.
The sale of UI's interest in Seabrook Station was consummated on November 1,
2002. UI's share of the Seabrook decommissioning trust funds was transferred to
the buyer, along with UI's decommissioning and decommissioning fund obligation,
at the closing of the sale. UI made payments totaling $19.8 million at closing
to extinguish its decommissioning obligations subject to true-up. The amount was
subsequently trued-up to $18.7 million, and $1.1 million was refunded to UI on
December 30, 2002.
The sale of Millstone Unit 3 was consummated on March 31, 2001 and, as a result,
UI's share of the trust fund balance for Millstone Unit 3 was transferred to the
new owner. UI's share of the market value of the trust fund transferred was $8.5
million.
- 60 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
requires the recognition of impairment losses on long-lived assets when the book
value of an asset exceeds the sum of the expected future undiscounted cash flows
that result from the use of the asset and its eventual disposition. This
standard also requires that rate-regulated companies recognize an impairment
loss when a regulator excludes all or part of a cost from rates, even if the
regulator allows the company to earn a return on the remaining costs allowed.
Under this standard, the probability of recovery and the recognition of
regulatory assets under the criteria of SFAS No. 71 must be assessed on an
ongoing basis. At December 31, 2002 and December 31, 2001, neither UI nor URI
had any assets that were impaired under this standard.
EARNINGS PER SHARE
The following table presents a reconciliation of the basic and diluted earnings
per share calculations for the years 2002, 2001 and 2000:
INCOME APPLICABLE TO AVERAGE NUMBER OF EARNINGS
COMMON STOCK SHARES OUTSTANDING PER SHARE
-------------------- ------------------ ---------
(In Thousands, except per share amounts)
2002
- ----
Basic earnings per share $43,947 14,239 $3.09
Effect of dilutive stock options - 43 (.01)
-----------------------------------------------------------
Diluted earnings per share $43,947 14,282 $3.08
===========================================================
2001
- ----
Basic earnings per share $59,363 14,097 $4.21
Effect of dilutive stock options - 62 (.02)
-----------------------------------------------------------
Diluted earnings per share $59,363 14,159 $4.19
===========================================================
2000
- ----
Basic earnings per share $60,757 14,073 $4.32
Effect of dilutive stock options - 25 (.01)
-----------------------------------------------------------
Diluted earnings per share $60,757 14,098 $4.31
===========================================================
STOCK-BASED COMPENSATION
UIL Holdings accounts for employee stock-based compensation in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation." The statement allows
entities to continue to measure compensation expense in accordance with the
prior authoritative literature, APB No. 25, "Accounting for Stock Issued to
Employees," but requires that pro forma net income and earnings per share be
disclosed for each year for which an income statement is presented as if SFAS
No. 123 had been applied.
On December 31, 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," an amendment of FASB Statement No. 123, which provided alternative
transition methods to the expensing of employee stock-based compensation under
SFAS No. 123. In accordance with the provisions of SFAS No. 148, UIL Holdings
will begin expensing employee stock-based compensation effective January 1, 2003
and will record such expense on a prospective basis. Adoption of the prospective
method will result in recognition of expense equal to the fair market value of
all new option grants
- 61 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
made after December 31, 2002. UIL Holdings does not expect the adoption of this
standard to have a material effect on its consolidated financial position,
results of operations or liquidity.
COMPREHENSIVE INCOME
Comprehensive income in 2002 included a pre-tax loss of $44.4 million (after-tax
$26.7 million) representing the minimum pension liability regarding the UI
pension plan, calculated in accordance with the requirements of SFAS No. 87. In
addition, UIL Holdings reversed an unrealized pre-tax gain of $0.9 million
(after-tax $0.5 million) recorded in 2001 on a convertible note receivable that
was repaid in May 2002.
Comprehensive income for 2001 included an unrealized pre-tax gain of $0.9
million (after-tax $0.5 million) on APS's convertible note receivable (see
"Marketable Securities"). Comprehensive income for 2000 was equal to net income
as reported.
NEW ACCOUNTING STANDARDS
The FASB has issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of
Others." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting
for Contingencies", relating to guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. The provisions of this
interpretation for initial recognition and measurement should be applied on a
prospective basis to guarantees issued or modified after December 31, 2002. The
guarantor's previous accounting for guarantees that were issued before the date
of FIN 45's initial application may not be revised or restated to reflect the
effect of the recognition and measurement provisions of FIN 45. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. UIL Holdings does not expect the
adoption of this standard to have a material effect on its consolidated
financial position, results of operations, or liquidity. UI has provided a
guarantee in connection with UI's participation in the Hydro-Quebec transmission
intertie facility. See Note (J), "Commitments and Contingencies - Other
Commitments and Contingencies - Hydro-Quebec" for further discussion. UCI
provided a guarantee to Hydro-Quebec in connection with UCI's ownership interest
in Cross-Sound Cable Company, LLC (Cross-Sound) and related construction of a
transmission line connecting Connecticut and Long Island under Long Island
Sound; and UIL Holdings provided a guarantee in support of UCI's obligation.
See Note (J), "Commitments and Contingencies - Other Commitments and
Contingencies - Cross-Sound" for further discussion. APS had a letter of credit
outstanding at December 31, 2002 in connection with its revolving credit
agreement, and Xcelecom had letters of credit outstanding at December 31, 2002
in connection with its revolving credit agreement. See Note (D), "Short-Term
Credit Arrangements" for further discussion.
The FASB has issued Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities," an interpretation of ARB 51, which is effective for the
first interim or annual reporting period beginning after June 15, 2003. The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights (variable interest entities or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). UIL
Holdings does not expect the adoption of this standard to have any impact on its
consolidated financial position, results of operations, or liquidity.
The FASB has issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
This statement, which is effective for fiscal years beginning after June 15,
2002, requires that an asset retirement obligation be recognized at the time
when an entity faces a legal obligation to retire an asset. UIL Holdings has
reviewed its legal obligations associated with the retirement of tangible
long-lived assets and determined that the adoption of SFAS No. 143 will not have
a material effect on UIL Holdings consolidated financial position, results of
operation, or liquidity.
- 62 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of commitment
to an exit or disposal plan. Costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. UIL Holdings does not
expect the adoption of this standard to have a material effect on its
consolidated financial position, results of operations, or liquidity.
The FASB has issued SFAS No. 147 (SFAS 147), "Acquisitions of Certain Financial
Institutions," an amendment of SFAS No. 72 and SFAS No. 144 and FASB
Interpretation No. 9. SFAS 147 provides guidance for (1) the accounting and
reporting for the acquisition of all or part of a financial institution,
excluding those transactions between two or more mutual enterprises and (2)
accounting for the impairment or disposal of long-term customer-relationship
intangible assets of financial institutions, including the long-term
customer-relationship intangibles of mutual enterprises. UIL Holdings does not
expect the adoption of this standard to have any impact on its consolidated
financial position, results of operations, or liquidity.
(B) CAPITALIZATION
COMMON STOCK
UIL Holdings had 14,460,680 shares of its common stock, no par value,
outstanding at December 31, 2002 and 14,332,321 shares of its common stock, no
par value, outstanding at December 31, 2001, of which 188,600 shares and 216,540
shares were unallocated shares held by UI's 401(k)/Employee Stock Ownership Plan
(KSOP) and not recognized as outstanding for accounting purposes as of December
31, 2002 and 2001, respectively.
In 1998, UI entered into an arrangement under which it loaned $11.5 million to
the KSOP. The trustee for the KSOP used the funds to purchase 328,300 shares of
UI common stock in open market transactions. On July 20, 2000, effective with
the formation of a holding company structure, unallocated shares held by the
KSOP were converted into shares of UIL Holdings' common stock. The shares will
be allocated to employees' KSOP accounts, as the loan is repaid, to cover a
portion of the required KSOP contributions. 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
December 31, 2002, 188,600 shares, with a fair market value of $6.6 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. 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 June 28, 1999, UI's shareowners approved a stock option plan for directors,
officers and key employees of UI, providing for the awarding of options to
purchase up to 650,000 shares of common stock over periods 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. Effective with the formation of the holding company structure on July 20,
2000, all options were converted into options to purchase shares of UIL
Holdings' common stock. On March 25, 2002, the Board of Directors recommended to
the shareowners that the plan be amended to increase the maximum number of
shares of UIL Holdings' common stock for which stock options may be granted from
650,000 to 1,350,000, and to increase the limit on the number of shares that may
be covered by options granted in any one year to any employee from 50,000 to
150,000. The shareowners approved this amendment at the UIL Holdings Annual
Meeting on May 15, 2002.
- 63 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock option transactions for 2002, 2001 and 2000 are as follows:
WEIGHTED
AVERAGE
NUMBER OPTION PRICE EXERCISE
OF SHARES PER SHARE PRICE
--------- ------------ --------
Balance - December 31, 1999 16,300 $30.00-$42.38 $38.37
Granted 334,605 (1) $39.41-$53.13 $41.15
Forfeited (9,100) $39.38-$50.31 $40.59
Exercised (9,075) $43.22 $43.22
--------------
Balance - December 31, 2000 332,730 $30.00-$53.13 $41.00
Granted 176,633 (1) $43.22-$49.84 $45.30
Forfeited (5,333) $39.41-$43.22 $40.48
Exercised (12,023) $39.41-$43.22 $41.00
--------------
Balance - December 31, 2001 492,007 $30.00-$53.13 $42.55
Granted 302,017 (1) $52.16-$57.99 $56.30
Forfeited (21,633) $39.41-$56.61 $50.66
Exercised (185,937) $30.00-$45.18 $41.18
--------------
Balance - December 31, 2002 586,454 $39.41-$57.99 $49.77
==============
Exercisable at December 31, 2000 58,730 $30.00-$43.22 $41.58
Exercisable at December 31, 2001 186,822 $30.00-$53.13 $41.38
Exercisable at December 31, 2002 223,698 $39.41-$57.99 $46.37
(1) One-third of the options granted became exercisable on each of the first
three anniversaries of the grant date.
If compensation expense had been recorded for the stock option plan based on the
fair value method, net income and earnings per share for 2002, 2001 and 2000
would have been as follows:
2002 2001 2000
---- ---- ----
(In Thousands, except Earnings per Share)
Net income
As reported $43,947 $59,363 $60,757
Pro forma $42,183 $58,732 $60,490
Earnings per share-Basic
As reported $3.09 $4.21 $4.32
Pro forma $2.96 $4.17 $4.30
Earnings per share-Diluted
As reported $3.08 $4.19 $4.31
Pro forma $2.95 $4.15 $4.29
- 64 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of stock options granted has been estimated on the date of grant
using the binomial option-pricing model for 2002 and the Black-Scholes
option-pricing model for 2001 and 2000 using the assumptions below. The binomial
option-pricing model is more appropriate for valuing options on stocks with high
dividend yields, such as UIL Holdings. In 2002, UIL Holdings changed its method
of option valuation. The Black-Scholes option-pricing model, if used for 2002,
would have produced a lower option value.
2002 2001 2000
---- ---- ----
Risk-free interest rate 5.40% 5.75% 5.08%
Expected volatility 22.53% 21.92% 16.51%
Expected lives 6.80 years 7.59 years 9.09 years
Expected dividend yield 6.01% 6.11% 6.13%
The weighted average fair value of options granted during 2002, 2001 and 2000
were $9.71, $6.09, and $3.16 per share, respectively. As of December 31, 2002,
2001 and 2000, the weighted average remaining contractual lives for those
options outstanding were 6.8 years, 7.4 years and 8.4 years, respectively.
On February 23, 1998, UI's Board of Directors granted 80,000 "phantom" stock
options to Nathaniel D. Woodson upon his appointment as President of UI.
Effective with the formation of the holding company structure on July 20, 2000,
all outstanding phantom stock options were converted to UIL Holdings' phantom
stock options. On each of the first five anniversaries of the grant date, 16,000
phantom stock options become exercisable and can be exercised at any time within
Mr. Woodson's period of employment with UI by means of UI paying him the
difference between the prevailing market price for each share of UIL Holdings'
common stock and the phantom stock option price of $45.16 per share. At ten
years after the grant date any unexercised phantom stock options will expire. At
December 31, 2002, 64,000 phantom stock options were exercisable. During 2002,
$448,000 was recognized as income with regard to these phantom stock options,
due to a decrease in the stock price during 2002, which resulted in a reduction
in previously recognized cumulative expense.
RETAINED EARNINGS RESTRICTION
The indenture under which UI has issued $100 million principal amount of Notes
places limitations on UI relative to the payment of cash dividends on its common
stock, which is wholly-owned by UIL Holdings, and the purchase or redemption of
said common stock. Retained earnings in the amount of $68.9 million were free
from such limitations at December 31, 2002.
- 65 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-TERM DEBT
DECEMBER 31,
2002 2001
---- ----
(In Thousands)
Pollution Control Revenue Bonds:
4.35%, 1996 Series, due June 1, 2026 (1) $ 7,500 $ 7,500
5 7/8%, 1993 Series, due October 1, 2033 64,460 64,460
Pollution Control Refunding Revenue Bonds:
3.75%, 1997 Series, due July 1, 2027 (2) 27,500 27,500
4.55%, 1997 Series, due July 1, 2027 (1) 71,000 71,000
4.00%, 1999 Series, due December 1, 2029 (3) 25,000 25,000
Notes:
6.25%, 1998 Series I, due December 15, 2002 - 100,000
6.00%, 1998 Series J, due December 15, 2003 100,000 100,000
4.42% Senior Notes, Series A, due December 12, 2007 74,000 -
4.89% Senior Notes, Series B, due December 12, 2009 51,000 -
7.23% Senior Notes, Series A, due February 15, 2011 30,000 30,000
7.38% Senior Notes, Series B, due February 15, 2011 45,000 45,000
Obligation under the Seabrook Unit 1 sale/leaseback agreement - 208,900
-------------------
Long-Term Debt 495,460 679,360
Unamortized debt discount less premium (28) (96)
-------------------
495,432 679,264
Less:
Current portion included in Current Liabilities 100,000 100,000
Investment-Seabrook Lease Obligation Bonds - 80,707
-------------------
Net Long-Term Debt $395,432 $498,557
===================
(1) The interest rate on these Bonds was fixed on February 1, 1999 for the
five-year period ending January 31, 2004.
(2) The interest rate on these Bonds was fixed on February 1, 2002 for the
two-year period ending January 31, 2004.
(3) On December 1, 2002, the interest rate on these Bonds was set at 4%. The
Bonds were purchased and held by UI until February 5, 2003, when the
interest was reset at 3.25% and the Bonds were sold to investors. The new
interest rate will remain in effect to December 3, 2007.
On December 12, 2002, UI issued and sold $125 million of Senior Notes to several
institutional investors in a private sale. The issue was composed of two series:
4.42% Senior Notes, Series A, due December 12, 2007, in the principal amount of
$74 million, and 4.89% Senior Notes, Series B, due December 12, 2009, in the
principal amount of $51 million. Interest due under the Senior Notes is payable
semi-annually on June 12th and December 12th. The net proceeds of the sale were
used to repay the maturing 6.25% Notes, 1998 Series I, due December 15, 2002 and
for general corporate purposes.
On December 2, 2002, UI purchased the $25 million principal amount of Pollution
Control Refunding Revenue Bonds, 1999 Series, due December 1, 2029 (the 1999
Series Bonds), issued by the Business Finance Authority of the State of New
Hampshire (BFA). The 1999 Series Bonds were held by UI as an investment while
the borrowing
- 66 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
agreement with the BFA was amended to provide more remarketing flexibility. On
February 5, 2003, the 1999 Series Bonds were sold to investors and the interest
rate was fixed at 3.25%. The new interest rate will remain in effect for a
four-year ten-month period through December 3, 2007. UI is obligated, under its
borrowing agreement with the BFA, to pay the interest on the Bonds. Interest is
payable semi-annually on June 1st and December 1st.
The expenses to issue long-term debt are deferred and amortized over the life of
the respective debt issue.
Maturities and mandatory redemptions/repayments are set forth below:
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
(In Thousands)
Maturities $100,000 $ - $4,286 $4,286 $78,286
(C) RATE-RELATED REGULATORY PROCEEDINGS
RATE CASE
In November 2001, as directed by the DPUC, UI filed a retail customer rate case
application and supporting schedules and pre-filed testimony with the DPUC (Rate
Case). In that application, UI proposed no change in its previously authorized
base rates and no change in its 11.5% previously authorized return on equity. UI
had previously agreed, and subsequently been ordered by the DPUC, to continue
the earnings sharing mechanism applicable to a previous multi-year rate plan for
the period January 1, 2002 until the conclusion of the Rate Case proceeding.
Under that prior earnings sharing mechanism, earnings above 11.5% on an annual
basis, were shared one-third for customer bill reductions, which lowered
recorded revenue, and one-third to accelerate amortization of stranded costs,
with one-third retained by UI as earnings.
The DPUC issued a final decision in the Rate Case proceeding that became
effective on September 26, 2002. The decision provides for a $30.9 million
reduction in UI's annual revenue requirements, including (1) a $20.3 million
reduction to UI's customer rates, (2) $2.0 million to be applied annually for
additional funding of conservation programs, (3) $8.3 million to be applied
annually to reduce stranded costs, and (4) $0.3 million to be applied to a
combination of uncollectibles, taxes and rate base changes. In accordance with
the decision, UI took accelerated amortization of stranded costs of $5.6 million
before-tax ($4.7 million after-tax) in the fourth quarter of 2002, and reduced
customer rates by 3.0% overall and is continuing accelerated amortization at
$1.4 million before-tax ($1.2 million after-tax) per quarter as of January 1,
2003. The rate reductions, approved by the DPUC, are applied with no significant
rate design changes, although the generation services charge (GSC) component of
customers' rates is increased and the competitive transition assessment (CTA)
component is decreased in a dollar amount equal to the GSC increase. The final
Rate Case decision establishes rates on the basis of an authorized return on
equity of 10.45%. Earnings above the authorized return are to be shared 50% to
customers and 50% to retained earnings, with the customers' share divided
equally between bill reductions and an accelerated amortization of stranded
costs. The Rate Case decision did not adopt or impose a multi-year rate plan.
The Rate Case decision recognizes that the revenue requirements determination
for transmission investment, including the applicable return on equity, is
within the jurisdiction of the FERC. UI's authorized return on equity for
transmission investment is 10.75%.
On January 8, 2003, in a reopened proceeding requested by UI, the DPUC issued a
decision making a technical change to the Rate Case decision, approving UI's
proposed revenue transfer of $3.9 million annually from the competitive
transition assessment to the delivery component of rates beginning with the
September 26, 2002 effective date and continuing until the decision in UI's next
rate case proceeding.
On November 27, 2002, UI filed with the DPUC a request that the DPUC reopen the
Rate Case decision to adjust UI's revenue requirements for pension and
postretirement benefits expenses in 2003 in excess of the amount
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
approved in the Rate Case. On December 18, 2002, the DPUC denied UI's request,
concluding that UI had not demonstrated "changed conditions" such that the Rate
Case should be reopened, and stating that UI had the right to initiate a new
rate case proceeding if it deemed such action necessary. UI asked the DPUC to
reconsider this denial and, on January 22, 2003, the DPUC reopened the Rate Case
proceeding for the limited purpose of determining whether there are changed
conditions sufficient to warrant consideration of UI's revenue requirements for
pension and postretirement benefits expenses in 2003. In February 2003, UI
updated the estimate of its 2003 expense for these benefits to true-up asset
values and certain census data for the 2002 plan year and to reflect updated
assumptions. As a result, the adjustment to revenue requirements sought by UI
has increased to $15.5 million. The DPUC has submitted interrogatories relating
to the reopened docket and held a technical meeting on February 27, 2003. If the
DPUC determines not to address the additional revenue requirements associated
with pension and postretirement benefits expenses, UI intends to initiate a new
rate case proceeding as soon as practicable. Absent any other actions, the
additional pension and postretirement benefits expenses will prevent UI from
earning its authorized 10.45% rate of return on equity in 2003.
PUBLIC ACT 98-28
In April 1998, the Connecticut legislature enacted Public Act 98-28 (the
Restructuring Act), a statute designed to restructure the regulated electric
utility industry. As a result of the Restructuring Act, the business of selling
electricity directly to consumers has been opened to competition since January
2000. The business of delivering electricity remains with the incumbent
franchised utility companies (including UI).
A major component of the Restructuring Act is the collection, by distribution
companies, of a "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, or will be incurred, by
distribution companies to meet their public service obligations, and that will
likely not otherwise be recoverable in a competitive generation and supply
market. These costs include above-market long-term purchased power contract
obligations, regulatory asset recovery and above-market investments in power
plants (stranded costs). The systems benefits charge represents public policy
costs, such as generation decommissioning and displaced worker protection costs.
Beginning in 2000, UI has collected the competitive transition assessment, the
systems benefits charge, the energy conservation and load management program
charge and the renewable energy investment charge from customers. The DPUC has
an annual proceeding to review UI's collection of the competitive transition
assessment and systems benefits charge for the prior year, and to establish the
applicable competitive transition assessment charge and systems benefits charge
for the next year. Because of overcollection of systems benefits charge revenues
in 2001, and an expectation that such revenues will exceed systems benefits
charge costs in 2002 and 2003, the DPUC has ordered that UI's systems benefits
charge on customers' bills be reduced for 2003, with an offsetting increase to
the competitive transition assessment charge.
Under the Restructuring Act, all Connecticut electricity customers are able to
choose their electricity suppliers. Through December 31, 2003, UI is required to
offer retail service to its customers under a regulated "standard offer" rate to
each customer who does not choose an alternate electricity supplier, even though
UI is no longer in the business of power generation. UI is also required under
the Restructuring Act to provide back-up power supply service to customers whose
alternate electricity supplier fails to provide power supply services for
reasons other than the customers' failure to pay for such services. On December
28, 2001, UI entered into an agreement with Virginia Electric and Power Company
for the supply of all of UI's standard offer generation service needs from
January 1, 2002 through December 31, 2003, and for the supply of all of UI's
generation service requirements for special contract customers through 2008. The
Connecticut General Assembly, in its session that began in January 2003, is
considering whether to extend the standard offer beyond 2003 and, if so, under
what terms, and is also considering whether to make other changes to the 1998
restructuring legislation.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SALE OF NUCLEAR GENERATION
The Restructuring Act required that, in order for UI to recover any stranded
costs, it must attempt to divest its ownership interests in two nuclear-fueled
power plants prior to 2004. 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 planned to divest its nuclear generation ownership and leasehold
interests (17.5% of Seabrook Station in New Hampshire and 3.685% of Millstone
Unit 3 in Connecticut) by the end of 2003, in accordance with the Restructuring
Act.
The sale of UI's ownership in Millstone Unit 3 was consummated on March 31,
2001. UI's share of the proceeds from the sale, including nuclear fuel, was
$34.4 million, before settlement of its decommissioning obligation. On January
13, 2003, the DPUC issued a draft decision on the Millstone Divestiture Plan -
Disposition of Proceeds, which, if adopted, would have authorized UI to reduce
its stranded costs balance by $16.7 million. The draft decision approved most
of the accounting treatment proposed by UI but disallowed certain expenses that
were applied to reduce net proceeds from the sale of Millstone Unit 3. UI
submitted to the DPUC its exceptions to the draft decision in support of partial
recovery of these costs and expects to take a similar position with regard to
Seabrook Station. UI has accounted for the regulatory risk associated with the
recovery of the expenses related to the sales of both Millstone Unit 3 and
Seabrook Station, consistent with its position in the written exceptions filed
with the DPUC. On February 27, 2003 the DPUC issued a decision on the Millstone
Divestiture Plan, subject to appeal. The decision will not have a material
impact on 2003 results.
The sale of Seabrook Station was consummated on November 1, 2002. The net
proceeds from the sale of UI's ownership and leasehold interests in Seabrook
Station were $157.8 million, of which $57.8 million was transferred directly
from the buyer to the lessor and applied to the amounts necessary to terminate
the Seabrook Lease Obligation. The net proceeds attributable to UI's direct
ownership interest, including nuclear fuel and excluding settlement of its
decommissioning obligation and transaction costs, were $100 million. The UI
proceeds, along with an additional cash payment by UI of $31.2 million, were
used to repay $208.9 million of Seabrook Lease Obligation Bonds, net of the
redemption of UI's investment of $80.8 million in those bonds, plus accrued
interest. UI also made payments totaling $20.8 million to settle its
decommissioning obligation and transaction costs, along with an additional $6.4
million for various operating expenses and other adjustments. There are also
approximately $72 million in tax benefits related to the sale of Seabrook
Station and the termination of the Lease Obligation, of which approximately $29
million was realized in 2002 and $43 million will be realized in 2003.
In compliance with the Restructuring Act, the net-of-tax gain from the sale
after termination of the Seabrook Lease Obligation that is in excess of the book
value of the plant, as set by the DPUC based on its estimate of the market value
of the plant, was used to reduce UI's stranded costs. This calculation is
subject to review and true-up by the DPUC.
OTHER REGULATORY MATTERS
The DPUC is required by Connecticut law to initiate a proceeding whenever a work
stoppage occurs at a public service company for a period of more than seven
days. Because the unionized employees at UI were on strike from May 16, 2002 to
June 9, 2002, the DPUC is conducting a proceeding to determine whether, as a
result of the work stoppage, UI earned unreasonable profits and whether the
quality of service to UI's customers was impaired. UI has submitted to the DPUC
a post-strike analysis of the financial impact of the strike, together with a
review of service quality metrics. UI has answered interrogatories submitted by
the DPUC and the state's Office of Consumer Counsel. No time schedule has been
set by the DPUC for this proceeding.
Under Connecticut law, the DPUC is required to conduct a management audit of
each electric public service company having more than seventy-five thousand
customers, no less frequently than once every six years. The last DPUC
management audit of UI began in 1996 and concluded in 1997. In the third quarter
of 2002 the DPUC
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
commenced the management audit process for UI, and in January 2003, the
consulting firm selected to assist the DPUC in its audit of UI submitted its
final report to the DPUC. The final report includes recommendations of areas for
further audit review. UI submitted comments to the DPUC in February 2003.
Resolution of the audit recommendations is not expected at this time to have a
material financial impact.
(D) SHORT-TERM CREDIT ARRANGEMENTS
UIL Holdings has a money market loan arrangement with JPMorgan Chase Bank. This
is an uncommitted short-term borrowing arrangement under which JPMorgan Chase
Bank may make loans to UIL Holdings for fixed maturities from one day up to six
months. JPMorgan Securities, Inc. acts as an agent and sells the loans to
investors. The fixed interest rates on the loans are determined based on
conditions in the financial markets at the time of each loan. As of December 31,
2002, UIL Holdings had $14 million outstanding under this arrangement.
UIL Holdings has a revolving credit agreement with a group of banks that extends
to July 31, 2003. The borrowing limit of this facility is $100 million. The
facility permits UIL Holdings to borrow funds at a fluctuating interest rate
determined by the prime lending market in New York, and also permits UIL
Holdings to borrow money for fixed periods of time specified by UIL Holdings at
fixed interest rates determined by the Eurodollar interbank market in London
(LIBOR). If a material adverse change in the business, operations, affairs,
assets or condition, financial or otherwise, or prospects of UIL Holdings and
its subsidiaries, on a consolidated basis, should occur, the banks may decline
to lend additional money to UIL Holdings under this revolving credit agreement,
although borrowings outstanding at the time of such an occurrence would not then
become due and payable. As of December 31, 2002, UIL Holdings had $25 million in
short-term borrowings outstanding under this facility.
Xcelecom has a revolving credit agreement with two banks that expires on June
30, 2004. This agreement provides for a $35 million revolving loan facility,
available to meet working capital needs and up to $5 million in capital
equipment needs, and to support standby letters of credit issued by Xcelecom in
the normal course of its business. Capital equipment loans under this facility
can be converted to amortizing term loans with a maturity of up to four years.
This agreement also provides for the payment of interest at a rate, at the
option of Xcelecom, based on the agent bank's prime interest rate or LIBOR. As
of December 31, 2002, the outstanding revolving working capital balance on this
facility was $3 million. In addition, Xcelecom had $1.1 million of capital
equipment funding that had been converted to term notes outstanding and standby
letters of credit of $5.1 million outstanding at December 31, 2002. All
borrowings outstanding under this agreement are secured solely by assets of
Xcelecom and its subsidiaries.
APS has a revolving credit agreement with a bank that expired on June 28, 2002.
The expiration date has been extended to March 10, 2003. This agreement provides
for a $10 million working capital facility for APS and its subsidiaries,
available for working capital needs, acquisitions of fixed assets in an
aggregate amount not to exceed $4 million, and to make additional equity
investments in acquired subsidiaries in an aggregate amount not to exceed $1
million. The terms of this agreement allow APS to select the interest rate on
its short-term borrowings based on either the bank's prime interest rate or
LIBOR. As of December 31, 2002, APS had $3.3 million in short-term borrowings
outstanding under this agreement. In addition, APS had an outstanding letter of
credit which is collaterized by $1.4 million borrowed under the APS facility at
December 31, 2002. For the quarter ended December 31, 2002, APS did not comply
with the tangible net worth covenant under this agreement and received a waiver
of non-compliance from the bank.
APS is engaged in negotiations with a bank for a new $10 million credit
agreement, with an expiration date of June 24, 2004, that will provide $10
million for working capital and corporate needs of APS and it subsidiaries and
$5 million for capital equipment needs. The agreement is expected to support an
additional $1.4 million standby letter of credit. All borrowings outstanding
under this agreement would continue to be secured solely by assets of APS and
its subsidiaries.
- 70 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Information with respect to short-term borrowings of UIL Holdings, Xcelecom and
APS are as follows:
2002 2001 2000
---- ---- ----
(In Thousands)
UIL HOLDINGS
- ------------
Maximum aggregate principal amount of short-term borrowings
outstanding at any month-end $50,000 $129,000 $114,000
Average aggregate short-term borrowings outstanding during the year* $19,771 $43,421 $42,511
Weighted average interest rate* 2.3% 5.8% 7.2%
Principal amounts outstanding at year-end $39,000 $18,000 $109,000
Annualized interest rate on principal amounts outstanding at year-end 2.1% 2.9% 7.6%
Fees* $365 $297 $386
XCELECOM
- --------
Maximum aggregate principal amount of short-term borrowings
outstanding at any month-end $13,965 $13,800 -
Average aggregate short-term borrowings outstanding during the year* $6,804 $7,746 -
Weighted average interest rate* 2.6% 3.3% -
Principal amounts outstanding at year-end $3,050 $12,930 -
Annualized interest rate on principal amounts outstanding at year-end 3.1% 2.7% -
Fees* $119 $25 -
APS
- ---
Maximum aggregate principal amount of short-term borrowings
outstanding at any month-end $3,810 $824 $500
Average aggregate short-term borrowings outstanding during the year* $1,839 $143 $29
Weighted average interest rate* 4.7% 5.1% 9.7%
Principal amounts outstanding at year-end $3,260 $685 $ -
Annualized interest rate on principal amounts outstanding at year-end 4.3% 4.8% -
Fees* $20 $36 $11
* Average short-term borrowings represent the sum of daily borrowings
outstanding, weighted for the number of days outstanding and divided by the
number of days in the period. The weighted average interest rate is determined
by dividing interest expense by the amount of average borrowings. Fees are
excluded from the calculation of the weighted average interest rate.
- 71 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(E) INCOME TAXES
2002 2001 2000
---- ---- ----
(In Thousands)
Income tax expense consists of:
Income tax provisions:
Current
Federal $ (25,476) $ 55,706 $ 31,650
State (5,389) 11,196 6,679
---------------- ------------ ------------
Total current (30,865) 66,902 38,329
---------------- ------------ ------------
Deferred
Federal 56,343 (14,083) 9,152
State 11,349 (3,970) 1,283
---------------- ------------ ------------
Total deferred 67,692 (18,053) 10,435
---------------- ------------ ------------
Investment tax credits (564) (658) (735)
---------------- ------------ ------------
Total income tax expense $ 36,263 $ 48,191 $ 48,029
================ ============ ============
Income tax components charged as follows:
Operating tax expense $ 38,239 $ 52,368 $ 52,298
Nonoperating tax expense (1,976) (4,177) (4,269)
---------------- ------------ ------------
Total income tax expense $ 36,263 $ 48,191 $ 48,029
================ ============ ============
The following table details the components of
the deferred income taxes:
Gain on sale of utility property $ (280) $ (9,680) $ -
Seabrook sale/leaseback transaction 8,525 (2,546) (2,599)
Seabrook lease buyout 28,156 - -
Seabrook II Sale (1,885) - -
Pension benefits 2,189 729 6,878
Accelerated depreciation (335) (2,891) (3,006)
Tax depreciation on unrecoverable plant
investment 34,805 202 235
Unit overhaul and replacement power costs - 939 326
Conservation and load management (107) (107) (107)
Displaced worker protection costs (956) (333) (909)
Bond redemption costs (1,026) (1,026) (585)
Cancelled nuclear project (467) (467) (467)
Restructuring costs (538) (538) 1,132
Regulatory deferrals 1,570 804 9,210
Other - net (1,959) (3,139) 327
---------------- ------------ ------------
Deferred income taxes - net $ 67,692 $ (18,053) $ 10,435
================ ============ ============
- 72 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Total income taxes differ from the amounts computed by applying the federal
statutory tax rate to income before taxes. The reasons for the differences are
as follows:
2002 2001 2000
---- ---- ----
(In Thousands)
Computed tax at federal statutory rate $28,073 $37,644 $38,075
Increases (reductions) resulting from:
ITC taken into income (564) (658) (735)
Allowance for equity funds used during construction (433) (393) (402)
Amortization of regulatory asset 11,345 14,000 14,433
Book depreciation in excess of non-normalized tax depreciation (3,000) (3,445) (3,565)
State income taxes, net of federal income tax benefits 3,874 4,697 5,176
Other items - net (3,032) (3,654) (4,953)
----------------------------------------------
Total income tax expense $36,263 $48,191 $48,029
==============================================
Book income before income taxes $80,210 $107,554 $108,786
==============================================
Effective income tax rates 45.2% 44.8% 44.1%
==============================================
As a result of the sale of UI's ownership and leasehold interest in Seabrook
Station and the termination of the associated Seabrook Lease Obligation, UIL
Holdings incurred a net operating loss for the year 2002 of approximately $73
million for tax purposes that will be carried forward and utilized in 2003. This
will result in future cash tax reductions of approximately $45 million, of which
approximately $42.8 million is from the sale of Seabrook Station and the
termination of the Seabrook Lease Obligation.
At December 31, 2002, UIL Holdings had deferred tax liabilities for taxable
temporary differences of $320 million and deferred tax assets for deductible
temporary differences of $94 million, resulting in a net deferred tax liability
of $226 million. Significant components of deferred tax liabilities and assets
were as follows: tax liabilities on book/tax plant basis differences and on the
cumulative amount of income taxes on temporary differences previously flowed
through to ratepayers, $167 million, tax liabilities on normalization of
book/tax depreciation timing differences, $107 million, tax assets on 2002 net
operating loss carryforward, $45 million, and tax assets on minimum pension
provision, $18 million.
- 73 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(F) SUPPLEMENTARY INFORMATION
2002 2001 2000
---- ---- ----
(In Thousands)
OPERATING REVENUES
- ------------------
Utility
Retail $ 639,025 $ 627,178 $ 602,347
Wholesale 58,249 61,570 67,990
Proceeds from Millstone Unit 3 settlement - - 14,960
Other 30,259 26,070 19,394
Non-utility business unit revenues
American Payment Systems 93,699 58,649 37,940
Xcelecom 310,044 312,556 138,267
Other/Eliminations (254) (177) (43)
------------ ------------ -------------
Total Operating Revenues $1,131,022 $1,085,846 $ 880,855
============ ============ =============
SALES BY CLASS(MEGAWATT-HOURS) - UNAUDITED
- ------------------------------------------
Retail
Residential 2,247,196 2,119,976 2,056,366
Commercial 2,465,711 2,476,027 2,403,212
Industrial 1,021,586 1,082,394 1,146,295
Other 46,517 46,073 47,852
------------ ------------ -------------
5,781,010 5,724,470 5,653,725
Wholesale 1,812,531 2,030,365 2,237,805
------------ ------------ -------------
Total Sales by Class 7,593,541 7,754,835 7,891,530
============ ============ =============
DEPRECIATION AND AMORTIZATION
- -----------------------------
Utility property, plant, and equipment $ 26,336 $ 25,549 $ 24,575
Non-utility business property, plant and equipment 6,051 3,878 3,278
Nuclear Decommissioning 2,241 3,384 3,986
------------ ------------ -------------
Total Depreciation 34,628 32,811 31,839
------------ ------------ -------------
Amortization of intangibles, including goodwill 1,963 4,456 1,439
Amortization of nuclear plant regulatory assets 28,479 27,650 2,851
Amortization of purchase power contracts 24,014 26,115 26,744
Amortization of other regulatory assets 5,873 3,924 5,668
Amortization of cancelled plant 1,172 1,172 1,172
------------ ------------ -------------
Total Amortization 61,501 63,317 37,874
------------ ------------ -------------
Total Depreciation and Amortization $ 96,129 $ 96,128 $ 69,713
============ ============ =============
TAXES - OTHER THAN INCOME TAXES
- -------------------------------
Operating:
Connecticut gross earnings $ 28,293 $ 26,661 $ 23,715
Local real estate and personal property 11,782 12,334 13,939
Payroll taxes 6,597 6,154 5,402
------------ ------------ -------------
Total Taxes - Other than Income Taxes $ 46,672 $ 45,149 $ 43,056
============ ============ =============
OTHER INCOME AND (DEDUCTIONS), NET
- ----------------------------------
Interest income $ 314 $ 692 $ 1,723
Allowance for funds used during construction 2,220 1,913 2,609
Equity earnings from Connecticut Yankee 818 288 1,913
Non-utility business passive income (expense) (5,299) 6,134 4,126
Non-utility business opportunities - (403) (2,581)
Miscellaneous other income and (deductions) - net 76 (2,236) (4,451)
------------ ------------ -------------
Total Other Income and (Deductions), net $ (1,871) $ 6,388 $ 3,339
============ ============ =============
OTHER INTEREST, NET
- -------------------
Notes Payable $ 459 $ 2,507 $ 3,078
Other 1,357 2,347 2,175
------------ ------------ -------------
Total Other Interest, net $ 1,816 $ 4,854 $ 5,253
============ ============ =============
- 74 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(G) PENSION AND OTHER BENEFITS
UI's qualified pension plan covers substantially all of its employees, the
employees of UIL Holdings and APS, and certain management employees of Xcelecom
and UCI. UI also has a non-qualified supplemental plan for certain executives
and a non-qualified retiree-only plan for certain early retirement benefits. The
net pension expense (income) for these plans for 2002, 2001 and 2000 was $6.7
million, $0.8 million, and $(14.7) million, respectively.
Funding policy for the qualified plan is to make annual contributions that
satisfy the minimum funding requirements of ERISA but that do not exceed the
maximum deductible limits of the Internal Revenue Code. These amounts are
determined each year as a result of an actuarial valuation of the plan. In 2000,
$2.5 million was contributed for 1999 funding requirements. In 2001, $2.6
million was contributed for 2000 funding requirements. Due to IRS limitations
regarding tax deductibility, UI did not make a contribution for the 2001 plan
year. In 2002, $12.2 million was contributed for the 2002 funding requirements.
UI has established a supplemental retirement benefit trust and through this
trust purchased life insurance policies on officers of UI to fund the future
liability under the supplemental plan. The cash surrender value of these
policies is included in Other Property and Investments on the Consolidated
Balance Sheet.
In addition to providing pension benefits, UI also provides other postretirement
benefits (OPEB), consisting principally of health care and life insurance
benefits, for retired employees and their dependents. Employees whose sum of age
and years of service at time of retirement is equal to or greater than 85 (or
who are 62 with at least 20 years of service) are eligible for benefits
partially subsidized by UI. The amount of benefits subsidized by UI is
determined by age and years of service at retirement.
For funding purposes, UI established a Voluntary Employees' Benefit Association
Trust (VEBA) to fund OPEB for UI's union employees. Approximately 43% of UI's
employees are represented by Local 470-1, Utility Workers Union of America,
AFL-CIO, for collective bargaining purposes. UI established a 401(h) account in
connection with the qualified pension plan to fund OPEB for UI's non-union
employees who retire on or after January 1, 1994. The funding policy assumes
contributions to these trust funds to be the total OPEB expense calculated under
SFAS No. 106, adjusted to reflect a share of amounts expensed as a result of
voluntary early retirement programs minus pay-as-you-go benefit payments for
pre-January 1, 1994 non-union retirees, allocated in a manner that minimizes
current income tax liability, without exceeding maximum tax deductible limits.
In accordance with this policy, UI did not make contributions to the union VEBA
in 2002, 2001 and 2000. In 2002, UI contributed $0.8 million to the 401(h)
account. UI did not make a contribution to the 401(h) account in 2001. UI
contributed $0.2 million to the 401(h) account in 2000. Plan assets for both the
union VEBA and 401(h) account consist primarily of equity and fixed-income
securities.
The following table represents the change in benefit obligation, change in plan
assets and the respective funded status of UI's pension and postretirement plans
as of December 31, 2002 and 2001.
- 75 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AT DECEMBER 31,
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $247,992 $233,840 $34,187 $32,710
Service cost 5,043 4,415 528 477
Interest cost 17,768 17,241 2,811 2,385
Amendments 1,312 - (2,118) -
Actuarial (gain) loss 19,836 13,591 16,154 1,034
Settlements, curtailments and other (1,146) (2,615) - 134
---------------------------------------------------------------
Benefits paid (including expenses) (17,867) (18,480) (3,221) (2,553)
---------------------------------------------------------------
Benefit obligation at end of year $272,938 $247,992 $48,341 $34,187
===============================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $212,000 $247,040 $19,327 $20,534
Actual return on plan assets (19,957) (19,299) (1,342) 749
Employer contributions 12,437 5,085 1,624 597
Benefits paid (including expenses) (17,867) (20,826) (3,221) (2,553)
---------------------------------------------------------------
Fair value of plan assets at end of year $186,613 $212,000 $16,388 $19,327
===============================================================
Funded Status at December 31:
Projected benefits (less than) greater than
plan assets $86,325 $35,992 $31,953 $14,860
Unrecognized prior service cost (10,213) (10,026) 1,737 (258)
Unrecognized transition asset 2,632 3,687 (9,878) (10,936)
Unrecognized net gain (loss) from past
experience (88,684) (32,362) (16,308) 2,547
---------------------------------------------------------------
(Prepaid)/accrued benefit obligation $(9,940) $(2,709) $7,504 $6,213
===============================================================
Amounts recognized in the Consolidated Balance
Sheet consist of:
Prepaid benefit cost $ - $(2,709) $ - $ -
Accrued benefit liability 44,857 - 7,504 6,213
Intangible asset (10,400) - - -
Accumulated other comprehensive income (44,397) - - -
---------------------------------------------------------------
Net amount recognized $(9,940) $(2,709) $7,504 $6,213
===============================================================
The following actuarial assumptions were used
in calculating the benefit obligations at
December 31:
Discount rate 6.75% 7.25% 6.75% 7.25%
Average wage increase 4.50% 4.50% 4.50% 4.50%
Health care cost trend rate N/A N/A 7.30% 5.50%
- 76 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of net periodic benefit cost are:
FOR THE YEAR ENDED DECEMBER 31,
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands)
Components of net periodic benefit cost:
Service cost $5,043 $4,415 $528 $477
Interest cost 17,768 17,241 2,811 2,385
Expected return on plan assets (19,311) (22,821) (1,810) (1,860)
Amortization of:
Prior service costs 1,125 1,172 (122) 11
Transition obligation (asset) (1,054) (1,054) 1,058 1,090
Actuarial (gain) loss 2,527 (424) 493 (518)
Settlements and curtailments 653 2,256 - 210
---------------------------------------------------------
Net periodic benefit cost $6,751 $785 $2,958 $1,795
=========================================================
The following actuarial assumptions were used in
calculating net periodic benefit cost:
Discount rate 6.75% 7.25% 6.75% 7.25%
Average wage increase 4.50% 4.50% 4.50% 4.50%
Return on plan assets 9.50% 9.50% 9.50% 9.50%
Health care cost trend rate N/A N/A 7.30% 5.50%
A one percentage point change in the assumed health care cost trend rate would
have the following effects:
1% INCREASE 1% DECREASE
----------- -----------
(In Thousands)
Aggregate service and interest cost components $429 $(353)
Accumulated postretirement benefit obligation $6,069 $(4,917)
UI has a 401(k)/Employee Stock Ownership Plan (KSOP) in which substantially all
of its employees, the employees of UIL Holdings, APS and UCI, are eligible to
participate. The KSOP enables employees to defer receipt of a portion of their
compensation, up to statutory limits, and to invest such funds in a number of
investment alternatives. Matching contributions are made to the KSOP, in the
form of UIL Holdings' common stock, based on each employee's salary deferrals in
the KSOP. Through December 31, 2002, the matching contribution equaled fifty
cents for each dollar of the employee's compensation deferred, but not more than
3 3/8% of the employee's annual salary. Matching contributions to the KSOP
during 2002, 2001 and 2000 were $1.7 million, $1.6 million and $1.8 million,
respectively. Beginning January 1, 2003, the matching contribution to the KSOP
will be 100% of the first 3% of employee compensation deferred and 50% of the
next 2% deferred. The maximum match will be 4% of annual salary and all matching
contributions will continue to be made in the form of UIL Holdings' common
stock.
UIL Holdings pays dividends on the shares of stock in the KSOP to the
participant and UIL Holdings receives a tax deduction for the dividends paid.
Through December 31, 2002, contributions made to the KSOP were equal to 25% of
the dividends paid to each participant. Annual contributions of $0.3 million
were made in 2002, 2001 and 2000. Effective January 1, 2003, UIL Holdings will
no longer make these contributions.
- 77 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Certain of Xcelecom's subsidiaries make contributions to union-administered
benefit funds, which cover the majority of the subsidiaries' union employees.
Governmental regulations require that, in the event of plan termination or
employer withdrawal, an employer may be liable for a portion of the plan's
unfunded vested benefits, if any. Xcelecom is not aware of any liabilities
resulting from unfunded vested benefits related to union-administered benefit
plans. Xcelecom does not anticipate withdrawal from the plans, nor is Xcelecom
aware of any expected plan terminations.
In December of 2001, Xcelecom established the Xcelecom, Inc. 401(k) Plan. Upon
establishment, Xcelecom merged each of the separate subsidiary non-union
retirement plans into this single company-wide plan in a staged manner.
Beginning on January 1, 2002, Xcelecom non-union employees in subsidiaries
merged into this plan are eligible to participate upon completing six months of
service and attaining age twenty-one. Participants become vested in matching
contributions immediately upon entry into the plan. Xcelecom makes matching
contributions equal to 100% of the first 3% of employee salary deferred and 50%
of any salary deferrals that exceed 3% but do no exceed 5% of the participant's
compensation.
Certain of Xcelecom's subsidiaries maintained separate defined contribution
employee retirement plans for part or all of 2002, pending merger into
Xcelecom's 401(k) Plan. These plans are open to certain employees after various
lengths of service. Employee contributions and employer matching contributions
occur at different rates, and the matched portions of the funds vest over a
period of years. Contributions for the profit sharing portion of the Plans are
generally at the discretion of the individual subsidiary.
(H) UNAMORTIZED CANCELLED NUCLEAR PROJECT
From December 1984 through December 1992, UI had been recovering its investment
in Seabrook Unit 2, a partially constructed nuclear generating unit that was
cancelled in 1984, over a regulatory approved ten-year period without a return
on its unamortized investment. In a 1992 rate decision, the DPUC adopted a
proposal by UI to write off its remaining investment in Seabrook Unit 2,
beginning January 1, 1993, over a 24-year period, corresponding with the
flowback of certain Connecticut Corporation Business Tax (CCBT) credits. This
decision allows UI to retain the Seabrook Unit 2/CCBT amounts for ratemaking
purposes, with the accumulated CCBT credits not deducted from rate base during
the 24-year period of amortization in recognition of a longer period of time for
amortization of the Seabrook Unit 2 balance. Unit 2 was sold on November 1,
2002. As a result of reducing its remaining unamortized investment in Seabrook
Unit 2 with related proceeds from the sale, UI expects its investment to be
fully amortized by the end of 2003.
(I) LEASE OBLIGATIONS
UIL Holdings and its wholly-owned direct and indirect subsidiaries have lease
arrangements for data processing equipment, office equipment, vehicles and
office space, including the lease of a distribution service facility that is
recognized as a capital lease. The gross amount of assets recorded under the
capital lease and the related obligation of this lease as of December 31, 2002
are recorded on the Consolidated Balance Sheet.
- 78 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Future minimum lease payments under the capital lease are estimated to be as
follows:
(In Thousands)
2003 $1,696
2004 16,000 (1)
2005 -
2006 -
2007 - after -
----------------
Total minimum capital lease payments 17,696
Less: Amount representing interest 2,408
----------------
Present value of minimum capital lease payments $15,288
================
(1) Represents anticipated buyout option payment in connection with the Electric
System Work Center property.
Capitalization of leases on UI's books has no impact on income, since the sum of
the amortization of a leased asset and the interest on the lease obligation
equals the rental expense allowed for ratemaking purposes.
Operating leases, which are charged to operating expense, consist principally of
leases of office space and facilities and a wide variety of equipment. The most
significant operating lease is that of UI's corporate headquarters. The future
minimum lease payments under these operating leases is estimated to be as
follows:
(In Thousands)
2003 $11,825
2004 11,770
2005 12,375
2006 10,922
2007 - after 64,481
----------------
Total $111,373
================
Rental payments charged to operating expenses in 2002, 2001 and 2000, including
rental payments for its corporate headquarters, were $13.8 million, $13.0
million and $11.3 million, respectively.
(J) COMMITMENTS AND CONTINGENCIES
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. A decision by the FERC that became effective on August 1,
2000 allows Connecticut Yankee to collect through the power contracts with the
unit's owners the FERC-approved decommissioning costs, other costs associated
with the permanent shutdown of the Connecticut Yankee Unit, the unrecovered
investment in the Connecticut Yankee Unit, and a return on equity of 6%.
- 79 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As part of an ongoing review process, management of Connecticut Yankee prepared
revised estimates of the cost of decommissioning the Connecticut Yankee Unit.
The estimated costs of decommissioning the Connecticut Yankee Unit have
increased by approximately $150 million over prior estimates. The new estimates
are attributable mainly to increases in the projected costs of spent fuel
storage, security, and liability and property insurance. UI's 9.5% ownership
share of the increased costs would be approximately $14.25 million.
To the extent that the new estimates described above are related to spent fuel
storage, they could be affected by the outcome of an ongoing dispute between the
federal Department of Energy (DOE) and several utilities and states. Under the
Nuclear Waste Policy Act of 1982 (the Act), the DOE is required to design,
license, construct and operate a permanent repository for high-level radioactive
waste and spent nuclear fuel. The Act requires the DOE to provide for the
disposal of spent nuclear fuel and high-level waste from commercial nuclear
plants through contracts with the owners. In return for payment of established
disposal fees, the federal government was required to take title to and dispose
of the utilities' high-level waste and spent nuclear fuel beginning no later
than January 1998. After the DOE announced that its first high-level waste
repository will not be in operation earlier than 2010, several utilities and
states obtained a judicial declaration that the DOE has a statutory
responsibility to take title to and dispose of high-level waste and spent
nuclear fuel beginning in January 1998. Although the federal government now
concedes that its failure to begin disposing of high-level waste and spent
nuclear fuel in January 1998 constituted a breach of contract, it continues to
dispute that the entities with which it had contracts are entitled to damages.
The new estimates will be revised from time to time based on information
available to Connecticut Yankee regarding future costs. Prior cost estimates
have been included in Connecticut Yankee's FERC approved rates. UI expects
Connecticut Yankee to seek recovery of these increases in rate applications to
be filed in due course with the FERC, with any resulting adjustments being
charged to their respective sponsors including UI. The timing, amount and
outcome of these filings cannot be predicted at this time. UI would expect in
turn to seek recovery of its respective share of any allowed increases from
ratepayers through appropriate state and federal rate proceedings.
HYDRO-QUEBEC
UI is a participant in the Hydro-Quebec transmission intertie facility linking
New England and Quebec, Canada. UI has a 5.45% participating share in Phase I
and Phase II of this facility, which in aggregate have a maximum 2000 megawatt
equivalent generation capacity value. UI is obligated to furnish a guarantee for
its participating share of the debt financing for the Phase II facility. As of
December 31, 2002, UI's guarantee liability for this debt was approximately $4.4
million.
ENVIRONMENTAL CONCERNS
In complying with existing environmental statutes and regulations and further
developments in areas of environmental concern, including legislation and
studies in the fields of water quality, hazardous waste handling and disposal,
toxic substances, and electric and magnetic fields, UIL Holdings and its
wholly-owned direct and indirect subsidiaries may incur substantial capital
expenditures for equipment modifications and additions, monitoring equipment and
recording devices, and it may incur additional operating expenses. The total
amount of these expenditures is not now determinable. Environmental damage
claims may also arise from the operations of UIL Holdings' subsidiaries.
Significant environmental issues known to UIL Holdings at this time are
described below.
SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS
As a result of a 1992 DPUC retail rate decision, since January 1, 1993, UI had
been recovering through retail rates $1.075 million per year of environmental
remediation costs for decontaminating its demolished Steel Point Station
property in Bridgeport. As a result of the Rate Case decision dated September
26, 2002, UI will recover the remaining $3.0 million of these costs ratably
during the 2002 through 2004 time period. This reflects the remaining
- 80 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
cost of cleaning up the property, assuming a zero sales value. Final costs will
be offset by any sale price realized, and will be subject to regulatory true-up
upon disposition of the property.
Subsequent to the demolition of Steel Point Station, the adjacent East Main
Street Substation was removed at the request of the City of Bridgeport. UI will
undertake an environmental subsurface investigation of the former substation
site, but potential environmental remediation costs, if any, cannot be estimated
at this time.
Concurrent with the removal of the East Main Street Substation in 2000, the
Congress Street Substation was expanded to replace it. Of the total cost, $10.6
million is reimbursable from the City of Bridgeport. UI expects that the
receivable will be collectible from the City of Bridgeport through anticipated
redevelopment grants or similar funding by the State of Connecticut. The City of
Bridgeport has included these costs in its request to the State of Connecticut
for funding. UI is also replacing portions of the bulkhead at the Steel Point
Station property. The work is expected to cost approximately $6.4 million and is
currently expected to be completed in 2004. Such costs are expected to be
reimbursed by the City of Bridgeport.
UI is in the process of replacing the bulkhead surrounding a site, bordering the
Mill River in New Haven, that contains transmission facilities and deactivated
generation facilities, 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 has been expensed. UI expects the project to be completed
in 2003. UI has conveyed to an unaffiliated entity, Quinnipiac Energy LLC (QE),
this entire site, reserving to UI permanent easements for the operation of its
transmission facilities on the site. QE will complete the bulkhead replacement
project at UI's expense, with UI acting as the project manager. UI has also
funded 61% (approximately $1.2 million) of the estimated environmental
remediation costs that will be incurred by QE to bring the site into compliance
with applicable minimum Connecticut environmental standards. QE intends to
reactivate the generation facilities on the site as a merchant electric
generating plant.
On April 16, 1999, UI closed on the sale of its Bridgeport Harbor Station and
New Haven Harbor Station generating plants in compliance with Connecticut's
electric utility industry restructuring legislation. Environmental assessments
performed in connection with the marketing of these plants indicate that
substantial remediation expenditures will be required in order to bring the
plant sites into compliance with applicable minimum Connecticut environmental
standards. The purchaser of the plants has agreed to undertake and pay for the
remediation of the purchased properties. With respect to the portion of the New
Haven Harbor Station site that UI has retained, UI has performed an additional
environmental analysis and estimates that approximately $3.2 million in
remediation expenses will be incurred. The required remediation is virtually all
on transmission-related property; and UI accrued these estimated expenses during
the third quarter of 2002.
From 1961 to 1976, UI owned a parcel of property in Derby, Connecticut, on which
it operated an oil-fired electric generating unit. For several years, the
Connecticut Department of Environmental Protection has been remediating a
migration of fuel oil contamination from a neighboring parcel of property into
the adjacent Housatonic River. Although, based on its own investigation to date,
UI believes it has no responsibility for this contamination, if regulatory
agencies determine that UI is responsible for the cost of these remediation
activities, UI may experience substantial costs, no estimate of which is
currently available.
CLAIM OF ENRON POWER MARKETING, INC.
UI's agreement with VEPCO for standard offer generation service replaces an
earlier wholesale power agreement and other related agreements with Enron Power
Marketing, Inc. (EPMI), originally intended to supply all of the power needed to
meet UI's standard offer obligations until the end of the standard offer period
(the Agreements). Following EPMI's bankruptcy filing on December 2, 2001, UI
terminated the Agreements in accordance with their terms, effective January 1,
2002, in reliance upon provisions of the Bankruptcy Code that permit termination
of such
- 81 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
contracts. The Agreements permitted UI to calculate its gains and losses
resulting from the termination, and globally to net these gains and losses
against one another, and against any other amounts that UI owed to EPMI under
the Agreements, to arrive at a single sum. EPMI, however, commenced on
January 31, 2003 an adversary proceeding against UI and UIL Holdings in the
EPMI bankruptcy, ENRON POWER MARKETING, INC. V. THE UNITED ILLUMINATING COMPANY,
ET AL., ADVERSARY PROCEEDING NO. 03-02065 (Bankr. S.D.N.Y.). UIL Holdings was
sued as the guarantor of UI's financial obligations under the Agreements. EPMI
contends that UI was not entitled to offset, against any losses UI suffered from
the termination of the Agreements, any amounts owing to EPMI for power delivered
to UI after the date EPMI filed for bankruptcy. The amount of the allegedly
improper setoff that EPMI seeks to recover in the adversary proceeding is
approximately $8.2 million, plus interest and attorneys' fees.
CROSS-SOUND
As of December 31, 2002, UCI's 25% share of the actual project cost for the
Cross-Sound cable was $31.1 million. UCI provided a guarantee to Hydro-Quebec
for UCI's participating share of the construction costs, and UIL Holdings
provided a separate guarantee of UCI's obligation. The bulk of the project costs
had been financed through the constructor of the project. As of December 31,
2002, UCI's 25% share of the estimated total final cost of the project is $34.6
million. In December 2002, UCI provided an equity infusion of $2.9 million. In
February 2003, UCI provided an additional equity infusion of $6.9 million, and
UIL Holdings loaned the project $22.7 million to repay the constructor
financing. The guarantees described above were terminated when the constructor
financing was repaid. New guarantees of $3.8 million, in support of
Hydro-Quebec's guarantees to third parties in connection with the construction
of the project have been provided. Upon commercial operation, the UIL Holdings'
loan is expected to be refinanced with external project financing. UCI will be
responsible for 25% of any additional cost of project completion over the
estimated amount.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of UIL Holdings' financial instruments are as follows:
2002 2001
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(In Thousands) (In Thousands)
Unrestricted cash and temporary cash investments $20,568 $20,568 $29,500 $29,500
Long-term debt (1)(2)(3) $495,460 $512,297 $470,460 $475,372
(1) 2001 amounts exclude the obligation under the Seabrook Unit 1
sale/leaseback agreement.
(2) The fair value of UIL Holdings' long-term debt is estimated by investment
bankers based on market conditions at December 31, 2002 and 2001,
respectively.
(3) See Note (B), "Capitalization - Long-Term Debt."
- 82 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(L) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2002 and 2001 are set forth below:
OPERATING OPERATING NET EARNINGS PER SHARE
REVENUES INCOME INCOME OF COMMON STOCK(1)
--------- --------- ------ -------------------
(In Thousands) Basic Diluted
----- -------
2002
- ----
First Quarter $258,336 $27,973 $ 9,569 $0.68 $0.67
Second Quarter 284,288 31,488 9,140 0.64 0.64
Third Quarter 321,083 47,006 21,807 1.53 1.53
Fourth Quarter 267,315 14,859 3,431 0.24 0.24
2001
- ----
First Quarter $242,198 $28,846 $ 9,476 $0.67 $0.67
Second Quarter 262,509 36,955 15,220 1.08 1.08
Third Quarter 313,613 53,439 24,929 1.77 1.76
Fourth Quarter 267,526 25,465 9,738 0.69 0.68
--------------------
(1) Based on weighted average number of shares outstanding each quarter.
(M) SEGMENT INFORMATION
UIL Holdings has three segments, UI, its regulated electric utility business
engaged in the purchase, transmission, distribution and sale of electricity,
Xcelecom, its non-utility, indirect, wholly-owned subsidiary, which provides
specialized contracting services in the electrical, mechanical, communications
and data network infrastructure industries, and APS, its non-utility, indirect,
wholly-owned subsidiary, which provides a variety of financial products and
services, including walk-in bill payments, prepaid telephony products and
prepaid stored value cards. Revenues from inter-segment transactions are not
material. All of UIL Holdings' revenues are derived in the United States.
The following table reconciles certain segment information with that provided in
UIL Holdings' Consolidated Financial Statements. In the table, Other includes
the information for the remainder of UIL Holdings' non-utility businesses and
inter-segment eliminations.
2002 2001
---- ----
Total Assets (In Thousands)
------------
UI $1,403,283 $1,536,802
Xcelecom 195,721 180,794
APS 123,037 123,610
Other 58,770 22,725
----------------------------
Total UIL Holdings $1,780,811 $1,863,931
============================
- 83 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2002 2001 2000
---- ---- ----
Revenues from External Customers (In Thousands)
- --------------------------------
UI $727,533 $714,818 $704,691
Xcelecom 310,044 312,556 138,267
APS 93,699 58,649 37,940
Other (254) (177) (43)
--------------------------------------------
Total UIL Holdings $1,131,022 $1,085,846 $880,855
============================================
2002 2001 2000
---- ---- ----
Income (Loss) before Income Taxes (In Thousands)
- ---------------------------------
UI $96,865 $102,971 $108,039
Xcelecom 2,387 10,869 3,944
APS (3,020) (224) 3,327
Other (16,022) (6,062) (6,524)
--------------------------------------------
Total UIL Holdings $80,210 $107,554 $108,786
============================================
(N) GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 2002, and 2001, UIL Holdings maintains $76.1 million and
$63.5 million, respectively, of goodwill related to its non-utility businesses
that is no longer being amortized, and $7.8 million and $1.4 million, at
December 31, 2002 and 2001, respectively, of identifiable intangible assets that
continue to be amortized.
A summary of UIL Holdings' goodwill as of December 31, 2002 is as follows:
American
Payment
(Thousands of Dollars) Xcelecom Systems Total
----------------------------------
Balance, January 1, 2002 $56,974 $6,482 $63,456
Goodwill acquired during the year ended December 31, 2002 9,983 2,654 12,637
----------------------------------
Balance, December 31, 2002 $66,957 $9,136 $76,093
==================================
There were no impairments to the goodwill balances recognized during the year
ended December 31, 2002.
- 84 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 2002 and 2001, UIL Holdings' intangible assets and related
accumulated amortization consisted of the following:
As of December 31, 2002
-----------------------------------
Accumulated Net
(Thousands of Dollars) Gross Amortization Balance
-----------------------------------
Intangible assets subject to amortization:
Agent listing $5,577 $ 687 $4,890
Non-compete agreements 1,485 1,057 428
Backlog 256 214 42
Employee sales force 150 113 37
Trade name 100 76 24
Finder fee 200 67 133
-----------------------------------
Total $7,768 $2,214 $5,554
===================================
As of December 31, 2001
-----------------------------------
Accumulated Net
(Thousands of Dollars) Gross Amortization Balance
-----------------------------------
Intangible assets subject to amortization:
Non-compete agreements $ 640 $105 $535
Agent listing 500 209 291
Employee sales force 150 62 88
Trade name 100 42 58
-----------------------------------
Total $1,390 $418 $972
===================================
The intangible asset balance is included in Other Deferred Charges on the
Consolidated Balance Sheet.
UIL Holdings recorded amortization expense of $1.8 million for 2002 related to
these intangible assets. Assuming there are no acquisitions or dispositions that
occur in the future, the estimated amortization expense for the years 2003
through 2007 is approximately $1.8 million per year.
The elimination of goodwill amortization in 2002 increased earnings per share by
approximately $0.15 for the year, compared to 2001. For 2001 and 2000, UIL
Holdings' net income, adjusted to exclude the effect of amortization of goodwill
during those periods, was $61.8 million and $62.2 million, respectively. Basic
and diluted earnings per share for UIL Holdings, adjusted to exclude the effect
of amortization of goodwill during 2001 and 2000, were $4.39 per share and $4.42
per share, respectively.
- 85 -
PRICEWATERHOUSE COOPERS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10019-6013
Telephone (646) 471 4000
Facsimile (646) 394 5324
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Shareholders
of UIL Holdings Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of UIL Holdings Corporation and its subsidiaries (the
"Company") at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note A to the financial statements, the Company changed its
accounting for Goodwill and Other Intangible Assets.
/s/ PricewaterhouseCoopers LLP
January 27, 2003
- 86 -
PRICEWATERHOUSE COOPERS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
1301 Avenue of the Americas
New York, NY 10019-6013
Telephone (646) 471 4000
Facsimile (646) 394 5324
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and the Shareholders
of UIL Holdings Corporation:
Our audits of the consolidated financial statements referred to in our report
dated January 27, 2003 appearing in the 2002 Annual Report to Shareholders of
UIL Holdings Corporation on Form 10-K also included an audit of the financial
statement schedule in Item 14(a)(2) on page S-1 of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
January 27, 2003
- 87 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The information appearing under the captions "NOMINEES FOR ELECTION AS
DIRECTORS" AND "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in UIL
Holdings Corporation's (UIL Holdings') definitive Proxy Statement, dated April
4, 2003 for the Annual Meeting of the Shareowners to be held on May 14, 2003,
which Proxy Statement will be filed with the Securities and Exchange Commission
on or about April 4, 2003, is incorporated by reference in partial answer to
this item. See also "EXECUTIVE OFFICERS", following Part I, Item 4 herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "EXECUTIVE COMPENSATION,"
"OPTIONS/SAR GRANTS IN LAST FISCAL YEAR," "STOCK OPTION EXERCISES IN 2002 AND
YEAR-END OPTION VALUES," "RETIREMENT PLANS," "BOARD OF DIRECTORS COMPENSATION
AND EXECUTIVE DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE COMPENSATION,"
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," "DIRECTOR
COMPENSATION" and "SHAREOWNER RETURN PRESENTATION" in UIL Holdings' definitive
Proxy Statement, dated April 4, 2003, for the Annual Meeting of the Shareowners
to be held on May 14, 2003, which Proxy Statement will be filed with the
Securities and Exchange Commission on or about April 4, 2003, is incorporated by
reference in answer to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the captions "PRINCIPAL SHAREOWNERS" and "STOCK
OWNERSHIP OF DIRECTORS AND OFFICERS" in UIL Holdings' definitive Proxy
Statement, dated April 4, 2003 for the Annual Meeting of the Shareowners to be
held on May 14, 2003, which Proxy Statement will be filed with the Securities
and Exchange Commission on or about April 4, 2003, is incorporated by reference
in answer to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Under a lease agreement dated May 7, 1991, The United Illuminating Company (UI)
leased its corporate headquarters offices in New Haven from Connecticut
Financial Center Associates Limited Partnership (CFCALP). CFCALP is a limited
partnership controlled by the David T. Chase family, including Arnold L. Chase,
a Director of UIL Holdings since June 28, 1999, and members of his immediate
family. During 2002, UI's lease payments to CFCALP totaled $7.8 million.
A subsidiary of United Resources, Inc., United Capital Investments, Inc. (UCI),
invested $3.9 million in 2000 and 2001 to purchase a minority ownership interest
in Gemini Networks, Inc. (Gemini). Gemini proposes to develop, build, and
operate an open-access, hybrid fiber coaxial communications network serving
business and residential customers in the northeastern United States. Gemini is
a corporation controlled by the David T. Chase family, and Arnold L. Chase is
the President and a Director of Gemini. In June 2002, UCI wrote its investment
in Gemini down to one dollar, because the telecommunications sector had suffered
substantial losses in value, and because UCI concluded that Gemini was unlikely
to continue its network development in the absence of additional financing.
Since January 1, 2002, there has been no other transaction, relationship or
indebtedness of the kinds described in Item 404 of Regulation S-K.
- 88 -
PART IV
ITEM 14. CONTROLS AND PROCEDURES.
UIL Holdings Corporation (UIL Holdings) maintains disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in its periodic reports to the Securities and Exchange Commission (SEC) is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to UIL Holdings' management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-14(c). In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, through United Capital Investments, Inc.
and United Bridgeport Energy, Inc., UIL Holdings has minority ownership
investments in certain other entities. As UIL Holdings does not control or
manage these entities, its disclosure controls and procedures with respect to
such entities are necessarily substantially more limited than those it maintains
with respect to its subsidiaries.
Within 90 days prior to the date of this report, UIL Holdings carried out an
evaluation, under the supervision and with the participation of its management,
including its Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of UIL Holdings' disclosure controls
and procedures. Based on the foregoing, UIL Holdings' Chief Executive Officer
and Chief Financial Officer concluded that its disclosure controls and
procedures were effective.
There have been no significant changes in UIL Holdings' internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date UIL Holdings completed its evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
Financial Statements (see Item 8):
Consolidated statement of income for the years ended December 31, 2002,
2001 and 2000
Consolidated statement of comprehensive income for the years ended
December 31, 2002, 2001 and 2000
Consolidated statement of cash flows for the years ended December 31,
2002, 2001 and 2000
Consolidated balance sheet, December 31, 2002 and 2001
Consolidated statement of changes in shareholders' equity for the
years ended December 31, 2002, 2001 and 2000
Notes to consolidated financial statements
Report of independent accountants
Financial Statement Schedule (see S-1)
Schedule II - Valuation and qualifying accounts for the years ended
December 31, 2002, 2001 and 2000.
- 89 -
Exhibits:
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, certain of
the following listed exhibits, which are annexed as exhibits to previous
statements and reports filed by UIL Holdings Corporation (Commission File Number
1-5995) (UIL) and/or The United Illuminating Company (Commission File Number
1-6788) (UI), are hereby incorporated by reference as exhibits to this report.
Such statements and reports are identified by reference numbers as follows:
(1) Filed with UI and UIL Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 2000.
(2) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended
June 30, 2002.
(3) Filed with UI Registration Statement No. 33-40169, effective August 12,
1991.
(4) Filed with UI Registration Statement No. 2-57275, effective October 19,
1976.
(5) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1995.
(6) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1996.
(7) Filed with UI Registration Statement No. 2-60849, effective July 24, 1978.
(8) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1991.
(9) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended
June 30, 1997.
(10) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 2002.
(11) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 1997.
(12) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
1999.
(13) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended
June 30, 2001.
(14) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended
March 31, 1998.
(15) Filed with UI Quarterly Report (Form 10-Q) for fiscal quarter ended
June 30, 1999.
(16) Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended
September 30, 2001.
(17) Filed with UI Annual Report (Form 10-K) for fiscal year ended December 31,
2000.
- 90 -
The exhibit number in the statement or report referenced is set forth in the
parenthesis following the description of the exhibit. Those of the following
exhibits not so identified are filed herewith.
Exhibit
Table Exhibit Reference
Item No. No. No. Description
- ------- ------- --------- -----------
(3) 3.1 (1) Copy of Certificate of Incorporation of UIL Holdings Corporation, as amended through
July 20, 2000. (Exhibit 3.3)
(3) 3.2 (2) Copy of Bylaws of UIL Holdings Corporation, as amended through July 22, 2002. (Exhibit
3.2a)
(4) 4.1 (3) Copy of Indenture, dated as of August 1, 1991, from The United Illuminating Company to
The Bank of New York, Trustee. (Exhibit 4)
(10) 10.1 (4) Copy of Stockholder Agreement, dated as of July 1, 1964, among the various stockholders
of Connecticut Yankee Atomic Power Company, including The United Illuminating
Company. (Exhibit 5.1-1)
(10) 10.2a (4) Copy of Power Contract, dated as of July 1, 1964, between Connecticut Yankee Atomic Power
Company and The United Illuminating Company. (Exhibit 5.1-2)
(10) 10.2b (5) Copy of Additional Power Contract, dated as of April 30, 1984, between Connecticut Yankee
Atomic Power Company and The United Illuminating Company. (Exhibit 10.2f)
(10) 10.2c (6) Copy of 1987 Supplementary Power Contract, dated as of April 1, 1987, supplementing
Exhibits 10.2a and 10.2b. (Exhibit 10.2c)
(10) 10.2d (6) Copy of 1996 Amendatory Agreement, dated as of December 4, 1996, amending Exhibits 10.2b
and 10.2c. (Exhibit 10.2d)
(10) 10.2e (6) Copy of First Supplement to 1996 Amendatory Agreement, dated as of February 10, 1997,
supplementing Exhibit 10.2d. (Exhibit 10.2e)
(10) 10.3 (4) Copy of Capital Funds Agreement, dated as of September 1, 1964, between Connecticut
Yankee Atomic Power Company and The United Illuminating Company. (Exhibit 5.1-3)
(10) 10.4 (7) Copy of Capital Contributions Agreement, dated October 16, 1967, between The United
Illuminating Company and Connecticut Yankee Atomic Power Company. (Exhibit 5.1-5)
(10) 10.5a (7) Copy of Transmission Line Agreement, dated January 13, 1966, between the Trustees of the
Property of The New York, New Haven and Hartford Railroad Company and The United
Illuminating Company. (Exhibit 5.4)
(10) 10.5b (8) Notice, dated April 24, 1978, of The United Illuminating Company's intention to extend
term of Transmission Line Agreement dated January 13, 1966, Exhibit 10.5a. (Exhibit 10.9b)
(10) 10.5c (8) Copy of Letter Agreement, dated March 28, 1985, between The United Illuminating Company
and National Railroad Passenger Corporation, supplementing and modifying Exhibit
10.5a. (Exhibit 10.9c)
(10) 10.5d (9) Copy of Notice, dated April 22, 1997, of The United Illuminating Company's intention to
extend term of Transmission Line Agreement, Exhibit 10.5a, as supplemented and modified
by Exhibit 10.5c. (Exhibit 10.9d)
(10) 10.6a (10) Copy of Agreement and Supplemental Agreement, effective June 9, 2002, between The United
Illuminating Company and Local 470-1, Utility Workers Union of America, AFL-CIO.
(Exhibit 10.7d)
(10) 10.7a* (11) Copy of Employment Agreement, dated as of March 1, 1997, between The United Illuminating
Company and Charles J. Pepe. (Exhibit 10.31)
(10) 10.7b* (12) Copy of First Amendment to Employment Agreement between The United Illuminating Company and
Charles J. Pepe, dated as of December 13, 1999. (Exhibit 10.19b*)
- 91 -
Exhibit
Table Exhibit Reference
Item No. No. No. Description
- ------- ------- --------- -----------
(10) 10.7c* (13) Copy of Third Amendment to Employment Agreement between The United Illuminating Company
and Charles J. Pepe, dated as of June 1, 2001. (Exhibit 10.11c*)
(10) 10.8a* (14) Copy of Employment Agreement, dated as of February 23, 1998, between The United
Illuminating Company and Nathaniel D. Woodson. (Exhibit 10.28)
(10) 10.8b* (12) Copy of First Amendment to Employment Agreement between The United Illuminating Company
and Nathaniel D. Woodson, dated as of December 13, 1999. (Exhibit 10.20b*)
(10) 10.9a* (14) Copy of The United Illuminating Company Phantom Stock Option Agreement, dated as of
February 23, 1998, between The United Illuminating Company and Nathaniel D. Woodson.
(Exhibit 10.29)
(10) 10.9b* (1) Copy of First Amendment, made as of the close of business on July 20, 2000, to The United
Illuminating Company Phantom Stock Option Agreement, dated as of February 28, 1998,
between The United Illuminating Company and Nathaniel D. Woodson. (Exhibit 10.21b+)
(10) 10.10* (1) Copy of Employment Agreement, made as of June 26, 2000, between The United Illuminating
Company and Susan E. Allen. (Exhibit 10.29+)
(10) 10.11* (1) 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 Exhibits 10.7a*, 10.8a* and 10.10*. (Exhibit 10.30+)
(10) 10.12* (2) Copy of Employment Agreement, dated as of January 28, 2002, between UIL Holdings
Corporation and Richard J. Nicholas. (Exhibit 10.21+)
(10) 10.13* (2) Copy of Employment Agreement, dated as of April 22, 2002, between UIL Holdings Corporation
and Louis J. Paglia. (Exhibit 10.22+)
(10) 10.14* (2) Copy of engagement letter agreement, dated May 16, 2002, between UIL Holdings Corporation
and Robert L. Fiscus. (Exhibit 10.23+)
(10) 10.15a* (6) Copy of The United Illuminating Company 1990 Stock Option Plan, as amended on December 20,
1993, January 24, 1994 and August 22, 1994. (Exhibit 10.18*)
(10) 10.15b* (1) Copy of First Amendment to The United Illuminating Company 1990 Stock Option Plan, as
previously amended through August 22, 1994, effective immediately prior to the close of
business on July 20, 2000. (Exhibit 10.23b+)
(10) 10. 16a* (15) Copy of The United Illuminating Company 1999 Stock Option Plan. (Exhibit 10.29)
(10) 10.15c*, 10.16b* (1) Copy of Instrument of Assumption of Stock Option Plans, made as of July 21, 2000, between
UIL Holdings Corporation and The United Illuminating Company, with respect to Exhibits
10.15a*, 10.15b* and 10.16a*. (Exhibit 10.23c+ and 10.24a+)
(10) 10.17* (16) Copy of UIL Holdings Corporation Change In Control Severance Plan (As Amended and
Restated Effective September 24, 2001). (Exhibit 10.21+)
(10) 10.18* (17) Copy of Non-Employee Directors' Common Stock and Deferred Compensation Plan of UIL
Holdings Corporation, as amended through December 31, 2000. (Exhibit 10.19*)
(10) 10.19 * (1) Copy of UIL Holdings Corporation Non-Employee Directors Change in Control Severance
Plan. (Exhibit 10.32+)
(21) 20 (2) List of subsidiaries of UIL Holdings Corporation. (Exhibit 21a)
- --------------------------
*Management contract or compensatory plan or arrangement.
- 92 -
The foregoing list of exhibits does not include instruments defining the rights
of the holders of certain long-term debt of UIL Holdings Corporation and its
subsidiaries where the total amount of securities authorized to be issued under
the instrument does not exceed ten (10%) of the total assets of UIL Holdings
Corporation and its subsidiaries on a consolidated basis; and UIL Holdings
Corporation hereby agrees to furnish a copy of each such instrument to the
Securities and Exchange Commission on request.
(b) Reports on Form 8-K.
Item Financial
Reported Statements Date of Report
-------- ---------- --------------
2 None November 1, 2002
5 None November 27, 2002
5 None December 18, 2002
- 93 -
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, UIL Holdings has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UIL HOLDINGS CORPORATION
By /s/ Nathaniel D. Woodson
----------------------------------------------
Nathaniel D. Woodson
Chairman of the Board of Directors,
President and Chief Executive Officer
DATE: February 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Director, Chairman of the
Board of Directors, President
/s/ Nathaniel D. Woodson and Chief Executive Officer February 28, 2003
- -------------------------------
(Nathaniel D. Woodson)
(Principal Executive Officer)
Executive Vice President and
/s/ Louis J. Paglia Chief Financial Officer February 28, 2003
- -------------------------------
(Louis J. Paglia)
(Principal Financial and
Accounting Officer)
/s/ John F. Croweak Director February 28, 2003
- -------------------------------
(John F. Croweak)
/s/ F. Patrick McFadden, Jr. Director February 28, 2003
- -------------------------------
(F. Patrick McFadden, Jr.)
/s/ Betsy Henley-Cohn Director February 28, 2003
- -------------------------------
(Betsy Henley-Cohn)
/s/ James A. Thomas Director February 28, 2003
- -------------------------------
(James A. Thomas)
/s/ David E.A. Carson Director February 28, 2003
- -------------------------------
(David E.A. Carson)
/s/ John L. Lahey Director February 28, 2003
- -------------------------------
(John L. Lahey)
/s/ Marc C. Breslawsky Director February 28, 2003
- -------------------------------
(Marc C. Breslawsky)
- 94 -
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thelma R. Albright Director February 28, 2003
- -------------------------------
(Thelma R. Albright)
/s/ Arnold L. Chase Director February 28, 2003
- -------------------------------
(Arnold L. Chase)
/s/ Daniel J. Miglio Director February 28, 2003
- -------------------------------
(Daniel J. Miglio)
/s/ William F. Murdy Director February 28, 2003
- -------------------------------
(William F. Murdy)
- 95 -
CERTIFICATION
I, NATHANIEL D. WOODSON, certify that:
1. I have reviewed this annual report on Form 10-K of UIL Holdings Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date 02/28/2003 /s/Nathaniel D. Woodson
----------------------- ---------------------------------------
Nathaniel D. Woodson
Chairman of the Board of Directors,
President and Chief Executive Officer
- 96 -
CERTIFICATION
I, LOUIS J. PAGLIA, certify that:
1. I have reviewed this annual report on Form 10-K of UIL Holdings Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date 02/28/2003 /s/ Louis J. Paglia
----------------------- ---------------------------------------
Louis J. Paglia
Executive Vice President
and Chief Financial Officer
- 97 -
UIL HOLDINGS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
(THOUSANDS OF DOLLARS)
COL. A. COL. B. COL. C COL. D. COL. E.
------- ------- ------ ------- -------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Classification of Period Expenses Accounts Deductions of Period
---------------------------------- --------- -------- -------- ---------- ---------
RESERVE DEDUCTION FROM
ASSETS TO WHICH IT APPLIES:
Reserve for uncollectible
accounts (consolidated):
2002 $3,022 $7,189 $ - $6,086 (A) $4,125
2001 $2,569 $6,721 $ - $6,268 (A) $3,022
Reserve for uncollectible
accounts (American Payment
Systems, agent collections (B)):
2002 $353 $869 $ - $281 (A) $941
2001 $206 $545 $ - $398 (A) $353
NOTE:
(A) Accounts written off, less recoveries.
(B) Included in consolidated amounts above.
S-1