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 JUNE 30, 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
The number of shares outstanding of the issuer's only class of common stock, as
of July 31, 2003, was 14,460,680.
- 1 -
INDEX
PART I. FINANCIAL INFORMATION
PAGE
NUMBER
------
Item 1. Financial Statements...............................................3
Consolidated Statement of Income for the three and six months
ended June 30, 2003 and 2002.....................................3
Consolidated Statement of Comprehensive Income for the three
and six months ended June 30, 2003 and 2002......................3
Consolidated Balance Sheet as of June 30, 2003 and
December 31, 2002................................................4
Consolidated Statement of Cash Flows for the three and six
months ended June 30, 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..............................12
- Income Taxes................................................13
- Supplementary Information...................................14
- Commitments and Contingencies...............................15
- Other Commitments and Contingencies......................15
- Connecticut Yankee Atomic Power Company...............15
- Hydro-Quebec..........................................16
- 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
- Subsequent Events...........................................20
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............................................25
- United Capital Investments, Inc..........................26
- United Bridgeport Energy, Inc............................27
- Liquidity and Capital Resources.............................28
- Contractual and Contingent Obligations...................28
- Critical Accounting Policies................................28
- Results of Operations.......................................29
- Looking Forward.............................................45
Item 3. Quantitative and Qualitative Disclosure About Market Risk.........48
Item 4. Controls and Procedures...........................................48
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...............49
Item 6. Exhibits and Reports on Form 8-K..................................50
SIGNATURES AND CERTIFICATIONS.....................................51
- 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
OPERATING REVENUES (NOTE F)
Utility $ 156,083 $ 168,471 $ 321,375 $ 340,496
Non-utility businesses 106,069 115,817 204,406 202,128
-------------- -------------- --------------- ---------------
Total Operating Revenues 262,152 284,288 525,781 542,624
-------------- -------------- --------------- ---------------
OPERATING EXPENSES
Operation
Fuel and energy 62,366 62,020 128,848 125,975
Operation and maintenance 150,742 159,165 290,599 294,116
Depreciation and amortization (Note F) 22,903 20,137 50,527 39,646
Taxes - other than income taxes (Note F) 10,626 11,478 21,826 23,426
-------------- -------------- --------------- ---------------
Total Operating Expenses 246,637 252,800 491,800 483,163
-------------- -------------- --------------- ---------------
OPERATING INCOME 15,515 31,488 33,981 59,461
-------------- -------------- --------------- ---------------
OTHER INCOME (DEDUCTIONS), NET (NOTE F) 821 (3,746) 576 (3,955)
-------------- -------------- --------------- ---------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 16,336 27,742 34,557 55,506
-------------- -------------- --------------- ---------------
INTEREST CHARGES, NET
Interest on long-term debt 6,610 10,814 13,144 21,643
Interest on Seabrook Lease Obligation Bonds owned by UI - (1,541) - (3,083)
Other interest, net (Note F) 319 553 623 982
-------------- -------------- --------------- ---------------
6,929 9,826 13,767 19,542
Amortization of debt expense and redemption premiums 316 532 625 1,063
-------------- -------------- --------------- ---------------
Interest Charges, net 7,245 10,358 14,392 20,605
-------------- -------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 9,091 17,384 20,165 34,901
-------------- -------------- --------------- ---------------
INCOME TAXES (NOTE E) 4,790 8,244 10,598 16,192
-------------- -------------- --------------- ---------------
NET INCOME AND INCOME AVAILABLE TO COMMON STOCK $ 4,301 $ 9,140 $ 9,567 $ 18,709
============== ============== =============== ===============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,286 14,253 14,283 14,209
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,302 14,324 14,290 14,290
EARNINGS PER SHARE OF COMMON STOCK - BASIC $ 0.30 $ 0.64 $ 0.67 $ 1.32
EARNINGS PER SHARE OF COMMON STOCK - DILUTED $ 0.30 $ 0.64 $ 0.67 $ 1.31
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.72 $ 0.72 $ 1.44 $ 1.44
- ------------------------------------------------------------------------------------------------------------------------------------
UIL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
NET INCOME $ 4,301 $ 9,140 $ 9,567 $ 18,709
OTHER COMPREHENSIVE INCOME, NET OF TAX:
UNREALIZED LOSS ON INVESTMENT - (388) - (519)
-------------- -------------- --------------- ---------------
COMPREHENSIVE INCOME $ 4,301 $ 8,752 $ 9,567 $ 18,190
============== ============== =============== ===============
The accompanying Notes to Consolidated Financial
Statements are an integral part of the financial statements.
- 3 -
UIL HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
(Thousands of Dollars)
June 30, December 31,
2003 2002*
---- -----
(Unaudited)
Current Assets
Unrestricted cash and temporary cash investments $ 11,035 $ 20,568
Restricted cash 48,154 46,430
Utility accounts receivable less allowance of $1,654 and $1,654 50,040 58,171
Other accounts receivable less allowance of $2,989 and $2,471 88,970 94,161
Settlement assets 70,977 44,770
Unbilled revenues 39,629 38,403
Materials and supplies, at average cost 9,055 6,203
Prepayments 2,805 2,348
Other 2,996 1,105
------------ ------------
Total Current Assets 323,661 312,159
------------ ------------
Other Property and Investments
Investment in United Bridgeport Energy facility 81,123 83,677
Investment in debt securities - 25,000
Other 20,525 13,450
------------ ------------
Total Other Property and Investments 101,648 122,127
------------ ------------
Property, Plant and Equipment at original cost
In service 774,733 755,281
Less, accumulated depreciation 302,028 287,610
------------ ------------
472,705 467,671
Construction work in progress 59,193 49,411
------------ ------------
Net Property, Plant and Equipment 531,898 517,082
------------ ------------
Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Nuclear plant investments-above market 446,728 456,950
Income taxes due principally to book-tax differences 67,189 69,115
Long-term purchase power contracts-above market 92,014 100,379
Connecticut Yankee 31,800 33,821
Unamortized redemption costs 17,840 18,245
Other 34,133 40,804
------------ ------------
Total Regulatory Assets 689,704 719,314
------------ ------------
Deferred Charges
Goodwill - net of amortization of $4,758 and $4,758 78,457 76,093
Unamortized debt issuance expenses 4,969 4,509
Long-term receivable - Cross Sound Cable Project 22,940 -
Other long-term receivables 12,958 10,766
Other 17,045 18,761
------------ ------------
Total Deferred Charges 136,369 110,129
------------ ------------
Total Assets $ 1,783,280 $ 1,780,811
============ ============
*Derived from audited financial statements
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
LIABILITIES AND CAPITALIZATION
(Thousands of Dollars)
June 30, December 31,
2003 2002*
---- -----
(Unaudited)
Current Liabilities
Notes payable $ 23,679 $ 46,315
Current portion of long-term debt 100,000 100,000
Accounts payable 33,680 44,007
Settlement obligations 113,360 82,659
Dividends payable 10,286 10,275
Accrued liabilities 73,935 72,723
Deferred revenues - non-utility businesses 20,838 25,553
Taxes accrued 10,691 7,314
Interest accrued 7,283 7,457
Obligations under capital leases 15,056 473
-------------- -------------
Total Current Liabilities 408,808 396,776
-------------- -------------
Noncurrent Liabilities
Purchase power contract obligation 92,014 100,379
Pension accrued 53,539 44,857
Connecticut Yankee contract obligation 26,465 28,442
Long-term notes payable 13,551 14,408
Obligations under capital leases - 14,815
Other 16,376 13,680
-------------- -------------
Total Noncurrent Liabilities 201,945 216,581
-------------- -------------
Deferred Income Taxes (FUTURE TAX LIABILITIES OWED
TO TAXING AUTHORITIES) 241,575 225,904
-------------- -------------
Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS
THROUGH THE RATEMAKING PROCESS)
Accumulated deferred investment tax credits 12,906 13,201
Deferred gains on sale of property 33,612 33,130
Customer refund 5,902 6,820
Other 11,057 10,615
-------------- -------------
Total Regulatory Liabilities 63,477 63,766
-------------- -------------
Commitments and Contingencies (Note L)
Capitalization (Note B)
Long-term debt 395,447 395,432
Common Stock Equity
Common Stock 296,951 296,501
Paid-in capital 3,910 3,749
Capital stock expense (2,170) (2,170)
Unearned employee stock ownership plan equity (5,936) (6,411)
Unearned compensation restricted stock (410) -
Other comprehensive income (loss) (26,694) (26,694)
Retained earnings 206,377 217,377
-------------- -------------
Net Common Stock Equity 472,028 482,352
Total Capitalization 867,475 877,784
-------------- -------------
Total Liabilities and Capitalization $ 1,783,280 $ 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----- ----- ----- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,301 $ 9,140 $ 9,567 $ 18,709
------------ ------------ ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 17,833 16,592 35,767 32,762
Deferred income taxes (907) 718 (5,084) (1,064)
Deferred investment tax credits - net (147) (107) (295) (214)
Future tax benefits (Note E) 9,100 - 19,400 -
Amortization of nuclear fuel - 1,031 - 2,585
Allowance for funds used during construction (643) (391) (1,299) (1,068)
CTA and SBC regulatory deferral (607) (2,472) 3,467 (5,261)
Changes in:
Accounts receivable - net 409 (5,272) 13,321 7,598
Materials and supplies (1,731) 826 (2,852) 605
Prepayments 2,387 2,056 (457) 306
Settlements assets 5,929 (5,534) (26,207) (20,602)
Accounts payable (1,470) 3,031 (10,327) (9,129)
Interest accrued (1,437) 5,258 (174) 7,201
Taxes accrued (6,406) (5,493) 3,377 3,567
Settlements obligations (16,200) 1,444 30,701 (7,968)
Other assets and liabilities 9,575 (9,543) (2,260) (12,708)
------------ ------------ ----------- -----------
Total Adjustments 15,685 2,144 57,078 (3,390)
------------ ------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,986 11,284 66,645 15,319
------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired - (8,200) - (13,849)
Investment in non-utility business - (2,250) - (2,250)
Loan to Cross Sound Cable Project (190) - (22,940) -
Deferred payments in prior acquisitions (460) (742) (2,757) (3,718)
Plant expenditures, including nuclear fuel (17,571) (12,063) (30,167) (24,101)
Investment in debt securities, net - - 25,000 5,043
------------ ------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (18,221) (23,255) (30,864) (38,875)
------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of common stock 441 1,676 677 5,608
Notes payable (11,697) 1,390 (23,478) (10,780)
Capital lease obligations (117) (179) (232) (285)
Payment of common stock dividend (10,281) (10,219) (20,557) (20,381)
------------ ------------ ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (21,654) (7,332) (43,590) (25,838)
------------ ------------ ----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD (19,889) (19,303) (7,809) (49,394)
BALANCE AT BEGINNING OF PERIOD 79,078 56,005 66,998 86,096
------------ ------------ ----------- -----------
BALANCE AT END OF PERIOD 59,189 36,702 59,189 36,702
LESS: RESTRICTED CASH 48,154 29,855 48,154 29,855
------------ ------------ ----------- -----------
BALANCE: UNRESTRICTED CASH AND $ 11,035 $ 6,847 $ 11,035 $ 6,847
TEMPORARY CASH INVESTMENTS ============ ============ =========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest (net of amount capitalized) $ 8,057 $ 5,990 $ 13,395 $ 11,966
============ ============ =========== ===========
Income taxes $ 1,900 $ 11,200 $ 3,000 $ 12,800
============ ============ =========== ===========
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 consolidated 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 that 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 that, 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 six months ended June 30, 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 302,000 stock options granted during
the second quarter of 2003 at an exercise price of $36.125, and, as a result,
compensation expense was recorded in the determination of net income during the
second 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.
- 7 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(A) Statement of Accounting Policies
Stock-Based Compensation
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Income, as reported $4,301 $9,140 $9,567 $18,709
Add: Stock-based compensation
expense included in reported
net income, net of related tax
effects 97 ----- 97 -----
Deduct: Total stock-based compensation
determined under fair value based
method for all stock grants, net of
related tax effect (286) (267) (476) (362)
----- ----- ----- -----
Pro forma net income $4,112 $8,873 $9,188 $18,347
------ ------ ------ -------
Earnings per share:
Basis - as reported $0.30 $0.64 $0.67 $1.32
----- ----- ----- -----
Basis - proforma $0.29 $0.62 $0.64 $1.29
----- ----- ----- -----
Diluted - as reported $0.30 $0.64 $0.67 $1.31
----- ----- ----- -----
Diluted - proforma $0.29 $0.62 $0.64 $1.28
----- ----- ----- -----
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
were approved by shareowners at the UIL Holdings Annual Meeting on May 14, 2003.
COMPREHENSIVE INCOME
Comprehensive income for the three and six months ended June 30, 2003 was equal
to net income as reported. Comprehensive income for the three and six months
ended June 30, 2002 included unrealized pre-tax losses of $645,342, ($388,012
after-tax) and $862,500, ($518,578 after-tax), respectively, 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 June 30, 2003, of which 174,630 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
- 8 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 June 30, 2003, 174,630 shares, with a fair market value of $7.1
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 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 approved the 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 $64.6 million were free
from such limitations at June 30, 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 commencing January
1, 2003. The rate reductions, approved
- 9 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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 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 CTA 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."
On June 25, 2003, the DPUC issued a decision denying, without prejudice, UI's
request for recovery of $15.5 million in increased pension and postretirement
benefits expenses. The DPUC stated that although "UI demonstrated increased
expenses related to those items, the Company's current earning at or near its
allowed return on equity indicates that no ratemaking relief is necessary at
present." On August 8, 2003, UI filed an administrative appeal from that
decision in the Connecticut Superior Court, asserting that the DPUC's decision
was contrary to law and should be reversed.
The DPUC's June 25, 2003 decision noted "that the Company may request regulatory
treatment for this specific expense in the future by filing a motion to reopen."
On July 29, 2003 UI filed a motion to reopen the docket to request recovery of
the increased pension and postretirement benefits expense on a going-forward
basis, based upon UI's earnings for the first six months of 2003 and for the
nine months since the Rate Case decision. A ruling on this motion has not been
made at this time.
SALE OF NUCLEAR GENERATION
The sale of UI's investment in Seabrook Station and the termination of the
sale/leaseback of a portion of its interest in Seabrook Unit 1 were consummated
on November 1, 2002. In compliance with the Connecticut Public Act 98-28
(Restructuring Act), the net-of-tax gain on these transactions, after adjusting
for transaction costs and sale-related costs, was used to reduce UI's stranded
costs. In UI's compliance filing with the DPUC on April 30, 2003, UI reported a
net-of-tax gain of approximately $5.0 million. This calculation is subject to
review and true-up by the DPUC with a final decision currently scheduled for
December 2003.
OTHER REGULATORY MATTERS
DEPARTMENT OF PUBLIC UTILITY CONTROL
UI generally has 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.
- 10 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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. The IRS allowed for the
submission of written comments during a public comment period ended June 2,
2003, as well as at a public hearing that was held at the IRS National Office on
June 25, 2003. In the event the final regulations remain in their current form,
there would be no resulting material impact on UI's earnings or cash flow.
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 exceed the amount it pays to Bridgeport
RESCO for this energy on a cumulative basis, the difference is used to adjust
the above market portion of purchase power expense recovered through UI's
competitive transition assessment (CTA). This methodology has been approved by
the DPUC, with all relevant data and calculations subject to review in the next
CTA reconciliation docket. To the extent that expenses paid for this energy
exceed revenues on a cumulative basis, UI would advise the DPUC and propose an
alternative recovery mechanism.
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.
- 11 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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 June 30,
2003, UIL Holdings had $2.5 million outstanding under this arrangement.
UIL Holdings has a revolving credit agreement with a group of banks that was
amended on July 31, 2002 and extended to July 29, 2004. 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 June 30, 2003, UIL
Holdings had $20.0 million in short-term borrowings outstanding under this
facility.
Xcelecom has a revolving credit agreement with two banks that expires on June
30, 2004. This agreement provides for a $35 million revolving loan facility,
available to meet working capital needs and up to $5 million in capital
equipment needs, and to support standby letters of credit issued by Xcelecom in
the normal course of its business. Capital equipment loans under this facility
can be converted to amortizing term loans with a maturity of up to four years.
This agreement also provides for the payment of interest at a rate, at the
option of Xcelecom, based on the agent bank's prime interest rate or LIBOR. As
of June 30, 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 $7.6 million outstanding at June 30, 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. 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands) (In Thousands)
Income tax expense consists of:
Income tax provisions (benefit):
Current
Federal $ 4,128 $ 6,170 $ 11,629 $ 14,155
State 1,716 1,463 4,348 3,315
---------- ---------- ---------- ---------
Total current 5,844 7,633 15,977 17,470
---------- ---------- ---------- ---------
Deferred
Federal (234) 872 (3,076) (286)
State (673) (154) (2,008) (778)
---------- ---------- ---------- ---------
Total deferred (907) 718 (5,084) (1,064)
---------- ---------- ---------- ---------
Investment tax credits (147) (107) (295) (214)
---------- ---------- ---------- ---------
Total income tax expense $ 4,790 $ 8,244 $ 10,598 $ 16,192
========== ========== ========== =========
Income tax components charged as follows:
Operating tax expense $ 5,293 $ 8,890 $ 10,706 $ 17,178
Nonoperating tax benefit (503) (646) (108) (986)
---------- ---------- ---------- ---------
Total income tax expense $ 4,790 $ 8,244 $ 10,598 $ 16,192
========== ========== ========== =========
As a result of the sale of UI's ownership and leasehold interest in Seabrook
Station and the termination of the associated Seabrook Lease Obligation on
November 1, 2002, UIL Holdings incurred a net operating loss for the year 2002
of approximately $73 million for tax purposes that was carried forward and is
being utilized in 2003. This has resulted in the realization of cash tax
benefits for the three and six months ended June 30, 2003 of $9.1 and $19.4
million, respectively.
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 statutory 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.
In addition, legislation is currently being considered by the Connecticut
legislature which would impose a 25% surcharge on the corporation business tax
for the year 2004, which would effectively increase the statutory rate from 7.5%
to 9.375% for the year 2004 only.
The effective income tax rates for the three and six months ended June 30, 2003
were 52.7% and 52.5%, respectively, as compared to 47.7% and 46.4% for the three
and six months ended June 30, 2002, respectively. The increases in the 2003
rates are due primarily to: (1) the imposition of a 20% surcharge on the
Connecticut corporation business tax for the year 2003, (2) differences in the
amounts of amortization of regulatory assets, and (3) differences in the amounts
of book depreciation in excess of non-normalized tax depreciation.
- 13 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(F) SUPPLEMENTARY INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(In Thousands) (In Thousands)
OPERATING REVENUES
- ------------------
Utility
Retail $ 143,107 $ 148,700 $ 293,081 $ 295,987
Wholesale 5,409 13,334 12,971 31,118
Other 7,567 6,437 15,323 13,391
Non-utility businesses
American Payment Systems 31,531 23,661 60,921 45,351
Xcelecom 74,532 92,152 143,474 156,768
Other 6 4 11 9
----------- ----------- ------------ ------------
Total Operating Revenues $ 262,152 $ 284,288 $ 525,781 $ 542,624
=========== =========== ============ ============
SALES BY CLASS(MEGAWATT-HOURS)
- -----------------------------
Retail
Residential 473,389 472,575 1,074,022 1,019,924
Commercial 603,725 592,700 1,212,112 1,172,202
Industrial 237,410 256,484 464,335 493,345
Other 9,640 9,695 22,473 22,580
----------- ----------- ------------ ------------
1,324,164 1,331,454 2,772,942 2,708,051
Wholesale 117,263 416,481 231,927 970,856
----------- ----------- ------------ ------------
Total Sales by Class 1,441,427 1,747,935 3,004,869 3,678,907
=========== =========== ============ ============
DEPRECIATION AND AMORTIZATION
- -----------------------------
Utility property, plant, and equipment $ 6,779 $ 6,910 $ 13,785 $ 13,837
Non-utility business property, plant and equipment 1,831 1,549 3,571 2,710
Nuclear Decommissioning - 673 - 1,345
----------- ----------- ------------ ------------
Total Depreciation 8,610 9,132 17,356 17,892
----------- ----------- ------------ ------------
Amortization of intangibles 659 510 1,314 946
Amortization of nuclear plant regulatory assets 5,923 3,277 16,524 6,239
Amortization of purchase power contracts 5,992 5,987 11,918 11,909
Amortization of other regulatory assets 1,426 938 2,829 2,074
Amortization of cancelled plant 293 293 586 586
----------- ----------- ------------ ------------
Total Amortization 14,293 11,005 33,171 21,754
----------- ----------- ------------ ------------
Total Depreciation and Amortization $ 22,903 $ 20,137 $ 50,527 $ 39,646
=========== =========== ============ ============
TAXES - OTHER THAN INCOME TAXES
- -------------------------------
Operating:
Connecticut gross earnings $ 6,095 $ 6,531 $ 12,516 $ 12,954
Local real estate, personal property and sales tax 2,668 3,174 5,287 6,587
Payroll taxes 1,863 1,773 4,023 3,885
----------- ----------- ------------ ------------
Total Taxes - Other than Income Taxes $ 10,626 $ 11,478 $ 21,826 $ 23,426
=========== =========== ============ ============
OTHER INCOME (EXPENSE), NET
- ---------------------------
Interest income $ 398 $ 430 $ 640 $ 728
Allowance for funds used during construction 643 391 1,299 1,068
Equity earnings (loss) from Connecticut Yankee 71 101 156 185
Non-utility business passive income (expense) (632) (4,149) (2,778) (5,673)
Miscellaneous other income and (expense) - net 341 (519) 1,259 (263)
----------- ----------- ------------ ------------
Total Other Income (expense), net $ 821 $ (3,746) $ 576 $ (3,955)
=========== =========== ============ ============
OTHER INTEREST, NET
- -------------------
Notes Payable $ 146 $ 106 $ 270 $ 209
Other 173 447 353 773
----------- ----------- ------------ ------------
Total Other Interest, net $ 319 $ 553 $ 623 $ 982
=========== =========== ============ ============
- 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%.
In 2002, 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 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.
On June 13, 2003, Connecticut Yankee terminated its fixed-price decommissioning
contract with Bechtel Power Corporation (Bechtel), subject to Bechtel's right to
cure various defaults in its obligations. Bechtel then filed a lawsuit in
Connecticut Superior Court against Connecticut Yankee alleging breach of
contract and other claims seeking compensatory and punitive damages. Connecticut
Yankee is considering claims against Bechtel and pursuing its rights under a $36
million performance bond. The termination became effective on July 14, 2003,
after Bechtel failed to cure its defaults. After winding up Bechtel's work,
Connecticut Yankee will perform the remaining decommissioning work. Bechtel's
defaults and the resulting termination may delay decommissioning of the
Connecticut Yankee Unit. Absent recovery from Bechtel and under the performance
bond, UI's decommissioning costs may increase.
The estimates of the cost of decommissioning the Connecticut Yankee Unit 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.
- 15 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
June 30, 2003, UI's guarantee liability for this debt was approximately $4.1
million.
ENVIRONMENTAL CONCERNS
In complying with existing environmental statutes and regulations and further
developments in areas of environmental concern, including legislation and
studies in the fields of water quality, hazardous waste handling and disposal,
toxic substances, and electric and magnetic fields, UIL Holdings and its
wholly-owned direct and indirect subsidiaries may incur substantial capital
expenditures for equipment modifications and additions, monitoring equipment and
recording devices, and it may incur additional operating expenses. The total
amount of these expenditures is not now determinable. Environmental damage
claims may also arise from the operations of UIL Holdings' subsidiaries.
Significant environmental issues known to UIL Holdings at this time are
described below.
SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS
As a result of a 1992 DPUC retail rate decision, since January 1, 1993, UI had
been recovering through retail rates $1.075 million per year of environmental
remediation costs for 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. UI
is entitled to reimbursement of these costs from the City of Bridgeport pursuant
to UI's contract with the City.
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 has
initiated arbitration proceedings to collect these funds 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. 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.
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
- 16 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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. 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.
CROSS-SOUND CABLE COMPANY, LLC
As of June 30, 2003, UCI's 25% share of the actual project cost for the
Cross-Sound Cable Company, LLC (Cross-Sound) cable was $33.4 million. UCI's 25%
share of the estimated total final cost of the project is $35.4 million. UCI
has provided an equity infusion of $9.9 million to Cross-Sound and UIL Holdings
loaned $22.7 million to Cross-Sound. In addition, a guarantee of $3.8 million,
in support of Hydro-Quebec's guarantees to third parties in connection with the
construction of the project has 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 owners, who are affiliates of 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. Absent other
developments, UCI anticipates that the cable will become operational in 2005.
Upon commercial operation, the loan from UIL Holdings 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.
- 17 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 laundering and terrorist financing. 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 criminal penalties against APS and/or
its agents. APS is continually reviewing and enhancing its compliance program to
meet the requirements of all applicable laws and regulations. At this time,
management is unable to determine the full impact compliance with such
regulatory requirements will have on APS's operations.
(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.
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Total Assets (In Thousands)
- ------------
UI $1,397,983 $1,403,283
Xcelecom 188,264 195,721
APS (Note) 160,716 123,037
Other 36,317 58,770
---------------------------------------------
Total UIL Holdings $1,783,280 $1,780,811
=============================================
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
Revenues from External Customers (In Thousands) (In Thousands)
- --------------------------------
UI $156,083 $168,471 $321,375 $340,496
Xcelecom 74,532 92,152 143,474 156,768
APS 31,532 23,660 60,921 45,351
Other 5 5 11 9
-----------------------------------------------------------------------------
Total UIL Holdings $262,152 $284,288 $525,781 $542,624
=============================================================================
Income (Loss) before Income Taxes
- ---------------------------------
UI $15,256 $22,474 $31,706 $47,701
Xcelecom (1,631) 2,621 (2,108) (983)
APS (1,121) (516) (1,532) (543)
Other (3,413) (7,195) (7,901) (11,274)
-----------------------------------------------------------------------------
Total UIL Holdings $9,091 $17,384 $20,165 $34,901
=============================================================================
Note: Includes settlement assets and restricted cash of $115,860 and
$85,221 as of June 30, 2003 and December 31, 2002, respectively.
- 18 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(N) GOODWILL AND OTHER INTANGIBLE ASSETS
As of June 30, 2003 and December 31, 2002, UIL Holdings maintains $78.5 million
and $76.1 million, respectively, of goodwill related to its non-utility
businesses that, in accordance with the Statement of Financial Accounting
Standard 142, is no longer being amortized, and $8.8 million and $7.8 million,
at June 30, 2003 and December 31, 2002, respectively, of identifiable intangible
assets that continue to be amortized.
A summary of UIL Holdings' goodwill as of June 30, 2003 is as follows:
American
(Thousands of Dollars) Xcelecom Payment Systems Total
-------------------------------------------
Balance, December 31, 2002 $66,957 $9,136 $76,093
Goodwill acquired during the six months ended June 30, 2003 2,113 251 2,364
-------------------------------------------
Balance, June 30, 2003 $69,070 $9,387 $78,457
===========================================
There were no impairments to the goodwill balances recognized during the six
months ended June 30, 2003.
As of June 30, 2003 and December 31, 2002, UIL Holdings' intangible assets and
related accumulated amortization consisted of the following:
As of June 30, 2003
-------------------------------------------------------------
(Thousands of Dollars) Gross Accumulated Amortization Net Balance
-------------------------------------------------------------
Intangible assets subject to amortization:
Agent listing $5,603 $1,312 $4,291
Non-compete agreements 2,445 1,657 788
Backlog 256 256 -
Employee sales force 150 138 12
Trade name 100 92 8
Finder fee 200 100 100
-------------------------------------------------------------
Total $8,754 $3,555 $5,199
=============================================================
As of December 31, 2002
-------------------------------------------------------------
(Thousands of Dollars) Gross Accumulated Amortization Net 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.
UIL Holdings recorded amortization expense of $1.3 million and $0.8 million for
the six months ended June 30, 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)
$1,461 $1,350 $1,010 $1,010 $714
- 19 -
UIL HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(O) SUBSEQUENT EVENTS
On July 11, 2003, three UI employees were burned while assessing work to be
performed on electrical equipment at a customer's premises, which resulted in
one fatality. The cause of the event has not yet been determined and is under
investigation. UI has notified the Occupational Safety and Health Administration
(OSHA) and the DPUC. UI cannot evaluate at this time what impact, if any, this
may have on its financial condition.
- 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."
On June 25, 2003, the DPUC issued a decision denying, without prejudice, UI's
request for recovery of $15.5 million in increased pension and postretirement
benefits expenses. The DPUC stated that although "UI demonstrated increased
expenses related to those items, the Company's current earning at or near its
allowed return on equity indicates that no ratemaking relief is necessary at
present." On August 8, 2003, UI filed an administrative
- 21 -
appeal from that decision in the Connecticut Superior Court, asserting that the
DPUC's decision was contrary to law and should be reversed.
The DPUC's June 25, 2003 decision noted "that the Company may request regulatory
treatment for this specific expense in the future by filing a motion to reopen."
On July 29, 2003 UI filed a motion to reopen the docket to request recovery of
the increased pension and postretirement benefits expense on a going-forward
basis, based upon UI's earnings for the first six months of 2003 and for the
nine months since the Rate Case decision. A ruling on this motion has not been
made at this time.
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.
In June 2003, the Connecticut General Assembly enacted Public Act 03-135,
subsequently amended in part by Public Act 03-221, to provide for electric
distribution companies to provide "transitional standard offer service,"
beginning January 1, 2004 and continuing through December 31, 2006, to each
customer who does not choose an alternate energy supplier. The 2003 legislation
also makes other changes to restructuring on a going forward basis, including a
provision for "federally mandated congestion costs" to be shown separately on
customer bills. The legislation provides that the DPUC will establish the
transitional standard offer in a contested proceeding later in 2003, with the
expected transitional standard offer price (which excludes federally mandated
congestion costs) to be not greater than 1996 price levels, taking into account
a subsequent ratemaking decision. The legislation also provides for the electric
distribution companies to recover their costs of procuring and providing
transitional standard offer service. Public Act 03-135 provides for a fee of
$0.005 per kilowatt-hour to be collected by the electric distribution company as
further compensation for the procurement of transitional standard offer supply.
Renewable energy portfolio standards will be in effect as of January 1, 2004,
pursuant to the legislation, for generation services provided to retail
customers. UI expects to include the requirement to meet these standards in a
long-term power supply agreement similar to the current agreement, consistent
with statutory requirements. The legislation will be implemented through several
DPUC proceedings, including a proceeding to establish the transitional standard
offer rates by December 15, 2003. In addition, the legislation requires that any
new rate case filings include a four-year rate plan.
At the end of July 2003, the Connecticut General Assembly enacted legislation,
now awaiting the signature of the Governor, that would provide, for the period
February 1, 2003 through July 31, 2005, for certain of the funds collected by
electric distribution companies from retail customers pursuant to Public Act
98-28 for conservation and load management programs to be transferred to the
general funds of the state. The General Assembly is also considering the
enactment of legislation that would provide that the transfer of funds would not
occur provided that the electric distribution companies securitize the
conservation and load management and renewable energy investment funds for the
two fiscal years beginning July 1, 2003 through rate reduction bonds secured by
customer revenue streams. This process would result in the state receiving the
net proceeds from the rate reduction bonds. The legislation would provide for
the collection of the companies' costs with respect to the bonds to be collected
through the competitive transition assessment on customers' bills. If
legislation were enacted similar in substance to that under consideration, UI
would intend to request a financing order from the DPUC, providing for the
issuance of rate reduction bonds, adjustment of the conservation and renewable
investment charges, and increase in the competitive transition assessment on
customers' bills. It is UI's expectation that if legislation is enacted, it
would provide that the securitization would not adversely impact the electric
distribution companies and that there would be no material impact on UI's
financial condition.
- 22 -
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 at year-end 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
2011.
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. UI expects to fund capital projects internally
through the recovery of depreciation and from amortization of stranded costs. To
the extent that the cost of future capital projects exceeds internally generated
funds, 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.
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
- 23 -
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
investigates advances in technology as part of its efforts to make improvements
in its 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 maintain a record-keeping system, and 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 laundering and terrorist financing. 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 criminal penalties against APS and/or
its agents. APS is continually reviewing and enhancing its compliance program to
meet the requirements of all applicable laws and regulations.
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 have included APS Card Services, Inc. (CSI), which was 100%
owned, and CellCards of Illinois, LLC (CCI), which is currently 51% owned. CSI
was organized by APS to market a prepaid stored value card to consumers through
the APS agent network. CSI was merged into APS on July 31, 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 assets valued
at $0.8 million, including the borrower's accounts receivable, inventory,
assignment of contracted arrangements with the borrower's retailer network, and
POSA terminals. 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 August 15, 2003. As part of the foreclosure, the remaining
- 24 -
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) 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.
- 25 -
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 June 30, 2003 of approximately $125 million,
compared with backlog, including the effects of 2002 acquisitions, of
approximately $121 million as of June 30, 2002.
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. UCI has no current plans to make additional, new,
minority ownership interest investments.
UCI also has a 25% interest in Cross-Sound Cable Company, LLC (Cross-Sound).
Cross-Sound owns and proposes to operate a 330 megawatt transmission line
(cable) connecting Connecticut and Long Island under Long Island Sound.
TransEnergieUS Ltd., the project developer and majority owner, is a Delaware
corporation and a subsidiary of TransEnergie HQ Inc., the transmission
affiliate of Hydro-Quebec (HQ). Cross-Sound has a twenty year contract with the
Long Island Power Authority for the entire capacity of the transmission line.
The 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. It is expected that the appeal will
be argued in the fall of 2003 and a decision issued by the Connecticut Supreme
Court in the first half of 2004. 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
- 26 -
navigational concerns related to operation of the cable as currently buried;
however, the DEP has indicated that under the current permit, the permit depth
must be reached before commercial operation can begin. Cross-Sound is developing
proposals for achieving the required burial depth. On June 12, 2003 Cross-Sound
submitted a new Permit Application to the DEP requesting that the DEP issue a
permit to allow Cross-Sound to operate the cable as installed in its current
location through December 31, 2007.
Moreover, a Connecticut legislative moratorium on installing new gas and
utility lines across Long Island Sound through early June 2004 has been
enacted. This moratorium has impacted the permitting process. Cross-Sound
expects the DEP to act on Cross-Sound's new Permit Application no later than
when the moratorium expires. Absent other developments, UCI anticipates that
the cable will become operational in 2005.
As of June 30, 2003, UCI's 25% share of the actual project cost for the
Cross-Sound Cable was $33.4 million. UCI's 25% share of the estimated total
final cost of the project is $35.4 million. UCI has provided an equity infusion
of $9.9 million to Cross-Sound and UIL Holdings loaned $22.7 million to
Cross-Sound. In addition, a guarantee of $3.8 million, in support of
Hydro-Quebec's guarantees to third parties in connection with the construction
of the project has 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 owners, who are affiliates of 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 loan
from UIL Holdings 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.
UNITED BRIDGEPORT ENERGY, INC.
Due to the relatively low wholesale price for both electricity and generation
capacity, and high natural gas prices during the past two years, UBE's
investment in Bridgeport Energy LLC (BE) has not produced the returns initially
anticipated. The facility is located in a transmission-constrained area and may
benefit from the implementation of standard market design changes in New
England. See "Looking Forward - United Resources, Inc. (URI) Earnings Estimates
for 2003 - URI Minority Ownership Interest Investments - United Bridgeport
Energy, Inc."
- 27 -
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, UIL Holdings had $59.2 million of cash and temporary cash
investments, of which $48.2 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 a decrease of $7.8 million from the
corresponding balance at December 31, 2002. The components of this decrease,
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 39.2
Net settlements (1) 4.5
--------------
43.7
--------------
Net cash provided by (used in) investing activities:
- - Investment in debt securities, net 25.0
- - Cash invested in plant (30.2)
- - Deferred payments in prior acquisitions (2.7)
--------------
(7.9)
--------------
Net cash used in financing activities:
- - Financing activities, excluding dividend payments (23.0)
- - Dividend payments (20.6)
--------------
(43.6)
Net Change in Cash (7.8)
--------------
Balance, June 30, 2003 $59.2
==============
(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 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
financial 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 June 30, 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
- 28 -
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 June 30, 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: SECOND QUARTER 2003 VS.
- ------------------------------------------------------------------------
PREVIOUS ESTIMATE
- -----------------
Net Income for UIL Holdings Corporation (UIL Holdings) was $4.3 million in the
second quarter of 2003, or $0.30 per share. This was lower than the $0.40-$0.50
per share range estimated in UIL Holdings' Annual Report on Form 10-K for 2002.
The unanticipated shortfall was due to lower than expected results at UIL
Holdings' non-utility businesses, under United Resources, Inc. (URI), only
partly offset by improvements at the utility, The United Illuminating Company
(UI). Non-utility results were as follows. APS reported lower than anticipated
revenues in its non-bill payment businesses, and higher expenses partly because
of slower than expected conversion of agents to their own bank accounts from
APS-owned bank accounts. Xcelecom's results were lower than expected because of
the continuing economic slowdown in the non-residential construction industry
and to an unanticipated recording of a project loss reserve. UBE reported lower
than expected results because of the continuing negative impact of high gas
prices on its sales.
SECOND QUARTER 2003 VS. SECOND QUARTER 2002
- -------------------------------------------
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: SECOND QUARTER 2003
- --------------------------------------------------------------------
VS. SECOND QUARTER 2002
- -----------------------
UIL Holdings' earnings for the second quarter of 2003 decreased by $4.8 million,
or $0.34 per share, compared to the second quarter of 2002. The decrease in
earnings was due to lower earnings at UI and URI. 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 effective on September 26, 2002, 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 retail rate reduction applied to UI's Distribution Division. UI's retail
sales decreased in the second quarter of 2003 compared to the second quarter of
2002 by 0.5 percent. This reflects decreases of 2.0 percent from milder weather
and 1.4 percent in weather corrected sales, mostly offset by the absence in 2003
of an adjustment made in the second quarter of 2002 that reduced sales by 2.9
percent in that quarter, reflecting the resolution of a station service dispute
with a generating plant owner. The Rate Case decision did not include provisions
for increases in pension and postretirement benefits expenses, $15.5 million
annually or $3.9 million per quarter of 2003, that became known after the
hearings in the Rate Case proceeding were concluded. These costs are currently
being expensed by UI and are included in the second quarter of 2003 results. The
earnings decrease at URI was due primarily to lower earnings at Xcelecom, Inc.,
which continues to be impacted by the economic slowdown in its markets, partly
offset by smaller decreases in valuations of minority ownership interest
investments. More details are supplied below.
- 29 -
The table below represents a comparison of UIL Holdings' Net Income and Earnings
per Share (EPS) for the second quarter of 2003 and the second quarter of 2002.
- ------------------------------------------------------------------------------------------------------
2003 more (less) than 2002
--------------------------
Quarter Ended Quarter Ended
June 30, 2003 June 30, 2002 Amount Percent
- ------------------------------------------------------------------------------------------------------
NET INCOME (IN MILLIONS EXCEPT PERCENTS)
UI $8.0 $12.1 $(4.1) (34)%
Nuclear Division 0.0 0.1 (0.1) (100)%
United Resources (Non-Utility) (3.7) (3.1) (0.6) - -
----- ----- -----
TOTAL NET INCOME FROM OPERATIONS $4.3 $9.1 $(4.8) (53)%
=== === ===
EPS FROM OPERATIONS
UI $0.56 $0.85 $(0.29) (34)%
Nuclear Division 0.00 0.01 (0.01) (100)%
United Resources (Non-Utility) (0.26) (0.22) (0.04) - -
----- ----- -----
TOTAL EPS - BASIC $0.30 $0.64 $(0.34) (53)%
==== ==== ====
TOTAL EPS - DILUTED (NOTE A) $0.30 $0.64 $(0.34) (53)%
==== ==== ====
- ------------------------------------------------------------------------------------------------------
Note A: Reflecting the effect of unexercised dilutive stock options.
- 30 -
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 second quarter of 2003 and the second quarter of 2002. Significant
variances are explained in the individual subsidiary sections that follow.
UIL HOLDINGS CORPORATION
SEGMENTED CONSOLIDATED INCOME STATEMENT
QUARTER ENDED QUARTER ENDED 2003 MORE (LESS)
(IN MILLIONS - UNAUDITED) JUNE 30, 2003 JUNE 30, 2002 THAN 2002
- ------------------------- ------------- ------------- ---------
OPERATING REVENUES
UI from operations, before sharing $156.1 $159.0 ($2.9)
Nuclear 0.0 9.5 (9.5)
Xcelecom 74.6 92.2 (17.6)
APS 31.6 23.7 7.9
Minority Ownership Interest Investment and Other (0.1) (0.1) 0.0
----- ----- ---
TOTAL OPERATING REVENUES 262.2 284.3 (22.1)
====== ====== ======
FUEL AND ENERGY EXPENSES
UI 62.3 60.7 1.6
Nuclear 0.0 1.3 (1.3)
---- ---- -----
TOTAL FUEL AND ENERGY EXPENSES 62.3 62.0 0.3
===== ===== ===
OPERATION AND MAINTENANCE EXPENSES
UI 44.3 40.0 4.3
Nuclear 0.0 6.7 (6.7)
Xcelecom 74.6 87.8 (13.2)
APS 30.8 23.4 7.4
Minority Ownership Interest Investment and Other 1.0 1.2 (0.2)
---- ---- -----
TOTAL OPERATION AND MAINTENANCE EXPENSES 150.7 159.1 (8.4)
====== ====== =====
DEPRECIATION AND AMORTIZATION EXPENSES
UI 6.8 7.3 (0.5)
Nuclear 0.0 0.3 (0.3)
Xcelecom 0.8 0.8 0.0
APS 0.9 0.7 0.2
Minority Ownership Interest Investment and Other 0.0 0.0 0.0
---- ---- ---
Subtotal depreciation 8.5 9.1 (0.6)
Amortization of regulatory assets (UI) 13.7 10.5 3.2
Amortization Xcelecom 0.4 0.3 0.1
Amortization APS 0.3 0.2 0.1
---- ---- ---
TOTAL DEPRECIATION AND AMORTIZATION EXPENSES 22.9 20.1 2.8
===== ===== ===
TAXES - OTHER THAN INCOME TAXES
UI - State gross earnings tax 6.1 6.6 (0.5)
UI - other 3.4 4.0 (0.6)
Nuclear - other 0.0 0.3 (0.3)
Xcelecom 0.4 0.4 0.0
APS 0.7 0.2 0.5
Minority Ownership Interest Investment and Other 0.0 0.0 0.0
---- ---- ---
TOTAL TAXES - OTHER THAN INCOME TAXES 10.6 11.5 (0.9)
===== ===== =====
- 31 -
QUARTER ENDED QUARTER ENDED 2003 MORE (LESS)
(IN MILLIONS - UNAUDITED) JUNE 30, 2003 JUNE 30, 2002 THAN 2002
- ------------------------- ------------- ------------- ---------
OTHER INCOME (DEDUCTIONS)
UI 1.3 0.2 1.1
Nuclear 0.0 (0.1) 0.1
Xcelecom 0.2 0.1 0.1
APS 0.0 0.3 (0.3)
Minority Ownership Interest Investment and Other (0.8) (4.3) 3.5
----- ----- ---
TOTAL OTHER INCOME (DEDUCTIONS) 0.7 (3.8) 4.5
==== ===== ===
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
UI 20.8 30.1 (9.3)
Nuclear 0.0 0.8 (0.8)
Xcelecom (1.4) 3.0 (4.4)
APS (1.1) (0.5) (0.6)
Minority Ownership Interest Investment and Other (1.9) (5.6) 3.7
----- ----- ---
TOTAL EARNINGS BEFORE INTEREST AND TAXES (EBIT) 16.4 27.8 (11.4)
===== ===== ======
INTEREST CHARGES
UI 5.3 9.0 (3.7)
UI - Interest on Seabrook obligation bonds owned by UI 0.0 (1.6) 1.6
UI - Amortization: debt expense, redemption premiums 0.3 0.5 (0.2)
Nuclear 0.0 0.6 (0.6)
Xcelecom 0.2 0.3 (0.1)
APS 0.0 (0.1) 0.1
Minority Ownership Interest Investment and Other 1.5 1.7 (0.2)
---- ---- -----
TOTAL INTEREST CHARGES 7.3 10.4 (3.1)
==== ===== =====
INCOME TAXES
UI 7.2 10.1 (2.9)
Nuclear 0.0 0.1 (0.1)
Xcelecom (0.6) 1.1 (1.7)
APS (0.5) (0.1) (0.4)
Minority Ownership Interest Investment and Other (1.3) (2.9) 1.6
----- ----- ---
TOTAL INCOME TAXES 4.8 8.3 (3.5)
==== ==== =====
NET INCOME
UI 8.0 12.1 (4.1)
Nuclear 0.0 0.1 (0.1)
Xcelecom (1.0) 1.6 (2.6)
APS (0.6) (0.3) (0.3)
Minority Ownership Interest Investment and Other (2.1) (4.4) 2.3
----- ----- ---
TOTAL NET INCOME $4.3 $9.1 ($4.8)
===== ===== ======
- 32 -
THE UNITED ILLUMINATING COMPANY RESULTS OF OPERATIONS: SECOND QUARTER OF 2003
- ------------------------------------------------------------------------------
VS. SECOND QUARTER OF 2002
- --------------------------
- -------------------------------------------------------------------------------------------------
2003 more (less) than 2002
--------------------------
Quarter Ended Quarter Ended
June 30, 2003 June 30, 2002 Amount Percent
- -------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
UI before Nuclear Division and Sharing $0.56 $0.85 $(0.29) (34)%
Nuclear Division 0.00 0.01 (0.01) (100)%
---- ---- ------
Total UI EPS from operations $0.56 $0.86 $(0.30) (35)%
==== ==== ======
RETAIL SALES (MILLIONS OF KWH) 1,324 1,331 (7) (0.5)%
- -------------------------------------------------------------------------------------------------
UI EXCLUDING THE NUCLEAR DIVISION
Excluding the Nuclear Division, UI's net income was $8.0 million, or $0.56 per
share, in the second quarter of 2003, compared to $12.1 million, or $0.85 per
share, in the second quarter of 2002. The decrease of $0.29 per share was due to
the results of 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, after all revenue
and expense considerations, 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
also 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.
Overall, UI's revenue decreased by $2.9 million, from $159.0 million in the
second quarter of 2002 to $156.1 million in the second quarter of 2003. Details
of this change in revenue are as follows:
- 33 -
- --------------------------------------------------------------------------------
In Millions From Operations
- --------------------------------------------------------------------------------
Revenue Increase/(Decrease)
- --------------------------------------------------------------------------------
RETAIL REVENUE FROM DISTRIBUTION DIVISION:
Estimate of operating Distribution Division component of
"weather normalized" retail sales growth, (1.4)% $(0.7)
Estimate of operating Distribution Division component of
weather effect on retail sales, (2.0)% (1.2)
Impact of rate decrease and mix of sales on average price
and other (2.9)
-----
TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION (4.8)
RETAIL REVENUE FROM OTHER UTILITY DIVISIONS (NOTE A) (0.8)
-----
TOTAL UI RETAIL REVENUE (5.6)
OTHER OPERATING REVENUE INCREASE (DECREASE)
NEPOOL transmission revenues 0.5
Other 0.7
---
TOTAL UI OTHER OPERATING REVENUES 1.2
UI WHOLESALE REVENUE 1.5
---
TOTAL UI REVENUES $(2.9)
===
- --------------------------------------------------------------------------------
Note A: Includes a 2.9% increase in electricity sales and a corresponding
$2.4 million revenue increase resulting from the absence of adjustments
made in the second quarter of 2002 resulting from the resolution
of a station service dispute with a generating plant owner.
UI's total fuel and energy expense increased by $1.6 million in the second
quarter of 2003, compared to the second quarter of 2002. Retail fuel and energy
expense increased by $2.0 million. 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
decreased by $0.4 million.
UI's operation and maintenance (O&M) expenses increased by $4.3 million, from
$40.0 million in the second quarter of 2002 to $44.3 million in the second
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) $3.7
Other 0.3
---
TOTAL OPERATING DISTRIBUTION DIVISION $4.0
NON-DISTRIBUTION O&M 0.3
---
TOTAL O&M EXPENSE $4.3
===
- --------------------------------------------------------------------------------
Note A: The increase in pension expense reflects the lower returns being
generated since approximately the beginning of 2000 by the equity
investments held by the UI pension plan, a portion of which must be
recognized immediately with the remainder deferred and amortized
over time. These returns, when combined with the lower market value
of the assets in the pension fund and the increase in projected
liabilities caused by lower discount rates, may, depending on the
actual performance of the fund, require increased cash contributions
to the pension fund in the future.
- 34 -
Amortization of regulatory assets, as booked, increased by $3.2 million, from
$10.5 million in the second quarter of 2002 to $13.7 million in the second
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 2.4 1.4
--- ---
TOTAL AMORTIZATION OF REGULATORY ASSETS $3.2 $2.0
=== ===
- --------------------------------------------------------------------------------
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 income increased by $1.1 million in the second quarter of 2003 compared to
the second quarter of 2002 due to improvement in the market value of
investments.
Taxes - other than income taxes decreased by $0.6 million, from $4.0 million in
the second quarter of 2002 to $3.4 million in the second 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 $2.4 million, from $8.0 million in the second
quarter of 2002 to $5.6 million in the second quarter of 2003. About $1.5
million of this decrease occurred in the Distribution Division and $0.9 million
occurred in the CTA. Overall, the decrease was due primarily to the redemption
of the Seabrook lease obligation bonds in connection with the sale of UI's
interest in 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 only
$0.1 million, or $0.01 per share in the second quarter of 2002 due to an outage
in that quarter.
UNITED RESOURCES, INC. RESULTS OF OPERATIONS: SECOND QUARTER 2003 VS.
- ----------------------------------------------------------------------
SECOND QUARTER 2002
- -------------------
- -------------------------------------------------------------------------------------------------
2003 more (less)
Quarter Ended Quarter ended than 2002
----------------
June 30, 2003 June 30, 2002 Amount
- -------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
Operating Businesses
American Payment Systems, Inc. (APS) $(0.05) $(0.02) $(0.03)
Xcelecom, Inc. (Xcelecom) (0.07) 0.11 (0.18)
------ ---- ------
SUBTOTAL OPERATING BUSINESSES (0.12) 0.09 (0.21)
Minority Ownership Interest Investments
United Bridgeport Energy, Inc. (UBE) (0.04) (0.03) (0.01)
United Capital Investments, Inc. (UCI) (0.01) (0.18) 0.17
---- ---- ----
SUBTOTAL MINORITY OWNERSHIP INTEREST
INVESTMENTS (0.05) (0.21) 0.16
URI HEADQUARTERS (NOTE A) (0.09) (0.10) 0.01
---- ---- ----
TOTAL NON-UTILITY EPS FROM OPERATIONS $(0.26) $(0.22) $(0.04)
==== ===== =====
- -------------------------------------------------------------------------------------------------
Note A: Includes interest charges on intercompany and unallocated debt and
strategic and administrative costs associated with the non-utility
holding company.
- 35 -
Overall, the consolidated non-utility businesses operating under the parent,
URI, lost approximately $3.7 million, or $0.26 per share, in the second quarter
of 2003, compared to losses of about $3.1 million, or $0.22 per share, in the
second quarter of 2002, for a decrease of $0.6 million, or $0.04 per share.
Operating revenue for the URI businesses decreased by $9.7 million, or 8%.
Expenses for the URI businesses, including losses on minority ownership interest
investments but excluding income taxes, decreased by $8.7 million, and income
taxes decreased by $0.4 million.
The results of each of the subsidiaries of URI for the second quarter of 2003
and the second 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, UCI and Xcelecom, and 30% equity and 70% debt for UBE. URI absorbs
interest charges on the equity portion of its investments in its subsidiaries to
the extent those investments are financed with debt. URI may incur other
expenses necessary to manage its investments from time to time.
The following is a detailed explanation of the quarterly variances by URI
subsidiary.
URI OPERATING BUSINESSES
AMERICAN PAYMENT SYSTEMS, INC.
APS lost $0.6 million, or $0.05 per share, in the second quarter of 2003,
compared to a loss of $0.3 million, or $0.02 per share, in the second quarter of
2002. Revenues increased by $7.9 million, to $31.6 million, reflecting gains in
both the bill payment business and in the sale of other products and services.
Cost of Sales increased, and additional administrative expenses were incurred
for legal services to meet increased regulatory compliance requirements in APS'
lines of business, and 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. These cost increases, and an increase in
depreciation and amortization expenses, which were higher due to the purchase
and installation of additional field equipment and contract costs, more than
offset the revenue gains.
XCELECOM, INC.
Xcelecom lost $0.07 per share in the second quarter of 2003, compared to
earnings of $0.11 per share in the second quarter of 2002. Margin degradation
and the necessity to record a loss reserve relating to a project at one Xcelecom
subsidiary reduced earnings by about $0.08 per share from levels that would have
otherwise been recorded. As with other companies in the non-residential
construction industry, there continues to be a very evident decline in economic
activity in Xcelecom's markets. Xcelecom is experiencing a continuation of
customer postponements and cancellations of projects, a reduction in new project
orders, and increased competition for fewer jobs, resulting in both lower demand
and lower margins. These general economic factors reduced earnings by $.05 per
share from levels in the second quarter of 2002. Additionally, the completion of
two large, profitable, non-recurring contracts in 2002 that have not been
replaced in 2003 has resulted in an earnings decline of $0.08 per share. These
decreases were partly offset by improved performance in the systems integration
segment, which added about $0.03 in the second quarter of 2003 compared to the
second quarter of 2002.
URI MINORITY OWNERSHIP INTEREST INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC.
UBE owns a 33 1/3% interest in Bridgeport Energy, LLC (BE). UBE lost $0.7
million, or $0.05 per share, in the second quarter of 2003, compared to a loss
of $0.4 million, or $0.03 per share in the second quarter of 2002. The $0.02 per
share decrease was due to two major factors: a $0.08 per share reduction was due
to lower installed capability (ICAP) revenues, and a $0.06 per share increase
was due to reduced expenses, mostly the absence of overhaul costs incurred in
the second 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 second
quarter of 2003.
- 36 -
UNITED CAPITAL INVESTMENTS, INC.
UCI lost $0.1 million, or $0.01 per share, in the second quarter of 2003,
compared to a loss of $2.6 million, or $0.18 per share in the second quarter of
2002. The improvement was due to the absence of a $0.16 per share impairment
loss recorded in the second quarter of 2002, and the remainder was due to
smaller decreases in valuations of minority ownership interest investments.
URI HEADQUARTERS
URI Headquarters incurred unallocated expenses of $1.3 million, after-tax, or
$0.08 per share, in the second quarter of 2003, compared to unallocated expenses
of $1.4 million, after-tax, or $0.10 per share, in the second 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.
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: FIRST SIX MONTHS 2003 ACTUAL
- -----------------------------------------------------------------------------
EARNINGS VS. PREVIOUS ESTIMATE
- ------------------------------
Net Income for UIL Holdings Corporation (UIL Holdings) was $9.6 million in the
first six months of 2003, or $0.67 per share. This was slightly above the sum of
the low-end earnings estimates for the first two quarters estimated in UIL
Holdings' Annual Report on Form 10-K for 2002, but was negatively impacted by
the results of the second quarter.
FIRST SIX MONTHS 2003 VS. FIRST SIX MONTHS 2002
- -----------------------------------------------
UIL HOLDINGS CORPORATION RESULTS OF OPERATIONS: FIRST SIX MONTHS 2003 VS.
- --------------------------------------------------------------------------
FIRST SIX MONTHS 2002
- ---------------------
UIL Holdings' earnings for the first six months of 2003 decreased by $9.1
million, or $0.65 per share, compared to the first six months 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
six months of 2003 of the $0.25 per share contribution of that division in the
first six months of 2002. The lower earnings at UI were due primarily to the
impact of the DPUC Rate Case decision, that was effective on September 26, 2002,
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 retail rate reduction applied to UI's
Distribution Division. Partly offsetting these impacts, UI's retail sales
increased in the first six months of 2003 compared to the first six months of
2002 by 2.4 percent. This reflects increases of 0.7 percent from colder weather
in the first quarter, 0.3 percent in weather corrected sales, and the absence in
2003 of an adjustment made in the first six months of 2002 that reduced sales by
1.4 percent in that period, reflecting the resolution of a station service
dispute with a generating plant owner. The Rate Case decision did not include
provisions for increases in pension and postretirement benefits expenses, $15.5
million annually or $7.8 million for six months, that became known after the
hearings in the Rate Case proceeding were concluded. These costs are currently
being expensed by UI and are included in the first six months of 2003 results.
The earnings improvement at URI was due to smaller decreases in valuations of
minority ownership interest investments, that more than offset decreased
earnings at its operating businesses. Xcelecom continues to be impacted by the
economic slowdown in its markets, and APS' earnings decreased due to higher
expenses. More details are supplied below.
- 37 -
The table below represents a comparison of UIL Holdings' Net Income and Earnings
per Share (EPS) for the first six months of 2003 and the first six months of
2002.
- ----------------------------------------------------------------------------------------------------
Six Months Six Months 2003 more (less) than 2002
---------------------------
Ended Ended
June 30, 2003 June 30, 2002 Amount Percent
- ----------------------------------------------------------------------------------------------------
NET INCOME (IN MILLIONS EXCEPT PERCENTS)
UI $16.5 $22.8 $(6.3) (28)%
Nuclear Division 0.0 3.6 (3.6) (100)%
United Resources (Non-Utility) (6.9) (7.7) 0.8 - -
----- ----- ----
TOTAL NET INCOME FROM OPERATIONS $9.6 $18.7 $(9.1) (49)%
=== ==== ===
EPS FROM OPERATIONS
UI $1.16 $1.61 $(0.45) (28)%
Nuclear Division 0.00 0.25 (0.25) (100)%
United Resources (Non-Utility) (0.49) (0.54) 0.05 - -
------ ------ ----
TOTAL EPS - BASIC $0.67 $1.32 $(0.65) (46)%
==== ==== ====
TOTAL EPS - DILUTED (NOTE A) $0.67 $1.31 $(0.64) (49)%
==== ==== ====
- ----------------------------------------------------------------------------------------------------
Note A: Reflecting the effect of unexercised dilutive stock options.
- 38 -
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 six months of 2003 and the first six months of 2002.
Significant variances are explained in the individual subsidiary sections that
follow.
UIL HOLDINGS CORPORATION
SEGMENTED CONSOLIDATED INCOME STATEMENT
YEAR TO DATE YEAR TO DATE 2003 MORE (LESS)
(IN MILLIONS - UNAUDITED) JUNE 30, 2003 JUNE 30, 2002 THAN 2002
- ------------------------- ------------- ------------- ---------
OPERATING REVENUES
UI from operations, before sharing $321.4 $317.0 $4.4
Nuclear 0.0 23.5 (23.5)
Xcelecom 143.5 156.8 (13.3)
APS 61.0 45.4 15.6
Minority Ownership Interest Investment and Other (0.1) (0.1) 0.0
----- ----- ---
TOTAL OPERATING REVENUES 525.8 542.6 (16.8)
====== ====== ======
FUEL AND ENERGY EXPENSES
UI 128.8 122.7 6.1
Nuclear 0.0 3.3 (3.3)
---- ---- -----
TOTAL FUEL AND ENERGY EXPENSES 128.8 126.0 2.8
====== ====== ===
OPERATION AND MAINTENANCE EXPENSES
UI 87.3 81.3 6.0
Nuclear 0.0 12.0 (12.0)
Xcelecom 142.3 154.4 (12.1)
APS 59.3 44.3 15.0
Minority Ownership Interest Investment and Other 1.7 2.1 (0.4)
---- ---- -----
TOTAL OPERATION AND MAINTENANCE EXPENSES 290.6 294.1 (3.5)
====== ====== =====
DEPRECIATION AND AMORTIZATION EXPENSES
UI 13.8 14.5 -0.7
Nuclear 0.0 0.7 -0.7
Xcelecom 1.7 1.4 0.3
APS 1.8 1.3 0.5
Minority Ownership Interest Investment and Other 0.0 0.0 0.0
--- --- ---
Subtotal depreciation 17.3 17.9 -0.6
Amortization of regulatory assets (UI) 31.9 20.8 11.1
Amortization Xcelecom 0.7 0.6 0.1
Amortization APS 0.6 0.3 0.3
--- --- ---
TOTAL DEPRECIATION AND AMORTIZATION EXPENSES 50.5 39.6 10.9
==== ==== ====
TAXES - OTHER THAN INCOME TAXES
UI - State gross earnings tax 12.5 13.0 -0.5
UI - other 7.3 8.6 -1.3
Nuclear - other 0.0 0.6 -0.6
Xcelecom 1.0 0.8 0.2
APS 1.0 0.4 0.6
Minority Ownership Interest Investment and Other 0.0 0.0 0.0
--- --- ---
TOTAL TAXES - OTHER THAN INCOME TAXES 21.8 23.4 -1.6
==== ==== ====
- 39 -
YEAR TO DATE YEAR TO DATE 2003 MORE (LESS)
(IN MILLIONS - UNAUDITED) JUNE 30, 2003 JUNE 30, 2002 THAN 2002
- ------------------------- ------------- ------------- ---------
OTHER INCOME (DEDUCTIONS)
UI 3.0 1.6 1.4
Nuclear 0.0 0.0 0.0
Xcelecom 0.4 0.3 0.1
APS 0.2 0.4 -0.2
Minority Ownership Interest Investment and Other -3.1 -6.3 3.2
---- ---- ---
TOTAL OTHER INCOME (DEDUCTIONS) 0.5 -4.0 4.5
=== ==== ===
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
UI 42.8 57.7 (14.9)
Nuclear 0.0 6.9 (6.9)
Xcelecom (1.8) (0.1) (1.7)
APS (1.5) (0.5) (1.0)
Minority Ownership Interest Investment and Other (4.9) (8.5) 3.6
----- ----- ---
TOTAL EARNINGS BEFORE INTEREST AND TAXES (EBIT) 34.6 55.5 (20.9)
===== ===== ======
INTEREST CHARGES
UI 10.5 18.1 (7.6)
UI - Interest on Seabrook obligation bonds owned by UI 0.0 (3.1) 3.1
UI - Amortization: debt expense, redemption premiums 0.6 1.1 (0.5)
Nuclear 0.0 0.9 (0.9)
Xcelecom 0.3 0.8 (0.5)
APS 0.0 0.0 0.0
Minority Ownership Interest Investment and Other 3.0 2.8 0.2
---- ---- ---
TOTAL INTEREST CHARGES 14.4 20.6 (6.2)
===== ===== =====
INCOME TAXES
UI 15.2 18.8 (3.6)
Nuclear 0.0 2.4 (2.4)
Xcelecom (0.8) (0.3) (0.5)
APS (0.6) (0.2) (0.4)
Minority Ownership Interest Investment and Other (3.2) (4.5) 1.3
----- ----- ---
TOTAL INCOME TAXES 10.6 16.2 (5.6)
===== ===== =====
NET INCOME
UI 16.5 22.8 (6.3)
Nuclear 0.0 3.6 (3.6)
Xcelecom (1.3) (0.6) (0.7)
APS (0.9) (0.3) (0.6)
Minority Ownership Interest Investment and Other (4.7) (6.8) 2.1
----- ----- ---
TOTAL NET INCOME $9.6 $18.7 ($9.1)
===== ====== ======
- 40 -
THE UNITED ILLUMINATING COMPANY RESULTS OF OPERATIONS: FIRST SIX MONTHS 2003
- -----------------------------------------------------------------------------
VS. FIRST SIX MONTHS 2002
- -------------------------
- --------------------------------------------------------------------------------------------------
Six Months Six Months 2003 more (less) than 2002
--------------------------
Ended Ended
June 30, 2003 June 30, 2002 Amount Percent
- --------------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
UI before Nuclear Division and Sharing $1.16 $1.61 $(0.45) (28)%
Nuclear Division 0.00 0.25 (0.25) (100)%
---- ---- ------
Total UI EPS from operations $1.16 $1.86 $(0.70) (38)%
==== ==== ======
RETAIL SALES (MILLIONS OF KWH) 2,773 2,708 65 2.4%
- --------------------------------------------------------------------------------------------------
UI EXCLUDING THE NUCLEAR DIVISION
Excluding the Nuclear Division, UI's net income was $16.5 million, or $1.16 per
share, in the first six months of 2003, compared to $22.8 million, or $1.61 per
share, in the first six months of 2002. The decrease of $0.45 per share was due
to the results of 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, after all revenue
and expense considerations, 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
also 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.
Overall, UI's revenue increased by $4.4 million, from $317.0 million in the
first six months of 2002 to $321.4 million in the first six months 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, 0.3% $0.3
Estimate of operating Distribution Division component of
weather effect on retail sales, 0.7% 0.7
Impact of rate decrease and mix of sales on average price
and other (7.4)
---
TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION (6.4)
RETAIL REVENUE FROM OTHER UTILITY DIVISIONS (NOTE A) 3.5
---
TOTAL UI RETAIL REVENUE (2.9)
OTHER OPERATING REVENUE INCREASE (DECREASE)
NEPOOL transmission revenues 0.9
Other 1.0
---
TOTAL UI OTHER OPERATING REVENUES 1.9
UI WHOLESALE REVENUE 5.4
---
TOTAL UI REVENUES $4.4
===
- --------------------------------------------------------------------------------
- 41 -
Note A: Includes a 1.4% increase in electricity sales and a corresponding
$2.4 million revenue increase resulting from the absence of adjustments
made in the second quarter of 2002 resulting from the resolution of a
station service dispute with a generating plant owner.
Total fuel and energy expenses increased by $6.1 million in the first six months
of 2003, compared to the first six months of 2002. Retail fuel and energy
expense increased by $5.8 million. 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 $0.3 million.
UI's operation and maintenance (O&M) expenses increased by $6.0 million, from
$81.3 million in the first six months of 2002 to $87.3 million in the first six
months 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) $7.8
Incentive Costs (1.8)
NEPOOL transmission expense 0.4
Other (0.5)
-----
TOTAL OPERATING DISTRIBUTION DIVISION $5.9
NON-DISTRIBUTION O&M 0.1
---
TOTAL O&M EXPENSE $6.0
===
- --------------------------------------------------------------------------------
Note A: The increase in pension expense reflects the lower returns being
generated since approximately the beginning of 2000 by the equity
investments held by the UI pension plan, a portion of which must
be recognized immediately with the remainder deferred and amortized
over time. These returns, when combined with the lower market value
of the assets in the pension fund and the increase in projected
liabilities caused by lower discount rates, may, depending on the
actual performance of the fund, require increased cash contributions
to the pension fund in the future.
Amortization of regulatory assets, as booked, increased by $11.1 million, from
$20.8 million in the first six months of 2002 to $31.9 million in the first six
months 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 $1.6 $1.3
Amortization in CTA and SBC 9.5 5.5
--- ---
Total Amortization of Regulatory Assets $11.1 $6.8
==== ===
- --------------------------------------------------------------------------------
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 income increased by $1.4 million in the first six months of 2003 compared
to the first six months of 2002 due primarily to improvement in the market value
of investments.
Taxes - other than income taxes decreased by $1.3 million, from $8.6 million in
the first six months of 2002 to $7.3 million in the first six months 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.
- 42 -
Interest charges decreased by $5.1 million, from $16.2 million in the first six
months of 2002 to $11.1 million in the first six months of 2003. About $3.4
million of this decrease occurred in the Distribution Division and $1.7 million
occurred in the CTA. Overall, the decrease was due primarily to the redemption
of the Seabrook lease obligation bonds in connection with the sale of UI's
interest in 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 $3.6
million, or $0.25 per share in the first six months of 2002.
UNITED RESOURCES, INC. RESULTS OF OPERATIONS: FIRST SIX MONTHS 2003 VS.
- ------------------------------------------------------------------------
FIRST SIX MONTHS 2002
- ---------------------
- ----------------------------------------------------------------------------------------------
Six Months Six Months 2003 more (less)
Ended Ended than 2002
----------------
June 30, 2003 June 30, 2002 Amount
- ----------------------------------------------------------------------------------------------
EPS FROM OPERATIONS (BASIC)
Operating Businesses
American Payment Systems, Inc. (APS) $(0.07) $(0.02) $(0.05)
Xcelecom, Inc. (Xcelecom) (0.09) (0.04) (0.05)
------ ------ ------
SUBTOTAL OPERATING BUSINESSES (0.16) (0.06) (0.10)
Minority Ownership Interest Investments
United Bridgeport Energy, Inc. (UBE) (0.15) (0.10) (0.05)
United Capital Investments, Inc. (UCI) (0.02) (0.21) 0.19
---- ---- ----
SUBTOTAL MINORITY OWNERSHIP INTEREST
INVESTMENTS (0.17) (0.31) 0.14
URI HEADQUARTERS (NOTE A) (0.16) (0.17) 0.01
---- ---- ----
TOTAL NON-UTILITY EPS FROM OPERATIONS $(0.49) $(0.54) $0.05
==== ===== ====
- -----------------------------------------------------------------------------------------------
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 $6.9 million, or $0.49 per share, in the first six
months of 2003, compared to losses of about $7.7 million, or $0.54 per share, in
the first six months of 2002, for an improvement of $0.8 million, or $0.05 per
share. Operating revenue for the URI businesses increased by $2.3 million, or
1%. Expenses for the URI businesses, including losses on minority ownership
interest investments but excluding income taxes, increased by $1.0 million, and
income taxes increased by $0.5 million.
The results of each of the subsidiaries of URI for the first six months of 2003
and the first six months 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, Xcelecom and UCI, and 30% equity and 70% debt for UBE. URI absorbs
interest charges on the equity portion of its investments in its subsidiaries to
the extent those investments are financed with debt. URI may incur other
expenses necessary to manage its investments from time to time.
The following is a detailed explanation of the quarterly variances by URI
subsidiary.
- 43 -
URI OPERATING BUSINESSES
AMERICAN PAYMENT SYSTEMS, INC.
APS lost $0.9 million, or $0.07 per share, in the first six months of 2003,
compared to a loss of $0.03 million, or $0.02 per share, in the first six months
of 2002. Revenues increased by $16.6 million, to $61.1 million, reflecting gains
in both the bill payment business and in the sale of other products and
services. Cost of sales increased, and additional administrative expenses were
incurred for legal services to meet increased regulatory compliance requirements
in APS' lines of business, and 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. These cost increases, and an
increase in depreciation and amortization expenses, which were higher due to the
purchase and installation of additional field equipment and contract costs, more
than offset the revenue gains.
XCELECOM, INC.
Xcelecom lost $.09 per share in the first six months of 2003, compared to a loss
of $0.04 per share in the first six months of 2002. As with other companies in
the non-residential construction industry, there continues to be a very evident
decline in economic activity in Xcelecom's markets. Xcelecom is experiencing a
continuation of customer postponements and cancellations of projects, a
reduction in new project orders, and increased competition for fewer jobs,
resulting in both lower demand and lower margins. These general economic factors
reduced earnings by $0.06 per share from 2002 levels, but a lower net overall
requirement for loss reserves on construction projects in 2003 improved earnings
by $0.04 per share from levels a year earlier. Additionally, the completion of
several large, profitable, non-recurring contracts in 2002 that have not been
replaced in 2003 has resulted in an earnings decline of $0.09 per share. These
decreases were partly offset by improved performance in the systems integration
segment, which added about $0.06 in the first six months of 2003 compared to the
first six months of 2002.
URI MINORITY OWNERSHIP INTEREST INVESTMENTS
UNITED BRIDGEPORT ENERGY, INC.
UBE owns a 33 1/3% interest in Bridgeport Energy, LLC (BE). UBE lost $2.2
million, or $0.15 per share, in the first six months of 2003, compared to a loss
of $1.4 million, or $0.10 per share in the first six months of 2002. The $0.05
per share decrease was due to several factors: a $0.20 per share reduction was
due to lower installed capability (ICAP) revenues, a $0.02 per share reduction
was due to lower energy revenues and higher gas prices, and a $0.16 per share
increase was due to reduced expenses, mostly the absence of overhaul costs
incurred in the first six months of 2002.
Effective March 1, 2003, Standard Market Design was implemented by ISO New
England. This has had a minimal impact on energy sales prices to date.
UNITED CAPITAL INVESTMENTS, INC.
UCI lost $0.2 million, or $0.02 per share, in the first six months of 2003,
compared to a loss of $3.0 million, or $0.21 per share in the first six months
of 2002. The improvement was due to the absence of a $0.16 per share impairment
loss recorded in the second quarter of 2002, reduced administrative costs
contributing $0.01 per share, and the remainder 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 unallocated expenses of $2.3 million, after-tax, or
$0.16 per share, in the first six months of 2003, compared to unallocated
expenses of $2.4 million, after-tax, or $0.17 per share, in the first six months
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.
- 44 -
LOOKING FORWARD
A LOOK AT 2003
- --------------
UIL HOLDINGS' CONSOLIDATED EARNINGS ESTIMATES FOR 2003
UIL Holdings is reducing its earnings guidance for 2003 from $2.45-$2.65 per
share to $2.20-$2.35 per share. The primary reasons for the decrease are lowered
expectations for URI's non-utility subsidiaries. More detail is provided below.
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 positive cash flow from operations. This cash flow comes
primarily from UI, and includes, in addition to positive cash flow from the
Distribution Division, the accelerated recovery of stranded costs built into the
CTA rate base. APS and Xcelecom also generate positive cash flow from
operations. 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. 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 cash
flow results.
THE UNITED ILLUMINATING COMPANY (UI)
UI EARNINGS ESTIMATES FOR 2003
UI is expected to earn $2.50-$2.60 per share in 2003, as compared to the
previous estimate of $2.45-$2.60 per share. Achieving the high end of this range
will be a challenge for UI under the terms of the DPUC Rate Case decision. UI is
incurring approximately $15.5 million of additional pension and postretirement
benefits expenses not presently recovered in rates under the September 26, 2002
Rate Case decision. In response to UI's November 2002 request, in March 2003 the
DPUC reopened the 2002 Rate Case docket for the limited purpose of examining
these increased costs. In its decision on June 25, 2003, the DPUC denied the
request for recovery of these increased expenses but noted, "that the Company
may request regulatory treatment for this specific expense in the future by
filing a motion to reopen." Through the second quarter of 2003, UI had not
achieved the allowed return on common stock equity and therefore filed a motion
to reopen the docket on July 29, 2003. A ruling from the DPUC on this motion has
not been made at this time. Reductions of other expenses will be required if
UI's increased pension and postretirement benefits expenses are not allowed for
recovery by the DPUC. Since UI must take into account the interests of its
customers in making any changes to its operations to lower expenses, 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:
- 45 -
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 $0.45 per
share to losses of $0.30 per share in 2003. This is a $0.40 per share reduction
from the previous range estimate of losses of $0.05 per share to earnings of
$0.10 per share, and reflects estimated reductions in all of the non-utility
businesses.
URI OPERATING BUSINESSES
AMERICAN PAYMENTS SYSTEMS, INC. (APS)
APS is expected to earn $0.00-$0.10 per share for UIL Holdings in 2003, reduced
from the previous estimate of $0.15-$0.20 per share. APS has incurred
significantly higher than anticipated legal expenses to meet regulatory
compliance requirements in its lines of business in the first six months of
2003. APS has also experienced delays in achieving, to the degree and the timing
anticipated, banking fee savings derived from switching to agent owned bank
accounts from APS owned bank accounts, but significant progress has been made
and is expected to continue. The new estimate for 2003 includes improvements in
the second half of the year compared to the first six months due to reduced
legal expenses, continued reduction of bank fees, increased revenues from higher
transaction fees, and reduced sales, general and administrative expenses. The
new estimate for 2003 is also an improvement from the 2002 loss of $0.13 per
share, and the improvement is due to the addition of a major new customer in
late 2002, higher revenues and improved margins for the bill payment business,
continued reduction of bank fees, and operational efficiencies.
XCELECOM, INC.
Due to the project loss recorded in the first six months of 2003, and the
continuation of reduced economic activity in Xcelecom's markets, earnings for
Xcelecom are expected to be approximately $0.10-$0.20 per share for UIL Holdings
in 2003, reduced from the previous 2003 estimate of $0.20-$0.35 per share. As
with other companies in the construction and systems integration industries,
Xcelecom is experiencing customer postponements and cancellations of projects, a
reduction in new project orders, a continuing slowdown in spending for
technology by its customers, and increased competition for fewer jobs, resulting
in both lower demand and lower margins. Xcelecom is taking action to offset the
negative impact of these items by working to reduce operating and overhead
related costs. Generally, the economic activity of the non-residential
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.
However, Xcelecom's estimates for earnings in the second half of 2003 reflect
sales and gross margin performance based on current backlog levels and expected
customer orders, a continuation of insurance claims savings based on strong
safety performance, successful resolution of certain pending claims and change
orders, and the addition of new monthly fee income based on a subcontract to
complete open projects for another company.
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 $0.45-$0.55 per share in 2003,
revised from the previous 2003 estimated loss of $0.40-$0.45 per share due to a
lower estimate for UBE and decreases in the valuations of minority ownership
interest investments. URI Headquarters' costs include interest expense on
intercompany loans from URI to UBE, based on a capital structure, including an
equity component, and
- 46 -
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 $0.15-$0.20 per share,
revised from the previous 2003 estimated loss of $0.10-$0.15 per share. Results
at UBE continue to be hampered by high gas prices reducing both margins and
sales levels. The 2003 estimate also 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.
Bridgeport Energy, LLC (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 to date. In the longer
term, the new market design is expected to benefit BE 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 lose up to $0.10 per share in 2003, a reduction from the
previous breakeven estimate, reflecting decreases in minority ownership interest
investments. This is still 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 the DPUC decision in UI's Rate
Case was effective September 26, 2002, and Seabrook Station was sold on November
1, 2002. These factors have or 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 treatment for the sale of Millstone and Seabrook that
UIL Holdings recorded in the Nuclear Division in the fourth quarter of 2002 will
increase earnings in the fourth quarter of 2003 compared to the fourth quarter
of 2002.
Actual 2003 results may vary from estimates depending on factors that could
affect some or all of UIL Holdings' businesses to varying degrees. The factors
are discussed in the "Major Influences on Financial Condition" section, and
their impacts can change from quarter to quarter.
UIL Holdings' current overall estimate of earnings per share from operations for
2003 is a range of $2.20-$2.35. 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 0.30 $0.64
3 $1.15-$1.30 $1.53
4 $0.35-$0.45 $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 $2.20-$2.35 per share.
- 47 -
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.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Shareowners of UIL Holdings was held on May 14, 2003,
for the purpose of electing a Board of Directors for the ensuing year, voting on
approval of the employment of PricewaterhouseCoopers LLP as the firm of
independent public accountants to audit the books and affairs of UIL Holdings
for the fiscal year 2003, voting on approval of the UIL Holdings Corporation
1999 Amended and Restated Stock Plan, and voting on approval of the UIL Holdings
Corporation Deferred Compensation Plan. The shareowner proposal concerning
"poison pills" described in the Corporation's proxy statement dated April 4,
2003, was not properly brought before the meeting and was thus not voted upon at
the meeting.
All of the nominees for election as Directors listed in UIL Holdings' proxy
statement for the meeting were elected by the following votes:
NUMBER OF SHARES
---------------------------
VOTED NOT
NOMINEE "FOR" VOTED
------- ----- -----
Thelma R. Albright 12,094,459 202,611
Marc C. Breslawsky 12,097,948 199,121
David E. A. Carson 12,096,278 200,789
Arnold L. Chase 11,304,371 992,698
John F. Croweak 12,096,481 200,586
Betsy Henley-Cohn 12,084,241 212,827
John L. Lahey 12,108,015 189,052
F. Patrick McFadden, Jr. 12,104,887 192,181
Daniel J. Miglio 12,101,912 195,156
William F. Murdy 12,106,575 190,494
James A. Thomas 12,106,002 191,066
Nathaniel D. Woodson 12,095,747 201,321
The employment of PricewaterhouseCoopers LLP as the firm of independent public
accountants to audit the books and affairs of UIL Holdings for the fiscal year
2003 was approved by the following vote:
NUMBER OF SHARES
---------------------------------------
VOTED VOTED NOT
"FOR" "AGAINST" VOTED
----- --------- -----
12,089,877 143,433 63,753
The proposal to approve the UIL Holdings Corporation 1999 Amended and Restated
Stock Plan was approved by the following vote:
NUMBER OF SHARES
---------------------------------------
VOTED VOTED NOT
"FOR" "AGAINST" VOTED
----- --------- -----
11,243,289 876,894 176,879
The proposal to approve the UIL Holdings Corporation Deferred Compensation Plan
was approved by the following vote:
NUMBER OF SHARES
---------------------------------------
VOTED VOTED NOT
"FOR" "AGAINST" VOTED
----- --------- -----
11,263,504 808,599 224,962
- 49 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Table Item Exhibit
Number Number Description
--------- ------ -----------
(99) 99 Certification of Periodic Financial Report.
(b) Reports on Form 8-K.
Item Financial
Reported Statements Date of Report
-------- ---------- --------------
5 None April 1, 2003
7, 9 None April 28, 2003
5 None May 19, 2003
5 None June 25, 2003
5 None June 30, 2003
- 50 -
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 08/08/2003 /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 08/08/2003 /s/ Nathaniel D. Woodson
--------------------- ----------------------------------------
Nathaniel D. Woodson
Chairman of the Board of Directors,
President and Chief Executive Officer
- 52 -
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 08/08/2003 /s/ Louis J. Paglia
------------------ ---------------------------------
Louis J. Paglia
Executive Vice President
and Chief Financial Officer
- 53 -