-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NKWI/omeMtTXZIEXingw9wH8QLg7SQruLmX1CDVintPCZkThlSFBO+FsvhSiS6r5 b2ZyRYVJxwTrBQ2zqRbaDg== 0001082510-01-500021.txt : 20020410 0001082510-01-500021.hdr.sgml : 20020410 ACCESSION NUMBER: 0001082510-01-500021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UIL HOLDINGS CORP CENTRAL INDEX KEY: 0001082510 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 061541045 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15052 FILM NUMBER: 1784730 BUSINESS ADDRESS: STREET 1: 157 CHURCH ST CITY: NEW HAVEN STATE: CT ZIP: 06510 BUSINESS PHONE: 2034992000 MAIL ADDRESS: STREET 1: 157 CHURCH ST CITY: NEW HAVEN STATE: CT ZIP: 06510 10-Q 1 uil_10q93001.txt UIL HOLDINGS CORP. 10-Q FOR QTR. ENDED 9/30/01 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 SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------- Commission file number 1-15995 UIL HOLDINGS CORPORATION (Exact name of registrant as specified in its charter) CONNECTICUT 06-1541045 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 157 CHURCH STREET, NEW HAVEN, CONNECTICUT 06506 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 203-499-2000 NONE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's only class of common stock, as of October 31, 2001, was 14,324,565. 1 INDEX PART I. FINANCIAL INFORMATION PAGE NUMBER ------ Item 1. Financial Statements. 3 Consolidated Statement of Income for the three and nine months ended September 30, 2001 and 2000. 3 Consolidated Balance Sheet as of September 30, 2001 and December 31, 2000. 4 Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2001 and 2000. 6 Notes to Consolidated Financial Statements. 7 - Statement of Accounting Policies 7 - Capitalization 8 - Rate-Related Regulatory Proceedings 9 - Short-term Credit Arrangements 11 - Income Taxes 13 - Supplementary Information 14 - Commitments and Contingencies 15 - Capital Expenditure Program 15 - Nuclear Insurance Contingencies 15 - Other Commitments and Contingencies 15 - Connecticut Yankee 15 - Hydro-Quebec 16 - Long Island Cable Project 16 - Environmental Concerns 16 - Site Decontamination, Demolition and Remediation Costs 16 - Nuclear Fuel Disposal and Nuclear Plant Decommissioning 17 - Segment Information 17 - Restructuring 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 19 - Major Influences on Financial Condition 19 - Capital Expenditure Program 21 - Liquidity and Capital Resources 21 - Subsidiary Operations 22 - Results of Operations 23 - Looking Forward 33 Item 3. Quantitative and Qualitative Disclosure About Market Risk. 38 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 39 SIGNATURES 40 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UIL HOLDINGS CORPORATION CONSOLIDATED STATEMENT OF INCOME (Thousands except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- OPERATING REVENUES (NOTE G) Utility $209,896 $201,127 $548,824 $546,116 Non-regulated businesses 103,717 45,927 269,496 99,982 ------------- ------------ ------------ ------------ Total Operating Revenues 313,613 247,054 818,320 646,098 ------------- ------------ ------------ ------------ OPERATING EXPENSES Operation Fuel and energy 76,894 74,164 211,186 214,503 Capacity purchased 266 683 2,158 3,587 Other operation and maintenance 131,777 77,831 351,713 196,902 Non-regulated-selling, general and administrative 11,885 6,703 32,182 16,964 Depreciation and amortization (Note G) 27,127 26,271 67,903 49,034 Taxes-other than income taxes (Note G) 12,225 11,441 33,938 33,658 ------------- ------------ ------------ ------------ Total 260,174 197,093 699,080 514,648 ------------- ------------ ------------ ------------ OPERATING INCOME 53,439 49,961 119,240 131,450 ------------- ------------ ------------ ------------ OTHER INCOME AND (DEDUCTIONS) (NOTE G) 2,698 (1,986) 5,703 (394) ------------- ------------ ------------ ------------ INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 56,137 47,975 124,943 131,056 ------------- ------------ ------------ ------------ INTEREST CHARGES Interest on long-term debt 10,898 9,540 31,949 28,659 Interest on Seabrook obligation bonds owned by UI (1,579) (1,618) (4,739) (4,853) Dividend requirement of mandatorily redeemable securities - 1,123 - 3,529 Other interest (Note G) 1,531 2,026 4,343 3,052 ------------- ------------ ------------ ------------ 10,850 11,071 31,553 30,387 Amortization of debt expense and redemption premiums 531 571 1,625 1,710 ------------- ------------ ------------ ------------ Net Interest Charges 11,381 11,642 33,178 32,097 ------------- ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 44,756 36,333 91,765 98,959 INCOME TAXES (NOTE F) 19,827 16,626 42,140 44,591 ------------- ------------ ------------ ------------ NET INCOME AND INCOME APPLICABLE TO COMMON STOCK $24,929 $19,707 $49,625 $54,368 ============= ============ ============ ============ AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 14,101 14,070 14,093 14,072 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED 14,151 14,112 14,147 14,087 EARNINGS PER SHARE OF COMMON STOCK - BASIC AND DILUTED $1.77 $1.40 $3.52 $3.86 CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $0.72 $0.72 $2.16 $2.16
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)
September 30, December 31, 2001 2000* ---- ---- (Unaudited) Current Assets Unrestricted cash and temporary cash investments $19,838 $14,237 Restricted cash 39,163 33,202 Accounts receivable Customers, less allowance for doubtful accounts of $2,426 and $2,569 250,394 190,159 Unbilled revenues 32,870 36,694 Materials and supplies, at average cost 13,417 10,938 Other 4,646 3,076 ----------------- ----------------- Total 360,328 288,306 ----------------- ----------------- Other Property and Investments Investment in United Bridgeport Energy facility 91,451 90,284 Nuclear decommissioning trust fund assets 25,265 32,844 Other 7,476 7,862 ----------------- ----------------- 124,192 130,990 ----------------- ----------------- Property, Plant and Equipment at original cost In service 903,340 962,485 Less, accumulated provision for depreciation 417,742 466,635 ----------------- ----------------- 485,598 495,850 Construction work in progress 27,586 30,267 Nuclear fuel 18,716 24,536 ----------------- ----------------- Net Property, Plant and Equipment 531,900 550,653 ----------------- ----------------- Regulatory Assets (FUTURE AMOUNTS DUE FROM CUSTOMERS THROUGH THE RATEMAKING PROCESS) Nuclear plant investments-above market 483,040 497,829 Income taxes due principally to book-tax differences 108,545 123,043 Long-term purchase power contracts-above market 116,269 128,328 Connecticut Yankee 21,738 24,272 Unamortized redemption costs 21,453 22,293 Other 66,486 44,628 ----------------- ----------------- Total 817,531 840,393 ----------------- ----------------- Deferred Charges Goodwill 61,697 51,508 Unamortized debt issuance expenses 5,484 5,477 Other 1,893 1,227 ----------------- ----------------- Total 69,074 58,212 ----------------- ----------------- Total Assets $1,903,025 $1,868,554 ================= =================
*Derived from audited financial statements The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 4 UIL HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEET LIABILITIES AND CAPITALIZATION (Thousands of Dollars)
September 30, December 31, 2001 2000* ---- ---- (Unaudited) Current Liabilities Current portion of long-term debt $ 665 $ - Notes payable 24,083 110,699 Accounts payable 140,803 149,146 Dividends payable 10,153 10,135 Taxes accrued 36,386 3,845 Interest accrued 14,502 8,528 Obligations under capital leases 429 405 Other accrued liabilities 96,678 63,988 ------------------- ------------------ Total 323,699 346,746 ------------------- ------------------ Noncurrent Liabilities Purchase power contract obligation 116,269 128,328 Nuclear decommissioning obligation 25,265 32,844 Connecticut Yankee contract obligation 15,330 17,157 Long-term notes payable 10,888 9,774 Obligations under capital leases 15,400 15,725 Other 8,547 14,432 ------------------- ------------------ Total 191,699 218,260 ------------------- ------------------ Deferred Income Taxes (FUTURE TAX LIABILITIES OWED TO TAXING AUTHORITIES) 238,355 252,809 Regulatory Liabilities (FUTURE AMOUNTS OWED TO CUSTOMERS THROUGH THE RATEMAKING PROCESS) Accumulated deferred investment tax credits 13,945 14,422 Deferred gains on sale of property 29,991 15,978 Customer refund 4,597 17,976 Other 2,941 1,097 ------------------- ------------------ Total 51,474 49,473 ------------------- ------------------ Capitalization (Note B) Long-term debt Long-term debt 679,246 604,856 Investment in Seabrook obligation bonds (80,707) (82,635) ------------------- ------------------ Net long-term debt 598,539 522,221 ------------------- ------------------ Common stock equity Common stock 291,972 291,655 Unearned employee stock ownership plan equity (7,598) (8,310) Retained earnings 214,885 195,700 ------------------- ------------------ 499,259 479,045 ------------------- ------------------ Total Capitalization 1,097,798 1,001,266 ------------------- ------------------ Commitments and Contingencies (Note L) - - ------------------- ------------------ Total Liabilities and Capitalization $1,903,025 $1,868,554 =================== ==================
* 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 Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $24,929 $19,707 $49,625 $54,368 ------------ ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 27,918 26,999 60,947 60,625 Deferred income taxes (1,285) 1,416 (17,604) 7,042 Deferred investment tax credits - net (166) (103) (477) (276) Amortization of nuclear fuel 1,572 1,979 4,014 5,772 Allowance for funds used during construction (464) (693) (1,374) (1,860) CTA and SBC regulatory deferral 4,513 (7,888) (1,366) (32,904) Changes in: Accounts receivable - net (35,802) (45,817) (60,235) (70,463) Materials and supplies (2,925) (975) (2,479) (1,398) Prepayments (872) (1,889) (1,414) (2,286) Accounts payable 15,646 32,673 (8,343) 22,692 Interest accrued (3,718) (2,399) 5,974 5,372 Taxes accrued 21,051 (3,119) 32,541 6,799 Other assets and liabilities (3,996) 2,404 19,682 (1,156) ------------ ------------ ------------ ------------ Total Adjustments 21,472 2,588 29,866 (2,041) ------------ ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 46,401 22,295 79,491 52,327 ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Issuance of: Common stock 330 (347) 1,030 219 Long-term debt - - 75,000 - Notes payable (11,191) 66,080 (85,502) 63,211 Securities redeemed and retired: Long-term debt - - - (25,750) Company obligated mandatarily redeemable securities of subsidiary holding solely parent debentures - (50,000) - (50,000) Expenses of issuance - - (825) - Lease obligations (103) (95) (301) (279) Dividends Common stock (10,147) (10,135) (30,422) (30,390) ------------ ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (21,111) 5,503 (41,020) (42,989) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Plant expenditures, including nuclear fuel (9,102) (18,085) (28,837) (40,780) Investment in debt securities - - 1,928 4,778 ------------ ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (9,102) (18,085) (26,909) (36,002) ------------ ------------ ------------ ------------ CASH AND TEMPORARY CASH INVESTMENTS: NET CHANGE FOR THE PERIOD 16,188 9,713 11,562 (26,664) BALANCE AT BEGINNING OF PERIOD 42,813 31,945 47,439 68,322 ------------ ------------ ------------ ------------ BALANCE AT END OF PERIOD 59,001 41,658 59,001 41,658 LESS: RESTRICTED CASH 39,163 33,212 39,163 33,212 ------------ ------------ ------------ ------------ BALANCE: UNRESTRICTED CASH AND TEMPORARY CASH INVESTMENTS $19,838 $8,446 $19,838 $8,446 ============ ============ ============ ============ CASH PAID DURING THE PERIOD FOR: Interest (net of amount capitalized) $12,757 $10,173 $23,494 $18,732 ============ ============ ============ ============ Income taxes $2,800 $20,000 $30,300 $32,600 ============ ============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 6 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) BASIS OF PRESENTATION The consolidated financial statements of UIL Holdings Corporation (UIL Holdings), which include its wholly-owned direct subsidiaries, The United Illuminating Company (UI) and United Resources, Inc. (URI), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The statements reflect all adjustments that are, in the opinion of management, necessary to a fair statement of the results for the periods presented. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. UIL Holdings believes that the disclosures are adequate to make the information presented not misleading. 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, 2000. Such notes are supplemented as follows: (A) STATEMENT OF ACCOUNTING POLICIES NUCLEAR DECOMMISSIONING TRUSTS External trust funds are maintained to fund the estimated future decommissioning costs of the nuclear generating units in which UI has an ownership interest. These costs are accrued as a charge to depreciation expense over the estimated service lives of the units and are recovered in rates on a current basis. UI paid $2.5 million into the decommissioning trust fund for Seabrook Unit 1 in the first nine months of each of 2001 and 2000. At September 30, 2001, UI's share of the trust fund balance for Seabrook Station, which included accumulated earnings on the funds, was $25.3 million. This fund balance is included in "Other Property and Investments" and the accrued decommissioning obligation is included in "Noncurrent Liabilities" on the Consolidated Balance Sheet. On March 31, 2001, UI sold its ownership interest in Millstone Unit 3 to Dominion Resources, Inc. and, as a result, its share of the trust fund balance for Millstone Unit 3 was transferred to the new owner. UI's share of the market value of the trust fund transferred was $8.5 million. COMPREHENSIVE INCOME Comprehensive income for the three and nine month periods ended September 30, 2001 and 2000 is equal to net income as reported. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, which became effective for UIL Holdings in the first quarter of 2001, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires entities to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for the changes in the fair value of a derivative (gains and losses) would depend on the intended use and designation of the derivative. UI has a contract with a power marketer that includes a financially settled contract for differences related to certain call rights of the power marketer and put rights of UI with respect to UI's entitlements in Seabrook Unit 1. This contract will terminate at the earlier of December 31, 2003 or the date that UI sells its interest in Seabrook Unit 1. Application of the new accounting standard required the recognition 7 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) of UI's future obligation for financial settlements under this contract. As of September 30, 2001, UI's estimated future obligation for financial settlements under this contract is approximately $24 million. This future obligation has been estimated using assumptions regarding the future market price for power, the operation of the unit, and the projected future sale date of UI's interest in Seabrook Unit 1. If actual market prices, the operation of the unit, and/or the actual date of sale differ significantly from these assumptions, the actual amount paid for financial settlement of this contract will vary significantly from this estimate. However, since the costs of this contract are considered in the annual reconciliation of the Competitive Transition Assessment mechanism, there is no income statement effect. As a result, the future obligation has been recognized as a current liability and an offsetting regulatory asset. The Financial Accounting Standards Board has issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141, which applies to all business combinations initiated after June 30, 2001, will result in UIL Holdings accounting for any business combinations initiated after that date under the purchase method of accounting. The adoption of SFAS No. 141 will not change the method of accounting used in previous business combinations. SFAS No. 142, which will be adopted by UIL Holdings on January 1, 2002, will result in UIL Holdings no longer amortizing its existing goodwill. At September 30, 2001, goodwill associated with its non-regulated businesses was approximately $61.7 million. On an annualized basis, the amortization of this goodwill has approximately a $0.15 per share impact on earnings. In addition, UIL Holdings will be required to measure goodwill for impairment effective January 1, 2002 as part of the transition provisions. The statement requires goodwill to be allocated to reporting units and measured for impairment under a two-step test. The first step of the test is required to be completed by June 30, 2002 and the second step, if necessary, no later than December 31, 2002. Any impairment resulting from the transition test will be recorded as of January 1, 2002 and will be recognized as a cumulative effect of a change in accounting principle. UIL Holdings will not be able to determine if an impairment write-off will be required until completion of such impairment test. The Financial Accounting Standards Board has issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement, which is effective for fiscal years beginning after June 15, 2002, requires that an asset retirement obligation be recognized at the time when an entity faces a legal obligation to retire an asset. The asset retirement cost would be capitalized as part of the related long-lived asset and initially measured at fair value and adjusted in subsequent periods when necessary. Upon adoption of the statement, a cumulative effect approach will be used to recognize transition amounts for any existing asset retirement obligations. UIL Holdings has not assessed the full impact this standard will have on its financial position and results of operations. (B) CAPITALIZATION COMMON STOCK UIL Holdings had 14,324,565 shares of its common stock, without par value, outstanding at September 30, 2001, of which 223,525 shares were unallocated shares held by UI's 401(k)/Employee Stock Ownership Plan (KSOP) and not recognized as outstanding for accounting purposes. UI has entered into an arrangement under which it loaned $11.5 million to the KSOP. The trustee for the KSOP used the funds to purchase shares of UI common stock in open market transactions. On July 20, 2000, effective with the formation of the holding company structure, unallocated shares held by the KSOP were converted into shares of UIL Holdings' common stock. The shares will be allocated to employees' KSOP accounts, as the loan is repaid, to cover a portion of the required KSOP contributions. The loan will be repaid by the KSOP over a twelve-year period, using employer contributions and UIL Holdings' dividends paid on the unallocated shares of the stock held by the KSOP. As of September 30, 2001, 223,525 shares, with a fair market value of $10.7 million, had been purchased by the KSOP and had not been committed to be released or allocated to KSOP participants. In 1990, UI's Board of Directors and the shareowners approved a stock option plan for officers and key employees of UI. Effective with the formation of the holding company structure on July 20, 2000, all outstanding options were converted into options to purchase an equivalent number of shares of UIL Holdings' common stock. 8 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) On March 22, 1999, UI's Board of Directors approved a stock option plan for directors, officers and key employees of UI. The plan provides for the awarding of options to purchase up to 650,000 shares of UI's common stock over periods of from one to ten years following the dates when the options are granted. The exercise price of each option cannot be less than the market value of the stock on the date of the grant. On June 28, 1999, UI's shareowners approved the plan. Effective with the formation of the holding company structure on July 20, 2000, all outstanding options were converted into options to purchase an equivalent number of shares of UIL Holdings' common stock. On March 26, 2001, options were granted to purchase 167,600 shares of stock at an exercise price of $45.175. On May 14, 2001, options were granted to purchase 4,900 shares of stock at an exercise price of $47.185. And on May 30, 2001, options were granted to purchase 3,200 shares of stock at an exercise price of $48.550. RETAINED EARNINGS RESTRICTION The indenture under which UI has issued $200 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 $106.7 million were free from such limitations at September 30, 2001. LONG-TERM DEBT On February 15, 2001, UIL Holdings issued and sold $75,000,000 of Senior Notes to several institutional investors in a private sale. The issue was composed of two series: 7.23% Senior Notes, Series A, due February 15, 2011, in the principal amount of $30,000,000, and 7.38% Senior Notes, Series B, due February 15, 2011, in the principal amount of $45,000,000. Under the Senior Notes, Series A, UIL Holdings is required to prepay the principal amount of $4,285,714 each February 15th, beginning on February 15, 2005 and ending on February 15, 2010. Interest due under the Senior Notes is payable semi-annually on February 15th and August 15th. The net proceeds of the sale were used to repay short-term debt of UIL Holdings. Under the Note Purchase Agreement in connection with the issue described above, UIL Holdings is required to (i) maintain a ratio of consolidated debt to consolidated capital of not greater than 65% (debt ratio); (ii) maintain a ratio of consolidated earnings available for interest charges to consolidated interest charges for any period of four fiscal quarters of at least 2.00 to 1.00 (interest coverage ratio); and (iii) maintain consolidated net worth of at least $345 million plus 25% of consolidated net income on a cumulative basis for each fiscal quarter for which consolidated net income is positive. As of September 30, 2001, UIL Holdings' debt ratio was 57%; its interest coverage ratio was 3.06 to 1.00; and it had consolidated net worth in the amount of $141.9 million in excess of the requirement. (C) RATE-RELATED REGULATORY PROCEEDINGS On December 31, 1996, the Connecticut Department of Public Utility Control (DPUC) completed a financial and operational review of UI and ordered a five-year incentive retail rates regulation plan for the years 1997 through 2001 (the Rate Plan). The Rate Plan accelerates the amortization and recovery of regulatory assets during 1999-2001 if UI's common equity return on regulated utility investment exceeds 10.5% after recording the amortization. UI's authorized return on regulated utility common equity during the period is 11.5%. Earnings above 11.5%, on an annual basis, are utilized one-third for customer price reductions, one-third to increase amortization of assets, and one-third retained as earnings. The Rate Plan included a provision that it could be reopened and modified upon the enactment of electric utility restructuring legislation in Connecticut. On October 1, 1999, the DPUC issued a decision establishing UI's standard offer customer rates, commencing January 1, 2000, at a level 10% below 1996 rates, as directed by the Restructuring Act described in detail below. These standard offer customer rates supersede the rates that were included in the Rate Plan. The decision also reduced the required amount of accelerated amortization of assets in 2000 and 2001. Under this 1999 decision, all other components of the 1996 Rate Plan are expected to remain in effect through 2001. The 9 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Connecticut Office of Consumer Counsel (OCC), the statutory representative of consumer interests in public utility matters, appealed the DPUC's standard offer decision to the Connecticut Superior Court, challenging the DPUC's determination of UI's average prices in 1996 rates from which a 10% reduction is required by the Restructuring Act. On February 22, 2001, the Superior Court dismissed the OCC's appeal from the DPUC's decision. On February 13, 2001, the Connecticut Attorney General and the OCC petitioned the DPUC to initiate a proceeding and hold a hearing concerning the need to decrease UI's rates by reason of UI having earned a return on regulated common equity more than 1% above the authorized level of 11.5% for at least six consecutive months. The DPUC docketed such a proceeding and, by a letter dated July 3, 2001, stated its intention to combine a full review of UI's retail rates (a Rate Case) in the same docket as the overearnings proceeding. Following hearings on August 8, 2001 and August 27, 2001, the DPUC issued a final decision on October 31, 2001 holding that as a result of the earnings sharing mechanism embedded in UI's rate plan, UI's customers have directly benefited when UI has earned over its 11.5% authorized return on regulated common equity during the Rate Plan period. Because the earnings sharing mechanism is scheduled to end, with the Rate Plan, on December 31, 2001, the DPUC ordered that the earnings sharing mechanism be extended effective January 1, 2002 until the conclusion of the Rate Case proceeding. The DPUC's decision also found that UI's earnings are not expected to exceed 11.5% in 2002, but that just and reasonable rates for UI at this point in time can only be determined in the full Rate Case proceeding. Accordingly, the DPUC ordered UI to file rate case schedules with the DPUC by November 15, 2001. UI expects to file rate case schedules on November 15, 2001, together with supporting pre-filed sworn written testimony. UI anticipates a final decision in the rate case proceeding within 180 days of this filing. In April 1998, Connecticut enacted Public Act 98-28 (the Restructuring Act), a massive and complex statute designed to restructure the State's regulated electric utility industry. As a result of the Restructuring Act, the business of generating and selling electricity directly to consumers has been opened to competition. These business activities are separated from the business of delivering electricity to consumers, also known as the transmission and distribution business. The business of delivering electricity remains with the incumbent franchised utility companies (including UI) which continue to be regulated by the DPUC as Distribution Companies. Since mid-1999, Distribution Companies have been required to separate on consumers' bills the electricity generation services component from the charge for delivering the electricity and all other charges. A major component of the Restructuring Act is the collection, by Distribution Companies, of a "competitive transition assessment," a "systems benefits charge," an "energy conservation and load management program charge" and a "renewable energy investment charge." The competitive transition assessment represents costs that have been reasonably incurred by, or will be incurred by, Distribution Companies to meet their public service obligations as electric companies, and that will likely not otherwise be recoverable in a competitive generation and supply market. These costs include above-market long-term purchased power contract obligations, regulatory asset recovery and above-market investments in power plants (so-called stranded costs). The systems benefits charge represents public policy costs, such as generation decommissioning and displaced worker protection costs. Beginning in 2000, a Distribution Company has been required to collect the competitive transition assessment, the systems benefits charge, the energy conservation and load management program charge and the renewable energy investment charge from all Distribution Company customers. Under the Restructuring Act, all of UI's customers are able to choose their power supply providers. Until January 1, 2004, UI is required to offer full "standard offer" electric service, under regulated rates, to all customers who do not choose alternate power supply providers. The standard offer rates must be at least 10% below the average prices in 1996. The standard offer rates must include the price of generation, transmission and distribution services, the competitive transition assessment, the systems benefits charge and the conservation and renewable energy charges. Under current regulatory provisions, UI's financial condition is not affected materially by whether customers choose alternate suppliers to UI's standard offer electric service. On December 28, 1999, UI and Enron Power Marketing, Inc. (EPMI) entered into a Wholesale Power Supply Agreement, a PPA Entitlements Transfer Agreement and related agreements documenting a four-year standard offer 10 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) power supply arrangement and the assumption of all of UI's long-term purchased power agreements, effective January 1, 2000. Under these agreements, EPMI supplies the generation services needed by UI to meet its standard offer obligations for four-year standard offer period at a fixed price. The agreements with EPMI also include a financially settled contract for differences related to certain call rights of EPMI and put rights of UI with respect to UI's entitlement in Seabrook Unit 1, and UI's provision to EPMI of certain ancillary products and services associated with that nuclear entitlement, which provisions terminate at the earlier of December 31, 2003 or the date that UI sells its interest in Seabrook Unit 1. The agreements do not restrict UI's right to sell to third parties UI's ownership and leasehold interests in Seabrook Unit 1 or the generated energy actually attributable to those interests. The Restructuring Act requires that, in order for UI to recover any stranded costs associated with its power plants, it must attempt to divest its ownership interests in its nuclear-fueled power plants prior to 2004. On October 1, 1998, in its "unbundling plan" filing with the DPUC under the Restructuring Act, and in other regulatory dockets, UI stated that it planned to divest its nuclear generation ownership and leasehold interests (17.5% of Seabrook Unit 1 in New Hampshire and 3.685% of Millstone Unit 3 in Connecticut) by the end of 2003, in accordance with the Restructuring Act. On April 19, 2000, the DPUC approved UI's plan for divesting its ownership interest in Millstone Unit 3 by participating in an auction process for all three of the generating units at Millstone Station, which was concluded on August 7, 2000 when Dominion Resources, Inc. agreed to purchase Millstone Units 1 and 2, and 93.47% of Millstone Unit 3 for $1.298 billion. The sale was consummated on March 31, 2001. UI's share of the proceeds from the sale, including nuclear fuel, was $35.2 million. There was no direct impact on UI's financial results in the first quarter, and net-of-tax proceeds from the sale that were in excess of the market value of the plant, as set by the DPUC, were credited to the Competitive Transition Assessment plant balances and rate base. That amount is approximately $15.8 million and is subject to true-up. On December 15, 2000, UI and The Connecticut Light and Power Company (CL&P) filed with the DPUC for its approval their plan to divest their respective interests in Seabrook Station by an auction process. On May 9, 2001, the DPUC issued an interim decision approving the plan, with certain modifications and subject to the impact of legislation under consideration in New Hampshire that could affect the divestiture transaction. On July 27, 2001, UI and CL&P filed a letter with the DPUC notifying the DPUC that appropriate New Hampshire legislation had been enacted and requesting that the DPUC finalize its decision. On October 10, 2001, the DPUC issued its final decision approving the plan with certain modifications. The New Hampshire Public Utilities Commission, in coordination with the DPUC, has retained an investment banking firm as the asset sale specialist to conduct the auction of Seabrook Station. The sale process is expected to begin by the end of 2001. Based on the decisions in the regulatory proceedings described above, the sale of UI's fossil-generation assets and its ownership interest in Millstone Unit 3, and the planned divestiture of its ownership and leasehold interests in Seabrook Station by the end of 2003, UI ceased applying Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," to the generation portion of its assets and operations as of December 31, 1999. Based on the favorable DPUC decisions that allow full recovery, through UI's rates, of all historically incurred stranded costs, UI did not record any write-offs in connection with this event. (E) SHORT-TERM CREDIT ARRANGEMENTS UIL Holdings has a Money Market Loan arrangement with Chase Manhattan Bank. This is an uncommitted short-term borrowing arrangement under which Chase Manhattan Bank may make loans to UIL Holdings for fixed maturities from one day up to six months. Chase Securities, Inc. acts as an agent and sells the loans to investors. The fixed interest rates on the loans are determined based on conditions in the financial markets at the time of each loan. As of September 30, 2001, UIL Holdings had no loans outstanding under this arrangement. UIL Holdings has a revolving credit agreement with a group of banks, which extends to August 1, 2002. The borrowing limit of this facility is $70 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 11 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) otherwise, or prospects of UIL Holdings and its subsidiaries, on a consolidated basis, should occur, the banks may decline to lend additional money to UIL Holdings under this revolving credit agreement, although borrowings outstanding at the time of such an occurrence would not then become due and payable. As of September 30, 2001, UIL Holdings had $10.0 million in short-term borrowings outstanding under this facility. The revolving credit agreement described above requires that UIL Holdings (i) maintain a ratio of consolidated debt to consolidated capital, as of the last day of each March, June, September and December, of not greater than 0.65 to 1.00; and (ii) shall not cause to exist debt of UIL Holdings (excluding debt of its subsidiaries) exceeding $200 million in the aggregate principal amount outstanding at any time. As of September 30, 2001, UIL Holdings' consolidated debt to consolidated capital ratio was 0.57 to 1.00; and its aggregate principal debt outstanding (excluding debt of its subsidiaries) was $153.8 million (including inter-company loans to UIL Holdings). Xcelecom, Inc. has a revolving working capital credit agreement with Fleet National Bank. This agreement provides for a $25 million revolving working capital facility, available to meet working capital needs and to support standby letters of credit issued by Xcelecom in the normal course of its business. This agreement also provides for the payment of interest at a rate, at the option of Xcelecom, based on the bank's prime interest rate or LIBOR. As of September 30, 2001, the outstanding balance on this facility was $12.9 million. In addition, Xcelecom had outstanding standby letters of credit of $4.3 million at September 30, 2001. This agreement requires that Xcelecom maintain certain financial ratio coverages, including minimum ratios at the end of each fiscal quarter of: (1) debt to earnings; (2) debt to assets; and (3) earnings to interest expense. At September 30, 2001, Xcelecom was in compliance with all covenants and conditions under this agreement. 12 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (F) INCOME TAXES
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- (Thousands of Dollars) Income tax expense consists of: Income tax provisions: Current Federal $17,233 $12,416 $48,750 $30,612 State 4,045 2,897 11,471 7,213 ------------- ------------ ------------ ------------ Total current 21,278 15,313 60,221 37,825 ------------- ------------ ------------ ------------ Deferred Federal (845) 1,124 (13,914) 6,202 State (440) 292 (3,690) 840 ------------- ------------ ------------ ------------ Total deferred (1,285) 1,416 (17,604) 7,042 ------------- ------------ ------------ ------------ Investment tax credits (166) (103) (477) (276) ------------- ------------ ------------ ------------ Total income tax expense $19,827 $16,626 $42,140 $44,591 ============= ============ ============ ============ Income tax components charged as follows: Operating tax expense $20,526 $18,357 $42,975 $47,574 Non-operating tax expense (699) (1,731) (835) (2,983) ------------- ------------ ------------ ------------ Total income tax expense $19,827 $16,626 $42,140 $44,591 ============= ============ ============ ============
13 UIL HOLDINGS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) (G) SUPPLEMENTARY INFORMATION (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- (Thousands of Dollars) OPERATING REVENUES - ------------------ Utility Retail $184,256 $160,028 $484,256 $457,697 Wholesale 17,574 20,511 44,989 59,083 Other 8,066 20,588 19,579 29,336 Non-regulated business unit revenues American Payment Systems 16,016 9,489 40,254 28,519 Xcelecom 87,752 36,456 229,355 71,490 Other/Eliminations (51) (18) (113) (27) --------------- --------------- --------------- -------------- Total Operating Revenues $313,613 $247,054 $818,320 $646,098 =============== =============== =============== ============== SALES BY CLASS(MEGAWATT-HOURS) - ----------------------------- Retail Residential 604,532 535,409 1,630,657 1,543,702 Commercial 685,247 657,897 1,883,646 1,808,518 Industrial 287,234 298,806 820,257 870,002 Other 10,296 10,445 32,982 33,945 --------------- --------------- --------------- -------------- 1,587,309 1,502,557 4,367,542 4,256,167 Wholesale 564,626 663,649 1,492,183 1,932,945 --------------- --------------- --------------- -------------- Total Sales by Class 2,151,935 2,166,206 5,859,725 6,189,112 =============== =============== =============== ============== DEPRECIATION AND AMORTIZATION - ----------------------------- Utility property, plant, and equipment $6,384 $6,255 $19,229 $18,506 Non-regulated business property, plant, and equipment 2,121 1,135 5,998 3,059 Amortization of nuclear plant regulatory assets 9,476 9,637 15,350 (695) Amortization of purchase power contracts 6,583 6,723 19,533 20,022 Amortization of other regulatory assets 1,437 1,221 4,310 4,261 Amortization of cancelled plant 293 293 879 879 Nuclear Decommissioning 833 1,007 2,604 3,002 --------------- --------------- --------------- -------------- Total Depreciation and Amortization $27,127 $26,271 $67,903 $49,034 =============== =============== =============== ============== TAXES-OTHER THAN INCOME TAXES - ----------------------------- Charged to: Operating: State gross earnings $8,094 $6,480 $20,434 $18,035 Local real estate and personal property 2,981 3,612 9,398 11,310 Payroll taxes 1,150 1,349 4,106 4,313 --------------- --------------- --------------- -------------- 12,225 11,441 33,938 33,658 Nonoperating and other accounts 143 197 450 476 --------------- --------------- --------------- -------------- Total Taxes-other than income taxes $12,368 $11,638 $34,388 $34,134 =============== =============== =============== ============== OTHER INCOME AND (DEDUCTIONS) - NET - ----------------------------------- Interest income $182 $197 $493 $808 Allowance for funds used during construction 464 693 1,374 1,860 Equity earnings from Connecticut Yankee 99 574 190 817 Miscellaneous other income and (deductions) - net 1,953 (3,450) 3,646 (3,879) --------------- --------------- --------------- -------------- Total Other Income and (Deductions) - net $2,698 ($1,986) $5,703 ($394) =============== =============== =============== ============== OTHER INTEREST - -------------- Notes Payable $345 $702 $2,342 $1,217 Other 1,186 1,324 2,001 1,835 --------------- --------------- --------------- -------------- Total Other Interest $1,531 $2,026 $4,343 $3,052 =============== =============== =============== ==============
14 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (L) COMMITMENTS AND CONTINGENCIES CAPITAL EXPENDITURE PROGRAM UIL Holdings' continuing capital expenditure program is presently estimated at $306.6 million, excluding UI's allowance for funds used during construction (AFUDC), for 2001 through 2005. NUCLEAR INSURANCE CONTINGENCIES The Price-Anderson Act, currently extended through August 1, 2002, limits public liability resulting from a single incident at a nuclear power plant. The first $200 million of liability coverage is provided by purchasing the maximum amount of commercially available insurance. Additional liability coverage will be provided by an assessment of up to $83.9 million per incident, levied on each of the nuclear units licensed to operate in the United States, subject to a maximum assessment of $10 million per incident per nuclear unit in any year. In addition, if the sum of all public liability claims and legal costs resulting from any nuclear incident exceeds the maximum amount of financial protection, each reactor operator can be assessed an additional 5% of $83.9 million, or $4.2 million. The maximum assessment is adjusted at least every five years to reflect the impact of inflation. With respect to the one operating nuclear generating unit in which UI has an interest, UI will be obligated to pay its ownership and leasehold share of any statutory assessment resulting from a nuclear incident at any nuclear generating unit. Based on its interest in this nuclear generating unit, UI estimates its maximum liability would be $14.7 million per incident. However, any assessment would be limited to $1.8 million per incident per year. The Nuclear Regulatory Commission requires each operating nuclear generating unit to obtain property insurance coverage in a minimum amount of $1.06 billion and to establish a system of prioritized use of the insurance proceeds in the event of a nuclear incident. The system requires that the first $1.06 billion of insurance proceeds be used to stabilize the nuclear reactor to prevent any significant risk to public health and safety and then for decontamination and cleanup operations. Only following completion of these tasks would the balance, if any, of the segregated insurance proceeds become available to the unit's owners. For the one operating nuclear generating unit in which UI has an interest, UI is required to pay its ownership and leasehold share of the cost of purchasing such insurance. Although this unit has purchased $2.75 billion of property insurance coverage, representing the limits of coverage currently available from conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds. Under those circumstances, the nuclear insurance pools that provide this coverage may levy assessments against the insured owner companies if pool losses exceed the accumulated funds available to the pool. The maximum potential assessments against UI with respect to losses occurring during current policy years are approximately $2.1 million. OTHER COMMITMENTS AND CONTINGENCIES CONNECTICUT YANKEE On December 4, 1996, the Board of Directors of the Connecticut Yankee Atomic Power Company (Connecticut Yankee) voted unanimously to retire the Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial operation. UI has a 9.5% stock ownership share in Connecticut Yankee. The power purchase contract under which UI had purchased its 9.5% entitlement to the Connecticut Yankee Unit's power output permits Connecticut Yankee to recover 9.5% of all of its costs from UI. In December of 1996, Connecticut Yankee filed decommissioning cost estimates and amendments to the power contracts with its owners with the Federal Energy Regulatory Commission (FERC). Based on regulatory precedent, this filing requested confirmation that Connecticut Yankee will continue to collect from its owners its decommissioning costs, the unrecovered investment in the Connecticut Yankee Unit and other costs associated with the permanent shutdown of the Connecticut Yankee Unit. On April 7, 2000, Connecticut Yankee reached a settlement agreement with the DPUC and the Connecticut Office of Consumer Counsel (two of the intervenors in the FERC proceeding). This agreement was submitted to the FERC, which approved it in all respects on July 26, 2000; and it became effective on August 1, 2000. The agreement allows Connecticut Yankee to earn a return on equity of 6% and stipulates a new decommissioning cost estimate for the Connecticut Yankee Unit for purposes of 15 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) FERC-approved decommissioning cost collections by Connecticut Yankee through the power contracts with the unit's owners. UI's estimate of its remaining share of Connecticut Yankee costs, including decommissioning, less return of investment (approximately $6.4 million) and return on investment (approximately $1.4 million) at September 30, 2001, is approximately $15.3 million. This estimate, which is subject to ongoing review and revision, has been recorded as an obligation with an offsetting regulatory asset of $21.7 million, which includes the $6.4 million return of investment. HYDRO-QUEBEC UI is a participant in the Hydro-Quebec transmission intertie facility linking New England and Quebec, Canada. Phase I of this facility, which became operational in 1986 and in which UI has a 5.45% participating share, has a 690 megawatt equivalent generation capacity value; and Phase II, in which UI has a 5.45% participating share, increased the equivalent generation capacity value of the intertie from 690 megawatts to a maximum of 2000 megawatts in 1991. UI is obligated to furnish a guarantee for its participating share of the debt financing for the Phase II facility. As of September 30, 2001, UI's guarantee liability for this debt was approximately $5.1 million. LONG ISLAND CABLE PROJECT United Capital Investments (UCI), an indirect wholly-owned subsidiary of UIL Holdings, has a 25% interest in a merchant electric transmission line project that proposes to install, own and operate a 330-megawatt transmission line connecting Connecticut and Long Island under Long Island Sound. UCI is obligated to furnish a direct guarantee by means of a letter of credit for its participating share of the debt financing of the project. Under separate agreement, UIL Holdings is an indirect guarantor of the obligation of UCI. As of September 30, 2001, UCI's guarantee liability for this debt was approximately $7.7 million. In March 2001, the Connecticut Siting Council rejected, without prejudice, a permit application for siting the cable, in part because of potential damage that installation of the cable could inflict upon oyster beds in New Haven Harbor. The project has filed a new application with the Siting Council utilizing a revised route that addresses environmental concerns. A decision from the Siting Council is expected in the fourth quarter of 2001. 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. SITE DECONTAMINATION, DEMOLITION AND REMEDIATION COSTS UI has estimated that the total cost of decontaminating and demolishing its Steel Point Station and completing requisite environmental remediation of the site will be approximately $11.3 million, of which approximately $8.7 million had been incurred as of September 30, 2001, and that the value of the property following remediation will not exceed $6.0 million. As a result of a 1992 DPUC retail rate decision, beginning January 1, 1993, UI has been recovering through retail rates $1.075 million of the remediation costs per year. The remediation costs, property value and recovery from customers will be subject to true-up in UI's pending retail rate proceeding, based on actual remediation costs and actual gain on UI's disposition of the property. UI has begun 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 16 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) in service and the remaining estimated cost of $9.3 million was expensed. UI has conveyed to an unaffiliated entity, Quinnipiac Energy LLC (QE), this entire site, reserving to UI permanent easements for the operation of its transmission facilities on the site. QE will complete the bulkhead replacement project at UI's expense, with UI acting as the project manager. UI has also funded 61% (approximately $1.2 million) of the environmental remediation costs that will be incurred by QE to bring the site into compliance with applicable minimum Connecticut environmental standards. QE intends to reactivate the generation facilities on the site as a merchant electric generating plant. UI closed on the sale of its Bridgeport Harbor Station and New Haven Harbor Station generating plants in compliance with Connecticut's electric utility industry restructuring legislation on April 16, 1999. Environmental assessments performed in connection with the marketing of these plants indicate that substantial remediation expenditures will be required in order to bring the plant sites into compliance with applicable minimum Connecticut environmental standards. The purchaser of the plants has agreed to undertake and pay for the major portion of this remediation. However, UI will be responsible for remediation of the portions of the plant sites that have been retained by it. (M) NUCLEAR FUEL DISPOSAL AND NUCLEAR PLANT DECOMMISSIONING New Hampshire has enacted a law requiring that the funds required to finance the decommissioning of nuclear generating units in that state be managed by the State Treasurer. The New Hampshire Nuclear Decommissioning Financing Committee (NDFC) has established $556 million (in 2001 dollars) as the decommissioning cost estimate for Seabrook Unit 1, of which UI's share would be approximately $97 million. This estimate assumes the prompt removal and dismantling of the unit at the end of its estimated 36-year energy producing life. Monthly decommissioning payments are being made to the state-managed decommissioning trust fund. UI's share of the decommissioning payments made during the first nine months of 2001 was $2.5 million. UI's share of the fund at September 30, 2001 was approximately $25.3 million. Connecticut has enacted a law requiring the operators of nuclear generating units to file periodically with the DPUC their plans for financing the decommissioning of the units in that state. As of January 1, 2000, the estimate of future decommissioning costs to be incurred subsequent to that date for the Connecticut Yankee Unit, assuming the prompt removal and dismantling of the unit, was $394 million. As of September 30, 2001, $106 million of this amount had been expended for decommissioning. The projected remaining decommissioning cost is $288 million, of which UI's share is $27 million. For UI's 9.5% equity ownership in Connecticut Yankee, decommissioning costs of $1.2 million were funded by UI during the first nine months of 2001, and UI's share of the fund at September 30, 2001 was $14 million. On April 19, 2000, the DPUC approved UI's plan for divesting its ownership interest in Millstone Unit 3 by participating in an auction process for all three of the generating units at Millstone Station, which was concluded on August 7, 2000 when Dominion Resources, Inc. (Dominion) agreed to purchase Millstone Units 1 and 2, and 93.47% of Millstone Unit 3. The sale was consummated on March 31, 2001. UI's share of the Millstone Unit 3 decommissioning payments made during the first three months of 2001 was $1.2 million. This amount included a preliminary payment of $1.1 million required by the Purchase and Sale Agreement (PSA) with Dominion. The actual amount due Dominion under the PSA is still subject to final adjustment, but UI does not expect an adjustment to be material. UI's share of the fund at March 31, 2001 was $8.5 million. This balance was transferred to Dominion on that date, along with the decommissioning obligation. (P) SEGMENT INFORMATION UIL Holdings has two reportable operating segments, UI, its regulated electric utility business engaged in the transmission, distribution and sale of electricity, and Xcelecom, Inc., its non-regulated, indirect, wholly-owned subsidiary, which provides specialized contracting services in the electrical, communications and data network infrastructure industries. Revenues from inter-segment transactions are not material, and all of UIL Holdings' revenues are derived in the United States. 17 UIL HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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-regulated businesses and inter-segment eliminations. 9/30/2001 12/31/2000 --------- ---------- Total Assets (In Thousands) ------------ Regulated Utility $1,587,989 $1,602,327 Xcelecom - Non-regulated Business 164,372 136,951 Other 150,664 129,276 ----------------------------------------- Total - UIL Holdings $1,903,025 $1,868,554 =========================================
QUARTER QUARTER ENDED ENDED YEAR TO DATE YEAR TO DATE 9/30/2001 9/30/2000 9/30/2001 9/30/2000 --------- --------- --------- --------- (In Thousands) Revenues from External Customers - -------------------------------- Regulated Utility $209,896 $201,127 $548,824 $546,116 Xcelecom - Non-regulated Business 87,752 36,456 229,355 71,490 Other 15,965 9,471 40,141 28,492 -------------------------------------------------------------------- Total - UIL Holdings $313,613 $247,054 $818,320 $646,098 ==================================================================== Income (Loss) before Income Taxes - --------------------------------- Regulated Utility $41,854 $38,622 $89,802 $100,602 Xcelecom - Non-regulated Business 3,861 1,157 7,265 1,319 Other (959) (3,446) (5,302) (2,962) -------------------------------------------------------------------- Total - UIL Holdings $44,756 $36,333 $91,765 $98,959 ====================================================================
(Q) RESTRUCTURING UI is currently undergoing a restructuring and redesign in order to align more properly its services and costs. As of September 30, 2001, approximately $3.7 million had been accrued under this program, representing employee severance payments. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MAJOR INFLUENCES ON FINANCIAL CONDITION The financial condition of UIL Holdings Corporation (UIL Holdings) will continue to be dependent on the level of the electric utility retail sales of The United Illuminating Company (UI), and on UI's ability to control expenses, as well as on the performance of the businesses of UIL Holdings' non-regulated subsidiaries. The two primary factors that affect electric utility sales volume are economic conditions and weather. The principal factors affecting the financial condition of UIL Holdings' operating non-regulated subsidiaries, American Payment Systems, Inc. and Xcelecom, Inc., are the pace of technological changes, competition and risks related to the management of growth, including, in the case of Xcelecom, acquisition financing and integration. UIL Holdings' financial status and financing capability will continue to be sensitive to many other factors, including conditions in the securities markets, economic conditions, interest rates, the level of income and cash flow of UIL Holdings' subsidiaries, and legislative and regulatory developments, including the cost of compliance with increasingly stringent environmental legislation and regulations. On December 31, 1996, the Connecticut Department of Public Utility Control (DPUC) completed a financial and operational review of UI and ordered a five-year incentive retail rates regulation plan for the years 1997 through 2001 (the Rate Plan). The Rate Plan accelerates the amortization and recovery of regulatory assets during 1999-2001 if UI's common equity return on regulated utility investment exceeds 10.5% after recording the amortization. UI's authorized return on regulated utility common equity during the period is 11.5%. Earnings above 11.5%, on an annual basis, are utilized one-third for customer price reductions, one-third to increase amortization of assets, and one-third retained as earnings. The Rate Plan included a provision that it could be reopened and modified upon the enactment of electric utility restructuring legislation in Connecticut. On October 1, 1999, the DPUC issued a decision establishing UI's standard offer customer rates, commencing January 1, 2000, at a level 10% below 1996 rates, as directed by the Restructuring Act described in detail below. These standard offer customer rates supersede the rates that were included in the Rate Plan. The decision also reduced the required amount of accelerated amortization of assets in 2000 and 2001. Under this 1999 decision, all other components of the 1996 Rate Plan are expected to remain in effect through 2001. The Connecticut Office of Consumer Counsel (OCC), the statutory representative of consumer interests in public utility matters, appealed the DPUC's standard offer decision to the Connecticut Superior Court, challenging the DPUC's determination of UI's average prices in 1996 rates from which a 10% reduction is required by the Restructuring Act. On February 22, 2001, the Superior Court dismissed the OCC's appeal from the DPUC's decision. On February 13, 2001, the Connecticut Attorney General and the OCC petitioned the DPUC to initiate a proceeding and hold a hearing concerning the need to decrease UI's rates by reason of UI having earned a return on regulated common equity more than 1% above the authorized level of 11.5% for at least six consecutive months. The DPUC docketed such a proceeding and, by a letter dated July 3, 2001, stated its intention to combine a full review of UI's retail rates (a Rate Case) in the same docket as the overearnings proceeding. Following hearings on August 8, 2001 and August 27, 2001, the DPUC issued a final decision on October 31, 2001 holding that as a result of the earnings sharing mechanism embedded in UI's rate plan, UI's customers have directly benefited when UI has earned over its 11.5% authorized return on regulated common equity during the Rate Plan period. Because the earnings sharing mechanism is scheduled to end, with the Rate Plan, on December 31, 2001, the DPUC ordered that the earnings sharing mechanism be extended effective January 1, 2002 until the conclusion of the Rate Case proceeding. The DPUC's decision also found that UI's earnings are not expected to exceed 11.5% in 2002, but that just and reasonable rates for UI at this point in time can only be determined in the full Rate Case proceeding. Accordingly, the DPUC ordered UI to file rate case schedules with the DPUC by November 15, 2001. UI expects to file rate case schedules on November 15, 2001, together with supporting pre-filed sworn written testimony. UI anticipates a final decision in the rate case proceeding within 180 days of this filing. In April 1998, Connecticut enacted Public Act 98-28 (the Restructuring Act), a massive and complex statute designed to restructure the State's regulated electric utility industry. As a result of the Restructuring Act, the business of generating and selling electricity directly to consumers has been opened to competition. These business 19 activities are separated from the business of delivering electricity to consumers, also known as the transmission and distribution business. The business of delivering electricity remains with the incumbent franchised utility companies (including UI) which continue to be regulated by the DPUC as Distribution Companies. Under the Restructuring Act, all of UI's customers are able to choose their power supply providers. Until January 1, 2004, UI is required to offer full "standard offer" electric service, under regulated rates, to all customers who do not choose alternate power supply providers. The standard offer rates must be at least 10% below the average prices in 1996. Under current regulatory provisions, UI's financial condition is not affected materially by whether customers choose alternate suppliers to UI's standard offer electric service. On December 28, 1999, UI and Enron Power Marketing, Inc. (EPMI) entered into a Wholesale Power Supply Agreement, a PPA Entitlements Transfer Agreement and related agreements documenting a four-year standard offer power supply arrangement and the assumption of all of UI's long-term purchased power agreements, effective January 1, 2000. Under these agreements, EPMI supplies the generation services needed by UI to meet its standard offer obligations for the four-year standard offer period at a fixed price. The agreements with EPMI also include a financially settled contract for differences related to certain call rights of EPMI and put rights of UI with respect to UI's entitlement in Seabrook Unit 1, and UI's provision to EPMI of certain ancillary products and services associated with that nuclear entitlement, which provisions terminate at the earlier of December 31, 2003 or the date that UI sells its interest in Seabrook Unit 1. The agreements do not restrict UI's right to sell to third parties UI's ownership and leasehold interests in Seabrook Unit 1 or the generated energy actually attributable to those interests. The Restructuring Act requires that UI must attempt to divest its ownership interests in its nuclear-fueled power plants prior to 2004 in order to recover any stranded costs associated with its power plants. On October 1, 1998, in its "unbundling plan" filing with the DPUC under the Restructuring Act, and in other regulatory dockets, UI stated that it planned to divest its nuclear generation ownership interests (17.5% of Seabrook Unit 1 in New Hampshire and 3.685% of Millstone Unit 3 in Connecticut) by the end of 2003, in accordance with the Restructuring Act. On April 19, 2000, the DPUC approved UI's plan for divesting its ownership interest in Millstone Unit 3 by participating in an auction process for all three of the generating units at Millstone Station, which was concluded on August 7, 2000, when Dominion Resources, Inc. agreed to purchase Millstone Units 1 and 2, and 93.47% of Millstone Unit 3 for $1.298 billion. The sale was consummated on March 31, 2001. UI's share of the proceeds from the sale, including the sale of nuclear fuel, was $35.2 million. On December 15, 2000, UI and The Connecticut Light and Power Company (CL&P) filed with the DPUC for its approval their plan to divest their respective interests in Seabrook Station by an auction process. On May 9, 2001, the DPUC issued an interim decision approving the plan, with certain modifications and subject to the impact of legislation under consideration in New Hampshire that could affect the divestiture transaction. On July 27, 2001, UI and CL&P filed a letter with the DPUC notifying the DPUC that appropriate New Hampshire legislation had been enacted and requesting that the DPUC finalize its decision. On October 10, 2001, the DPUC issued its final decision approving the plan with certain modifications. The New Hampshire Public Utilities Commission, in coordination with the DPUC, has retained an investment banking firm as the asset sale specialist to conduct the auction of Seabrook Station. The sale process is expected to begin by the end of 2001. 20 CAPITAL EXPENDITURE PROGRAM UIL Holdings' 2001-2005 estimated capital expenditure program, excluding UI's allowance for funds used during construction, is presently budgeted as follows:
2001 2002 2003 2004 2005 TOTAL ---- ---- ---- ---- ---- ----- (In Thousands) UI Distribution and Transmission $44,225 $66,132 $52,559 $34,629 $25,387 $222,932 Nuclear Generation (1) 2,276 - - - - 2,276 Nuclear Fuel (1) 5,094 3,677 - - - 8,771 ---------------------------------------------------------------------------- Total UI 51,595 69,809 52,559 34,629 25,387 233,979 ---------------------------------------------------------------------------- United Resources, Inc. (URI) Xcelecom 6,643 7,473 13,052 6,834 8,298 42,300 American Payment Systems 11,754 2,625 2,606 2,586 2,600 22,171 United Capital Investments 5,534 1,450 890 250 - 8,124 ---------------------------------------------------------------------------- Total URI 23,931 11,548 16,548 9,670 10,898 72,595 ---------------------------------------------------------------------------- Total UIL Holdings $75,526 $81,357 $69,107 $44,299 $36,285 $306,574 ============================================================================
(1) Assumes that the sale of UI's interest in Seabrook Station will be completed by December 31, 2002. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, UIL Holdings had $59.0 million of cash and temporary cash investments, of which $39.2 million is restricted cash. This represents an increase of $11.6 million from the corresponding balance at December 31, 2000. The components of this increase, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows: (In Millions) ----------- Balance, December 31, 2000 $47.4 ---- Net cash provided by operating activities 79.5 Net cash provided by (used in) financing activities: - Financing activities, excluding dividend payments (10.6) - Dividend payments (30.4) Retirement of debt securities 1.9 Cash invested in plant, including nuclear fuel (28.8) ---- Net Change in Cash 11.6 ---- Balance, September 30, 2001 $59.0 ==== 21 UIL Holdings' capital requirements are presently projected as follows:
2001 2002 2003 2004 2005 ---- ---- ---- ---- ---- (In Millions) Cash on Hand - Beginning of Year (1) $14.2 $ - $ - $ - $ - Funds from Operations less Dividends (2) 92.4 80.4 77.3 88.3 91.4 ------------------------------------------------------- Subtotal 106.6 80.4 77.3 88.3 91.4 Less: Capital Expenditures (2) UI 51.6 69.8 52.6 34.6 25.4 URI 23.9 11.6 16.5 9.7 10.9 ------------------------------------------------------- Total Capital Expenditures 75.5 81.4 69.1 44.3 36.3 Plus: Net Cash from Plant Sales (3) 11.0 130.0 84.9 - - ------------------------------------------------------- Cash Available to pay Debt Maturities and Redemptions 42.1 129.0 93.1 44.0 55.1 Less: Maturities and Mandatory Redemptions - 100.0 100.0 - 79.3 Optional Redemptions - 128.2 - - - ------------------------------------------------------- External Financing Requirements (Surplus) (2) (42.1) 99.2 6.9 (44.0) 24.2 ------------------------------------------------------- Plus: Issuance and Sale of Long-term Debt 75.0 75.0 75.0 - 50.0 ------------------------------------------------------- Increase (Decrease) in Short-Term Borrowings (117.1) 24.2 (68.1) (44.0) (25.8) ------------------------------------------------------- Short-Term Borrowings/(Temporary Cash Investments) - End of Year $(6.4) $17.8 $(50.3) $(94.3) $(120.1) =======================================================
(1) Excludes $3.3 million Seabrook Unit 1 operating deposit, and restricted cash of American Payment Systems, Inc. of $29.9 million. (2) "Funds from Operations less Dividends", "Capital Expenditures" and "External Financing Requirements (Surplus)" are estimates based on current earnings and cash flow projections. All of these estimates are subject to change due to future events and conditions that may be substantially different from those used in developing the projections. (3) The estimate for "Net Cash from Plant Sales" for 2002 is based on speculative pricing and other projections for the sale of Seabrook Station, including a sale date by December 31, 2002. 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 $70 million revolving credit agreement with a group of banks, future external financing needs are expected to be satisfied by the issuance of additional short-term and long-term debt. The continued availability of these methods of financing will be dependent on many factors, including conditions in the securities markets, economic conditions, and future income and cash flow. See Item 1, "Notes to Financial Statements," Notes (B) and (E) for a discussion of UIL Holdings' credit arrangements. SUBSIDIARY OPERATIONS UI is a regulated operating electric public utility established in 1899. It is engaged principally in the purchase, transmission, distribution and sale of electricity for residential, commercial and industrial purposes in a service area 22 of about 335 square miles in the southwestern part of the State of Connecticut. The population of this area is approximately 704,000, which represents approximately 21% of the population of the State. The service area, largely urban and suburban in character, includes the principal cities of Bridgeport (population approximately 137,000) and New Haven (population approximately 124,000) and their surrounding areas. Situated in the service area are retail trade and service centers, as well as large and small industries producing a wide variety of products, including helicopters and other transportation equipment, electrical equipment, chemicals and pharmaceuticals. Of UI's 2000 retail electric revenues, approximately 42% were derived from residential sales, 40% from commercial sales, 16% from industrial sales and 2% from other sales. URI serves as the parent corporation for several non-regulated businesses, each of which is incorporated separately to participate in business ventures that will provide long-term rewards to UIL Holdings' shareowners. As of September 30, 2001, URI has invested approximately $226 million in its non-regulated businesses. URI, which is not itself an operating company, has four wholly-owned subsidiaries: AMERICAN PAYMENT SYSTEMS, INC. (APS) is the largest vendor in the nation for walk-in payment of utility bills. APS manages a national network of retailers for the processing of bill payments made by customers of UI and other companies. It recruits and manages retailers who collect payments for APS contracted and non-contracted billers, which include major utility and telecommunications companies. The retailers transmit all billing information to APS electronically and deposit all payments into a bank account. APS sweeps these accounts daily and then forwards payment and other information electronically to the billers. APS processes all critical data in-house in Hamden, Connecticut. APS's subsidiaries include APS Card Services, Inc. of Connecticut and CellCards of Illinois, LLC, who market prepaid stored value cards and prepaid telecommunications calling cards, respectively, at retail locations throughout the United States. XCELECOM, INC. (Xcelecom, formerly known as Precision Power, Inc.) and its subsidiaries, provide general and specialty electrical and voice-data-video design, construction, systems integration and services in regional markets of the Eastern United States. The Xcelecom group currently includes Allan Electric Co., Inc., Brite-Way Electrical Contractors, Inc., JBL Electric, Inc. and The Datastore, Incorporated, of New Jersey, Orlando Diefenderfer Electrical Contractors, Inc., of Pennsylvania, 4Front Systems, Inc., of North Carolina, and Johnson Electric Co., Inc., M. J. Daly & Sons, Inc., McPhee Electric Ltd., LLC and McPhee Utility Power and Signal, Ltd., of Connecticut. Xcelecom also owns and operates heating and cooling energy centers through its Thermal Energies, Inc. subsidiary, providing heating and cooling services to two of New Haven, Connecticut's largest office and government complexes. UNITED CAPITAL INVESTMENTS, INC. (UCI) and its subsidiaries invest in business ventures that are expected to earn above-average returns. Some of its investments include: o LONG ISLAND CABLE PROJECT - UCI has a 25% interest in a merchant electric transmission line project that proposes to install, own and operate a 330-megawatt transmission line connecting Connecticut and Long Island under Long Island Sound; o ZERO STAGE CAPITAL - Regional high technology venture capital funds in which UCI has invested, both as a financial investment and as a means of promoting local economic development; and o GEMINI NETWORKS - A regional wholesale and retail bandwidth provider. UNITED BRIDGEPORT ENERGY, INC. owns, as a passive investor, 331/3% of a merchant wholesale electric generating facility co-owned and operated by a unit of Duke Energy and located in Bridgeport, Connecticut. RESULTS OF OPERATIONS --------------------- As a result of the formation of UIL Holdings Corporation (UIL Holdings), all subsidiary results are consolidated. All periods reported herein have been reclassified for consolidated reporting, with no impact on earnings. 23 THIRD QUARTER 2001 VS. THIRD QUARTER 2000 - ----------------------------------------- Third quarter 2001 results for UIL Holdings reflect the change in the quarterly earnings pattern compared to 2000 that was predicted by UIL Holdings in its fourth quarter 2000 earnings release dated January 22, 2001. UIL Holdings achieved earnings above the top end of the estimated 2001 range for the third quarter reported in its second quarter 2001 earnings release dated July 23, 2001. The actual third quarter earnings were higher than estimated because of better than expected performance at The United Illuminating Company's Seabrook nuclear generating unit, and higher than anticipated revenues and earnings at its distribution division, both from higher retail sales and average prices. The retail sales improvement was almost entirely due to hotter than normal weather, which resulted in higher kwh usage and contributed to a higher average price. Additionally, Xcelecom, Inc., a United Resources, Inc. (URI) subsidiary, performed better than expected, but that performance was offset by the lower performance of URI's passive investments. UIL HOLDINGS CORPORATION (UIL HOLDINGS) RESULTS OF OPERATIONS: THIRD QUARTER - ----------------------------------------------------------------------------- 2001 VS. THIRD QUARTER 2000 - ---------------------------
- --------------------------------------- ---------------- ------------------ --------------------------- 2001 more (less) than 2000 -------------------------- Quarter Ended Quarter Ended ($000 except Earnings Per Share (EPS)) Sept. 30, 2001 Sept. 30, 2000 Amount Percent - --------------------------------------- ---------------- ------------------ --------------- ----------- Operating Revenue United Illuminating $209,896 $201,127 $8,769 4% United Resources $103,717 $45,927 $57,790 126% -------- ------- ------- Total Operating Revenue $313,613 $247,054 $66,559 27% TOTAL EARNINGS FOR COMMON STOCK $24,929 $19,707 $5,222 27% EPS (BASIC) United Illuminating $1.65 $1.29 $0.36 28% United Resources $0.12 $(0.10) $0.22 ----- ------- ----- TOTAL EPS FROM OPERATIONS $1.77 $1.19 $0.58 49% EPS from one-time items $0.00 $0.21 $(0.21) - - Dilution $0.00 $0.00 $0.00 - - ----- ----- ----- TOTAL EPS (DILUTED) $1.77 $1.40 $0.37 26% - --------------------------------------- ---------------- ------------------ --------------- -----------
UNITED ILLUMINATING (UI) RESULTS OF OPERATIONS: THIRD QUARTER 2001 VS. THIRD - ----------------------------------------------------------------------------- QUARTER 2000 - ------------ Third quarter results for UI reflect the change in the quarterly earnings pattern compared to 2000 that was predicted by UIL Holdings on January 22, 2001.
- --------------------------------------------------------------------------------------------------------------------- 2001 more (less) than 2000 ---------------------------- Quarter Ended Quarter Ended ($000 except Earnings Per Share (EPS)) Sept. 30, 2001 Sept. 30, 2000 Amount Percent - -------------------------------------------------- ----------------- ------------------ ---------------- ------------ Operating Revenue from Operations $209,896 $191,485 $18,411 10% One-time Operating Revenues net of sharing 0 9,642 (9,642) (100)% ------- ------- ------- Total Operating Revenue $209,896 $201,127 $8,769 4% EPS FROM OPERATIONS (BASIC) UI excluding Nuclear Division and Sharing $1.51 $1.89 $(0.38) (20)% Sharing $(0.10) $(0.82) $0.72 - - Nuclear Division $0.24 $0.22 $0.02 9% ----- ------ ------ Total UI EPS from operations $1.65 $1.29 $0.36 28% GWH SALES (THOUSANDS OF MWH) 1,588 1,502 86 5.7% - -------------------------------------------------- ----------------- ------------------ ---------------- ------------
UI EXCLUDING THE NUCLEAR DIVISION Excluding the nuclear division and "sharing" under UI's retail customer Rate Plan (described below), UI's earnings from operations were $1.51 per share in the third quarter of 2001 compared to $1.89 per share in the third quarter of 24 2000. The $0.38 per share decrease was due primarily to the $2.0 million increase on a pre-tax basis ($1.7 million after-tax) in accelerated amortization expense that went into effect on January 1, 2001 as part of the Rate Plan, and to a $4.2 million decrease in the pre-tax earnings of UI's employees' pension fund. Similar impacts in accelerated amortization and the pension fund earnings will be repeated in the remaining quarter of 2001. Both changes have been anticipated in UIL Holdings' earnings guidance for 2001. See the "Looking Forward" section for more details. On December 31, 1996, the DPUC issued an order that implemented a five-year Rate Plan to reduce UI's regulated retail prices and accelerate the recovery of certain "regulatory assets." Under the Rate Plan, UI's authorized return on regulated utility common equity during the five-year period is 11.5%. Earnings for the distribution division that exceed 11.5%, on an annual basis, are "shared," one-third for customer price reductions, one-third to increase amortization of regulatory assets, and one-third retained as earnings. The details below explain the variances for all of UI excluding the nuclear division. It should be noted that changes to income and expense items in the distribution division have an immediate net income impact, while changes to those items in "other unbundled utility divisions" do not. Those divisions include the Competitive Transition Assessment (CTA) and the Systems Benefits Charge (SBC), both of which earn an 11.5% return on the equity portion of their respective rate bases. That return is achieved by either accruing additional amortization expenses, or by deferring such expenses as required. Amortization expenses in those divisions impact earnings indirectly, and mostly in the future, through changes to rate base. The "other unbundled utility divisions" also include the Generation Service charge (GSC), the Conservation and Load Management (C&LM) charge, and the Renewables charge. Those are pass-through charges. Except for a small management fee earned in the C&LM division, expenses are either accrued or deferred such that there is no net income associated with those divisions. Overall, UI retail revenue increased by $24.2 million in the third quarter of 2001, to $184.3 million, compared to the third quarter of 2000.
$ millions - --------------------------------------------------------------------------------------------------------------- From From Retail Revenue Increase/(Decrease) Operations One-Time Items Total - ---------------------------------------------------------- ----------------- ------------------- -------------- Revenue from Distribution Division: - ---------------------------------------------------------- ----------------- ------------------- -------------- Estimate of operating Distribution Division component of "weather corrected" retail sales growth, (0.3)% (0.1) (0.1) - ---------------------------------------------------------- ----------------- ------------------- -------------- Estimate of operating Distribution Division component of weather effect on retail sales, 5.9% 4.4 4.4 - ---------------------------------------------------------- ----------------- ------------------- -------------- Impact of mix of sales on average price and other (0.5) (0.5) - ---------------------------------------------------------- ----------------- ------------------- -------------- Sharing revenues 9.1 5.3 14.4 - ---------------------------------------------------------- ----------------- ------------------- -------------- TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION 12.9 5.3 18.2 - ---------------------------------------------------------- ----------------- ------------------- -------------- REVENUE FROM OTHER UNBUNDLED UTILITY DIVISIONS 6.0 - - 6.0 - ---------------------------------------------------------- ----------------- ------------------- -------------- TOTAL UI RETAIL REVENUE 18.9 5.3 24.2 - ---------------------------------------------------------- ----------------- ------------------- --------------
Other operating revenues, excluding one-time revenues of $15 million recorded in the third quarter of 2000 for the Millstone Unit 3 management dispute arbitration settlement, increased by $2.4 million in the third quarter of 2001 compared to the third quarter of 2000. Other operating revenues include transmission revenues from the New England Power Pool (NEPOOL), which increased by $2.7 million in the third quarter of 2001 compared to the third quarter of 2000, and which were partially offset by a decrease of $0.3 million in other items. Retail fuel and energy expense increased by $3.3 million in the third quarter of 2001 compared to the third quarter of 2000. UI receives, and will receive through 2003, electricity to satisfy its standard offer retail customer service requirements through fixed-price purchased power agreements. These costs are recovered through the GSC portion of UI's unbundled retail customer rates. It should be noted that a small number of customers have selected alternate suppliers to provide generation services, but this has no effect on UI's financial results. 25 UI's operating expenses for operation, maintenance and purchased capacity (O&M and Capacity) increased by $4.6 million in the third quarter of 2001 compared to the third quarter of 2000. The principal components of these expense changes included: $ millions - -------------------------------------------------------------- ------------- Increase/ Operating Distribution Division: (Decrease) - -------------------------------------------------------------- ------------- Pension fund earnings (Note A) 4.2 - -------------------------------------------------------------- ------------- NEPOOL transmission expense 1.7 - -------------------------------------------------------------- ------------- Severance costs 0.9 - -------------------------------------------------------------- ------------- Other (0.1) - -------------------------------------------------------------- ------------- TOTAL OPERATING DISTRIBUTION DIVISION 6.7 - -------------------------------------------------------------- ------------- O&M AND CAPACITY FROM OTHER UNBUNDLED UTILITY DIVISIONS (2.1) - -------------------------------------------------------------- ------------- TOTAL O&M EXPENSE 4.6 - -------------------------------------------------------------- ------------- Note A: This cost increase reflects the deteriorating conditions in the financial markets over the past eighteen months. Other taxes for UI decreased by $0.6 million in the third quarter of 2001 compared to the third quarter of 2000. Depreciation and amortization expense for UI, excluding amortization of regulatory assets in the CTA, were unchanged in the third quarter of 2001 compared to the third quarter of 2000. According to the Rate Plan, under which UI is currently operating, "accelerated" amortization of past regulated utility investments is scheduled for every year that the Rate Plan is in effect, contingent upon UI earning a 10.5% return on regulated utility common equity. Beginning in 2000, these accelerated amortizations are charged to, and impact directly the earnings of, the operating distribution division. They impact the earnings of the CTA only indirectly through changes to the CTA rate base. Additionally, any "sharing" amortization required as a result of the distribution division exceeding an 11.5% return on the equity portion of its rate base impacts the distribution division earnings but reduces CTA rate base. UI is allowed to earn an 11.5% return, no more and no less, on the equity portion of the CTA rate base that includes all stranded assets. If CTA revenues and various costs included in the CTA do not produce an 11.5% return, then plant amortizations are either accelerated or deferred accordingly. A similar mechanism is in place to deal with SBC, but the impact is immaterial. The table below shows the increases and decreases in amortization of regulatory assets in the third quarter of 2001 compared to the third quarter of 2000. "Accelerated" amortization is spread evenly throughout the year, assuming the 10.5% return is maintained; but "sharing" amortization will only take place once the distribution division achieves an 11.5% return on the common equity portion of its rate base on a year-to-date basis. This usually will not occur until at least the third quarter, and all positive earnings of the distribution division from that point to the end of the year will be "shared". Amortization of regulatory assets, exclusive of third quarter 2000 sharing amortization associated with a one-time item, increased in the third quarter of 2001 compared to the third quarter of 2000 by $3.3 million. The principal components of this change were: 26
$ millions: Increase (Decrease) - ----------------------------------------------------------------------------------------- Amortization of regulatory assets: As Booked After-tax - -------------------------------------------------------- ----------------- -------------- Distribution Division: - -------------------------------------------------------- ----------------- -------------- Accelerated amortization 2.0 1.6 - -------------------------------------------------------- ----------------- -------------- "Sharing" from operations (5.9) (5.0) - -------------------------------------------------------- ----------------- -------------- TOTAL DISTRIBUTION DIVISION (3.9) (3.4) - -------------------------------------------------------- ----------------- -------------- Amortization in CTA and SBC 7.2 4.3 - -------------------------------------------------------- ----------------- -------------- AMORTIZATION OF REGULATORY ASSETS EXCL. ONE-TIME 3.3 0.9 - -------------------------------------------------------- ----------------- -------------- One-time "Sharing" amortization (third quarter 2000) (3.4) (3.0) - -------------------------------------------------------- ----------------- -------------- TOTAL AMORTIZATION OF REGULATORY ASSETS (0.1) (2.1) - -------------------------------------------------------- ----------------- --------------
Net interest charges for UI, including the "Dividend requirement of mandatorily redeemable securities" and interest income, increased only slightly in the third quarter of 2001 compared to the third quarter of 2000. NUCLEAR DIVISION The nuclear division contributed $0.24 per share in the third quarter of 2001 compared to $0.22 per share in the third quarter of 2000. Wholesale sales margin decreased by about $2.4 million in the third quarter of 2001 compared to the third quarter of 2000, due primarily to the absence of the Millstone Unit 3 generating unit that was sold on March 31, 2001. The margin shortfall was more than offset by a $2.7 million reduction in expenses, about $2.0 million of which was due to the absence of Millstone Unit 3. See the "Looking Forward" section for the impact of the sale of UI's ownership share of the Millstone Unit 3 generating unit on the financial results. UNITED RESOURCES (URI) RESULTS OF OPERATIONS: THIRD QUARTER OF 2001 VS. THIRD - ------------------------------------------------------------------------------ Quarter of 2000 - ---------------
- ----------------------------------------------- ---------------- ---------------- --------------------------- 2001 more (less) than 2000 -------------------------- Quarter Ended Quarter Ended ($000 except Earnings Per Share (EPS)) Sept. 30, 2001 Sept. 30, 2000 Amount Percent - ----------------------------------------------- ---------------- ---------------- ---------------- ---------- Total Operating Revenue $103,717 $45,927 $57,790 126% EPS FROM OPERATIONS (BASIC AND DILUTED) Operating Businesses American Payment Systems, Inc. (APS) $0.00 $0.03 $(0.03) (100)% Xcelecom, Inc. $0.16 $0.04 $0.12 300% ----- ----- ----- SUBTOTAL OPERATING BUSINESSES $0.16 $0.07 $0.09 129% Passive Investments United Bridgeport Energy, Inc. (UBE) $0.11 $(0.11) $0.22 200% United Capital Investments, Inc. (UCI) $(0.08) $(0.01) $(0.07) (700)% ------ ------ ------ SUBTOTAL PASSIVE INVESTMENTS $0.03 $(0.12) $0.15 - - URI HEADQUARTERS (NOTE A) $(0.07) $(0.05) $(0.02) (40)% ------ ------- ------ TOTAL NON-REGULATED EPS FROM OPERATIONS $0.12 $(0.10) $0.22 220% - ----------------------------------------------- ---------------- ---------------- ---------------- ----------
Note (A): Includes financial leveraging, strategic and administrative costs of the non-regulated business units. Overall, the consolidated non-regulated businesses operating under the parent, URI, after corporate parent-allocated interest, earned approximately $1.7 million, or $0.12 per share, in the third quarter of 2001, compared to a loss of about $1.5 million, or $0.10 per share, in the third quarter of 2000. Operating revenue for the URI businesses increased by $57.8 million, or 126%, to $104 million in the third quarter of 2001. Expenses, including cost of goods sold, selling and administrative expenses, increased by $55.6 million in the third quarter of 2001 compared to the third quarter of 2000. Operating revenue and expense increases were due primarily to acquiring other companies. Depreciation and amortization expense for the URI businesses increased by $1.0 million. Other income increased by $3.6 million, and income taxes increased by $2.1 million. 27 Interest charges for URI decreased by a net $0.5 million in the third quarter of 2001 compared to the third quarter of 2000. The results of each of the subsidiaries of URI for the third quarter of 2001, as presented below, reflect the allocation of debt costs from the parent, URI, based on a capital structure, including an equity component, and an interest rate deemed to be appropriate for that type of business. The targeted capital structures for each of URI's subsidiaries are: 100% equity for APS and UCI, 65% equity and 35% debt for Xcelecom, and 30% equity and 70% debt for UBE. URI absorbs interest charges on the equity portion of its investments in its subsidiaries to the extent those investments are financed with debt. URI may incur other expenses necessary to manage its investments from time to time. The following is a detailed explanation of these variances by URI subsidiary. URI OPERATING BUSINESSES AMERICAN PAYMENT SYSTEMS, INC. APS broke even in the third quarter of 2001 compared to earnings of $0.03 per share in the third quarter of 2000. Earnings decreased from higher business development and selling expenses associated primarily with the implementation of APS's strategic growth plans. XCELECOM, INC. Xcelecom earned $0.16 per share in the third quarter of 2001 compared to $0.04 per share in the third quarter of 2000. The increase was due primarily to earnings from accretive acquisitions made by Xcelecom since the third quarter of 2000 that performed well enough to overcome adverse economic conditions in the industry. URI PASSIVE INVESTMENTS UNITED BRIDGEPORT ENERGY, INC. UBE contributed $0.11 per share in the third quarter of 2001 compared to a loss of $0.11 per share in the third quarter of 2000. The loss in the third quarter of 2000 was due to mild weather that depressed energy sales prices, high gas prices that further reduced margins, and a contract termination charge. In 2001, UBE took steps to reduce the operating and margin risks that occurred in 2000, resulting in the improved performance. See the "Looking Forward" section for more information on issues involving Installed Capacity revenues and on UBE's risk reduction efforts. UNITED CAPITAL INVESTMENTS, INC. UCI lost $0.08 per share in the third quarter of 2001 compared to a loss of $0.01 per share in the third quarter of 2000. The loss in 2001 was due to valuation losses on passive investments. URI HEADQUARTERS URI Headquarters incurred after-tax expenses of $0.07 per share in the third quarter of 2001 compared to a loss of $0.05 per share in the third quarter of 2000. The results of each of the subsidiaries of URI, as presented above, reflect interest expense on allocated debt from URI, based on a capital structure, including an equity component, and an interest rate deemed to be appropriate for that type of business. Some financial leveraging, and strategic and administrative costs for the subsidiaries of URI, are retained by the parent URI. The earnings decrease at URI Headquarters reflects additional leveraging in 2001 and expenses incurred for managing investments. 28 FIRST NINE MONTHS OF 2001 VS. FIRST NINE MONTHS OF 2000 - ------------------------------------------------------- Results for the first nine months of 2001 for UIL Holdings reflect the change in the quarterly earnings pattern compared to the first nine months of 2000 that was predicted by UIL Holdings in its fourth quarter 2000 earnings release dated January 22, 2001. UIL HOLDINGS CORPORATION (UIL HOLDINGS) RESULTS OF OPERATIONS: FIRST NINE - -------------------------------------------------------------------------- MONTHS OF 2001 VS. FIRST NINE MONTHS OF 2000 - --------------------------------------------
- -------------------------------------------------- ---------------- ------------------ ----------------------------- 2001 more (less) than 2000 ---------------------------- Nine Months Nine Months Ended Ended ($000 except Earnings Per Share (EPS)) Sept. 30, 2001 Sept. 30, 2000 Amount Percent - -------------------------------------------------- ---------------- ------------------ ----------------------------- Operating Revenue United Illuminating $548,824 $546,116 $2,708 - - United Resources $269,496 $99,982 $169,514 170% -------- ------- -------- Total Operating Revenue $818,320 $646,098 $172,222 27% TOTAL EARNINGS FOR COMMON STOCK $49,625 $54,368 $(4,743) (9)% EPS (BASIC) United Illuminating $3.47 $3.88 $(0.41) (11)% United Resources $0.05 $(0.08) $0.13 - - ----- ------- ----- TOTAL EPS FROM OPERATIONS $3.52 $3.80 $(0.28) (7)% EPS from one-time items $0.00 $0.06 $(0.06) - - Dilution $0.00 $0.00 $0.00 - - ----- ----- ----- TOTAL EPS (DILUTED) $3.52 $3.86 $(0.34) (9)% - -------------------------------------------------- ---------------- ------------------ --------------- -------------
UNITED ILLUMINATING (UI) RESULTS OF OPERATIONS: FIRST NINE MONTHS OF 2001 VS. - ---------------------------------------------------------------------------- FIRST NINE MONTHS OF 2000 - ------------------------- Results for the first nine months of 2001 for UI reflect the change in the quarterly earnings pattern compared to 2000 that was predicted by UIL Holdings on January 22, 2001.
- -------------------------------------------------- ----------------- ------------------ ---------------------------- 2001 more (less) than 2000 --------------------------- Nine Months Nine Months Ended Ended ($000 except Earnings Per Share (EPS)) Sept. 30, 2001 Sept. 30, 2000 Amount Percent - -------------------------------------------------- ----------------- ------------------ ---------------------------- Operating Revenue from operations $548,824 $536,474 $12,350 2% One-time Operating Revenue net of sharing 0 9,642 (9,642) (100)% ------- ------- ----- Total Operating Revenue $548,824 $546,116 $2,708 - - EPS FROM OPERATIONS (BASIC) UI excluding Nuclear Division and Sharing $3.09 $4.06 $(0.97) (24)% Sharing (0.10) (0.82) 0.72 - - Nuclear Division $0.48 $0.64 $(0.16) (25)% ----- ----- ------ Total UI EPS from operations $3.47 $3.88 $(0.41) (11)% GWH SALES (THOUSANDS OF MWH) 4,368 4,256 112 2.6% - -------------------------------------------------- ----------------- ------------------ ---------------- -----------
UI EXCLUDING THE NUCLEAR DIVISION Excluding the nuclear division, UI's earnings from operations were $2.99 per share in the first nine months of 2001 compared to $3.24 per share in the first nine months of 2000. The $0.25 per share decrease was due primarily to the $6.0 million increase on a pre-tax basis ($5.1 million after-tax) in accelerated amortization expense that went into effect on January 1, 2001 as part of the Rate Plan (described below), and to a $10.3 million decrease in the pre-tax earnings of UI's employees' pension fund. The increase in accelerated amortization and the decrease in pension fund 29 earnings will continue in the remaining quarter of 2001. Both changes have been anticipated in UIL Holdings' earnings guidance for 2001. See the "Looking Forward" section for more details. On December 31, 1996, the DPUC issued an order that implemented a five-year Rate Plan to reduce UI's regulated retail prices and accelerate the recovery of certain "regulatory assets." Under the Rate Plan, UI's authorized return on regulated utility common equity during the five-year period is 11.5%. Earnings for the distribution division that exceed 11.5%, on an annual basis, are "shared," one-third for customer price reductions, one-third to increase amortization of regulatory assets, and one-third retained as earnings. The details below explain the variances for all of UI excluding the nuclear division. It should be noted that changes to income and expense items in the distribution division have an immediate net income impact, while changes to those items in "other unbundled utility divisions" do not. Those divisions include the Competitive Transition Assessment (CTA) and the Systems Benefits Charge (SBC), both of which earn an 11.5% return on the equity portion of their respective rate bases. That return is achieved by either accruing additional amortization expenses, or by deferring such expenses as required. Amortization expenses in those divisions impact earnings indirectly through changes to rate base. The "other unbundled utility divisions" also include the Generation Service Charge (GSC), the Conservation and Load Management (C&LM) charge, and the Renewables charge. Those are pass-through charges. Except for a small management fee earned in the C&LM division, expenses are either accrued or deferred such that there is no net income associated with those divisions. Overall, UI retail revenue increased by $26.6 million in the first nine months of 2001, to $484 million, compared to the first nine months of 2000. Details of the change in retail revenue are:
$ millions - -------------------------------------------------------------- ------------- ------------------ ----------- From From Retail Revenue Increase/(Decrease) Operations One-Time Items Total - -------------------------------------------------------------- ------------- ------------------ ----------- Revenue from Distribution Division: - -------------------------------------------------------------- ------------- ------------------ ----------- Estimate of operating Distribution Division component of "weather corrected" retail sales growth, - -% - - - - - -------------------------------------------------------------- ------------- ------------------ ----------- Estimate of operating Distribution Division component of weather effect on retail sales, 2.7% 5.5 5.5 - -------------------------------------------------------------- ------------- ------------------ ----------- Impact of mix of sales on average price and other (1.6) (1.6) - -------------------------------------------------------------- ------------- ------------------ ----------- Sharing revenues 9.1 5.3 14.4 - -------------------------------------------------------------- ------------- ------------------ ----------- TOTAL RETAIL REVENUE FROM DISTRIBUTION DIVISION 13.0 5.3 18.3 - -------------------------------------------------------------- ------------- ------------------ ----------- REVENUE FROM OTHER UNBUNDLED UTILITY DIVISIONS 8.3 - - 8.3 - -------------------------------------------------------------- ------------- ------------------ ----------- TOTAL UI RETAIL REVENUE 21.3 5.3 26.6 - -------------------------------------------------------------- ------------- ------------------ -----------
Other operating revenues, excluding one-time revenues of $15 million recorded in the third quarter of 2000 for the Millstone Unit 3 management dispute arbitration settlement, increased by $5.2 million in the first nine months of 2001 compared to the first nine months of 2000. Other operating revenues include transmission revenues from the New England Power Pool (NEPOOL), which increased by $4.7 million in the first nine months of 2001 compared to the first nine months of 2000. Other non-NEPOOL transmission revenues increased by $0.6 million, and revenues for other items decreased by $0.1 million. Retail fuel and energy expense decreased by $1.9 million in the first nine months of 2001 compared to the first nine months of 2000. UI receives, and will receive through 2003, electricity to satisfy its standard offer retail customer service requirements through fixed-price purchased power agreements. These costs are recovered through the GSC portion of UI's unbundled retail customer rates. It should be noted that a small number of customers have selected alternate suppliers to provide generation services, but this has no effect on UI's financial results. UI's operating expenses for operation, maintenance and purchased capacity (O&M and Capacity) increased by $13.0 million in the first nine months of 2001 compared to the first nine months of 2000. The principal components of these expense changes included: 30 $ millions - -------------------------------------------------------------- ------------- Increase/ Operating Distribution Division: (Decrease) - -------------------------------------------------------------- ------------- Pension fund earnings (Note A) 10.3 - -------------------------------------------------------------- ------------- NEPOOL transmission expense 3.1 - -------------------------------------------------------------- ------------- Severance costs 3.0 - -------------------------------------------------------------- ------------- Other 0.2 - -------------------------------------------------------------- ------------- TOTAL OPERATING DISTRIBUTION DIVISION 16.6 - -------------------------------------------------------------- ------------- O&M AND CAPACITY FROM OTHER UNBUNDLED UTILITY DIVISIONS (3.6) - -------------------------------------------------------------- ------------- TOTAL O&M EXPENSE 13.0 - -------------------------------------------------------------- ------------- Note A: This cost increase reflects the deteriorating conditions in the financial markets over the past eighteen months. Other taxes for UI decreased by $2.0 million in the first nine months of 2001 compared to the first nine months of 2000. Depreciation and amortization expense for UI, excluding amortization of regulatory assets in the CTA, were unchanged in the first nine months of 2001 compared to the first nine months of 2000. According to the Rate Plan, under which UI is currently operating, "accelerated" amortization of past regulated utility investments is scheduled for every year that the Rate Plan is in effect, contingent upon UI earning a 10.5% return on regulated utility common equity. Beginning in 2000, these accelerated amortizations are charged to, and impact directly the earnings of, the operating distribution division. They impact the earnings of the CTA only indirectly through changes to the CTA rate base. Additionally, any "sharing" amortization required as a result of the distribution division exceeding an 11.5% return on the equity portion of its rate base impacts the distribution division earnings but reduces CTA rate base. UI is allowed to earn an 11.5% return, no more and no less, on the equity portion of the CTA rate base that includes all stranded assets. If CTA revenues and various costs included in the CTA do not produce an 11.5% return, then plant amortizations are either accelerated or deferred accordingly. A similar mechanism is in place to deal with SBC, but the impact is immaterial. The table below shows the increases and decreases in amortization of regulatory assets in the third quarter of 2001 compared to the third quarter of 2000. "Accelerated" amortization is spread evenly throughout the year, assuming the 10.5% return is maintained; but "sharing" amortization will only take place once the distribution division achieves an 11.5% return on the common equity portion of its rate base on a year-to-date basis. This usually will not occur until at least the third quarter, and all positive earnings of the distribution division from that point to the end of the year will be "shared". Amortization of regulatory assets, exclusive of third quarter 2000 sharing amortization associated with a one-time item, increased in the first nine months of 2001 compared to the first nine months of 2000 by $19 million. The principal components of this change were:
$ millions - ----------------------------------------------------------------------------------------- Amortization of regulatory assets: As Booked After-tax - ------------------------------------------------------------ -------------- ------------- Distribution Division: - ------------------------------------------------------------ -------------- ------------- Accelerated amortization 6.0 5.0 - ------------------------------------------------------------ -------------- ------------- "Sharing" from operations (5.9) (5.0) - ------------------------------------------------------------ -------------- ------------- TOTAL DISTRIBUTION DIVISION 0.1 - - - ------------------------------------------------------------ -------------- ------------- Amortization in CTA and SBC 18.9 11.2 - ------------------------------------------------------------ -------------- ------------- AMORTIZATION OF REGULATORY ASSETS EXCL/ ONE-TIME 19.0 11.2 - ------------------------------------------------------------ -------------- ------------- One-time "Sharing" amortization (3.4) (3.0) - ------------------------------------------------------------ -------------- ------------- TOTAL AMORTIZATION OF REGULATORY ASSETS 15.6 8.2 - ------------------------------------------------------------ -------------- -------------
Interest charges for UI, including the "Dividend requirement of mandatorily redeemable securities" and interest income, decreased slightly in the first nine months of 2001 compared to the first nine months of 2000. 31 NUCLEAR DIVISION The nuclear division contributed $0.48 per share in the first nine months of 2001 compared to $0.64 per share in the first nine months of 2000. Wholesale sales margin decreased by about $12.8 million in the first nine months of 2001 compared to the first nine months of 2000, due to the absence of the Millstone Unit 3 generating unit that was sold on March 31, 2001, and to generating unit outages in the first quarter of 2001. The margin shortfall was partly offset by $7.4 million of reductions in O&M expense, about $4.4 million of which was due to the absence of Millstone Unit 3, and reductions in other expenses associated with the absence of Millstone Unit 3. See the "Looking Forward" section for the impact of the sale of UI's ownership share of the Millstone Unit 3 generating unit on the financial results. UNITED RESOURCES (URI) RESULTS OF OPERATIONS: FIRST NINE MONTHS OF 2001 VS. - --------------------------------------------------------------------------- FIRST NINE MONTHS OF 2000 - -------------------------
- --------------------------------------------------------- ---------------- ---------------- ---------------------------- 2001 more (less) than 2000 --------------------------- Nine Months Nine Months Ended Ended ($000 except Earnings Per Share (EPS)) Sept. 30, 2001 Sept. 30, 2000 Amount Percent - --------------------------------------------------------- ---------------- ---------------- ----------------- ---------- Total Operating Revenue $269,496 $99,982 $169,514 170% EPS FROM OPERATIONS (BASIC AND DILUTED) Operating Businesses American Payment Systems, Inc. (APS) $0.00 $0.13 $(0.13) (100)% Xcelecom, Inc. $0.29 $0.05 $0.24 480% ----- ----- ----- SUBTOTAL OPERATING BUSINESSES $0.29 $0.18 $0.11 61% Passive Investments United Bridgeport Energy, Inc. (UBE) $0.16 $(0.19) $0.35 - - United Capital Investments, Inc. (UCI) $(0.21) $0.08 $(0.29) (363)% ------- ----- ------ SUBTOTAL PASSIVE INVESTMENTS $(0.05) $(0.11) $0.06 - - URI HEADQUARTERS (NOTE A) $(0.19) $(0.15) $(0.04) (27)% ------- ------ ------ TOTAL NON-REGULATED EPS FROM OPERATIONS $0.05 $(0.08) $0.13 - - - --------------------------------------------------------- ---------------- ---------------- ----------------- ----------
Note (A): Includes financial leveraging, strategic and administrative costs of the non-regulated business units. Overall, the consolidated non-regulated businesses operating under the parent, URI, after corporate parent-allocated interest, earned approximately $0.7 million, or $0.05 per share, in the first nine months of 2001, compared to losses of about $1.1 million, or $0.08 per share, in the first nine months of 2000. Operating revenue for the URI businesses increased by $169.5 million, or 170%, to $269.5 million in the first nine months of 2001. Expenses for the URI businesses, including cost of goods sold, selling and administrative expenses, increased by $163.0 million in the first nine months of 2001 compared to the first nine months of 2000. Operating revenue and expense increases were due primarily to acquiring other companies. Depreciation and amortization expense for the URI businesses increased by $2.9 million. Other income increased by $1.0 million, and income taxes increased by $1.5 million. Interest charges for URI increased by a net $1.2 million in the first nine months of 2001 compared to the first nine months of 2000. The results of each of the subsidiaries of URI for the first nine months of 2001, as presented below, reflect the allocation of debt costs from the parent based on a capital structure, including an equity component, and an interest rate deemed to be appropriate for that type of business. The targeted capital structures for each of URI's subsidiaries are: 100% equity for APS and UCI, 65% equity and 35% debt for Xcelecom, and 30% equity and 70% debt for UBE. URI absorbs interest charges on the equity portion of its investments in its subsidiaries to the extent those investments are financed with debt. URI may incur other expenses necessary to manage its investments from time to time. 32 The following is a detailed explanation of these variances by URI subsidiary. URI OPERATING BUSINESSES AMERICAN PAYMENT SYSTEMS, INC. APS broke even in the first nine months of 2001 compared to earnings of $0.13 per share in the first nine months of 2000. Earnings decreased from higher business development and selling expenses associated primarily with the implementation of APS's strategic growth plans. XCELECOM, INC. Xcelecom earned $.29 per share in the first nine months of 2001 compared to earnings of $.05 per share in the first nine months of 2000. The increase was due primarily to acquisitions made by Xcelecom since the second quarter of 2000, that performed well enough to overcome adverse economic conditions in the industry. Xcelecom would have earned $.40 per share from normal operations in the first nine months of 2001 but, in connection with its overall construction management process, it established loss reserves relating to projects at certain of its subsidiaries. The effect of these charges was approximately $.11 per share. Operating revenue increased by $158 million to $229 million in the first nine months of 2001, due primarily to acquisitions. URI PASSIVE INVESTMENTS UNITED BRIDGEPORT ENERGY, INC. UBE contributed $0.16 per share in the first nine months of 2001 compared to a loss of $0.19 per share in the first nine months of 2000. The loss in the first nine months of 2000 was due to mild weather that depressed energy sales prices, high gas prices that further reduced margins, an extended shutdown throughout the first half of the year, and a contract termination charge. In 2001, UBE took steps to reduce the operating and margin risks that occurred in 2000, resulting in the improved performance. See the "Looking Forward" section for more information on issues involving Installed Capacity revenues and on UBE's risk reduction efforts. UNITED CAPITAL INVESTMENTS, INC. UCI lost $0.21 per share in the first nine months of 2001 compared to earnings of $0.08 per share in the first nine months of 2000. The loss in 2001 was due primarily to valuation losses on passive investments. The earnings in 2000 were due to unrealized gains on passive investments. URI HEADQUARTERS URI Headquarters incurred after-tax expenses of $2.7 million, or $0.19 per share, in the first nine months of 2001 compared to a charge of $0.15 per share in the first nine months of 2000. The results of each of the subsidiaries of URI, as presented above, reflect interest expense on allocated debt from URI, based on a capital structure, including an equity component, and an interest rate deemed to be appropriate for that type of business. Some financial leveraging, and strategic and administrative costs for the subsidiaries of URI, are retained by the parent URI. The earnings decrease at URI Headquarters reflects additional leveraging in 2001 and expenses incurred for managing investments. LOOKING FORWARD CERTAIN STATEMENTS CONTAINED HEREIN, REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS, ARE FORWARD-LOOKING STATEMENTS (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995). SUCH FORWARD-LOOKING STATEMENTS INCLUDE RISKS AND UNCERTAINTIES; CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED THEREBY, DUE TO IMPORTANT FACTORS INCLUDING, BUT NOT LIMITED TO, GENERAL ECONOMIC CONDITIONS, LEGISLATIVE AND REGULATORY CHANGES, DEMAND FOR ELECTRICITY AND OTHER PRODUCTS AND SERVICES, CHANGES IN ACCOUNTING PRINCIPLES, POLICIES OR GUIDELINES, AND OTHER ECONOMIC, COMPETITIVE, GOVERNMENTAL, AND TECHNOLOGICAL FACTORS AFFECTING THE OPERATIONS, MARKETS, PRODUCTS, 33 SERVICES AND PRICES OF THE SUBSIDIARIES OF UIL HOLDINGS CORPORATION (UIL HOLDINGS). FORWARD-LOOKING STATEMENTS INCLUDED HEREIN SPEAK ONLY AS OF THE DATE HEREOF, AND UIL HOLDINGS UNDERTAKES NO OBLIGATION TO REVISE OR UPDATE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS OR CIRCUMSTANCES. A LOOK AT 2001 - -------------- UIL HOLDINGS' EARNINGS UIL Holdings expects that its 2001 earnings will be $4.05-$4.15 per share. This range is the same range that was announced on July 23, 2001. It reflects the effects of the slowing economy, specifically a drop-off in demand for network infrastructure equipment at Xcelecom, Inc., and lowered results and expectations from passive investments at UCI. See below for further details. UIL HOLDINGS' CASH FLOW UIL Holdings' cash flow available for dividends, investment and reduction of capital is expected to remain strong in 2001. UIL Holdings has a balanced approach of maintaining its strong dividend yield while prudently investing internally generated cash in growth potential businesses or, if such investment opportunities are not available, in reducing its capital costs. THE UNITED ILLUMINATING COMPANY (UI) FIVE-YEAR RATE PLAN On December 31, 1996, the Connecticut Department of Public Utility Control (DPUC) issued an order (the Order) that implemented a five-year regulatory framework (Rate Plan) to reduce UI's regulated retail prices and accelerate the recovery of certain "regulatory assets," beginning with deferred conservation costs. UI has operated under the terms of this Order since January 1, 1997. The Order's schedule of price reductions and accelerated amortizations was based on a DPUC pro-forma financial analysis that anticipated UI would be able to implement such changes and earn an allowed annual return on common equity invested in regulated utility assets of 11.5% over the period 1997 through 2001. The Order established a set formula, the "sharing" mechanism, to share any regulated utility income that would produce a return above the 11.5% level: one-third to be applied to customer price reductions, one-third to be applied to additional amortization of regulatory assets, and one-third to be retained by shareowners (see "Sharing Implementation" below). Regulated utility income for this purpose is inclusive of earnings from operations and one-time items. SHARING IMPLEMENTATION "Sharing" results only if UI's regulated operating distribution division exceeds its allowed return of 11.5% on its portion of regulated utility common equity. As a result of enactment, in 1998, of Connecticut's Public Act 98-28, restructuring the electric utility industry in Connecticut, earnings subject to sharing do not include the Competitive Transition Assessment (CTA) and other unbundled utility components. UI is allowed to earn an 11.5% return, no more and no less, on the equity portion of the CTA rate base that includes all stranded assets. The CTA return, therefore, is not subject to "sharing." Distribution division earnings did exceed the sharing level in the third quarter of 2001. All positive regulated distribution division earnings recorded in the fourth quarter of 2001 will be subject to "sharing." RATE-RELATED REGULATORY PROCEEDINGS On October 31, 2001, the DPUC issued a final decision in UI's overearnings docket holding that as a result of the earnings sharing mechanism embedded in UI's rate plan, UI's customers have directly benefited when UI has earned over its 11.5% authorized return on regulated common equity during the Rate Plan period. Because the earnings sharing mechanism is scheduled to end, with the Rate Plan, on December 31, 2001 the DPUC ordered that the earnings sharing mechanism be extended effective January 1, 2002 until the conclusion of the Rate Case proceeding. 34 The DPUC's decision also found that UI's earnings are not expected to exceed 11.5% in 2002, but that just and reasonable rates for UI at this point in time can only be determined in the full Rate Case proceeding. Accordingly, the DPUC ordered UI to file rate case schedules with the DPUC by November 15, 2001. UI expects to file rate case schedules on November 15, 2001, together with supporting pre-filed sworn written testimony. UI anticipates a final decision in the rate case proceeding within 180 days of this filing. UI EARNINGS ESTIMATES FOR 2001 Overall, UI, including the nuclear division, is expected to contribute $3.95-$4.05 to UIL Holdings' earnings per share in 2001. This is consistent with the previous guidance given on July 23, 2001. If UI were to earn an 11.5% return on regulated utility common equity, excluding the nuclear division, that level of earnings would generate $3.35-$3.45 per share for UIL Holdings. Under the current rate plan, UI is allowed to earn an 11.5% return on the equity portions of CTA and the Systems Benefits Charge (SBC) rate base (the latter is minimal), no more and no less. Amortization of the regulatory assets that are being recovered in the CTA includes several parts: straight-line amortization of generation regulatory assets based on what would be the remaining normal book lives of those assets, amortization of other regulatory assets as prescribed by the DPUC, any accelerated amortization and/or sharing amortization incurred by the distribution division, and a "true-up" amount of amortization. This true-up, comprised of deferred accounting or accelerated amortization, occurs if CTA revenues and expenses, including amortization expense, would produce a return more or less than the allowed return. In either case, the true-up amortization impacts the rate base, keeping it higher than it would be otherwise in the case of a shortfall in return, and reducing it in the case that the return would be higher than 11.5%. The true-up also adjusts for sales volume fluctuations as well as pricing factors. A similar adjustment, on a much less significant scale, applies to the SBC component. In the long-term, the amortization and other expenses associated with these regulatory assets continue only until all of the regulatory assets are recovered. The generation service, conservation and renewables charges are pass-through charges, based on retail rates that were set by the DPUC for the standard offer period through 2003. In the case of generation service, UI has contracted with Enron Power Marketing, Inc., a subsidiary of Enron Corp., for all of UI's retail customer standard offer service requirements through 2003, on a fixed-price basis. This arrangement protects UIL Holdings' shareowners and UI's retail customers from the type of market and pricing volatility that is being experienced in California, regardless of demand and volume requirements. The only retail electricity sales volume fluctuations that directly impact UI's net income are those that apply to the operating distribution division component of rates. Thus, a 1% sales volume increase would produce additional sales margin of about $2.4 million in 2001. A mandated increase in distribution division accelerated amortization expense, the absence of a significant one-time gain that occurred in 2000, a reduction in pension fund earnings, and other 2001 cost increases relative to 2000 will likely reduce significantly the amount of distribution division earnings above the 11.5% allowed return in 2001 compared to the 2000 level. Because of these factors, UI has not previously projected any "sharing" in 2001. But UI has recorded some sharing in the third quarter of 2001 and now projects additional sharing in the fourth quarter, though sharing will still be at a significantly reduced level from 2000. The primary reason for the enhanced distribution division earnings in the third quarter of 2001, compared to expectations, was higher than anticipated revenues, both from higher retail sales and average prices. The retail sales improvement was almost entirely due to hotter than normal weather, which resulted in higher kwh usage and contributed to a higher average price. NUCLEAR DIVISION EARNINGS ESTIMATES FOR 2001 The nuclear division contributed $0.45 per share to UIL Holdings' results for 2000. Assuming that the Seabrook nuclear generating unit operates normally for the last three months of 2001, the contribution to earnings in 2001 of the unit should be about $0.60 per share. Seabrook has operated at full capacity in the second and third quarters of 2001, and operations and maintenance expense savings were achieved in those quarters. It is possible for earnings to improve slightly from the estimated level if the unit operates at near full capacity in the fourth quarter of 2001. 35 UI's share of the Millstone 3 nuclear generating unit was sold on March 31, 2001. There was no direct impact on financial results in the first quarter, and net-of-tax proceeds from the sale that were in excess of the market value of the plant, as set by the DPUC, were credited to the CTA plant balances and rate base. That amount is approximately $15.8 million and is subject to true-up. See the section "A Look at 2002" below for information regarding the sale of UI's share of the Seabrook nuclear generating unit. UNITED RESOURCES, INC. (URI) EARNINGS ESTIMATES UIL Holdings' non-regulated businesses, under the parent URI, are expected to earn $0.05-$0.15 per share in 2001. This is consistent with the previous guidance given on July 23, 2001. It reflects the effects of the slowing economy and lower results and expectations from passive investments at United Capital Investments, Inc. (UCI). AMERICAN PAYMENTS SYSTEMS, INC. (APS) APS is expected to break even in 2001. The expected reduction in total earnings reflects anticipated strategic expenses designed to produce future earnings enhancements in the non-contracted payment and agent products segments of its business. Management's experience with Xcelecom, Inc. indicates that incurring short-term strategic expenses to build an appropriate management team and processes that are necessary to grow through acquisitions and product and service enhancements will increase shareowner value in the longer term. Management believes that experience will be equally applicable to APS. APS has made acquisitions in 2001, giving APS the ability to both grow its agent base and to further diversify its list of products and services. XCELECOM, INC. Earnings for Xcelecom are expected to grow to approximately $0.30 per share in 2001 from the $0.15 per share earned in 2000. This estimate reflects the impact of the slowing economy, including a drop-off in demand for network infrastructure equipment. URI PASSIVE INVESTMENTS Earnings from URI's passive investments, offset by its headquarters' costs, are expected to lose $0.15-$0.20 per share in 2001. This estimate incorporates the $0.21 per share valuation losses at UCI in the first nine months of 2001 and lower expectations for the remainder of the year. URI's investments also include United Bridgeport Energy, Inc. (UBE), which is expected to earn about $0.20 per share in 2001. UBE's expected contribution assumes the favorable outcome of an important pending matter that management is confident will come about, although there can be no assurance that it will occur. The assumption is the anticipated realization of UBE's 33 1/3% portion of the revenues of Bridgeport Energy LLP (BE) related to the market value of the Installed Capacity (ICAP) of its merchant wholesale electric generating facility in Bridgeport, Connecticut. These ICAP revenues are expected to produce about $0.25 per share for UBE in 2001. The Federal Energy Regulatory Commission (FERC), in an order (FERC Order) issued August 28, 2001 re-affirmed the value of the ICAP market in New England as a necessary reliability function, thereby validating a pre-existing contract of BE for ICAP revenues The FERC Order also set a deficiency charge price for ICAP at a level that supports BE's contract price. As of September 30, 2001, BE's ICAP customer is disputing its contract with BE. BE is continuing to record ICAP revenues pursuant to the existing terms of the ICAP contract. Also, UBE has an agreement with Duke Energy Trading and Marketing, the marketing entity for the BE generating unit, that will effectively eliminate UBE's exposure to operating risk, including margin risk, for all of 2001. In return, UBE will forego potential increased earnings from the unregulated energy market, as well as a portion of anticipated 2001 ICAP revenues. QUARTERLY EARNINGS PATTERN FOR 2001 - ----------------------------------- The 2001 quarterly earnings pattern for UI is different from the 2000 pattern. Nuclear division outages in the first quarter of 2001 reduced earnings compared to the first quarter of 2000. Higher mandated amortization expense for the distribution division will be spread evenly throughout 2001, and reduced pension fund earnings will affect every quarter. UI is now projecting "sharing" in 2001, but at a level significantly reduced from 2000 levels, particularly in the third quarter. This reduction in sharing enhanced third quarter 2001 results from operations by about $0.72 per 36 share compared to the third quarter of 2000. The fourth quarter of 2001 should show an improvement in earnings compared to the corresponding quarter in 2000, but that improvement will come from the Nuclear Division, which experienced a generating unit outage in the fourth quarter of 2000. UIL Holdings makes every effort to incorporate such impacts, including the sharing impact, in its earnings estimates as each quarter is reported. Actual 2001 results may vary from estimates depending on changes due to weather, economic conditions, sales mix (the usage pattern of the UI distribution division's retail customers), the ability to control expenses, and other unanticipated events. These factors can change from quarter to quarter. UIL Holdings' current overall estimate of earnings per share from operations for 2001 is $4.05-$4.15, and the estimates of quarterly results are as follows: Earnings per share from operations: Estimated Actual Actual Quarter 2001 Range* 2001 2000 ------- ---------- ---- ---- 1 $0.65 - $0.70 $0.67 $1.20 2 $0.85 - $0.90 $1.08 $1.41 3 $1.50 - $1.65 $1.77 $1.19 4 revised $0.55 - $0.65 $0.46 ---- $4.26 *Future quarters' ranges are adjusted to reflect the latest estimates for the year and actuals recorded to date. Quarterly range estimates are not additive, that is, adding the actual 2001 results for the first three quarters and the low range numbers for the fourth quarter produces a result that is lower than UIL Holdings' low estimate for the year, and adding the actual 2001 results for the first three quarters and the high range numbers for the fourth quarter produces a result that is higher than UIL Holdings' high estimate for the year. The sums of the low and high range values should not be construed to represent any estimate other than UIL Holdings' annual estimate of $4.05-$4.15 per share. The quarterly range estimates do not add to the total UIL Holdings' range for the year because impacts in one quarter can affect the results of other quarters through the sharing mechanism and through timing of activities. A LOOK AT 2002 - -------------- UIL HOLDINGS' EARNINGS UIL Holdings expects that its 2002 earnings will be $4.05-$4.15 per share, the same overall results as estimated for 2001. As noted below, however, the 2002 estimate reflects a different mix of utility and non-regulated business earnings, with the earnings contribution from the non-regulated business units becoming more important in 2002. The estimate for 2002 assumes that the weak economy will not further deteriorate the earnings of the utility or the non-regulated businesses. UIL HOLDINGS' CASH FLOW UIL Holdings' cash flow available for dividends, investment and reduction of capital is expected to remain strong in 2002. UIL Holdings has a balanced approach of maintaining its strong dividend yield while prudently investing internally generated cash in growth potential businesses or, if such investment opportunities are not available, in reducing its capital costs. THE UNITED ILLUMINATING COMPANY RATE-RELATED REGULATORY PROCEEDINGS AND ASSUMPTIONS FOR 2002 On October 31, 2001, the DPUC issued a final decision in UI's overearnings docket holding that as a result of the earnings sharing mechanism embedded in UI's rate plan, UI's customers have directly benefited when UI has earned over its 11.5% authorized return on regulated common equity during the Rate Plan period. Because the earnings sharing mechanism is scheduled to end, with the Rate Plan, on December 31, 2001 the DPUC ordered that the 37 earnings sharing mechanism be extended effective January 1, 2002 until the conclusion of the Rate Case proceeding. The DPUC's decision also found that UI's earnings are not expected to exceed 11.5% in 2002, but that just and reasonable rates for UI at this point in time can only be determined in the full Rate Case proceeding. Accordingly, the DPUC ordered UI to file rate case schedules with the DPUC by November 15, 2001. UI expects to file rate case schedules on November 15, 2001, together with supporting pre-filed sworn written testimony. UI anticipates a final decision in the rate case proceeding within 180 days of this filing. UI's earnings guidance for 2002 assumes that retail rates will not change, and that UI will be allowed to earn an 11.5% return on the common equity portion of its rate base. Current estimates anticipate that UI will earn the allowed return and that there will be no sharing in 2002. UI EARNINGS ESTIMATES FOR 2002 Overall, UI, including the nuclear division, is expected to contribute $3.80-$3.90 to UIL Holdings' earnings per share in 2002, a decrease of $0.15 per share from the 2001 estimate of $3.95-$4.05 per share. The decrease reflects a decline in the expected return on the common equity portion of rate base to an 11.5% level from a slightly higher level expected in 2001, due primarily to higher costs, particularly a reduction in pension fund earnings, and a moderate reduction to rate base. If UI were to earn an 11.5% return on regulated utility equity, excluding the nuclear division, that level of earnings would generate $3.30-$3.40 per share for UIL Holdings. NUCLEAR DIVISION EARNINGS ESTIMATES FOR 2002 The nuclear division, consisting of UI's share of the Seabrook nuclear generating unit, is expected to contribute about $0.50 per share to UIL Holdings' results for 2002, about $0.10 per share less than expected for 2001. The 2001 estimate reflects better than expected actual performance through the first nine months of the year, and 2002 earnings could benefit from similar performance improvement. The 2002 estimate assumes that UI's share of the Seabrook nuclear generating unit will be sold by the end of 2002. There is a five-to-six week refueling outage scheduled for the second quarter of 2002, but that is roughly equivalent to the unscheduled outage experienced in the first quarter of 2001. URI EARNINGS ESTIMATES FOR 2002 UIL Holdings' non-regulated businesses, under the parent URI, are expected to earn $0.20-$0.30 per share in 2002. This is an increase of $0.15 per share from the 2001 estimate of $0.05-$0.15 per share. That increase will be due primarily to the change in accounting for goodwill mandated by Financial Accounting Standards Board SFAS No. 142, "Goodwill and Other Intangible Assets." Net of this change, URI's performance is expected to hold steady as compared to 2001, assuming continuation of weak economic and prevailing poor financial market conditions. As stated previously, as a result of management's continued confidence in the potential of the non-regulated businesses, UIL Holdings is evaluating further investments in this area. Near-term losses could be incurred due to these new growth initiatives, if the potential for future earnings is deemed to warrant such losses. The weak economy, however, is providing some excellent acquisition opportunities that should help to grow the non-regulated businesses' contribution to earnings. 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. 38 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
Exhibit Table Item Exhibit Number Number Description ---------- ------- ----------- (3) 3.2a Copy of Bylaws of UIL Holdings Corporation, as amended through September 24, 2001, superseding Exhibit 3.2*. (10) 10.21+ Copy of UIL Holdings Corporation Change In Control Severance Plan (As Amended and Restated Effective September 24, 2001), superseding Exhibit 3.21*. (21) 21b List of subsidiaries of UIL Holdings Corporation, superseding Exhibit 21a**.
- -------------------------------- + Management contract or compensatory plan or arrangement. * Filed with UIL Holdings Corporation (Commission File Number 1-5995) (UIL) and The United Illuminating Company (Commission File Number 1-6788) Quarterly Report (Form 10-Q) for fiscal quarter ended September 30, 2000. ** Filed with UIL Quarterly Report (Form 10-Q) for fiscal quarter ended March 31, 2001. (b) Reports on Form 8-K. None 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UIL HOLDINGS CORPORATION Date 11/13/2001 Signature /s/ Robert L. Fiscus ------------ ----------------------------------------- Robert L. Fiscus Vice Chairman of the Board of Directors and Chief Financial Officer 40 EX-3.(II) 3 exh32a_bylawsamended.txt BY-LAWS AMENDED & RESTATED 9/24/01 EXHIBIT 3.2a BYLAWS OF UIL HOLDINGS CORPORATION (AS AMENDED THROUGH SEPTEMBER 24, 2001) -------------------- ARTICLE I. OFFICES. SECTION 1. PRINCIPAL OFFICE. The location of the principal office of the Corporation shall be in the Town of New Haven County of New Haven in the State of Connecticut. SECTION 2. OTHER OFFICES. The Corporation may also have other offices at such other places within or without the State of Connecticut as the Board of Directors or the President may from time to time determine or as the business of the Corporation may require. ARTICLE II. MEETINGS OF SHAREOWNERS. SECTION 1. ANNUAL MEETING. The annual meeting of the shareowners shall be held at the principal office of the Corporation in the State of Connecticut, or at such other place as the Board of Directors or the President may determine, on the first Wednesday of April in each year, unless another date shall be designated by the Board of Directors, in which case such meeting shall be held on the date so designated, for the purpose of electing a Board of Directors and for the transaction of any other business that may legally come before the meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareowners may be called at any time by the President, or in his absence or disability by a Vice President, and shall be called on the request in writing or by a vote of a majority of the Board of Directors or upon the written request of the holders of not less than 35 percent of the voting power of all shares entitled to vote at the meeting. Special meetings of the shareowners may be held at such place within the State of Connecticut as is specified in the notice or call of such meeting. SECTION 3. NOTICE OF MEETINGS. A written or printed notice of each meeting of shareowners, stating the place, day and hour of the meeting and the general purpose or purposes for which it is called, shall be mailed, postage prepaid, by or at the direction of the Secretary, to each shareowner of record entitled to vote at such meeting, addressed to the shareowner at the shareowner's last known post office address as last shown on the stock records of the Corporation, not less than ten days nor more than sixty days before the date of the meeting. SECTION 4. QUORUM. At any meeting of the shareowners, the owners of a majority of the voting power of the shares entitled to vote, present in person or by proxy, shall constitute a quorum for such meeting, except as otherwise expressly provided by statute, the Certificate of Incorporation of the Corporation or these Bylaws. In the absence of a quorum, the owners of a majority of the voting power of the shares entitled to vote, present in person or by proxy, may adjourn the meeting to a new date, time or place, from time to time, not exceeding thirty days at any one time, without further notice, until a quorum shall attend, and thereupon any business may be transacted that might have been transacted at the meeting as originally called. Except where otherwise expressly provided by statute, the Certificate of Incorporation of the Corporation or these Bylaws, when a quorum is present at any duly held meeting, directors shall be elected by a plurality of the votes cast by the owners of the voting power of shares entitled to vote in the election of directors, and any other action to be voted on shall be approved if the votes favoring the action cast by the owners of the voting power of the shares entitled to vote on the matter exceed the votes opposing the action cast by such shareowners. SECTION 5. VOTING. Each owner of a share that may be voted on a particular subject matter at any meeting of shareowners shall be entitled to one vote, in person or by proxy, for each such share standing in his name on the books of the Corporation on the record date for such meeting. All voting at meetings of shareowners shall be by voice vote, except that the vote for the election of directors shall be by ballot and except where a vote by ballot is required by law or is determined to be appropriate by the officer presiding at such meeting. SECTION 6. INSPECTORS OF PROXIES AND TELLERS. The Board of Directors or, in the absence of action by the Board of Directors, the President or, in the absence or disability of the President, the chairman of the meeting may appoint two persons (who may be officers or employees of the Corporation) to serve as Inspectors of Proxies and the same persons or two other persons (who may be officers or employees of the Corporation) to serve as Tellers at any meeting of shareowners. The determination by such persons of the validity of proxies and the count of shares voted shall be final and binding on all shareowners. ARTICLE III. DIRECTORS. SECTION 1. GENERAL POWERS. The property, affairs and business of the Corporation shall be managed by its Board of Directors, which may exercise all the powers of the Corporation except such as are by law or statute or by the Certificate of Incorporation of the Corporation or by these Bylaws expressly conferred upon or reserved to the shareowners. 2 SECTION 2. NUMBER AND TERM OF OFFICE. The number of directorships shall be thirteen. Directors shall be elected to hold office until the next annual meeting of the shareowners and until their successors shall have been elected and qualified. SECTION 3. VACANCIES. Subject to the provisions of the second paragraph of this Section, in case of any vacancy among the directors through death, resignation, disqualification, failure of the shareowners to elect as many directors as the number of directorships fixed by Section 2 of this Article III, or any other cause except the removal of a director, the directors in office, although less than a quorum, by the affirmative vote of the majority of such other directors, or the sole director in office if there be only one, may fill such vacancy; provided that the shareowners entitled to vote may also fill any such vacancy. If any such vacancy occurs in respect of a director elected by a particular class of shares voting as a class, and if such class is still entitled to fill such directorship, the remaining directors elected by such class, by the affirmative vote of a majority of such remaining directors, or the sole remaining director so elected if there be only one, may fill such vacancy; provided the shareowners of such class may also fill any such vacancy. The resignation of a director shall be effective at the time specified therein and, unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective. SECTION 4. REMOVAL OF DIRECTORS. Any director may be removed from office either with or without cause at any time, and another person may be elected in his or her stead to serve for the remainder of his or her term at any special meeting of the shareowners called for the purpose, by vote of a majority of all the shares outstanding and entitled to vote. SECTION 5. PLACE OF MEETING. The directors may hold their meetings and have one or more offices and keep the books of the Corporation (except as otherwise at any time may be provided by law or statute) at such place or places within or without the State of Connecticut as the Board of Directors may from time to time determine. SECTION 6. ORGANIZATION MEETINGS OF THE BOARD. The newly elected Board of Directors may meet for the purpose of organization, for the election of officers, and for the transaction of other business, immediately following the adjournment of the annual meeting of the shareowners or at such other time and place as shall be fixed by the shareowners at the annual meeting, and if a quorum be then present no prior notice of such meeting shall be required to be given to the directors. The time and place of such organization meeting may also be fixed by written consent of the newly elected directors, or such organization meeting may be called by the President upon reasonable notice. SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places within or without the State of Connecticut as the Board of Directors shall from time to time designate. 3 SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board of Directors (if one there be) or by the President or, in the absence or disability of the President, by a Vice President, or by a majority of the directors, and shall be called upon the written request of two directors. Special meetings of the Board shall be held at such place, either within or without the State of Connecticut, as shall be specified in the call of the meeting. SECTION 9. NOTICE OF MEETINGS. The Secretary of the Corporation shall give reasonable notice to each director of each regular or special meeting, either by mail, telegraph, telefax, electronic mail, telephone or personally, which notice shall state the time and place of the meeting. SECTION 10. QUORUM. A majority of the number of directorships shall constitute a quorum for the transaction of business, except where otherwise provided by statute or by these Bylaws, but a majority of those present at any regular or special meeting, if there be less than a quorum, may adjourn the same from time to time without notice until a quorum be had. The act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as otherwise may be provided by statute or by these Bylaws. SECTION 11. COMPENSATION OF DIRECTORS. The Board of Directors shall have authority to fix the compensation of directors and of members of committees of the directors, including reasonable allowances for expenses incurred in connection with their duties. SECTION 12. ACTION WITHOUT MEETING. If all of the directors severally or collectively consent in writing to any action taken or to be taken by the Corporation, and the number of such directors constitutes a quorum for such action, such action shall be as valid corporate action as though it had been authorized at a meeting of the Board of Directors. The Secretary shall file each such consent with the minutes of the meetings of the Board of Directors. ARTICLE IV. EXECUTIVE COMMITTEE AND OTHER COMMITTEES. SECTION 1. APPOINTMENT. The Board of Directors, by resolution adopted by the affirmative vote of directors holding a majority of the directorships, may appoint an Executive Committee, consisting of four or more directors, one of whom shall be the Chairman of the Board of Directors (if one there be) to serve during the pleasure of the Board, and may fill vacancies in such committee. The Executive Committee shall have and may exercise all of the authority of the Board of Directors, except as otherwise may be provided by statute or by these Bylaws. SECTION 2. MINUTES. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board of Directors. 4 SECTION 3. OTHER COMMITTEES. The Board of Directors, by resolution adopted by the affirmative vote of directors holding a majority of the directorships, shall appoint an Audit Committee and may appoint any other committee or committees consisting of two or more directors to serve during the pleasure of the Board, which committees shall have and may exercise such authority of the Board of Directors as shall be provided in such resolution. ARTICLE V. OFFICERS, AGENTS AND ATTORNEYS. SECTION 1. EXECUTIVE OFFICERS. The executive officers of the Corporation shall be a Chairman of the Board of Directors, if the Board of Directors so determine, and a President, one or more Vice Presidents, a Secretary and a Treasurer, all of whom shall be elected by the Board of Directors. The Board of Directors may also appoint such additional officers, including, but not limited to, one or more Assistant Secretaries and Assistant Treasurers, as in their judgment may be necessary, who shall have authority to perform such duties as may from time to time be designated by the Board of Directors or by the President. Any two of said offices may be held by the same person, except that the same person shall not be President and a Vice President. SECTION 2. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors (if one there be) when present shall preside at all meetings of the Board of Directors and of the shareowners. He or she shall have such powers and shall perform such duties as may from time to time be assigned to him by the Board of Directors. If so designated by the Board of Directors, the Chairman of the Board of Directors shall be the chief executive officer of the Corporation and, as such, he or she, and not the President, shall have and possess all of the powers and discharge all of the duties assigned to the President in these Bylaws, except that (1) in the absence, disability or death of the Chairman of the Board of Directors, the President shall have and possess all of such powers and discharge all of such duties, (2) the Board of Directors may delegate one or more of such powers and duties to the President, (3) the Chairman of the Board of Directors shall not have the power or duty of signing certificates for the shares of the Corporation and (4) both the Chairman of the Board of Directors and the President shall be included among those officers who may act with respect to shares of other corporations held by the Corporation and who may sign or countersign checks, drafts and notes of the Corporation under the provisions of Sections 5 and 6, respectively, of Article VII of these Bylaws. SECTION 3. POWERS AND DUTIES OF THE PRESIDENT. The President shall be the chief executive officer of the Corporation unless the Board of Directors designates the Chairman of the Board of Directors as the chief executive officer of the Corporation; he or she may sign, with the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certificates for the shares of the Corporation, and he or she shall sign and execute, in the name of the Corporation, all deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors, except in cases where the signing and execution thereof shall be delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation; and, in general, shall perform all the duties incident to the office of the President; provided, however, that any or all of the powers and duties of the President above set forth may be delegated by the Board of Directors by vote or by a contract of the Corporation approved by the Board of Directors, to some other officer, agent or employee of the Corporation. In the absence of the Chairman of the Board of Directors, or if there shall be no Chairman of the Board of Directors, the President shall preside at all meetings of the Board of Directors and of the shareowners. SECTION 4. POWERS AND DUTIES OF THE VICE PRESIDENTS. In the absence, disability or death of the President, a Vice President shall have and possess all the powers and discharge all the duties of the President, and the Board of Directors may designate the particular Vice President, if more than one, thus to possess the powers and discharge the duties of the President. Any Vice President may also sign, with the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certificates for the shares of the Corporation, and shall perform such other duties as from time to time may be assigned to him or her by the Board of Directors or by the President. SECTION 5. POWERS AND DUTIES OF THE SECRETARY. It shall be the duty of the Secretary to act as Secretary of all meetings of the Board of Directors and of the shareowners of the Corporation and keep the minutes thereof in a proper book or books to be provided for that purpose; he shall see that all notices required to be given by the Corporation are duly given or served; he may sign, with the President or a Vice President, certificates for the shares of the Corporation; he shall have the custody of the seal of the Corporation and, on behalf of the Corporation, he may attest and affix the corporate seal to such instruments as may require the same; and he shall in general perform all of the duties incident to the office of Secretary, and such other duties as may from time to time be assigned to him by the Board of Directors or by the President. SECTION 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall have the care and custody of all the funds and securities of the Corporation which may come into his or her hands and shall deposit all such funds to the credit of the Corporation in such banks, trust companies or other depositaries as shall be designated by the Board of Directors or pursuant to its authorization; he or she shall enter, or cause to be entered, regularly, in books to be kept by him or her for that purpose, full and adequate account of all moneys received and paid by him or her on account of the Corporation, and shall render a detailed statement of his or her accounts and records to the Board of Directors as often as it shall require the same; he or she may endorse for deposit or collection all negotiable instruments requiring endorsement for or on behalf of the Corporation; he or she may sign all receipts and vouchers for payments made to the Corporation; he or she may sign, with the President or a Vice President, certificates for the shares of the Corporation; and he or she shall in general perform all the duties incident to the office of Treasurer, and such other duties as may from time to time be assigned to him or her by the Board of Directors or by the President. SECTION 7. POWERS AND DUTIES OF ASSISTANT SECRETARY AND ASSISTANT TREASURER. In the absence, disability or death of the Secretary or whenever the convenience of the Corporation 6 shall make it advisable, an Assistant Secretary shall have and possess all the powers and discharge all the duties of the Secretary; and in the absence, disability or death of the Treasurer or whenever the convenience of the Corporation shall make it advisable, an Assistant Treasurer shall have and possess all the powers and discharge all the duties of the Treasurer. SECTION 8. AGENTS AND ATTORNEYS. The Board of Directors may appoint such agents, attorneys and representatives of the Corporation with such powers and to perform such acts and duties on behalf of the Corporation as the Board of Directors may determine, so far as the same shall not be inconsistent with the law or statutes of the State of Connecticut, the Certificate of Incorporation of the Corporation, or these Bylaws. SECTION 9. SALARIES. The salaries of the officers, including the Chairman of the Board of Directors (if one there be) and the President, may be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving a salary by reason of the fact that he or she is also a director of the Corporation. SECTION 10. CERTAIN OFFICERS TO GIVE BONDS. Every officer, agent or employee of the Corporation who may receive, handle or disburse money for its account or who may have any of the Corporation's property in his or her custody or be responsible for its safety or preservation, may be required, in the discretion of the Board of Directors or the Executive Committee to give bond, in such sum and with such sureties and in such form as shall be satisfactory to the Board of Directors or the Executive Committee, for the faithful performance of the duties of his or her office and for the restoration to the Corporation, in the event of his or her death, resignation or removal from office, of all books, papers, vouchers, moneys and other property of whatsoever kind in his or her custody belonging to the Corporation. SECTION 11. REMOVAL OF OFFICERS. Any officer elected or appointed by the directors may be removed at any time, with or without cause, by the affirmative vote of a majority of all of the directors, but nothing in this Section shall operate to invalidate, impair or otherwise affect any employment contract entered into by the Corporation which contract has been authorized or ratified by the affirmative vote of a majority of all the directors. The election or appointment of an officer for a given term shall not of itself create contract rights. SECTION 12. VACANCIES. All vacancies among the officers from whatsoever cause may be filled by the Board of Directors. ARTICLE VI. SHARES AND CERTIFICATES FOR SHARES. SECTION 1. CERTIFICATES OF SHARES. Every shareowner of the Corporation shall be entitled to a certificate or certificates, signed by, or, if the certificates are signed by a transfer agent acting on behalf of the Corporation, bearing the facsimile signatures of, the President or a Vice President 7 and the Treasurer or an Assistant Treasurer or the Secretary oran Assistant Secretary, and under the seal of the Corporation or with a facsimile of such seal affixed, certifying the number and class of shares of the Corporation owned by such shareowner. The names and addresses of all persons owning shares of the Corporation, with the number of shares owned by each and the date or dates of issue of the shares held by each, shall be entered in books kept for that purpose by the proper officers or agents of the Corporation. The Corporation shall be entitled to treat the owner of record of any share or shares as the owner in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has actual or other notice thereof, save as expressly provided by the statutes of the State of Connecticut or the United States of America. SECTION 2. LOST CERTIFICATES. If a share certificate be lost, destroyed or mutilated, another may be issued in its stead upon satisfactory proof of such loss, destruction or mutilation and upon the giving of a bond of indemnity satisfactory to the Corporation, unless this requirement be dispensed with by the President, a Vice President, the Treasurer, or the Board of Directors, and upon compliance with such other conditions as the Board of Directors may require. SECTION 3. TRANSFERS. Shares shall be transferable on the records of the Corporation by the owner of record thereof, or by such owner's attorney thereunto duly authorized, upon the surrender and cancellation of a certificate or certificates for a like number of shares of the same class and of the same series where there are more than one series in a class, with such proof of the authenticity of the signature of such holder or of such attorney and such proof of the authority of such attorney as the Corporation may require. SECTION 4. REGULATIONS. The Board of Directors may make such regulations as it may deem expedient concerning the issue, transfer and registration of shares. SECTION 5. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer agents and registrars, or a transfer agent only, and may require all share certificates to bear the signature of such a transfer agent, and, if a registrar shall also have been appointed, the signature of such a registrar. SECTION 6. RECORD DATE. The Board of Directors, by resolution, may fix a date as the record date for the purpose of determining the shareowners entitled to notice of and to vote at any meeting of shareowners or any adjournment thereof, or entitled to receive payment of any dividend or other distribution, or for any other purpose, such date in any case to be not earlier than the date such action is taken by the Board of Directors and not more than seventy days, and, in case of a meeting of shareowners, not less than ten full days, immediately preceding the date on which the particular event requiring such determination of shareowners is to occur. If no record date is so fixed, the date on which notice of a meeting is mailed shall be the record date for the determination of shareowners entitled to notice of and to vote at such meeting and the date on which the resolution of the Board of Directors declaring such dividend or other distribution is adopted shall be the record date for the determination of shareowners entitled to 8 receive payment of such dividend or other distribution. Shareowners actually of record at a record date shall be the only shareowners entitled to receive notice of or to vote at the meeting, or receive the dividend or other distribution, or otherwise participate in respect of the event or transaction, to which such date relates, except as otherwise provided by statute. ARTICLE VII. MISCELLANEOUS. SECTION 1. SEAL. The seal of the Corporation shall be circular in form and shall bear the name of the Corporation around the circumference and the figures "1999" in the center. SECTION 2. FISCAL YEAR. The fiscal year of the Corporation shall end December 31st in each year, or otherwise, as the Board of Directors may determine. SECTION 3. INSPECTION OF BOOKS. The Board of Directors shall determine from time to time whether and, if allowed, when and under what conditions and regulations the accounts and books of the Corporation (except such as may by statute be specifically required to be open to inspection), or any of them, shall be open to the inspection of the shareowners, and the shareowners' rights in this respect are and shall be restricted and limited accordingly. SECTION 4. WAIVER OF NOTICE. Whenever any notice of time, place, purpose or any other matter, including any special notice or form of notice, is required or permitted to be given to any person by law or statute, the Certificate of Incorporation, these Bylaws or a resolution of shareowners or directors, a written waiver of notice signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. The Secretary shall cause any such waiver to be filed with or entered upon the records of the Corporation or, in the case of a waiver of notice of a meeting, the records of the meeting. The attendance of any person at a meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by such person of notice of such meeting. SECTION 5. VOTING SHARES OF OTHER CORPORATIONS. Unless otherwise ordered by the Board of Directors or by the Executive Committee, the President, the Secretary or the Treasurer shall have full power and authority on behalf of the Corporation to attend and to act and vote at any meetings of shareholders of any corporation in which the Corporation may hold shares, and at any such meeting shall possess and exercise any and all the rights and powers incident to the ownership of such shares and which as the owner thereof the Corporation might have possessed and exercised if present; or the President may in his or her discretion give a proxy or proxies in the name of the Corporation to any other person or persons, who may vote said shares and exercise any and all other rights in regard to it as here accorded to the officers. The Board of Directors by resolution from time to time may limit or curtail such power. 9 SECTION 6. AUDITS. The Board of Directors of the Corporation shall cause an audit of the books and affairs of the Corporation to be made annually during the period between the close of each fiscal year and the next annual meeting, such audit to be made by such firm or individuals, not associated or connected with the Corporation, as the directors may determine. ARTICLE VIII. AMENDMENTS. These Bylaws may be altered, amended, added to or repealed (a) by the affirmative vote of the owners of a majority of the voting power of shares entitled to vote thereon or (b) by the affirmative vote of directors holding a majority of the directorships. Any notice of a meeting of the shareowners or of the Board of Directors at which these Bylaws are to be altered, amended, added to or repealed shall include notice of such proposed action. 10 EX-10 4 exh1021_chngcntrlsvrncpln.txt CHNG CNTRL SVERNCE PLN AMNDED & RESTATED 9/24/01 EXHIBIT 10.21 UIL HOLDINGS CORPORATION -------------------------------- CHANGE IN CONTROL SEVERANCE PLAN (AS AMENDED AND RESTATED EFFECTIVE SEPTEMBER 24, 2001) -------------------------------- ARTICLE I PURPOSE OF PLAN 1.1 The purpose of the UIL Holdings Corporation Change in Control Severance Plan ("Plan") is to provide the officers and certain executives and key employees of UIL Holdings Corporation and its wholly-owned direct and indirect subsidiary corporations (each a "Company") with appropriate assurances of continued income and other benefits for a reasonable period of time in the event that the individual's employment by a Company is terminated by such Company (or a successor to such Company, whether direct or indirect, by purchase, merger, consolidation or otherwise - a "Successor") under any of the circumstances described herein, thereby encouraging the continued attention and dedication of each such officer, executive or key employee to the continued success of such Company. ARTICLE II ELIGIBILITY FOR PARTICIPATION 2.1 The Board of Directors of UIL Holdings Corporation (the "Board") shall, from time to time and in its absolute discretion, select the persons to be covered by the Plan (each a "Participant") and, if the Participant is not an officer, determine whether the Participant is an executive or a key employee, and shall notify each Participant of this selection and provide to each Participant a copy of the Plan. 2.2 Participation in the Plan shall not in any respect be deemed to grant the Participant a right to continued participation in the Plan; nor shall participation in the Plan be deemed to grant the Participant a right to continued employment by a Company. A Participant may be a party to an Employment Agreement with a Company that provides for the payment of benefits to such Participant in the event of a Change in Control of such Company, as the term Change in Control is defined herein, in which case and event the benefits payable in aggregate to such Participant shall be the greater amount provided for in the Plan or in such Participant's Employment Agreement. ARTICLE III TERM 3.1 Except under the circumstances described in Section 3.3 below, the Board (or the governing body of a Successor to UIL Holdings Corporation) may, by written notice to all Participants that shall take effect not less than twelve (12) months after the date of such notice, terminate or suspend the Plan, or amend the Plan so as to impair the rights of all Participants in the Plan. 3.2 Except under the circumstances described in Section 3.3 below, the Board (or such governing body) may, by written notice to any Participant that shall take effect not less than twelve (12) months after the date of such notice, terminate the participation of such Participant in the Plan, or amend the Plan so as to impair the rights of such Participant in the Plan. 3.3 Termination or suspension of the Plan, or any amendment of the Plan that impairs the rights of any Participant, occurring on or after a Change in Control, as that term is defined herein, shall not take effect until twenty-four (24) months after the occurrence of such Change in Control. 3.4 Subject to Sections 3.1, 3.2 and 3.3 above, the Board (or such governing body) may, at any time and from time to time, modify or amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely. ARTCLE IV ELIGIBILITY FOR BENEFITS 4.1 For the purpose of the Plan, Change in Control of a Company shall mean any of the following events: (a) any merger or consolidation of such Company with any corporate shareowner or group of corporate shareowners holding twenty-five percent (.25) or more of the Common Stock of UIL Holdings Corporation (or a successor to UIL Holdings Corporation, whether direct or indirect, by purchase, merger, consolidation or otherwise - a "Successor"), or with any other corporation or group of corporations that is, or after such merger or consolidation would be, or be affiliated with, a shareowner or group of shareowners owning at least twenty-five percent (.25) of the Common Stock of UIL Holdings Corporation or a Successor, or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of any assets of such Company having an aggregate fair market value of $50 2 million or more to or with any shareowner or group of shareowners holding twenty-five percent (.25) or more of the Common Stock of UIL Holdings Corporation or a Successor, or to or with any affiliate of any such shareowner or group of shareowners; or (c) the issuance or sale by such Company, or the sale by UIL Holdings Corporation or a Successor, in exchange for cash, securities or other consideration having an aggregate fair market value of $50 million or more, of any securities of such Company to any shareowner or group of shareowners holding twenty-five percent (.25) or more of the Common Stock of UIL Holdings Corporation or a Successor, or to any affiliate of any such shareowner or group of shareowners; or (d) the implementation of any plan or proposal for the liquidation or dissolution of such Company, or of UIL Holdings Corporation or a Successor, proposed by or on behalf of any shareowner or group of shareowners owning at least twenty-five percent (.25) of the Common Stock of UIL Holdings Corporation or a Successor, or by or on behalf of any affiliate of any such shareowner or group of shareowners; or (e) any reclassification of securities (including a reverse stock split), or recapitalization, of UIL Holdings Corporation or a Successor, or any other transaction, which has the effect, directly or indirectly, of increasing the proportionate share of outstanding shares of any class of equity securities, or securities convertible into any equity securities, of UIL Holdings Corporation or a Successor, which class of securities is directly or indirectly owned by a shareowner or group of shareowners owning at least twenty-five percent (.25) of the Common Stock of UIL Holdings Corporation or a Successor, or by any affiliate of any such shareowner or group of shareowners. The Board of Directors of such Company may, from time to time, by the affirmative vote of not less than a majority of the entire membership of said Board of Directors, at a meeting of said Board of Directors called and held for the purpose, modify the phrase "twenty-five percent (.25)" in one or more of the foregoing Sections (7)(a), (7)(b), (7)(c), (7)(d) and/or (7)(e) to a lesser percentage, but not less than twenty percent (.20). 4.2 If a Company (or its Successor) terminates a Participant's employment involuntarily other than for Cause, as defined in Section 4.4 below, during the twenty-four (24) months following a Change in Control, the benefits described in Article V hereof shall become payable to the Participant. 4.3 Subject to the provisions of Section 4.5 below, if a Participant terminates his or her employment during the twenty-four (24) months following a Change in Control and within ninety (90) days following the occurrence of one or more of the events constituting Constructive Termination, as herein defined, the benefits described in Article V hereof shall become payable to the Participant. For the purposes of the Plan, Constructive Termination shall mean any of the following events: 3 (a) The assignment to a Participant without his or her written consent of any duties materially inconsistent with such Participant's position, duties, responsibilities and status with a Company immediately prior to the Change in Control, or any diminishment in such Participant's management responsibilities, duties or powers as in effect immediately prior the Change in Control, or the removal from or failure to re-elect him or her to any such position or office, except in the event of termination of such Participant's employment for Cause, death or mandatory retirement; or (b) A reduction in the Participant's base annual salary rate, unless such reduction is part of and consistent with a general reduction of the compensation rates of all employees of his or her Company (or its Successor) and all of its wholly-owned and majority-owned subsidiaries; or (c) A failure to increase the Participant's base annual salary rate on a basis consistent (as to frequency and amount) with the base annual salary rates of the other officers (if the Participant is an officer), executives (if the Participant is an executive) or key employees (if the Participant is a key employee) of his or her Company (or its Successor); or (d) A failure to continue the Participant's participation in the benefit plans of his or her Company (or its Successor) on the same basis, both in terms of the amount of benefits provided and the level of the Participant's participation relative to other officers (if the Participant is an officer), executives (if the Participant is an executive) or key employees (if the Participant is a key employee) of such Company. 4.4 For the purposes of the Plan, a Company (or its Successor) shall be deemed to have Cause to terminate a Participant's employment only upon such Participant's (A) conviction of a felony involving personal dishonesty or moral turpitude, (B) total and permanent physical or mental disability, or (c) absence from work on a full-time basis, due to physical or mental illness, for an uninterrupted 365-day period. 4.5 The provisions of Section 4.3 above shall be inoperative unless, (A) within thirty (30) days after an occurrence that the Participant considers to be an event constituting Constructive Termination, the Participant gives notice to the Board (or the governing body of a Successor to UIL Holdings Corporation) stating that in his or her opinion such event has occurred and setting forth in reasonable detail the relevant facts and circumstances, and (B) within thirty (30) days after receipt of such notice (the "30-day cure period") the Participant's Company (or its Successor) has failed to remedy or otherwise cure the situation to the Participant's satisfaction or to persuade the Participant that the facts and circumstances do not constitute an event constituting Constructive Termination. If the Participant's Company (or its Successor) shall, within such 30-day cure period, remedy or otherwise cure the situation, a recurrence thereof or another occurrence constituting Constructive Termination shall constitute a new event for purposes of Section 4.2 above and the provisions of clause (B) of this Section 4.5 shall not apply upon such recurrence or new occurrence. 4 In the event that a Participant and his or her Company (or its Successor) shall, after expiration of the 30-day cure period (or, if there is no 30-day cure period, ten (10) days after the giving of the notice referred to in clause (A) of this Section 4.5) remain in substantial disagreement as to whether or not an event has occurred that constitutes Constructive Termination, the disagreement shall be resolved by arbitration, as follows: The non-employee members of the Board (or the governing body of a Successor to UIL Holdings Corporation), by a majority vote of such members, shall, promptly on the request of the Participant or his or her Company (or its Successor), appoint an arbitrator, who shall not be a member of the Board (or the governing body of a Successor to UIL Holdings Corporation) or an officer or employee of any Company (or its Successor), to determine whether an event constituting Constructive Termination has occurred. The person so appointed shall determine all procedural matters relating to the arbitration. The decision of the arbitrator shall be conclusive and binding upon the Participant and his or her Company (or its Successor), and judgment upon such determination may be entered in any court having jurisdiction. Nothing herein shall require a Participant to remain in the employ of a Company (or its Successor) beyond the expiration of any 30-day cure period in order to qualify for compensation under Section 4.3 above; but if the Participant remains in the employ of the Company (or such Successor) thereafter, the twenty-four (24) month and ninety (90) day periods of Section 4.3 above shall be deemed extended by the number of days elapsed from the earlier of (a) expiration of any 30-day cure period, or (b) the appointment of the arbitrator, to the date on which notice of the arbitrator's decision is served on the Participant. 4.6 Any termination of a Participant by his or her Company (or its Successor) for Cause shall be given in writing and shall specify the relevant facts and circumstances. 4.7 In no event shall the voluntary resignation or retirement of a Participant give rise to any benefits under the Plan. ARTICLE V BENEFITS 5.1 In the event of termination covered by Section 4.2 or Section 4.3 above, the Participant shall be entitled to receive: (a) If the Participant is the Chief Executive Officer of a Company (or its Successor), (i) such Company (or such Successor) shall pay such Participant, within thirty (30) days, a lump sum amount equal to three (3) times such Participant's Total Compensation immediately prior to the date of his or her termination; and (ii) such Company (or such Successor) shall maintain in full force and effect, for the continued benefit of such Participant for the period ending on the third anniversary of the date of his 5 or her termination, all employee benefit plans and programs in which such Participant was entitled to participate immediately prior to the date of his or her termination, provided that such Participant's continued participation is possible under the general terms and provisions of such plans and programs and applicable law and, if such Participant's participation in any such plan or program is barred as a result of his or her termination, such Company (or such Successor) shall arrange to provide such Participant with benefits substantially similar on an after-tax basis to those that he or she would have been entitled to receive under such plan or program; and (iii) such Participant shall receive the addition of three (3) years of service deemed as an employee of such Company (or such Successor) in the calculation of the benefits payable to such Participant under the retiree medical benefit plan(s) of such Company (or such Successor) and in the calculation of any benefits payable to such Participant as a supplemental retirement benefit under his or her Employment Agreement. (b) If the Participant is an officer other than the Chief Executive Officer, or an executive, of a Company (or its successor), (i) such Company (or such Successor) shall pay such Participant, within thirty (30) days, a lump sum amount equal to two (2) times such Participant's Total Compensation immediately prior to the date of his or her termination; and (ii) such Company (or such Successor) shall maintain in full force and effect, for the continued benefit of such Participant for the period ending on the second anniversary of the date of his or her termination, all employee benefit plans and programs in which such Participant was entitled to participate immediately prior to the date of his or her termination, provided that such Participant's continued participation is possible under the general terms and provisions of such plans and programs and applicable law and, if such Participant's participation in any such plan or program is barred as a result of his or her termination, such Company (or such Successor) shall arrange to provide such Participant with benefits substantially similar on an after-tax basis to those that he or she would have been entitled to receive under such plan or program; and (iii) such Participant shall receive the addition of two (2) years of service deemed as an employee of such Company (or such Successor) in the calculation of the benefits payable to such Participant under the retiree medical benefit plan(s) of such Company (or such Successor) and in the calculation of any benefits payable to such Participant as a supplemental retirement benefit under his or her Employment Agreement. (c) If the Participant is not an officer or an executive of a Company (or its Successor), (i) such Company (or such Successor) shall pay such Participant, within thirty (30) days, a lump sum amount equal to such Participant's Total Compensation immediately prior to the date of his or her termination; and (ii) the Company (or such Successor) shall maintain in full force and effect, for the continued benefit of such Participant for the period ending on the first anniversary of the date of his or her termination, all employee benefit plans and programs in which such Participant was entitled to participate immediately prior to the date of his or her termination, provided that such Participant's continued participation is possible under the general terms and provisions of such plans and programs and applicable law and, if such Participant's participation in any such plan or program is barred as a result of his or her termination, 6 the Company (or such Successor) shall arrange to provide such Participant with benefits substantially similar on an after-tax basis to those that he or she would have been entitled to receive under such plan or program; and (iii) such Participant shall receive the addition of one (1) year of service deemed as an employee of such Company (or such Successor) in the calculation of the benefits payable to such Participant under the retiree medical benefit plan(s) of such Company (or such Successor) and in the calculation of the benefit payable to such Participant under the Pension Plan of such Company (or such Successor). (d) For purposes of the Plan, Total Compensation is defined as the sum of a Participant's base annual salary rate immediately prior to the date of such Participant's termination and the target amount payable to such Participant under any annual Executive Incentive Compensation Program of a Company (or its Successor). (e) The Participant will not be required to mitigate the amount of any payment or health insurance benefit provided for in this Section 5.1 by seeking other employment or otherwise; provided, however, that if the Participant obtains other employment that offers employee health insurance benefit plans or programs to the Participant, the Participant shall enroll in all such health insurance plans and programs and the employee health insurance benefits payable under any corresponding health insurance plan or program provided to the Participant under the Plan shall be reduced by the health insurance benefits payable under such other plan or program. 5.2 If, for purposes of the excise tax imposed by Section 4999 of the Internal Revenue Code: (a) The payments that a Participant is entitled to receive under the Plan, together with any other payment or distribution by a Company (or its Successor) to or for the benefit of the Participant (whether paid or payable or distributed or distributable) pursuant to the Plan or otherwise, would be less than or equal to 3.2 times the "base amount" of such Participant's compensation (as defined in Section 280G of the Internal Revenue Code, and not governed by any term(s) defined in the Plan), any portion of such payments that would constitute "excess parachute payments" (as defined in said Section 280G) subject to such excise tax shall be reduced to the largest amount that will result in no portion of such excess parachute payments being subject to such excise tax. (b) The payments that a Participant is entitled to receive under the Plan, together with any other payment or distribution by a Company (or its Successor) to or for the benefit of the Participant (whether paid or payable or distributed or distributable) pursuant to the Plan or otherwise, would be more than 3.2 times the "base amount" of such Participant's compensation (as defined in Section 280G of the Internal Revenue Code, and not governed by any term(s) defined in the Plan), but not more than 4.0 times such "base amount," such Participant shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount equal to (i) the amount of the excise tax imposed on the Participant in respect of the payments he or she is entitled to receive (the "Excise Tax"), plus (ii) all federal, state and local income, employment and excise taxes 7 (including any interest or penalties imposed with respect to such taxes) imposed on the Participantin respect of the Gross-Up Payment, such that after payment of all such taxes (including any applicable interest or penalties) on the Gross-Up Payment, the Participant retains a portion of the Gross-Up Payment equal to the Excise Tax. (c) The payments that a Participant is entitled to receive under the Plan, together with any other payment or distribution by a Company (or its Successor) to or for the benefit of the Participant (whether paid or payable or distributed or distributable) pursuant to the Plan or otherwise, would be more than 4.0 times the "base amount" of such Participant's compensation (as defined in Section 280G of the Internal Revenue Code, and not governed by any term(s) defined in the Plan), the portion of such payments that would constitute "excess parachute payments" (as defined in said Section 280G) subject to said excise tax shall be reduced to the largest amount that will not cause the payments that such Participant is entitled to receive to exceed 4.0 times such "base amount," and the provisions of (b) above shall apply. 5.3 Not later than the day prior to the date of the Change in Control, UIL Holdings Corporation will cause to be paid to the Trustee of The United Illuminating Company Supplemental Retirement Benefit Trust established pursuant to the Agreement, made as of the 1st day of June, 1995 and as amended effective December 31, 1995 and July 20, 2000, between said Company and State Street Bank and Trust Company, as Trustee, cash in an amount equal to a sum, calculated by said Company's independent certified public accountants, reasonably sufficient to pay and discharge each Company's future obligations, if any, to all Participants in the Plan assuming, for purposes of such calculation, that the employment of all of the Participants is terminated on the date of the Change in Control. ARTICLE VI GENERAL PROVISIONS 6.1 UIL Holdings Corporation will use its best efforts to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the businesses or assets of said Company to assume and adopt the Plan. If said Company fails to obtain such agreement prior to the effective date of any such succession, (a) any Participant who is not offered a position, duties, responsibilities, compensation and status that are equivalent in all material respects to his or her position, duties, responsibilities, compensation and status with his or her Company immediately prior to the succession may terminate his or her employment within thirty (30) days of such succession and treat such termination as an involuntary termination under Section 4.2 above after a Change in Control, entitling such Participant to the benefits provided him or her in Article V hereof in respect of such a termination; (b) any Participant who is offered a position, duties, responsibilities, compensation and status that are equivalent in all material respects to his or her position, duties, responsibilities, compensation and status immediately prior to the succession shall thereafter have no rights under the Plan, 8 unless during the twenty-four (24) months following such succession (i) the Participant's employment shall be terminated otherwise than for Cause, as defined in Section 4.4 above, or (ii) such Participant shall terminate his or her employment within ninety (90) days following the occurrence of one or more of the events constituting Constructive Termination as described in Section 4.3 above, in either of which cases the benefits to which such Participant would be entitled under Article V hereof in respect of a Constructive Termination after a Change in Control under Section 4.3 above shall become payable to him or her; and (c) UIL Holdings Corporation shall remain liable for the payment of any benefits to which the Participant may become entitled under the foregoing clauses (a) and (b) of this Section 6.1 6.2 If any Participant receiving benefits under Article V of this Plan should die while any amounts are still payable to him or her thereunder, all such amounts shall be paid to the Participant's designated beneficiary or, if no designation has been made, to his or her spouse, if any, and if none, to his or her children then living, if any, in equal payments, and if none, to the Participant's personal representatives. 6.3 In the event that a Participant institutes any legal action to enforce his or her rights under the Plan, and provided that he or she is the prevailing party, such Participant shall be entitled to recover from UIL Holdings Corporation (or its Successor) any actual and documented expenses for reasonable attorney's fees and disbursements incurred by him or her. 6.4 Any dispute or controversy, except a disagreement described in the second paragraph of Section 4.5, arising under or in connection with the Plan shall be settled exclusively by arbitration in New Haven, Connecticut, in accordance with the rules of the American Arbitration Association then in effect; and judgment may be entered on the arbitration award in any court having jurisdiction. 6.5 Any notice or other communication pursuant to the Plan intended for a Participant shall be deemed given when personally delivered to such Participant or sent to such Participant by registered or certified mail, return receipt requested, at such Participant's residence address as it appears on the records of the Participant's Company (or its Successor), or at such other address as such Participant shall have specified by notice to such Company (or its Successor) in the manner herein provided. Any notice or other communication pursuant to the Plan intended for the Participant's Company (or its Successor) shall be deemed given when personally delivered to the Secretary or Assistant Secretary of UIL Holdings Corporation (or its Successor), or sent to the attention of the Secretary or Assistant Secretary by registered or certified mail, return receipt requested, at its headquarters at 157 Church Street, New Haven, Connecticut, or at such other address as said Company (or its Successor) shall have specified by notice to all of the Participants in the manner herein provided. 6.6 A Participant may not assign, anticipate, transfer, pledge, hypothecate or alienate in any manner any interest arising under the Plan, nor shall any such interest be 9 subject to attachment, bankruptcy proceedings or to any other legal processes or to the interference or control of creditors or others. 6.7 It is intended that the decision of the Board (or the governing Board of a Successor to UIL Holdings Corporation) or its designated arbitrator as specified in the Plan shall be exclusive and final with respect to the interpretation or application of the Plan. If any body of law should be used or applied in determining the meaning or effect of the Plan, it shall be the law of the State of Connecticut. 6.8 In the event any provision of the Plan, if challenged, would be declared invalid, illegal or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforceable and the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. 10 EX-21 5 exh21b_subs.txt LIST OF SUBSIDIARIES OF UIL HOLDINGS CORP. EXHIBIT NO. 21b LIST OF SUBSIDIARIES OF UIL HOLDINGS CORPORATION
STATE OR JURISDICTION OF INCORPORATION OR NAME UNDER WHICH NAME OF SUBSIDIARY ORGANIZATION SUBSIDIARY DOES BUSINESS ------------------ --------------------- ------------------------ The United Illuminating Company (1) Connecticut The United Illuminating Company United Resources, Inc. (1) Connecticut United Resources, Inc. Xcelecom, Inc. (2) Connecticut Xcelecom, Inc. American Payment Systems, Inc. (2) Connecticut American Payment Systems, Inc. United Bridgeport Energy, Inc. (2) Connecticut United Bridgeport Energy, Inc. United Capital Investments, Inc. (2) Connecticut United Capital Investments, Inc. McPhee Electric Ltd., LLC (3) Connecticut McPhee Electric Ltd., LLC McPhee Utility Power and Signal, Ltd. (3) Connecticut McPhee Utility Power and Signal, Ltd. Thermal Energies, Inc. (3) Connecticut Thermal Energies, Inc. Allan Electric Co., Inc. (3) New Jersey Allan Electric Co., Inc. Brite-Way Electrical Contractors, Inc. (3) New Jersey Brite-Way Electrical Contractors, Inc. The DataStore, Incorporated (3) New Jersey The DataStore Incorporated Orlando Diefenderfer Electrical Contractors, Inc. (3) Pennsylvania Orlando Diefenderfer Electrical Contractors, Inc. Johnson Electric Co., Inc.(3) Connecticut Johnson Electric Co., Inc. M. J. Daly & Sons, Inc. (3) Connecticut M. J. Daly & Sons, Inc. 4Front Systems, Inc. (3) North Carolina 4Front Systems, Inc. APS Card Services, Inc. (4) Connecticut APS Card Services, Inc. CellCards of Illinois, LLC (4) Illinois CellCards of Illinois, LLC Souwestcon Properties, Inc. (5) Connecticut Souwestcon Properties, Inc. JBL Electric, Inc. (6) New Jersey JBL Electric, Inc.
- ---------------------- (1) Subsidiary of UIL Holdings Corporation (2) Subsidiary of United Resources, Inc. (3) Subsidiary of Xcelecom, Inc. (4) Subsidiary of American Payments Systems, Inc. (5) Subsidiary of United Capital Investments, Inc. (6) Subsidiary of Allan Electric Co., Inc. -----END PRIVACY-ENHANCED MESSAGE-----