SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-15995
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
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the issuer's only class of common stock, as
of April 30, 2002, was 14,460,680.
- 1 -
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NUMBER
------
Item 1. Financial Statements...............................................3
Consolidated Statement of Income for the three months
ended March 31, 2003 and 2002...................................3
Consolidated Statement of Comprehensive Income for the
three months ended March 31, 2003 and 2002......................3
Consolidated Balance Sheet as of March 31, 2003 and
December 31, 2002...............................................4
Consolidated Statement of Cash Flows for the three
months ended March 31, 2003 and 2002............................6
Notes to Consolidated Financial Statements.........................7
- Statement of Accounting Policies.............................7
- Capitalization...............................................8
- Rate-Related Regulatory Proceedings..........................9
- Short-term Credit Arrangements..............................11
- Income Taxes................................................13
- Supplementary Information...................................14
- Commitments and Contingencies...............................15
- Other Commitments and Contingencies......................15
- Connecticut Yankee Atomic Power Company...............15
- Hydro-Quebec..........................................15
- Environmental Concerns................................16
- Site Decontamination, Demolition and Remediation
Costs..............................................16
- Claim of Enron Power Marketing, Inc...................17
- Cross-Sound Cable Company, LLC........................17
- American Payment Systems, Inc.........................17
- Segment Information.........................................18
- Goodwill and Other Intangible Assets........................19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................21
- Major Influences on Financial Condition.....................21
- UIL Holdings Corporation.................................21
- The United Illuminating Company..........................21
- American Payment Systems, Inc............................23
- Xcelecom, Inc............................................24
- United Capital Investments, Inc..........................26
- United Bridgeport Energy, Inc............................27
- Liquidity and Capital Resources.............................27
- Contractual and Contingent Obligations...................28
- Critical Accounting Policies................................28
- Results of Operations.......................................28
- Looking Forward.............................................36
Item 3. Quantitative and Qualitative Disclosure About Market Risk.........39
Item 4. Controls and Procedures...........................................39
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................40
SIGNATURES AND CERTIFICATIONS.....................................41
- 2 -
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
2003 2002
---- ----
OPERATING REVENUES (NOTE F)
Utility $ 165,292 $ 172,024
Non-utility businesses 98,337 86,311
-------------- --------------
Total Operating Revenues 263,629 258,335
-------------- --------------
OPERATING EXPENSES
Operation
Fuel and energy 66,482 63,956
Operation and maintenance 139,857 134,950
Depreciation and amortization (Note F) 27,624 19,508
Taxes - other than income taxes (Note F) 11,200 11,948
-------------- --------------
Total Operating Expenses 245,163 230,362
-------------- --------------
OPERATING INCOME 18,466 27,973
-------------- --------------
OTHER DEDUCTIONS, NET (NOTE F) (245) (209)
-------------- --------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 18,221 27,764
-------------- --------------
INTEREST CHARGES, NET
Interest on long-term debt 6,534 10,828
Interest on Seabrook Lease Obligation Bonds owned by UI - (1,542)
Other interest, net (Note F) 304 429
-------------- --------------
6,838 9,715
Amortization of debt expense and redemption premiums 309 531
-------------- --------------
Interest Charges, net 7,147 10,246
-------------- --------------
INCOME BEFORE INCOME TAXES 11,074 17,518
-------------- --------------
INCOME TAXES (NOTE E) 5,808 7,949
-------------- --------------
NET INCOME AND INCOME APPLICABLE TO COMMON STOCK $ 5,266 $ 9,569
============== ==============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,279 14,165
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,279 14,256
EARNINGS PER SHARE OF COMMON STOCK - BASIC $ 0.37 $ 0.68
EARNINGS PER SHARE OF COMMON STOCK - DILUTED $ 0.37 $ 0.67
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.72 $ 0.72
- ------------------------------------------------------------------------------------------
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Three Months Ended
March 31,
2003 2002
---- ----
NET INCOME $ 5,266 $ 9,569
OTHER COMPREHENSIVE INCOME, NET OF TAX:
UNREALIZED LOSS ON INVESTMENT - (131)
-------------- --------------
COMPREHENSIVE INCOME $ 5,266 $ 9,438
============== ==============
The accompanying Notes to Consolidated Financial Statements are an
integral part of the financial statements.
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UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
(Thousands of Dollars)
March 31, December 31,
2003 2002*
---- -----
(Unaudited)
Current Assets
Unrestricted cash and temporary cash investments $ 22,150 $ 20,568
Restricted cash 56,928 46,430
Utility accounts receivable less allowance
of $1,654 and $1,654 56,236 58,171
Other accounts receivable less allowance
of $2,972 and $2,471 105,934 94,161
Settlement assets 76,906 44,770
Unbilled revenues 34,267 38,403
Materials and supplies, at average cost 7,324 6,203
Prepayments 5,192 2,348
Other 2,807 1,105
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Total Current Assets 367,744 312,159
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Other Property and Investments
Investment in United Bridgeport Energy facility 81,689 83,677
Investment in debt securities - 25,000
Other 20,140 13,450
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Total Other Property and Investments 101,829 122,127
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Property, Plant and Equipment at original cost
In service 760,160 755,281
Less, accumulated depreciation 295,261 287,610
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464,899 467,671
Construction work in progress 56,740 49,411
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Net Property, Plant and Equipment 521,639 517,082
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Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Nuclear plant investments-above market 451,839 456,950
Income taxes due principally to book-tax differences 68,156 69,115
Long-term purchase power contracts-above market 96,196 100,379
Connecticut Yankee 32,991 33,821
Unamortized redemption costs 18,043 18,245
Other 35,373 40,804
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Total Regulatory Assets 702,598 719,314
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Deferred Charges
Goodwill - net of amortization of $4,758 and $4,758 77,683 76,093
Unamortized debt issuance expenses 5,117 4,509
Long-term receivable 10,875 10,766
Other 18,573 18,761
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Total Deferred Charges 112,248 110,129
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Total Assets $1,806,058 $1,780,811
============= =============
*Derived from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an
integral part of the financial statements.
- 4 -
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
LIABILITIES AND CAPITALIZATION
(Thousands of Dollars)
March 31, December 31,
2003 2002*
---- -----
(Unaudited)
Current Liabilities
Notes payable $ 34,273 $ 46,315
Current portion of long-term debt 100,000 100,000
Accounts payable 35,150 44,007
Settlement obligations 129,560 82,659
Dividends payable 10,281 10,275
Accrued liabilities 64,482 72,723
Deferred revenues - non-utility businesses 19,689 25,553
Taxes accrued 17,097 7,314
Interest accrued 8,720 7,457
Obligations under capital leases 15,173 473
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Total Current Liabilities 434,425 396,776
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Noncurrent Liabilities
Purchase power contract obligation 96,196 100,379
Pension accrued 49,198 44,857
Connecticut Yankee contract obligation 27,527 28,442
Long-term notes payable 14,669 14,408
Obligations under capital leases - 14,815
Other 14,900 13,680
--------------- ----------------
Total Noncurrent Liabilities 202,490 216,581
--------------- ----------------
Deferred Income Taxes (FUTURE TAX LIABILITIES OWED
TO TAXING AUTHORITIES) 232,485 225,904
--------------- ----------------
Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Accumulated deferred investment tax credits 13,053 13,201
Deferred gains on sale of property 32,937 33,130
Customer refund 6,821 6,820
Other 10,836 10,615
--------------- ----------------
Total Regulatory Liabilities 63,647 63,766
--------------- ----------------
Commitments and Contingencies (Note L)
Capitalization (Note B)
Long-term debt 395,440 395,432
Common Stock Equity
Common Stock 296,501 296,501
Paid-in capital 3,746 3,749
Capital stock expense (2,170) (2,170)
Unearned employee stock ownership plan equity (6,174) (6,411)
Other comprehensive income (loss) (26,694) (26,694)
Retained earnings 212,362 217,377
--------------- ----------------
Net Common Stock Equity 477,571 482,352
Total Capitalization 873,011 877,784
--------------- ----------------
Total Liabilities and Capitalization $1,806,058 $1,780,811
=============== ================
*Derived from audited financial statements
The accompanying Notes to Consolidated Financial Statements are an
integral part of the financial statements.
- 5 -
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Three Months Ended
March 31,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,266 $ 9,569
-------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,934 16,170
Deferred income taxes (4,177) (1,782)
Deferred investment tax credits - net (148) (107)
Amortization of nuclear fuel - 1,554
Allowance for funds used during construction (656) (677)
CTA and SBC regulatory deferral 4,074 (2,789)
Changes in:
Accounts receivable - net (9,838) 12,870
Materials and supplies (1,121) (221)
Prepayments (2,844) (1,750)
Settlements assets (32,136) (15,068)
Accounts payable (8,857) (12,160)
Interest accrued 1,263 1,943
Taxes accrued 9,783 9,060
Settlements obligations 46,901 (9,412)
Other assets and liabilities (1,535) (3,165)
-------------- --------------
Total Adjustments 18,643 (5,534)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,909 4,035
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired - (5,649)
Deferred payments in prior acquisitions (2,297) (2,976)
Plant expenditures, including nuclear fuel (12,596) (12,038)
Investment in debt securities, net 25,000 5,043
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,107 (15,620)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of common stock 236 3,932
Notes payable (11,781) (12,170)
Capital lease obligations (115) (106)
Payment of common stock dividend (10,276) (10,162)
-------------- --------------
NET CASH (USED IN) FINANCING ACTIVITIES (21,936) (18,506)
-------------- --------------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD 12,080 (30,091)
BALANCE AT BEGINNING OF PERIOD 66,998 86,096
-------------- --------------
BALANCE AT END OF PERIOD 79,078 56,005
LESS: RESTRICTED CASH 56,928 34,008
-------------- --------------
BALANCE: UNRESTRICTED CASH AND TEMPORARY CASH INVESTMENTS $22,150 $21,997
============== ==============
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $5,338 $5,976
============== ==============
Income taxes $1,100 $1,600
============== ==============
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
- 6 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(A) STATEMENT OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
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. UIL
Holdings' Consolidated Financial Statements should be read in conjunction with
the consolidated financial statements and the notes to consolidated financial
statements included in UIL Holdings' Annual Report on Form 10-K for the year
ended December 31, 2002. Such notes are supplemented below.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. Certain
information and footnote disclosures which are normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Securities and Exchange Commission
rules and regulations. UIL Holdings believes that the disclosures made are
adequate to make the information presented not misleading. The information
reflects all adjustments which, in the opinion of UIL Holdings, are necessary
for a fair presentation of the financial position and results of operations for
the interim periods set forth herein. All such adjustments are of a normal and
recurring nature. The results for the three months ended March 31, 2003 are not
necessarily indicative of the results for the entire fiscal year ending December
31, 2003.
Certain amounts previously reported have been reclassified to conform to the
current presentation.
STOCK-BASED COMPENSATION
Effective January 1, 2003, UIL Holdings adopted the fair value recognition
provisions of Statement of Financial Standards No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of SFAS No.
123, "Accounting for Stock-Based Compensation." Under this statement, UIL
Holdings will record compensation expense prospectively for stock options
granted after January 1, 2003. There were no new stock options granted during
the first quarter of 2003, and, as a result, no compensation expense was
recorded in the determination of net income during the first quarter of 2003. No
compensation expense was recorded prior to 2003 as UIL Holdings accounted for
employee stock-based compensation in accordance with Accounting Principles Board
(APB) No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS
No. 123. The following table illustrates the effect on net income and earnings
per share as if the fair value based method had been applied to all outstanding
and unvested awards in each period.
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UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
(In thousands, except
per share amounts)
Net Income, as reported $5,266 $9,569
Add: Stock-based compensation expense
included in reported net income, net of
related tax effects - -
Deduct: Total stock-based compensation
determined under fair value based method
for all stock grants, net of related tax effect (190) (95)
----------- ------------
Pro forma net income $5,076 $9,474
----------- ------------
Earnings per share:
Basis - as reported $0.37 $0.68
----------- ------------
Basis - proforma $0.36 $0.67
----------- ------------
Diluted - as reported $0.37 $0.67
----------- ------------
Diluted - proforma $0.36 $0.66
----------- ------------
On March 25, 2003, UIL Holdings granted 13,200 shares of restricted stock to
directors. The average market price on the date of grant was $34.11. Such shares
have been granted subject to approval by shareowners at the UIL Holdings Annual
Meeting on May 14, 2003.
COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2003 was equal to net
income as reported. Comprehensive income for the three months ended March 31,
2002 included an unrealized pre-tax loss of $217,158, $130,566 (after-tax), on a
convertible note held by APS.
(B) CAPITALIZATION
COMMON STOCK
UIL Holdings had 14,460,680 shares of its common stock, without par value,
outstanding at March 31, 2003, of which 181,615 shares were unallocated shares
held by UI's 401(k)/Employee Stock Ownership Plan (KSOP) and not recognized as
outstanding for accounting purposes.
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
March 31, 2003, 181,615 shares, with a fair market value of $6.3 million, had
been purchased by the KSOP and had not been committed to be released or
allocated to KSOP participants.
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
- 8 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. On March 24, 2003, the Board of Directors recommended
to the shareowners that the 1999 Stock Option Plan be amended and restated as
the UIL Holdings Corporation 1999 Amended and Restated Stock Plan (Stock Plan).
Under the Stock Plan, a maximum of 1,350,000 shares of UIL Holdings' common
stock is authorized for issuance upon exercise or granting of stock options,
stock appreciation rights (SARS), restricted stock, restricted stock units,
performance shares and other awards (collectively, Awards). No more than 200,000
shares of stock may be issued pursuant to Awards of restricted stock, restricted
stock units and performance share awards. Shareowners will vote on this amended
and restated stock plan at the UIL Holdings Annual Meeting on May 14, 2003.
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 $67.0 million were free
from such limitations at March 31, 2003.
LONG-TERM DEBT
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 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.
(C) RATE-RELATED REGULATORY PROCEEDINGS
RATE CASE
On September 26, 2002, the Connecticut Department of Public Utility Control
(DPUC) issued a final decision in UI's retail customer ratemaking (Rate Case)
proceeding. 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,
and after converting from a revenue requirements basis to stranded cost
treatment, 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% for non-transmission rate base. Earnings above the authorized
return are to be shared 50% to customers and 50% to net income, with the
customers' share divided equally between bill reductions and an accelerated
amortization of stranded costs. The Rate Case decision recognizes that the
revenue
- 9 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
requirements determination for transmission rate base, including the
applicable return on equity, is within the jurisdiction of the Federal Energy
Regulatory Commission (FERC). UI's authorized return on equity for transmission
rate base 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 March 26, 2003, the DPUC issued a decision granting UI's request to reopen
its September 2002 rate decision, to examine increased pension and
postretirement benefits expenses of UI for 2003. The March 26, 2003 decision
states that "1) there are various changed conditions that have affected the
pension related expenses of UI, 2) the underlying causes of such changed
conditions were largely beyond UI's control, and 3) the impact on UI of the
changed conditions is of a magnitude that could affect UI's financial
integrity." Hearings were held in April 2003. A final decision is currently
scheduled for May 2003. UI has filed a separate request for an accounting order
allowing it to defer the increased pension and postretirement benefits expenses
until a final decision is rendered. A decision has not yet been received on the
request for accounting ruling, and UI accordingly has fully expensed its first
quarter pension and postretirement benefits costs.
OTHER REGULATORY MATTERS
DEPARTMENT OF PUBLIC UTILITY CONTROL
UI generally has at least several regulatory proceedings open and pending at the
DPUC at any given time. Examples of such proceedings include an annual DPUC
review and reconciliation of UI's competitive transition assessment and systems
benefits charge revenues and expenses, dockets to consider specific
restructuring or electricity market issues, consideration of specific rate or
customer issues, and review of conservation programs.
TAX CREDITS RELATED TO THE SALE OF GENERATION
On March 3, 2003, the Internal Revenue Service (IRS) issued proposed regulations
that would allow electric utilities to return certain tax benefits pertaining to
divested generation assets back to customers. Specifically, these regulations
deal with accumulated deferred investment tax credits (ADITC) and excess
deferred federal income taxes (EDFIT) associated with generation assets.
UI had been previously ordered by the DPUC to seek a Private Letter Ruling (PLR)
from the IRS requesting permission to immediately flow-through to customers $3.2
million of ADITC and $0.2 million of EDFIT relating to its formerly owned
fossil-fueled generating stations. In addition to the sale of its fossil-fueled
generating stations, UI also had ADITC in the amount of $4.7 million relating to
the sale of its ownership interest in the Millstone Unit 3 nuclear generating
facility.
While the proposed regulations, as written, do allow electric utilities to
return ADITC and EDFIT to customers, the utility may do so only at the same rate
that would have been permitted if the generation assets remained public utility
property, not immediately, as had been sought in UI's PLR request.
Although the IRS has not officially responded to UI's PLR request, these
proposed regulations provide authoritative guidance with respect to the IRS'
position as to the treatment of these tax benefits. In the event the final
regulations remain in their current form, there would be no resulting material
impact on UI's earnings.
- 10 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BRIDGEPORT RESCO GENERATING FACILITY
Effective January 1, 2003, UI began selling its energy entitlement from its
long-term purchase power contract with the Bridgeport RESCO generating facility
into the New England wholesale market at market prices. To the extent that UI
receives revenue from these sales that is greater or less than the amount it
pays to Bridgeport RESCO for this energy, the difference is used to adjust the
above market portion of purchase power expense recovered through UI's
competitive transition assessment, subject to review by the DPUC. To the extent
that expenses paid for this energy exceed revenues on a cumulative basis, UI
would propose an alternative recovery mechanism to the DPUC.
WORK STOPPAGE PROCEEDING
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 conducted 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. On April 2, 2003, the DPUC issued a
final decision determining that "the quality of service provided by UI to its
customers was not impaired as a result of the work stoppage" and therefore that
no further action by the DPUC was warranted.
FEDERAL ENERGY REGULATORY COMMISSION
UI has constructed transmission facilities to connect the 330-megawatt
transmission cable, connecting Connecticut and Long Island under Long Island
Sound, owned by Cross Sound Cable Company, LLC (Cross-Sound) to the New England
Power Pool (NEPOOL) transmission grid. Cross-Sound has paid UI $2.0 million for
the construction costs. Pending clarification from the FERC of its recent order
directing UI to reclassify a portion of this construction as transmission
network upgrades, UI may be required to reimburse Cross-Sound for part or all of
the $2.0 million it received from Cross-Sound. However, if the FERC requires
such reimbursement, UI expects to recover the costs of the network upgrades
through the network transmission rate or the NEPOOL Regional Network Service
rate.
(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 March 31,
2003, UIL Holdings had no loans 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 March 31, 2003, UIL Holdings had $30 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
- 11 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
agent bank's prime interest rate or LIBOR. As of March 31, 2003, there was no
outstanding revolving working capital balance under this facility. In addition,
Xcelecom had $1.6 million of capital equipment funding that had been converted
to term notes outstanding and standby letters of credit of $6.4 million
outstanding at March 31, 2003. All borrowings outstanding under this agreement
are secured solely by assets of Xcelecom and its subsidiaries.
APS had a revolving credit agreement with a bank that expired on April 11, 2003.
This agreement provided 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. As of March 31, 2003, APS had $3.0 million in short-term borrowings
outstanding under this agreement. In addition, APS had an outstanding letter of
credit which was collaterized by $1.4 million borrowed under the APS facility at
March 31, 2003. On April 11, 2003 APS repaid all borrowings outstanding under
this agreement. The funds for such repayment were provided by UIL Holdings. APS
expects to meet its short-term capital requirements from funds from operations.
All short-term capital requirements that exceed available cash will be provided
by UIL Holdings, until APS replaces the revolving credit agreement that expired.
- 12 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(E) INCOME TAXES
Three Months Ended
March 31,
(In Thousands)
2003 2002
---- ----
Income tax expense consists of:
Income tax provisions:
Current
Federal $ 7,501 $ 7,986
State 2,632 1,852
---------------------------
Total current 10,133 9,838
---------------------------
Deferred
Federal (2,842) (1,158)
State (1,335) (624)
---------------------------
Total deferred (4,177) (1,782)
---------------------------
Investment Tax Credits (148) (107)
---------------------------
Total income tax expense $ 5,808 $ 7,949
===========================
Income tax components charged as follows:
Operating tax expense $ 5,413 $ 8,289
Nonoperating tax expense 395 (340)
---------------------------
Total income tax expense $ 5,808 $ 7,949
===========================
Legislation enacted in Connecticut on February 28, 2003 imposes a 20% surcharge
on the corporation business tax for the year 2003 only. This surcharge, which
was made retroactive to January 1, 2003, effectively increases the statutory
rate of the Connecticut corporation business tax from 7.5% to 9.0% for the year
2003. Due to this change, the combined effective federal and state income tax
rate for UIL Holdings' Connecticut-based entities will increase slightly from
39.875% to 40.85% for the year 2003.
- 13 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(F) SUPPLEMENTARY INFORMATION (UNAUDITED)
Three Months Ended
March 31,
2003 2002
---- ----
(In Thousands)
OPERATING REVENUES
- ------------------
Utility
Retail $ 149,974 $ 147,287
Wholesale 7,562 17,784
Other 7,756 6,953
Non-utility businesses
American Payment Systems 29,390 21,690
Xcelecom 68,942 64,616
Other 5 5
------------- -------------
Total Operating Revenues $ 263,629 $ 258,335
============= =============
SALES BY CLASS(MEGAWATT-HOURS)
- -----------------------------
Retail
Residential 600,633 547,349
Commercial 608,387 579,502
Industrial 226,925 236,861
Other 12,833 12,885
------------- -------------
1,448,778 1,376,597
Wholesale 114,664 554,375
------------- -------------
Total Sales by Class 1,563,442 1,930,972
============= =============
DEPRECIATION AND AMORTIZATION
- -----------------------------
Utility property, plant, and equipment $ 7,006 $ 6,927
Non-utility business property, plant and equipment 1,740 1,161
Nuclear Decommissioning - 672
------------- -------------
Total Depreciation 8,746 8,760
------------- -------------
Amortization of intangibles 655 436
Amortization of nuclear plant regulatory assets 10,601 3,026
Amortization of purchase power contracts 5,926 5,921
Amortization of other regulatory assets 1,403 1,072
Amortization of cancelled plant 293 293
------------- -------------
Total Amortization 18,878 10,748
------------- -------------
Total Depreciation and Amortization $ 27,624 $ 19,508
============= =============
TAXES - OTHER THAN INCOME TAXES
- -------------------------------
Operating:
Connecticut gross earnings $ 6,421 $ 6,423
Local real estate and personal property 2,619 3,413
Payroll taxes 2,160 2,112
------------- -------------
Total Taxes - Other than Income Taxes $ 11,200 $ 11,948
============= =============
OTHER INCOME (EXPENSE), NET
- ---------------------------
Interest income $ 242 $ 298
Allowance for funds used during construction 656 677
Equity earnings (loss) from Connecticut Yankee 85 84
Non-utility business passive income (expense) (2,146) (1,525)
Miscellaneous other income and (expense) - net 918 257
------------- -------------
Total Other Income (expense), net $ (245) $ (209)
============= =============
OTHER INTEREST, NET
- -------------------
Notes Payable $ 124 $ 103
Other 180 326
------------- -------------
Total Other Interest, net $ 304 $ 429
============= =============
- 14 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(J) COMMITMENTS AND CONTINGENCIES
OTHER COMMITMENTS AND CONTINGENCIES
CONNECTICUT YANKEE ATOMIC POWER COMPANY
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%.
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 its
customers 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
March 31, 2003, UI's guarantee liability for this debt was approximately $4.3
million.
- 15 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 the demolition and decontamination of its 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
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
adjustment upon disposition of the property. 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.
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.
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. Based
- 16 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
on its own investigation to date, UI believes it has no responsibility for this
contamination. However, 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 has an agreement for standard offer generating service with Dominion Energy
Marketing (Dominion), assignee of Virginia Electric and Power Company (VEPCO).
The Dominion/VEPCO agreement replaced 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. 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 CABLE COMPANY, LLC
As of March 31, 2003, UCI's 25% share of the actual project cost for the
Cross-Sound cable was $32.2 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 March 31, 2003,
UCI's 25% share of the estimated total final cost of the project was $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. A new guarantee 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. It is expected that any obligations of
Cross-Sound that are supported by the guarantee would be funded by capital
contributions from the guarantors in amounts in proportion to their respective
ownership shares of Cross-Sound. No liability was recorded related to the
guarantee, as the likelihood of UIL Holdings having to perform under the
guarantee is remote. 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.
AMERICAN PAYMENT SYSTEMS, INC.
Most of APS's business consists of transmitting customer payments to domestic
utilities as agent of the utilities. APS's money transmitter and stored value
businesses are subject to licensing, operating and reporting requirements
imposed by many state money transmitter laws, and its operations are subject to
examination by state regulators. These state licensing laws may impose penalties
for conducting such activities without a license. APS has applied for or
obtained licenses for its businesses in all states in which it is offering these
services and has been advised that it is required to do so.
The number and complexity of regulatory requirements have increased
significantly following passage of the USA PATRIOT ACT in October 2001, to
detect and prevent money transfers to or from terrorists and other criminals.
Federal and state regulators have revised, imposed or are considering the
imposition of a variety of implementing regulations. Among other things, APS is
required under the federal Bank Secrecy Act to make certain filings with
regulators, keep certain records, maintain an anti-money laundering compliance
program and be examined for
- 17 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
regulatory compliance. A failure to comply with such requirements could result
in sanctions, including civil or criminal penalties against APS and/or its
agents. APS has been reviewing its compliance program and its procedures are
being enhanced to meet the requirements of all applicable laws and regulations.
APS expects the trend toward additional regulation to continue and will update
its compliance program to reflect such changes as they occur.
(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.
MARCH, 31, 2003 DECEMBER 31, 2002
--------------- -----------------
Total Assets (In Thousands)
- ------------
UI $1,397,468 $1,403,283
Xcelecom 184,598 195,721
APS (Note) 172,708 123,037
Other 51,284 58,770
---------------------------------------------
Total UIL Holdings $1,806,058 $1,780,811
=============================================
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Revenues from External Customers (In Thousands)
- --------------------------------
UI $165,292 $172,024
Xcelecom 68,942 64,616
APS 29,390 21,690
Other 5 5
---------------------------------------------
Total UIL Holdings $263,629 $258,335
=============================================
Income (Loss) before Income Taxes
- ---------------------------------
UI $16,450 $25,228
Xcelecom (477) (3,604)
APS (411) (27)
Other (4,488) (4,079)
---------------------------------------------
Total UIL Holdings $11,074 $17,518
=============================================
Note: Includes settlement assets and restricted cash of $131,101 and $85,221 as
of March 31, 2003 and December 31, 2002, respectively.
- 18 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(N) GOODWILL AND OTHER INTANGIBLE ASSETS
As of March 31, 2003 and December 31, 2002, UIL Holdings maintains $77.7 million
and $76.1 million, respectively, of goodwill related to its non-utility
businesses that is no longer being amortized, and $8.9 million and $7.8 million,
at March 31, 2003 and December 31, 2002, respectively, of identifiable
intangible assets that continue to be amortized.
A summary of UIL Holdings' goodwill as of March 31, 2003 is as follows:
American
Payment
(Thousands of Dollars) Xcelecom Systems Total
----------------------------------------
Balance, January 1, 2003 $66,957 $9,136 $76,093
Goodwill acquired during the quarter
ended March 31, 2003 1,339 251 1,590
----------------------------------------
Balance, March 31, 2003 $68,296 $9,387 $77,683
========================================
There were no impairments to the goodwill balances recognized during the quarter
ended March 31, 2003.
As of March 31, 2003 and December 31, 2002, UIL Holdings' intangible assets and
related accumulated amortization consisted of the following:
As of March 31, 2003
--------------------------------------------
Accumulated Net
(Thousands of Dollars) Gross Amortization Balance
--------------------------------------------
Intangible assets subject to
amortization:
Agent listing $5,711 $1,006 $4,705
Non-compete agreements 2,445 1,341 1,104
Backlog 256 256 -
Employee sales force 150 125 25
Trade name 100 84 16
Finder fee 200 83 117
--------------------------------------------
Total $8,862 $2,895 $5,967
============================================
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
============================================
The intangible asset balance is included in Other Deferred Charges on the
Consolidated Balance Sheet.
- 19 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
UIL Holdings recorded amortization expense of $0.5 million and $0.4 million for
the three months ended March 31, 2003 and 2002, respectively 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 as follows:
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
(In Thousands)
$1,413 $1,301 $962 $962 $666
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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' and its 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 Federal Energy Regulatory Commission
(FERC) and the Connecticut Department of Public Utility Control (DPUC). The
primary factors affecting the financial results of UI are sales volume, ability
to control expenses, and regulatory policies and decisions. The two primary
factors that affect electric utility sales volume are economic conditions and
weather. The weather can also have an impact on expenses dependent on the level
of maintenance required to deal with storms or other extreme conditions. The
major expense components are (1) purchased power; (2) amortization of stranded
costs; (3) wages and benefits; (4) depreciation; and (5) interest.
On September 26, 2002, the DPUC issued a final decision in UI's retail customer
ratemaking (Rate Case) proceeding. 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 rate base. Earnings above the authorized return are to be shared
50% to customers and 50% to net income, with the customers' share divided
equally between bill reductions and an accelerated amortization of stranded
costs. The Rate Case decision recognizes that the revenue requirements
determination for transmission rate base, including the applicable return on
equity, is within the jurisdiction of the FERC. UI's authorized return on equity
for transmission rate base 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 March 26, 2003, the DPUC issued a decision granting UI's request to reopen
its September 2002 rate decision, to examine increased pension and
postretirement benefits expenses of UI for 2003. The March 26, 2003 decision
states that "1) there are various changed conditions that have affected the
pension related expenses of UI, 2) the underlying causes of such changed
conditions were largely beyond UI's control, and 3) the impact on UI of the
changed conditions is of a magnitude that could affect UI's financial
integrity." Hearings were held in April 2003. A final decision is currently
scheduled for May 2003. UI has filed a separate request for an accounting order
allowing it to defer the increased pension and postretirement benefits expenses
until a final decision is rendered. A decision has not yet been received on the
request for accounting ruling, and UI accordingly has fully expensed its first
quarter pension and postretirement benefits costs.
- 21 -
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. VEPCO assigned its obligations under
the terms of the agreement to Dominion Energy Marketing (Dominion) on February
1, 2003. 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 Dominion. The Connecticut General
Assembly, in its session that began in January 2003, is considering whether to
require electric distribution companies to provide "fully bundled" electricity,
like 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 type 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. The
outcome of the legislative process could impact earnings and cash flow.
UI's agreement with Dominion 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. 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 review 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 DPUC review during
2003, pursuant to an annual review of UI's CTA revenues and expenses, 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.
- 22 -
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.
AMERICAN PAYMENT SYSTEMS, INC.
The four 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, (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, and (4) compliance with increasingly
complex regulatory requirements applicable to its businesses. 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 costs 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. Most of APS's business consists of transmitting customer payments to
domestic utilities as agent of the utilities. APS's money transmitter and stored
value businesses are subject to licensing, operating and reporting requirements
imposed by many state money transmitter laws, and its operations are subject to
examination by state regulators. These state licensing laws may impose penalties
for conducting such activities without a license. APS has applied for or
obtained licenses for its businesses in all states in which it is offering these
services and has been advised that it is required to do so.
The number and complexity of regulatory requirements have increased
significantly following passage of the USA PATRIOT ACT in October 2001, to
detect and prevent money transfers to or from terrorists and other criminals.
Federal and state regulators have revised, imposed or are considering the
imposition of a variety of implementing regulations. Among other things, APS is
required under the federal Bank Secrecy Act to make certain filings with
regulators, keep certain records, maintain an anti-money laundering compliance
program and be examined for regulatory compliance. A failure to comply with such
requirements could result in sanctions, including civil or
- 23 -
criminal penalties against APS and/or its agents. APS has been reviewing its
compliance program and its procedures are being enhanced to meet the
requirements of all applicable laws and regulations. APS expects the trend
toward additional regulation to continue and will update its compliance program
to reflect such changes as they occur.
Other factors affecting the financial results of APS and its subsidiaries are
the pace of technological changes, competition, 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. APS intends to merge CSI with APS during the second quarter
2003. 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.
UCI's $1.0 million investment in Bill Matrix, a provider of a bill payment by
phone service, was transferred to APS during the first quarter 2003. APS also
has a joint marketing agreement with Bill Matrix.
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 $0.8
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 May 15, 2003. As part of the foreclosure, the remaining outstanding
loan balance of $2.2 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 and weather. 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)
- 24 -
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.
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 March 31, 2003 of approximately $120 million,
compared with comparable backlog, including the effects of 2002 acquisitions, of
approximately $136 million as of March 31, 2002.
- 25 -
UNITED CAPITAL INVESTMENTS, INC.
UCI's investments in venture funds 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, 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.
Currently, there is a Connecticut legislative moratorium on installing new
utility lines across Long Island Sound through June 2003. The Connecticut
General Assembly, in its session that began January 2003, is likely to enact
legislation that would impose a moratorium through June 2004. 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 depth 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 issued a decision on
April 9, 2003, determining that the moratorium applies to Cross-Sound and
denying Cross-Sound's request for a court order requiring the DEP to consider
Cross-Sound's request. On April 23, 2003, Cross-Sound filed an application for
certification with the Connecticut Supreme Court, seeking permission to appeal
the Superior Court decision. On April 30, 2003, the Connecticut Supreme Court
denied the request. Cross-Sound is currently reviewing its legal options. When
the moratorium ends, Cross-Sound expects again to request the DEP to modify the
method of achieving the required depth, or to permit the cable to operate at the
current depth while Cross-Sound works to achieve the permit depth requirements.
As of March 31, 2003, UCI's 25% share of the actual project cost for the
Cross-Sound cable was $32.2 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 March 31, 2003,
UCI's 25% share of the estimated total final cost of the project was $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. A new guarantee 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. It is expected that any obligations of
Cross-Sound that are supported by the guarantee would be funded by capital
contributions from the guarantors in amounts in proportion to their respective
ownership shares of Cross-Sound. No liability was recorded related to the
guarantee, as the
- 26 -
likelihood of UIL Holdings having to perform under the guarantee is remote. 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, new, 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 Bridgeport Energy LLC
(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."
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, UIL Holdings had $79.1 million of cash and temporary cash
investments, of which $56.9 million was restricted cash; the majority of
restricted cash was funds collected by APS's agents that had not been forwarded
to APS's clients. This represents an increase of $12.1 million from the
corresponding balance at December 31, 2002. The components of this increase,
which are detailed in the Consolidated Statement of Cash Flows, are summarized
as follows:
(In Millions)
Balance, December 31, 2002 $67.0
-------------
Net cash provided by operating activities:
Net cash provided by operating activities before net settlements 9.1
Net settlements (1) 14.8
-------------
23.9
-------------
Net cash provided by (used in) investing activities:
- - Investment in debt securities, net 25.0
- - Cash invested in plant (12.6)
- - Deferred payments in prior acquisitions (2.3)
-------------
10.1
-------------
Net cash used in financing activities:
- - Financing activities, excluding dividend payments (11.6)
- - Dividend payments (10.3)
-------------
(21.9)
Net Change in Cash 12.1
-------------
Balance, March 31, 2003 $79.1
=============
(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.
There have been no material changes in UIL Holdings' capital resources or
capital requirements from those reported in UIL Holdings' Annual Report on Form
10-K for the fiscal year ended December 31, 2002, except that APS has repaid the
$3.0 million outstanding balance under its $10 million revolving credit
agreement with a bank, and the
- 27 -
agreement was not renewed when it expired on April 11, 2003. 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 and a $35 million revolving credit agreement
that Xcelecom has with two banks, future external financing needs are expected
to be satisfied by the issuance of additional short-term and long-term debt. The
continued availability of these methods of financing will be dependent on many
factors, including conditions in the securities markets, economic conditions,
and future income and cash flow. See Item 1, "Financial Statements - Notes to
Consolidated Financial Statements - Note (B), Capitalization and Note (D),
Short-Term Credit Arrangements" for a discussion of UIL Holdings' credit
arrangements.
CONTRACTUAL AND CONTINGENT OBLIGATIONS
At March 31, 2003 there was no material change in UIL Holdings' and its
subsidiaries contractual and contingent obligations from those reported in UIL
Holdings' Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
CRITICAL ACCOUNTING POLICIES
The discussion of Results of Operations and financial condition relies on UIL
Holdings' Consolidated Financial Statements that are prepared based on certain
critical accounting policies that require management to make judgments and
estimates that are subject to varying degrees of uncertainty. UIL Holdings
believes that investors need to be aware of these policies and how they impact
UIL Holdings' financial reporting to gain a more complete understanding of UIL
Holdings' Consolidated Financial Statements as a whole, as well as UIL Holdings'
related discussion and analysis presented herein. While UIL Holdings believes
that these accounting policies are grounded on sound measurement criteria,
actual future events can and often do result in outcomes that can be materially
different from these estimates or forecasts. The accounting policies and related
risks described in UIL Holdings' Annual Report on Form 10-K for the fiscal year
ended December 31, 2002 are those that depend most heavily on these judgments
and estimates. At March 31, 2003, there have been no material changes to any of
the Critical Accounting Policies contained therein.
RESULTS OF OPERATIONS
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: FIRST QUARTER 2003 VS.
- -----------------------------------------------------------------------
PREVIOUS ESTIMATE
- -----------------
Net Income for UIL Holdings Corporation (UIL Holdings) was $5.3 million in the
first quarter of 2003, or $0.37 per share. This was higher than the $0.25-$0.35
per share range estimated in UIL Holdings' Annual Report on Form 10-K for 2002.
The improvement was due primarily to higher than expected retail sales at United
Illuminating (UI), much of which was due to colder than normal weather. The
results of UIL Holdings' non-utility businesses, under United Resources, Inc.
(URI), were within the overall range estimated for those units.
FIRST QUARTER 2003 VS. FIRST QUARTER 2002
- -----------------------------------------
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: FIRST QUARTER 2003 VS. FIRST
- -----------------------------------------------------------------------------
QUARTER 2002
- ------------
UIL Holdings' earnings for the first quarter of 2003 decreased by $4.3 million,
or $0.31 per share, compared to the first quarter of 2002. The decrease in
earnings was due to the absence of earnings from the Nuclear Division and lower
earnings at UI, partly offset by lower losses at URI. The remaining operating
assets of the Nuclear Division (Seabrook nuclear generating station) were sold
on November 1, 2002, resulting in the absence in the first quarter of 2003 of
the $0.24 per share contribution of that division in the first quarter of 2002.
The lower earnings at UI were due primarily to the impact of the Department of
Public Utility Control's (DPUC) Rate Case decision, that was rendered on
September 26, 2002 and effective on that date, and higher pension and
postretirement benefits expenses. Overall, the decision reduced UI's allowed
return on utility common equity to 10.45% from the previous allowed return on
equity of 11.5%. From the effective date to the end of 2002, the decision was
implemented entirely through additional accelerated amortization of stranded
costs. Effective January 1, 2003, the decision was implemented by an overall 3%
reduction of UI's retail rates, and accelerated amortization of stranded costs.
The
- 28 -
retail rate reduction applied to UI's Distribution Division, and was offset
only partly by increased retail sales, mostly from colder weather in the first
quarter of 2003 compared to the first quarter of 2002. The Rate Case decision
did not include provisions for significantly higher pension and postretirement
benefits expenses that were not known at the time of the proceeding. These costs
are currently being expensed by UI and are included in the first quarter of 2003
results. The DPUC has reopened UI's Rate Case as a result of the changed
conditions regarding pension and postretirement benefits expenses and is
currently reviewing UI's estimate of these costs for 2003. It is expected that a
decision on recovery of these costs will be made by the DPUC in the second
quarter of 2003. The earnings improvement at URI was due to improvements at
Xcelecom, Inc. More details are supplied below.
The table below represents a comparison of UIL Holdings' Net Income and Earnings
per Share (EPS) for the first quarter of 2003 and the first quarter of 2002.
- -----------------------------------------------------------------------------------------------------
2003 more (less) than 2002
Quarter Ended Quarter Ended ---------------------------
March 31, 2003 March 31, 2002 Amount Percent
- -----------------------------------------------------------------------------------------------------
NET INCOME (IN MILLIONS EXCEPT PERCENTS)
UI $8.5 $10.7 $(2.2) (21)%
Nuclear Division 0.0 3.5 (3.5) (100)%
United Resources (Non-Utility) (3.2) (4.6) 1.4 - -
--- --- ---
TOTAL NET INCOME FROM OPERATIONS $5.3 $9.6 $(4.3) (45)%
=== === ===
EPS FROM OPERATIONS
UI $0.60 $0.76 $(0.16) - -
Nuclear Division 0.00 0.24 (0.24) (100)%
United Resources (Non-Utility) (0.23) (0.32) 0.09 - -
---- --- ----
TOTAL EPS - BASIC $0.37 $0.68 $(0.31) (46)%
==== ==== ====
TOTAL EPS - DILUTED (NOTE A) $0.37 $0.67 $(0.30) (45)%
==== ==== ====
- -----------------------------------------------------------------------------------------------------
Note A: Reflecting the effect of unexercised dilutive stock options.
- 29 -
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 the first quarter of 2003 and the first quarter of 2002. Significant
variances are explained in the individual subsidiary sections that follow.
QUARTER QUARTER
ENDED ENDED 2003 MORE (LESS)
(IN MILLIONS - UNAUDITED) MAR. 31, 2003 MAR. 31, 2002 THAN 2002
- ------------------------- ------------- ------------- ---------
OPERATING REVENUES
UI from operations, before sharing $165.3 $158.0 $7.3
Nuclear 0.0 14.0 (14.0)
Xcelecom 68.9 64.6 4.3
APS 29.4 21.7 7.7
Minority Ownership Interest Investment and Other 0.0 0.0 0.0
---- ---- ---
TOTAL OPERATING REVENUES 263.6 258.3 5.3
===== ===== ===
FUEL AND ENERGY EXPENSES
UI 66.5 62.0 4.5
Nuclear 0.0 2.0 (2.0)
---- ---- ---
TOTAL FUEL AND ENERGY EXPENSES 66.5 64.0 2.5
==== ==== ===
OPERATION AND MAINTENANCE EXPENSES
UI 43.0 41.3 1.7
Nuclear 0.0 5.3 (5.3)
Xcelecom 67.7 66.6 1.1
APS 28.5 20.9 7.6
Minority Ownership Interest Investment and Other 0.7 0.9 (0.2)
----- ---- ---
TOTAL OPERATION AND MAINTENANCE EXPENSES 139.9 135.0 4.9
===== ===== ===
DEPRECIATION AND AMORTIZATION EXPENSES
UI 7.0 7.2 (0.2)
Nuclear 0.0 0.4 (0.4)
Xcelecom 0.9 0.6 0.3
APS 0.9 0.6 0.3
Minority Ownership Interest Investment and Other 0.0 0.0 0.0
--- --- ---
Subtotal depreciation 8.8 8.8 (0.0)
Amortization of regulatory assets (UI) 18.2 10.3 7.9
Amortization Xcelecom 0.3 0.3 0.0
Amortization APS 0.3 0.1 0.2
---- ---- ---
TOTAL DEPRECIATION AND AMORTIZATION EXPENSES 27.6 19.5 8.1
==== ==== ===
TAXES - OTHER THAN INCOME TAXES
UI - State gross earnings tax 6.4 6.4 0.0
UI - other 3.9 4.6 (0.7)
Nuclear - other 0.0 0.3 (0.3)
Xcelecom 0.6 0.4 0.2
APS 0.3 0.2 0.1
Minority Ownership Interest Investment and Other 0.0 0.0 0.0
---- ---- ---
TOTAL TAXES - OTHER THAN INCOME TAXES 11.2 11.9 (0.7)
==== ==== ===
- 30 -
QUARTER QUARTER
ENDED ENDED 2003 MORE (LESS)
(IN MILLIONS - UNAUDITED) MAR. 31, 2003 MAR. 31, 2002 THAN 2002
- ------------------------- ------------- ------------- ---------
OTHER INCOME (DEDUCTIONS)
UI 1.7 1.4 0.3
Nuclear 0.0 0.1 (0.1)
Xcelecom 0.2 0.2 0.0
APS 0.2 0.1 0.1
Minority Ownership Interest Investment and Other (2.3) (2.0) (0.3)
--- --- ---
TOTAL OTHER INCOME (DEDUCTIONS) (0.2) (0.2) 0.0
=== === ===
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
UI 21.9 27.6 (5.7)
Nuclear 0.0 6.2 (6.2)
Xcelecom (0.3) (3.1) 2.8
APS (0.4) 0.0 (0.4)
Minority Ownership Interest Investment and Other (3.0) (2.9) (0.1)
---- ---- ---
TOTAL EARNINGS BEFORE INTEREST AND TAXES (EBIT) 18.2 27.8 (9.6)
==== ==== ===
INTEREST CHARGES
UI 5.2 9.1 (3.9)
UI - Interest on Seabrook obligation bonds owned by UI 0.0 (1.5) 1.5
UI - Amortization: debt expense, redemption premiums 0.3 0.6 (0.3)
Nuclear 0.0 0.3 (0.3)
Xcelecom 0.1 0.5 (0.4)
APS 0.0 0.1 (0.1)
Minority Ownership Interest Investment and Other 1.5 1.1 0.4
--- ---- ---
TOTAL INTEREST CHARGES 7.1 10.2 (3.1)
=== ==== ===
INCOME TAXES
UI 8.0 8.7 (0.7)
Nuclear 0.0 2.3 (2.3)
Xcelecom (0.2) (1.4) 1.2
APS (0.1) (0.1) 0.0
Minority Ownership Interest Investment and Other (1.9) (1.6) (0.3)
--- --- ---
TOTAL INCOME TAXES 5.8 7.9 (2.1)
=== === ===
NET INCOME
UI 8.5 10.7 (2.2)
Nuclear 0.0 3.5 (3.5)
Xcelecom (0.3) (2.2) 1.9
APS (0.3) 0.0 (0.3)
Minority Ownership Interest Investment and Other (2.6) (2.4) (0.2)
--- --- ---
TOTAL NET INCOME $5.3 $9.6 ($4.3)
=== === ===
- 31 -
THE UNITED ILLUMINATING COMPANY RESULTS OF OPERATIONS: FIRST QUARTER OF 2003
- -----------------------------------------------------------------------------
VS. FIRST QUARTER OF 2002
- -------------------------
- ------------------------------------------------------------------------------------------------------
2002 more (less) than 2001
Quarter Ended Quarter Ended --------------------------
March 31, 2003 March 31, 2002 Amount Percent
- ------------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
UI before Nuclear Division and Sharing $0.60 $0.76 $(0.16) (21)%
Nuclear Division 0.00 0.24 (0.24) (100)%
---- ---- ------
Total UI EPS from operations $0.60 $1.00 $(0.40) (40)%
==== ==== ======
RETAIL SALES (MILLIONS OF KWH) 1,449 1,377 72 5%
- ------------------------------------------------------------------------------------------------------
UI EXCLUDING THE NUCLEAR DIVISION
Excluding the Nuclear Division, UI's net income was $8.5 million, or $0.60 per
share, in the first quarter of 2003, compared to $10.7 million, or $0.76 per
share, in the first quarter of 2002. The decrease of $0.16 per share was due to
lower revenues, resulting from the September 26, 2002 Rate Case decision, and
higher pension and postretirement benefits expenses.
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.
- 32 -
Overall, UI's revenue increased by $7.3 million, from $158.0 million in the
first quarter of 2002 to $165.3 million in the first quarter of 2003. 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, 1.8% $1.0
Estimate of operating Distribution Division component of
weather effect on retail sales, 3.4% 1.9
Impact of rate decrease and mix of sales on average price
and other (4.4)
---
TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION (1.5)
RETAIL REVENUE FROM OTHER UTILITY DIVISIONS 4.2
---
TOTAL UI RETAIL REVENUE 2.7
OTHER OPERATING REVENUE INCREASE (DECREASE)
NEPOOL transmission revenues 0.8
Other 0.0
---
TOTAL UI OTHER OPERATING REVENUES 0.8
UI WHOLESALE REVENUE 3.8
---
TOTAL UI REVENUES $7.3
===
- -------------------------------------------------------------------------------
Retail fuel and energy expense increased by $3.8 million in the first quarter of
2003, compared to the first quarter of 2002. 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. UI's financial results are not affected by its customers' selection of
alternate suppliers to provide generation services. UI's wholesale energy
expense increased by $0.7 million, but these costs are recovered from customers
through the CTA.
UI's operation and maintenance (O&M) expenses increased by $1.7 million, from
$41.3 million in the first quarter of 2002 to $43.0 million in the first quarter
of 2003. The principal components of these expense changes included:
- --------------------------------------------------------------------------------
Increase/
In Millions (Decrease)
- --------------------------------------------------------------------------------
Operating Division:
- --------------------------------------------------------------------------------
Net pension expense and postretirement benefits expenses (Note A) $4.2
Incentive Costs (1.8)
NEPOOL transmission expense 0.5
Other (1.2)
---
TOTAL OPERATING DISTRIBUTION DIVISION $1.7
NON-DISTRIBUTION O&M 0.0
---
TOTAL O&M EXPENSE $1.7
===
- --------------------------------------------------------------------------------
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,
- 33 -
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 $7.9 million, from
$10.3 million in the first quarter of 2002 to $18.2 million in the first quarter
of 2003. The principal components of these changes were:
- -------------------------------------------------------------------------------
Increase (Decrease) In Millions As Booked After-tax
- -------------------------------------------------------------------------------
AMORTIZATION OF REGULATORY ASSETS:
- -------------------------------------------------------------------------------
Accelerated amortization in Distribution Division $0.8 $0.6
Amortization in CTA and SBC 7.1 4.2
--- ---
TOTAL AMORTIZATION OF REGULATORY ASSETS $7.9 $4.8
=== ===
- -------------------------------------------------------------------------------
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 the first quarter of 2003
compared to the first quarter of 2002.
Taxes - other than income taxes decreased by $0.7 million, from $4.6 million in
the first quarter of 2002 to $3.9 million in the first quarter of 2003. The
decrease was due to the absence of Seabrook property taxes due to the sale of
Seabrook Station on November 1, 2002. Approximately 90% of these taxes were
being recovered through the CTA.
Interest charges decreased by $2.7 million, from $8.2 million in the first
quarter of 2002 to $5.5 million in the first quarter of 2003. About $1.9 million
of this decrease occurred in the Distribution Division and $0.8 million occurred
in the CTA. Overall, the decrease was due primarily to the termination of the
Seabrook lease obligation resulting from the sale of Seabrook Station on
November 1, 2002.
NUCLEAR DIVISION
The remaining operating assets of the Nuclear Division (Seabrook Station) were
sold on November 1, 2002. The Nuclear Division contributed net income of $3.5
million, or $0.24 per share in the first quarter of 2002.
UNITED RESOURCES, INC. RESULTS OF OPERATIONS: FIRST QUARTER 2003 VS.
- ---------------------------------------------------------------------
FIRST QUARTER 2002
- ------------------
- -----------------------------------------------------------------------------------------------------------
2003 more (less) than 2002
Quarter Ended Quarter Ended ---------------------------
March 31, 2003 March 31, 2002 Amount Percent
- -----------------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
Operating Businesses
American Payment Systems, Inc. (APS) $(0.02) $0.00 $(0.02) - -
Xcelecom, Inc. (Xcelecom) (0.02) (0.15) 0.13 - -
------ ------ ----
SUBTOTAL OPERATING BUSINESSES (0.04) (0.15) 0.11 - -
Minority Ownership Interest Investments
United Bridgeport Energy, Inc. (UBE) (0.11) (0.07) (0.04) - -
United Capital Investments, Inc. (UCI) (0.01) (0.03) 0.02 - -
---- ---- ----
SUBTOTAL MINORITY OWNERSHIP INTEREST
INVESTMENTS (0.12) (0.10) (0.02) - -
URI HEADQUARTERS (NOTE A) (0.07) (0.07) 0.00 - -
---- ---- ----
TOTAL NON-UTILITY EPS FROM OPERATIONS $(0.23) $(0.32) $0.09 - -
==== ==== ====
- -----------------------------------------------------------------------------------------------------------
- 34 -
Note A: Includes interest charges on intercompany and unallocated debt and
strategic and administrative costs associated with the non-utility
holding company.
Overall, the consolidated non-utility businesses operating under the parent,
URI, lost approximately $3.2 million, or $0.23 per share, in the first quarter
of 2003, compared to losses of about $4.6 million, or $0.32 per share, in the
first quarter of 2002, for an improvement of $1.4 million, or $0.09 per share.
Operating revenue for the URI businesses increased by $12.0 million, or 14%.
Expenses for the URI businesses, including losses on minority ownership interest
investments but excluding income taxes, increased by $9.3 million, and income
taxes increased by $1.3 million.
The results of each of the subsidiaries of URI for the first quarter of 2003 and
the first quarter of 2002, 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 quarterly variances by URI
subsidiary.
URI OPERATING BUSINESSES
AMERICAN PAYMENT SYSTEMS, INC.
APS lost $0.3 million, or $0.02 per share, in the first quarter of 2003,
compared to breakeven results in the first quarter of 2002. Revenues increased
by $7.7 million, to $29.4 million. Cost of Sales increased at a greater pace
than revenues increased, as much of the sales increase was in lower margin
products. Additional expenses 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 which are not yet profitable. Depreciation and
amortization expenses were also higher due to the purchase and installation of
additional field equipment and contract costs.
XCELECOM, INC.
Xcelecom lost $0.3 million, or $0.02 per share, in the first quarter of 2003,
compared to a loss of $2.2 million, or $0.15 per share in the first quarter of
2002. Revenues increased by $4.3 million including $10.3 million from an
acquisition completed in the second quarter of 2002. While revenues increased in
the systems integration business line, revenues in the construction business
line decreased, for an overall net reduction of $6.0 million. Gross margins
improved at most of Xcelecom's businesses, adding $4.3 million overall. Gross
margins would have increased by about $6.4 million, but cost overruns and slower
completion rates at some projects, partly due to severe winter weather, reduced
margins by about $2.1 million. Interest charges were reduced due to 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 $0.01 per share to Xcelecom in the first quarter of 2003,
but was offset by an earnings decrease in URI Headquarters, which received less
interest income from Xcelecom. These improvements were partly offset by higher
selling, general and administrative expenses (SG&A). SG&A expenses would have
decreased absent the acquisition mentioned above. Depreciation expenses also
increased, due primarily to the acquisition.
As with other companies in the construction and systems integration industries,
there is a very evident and continuing decline in economic activity in
Xcelecom's markets. Xcelecom is experiencing customer postponements and
cancellations of projects, a reduction in new project orders, and increased
competition for fewer jobs.
- 35 -
URI MINORITY OWNERSHIP INTEREST INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC.
UBE owns a 33 1/3% interest in Bridgeport Energy, LLC (BE). UBE lost $1.5
million, or $0.11 per share, in the first quarter of 2003, compared to a loss of
$1.0 million, or $0.07 per share in the first quarter of 2002. The $0.04 per
share decrease was due to several factors: a $0.11 reduction was due to lower
installed capability (ICAP) revenues, a $0.01 reduction was due to lower energy
revenues and higher gas prices, a $0.08 increase was due to reduced expenses,
mostly the absence of overhaul costs incurred in the first quarter of 2002.
Effective March 1, 2003, Standard Market Design was implemented by ISO New
England. This had a minimal impact on energy sales prices during the month of
March.
UNITED CAPITAL INVESTMENTS, INC.
UCI lost $0.1 million, or $0.01 per share, in the first quarter of 2003,
compared to a loss of $0.4 million, or $0.03 per share in the first quarter of
2002. The improvement was due to lower mark to market losses on minority
ownership interest investments.
In March 2003, Souwestcon Properties, Inc. completed the sale of a parcel of
land in North Haven, CT for $0.8 million. An impairment loss of $0.4 million had
been expensed in 2002 to adjust the book value to reflect the sales price.
URI HEADQUARTERS
URI Headquarters incurred an after-tax loss of $1.0 million, or $0.07 per share,
in the first quarter of 2003, compared to a loss of $1.1 million, or $0.07 per
share, in the first quarter of 2002. 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 intercompany debt and
strategic and administrative costs for the subsidiaries of URI are retained by
URI. In the first quarter of 2003 compared to the first quarter of 2002,
slightly lower administrative expenses incurred for managing investments were
offset by lower interest income from the reclassification of Xcelecom's
intercompany debt to equity, beginning in the second quarter of 2002.
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, and continued to do so in the first
quarter of 2003. 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.
- 36 -
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. The decision did not
include provision for significantly higher pension and postretirement benefits
that are now being incurred by UI. UI has filed for regulatory treatment of the
additional $15.7 million (annual) that is being recorded in 2003. The DPUC has
reopened the Rate Case for this issue and is currently reviewing UI's estimate
of these costs for 2003. Reductions of other expenses 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 Dominion/VEPCO 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.
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 Benefits Expense.
o Seabrook Disposition of Proceeds.
o Annual CTA/SBC Reconciliation. This will be the normal annual review of
accounting for the CTA.
See Item 1, "Financial Statements - 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 banking costs by converting the agents from APS-owned bank
accounts to agent-owned bank accounts, and operational efficiencies.
- 37 -
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 projects, 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.
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.
Effective March 1, 2003, Standard Market Design (SMD) was implemented by ISO New
England. This had a minimal impact on energy sales prices during the month of
March. In the longer term, the new market design is expected to benefit
Bridgeport Energy because BE is located in the southwest region of Connecticut,
which has energy supply problems due primarily to transmission congestion.
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
- 38 -
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 Actual
Quarter 2003 Range* 2003 2002
- ------- ---------- ---- ----
1 $0.25-$0.35 $0.37 $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 3. 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.
ITEM 4. 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.
- 39 -
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Table Item Exhibit
Number Number Description
---------- ------- -----------
(10) 10.16c* Copy of UIL Holdings Corporation 1999 Amended and Restated Stock
Plan.
(10) 10.20* Copy of UIL Holdings Corporation Deferred Compensation Plan, as
originally adopted effective January 27, 2003, reflecting
amendments through March 24, 2003.
(99) 99 Certification of Periodic Financial Report.
*Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
Item Financial
Reported Statements Date of Report
-------- ---------- --------------
5 None March 12, 2003
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UIL HOLDINGS CORPORATION
Date 05/09/2003 /s/ Louis J. Paglia
------------------ ----------------------------------
Louis J. Paglia
Executive Vice President
and Chief Financial Officer
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CERTIFICATION
I, NATHANIEL D. WOODSON, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UIL Holdings
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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 05/09/2003 /s/ Nathaniel D. Woodson
---------------- ------------------------------------
Nathaniel D. Woodson
Chairman of the Board of Directors,
President and Chief Executive Officer
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CERTIFICATION
I, LOUIS J. PAGLIA, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UIL Holdings
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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 05/09/2003 /s/ Louis J. Paglia
---------------- --------------------------------------
Louis J. Paglia
Executive Vice President
and Chief Financial Officer
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