ML20009F293
| ML20009F293 | |
| Person / Time | |
|---|---|
| Site: | Seabrook  |
| Issue date: | 01/05/1981 |
| From: | UNITED ILLUMINATING CO. |
| To: | |
| Shared Package | |
| ML20009F275 | List: |
| References | |
| NUDOCS 8107300255 | |
| Download: ML20009F293 (75) | |
Text
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United Illuminating 1980 AnnualReport O
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a yearof challenges i 4 met.
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mh He! ping the Comnany meet 1980 challenges were UI employees, a cross section of whom are shown.
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eer T hn c I A sistant.
and Joe Ryzewski Di i n Su rvisor
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"$$$$aa" in erk ab Soi Jackie Schatz
- r. First Class Electncal Engineer Janet Rakiec Glove Lab Techncan Chns Koulouns Data Entry Operator Gerald Polite 0011er rator C rn ca and Mariye Stanley Combuston Tester Computer Operator
Highlights 1980 1979 Operating Revenues S 364.122,000 5 281.878.000 m Net Income S 34.466,000 S 29.668.000 Earnings per Share of Common Stock (based on average number of shares outstanding) $3.56 $3.94 Dividends Declared per Share of Common Stock S2.68 $2.62 Utility Plant S 830.034,000 $ 764.652.000 Salesof Energy-KWH 4,715,078,000 4.780.751.000 Total Customers 280,800 278.523 Average Residential Use - KWH 6,545 6.664 Peak Load - KW 971,100 911.300 Numberof Employees 1,481 1.460 Number of Common Shareowners 36,447 34.554 Contents 19 Statement of Retained Eamings 2 Chairman s Report 4 Noteworthy 1980 Operating Results 20 Balance Sheet 8 Planning ana Providing for the Future 22 Statement of Accounting Policies 12 A Wide Ranging Communications Program 23 Notes to Financial Statements 27 Report of Independent 14 1980 Financial Results Certified Public Accountants 15 Organizational and Personnel Developments 27 Common Stock Data 16 Ten-Year Summary of Selected 28 Management Discussion and Analysis j
f' Financial and Statistical Data of FinancialCondition 18 Statement of .ncome ;ad Results of Operations 3u Supplementary Information inflation 19 Statementof Sourcesof Funds for Gross Property Additions 32 Directors and Officers Annual Meeting date: The Company's Annual Meeting will be held in the auditonum at 8r femple Street. New Haven, on Wednesday. April 29.1981 commencing at 10.00 a m.
The cove ' eghnghts examples of activities that represented a range of challenges to the Company in 1980 Of special significance was the sale of three major equity issues - two common and one
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preference - that produced approx:mately $60 mi!! ion in additional investment in the Company
gjggg in UI's 1979 Annual Report I stated-70pOYt " Candor requores me to acknowledge that f '
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I Ilook forward to the 1980s with some trepidation. Even absent unforeseen adverse developments - and such have l_f th 4 been practically the rule dunng recent years - st is apparent that the 80s will be f :$ ;' Q}] Tl. ..
extremely challenging years for UI Just as they willlot ournation:
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Having completed the first year of the 80s. ' K f.i(i) j
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.y tified: 1980 was indeed a very challenging #
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our nation! Two generally unpredicted ad- '%" jf., ~ ' -
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the Iraq tran war resulting in further reduc- . ;'} - .1 '. ,(,
tion of world oil supply and twin peaks 1 ' ,,.h .' f 'Q
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- )w p ' g of unprecedented pnme interest rates- f . .
compounded the anticipated challenges. ,. . . ( , "f ,,4-h;-
Accordingly. I am most pleased to report . , ,g ,;. . 7.> j .
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that UI not only effectively met those chal- .l'
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- tenges, but that it emerged from the trying year far stronger than it began the jear. l'l Chairrnan John D. Fassett _
The most entical challenge facing the Company as 1980 began was the contin-roducing reimbursement of $31 mill:on. As ued need to support. despite a detenorating a result of these major actions, together economy and the disarray of the financial with new investment pursuant to the Auto-markets, the Company s commitment to a matic Divide.rd Reinvestment and Common construction program planned to reduce Stock Puich.ise Plan. and other less signifi-substantially its excessive dependence on cant cash-generating activities. Ul s short-imported oil. With $81 million of short-term term borrowings as 1981 began were about debt outstanding on January 1.1980.
$18 million. a relatively modest level.
scheduled cash requirements for construc-The foregoing was accomplished desp tion and refinancing of matunng debt during the year of 594 million, and the prime rate saWam leds d eaqs W nternal cash generation by the Company escalating towaro 20% for the first time during 1980. The resuli of supenmposing dunng the year, the hurdles to success on ar. economy hurdened by skyrocketing inflation and financing costs of further est.a-However, despite the severe constraints lating oil p; ices was redocuons from 1979 imposed on the Company s financing op-levels of kilowatt-hour sales and per-share -
tions by the astronomical lending rates. the earnings and further erosion of internally Company was able dunng the first half of generated cash. As a first step toward im-1980 to negotiate four major secunty sales roving this situation. an application for lim-prouacing approximately $100 million of ited rate relief was filed with the Connecticut additionalinvestment in UI. Also during the Department of Public Util.ty Control (DPUC) first half of 1980, the Company completed in January 1980 requesting solely expe-sale of the property of its subsidiary Re-dited incorporation into rates of those ad-search Center. Inc. producing about $2 mil-verse financial impacts (consisting of in-lion. In October the long-anticipated safe of one-eighth of the Company's 20% interest in the Seabrook project was consummated m
2
creased State tax payments and financing a cntical element of its program to reduoe regulatory climate for accomplishment of costs for fuel) not conternplated by the ex- its current more than 90% dependence on Ul s objectives - hopefully. the change may isting fuel adjustment charg; and resulting imported od-fired generation to serve its even at long last, result in adoption for the from the rapid increase of the pnce to the curtomers' electncity requirements. In con- future of the wise and comprehensive na-Company of oil from approximately $20 per ciuding in its decision that the Company S tional energy pohcy I have joined many irrelin mic-1979 to $30 34 when the ap- construction program through 1987 is "ac. others in pleading for since i first signed n ication was fued The recently appointeJ Ceptablef the DPUC stated. "The Com- one of these reports six years ago.
panel of Commissioners proceeded rapidly pany s construction program. as proposed. At year-end. to strengthen the Com-and responsibly and the authonzed in- wdl me0t consumer requirements as well pany s abikty to move forward in the new crease in annual revenues of $17 6 milhon as regWatory cntena and is therefore decade, the Board of Directors made sig-became effective on Apnl 25.1980 approved.' nificant changes in top management re-The full fledged rate review apphcation As a result of financing and regulatory sponsibihties. James F Cobey Jr., a grad-announce11n the kmited proceeding and constraints. construction emphasis at the uate of Choate. '43. Ya!e. '48, and Harvard discussed in f ast year s Annual Report was Seabrook project dunng the last three quar- Business School 52 after a tour as an offi-fded on July 3.1980. as scheduled to this ters of 1980 was directed toward Unit 1. cer in the Navy, became president on Jan-proceeding the Company sought not only Whde construction employment at year-end uary 1,1981. He has been the Company s updating of inflation-ravaged expenses and was still at the reduced level of approxi- chief financial officer since 1975 and has more realistic levels o: return in view of re- mately 3.500 employees. it is reassunng served with ability and ded. cation dunng a centwst and anticipa'ed financing costs. that no shutdown resulted from any of the most demanding penod anc I look forward bu' also recognition through depreciation problems of 1980 and major progr ss was to his shanng of broader respansibihties aHowances of probable future restnctions made toward completion of the project. We The other promotions. which are detaileJ on cil use by generating stations and adop- continue to be optimistic that Sea 3 rook Unit on page 15, are similarly well earned and tion of certain accounting practices with I will be producing electncity and reducing reflect both sobd capabikty and firm dedi-respect to federal taxes which had afwr Ul s and the region's od dependency in cation to UI. The Company could not oper-been rejected by Connecticut regulatc 1984. As discussed hereafterin this Annual ate effectively in these trying times without though accepted by virtually all enhghtt Report. progress was also made dunng such conscientious and dedicated employ-regulators elsewhere The DPUC decision 1980 on many of UI's other prc,ects simi- ees. and I wish to take this occasion to resulting in an increase of $35 9 mdhon ef- larly designed to reduce oil dependency, thank all of the Company ~s employees for fective December 17,1980. whde denying but the Company's refuse-denved fuel prol- their strong performance and support the request for increased depreciation. con- ect suffered a disappointing - although dunng 1980.
ch Med that returrs on common equity of we beheve temporary - setback with the The accomphshments of 1980 also re-l 41 'o and on rate base of 11.3'o were rea- bankruptcy of the waste conveision Llant flect the wise Counsel and strong support sor aole and authonzed the tax normah2a- operator. to management of the Company's direc-(n accounting practices requested Con. Whde 1981 commences with the pnme tors To tner . ou extend thanks on s tena impacts of inflation not reflected in interest rate again exceeding 20 a. with od behalf of management employees and the increase tagether with a further escala- costing $34 08 a barrel and nsino, with con- shareowners tion at year-end of the pnce of oil to more tinuing large cash needs for the Company S than $5 per barral above the level incorpm construction program and with scheduled j ) 77 rated in the new rates wdl obviously nece ;- refinancings of matunng debt, my trepi4- %
- t. tate further rate review dunng 1981. but tion about the future is less than a year ago / Chairman the apparent greater comprehension by for many reasons:
Connecticut utihty regulators of utikties' First, as a result of 1980 s actions. Ul concerns and the long-term best interest begins 1981 in a relatively favorable short-of utthty customers and the State has term cash position _ implementation of been reassunng the accounting langes authonzed by the January 5.1981 Dunng the extended heanngs on the DPUC should improve internal cash Company s July rate appbcation several generation purported consumer representatives and a Second. the cntical Seabrook project is few other participants again argued (most moving forward and the major regional clearly reflecting st ong anti nuclear com- benefits of that facihty are closer to fruition.
mitments rather than evaluations of feasibte Third. I am most optimistic that the im-alternatives) that the DPUC should require pending change in national administrations UI to terminate its participation in the Sea- will result in a more favorable economic and brook project Company witnesses again explained that even if no future load growth should occur - a most unkkely scenano -
the Company s partic 'ation in Seabrook is
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I Despita exceptionally hot weather dunng also among its residential customers In Noteworthy 1980 the summer and fngid winter tempera- spite of substantially increased heating Operat,mg reSultS tures, sales of electncity dunng 1980 to- and cooling needs in 1980. the average talled only 4.7 billion kilowatt-hours (kwh). consumption of UI's residential customers 1.4*. below 1979 sales. The reduction declined 1.8"o - f rom 6.664 kwh in 1979 to clearly reflects severely adverse economic 6.545 in 1980.
conditions as well as increasing conserva- In cooperation with six other el6ctnc an1 tion efforts by customers and the impact of gas utilities in Connecticut Ul in 1980 par-the Company's expanding load manage- ticipated in the launching of CONN SAVE -
ment efforts. probably the most comprehensive resi-While commercial sales were virtually dential energy audit program in the nation.
even with 1979 and sales to residential For a fee of $10 the program offers resi-customers were down only 1.0*.. con- dential customers complete on-site energy sumption by induskial customers was audits as well as asQstance in arranging down 3.6% This rerlected not only a gen- for financing and installation of conserva-erally reduced level of industnal activity tion measures. As of year-end. more than cnd price-induced conservation efforts. 14.000 Connecticut res; dents had re-b;t also several closings of major indt.s- quested audits and requests were being trial plants in the Company's service area. received at a rate of more than 200 per Continued attrition of industnal load is an- day.
ticipated as certain heavy milling and man- One of UI's energy management pro-of acturir 7 iiidustries reduce their opera- grams, undertaken in compliance with a tions in the region ano the trend toward a Department of Public Utility Control service-oriented economy continues in (DPUC) directive, involves lowenng the southern Connecticut. voltage band of all distnbution circuits in Because of the exceptional summer order to reduce consumption of energy.
weather, peak demand for electncity The program was completed by year-end.
reached a record level on July 21 despite To reduce energy losses in the course of tne general reduction in sales. Dunng the distnbution and to maintain and enhance peak hour on that date demand was the level of system reliability. the Company 971.100 kilowatts, surpassing ti; crevious has also been engaged in a program of record of 952,900 kilowatts esta' ad . xjrading key distnbu en circuits. Dunng August 17,1978. The 24-hour usag ,e- 1!60 progress was made on the conver-cord of 18,794,300 kwh set o, 'a Ir_tter sion of the 6.900-volt system in the Com-date was not exceeded on Jut/ 21 when pany's Center Division to a h'gher 13.800 the totai reached only 18.57920n
- th. voltage.
The Company also began installation Conservation and dunng 1980 of a unique Distnbution Car-energy management ner Communications System (DCCS).
The Company continues to observe signif- Part of a program to collect improved data icant effects of customer conservation ef-forts not only in usage levels of specific commercial and industrial customers, but 4
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- CONN SAVE auditor Marcy Wheeler visits a Milford residence to conduct a home er-
- - <-- i ergy audit The comprehensive audit in-
. ciudes a heat loss study of the dwelling z
' and a detailed computer pnntout indicating energy saving suggestions, costs and lists u
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of contractors and lending institutions.
Auditor in lower right photo is inspecting furnace and duct work.
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Continued regarding customers' leads, the system Efficiency and cost Operating results automatically reads customers' meters of generation and pariodically transmits the readings A major aspect of the Company ~s diverse over electric distribution lines to a Com- program to improve its efficiency in the use pany computer. While the immediate ob- of all forms of energy has long been a prop :
jectives are to collect data concerning cus- ect to improve the average heat rate of its :
tomer electnc usage pattems and to assist generating units -in other words, to max-in the promotion of conservation by cus- imize the number of kwh produced per tomers, the DCCS also has obvious addi- barrel of oil. Dunng 1980 the average heat tional potential for accomplishing load rate of the Company s Bndgeport and New management objectives and facilitating the Haven plants was again reduced-by most economical scheduling of generating nearly 100 Btu's - to 10.170 Btu's. This facilities. achievement - which ranks UI's plants in the most efficient quarter of the nation's
.f generating units -is particularly impres-t ,p,.I f / ; sive since Ul s plants rarely operate as base load generators as do most of the
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provided by more economical nuclear
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, needs, a mode of operation which is inher-(; I ,j" ently more fuel consuming.
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s ;, a ' which is 9.5 o owned by Ul, also achieved .
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1980 it produced 338.5 million kwh for UI e d '
customeo, translating into a savings of -
f-. 558.000 barrels of oil that were not re-
- quired to be burned to meet customers requirements.
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In February 1980. Ul again apphed to
- j b, % the Connecticut Department of Environ-Meter Tester-Installer Ted Mucha takes a test reading frorn a residential electnc mental Protection (DEP) for permission to meter to chart daily patterns of electncity usage as part of a load research prograrn. burn at its major generating units oil with sulfur content higher than the 0.5 limita-tion imposed by Connecticut regulations.
Independent studies and Ul s expenence dunng a two-month penod in 1979, when an emergency variance from the 0 Sao re-quirement was permitted, have clearly demonstrated that this regulation is not re-quired to protect human health. All of Con-M 6
i necticut's neighbonng states permit burr.- quality. the Company and others empha-ing of far higher sulfur-con:ent fuel- plants sized the great economic hardship that the on Long Island visible from UI's stations regulation imposes on Connecticut busi-regularly burn fuel of 2.2*o or higher sulfur nesses. industnes and municipalities as ontent. At times dunng 1980 the pnce dif- we'; as rosidential electnc cus'.omers. Fi-ential between 0 5* sulfur oil and the nally in January 1981, the DEP heanng ore abundant 2.2*o sulfur oil reached officer issued a decision recommending
$12 per barrel ar.d the cost to UI's cus- that UI be allowed to burn oil with sulfur tomers dunng the year of maintaining this content up to 2.2 o at its largest units in unrealistic requirement probably exceeded Bndgeport and New Haven. Approvalof
$40 million. Dunng the extended heanngs the State DEP commissioner and the fed-on the application, in addition to producing eral Environmental Protection Agency is extensive expert testimony regardino air now required to make this relief a reality.
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NEPOOL to provide forecasts cover:ng Planning and in furtnerance of its firm commitment to just UI's service area. When fully devel-reduce its heavy reliance on oil to generate providing for ine eiect,3c,ty requirements of its cus- oped. this modei wiii provide hour-to-hour the future tomers. tne Company dunng 1980 contin- forecasts for UI by individual classes of ued its support for and investments in the customers. Wharton Econometnc Fore-four NEFOOL-planned nuclear generating casting Associates pursuant to a contrat units currently expected to provide Ul and tual arrangement. is also now providing to the region relief from oil dependence by UI both short- and long-term forecasts to the mid-1980s. As explained in greater de- be integrated into the Battelle model and tail in " Management's Discussion and the Company's other studies.
Analysis of Finar.cial Condition and Re- Since planning for the future also re-sults of Operations" following the financial quires sophisticated longer-term financial statements in this report. in October the forecasting. the Company has also taken a Company reduced its ownership of the two major step to improve significantly its ca-Seabrook units under construction in New pability in that area. Following preliminary Hampshire to 17.5*o. No further sales of studies dunng 1979 of UI's computerized UI's Seabrook interest are scheduled and corporate model system by Planmetrics.
the Company a!so continues to own a Inc., that highly qualified consultant in fi-3.6859 share in Millstone Unit 3 under nancial modeling was retained to assist construction in Waterford, Connecticut. Company personnel in developing for Ul and a 3.3* ownership interest in Pilgnm an integrated system incorporating the Unit 2, planned to be constructed in Plym- most advanced state of the art. This sys-outh. Massachusetts. tem became operational in 1980 and has Construction moved forward on the been utilized in the preparation of several Seabrook and Millstone 3 projects during additional stuJies undertaken by the Com-l 1980:Seabrook Unit 1 has now passed its pany for compliance with recent regulatory construction mid-point and is scheduled requirements and for financial planning for operation in 1984; Millstone Unit 3 is purposes.
more than one-third complete and is Use of computer technology has ex-scheduled for service in 1986; approach- panded greatiy in all aspects of the Com-ing 10 a completion. Seabrook Unit 2 is pany's operations and the Company's ob-expected to be in operation two years fol- jectives of continuing improvements in Iowing Unit 1, but its precise schedule is currently uncertain for the reasons dis-cussed in Note K on page 26 of this report. ,
,k Improving forecasting '
capabilities ,j} 7 Changing governmental constraints, eco-nomic corditions. public attitudes, and
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quirements. The Company, nevertheless, continues to adopt improvements to its load forecasting capability in order to en-hance its ability to perform ionger-range planning. Dunng 1980 steps were taken to ///g/MI / bM' I convert the sophisticated Battelle-Colum- ! Mi bus Laboratories' regional econometric W .
forecasting model recently adopted by /j!
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continoco operating efficiency and planning capabil- Ul completed its study, undertaken pur-Planning for the future ity will require even greater computer use suant to an earlier DOE grant. of the fea-in the future. In recognition of this, as well sibility of converting two older units at as to provide a secunty backup for the Steel Point Station to bum gasified coal.
Company's primary computer system. in The report concluded that the proposed late 1980 UI had installed a second com- project is technically feasible, but identi-puter, an IBM 4331, at a separate luion fled economic considerations precluding on its system. near-term implementation of such a demonstration project solely by UI. The Progress on other Company has offered to make the f acility energy supply projects available for a demonstration project in furtherance of its oldective of reduction supported by DOE, equipment manufac-of reliance on oil,in ado: tion to its nuclear turers, other utilities, or a combination commitments, Ul dunng 1980 continued its thereof.
wide-ranging program of investigation and
- Acting through NEPOOL, Ul and other development of possible alternatives to oil- New England systems participated in fired generation. discussions during the year with officials Dunng the year- of Hydro-Quebec Electnc regarding pos-
- UI was awarded a U.S. Department of sibilities of purchase by New England Energy (DOE) grant for a study of the utilities from the Canadian system begin-feasibility of a cogeneration district heat. ning in 1990 of hydroelectric power. Hy-ing system in Bnogeport. The study, dro-Quebec has tentatively indicated its being undertaken in conjunction with the willingness to construct in advance of its City of Bridgeport and the Greater own needs a major additional hydro fa-Bndgeport Regional Planning Agency. cility and to sell the excess energy to involves consideration of the use of systems in northeastern U.S. The power steam from turbine-generators at would be transmitted to New England Bridgeport Harbor and Steel Point sta. over a proposed high capacity transmis-tions for space and water heating pur. sion line onginating northeast of Mon-poses in buildings in the city and for treal and terminating in southern New process steam requirements of industry England. Studies and negotiations to de-within the area. termine the actual feasibility and eco-nomics of the proposed program as well em ~
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- DOE took the next step in its administra-
- tive proceeding initiated in 1979 to re-e quire the Company to convert Bridge-port Harbor Unit 3 to bum coal. As it had in response to DOE's first preliminary
/ notice, Ui again indicated its willingne ss N to do everything reasonably feasible to accomp;ish conversion of the Unit from j, 4 f oil to coalif there is a consensus as to The Planning Coordinating Committee meets mgularlv .s a "cleannghouse" for various planning activities in the Company. Members, represent.rg vanous areas, are from left to nght: Chairman Dennis Hrabchak, director- planning system; Anthony Esposito, supervnor- planning and manage-ment science; Jon Majkowski, director - financial pf anning and control; William Elder, treasurer:
William Femer, director-systems forecast: John Sendlein chief systems planning engineer, and Robert Lancio, fuel management and operations budget supervisor.
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l in addition to introducing many innovations pated in an Energy Ethics Conference at l
A wide-ranging to its programs and procedures for provid- Yale University bnnging together church Communications ing timely and accurate information about leaders, social scientists and energy ex-program ui and its many activities and energy de- perts to discuss and to achieve a better velopments generally to its traditional pri- understanding of energy problems.
mary constituencies - Company share- In cooperation with the University of owners, employees, customers, and opin- Bndgeport, Ui organized and sponsored a ion leaders of the Company's service area day-long seminar for science teachers and
- dunng 1980 efforts were expanded to students from 27 area high schools. Called open or widen channels of communication " Energy Forum 80,"it included wide-rang-with many additional groups. A wide spec- ing presentations on regional power sup-trum of audiences was reached and these ply, energy alternatives and guided tours efforts will be continued since Ul manage- of Bndgeport Harbor Station.
ment is convinced that resolution of the less formal tours of UI generating facili-grave energy problems of our nation re- ties and discussions of Ul, regional and quires an informed dialogue among all of national energy problems were conducted its citizens. during the year for many other interested in a first-of-sts-kind event in the Ul area. groups and individuals including media the Company co-sponsored and partici. personnel. federal and State legislators, service clubs and student groups.
The Company's Speakers Bureau, compnsed of volunteer UI employees, pro-
,. _. vided speakers dunng 1980 to more than u '
100 vaned audiences, ranging from
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" [; ' cess with UI's Power Quiz program which
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u-its. This program has now been fully inte-grated into the curnculuin of 300 classes in Among individuals who toured Ut facilities dur- the Ul area with about 8.000 students par-ing the year was Senate candidate U.S. Repre-sentative Christopher Dodd (left). who visited ticipating dunng 1980.
Bridgeport Harbor Station in August. With Rep.
Dodd were wce President Richard Grossi (back to camera). President John Fassett and Senior Vice President John Fratus.
, ~/ W . .e At a unique Energy Ethics -
, .N" Conference, which the Com-pany co-sponsored and partic- ( f-ipated in. Department of Pubhc 4 ' -
r' Utikty Control Commissioner , , . ,wg h;c Edythe Gaines leads a discus- ,
sion group. s _-
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bor Station in October and dA viewed the plant's unit opera-tor training simulator, ex-QM
- f,fy plained by Mce President ;
David Hoskinson. Looking on ,7, f /[;'. "
are Manager - Pubhc informa- f., ' M ;
tion John Dolan and Executive S .-
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Op r ting revenues reached the record Dunng 1980 UI burned in excess of 8.1 1980 financial level of $364.1 million, up 29.2% from million barrels of No. 6 oil.
reSultS 1979. Fuel oil price increases reflected Earnings per share amounted to $3.56, through operation of the fuel adjustment down 38c per share from 1979. While in-clause in UI rates and general rate in- come applicable to common stock in-creases authonzed by the DPUCin Apnl creased to $25.2 million from $23.9 million ,
and December account for the higher in 1979, the average number of shares ,
revenues. outstanding increased by about a million Total operating expenses dunng the shares to 7,061,241 shares.
year were $327.9 million. $84.3 million Comprehensivediscussionsof the higher than the preceding year. Of this to- Company's extensive financing activities ,
I tal $209.2 million was the cost of fuel and and the two rate proceedings during 1980 interchange energy, up from $141.7 million are included in" Management's Discussion the prior year. The price of 0.5% sulfur oil and Analysis of Financial Condition and began 1981 at $34.08 per barrel (42 gal- Results of Operations" following the finan-lons), an increase of more than 36% over cial statements in this report.
the December 1,1979 price of $24.98.
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-W 9 i President Fassett(left) and Ex.
ecutive Vice President Cobey I k (above) presented testimony at general rate heanngs in Sep-tember before DPUC Commis-sioners (left to nght) John a . Downey, Marvin Loewith and Peter Boucher.
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h Org:nizatirn~~l in December, the Company's Board of Di- Tw:-yrr libor (greement eigned rectors made several significant manage- Dunng mid-year. Mr. Moore led the Com-V ment changes, etfective January 1,1981, pany s bargaining committee which. after developments in order to enhance tne Company s capa- extended negotiations. reached agree-bility to meet and overcome the continuing ment on a new two-year contract with j challenges of the business. Loca! 470-471, Utility Woikers Union of
- John D. Fassett was named chairman of Amenca AFL-CIO,representativeof the the board and chief executive officer of the Company's more Qan 800 bargaining unit Company. Mr. Fassett had served as pres- employees. The new agreement, which ident since July 1974 and has been chief provides wage increases and improved executive officer since January 1976. Mr. benefits, runs through September 15.
Fassett joined Ulin 1973 as vice president 1982.
and general counsel and had been a part. The Company's Management Direct ner in the law firm of Wiggin & Dana. Compensation Program, which is applica-In 1972 he became a director of the ble to non-officer management employees Company. and has the objectives both of achieving intemal equity among those employees Named to succeed Mr. Fassett as presi-and a reasonable relationship between sa-dent was James F. Cobey Jr. He had been lanes at Ul and those paid by comparable serving as UI executive vice president -
ies, also unhnmany renements finance and administration and treasurer dunng 1980. This comprehensive system since September 1976. He joined UI in that integrates job descriptior.s position 1971 and was elected secretary and treas- ev lu ti ns, performance appraisals and urer in 1973 and was named vice presi-a me na es has conWed dent - finance and accounting and treas-gre fly to achievement of the program's urer in 1975. He was elected to UI's Board o twes.
in 1978 Robert L. Fiscus, who had been vice Rate department reorganized president and controller since September Dunng 1980 the Company's Rate Depart-1976, was named vice president of finance ment was completely reorganized and ex-and accounting. He is a Certified Public panded. Proliferating regulatory require-Accountant and joined Ulin 1972 as ments at both federal and State levels in controller. recent years, together with the heavy de-G James L Benjamin was elected control-ler by the Board He had served as assist-ant controller since February 1976. Mr.
m nds of expanded and more frequent r te proceedings, necessitated this step.
An individual with rate experience was hired from another electric utility and he Benjamin joined Ulin 1962 as accounting an i his six staff members have since been assistant and was promoted to accounting deeply involved not only in rate case activi-manager in 1973 ties, but also in the preparation of a series William A. Elder was elected treasurer. of new rcports, including ones on cost of He had served as assistant treasurer since service information, cogeneration rates.
February 1976 He joined UIin 1968 as and load management activities - required supervisor of cash records and in 1975 to be submitted to the Federal Energy was named manager - financial planning Regulatory Commisson pursuant to the and cash management- Public Utility Regulatory Policy Act of 1978 At the outset of 1980 the Board of Di- - as well as the many additional studies rectors elected Harold J. Moore Jr. to the required for preparation of additional re-office of vice president - employee rela- ports requested by the Connecticut DPUC.
tions. Mr. Moore previously had headed the employee relations department as an i assistant vice president.
9 15
Ten-Yzr Summ ry 1980 1979 of Selected Financial Kilowatt-Hour Sales (000)
Residential 1,660,353 1.677.431 and Statistical Data Commercial 1,568,638 1.565.380 Industnal 1,415,274 1.467.f Other 70,813 691 Total 4,715.078 4.780.751 Financial Results(OCO) 3 ales of electricity - Residential 5 133,763 S 104.512 Commercial 122,904 94.400 Industnal 98,303 75.316 Other 7,697 6.330 Other operating revenues 1,455 1.320 Total operating revenues 364,122 281.878 Operating expenses excluding income tax expense 328,253 238.605 income tax expense (credit) (387) 4.963 Allowance for funds used dunng construction 27,556 15.501 Otherincome 709 1.102 Interest charges 30,055 25.245 Cumulative effect of change in accounting - -
Net income 34,466 29.668 Preferred and preference dividends 9,296 5.744 income applicable to common stock S 25,170 S 23.924 Capitalization (000)
Long-term debt S 295,581 S 251.977 Preferred and preference stock Not subject to mandatory redemption 70,000 70.000 Subject to mandatory redemption 45,000 15.000 Common stock equity 222,861 186.326 Total S 633,442 S 523.3m Common Stock Number of shares at year-end 7,660,132 6.090.448 Earnings per share (a)
Before cumulative effect of change iri accounting S3.56 S3 94 Cumulative effect o' change in accounting - -
Income applicable to common stock S3.56 S3.94 Dividends declared per share $2.68 S2.62 Shareowners - Total 36,447 34.554 In Connecticut 18,372 18.439 In Company terr: tory 12.456 12.155 General Peak load - kilowatts 971,100 911.300 Generating capability at year-end - kilowatts tc) 1,299,360 1.299.360 Number of customers 280,800 278.523 Kilowatt-hours per residential customer 6,545 6.664 Numberof employees 1,481 1.460 Total payroll (000) S 31,653 $ 28.405 Total taxes (000) S 34,777 S 32.424 Utihty plant at year-end (000) S 830.034 S 764.652 Gross property additions (000) S 98,414 S 86.642 Total assets at year-end (000) S 739,027 5 666.387 (a) Eamings per share based on the average number of shares outstanding (1980-7.061.241;1979-6.072.725.1978-5.458.428.1977-5.012.122.1976-1 999.514.
197H.424.281.1974-3.677.117: 1973-3.504.M 4.1972-3.232.929 1971 -3.154.514 )
(b) Relates to change in method of accounting for fuosal fuel costs.
(c) Represents maximum dependable net load-carrying abikty during the winter penod for New Eng:and Dower Pool purposes includirg Ul s share of capacity in Connecticut Yankee Atomic Power Company (55.100 KW) 16 l
i 1978 1977 1976 1975 1974 1973 1972 1971 1.683.363 1.664.029 1.660.733 1.627.194 1.601.131 1.659.253 1.598.607 1.524.249 1.541.127 1.505.879 1.474.885 1.402.742 1.327.138 1.383.293 1,308.824 1.238.367 19.297 1.356 652 1.298.990 1.241.912 1.453.283 1.515.107 1.428.277 1.342.867 0 4.712.408 68.621 67.541 4.594.101 64.391 4.498.999 61.104 4 332.952 60.124 4.441.676 56.512 4.614.165 52.706 4.388.414 49.620 4.155.103 5 82.316 S 84.099 $ 75.860 S 74.684 S 66.973 S 46.798 S 42.252 S 33.490 72.361 73.323 64.623 62.175 54.165 37.156 33.126 26.120 54.994 55.348 47.049 45.639 47.048 28.364 24.432 18 054 5.463 5.530 5.096 5.003 4.732 3.573 3.146 2.716 1.181 1.203 1.192 1.150 920 868 788 709 216.315 219.503 193.820 188.651 173.838 116.759 103.744 81.089 183.289 182.696 162.060 161.322 148.638 97.096 76.827 64,535 (164) 2.259 466 (3.507) 98 263 7.543 2.814 8.268 4.937 2.843 6.630 7.186 3.240 955 230 740 143 528 292 546 472 314 268 20.721 15.970 16.103 16.204 14.081 8.527 6.767 6.611 1.884 (b) - - -
21.477 23.658 18.562 21.554 20.637 14.585 13.876 7.635 4.751 4.751 3.717 3.431 3.431 2.877 2.078 1.341 S 16,726 S 18.907 S 14.845 S 18.123 $ 17.206 S 11.708 S 11.798 S 6.294 S 233.953 S 241.931 S 216.908 $ 216.885 S 187.130 S 167.118 S 137.500 S 112.500 70.000 70.000 70.000 55.000 55.000 55.000 40.000 27.500 177.526 149.099 142.104 139.764 106.814 92.910 88.522 73.722 481.479 5 461.030 5 429.012 S 411.649 S 348.944 S 315.028 S 266.022 S 213.722 6.047.018 5.020.119 4.999.514 4.999.514 3.804.514 3.504.514 3.504.514 3.154.514 S3.06 S3 77 $2.97 S4.10 54.17 S3.34 S3 65 52.00
.51 (b) - - -
S3 06 53.77 S2.97 F410 54 68 S3.34 S3.65 $2.00 S2.56 S2.47 S2.35 $2.32 S2.32 $2.26 S2.16 $2.08 35.285 32.354 32.879 33.468 29.066 27.631 27.752 26.686 19.018 18.695 19.484 20.355 19.783 19.554 20.110 20.116 12.343 12.201 13.037 13.718 13.634 13.614 14.108 14.395 952.900 944.100 862.500 859.100 829.800 923.600 835.900 804.000 1.322.800 1.331.020 1.403.290 1 438.140 1.010.330 1.001.330 1.081.330 1.086.330 276.289 274 432 271.871 270.109 268.511 265.673 261.827 257.307 6.739 6.711 6.749 6.650 6.593 6.938 6.789 6.616 1.424 1.421 1.422 1.449 1.516 '.533 1.488 1.468 S 25.894 S 23.317 5 22.021 S 20.613 S 20.067 S 19.476 S 17.945 S 17,256 S 23.180 5 24.198 S 21.583 S 16.219 S 18.112 S 14.045 S 20.831 S 14.426 5 681.585 S 612.237 5 566.549 S 534.156 5 500.409 S 429.310 S 361.977 5 331.408 5 70.731 S 48.300 S 35.396 S 39.866 S 73.608 S 70.478 $ 35.158 $ 17.314 5 575.110 $ 515.037 5 482.459 S 458.617 S 437.892 S 353.452 S 304.464 S 261,474 I
The United liluminating Company 17
Statement of Income For the Years Ended December 31,1980,1979 and 1978 1980 1979 1978 Operating Revenues (Note A) $364,122,155 $281.878.498 $216.315.343 Operating Expenses Operation 209,179,176 141,705,907 96,212,765 Fuel and interchange energy-net 5,275,628 4,712.937 2,632,819 Capacity purchased-net 43,222,452 37,472.089 33,460.139 Other 14,098,606 13,301.260 12,765.167 Maintenance Depreciation 15,969,000 14,619.000 14.030.000 7,541,071 200,972 2,124.870 Amortization of deferred fossil fuel costs Income taxes, current (Note B) (51,052) 82,751 213,970 Income taxes, deferred (Note B) (561,142) 5.085.355 (966.253) 225,058 (205.040) 587,439 Deferred investment tax credits - net (Note B) 32,967,294 26.593.421 22.063.690
. Other taxes Total 327,866,091 243.568.652 183.124.60G Operating income 36,256,064 38.309.846 33.190.737 Other income and Deductions Allowance for equity funds used during 13,007,163 4,574.700 3.396,839 construction Other- net 709,393 1,102,018 739.729 Total 13,716,556 5.676,718 4.136.568 income Before Interest Charges 49,972,620 43,986.564 37,327,305 Interest Charges Interest on debentures 22,391,222 17,300.667 17,266,66 Otherinterest 7,664,025 7,943,981 3,453,972 Allowance for borrowed funds used during construction f14,548,440) (10.925,831) (4.871.127)
Total 15,506,807 14.318.817 15.849.511 Net income 34,465,813 29.667,747 21,477,794 Dividends on Preferred and Preference Stock 9,296,129 5.743,720 4.751,376 income Applicable to Common Stock $ 25,169,684 S 23.924.027 $ 16,726.418 Average Number of Common Shares Outstanding 7,061,241 6.072,725 5,458.428 Earnings per Share of Common Stock $3.56 $3.94 $3.06 The accompanying Statement of Accounting Pohcies and Notes to Financial Statements are integral parts of the financial statements.
The United Illuminating Company 18
Statement cf Sourcea cf Fund 3 for Grra Property Additi::ns For the Years Ended December 31,1980,1979 and 1978
'^
1980 1979 1978
)
v SOURCES OF FUNDS IntG rlly Generated Net income $34,465,813 529.667,747 $21,477,794 Add (deduct)
Depreciation and amorteat: n 23,711,617 14.984.255 16.319.582 Deferred income taxes on deferred fossil fuel costs, acce!erated amortization and other (358,735) 5.319,722 (731,886)
Deferred investment tax credits - nel 225,058 (205.040) 587,439 A'lowance for funos used dunng construction (27,555,603) (15.500.531) (8.267.966)
Funds provided from operations 30,488,150 34,266.153 29.384,963 Deduct dividends declared 28,260,648 21,707,886 18.924.672 Internally Generated Funds 2,227,502 12.558.267 10.460.291 External Financing Secunties sold (retired)
Common stock 32,225,591 1,011.021 26,109,433 Preferred and preference stock 30,000,000 15.000,000 -
Debentures, net of 54.000.000 retired in 1980 and 1979 44,000,000 '8.000.000 (8.000,000)
Expenses of issues (2,465,252) (353.970) (245.709) 103,760,339 33.657,051 17,863.724 incrzast (decrease)in notes payable (62,392,011) J.503,784 40,540.037 F;nds Obtained from External Financing 41,368,328 ft.160.835 58,403,761 Wther Sources (Uses)
Decrease (increase) in working capital, excluding notes payable and current portion of long-term debt 2,324,915 2.422,422 (5.614.215)
Deferralof fossilfuelcosts (6,870,886) (10,646,534) (854.919)
Sale of a 2%'. ownership share in Seabrook nuclear project 30,780,293 - -
Dividend from Research Center, Inc. 705,000 - -
Othar changes in noncurrent balance sheet items 322,802 646.833 % 545 Other Sources (Uses) 27,262,124 (7,577,279) (6,400.589)
Funds for Property Additions from Above Sources 70,857,954 71,141,823 62,463,463 Allowance for funds used dunng construction 27,555.603 15,500,531 8.267,966 GROSS PROPERTY ADDITIONS $98.413,557 586.642.354 $70.731.429 Statement of Retained Earnings For the Years Ended December 31,1980,1979 and 1978 1980 19/9 1978 Balanc?, January 1 $ 80,714,329 $72.754,468 $70,201,346 Net Income 34,465,813 29,667,747 21,477,794 115,180,142 102,422,215 91.679,140 Deduct Cash Dividends Declared Pr:f trred and preference stock 9,481,396 5,796,949 4,751,376 x Common stock- per share $2.68 for 1980, j $2 62 for 1979 and $2.56 for 1978 18,779,252 15.910,937 14,173.296 26.260,648 21,707,886 18.924.672 Balance, December 31 (Note F) $ 86,919,g $80.714.329 $72,754.468 19
BalEnce Sheet December 31,1980 and 1979 1980 1979 ASSETS Utility Plant at Original Cost in service $548,072,588 $538.236.283 Less reserve for depreciation 188,260,370 173.500.399 359,812,218 364,735.884 Construction work in progress 281,322.456 226.295.280 641,734,674 591.031.164 Acquisition adjustments, less am~tization 39,000 120.000 Net Utility Plant 641,773.674 591,151.164 Other Property and Investments Nonutility property, at cost 202,008 214.157 Connecticut Yankee Atomic Power Company 5.348,621 4.735.995 Research Center, Inc. (wholly owned subsidiary) 1,943 687.687 Total 5,552,572 5.637,839 Current Assets Cash (Note C) 1,491,472 2.510.068 Accounts receivable Customers, less allowance for doubtful accounts of $875,000 and $865.000 33,752,071 28.307,482 Other 15,285,986 4.783.079 Accrued utility revenues 20,859,600 13.095.20(,
Fuel, materials and supplies, at average cost 7,006,357 7.003.877 Prepayments 254,577 266.270 Total 78,650,063 55.966.176 Deferred Debits Fossil fuel costs 11,436,081 12,106.266 Other 1,614,657 1.525.545 Total 13,050,738 13.331.811
$739,027,047 S666.386.990 The accompany'ng Statement of Accounting Policies and Notes to Financial Statements are integral parts of the financial statements e
The United Illuminating Company 20
s 1980 1979 sj CAPITALIZATION AND LIABILITIES C:pitzlization Common stock (Note D) $139,708,913 S107.483.322 Capital stock expense (3,767,333) (1.871.358)
Retained earnings (Note F) 86,919,494 80.714,329 Common stock equity 222,861,074 186.326.293 Preferred stock not subject tc mandatory redemption (Note E) 70,000,000 70.000.000 Preferred and preference stock subject to mandatory redemotion (Note E) 45,000,000 15.000.000 Long-term debt t Note G) 283,581,091 247.976.299 Total 621,442,165 519.302 592 CurrInt Liabilities Current portion of long term debt 12,000,000 4.000.000 Notes payable (Note C) 10.527,106 80.919.117 Accounts payable 39,429.410 20.229.151 Dividends payable 7,853,320 5.610.632 m Customers deposits 854,595 800.507
) Taxes accrued 16,127,112 13.018.633 Deferred incorra taxes -
accrued utility revenues 703,070 905.477 Interest accrued 3,475,254 3.357,593 Other accrued liabilities 7,229.658 6.741,624 Total 106.199,525 135.582.734 Cust:mers' Ad rances for Construction 782,950 712.049 Acce Pulated Deferred in ..;stment Tax Credits (Note B) 4,154,941 3.929,883 Def;rr;d income Taxes Deferred fossil fuel costs 5.834,463 6.189.732 Accelerated amortization 613,000 670.000 C3mmitments and Contingencies (Note K) - -
$739,027,047 5666.386.990 sf 21
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St tementcf Accounting Pclicb Accounting Records The accounting records are maintained in accordance with the the provisions of the Tax Reduction Act of 1975 is deferred and uniform systems of accounts prescribed by the Federal Energy amortized tc income ratably over the useful lives of the related Regu!atory Commission (FERC) and the Connecticut Departrnent properties. The Company has elected to take investment tax credit of Pubhc Utmty Control (DPUC) and their predecessor agencies apphcable to long-term projects on a progress-of-construction ba-sis. which accounts for the major portion of credits generated The Utility Plant treatment of these items is appropnate for rate and accounting The cost of addit:ons to utihty plant and the cost of renewals and purposes and is in accordance with the practice of the DPUC the betterments are capitahzed Cost consists of labor. matena!s ser- State regulatory body having junsdiction over such matters.
vices and certain indirect construction costs. including an ahow- Effective January 1.1981. the Company adopted several ance for funds used dunng construction The cost of current repairs changes to the above descnbed pohcies. pursualt to approval of and minor replacements is charged to appropriate operating ex- the changes by the DPUC in a December 1980 rate decision.
pense accounts The onginal cost of utihty plant retired or otherwise Specificahy, the Company adopted the pohcies of:
disposed of and the cost of removalless salvage are charged to the 1. Interpenod tax allocation with respect to differences in the timing reserve for depreciation of (a) book and tax depreciation deductions applicable to addi-ti ns to plant-in-service after January 1.1981, and (b) pension Allowance for Funds Used During Construction and tax costs capitahzed as construction costs on the books. but In accordance with the apphcable regulatory systems of accounts, deducted cun ently for income tax purposes.
the Company capitahzes and credits to income an allowance for funds used dunng construction, which represents the approximate 2. Defernng and emortizing to income ratably over the usefullives cost of debt and equit/ capital devoted to plant under construction. of the related properties the first 4'.of the investment tax credit Although the allowance does not represent current cash income. It apphcable to long term projects on a progress-of construction is recovered under the rate-making process over the service lives basis.
of the related properties In accordance with FERC prescobed accounting. the portion of the allowance atmbutable to borrowed Accrued Utility Revenues funds. on a before tax basis, is presented in the statement of The estimated amount of utikty revenues (less related expenses income as a reduction ol interest charges. and apphcable taxes) for service rendered but not billed ts accrued The average rates used for computing the allowance were 8 3'. at the end of each accounting penod for 1978. 9 92 for 1979 and 11. for 1980 Effective January 1, '
1980. as permitted by the FERC. the Company elected to com. Investments pound semi-annuauy the allowance apphcable to major construc. Investments in Research Center. Inc , a wholly owned subsidiary, tion projects The effect of such compounding was to increase the and Connecticut Yankee Atomic Power Company. a nuclear get allowance for 1980 by $4 2 milhon Effective January 1.1981. the erating company in which the Company has a 9%'. stock interest.
Company began accounting for the borrowed funds portion of the are accounted for on an equity basis allowance on a net-of-tax basis. a change which was approved by in May 1980. Research Center. Inc. sold its only significant asset, an interest in a tract of land ;n Menden and Walkngford. Connecti-the DPUC in a December 1980 rate decision.
cut. resulting in a gain. after taxes. of 5940.700 which is included in Depreciation equity in eamings of subsidianes (Other-net) in the statement of income. Research Center. Inc . which had no other significant Provisions for depreciation on utihty plant for book purposes are revenues dunng the last three years. subsequently pa'd a dividend computed on a straight kne. average-hfe basis. giving effect to the to the Company from the proceeds of this sale.
reserve requirement and estimated service hves determined by independent engineers. One-half year's depreciation is taken in the Fossil Fuel Costs year of addition and disposition of utility plant. except in the case of The amount of fossil fuel costs that, pursuant to the fuel adjustment major operating units on which depreciation commences in the clause in the Company's rates cannot be reflected currently in month they are placed in service and ceases in the month they are Customers' bills is deferred at the end of each accounting penod removed from service. The aggregata annual provisions for depre.
Since adoption of the deferred accounting procedure in 1974, rate c ation for the years 1978.1979 and 1980 were equivalent to decisions by the DPUC and its predecessors have consistently approximately 2.77' 2.83'o and 3 04*e, respectively, of the ongi.
made specific provision for amortization and ecovery of existing nal cost of depreciable property.
deferred fossil fuel cost balances income Taxes Provisions for income taxes have been reduced to reflect the timing Pension Plan benefits that result from the use of a rapid depreciation method. the Annual pension cost. Including amortization of pnor service cost use of shorter tax depreciation hves than those used for cook over 30 years. is accrued each year and funded in the following purposes for certain plant and the current deduction of certain year.
capitahzed construction costs consisting pnncipally of pensions.
taxes and the interest component of allowance for funds used Research and Development Costs {
dunng const'uction in addition. the provision for Current federal Research and development costs, including environmental studies.
income taxes is reduced by the a!!owable 4 o investment tax credit are capitahzed if related to specific construction projects and depre-under the provisions of the Internal Revenue Code of 1954. as ciated over the hves of the related assets. Other research and amended. The additional 6* investment tax credit allowable under development costs are charged to expense as incurred.
22
Notes ta Financirl Statement]
/ \
(A) Rate Proceedings Rate increases, other than changes in fossil fuel cost adjustment rates, approved by the DPUC and its predecessors since January 1.1978 were as follows:
Annual Percentage increase of Cnginal Application Effective Approved r'leq',3st Dates _
Dates 1Miihons) Appu ed h nuary 10,1979 $R91 July 14,1978 (September 16.1979 67'.
1.31 January 24,1980 Apnl 25,1980 17.6 80'.
July 3,1980 December 17,1980 35 9 71'.
The 1979 increases, intended to cover inflation in operating and financing costs, represented a single approved increase, imple-mented in two steps. The second step coincided with the date of a scheduled wage increase under the Company's collective bargain-ing agreement.
The January 1980 application was aimed solely at remedying certain severe and adverse impacts of sharply escalated residual fuel oil prices on the Company's operations. The increase approved provided for recovery of the 5% state gross revenues tax on in-creased revenues resulting from higher fuel costs as well as for amortization and recovery of $16.1 million of added deferred fossil fuel costs over an 18-month period.
The July 1980 application addressed increased non-fuel operat-ing expenses and financing costs and requested certain changes Q in accounting practices used by the DPUC's predecessor agencies.
All of the requested accounting changes were approved by the DPUC, as set forth under " Allowance for Funds Used During Con-struction" and " Income Taxes" in the Statement of Accounting Policies.
The most recently approved increase also includes provision for amortization and recovery of deferred fossil fuel costs of $7.7 milhon annually, the amortization level that will be used by the Company starting January 1,1981 and continuing until a revised level is approved. This amortization level was based upon an esti-mated December 31,1980 balance of deferred costs, but fuel price increases subsequent to the estimate caused the actual balance to exceed the estimate by $3.7 million.
(B) Income Tax Expente income tax expense ccnsists of:
1980 1979 1978 Income taxes, current included in:
Operating expenses $ (51,052) $ 82,751 $ 213.970 Otherincome and deductions 1,104,300 -
670.200 Income taxes, deferred; Accrued utility revenues (202,407) (234.367) (234.367)
Deferred fossil fuelcosis (355.266) 5.314.089 (651,006)
Accelerated amortization (57,000) (57,000) (57.000)
Other- net 53,531 62.633 (23.880)
Deferred investment tax
_'~'y credits 309.813 (132.050) 649.693
) Amortization of deferred d investment tax credits (62,254)
(84.755) (72.990)
Totalincome tax expense $ 717,164 $ 4.963.066 $ 505.356 (continued) 23
[
tontmued Notes 13 Financial Statements Tre amounts reported for federal income tax expense for the current federal income tax expense for 1979 since taxes paid n y:ars 1980,1979 and 1978 were less than the amounts computed 1976 were 100* offset by investment tax credits utihzed in that by applying the federal income tax statutory rates to book income year. Deferred investment tax credits were appropnately adjusted before federal income taxes. The reasons for such differences are to reflect the recomputed 1976 credits util' zed.
as follows: The investment tax credits carned forward at December 31.1980 1980 1979 1978 amount to approximately $19.800.000, of which $2.400.000 expires Net income $34 465.813 $29.667.747 $21.477.794 in 1984. 55.200.000 expires in 1985. 57.000.000 expires in 1986 Totalincome tax expense 717.164 4.963.066 505.356 and 55.200.000 expires in 1987.
Less state income tax If, in fact, these credits are utilized against future income tax expense 365.961 992.703 316.378 liabikties, substantially all the credits will be deferred and amortized Federalincome tax expense 351.203 3.970.363 188.978 to income ratably over the lives of the related properties.
Book income before federahncome taxes 34.817.016 33.638.110 21.666.772 (C) Compensating Balances and Federalincome tax Short-Term Borrowings statutory rates 4 6* . 46*. 48*
Federalincome taxes at M d AM M for operating requirements and for compensating balances to statutory rates 16.015.827 15.473.530 10.400.051 cover bank knes of credit. The Company's bank knes of credit, some of which are subject to renewal on Apnl 30,1981. amount to wanc for nds used dunng construction capi.
$50.000.000 pursuant to individual arrangements with several talized for book purposes. banks. Compensating balances equal to 10 o of the lines are not tarable income 12.675.577 7.130.200 3.968.600 required for $16.500.000 of these lines of credit and fees in Tax depreciation. computed heu of such compensating balances are paid for the remaining poncipally on sum of- $33.500.000 of the knes.
years digits method using On June 29,1979, the Company entered into a revolving credit shorter than book lives for agreement with the same banks aggregating 575.000.000 (re-certain plant. in excess of duced to $20.000.000 on October 31, 1980 at the Company's option). Under this agreement, which terminates on June 20.1981 gh re h 2.804.720 3.468.900 4.428.600 the Company has the option to convert its outstanding borrowings Taxes and pensions capi-talmd for book purposes. at that date into term loans payable in four equal semi-annual deducted currently for tax installments beginning December 31,1981. The revolving credit purposes 895.786 754.900 573.200 agreement hmits total indebtedness to 53*. of total capitalization investment tax credits 884.287 (62.780) 1.170.100 and short-term indebtedness. At December 31.1980, totalindebt-Equity in earnings of sub- edness represented 47.3 o of total capitalization and short-term sidiary companies for indebtedness.
book purposes, not Fi om October 30.1979 through May 1.1980, the Company also taxable income 595,649 236.710 106.118 utikzed a revolving subordinated credit agreement arranged with Taxabie income resulting the same banks to cover up to $32 'V)0.000 of their total commi t ment of $75.000.000. Interest on suboCnated borrowings was at fa2 o 108.5"o of pnme and bank fees were paid on the unused portion of share in Seabrook nuclear project (2.146.015) - - the aggregate commitment. Maximum borrowings under this Other items - net (45.380) q 24.763) (35.545) agreement were $14,000.000 in 1979 and $30,000.000 in 1980.
Federalincome tax expense $ 351.203 $ 3.970.363 $ 188.978 The agreement expired on July 31,1980 information with respect to short. term borrowings is as follows:
Effective federat income tax rates 1 0* . 1 1.8*. .9". 1980 1979 1978 Maximum aggregate pnncipal amount of short term The 4* investment tax credit allowable under the provisions of borrowings outstanding at tha Internal Revenue Code of 1954, as amended is flowed through any month-end $95.925.000 $97.325.000 $48.700,000 to net income as a reduction of federal income tax expense. The Average aggregate short. term Company has elected to defer and amortize to income ratably over borrowings outstanding th3 hfe of the related property the additional 6*o credit allowable during the penod 43.36'.107 61.235.978 09.239.863 Average interest rate 15 2*. 12*. 8. 2* .
under the Tax Reduction Act of 1975 (1975 Act).
Pnrcipal amounts outstanding The 1975 Act and succeeding amendments provide that for 1978 up to 80* and for 1979 and 1980 up to 70 o of federalincome taxes Co mer a paper otherwise currently payable may be of f set by investment tax credits. borrowings $18.800.000 $53.825.000 $48.700.000 The total credits utilized in 1978 and 1980 amounted to $1,758.000 Bank borrowings (including and $1,109.000, respectively, the maimum amounts allowed by the 1975 Act, as amended. These ar.iounts were represented en-subordinaied borrowings of $14.000.000) -
27.500.000
-j tirely by credits carried forward from pnor years. Total $18.800.000 $81.325.000 $48.700 000 No credits were utilized in 1979 since there was a current taxable Weighted average loss for the year, Carryback of this loss to 1976 resulted in no interest rate 19 3*. 14 8*. 10.5*.
24
j Average short. term borrowings represent the sum of daily bor- were charged to capital stock expense.
wowings outstanding. weighted for the number of days outstanding Preference stock is a form of preferred stock that is Junior to the and divided by the number of days in the penod. The average preferred stock. but sentc r to the common stock. It is not subject to interest rate is determined by dividing interest expense by the the eamings coverage requirements or minimum capital and sur-amount of average borrowings plus requirements goveming the issuance of preferred stock.
Shares of preferred and preference stock has . irc'rt..tial divi-(D) C:mmon Stock dend and liquidation nghts over shares of common tock. Preferred Common stock. no par value, at December 31.1980 consisted of and preference stockholders are not entitled to general voting 12.500 000 shares authcnzed (including an increase of 5.000.000 nghts However, if any preference dividends are in arrears for six or shares voted by the shareowners on Apnl 9.19801 and 7.660.132 more quarters or if some other event of default occurs. preference shares outstanding. Shares issued dunng 1978.1979 and 1980 stockholders are entitled to efect two members of the Board of and increases to the common stock account from the proceeds of Directors until all dividend arrears are paid and any event of default these issues were as follows: is terminated. If similarly affected, preferred stockholders are enti-Shares issued Proceeds tied to elect a majonty of the Board of Directors.
]
1980 to$ 8 1.569 684
$2 32.225 591 (F) Retained Earnings Restriction The indenture under which all of the Company's debentures are issued places limitations on the payment of cash dividends on the Expenses related to these issues were charged to capital stock expense common stock of the Company and on the amounts that can be expended to purchase or redeem shares of common stock. Under Authonzed common stock includes 250.000 shares registered in the most restnctive provision of the indenture, retained eamings in connection with the Companys automatic dividend reinvestment and stock purchase plan under which participating shareowners the amount of 546.665.026 were free from such limitations at December 31.1980 purchased 26 899. 43.430 and 69.684 shares in 1978.1979 and 1980. respectively. (G) Long-Term Debt (E) Pr;ferred and Preference Stock L ng4erm debt at December 31.1980 consisted ot Preferred and preference stock authorized at December 31.1980 ' "9
2 98 Se es due March 1.1981 $ 8.000.000 e~onsisted of: 3% 1984 Senes. due October 1.1984 9 000.000 Cumulative preferred stock. $100 par valu+-1.350.000 shares. 4'.% 1987 Senes. cue November 1.1987 10.000 000
$25 par value-2.400.000 shares Oncluding increases of 13' % 1990 Senes. due July 1,1990 500.000 shares and 1.200.000 shares. respectively. voted by Ossued July 16.1980) 40.000.000 the sharec,wners on Apnl 9.1980) 4 65'.1990 Senes. due August 15.1990 15.000.000 Cumulative preference stock $25 par value--1.200.000 stares 4 %% 1991 Senes. due July 15,1991 10.000.000 5'4*.1996 Senes. due August 15.1996 15.000.000 Shares outstanding at December 31.1980 consisted of:
6% 1997 Senes. due June 15.1997 22.500.000 al Preferred stock not subject to mandatory redemption. 7'.1999 Senes. due January 15.1999 15.000.000 Cumulative. $100 par value 10' 4% 2000 Senes. due Jure. 15.2000 30.000.000 4 35% Ser.es A 50.000 7'.% 2002 Senes, due October 1. 2002 25.000.000 4.72% Senes B 75.000 8' 4*. 2003 Senes. due December 15.2003 30.000.000 4 64% Senes C 75.000 229.500.000 5%% Senes D 75.000 Senal Debentures 7 60% Senes E 125 000 11% matunng senally as to $4.000.000 pnncipal 7 60% Senes F 150.000 amount on September 15 in each of the years 550.000 1981 to 1983. inclusive 12.000.000 Cumulative. $25 par value 8' <% matunng senally as to $1.666.667 pnncipal 8 80% 1976 Senes 600 000 amount on November 15 n each of the years 1983 to 1997, inclusive 25.000.000 b) Preferred and preference stock subject to mandatory redemption: 11 % matunng senally as to $2.000.000 poncipal Cumulative preferred stock. $100 par value amount on November 15 in e3ch of the pa.s 1985 9' .% Senes G Ossued Apol 10.1979). to 1999. inclusive 30.000.000*
subject to mandatory redervtion of 30.000 Unamortized debt discount less premium at shares each year beginning April 15.1985. December 31.1980 (918.909) at $100 per share, plus accrued dividends Total long-term debt -295.581.091 to redemption date 150.000 Less current portion included in Current Liabilities 12.000.000 Cumulative preference stock. $25 par va:ue 15 88% 1980 Senes Ossued May 1,19801 *$22.000.000 of this senes of 11% debentures was issued on December 4.
subject to mandatory redemption of 80.000 1979 and. under a delayed delivery arrangement. an additional $8.000.000
-s shares each year beginning Apnl 15.1986. was issued on January 8,1980.
$2 share, plus accrued dividends to
' 200.000 Too aggregate maturities of long-term debt dunng each of the five years 1981-1985 are: 1981 - 512.000.000:1982 - S4.000.000:
The par value of each of the above issues was credited to the 1983-55.666.667; 1984-S10.666.667. and 1985-S3.666.667.
appropnate stock account and expenses related to thes3 issues (cont,nued) 25
cont raed Notes to Financial Statements (H) Supplementary Income Statement Information quate to assure its ability to finance the entire construction prograr.
The amount of taxes, maintenance and the provisions for deprecia- through 1987 and because of the opinion expressed by a majonty tion and amortization, other than those set forth in the statement of of the commissioners involved in the rate decision that the Com-income, are not significant. pany's then existing 20% ownership share in the units should be reduced. These efforts resulted in the sale of a 2.5% ownership Neither rents, advertising costs nor research and development costs exceed one per cent of total revenues and there are no share in the units to Central Maine Power Company in October 1980. The Massachusetts Department of Public Utilities on October royalties. Taxes, other than income taxes, charged to costs and openses, are set forth below: 30,1980 disapproved a proposed purchase by a Massachusetts utility company of a further 1.1% ownership share in the units As a 1980 1979 1978 State gross eamings $18.206.995 $14.094.642 $10,817,088 Although the Company has also had negotiations for the sale of a Locai reat estate and 1.5% ownership share in the units to a Connecticut electnc coop-personal property 13.828.148 11.581.238 10.346.650 erative, there are no prospects for a reduction in the Companys Pryroll 2.024.943 1.785.154 1.510.520
$34.060.091 $27.461.034 $22.674.258 obligation to finance its 17.5% ownership share in the units.
Public Service Company of New Hampshire (PSNH), which has Charged to.
Tax expense $32.967.294 $26.593.421 $22.063.690 held a 50% ownership share in the two Seabrook units and is Other accounts 1.092,797 867.613 310.568 responsible for the construction and scheduling of these units, is
$34.060.091 $27,461.034 $22.674.258 presently reducing its ownership share by selling portions aggre-gating approximately 15%. to several New England utilities. In order (1) Pension Plan to complete these sales, the purchaser of a 6% share must obtain The Company has a pension plan covering substantially all its its initial financing and two purchasers of shares aggregating 2.5%
employees. The entire cost of the plan is bome by the Company require further govemmental approvals.
and is paid into an irrevocable trust fund. In March 1980, in view of the unsettled state of the capital markets Pension costs for the years 1980,1979 and 1978 were and the very high cost of external funds. PSNH decided that the
$3,966.000, $3.551,000 and $3,323.000, respectively. overall level of construction on the units should be reduced sub-Accumulated plan benefits and plan net assets at January 1. stantially in order to lessen PSNH s external financing require-1980 were: ments. Subsequently in 1980, the New Hampshire Public Utilities Actuarial present value of accumulated plan benefits:
Commission ordered a delay in work on Unit 2. except for thos
$29.716.800 areas common to both units, until PSNH received the regulator Vested benefits Non-vested benefits 3.676.000 approvals necessary for reducing its ownership share and until the
$33.392.800 reduction commenced. PSNH had hoped that, by continuing con-Net assets available for benefits $38.453.500 struction on items considered essential to maintain the earliest possible completion dates.1983 and 1985 in-service dates for the The assumed weighted average rate of retum used in determin- units could be maintained. However, PSNH now believes that the ing the actuanal prisent value of accumulated plan benefits reduction in the level of construction and an ironworkers'stnke amounted to 7%% dunng the summer of 1980 have delayed these in-service dates.
The extent of the delay will not be known until PSNH completes its review of the project schedule during the first quarter of 1981.
(J) Jointly Owned Plant The figures above for the Company's estimated construction The Company's 93.7% ownership share of the New Haven Harbor expenditures and costs of Seabrook Units 1 and 2 give effect to the Station generating unit represented $131.2 million of utility plant in reduced level of Seacrook construction (assumed for this purpose service and $17.4 million of reserve for depreciation at December to continue until Apnl 1981), which would postpone the scheduled 31,1980. The Company's share of the operating costs are included completion dates of the units by one year to '984 and 1986.
in the appropriate expense captions in the statement of income.
respectively, but do not reflect the possible impacts of other factors.
The Company also has ownership shares in four future nuclear such as the New Hampshire commission's directive to delay further generating units. See Note K, " Commitments and Contingencies., the work on Seabrook Unit 2 or the outcome of the project schedule review. A further delay in the scheduled completion date for Unit 2 (K) Commitments and Contingencies would reduce yearly expenditures in the future, but would signifi-The Company has entered into substantial commitments in con- cantly increase total construction expenditures for that unit.
nection with its continuing construction program, which is presently Completion of construction of each of the four nuclear generating (stimated at approximately $616 million for the years 1981-87, units in which the Company is participating is contingent, among including approximately $549 million for the Company's ownership other things. upon obtaining necessary regulatory approvals. per-share in the costs of four future nuclear generating units. These mits and sufficieat financing While it is possible that future devel-construction program estimates include $412 million for the Com- opments could lead to cancellation of one or more of the units, the pany's 17.5% ownership share in the cost of Seabrook Units 1 and Comoanyconsidersthepossibilityof cancellationof anyof theunits 2, and $137 million for the Company's 3.685% ar'd 3 3% ownership under construction unlikely. However, if any of the units were car shares in Millstone Unit 3 and Pilgrim Unit 2, respectively. celled, the Company estimates its share of the total cancellatio in January 1979, the Company offered to sell a 10% ownership costs would be substantial, the precise amount would depend upon interest in the Seabrook units because it considered the rate relief a number of factors including the amount of termination charges granted by a DPUC predecessor agency in December 1978 inade- and salvage and the results of negotiations in connection with 26
jntract terminations. The Company would apply to the DPUC for approval to amortize its share of total costs over an appropriate Report of Independent future penod and to recover such costs through its rates, but the Company cannot predict whether and to what extent such recovery would be permitted. The Company's investment in the four nuclear generating units was approximately $272 milkon at December 31. To the Shareowners and Directors of 1980 including $226 million invested in the Seabrook units. 533 The United Illuminating Company:
million in Millstone Unit 3 and $13 milkon in Pilgnm Unit 2.
The generating units at Bridgeport Harbor Station are capable of We have examined the baiance sheets of The United burning either oil or coal, and on November 10.1980, the Economic illuminating Company as of December 31,1980 and Regulatory Administration of the Department of Energy published 1979. and the related statements of income, retained a notice of its intention to proceed with its November 27,1979 earnings and sources of funds for gross property addi-proposed order which would prohibit the buming of oil by the largest tions for each of the three years in the penod ended De-generating unit at this station. An extensive comment and heanng cember 31,1980. Our examinations were made in ac-procedure has commenceo. dunng which the Company and the cordance with generally accepted auditing standards and, several governmental agenc!es having junsdiction over its opera- accordingly. included such tests of the accounting records tions, financial structure and rates will continue to analyze and and such other auditing procedures as we considered present evidence conceming the economic environmental and necessary in the circumstances.
cngineenng feasibihty of converting this ge%ratog unit to coal- In our opinion, tha financial statements referred to buming The Company cannot predict the outcome of these pro- above present fairly the financial position of The United ceedings however, a conversion to coal-burning could be expected Illuminating Company as of December 31,1980 and to involve expenditures for fuel inventory, equipment modifications 1979, and the results of its operations and sources of and additions and pollution control and monitonng devices. Al- funds for gross property aoditions for each of the three though the total amount of these expenditures would be dependent years in the penod ended December 31,1980, in con-upon the actions of several governmental agencies, the Company formity with generally accepted accounting pnnciples ap-has proposed a conversion plan that would minimize expenditures phed on a consistent basis.
and provide the financtal resources needed to accomphsh it.
in March 1979, the Company challenged the legakty of an ordi- Coopers & Lybrand O.ance in the City of New Haven which permitted increased New York. Newreal York property tax assessments to be phased-in over a penod of five January 26.1981 y:ars. After an initial ruhng by the Connecticut Supenor Court in the Companys favor, the Connecticut Supreme Court reversed the lower court s decision. The Company subsequently appealed to the United States Supreme Court, but the appeal was dismissed in October 1980. Since the Company had been accruing the addi-tional property taxes resulting from the phase-in plans of New Haven and the other cities which adopted similar plans in 1980, dismiss 3l of the appeal had no effect on the financial statements.
(L) Quarterly Financial Data (unaudited)
Selected quarterly financial data for 1980 and 1979 are set fortti Common Stock Data below: Ul s Common Stock is traded on the New York Stock Earnings Exchange, where the high and low sale prices during oE Operatrg OperaSng Net f Ouarter Revenues income 1980 High 1980 Low 1979 High 1979 Low income Common Stock (1) e nce Sale Pnce Sale N Sab %
1Thousa..Js of Dollars) 1980 First Quarter 23 % 17N 24 % 23 First $89.356 $10.753 $ 9.084 $121 Seond Ouarter 22 % 17% 23 % 21 %
Second 84.789 7.158 7.194 73 Third Quarter 22 % 19 % 25 % 23 Third 95.639 9.892 10.479 1 02 Fourth Quarter 21 17 23 % 20 %
Fourth 94.338 8.453 7.709 65 .
Ut has paid quarterly dividends on its Common Stock 1979 since 1900. The first three 1979 Quarterly dividends First $65.806 $10.991 $ 8.652 $123 were paid at the rate of 64c per share. Commencing with 61455 8.156 6.195 78 the dividend paid October 1,1979, quarterly dividends inird 75.852 GSecond Fourth 76.765 10.789 8.374 8.540 6.281 1.15
.78 have been paid at the rate of 67c per share.
As of January 31,1981, there were 36.412 Common Stock shareowners of recoro.
(1) Based on weighted average number of shares outstanding during each quarter 27
Management'a Discu sion End Analy:Is cf Fin:nci:1 C:nditirn End Results of Operations Results of Operations income apphcable to common stock in 1978 was severely d-pressed because rate levels were insufficient to cover inflationar, increases in non-fuel operating expenses. A S17.9 million annual Major influences on Financial Condition rate increase effective January 10 substantially improved 1979 in recent years and particularly over the last two years, the financial earnings. However. as the year 1979 progressed. earnings and condition of the Company has been affected by two interrelated cash flow were adversely affected by sharp escalation in residual f actors - a heavy dependence on ex pensive foreign oil as a source oil pnces. nsing interest rates declining kilowatt-hour sales and of fuel to generate electricity and a large construction program to inflation in non-fuel operating expenses. These same factors ad-meet the objective of reducing the economic burden and rehabikty versely affected 1980 income apphcable to common stock to the risks of this undue reliance on oil-fired generation. point where it would have been below 1979 had it not been for the Approximately 92*o of the electncity consumed by the Com- adoption of the practice of compounding the allowance for funds pany's customers is produced by burning imported residual fuel oil. used dunng construction. which added $4.2 million. or 59c per The price of this oil has escalated from just under $13 per barrel at share. to the allowance A rate increase. effective Apnl 25.1980.
the beginning of 1978 to almost 534 per barrel at the end of 1980 which provided for recovery of the state tax on the increased level Although there is a fossil fuel adjustment clausc in all of the Com- of revenues resulting from poor oil pnce increases. avoided further pany's rates, there are three pnmary adverse impacts of oil price detenoration of earnings. to the extent that recovery of the added increases that are not covered by the adjustment clause First, tax was provided.
thIre is a tr.no lag in the operation of the fuel clause - changes in On a per share basis. eamings for 1978.1979 and 1980 were fuel costs are not reflected in customer billings until two months moderated by increasingly higher average shares outstanding due after the costs have been incurred. second. the requirement that to sales of common stock in 1978 and 1980.
the Company pay to the State of Connecticut a tax of 5*. on all The proportion of earnings appkcable to common stock repre-revenues, including those resulting from increased fuel costs: and sented by the non-cash credit for allowance for funds used dunng third, the cost of financing higher oil purchases. The Company's construction increased from 49*o in 1978 to 65 o in 1979 and to financial condition is sensitive to all of these factors, but only me 109 o in 1980. These percentages reflect the build-up of construc-last two factors influence results of operation since the effect of the tion costs on the nuclear units. the increased costs of financing two month billing lag in the fuel adjustment clause is deferred for construction of the units and, for 1980. the effect of Compounding accounting purposes, pending regulatory approval of an amortiza- the allowance tion schedule. Interest on debentures and dividends on preferred and prefer-Total construction program expenditures for the years 1978-1980 ence stock are up substantially since 1978 due to sales of secuntie w:re $256 milhon, including allowance for funds used dunng con- necessary to finance the Companys construction program. The struction of $51 million. The major portion of these expenditures scanng cost of these recent issues has raised the average embed-was required for partiupation in the construction of four future ded cost rates for debentures and preferred and preference stock nuclear generating units: Seabrook Units 1 and 2 in Seabrook. New from 7.3 o and 6 9% respectively, as of December 31.1977. to Hampshire, Millstone Unit 3 in Waterford. Connecticut and Pilgnm 8 5 o and 9 8 o as of December 31.1980. Other tnterest crWges Unit 2 in Plymouth Macsachusetts. The Company currently owns were hkewise much higher in 1979 and 1980 than in previous years.
17.5*.of each of the Seabrook units. 3.685* of the Millstone unit due mainly to increased levels of short-term borrowings and higher and 3.3*o of the Pilgnm Unit. short-term interest rates.
The Company has been experiencing difficulty in maintaining Rates of growth in kilowatt-hour sales were 2 6 o in 1978.15 o adequate cash flow and financing this construction program. It has in 1979 and a negative 1.4* in 1980 The 1980 sales decrease was been the practice of the Company to finance current construction mainly the result of a dechne in industnal activity due to depressed expenditures in excess of available internally generated funds from economic conditions. Operating revenues were not significantly th3 proceeds of short-term borrowings. to be repaid through the influenced by these changes in sales volume, but revenues did sale of common, preferred and preference stocks and debentures. increase substantially in 1979 and 1980 due to the impact of higher in recent years. intemally generated funds have provided varying residual fuel oil onces through the operation of the fuel adjustment percentages of the Company's construction program requirements. clause. In addition. rate increases effective in 1979 and 1980 added and the Company has been dependent on outside financing to about $18 2 mi l hon and S14 5 milkon to operating revenues for the provide a major portion of such capital requirements. Internally respective years.
generated funds provided an average of approximately 45*o of Fuel and interchange energy expense more than doubled from such expenditures during the penod 1975-1977; however, these 1978 to 1980 as the average cost of oil burned per kilowatt hour funds provided only 17 o. 18 o and 3*o dunng 1978.1979 and generated went from 2.15c in 1978. to 3 33c in 1979 and to 4.91c 1980. respectively. The decline since 1977 in the percentage of in 1980. Capacity purchased expense also increased significantly construction expenditures provided by internally generated funds dunng this penod due to increased operating and capital costs at reflects increased construction work on Seabrook Units 1 and 2. the Connecticut Yankee nuclear unit. Other operation and mainte-
'ncreased costs related to the financing of Seabrook construction nance expenses increased. due pnncipally to labor cost increases expenditures and inadequate rate rehef. The latter has resulted in and continuing high general inflation. Other taxes rose sharply due low intemal cash generation due pnmanly to practices followed by mainly to higher state gross earnings taxes attnbutable to increased the Connecticut Department of Pubhc Utikty Control (DPUC) and revenues and due to increased local property taxes.
its predecessor agencies of flowing through. as a reduction of Income tax expense for the years 1978-1980 was influenceo current revenue levels. the income tax benefits associated with both by levels of taxable income and by changes in effective tax construction programs and accelerated depreciation and of a; low- rates. reflecting the flow-through income tax practices followed by ing insufficient returns on common stock equity. the DPUC and its predecessor agencies.
28
Fin:ncing The combination of factors discussed in the preceding sections led developments, the Company allowed the revolving subordinated to particularly acute financing problems dunng the latter part of credit agreement to expire on July 31,1980. Consummation of the 1979 and the first half of 1980. Earlier in 1979, as a result of rate safe of a 2% ownership interest in the Seabrook project to Central
_ r; lief inadequate to finance a then 20 o interest in the Seabrook
_ Maine Power Company on October 20,1980 provided funds of (clear generating units, the Company negotiated agreements to $30.8 million and permitted elimination of all outstanding short-term 113 6% of its interest. In June a revolving credit agreement cf $75 borrowings.
million was arranged with several banks in order to support carrying On December 8,1980, the DPUC granted the Company an a 20*o interest in the Seabrook project until proceeds from there annual revenue increase of $35.9 million, effective December 17, planned sales were received. But delays in these sales and rapidly in response to the Company's general rate relief application filed nsing oil pnces, which resulted in negative cash flow over the last July 3. 980 requesting an increase in annual revenues of $50.5 half of 1979, caused short-term borrowings to increase dramats- million. A number of positive steps were adopted in the decision cally. In addition, short-term interest rates increased sharply. including approval of income tax normalization accounting (revers-As a result, the interest coverage ratio in the Company's Trust ing flow-through practices used previously). amortization of esti-Indenture, which applies to both long- and short-term borrowings, mated deferred fossil fuel costs over a one year period and an had declined by October to the point where no further unsubordi- increase in the allowed re! urn on common equity from 13.39. to nated short-term borrowings were permitted. At this stage, the 15.1% All of these changes will have the effect of improving the Company entered into a $20 million revolving subordinated credit Company's cash flow. In addition, the DPUC agreed with the Com-agreement at a premium interest cost over pnme rate. The onginal pany's use of an altered target capital structure for rate-making termination date of this agreement was March 28.1980. Dunng purposes, reducing long-term debt from 5096 to 45?. of total capi-December 1979 and January 1980, the Company sold. via a split talization, increasing common stock equity from 3596 to 40*o, and closing. $30 million of 11*o debentures, the private sale of which leaving preferred and preference stock unchanged at 15% The had been negotiated in September 1979. As of December 31.1979. effect of this change will be greater financing flexibility through short-term borrowings amounted to over $81 million at an average improved coverage ratios and net income.
interest rate of nearly 15 o. Outlook In early 1980. the situation worsened due to further escalation in By the beginning of 1981, there was a marked improvement from fuel oil pnces and interest rates and continued delays in the Seabrook the circumstances which had existed a year earlier. Short-term sales. On January 24,1980, the Company applied to the DPUC for borrowings have been significantly reduced and coverage ratios expedited rate relief, limited to recovenng two adverse impacts of have improved sufficiently to permit financing flexibility. Although increased oil pnces, specifically the two-month delay in bilkng in- the accounting and capital structure changes approved in the latest creased fuel oil costs to customers through the fuel adjustment clause rate decision combined with a reduction in the Company's owner-(deferred fuel costs) and the 5 o gross earnings tax on added reve- ship interest in the Seabrook project will improve the quality of the
_ nues. #,n extension in the revolving subordinated credit agreement to Company's earnings and the relationship of its intemally generated
.ly 31,1980 and an increase to $30 million were negotiated in funds to construction requirements. the positive effects of these mAbruary. n I or erd to rep acel orrow b ngs i un erdth s agreement, i w chi h changes are likely to be offset in 1981 by continued escalation in had reached $22.3 millon i by the end of February, the Company fuel oil prices, high financing costs and inflation in other operation scheduled a sale of 800.000 shares of common stock for early March. expenses In ariy event. the Company presently anticipates that it However. due to poor market conditions. only 500 000 shares could will be necessary to rely on external sources for a substantial be sold, providing proceeds of less than $10 million Consequently. portion of the capital required to finance its construction program subordinated borrowings were still at a level of $21 million at the end and refund matunng secunties through 1986. Construction expend-of March in view of the borrowing hmitations under the credit agree- itures for 1981-1986 are presently estimated at $390 milkon. ex-ment and the absolute kmitation of less than S40 million in subordi- clud.ng allowance for funds used dunng construction An additional nated borrowings imposed by the Trust indenture. and since earnings $47.7 million will be required over this penod for the refunding of coverage under the Company's Preferred Stock provisions was insuf- matunng debentures and redemption of preferred and preference ficient to issue additional preferred stock, a sale of preference stock. a stock, including $8 milhon of 2N o debentures in 1981 and 59 junior im of preferred stock that has no coverage requirement for melhon of 3 o debentures in 1984.
issuance. was scheduled. Construction estimates are based upon in service dates of 1984 In April. poor to issuance of the preference stock. the major for Seabrook Unit 1.1986 for Seabrook Unit 2 and Millstone Unit 3 secunty rating agencies reduced the ratings on all of the Company's and 1987 for the Pilgnm unit and do not include any provision for outstanding secunties and on its commercial paper. Nevertheless. possible conversion of the Company's Bndgeport Harbor Unit 3 fate in Apnl. the Company was able to sell $30 milkon of preference from an oil- to a coal-burning operation. Delays in these estimated stock. albeit at a dividend rate of 15.88oo. permitting elimination of in-service dates or expenditures for coal conversion could substan-all outstanding subordinated borrowings. Meanwhile. the decision tially increase aggregate construction expenditures and capital in Mi..ch 1980 by Public Service Company of New Hampshire. the requirements.
lead participant in the Seabrook project. to slow down construction The success of the Company's financing plan is depen-dent upon a nurnber of factors. including conditions in the secunties on the project due to financial problems resulted in an approximate
$25 million reduction in the Company's financing requirements for market. economic conditions. the level of the Company's sales and the year. Dunng the spang and early summer of 1980. downturns the ability to obtain adequate and timely rate relief. Due to the occurred in fuel oil pnces and imerest rates. from all-time highs continued escalation of residual fuel oil pnces. which reached earlier in the year, $17.6 million of the rate relief requested in nearly $39 per barrel in early February 1981. high financing costs
- 'anuary became effective on Apnl 25. and the Company's long- and inflation in other operating expenses. the Company anticipates m financing program for the year was successfully completed A a need for additional rate relief in 1981. Continuation of these inflationary trends will require penodic rate rehef after 1981.
dcond 1980 sale of common stock. one milhon shares with net proceeds of $21 milhon. in late June and the sa!e of $40 milkon of Inflation 13' #o debentures in mid-Jt ly concluded in excess of $100 milhon For further discussion of the effects of changing prices on the of long-term financing dunng 1980 in view of these favorable Company, see Supplementary Information Inflation.
29
Supplementaryinf:rm ti:n/Infttion Introduction The purpose of the following infom'ation. fumished as a supple- at the level required to provide an adequate, reliable supply ment to the pnmary histoncal cost-basis financial statements, is to electocity to meet tne demands of its customers. To do this requires convey the effects of certain price changes on selected balance substantialinvestments in generating and other f acilities. The Com-sheet and income statement items. This information has been pany makes these investments and incurs all the other costs. under compiled in accordance with a requirement of the Financial Ac- existing economic conditions. necessary to supply customer de-counting Standards Board (FASB) that companies disclose certain mands with the expectation of earning an appropnate return on the effects of inflation on their operations. investments and of recovenng the costs involved. In that sense.
Constant dollar amounts represent histoncal amounts stated in readers should not be misled into believing that past pnces for terms of dollars of equal purchasing power, as measured by the electncity should necessanly have been increased to cover con-1980 average of the Consumer Price Index for All Urban Con- sumption of the service potential of the pnce level adjusted cost of sumers. Current cost amounts reflect the changes in specific pnces plant.
of plant from the date the plant was acquired to the present, as However, in another sense, the pnce level adjusted income ap-measured by the Handy-Whitman Index of Public Utility Construc- plicable to common stock. particularly on a current cost basis. does tion Costs. Current cost amounts of plant ditfer from constant dollar illustrate the inability of income levels to support the targe. long lead amounts to the extent that specihc prices have increased more or time construction programs, whether to replace existing capacity or less rapidly than pnces in general Current cost is a reproduction to meet projected growth. currently being undertaken by many cost concept i e., the cost of replacing assets owned, as distinct electnc utilities, including the Company. This inability results from from replacement cost, which focuses on the cost of replacing the common regulatory practice. foll owed in Connecticut. of making physical productive capacity with current state of the ari no provision in revenues for recovery of or return on these construc-technology. tion costs until the plant commences operation Plant investment as referred to in the accompanying data in. This practice effectively restncts the income currently available cludes utility plant in service net of reserve for depreciation, con- for shareowner distnbutions and means that the Company must struction work in progress and acquisition adjustments. The con- increasingly rely on the capital markets to provide the financial stant dollar and current cost provisions for de;'reciation were resources required to maintain its operating capability, thus further determined by applying the Company's histoncal cost-basis depre- exposing the Company to the effacts of inflation in the form of ciation rates to the Consumer Pace and Handy-Whitman indexed increased financing costs.
plant amounts. The purchasing power gain on net monetary liabilities shown to Fuel, matenals and supplies inventones and related expense the accompanying data theoretically represents the extent to whv Categones have not been restated from histancal amounts al. equity investors were hedged against the nsk of inflation in pla though as set forth in Management's Discussion and Analysis of investmeni and other costs, pnmanly because a substantial portion Financial Condition and Results of Operations. volatile oil prices do of plant costs was financed by long-term debt. The Company cau-impact the Company operations. tions that such gains are unrealized and. therefore. do not contnb-ute to cash flow or distnbutable income. Because depreciation on As prescnbed by the FASB the data is based on actualincome tax expense unadjusted for the effects of inflation. plant is limited to the recovery of historical costs. :he Company does not have an opportunity to realize either the increase in Discussion specific pnces of plant investment helc; (sometimes called holding The supplementary data should be viewed as an estimate, rather gains) or the related gains on debt used to finance investment in than as a precise measure. of the approximate effect of price plant assets. Gains on deV in be relized if the inflation-adjusted changes on money invested in plant over many years and on cost of the related asset, can be converted into cash. via recovery money borrowed to provide a substantial portion of the funds in- through revenues of higher depreciation allo.vances, and if the debt vested in plant. Of the two methods used to measure inflation, the is retired and not replaced. However, the occurrence of this combi-more relevant to Ul is the current cost method because it is based nation of circumstances is un:ikely in view of present regulatory l
on the Handy-Whitman Index, which depicts the trend in public practices and the projected need for increased plant investment utility construction costs. The constant dollar data. because it is and debt financing l
l developed using the broad based Consumer Pnce index. is not The reduction of inflation adjusted plant investment to net re-
! necessanly representative of the effects of inflation on the Com- coverable, or histoncal. cost has been included in the 1980 data in pany. A pomary value of conetant dollar data is that it provides a view of the FASB's opinion that it may not be appropnate for com-common basis for companscn of companies in various industnes panies limited to recovery of the histoncal cost of their plant invest-subject to the reporting requirements. ment through the regulatory process to state their assets above the The depreciation adjustments to 1980 reported net income and recoverable amounts. This reduction should not be allowed to the similar adjustments used in calculating general and specific obscure the fact that inflation in pnces affects virtually all the Com-price level adjusted income applicable to common stock for 1978 pany's operations. While it is true that future cash flows relative to and 1979 represent the cost of providino suificient funds to replace. the Companys plant insestment will be based upon recovery of at the assumed pnce levels, the service potential of plant used up historical cost plus a specified rate of return, it is equally true that during those years. This concept is based on the belief by some the Company has the same problem as non-regulated businesses persons that businesses are not generating and retaining the finan- in maintaining its operating capability and avoiding erosion of car cial resources required to replace existing capacity and marntain tal. Furthermore, the Company and other utilities must compete operating capability, i.e. maintain the capability of the business to the same capital markets as non-regulated businesses and eturns provide a constant supply of goods and services. must be suf ficient to raise the capital required The reduction should it is important that the Company maintain its operating capability be viewed in recognition of these f acts.
30
elected Supplementary Financial Data Adjusted for the Effects of Inflation S.n Thousands of Average 1980 Dollars)
For the Year 1980 Constant Current Donar Cost Net income, as reported in the statement of income $ 34.466 5 34.466 Adjustment to depreciation expense based on plant invest-ment recalculated to recognize the effects of inflation in the general pnce level and in specific pnces 19.437 24.765 Net income, as adjusted 15.029 9.701 Dividends on preferred and preference stock 9 296 9.296 Income appkcable to common stock. as adjusted $ 5.733
$_ 405 Purchasing pc ver gain on net monetary habikties long term debt 5 31.695 $ 31.695 Other, pnncipally net current habi'ities 6.924 6.924 Total $ 38.619 5 38.619 Effect of inflanon on plant investment held dunng the year as measured by changes in-Specific pnces 5 81.588 General pnce levt i 121.311 Inflation in specific prices of plant investment over (under) general pnce level inflation 5 (39.723)
Reduction of inflation-adjusted plant investment to I.et recoverable (histoncal) cost $ 52.790 $ 7.739 At December 31.1980. the current cost of plant investment was $1.091.478 as compared to histoncal
'st of $641.774
~-
Fiva Yiar Summary 1980 1979 1978 1977 1976 Operating revenues $364.122 $319.051 $273.217 $298.476 $280.555 Histoncal cost information adjusted for inflation in tne general prA a level (constant dollar information).
Income applicable to common stock $ 5.733 $ 10.943 $ 5.908 Earnings per share of common stock $ 81 $1.80 $1.08 Common stock equity at year-end W $627.802 $567.513 $520.813 Histoncat cost information adjusted for inrlation in specific pnces (curr?nt cost information).
Income applicable to common stock $ 405 $ 4.666 $ G.'0E Earnings per share of common stock 5 06 $.77 ? 24)
Inflation in specific pnces of plant investment over (under) general pnce level inflation $ (39.7231 $ (21.860) $ 22.718 Common stock equity at year-end Ia) $542.124 5624.604 $606.035 Generalinformation:
Purchasing power gain on net monetary liabehties.
Long-term debt $ 31.695 5 34.547 5 26.122 Other, pnncipafly net Current liabikties 6.924 8.421 2.393 Totat $ 38.619 $ 42.968 $ 28.515 Dividends declared per share of common stock $2.68 $2.97 $3 23 $3 36 $3 40 Market pace per comraon share at year-end $17.30 $22 67 $27 68 $37.30 $37.34 Average Consumer Pnce Index (1967 100) 246 8 217.5 195 4 181.5 170 5
.. (a) Year-end data, stated in average 1980 dorf ars: 1980 1979 1978 Common stock equity at net recove able thistoncall cost $212.774 $199.936 $215.936 Net assets-Constant dot ar $737.597 $659.726 5605.958 Cur ent cost $751.919 $715.812 $691.181 Net recoverable thistoncat) cost $322.570 $291.145 $301.081 31
DirectITS Direct:rs Offic;rs and Angus N. Gordon Jr. John D. Fassett MICerS Chairman of the Northeast Power Coordinating Council Chairman of the Board and Chief Executive Officer (Former Chairman of the Board.
United lituminating) James F. Cobey Jr.
Presdent John D. Fassett Chairman of the Board and Leon A. Morgan Chet Executive Officer. Executive Vice President-Unded liluminating Operatons. Engineenng and Customer Services D. Allan Bromley Henry Ford 11 Professor and Director. Charles W. Cook Jr.
A W Wnght Nuclear Structure ce Presdent-Laboratory. Yale University Castomer Services John M. C. Betts Robert L. Fiscus Chairman of the Board. Vice Presdent-Blue Cross & Blue Shield Finance and Accounting of Connecticut. Inc.
(Former Senior Vice PreWent.
John V. Fratus Jr.
United lituminating) Senior Vce President-Governmental Relations Norwick R. Goodspeed Presdent and Chief Executive Officer. Richard J. Grossi People s Savings Bank-Bndgeport Vice President-Engineenng and Planning Robert D. Russo, M.D.
Chairman. Department of Radiology. Albert Harary Vice P,esdent-St Vincent s Medical Center Management Services James F. Cot'ey Jr.
President. United illuminating David W. Hoskinson Vice President-Leland W. Miles Operatons President. University of Ordgeport Marcus R. McCraven Leon A. Morgan Vce President-Executive Vice Presdent- Environmental Engineenng Operatens. Engineenng and Customer Services. United il!uminating Harold J. Moore Jr.
Vice Presic'ent-Frederick J. Mancheski Employee Relatons Chairman and Chef Executive Officer.
The Echlin Manufactunng Company.
Anne G. Spinney manufacturer of automotive parts Vre President-and accessones Communications Geraldine W. Johnson Earle G. Anderson Supenntendent of Schools. Assistant Vice President-Cdyof Bridgeport Governmental Releor s James L Benjami.
Controller William A. Elder Treasurer Richard F. Skinner Secretary 9
32
i General Counsel W9pn 5 Dana Uls Board of Directors Independent Certified t gr . Public Accountants
. Coopers & Lybrand
- k f.
- f j f Stock Transfer and Dividend
[ j Disbursing Agent, Flepstrar and Dividend Reinvestruent Plan Agent The Connecticut Bank and Trust Company. Hartford Connecticut g John D Fassett- Stock Listing James F Cobey Jr The New York Stock Enchange i and D Ahan Bromley ,
i 8 80'. Pre' erred Stock.1976 Ser.es ,
f 7 15 88'. Preference Stock
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John M C Detts Angus N Gordon Jr ;
and Dr Robert D Russ',
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- M Seated,leito rrger Richard J G essi H,voxf J Moore Jr . Anne G Spinney David W i Hoskinson. Robert L Fiscus and John V Fratus Jr Standing Marcus R McCraven, James L Benjamen. Rrchard F Skinner. W@am A l Elder. Chades W Cook Jr . Albert Harary and Earle G Anderson 33
5!
The crea Ul serves ea o u Harnden
.A *~ *U s Wood
- orth T bridge Haven EI O
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? U* CL North -$ $ 93 New Haven Branford g Shelton ggg Orange ~ kkN Easton Trumouti ff N , $$
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E United Illuminating Steam Generatng Stations ;
I Transmission Lines 345.000 volt I t 5.000 voit Strattord United illuminating ===.. ====== 1 Northeast Utilities --- -------- {
Ul is an operating electric utility serving an area of ?
about 335 square m,;es in the southwestern part of ; )
Connecticut. The Company's service area (about '
7'/.of the state) includes the principal cities of Bridgeport and New Haven and their surrounding areas. The population of this area is approximately 704.000, or 23*.of the population of the state, s
The area NEPOOL serves h NEPEX, the New England Power Exchange,is the operations arm of NEPOOL, coordMating and di-recting the operation of all major electric oower generation and transmission facilities in N ew Eng-land. From a master control center in West Spring-New England Power Exchange field Massachusetts, NEPEX works through four satellite control centers at key locations, which 9N EN LAN continuously monitor the operation of the six-state J R region s electric power system, selecting and p
implementing the best available combinations of E Locatioisof thefour generatK)n and transmission from moment to mo-NEPOOL-planned ment to meet total power demands. Another func-nuclear generatmg tion of NEPOOL is to provide a central planning units in whch Ut staff, New Eng!and Power Planning (NEPLAN),
is participatng' which has the responsibility for preparing electnc load forecasts, evafuating attemate generation and transmission plans, recommending reliabiluf stan-dards and facilitating the joint ownership of power plants through optimization of size and location.
The Satellite Control Centers are:
@ CONNECTICUT VALLEY ELECTRIC EXCHANGE (CONVEX)
Southmgton, Connecteut Controls power in Connecticut and western Massachusetts
@ RHODE ISLAND-EASTERN MASSACHUSETTS-seabroom i ano 2 VERMONT ENERGY CONTROL (REMVEC)
Westboro. Massachusetts Controls power in Rhode Is-p . land, eastern Massachusetts and Vermont.
/
@ NEW HAMPSHIRE CONTROL CENTER ,
c-Manchester. New Hampshire Controls power in rnost of o u)
New Hampshire g$o E a)
WMW3
@ MAINE POWER EXCHANGE Augusta. Maine. Controls power in most of Maine dbk g gg
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O s
nU SECURITIES AND EXCHANGE COMMISSION WASIIINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF Tile SECURITIES EXCIIANGE ACT OF 1934 For the fiscal year ended December 31,1980 Commission File Number 1-6788 The United Illuminating Company (Esact name of registrant as specified in its charter)
Connecticut 06-0571640 (Sta te or other jurisdiction of f I.R.S. Employ er incorporstmn or organization ) Identification No.)
80 Temple Street, New Ilaven, Conn. 06506
( Addrew of principal esecutise offices) ( Zip Code)
Registrant's telephone number, including area code: (203) 787-7200 Securities registered pursuant to Section 12(b) of the Act:
Name of each eschange on T
p of each claw which registered Common Stock, no par value New York Stock Exchange
[\ 8.80% Preferred Stock
($25 par 5alue per share) New York Stock Exchange 15.88% Preference Stock
($25 par salue per share) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act:
Conunon Stock, no par value (Title of claw)
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 dorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes y' No The aggregate market value of the registrant *s 50 ting stock held by non-alliliates, computed on the basis of the i,crage of the high and low sale prices of said stock reported on the composite tape for New York Stock Exchange listed securities, as published in The Commercial and Financial Chronicle, on February 19,1981, is $142,110,895.
The number of shares outstanding of the registrant's only class of common stock, as of February 23, 1981, was 7,681,670.
DOCUMENTS INCORPORATED BY REFERENCE Part of this Form 10-K into Document Which Document is Incorporated Definiti e Proxy Statement, dated March 19,1981, p for Annual Meeting of the Shareholders I to be held on April 29,1981. III
.\v/
l l
1
TIIE UNITED ILLUMINATING COMPANY FORN1 10-K December 31,1980 TAllLE OF CONTENTS
* E Part i Item 1. Business.. . 3 General . 3 Problems of the Industry and the Company.. 3 Construction Program . 4 Financing Problems.. 7 Franchises and Regulation.. 9 Rates . 9 Fuel Supply ar.d Related Operating Considerations.. 1I Nuclear Fuel. I1 Arrangements with Otiter Utilities.. 12 Environmental Regulation.. 12 Nuclear Licensing Proceedings.. 14 Employees.. 15 Item 2. Properties. 15 Generating Facilities . 15 Transmission and Distribution Plant.. 16 Item 3. Legal Proceedings.. 16 Item 4. Security Ownership of Certain Beneficial Owners and hianage-ment . 17 Equity Securities of the Company Owned by hianagement. 17 Executive Oflicers of the Company.. 18 Part 11 Item 5. Starket for the Company's Common Stock and Related Security lloider Statters . 20 item 6. Selected Financial Data.. 20 item 7. Nianagement's Discussion and Analysis of Financial Condition and Results of Operations.. 20 hiajor Influences on Financial Condition.. 20 Results of 0perations . 21 Financing . 22 Outlook . 23 Intlation.. 23 Item 8. Financial Statements and Supplementary Data.. 24 Statement of Income.. 24 Statement of Sources of Funds for Gross Property Additions.. 25 Statement of Retained Earnings. 26 Balance Sheet.. 28 Statement of Accounting Policies.. .._.. 30 Notes to Financial Statements . 32 Report ofIndependent Certified Public Accountants.. 40 Supplementary Information/ Inflation.. 41 Part 111 Item 9. Directors and Executive Orlicers of the Company.. 45 Item 10. Nianagement Remuneration and Transactions. 45 Part IV Item i1. Exhibits, Financial Statement Schedules, and Reports on j Form 8-K . . 45 i Signatures.. 52 2
PARTI p) q v
Item 1. Business The United Illuminating Company (the Company or UI) is an operating electric public utility company, incorporated under the laws of the State of Connecticut in 1899. It is engaged principally in the production, purchase, transmission, distribution and sale of electricity for residential, commercial and industrial purposes in a service area of about 335 square miles in the southwestern part of the State of Connecticut. The population of thi+. area is approximately 704,000, or 23% of the population of the State.
The service area, largely urban and suburban in character, includes the principal cities of Bridgeport (population 148,000) and New Haven (population 130,000) and their surrounding areas. Situated in the service area are both large and small industries producing a wide variety of products, including primary metals, aircraft engines, helicopters and other transportation equipment, rubber and plastic products, fabricated metal products, ordnance and electrical machinery and equipment. During 1980, approxi-mately 36.9% of the Company's electric revenues was derived from residential sales, 33.9% from commercial sales,27.1% from industrial sales and 2.1% from other sales.
PROBLEAfS OF TIIE INDUSTRY AND TIIE COAfPANY The electric utility industry and the Company have been experiencing problems in a number of areas, including a continued rapid escalation of the price of fuel for the generation of electric energy (see
" Nuclear Fuel" and Item 7. "Atanagement's Discussion and Analysis of Financial Condition and Results of Operations"); unsettled capital markets, the high cost of capital, and difficulty in meeting coverage requirements for the issuance of senior securities (see " Financing Problems" and Item 7. "Atanagement's Discussion and Analysis of Financial Condition and Results of Operations"); difficulty in obtaining sufficient return on invested capital, in obtaining adequate cash tiow and in securing adequate rate increases when required (see " Financing Problems", " Rates" and item 7. "Af anagement's Discussion and Analysis of Financial Condition and Results of Operations"); the errects of inflation on the cost of gj operations and on construction expenditures (see " Construction Program" and " Rates"); compliance with environmental regulations ( see " Environmental Regulation"); controversies over the use of nuclear power (see " Construction Program" and " Nuclear Licensing Proceedings"); large financial commitments and longer construction periods for new generating units (see " Construction Program", Item 2. " Generating Facilities" and Item 7. "Afanagement's Discussion and Analysis of Financial Condition and Results of Operations"); the effects of energy conservation and higher ekctricity prices on the use of electric energy (see " Financing Problems" and Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations"); and the uncertain effect of federal energy legislation (see " Rates" and " Fuel Supply and Related Operating Considerations").
As described herein, UI has been, and expects to continue, experiencing problems of these types in varying degrees. Specifically, during the final months of 1979 and the early months of 1980 the Company was prohibited by its Trust Indenture coverage requirements from increasing the aggregate amount ofits short-term and long-term unsubordinated indebtedness, and during Alarch and April of 1980 the Company's Preferred Stock provisions prohibited the issuance of additional Preferred Stock. Afarket conditions have also reduced to some extent the availability oflong-term capital funds to the Company.
Such considerations, and the view expressed by a majority of the members of Connecticut's regulatory authority that UI should reduce its ownership interest in two future generating units at Seabrook, New Hampshire, prompted a decision by the Company in 1979 to attempt to sell a substantial portion of tha:
ownership interest, which attempt was only partially successful. Although the Company's construction program has been reduced by a sale of a portion ofits Seabrook ownership interest, the magnitude of the program through at least 1984 is expected to contiaue to pose substantial financing problems for the Company and to result in a large percentage of earnings applicable to Common Stock being represented by allowance for funds used during construction. Controversies over the use *f nuclear power, regulatory action, existing and possible interventions and appeals in regulatory and environmental proceedings, p licensing delays and the unresolved issue of the disposal of nuclear wastes may further delay completion
) and increase the costs of the two Seabrook nuclear generating units and two other future nuclear units m (J
3
which UI is participating. These diHiculties and the financing problems of the utility which has responsibihty for the construction and scheduling of the Seabrook generating units have resulted in a decision to reduce the overall level of construction on these units, delaying their expected completion dates, and in a directive by the New Hampshire Public Utilities Commission (PUC) which may result in a fmther delay of the completion date of the second unit. These diHiculties and problems may result in the further deferral, or the suspension or cancellation, of one or both of these units. Similar problems could also atrect the two other future nuclear units. Any delay in the completion of any one of these units will increase its cost, and any cancellation of a unit could result in substantial cancellation penalties and charges against the Company's net income, which charges migh: be unrecoverable. Since the causes of these problems are, fi>r the most part, beyond the control of UI. it is unable to predict the likelihood of the continuation or the severity of such problems and, therefore, their future etreet on its operations. However, suspension, deferral or caacellation of one or more of the fi>ur future nuclear units or the sale of any additional portions of the Company's ownership interest in the two Seabrook units may adversely atrect the adequacy and reliability of UI's future service and its future earnings.
CONSTRUCTION PROGRANI UI is engaged m a continuing program, presently estimated at approximately $559,800,000 (excluding estimated nuclear fuel costs of approximately $56,200,000) during the years 1981-1987, inclusive, to provide facilities to ser e the requirements ofits customers.
The Company's 1981 construction program (excluding nuclear fuel costs of approximately
$ 14,259,000 ) totals approximately $108,816,000. This program provides about $94.824,000 li>r electric generating projects, including approximately $S0.507.000 ti>r the Company's ownership share of the 1981 costs of the two Seabrook nuclear generating units (Seabrook Unit Nos. I and 2) and approximately
$ 12,001,000 for its ownership share of the !?'l costs of the two other future nuclear generating units in which the Company is participating (Pilgrim Unit No. 2 and Niillstone Unit No. 3). In addition, the 1981 construction program provides approximately $9,737,000 fi>r expansion of distribution facilities, including overhead and underground distribution line extensions, substations and transfi>rmer, meter and new service installations, and $4.235,000 li>r transmiwion facilities and other projects.
The Company's construction program is presently estimated at approximately $451,022,000 (ex.
cluding estimated nuclear fuel costs of $41,968.000) during the years 1982-1987, inclusive, including approximately $399,908,000 fi)r the Company's participation in the construction of the four nuclear generating units. The Company's ownership shares of these units, and their estimated in-service dates and present cost estimates, are indicated in the following table:
M abrook M abrook Pilgrim Milhtone t ' nit t' nit t ' nit t ' nit No. I No. 2 No. 2 No. 3
% abrook, M abrook, Ply mou t h, Wa terford, N.II. N.ll. Maw. Conn.
Total Unit Generating Capability ( N1W) . 1,150 1,150 1.150 1,150 UI's Ow nership Share
- Perce n t.. 17.5% 17.5% 3.3% 3.685 %
Niegaw atts.. 201.3 201.3 38 42 Estimated In-Service Date ( 1 )( 3 ) . 1984 1986 1987 1986 u ,
Estimated UI Cost per K W ( 2 ) ( 3 ). $ 1,426 $ 1,834 $2.438 Estimated UI Costs ( Niillions of Dollars ) ( 2 ) ( 3 )
Prior to 1981. $209.2 $ 12.7 $ 32.0 198I. 80.5 2.3 9.7 1982.. 83.6 4.2 12.9 1983.. 83.4 7.4 14.2 1984.. 62.5 10.2 14.6 1985. 44.1 12.1 13.6 1986.. 10.9 13.3 5.4 1987.. -
7.5 -
Total to completion.. $574.2 $ 69.7 $ 102.4 4
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(I) See" Nuclear Licensing Proceedings"concerning the licensing difF alties being experienced by these umts.
(2) Excluding cost of nuclear fuel. At December 31,1980, $17,031,000, $356,000 and $1,223,000 had been incurred by UI for nuclear fuel for Seabrook Unit Nos. I and 2, Pilgrim Unit No. 2 and hiillstone Unit No. 3, respectively. The present estimate of nuclear fuel costs to be incurred by UI during 1981-1987 for these units is approximately $47,153,000, $3,966,000 and $5,108,000, respec-tively. These estimates do not include any amounts for the cost of storage, reprocessing and disposal of spent nuclear fuel. See " Nuclear Fuel" (3) The estimated costs and in-service dates for Seabrook Unit Nos. I and 2 assume a continuation until April 1981 of the present reduced level of construction of these units, but do not reflect the possible impact of a New llampshire PUC directive, discussed below, to delay work on Seabrook Unit No. 2.
A review of the project schedule and cost estimates for these units is due to be completed in hiarch of 1981. 'Ihc estimates given above on in-service dates and costs of the other two nuclear units are furnished by the companies responsible for the construction of the units and are subject to change as a result of periodic reviews. Due to uncertainty as to the licensing of construction of Pilgrim Unit No. 2, there has been no recent review of the construction budget for that unit. The in-service dates of the four units have been deferred from time to time, and additional deferrals may occur due to licensing delays, economic conditions and other factors. The costs of any or all four of these units.may increase substantially due to further construction schedule revisions or other causes. See Item 2. " Generating Facilities" The remainder of the 1982-1987 program consists of approximately $2,573,000 for other electric generating projects. $44,963,000 for distribution projects, and $3,578,000 for transmission facilities and other projects.
All of the above construction program costs are based on current construction schedules and include allowance for funds used Aring construction. See Item 8. "Statemen' of Accountmg Policies" They do not include any provision for possible conversion of a generating unit at the Company's Bridgeport Harbor b
V Station from oil to coal-burning operation. See " Fuel Supply and Related Operating Considerations".
During the years 1976-1980, the Company's construction program expenditures for pollution control facilities (exclusive of the four nuclear generating units) totaled approximately $2,776,000. The construction program for 1981 includes approximately $881,000 for such facilities, and for the years 1982-1987 expenditures for such facilities will be substantial. See " Environmental Regulation" The principal component of UI's construction program is its participation in the construction of Seabrook Unit Nos. I and 2. Existing contractual commitments for these nuclear generating units and for Pilgrim Unit No. 2 and hiillstone Unit No. 3 require the Company to pay its ownership share percentages of the continuing planning, construction and fuel costs for the units. The above construction program costs assume continuation of UI's 17.5% participation in Seabrook Unit Nos. I and 2. Due to the Company's belief that the rate relief which the Connecticut Public Utilities Controi Authority (PUCA) granted it in December 1978 was inadequate to assure its ability to finance the entire construction program, and to the view expressed by a majority of the PUCA Commissioners that the Company's then 20% ownership share in the Seabrook generating units should be reduced, the Company offered to sell a 10% ownership share in the units. As a result of the offer, the Company sold a 2.5% ownership share in the units to Central hiaine Power Company on October 20,1980. This sale was made at book value, including allowance for funds used during construction, and proceeds to UI amounted to approximately $30,800,000. An agreement for the s.ile of another 1.1% ownership share to a hiassachusetts utility company had been reached, but this agreement was terminated by mutual consent after the hiassachusetts Department of Public Utilities (DPU) disapproved the buyer's application for permission to purchase said share. At this time, there are no prospects of a further reduction in UI's 17.5% participation in this project.
Public Ser ice Company of New Hampshire (PSNH), which has
- eld a 50% ownership share in Seabrook Unit Nos. I and 2 and has responsibility for the construction and scheduling of these units, has been and is experiencing serious difficulties in financing its construction program, particularly the Seabrook units. In view of these ditliculties, PSNH attempted to sell a 22% ownership share in the units, and is presently selling portions ofits shar,e aggregating approximately 15% to several New England utilities. In
- t pI order to complete these sales, the purchaser of an approximate 6% share must obtain its initial 'inancing, V and two purchasers of shares aggregating approximately 2.5% require further governmental at avals.
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in March 1980,in view of the unsettled state of the capital markets and the very hig . cost of external funds, PSNil decided that the overall level of construction on Seabrook Unit Nos. I ind 2 would be reduced substantially in order to lessen PSNil's external financing requirements. Subsequently, the New llampshire PUC ordered a delay in work on Seabrook Unit No. 2, except for those areas that are common to both Unit Nos. I and 2, until PSNil received the regulatory approvals necessary for reducing its ownership share and until the reduction commenced; and it is anticipated that the reduced level of construction will continue at least until that time. PSNil had hoped that, by continuing construction on items considered essential to maintain the earliest possible completion dates,1983 and 1985 in-service dates for these units could he maintained. Ilowever, PSNil now believes that the reduction in the level of construction and an ironworkers' strike during the summer of 1980 have delayed these in-service dates.
The extent of the delay will not be known until PSNil completes a review of the project schedule and cost estimates during March of 1981. If PSNil is unable to complete its sales of ownership shares, or if PSNil's financing program pending such sales cannot be carried out, the level of construction of the units might have to be further reduced or suspended and the in-service dates for one or both of the Seabrook
, generating units might have to be further deferred until PSNil's financing problems are resolved.
Although PSNil has agreed not to suspend construction for an extended period without the consent of participating ut.lities holding ownership shares in the project aggregating at least 75% PSNil has already substantially reduced the construction level without such consent and such consent would oat he required for PSNil to implement a directive by the New llampshire PUC to delay work on the project. The adven.e impact on UI of an extended suspension or construction slowdown of the Seabrook project, for any reason, could he material.
The complexity of present-day electric utility technology and the time required for the construction of generating facilities and for the completion oflicensing and other regt.latory proceedings relating thereto, which have become increasingly extensive, have compelled UI, as well as other electric utilities, to make substantial investments in such facilities before the licensing and regulatory proceedings are final.
Completion of construction of each of the four nuclear generating units in which the Company is participating is contingent, among other things, upon obtaining necessary regulatory approvals, permits and sufficient financing. It is possible that future developments could lead to cancellation of one or more of the units, and if any of the units were cancelled the Company estimates its share of total cancellation costs would be substantial. The precise amount would Jepend upon a number of factors, including the amount of termination charges and salvage and the results of negotiations in connection with contract terminations. The Company would apply to the Connecticut Department of Public Utility Control
( DPUC) for approval to amortize its share of total costs over an appropriate future period and to recover such costs through its rates, but the Company cannot predict whether and to what extent such recovery would be permitted. The scheduling of Pilgrim Unit No. 2 and Niillstone Unit No. 3 and the right to cancel each of these units is the responsibility of the particular New England utility which is constructing the unit and, although the other participating utilities, including the Cot..pany, must be consulted, the unit can be cancel!ed by the constructing utility without their consent. Seabrook Unit Nos. I and 2 can be cancelled by participating utilities holding ownership shares in these units aggregating at least 75%
The expanding development of nuclear power plants in the United Stat ; continues to be a subject of public controversy. Various groups have published articles and reports, filed lawsuits and participated in administrative proceedings, claiming that the proliferatbn of nuclear power plants under the present state of nuclear technology presents unacceptable risks :o public hedth and safety and to the environment. In addition, certain of these groups have proposed restrictive legislation in Connecticut, Massachusetts, New llampshire and the United States Congress, and othm have participated in disruptive demonstrations and raised questions in public hearings regarding the ulua are cost of energy produced by nuclear plants as }
opposed to other fuels. A more widespread concern abeut the safety of nuclear plants was caused by the March 1979 accident at the Three Mile Island Nuclear Unit No. 2, in Pennsylvania, which resulted in damage to a power plant and the release of radioactivity into the environment. It is possible that some of the clairas made, should they prevail, or the existence of controversy or concern itself, will delay or prevent 6
m
construction or require substantial modifications or extended shutdowns, of such plants, aay of which
/ could hase a substantial adverse impact on UI.
V) See " Financing Problems", " Nuclear Fuel", " Arrangements with Other Utilities", " Environmental Regulatian"," Nuclear Licensing Proceedings", Item 2. " Generating Facilities" and Item 7. "hf anage-ment's Discussion and Analysis of Financial Condition and Resuhs of Operations" FINANCING PROHLEMS The Company has been experiencing difficulty in financing its construction program and in maintaining cash flow adequate to fund the program and the costs ofits current business operations.
It has been the practice of the Company to finance current construction expenditures in excess of available internally generated funds from the proceeds of short-term borrowings, to bc repaid through the issuance and sale of Common Stock, Preferred Stock, Preference Stock and Debentures. In recent years, internally genented funds, including funds related to depreciation charges, available to finance construc-tion expenditures have provided var >ieg percentages of the Company's constructior. program require-ments, and the Company has been dependent on outside financing to provide a major portion of such capital requirements. Internally generated funds, after the payment of dividends, provided an average of approximately 45% of such expenditures during the period 1975-1977. Ilowever, these funds provided only 17%,18% and 370 of such expenditures during 1978,1979 and 1980, respectively. The decline since 1977 in the percentage ofinternally generated funds to total construction expenditures re0ccts increased construction work on Seabrook Unit Nos. I and 2, the costs of financing Seabrook constructior, expenditures and inadequate rate relief. The latter has resulted in low internal cash generation due primarily to practices followed by the Connecticut Department of Public Utility Control (DPUC) and its predecessor agencies of flowing-through, as a reduction of current revenue levels, the income tax benefits associated with construction programs and accelerated depreciation and by allowing insufficient returns on common stock equity.
The following table shows the Company's estimated capital requirements (excluding any amounts required for an increase in working capital) for the years 1981 through 1986 on a year-by-year basis-19N1 19N2 1983 19N4 1985 1986 (Thousands of Dollan)
Construction * $ 82,590 $73,461 $68,004 $57,184 $43,253 $24,165 Nuclear Fuel
- 12,279 9.443 12,081 3,965 1,472 1,641 Debenture, Preferred and Preference Stock hiaturities. 12,000 4,000 5,667 10,667 6,667 8,667 Totalt $ 106,869 $86,904 $85,752 ' 816
, $51,392 $34,473
- Exclusive of any allowance for funds used during construction and assuming retention of the Com9any's 17.5% interest in Seabrook Unit Nos. I and 2. See " Construction Program" and item 8. " Statement of Accounting Policies" Nuclear fuel requirements are for the purchase of uranium concentrates and for conversion, enrichment and fabrication services. See " Nuclear Fuel" The Company presently estimates that it will be necessary to rely on external sources for a substantial portion of the capital required to finance its construction program and refund maturing securities through 1986: and there is no assurance that such financing can be effected by UI.
The earnings coverage provisions of the Trust indenture under which the Company issues its Debentures prohibit any increase in short-term or long-term unsubordinated or subordinated indebtedness (except $2,000,000 of short-term borrowings incurred for operating expense purposes, and except for borrowings which are expressly subordinated to the Debentures, limited to an aggregate amount not exceeding 10% of the Trust Indenture debt limit-624% of the cost of the Company's properties less p depreciatic i thereon-approximately $40,100,000 as of December 31, 1980) unless the Company's income before federal income taxes for a period of twelve consecutive months within the fifteen calendar
(]
7
months immediately preceding such increase is at least twice annualized interest charges on all indebtedness to be outstanding.
The Company's Preferred Stock provisions prohibit the issuance of additional Preferred Stock unless the Companfs after-tax income for a period of twelve consecutive months ending not more than 90 days prior to such issuance is at least one and one-half times the aggregate of annual interest charges on all indebtedness and annual dividends on all Preferred Stock to be outstanding. The Preferred Stock provisions also prohibit any increase in long-term indebtedness unless the Company's after-tax income for a period of twelve consecutive months ending not more than 90 days prior to such increase is at least twice annualized interest charges on all long-term indebtedness to be outstanding.
On the basis of the formulas contained in the Trust Indenture and Preferred Stock provisions, the coverages fi>r each of the five years ended December 31,1980, were as fi>llows: j Preferred Shwk l Indenture Prm euans Preferred long.terrn
) ear indebtednew Shek Indchardnew 1976. 2.23 1.71 2.24 1977. 2.29 1.74 2.26 l 1978. 1.88 1.56 2.44 1 1979. l.87 1.47 2.84 1980. 2.24 1.85 2.56 i
See item 7. " Management's Discussion and Analysis of Financial Condition and Results of l Operations" regarding the acute financing problems w hich the Company experienced during the latter part )
of 1979 and the first half of 1980 and the financing outlook fiir 1981 and the future. I 1
See Note (C) of item 8. " Notes to Financial Statements" concerning the Company's short-term borrowings and its lines of credit and revohing credit agreement with a group of banks.
In recent years, the higher cost of electricity, reflectira mereased fuel oil prices and other inflationary factors, has prompted conservation practices by the Company's customers and, together with depressed economic conditions w hich have curtailed industrial activity, has resulted in a declining rate of growth in kilowatt-hour sales. In 1980, a negative 1.4% rate of growth was experienced. While the Company l currently forecasts a resumption of growth in kilowatt-hour sales in 1981 and future years,it is likely that higher fuel oil costs and operating expenses will cause continuing increases in electricity prices to customers. Thus, it is possible that the Company's customers will further cunail their consumption of electricity, thereby adversely affecting the Company's not income and its ability to obtain external financing.
The Company expects to continue to finance its future construction program, and to meet its j obligations to redeem Preferred Stock and refund maturing long-term debt obligitions, by issuing l additional unsubordinated and subordinated short-term debt a:.:1 aJditional long-term debt and equity j securities. Ilowever, the availability of these methods of financing cannot be assured. The success of the Company's financing plan is dependent upon a number of factors, including conditions in the securities markets, economic conditions, the level of the Company's sales and its ability to obtain adequate and timely rate relief. If the Company is unable to obtain sufficient financing to meet its present construction program requirements and de*3t and Preferred Stock obligations, it would be fi>rced to reduce its construction program. In view of the Company's commitments on the four nuclear generating units described above under"Constructi.m Program", the Company might be unable to effect a reduction in the program sufficient to permit it to maintain its business operations.
UI has not yet determined what methods of financing will be employed to defray the cost of nuclear fuel for the nuclear generating units in which it is participating. See " Construction Program" and
" Nuclear Fuel" UI owns 9.59 of the common stock of Connecticut Yankee Atomic Power Company (Connecticut Yankee), which has in operation a 580,000 kilowatt nuclear generating station (the Connecticut Yankee unit) in fladdam Neck, Connecticut; and UI is entitled to an equivalent percentage of the generating 8
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capability of this station. UI is also obligated to furnish an equivalent percentage of Connecticut Yankee's capital requirements, within specified limits. During 1981, UI expects to furnish or guarantee its stock ownership percentage of a $75,000,000 long-term debt issue and to guarantee an equivalent percentage of bank lines of credit of approximately $25,000,000 for Connecticut Yankee. See " Nuclear Fuel" and
" Nuclear Licensing Proceedings".
FRANCillSES AND REGULATION Subject to the power of alteration, amendment or repeal by the Connecticut legislature, and subject to certain approvals, permits and consents of public authority and others prescribed by statute, the Company has valid franchises to engage in the production, purchase, transmission, distribution and sale of electricity in the area served by it, the right to erect and maintain certain facilities on public highways and grounds, and the power of eminent domain.
The Company is subject to regulation by the Connecticut DPUC, which has jurisdiction with respect to, among other things, rates, accounting procedures, certain dispositions of property and plant, mergers and consolidations, the issuance of securities, certain standards of service, management efficiency, operation and construction, and the location and construction of certain electric facilities. See " Rates" The DPUC consists of five Commissioners, appointed by the Governor of Connecticut with the advice and consent of both houses of the Connecticut legislature.
The law governing the DPUC requires management audits of public utilities to be conducted at regular intervals, which audits may result in the DPUC ordering implementation of new management practices or procedures. A management audit of UI pursuant to this statute commenced in 1976 and was completed in 1977. In its final report, the independent consulting firm which conducted the audit concluded that UI is generally well-managed and is serving its customers reliably, at reasonable rates and at an overall level of performa' ice above average for the industry.
UI is a "public utility" within the meaning of Part II of the Federal Power Act, and is subject to regulation by the Federal Energy Regulatory Commission (FERC), which has jurisdiction with respect to interconnection and coordination of facilities, wholesale rates and accounting procedures, among other things.
The Company is a holder of three construction permits and an applicant for one construction permit under the Atomic Energy Act of 1954, as amended, and, as a holder of such permits and future operating licenses, is and will be subject to the jurisdiction of the Nuclear Regulatory Commission (NRC), which has broad regulatory and supervisoryjurisdiction with respect to the construction and operation of nuclear reactors, including matters of public health and safety, financial qualifications, antitrust considerations and environmental impact. Connecticut Yankee is also subject to this NRC regulatory and supervisory jurisdiction. See " Financing Problems" The Company is and will be subject to the jurisdiction of the Massachusetts DPU and the New Ilampshire PUC for limited purposes in connection with its ownership interests in Pilgrim Unit No. 2 and Seabrook Unit Nos. I and 2.
RATES The Company's electric service rates are subject to regulation by the Connecticut DPUC (PUCA prior to January 1,1979).
Connecticut law affords the DPUC 150 days to act upon a proposed rate increase. In default of such action by the DPUC, the proposed rates may be put into effect subject to refund. Interim rate increases, subject to refund, may be approved by the DPUC after a public hearing if they are found to be necessary to prevent substantial and material deterioration of the financial condition, or the adequacy and reliability of service, of a utility.
On January 24,1980 UI filed with the DPUC a limited application for rate relief designed to increase annual revenues by approximately $22,100,000.' This application was limited to remedying two adverse Q impacts which the rapid escalation in the price of fuel oil had on UI. Although the fuel adjustment clause Q in the Company's rates allows UI to increase its customers' bills to reflect increased fuel oil costs, there is 9
no provision made for recovery of Connecticut's 5'6 gross receipts tax on the increased revenues produced by the clause. In addition, the two-month delay between incurrence of increased fuel oil costs and the billing ofincreased fuel adjustment clause charges to customers had generated accumulated deferred fuel costs, since the Company's 1978 rate increase proceeding, fi>r which no recovery was provided in UI's existing rates. The Company's rate relief al, plication requested expedited approval by the DPUC of the recovery of the added Connecticut tax and deferred fuel costs resulting from increased fuel oil prices. The DPUC approved a rate surcharge designed to increase the Company's annual revenues by approximately
$ 17,600,000. This surcharge became elrective for service rendered on and after April 25,1980.
On July 3,1980, UI filed with the DPUC amended rate schedules requesting an increase of approximately $50,500,000 in annual revenues, or 13.5%, over annualized current revenues. The DPUC issued its decision on December 8,1980, allowing an increase in annual revenues of approximately
$35,900,000 effective fiir service rendered on and after December 17,1980. The increase was based upon allowed rates of return of 15.I'1 on common stock equity (40'; of total capitalization) and I1.3'J, on rate base. An historical test year was used to establish the original cost rate base, w hich was calculated on year-end amounts and excluded all construction work in progress at year-end. The decision approved income tax normalization accounting. reversing the previous flow-through practice of the DPUC and its predecessors, and permitted the Company, on a prospective basis, to use the normalization method of accounting fiir the income tax benefits associated with the Company's construction program and accelerated depreciation.
T he Company anticipates that it will require additional rate rehefin 1981. See item 7. " Manage-ment's Discussion and Analysis of Financial Condition and Results of Operations" Under Connecticut law, the DPUC is required to conduct a complete review and investigation of, and to hold a public hearing on, the financial and operating results of an electric utility at least once every two years to determine w hether an increase or decrease in the level of the utility's rates is required. In 1978 and 1980, the DPUC and its predecessors incorporated this statutory review and investigation into its proceedings on UI's requests fiir rate increases.
UI's present rate structure consists of various rate and service classifications covering residential, commercial, industrial and street lighting services. Rate schedules, fi>r the most part, are of the block type, providing incentives liir improved load factors and off-peak consumption. During 1976 and 1977, the PUCA conducted a broad general investigation and public hearings on pricing principles and rate structures liir electric utilities. In its findings and order in this proceeding, the PUCA was critical of the existing declining block rate structures employed by Connecticut electric utilities and concluded that they should be replaced by time-of-day rates. The utilities were directed to adopt time.of-day rates and offer them to customers on a voluntary basis, to conduct revenue and cost-impact analyses with respect to those rates and to conduct general cost-of-service studies and load research projects during 1977 and 1978. UI has complied with these directives. In January 1979, the DPUC commenced a further general investigation of pricing principles and rate structures to consider the results and etreets of the 1977 directives and new developments or desirable modifications in such principles and structures. The Company has been an active participant in this proceeding and in another general investigation by the DPUC of the implementation of load control programs by Connecticut electric utilities.
Since January 1971, UI has had a fuel adjustment' clause in all ofits rates. The DPUC is required by law to convene an administrative proceeding prior to approving fuel adjustment charges of electric utilities fiir each month. The law permits automatic implementation of the charges if the DPUC fails to act within five days of the administrative proceeding, although all such charges are also subject to further review and appropriate adjustment by the DPUC at public hearings required to be held at least every three months.
No evidence ofinaccurate computations with respect to UI's fuel adjustment charges has been presented at any of these proceedings or hearings.
National energy legislation enacted in recent years contains provisions dealing with energy con-servation, energy taxes and utility rate regulatirn. Although the implementation of this legislation has not
)
adversely atrected UI to date, it is unabic to predict, at this time, what effect this legislation may have on its rates, sales, revenues or net income in the future.
10
FUEL, SUPPlJ AND REl.ATED OPERATING CONSIDERATIONS
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U The Company burns residual oil at its generating stations and thus, in common with other electric utilities on the Eastern seaboard,is heavily dependent on imported oil. During 1980, UI's share of the fuel oil requirements of UI's generating stations totaled approximately 8,000,000 barrels. 'Ihe Company owns storage tanks at its major generating stations in New llaven and Bridgeport which have maximum capacities of approximately 650,000 and 680,000 barrels of vil, respectively. Requirements for the Company's Bridgeport and New Ilaven liarbor generating stations, which constitute the bulk of the Company's total oil requirements, are covered by a long-term contract with Texaco, Inc. Under this requirements contract, whkh extends to March 31,1983, Texaco owns and maintains an inventory in the Company's storage tarks and, consequently, the Company maintains no significant fuel inventory. This contract contains a broad fi>rce majeure provision excusing failure of perfiirmance by the supplier due to causes beyond its control. Neither the Mideast oil embargo nor other national energy problems have necessitated any reduction in planned generation at the Company's generating stations. The recent decontrol in the price of domestic oil is not expected to have any effect uptm the supply of oil to the Company, sir ce all of the oil used by the Company is obtained from foreign sources.
The generating units at UI's Bridgeport liarbor Station are capable of burning either oil or coal, and the Economic Regulatory Administration ( ERA) of the Department of Energy, acting pursuant to the Powerplant and Industrial Fuel Use Act of 1978, is considering a proposed order which would prohibit the burning of oil by the large (410 MW) generating unit at Bridgeport liarbor Station. An extensive comment and hearing procedure with respect to this proposed order is in progress, during which the Company and the several governmental agencies having jurisdiction over its operations, financial structure and rates are analyzing and presenting evidence to the ERA concerning the economic, environmental and engineering feasibility of converting this generating unit to coal-burning. The Company cannot predict the outcome of these proceedings. A conversion to coal-burning could be expected to involve substantial capital expenditures for fuel inventory, equipment modifications and additions and pollution control and (g) monitoring devices, presently estimated by the Company at $40,000,000 to $170,000,000, in addition to V icereased operating expenses. No provision fi>r these capital expenditures has been included in the Company's construction program. Although the c<act amount of conversion expenditures cannot be accurately predicted at this time, they would be substantial and they would be likely to exacerbate UI's future financing problems in the absence of substantial government financial assistance or adequate rate relief, or both.
NUCI. EAR FUEL, Generally, the supply of fuel fi>r nuclear generating units involves the mining and milling of uranium ore to uranium concentrates, the conversion of uranium concentrates to uranium hexatlooride, enrichment of that gas and fabrication of the enriched hexalluoride into uablo fuel assemblies.
After a region (approximately M to % of the nuclear fuel assemblies in the reactor at any time) of spent fuel is removed from a nuclear reactor, it is placed in temporary storage in a spent fuel pool at the nuclear station site fi>r cooling and ultimately is expected to be transported to permanent storage sites or to plants fi>r reprocessing into uranium hexalluoride and plutonium oxide fi>r reuse as nuclear fuel.
Uranium concentrates, uranium processing and nuclear core fabrication services fi)r the initial fuel loading and reload fuel fi>r nuclear units are sometimes purchased as a package from the reactor supplier.
In other instances the uranium concentrates are purchased separately from processing and fabrication services. Based on infi>rmation furnished by the utilities responsible fi>r the construction and operation of the Connecticut Yankee unit and the four future units in which the Company is participating, there are outstanding contracts which cover uranium concentrate purchases liir the Connecticut Yankee unit through l/ 1986, liir the initial core and three refuelings fi>r Millstone Unit No. 3 and substantially all of the uranium
(/ concentrates fi>r the initial cores li>r Seabrook Unit Nos. I and 2 and Pilgrim Unit No. 2, and there are il
outstanding contracts to the extent indicated below for conversion, enrichment and fabrication sersices fi>r these units extending through the fi>llowing years: '
Comerdon so lleultuuride Fn ament Fabrica tion Connecticut Yankee Unit. 1985 1995 1986 Seabrook Unit No.1. 1987 2008 1986 Seabrook Unit No. 2.. 1987 2008 1986 Pilgrim Unit No. 2. 1986 2015 1986 Mdistone Unit No. 3.. 1989 2014 993 See item 3. " Legal Proceedings" UI expects that uranium concentrates and related services li)r periods not covered by existing contracts l will be available, although such availability depends, among other factors, on suppliers of such materials and services developing additional capacity. There can be no assurance that such concentrates and services will in fact be available w hen needed. Costs for subsequent periods could be substantially higher than those under existing contracts.
There are no commercial facilities presently available in the United States for the reprocessing of spent nuclear fuel, and current federal policy includes indefinite deferral of commercial reprocessing of spent fuel and a suggestion that the federal government take title to such fuel and store it in a retrievable fashion while the question of ultimate disposal is being settled. In view of this, operating nuclear generating plants are required to make long-term arrangements for the storage of spent fuel. The Connecticut Yankee unit has adequate storage capacity on site until at least the mid-1990s when government storage facilities are expected to become available. It is anticipated that there will be substantial additional costs (above those presently accepted by regulatory authorities for rate purposes) associated with disposal of spent fuel from the Connecticut Yankee unit.
ARRANGEMENTS WITil OlllER UTILITIES The Company, in cooperation with other privately-ow ned and publicly-ow ned New England electric utilities, established a New England Power Pool (NEPOOL) in 1971. The objectives of NEPOOL are:
(a) to assure that the bulk power supply of New England and any adjoining areas served confi>rms to proper standards of reliability, ( b) to attain maximum practicabic economy, consistent with such proper standards of reliability,in such bulk power supply, and (c) to provide fi>r equitable sharing of the resulting benefits and costs. These objectives me to be achieved through joint planning, central dispatching, cooperation in environmental matters, coordinated construction, operation and maintenance of electric generation and transmission facilities and through the provision fi>r more etrective coordination with other power pools and utilities situated in the United States and Canada. The egreement establishing NEPOOL was filed with th- Federal Po- Commission ( FERC after September 30, 1977) and many of its provisions continue to be subject u, . .RC jurisdiction.
Substantially all planning, operation and dispatching of electric generating capacity fiir New England is done on a regional basis under NEPOOL. A central dispatching agency of NEPOOL, designated NEPEX, directs the operation and schedules the maintenance of the generating and transmission facilities of participating utilities and provides fi>r coordination with other power pools and utilities.
The Company contributes to the financial support of certain 345KV transmission facilities in Connecticut which are a part of the New England transmission grid and, in connection with its participation in the ownership of the fi>ur future nuclear generating units described in Item 2. "Gener-a'ing Facilities", will contribute to the financial support of certain additional transmission facilities required by these generating units.
ENVIRONMENTAL REGULATION The National Environmental Policy Act requires that detailed statements of the environmental etrect of the Company's facilities be prepared in connection with various federal permit and licensing 12
l 4
proceedings. Federal agencies are required by that Act to make an independent emironmental evaluation of facilities as part of their actions during such proceedings.
The Clean Water Act (CWA) requires permits for discharges of effluents into navigable waters and requires that all discharges of pollutants comply with federally approved state water quality standards.
l The ronnecticut Department of Environmental Protection (DEP) has adopted, and the federal government has approved, water quality standards for receiving waters. A joint federal and state permit system has been established to insure that applicable effluent limitations and water quality standards are met in connection with the construction and operation of facilities which affect or discharge into state or
! interstate waters. The Company has obtained five-year discharge permits for all ofits generating stations.
All of these permits, except the permit for New flaven liarbor Station, require further studies and monitoring to determine whether the existing cooling water intake structures reflect the best available technology as defined by the federal Environmental Protection Agency (EPA) for the location, design, construction and capacity of these structures.
The EPA is reviewing and, where appropriate, will develop technology-based etlluent standards for
! certain potentially toxic chemical pollutants discharged from electric generating facilities. If such i standards are adopted, further chemical waste treatment facilities for the Company's generating stations may be required. The EPA's effluent limitation regulations which would require the eventual installation l~ of closed, recirculating cooling water systems, such as cooling towers, on electric generating facilities do not appear to be applicable to any of UI's existing generating units, except New flaven liarbor Station, or to the Connecticut Yankee unit. The discharge permit for New flaven liarbor Station, which wi'l expire on June 30,1982, is su' !cet to revision in this respect. Because of the uncertainties with resp:ct to toxic chemical pollutant standards and the possibility of required changes in the existing and plan ned cooling water systems at New flaven 11 arbor Station, the cost etrect of the CWA on Ul cannot be estimated: but i
additional modifications, in some cases extensivc and involving substantial costs, may ultimauly be
- required for one or more of the Company's generating facilities. See also " Nuclear Licensing Proceedings",
N Under the Clean Air Act, the EPA has promulgated national primary and secondary air quality standards for certam air pollutants, including sulfur oxides, particulate matter and nitrogen oxides. The DEP has adopted regulations for the attainment, maintenance and enforcement of these standards. In order to comply with these regulations, the Company is required to burn fuel oil with a sulfur content not in excess of 0.5% These regulations also include other air quality standards, emission performance
, standards and monitoring, testing and reporting requirements which are applicable to the Company's
- generating stations, and further restrict the construction of new sources of air pollution or the modificatior
- of existing ones by requiring that both construction and operating permits be obtained and that a new or I modified source will not result in the violation of the EPA's national air quality standards or its regulations j for the prevention of significant deterioration of air quality. Because of the latter, future construction or modification of fossil-fired generating units may be hindered or precluded in UI's service area, depending on pollutant levels over which the Company has no control.
l The Company's generating stations in the cities of Bridgeport and New flaven comply with the air
! quality and emission performance standards adopted by those cities.
A Connecticut statute prohibits the commencement of construction or reconstruction of electric generation or transmission facilities without a certificate of environmental compatibility and public need from the Power Facility Evaluation Council (PFEC). The PFEC has pending a proceeding to weigh the various factors which bear on the feasibility and costs of the undergrounding of some or all overhead transmission and distribution lines in Connecticut. If all or a significant part of the transmission and distribution lines of the Company were required to be installed underground, substantial additional costs would have to be incurred by the Company with respect to proposed or existing lines. No significant action was taken in this proceeding in 1980 and it is not presently knuvn when it will be concluded.
In complying with the foregoing environmental regulations and further developments in these and n,
y other areas of regulation, the Company expects to incur substantial capital expenditures for equipment modifications and additions, monitoring equipment and recording devices and to incur additional 13
operating expenses. The total amount of these expenditures is not now determinable. The requirements in these areas may also cause substantial delays in the completion of new facilities, such as the four nuclear generating units in which the Company has an interest.
s NUCLFAE LICENSING PROCEEDINGS Nuclear generating units are subject to the licensing requirements of the Nuclear Pegulatory Commission (NRC) under the Atomic Energy Act of 1954, as amended, and a variety of other state and federal requirements. See " Franchises and Regulation" and " Environmental Regulation" NRC construction permits for Seabrook Unit Nos. I and 2 were issued in 1976, and these units are presently under construction. The licensing of these units has been plagued by lengthy delays and has been consistently opposed by a number of intervening groups, which ha e participated actively in administrative proceedings, filed numerous lawsuits and uemonstrated at the construction site. Construc-tion of the units was suspended in 1977 and 1978 for periods of seven months and t!'ree weeks, respectively, as a result of administrative proceedings and court appeals, three of which are still pending.
The NRC,in its 1976 decision affirming the ruling of the Atomic Safety and Licensing Appeal Board (the Appeal Board) approving the issuance of construction permits for the Seabrook units by the NRC Atomic Safety and Licensing Evard, postponed a final decision on the seismic issue pending receipt of the opinion of the dissenting member of the Appeal Board on that issue. The dissenting member issued his opinion in August 1979, and the Appeal Board issued a responsive sumlemental decision in September 1979. One intervenor filed a petition for review of this decision, mid in September 1980 the NPC remanded the issue to the Appeal Board for a further limited evider.tiary hearing. The Company cannat predict the outcome of this hearing.
There is pending before the United States Court of Appeals for the First Circuit, in New England Coalition on Nuclear Pollution vs. Nuclear Regulatory Commission and United States Of America ( No. 76-75), an appeal filed in November 1976 by intervenors challenging the NRC's refusal in 1976 to suspend the Seabrook coumction permits despite a court decision (later reversed) in a lawsuit not involving Seabrook which set aside the NRC's rule with respect to the environmental effects of reprocessing spent nuclear fuel and disposing of nuclear waste. In addition to the named parties, Public Service Company of New Hampshire has intervened as a party to this appeal. The NRC has since promulgated a new rule regarding the consideration of these environmental effects. An appeal of the new rule is pending in the United States Court of Appeals for the District of Columbia. Th: Company believes that the environmental effects of the fuel cycle, determined in accordance with the new rule, are too small to affect the environmental cost-benefit evaluation of the Seabrook project.
The NRC construction permit proceedings on Pilgrim Unit No. 2 have been indefinitely ddayed.
Costs incurred to date for this unit have consisted er site acquisition expenditures, engineering and design costs and payments under machincry and equioment contracts. This unit is being opposed by various governmental bodies and private parties, several of whom have been participating actively in the construction permit proceedings. The EPA has approved the use of a once-through cooling water system for this unit.
A construction permit for Millstone Unit No. 3 was issued by the NRC in August 1974 and the unit is i presently under construction, although its in-service date has been delayed from 1982 to 1986. The EPA has approved the use of a once-through cooling water system for this unit, but the approval is subject to revision.
In view of the various uncertainties, including existing and possible interventions and appeals in these licensing proceedings, the Company is unabic to predict whether the necessary authorizations for the construction and operation of the four nuclear units can be obtained and maintained on a satisfactory basis. See " Construction T ogram" In addition to the individual safety reviews which are conducted by the NRC of each nuclear '
generating unit in connection with construction permit and operating license applications, the NRC may 14
L require modifications in units waich already h.sve a construction permit or operating license, or in the fuel for such units. After the 1979 acciden at the Three Mile Island Nuclear Unit No. 2, in Pennsylvania, (TMI) rigorous reexaminations of nud:ar plant construction and operations have been undertaken by governmental commissions, industry groups and individual utilities The NRC has promulgated numerous requirements in response to TMI, and other initiatives have resulte.1 from the industry's own examinations. ,
Based upon engineering reviews and plan, modificatbns completed to date, it is anticipated that modifications to Seabrook Unit Nos. I and 2, Millstone Unit No. 3 and the Connecticut Yankee unit will be made and that the capital costs of such units will be increased by approximately $2,000,000, $1,500,000 and $8,000,000, respectively. Such modifications are expected to increase the capital costs of Pilgrim Unit No 2 by an amount which has not yet been determined, but which may be substantial. Where modifications of nuclear facilities or operating procedures are required, delays in construction and costly modifications of planned and operating units may result, and it may sometimes be necessary to suspend
, the operation of a particular unit, or to reduce the level of its operation, until the modifications can be etTected.
EMPLOYEES As of December 31,1980, the Company had 1,481 employees. Of these, approximately two-thirds had been with the Company for 10 or more years. During the past 14 years there has been no work stoppage due to labor disagreements, and employee relations are cons.Jered satisfactory by the Company.
Approximately 880 of the Company's operating, maintenance and clerical employees are represented by Local 470-471. Utility Workers Union of America, AFL-CIO for collective bargaining purposes. The Company's current contract with the Union expires on September 15,1982.
Item 2. Properties GENERATING FACILITIES The present electric generating capability of the Company (the maximum dependable net load-carrying ability during the winter period for New England Power Pool purposes) is as follows:
Nee Yearof Capability Station Installation (kilowatts)
Bridgeport liarbor Station, Bridgeport.. .. 1957-1968 686,700 New flaven liarborStation New flaven.. 1975 418,860(I)
English Station, New liaven . . . . . 1929-1953 75,000 Steel Point Station, Bridgeport.-. 1923-1950 63,700 Conne:ticut Yankee Unit,11addam Neck.. 1968 55,100(2)
Total . .. 1,299,360 (l) UI's 93.705% ownership share of total net capability. This unit is jointly owned by UI (93.703%), Fitchburg Gas and Electric Light Company
, (4.5%) and the electric departments of three Massachusetts municipalities
( l.795%).
(2) Represents UI's entitlement in the unit. (See item 1. " Financing Problems".)
Public Service Company of New flampshire is constructing two 1,150,000 kilowatt nuclear generating units in Seabrook, New llampshire (Seabrook Unit Nos. I and 2 ) presently scheduled for initial operation in 1983 and 1985, respectively. Boston Edison Company proposes to construct a 1,150,000 kilowatt nuclear generating unit in Plymouth, Massachusetts (Pilgrim Unit No. 2) presently planned for initial operation in 1987. i'he Connecticut Light and Power Company, The liartford Electric Light Compar.y O and Western Massachusetts Electric Company are constructing a 1,150,000 kilowatt nuclear generating 15
unit in Waterford, Connecticut ( Millstone Unit No. 3) presently scheduled fi>r initial operation in 1986.
Ihe Company is an ow ner-participant in each of these units, ow ning 17.5'; of each of Seabrook Unit Nos.
I and 2, 3.3"l, of Pilgnm Unit No. 2 and 3.685'1 of Millstone Unit No. 3, and will be entitled to a percentage of the generating capability of each unit eqi al to such ownership percentage. It has been the experience of the electne utility industry that the construction and initial operation of nuclear generating units are subject to increasingly stringent licensing requirements. 'Ihese licensing requirements and other factors have tended to delay completion dates fi>r, and increase substantially the costs of, new nuclear generating units. 'Ihe level of operation of nuclear umts is also subjemt to various licensing requirements and restrictions, and substantial costs may be incurred in decommissioning these units at the conclusion of their service lives. Depreciation provisions for these units normally include an e!cment for recovery, to the extent permitted by regulatory rate-setting bodies. of the estimated decommissioning costs over the service hves of the units. See item 1. " Construction "rogram", " Financing Problems", " Franchises and Regulation"," Environmental llegulation" and "Nuacar Licensing Proceedings" During 1980, the peak load on the Company's system was approximately 971 megawatts, which occurred in July. UI's generating capability at that time was 1,299 megawatts. The Company is currently fi> recasting annual growth in its peak load in the range of 0.3rl, to 2.7"l4 during the period 1981 to 1990.
Ilased on current forecasts of loads, UI's generating capability will exceed its projected capability responsibility to the New England Power Pool through at least 1995. If, due to the recent sale of a portion ofits ow nership share of Seabrook Unit Nos. I and 2 or to the cancellation of or an extended delay in the completion date Ibr one or more of the four future nuclear generating units in which it is participating, UI's ow n generating capability becomes inadequate to meet its load gmwth and its capability responsibility to the New England Power Pool, UI intends to purchase capacity from other utilities as necessary. Ilowever, because the generation and transmission systems of the major New England utilities, including Ul, are operated as if they were a single system, the ability of UI to meet its load is and will be dependent on the ability of New England's utilities to meet the region's load. At the time of the most recent NEPOOL winter peak in January of 19S1, the New England utilities had approximately 21,212 megawatts of generating capacity to meet the New England peak load of approximately 15,502 megawatts. See Item 1.
- Arrangements with Other Utilities" TRANSMISSION AND DISTRillUTION Pl. ANT The transmission lines of the Company consist of approximately 95 circuit miles of overhead lines and approximately 14 circuit miles of underground lines, all operated at 345KV or ll5KV and located within or immediately adjacent to the territory served by the Company. 'Ihese transmission lines interconnect the Company's English, Steel Poira, Bridgeport liarbor and New Haven liarbor generating stations with the transmission lines of'Ihe Connecticut Light and Power Company at iI locations. A major porwn of the Comp tny's transmission lines is constructed on a railroad right-of-way pursuant to a Transmission Line Agreement which expires in May 2000.
The Company owns and operates 2 I bulk electne supply substations with a capacity of approximately 2,293,000 KVA and 76 distribution substations with a capacity of approximately 534,000 KVA. The Company has approximately 2.950 pole-line miles of overhead distnbution lines and approximately 125 conduit-bank miles of underground distribution lines.
See also item 1. " Construction Pmgram" concerning additions to the Company's transmission and distribution facilities.
Item 3. Legal Proceedings See item 1. " Nuclear Licensing Proceedings" concerning pending legal proceedings involving the future generating units in which the Company is participating.
A dispute as to the intent or entbreeability of a uranium contract Ibr Seabrook Unit Nos. I and 2 has resuhed in the supplier instituting litigation against the owners of the Seabrook units, including the Company, lbr alleged breath of contract ( alleging damages of about $5,000,000) and unlawful restraint of 16
trade (seeking treble damages). A counterclaim and a separate action have been filed against the supplier based upon its wrongful influencing of the market price. The Company cannot predict the outcome of this v litigation.
Item 4. Security ownership of Certain Reneficial Owners and Management No person is known to the Company to be the beneficial owner of more than five percent of the Company's voting stock, nor is there any arrangement known to the Company, the operation of which may at a date subsequent to the date of this report result in a change in control of the Company.
EQUITY SECURITIES OF TIIE COMPANY OWNED BY MANAGEMENT Percent of the 7,681.670 Shares of Common Stock Outstanding Shares of Common As of February 23,1981 Name of Director or Stock of the Compsny Number of Persons in Benefidally Oaned Sole Voting and Shared Voting and Group Directly or Indirectly i Intestment Powers 2 Insestment Powers 3 Angus N. Gordon, Jr. 6,900 0.087 % 0.003 %
John D. Fassett._ 4,800 0.062 -
D. Allan Bromley . 148 -
0.002 John M.C. Betts - 1,347 0.018 -
Norwick R.Goodspeed- 200 0.003 -
Robert D. Russo, M.D. 158 0.002 -
James F. Cobey, Jr. 158 -
0.002 Leland W. Miles. 10 0.0001 -
Leon A. Morgan 477 0.001 0.005 (g/
Frederick J. Mancheski Geraldine W. Johnson..
200 125 0.003 0.002 24 Directors and Officers as a group, including those named above. 19,076 0.197 0.050
( 1 ) Based on reports furnished by the directors and officers as to shares of Common Stock beneficially owned as of February 23,1981. The shares include, in some instances, shares held by spouses, minor children, trusts or relatives living in the same homes as the directors and officers, the reporting of which is not to be construed as an admission of beneficial ownership.
(2) Shares as to which sole voting and investment powers are held by the named individual or the persons in the group.
(3) Shares as to which voting and investment powers are shared by the named individuals or the persons in the group with spouses and other persons.
An officer of the Company owns 800 shares of the Company's 8.80% Preferred Stock,1976 Series, 0.133% of this class of the Company's Preferred Stock. The Company has been advised that no other officer or director beneficially owns directly or indirectly any shares of any class of the Preferred Stock or Preference Stock of the Company.
O 17
EXECUTIVE OFFICERS OF TIIE COMPANY The names and ages of all executive omeers of the Company and all persons chosen to become executive officers, all position; and offices with the Company held by each such person, and the period during which he has served as an officer in the office indicated, are as follows:
Positions and Period of Name Age Offices IIeld Senice in Office John D. Fassett . 55 Chairman of the Board of Directors and Chief January 1,1981 Executive Officer to date James F. Cobey, Jr.. 54 President January 1,1981 to date Leon A. Morgan.. 46 Executive Vice President-Operations, Engineer. February 1,1976 ing and Customer Services to date Charles W. Cook, Jr.. 49 Vice President-Customer Services February 6,1975 to date Robert L. Fiscus.. 43 Vice President-Finance and Accounting January 1,1981 to date John V. Fratus, Jr.. 57 Senior Vice President-Governmental Relations January 1,1978 to date Richard J. Grossi.. 45 Vice President-Engineering and Planning June 15,1974 to date Albert liarary. 43 Vice President-Management Services January 1,1978 to date David W. Iloskir. son.. 45 Vice President-Operations February 1,1976 to date Marcus R. McCraven.. 57 Vice President-Environmental Engineering January 1,1978 to date liarold J. Moore, Jr.. 53 Vice President-Employee Relations January 1,1980 to date Anne G. Spinney. 59 Vice President-Communications April 20,1977 to date Earle G. Anderson . 64 Assistant Vice President-Governmental February 23,1976 Relations to date James L. Benjamin.. 39 Controller January 1,1981 to date William A. Elder.. 39 Treasurer January 1,1981 to date Richard F. Skinner.. 51 Secretary February 1,1975 to date There is no family relationship between any director, executive officer, oc person nominated or chosen to become a director or executive officer, of the Company. All executive officers of the Company hold office during :he pleasure of the Company's Board of Directors. There is no arrangement or understanding between any executive officer of the Company and any other person pursuant to which such officer was selected as an officer.
A brief account of the business experience during the past five years of each executive officer of the Company is as follows:
John D. Fassett. During the period December 31,1975 to January 1,1981, Mr. Fassett served as President of the Company. He has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since January 1,1981.
James F. Cobey, Jr. During the period January 1,1976 to October 1,1976, Mr. Cobey served as Vice President-Finance and Accounting and Treasurer of the Company. From October 1,1976 to January 1, 18
1981, he served as Executive Vice President-Finance and Administration and Treasurer of the Company.
l (7
\ )
lie has served as President of the Company since January 1,1981.
V Leon <f. Aforgan. During the period January 1,1976 to February 1,1976, Str. Morgan served as Vice President-Operations of the Company. lie has served as Executive Vice President-Operations, Engineering and Customer Services of the Company since February 1,1976.
Char /cs ir. CooA,Jr. Alr. Cook has served as Vice President-Customer Services of the Company .;ince February 6,1975.
Robert L Fiscus. During the period January I,1976 to October 1,1976, Mr. Fiscus served as Controller of the Company. From October I,1976 to January 1,1981, he served as Vice President and l Controller of the Company. lie has served as Vice President-Finance and Accounting of the Company since January I,1981.
John F. Fratur Jr. During the period January 1,1976 to October I,1976, Nir. Fratus served as Vice President-Emploge Relations of the Company. From October 1,1976 to January 1,1978, he served as Vice President-Governmental Relations of the Company. lie has served as Senior Vice President-Governmental Relations of the Company since January 1,1978.
RichardJ. Groni. N1r. Grossi has served as Vice President-Engineering and Planning of the Company since June 15,1974.
<f /bert //arary. During the period January 1,1976 to February 1,1976, Mr. Harary served as Director of Management Information Systems of the Company. From February 1,1976 to January 1,1978, he served as Assistant Vice President-Computer Services of the Company. Ile has served as Vice President-Management Services of the Company since January 1,1978.
Darid IV. //mAinwn. During the period January 1,1976 to February I,1976, Mr. Iloskinson served as Superintendent, Steel Point Generating Station, of the Company. Ile has served as Vice President-Operations of the Company since Febre ry 1,1976.
[)
V Afarcut R. AlcCraren. During he period January 1,1976 to February 1,1976, Mr. McCraven served as Director of Environmental Engineering of the Company. From February 1,1976 to January 1,1978, he served as Assistant Vice President-Environmental Engineering of the Company. lie has served as Vice Pre > dent-Environmental Engineering of the Company since January I,1978.
//arold J. Afoore, Jr. During the period January 1,1976 to October I,1976, Mr. Moore served as Labor Relations Manager of the Company. From October 1,1976 to January 1,1978, he served as Director of Employee Relations of the Company. From January 1,1978 to January 1,1980, he served as Assistant Vice President-Employee Relations of the Company. Ile has served as Vice President-Employee Relations of the Company since January I,1980.
<tnne G. Spinmy. During the period January 1,1976 to February I,1976, Mrs. Spinney served as Director ofInformation Services of the Company. From February 1,1976 to April 20,1977, she served as Assistant Vice President-Communications of the Company. She has served as Vice President-Communications of the Company since April 20,1977.
Earle G. <fnderson. During the period January 1,1976 to February 23,1976, Mr. Anderson served as Assistant Vice President-Community Affairs of the Company. lie has served as Assistant Vice President-Governmental Relations (formerly Governmeatal Services) of the Company since February 23,1976.
James L Benjamin. During the period January 1,1976 to February 1,19/6, Mr. Benjamin served as Accounting Manager of the Company. From February 1,1976 to January I,1981, he served as Assistant Controller of the Company. lie has served as Comroller of the Company since January 1,1981.
Irilliam <f. Elder. During the period January 1,1976 to February 1,1976, Mr. Elder served as Manager-Financial Planning and Cash Management of the Company. From February 1,1976 to January 1,1981, he served as Assistant Treasurer of the Company. He has served as Treasurer of the Company since January 1,1981.
Richard F. Skinner. Mr. Skinner has served as Secretary of the Company since February 1,1975.
v}
19
PART II Item 5. Afarket for the C<mupany's Common Stock and Related Security Holder 3fatters UI's Common Stock is traded on the New York Stock Exchange, where the high and low sale prices during 1980 and 1979 were as follows:
19M0 High 19M0 low 1979 Iligh 1979 low Sale Price Sale Price Sale Price Sale Price First Quarter.. 23% 17 % 24h 23 Second Quarter.. 22 % 17% 23 % 21h Third Quarter. 22% 19 % 25% 23 Fourth Quarter . 21 17 23h 20%
UI has paid quarterly dividends on its Common Stock since 1900. The first three 1979 quarterly dividends were paid at the rate of c4c per share. Commencing with the dividend paid October 1,1979, quarterly dividends have been paid at the rate of 67c per share.
The Trust Indenture under w hich all of the Company's Debentures are issued places limitations on the payment of cash dividends on the Common Stock of the Company and on the amounts th.it can be expended to purchase or redeem shares of Common Stock. Under the most restrictive provision of the Trust Indenture, retained earnings in the amount of $46,665,026 were free from such limitations at December 31,1980. Under the terms of a proposed issue of Debentures which the Company plans to issue in May of 1981, $40,000,000 of retained earnings would have been free from such limitations at December 31,1980.
As of January 31,1981, there were 36,412 Common Stock shareowners of record.
Item 6. Selected Financial Data 19M0 1979 197N 1977 1976 Operating revenues ( 000 ) . $ 364.122 $ 281,878 $ 216,315 $ 219,503 $ 193,820
$ 34,466 $ 29,668 $ 21,477 $ 23,658 $ 18,562 Net income ( 000 ) .
Preferred and Preference dividends (000).. $ 9,296 $ 5,744 $ 4,751 $ 4,751 $ 3,717 Income applicable to Common Stock (000). $ 25,170 $ 23,924 $ 16,726 $ 18,907 $ 14,845 Earnings per share of Common Stock.. $ 3.56 $ 3.94 $ 3.06 $ 3.77 $ 2.97 Cash dividends declared per share of Com-mon Stock.. $ 2.68 $ 2.62 $ 2.56 $ 2.47 $ 2.35 Average number of Common shares out-standing . 7,061,241 6,072,725 5,458,428 5,012,122 4,999,514 Total assets at year-end (000) . $ 739,027 5 666,387 $ 575,110 $ 515,037 5 482,459 Long-term debt (000 ) . $ 295.581 $ 251,977 $ 233,953 $ 241,931 $ 216,908 Preferred and Preference Stock subject to mandatory redemption (000 ) . $ 45,000 $ 15,000 - - -
Item 7. Afanagement's Discussion and Analysis of Financial Condition and Results of Operations MA. LOR INFl.UENCES ON FINANCIAL CONDITION in recent years and particularly over the last two years, the financial condition of the Company has been affected by two interrelated factors-a heavy dependence on expensive foreign oil as a source of fuel to generate electricity and a large construction program to meet the objective of reducing the economic burden and reliability risks of this undue reliance on oil-fired generation.
Approu ely 92% of the electricity consumed by the Company's customers is produced by burning imported residual fuel oil. The price of this oil has escalated from just under $13 per barrel at the beginning of 1978 to almost $34 per barrel at the end of 1980. Although there is a fossil fuel adjustment clause in all of the Company's rates, there are three primary adverse impacts of oil price increases that are not covered by the adjustment clause. Firs:, there is a time lag in the operation of the fuel clause-changes in fuel costs are not reflected in customer billings until two months after the costs have been incurred; second, the requirement that the Company pay to the State of Connecticut a tax of 5% on all revenues, including those resulting from increased fuel costs; and third, the cost of financing higher oil purchases.
20
The Company's financial condition is sensitive to all of these factors, but only the last two factors influence Ci V
results of operation since the etTect of the two month billing lag in the fuel adjustment clause is deferred for accounting purposes, pending regulatory approval of an amortization schedule.
Total construction program expenditures ror the years 1978-1980 were $256 million, including allowance for funds used during construction ofiS1 million. The major portion of these expenditures was required for participation in the construction of four future nuclear generating units: Seabrook Units I and 2 in Seabrook, New liampshire, Millstone Unit 3 in Waterford, Connecticut and Pilgrim Unit 2 in Plymouth, Massachusetts. The Company currently owns 17.5% of each of the Seabrook un.ts,3.685% of the Millstone unit and 3.3% of the Pilgrim unit.
The Company has been experiencing difliculty in maintaining adequate cash flow and financ ng this construction program. It has been the pnctice of the Company to finance current construction expenditures in excess of available internally generated funds from the proceeds of short-term borrowings, to be repaid through the sale of common, preferred and preference stocks and debentures. In recent years, internally generated funds have provided varying percentages of the Company's construction program requirements, and the Company has been dependent on outside financing to provide a major portion of such capital requirements. Internally generated funds provided an average of approximately 45% of such expenditures during the period 1975-1977; however, these funds provided only 17%,18% and 3% during 1978,1979 and 1980, respectively. The decline since 1977 in the percentage of construction expenditures provided by internally generated funds reflects increased construction work cn Seabrook Units 1 and 2, increased costs related to the financing of Seabrook construction expenditures and inadequate rate relief.
The latter has resulted in low internal cash generation due primarily to practices followed by the Connecticut Department of Public Utility Control (DPUC) and its predecessor agencies of flowing-through, as a reduction of current revenue levels, the income tax benefits associated with construction programs and accelerated depreciation and of allowing insufficient returns on common stock equity.
RESUI.TS OF OPERATIONS
() Income applicable to common stock in 1978 was severely depressed because rate levels were insutlicient to cover inflationary increases in non-fuel operating expenses. A $17.9 million annual rate increase effective January 10 substantially improved 1979 earnings. Ilowever, as the year 1979 progressed, earnings and cash flow were adversely affected by sharp escalation in residual oil prices, rising interest rates, declining kilowatt-hour sales and inflation in non-fuel operating expenses. These same fcctors adversely affected 1980 income applicable to common stock to the point where it would have been below 1979 had it not been for the adoption of the practice of compounding the allowance for funds used during construction, which added $4.2 million, or 59e per share, to the allowance. A rate increase, effective April 25,1980, which provided for recovery of the state tax on the increased level of revenues resulting from prior oil price increases, avoided further deterioration of earnings, to the extent that recovery of the added tax was provided.
On a per share basis, earnings for 1978,1979 and 1980 were moderated by increasingly higher average shares outstanding due to sales of common stock in 1978 and 1980.
The proportion of earnings applicable to common stock represented by the non-cash credit for allowance for funds used during construction increased from 49% in 1978 to 65% in 1979 and to 109% in 1980. These pncentages reflect the build-up of construction costs an the nuclear units, the increased costs of financing construction of the units and, for 1980, the effect of compounding the allowance.
Interest on debentures and dividends on preferred and preference stock are up substantially since 1978 due to sales of securities necessary to finance the Company's construction program. The soaring cost of these recent issues has raised the average embedded cost rates for debentures and preferred and preference stock from 7.3% and 6.9%, respectively, as of December 31,1977, to 8.5% and 9.8% as of December 31,1980. Other interest charges were likewise much higher in 1979 and 1980 than in previous years, due mainly to increased levels of short-term borrowings and higher short-term interest rates.
(p a
l Rates of growth in kilowatt-hour sales were 2.6% in 197 1.5% in 1979 and a negative 1.4% in 1980.
The 1980 sales decrease was mainly the result of a declite m inual activity due to depressed economic 21
conditions. Operating revenues were not significantly influenced by these changes in sales volume, but revenues did increase substantially in 1979 and 1980 due to the impact of higher residual fuel oil prices through the operation of the fuel adjustment clause. In addition, rate increases effective in 1979 and 1980 added about $18.2 million and $14.5 million to operating revenues for the respective years.
Fuel and interchange energy expense more than doubled from 1978 to 1980 as the average cost of oil burned per kilowatt-hour generated went from 2.15e in 1978, to 3.33c in 1979 and to 4.91c in 1980.
Capacity purchased expense also increased significantly during this period due to increased operating and capital costs at the Connecticut Yankee nuclear unit. Other operation and maintenance expenses increased, due principally to labor cost increases and continuing high general inflation. Other taxes rose sharply due mainly to higher state gross earnings taxes attributable to increased revenues and due to increased local property taxes Income tax expense for the years 1978-1980 was influenced both by levels of taxable income and by changes in etrective tax rates, retlecting the flow-through income tax practices followed by the DPUC and its predecessor agencies.
FINANCING The combination of factors discussed in the preceding sections led to particularly acute financing problems during the latter part of 1979 and the first half of 1980. Earlier in 1979, as a result of rate relief inadequate to finance a then 20% interest in the Seabrook nuclear generating units, the Company negotiated agreements to sell 3.6% ofits interest. In June a revolving credit agreement of S75 million was arranged with several banks in order to support carrying a 20% interest in the Seabrook project untd proceeds from these planned sales were received. But delays m these sales and rapidly rising oil price.,
which resulted in negative cash flow over the last half of 1979, caused short-term borrowings to increase dramatically. In addition, short-term interest rates increased sharply.
As a result, the interest coverage ratio in the Company's Trust Indenture, which applies to both long-and short-term borrowings, had declined by October to the point where no further unsubordinated short-term borrowings were permitted. At this stage, the Company entered into a $20 million revolving subordinated credit agreement at a premium interest cost over prime rate. The original termination date of this agreement was Alarch 28,1980. During December 1979 and January 1980, the Company sold, via a split closing, $30 million of 11% debentures, the private sale of which had been negotiated in September 1979. As of December 31, 1979, short-term borrowings amounted to over $81 million at an average interest rate of nearly 15%.
In early 1980, the situation worsened due to further escalatten in fuel oil prices and interest rates and continued delays in the Seabrook sales. On January 24, 1980, the Company applied to the DPUC for expedited rate relief, limited a recovering two adverse impacts ofincreased oil prices, specifically the two-month delay in billing increased fuel oil costs to customers through the fuel adjustment clause (deferred fuel costs) and the 5% gross earnings tax on added revenues. An extension in the revolving subordinated credit agreement to July 31,1980 and an increase to $30 million were negotiated in February. In order to replace borrowings under this agreement, which had reached $22.3 million by the end of February, the Company scheduled a sale of 800,000 shares of common stock for early March. However, due to poor market conditions, only 500,000 shares could be sold, providing proceeds of less than $10 million.
Consequently, subord nated borrowings were still at a level of $21 inillion at the end of March. In view of the borrowir g limitations under the credit agreement and the absolute limitation ofless than $40 million in subordinated borrowings imposed by the Trust Indenture, and since earnings coverage under the Company's Preferred Stock provisions was insufficient to issue additional pre %rred stock, a sale of preference stock, a junior form of preferred stock that has no coverage requirement for issuance, was scheduled.
In April, prior to issuance of the preference stock, the major security rating agencies reduced the ratings on all of the Company's outstanding securities and on its commercial paper. Nevertheless, late in April, the Company was able to sell $30 million of preference stock, albeit at a dividend rate of 15.88%,
permitting climination of all outstanding subordinated borrowings. Meanwhile, the decision in March 1980 by Public Service Company of New Hampshire, the lead participant in the Seabrook project, to slow 22
down construction on the project due to financial problems resulted in an approximate $25 million reduction in the Company's financing requirements for the year. During the spring and early summer of Q 1980, downturns occurred in fuel oil prices and interest rates, from all-time highs earlier in the year, $17.6 million of the rate relief requested in January became effective on April 25, and the Company's long-term financing program for the year was successfully completed. A second 1980 sale of common stock, one million shares with net proceeds of $21 million, in late June and the sale of $40 million of 13%%
debentures in mid-July concluded in excess of $100 million oflong-term financing during 1980. In view of these favorable developments, the Company allowed the revolving subordinated credit agreement to expire on July 31,1980. Consummation of the sale of a 2%% ownership interest in the Seabrook project to Central Maine Power Company on October 20, 1980 provided funds of $30.8 million and permitted elimination of all outstanding short-term borrowings.
On December 8,1980, the DPUC granted the Company an annual revenue increase of $35.9 million, etrective December 17, in response to the Company's general rate relief application filed July 3,1980 requesting an increase in annual revenues of $50.5 million. A number of positive steps were adopted in the decision including approval of income tax normalization accounting (reversing flow-through practices used previously), amortization of estimated deferred fi>ssil fuel costs over a one year period and an increase in the allowed return on common equity from 13.3% to 15.1%. All of these changes will have the effect ofimproving the Company's cash flow. In addition, the DPUC agreed with the Company's use of an altered target capital structure fi>r rate-making purposes, reducing long-term debt from 50% to 45% of total capitalization, increasing common stock equity from 35% to 40%, and leaving preferred and preference stock nchanged at 15%. The etreet of this change will be greater financing flexibility through improved coverage ratios and net income.
OUTI.OOK By the beginning of 1981, there was a marked improvement from the circumstances which had existed a year earlier. Short-term borrowings have been significantly reduced and coverage ratios have improved
/ i sufficiently to permit financing flexibility. Although the accounting and capital structure changes approved V in the latest rate decision combined with a reduction in the Company's ownership interest in the Seabrook project will improve the quality of the Company's earnings and the relationship ofits internally generated funds to construction requirements, the positive etrects of these changes are likely to be offset in 1981 by continued escalation in fuel oil prices, high financing costs and inflation in other operation expenses. In any event, the Company presently anticipates that it will be necessary to rely on external sources for a substantial portion of the capital required to finance its construction program and refund maturing securities through 1986. Construction expenditures for 1981-1986 are presently estimated at $390 million, excluding allowance for funds used during construction. An additional $47.7 million will be required over this period fi>r the refunding of maturing debentures and redemption of preferred and preference stock, including $8 million of 27s% debentures in 1981 and $9 million of 3% debentures in 1984.
Construction estimates are based upon in-service dates of 1984 for Seabrook Unit I, 1986 fi>r Seabrook Unit 2 and Millstone Unit 3 and 1987 for the Pilgrim unit and do not include any provision for possible conversion of the Company's Bri dgeport Harbor Unit 3 from an oil- to a coal-burning operation.
Delays in these estimated in-service dates or expenditures for coal ceaversion could substantially increase aggregate construction expenditures and capital requirements.
The success of the Company's financing plan is dependent upon a number of factors, including conditiens in the securities market, economic conditions. the level of the Company's sales and the ability to obtain adequate and timely rate relief. Due to the continued escalation of residual fuel oil prices, which reached nearly $39 per barrel in early February 1981, high financing costs and inflation in other operating expenses, the Company anticipates a need fi>r additional rate relief in 1981. Continuation of these intiationary trends will requ:re periodic rate relief after 1981.
INFLATION For further discussion of the etTects of changing prices on the Company, see Supplementary
) Infiirmation/ Inflation.
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Item 8.17nancialStatements and Supplementary Data TIIE UNITED ll.l.UMINATING COMPANY STAIEN1ENT OF INCONIE For the Years Ended December 31,1980,1979 and 1978 /
19M0 1979 1978 Operating Revenues ( Note A) . $364,122,155 $281,878,498 $216,315,343 Operating Expenses Operation Fuel and interchange energy-net . 209,179,176 141,705,907 96,212,765 Capacity purchased-net.. 5,275,628 4,712,937 2,632,819 Other.. 43,222,452 37,472,089 33,460,139 Maintenance.. 14,098,606 13,301,260 12,765,167 Depreciation.. 15,969,000 14,614,000 14,030,000 Amortization of deferred fossil fuel costs.. 7,541,071 200,972 2,124,870 Income taxes, current ( Note 11) . (51,052) 82,751 213,970 Income taxes, deferred ( Note B) . (561,142) 5,085,355 (965,253)
Deferred investment tax credits-net ( Note 11).. 225,058 (205,040) 587,439 Other taxes . 32,967,294 26,593,421 22,063,690 Total .. 327,866,091 243,568,652 183,124,606 Operating Income.. 36,256,064 38,309.846 33,190,737 Other Income and Deductions Allowarve for equity funds used during construc-tion.. 13,007,163 4,574,700 3,396,839 Other-net.. 709,393 1,102,018 739,729 Total . 13,716,556 5,676,718 4,136,568 Income Before Interest Charges.. 49,972,620 43,986,564 37,327,305 Interest Charges Interest on debentures.. 22,391,222 17,300,667 17,266,666 Other Interest . 7,664,025 7,943,981 3,453,972 Allowance for borrowed funds used during con-struction . g4.548,440 ) (10,925.831) (4,871,127)
Total . 15,506,807 11,318,817 15,849,511 1
Net income . 34,465,813 29,667,747 21,477,794 l Dividends on Preferred and Preference Stock . 9,296,129 5,743,720 4,751,376 l
l Income Applicable to Common Stock . $ 25,169,684 $ 23,924,027 $ 16,726,418 Average Number of Common Shares Outstanding . 7,061,241 6,072,725 5,458,428 Earnings per Share of Common Stock.. $3.56 $3.94 $3.06 The accompanying Statement of Accounting Policies and Notes to Financial Statements are integral parts of the financial statements.
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TIIE UNITED ILI.UMINATING COMPANY STATEMENT OF SOURCES OF FUNDS FOR GROSS PROPERIT ADDITIONS For the Years Ended December 31,1980,1979 and 1978 1980 1979 1978 SuuRcts Or FUNDS Internally Generated Net income.. $ 34,465,813 $ 29,667,747 $21,477,794 Add (deduct )
Depreciation and amortization.. 23,711,617 14,984,255 16,319,582 Deferred income taxes on deferred fossil fuel costs, accelerated amortization and other.. (358,735) 5,319,722 (731,886)
Deferred investment tax credits-net.. 225,058 (205,040) 587,439 Allowance for funds used during construction.. (27,555,603) (15,500,531) (8,267,966)
Funds provided from oper.itions . 30,488,150 34,266,153 29,384,963 Deduct dividends declared. 28,260,648 21,707,886 18,924,672 Internally Generated Funds.. 2,227,502 12.558,267 10,460,291 External Financing Securities sold (retired)
Comman stock. 32,225,591 1,011,021 26,109,433 Preferred and preference stock.. 30,000,000 15,000,000 -
Debentures, net of $4,000,000 retired in 1980 V and 1979 - 44,000,000 18,000,000 (8,000,000)
Expenses ofissues.. (2,465,252) (353,970) (245,709) 103,760,339 33,o57,051 17,863,724 Increase (decrease) in notes payable.. (62,392,01I) 32,503,784 40,540,037 Funds Ontained from External Financing. 41,368,328 66,160,835 58,403,761 Other Sources ( Uses)
Decrease (increase) in working capital, excluding actes payable and current portion of long-term debt -- 2,324,915 2,422,422 (5,614,215)
Deferral of fossil fuel costs.. (6,870,886) (10,646,534) (854,919)
Sale of a 2%% ownership share in Seabrook nucle-ar project.. . .. .. 30,780,293 - -
Dividend from Research Center,. Inc. 705,000 - -
Other changes in noncurrent balance sheet items.. 322,802 646,833 68,545 Other Sources ( Uses ) .. .. 27,262,124 (7,577,279) (6.400,589)-
Funds for Property Additions from Above Sources.. 70,857,954 71,141,823 62,463,463 Allowance for funds used during construction.. 27,555,603 15,500,531 8,267,966 gross PROPIRTY ADDITIONS.. $ 98,413,557 $ 86,642,354 $70,731,429 p The accompanying Statement of Accounting Policies and Notes to Financial Statements are integral parts of the financial statements.
{)
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Tile UNITED ll.1,UN11NATING COMPANY STAIEMEN T OF REl AINE D EARNINGS For the Years Ended December 31,1980,1979 and 1978 1980 1979 1978 Balance, January 1. $ 80,714,329 $ 72,754,468 $70.201,346 Net income . 34,465,813 29,667,747 '1,477.794 115.I 80,I42 102,422,215 91,679,140 Deduct Cash Dividends Declared Preferred and preference stock.. 9,481,396 5,796,949 4,751,376 Common stock-per share $2.68 for 1980, $2.62 for I979 and $2.56 for 1978.. I8.779,252 15,910,937 I4,173,296 28.260,648 21,707,886 18,924,672 Balance, December 31 ( Note F) . $ 86,919,494 $ 80,714,329 $72,754,468 The accompanying Statement of Accounting Policies and Notes to Financial Statements are integral parts of the financial statements.
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__._____,._.__________._____._,_,_.___.______.-.____,I
Tile UNITED ll.LUS11NATING CONIPANY {
HAl.ANCE SilFET December 31,1980 and 1979 I
ASSETS i i
I980 1979 Utility Plant at Original Cost in service. $548,072,588 $538,236,283 Less reserve for depreciation.. I88,260,370 173,500,399 359,812,218 364,735,884 Construction work in progress.. 281,922,456 226,295,280 641,734.674 591,031,164 Acquisition adjustments, less amortization.. 39,000 120,000 Net Utility Plant.. 641,773,674 591,151,164 Other Property and Investments Nonutility property, at cost . 202,008 214,157 Connecticut Yankee Atomic Power Company. 5,348,621 4,735,995 Research Center, Inc. (wholly owned subsidiary).. 1,943 687,687 Total.. 5,552,572 5,637,839 Current Assets Cash ( Note C).. 1,491,472 2,510,068 Accounts receivable Customers, less allowance for doubtful accounts of $875,000 and $865,000.. 33,752,071 28.10',482 ,
Other.. 15,285,986 4,783,279 )
Accrued utility revenues . 20,859,600 13,095,200 Fuel, materials and supplies, at average cost . 7,006,357 7,003,877 254,577 266.270 Prepayments . )
Total.. 78,650,063 55,966,176 Deferred De'eits Fossil fuel costs . I1,436,081 12 106,266 Other. 1,614,657 1,525,545 Total.. I3,050,738 13,631,8 l 1,
$739,027,047 $666,386,990 The accompanying Statement of Accounting Policies and Notes to Financial Statements are integral parts of the financial statements. l l
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, ,, TIIE UNITED ILLUMINATING COMPANY
, 3
) IIAIANCE SilEET December 31,1980 and 1979 C A PIT A LIZ ATION AN D LI A BILITIES 1980 19*9 Capitalization Common stock (Note D ). $139,708,9 I3 $107,483,322 Capital stock expense . (3,767,333) (1,871,358)
Retained earnings ( Note F) . 86,919,494 80,714,329 Common stock equity.. 222,861,074 186,326,293 Preferred stock not subject to mundatory redemption ( Note E) . 70,000,000 70,000,000 Preferred and preference stock subject to mandatory redemption (Note E) . 45,000,000 15,000,000 Long-term debt (Note G).. 283,581,091 247,976,299 Total.. o21,442,I65 519,302,592 Current Liabilities Current portion oflong-term debt . 12,000,000 4,000,000 Notes payable ( Note C) . 18,527,106 80,919,117 Accounts payable.. 39,429,410 20,229,15i Dividends payable.. . 7,853,320 3,610,632 Customers' deposits.. . 854,595 800,507 Taxes accrued . 16,127,112 13,018,633 703,070 905,477
[ Deferred income taxes-accrued utility revenues.
3,475,254 3,357,593
\m/ Interest accrued.. ..
Other accrued liabilities.. 7,229,658 6,741,624 Total.. 106,199,525 135,582,734 Customers' Advances for Construction - 782,950 712,049 Accumulated Deferred Investment Tax Credits (Note B).. 4,154,941 3,929,883 Deferred Income Taxes Deferred fossil fut I costs.. 5,834,466 6,189,732 Accelerated amortization.. .. 613,000 670,000 Commitments and Contingencies (Note K).. - -
$739,027,047 $666,386,990 The accompanying Statement of Accounting Policies and Notes to Financial Statements are integral parts of the financial statements.
,7 29
TIIE UNITED h JMINATING COMPANY SI ATDtENT OF A(TOlNilNG POI.lCIES Accounting Records The accounting records are maintained in accordance with the uniform systems of accounts prescribed by the Federal Energy Regulatory Commission ( FERC) and the Connecticut Department of Public Utility Control ( DPUC) and their predecessor agencies.
Utility Plant The cost of additions to utility plant and the cost of renewals and betterments are capitalized. Cost consists of labor, materials, services and certain indirect construction costs, including an allowance for funds used during construction. The cost of current repairs and minor replacements is charged to appropriate operating expense accounts. The original cost of utility plant retired or otherwise disposed of and the cost of removal less salvage are charged to tne reserve for depreciation.
Allowance for Funds Used During Construction In acecrdance with the pplicable regulatory systems of accounts, the Company capitalizes and credits to income an allowance for funds used during construction, which represents the approximate cost of debt and equity capital devoted to plant under construction. Although the allowance does not represent current cash income, it is reevered under the rate-makin. "ocess over the service lives of the related properties.
In accordance with FERC prescribed accounting portion of the allowance attributable to borrowed funds, on a before-tax basis, is presented in the s . s it ofincome as a reduction ofinterest charges.
The average rates used for computing the allowance were 8.3% for 1978,9.9% for 1979 and 11% for 1980. EtTect ve January 1,1980, as permitted by the FERC, the Company elected to compound semi-annually the :llowance applicable to major construction projects. The effect of such compounding was to increase t'.c allowance for 1980 by $4.2 million. Efrective January 1,1981, the Company began accounting for the borrowed funds portion of the aniowance on a net-of-tax basis, a change which was appraved by the DPUC in a December 1980 rate decision.
Depreciation Provisions for depreciation on utility plast for book purposes are computed on a straight-line, I average-life basis, giving effect to the reserve requirement and estimated service lives determined by independent engineers. One-half year's depreciatior. is taken in the year of addition and disposition of i utility plant, except in the case of major operatirg units on which depreciation commences in the month they are placed in service and ceases in the month they are removed from service. The aggregate annual provisions for depreciation for the years 1978,1979 and 1980 were equivalent to approximately 2.77%,
2.83% and 3.04%, respectively, of the original cost of depreciable property.
Income Taxes Provisions far income taxes have been reduced to reflect the timing benefits that result from the use of a rapid depreciation method, the use of shorter tax depreciation lives than those used for book purposes for certain plant, and the current deduction of certain capitalized construction costs consisting principally of pensions, taxes and the interest component of allowance for funds used during construction. In adJ.: ion, the provision for current federal income taxes is reduced by the allowable 4% investment tax credit under i the provisions of the Internal Revenue Code of 1954, as amended. The additional 6% investment tax credit allowable under the provisions of the Tax Reduction Act of 1975 is deferred and amortized to l income ratably over the usefullives of the related properties. The Company has elected to take investment ]
tax credit applicable to long-term projects on a progress-of-construction basis, which accounts for the major portion af credits generated. The treatment of these items is appropriate for rate and accounting 30
- purposes and is in accordance with the practice of the DPUC, the State regulatory body havingjurisdiction over such matters.
Effective January 1,1981, the Company adopted several changes to the above described policies, pursuant to approval of the changes by the DPUC in a December 1980 rate decision. Specifically, the Company adopted the policies of:
- 1. Interperiod tax allocation with respect to differences in the timing of (a) book and tax depreciation deductions applicable to additions to plant-in-service atier January 1,1981, and (b) pension and tax costs capitalized as construction costs on the books, but deducted currently for income tax purposes.
- 2. Deferring and amortizing to income ratably over the useful lives of the related properties the first 4% of the investment tax credit applicable to long-term projects on a progress of-construction basis.
Accrued Utility Revenues The estimated amount of utility revenues (less related expenses and applicable taxes) for service rendered but not billed is accrueo at the end of each accounting period.
Investments
! Investments in Research Center, Inc., a wholly owned subsidiary, and Connecticut Yankee Atomic 2
Power Company, a nuclear generating company in which the Company has a 9%% stock interest, are accounted for on an equity basis.
In May 1980, Research Center, Inc. sold its only significant asset, an interest in a tract ofland in Meriden and Wallingford, Connecticut, resulting in a gain, after taxes, of $940,700 which is included in p equity in earnings of subsidiaries (Other-net) in the statement ofincome. Research Center, Inc., which
) had no other significant revenues during the last three years, subsquently paid a dividend to the Company from the proceeds of this sale.
Fossil Fuel Costs The amounts of fossil fuel costs that, pursuant to the fuel adjustment clause in the Company's rates, cannot be reflected currently in customers' bills is deferred at the end of each accounting period. Since adoption of the deferred accounting procedure in 1974, rate decisions by the DPUC and its predecessors have consistently made specific provision for amortization and recovery of existing deferred fossil fuel cost balances.
l Pension Plan i Annual pension cost, including amortization of prior service cost over 30 years, is accrued each year i and funded in the following year.
Research and Deielopment Costs Research and development costs, including environmental studies, are capitalized if related to specific construction projects and depreciated over the lives of the related assets. Other research and development costs a charged to expense as incurred.
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31 l
Tile UNITED ILLUh11NATING CON 1PANY NOIES TO FINANCIAL STATENtENTS
( A) RATE PROCELDINGS Rate increases, other than changes in fossil fuel cost adjustment rates, approved by the DPUC and its predecessors since January 1,1978 were as follows:
Annual Percentage In(rease of Original Application Flfectiie Appros ed Request Dates Dates (Stillions) Approsed July 14,1978 f J nu ry 10, M $17.9 1 67%
( September 16,1979 1.3 J Januar-f24,1980 Apr 125,1980 17.6 80 July 3,1980 December 17,1980 35.9 71 The 1979 increases, intended to cover inflation in operating and financing costs, represented a single approved increase, implemented in two steps. The second step coincided with the date of a scheduled wage increase under the Company's collective bargaining agreement.
The January 1980 application was aimed solely at remedying certain severe and adverse impacts of sharply escalated residual fuel oil prices on the Company's operations. The increase approved provided for recovery of the 5% state gross revenues tax on ir. creased revenues resulting from higher fuel costs as well as for amortization and recovery of $16.1 million of added deferred fossil fuel costs over an 18 month period.
The July 1980 application addressed increased non-fuel operating expenses and financing costs and requested certain changes in accounting practices used by the DPUC's predecessor agencies. All of the requested accounting changes were approved by the DPUC, as set forth under" Allowance for Funds Used During Construction" and " Income Taxes"in the Statement of Accounting Policies.
The most recently approved increase also includes provision for amortization and recovery of deferred fossil fuel costs of $7.7 million annually, the amortization level that will be used by the Company starting January 1,1981 and continuing until a revised level is approved. This amortization level was based upon an estimated December 31, 1980 balance of deferred costs, but fuel price increases subsequent to the estimate caused the actual balance to exceed the estimate by $3.7 million.
(B) INCOME tax EXPENSE Income tax expense consists of:
1980 1979 1978 Income taxes, current included in: l Operating expenses.. $ (51,052) $ 82,751 $213,970 Other income and deductions.. 1,104,300 - 670,200 Income taxes, deferred:
Accrued utility revenues.. (202,407) (234,367) (234,367)
Deferred fossil fuel costs.. (355,266) 5,314,089 (651,006)
Accelerated amortization.. (57,000) ( $7,000 ) (57,000)
Other-net.. 53,531 62,633 (23,880) i Deferred mvestment tax credits . 309,813 (132,050) 649,693 I
Amortization of deferred investment tax credits . (84,755) ( 72,990) (62,254)
Total income tax expense . $ 717,164 $4,963.066 $505,356 32
TIIE UNITED ILLUMINATING COMPANY NOTES TO FINANCIAL STATEMENTS-(Continued)
V The amounts reported for federal income tax expense for the years 1980,1979 and 1978 were less than the amounts computed by applying the federal income tax statutory rates to book income before federal income taxes. The reasons for such ditrerences are as follows:
1980 1979 1978
$34,465,813 $29,667,747 $21,477,794 Net income.. l 717,164 4,963,066 505,356 Total income tax expense.
365,961 992,703 316,378 1.ess state income tax expense .
351,203 3,970,363 188,978 Federalincome tax expense. .
34,817,016 33,638,110 21,656,772 Book income before federal income taxes.
Federal income tax statutory rates.. 46% 46% 48%
16,015,827 15,473,530 10,400,051 Federal income taxes at statutory raies.,
Less tax effects of:
Allowance for funds used during construction capi-12,675,577 7,130,200 3,968,600 talized for book purposes, not taxable income..
Tax depreciation, computed principally on sum-of-years digits method using shorter than iak lives for certain plant, in excess of book depreciation 4,428,600 on straight-line method.. 2,804,720 3,468,900 Taxes and pensions capitalized for book purposes, 895,786 754,900 573,200 deducted currently for tax purposes.
884,287 (62,780) 1,170,100 investmer ( .ax credits .
[]j
(
Equity in earnings of subsidiary companies for book purposes, not taxable income .
Taxable income resulting from sale, at book value, 595,649 236,710 106,118 of a 2%% ownership share in Seabrook nuclear project.. (2,146,015) - -
(45,380) (24,763) (35,545)
Other items-net..
$ 351,203 $ 3,970,363 $ 188,978 Federal income tax expense.
1.0% i 1.8% .9%
Effective federalincome tax rates .
The 4% investment tax credit allowable under the provisions of the Internal Revenue Code of 1954, as amended, is flowed through to net income as a reduction of federal income tax expense. The Company has elected to defer and amortize to income ratably over the life of the related property the additional 6%
credit allowable under the Tax Reduction Act of 1975 (1975 Act).
The 1975 Act and succeeding amendments provide that for 1978 up to 99, and for 1979 and 1980 up to 70% of federat mcome taxes otherwise currently payable may be oliset by investn.ent tax credits. The total credits utihzed in 1978 and 1980 amounted to $1,758,000 and $1,109,000, respectively, the maximum amounts allowed by the 1975 Act, as amended. These amounts were represented entirely by credits carried forward from pnor years.
No credits were utilized in 1979 since there was a current taxable loss for the year. Carryback of this loss to 1976 resulted in no current federalincome tax expense for 1979 since taxes paid in 1976 were 100%
otTset by investment tax credits utilized in that year. Deferred investment tax credits were appropriately adjusted to reflect the recomputed 1976 credits utilized.
The investment tax credits carried forward at December 31, 1980 amount to approximately n $19,800,000, of which $2,400,000 expires in 1984, $5,200,000 expires in 1985, $7,000.000 expires in 1986
/ and $5,200,000 expires in 1987.
33
Till' UNII ED ll.I.UMINATING CO.\lPAN Y NOlFS 10 FINANCl41. STARMNIS-(Continued)
If, in fact, these credits are utilized against future income tax liabilities, substantially all the credits will be deferred and amortized to income ratably over the lives of ane related properties.
(C) COstPI NSATING bat ANCI S AND SHORr-Tinst HORROWINGS Substantially all cash serves the dual purpose of providing funds for operating requirements and for compensating balances to cover bank lines of credit. The Company's bank lines of credit, some of which are subject to renewel on April 30,1981, amount to $50,000,000 pursaant to individual arrangements with several banks. Compensating balances equal to 10% of the lines are required for $16,500,000 of these lines of credit and fees in lieu of such compensating balances are paid for the remaining $33,500,000 of the lines.
On June 29, 1979, the Company entered into a revolving credit agreement with the same banks aggregating $75,000,000 (reduced to $20,000,000 on October 31,1980 at the Company's option). Under this agreement, which terminates on June 29,1981, the Company has the option to convert its outstanding borrowings at that date into term loans payable in four equal semi-annual installments beginning December 31,1981. The revolving credit agreement limits total indebtedness to 53% of total capitalization and short-term indebtedness. At December 31, 1980, total indebtedness represent,d 47.3% of total capitalization and short-term indebtedness.
From October 30,1979 through May 1,1980, the Company also utilized a revolvir ' subordinated credit agreement arranged with the same banks to cover up to $30,000,000 of their totai et mmitment of
$75,000,000. Interest on subordinated borrowings was at 108.5% of prime and bank fees were oaid on the unusJ,1 portion of the aggregate c >mmitment. Maximum borrowings under this agreement were
$14,000,000 in 1979 and $30,000,000 in 1980. The agreement expired on July 31,1980.
Information with respect to short-term borrowings is as follows:
1980 1979 1978 Maximum aggregate principal amount of short-term borrowings outstanding at any month-end- 595,925,000 $97,325,000 $48,700,000 Average aggregate short-term borrowings outstanding during the period . 43,361,107 61,235,978 39,239,863 Average interest rate.. 15.2 % 12 % 8.2%
Principal amounts outstanding at year end: !
Commercial paper borrowings.. $ 18,800,000 $53,825,000 $48,700,000 l Bank barc,bes (including subordinated bor-rowi igs of $ 14,000,000 ) . -
27,500,000 -
Total.. $ 18,800,000 $81,325,000 $48,700,000 Weighted average interest rate.. 19.3% I 4.8% 10.5 %
Average short-term borrowings represent the sum of daily borrowings outstanding, weighted for the l
number of days outstanding and divided by the number of days in the period. The average interest rate is determined by dividing interest expense by the amount of average borrowings. ,
( D) CoststON STOCK Common stock, no par value, at December 31, 1980 consisted of 12,500,000 4 hares authorized (including an increase of 5,000,000 shares voted by the shareowners on April 9,1980) and 7,660,132 34 l
TIIE UNITED ILLUMINATING COMPANY NOTES TO FINANCI AL S1 ATEMENTS-(Continued) shares outstanding. Shares issued during 1978,1979 and 1980 and increases to the common stock account from the proceeds of these issues were as follows:
Shares Issued Proceeds 1978.. .. 1,026,899 $26,109,433 1979.. . . .
43,430 1,011,021 1980.- 1.569,684 32,225,591 Expenses related to these issues were charr.ed to capital stock expense.
Authorized common stock includes 250,000 shares registered in connection with the Company's j automatic dividend reinvestment and stock purchase plan under which participating shareowners
- purchased J6,899,43,430 and 69,684 shares in 1978,1979 and 1980, respectively.
! (E) PREFERRED AND PRtrLRENCE stock j Preferred and preference stock authorized at Decmber 31,1980 consisted of:
Cumulative preferred stock: $100 par value-1,350,000 shares; $25 par value-2,400,000 shares (iicluding increases of 500,000 shares and 1,200,000 shares, respectively, voted by the sl.areowners
- on April 9,1980)
Cumulative preference stock: $25 par value-1,200,000 shares Shares outstanding at December 31,1980 consisted of:
l 4 a) Preferred stock not subject to mandatory redemption:
J Cumulative, $100 par value t
4.35%, Series A -50,000 j ,. ..
4.72%, Series B = 75,000 4.64%, Series C -- 75,000 5%%, Series D 75,000 7.60%, Series E = 125,000 I 7.60%, Series F. 150,000 i 550,000 i
Cumulative, $25 par value 8.80%,1976 Series.. . 600,000 4
' b) Preferred and preference stock subject to mandatory redemption:
} Cumulative preferred stock, $100 par value 9%%, Series G (issued April 10, 1979), subject to mandatory redemption of 30,000 shares each year.
beginning April 15,1985, at $100 per share, plus i accrued dividends to redemption date 150,000 Cumulative preference stock, $5 par value
.15.88 %, 1980 Series (issued May 1,1980) subject to mandatory redemption of 80,000 shares:each year beginning April 15,1986,. at $25 per share, plus accrued dividends to redemption date . 1,2r0,000
[7 The par value of each of the above issues was credited to the appropriate stock account and expenses
- d. related to these issues were charged to capital stock expense.
35.
Tile UNITED ILLUMINATING COMPANY No I Es 10 IciN ANcut. STAIEMENTs-(continued)
Preference stock is a form of preferred stock that is junior to the preferred stock, but senior to the common stock. It is not subject to the earnings coverage requirements or minimum capital and surplus requirements governing the issuance of preferred stock.
Shares of preferred and preference stock have preferential dividend and liquidation rights over shares of common stock. Preferred and preference stockholders are not entitled to general voting rights.
Ilowever, if any preference dividends are in arreais for six or more quarters or if some other event of default occurs, preference stockholders are entitled to elect two members of the Board of Directors until all dividend arrears are paid and any event of default is terminated. If similarly atrected, preferred stockholders are entitled to elect a majority of the Board of Directors.
(F) PETAINED EARNINGS RtsTaicTios The indenture under which all of the Company's debentures are issued places limitations on the payment of cash dividends on the common stock of the Company and on the amounts that can be expended to purchase or redeem shares of common stock. Under the most restrictive provision of the indenture, retained earnings in the amount of $46.665,026 were free from such limitations at December 31, 1980.
(G) LoNo-Ttnu Drur Long-term debt at December 31,1980 consisted of:
Long-term Debentures:
2'k%,1981 Series, due March I,1981. $ 8,000,000 3%,1984 Series, due October 1,1984.. 9,000,000 4%%,1987 Series, due Novemher I,1987.. 10,000,000 13%%,1990 Series, due July 1,1990 (issued July 16,1980). 40,000,000 4.65%,1990 Series, due August 15,1990. I5,000,000 437,1991 Series, due July I5,1991. 10,000,000 5%%,1996 Series, due August 15,1996.. I5,000,000 6%,1997 Series, due June 15,1997. 22,500,000 7%,1999 Series, due January 15, 1999.. 15,000,000 10%9,2000 Series, he June 15,2000.. 30,000,000 7W,2002 Series, due October 1,2002.. 25,000,000 8%%,2003 Series, due December 15,2003.. 30,000,000 229,500,000 Serial Debentures:
11%, maturing serially as to $4,000,000 principal amount on September 15 in each of the years 1981 to 1983, inclusive.. 12,000,000 8%9, maturing serially as to $1,666,667 principal amount on November 15 in each of the years 1983 to 1997, inclusive.. 25,000,000 11%, maturing serially as to $2,000,000 principal amount on November 15 in each of the years 1985 to 1999, inclusive.. 30,000,000*
Unamortized debt discount less premium at December 31,1980. (918,909)
Total long-term debt . 295,581,091 Less current portion included in Current Liabilities . 12,000,000 Long-term debt included m Capitalization . $283,581,091
- $22,000,000 of this senes of I1% debentures was issued on Deccmtser 4,1979 and, under a delayed delivery arrangement, an additional $8,000,000 was issued on January 8,1980.
36
7 Tile UNITED ILLUMINATING COMPANY I
fg NOIES 10 FINANCIAL SI A'IEMENTS-(Continued)
The aggregate maturities of long-term debt during each of the five years 1981-1985 are:
1981-$12,000,000; 1982-$4,000,000; 1983-$5,666,667; 1984-$10,666,667; and 1985-$3,666,667.
(II) SUPPLEMINTARY INCOME SrATLMENT INFORM ATION i
The amount of taxes, maintenance and the provisions for depreciation and amortization, other than those set forth in the statement ofincome, are not significant.
Neither rents, advertising costs nor research and development costs exceed one per cent of total revenues and there are no royalties. Taxes, other than income taxes, charged to costs and expenses, are set forth below:
19so 1979- ins State gross earnings . $18,206,995 $I4,094,642 $10,817,088 Local real estate and personal property.. .. 13,828,148 11,581,238 10,346,650 Payroll . 2,024,948 1,785,154 1,510,520
$34,060,091 $27,461,034 $22,674,258 Charged to:
Tax expense.. $32,967,294 $26,593,421 $2.' 063,690 Other accounts.. . 1,092,797 867,613 610,568
$34,060,091 $27,461,034 $22,674,258 (1) PLNSION PLAN The Company has a pension plan covering substantially all its employees. The entire cost of the plan is borne by the Company and is paid into an irrevocable trust fund.
y Pension costs for the years 1980,1979 and 1978 were $3,966,000, $3,551,000 and $3,323,000, respectively.
Accumulated plan benefits and plan net assets at January 1,1980 were:
Actt trial present value of accumulated plan benefits:
Vested benefits. $29,716,800 Non-vested benefits 3,676,000
$33,392,800 Net assets available for benefits.. .. .. , $38,453,500 The assumed weighted average rate of return used in determining the actuarial present value of accumulated plan benefits amounted to 7%%.
(J) JOINTLY OWNED PLANT The Company's 93.7% ownership share of the New Haven liarbor Station generating unit represented
$131.2 million of utility plant in service and $l7.4 million of reserve for depreciation at December 31, 1980. The Company's share of the operating costs are included in the appropriate expense captions in the statement ofincome.
The Company also has ownership shares in fcur future nuclear generating units. See Note K,
" Commitments and Contingencies."
( K) COMMITMENTS AND CONTINGLNCILS The Company has entered into substantial commitments in connection with its continuing construction program, which is presently estimated at approximately $616 million for the years 1981-87, including approximately $549 million for the Company's ownership share in the costs of four future nuclear generating units. These construction program estimates include $412 million for the Company's 17.5%
ownership share in the cost of Seabrook Units I and 2, and $137 million for the Company's 3.685% and
) 3.3% ownership shares in Millstone Unit 3 and Pilgrim Unit 2, respectively.
37
Tile UNITI'D ll.LUN11NATING CONIPANY NO 3 ES 'lO FINANCI Al. SI A la1EN IS-(Continued)
In January 1979, the Company offered to sell a 10% ownership interest in tric Seabrook units because it considered the rate relief granted by a DPUC predecessor agency in December 1978 inadequate to assure ability to finance the entire construction program through 1987 and because of the opinion expressed by a majority of the commissioners involved in the rate decision that the Company's then existing 20% ownership share in the units should be reduced. These ellbrts resulted in the sale of a 2.5%
ownership share in the units to Central Alaine Power Company in October 1980. The Afassachusetts Department of Public Utilities on October ~,0,1980 disapproved a proposed purchase by a Niassachusetts utility company of a further 1.1% ownership share in the units. As a result, the sale contract was terminated by mutual agreement. Although the Company has ale had negotiations for the sale of a 1.5%
ownership share in the units to a Connecticut electric cooperative, there are no prospects for a reduction in the Company's obligation to finance its 17.5% ownership share in the units.
Public Service Company of New llampshire (PSNil), which had a 50% ownership share in the two Seabrook units and is responsible for the construction and scheduling of these units,is presently reducing its ownership share by selling portions aggregating approximately 15%, to several New England utilities.
In order to complete these sales, the purchaser of a 6% share must obtain its initial financing and two purchasers of shares aggregating 2.5% require further gavernmental approvals.
In N1 arch 1980, in view of the unsettled state of the capital markets and the very high cost of external funds, PSNH decided that the overall level of construction on the units should be reduced substantially in order to lessen PSNH's external financing requirements. Subsequently in 1980, the New llampshire Public Utilities Commission ordered a delay in work on Unit 2, except for those areas common to both units, until PSNil received the regulatory approvals necessary for reducing its ownershi, 3 hare and until the reduction commenced. PSNH had hoped that, by continuing construction on items considered essential to maintain the earliest possible completion dates,1983 and 1985 in-service dates for the units could be maintained.
Ilowever, PSNil now believes that the reduction in the level of construction an 1 an iron workers' strike during the summer of 1980 have delayed these in-service dates. The extent of the delay will not be known until PSNH completes its review of the project schedule during the first quarter of 1981.
The figures above for the Company's estimated construction expenditures and costs of Seabrook Units I and 2 give effect to the reduced level of Seabrook construction (assumed fbr this purpose to continue until April 1981), which would pmtpone the scheduled completion dates of the units by one year to 1984 and 1986, respectively, but do not reflect the possible impacts of other factors, such as the New llampshire commission's directive to delay further the work on Seabrook Unit 2 or the outcome of the project schedule review. A further delay m the scheduled completit a date for Unit 2 would reduce yearly expenditures in the future, but would significantly increase total construction expenditures for that unit.
1 Completion of construction of each of the four nuclear ge .erating units in vhich the Company is participating is c(mtingent, among other things, upon obtaining necessary regulatory approvals, permits and sufficient financing. While it is possible that future developments could lead to cancellation of one or more of the units, the Company considers the possibility of cancellation of any of the units under construction unhkely. However, if any of the units were cancelled, the Company estimates its share of the total cancellation costs would be substantial; the precise amount would depend up<m a number of factors, including the amount of termination charges and salvage and the results of negotiations in connection with contract terminations. The Company would apply to the DPUC for approval to amortize its share of total costs over an appropriate future period and to recover such costs through its rates, but the Company cannot predict whether and to what extent such recovery would be permitted. The Company's investment in the four nuclear generating units was approximately $272 million at December 31,1980, including $226 million invested in the Seabrook units, $33 million in Niillstone Unit 3 and $13 million in Pilgrim Unit 2. '
38
= - _-
i j
THE UNITED ILLUMINATING COMPANY
. NOTES 10 FINANCIAL STATEMENTSHConcluded)
The generating units at Bridgeport Harbor Station are capable of burning either oil or coal, and on November 10,1980, the Economic Regulatory Administration of the Department of Energy published a notice of its intention to proceed with its November 27,1979 proposed order which would prohibit the burning of oil by the largest generating unit at this station. An extensive comment and hearing procedure has commenced, during which the Company and the several governmental agencies having jurisdiction over its operations, financial structure and rates will continue to analyze and present evidence conceming the economic, environmental and engineering feasibility of converting this generating unit to coal-burning.
' The Company cannot predict the outcome of these proceedings; however, a conversion to coal-burning could be expected to involve expenditures for fuel inventory, equipment modifications and additions and pollution control and monitoring devices. Although the total amount of these expenditures would be dependent upon the actions of several governmental agencies, the Company has proposed a conversion plan that would minimize expenditures and provide the financial resources needed to accomplish it.
In March 1979, the Company challe ,ged the legality of an ordinance in the City of New Haven which permitted increased real property tax assessments to be phased-in over a period of five years. After an initial ruling by the Connecticut Superior Court in the Company's favor, the Connecticut Supreme Court
. reversed the lower court's decision The Company subsequently appealed to the United States Supreme Coun, but the appeal was dismissed in October 1980. Since the Company had been accruing the additional property taxes resulting from the phase-in plans of New Haven and the other cities which adopted similar plans in 1980, dismissal of the appeal had no effect on the financial statements.
? (L) QUAnitaty FINANCIAL DATA (UNAUDrrED)
Selected quarterly financial data for 1980 and 1979 are set forth below:
5 Earnings Per Share of Operating Operatina Net Common Quarter Resenues Income Income Stock (l)
(Thorsands of Dollars) 1980 First. $89,356 $10,753 $ 9,084 $1.21 Second. 84,789 7,158 7,194 .73 Third _ _ 95,639 9,892 10,479 1.02 Fourth __ 94,338 8,453 7,709 .65 1979 First. $65,806 $10,991 $ 8,652 $1.23 Second 63,455 8,156 6,195 .78 Third . 75,852 10,789 8,540 1.15 Fourth.. 76,765 8,374 6,281 .78 (1) Based on weighted average number of shares c..tstanding during each quarter.
r 39 J
REPORT OF INDEPENDI3 " CERTIFIED PUBl.IC ACCOUNTANTS To the Shareowners and Directors of Tile UNITED ILLUMINATING COMPANY:
We have examined the balance sheets of The United Illuminating Company as of December 31,1980 and 1979, and the related statements ofincome, retained earnings and sc>urces of funds for gross property additions for each of the three years in the period ended December 31,1980 and the financial statement schedules (pages S-1 through S-5). Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary 4 the circumstances.
In our opinion, the financial statements referred to above present fairly the financial position of The United Illuminating Company as of De: ember 31,1980 and 1979, and the results ofits operations and sources of funds for gross property additions for each of the three years in the period ended December 31, 1980, and the fmancial statement schedules present fairly the information required to be included therein, all in conformity with generally accepted accounting principles applied on a consistent basis.
COOPIRS & LYBRAND New York, New York January 26,1981 O
O 40
SUPPLEMENTARY INFORM ATION/INFIATION Introduction The purpose of the following information, furnished as a supplement to the primary historical cost basis financial statements, is to convey the effects of certain price changes on selected balance sheet and income statement imms. This information has been compiled in acco dance with a requirement of the Financial Accounting Standards Board (FASB) that companies disclose certain effects ofintiation on their operations.
Constant dollar amounts represent historical amounts stated in terms of dollars of equal purchasing power, as measured by the 1980 average of the Consumer Price Index for All Urban Consumers. Current cost amounts reflect the changes in specific prices of plant from the date the plant was acquired to the present, as measured by the Handy-Whitman Index of Public Utility Construction Costs. Current cost amounts of plant differ from constant dollar amounts to the extent that specific prices have increased more or less rapidly than prices in general. Current cost is a reproduction cost concept, i.e., the cost of replacing assets owned, as distinct from replacement cost, which focuses on the cost of replacing physical productive capacity with current state-of the-art technology.
Plant investment as referred to in the accompanying data includes utility plant in service net of reserve for depreciation, construction work in progress and acquisition adjustments. The constant doUar and current coa provisions for deprecL..,n were determined by applying the Company's historical cost-basis depreciation rates to the Consumer Price and llandy-Whitman indexed plant amounts.
Fuel, rnaterials and supplies inventories and related expense categories have not been restated from historical amounts although, as set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, volatile oil prices do impact the Company operations.
As prescribed by the FASB, the data is based on actualincome tax expense unadjusted for the effects of inflation.
(s Discussion The supplementary data should be viewed as an estimate. rather than as a precise measure, of the approximate effect of price changes on money invested in plant over many years and on money borrowed to provide a substantial portion of the funds invested in plant. Of the two methods used to measure inflation, the more relevant to UI is the current cost method because it is based on the llandy-Whitman Index, which depicts the trend in public utility construction costs. The constant dollar data, because it is developed using the broad based Consumer Price Index,is not necessarily representative of the effects of intiation on the Company. A primary value of constant dollar data is that it provides a commo i basis for comparison of companies in various iadustries subject to the reporting requirements.
The depreciation adjustments to 1980 reported net income and the similar adjustments used in calculating general and specific price level adjusted income applicable to common stock for 1978 and 1979 represent the cos: of providing sufficient funds to replace, at the assumed price levels, the service potential of plant used up during those years. This concept is based on the belief by some persons that businesses are not generating and retaining the financial resources required to replacc existing capacity and maintain operating capability,i.e., maintain the capability of the business to provide a constant supply of goods and services.
It is irr portant that the Company maintain its operating capability at ths level required to provide an adequate, reliable supply of electricity to meet the demands of its customers. To do this requires substantial investments in generating and other facilities. The Company mat t these investments and incurs all the other costs, under existing economic conditions, necessary to supp.y customer demands with the expectation of earning an appropriate return on the investments and of recovering the costs involved.
p In that sense, readers should not be misled into be' J ving that past prices for electricity should necessarily
! have been increased to cover consumption of the service potential of the price level adjusted cost of plant.
41
llowever,in another sense, the price level adjusted income applicable to common stock, particularly on a current cost basis, does illustrate the inability of income levels tc support the large, long lead time construction programs, whether to replace existing capacity or to meet projected growth, currently being undertaken by many electric utilities, including the Company. This inability results *om the common regulatory prac ice, followed in Connecticut, of making no provision in revenues for recovery of or return on these construction costs until the plant commences operation.
This practice effectively restricts the income currently availabic for shareowner distributions ar.d means that the Company must increasingly rely on the capital markets to provide the financial resources required to maintain its operating capability, thus further exposing the Company to the effects ofinflation in the form of increased financing costs.
The purchasing power gain on net monetary liabilities shown in the accompanying data theoretically represents the extent to which equity investors were hedged against the risk ofinflation in plant investment and other costs, primanly because a substantial portion of plant costs was financed by long-term debt. The Company cautions that such gains are unrealized and, therefore, do not contribute to cash flow or distributable income. Because depreciation on plant is limited to the recovery of historical costs, the Company does not have an opportunity to realize either the increase in specific prices of plant investment held (sometimes called holding gains) or the related gains on debt used to finance investment in plant assets. Gains on debt can be realized if the inflation-adjusted cost of the related assets can be converted into cash, via recovery through revenues of higher depreciation allowances, and if the debt is retired and not replaced. Ilowever, the occurrence of this combination of circumstances is unhkely in view of present regulatory practices and the projected need for increased plant investment and debt financing.
The reduction of inflation-adjusted plant investment to net recoverable, or historical, cost has been included in the 1980 data in view of the FASB's opinion that it may not be appropriate for companies limited to recovery of the historical cost of their plant investment through the regulatory process to state their assets above the recoverable amounts. This reduction should not be allowed to obscure the fact that inflation in prices affects virtually all the Company's operations. While it is true that future cash flows relative to the Company's plant investment will be based upon recovery of historical cost plus a specified rate of return, it is equally true that the Company has the same problem as non-regulated businesses in maintaining its operating capability and avoiding erosion of capital. Furthermore, the Campany and other utilities must compete in the same capital markets as non-regulated businesses and returns must be sufficient to raise the capital required. The reduction should be viewed in recognition of these facts.
42 O
l - - - - - - - - -
Sel.~ted Supplementary Financial Data Adiustedfor the Ep'ects of infration #
' (la .*housands of Average 19NO Dollars)
\
L FoR Tin YLAR 1980 Constant Current Dollar Cost Net income, as reported in the statement ofincome.. $34,466 $ 34,466 Adjustment to depreciation expense based on plant investment recalculated to recogr.ize the effects of inflation in the general price level and in specific prices . . .. 19,437 24,765 Net income, as adjusted -- 15,029 9,701 Dividends on preferred and preference stock.. 9,296 9,296 Income applicable to common stock, as adjusted . S 5,733 $ 405 Purchasing power gain on net monetary liabilities:
Long-term debt - $31,695 $ 31,695 Other, principally net current liabilities . . 6,924 6,924 Total . $38,619 $ 38,619 EtTect ofinflation on plant investment held during the year as measured by changes in:
Specific prices.. $ 81,588 General price level.. 121,311 Inflation in specific prices of plant investment over (under) general price level inflation.. (39,723)
Reduction of inflation-adjusted plant investment to net recoverable (histori-C') cal; cost. $52,790 $ 7,739 l
l At December 31,1980, ihe current cost of plant investment was $1,091,478 as compared to historical cost of $641,774.
(A) w/
43
FIVE Ytan SUMM ARY 1980 1979 1978 197 1976 Operating revenues . $364,122 $319,851 $273,217 $298,476 $280,555 llistorical cost information adjusted for in-flation in the general price level (constant dollar information ):
Income applicable to common stock.. $ 5,733 $ 10,943 $ 5,908 Earnings per share of common stock $.81 $1.80 $ 1.08 Common stock couity at year-end(a) . $627,802 $567,519 $520,813 Ilistorical cost information adjusted for in-flation in specific prices (current cost in-formation):
Income applicable to common stock.. $ 405 $ 4,666 $ (I,305)
Eanings per share of common stock. $.06 $.77 $(.24)
Inflation in specific prices of plant in-vestment over (under) general price level intlation . $(39,723) $(21,860) $ 22,718 Common stock equity at year-end( a ) . $642,124 $624,604 $606,035 Gsneralinformation:
Purchasing power gain on net monetary liabilitice Long-term debt.. $ 31,695 $ 34,547 $ 26,122 i Other, prir:cipally net current liabi-I lities.. 6,924 8,421 2,393 Total . $ 38,619 $ 42,968 $ 28,515 ,
Dividends declared per share of com-mon stock. $2.68 $2.97 $3.23 $3.36 $3.40 Market price per common share at year- )
end.. $ 17.30 $22.67 $27.68 $37.30 $37.34 Average Consumer Price Index (1967
= 100).. 246.8 217.5 195.4 181.5 170.5 (a) Year-end data, stated in average 1980 dollars:
1980 1979 1978 Common stock equity at net recoverable l
( historical) cost . $212,774 $I 99,936 $215,936 Net assets:
Constant dollar . $737,597 $658,726 $605,958 Current cost.. $751,919 $715,812 $691,181 Net recoverable ( his.arical) cost . $322,570 $291,145 $301,081 44 0
PARTlli Item 9. Directors and Executive Opcers of the Company The information appearing under the caption " NOMINEES FOR ELECTION AS DIRECTORS" in the Company's definitive Proxy Statement, dated N1 arch 19,1981, for the Anm'al hiecting of the Shareholders to be held on April 29, 1981, which Proxy Statement is to be filed with the Securities and Exchange Commission on or about hiaich 19,1981, is incorporated by reference in partial answer to this item. See also item 4 " EXECUTIVE OrrtCERs OF TIIE COMPANY" item 10. Management Remuneration and Transactions The information appearing under the caption " REMUNERATION OF DIRECTORS AND Orr CEns"in the Company's definitive Proxy Statement, dated hiarch 19,1981, for the Annual h1eeting of the Shareholders to be held on April 29,1981, which Proxy Statement is to be filed with the Securities and Exchange Commission on or about Af arch 19,1981,is incorporated by reference in answer to this item.
PART IV Item i1. Exhibits, Financial Statement Schedules, and Reports on Form 8.K The following documents are filed as a part of this repon:
FinancialStatements (see item 8):
Report ofindependent certified public accountants Statement ofincome for the years ended December 31,1980,1979 and 1978 Statement of sources of funds for gross property additions for the years ended December 31, 1980,1979 and 1978 Statement of retained earnings for the years ended December 31,1980,1979 and 1978 Balance sheet, December 31,1980 and 1979 Statement of accounting policies Notes to financial statements Supplementary information/ inflation (unaudited)
Financial Statement Schedules Schedule V-Property, plant and equipment for the years ended December 31,1978,1979 and 1980 Schedule VI-Reserve for depreciation of property, plant and equipment for the years ended December 31,1980,1979 and 1978 Schedule Vill-Valuation and qualifying accounts for the years ended December 31,1980,1979 and 1978.
O 45
Exhibin.-
Pursuant to Rule 12h-32 under the Securities Fxchange Act of 1934, certain of the fi>llowing listed exhibits w hich are annexed as exhibits to presious statements and reports filed by the Company are herchy incorporated by reference as exhibits to this report. Such statement, and reports are identified by reference numbers as follows:
( I) Filed with Registration Statement No. 2-45434, c:Tectise September 25,1972, and Registration Statement No. 2-45435, effettive September 26,1972.
( 2 ) Fded with Registration Statement No. 2-60849, erlective July 24,1978 (3) Fded with Registration Statement No. 2-66518, etrective February 25,1980.
(4) Filed with Registration Statement No. 2-57275, effective October 19,1976.
(5) Filed with Registration Statement No. 2-67998, effective June 19,1980.
(6) Filed with Quarterly Report ( Form 10-Q) for fiscal quarter ended June 30,1980 (7) Fded with Quarterly Report ( Form 10-Q) for fiscal quarter ended September 30, 1980.
(8) Filed with Registration Statement 'so. 2-49669, effective December 11,1973.
(9) Filed with Registration Statement No. 2-52657, effective February 6,1975.
(10) Filed with Registration Statement No. 2-54876, etrective November 19,1975.
( 11 ) Filed with Anr.ual Report ( Form 10-K ) fi>r the fiscal year ended December 31,1978.
(12) Filed with Regiuration Statement No. 2-53801, effective June 24,1975.
(13) Filed with Annual Report ( Form 10-K ) fi>r the fiscal year ended December 31,1977.
The exhibit number .a the statement or report referenced is set flirth in the parenthesis fidlowing the description of the exhibit. ~Ihose of the liillowing exhibits not so identified are filed herewith.
'I able II l shibit Reference item No. No. N o. Dncription (3) 3.1 Copy of Chartcr of t he United Illuminating Company, dated December 15,1965.
(3) 3.2 (1) Copy of a certificate concerning the creation of a class of Preferred Stock of ~lhe United Illuminating Company and the authority of the lloard l of Directors to issue said Preferred Stock, dated July 13,1956,and filed with the Secretary ofState of Connecticut July 13,1956. (Fxhibit 3.12)
(3) 3.3 Copy of Certiticate Amending Certificate of Incorporation by Act.on of Iloard of Directors, dated November 19, 1962, and filed with the Secretary of State of Connecticut November 29,1962.
(3) 3.4 Copy of Ce.*tificate Amending Certificate of Incorporation by Action of Iloard of Directors, dated October 25, 1965, and tiled with the 1 Secretary of State of Connecticut November 22,1965.
)
(3) 3.5 (I) Copy of Certificate Amending Certificate of Incorporation by Action of I Iloard of Directors and Shareholders, dated June 6,1967, and filed l with the Secretary of State of Connecticut June 6,1967. ( Fxhibit 3.13)
(3) 3.6 Copy of Certificate Amending Certificate of incorporation by Action of l lloard of Directors, dated December 1,1967, and filed with the ,
Secretary of State of Connecticut December 7,1967. '
(3) 3.7 (2) Copy of Certificate Amending Certificate of Incorporation by Action of Iloard of Directors and Shareholdert, dated April 27,1971, and filed with the Secretary of State of Connecticut April 29, 1971. ( Fxhibit 2.2-14) 46
m Table ll lihibit f(eference leese No. Na Nm Dewripti<m (3) 3.8 Copy of Certificate Amending Certificate of Incorporation by nction of Iloard of t)irectors, dated March 29,1972, and filed with the Secretary of State of Connecticut March 30,1972.
(3) 3.9 (3) Copy of Certificate Amending Certificate of incorporatioThy Action of Board of Directors and Shareholders, dated May 4,1973, and filed with the Secretary of State of Connecdcut May 7,1973. ( Exhibit 2.2-17)
(3) 3.10 Copy of Certificate Amending Certificate of incorporation by Action of Board of Directors, dated July 2,1973, and filed with the Secretary of State of Connecticut July 2,1973.
(3) 3.11 (4) Copy of Certificate Amending Certificate of Incorporation by Action of Board of Directors and Shareholders, dated April 26,1976, and filed with the Secretary of State of Connecticut April 27,1976. ( Exhibit 2.2-18)
(3) 3.12 (4) Copy of Certificate Amending Certificate of incorporation by Action of Board of Directors and Shareholders, dated April 26,1976, and filed with the Secretary of State of Connecticut April 27,1976. ( Exhibit 2.2-19)
(3) 3.13 Copy of Certificate Amending Certificate of Incorporation by Action of Board of Directors, dated October 20, 1976, and filed with the Secretary of State of Connecticut October 21,1976.
(3) 3.14 Copy of Certificate Amending Certificate ofIncorporation by Action of Board of Directors, dated April 4,1979, and filed with the Secretary of State of Connecticut April .,,1979.
q (3) 3.15 Copy of Certificate Amendmg Certificate of Incorporation by Action of Iloard of Directors, dated April 29,1980, and filed with the Secretary (v) of the State of Connecticut April 30,1980.
(3) 3.16 (5) Copy of Certificate Amending Cer ificate of Incorporation by Action of Hoard of Directors and Shareholders, dated May 20,1980, and filed with the Secretary of State of Connecticut May 23, 1980.
(Exhibit 2.2-20)
(3) 3.17 (2) Copy of Hylaws of The United Illuminating Company. ( Exhibit 2.3 )
(4) 4.1 (2) Composite copy of Trust Indenture, dated as of February 1,1948, between The United illuminating Company and The First New llaven National Bank (successor to The First National Bank and Trust Company of New flaven), as amended by ten supplemental in-dentures (to and including a supplemental indenture dated as of October 1,1972 ). ( Exhibit 2.6-1 )
(4) 4.2 Copy ot' Eleventh Supplemental Indenture, dated as of December 15, 1973, between The United Illuminating Company and The First New ilaven National Bank, as Trustee, supplementing Exhibit 4.1.
(4) 4.3 Copy of Twelfth Supplemental Indenture, dated as of September 15, 1974, between The United illuminating Company and The First New flaven National Bank, as Trustee, supplementing Exhibit 4.I.
(4) 4.4 Copy of Thirteenth Supplemental Indenture, dated as of June 15,1975, between The United Illuminating Company and The First New llaven National Bank, as Trustee, supplementing Exhibit 4.1.
(4) 4.5 (2) Copy of Fourteenth Supplemental Indenture, dated as of November 15, 1977, between The United illuminating Company and First Bank, as Trustee, supplementing Exhibit 4.1. ( Exhibit 2.6-5 )
m (4) 4.6 (3) Copy of Fifteenth Supplemental Indenture, dated as November 15, 1979, between The United Illuminating Company and First Bank, as Trustee, supplementing Exhibit 4.1. (Exhibit 2.6-6) 47
'lable il I shibit Refererne tiem No. No. N o. Dewription (4) 4.7 (6) Copy of Sixteenth Supplemental Indenture, dated as of July 1,1980, between lhe United Illuminating Company and First Ilank, as Trustee, supplementing Exhibit 41. ( Exhibit 41115)
(10) 10.1 (4) Copy of Stockholder Agreement, dated as of July 1,1964, among the various stockholders of Connecticut Yankee Atomic Power Company, includ:ng 1he United Illuminating Company. ( Exhibit 5.I-1)
(10) 10.2 a (4) Copy of Power Contract, dated as of July 1,1964, between Connecticut Yankee Atomic Power Company and The United Illuminating Com-pany. ( Exhibit 5.12)
(10) 10.2 h (2) Copy of Supplementary Power Contract, dated as of March I,1978, between Connecticut Yankee Atomic Power Company and The United Illuminating Company, supplementing Exhibis 10.2a. (Exbibit 5.1 -6 )
(10) 10.2c (7) Copy of Agreement Amending Supplementary Power Contract, dated August 22, 1980, between Connecticut Yankee Atomic Power Com-pany and The United lileminating Company, amending Exhibit 10.2b. ( Exhibit 13 J 6)
(10) 10.3 (4) Copy of Capital Funds Agreement, dated as of September 1,1964, between Connecticut Yankee Atomic Power Company and The United illuminating Company. ( Exhibit 5.1-3)
(10) 10.4a (4) Copy of Connecticut Yankee Transmission Agreement, dated as of October 1,1964, among the various stockholders of Connecticut Yankee Atemic Power Company, including The United Illuminating Company. ( Exhibit 5.1-4)
(10) 10.4h (3) Copy of Agreement Amending and Revising Connecticut Yankee Trans-mission Agreement, dated as of July 1,1979, amending Exhibit 10.4a.
( Exhibit 5.1-7 )
(10) 10.5 (2) Copy of Capital Contributions Agreement, dated October 16, 1967, between 1he United illuminating Company and Connecticut Yankee Atomic Power Company. ( Exhibit 5.1-5 )
(10) 10.6 Copy of Five-Year Capital Contribution Agreement, dated as of Novem-her i,1950, between Connecticut Yankee Atomic Power Company and The United illuminating Company.
(10) 10.7a (2) Copy of New England Power Pool Agreement, dated as of September 1, ,
!971. ( Exhibit 5.5-1 ) l l
(10) 10.7b (3) Copy of Amendment to NEPOOL Power Pool Agreement, dated as of i July 1,1972, amending Exhibit 10.7a. ( Exhibit 5.5-2)
(10) 10.7c (8) Copy of Agreement Setting Out Supplemental NEPOOL Under-standings, dated as of April 2,1973. ( Exhibit 5.6-10)
(10) 10.7d (3) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated as of March 1,1973, amendmg Exhibit 10.7a. ( Exhibit 5.5-4)
(10) 10.7e (9) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated as of March 15.1974, amending Exhibit 10.7a. ( Exhibit 5.6-12) )
(10) 10.7f (10) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated as of June I,1975, amending Exhibit 10.7a. ( Exhibit 5.5-14) l (10) 10.7g (10) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated as of September I,1975, amending Exhibit 10.7a. ( Exhibit 5.5-15)
( 10 ) 10.7h (4) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated l as of December 31, 1976, amending Exhibit 10.7a. ( Exhibit 5.5-17, i Post-etTective Amendment No. 2)
(10) 10.7i (4) Copy of Agreement Amending NEPOOL Power Pool Agrement, dated '
I as of January 31, 1977, amending Exhibit 10.7a. ( Exhibit 5.5-18, Post-etfective Amendment No. 21 48
Tahic li hhibit Heference leen No No. N o. Description 4
(10) 10.7j (2) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated as ofJuly 1,1977, amending Shibit 10.7a. ( Exhibit 5.5-10)
(10) 10.7L (2) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated as of August 1,1977, amending Exhibit 10.7a. ( Exhibit 5.5-1I)
(10) 1 0.71 (lI) Copy of Agreement Amending NEPOOL Power Pool Agreement, dated as of August 15,1978, amending Exhibis 10.7a. ( Exhibit 13 B 14n)
(10) 10.8a (3) Conformed copy of Agreement for Joint Ownership, Construction and Operation of Pilgrim Unit No. 2. dated as of Octaber 13,1972, among Boston Edison Company, Central hiaine Power Company, Central Vermont Public Service Company The Connecticut Light and Power Company, Fitchburg Gas and Electric Light Company, Alontaup Electric Company, New Bedford Gas and Edistm Light Company, New England Power Company, PubEc Service Company of New llampshire, The United Illuminating Company, and Western hiassachusetts Electric Company ( the Pilgrim Companies), relating to a nuclear fueled generating unit at Plymouth, Alassachusetts. (Exhibit 5.6 t )
(10) 10.8h (3) Conformed copy of Agreement fi>r Sharing Costs Associated with Pilgrim Unit No. 2 Transmission, dated as of October 13,1972, among the Pilgrim Companies. (Exhibit 5.6-2)
(10) 19.8c (9) Copy of Amendment No. I to Agreement For Joint Ownership, Con-struction and Operation of Pilgrim Unit No. 2, dated September 20 j 1973, amending Exhibit 10.8a. (Exhibit 5.7-3)
(10) 10.8d (9) Copy of Amendment No. 2 to Agreement fi>r Joint Ownership, Construc-tion and Operation of Pilgrim Unit No. 2, dated as of September 15, 1974, amending Exhibit 10.8a. (Exhibit 5.7-4)
(10) 10.8e Copy of Amendment No. 3 to Agreement for Joint Ownership, Construc-tion and Operation of Pilgrim Unit No. 2, dated as of December 1, 1974, amending Exhibit 10.8a.
(10) 10.8f Copy of Addendum to Agreement for Joint Ownership, Construction and Operation of Pilgrim Unit No. 2 adding Burlington Electric Depart-ment as a party to Exhibit 10.8a.
(10) 10.8g (12) Copy of Amendment No. 4 to Agreement for Joint Ownership, Construc-tion and Operation of Pilgrim Unit No. 2, dated as of February 15, 1975, amending Exhibit 10.8a. (Exhibit 5.7-7)
(10) 10.8h (12) Copy of Amendment No. 5 to Agreement for Joint Ownership, Construc-tion and Operation of Pilgrim Unit No. 2, dated as of April 30,1975, amending Exhibit 10.8a. ( Exhibit 5.7-8)
(10) 10.8i (10) Copy of Amendment No. 6 to Agreement fiir Joint Ownership, Construc-tion and Operation of Pilgrim Unit No. 2, dated as of June 30,1975, ,
amending Exhibit 10.8a. ( Exhibit 5.6-9i (10) 10.8j Copy of Amendment No. 7 to Agreement for Joint Ownership, Construc-tion and Operation of Pilgrim Unit No. 2, dated as of November 30, 1975, amending Exhibit 10.8a.
(10) 10.9a (8) Copy of Agreement for Joint Ownership, Construction and Operation of New flampshire Nuclear Units, dated hiay 1,1973, among Public Service Company of New liampshire, The United Illuminating Com-pany, Central hiaine Power Company, The Connecticut Light and Power Company, Fitchburg Gas and Electric Light Company, hion-taup Electric Company, Ne v Bedfi>rd Gas and Edison Light Com-pany, New England Power Company and Vermont Electric Power n Company, Inc. (the Seabrook Companies), relating to two nuclear fueled electric generating units at Seabrook, llampton and flampton Falls, New flampshire. ( Exhibit 5.9-1) 49
mie n nhihie Reference item No. N "- N "- nneripiion (10) 10.9 b (8) Copy of Transmission Support Agreement, dated as of N1ay 1,1973, among the Seabrook Companies. ( Exhibit 5.9-2 )
(10) 10 9e (9) Copy of First Amendment to Agreement fi>r Joint Ownership, Construc-tion and Operation of New llampshire Nuclear Units, dated as of Niay 24,1974, amending Exhibit 10.9a. ( Exhibit 5.8-3 )
(10) 10.9d (9) Copy of Second Amendment to Agreement fi>r Joint Ownership, Con-struction and Operation of New flampshire Nuclear Units, dated as of June 21,1974, amending Exhibit 10.9a. ( Exhibit 5.8-4)
(10) 10.9e (9) Copy of Third Amendment to Agreement fi>r Joint Ownership, Construc-tion and Operation of New flampshire Nuclear Units, dated as of September 25,1974, amending Exhibit 10.9a. ( Exhibit 5.8-5 )
(10) 10.9f (9) Copy of Fourth Amendment to Agreement fi>r Joint Ownership, Con-struction and Operation of New llampshire Nuclear Units, dated as of October 25,1974, amending Exhibit 10.9a. ( Exhibit 5.8-6)
(10) lb.9g Copy of Agreement to Waive for Certain Additioni Participants the November 30, 1974, Signing Deadline Containe< in Agreement fi>r Joint Ownership, Construction and Operation of New llampshire Neelear Units.
(10) 10.9h (12) Copy of Fifth Amendment to Agreement ti>r Joint Ownership, Construc-tion and Operation of New llampshire Nuclear Units, dated as of )
January 31,1975, amending Exhibit 10.9a. ( Exhibit 5.8-8 )
(10) 10.9i (4) Agreement Among Participants in New flampshire Nuclear Units, Certain Niassachusetts N1umcipal Systems and Niassachusetts N1unici-pal Wholesale Electric Company, dated as of Ntay 28,1976, regarding assignment ofinterests in Exhibit 10.9a. ( Exhibit 5.7-9)
(10) 10.9j (4) Copy of Sixth Amendment to Agreement fiir Joint Ownership, Construc-tion and Operation of New Ilampshire Nuclear Units, dated as of April 18, 1979, amending Edibit 10.9a. ( Exhibit 5.7-12, Post-effective Amendment No. 4)
(10) 10.9 k (4) Copy of Seventh Amendment to Agreement fi>r Joint Ownership, Construction and Operation of New llampshire Nuclear Units, dated as of Apnl IS,1979, amending Exhibit 10.9a. ( Exhibit 5.7-13. Post-etrective Amendment No. 4)
(10) 10.91 (4) Copy of Eighth Amendment to Agreement li>r Joint Ownership, Con-struction and Operation of New flampshire Nuclear Units, dated as of April 25, 1979, amending Exhibit 10.9a. ( Exhibit 5.7-14, Post-effective Amendment No. 4)
Copy of Ninth Amendment to A Ireement tiir Joint Ownership, Con- I (10) 10.9m (3) struction and Operation of New Ilampshire Nuclear Units, dated as of June 8,1979, amending Exhibit 10.9a. ( Exhibit 5.7-13)
( 10 ) 10.9n (3) Copy of Tenth Amendment to Agreement for Joint Ownership, Con-struction and Operation of n'cw llampshire Nuclear Units, dated as of October iI,1979, amending Exhibit 10.9a. ( Exhibit 5.7-14)
(10) 10.90 (3) Copy of Eleventh Amendment to Agreement for Joint Ownership, Construction and Operation of New flampshire Nuclear Units, dated as of December 15,1979, amending Exhibit 10.9a. ( Exhibit 5.7-15)
I (10) 10.9p (7) Copy of Twelfth Amendment to Agreement fi>r Joint Ownership, Construction and Operation of New llampshire Nuclear Units, dated as of June 16,19S0, amending Exhibit 10.9a. ( Exhibit 13 K 2 )
(10) 10.9q Copy of Thirteenth Amendment to Agreement fi>r Joint Ownership, Construction and Operation of New llampshire Nuclear Units, dated as of December 31,1980. amending Exhibit 10.9a.
50
Table ll bhibit Reference O leem No.
(10)
No.
10.10a No.
(3)
Description Copy of Sharing Agreement-1979 Connecticut Nuclear Unit, dated as of September 1,1973, among The Connecticut Light and Power Company, The liartford Electric Light Company, Western hiassachu-setts Electric Company, New England Power Company, The United Illuminating Company, Public Service Company of New llampshire, Central Vermont Public Service Corporation, hiontaup Electric Com-pany and Fitchburg Gas and Electric Light Company, relating to a nuclear fueled generating unit in Connecticut. ( Exhibit 5.8-1)
(10) 10.10b (9) Copy of Amendment to Sharing Agreement-1979 Connecticut Nuclear Unit, dated as of August 1,1974, amending Exhibit 10.10a. (Exhibit 5.9-2 )
(10) 10.10c (4) Copy of Amendment to Sharing Agreement-1979 Connecticut Nuclear Unit, dated as of December 15, 1975, amending Exhibit 10.10a.
(Exhibit 5.8-4, Post-effective Amendment No. 2)
(10) 10.l la (8) Copy of Fuel Oil Agreement, dated h1 arch 30,1973, between Texaco, Inc. and The United Illuminating Company. ( Exhibit 5.5)
(10) 10.1 lb (10) Copy ofletter agreement, dated July 15,1975, between Texaco, Inc. and The United Illuminating Company, amending Exhibit 10.I ta. ( Ex-hibit 5.3-2)
(10) 10.1 Ic (13) Copy ofletter agreement, dated h1 arch 21,1978, between Texaco, Inc.
and The United Illuminating Company, amending Exhibit 10.1la as amended by Exhibit 10.1lb. (Exhibit 13 Q)
(10) 10.l id (4) Copy of letter agreement, dated h1 arch 27,1979, between Texaco, Inc.
and The United Illuminating Company, amending Exhibit 10.lla as O amended by Exhibits 10. lib and 10.lle. (Exhibit 5.3-4, Post-effective Amendment No. 4)
(10) 10.12a (2) Copy of Transmission Line Agreement, dated January 13,1966, between the Trustees of the Property of The New York, New flaven and liartford Railroad Company and The United Illuminating Company.
(Exhibit 5.4)
(10) 10.12b (lI) Notice, dated April 24, 1978, of The United Illuminating Company's intention to extend term of Transmission Line Agreement dated January 13,1966, Exhibit 10.12a. ( Exhibit 13 D 5 )
(20) 20.1 Detailed descdpt' n relating to supplementary pensions being paid to certain retired employees, superseding Exhibit iI D 20.*
(20) 20.2 Copies of significant rate schedules of The United Illuminating Com-pany, superseding Exhibit 141."
- Filed with Annual Report (Form 10-K) for the fiscal year ended December 31,1979.
" Filed with Annual Report (Form 10-K) for the fiscal year ended December 31,1978.
No reports on Form 8 K were filed by the Company during the last quarter of the fiscal year ended December 31,1980.
O 51
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorind.
Tile UNrrtD IEtuulNATING COMPANY By__ JOHN D. FASsETr John D. Fawett Chairman of the Board of Directors and Chief Fuecutise Officer Date: February 23,1981 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signcd below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title D_a te Director, Chairman of the Board of Directors and Chief Execu-JOHN D. FAssErr tive Otlicer February 23,1981 (John D. Fawest)
(Principal Fuecutise Officer)
V :e President-Finance and ROsERT L. FisCUS Accounting February 23,1981
( Robert 1. Fiscus)
( Principal Financial and Accounting Otticer)
J AMES F. COBEY, JR. Director February 23,1981 (James F. Cobe), Jr.)
ANGUS N. GOrtDON, JR. Director February 23,1981
( Angus N. Gordon, Jr.)
i l Director February 23,1981 (D. Allan Bromley)
JOHN hl. C. BETIS Director February 23,1981 (John St. C. Betts)
NORWICK R. GOODsPEED Director February 23,1981 l (Norwick R. Goodspeed)
ROBERT D. RussO Director February 23,1981 (Robert D. Runo) l LELAND W. hllLES Director February 23,1981 (12fand W. Stiles)
LEON A. A10RGAN Director Fabruary 23,1981 (leon A. N1 organ)
FRFDERICK J. NI ANCIIESKI Director February 23,1981 (Frederick J. Atancheski)
GERALDINE W. JOllNsON Director February 23,1981 (Ceraldine W. Johnson) 52 i
Schedule V O
d Property, Plant and Equipment Tile UNITED ILLUMINATING COMPANY SCilt Dt:11 V-PROPFRI), PLANT AND FQt'IPMENT For the 3 ear ended December 31,1978 Col. A ColH Col. C Col. D Col. E Col F Halance at Heginning Additions Other Changes- Balance at C'awilication of Period at Cost Retirements Add ( Deduct ) Fad of Period UTit ITY PLANT, at original cost:
Elr cTRic PLANT IN SE RVicI Production Plant:
Stea m .. $294,583,258 $ 1,308,034 $ 31,069 $ 231 $295,860,454 Jet Turbine . 1,728,023 - - - 1,728,023 Total Production Plant.. 296,311,281 1,308,034 31,069 231 297,588,477 Transmission Plant . . 51,201,393 6,411,420 - I8,104 57,630,M 7 Distribution Plant . 159,066,015 5,853,532 1,384,949 (40,221) 163, 3 4,377 c General Plant.. 12,426,513 558,980 64,900 (231) 12,920.362 Total Electric Plant in Service ,. 519,005,202 14,131,966 1,480,918 (22,117)(1) 531,634,133 OILICTRic PLANT IIELD IOR FuTURL V Ust-LAND.. 1,239,443 - - (44,056)(2) 1,195,387 CONSTRUcTIOi, WORK IN PROGRESS. 91,710.103 56,730,864 - 113,520 148,554,487 TOTAL UTILITY PLANT, at original cost.- 611,954,748 70,862,830 1,480,918 47,347 681,384,007 ACQUISITION ADJUSTMINTS, Lt.Ss AuoRTizA-TION.- 282,000 - -
(81,000)(3) 201,000 TOTAL UTiLiry PLANT.. . $612,236,748 sd,862,830 $ 1,480,918 $( 33,653 ) $681,585,007 NosuTiLiTv PRor RTv. at cost .$ 343,612 $(71,241)(4) $ 272,371 NOTES:
(l) Represents transfer of customers' advances for construction.
(2) Represents transfer to construction work in progress.
(3) Amortization credited directly to the asset account and charged to amortization of acquisition adjustments.
Acquisition adjustments are being amortized over a 20-year period.
(4) Represents:
Transfer to construction work in progress.. . $(69,464)
Adjustment of cost basis of nonutility property. (l,777)
$( 71,241) r S-1
Schedule V Property, Plant and Equipment Tile UNITED ll.LUN11NATING CO51PANY SCIIFDt:LE V-PROPFRTY, PLANT AND FQt:lPNfENT For the year ended December 31,1979
(
Col A Col. Il Col C Col D Col. E Col F j llalance at (
lleginning Additions Other Changes- Italance at l Clawilication of Period at Cost Retirements Fnd of Period A_dd ( Deduct )
UTILITY PLANT, at original cost:
Eu cTRIC PLANT IN SERVICE Prodeion Plant:
Steam .. . $295,860,454 $ 273,027 $ 2,537 $ 40,711 $296,171,655 Jet Turbine . 1,728,023 - - - 1,728,023 Total Production Plant.. 297,588,477 273,027 2,537 40,711 297,899,678 Transmission Plant . 57,630,917 77,503 13,652 - 57,694,768 Distribution Plant. 163,494,377 6,498,823 1,594,519 (20,049) 168,378,632 General Plant . 12,920,362 2,107,834 1,992,836 (40,574) 12,994,786 Total Electric Plant in Sersice .. 531,634,133 8,957,187 3,603,544 (19,912)(I) 536,967,864 El t cTRIC Pl_ ANT III LD FOR FuTuRL Usl
- L AN D .. 1,195 '87 121,718 9,008 (39,678)(2) 1,268,419 CONSTRUCTION WORK IN PROGRLss. 148,554,487 77,702,203 - 38,590 226,295,280 TOTAL UTtuTY PLANT. at original cost.. 681,384,007 86,781,108 3,612,552 (21,000) 764,531,563 ACQUISITION ADJUSTMENTS, LLss AMORTIZA-TION., 201,000 - - (81,000)(3) 120,000 TOTAL UTluTY PLANT.. . $681,585,007 $86,781 108 $3,612,$52 $( 102.000) $764,651, 63 NONtrriurY PROPI RTY, at cost . $ 272,371 $ 37,778 $ ( 10,265 )(4) $ 224,328 NOTI.s:
(I) Represents transfers from:
Customers' advances for construction. $( 21,300 )
Electnc plant held for future use-land.. 1,088 Nonutility property.. 300
$( 19,912 )
(2) Represents transfers to:
Construction work in progress.. $( 38,590 )
Electric plant in service. _ (I,088)
$( 39,678 )
(3) Amortization credited d;rectly to the asset account and charged to amortization of acquisition adjustments. Acquisition adjustments are being amortized over a 20-year period.
(4) Represents:
Adiustment of cost basis of nonutility property.. $ (9,965)
Transfer to electric plant in service.. (300)
$( 10,265 )
S-2
Schedule V Property, Plant and Equipent m TIIE UNITED ILLUMINATING COMPANY SCilEDULE V.- PROPERTY, Pl. ANT AND EQl'IPMENT For the 3 ear ended December 31,1980 Col A Col. B Col C Col. D Col. E Col. F Ratance at Resinning of Additions Other Changes- Balance at Clawifiestion Period, at Cost Retirements Add ( Deduct ) Fnd of Period UTit.iTY PLANT, at original cost:
EticTRic PLANT IN SLRVICf!
Production Plant:
Steam . $296,171,655 $ 2,558,601 $ 267,216 $ (9,479) $298,453,561 Jet Turbine.. 1,728,023 - - - 1,728,023 Total Production Plant 297,899,678 2,558,601 267.216 (9,479) 300,181,584 Transmission Plant. 57.694,768 373,770 11,182 -
58,057,356 Distribution Plant. 168,378,632 7,918,920 1,368,540 (40,809) 174,888,203 General Plant . . 12.994,786 1,088,551 371,205 (76,783) 13,635,349 Total Electric Plant in Service - .
536,967,864 11,939,842 2,018,143 (127,071)(1) 546,762,492 Ett cTRic PLANT IIELD FOR FUTURE Us E- L AN D ...... _ 1,268,4'9 65,218 -
(23,541)(2) 1,310,096 CONSTRUCTION WORK IN PROGRESS., 226,295,20) 86,408,497 -
(30,781,321)(3) 281,922,456 TOrAL UTitiTv PLANT, at original cost _. 764,531,563 98,413,557 2,018,143 (30,931,933) 829,995,044 AcquistTioN ADJUSTMENTS, LEss AMoRTi-zATioN.. .. 520,000 - -
(81,000)(4) 39,000 TOTAL UTILITY PLANT. $764,651,563 $98,413,557 $2,018,143 $( 31,012,933 ) $830,034,044 j NONuTiLITY PROPERTY, at cost.. ... $ 224,328 $ 11,816 $ 212,512 NOTES-(1) Represents:
Transfers from customers' advances for construction.--- $ (40,970)
Adjustments to:
Maintenance expense. . _ . _ _ _ _ _ _
. (65,549)*
Allowance for other funds used during construction = ( 6,414)*
Allowance for borrowed funds used during construction (14,138)*
$ (127,071)
(2) Represents adjustments to: l Other interest expense.. . _ _ _ _ _ _
$ (21,439)*
Tax other than income taxes, other income and deductions . (689)*
Allowance for other fends used during construction . .. (424)*
Allowance for borrowed funds used during construction.. (989)*
$ (23,541)
(3) Represents:
Sale of 2%% ownership interest in Seabrook nuclear project, except for amount applicable to Education Center, $49,606 ($52,285 less accumulated depreciation of
$2,679), which is included in retirements column $( 30,730,687 )
. Adjustments to:
Operation expense __ _ .__.__ ___ _ (32,104)*
Allowance for other funds used during construction . ( 6,319 )
- Allowances for borrowed funds used during construction (12,21I)*
$(30,781,321 )
(4) Amortization credited directly to the asset account and charged to amortization of acquisition adjustments.
Acquisition adjustments are being amortized o'.er a 20-year period.
- These adjustments were made in accordance with a Federal Energy Regulatory Commission compliance audit as of December 31,1979.
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Schedule VI Hesene for i)cpreciation Tile UNITED ll.l UMINATING COMPANY sfiiFDt I.E VI-RESE RVE FOR DFPRFCIAllON OF PROPERTY, PIANI AND FQUIP), LENT For the Years Ended December 31,1980,1979 and 1978 Col. A Col. Il Col. C Col. D Col.E Col. F Additions Halance at Charged to Halar.cc at fleginning Costs and Other Charges End of Description of Period Espenses Retirements Add ( Deduct ) Period Reserve for depreciation, utility plant:
1980.. $i73,500,399 $15,969,000 $2,006,421 $797,392( A ) $ 188.2t>0,373 1979.. 161,643,642 14,619,000 3,593,384 831,141( A) 173,f 00,399 1978.. 149,039,090 14,030,000 1,480,378 54,930( A) 161,643,642 Reserve for depreciation, nonutility prop-erty:
1980.. 10,171 333( B) - -
10,504 1979.. 31,365 334( B) -
( 21,528 )(C ) 10,171 1978.. 32,110 1,032( B ) - ( 1,777 )( C ) 31.365 ;
Note s:
( A) Represents:
19M0 1979 197N Government reimbursements in connection with reloca-tion of plant in service.. $537,247 $ 53,257 $( I,817 )
Net salvage . 207,860 777,884 56,747 Srle of a 2%% ownership share in Seabrook Education
- L nter.. 52,285 - -
$797,392 $831,141 $54,930 (B) Charged to other income in the statement ofincome.
(C) Adjustment of cost basis of nonutility property.
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- Schedule VIII f
Valuation and Qualif.ging Accounts l TiiE UNITED II.I.UMINATING COMPANY l
FrilEDULE Vill-VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31,1980 and 1979 Col A ColH Col. C Col D Col E Additions Halance at Charged to Charged Balance at Heninning Costs and to Other End of Descriptio of Period Expenses Accounts Deductions Period (Note)
RLSLRVE DEDUCTION FROM ASSET To WillCit IT APPLIES:
Reserve for uncollectible cecounts:
1980. $865,000 $1,888,380 $1,878,389 $875,000 1979.-- 875,000 1,359,740 1,369,740 865,000 1978.. 720,000 1,278,055 1,123,055 875,000 NOTE Accounts written off, less recoveries.
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SECURITIES AND EXCHANGE COMMISSION i
Washington, D. C. 20549 l
i EURM 10-Q QUARTERLY REPORT UNDER SECTIm 13 0F THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission file number March 31, 1981 1-6788 THE UNITED ILLUMINATING COMPANY (Exact name of registrant as specified in its charter)
Connecticut 06-0571640 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
80 Temple Street, New Haven, Connecticut 06506 (Address of principal executive offices) (Zip Cade)
O Registrant's telephone number, including area code: 203-787-7200 None Former name, former address and former fiscal year, if changed since last report.
Indicate by check = ark 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 cousnon stock, as of the close of e.he period covered by this report, was 9,081,670.
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2 PART I. FINANCIAI INFCEMATICII ITIM 1. TIIANCIAL STA2EMENTS i
3E UNITED ttL"JrTMATING COMPANT l STLTEMENT OF 30mt (Unaudited) 3 ree Months Ended March 31 11!.k 1230,,
Operating Revouses $112.377.720 189.355.914 operating tapensee operation niet and interchense energy-not 62,576,052 51,155,381 Capacity purchased-net 1,139,299 991.502 Other 12,690,512 10.388,556 Maintenance 3,038,743 2,623,790 Depreciation 4,136,400 3,707,400 l Amortisation of deferred fossil fuel costs 1,924,226 50,241 Income taxes, current (Note 2) 2,398,161 (78,450)
Income cases, deferred (Note 2) 2,577,448 1,917,330 Deferred inveetner.: tas credits net (Note 2) 1.064,038 (420,809) l Other tazes 9.523.272 9.268.002 Total 101.068.171 78.602. % 3 operating Income 11.309.549 10.752.971 Other Income and %Juctions Allowance for equity funds used during construction (Note 2) 4,650,054 1,382.697 Interest income 196,084 129,695
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Other-net (' te 2) 1.812.115 _
a2.256 t Total 4.658.253 1.554. % 8 ,,
Ine w 3efore Interest ciarges 17.947.902 12.207.619
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Interest Charges Interest on debentures 6.222,708 5,009,764 l other intersec- 1,377,820 3,195,078 Allowance for borrowed funds used during t :onstruction (3 cts 2) (1.305.104) //. 981.180) l Total 5.795.124 3.:23.562 Net Income 12,172,378 9,083,957 l
Dividends an ? referred and ? reference Stock 2.??1.031 1.330.032 Income Applicable to Camman Stock 1 9,151.347 S 7,553,925 Average Number of cm Shares outstanding 7,697,226 6,234,025
!arnings per Share of Common Stock 31.23 31.21 Cash Dividends Declared per Share of Commoc Stock 3 .69 $ .67 Se Notes to Tinancial Statements which fallow are es integral part of the financial statements.
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. 3-THE UNITED ILLUMINATING COMPANY O " ' " " " " "
ASSETS March 31, December 31, i 1981 1980 (Unaudited)
! UTILITY PLANT AT ORIGINAL COST l In service $549,466,173 $548,072,588 Less reserve for depreciation 192,150,202 188,260,370 357,315,971 359,812,218 Construction work in progress 302,320,630 281,922,456 1 659,636,601 641,734,674 Acquisition adjust:nents, less amortization 25,500 39,000 l
Net Utility Plant 659,662,101 641,773,674 OTHER PROPERTY AND INVESDENTS l Nonutility property, less reserve of S10,504 . ..
202,008 202,008 Connecticut Yankee Atomic . "er Company 6,949,939 5,348,621 Rasearch Center, Inc. (wholly owned subsidiary) 1,943 1,943 Total 7,153,890 5,552,572 l CURRENT ASSETS l Cash (Note 3) 27,508,093 1,491,472 Accounts receivable Customers, less allowance for doubtful accounts of $1,000,000 and $875;000 44,291,829 33,752,071 Other 7,913,495 15,285,986 Accrued utility revenues 18,572,000 20,i,9,600 Fuel, materials and supplies, at average cost 7,022,601 7,006,357 Prepayments 319,626 254,577 Total 105,627,644 78,650,063 DEFERRED DEBITS Fossil fuel costs 15,914,668 11,436,081 Other 1,713,950 1,614,657 Total 17,628,618 13,050,738 S790,072,253 $739,027,047 The Notes to Financial Statements which follow are an integral part of the financial statements.
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THE UNITED ILLLMINATING COMPANY BAIANCE SHEET
CAPITALIZATION AND LIABILITIES March 31, December 31, 1981 1980
. (Unaudited)
CAPITALIZATION Common stock (Note 2) $166,020,938 $139,708,913 Capital stock expense (3,884,076) (3,767,333)
Retained earnings 91,070,487 86,919,494 i Common stock equity 253,207,349 222,861,074 Preferred stock not subject to mandatory redemption 70,000,000 70,000,000 Preferred and preference stock subject to mandatory redemption (Note 2) 45,000,000 '45,000,000 Long-term debt (Note 2) 283,597,789 283,581,091, Total 651,805,138 621,442,165 CURRENT LIABILITIES Current portion of long-term debt 4,000,000 12,000,000 Notes payable (Note 2) 45,438,671 18,527,106 l Accounts payable 33,561,249 39,429,410 Dividends payable 8,021,384 7,853,320 l Customers' deposits 920,913 854,595
! Taxes accrued 15,256,401 16,127,112 Deferred income taxes -
accrued utility revenues 646,499 703,070 Interest accrued 6,286,372 3,475,254 Other accrued liabilities 8,991,869 7,229,658 Total 123,123,358 106,199,525 CUSTOMERS' ADVANCES FOR CONSTRUCTION 791,330 782,950 ACCUMULATED DEFERRED INVES MENT TAX l CREDITS (50TE 2) 5,218,979 4,154,941 l
DEFERRED INCOME TAXES l Deferred fossil fuel costs 8,111,354 5,834,466 l Accelerated amortization 598,900 613,000 Accelerated depreciation (Note 2) 50,145 -
Construction overheads (Note 2) 373,049 -
COMMI MENTS AND CONTINGENCIES (Note 2) - -
$790,072,253 $739,027,047 t
l The Notes to Financial Statements which follow are an integral part of the l
financial statements.
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THE UNITED ILLUMINATING COMPANY STATr2ENT OF SOURCES OF FUNDS FOR GROSS PROPERTY ADDITIONS O
(Unaudited)
Three Months Ended March 31 1981 1980 SOURCES OF FUNDS Internally Generated Net income $12,172,378 $ 9,083,957 Add (deduct)
Depreciation and amortization 5,117,091 3,801,221 Deferred income taxes 2,634,038 1,973,901 Deferred investment tax credies-net 1,064,038 (420,809)
Allowance for funds used during construction (6.455.158) (6.363.877)
Funds Provided from Operations 15,532,387 8,074,393 Deduct dividends declared 8.021.385 5.620.832 Internally Generated Funds 7,511.002 2.453.561 External Financing
, Securities sold (retired) connon stock 26,312,025 9,979,725 j Debentures (8,000,000) 8,000,000 Expenses of issues (116,743) (144.169) 18,195,282 17,835,556 I
O Increase in notes payable Funds Obtained from External Financing 26.911.565 45.106.847 5.565,987 23.401.543 Other Sources (Uses)
Increase in wodcing capital, excluding.
l notes payable and current portion of long-term debt (28,965,313) (1,554,770) l Deferral of fossil fuel costs (6,402,813) (4,097,704)
! Lther changes in noncurrent balance sheet items (1.651.295) (206,354; Other Sources (Uses) (37.019.421) (5.858,828)
Funds for Property Additions from Above Sources 15,598,428 19,996,276 Allowance for funds used during construction 6.455.158 6.363.877 G. TOSS PROPERTY ADDITIONS $22,053,586 S26,360,153 The Notes to Financial Statements which follow are an integral part of the financial statements.
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, THE UNITED ILLUMINATING COMPANY NOTES TO FINANCIAL STATEMENTS (1) In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of operations for the three-month periods ended March 31, 1981 and 1980 have been included in the accompanying statement of income and balance sheet.
(2) The financial scacements presented herein should be read in conjunction with the Statement of Accounting Policies and the Notes to Financial Statements, appearing on pages 30 through 39 of the Company's 1980 Annual Report Forn 10-K.
Such statements and notes are supplemented as follows:
Allowance for Funds Used During Construction (Statement of Accounting Policies)
Effective January 1, 1981, the Company began accounting for the borrowed funds portion o. The allowance for funds used during construction on a net-of-tax basis, in accordance with a December 1980 race decision of tha Connecticut Department of Public Utility Control.
Coincident with the adoption of the net-of-tax allowance rate, the Company began recording the income tax benefits associated with the
, borrowed funds portion of the allowance, which amounted to $1,871,961 in the first three months of 1981, as other income rather than as a C reduction of operating income tax expence.
The allowance rate for the first quarter of 1981 was 8.8% on a net-of-tax basis (11.4%, before-tax) compared to the 11% before-tax rate in effect during 1980.
l Income Taxes (Statement of Accounting Policies) and Income Tax Expense (Note (3))
The substantial increases in deferred income taxes and deferred in-vestment tax credits in the first quarter of 1981 compared to the l
1980 period include the implementation, effective January 1, 1981, of the income tax normalization accounting changes approved in the l December 1980 rate decision. These accounting changes and the higher taxable income, which was produced by rate incresses effective in April and December 1980, resulted in an increase in the effective federal income tax rate to 22.2% for the first quarter of 1981 compared to 10.4% in the 1980 period.
Compensating Balances and Short-Term Borrowings (Note (C))
On May 1,1981, the Company's bank lines of credit, pursaant to individual arrangements with several banks, were increased from $50,000,000 to
$60,000,000 and extended to April 30, 1982. A revolving credit agreement with the same banks, aggregating $20,000,000, was terminated by the Ccmpany on April 30, 1981.
Conunon Stock (Note (D))
The Company realized proceeds of $398,025 in January 1981 from the issuance of 21,538 shares of Common Stock pursuant to its automatic dividend reinvestment and stock purchase plan. On March 31, 1981, the Company sold 1,400,000 shares of Common Stock via a public offering, realizing net proceeds of $25,914,000. The net proceeds from this issuance and sale of Conunon Stock were used to reduce short-term borrowing incurred in connection with the Company's construction program. There were 9,081,670 shares of Common Stock outstanding at March 31, 1981, after this issuance. Further proceeds of $414,064 were realized from the issuance in April 1981 of 22,060 additional shares pursuant to the dividend reinvestment and stock purchase plan.
Preferred and Preference Stock (Note (E))
The authorized number of shares of cumultstive preference stock, $25 par value, was increased from 1,200,000 shares to 5,000,000 shares by vote of the shareowners on April 29, 1981.
Long-Ters Debt (Note (G))
On March 1, 19J1, $8,000,000 of 2 7/8% debentures were redeemed at maturity.
On May 6,1981, the Comeny issued $20,000,000 of 15k.: Debentures, which will mature on Dacember 6, 1988.
j Commitments and Contingencies (Note (K))
l l The Company has entered into substantial commitments in connection with its continuing construction program, which is presently es-timated at approximately $681 million, inclusive of nuclear fuel, for the years 1981-87, including approximately S593 million for the Company's ownership share in the costs of four future nuclear generating units. These construction program estimates include S455 million for the Company's 17.5% ownership share in the cost of Seabrook Units 1 and 2, and $138 million for the Company's 3.685% and 3.3" ownership shares in Millstone Unit 3 and Pilgrim Unic 2, respectively.
Public Service Company of New Hampshire (PSNH), which has held a 50% ownership share in the two Seabrook units and is responsible for the constructico and scheduling of these units, is presently i reducing its ownership share by selling portions aggregating
' approximately 15%, to several New England utilities. In or?.. *:
complete these sales, the purchaser of a 6% share and the purchaser of a 2.2" share must complete thei- initial financing and the purchaser of a 0.3% additional share requirrv further governmental approvals.
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In March 1980, in view of the unsettled state of the capital i
'- markets and the very high cost of external funds, PSNH decided that the overall level of construction on the Seabrook units should be reduced substantially in order to lessen PSNE's external financing requirements. PSNH had hoped that, by continuing construction on items considered essential to maintain the ear 21est possible completion dates, 1983 and 1985 in-service dates for the units could be maintained.
However, by the end of 1980, and pending completion of a review of the project cost and schedule, PSNH had expected that the reduction in ene level of construction and an ironworkers' strike in the summer of 1980 had postponed the scheduled completion dates of both units by one year to 1984 and 1986. These revised in-service dates were confirmed on completion of the above review by PSNH in April 1981.
The figures above for the Company's estimated construction ex-pendituras and costs of Seabrook Units 1 and 2 are based on this recently completed raview and PSNE's plans to resume full con-struction when the above mentioned purchaser of a 6" share in the units completes its initial financing, which is expected to occur by June 30, 1981.
Actual construction expeeditures could vary from these estimates because of changes in PSNH's plans, delays, cost fluctuations and other factors.
Delays and cost increases could result from, among other things, expiration and renegotiation of labor contracts and increased regulatory and environmental requirements.
g Completion of construction of each of tne four nuclear generating
) units in which the Company is participating is contingent, among other things, upon obtaining necessary regulatory approvals, permits and sufficient financing. While it is possible that future develop-ments could lead to cancellation of one or more of the units, the Company considers the possibility of cancellation of any of the units under censtruction unlikely. However, if any of the units were cancelled, the Company escinates its share of the total cancellation costs would be substantial; the precise amount would depend upon a number of factors, including the amount of termination charges and salvage and the results of negotiations in connection with contract terminations. The Company would apply to the Connecticut Department of Public Utility Control for approval to amortize its share of total costs over an appropriate future period and to recover such costs through its rates, but the Company cannot oredict whether and to what extent such recovery would be permitted. The Company's investment in the four nuclear generating units was approximately $291 million at March 31, 1981, including $242 million invested in the Seabrook units, S36 million in Millstone Unit 3 and $13 million in Pilgrim Unit 2.
The generating units at Bridgeport Harbor Station are capable of burning either oil or coal, and on November 10, 1980, the Economic Regulatory Administration of the Depsrtment of Energy published a notice of its intention to proceed with its November 27, 1979 proposed order which would prohibit the burning of oil by the
_9 largest generating unit at this station. An exter.sive comment and hearing procedure has commenced, during which the Company and l the seseral governmental agencies having jurisdiction over its operations, financial structure and rates will continue to analyze j and present evidence concerning the economic, environmental and i engineering feasibility of converting this generating unit to l coal-burning. The Company cannot predict the outcome of these proceedings; however, a conversion to coal-burning could be ex-
! pected to involve expenditures for fuel inventory, equipment modifications and additions and pollution control and monitoring devices. Although the total amount of these expenditures would be dependent upon the actions of several governmental agencies, the Company has proposed a conversion plan that would minimize expenditures and provide the financial resources needed to l
accomplish it.
l l (3) The 1981 amount includes $25,914,000 of proceeds received on March 31, 1981 l from the sale of common stock. See Note 2, " Common Sto:.k." The proceeds from l this sale were not available for repayment of short-term borrowings until April 1, 1981.
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- 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Maior Influences on Financial Condition The financial condition of the Company continues to be affected by two interrelated factors - a heavy dependence on expensive foreign oil as a source of fuel to generate electricity and a large construction program to meet the objective of reducing the economic burden and reliability risks s of this undue reliance on oil-fired generation. The Company's financial condition is expected to be sensitive to these factors until at least the i
mid-1980's, when the major portion of the present construction program is expected to be completed and dependence on oil substantially reduced.
l During the first quarter of 1981, the prics of residual fuel oil in-creased from just ;nder $34 per barrel at the beginning of the year to i
approximately $40 per barrel at March 31, 1981. The price of oil is now l
about $10 per barrel higher than the price incorporated in the Company's current base rates. Although there is a fossil fuel adjustment clause I in all of the Company's rates, these price incraases are adversely af-
! fecting earnings and cash flow due to a two-mo th time lag in the op-eration of the fuel clause, the requirement that ets Company pay to the l State of Connecticut a tax of 5% on all revenues, f,reluding those re-sulting from increased fuel costs, and the cost of financing higher oil purchases.
l Construction expenditures for the first quarter of 1981 were $22 I million, including the allowance for funds used during construction.
The bulk of these expenditures were for the Company's current share of the costs of the four future nuclear unica M vhich the Company has ownership shares. First quarter expenditures reflect a reduced level of construction at the Seabrook project, but with the resump-tion of full scale construction at Seabrook the Company expects the average level of cash expenditures for the last three quarters of 1981 to substantially exceed the first quarter.
i During the first quarter of 1981, internally generated funds provided approximately 48% of construction program requirements, l compared to 12% in the 1980 quarter. The improvement reflects the l reduced level of construction activity at the Seabrook project as well as the positive effect on internally generated funds resulting from race increases effective in April and December 180 including the income tax normalization accounting changes approved in connection with the second rate increase. The percentage is expected to dete-riorate in subsequent quarters of 1981 with the resumption of full scale construction at Seabrook and due to lack of comparabia growth in internally generated funds as a result of anticipated adverse
- impacts of inflation on earnings and cash flow.
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1 Financing O' on March 31, 1981, the Company completed the public sale of 1.4 million shares of common stock with net proceeds of approximately $26 million. In early May, the Company sold $2C mittion of lebentures to an institutional investor.
The Company expects that the cash requirements of its construction program for the remainder of 1981, in excess of available internally generated funds, will be met from the proceeds of short-term borrowings and the sale of ad-dicional debentures and equity, most likely preferred stock.
k Results of Operations Income applicable to common stock for the first quarter of 1981 was nearly $1.9 million greater than the comparable period of 1980. This in-crease is largely attributable to rate increases effective in April and December 1980. However, the benefit of these rate increases has been sub-stantially offset by the adverse effects of a 3.5% reduction in kilowatt-hour sales and continued escalation in fuel oil prices, high financing costs and inflation in other operating expenses. In large measure, these factors wers not considered in the rate increases granted in 1980.
On a per share basis, earnings for the first quarter of 1981 were only 2c more than the comparable 1980 period due to a higher average number of shares outs.canding.
Although the level of the non-cash credit for allowance for funds used during construction for the first quarter of 1981 was practically O unchanged from the 1980 quarter,the proportion of earnings applicable to common stock represented by the allowance decreased from 84% in the first quarter of 1980 to 68" for the first quarter of 1981. The per-centage for the latest period reflects the benefit of the 1980 rate in-creases and the adoption on January 1, 1981 of the net-of-tax basis of accounting for the allowance ccmpared to the before-tax basis used during 1980. The effect of the lower allowance resr'. ting from net-of-tax ac-counting was substantially offset by the build-up of construction costs on the nuclear units and increased costs of financing construction of the units.
First quarter 1981 interest on short-term borrowings declined $1.8
- nillion from the 1980 quarter due to lower average borrowings, but 1981 interest on debentures and dividends on preferred and preference stock increased by $2.4 million due to sales of securities necessary to finance the construction program.
Operating revenues for the first three months of 1981 were higher than the 1980 period due to the approximately equal effects of two factors, the rate increases effective in 1980 and the impact of higher residual fuel oil prices through the operation of the fuel adjustment clause.
Operating expenses were up across-the-board with fuel and energy expense accounting for over half the increase. Other taxes rose by 15%
in the first "uarter of 1981, due mainly to higher state gross earnings taxes attributable to increased revenues.
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Total income taxes for the first quarter of 1981 were $2.8 million higher than in the first quarter of 1980 due to higher taxable income O and a higher effective tax rate, the combination of which mainly resulted from rate increases and the income tax normalization accounting changes approved in connect;an with the December 1980 rate increase.
In ant *cipation of the continuing impact of inflation on earnings and cash flow, the Company, on April 16, 1981, notified the Connecticut Department of Public Utility Control of its intent to file a general rate application requesting an annual increase in rates of about $54.5 million. The actual application is expected to be submitted in May 1981. Under Connecticut law, a decision on the application must occur within approximately five months of the date it is submitted.
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PART II. OTHER INFORMATION Ot Item 1. Legal Proceedings.
On February 20, 1981, the Department of Transportation, United States Coast Guard, issued a preliminary determination that a civil penalty of $600 should be assessed against the Registrant as a result of the discharges, on December 31, 1980 and February 3, 1981, of small quantities (estimated to ba.
less than 50 gallons each) of residual fuel oil into the harbor waters at Bridgeport, Connecticut, from a leak in the pipeline be: tween the oil tanker dock and the oil storage tanks at the Registrant's Bridgeport Harbor gen-erating station, which discharges were found to be in violation of the Federal iJacer Pollution Control Act. On each occasion, the oil, which was contained within the Registrant's floating containment boom, was removed at the Registrant's expense and, on March 31, 1981, the Registrant paid the civil penalty.
Item 2. Changes in Securities.
In connection with the issuance and sale, on May 6, 1981, of $20,000,000 principal amount of a new series of its 15k7. Debentures, maturing December 6, 1988, the Registrant has covenanted that, so long as any of this series of Dabentures are outstanding, it will not declare or pay any dividends on or make any distribution in respect of any shares of its class of Common Stock, no par value, (" Common Stock") other than common stock dividends, or, directly or indirectly, purchase, redeem or acquire for value any share of the Common Stock, unless the aggregate of all such declarations, payments, distributions, O. purchases, redemptions or acquisitions subsequent to December 31, 1980 does not execed the sum of (1) the net income applicable to the Common Stock for the period subsequent to December 31, 1980, plus (2) S40,000,000. The limi-tations of this covenant are the most restrictive of four limitations which the Registrant has agreed to, in connection with the issuance of its long-term debt securities, on the payment of cash dividends on the Common Stock and on amounts that can be expended to purchase, redeem or acquire for value shares of the Common Stock.
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- Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the shareholders of the Regiatrant was held on April 29, 1981. At said meeting, the shareholders adopted a resolution increasing the authorized amount of the Registrant's Cumulative Preference l Stock ($25 par value) from 1,200,000 shares to 5,000,000 thares and author-izing the Registrant's Board of Directors to issue and sell shares thereof.
i The numbers of affirmative and negative votes cast w .th respect to said I
resolution were as follows:
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Title of Class Affirmative Vote Negative Vote Common Stock, no par value 4,273,004 305,043 Cumulative Preference Stock ($25 par value) 624,585 38,510 Cumulative Preferred Stock ($100 par value) 498,025 425 Cumulative Preferred Stock ($25 par value) 374,493 24,332 Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Table II Exhibit Item No. No. Pescription (4) 4B18 Copy of Seventeenth Supplemental Indenture, dated as of May 1, 1981, between The United Illum h ting Company and First Bcnk, as Trustee, supplementing Exhibit 2.6-1.*
(20) 11A2c Copy of First Amendment, dated February 17, 1981, to Amended Trust Agreement between The United Illuminating Company and Union Trust Company, dated' November 26, 1976, amending Exhibit 11A2b.**
- Filed with Registration Statement No. 2-60849, effective July 24, 1978.
- Filed with Annual Report (Form 10-K) for the fiscal year ended December 31, 1976.
4 (b) Reports on Form 8-K: None.
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O SIGNATURES Pursuant to the requirements of the Securities Exchanga Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE UNITED ILLUMINATING COMPANY Date Signature Robert L. Fiscus Vice President -
Finance and Accounting and Principal Financial and Accounting Officer O
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PROSPECTUS (G
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( 1,400,000 Shares The United Illuniinating Con 1pany COMMON STOCK (no par value)
The Company's Common Stock is listed on the New York Stock Exchange and the Company l has applied for the listing on such Exchange of the Shares offered hereby.
THESE SECURTTIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURFTIES AND EXCHANGE C0313flSS10N NOR HAS THE C03fhflSSION PASSED UPGN THE ACCURACY OR ADEQUACY OF THIS PROSPECIUS. AhY REPRESEhTATION TO THE CONTRARYIS A CRIAfINAL OFFENSE.
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- I PR1CE $19% A SHARE
\s Underwriting Price to Discounts and Proceeda to Public Commissions (1) Company (t)
Per Share . . . .. $19.50 $0.99 $18.51 Total. . . $27,300,000 $1,386,000 $25,914,J00 (1) The Company has agreed to indemntly the several Underwriters against certain liabilities, including liabilities under the Securities .tet of 1933.
(1) Before deducting estimated expenses of $109,000 payable by the Company.
The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters, and subject to approval of certain legal matters by Day, Berry & IIoward, counsel for the Underwriters, and by IViggin & Dana, general counsel for the Company. It is expected that delivery of the Shares will be made on or about Jiarch 31,1981 at the offlee of JIorgan Stanley &
Co. Incorporated,55 TVater Street, New York, N. Y. against payment therefor in New York funds.
MORGAN STANLEY & CO.
Incorporated O
ofarch 24,1981
l No person is authorized in connection with this offering to give any information or to make any representations not contained in this Prospectus, and any information or representation not contained herein must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of sn offer to buy any of these securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. The delisery of this Prospectus at any time does not imply that the information herein is correct as of any time subsequent to its date.
ADDITIONAL INFORM ATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Information, as of particular dates, concerning directors and officers, their remuneration, and any material interest of such persons in transactions with the Company is disclosed in proxy I statements distributed to shareholders of the Company and filed with the Commission. Sr 'a reports, proxy statements and otner information can be inspected at the Public Reference Loom of the Commission at Room 6101,1100 L Street, N.W., Washington, D. C., and at the public reference facilities in the Commission's New York Regional Office, Room 1100,26 Federal Plaza, New York, New York, Los Angeles Regional Office, Suite 1710,10960 Wilshire Boulevard, les Angeles, California, and Chicago Regional Office, Room 1204, Everett McKinley Dirksen Building,219 South
Dearborn Street,
Chicago, Illinois, and copies of such material can be obtained at prescribed rates. Such material can also be inspected at the New York Stock Exchange.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE There are hereby incorporated in this Prospectus by reference the following documents and information heretofore filed with the Securities and Exchange Commission, to which reference is hereby made:
- 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31,1980, filed pursuant to Section 13 of the Securities Exchange Act of 1934 (the "1934 Act").
- 2. The Company's del'nitise proxy statement, dated March 6,1980, in connection with the Annual Meeting of the Shareholders of the Company held on April 9,1980, filed pursuant to the 1934 Act.
All documents filed by the Company with the Securities and Exchange Commission pursuant to Sections 13,14 or 15(d) of the 1934 Act after the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents.
The Company hereby undertakes to proside without charge to each person to whom a copy of this Prospectus has been delivered, on the written request of any such person, a copy of any or all of the documents described abose which are or may be incorporated in this Prospectus by reference, other than exhibits to such documents. Written requests for such copies should be directed to Mr. Richard F.
Skinner, Secretary, The United Illuminating Company, 80 Temple Street, New IIasen, Connecticut 06506.
IN CONNECFION WITil Tile OFFERING, Tile UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WIIICII STABILIZE OR MAINTAIN TIIE MARKET PRICE OF TIIE COMPANY'S COMMON STOCK AT LEVELS ABOVE TilOSE WIIICll MIGitT OTIIERWISE PREVAllIN TIIE OPEN MARKET. SUCil TRANSACTIONS MAY BE EFFECTED ON TIIE NEW
\ ORK STOCK EXCilANGE OR IN TIIE OVER-Tile-COUNTER MARKET. SUCll STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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SUMMARY
INFr 'IMATION The following material is quahped in its entirety by the detailed information and pnancial l statements appearing elsewhere in this Prospectus andin the documents incorporatedin this Prospectus by reference.
Tile OFFERING Securities to be Offered.. 1,400,000 shares of Common Stock, no par value (the Shares);
7,681,670 shares outstanding February 28,1981 Common Stock Dividend. On February 23,1981, a quarterly dividend of S.69 was declared payable April 1,1981 to shareholders of record on March 9, 1981. The Shares will not be entitled to this dividend. The indicated annual dividend rate is $2.76. The Company presently estimates that more than one-half of the Company's 1981 dividends on Common Stock will be treated as a return of capital for Federal income tax purposes and accordingly will not be taxable as ordinary income.
Common Stock Listed.. --.New York Stock Exchange (Symbol: UIL)
Common Stock Prices:
Report-d Ranges-1980. .. .23 %-17 1981 (through March 23, 1981).. 20 %-18 Book Value of Common Stock at December 31,1980 .. . $29.09 per share p)
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SELECTED FINANCIAL INFORMATION (Thousands except Per Share Amounts)
Year Ended December 31, 1976 1977 1978 1979 1980 Openting Revenues $193,820 $219,503 $216,315 $281,878 $364.122 Net Income $ 18,562 $ 23,658 $ 21,477 $ 29,668 $ 34,466 income Applicable to Common Stock $ 14.845 $ I8,907 $ 16,726 $ 23,924 $ 25,170 Average Shares of Common Stock Outstanding ... _. 4.999 5,012 5,458 6.072 7,06I
"'er Share of Common Stock Earnings $2.97 $3.77 $3.06 $3.94 $3.56 Dividends Declared. 52.35 $2.47 $2.56 $2.62 $2.68 Capitalization Summary:
December 31,1980 Adjusted Actual As Adjusted (a) Percentage Long-Term Debt (including current maturities) $295,58I $315,581 46.4%
Preferred and Preference Stock 115,000 115,000 16.9 Common Stock Equity . 222,861 249.056 36.7
$633,442 $679.637 100.0 %
(a) To reflect the sale of the Shares, the sale of 21,538 shares of Common Stock on January 1,1981 pursuant to the Company's Automatic Dividend Reinvestment and Common Stock Purchase Plan, and the proposed sale to an institutional purchaser of $20,000,000 of Debentures n scheduled for May,1981.
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TIIE COMPANY The United Illuminating Company (the Company or UI) is an operating electric public mility company, incorporated under the laws of the State of Connecticut in 1899. It is engeged principally in the production, purchase, transmission, distribution and sale of electricity for residential, commercial and industrial purposes in a service area of about 335 square miles in the southwestern part of the State of Connecticut. The population of this area is approximately 704,000, or 23% of the populction of the State.
The servi:e area, largely urban and suburban in character, includes the principal cities of Bridgeport (population 148,000) and New flaven (population 130,000) and their surrounding areas. Situated in the service area are both large and small industries producing a wide variety of products, including primary metals, aircraft engines, helicopters and other transportation equipment, rubber and plastic products, fabricated metal products, ordnance and electrical machinery and equipment. During 1980, approxi-mately 36.9% of tne Company's electric revenues was derived from residential sales, 33.9% from commercial sales,27.1% from industrial sales and 2.1% from other sales.
The principal executive offices of the Company are located at 80 Temple Street. New flaven, Connecticut 06506 (telephone 203-787-7200).
USE OF PROCEEDS AND COMSTRUCTION PROGRAM The proceeds to be received by the Company from the issuance and sale of the Shares wil! be used to reduce short-term borrowings incurred in connection with the Company's construction program. Short-term borrowings are expected to be approximately $45,000,000 immediately preceding the application of the proceeds from the sale of the Shares.
UI is engaged in a continuing construction program, presently estimated at approximately
$559,800,000 (excluding estimated nuclear fuel costs of approximately $56,200,000) during the years 1981-1987, inclusive, to provide facilities to serve the requirements ofits customers.
The Company's 1981 construction program (excludmg nuclear fuel costs of approximately
$14,259,000) totals approximately $108,816,000. This program provides about $94,824,000 for electric generating projects, including approximately $80,507,000 for the Company's ownership share of the 1981 costs of the two Seabrook nuclear generating units (Seabrook Unit Nes. I and 2) and approximately
$12,001,000 for its ownership share of the 1981 costs of the two other future nuclear generating units in which the Company is participating (Pilgrim Unit No. 2 and Millstone Unit No. 3). In addition, the 1981 construction program provides approximately $9,757,000 for expansion of distribution facilities, including overhead and underground distribution line extensions, substations and transformer, meter and new service installations, and $4,235,000 for transmission facilities and other projects.
The Company's construction program is presently estimated at approximately $451,022,000 (ex-ciuding estimated auclear fuel costs of $41,968,000) during the years 1982-1987, inclusive, including approximately $3V .908,000 for the Company's participation in the construction of the four nuclear generating units, and approximately $2,573,000 for other electric generating projects, $44,963,000 for distribution projects and $3,578,000 for transmission facil; ties and other projects.
All of the above construction program costs are based on current construction schedules and include allowance for funds used during construction.
The Company has been experiencing difficulty in maiataining adequate cash flow and financing its construction program. It has been the practice of the Company to finance current co. truction expenditures in excess of available internally generated funds from the proceeds of short-term borrowings, to be repaid through the sale of Common, Preferred and Preference Stocks and Debentures. In recent years, internally generated funds have provided varying percentages of the Company's construction program requirements, and the Company has been dependent on outside financing to provide a major portion of such capital requirements. Internally generated funds provided an averat,e of approximately 45% of such expenditures during the period 1975-1977; however, these funds provided only 17%,18% and 3% of such expenditures during 1978,1979 and 1980, respectively. The decline since 1977 in the percentage of construction expenditures provided by internally generated funds reflects construction work on Seabrook Unit Nos. I and 2, increased costs of financing Seabrook construction expenditures and inadequate rate relief. The Company presently anticipates that it will be recessary to rely on external 4 {
sources for a substantial portion of the capital required to finance its construction program and refund maturing securitias through 1986.
s The Company expects to issue 320,000,000 of a proposed new series of Debentures in May of 1981 and to use the proceeds of the sale of these Debentures to reduce short-term borrowings incurred in connection with the construction program.
The success of the Company's financing plan is dependent upon a number of factors, including conditions in the securities markets, economic conditions, the level of the Company's sales and its ability to obta!n adequate and timely rate relief. Due to the continued escalation of residual fuel oil prices, which reached nearly $39 per barrel in early February 1981, high financing costs and inflation in other operating expenses, the Company anticipates a need for additional rate relief in 1981. Continuation of these inflationary trends will necessitate periodic rate relief after 1981.
RECENT FINANCIAL RESULTS For the twelve months ended 1-ebruary 28,1981, operating revenues, net income and earnings per share for Common Stock were $379,482,471, $37,327,198 and $3.72, respectively. These amounts are unaudited but, in the opinion of the Company, include all adjustments (which comist of only normal recurring adjustments) necessary for a fair statement of the results of operations. 1 comparison to the year 1980, net income and earnings per share for the latest 12-month period improved primarily due to an increase in the non-cash credit for allowance for funds used during construction r.nd the impact of rate increases granted by the Connecticut Department of Public Utility Control ( DPUC) effective in April and December 1980. Ilowever, the benefits of the rate increases were substantially ofiset by the adverse effects l
of a slight reduction in kilowatt-hour sales, continued escalation in fuel oil prico, high financing costs and inflation in other operating expenses. In large measure, these adverse factors were not considered by the DPUC in the revenue increases granted in 1980.
DESCRIPTION OF CONINTON STOCK Disidend Rights lloiders of Common S ock have no fixed dividend rights. Dividends are declared by the Directors of
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L the Company, and are dependent upon earnings, capital requirements, financial condition and other factors.
The provisions of the Company's Preferred Stock and the Company's Preference Stock state that full cumulative dividends thereon, to the last preceding dividend date, must be paid or set apart before any dividends are paid or set apart for the Con. mon Stock, in connection with the issuance of its Debentures, the Company has agreed to limitations on the payment of cash divijends on its Common Stock and on amounts that can be expended to purchase or redeem shares ofits Common Stock. Under the most restrictive of the existing limitations, the Company may not declare or pay any dividends on its Common Stock, other than dividends payable in shares of such stock, or purchase, redeem or acquire for value any ofits Common Stock, except out of net income applicable to Common Stock subsequent to December 31,1978, plus $32,500,000. Under this covenant,
$46,665,026 of the Company's retamed earnings were unrestricted as of December 31,1980. Under the terms of the proposed issue of Debentures which the Company plans to issue in May of 1981, $40,000 000 of retained earnings would have been unrestricted as of December 31,1980.
Voting Rights lloiders of Common Stock are entitled to one vote per share and, except as holders of the Preferred Stock and Preference Stock may be entitled as a matter oflaw or under the provisions of those stocks to voting rights, holders of Common Stock have the exclusive right to receive notices of shareholders' meetings and to vote. The Preferred Stock provides that whenever dividends on any share of <.uch stock are in arrears in an amount equal to or exceeding six quarterly dividend payments, or whenever some other event of default has occurred, the holders of such stock shall be given notice of all shareholders' meetings and shall have the 'right to elect the sinallest number of directors necessary to constitute a majority of the Board of Directors of the Company until such time as the default has been cured. The Preference Stock provides that whenever dividends on any share of such stock are in arrears in an amount equal to or exceeding six quarterly dividend payments, or whenever some other event of default has occurred, the holders of such stock shall be given notice of all shareholders' meetings and shall have the right to elect two members of the Board of Directors of the Company until such time as the default has been cured.
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l.iquidation Rights On liquidation of the Company, holders of Common Stock are entitled to share pro rata the net assets of the Com,nany remaining afte. the payment of all amounts due to creditors and to holders of the Preferred Stock and Preference Stock then outstanding. liolders of outstanding shares of any series of the Preferred Stock and Preference Stock will be entitled to receive upon any liquidation, dissolution or winding up of the Company, if voluntary, the then current redemption price thereof and,ifinvoluntary, the par alue per share, plus in each case all dividends accrued and unpaid to the date of payment, before any payment may be made on the Common Stock.
Pre-emptise Hights licidcrs of Common Stock have no pre-emptive rights to subscribe to, purchase or receive any issue of the Company's capital stock of any class or any other securities issued by the Company, whether or not convertible into capital stock of any class.
Miscellaneous IIolders of Common Stock have no conversion rights, nor are there any redemption or sinking fund provisions applicable to the Ccmmon Stock. liolders of Common Stock are not, and holders of the Shares will not be, liable to further calls or assessment by the Company.
Transfer Agent and Registrar The Connecticut Bank and Trust Company, One Constitution Plaza, liartford, Connecticut, is Transfer Agent and Registrar of the Common Stock of the Company.
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UNDERWRITERS Under the terms and subject to the conditions in an Underwriting Agreement dated March 24,1981, the Underwriters named below have seserally agreed to purchase and the Company itas agreed to sell to each Underwriter, severally, ti e respective number of Shares set forth below.
Number Number of of Name Shares Name Shares Morgan Stanley & Co. Incorporated - 233,200 Johnston, Lemon & Co. Incorporated 6,700 Advest, Inc. 20,000 Edward D. Jones & Co. 2,200 Babbitt, Meyers & Company, Inc. 2,200 Josephthal & Co. Incorporated 3,150 Bache lialsey Stuart Shields Incorporated 56,000 Kidder, Peabody & Co. Incorporated ., 56,000 f Bacca, Whipple & Co. 6,700 Laidlaw Adams & Peck Inc. 2,200 Robert W. Baird & Co. Incorporated 6,700 Legg Mason Wood Walker, Incorporated 6,700 Baker, Watts & Co. 2,200 Lehman Brothers Kuhn Loeb Incorporated $6,000 Manley, Bennett, Mcdonald & Co. 2,200 Barclay Putnam Div. of F. L. Putnam & Compary,Inc. 2,200 A. E. Masten & Co. Incorporated 2,200 Bateman Eichler, Hdl Richards Incorporated.. 6,700 Mcdonald & Company 6,700 Bear,Stearns & Co. 56,000 Moore & Schley, Cameron & Co. 2,200 Birr, Wilson & Co.. Inc. 2,200 Moselcy, Hallgarten, Estabrook & Weeden Inc. . 56,000 Wdliam Blair & Company 6,700 New hard, Cook & Co. Incorporated. 3,350 Blunt Ellis & LoewiIncorporated 6,700 The Ohio Company 3,350
$6,000 Oppenheimer & Co., Inc. 20,000 Blyth Eastman Paine Webber Incorporated 6,700 Parker / Hunter Incorporated 3,350 J. C. Bradford & Co., Incorporated 20,000 Piper, Jaffray & Hopwood Incorporated 6,700 Alex. Brown & Sons 3,350 Prescott, Ball & Turben 6,700 Bruns, Nordeman, Rea & Co.
Rauscher Pierce Refsnes, Inc. 6,700 Burgess & Leith Incorporated 2,200 The Robinson-Humphrey Company,Inc. 6,700 Butcher & Singer Inc. 3,350 Rodman & Renshaw,Inc. 2,200 Carreau, Smith, Inc. 6,700 Wm. C. Roney & Co. 2,200 The Chicago Corporation - 3,350 Rotan Mode Ine- 6,700 Cowen & Company 3.350 56,000 L F. Rothschild, Unterberg, Towbin Craigie Incorporated 3,350 R. Rowland & Co., Incorporated 3,350 Dain Bosworth Incorporated 6,700 a n, ele , cMporated 2,200 Doft & Co.,Inc. 3,350 Do son, Lufkin & Jenrette Securities
{ b s Inc. 5 Smith Barney, Harris Upham & Co.
Drexei Burnham Lambert incorporated 56,000 56,000 Incorporated A. G. Edw ards & Sons, Inc. . 20,000 Smith, Moore & Co. 2,200 Elkins & Co. 3,350 Stifel, Nicolaus & Company Incorporated 3,350 Fahnestock & Co. 20,000 Stix & Co. Inc. 2,200 Ferris & Company, Incorporated 2,200 Sutro & Co. Incorporated 6,700 First Albany Corporation - 2,200 Henry F. Swifi & Co. 2,200 First ofMichigan Corporation 6,700 Thomson McKinnon Securities Inc. 20,000 Folger Nolan Fleming Douglas Incorporated ... 6,700 Tucker, Anthony & R. L Day,Inc. 20,000 Gruntala Co. 3,350 Wagenseller & Durst, Inc. 3,350 Herzfeld & Stern 3,350 Wertheim & Co.,Inc. 56,000 E. F. Hutton & Company Inc. 56.000 Wheat. First Securities, Inc. 6,700 Interstate Securities Corporation 3,350 Dean Witter Reynolds Inc. 56.000 Janney Montgomery Scott Inc. - 6,700 Total I.400,000 Johnson, Lane, Space, Smith & Co., Inc. .. . .. 2,200 The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Shares are subject to various conditions, including the approval of certain legal matters by counsel, that no stop order suspending the effectiveness of the Registration Statement is in effect and no proceedings for such purpose are pending before or threatened by the Securities and Exchange Commission, and that there has been no material adverse change (not in the ordinary course of business) in the condition of the Company from that set forth in or contemplated by the Registration Statement The nature of the Underwriters
- obligations is such that they are committed to take and pay for all of the Shares ts if any are taken.
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T!.e Underwriters propose to offer the Shares to the public at the otrering price set forth on the cover page hereof and to certain dealers at a price which represents a concession of 70c a share under the public offering price. Underwriters may allow and such dealers may reallow a concession, not in excess of 15c a i share, to other Underwriters or certain other dealers who enter into a Dealer Agreement T%e Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilitie, under the Securities Act of 1933.
LEGAL OPINIONS AND EXPERES The legality of the Shares will be passed upon for the Company by Messrs. Wiggin & Dana,195 Church Street, New Haven, Connecticut, and for the Underwriters by Messrs. Day, Berry & Howard, One Constitution Plaza, Hartford, Connecticut.
The statements made in the Corupany's Annual Report on Form 10-K for the fiscal year ended December 31,1980 ( which document is incorporated in this Prospectus by reference) as to matters oflaw and legal conclusions under " Construction Program", " Financing Problems", " Franchises and Regu-lation", " Rates", " Fuel Supply and Related Operating Considerations", " Arrangements with Other Utilities", "Ervironmental Regulation", " Nuclear Licensing Proceedings", " Generating Facilities",
" Transmission and Distribution Plant" and " Legal Proceedings", the statements n.ade in the Co.mpany's definitive proxy statement, dated March 6,1980, in connection with the Annual Meeting of the Shareholders of the Company held on April 9,1980 (which document is incorporated in this Prospectus by reference) as to matters oflaw and legal conclusions, and the statements herein as to matters oflaw and legal conclusions under " Description of Common Stock", have been reviewed by Messrs. Wiggin & Dana and are made on their authority as experts.
The financial statem:nts included in the Companyi Annual Report on Form 10-K for the fiscal year ended December 31,1980 (which document is incorporated in this Prospectus by reference) have been so included in reliance upon the report of Coopers & Lybrand, independent certified public accountants, which report is giun t pon their authority as experts in accounting and auditing.
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- AAb STATE OF CONNECTICUT
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! DEPART.t/ENT OF PUBLIC UTILITY CONTROL ;
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! DOCKET NO. 800601 i i
i APPLICATION OF ,
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i THE UNITED ILLLMINATING C0tiP.ViY TO INCREASE ITS RATES 1
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1 DECISION I
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s s ,- DECISION Table of Contents I. INTRODUCTION PAGE A. Company Proposal ............................................ 1
- 3. Hearing Held ................................................ 1 C. Parties and Intervenors . .................................... 1 II. APPLICANT'S EVIDENCE A. General ........................................ ............ 2
- 3. Test Year and Pro Forma Rates of Return . . . . . . . . . . . . . . . . . . . . . .3 C. Rates and Rate Structure .................................... 3 D. Revenues .................................................... 4
-E. Construction Program .................... ................... 5 F. Depreciation ................................................ 5 G. Rate Base ................................ .................. 6 H. Fi ancial Data .............................................. 6 I. Expenses ......... ................... . . . . . . . . . . . . . . . . . . . . . .6 III. PARTIES AND INTERVENOR'S POSITIONS N
A. Division of Consumer Counsel .......... . . . . . . . . . . . . . . . . . . . . .7
- 3. Western Connecticut Industrial Council, Inc. . . . . . . . . . . . . . . . . .9
- C. Connecticut Citizen Actica Group ............................ 9 i D. Connecticut Industrial Energy Consumers . . . . . . . . . . . . . . . . . . . . . 10 E. Connecticut Business & Industry Association . . . . . . . . . . . . . . . . . . 10 F. Tale University ............................................. 11 G. Connecticut Conference of M.unicipalities . . . . . . . . . . . . . . . . . . . . . 11 H. Barton and Buchanan . ........................................ 11 I. Cther Parties, Intervenors and Participants . . . . . . . . . . . . . . . . . . 12 IV. ACTHORITT ANALYSIS AND EVAI,UATION OF EVIDENCE A. General ..................................................... 12
- 3. Test Year .............................. .................... 13 -
C. Rates and Rate Structure . ................................... 14 D. Revenues ........................... ........................ 19 E.
Construction Program . ................... .................. 20
- . Depreciation .
.... .................................... ......&O G. Rate Base Table I . ...................... .................. 20 H. Financial Data .................... ......................... 22 I. Expenses ......................... .......................... 26 J. Summary Table II ............................................ 29 V. FINDINGS OF FACT ..................... ..... ..................... 30
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S DECISION I. INTRODUCTION A. Company Proposal On July 3, 1980, pursuant to Sections 16-19 and 16-19a of the General S tatutes of ~ Connecticut, the United Illuminating Company. filed with the Ceparment proposed amendments to its existing rates and special contracts.
The proposed amendments would increase the Company's annual revenues by
$50,496,612, or approximately 13.7% effective July 13, 1980.
- 3. Hearing Held Pursuant to Notice of Hearing dated August 15, 1980, a public hearing was convened in Hartford on September 2,1980 and continued on September 3, 4, 5, 8, 10, 12, 15 and October 1. In order to provide the Company's custo-mers with an opportunity to express their views concerning the Company's rate application, hearings were held at Bridgeport on September 9 for day y and evening hearings and New Haven on September 15 for an evening hearing.
C. Parties and Intervenors The Authority recognized the United Illuminating Company, The Division of Consumer Counsel, the Power Facilities Evaluation Council, The Department of Economic Development, The Office of Policy and Management, and The Department of Environmental Protection as parties. The Authority recognized the sollowing as intervesors.
John & Shirley Barton Thomas & Margaret 3uchanan Western Connecticut Industrial Council, Inc.
Connecticut Citizen Action Group Connecticut Industrial Energy Consumers -
Connecticut 3usiness & Industry Association New Haven Clamshell Yale University Connecticut Resources Recovery Authority Connecticut Conference of Municipalities Bernard E. I.ynch, Jr.
In addition to the above listed parties and intervenors, the ?.uthority took statements from many consumers and groups in the course of its public ,
hearings. The Authority has also received a number of letters from interes-
! ted persons concerning the Company's application.
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. DCCKET NO. 800601 Page 2 O II. APPLICANT'S EVIDENCE A. General
- 1. Description of Company The United Illuminating Company, a Corporation organized under the laws of the State of Connecticut, has its principal office at 80 Temple Street, New Haven, Connecticut. The Company is a public service company engaged in the business of generating, transmitting, distributing and selling electric energy within its franchised territory.
The Company's electric service territory covers approximately 335 square miles in 17 towns and has an estimated population of 727,000 or 23 percent of the population of the State. The average number of electric customers in the test year was 277,222.
The Company last received a general rate increase effective September 16, 1979 and a limited increase in the form of a surcharge to cover the increase in fuel costs effective April 25, 1980.
- 2. Comoany Witnesses The United Illuminating Company presented the testimony of seven wit-nesses in support of its application.
O Mr. John D. Fassett, President and Chief Executive Officer testified generally regarding the importance to the Company and its eustomers of being able to accomplish the financing required for the construction program, considerations to support the modifications to levels of accrual of depre-ciation for major generating units and general areas.
Mr. James F. Cobey, Jr. , Executive Vice President Finance & Adminis-tration and Treasurer or the Company testified regarding " test year" revenues and expenses and appropriate pro forma adjustments.
Mr. Leon A. Morgan, Zxecutive Vice President - Operations, Engineering and Customer Services testitied regarding the entire construction program including its budgeting, load forecasting and the importance of the four nuclear plants in which the Company is a participant.
Mr. Nicholas W. Cerjanec, Manager - Rates testified regarding the rate design aspects of the proposed increase.
Mr. David F. Springsteen, founder of David F. Springsteen Company, Financial Consub ro , testified regarding the Company's cost of equity capital and a fair rate of return.
Mr. Philip C. Kron, head of the Energy-East Department of Citibank dis-cussed:
- 1) How banks evaluate a utility's credit.
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DOCKET No. 800601 Page 3 V 2) Citibanks' involvement with U.I. and U.I. 's recent financial crisis.
- 3) Why U.I. is still vulnezable to financial difficulty.
- 4) What Citibank would like to see from the DPUC as Citibank considers future lending to U.I.
Mr. John F. Curley, Jr., Managing Director of Morgan Stanley & Company, Inc., an investment banking firm which has underwritten issues of U.I. 's securities, discussed difficulties U.I. experienced in 1980 in the marketing of its si.ock and fixed income securities and the adverse impact of the down-grading on the ability of the Company to finance. He said that investors accurately perceive that U.I.'s financial condition has deteriorated drama-tically, that investors consider the DPUC to be unresponsive to the ne;eds of Connecticut utilities to improva cash flow, and that rating agencies rate U.I.'s senior debt being of a higher quality only to Metropolitan Edison of the 130 electric utilities and pro forma rates of return rated by both Moody's and Standard & Poors.
- 3. Test Year and Pro Forma Rates of Return In the instant application, the Company indicated by Exhibits that for the test year ended March 31, 1980, it experienced adjuste.1 utility opera-ting income of $35,054,031 and a rate of return of 8.73*, on rate base. For a pro forma period at present rates, the Company calculated that adjusted utility operating income would amount to $24,463,865 and that the rate of return would be 6.23*. At the proposed rates requested, adjusted utility operating income would be $46,349,150 with a rate of return of 11.90",.
C. Races and Rate Structure
, James F. Cobey, Execucive Vice President, Finance and Administration, l and Treasurer for United Illuminating, subm3tted pre-filed testimony on the Company's proposed allocation of the revenue increase to United Illumina-l' ting's rates. Based on pro forma test year sales revenues, the Company proposed to increase rates an average of 13.7"..
The Company's original application included,: allecation of the pro-posed increase on a uniform percentage basis to the non-fuel component of most of the rates; a modified allocation method to rates with off-peak com-ponents (Rates A, RT, and GST) and streetlighting rates; modifications to l Rates GS and TE; changes in the Terms and Definitions concerning late pay-i ment and reconnection charges, and a fold-in credit to rates to reflect March, 1980 fossil fuel costs.
In response to a DPUC data request, on August 20, 1980 the Company submitted the testimony of Nicholas W. Cerj anee. Mr. Cerj anec, the new
- Manager - Rates for United Illumi
- . sting, adopted the pre-filed testimony and exhibits of James F. Cobey that pertained to rates, and also discussed com-pliance of the Company's rate with Title I of the Public Utility Regulatory Policies Act of 1978 (PURPA), and compliance of the proposed Self-Generator Race SG with the Federal Inergy Regulatory Commission's (FERC) Order No.
69 - Final Rule implementing Section 210 of PURPA.
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DOCKET NO. 800601 Page 4 Mr. Cerj anec testified that he believed the Company's rates to be in substantial compliance with the purposes of Title I of PURPA, including the consideration of the following ratemaking star tards: cost of service; declining block rates; time-of-day rates; season . and interruptible rates; load management techniques; master metering; auamatic adjustme at clauses; information to consumers; termination of electric service, and advertising.
Mr. Cerj anec also testified that the proposed Self Generator Rate SG complies with the FERC Order No. 69, including consideration of "just and reasonable rates", standard rates for purchase, avoided costs to an electric utility that purchases power from self-generators, and interconnection Costs.
The original testimony of Mr. Cobey proposed the allocation of the revenue increase on a uniform basis to the non-fuel component of all rates except Rates A, RT, GST and streetlighting rates and special contracts, and customer charges of Rites RT and GST. The Company testified that, since fuel cost related rate changes were made in Docket No. 791216, and the pur-pose of the proposed increase is to cover non-fuel related costs, their proposed allocation method is appropriate.
The off-peak portions of Rates A, RT and GST were not subject. to the proposed increcse, reflecting United Illuminating's recognition of a likely increase in the on-peak /off-peak fuel cost differential. Streetlighting rates were assigned a proposed increase approximately equal to the overall percentage increase requested; this was judged by the Company to be a note O
equitable allocation metnod for these races.
\_d In Rates GS and TE, United Illuminating again proposed to eliminate the block extender provision of these rates and replace it with an equivalent demand charge, phased in over a two year period to minir.ize customer impacts.
The Company testified that the block extender does not reflect demands placed on the system, customers do not pay proportionate shares of costs incurred in meeting those demands, and customers who have not reached the block extender limit do not have any incentive to reduce their demand.
The Company has proposed increasing customer charges of Rates R. nd GST to reflect updating of customer, metering, and equipment and a:aintenance costs, and to reflect the proposed rate of return.
I. ate payment charges are proposed to increase from 1% to 1\% per month
- for non-residential customers and reconnection charges are increased from
$5.00 to $9.00 (or S16.00 after 5 p.m. or on weekends). The Company believes these changes are necessary to reflect today's increased costs of providing these services.
D. Revenues To the test year revenue of $305,423,551, an adjustment downward of
$4,217,900 for billed revenues per Dochet No. 730701 was made; then the Ccm-pany made adjustments to reflect rates effective September 16, 1979, rates effective April 25, 19,80, and fuel prices as of September 1, 1980 of
$59,393,326. Adjustments to operating revenue were made to reflect year-end customers, normal weather, and existing and projected conservation througa
DotdT No. 800601 Page 5 voltage reduction (CVR) of $418,337. These adjustments increased pro-forma revenues at existing rates by $60,312,163. This results in revenues of
$361,552,814.
E. Constructien Program A witness for the Company submitted exhibits which showed that for the years 1980 through 1987, new construction ezpenditures are expected to total approximately $790.4 millica including AFUDC and approximately $490.5 mil-lion without AFUDC.
Electric production plant expenditures during the same period are expected to total approximately $419.5 million which accounts for approxi-mately 53.1% of the total construction budget. The major expenditure,
$414.5 million in this category is associated with the assumed ownership of 20% of the two 1,150 megawatt units of the Seabrook Nuclear Plant in Sea-brook, New Hampshire to be completed in 1984 and 1986 respectively, 3.685%
ownership of the 1,150 megawatt Millstone Unit #3 in Waterford, Connecticut to be completed in 1986, and a 3.3% ownership of the 1,150 megawatt Pilgrim Unit #2 in Plymouth, Massachusetts to be completed in 1987.
The projected expenditures for electric transmissian plant during the same period acccunt for approximately $6.0 million or .8% of the total construction budget. Distribution plant expenses are projected at approxi-mately $61 million or 7.7% of the total construction budget. The remainder of the construction program is in the general plant, accounting for approxi-mately $4,0 million or .5% of the total construction budget. The allowance N for funds used during construction amounted to approximately $299.9 million or 37.9% of the total construction program.
F. Depreciation The Company did not present a new depreciation study but did request an accelerated depreciation on the boiler portion of the New Haven Harbor Unit and Bridgeport Harbor Unit 93 fossil fuel facilities.
The Company proposes to increase the depreciation of Bridgeport Harbor Unit 13 plant by about $750,000 per year and the New Haven Harbor Unit by about $4.2 million per year.
The reason for the acceleration in depreciation for the Bridgeport Harbor Unit 93 plant is due in part because it ". . .has been targeted for conversion to coal burning by the Federal Department of Energy".
The reason for the acceleration in depreciation for the New Haven Harbor Unit is due in part to "... developments in tne international oil situation and this country's policy to reduce its dependence on foreign oil...".
Another clai=ed basis for these depreciation accelerations ".. .is that U.I. is required by its Trust Indenture to charge to depreciation expense not less than 2% of the averaga of the beginning and ending balances of the gross property account including construction work-in-progress."
DOCKET NO. 800601 Page 6
(( The Lompany did present an updated depreciation accruals and reserve balances by accounts as of March 31, 1980.
The Company's witnesses also stated that no funds were allocated for the conversion of the Bridgeport Harbor Unit No. 3 in the unstruction bud-get.
G. Rate Base
. A discuasion of the . spany's rate base evidence has been incorporated in the Authority's Analysu and Evaluation of Evidence. See Section IV., G.,
infra.
H. Financial Data The Company proposed the following capital structure and capital costs:
RATIO COST '4IGHTED COST Long-Ter:n Debt 45% 8.47 3.81%
Preferred & Preference Stock 15 9.69 1.45 Common Stock 40% 16.6 6.64 100% 11.90%
The rate of return proposed by tne Company was 11.90%.
{ I. Expenses The testimony and exhibits offered by the Company's Chief Financial Officer detail the Company's proposed expenses. The Company's pro forma expenses are discussed and adjusted where necessary, in the Authority's Analysis and Evaluation of Evidence. See Section IV., I., infra.
Proposed Tax Accounting Changes The Company proposed that the Authority " adopt the practice of match-ing the timing of the income tax benefits arising frca property investments l with the timing of the recovery through rates of the cost of such invest-ments." Specifically, the Compacy proposed:
- 1) the adoption of the net-of-tax treatment of accounting for A?UDC;
- 2) the adoption of nor:nalization accounting for property taxes, payroll texes, sales and use taxes and pension costs capita-li:ed as construction costs on the books, but deducted currently for income tax purposes;
- 3) to normalize the tax effect of the timing difference between book and .ax depreciation commencing January 1,1981 for pro-perty additions in 1931 and later years-
- 4) to defer the 4% portion of the investment tax credit on qualified progress expenditures and amorti:e the cr-lit to l
v l
4
, DOCKET NO. 800601 Page 7 income rateably over the book depreciable life of the associ-ated property.
The Company contended that the major benefits of the above -hanges would be to " cure the substantial subsidies which are accruing to present
- customers at the expense of future customers" and "would improve internal cash flow and in so doing, reduce external financing requirements and improve coverages". This would, the Company said, increase the quality of the Company's securities and therefore lower the cost of obtaining capital, the benefit of which would accrue to cusacmers.
The Company said that these changes would make Connecticut practice consistent with FERC policies, the majority of other state regulatory agen-cies, Congressional intent, and private and public accounting standards agencies, including the Finsacial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission, and also with the conclusions of a 1979 study published by the National Regulatory Researen Institute.
III. PARTIES AND INTERVENOR'S POSITIONS A. Division of Consumer Counsel Pursuant to Section 16-2a of the Connecticut General Statutes, the Division of Consumer Counsel (CCC) represented by Barry S. Zitser was gran-ted parny status in the proceeding.
,) presented its own briefs in the proceedings.
~he DCC cross-examined witnesses and The DCC has expressed the following positions in connection with the Company's applications:
- 1. The accelerated depreciation for Bridgeport Harbor Unit 3 Boiler and New Haven Harbor 3 oiler should be denied.
- 2. The Company's trust indenture should be modified.
- 3. The Company's proposed AFUDC net-of-tax treatment should be denied.
- 4. The Company's management should be directed to continue the pursuit of a sale of its accounts receivable.
- 5. The Company should be ordered to pursue fuel leasing.
- 6. The Department should encourage U.I. to create a pcrmanent and ongoing committee to explore the cash flow problem and should point out various alternatives for further improve-ments available to U.I.'s management.
- 7. The Company's requested return on common equity is excessive and it should be no higher than 14*..
k
1 i
DOCKZT NO. 800601 Page 8
- 8. The Company's construction program is more than necessary and a reduction in the ownership in Seabrook and a sale of its entire ownership in Pilgrim II should be ordered.
- 9. Regarding the fossil fuel plants, the Company should oppose coal conversion and a program to retire English Station and Steel Point Station should be implemented.
- 10. Property Taxes on unused and useless generating plant thould be denied. '
- 11. Any gains on the disposition of utility plant should be recognized as a recurring item for ratemaking purposes .
- 12. Ratepayers should not be compelled to pay for any expenses related to the Seabrook Infomational Center.
- 13. The Company's request for a storm allowance should be denied.
- 14. Charitable contributions chargable to ratepayers should be denied.
- 15. The sole source provision of Rate A should be eliminated.
- 16. The revenue increase should be spread proportionately to all customer classes.
b V 17. The Compaay should be ordered to flatten its rate structure.
- 18. The Company should be ordered to develop meaningful time of day and co-generation races.
- 19. Within ninety days of this order the Company should submit amendments to allow towns to purchase street light fixtures on a block by block basis; and to remove present penalties of conversion to sodium fixtures.
The DCC also stated that it would not be opposed to the following expense requests:
- 1. Deferred fuel expense as modified through a two year amorti-zation period.
- 2. The $1 million for the residential conservation services pro-gram.
- 3. A moderate increase in authorized profits.
4 A slight increase in the common equity ratio over the exist-ing ratio.
- 5. Estimated wage increases.
- 6. Additional computer equipment.
x
DOCKET NO. 800601 Page 9
- 7. Additional tree trimming crews.
- 8. EPRI Research expenses.
- 9. SCADA expenses.
- 10. Cogeneration study expenses.
B. Western Connecticut Industrial Council. Inc.
The Western Connecticut Industrial Council, Inc., granted intervenor status in this proceeding, was represented by Donald A. Gray, Jr. , its Pre-sident. The Council's interest in this proceeding rests in the needs of twelve of its members located within the service area of the Company for service.
The Council has expressed the following positions in connection with the Company's application:
- 1. The members require adequate, reliable power at reasonable cost to remain competitive and provide and maintain the employment vital to the state and local economies.
- 2. Power rates account for a large portion of their production costs which are an incregal part of their competitive posi-
- tion.
s- 3. Adequate, reliable power can only be provided by a financi-ally sound utility.
, 4. The financial health of a utility can only be guaranteed by j a cost justified rate structure.
- 5. The enforced burning of .5% sulphur content fuel penalizes each and every ratepayer to the advantage of the citizens in foreign states.
- 6. The Connecticut General Assembl/ by enacting residential pro-perty tax phase-in legislation has preferred some U.I.
ratepayers over others, t
- 7. A cost of service study should be required in each rate case as there is ample evidence in this case that inter and intra-class subsidies exists and have not been corrected.
- 8. This Authority and U.I. and Northeast Utilities should con-sider a merger of the two utilities.
C. Connecticut Citiren Action Groun The Connecticut Citizen Action Group (CCAG), granted intervenor status in this proceeding, was represented by Doreen Del 3ranco/ Robert Snyder. The CCAG intervened in order to protect the interest of its members and other customers of the Company as well as to block establishment of a number of
. DOCKET NO. 800601 Page 10
\ precedents in utility regulation and thus protect the interests of all con-sumers in the state.
The CCAG expressed the following positions in connection with the Com-pany's application:
- 1. Reject U.I.'s request for an increased rate of ;cofit.
- 2. Reject U.I.'s proposed accounting changes, regarding taxes and accelerated depreciation.
- 3. Eliminate the dec1;2ing block rate structure.
- 4. Force U.I. to re-avaluate its construction program.
- 5. Design rates to promote the use of alternative energy sources and cogeneration rather than to discourage it.
D. Connecticut Industrial Energy Consumers The Connecticut Industrial Energy Consumers (CIEC), granted intervenor status in this proceeding, was represented by Edward J. Riehl, Esq. of McNees , Wallace & Nurick. The CIEC's members who are customers of the Com- '
pany represent a major employment base in the state, are substantial users of electrical energy and take service under large power service schedules.
The CIEC has expressed the following positions in connection with the-O Company's applicatica:
- 1. The allocation of the fuel-related increase in Docket No.
791216 as a 2.3715 cent /kwh surcharge imposed greater percen-tage increases on classes with substantial fuel-related revenues.
- 2. The allocation of the incrcase in Docket No. 791216 on a fuel-related revenue basis supports allocation of the nonfuel increase on a nonfuel revenue basis.
- 3. The allocation of the rate increase as a uniform percentage increase in the nonfuel component of each charge does no more than to restore rates to the appropriate design.
E. Connecticut Business & Industry Association The Connecticut Business & Industry Association (C3IA), granted inter-venor statues in this proceeding, was represented by Marshall R. Collins.
The C3IA's members are a class of approximately 3,200 commercial and indus-trial consumers of electricity. Its membership employs over 600,000 men and women in Connecticut and ranges from small family businesses to large com-mercial and industrial corporations.
The C3IA has expressed the following positions in connection with the Company's application:
~ - . _ . . _ - _ __ _ _ _ - _ _ . . _ _ _ . _ - - _ . _ - . _ _ _ _ _ . . - _. . _ _ . _ . _ _ . .
DOCKET NO. 800601 Page 11 b
V 1. The income tax benefits resulting from AIUDC should be norma-lized rather than flowed through.
- 2. U.I.'s proposed rate design is reasonable, appropriate and should be approved.
F. Yale University Yale University (Yale), granted intervenor status in this proceeding, was represented by Elwin E. Linden, P.E. Yale's interest in this proceeding is that it is a customer of the Company and its annual expenses for electri-city would increase by approximately $1 million.
Yale's general conclusion would favor any change in rates being limited to the minimum amounts that would allow for the impact of inflation and the expenses of increased regulatory requirements on the Ccmpany's day to day operations - no more than that.
Also included in Yale's brief was the memorandum and reply memorandum of Yale by George C. Hastings on Docket No. 760305 and Yale's brief by George C. Hastangs, Esq. and Elwin E. Linden, P.E. on Docket No. . 780701.
G. Connecticut Conference of Municipalities The Coanecticut Conference of Municipalities (CCM), granted intervenor status in this proceeding, was represented by Robert M. Sussler, of Conway, Londregan, Leuba, McNamara & Sussler, P.C.
CCM has set out its analysis of the causes of the Company's dilemmas.
At the same time has found the Company at fault for not undertaking proper corporate planning techniques constituting crisis management to prepare itself for the adverse possibilities within the time period 1983-1986. Part of the potential problems are due to inadequate cash flow, which will be exacerbsted if Seabrook is delayed.
CCM also addressed the Company's street lighting rates. CCM requested a properly bifurcated rate schedule reflecting correct charges to municipa-lities that own street lighting fixtures. To encourage energy conservation, CCM desires a waivcr of any penalty charges for conversion to more efficient fixtures.
H. Barton and Buchanan John and Shirley Barton and Thomas and Margaret Buchanan were granted intervenor status in this proceeding. They were represented by John F.
Voyke, Esq., of Woyke, Fisher and Field, P.C. The intervenors submitted testimony and appeared for cross-examination.
The thrust o f the 3arton/3uchanan position is twofold. They propose several rates applicable to solar users, reflecting energy costs only.
Secondly, the intervenors support the Ccmpany's position on rate of return.
They believe that an adequate rate of return will uean that U.I. will not have to encourage excessive consumption, and will look more favorably upon alternative energy sour:es.
{
s
DOCKET NO. 800601 Page 12 I. Other Parties, Intervenors and Participants Other parties or intervenors did not file written briefs in this pro-ceeding whether or not they actively participated. In addition, members of the public appeared at the hearings and presented testimony. Much of the testimony thus received was in opposition to the rate increase. Petitions against the rate application were signed by numerous customers and filed with this Department.
IV. AUTHORITY ANAI.YSIS AND EVAI.UATION OF EVIDENCE A. General
- 1. Workforce Management Tids Authority is concerned that the management of UI has been less than diligent in pursuing expeditiously all available steps to improve the productivity of its workforce. The 1977 audit of UI performed by the independent management consultant firm of Theodore Barry & Associates, rec-
. ommended that the Company develop and implement workforce :nnagement systems for its production, distribution and meter reading forces as a means of achieving significant cost savings. Concern exists that the Company's cur-rently projected completion date of December, 1983, which if met would constitute an elapsed time of nearly six years, has resulted and will conti-nue to resul* in the deferral of the development and implementation of operational efficiencies to the detriment of the Company's ratepayers. Suc.h
( a long delay, by a company the sire of UI, indicates a lack of total comrnit-ment on the part of the Company.
Inar uch as the Ccmpany's detailed development and implementation plans were not submitted as part of the record in this proceeding, this Authority will order the Company to submit, for review and analysis by Authority staff, the documentation for the workforce management systems in the meter reading, production and distribution areas including a detailed implementa-tion schedule and steps the Corpany will take to expedite the current December, 1983 target date.
- 2. Inventerv Management UI's performance in inventory management during the recent past has been less than highly efficient. The Company's poor inventory management performance was criticired by the consulting firm of Theodore Barry & Asso-ciates in their 1977 management audit report of UI performed at the behest of the PUCA. To date the Ccmpany's perfor=ance has improved only margin-ally.
Using inventory turnover as a measure of inventory performance the Cei-pany h.2s failed to reach a conservative turnover ratio of 1.0 times since 1971. The implication of this measure is that each year UI purchases and/or carries in its inventory fs: more materials than can reasonably be expected to be used within a year. If the Ccmpany had achieved an inventory turnover v
COCIGT No. 800601 Page 13 of 1.0 times, it would have meant a reduction of the test yc r inventory level frca $6,405,255 to $3,514,333 based on the average of actual issues for 1978,1979 and 1980 annualized; a reduction of $2,890,922.
Due to this Authority's belief that inventory performance can and should have been improved, we will order an adjustment to rate base of
$1,445,461, vhich represents 50". of the improvement we believe should have been attained. While a 100*, adjustment is warranted due to the Company's past performance, the Company's present financial condition and our desire to avoid over-penalizing for past performance and thus hindering future per-formance leads us to the 50*. adjustment.
The Company shMid be cognizant of this Authority's commitment to the management audit process and the value of recommendations resulting from such audits. This process is aimed at assessing the Company's performance and identifying areas where improvement is needed and can be achieved. It is expected that the Company will pursue improvements in a reasonably expe-ditious and prudent marner or provide this Authority with the documentation and cost / benefit analyses supporting the non-implementation of such recom-mendations.
- 3. Corporate Planning No well-managed company today functions without a planning process.
I.on ger-term direction, or strategic planning, sets forth options for the future, systematically evaluates them, and selects the most appropriate for making the best use of the company's resources. Operational planning is t ' shorter term and determines what should be done today in order to shape the future.
It is the op :
the Authority that this Company has not availed itself fully of t. ucern management techniques. Upgrading its planning p rocess , we believe, would improve the Company's effectiveness in organiz-ing, directing, and controlling business activity. Accordingly, we will order the Company to advise the Authority within three months of the steps it intends to take to improve its business planning procedures.
B. Test Year It is the practice of thi: Authority, in utility rate cases, to esta-blish rates prospectively upon the basis of a historical test year, usually the most recent full twelve months for which adequate records are available, reflecting the actual operating results and experience during such period.
The test year, properly normalized and annuali:ed, seta the parameters within which the factors of ratemaking can be determined for the ratemaking process. It does not take into consideration future expenses or future revenues, except known changes suoject to audit or cross-examination.
The Company has proposed to use as a tes; year in these proceedings, the year ended March 31, 1980, as normalized and adjusted for known changes in revenues and expenses. The test year proposed by the company is accepta-ble to the Authority.
O
e DOCKET No. 800601 Page 14 i
For a pro forma period at present rates, the Compaly calculated that adjusted utility operating income would amount to $24,463,865 and that the rate of return would be 6.28%.
In the instant application, the Company indicated by exhibits that, for the test year ended March 31, 1980, it experienced a? justed utility operating income of $35,054,031 and a rate of return on rate base of 8.73%.
C. Rates and Rate Structure
- 1. Allocation of Allowed Increase to Classes of Customers The Company's proposed allocation of the revenue increase van un a uni-form basis to the non-fuel component of all est<s except Rate , A, RT and GST, streetlighting rates, and special contracts. For the custome.r charges of Rates RT and GST, the Company proposed f neresses based solely on identi-fied changes in cost components. The Company does not have a current detailed cost of service study to assist them in the design of the rates.
Lacking such a study, the Authority is in agreement with the Company's pec-posal concerning revenue allocation (excepting certain residential rates, discussed elsewhere in this Decision).
The Authority is concerned, however, that the Company's rates may not be cost-based. Therefore, the Company should investigate the cost and time necessary to conduct a fully allocated, time differentiated cost-of-service study and report its findings to the Authority. The cost study should O
(/
incorporate all the Findings of the Order in Docket No. 790101, Phase I
( kvestigation Irto Pricing Principles And Rate Structures For Electric Com-panies).
- 2. Residential Rate for Customers Using Solar-Ass- td or Renewable Resource-Assisted Vater Heatin ,
The Company does not believe that solar-assisted water heating custo-mers should receive service under Residential Rate A, as this would lead to underrecovery of customer and capstity costs that are currently collected in the o f f-peal: component of that rate. Instead, the Company has filed
! " Residential Controlled Water Heating Time-of -Day Rate RS", a modified time-of-use rate that gives renewable resource users credit for capacity savings. Rate RS differs fra time-of-day Rate RT in its redaced on-peak l charge ( 5556 cents per kwh).
l The Authority is of the opinion that, absent a current cost of service i rtudy, it would be inappropriate to introduce a new residential rate for i renewable resource users at this time. Further, the Authority finds that those residential customers most likely to utilize solar / renewable resources to assist in water heating live in single family homes. These customers currently make a greater contribution th.n other residential custe.ners towards fixed-cost recovery under Rate A. This utdicates that even with a reduction of off-peak consumption due to renewable resource contribution, there aay not exist any problem of renewable resour:e users being subsidi:ed by other residential customers, were these customers allowed to take service under Rate A.
p
( ")
DOCKET No. 800601 Page 15 For the above reasons, lacking more definitive cost data, and recogni:-
ing the urgent need to displace the burning of oil, the Authority is of the opinion that the sole source provision of Rate A should be removed for solar or renewable resource water heating customers. The Authority also finds it desirable to investigate this issue further in upcoming generic proceedings.
- 3. Vater Heater Rental Rates No increase was proposed by the Company for water heater rental rates.
Approximately 29,000 customers rent heaters under this program, all of which are controlled by timers, so that usage is primarily during off peak hoars.
The Company witness stated that the rental program produced a negative rate of return and that an increase of one to two dollars per heater per month would be in order. The Company stated in its brief that increased rental rates would have adverse consegaences in terms of present load management which could exceed any increased revenues.
Since exact costing elements were not available to the Authority to determine rental rates, they should remain unchanged. However, rental rates should be provided in subsequent rate filings, with supporting data for rate determination.
In the next rate filing, the Company will be expected to provide water heater rental rates with supporting data so that these rates can be more nearly cost related.
O 4. Self-Generator Rate SG It is the Authority's opinion that Self-Generator Rate SG does not comply with PURPA. Specifically, the Authority questions basing energy pay-ments at 95* of average fossil fuel costs, since doing so does not reflect either the Company's time-differentiated costs of providing service, or its sta;.us as a net exporter of energy to the New England Power Pool. Also, the Company does not address the question of capacity credits or qualifying facility status under PURPA.
Further, the Authority is concerned about the Company's lack of analysis of the potential value of diversified capacity from qualifying facilities, the value of coordinating Company and qualifying facility main-tenance, the potential for reduced line losses, and the Cocrpany's assumption of insignificant purchases frem self generators for the next twenty years.
Also, there has been no review of avoided costs associated with variable non-fuel generating plant operating and maintenance expenses.
- herefore, it is the opinion of the Authority that the Company should refile a cogenerator and small power producer rate (s) by January 31, 1981.
The revised rate (s) should take into account the above considerations.
Addi-ionally, the Authority believes that the Company's adoption of North-east Utilities' Power Purchase Rate design nethod (Docket Nos. 300403 and 300404) will result in a rate (s) that will comply with PUP.PA.
m., - . - , . - , , . - . r - - _ _ . - - . - . - - - , . _ _ . -. _- - . -
DOCKET No. 300601 Page 16 m
- 5. Block Extender Provision - Rates GS & TE As in the previous rate case (Docket No. 780701), the Company preposed replacing the block extender provision of Rates GS and TE with an equivalent ,
demand charge, phased in over two years to minimize impacts on customers.
The Authority's reasons for rejecting the prop al in that Docket still apply: the rate is not easily understood and it will be difficult for c'tstomers to calculate their tills. In addition with the block extender, differences in diversity are recogni:ed but not necessarily differences in load factors, while the reverse is true with the demand charge.
In Docket No. 730701, the Authority was hampered by the lack of a detailed cost-of-service study. This is still the case. Now, as then, it is impossible to determine cost iupacts associated with customer diversity and load factor. Therefore, absent a cost-of-service study, the Authority believes that the block extender should be retained at this time.
- 6. Residential Rates R, A and RT The Company's proposed a location of the revenue increase to the non-fuel portion of the rates is applicable to these residential rates with the exception of the off-peak components of Rates A and RT. The proposed increase of Time-of-Day (TOD) Rate RT's customer charge is intended to update identified changes in cost cemponents. Based on acnualized test year revenues, the results of this allocation are revenue increases of 16.4% for Rate R and 9.5% for Rates. A and RT.
J The present Rates R and A miMaum bills of $1.32 are proposed to be increased to $2.33. There is no proposed rebl.cking of Rates R and A. Rate R contains four additional blocks. Rate A contains the same four blocks plus an off-peak block. This proposed race design would result in greater percentage increases to lower-use customers.
Under both present and proposed rates, there is no difference between the minimum bills of Rates R and A. The Company, houever, has filed exhi- l bits indicating a Rate A metering cost of approximately $*. 80 per month more than Rate R. This is due to the costs of the more expensiie time-of-use meter used in Rate A.
In Rate RT (Optional Residential Time-of-Day Rate), unlike Rate A (Residential Heating and Off-Peak Rate), metering costs are collected up l front. The same two-dial meter is used for Rate RT anre of the relatively low saturation of more efficient sodium fixtures in the Company's service area relative the saturation levels in Northeast Utilities service area.
Because the record in this case is not fully developed, however, action can-not be taken now to permanently resolve this matter. Therefore, thts issue will be addressed in greater detail in Phase II of Dockst No. 790101, Inves-tigation Into Pricing Principles and Rate Structures for Electric Companies.
The Authority accepts the Company's definition contained within Rate U of a "specifically defined geographic area with the exception of the provi-
! sten that the area shall consist of at least twenty lights. The Autnority recognices no compelling evidence that requires such a provision.
m U
DOCIET NO. 800601 page 19 m
- 8. Interest Charge for Non-R *sidential Customers The Company has requested that it be permitted to increase the interest rate which it charges on the unpaid balances of non-residential accounts frca 1% to 1\%. We note that the current statutory limit with respect to interest charged on open-end credit plans with respect to the retail sale of consumer goods or sarvices is one and one quarter percent per month on that part of the average daily balance of the account or unpaid balance outstand-ing at the end of the current billing cycle which does not exceed two hundred fif ty dollars and one percent per month on that part of such balance in excess of two hundred fifty dollars. With respect to plans operated by a national bsnk, state bank and trust ecmpany, savings bank or building or savings and Ican association the maximum finance charge is one and one-quarter percent per month on such average daily or outstanding unpaid balance (Connecticut General Statutes, Section 42-133c). While this limit does not apply to interest charges assessed by public utility companies on the unpaid balances of non-residential accounts, we are not aware of any reason r. hat the rate assessed by utility companies should exceed the maximum rate found reasonable by the State of Connecticut with respect to interest charged on credit for consumer goods or services sold at retail. The Com-pany's request to increase the interest rate which it chacges on the unpaid .
balance of non-residential accounts is therefore denied and only an interest charge of ik% should be assesssed.
D. Revenues The method used by the Company to normalize sales is similar to the O cethod used by tne Authority in the Company's most recent rate case, Docket No. 791216 and is acceptable. The Authority finds that the Company's pro forma revenues are reasonable and they are accepted, except as follows:
Fossil Fuel price Fold-In The Company's original application reflected a farch 31, 1980 fuel price of 465.63C per .T13TU, a reduction from the 485.91C per .Tf3TU reflected in base rates in Docket No. 791216. l.4 is the usual practice of the Autho-rity, the Company was requested to update the roll-in to reflect the most current info rmation. The reflection of September 1, 1980 fuel prices (452.99S per TfBTU) and twelve months ended July 1980 losses and savings shares resulted in decreasing revenaes by $16,599,800. Subsequent to the hearing oil prices were iccreasing. In the opinion of the Authority a fuel price of 474.61C per .Tf3TU based on October 31, 1980 fuel prices for the
- Compiny's 3ridgeport Harbor and New Haven Harbor units is more reflective of l
the prices likely to be experien9d while the rates approved are in effect.
An increase in revenues of $10,089,563 and corresponding increases in expen-ses were made to reflect 474.61C per TfBTU in base rates.
An additional adjustment to fuel expense was made to reflect the burn-ing of refuse derived fuel (RDF) in base rates. Since RDF is paid for at a discount frem fossil fuel prices, any RDF that is burned reduces fuel expense. 3ecause of the uncertainty as to the amount of RDF that is likely to be burned, the Company proposed no reflection of EF for pro forma purpo-ses. The Authority is of the opinion that this is too pessimistic an assumption and has included RDF at, approxinately, one quarter of the aver-
DOCKET NO. 800601 Page 20 age monthly amount actually burned since the first burnings in November, 1979. This resulted in fuel expense being reduced by $75,000.
E. Construction Program The Authority has reviewed the Company's construction program in its entirety. This includes the Company's participation in Seabrook Units 1 and 2 currently scheduled for completion in 1984 and 1986 respectively. The review also includes transmission plant, distribution plant, other produc-tion plant and general plant.
The Authority finds that those portions of the construction program for the years 1980 to 1987 are acceptable. The Company's construction program, as proposed, will meet consumer requirements as well as regulatory criteria and is therefore approved.
English Station and Steel Point Generating Plants The Authority is of the opinion that the operable units at English Sta-tion, Units 7 and 8, and Steel Point Station, Units 9 and 11, should remain in the rate base. These units are being used by the Company for protection and by NEPCOL for dispatch. It was suggested by some intervenors that due to the excess capacity and the occasional use of these units that they should be removed from the rate base. The Authority does not agree with this opinion as they are needed for meeting peak loads and to provide assur-ance of service reliability in their franchise area.
Also, in the case of Steel Point S tation, the removal of these units would foreclose the pessibility of using gasified coal for generation which I
l is currently being studied and evaluated by the Company and DOE.
The Authority is of the opinion that only half of the allocated pro-perty tax on the mothballed non-operating units at these two facilities should be allowed. The reason for only allowing half the requested amount is to indicate to the Company that they should investigate the feasibility of dismantling these facilities so as to remove them entirely frca the tax lists in the areas where they are located.
F. Depreciation This Authority recogni::es that there may be uncertainties relating to the supply and reasonable cost of oil for electric generation, and the ordered conversion of the 3ridgeport Harbor Unit 13 to coal by the Federal Depart:nent of Energy. However, without more concrete information in the record, it cannot accept the Company's proposal to adopt a maximum '.ife for the Bridgeport Harbor Unic #3 ending in 1985 or New Haven Harbor Station ending in 1990. This proposal is simply too speculative at this time to burden ratepayers with the additional expenses resulting therefrom.
G. Rate 3ase Table I The rate base claimed by the company consists of the depreciated cost of plant in service as of March 31, 1980, adjusted for plant included in Construction Work !n Progress but put ints service before the end of the
9 D0CKET NO. 300601 Page 21 b)
\d test year and increased by plant to be put in service before the end of 1980 which was mandated either by the DPUC in Docket No. 780721 or by the Federal Gove rnment. The rate base also includes the customary items of materials and supplies and working capital, less custemer's advances for construction.
It is the customary regelatory practice to make an allowance for work-ing capital in recognition of the funds that must be provided by the owners to conduct operations for the period between the rendering of service and the receipt of payment therefore. The commonly accepted method of computing this working capital provision for utilities billing af ter service is ten-dered is to allow a sus coeputed as 12h% or one-eighth of the pro forma cash operating and saintenance expenses, excluding the cost of fuel oils, or the equivalent of 45 days expenses. The allowance for wo: king capital applica-ble to fuel oil costs is 21/365 or the equivalent of 21 days expenses.
The following adjustments have been made to the company's rate base:
- 1. Adjusted rate base by $68,425 to refl f t the updated net cost of the plant put into service before the end of the test year and the plant put into service before the end of 1980 which was mandated either by the DPUC or by the Federal Government.
- 2. Adjusted rate base by S1,445,461 to remove excess inventory.
- 3. Adjusted rate base by $581,356 to reflect the increase in
,_ fuel oil of $10,104,527 as adjusted by the authority.
- 4. Adjusted rate base by $42,051 to reflect a decrease in work-ing capital allowance in accordance with the operating and maintenance expenses found reasonable by the authority.
We show in Table I below the rate base as presented by the Company, adjustment made by the autharity and the rate base allowed by the authority.
TABLE I March 31, 1980 Company Aut,hority As Adjusted Pro Forma Adj us tments bv Authority
, Utility Plant in Service S539,935,733 S $539,935,733 less: Accumulated Depreciation 176,875.634 68,425 176.944,059 l Net Utility Plant $363,060,149 5262,391,724 Plus: Materials and Supplies 6,405,255 (1,445,461) 4,959,794 Excluding Fuel Fuel Reserve 693,537' 693,537 Working Capital 20,053,202 539,305 20,592,507 Less: Customer's Advances for i Construction 721.355 721.355 t
( Rate Base $389,490,288 3 (974,581) 5388,515,707 k,
l DOCKET No. 800601 Page 22 f
) H. Financial Data
- 1. Cost of Capital
- a. General The revenue requirement of a public utility includes both current items such as operations and maintenance expenses and taxes, and also non-current items such as the return of capital through depreciation and the return on capital; the payment for the use of funds provided to support the assets to provide service to customers. Sound regulation allows for a return on capt-tal only to those particular assets which are actually used to serve the customers, that is the rate base. In determining the amount of dollars that should be allowed as the return on capital, we go through a four step pro-cess:
- 1. The appropriate capital structure for rate making purposes is determined;
- 2. The cost rates for each component, that is, long term pre-ferred stock, common equity, etc.., are determined;
- 3. The rate of return on rate base is calculated as a weighted average of those cost rates, weighted by their proportion in the capital structure;
- 4. The rate of return is multiplied by the rate base to deter-d mine the dollar return on the rate base.
This return on rate base is the utility operating income that appears in the Authority's Decision. The utility operating income represents only the return on capital invested in the rate base. The cost rate used for comon equity represents return only on that common equity invested in the rate base. The rate of return on overall capital and on overall comon equity may very likely differ from that allowed on rate base and therefore the income for comon equity divided by the pro forma comen equity will usually differ from the cost rate allowed on the comon equity in the rate base. This is because of the impact of below-the-line items, revenues and expenses, not attributed to utility operations, assets not in the rate base and liabilities not part of permanent capital.
We have, in this case, testimony of David y. Springsteen concerning the rate of return, the testimony of the Company's financial witne:sses,'the tes-timony of John Curley of Morgan Stanley & Co. regarding financial market conditions and invest ar requirements, the testimony of Philip Kron of Citi-bank regarding how U. I . ' s banks regard U.I. , and a substantial amount of data on the economy, financial markets, and this particular firs as required by the Standard Filing Requirements ind also as a result of responses to staff requests for information.
- b. Capital Structure The Comcacy said that an "optisal" capital structure as shown on Sche-Q dale 2-LA, should be used, consisting of:
O
DOCKET No. 800601 Page 23 Long Term Debt 45%
Preferred & Preference Stock 15 Ccanon Stock 40 Total Capital 100%
Because of increased perception of electric indusr.ry risk, and in par-ticular the risk of United Illuminating, the Company contended that a more conservative capital structure is indicated. Also, as embedded capital costs rise, a higher proportion of ccamon equity in the capital structure
- will be required to maintain coverages.
If the short-term debt listed in Schedule D-1 is eliminated, the capi-tal structure on D-1 would be:
Long-Term Debt 48%
Preferred Stock 15 Common Equity 37 Total Capital 100%
The Authority recognizes ' that the Company will have to raise a ver/
large amount of capital over the next several years.
As more and more new, expensive debt enters the Company's capital-ization, and as older debt expires, the Company should move to a more O conservative, common equity rich capital structure.. While the existence of
( an " optimal" capital structure remains a topic of much controversy in finan- ,
cial theory, it appears that as a practical matter the Company's proposed F
" optimal" structure is a shift in the right direction.
Therefore we have used the proposed " optimal" capital structure.
- c. Cost of Ecuity David F. Springsteen testified on behalf of the Company in :egard to a fair rate of return. In determining the required return to common equity, Mr. 3pringsteen used three methods:
- 1. Discounted Cash Flow (DCF)
- 2. Risk Premium Method
- 3. Comparable Earnings His basic emphasis is on the DCF method, and he uses the standard DCF formula:
K = d/p + g K = total expected return in next 12 months.
d = dividends expected in next 12 months.
p = current market price of stock g = expected growth Mr. Springsteen uses a yield of 12.1%, the May 1980 average yield, based en a May stock price of 22.11. At the time of the hearings, the price
, ,-.. - - - - - - - - - - - + , . - , . , , ~ . , . , - . . - . -, ....-.n ,- ,.. ..---n..- ,.n , - , . , - + , , - , . - , . - ,
DOCKET NO. 800601 Page 24 of UI's common stock had dropped to 217/3, '.hich would indicate a yield of 12.25.
To estimate growth, Mr. Springsteen looked at UI's earnings for the last ten years, and found UI's earnings growth to be extremely erratic. He did a regression and found an implied compound growth rate of 3.3%.
Mr. Springsteen also made an esti= ate of growth based on the dividend payout ratio. The growth rate will equal, mathematically, the proportion of retained earnings timer its return on equity.
ga (1-P) X ROE g = growth p = dividend payout ratio ROE = return on equity The Company's average payout ratio for the last 5,10, and 15 years were 70.3%, 71.2%, and 70.0%. Using a 70% payout ratio and the last allowed return on equ'.ty of 13.3%, Mr. Springsteen calculated growth of; g = (1 - ?) X ROE
= (1 .1) X 13.3%
= 4%
If .9% attrition were assumed, then g would equal:
T g = (1 . 7) X 12.4 = 3.7%
) If the investor were looking forward and expected higher returns to be allowed, then growth would be higher, but Mr. Springsteen balanced that by observing that investors are aware that large amounts of new common equity will be sold over the next few years, and if sold below book value, would cause dilution.
Mr. Springsteen estimated investor expectation of growth as being 3.2%
i to 4%. He then found a bare bones DC7 estimate of the cost of equity for U.I. to be between 15.3% and 16.1%, his nore likely number being 15 . 7%.
This was adjusted by a 5.2% stock issuance cost to calculate a cost of equity estimate of 16.6%.
Mr. Springsteen also made as estimate of the Company's cost of equity using what he termed the Risk Premium Method. This is based on the concept that investors in ccmmon equity would be seeking a certain premium i.e. risk premium, over that Ccmpany's bond yield. According to Mr. Springsteen, an investor who uses this method would usually add 4 - 5% to a bond risk pre-mium of 0.15% to 2% (depending on the riskiness of the Company) to a "real" i.e. inflation free return. According to Mr. Springsteen, many investors would use a short :ut and simply determine the expected return by adding 4 - 5% to the current yield on the Ccmpany's own bonds. If this were done
- for U.I. , an indicated range for U.I. 's common equity would be 17% to 16 %.
l Mr. Springsteen said that he thought that this method would overstate the
! re'. urn on common equity iavestors require for utilities. Mr. Springsteen develops on Schedule S-10 a more sopaisticated version of this method and
, . s_-
i
_ , , - , - . . . . . . m - -, , - _ . . . - - - _ . , . , - - - , _ - - , .
DCCKET NO. 800601 Page 25 finds an indicated range of about 15.25*. to 16 . 5 *. . A critique of this method is that premiums appear to be somewhat arbitrary.
The third basic method Mr. Springsteen used to evaluate the Company's cost of equity is - the Comparable Earnings Method. On Schedule S-15, Mr.
Springsteen shows for the year 1973-1979 the average return on common equity earned in different industrics as compiled by Business '4eek for about 1,200 companies. In 1979 the all industry coa;posite was 16.6*. Basic criticism of the comparable earnings method include the fact that the all industry composite may not in fact be comparable to utilities and by its nature, must be based on older data than the other methods. However, the risk premium method and the comparable earnings method were offered as backup calcula-tions to the discounted cash flow estimate that Mr. Springsteen made.
'4e have reviewed with care the testimony of Mr. Springsteen end the other financial witnesses in this case. The accounting changes adopted in this decision should reduce the perception of risk. Therefore, we have not adopted the 16.6% cost of equity as estimated by Mr. Springsteen, but find a reasonable allowance to be 15.1*.
- d. Cost of Senior Securities The Company's calculations of a cost of long-term debt of 8.47*. and a cost of Preferred Preference Stock at 9.6* are accepted.
- e. Rate of Return
/N U The rate of return to be applied to rate base is now calculated to be 11.30*, and the weighted cost o_. i. capital, is as follows:
s- ,; 9 , ;1
[' RATIO CCST '4EIGHTED COST
. . ~ ,
I.ong-Ter:n Debt 45*, ~8.47[ 3.81*. 7 Preferred & Preference Stk. 15 ?9 M 2 1.45 Cocunon Stock C (IS.1ci---
40 ~
6.04 y ~ 11. 3 0*. 6
~
- r. .
- 2. Trust Indenture i-e p * ' .7] M'
.) w -
It was stated in testimony that part of the Company's inability to raise funds stessned from the Company's unique trust indenture. We are con-cerned about this and expect Company :nanagement to study the possibilities, the advantages, and costs of changing the indenture.
- 3. 'Jage & Price Guidelines The '4 age and Price Guidelines which would be applicable during the per-iod when rates would be in effect were not available during the hearings.
The Company presented evidence that it qualifies for exemptions under the present standards. The guidelines recognize for public utilities that exemptions may be appropriate when there are inadequate interest coverage ratios, the market to book ratios are icw (below 0.9), and cash flow is ina-O
DOCKET NO. 800601 Page 26 dequate. The Ccapany's financial condition is such that it is eligible for exemption under each of these tests.
I. Expenses
- 1. . Company F.ade Adjustments Either Requested by Authority or by United Illuminating There were many adjustments made and incorporated in the Company's revised pro forma income statement which were either requested by the Autho-rity or by the Company. These adjustments were based on updated information as it became krown and include (but were not limited to) the following:
- a. Fuel and Energy Expense Pro forma fuel and energy was decreased by $7,740,639 resulting from updating fuel prices to September 1, 1980, using July,1980 losses and 12 months ended July, 1980 savings shares.
- b. Payroll Pro forma operation and maintenance expenses were incrersed by
$1,106,188 to reflect the new union contract effective September 16, 1980, which reflects wage increases effective September 16, 1980 and September 16, 1981.
- c. Co-Generation Study Pro forma operation expense was decreased by $196,000 to reflect the 75*. Depart:nent of Energy reimbursement for the co-generation study.
- d. Amortization of Deferred Fossil Fuel Costs The Company's original pro forma income statement filed included amor-tization of accumulated fossil fuel deferral, approved in the Decision to Docket No. 791216. Amortization of deferred debit for fosril fuel costs was decreased by $6,893,158 to reflect the amortization of deferred fossil fuel not previously subject to amortization at July 31, 1980, and the Decem-ber 31, 1980 balance of amortization allowed in Docket No. 791216. The related inecme taxes deferred in prior years-credit was increased by
$3,509,244 to reflect the revision of amortization of deferred fossil fuel.
- e. Gross Earnings Tax Pro for:na taxes other than income taxes was decreased by $387,032 due to the revenue decrease resulting from using September 1,1980 fuel prices, July,1980 losses and 12 sienths ended July,1980 savings shares.
- f. Inceme Taxes Pro forma income taxes-federal and other was decreased by 3569,017 to reflect all the revisions incorporated in the Company's adjusted pro forma income statenent.
O
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DOCKET NO. 800601 Page 27 s
- 2. Further Adjustments The pro forma expenses claimed by the ecmpany are acceptable for deter-mining the company's revenue requirements at this time, with the following exceptions:
- a. Amortization of Deferred Debit For Fossil Fuel Costs The Coopany submitted data adjusting the amortization of deferred debit for fossil fuel costs based on a two-year period shich had been authorized in the previous full rate Decision in Docket No. 780701. In the Company's limited application for rate relief, Docket No. 791216, the Authority decided on an 18-month period of amortization because of the Company's unsatisfactory cash flow situation which resulted in severe financial con-straints and because the Company was to be subjected to a ecmplete rate review before the end of 1980. Afr r careful consideration the Authority has decided that a 12-month period of amortization is warranted because of the Company's unsatisfactory cash flow situation which is resulting in severe financial constraints.
Using the 12-month a, corti:stion period as we propose results in an increase in the amortization of deferred debit for fossil fuel costs of
$3,848,462.
- b. Income Taxes Deferred In Prior Years - Credit We must adjust the income taxes deferred in prior years - credit by
$1,959,215 to reflect the adjustment in the amortization of deferred debit for fossil fuel costs due to the change in the amorti:ation period,
- c. Fuel and Energy Expense Pro forma fuel and energy expense will be increased by $10,104,527 due to updating fuel prices to October 31, 1980.
- d. Taxes Other Than Income Taxes This account must be adjusted by $504,478 to reflect the increase in the gross receipts tax due '.o the adjustment to operating revenues.
- e. Insurance Premiums Based on an audit by staff it was determined that an average premics refund of $73,989 has been received by the Compamy for the past five calen-l dar years on group health and life insurance premiums. Thus, we have reduced pro forma group health and life insurance expenses by $73,989 to l reflect the average annual refund which can be expected on the basis of past experience.
- f. Major Storms The Company proposes to normalize over a four year period the costs of major ster:ns. The Authority established in Docket No. 730701 the practice of not allowing the Company to recover the costs of major storms that do not l
l
. __. . . _ _ _ -. _ _ _ . _ . _ __ _ _ _ . = . _ _ _ _ .
. DOCKET NO. 800601 Page 28 s
occur in the test year. In previous decisions the Company was allowed to amortize the costs of major storms over varying periods (3-5 years). Since no major storm occurred during the test year we will reduce pro forma main-tenance expenses by $232,090.
- g. Property Taxes - Mothballed And Inoperable Units The Company's pro forma income statement includes $427,788 for preperty taxes on mothballed and inoperable units (1-6 at English Station and 1-8, 10 at Steel Point Station). It is a policy of the Authority to disallow costs in connection with plant that is no longer used and useful. Although the Company has indicated problems with dismantling these units, we will disal-lov one-half of the property taxes of $213,894 and require the Company to submit plans for dismantling.
- h. Gain - Sale of Utility Plant The Company nas eliminated the gain from disposition of utility plant in its cro forma income statment because of its nonrecurring nature. Since gains from disposition of utility property (including one loss in 1975) have averaged $133,623 over the past five years, and since there are parcels of land still to be sold, we will recognize gains which occurred during the test year of $40,760 for pro forma purposes.
- i. Charitable Contributions
( 'g The Company proposed including $60,000 for charitable contributions in (j pro forma operating expenses. As this Authority has always believed that charitable endeavors are more properly in the domain of the individual rate-payer and the social agencies, we have rejected this proposal and reduced pro formt operating expenses by $60,000.
- 3. Proposed Tax Accounting Changes The Company has proposed two substantial tax account.cg changes in this proceeding: tax normali:stion for certain timing differences and accruing AFUDC on a net of tax basis. Each of these will produce substantial l improvements in the Company's cash flow. An increase in cash flow improves l the quality of earnings, reduces the need to obtain external financing, and l reduces risk. All these should, other things being equal, reduce the cost of capital. The Company is faced with a substantial construction program based on the oojective of reducing its dependence on costly foreign oil.
Much evidence and testinony was presented that the Cocpany's cash generation ability has been inadequate, and will continue to be inadequate without these changes. These changes increase taxes for rate making purposes by
$7,359,004.
The Company proposed to accrue AFUDC on an after tax basis. It argued l that this is the proper allocation of tax deductions which are associated with construction work in progress given that the value of construction work in progress is not included in rate base. We agree. Future rate payers will use plant currently under construction, and the capital costs (AFUDC) associated with this construction are charged to those future rate payers by s increasing the cost of future plant. Since these interest deductions from b
i l
DCCKET NO. 800601 Page 29 current taxes result from debt incurred to support construction work in pro-gress which will be paid for by future rate payers, we think it only proper that the tax benefits associated with this current construction (and future plant) be used to reduce the cost of the future plant, and thus the rates of the users of this future plant, rather than reduce the rates of urrent cus-
- tene rs . The latter are not paying the carrying cost of that con.truction in current rates. To use these interest tax deductions to reduce current rates rather than the rates of the future ratepayers who will be bearing the car-rying cost of that plant when it goes into service seems inconsistent and inequitable. We additionally note that this tax accounting change would improve the Company's cash ficw substantially. We accept this accounting change as presented in Exhibit JFC-4 of Mr. Colby's testimony in this doc-ket for all these reasons.
Turning to the specific tax normalization proposals requested by the i applicant, we note that until recently Connecticut has been largely a flow through jurisdiction. Similar changes were adopted in the Decision in Dockets 800403 and 800404 for the Northeast Utilities companies. The Autho-rity's predecessor, Public Utilities Commission, investigated the topic of normalization in its generic proceeding, Decket Number 11641. At that time, f
the majority of the Commission did not feel that the particular time was the most appropriate one to extend normalization but did say "we might be recep-tive to its possible implementation at a future date." (Decision, Locket No.
11641, Page 3). In this particular proceeding, given the financial strains the Company is under to meet its construction program and the urgency of its objective to diminish Connecticut's dependence upon foreign oil, we think it is appropriate to adopt the Company's specific normalization proposals as a means of producing cash flow, and of matching the income tax benefits gener-ated by investments with the timing of the recovery of tne costs of the investments from rates.
J. Summarv Table II 3
After the adjustments described above and after the necessary recalcu-lation of taxes, we find that the increased revenues requested by the Company would provide utility operating inecme of $49,070,366 which produces a cate of return of 12.63% on the rate base we have found reasonable. We show in table II, below, the revenues and expenses proposed by the Company, the adjustments made by the Authority and the Company's proposal as adjusted by the Authority.
1 Table II on Next Page O
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DOCKIT NO. 80c601 Page 30 s
TABLE II Adjusted Company Pro Forma Authority As Adjusted March 31, 1980 Adjustments by Authority Operating Revenues:
Actual 3361,522,814 $ $361,522,814 Proposed Increase 46,933,410 46,933,410 Fuel Fold'In 10,089,563 10.089,563 Total Opertting Revenues __$408,456,224 510,089,5o3 5418,545,787 Operating Expenses:
Fuel and Energy 206,741,676 10,029,527 216,771,203 Other Operation 50,765,757 (73,989) 50,691,768 Maintenance 15,408,544 (232,090) 15,176,454 Depreciation 19,686,151 (4,920,244) 14,765,907 Amortization of Deferred Debit for Fossil Fuel Costs 3,848,462 3,848,462 7,696,924 Taxes Other Than Income Taxes 35,239,531 290,584 35,530,115 Inccme Taxes - Federal and Other 31,354,574 486,072 31,840,646 Provision for Deferred Inceme Taxes 966,608 966,608 Income Taxes Deferred in Prior Years - Credit (2,280,947) (1,959,215) (4,240,162)
Gain - Sale of Utility Plant (40,760) (40,760)
C\ Deferred Investment Tax Credit Charitable Contributions 316,718 60,000 (60.000) 316,718
tal Operating Expenses $362,107,074 $ 7,368,347 3369,475,421 Total Utility Operating Income 46,349,150 49,070,366 l
l Rate Base 389,490,288 (974,581) 388,515,707 Rate of Return on Rate Base 11.90% 12.63%
V. FINDINGS OF FACT
- 1. The operating results for the twelve months ended March 31, 1980 are founc to be reasonable for test year purpr w.
- 2. The bmpany's rate base for purposes of this proceeding should be
$388,515,707.
- 3. The rate of return the Company would receive under the proposed amended schedule of rates would be more than just, reasonable and adequate to enable ene Company to provide properly for the public convenience, necessity and welface.
- 4. The propored schedule of rates would produce excess revenues and there-fore, should be denied.
Os l
- DOCKET NO. 800601 Page 31
- 5. The rate of return the Company would receive under its existing rates is less than just, reasonable and adequate to enable the Company to provide properly for the public convenience, necessity and welfare.
- 6. A revenue increase in the amount of $35,850,439 per annum above the Company's estimated, annualized and normalized test year revenue under its present rates, as adjusted by the Authority, should produce suffi-cient revenues to afford it a reasonable rate of return on the rate base and to pay operating and other expenses, maintain credit, attract capital and provide for reasonable dividends and additions to surplus.
Earnings at this level are adequate to maintain the Company's credit and permit it to obtain the required capital funds on reasonable terms.
- 7. The Company should develop a detailed implementation schedule of the workforce management projects in the distribution, production, and meter reading areas.
- 3. The rate base should be reduced by $1,445,461 which represents 50* of the improvements in inventory management which this Authority believes is the minimum the Company should have attaired.
- 9. By March 15, 1981, the Company should repart to the Authority regarding proposed improvements to its planning process, together with a ti= eta-ble for 1.rplementation.
- 10. The Authority is of the opinion that the Company should perf >rm a fea-3 sibility study on the dismantling of the non-sperating units at the English Station and the Steel Point Generating Plants.
- 11. Water heater rental rates should remain uc hanged.
- 12. The accelerated depreciation of the Bridgep t Harbor Unit sk3 and New Haven Earbor Unit boilers should be denied.
- 13. The Company's Fuel Adjustment Clause should .t updated as follows:
- a. The base price of fossil fuel (Pb) should be 474.61C per MMBTU.
- b. The base savings share (Sb) should be .144C per Kwh.
- 14. The appropriate race of return that the Company should earn on rate base is 11.30*., caleslated as the weighted cost of capital as follows:
RATIO COST WEIGHTED COST Long-Ters Debt 45% 8.47 3.31%
Preferred & Preference Stock 15 9.69 1.45 Common Stock 40 15 .1 6.04 100% 11.30%
- 15. A 11.30% race of return on a rate base of $388,515,707 will produce utility operating income of $43,902,275.
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t DOGGT NO. 800601 Page 32
- 16. Table III, below, shows the revenues and expenses found reasonable by the Authority.
TABLE III Operating Revenues:
Actual $361,522,814 Fuel Fold-In 10,089,563 Allowed Revenue Increase 35,850,439 Total Operating Revenues $407,462,816 Operating Expenses:
Fuel and Energy $216,771,203 Other Operation 50,691,768 Maintenance 15,176,454 Depreciation 14,765,907 Amortization of Deferred Debit for Fossil Fuel Costs 7,696,924 Taxes other Than Income Taxes 34,975,966 Incore Taxes-Fcderal and Other 26,479,915 Pro.tsion for Deferred Income Taxes 966,608 Income Taxes Deferred in Prior Ye a rs-Credit (4,240,162)
Gain-Sale of Utility Plant (40,760)
Deferred Investment Tax Oedit 316,713 Total Operating Expenses $363,560,541 Utility Operating Inccme $ 43,902,275
- 17. The increase in revenues should be applied according to the Company's proposed allocation eiethod, except when stated otherwise.
- 18. '41thout a current detailed cost of service study, the cost basis of the Company's rates is questionable.
- 19. The Company should investigate the costs and time necessary to conduct a fully-allocated, time-differentiated cost-of-service study and report its findings to the Authority. This study should incorporate all the Findings of the Order in Docket No. 790101, Phase I.
- 20. There exist several i.nconsistencies in the Company's residential rates.
- 21. The off-peak charges of Rates RT and G3T should be equali:ed.
- 22. *he minimum bill for Rate A should be increased by an additional $1.30 per monc.h (over the increase dictated by the Company's revenue alloca-tion method), to reflect higher netering costs to serve Rate A custcmers.
- 23. The number of energy blocks in Races R and A shot.ld be reduced (see
" Authority Analysis", Supra).
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DOCKET No. 800601 Page 33
( 24 The Company has presented insufficient evidence to justify the exclu-sion of customers using solar-assisted or renewable resource-assisted water heating from residential Rate A.
- 25. The Company's proposed Rate RS should be denied.
- 26. The block extender provisions in Rate GS and TE should be retained at this time.
- 27. The Company's proposed Rate U should be accepted, with the following adjustments: the proposed facility charge scould be reduced by 50* ,
subject to further adjustreats based on revenues granted in this deci-sion; the stipulation that a specifically defined geographic area must contain at. least twenty lights should be deleted.
- 23. The Company should review their records to determine if any street lighting customers were incorrectly billed.
- 29. Proposed Rate SG does not comply with PURPA.
- 30. The Company should refile Rate SG.
- 31. The interest charge of 1\*. on late payment, non-residential bills should be denied and a charge of IW should be approved.
VI. CONCI.USION AND ORDER
- 1. Based upon the foregoing, the amended schedule of rates filed with the Authority is denied, as are the requested rates of return.
- 2. Additional revenues in the amount of $35,850,439 per annum over the annual revenues received by the Company under the present rates are approved, subject to compliance with items Number 3 through 23, below.
- 3. The Company is directed to file no later than December 11, 1980 an amended schedule of rates in conformance with this Decision, designed to produce tae revenues authori:ed herein.
4 The Company is ordered to submit within 90 days:
A. a detailed implementation schedule of the workforce manage-ment projects in the distribution, production, and meter i reading areas;
- 3. steps that will be taken to expedite the current target date of December 1983, and C. the detailed documentation of these systems, including but not limited to, the tasks covered by these systems, the time values associated with each task, and the number of employees covered by each system.
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e DOCKET No. 800601 Page 34
- 5. The rate base shall be reduced by $1,445,461 to reflect 50". of the sav-ings in inventory management that should have been accomplished by the Company.
- 6. By March 15, 1981, the Company shall report. to the Authority regarding proposed improvements to its planning process, together with a timeta-ble for implementation.
- 7. The Company's construction program, as presented, is found to be rea-sonable by the Department.
- 3. The accelerated depreciation for the Bridgeport Harbor Unit 93 and New Haven Unit boilers is denied.
- 9. The Company will report back to this Authority within 3 months on the feasibility of dismantling the n-eperating units at Englf sh Station and Steel Poist Generating Plants.
- 10. Water heater rental rates shall remain at their present level.
- 11. The Authority finds a rate of return on rate base of 11.30*. just and reasonable.
- 12. The base price of fossil fuel shall be 474.61C per MM3TU.
3 13. The base savings share shall be .144C per kwh.
- 14. The Company will supply a monthly statement of finaccial and operating result, to the Department to allcw tracking of the actual results against the revenue requirement as determined in this Decision. The Company is ordered to meet with the Department staff within 45 days of this Decision to determine the most effective means of monitoring the results of this Decision and the Company's tracking and variance models.
- 15. The increase in revenues shall be applied according to the Company's proposed allocation method, except when stated otherwise.
- 16. The Company is directed to investigate the costs and time necessary to conduct a fully-allocated, time-differentiated cost-of-service study and report its findings to the Authority within ninety (90) days. The study shall incorporate all the Findings of the Order in Docket No.
790101, Phase I.
- 17. The off-peak charges of Rates RT and GST shall be equalized by adjust-ing Rate GST's off peak charge.
- 18. The c.inimum bill of Rate A shall be increased by au additional $1.80 per month (over the increase dictated by the Coa:pany's revenue alloca-tioa method). Additional revenues collected shall be distributed equally over all energy charges of Rates A and R.
- 19. The number of energy blocks in Rates R and A shall be reduced (see
()
N_
Authority Analysis", Supra) .
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DOCRIT No. 300601 Page 35
- 20. The sole source provision of Race A shall not apply for customers uti-lizing solar-assisted or, renewable resource-assisted water heating.
- 21. The Company's proposed Rate RS is denied.
- 22. The block extender provi* ions in Rates S and TE shall be retained at this time.
~
- 23. Proposed Rate U in accepted, with the following adjustments: the pro-posed facility charge shall te reduced by 50% (subject to further adjustments based on revenues granted in this decision); the stipula-tion that s specifically defined geographic area must contain at least twenty lights shall be deleted.
- 24. If it is determined that municipalities were incorrectly billed under the Company's streetlighting rates, the Company shall correct the error by rebilling the municipalities.
25 . Proposed Rate SG is denied.
- 26. The Company is directed to refile Rate SG by January 31, 1981 (see
" Authority Analysis", Supra) .
- 27. The interest chstge of 1 % on late payment, can-residential bills is denied and a charge of Ik% is approved.
- 23. We expect the Company management to look into the possibilities, advan-tages and disadvantages of changing the trust indenture.
- 29. A hearing on the filed rates in compliance with this Decision is sche-duled for Tuesday, December 16,1980, at 10:00 a.m. , in the offices of the Department.
We hereby direct that notice of the foregoing be given by tae Executive Secretary of this Department, by forwarding true and correct copies of this document to parties in interest and due return make.
Dated at Hartford, Connecticut. this 5th day of December, 1980.
.5arvin S. Loewith )
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John T. Downey ) DEPARTMENT OF PUBLIC UTILITY CONTROL l
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i Peter G. 3oucher )
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- DOCKET No. 300601 Page 36 State of Connecticut ) -
) ss. Hartford, December 3, 1980-County of Hartford )
I hereby certify that the foregoing is a true and correct copy of Decision, issued by the Department of Public Utility Control, State of Con-necticut.
Attest:
Executive Secretary, Department of Public Utility Control I
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