ML20198F951
| ML20198F951 | |
| Person / Time | |
|---|---|
| Site: | Seabrook  |
| Issue date: | 12/31/1997 |
| From: | Grossi R, Waterhouse P, Woodson N UNITED ILLUMINATING CO. |
| To: | |
| Shared Package | |
| ML20198F859 | List: |
| References | |
| NUDOCS 9812280256 | |
| Download: ML20198F951 (123) | |
Text
{{#Wiki_filter:-. . . . e The UnitedIlluminating Company o Annual Reaort to Shareowners o Notice of ~ 998 Annua Meeting o Proxy Statement UIat a Glance Inside Cover Erecutive Letter to Shareowners Section A Summary FinancialInfortnation Section B 1997AnnualReport to Shareowners Section C Notice of1998 AnnualMeeting Section D Proxy Staternent Section D Directions to AnnualMeeting Inside Back Cover InvestorInforntation Back Cover
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9812280256 981216 PDR I ADOCK 05000443 PDR Please sign and return your proh promptly.
UI ct s Gl:nce FINANCIAL PROFILE Number of electric employees at year-end 1,212 Number of shares at year-end 14,101,291 Total payroll (000) $69,276 Balance for common stock (000) $40,606 Total taxes (000) $101,526 Earnings per share of common stock $2.88 Total operating revenue (000) $726,020 Earnings per share from operations $3.94 Net utility plant at year-end (000) $ 1,322,314 Dividends declared per share $2.88 Fuel and energy cost (000) $160,517 Payout ratio 100 % Shareowners (total) 17,289 Return on average equity 9.20 % in Connecticut 8,319 Book value per share $31.20 CUSTOMER PROFILE Residential Commercial Industrial Other Total Average number 279,024 28,666 1,652 1,141 310,483 kWh sales (000) 1,891,988 2,258,501 1,141,109 48,291 5,339,889 Sales revenue (000) $265,562 $263,609 $108,825 $11,880 $649,876 Average revenue per kWh 14.04p 11.67( 9.54 24.60# 12.17 Average kWh use per customer 6,781 Peak Load (MW) 1,045 UI GENERATING PROFILE in-Service Capacity UI Share Name Location Date (MW) (M W) % Fossil Capacity Bridgeport Harbor Station Bridgeport, CT 1961-1985 556.2 556.2 100 % New Haven Harbor Station New Haven, CT 1975 447.0 418.9 93.71 % Nuclear Capacity Millstone Unit 3 Waterford, CT 1986 1,119.6 41.3 3.685 % Seabrook Unit i Seabrook, NH 1990 1,162.0 203.4 17.5 % Renewable Capacity Hydro Quebec Entitlement Canada NA 1,800.0 98.1 5.5% Power Purchase: Refuse Recovery Generator Bridgeport, CT 1988 59.5 59.5 100 %, Average fuel cost per kWh generated 1.69d Coal burned (tons) 925,330 Generating capability at year-end (MW) 1,522 Coal burned oil equivalent (BBL) 3,763,111 Barrels of oil burned (42 gal / BBL) 3,058,874 Gas burned (MCF) 1,912,0M TRANSMISSION AND DISTRIBUTION PROFILE Transmission and Distribution UI maintains approx- There are 3,125 pole-line miles of distribution lines imately 102 circuit miles of overhead transmission lines and 130 conduit-bank miles of underground distribu-and approximately 17 circuit miles of underground tion lines in UI's system. transmission cables. The Company owns and operates 24 bulk substations and 42 distributions substations. l l E
l 7he United Illuminating Company i 157 Chserch Street PO. Box 1504 ' New Ilaren. CT0650641901 j 203.499.2370 Fax:203.499.36s4 l l Richard J. Grossi g Chainnan & Chic] Executive Qgicer III i 1 l
I The year 1997 reminded me a little of that recent television series on i the Lewis and Clark e.ypedition: unforeseen valleys and peaks, .i unexpected twists and turns. We stayed on course, however, focusing l on our efforts to transform your Company, making it more competiuve ! by reducing costs. As a result,1997 was a year of solid financial accomplishment. ; l i Valleys and Peaks By the end of March 1997, a series of perceived i i negative events had shaken inve .or confidence in our earnings ; outlook and dividend prospects. The stock price fell to a five-year low. ! l As proposed electric utility restructuring legislation, both in Connecticut and elsewhere, became better understood, investor confidence in our outlook grew. We started a stock price recovery that, by year-end, I achieved a five-year high, producing a total return for the year of over
' 55%.
1 The year 1997 was also the first of our innovative five-year rate plan ("the Plan"), approved in 1996 '., ;he Department of Public Utility Control. The Plan is based on an " allowed" utility equity return of 1 11.5%, reduces customer prices and accelerates asset recovery. The Plan worked wellin 1997. On a diluted basis, earnings per share for the year increased 14% to $3.26. This increase occurred despite an l average reduction in prices of 4.6%, or $30 million in revenue. There l A-1
1 l I were several one-time items that contributed a net $.16 per share, so i earnings per share from operations were $3.10 for the wear.
- We did not, however, achieve our " allowed" level of earnings from operations for the year, primarily because of costs associated with our ownership share of the shutdown Millstone 3 nuclear unit, operated by :
Northeast Utilities. Although we anticipated the unit being ! out-of-service for the entire year, our share of the restart expenses was )
$3.5 million more than expected. An unexpected Seabrook nuclear l outage at year-end also added about $1.5 million to expense.
Our cash flow remained excellent for the year, producing over $168 l million from operating activities, more than 4 times the indicated annual j dividend of $2.88, on a per share basis. The ratio of dividends-to-earnings declined in 1997 to 88%, and we expect a further decline in this payout ratio in 1998 because we expect earnings to improve. In response to many investor inquiries in 1997, we reaffirmed the security of the dividend, and the 1997 financial results have proved our point. ! 1 Maintaining high cash flow is a key benefit of the Plan. Even with the price reductions taken in 1997, we expect that price levels will still be adequate to accelerate the non-cash amortization of pre-tax regulatory l assets by more than $13 million in 1998 and $20 million in 1999. Cash l l flow per share should remain at about 3-4 times the dividend level as ) long as the Plan remains in place. Strong cash flow allows debt l l paydown and advantageous refinancing of higher-cost debt. Cash available after paying dividends and capital requirements in 1997, alone, allowed us to pay down long-term debt by $85 million, about I l l l A-2 l _ ___ _ _ __0
! 1 l 11% of the total outstanding long-term debt, and to reduce interest l expense by $7.5 million, a decline of 11%. i Twists and Turna ,In May of 1997, we thought we would be
. explaining to our shareowners dramatic changes in the way the utility i l
-industry would be structured in Connecticut. Instead, the bill in the i legislature was withdrawn without coming to a vote. !
( Now, in March of 1998, a new restructuring bill is being considered in the legislature.- We are optimistic that we will be able to work with legislators to refine the language of the bill to provide equitable treatment for our shareowners and customers as the utility business 1 moves forward into the future. We continue to support the basic l concepts of industry restructuring. I f l Even though we do not yet have approved restructuring legislation, we l are already moving into the future. We have organized along business t unit lines. We expect that the " Power Supply" business will become unregulated and separated from the " Wires" business. We expect the
" Wires" business to remain a regulated entity responsible for i
l maintaining the reliability of power delivery over the distribution wire system. We are unbundling our costs and creating separate financial reports and forecasts for each business unit, and we are building separate business strategies as well. Unregulated Subsidiaries Ul recognized the profit potential of several unregulated activities associated with the utility business more than five years ago, when it established American Payment Systems, i A3 u
inc. and Precision Power, Inc. American Payment Systems manages remote agent collection networks for utility companies and has become a leading supplier of these services as utilities downsize by closing their customer service centers. After a slow start and a disappointing write-off in 1996, American Payment Systems turned in positive results in 1997 and is expected to contribute 5-10 cents per share to consolidated earnings in 1998. There is room for enormous growth in this business, but we have to be certain the profit margins are worth the risks. Precision Power was created to fill a need for power quality consulting and back-up power system design in our service territory. Precision Power is expected to breakeven in 1998 and, with the addition of new services, it should begin to make an earnings contribution in the following year. The "unbundling" of vertical integration in the electric industry should create additional opportunities for growth. Evidence of this is our recent agreement with Duke Energy to develop a combined cycle gas turbine plant at our Bridgeport Harbor location and the NEES Global Transmission effort to build a transmission cable across Long Island Sound from our New Haven Harbor Station location. Looking Ahead in 1998 The Company anticipates significant net expense declines, principally from: employee reductions made in 1997 (our workforce declined to about 1,050 utility employees at year-end 1997,17% below 1995 levels and 35% below peak levels in 1989); continued interest expense reductions as a result of debt paydown; A4
l 1 l 1 l improved Seabrook nuclear availability; and, hopefully, a return to service of the Millstone 3 nuclear unit. These expense reductions should more than compensate for the loss of one-time items realized in i 1997, cover the increased accelerated asset recovery, and allow utility i earnings to rise above the 11.5% return level into the " sharing" range l included in the Plan. When coupled with the expected improvement in subsidiary earnings, we now expect earnings in the neighborhood of $3.50 per share for 1998. Of course, our sales are highly weather-dependent and we all know "El Nino" is wreaking havoc with " normal" weather patterns, so a lot depends on how our summer sales period is affected. The United Illuminating Company is well-positioned to meet the challenges and opportunities of a deregulated world. All of the work
' completed and changes implemented over the past three years have l provided a solid platform for a new strategy and direction for the company. l It was time to make another change as well.
A New Leader Iinformed the Board of Directors last year that I wished to retire by the end of 1998. The Board did an j
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outstanding job in its search for my 44 successor. Many excellent candidates were reviewed before the Board selected f Nathaniel D. Woodson, a 30-year veteran Nathaniel D. Woodson l A-5
l' i of Westinghouse Electric Corporation, as President of Ul and my ; I suCCOssor.
- j. i Nat's broad range of managerial experience and reputation as an aggressive strategist will serve UI well as the company moves into a i
different and more competitive world. I'm pleased to be leaving the company in such capable hands at such a critical time in its history. Nat l will be assuming the role of Chief Executive Officer immediately . following the Annual Meeting in May and will become Chairman of the l L Board at year's end, I i i I have enjoyed every one of my 41 years with UI. My assignments were both challenging and rewarding, and it was indeed an honor and privilege to work with people who were competent and dedicated to fulfilling Ul's mission. For all the support and encouragement I received over the years from Ul employees and from you, UI's shareowners, I extend my thanks and deepest appreciation. . l / 4 Richard J. Grossi - , Chairman and Chief Executive Officer ! i Note: All earnings per s'aare amounts are on a fully diluted basis. l I r 1
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m /- l $ i 4 s ., .g i t l ] , i i s& I l _ $ ! . N E l Richard J. Grossi, chairman and generating plant and served as executive l chief executive officer of The United assistant to the vice president of illuminating Company will retire this year engineering and planning; he was later with 41 years of extraordinary service, named vice president in 1974. ! His outstanding leadership and in the 1980s, Mr. Grossi attended j vision have helped UI meet the Harvard University's Advanced challenges of past decades and prepared Management Program and was named it to succeed in the industry of the future. vice president of corporate planning and During his career at Ul, Mr. Grossi development. He was named executive contributed significantly to all aspects of vice president and chief operating officer the Company. He brought the benefit of in 1983, president in 1987 and assumed his extensive background in engineering the position of chairman and chief and strategic planning and combined it executive officer in 1991. with a special blend of high ethical Mr. Grossi exemplifies UI's widely standards, intellectual curiosity and a recognized commitment to community sense of humor. service, serving on a number of area He joined UI in 1957 as an boards including: New Haven Savings l engineering assistant and subsequently Bank, Anthem Blue Cross and Blue was appointed chief mechanical engineer Shield of Connecticut, The University of in 1965. In 1968, Ul took a lead position Connecticut Foundation, Inc. and in developing a nuclear power plant in Regional Growth Partnership. New Hampshire to be called Seabrook. Mr. Grossi believes UI has the l Mr. Grossi was named project engineer people, the capabilities and the values and moved his family to New Hampshire needed to take the Company for a year and a half. successfully into the future. Today, the While at Ul, he also supervised the health and vitality of Ul, operationally and design and construction of the financially, are a testament to Mr. Company's New Haven Harbor Station Grossi's effectiveness. A-7
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4 5 6 [THIS PAGE INTENTIONALLY LEFT BLANK] i i e d i l- , I
e S$rhe unitea11tuminating company 1
- Summary FinancialInformation 1
l i Glossary of Tenns B-1 Surnmary Results of Operations B-3 Condensed Consolidated Statement ofIncome B-5 Condensed Consolidated Balance Sheet B-6 Condensed Consolidated Statement of Cash Flows B-7 FinancialandStock Data B-8 1 l l
Glossary of Terms after-tax The effect that an item ofincome or expense has on earnings after the impact of state and federal income taxes; the combined statutory income tax rate on UI was about 42% in 1997. amortization The accounting process of decreasing the book value of an intangible asset by periodic non-cash charges against income over a specified time period. amortization of The amortization in 1995 to 1999 of deferred Seabrook related income accrued during Seabrook phase-In its phase-in to rate base during 1990 to 1993. costs APS American Payment Systems, Inc. a wholly owned subsidiary of UI that manages a national network of agents for the processing of bill payments made by customers of other utilities. I book value per share Calculated by dividing " Total Common Stock Equity" by " Common Shares Outstanding". capacity factor A measure of the energy actually produced by a generating system over a period of time relative to maximum amount of energy that the system was capable of producing during that time period. conservation A component of retail customer rates that allows the Corrpany to recover its adjustment expenditures for approved conservation and load management programs, mechanism cash flow Net cash provided by operating activities as shown on the Consolidated Statement of Cash Flows", deferring The process of delaying the recognition of an expense transaction for accounting purposes until some time in the future. electric utility The process of removing governmental controls over the electric industry and allowing deregulation the utility companies to operate in a free market with no defined territories and open to competition. DPUC Dep artment of Public Utility Control- the governmental body that regulates the activities of the Company. early retirement A one-time recording of the expenses associated with an early retirement program charges offer.ing to employees. I earnings per share " income Applicable to Common Stock" divided by " Average Number of Common Shares Outstanding". carnings per share Earnings per share, excluding the effects of non-recurring items ofincome or expense. from operations B-l
equity capitalization The ratio of" Common Stock Equity" to " Total Capitalization". ratio free cash flow Net cash from operating activities less dividend payments and capital expenditures; cash available to pay down debt. gross earnings tax A Connecticut tax (approximately 3.8% on average in 1997) assessed on all of a utility's retail revenues. kWh The energy consumed by ten 100 watt light bulbs operating for one hour; MWH = Mega-watt hour or 1,000 kWhs; G WH = Giga-watt hour or 1,000,000 kWhs. load factor A measure of the kWh consumed by a retail system over a period of time relative to the kWh it would have consumed ifits rate of consumption during the entire period had equated its maximum rate of consumption at any time during the period. NEPOOL New England Power Pool. non-recurring An income or expense item that is a "one-time" event... e.g., a gain from the sale of property or an early retirement charge. payout ratio Cash dividends declared per share of common stock divided by earnings per share. Rate Plan A 5 year plan offered by the DPUC and implemented by the Company in 1996 that allowed the Company to earn an annual equity return of 11.5% over the five year period and to share any earnings above that level. The plan also provides for annual increases in the accelerated amortization of some regulatory assets, although earnings need to be at least 10.5% for the accelerated charges to be taken, regulatory assets A balance sheet asset consisting of the right to collect certain revenues in the future, retail wheeling The selling of electricity to an end user in a utility's retail franchise territory by a person
. other than that utility.
sales margin Revenues less fuel expense and Connecticut's tax on revenues. Seabrook The nuclear generating unit located in Seabrook, New Hampshire, which isjointly owned by Ul and ten other New England electric utility entities. Seabrook refueling The period when Seabrook is unavailable to produce electricity while a portion ofits nuclear fuel is being replaced. securitization A form of state assisted debt financing that may allow the Company to lower cost and further enhance customer price reductions. stranded costs Past investments in plant that may not be recoverable in the new competitive power market environment. Alse known as transition assets, total return Cash dividends declared per share of Common Stock over a period of time, plus (or minus) the increase (or decrease) in the market price per share of Common Stock between the beginning and the end of the period. B-2
1 1 1 Summxry Results of Operations I. Earnings under 5 Year Rate Plan ("The Plan") The Plan allows for an equity return of i 1.5% on rate base equity and a sharing mechanism that allows the Company to earn above 11.5% if operating margins improve over antidpated levels. He Plan also provides for annual increases in accelerated amortization, although earnings 34.00 need to be at least 10.5% for these charges to be taken. g _ Earninge from Ooerations Total carnings may fluctuate $ 3.00 +- - - - - - due to various non-recurring items. Looking at "camings $ 2.50 -- -- - - - - fro:n operations", which exclude non-recurring items, is a ,,,,,_ _ _ _ _ _ useful way to evaluate year-to-year trends and build expectations for the future years. $1.50 - - - - - -
$1.00 - - - - - -
Earnings from operations in 1997 were $3.11 per share, IUU - - - ~~ ~~~ ~ down 21% from 1996. The expected decrease was due to lower prices to customers resulting from implementation of $0.00 -- - - - - - i rate plan and higher retail fuel expense. 93 94 e5 se 97 Earnings Per Share from Operations Total Earnings Total camings per share for 1997 were
$3.27, up S.39 from the 1996 level of $2.88. Earnings in 1996 were down $0.76 per share from the 1995 level of $3.64 per share. Earnings in each of the years 1993-1997 were affected by non-recurring items that, if not segregated, produce a view of recent earnings trends that is different from the view provided by earnings from operations:
e 1997 - Gains, principally from an income tax expense reduction from deferred tax benefits associated with future decommissioning of generating plants, partially $4.00 ofTset by charges for the accelerated amortization of $ 3.50 regulatory assets and for the termination of a contract, ,3,g a _ _ increased earnings by $.16 per share.
$ 2.50 p - - - - -
e 1996 - Charges related to two early retirement programs, $ 2.00 - - - - - - a severance program and a subsidiary loss, offset by a $ 1.50 - - - - - - l gain from the purchase of preferred stock at a discount, si,oo _ _ _ _ _ _ reduced earnings by $1.06 per share. ,g,gg g __ _ _ _ _ e 1995 - A charge to reflect the effects oflegislated future $ o.00 b --- --- - - - state income tax rate reductions and a gain from the 93 94 95 96 97 repurchase of preferred stock at a discount, increased Total Earnings Per Share earnings by S.03 per share, e 1994 - The settlement of a property tax dispute with the city of Bridgeport and an accounting change to reflect the accrual of Postemployment Benefits, reduced earnings by S.19 per share, e 1993 - An early retirement program, associated with the Company's reorganization, created a charge that reduced earnings by $.56 per share. B-3
1 l l II. Why E:rnings from Oper:tions Decreised in 1997 Non-utility earnings should increase by about $.05-$.10 per l share, primarily from an anticipated improvement in l Earnings decreased principally because of reductions in earnings of American Payment Systems, Inc. I sales margin. Reductions in customer prices decreased retail operating revenues by about $30 million due mainly to The strength of wholesale sales markets will depend on the l implementation of the 5-year rate plan. Overall average timing of the return to service of the nuclear units at ; prices declined by 4.6%. Retail fuel and energy expenses Millstone, the addition of new generation sources, and on l increased by $14.2 million, which was mainly due to the how the capacity and energy markets perform under the new need to purchase more expensive fossil energy to replace NEPOOL competitive bid market system. , generation from shutdown nuclear generating plants. These I sales margin reductions were offset by $9.4 million from 1999 to 2002 ) increased sales volume and reductions in revenue based taxes. Legislation The Connecticut legislature may pass a bill this year to restructure the electric utility industry in 1997 1996 Connecticut. Any final version of the bill that will be 1 Earnings Per Share-Basic supported by the Company is likely to encompass the l From operations $3.11 $3.94 "unbundling" ofintegrated electric service, including: l From non-recurring items .16 (1.06) divestiture of fossil generating plants; retail customer choice i Total Earnings Per Share $3.27 $2.88 of supplier; a regulated distribution system; pass-through of mandated government program costs; and provisions to Ill. Outlook for 1998 and beyond recover past investments in plant that may not be recoverable in the new competitive power market 122fl The Company expects substantial net expense environment (so called " stranded costs") through a non-reductions that should more than compensate for the loss of bypassable " transition" charge. The proposed bill will also one-time items realized in 1997 and the increase in require utilities to reduce prices by 10% from 1996 levels, accelerated amortization under the rate plan. The savings which will be an additional 4-5% reduction from the should allow utility earnings to increase above an 11.5% Company's current plan. The Company expects to be able to return into the " sharing" range of the rate plan. If the accomodate these additional price cuts and still allow for Company were to achieve the 11.5% return, earnings from accelerated amortization of certain costs. utility operations would be in the $3.40 to $3.45 per share ; range. - Wholesale Revenues The Company does not expect much additional rowth as the generating capacity of the Company The Company experienced about 1%-1.5% of"real" sales is limiteo. growth in 1997. A similar level of growth in 1998 from all customer groups would add about $6-$8 million to sales Retail Sain The Comp my expects continuing modest margin. UI's largest customer is, however, constructing a growth resulting from improvements in the local economy. cogeneration unit that is expected to commence operation in early 1998. This is expected to offset sales growth from Expenses other customers and as a result, little change in retail e Fuel and Energy The Company expects fuel savings kilowatt hour sales is expected in 1998 compared to 1997. from its fossil fueled generating plants with the return of Retail revenues should decline by several million dollars (or Millstone Unit 3 to service and anticipates nuclear fuel more if the Company is in the " sharing" range above an expense savings from nuclear fuel price reductions and i1.5% return). Abnormal weather can swing sales either up expanded intervals betwei n refueling of the nuclear units or down, and the Company has no regulatory protection in which it has interests, from these effects.
- Interest - The Company expects a further reduction in Expense reductions include $6 million of savings from the interest costs in 1999 anci continued declines thereafter 1996-1997 early retirement and severance separation from refinancing and the continued paydown of debt, all programs, $9 million savings from operation & maintenance assuming that interest rates remain at current levels.
expenses associated with Seabrook and Connecticut Yankee, and $10 million savings from lower interest costs, offset by
- Operating - The Company expects continuing declines in increased costs for fossil fueled generating unit operation and maintenance expenses from the process re-maintenance, base depreciation and accelerated amortization engineering cost reductions and the retirement of per the rate plan. Connecticut Yankee.
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Ccudensed Consolidated Statement ofIne me This statement is a summary of the Company's operating performance that shows the Company's revenues and expenses that result in the " Balance for Common Stock," the earnings for all shareowners, r T For the Years Ended December 31,1997 and 1996 Declined by $35 million... (Millions Except Per Share Amounts) 1997 1996 This was the principal Operating Revenues $710 $726 cause of our reduction in Fueland energy expense 183 160 earnings from operations Sales-related taxes 23 27
\- > Sales Margin 504 -------
g 539 includes operation, - - - - - - - - - -> Operation expenses 269 i 272 maintenance, purchased . , - - - -> Depreciation and amortization 82 l 80 capacity and property and ,' Non-recurring charges - ,-----> 7 f 29 payroll taxes ,
, Other(income) and expenses l (1) 5
,',' r ->lnterest expense l
'62 70 includes about $13 ' l Income Before Income Taxes l 85 l 83 million of amortization of ; ; ;
Previously deferred '
, Income taxes for operations l 48 .l' 56 revenue '
Non-recurring income taxes l- - - - - > (9) (12) l Net income 46 39 { { ne Company's refinancing - J Program and strong cash Gains on repurchase of preferred stock l-----> - l (2) Preferred stock dividends l - - flow help to reduce interest ' , expense Income Applicable to Common Stock l $46 l $41 Average Number of Shares Outstanding l 14 l 14 Earnings per Share - Basic ; $3.27 $2.88 i i Earnings per Share Diluted l $3.26 l $2.87 ( -l l ; Non-recurring charges include - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---------- [~~~~~~~~' acc;lerated amortization of Declined because of g S conservation costs and price reductions to 1997 1996 deferred tax benefits in 1997 customers - - - - - - > Retail Operating Revenue $623 $650 and voluntary early retirement Other Operating Revenue 4 3 program charges in 1996 Increased because of - - - - - > Retail fuel and energy expense 110 95 nuclear plant outages , Sales-related taxes 23 27 Retail Sales Margin $494 $531 Decreased due to ' .- Wholesale Operating Revenue $83 $73 Wholesale fuel and energy expense 73 65 Wholesale Sales Margin $10 $8 ( J These condensed financial statements should be read in conjunction with the full financial statements for the year ended December 31,1997, including the report ofindependent accountants, dated January 26,1998, in the Annual Report to Shareowners. B-5 l
Ccndens:d Ccustlid ted B lance Sheet This statemelt rep;rts the Campany's t:t:1 assets (what we cun and what is cwed ts ts), liabilities (what we owe others, now and in the future) and capitalization (amounts invested in or loaned to the Company) at the end of the year. r 3 December 31,1997 and 1996 (Millions of Dollars) 1997 1996 Assets Utility Net Plant at Original Cost $1,222 $1,258 Construction Work in Progress 26 41 Nuclear Fuel 26 23 Other Property and Investments 33 26 Current Assets Cash and temporary cash investments 32 6 Customer accounts receivable, net and accrued utility revenues 83 93 Includes inventory and - - - - - - - > Other 50 64 Prepayments Total 165 163 Principally unamortized- --- > Deferred Charges 12 8 debt issuance costs
,- - > Regulatory Assets 348 441 l $1,832 $1,960 Future revenues due from - -l customers through the Capitalization and Liabilities ratemaking process, Capitalization principally to collect Common stock equity ----> $439 $440 future income taxes Preferred stock -
4 4 Preferred securities f 50 50 Includes Connecticut Long-term debt - net ; 645 760 Yankee obligation and Total l 1,138 1,254 - pensions accrued - - - - - - - - >Noncurrent Liabilities 120 139 { Current Liabilities l Current portion oflong-term debt l 100 70 Includes dividends Notes payable > 38 11 payable, taxes accrued and Accounts payable ; 69 68 interest accrued ------
- - > Other '
62 61 Total , 269 210
,------------ - > Regulatory Liabilities ; I8 18 Future amounts owed
- > Deferred Income Taxes 285 337 l- {
to customers through l Other ' 2 2 the ratemaking process Commitments and Contingencies - - ' i . $1,832 $1,960 l( J Future tax liabilities owed - ' Shareowners'
- book" value - - - - - - - - - - - - - - - - -
- to taxmg authorities from 1997: $31.56 per share future customer revenues 1996: $31.20 per share These condensed financial statements should be read in conjunction with the full financial statements for the year ended December 31,1997, including the report of independent accountants, dated January 26,1998, in the Annual Report to %:cowners.
B-6
Condensed Cons:lidat:d Statement of Cash FIsws This statemnt sImm:rizes cash liflows aid cutflows drring the year fr:m eperatiIg,investlig, 1 and financing activities. l I l r 3 For the Years Ended December 31,1997 and 1996 (Millions of Dollars) 1997 1996 l Cash Flows From Operating Activities j Net income $46 $39 Adjustments to reconcile net income to net cash provided by operating activities: [ Depreciation and amortization 92 83 1 8 (2) l These amounts are included -- > { Deferred income taxes l 6 6 in the calculation of net l Amortization of nuclear fuel ncome, but do not LOther non-cash income items (2) (3) represent cash outflows Subtotal 150 123 Changes in working capital 19 22 l Cash Provided by Operating Activities 169 145 J Dividend payments (41) (41) Cash used for debt and equity redemptions (151) (77) Investment in our own Cash provided by debt / equity issuances and borrowings 117 93 j debt securities to reduce Cash used for other financing activities - (1) I interest expense -- ----- > Cash used for investments (35) (71) Cash used for capital expenditures (33) (47) l Increase in Cash and Temporary Cash Investments 26 .I Cash Balance at Beginning ofPeriod 6 5 Cash Balance at EndofPeriod $32 $6 L A f % (~ 3 1997 1996 1997 1996 Cash Available from Earnings to Cash Provided by Operating Pay Interest Charges (A) $228 $214 Activities less Dividend Payments $128 $104 , Annual Cash Interest Charges (B) 59 69 Capital Expenditures (33) (47) Total Debt (C) 745 830 Difference 7 95 557 Cash Coverage Ratio (A)/(B) 3.9 3.1 ( ; Cash Available to Total Debt (A-B) / (C) 23 % 17 % \ J These condensed financial statements should be read in conjunction with the full financial statements for the year ended December 31,1997, including the report of independent accountants, dated January 26,1998, in the Annual Report to Sharcowners. B-7
1 l Fin ncial and Stock Data INCOME AND DIVIDEND DATA Pretax (ted ) Balance for Basic Diluted Dmdend Yield on Sales Margm Net income Common Earnings Earnings Declared Payout Average Year $ mil $/ share $ mil % of s m $ mil per Share $ per Share $ Share $ Ratio % Price % 1993 487 34.63 63 12.9 36 2.57 2.56 2.66 103.5 6.3 1994 502 35.64 81 16.1 43 3.09 3.08 2.76 89.3 8.1 1995 525 37.25 92 17.5 51 3,64 3.63 2.82 77.5 8.3 1996 539 38.21 74 13.7 41 2.88 2.87 2.88 100.0 8.1 1997 504 36.06 76 15.1 46 3.27 3.26 2.88 88.1 8.2 5 Yr. Avg. 511 36.36 77 43 15.1 3.09 3.08 2.80 91.7 7.8 COMMON SHARE DATA Closing Price Range Price Earnings Ratio Year $ High ! Low $ End High Low Close 1993 45 7/8 38 1/2 40 1/4 17.9 15.0 15.7 1994 39 1/2 29 29 1/2 12.8 9.4 9.5 1995 38 1/2 29 1/2 37 3/8 10.6 8.1 10.3 1996 39 3/4 31 3/8 31 3/8 13.8 10.9 10.9 1997 45 15/16 24 1/2 45 15/16 14.0 7.5 14.0 5 Yr. Avg. 41 15/16 30 9/16 36 7/8 13.8 10.2 12.1 COMMON SHARE DATA (Cont'd) Closing Market Price $ Trading Volume Quarter 1997 1996 1995 in Thousands ended High Low End liigh Low End High Low End 1997 19 % 1995 3/31 32 5/8 24 1/2 26 I/8 39 3/4 36 1/4 36 7/8 33 1/4 29 I/2 32 4,990 4,023 2,796 6/30 30 7/8 24 1/2 30 7/8 38 35 3/4 373/8 33 5/8 31 1/4 33 4.660 2,534 1,468 9/30 37 311/2 36 7/16 37 1/2 33 7/8 34 3/8 35 1/4 31 1/2 4,032 35 1/8 1,801 1,522 12/31 45 15/16 37 45 15/16 35 313/8 313/8 38 1/2 35 3/4 37 3/8 2,710 3,020 2,657_ , 4 QUARTERLY FINANCIAL INFORMATION 4 Quarter Sales Margin 5 mil. Pretax (fed ) Net income $ mil. Basic Earnings per Share $ Dividends Paid per Share $ ended 1997 19 % 1995 1997 19 % 1995 1997 1996 1995 1997 19 % 1995 3/31 120 133 122 15 21 18 0.54 0.82 0.62 0.72 0.705 0.69 6/30 119 129 123 8 18 16 0.61 0.75 0.67 0.72 0.72 0.705 9/30 146 153 156 40 31 44 1.68 1.27 1.89 0.72 0.72 0.705 12/31 119 124 124 13 4 14 0.44 0.04 0.46 0.72 0.72 0.705 s.m. = Sales Margin; (fed.) = Federal i B-8
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e S$1he unitedittuminating company i
. 1997 Annual Report 1:o Shareowners Managernent's Discussion and Analysis of Financial Condition and Results of Operation C-1 Report ofIndependent Accountants C-12 ConsolidatedStatement ofIncome C-14 l
ConsolidatedStatement of Cash Flows C-15 Consolidated Balance Sheet C-16 ConsolidatedStatement ofRetained Earnings C-18 Notes to Consolidated FinancialStatements C-19 Marketfor the Contpany's Common Equity andRelatedStockholderMatters C-48 Executive Officers of the Company C-48 Selected FinancialData C-49 1 l
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r MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAJOR INFLUENCES ON FINANCIAL CONDITION The Company's financial condition will continue to be dependent on the level ofits retail and wholesale sales and the Company's ability to control expenses. The two primary factors that affect sales volume are economic conditions and weather. Annual growth in total operation and maintenance expense, excluding one-time items and cogeneration capacity purchases, has averaged less than 1.5% during the past 5 years. The Company hopes to continue to restrict this average to less than the rate ofinflation in future years (see "Looking Forward").
. The Company's financial status and financing capability will continue to be sensitive to many other factors, including conditions in the securities markets, economic conditions, interest rates, the level of the Company's income and cash flow, and legislative and regulatory developments, including the cost of compliance with .
increasingly stringent environmental legislation and regulations and competition within the electric utility industry. A major factor affecting the Company's earnings prospects will be the success of the Company's efforts to implement the regulatory framework ordered by the DPUC at the end of 1996. On December 31,1996, the DPUC r completed a financial and operational review of the Company and ordered a five-year incentive regulation plan for the years 1997-2001. The DPUC did not change the existing retail base rates charged to customers; but its order increased amortization of the Company's conservation and load management program investments during 1997 1998, and accelerated the recovery of unspecified regulatory assets during 1999-2001 if the Company's common stock equity return on utility investment exceeds 10.5% after recording the increased conservation and load management amortization. The order also reduced the level of conservation adjustment mechanism revenues in retail prices, provided a reduction in customer prices through a surcredit in each of the five plan years, and [ accepted the Company's proposal to modify the operation of the fossil fuel clause mechanism. The Company's l ' authorized return on utility common stock equity was reduced from 12.4% to 11.5%. Earnings above 11.5%, on an annual basis, are to be utilized one-third for customer price reductions, one-third to increase amortization of regulatory assets, and one-third retained as earnings. As a result of the DPUC's order, customer prices were required to be reduced, on average, by 3% in 1997 compared to 1996. Retail revenues actually decreased by approximately $30 million, or 4.6%, in 1997 due to customer price redur Also as a result of the order, customer prices are required to be reduced by an additional 1% in 2000, and
- 1% in 2001, compared to 1996.
By its terms, the DPUC's 1996 order should be reopened in 1998 to e o rmine the regulatory assets to be subjected to accelerated recovery in 1999,2000 and 2001. Federal legislation has fostered competition in the wholesale electric power market, as has a FERC rulemaking requiring electric utilities to furnish transmission service to all buyers and sellers in the marketplace. In its rulemaking, the FERC stated that state regulatory commissions should address the issue of recovery by electric utilities of the costs of existing facilities that, on account of" retail access", become unrecoverable by the utilities th ough the regulated rates charged to their service territory customers. The legislatures and regulatory commissions in several states have considered or are considering " retail access", i This, in general terms, means the transmission by an electric utility of energy produced by another entity over the l utility's transmission and distribution system to a retail customer in the utility's own service territory. A retail access requirement has the effect of permitting retail customers to purchase electric capacity and energy, at the election of such customers, from the electric utility in whose service area they are located or from any other electric l- utility, independent power producer or power marketer. The costs of existing facilities that become unrecoverable by the service area electric utility on account of the loss of sales to these customers are said to be " stranded costs". In i 1995, the Connecticut Legislature established a task force to review these issues and to make recommendations on - electric industry restructuring within Connecticut. The task force concluded its work in December 1996 and issued a f [ C-1
report and related recommendations. In its 1997 session, the Connecticut legislature drafted, but failed to bring to a vote, comprehensive legislation that would have introduced retail access in Connecticut over a period of several years, with a provision for the recovery of stranded costs by service area utilities. The legi:lature is currently considering legislation of this same sort in its 1998 session. Among many other factors, decisions and actions concerning retail access in other states could impact the timing and form of this legislation. Although the Company is unable to predict the future effects of competitive forces in the electric utility industry, competition could result in a change in the regulatory structure of the industry, and costs that have traditionally been recoverable through the ratemaking process may not be recoverable in the future. This efTect could have a material impact on the financial condition and/or results of operations of the Company. Currently, the Company's electric service rates are subject to regulation and are based on the Company's costs. Therefore, the Company, and most regulated utilities, are subject to certain accounting standards (Statement of Financial Accounting Standards No. 71, " Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71)) that are not applicable to other businesses in general. These accounting rules allow regulated utilities, where appropriate, to defer the income statement impact of certain costs that are expected to be recovered in future regulated service rates and to establish regulatory assets on balance sheets for such costs. The effects of competition or a change in the cost-based regulatory structure could cause the operations of the Company, or a portion of its assets or operations, to cease meeting the criteria for application of these accounting rules. While the Company expects to continue to meet these criteria in the foreseeable future, if the Company, or a portion of its assets or operations, were to cease meeting these criteria, accounting standards for businesses in general would become applicable and immediate recognition of any previously deferred costs, or a portion of defen ed costs, would be required in the year in which the criteria are no longer met, if such deferred costs are not recoverable in that portion of the business that continues to meet the criteria for the application of SFAS No. 71, if this change in accounting were to occur, it would have a material adverse effect on the Company's earnings and retained eamings in that year and could have a material adverse efTect on the Company's ongoing financial condition as well. i l LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are presently projected as follows: 1228 1292 200H 2110 1 2110 2 l (millions) Cash on Hand - Beginning of Year S 32.0 $10.4 S - S- S-Internally Generated Funds less Dividends 118.5 108.0 JD22 22,Q fifi l l Subtotal 150.5 118.4 109.3 97.0 68.6 I f Less: j Capital Expenditures .312 12.2 12Ji 1L1 3D 2 Cash Available to pay Debt Maturities and Redemptions 114.6 85.7 69.7 65.9 37.9 Less: Maturities and Mandatory Redemptions 104.2 103.4 150.4 211 _03 External Financing Requirements (Surplus) $(10.41 $12.2 $101 SM $(12.ft) Note: Internally Generated Funds less Dividends, Capital Expenditures and External Financing Requirements are estimates based on current earnings and cash flow projections and are subject to change due to future events and conditions that may be substantially different from those used in developing the projections. C-2
l All of the Company's capital requirements that exceed available cash will have to be provided by external financing. Although the Company has no commitment to provide such financing from any source of funds, other than a $75 million revolving credit agreement with a group of banks, described below, the Company expects to be able to satisfy its external financing needs by issuing additional short-term and long-term debt, and by issuing preferred stock or common stock, if necessary. He continued availability of these methods of financing will be dependent on many factors, including conditions in the securities markets, economic conditions, and the level of the Company's income and cash flow. On December 30,1996, the Company transferred $51.3 million to a trustee under an escrow agreement. The funds, which were invested in Treasury Notes, were used to pay $50 million principal amount of 7% Notes that matured on Januaiy 15,1997 plus accrued interest. In February 1997, the Company purchased at a discount on the open market, and canceled,403 shares ofits $100 par value 4.35%, Series A preferred stock. The shares, having a par value of $40,300, were purchased for $21,271, creating a net gain of $19,029. On February 15,1997, t'te Company repaid $10.8 million principal amount of maturing 9.44% First Mortgage Bonds, Series B, and redeemed, at a premium of $185,328, the remaining $21.6 million outstanding principal amount of 9.44% First Mortgage Bonds, Series B, issued by Bridgeport Electric Company, a wholly-owned subsidiary of the Company that was merged with and into the Company in September 1994. On July 30,1997, the Company borrowed $98.5 million from the Business Finance Authority of the State of New Hampshire (BFA), representing the proceeds from the issuance by the BFA of $98.5 million principal amount of tax-exempt Pollution Control Refunding Revenue Bonds (PCRRBs). The Company is obligated, under its borrowing agreement with the BFA, to pay to a trustee for the PCRRBs' bondholders such amounts as will pay, when due, the principal of and the premium, if any, and interest on the PCRRBs. The PCRRBs will mature in 2027, and their interest rate is adjusted periodically to reflect prevailing market conditions. The PCRRBs' interest rate, which is being adjusted weekly, was 3.75% at December 31,1997. The Company has used the proceeds of this $98.5 million borrowing to cause the redemption and repayment of $25 million of 9 3/8%,1987 Series A, Pollution Control Revenue Bonds, $43.5 million of 10 3/4 %, 1987 Series B, Pollution Control Revenue Bonds, and $30 million of Adjustable Rate,1990 Series A, Solid Waste Disposal Revenue Bonds, three ou? standing series of tax-exempt bonds on which the Company also had a payment obligation to a trustee for the bondholders. Expenses associated with this transaction, including redemption premiums totaling $2,055,000 and other expenses of approximately $1,500,000, were paid by the Company. In August 1997, the Company purchased at a discount on the open market, and canceled,500 shares ofits $100 par value 4.72%, Series B preferred stock and 200 shares ofits $100 par value 4.64%, Series C preferred stock. Rese shares, having a par value of S70,000, were purchased for $41,100, creating a net gain of $28,900. On November 12,1997, the Company refinanced the secured lease obligation bonds that were issued in 1990 in connection with the sale and leaseback by the Company of a portion ofits ownership share in Seabrook Unit 1. All of the outstanding $69,593,000 principal amount of 9.76% Series 2006 Seabrook Lease Obligation Bonds (the "9.76% Bonds") and $129,055,000 principal amount of 10.24% Series 2020 Seabrook Lease Obligation Bonds (the "10.24% Bonds") were redeemed. The redemption premiums paid on the 9.76% Bonds and the 10.24% Bonds were $1,884,549 and $8,589,901, respectively. The Bonds were refunded with the proceeds from the issuance of $203,088,000 principal amount of 7.83% Seabrook Lease Obligation Bonds due January 2, 2019 (the "7.83% Bonds"), the principal of which will be payable from time to time in installments. Transaction expenses totaling $1,530,022 and redemption premiums totaling $8,139,978 were paid from the proceeds of the 7.83% Bonds and will be repaid as part of the Company's Lease payments over the remaining term of the Lease. The remainder of the redemption premiums ($2,334,472) and transaction expenses were paid by the Company and will be amortized over the remainder of the Lease term. The transaction reduces the interest rate on the leaseback arrangement, which is treated as long term debt on the Company's Consolidated Balance Sheet, from 8.45% to 7.56%. The Company owned $16,997,000 principal amount of the 9.76% Bonds and $49,850,000 principal amount of the 10.24% Bonds. C-3
I The Company used the proceeds from the redemption of these bonds ($70,662,688, including redemption premiums totaling $3,815,688), plus available funds and short-term borrowings, to purchase $101,388,000 principal amount of the 7.83% Bonds. The Company intends to hold the 7.83% Bonds until maturity and has recognized the investment , as an offset to long-term debt on its Consolidated Balance Sheet.
]
( On January 13,1998, the Company issued and sold $100 million principal amount of 6.25% four-year and eleven i month Notes. The yield on the Notes, which were issued at a discount, is 6.30%; and the Notes will mature on j December 15, 2002. The proceeds from the sale of the Notes were used to repay $100 million principal amount of I 7 3/8% Notes, which matured on January 15,1998. The Company has a revolving credit agreement with a group of banks, which currently extends to December 9, 1998. The borrowing limit of this facility is $75 million. The facility permits the Company to borrow funds at a fluctuating interest rate determined by the prime lending market in New York, and also permits the Company to borrow money for fixed periods of time specified by the Company at fixed interest rates determined by the Eurodollar interbank market in London, or by bidding, at the Company's option. If a material adverse charge in the business, operations, affairs, assets or condition, financial or otherwise, or prospects of the Company and its subsidiaries, on a consolidated basis, should occur, the banks may decline to lend additional money to the Company under this revolving credit agreement, although borrowings outstanding at the time of such an occurrence would not then become due and payable. As of December 31,1997, the Company had $30 million of short-term borrowings outstanding under this facility, in addition, as of December 31,1997, one of the Company's subsidiaries, American Payment Systems, Inc., had borrowings of $7.8 million outstanding under a bank line of credit agreement. At December 31,1997, the Company had $32.0 million of cash and temporary cash investments, an increase of
$25.6 million from the balance at December 31,1996. The components of this increase, which are detailed in the Consolidated Statement of Cash Flows, are summarized as follows:
(Millions) Balance, December 31,1996 $_fiA Net cash provided by operating activities 168.4 Net cash provided by (used in) financing activities: Financing activities, excluding dividend payments (34.2)
- Dividend payments (40.6)
Net cash used in investing activities, excluding investment in plant (34.6) Cash invested in plant, including nuclear fuel 33.4) Net Change in Cash .21fi Balance, December 31,1997 S.32A The Company's long-term debt instruments do not limit the amount of short-term debt that the Company may issue.
'Ihe Company's revolving credit agreement described above requires it to maintain an available earnings / interest charges ratio of not less than 1.5:00 for each 12-month period ending on the last day of each calendar quarter. For the 12-month period ended Decembu 31,1997 this coverage ratio was 3.23:1.0.
j SUBSIDIARY OPERATIONS UI has one wholly-owned subsidiary, United Resources, Inc. (URI), that serves as the parent corporation for several unregulated businesses, each of which is incorporated separately to participate in business ventures that will f C-4
l complement and enhance Ufs electric utility business and serve the interests of the Company and its shareholders and l customers. URI has four wholly-owned subsidiaries. The largest URI subsidiary, American Payment Systems, Inc., manages a national network of agents for the processing of bill payments made by customers of other utilities. Another subsidiary of URI, Thermal Energies, Inc., is participating in the development of district heating and cooling facilities in the downtown New flaven area, including the energy center for an office tower smd participation as a 52% partner in the energy center for a city hall and office tower complex. A third URI subsidiary, Precision Power, Inc., provides power-related equipment and services to the owners of commercial buildings and industrial facilities. URl's fourth subsidiary, United Bridgeport Energy, Inc., is participating in a merchant wholesale electric generating facility being constructed on land leased from Ul at its Bridgeport liarbor Station generating plant. The after-tax impact of the subsidiaries on the consolidated financial statements of the Company is as follows: Assets Net Income (loss) Earnings at Dec.31 (000's) per Share (000's) (Basic & Diluted) 1997 $(542) $(0.04) $27,873 1996 (5,237) (0.37) 36,385 1995 (2,640) (0.19) 16,323 In 1996, the Company made provisions for losses of $2.6 million (after-tax) associated with agent collections and miscellaneous other items at its American Payment Systems, Inc. subsidiary. RESULTS OF OPERATIONS 1997 vs.1996 Earnings for the year 1997 were $45.6 million, or $3.27 basic earnings per share, up $5.0 million, or $.39 per share, from 1996. Earnings from operations, which exclude one-time items and accelerated amortization of costs attributable to one-time items, decreased by $12.2 million, or $.83 per share, in 1997 compared to 1996. The most significant one-time item recorded in 1997 was a gain from an income tax expense reduction of $6.7 million in the second quarter, or $.48 per share, which makes provision for the cumulative deferred tax benefits associated with the future decommissioning of fossil-fueled generating plants. By order of the Connecticut Department of Public Utility Control (DPUC), the Company was required to accelerate the amortization of regulatory assets by as much as $6.4 million ($4.1 million after-tax), or $.30 per share, provided that the 1997 return on utility common stock equity would exceed 10.5 percent for the year. As a result of the tax benefit, the full $6.4 million was charged in the second quarter of 1997 See the LOOKING FORWARD sectionfor more information on the DPUC order. Additional 1997 one-time items include a $.05 per share gain related to subleasing office space, a gain of $2.5 million ($1.5 million after-tax), or $.11 per share, related to forgone benefits associated with the 1996 voluntary retirement and separation programs, and a charge of $4.3 million ($2.5 million after-tax), or $.18 per share, for terminating a consulting contract. The one-time items recorded in 1996, which amounted to a net loss of $1.06 per share were: charges of $23.0 million ($13.4 million after-tax), or 5.95 per share, from early retirement and voluntary severance programs, a charge of $1.4 million ($0.8 million after-tax), or $.06 per share, for the cumulative loss on an office space sublease, a charge of $2.6 million (after-tax), or $.18 per share, related to subsidiary operations, and a gain of $1.8 million (after-tax), or $.13 per share, from the repurchase of preferred stock at a discount to par value. Retail operating revenues decreased by about $26.3 million in 1947 compared to 1996: C-5 MhthhE%7M?l
e Results for 1997 reflect an adjustment to retail kilowatt-hour sales and revenue, made in the fourth quarter of 1997, to reverse prior period overestimates of transmission losses. The adjustment added 25 million kilowatt-hours, a 0.5 percent increase compared to 1996 kilowatt-hour sales, and $2.7 million of revenues.
- An additional retail kilowatt-hour sales increase of 0.2% from the prior year increased retail revenues by
$1.6 million and sales margin (revenue less fuel expense and revenue-based taxes) by $1.1 million. The Company believes that weather factors had a negative impact on retail kilowatt-hour sales of about 0.5 percent. There was one less day in 1997 (1996 was a leap year), which decreased retail kilowatt-hour sales by 0.3 percent. This would indicate that "real" (i.e. not attributable to abnormal weather or the leap year day in 1996) kilowatt-hour sales increased by about 1.0-1.5 percent for the year. = Reductions in customer bills, as agreed to by the Company and the DPUC in December 1996, decreased retail revenues by about $23.0 million, including suspension of the fossil fuel adjt.stment clause (FAC) mechanism that reduced revenues by $6.0 million. This was a somewhat greater decrea e than expected, principally because of a decrease in conservation spending. Other reductions in customer bills, due to rate mix, contract pricing and other pass-through reductions, amounted to $7.6 million.
Wholesale " capacity" revenues increased $2.1 million in 1997 compared to 1996. Wholesale " energy" revenues, which increased during 1997 compared to 1996 as a result of nuclear generating unit outages in the region, are a direct offset to wholesale energy expense and do not contribute to sales margin. Retail fuel and energy expenses increased by $14.2 million in 1997 compared to 1996. These expenses increased by $12.6 million due to the need for more expensive energy to replace generation by nuclear generating units: for the Connecticut Yankee unit, which ran at nearly full capacity in the first six and one-half months of 1996, for Millstone Unit 3, which ran at nearly full capacity in the first quarter of 1996, for an unplanned eight-day extension of a Seabrook unit refueling nutage in the secono quarter of 1997 that increased the Company's replacement generation cost by about $0.7 million, and fc an unplanned Seabrook unit outage that began on December 5,1997. The Seabrook unit was returned to service from the last outage on January 17,1998. Millstone Unit 3 was taken out of service on M irch 30,1996 and Connecticut Yankee was taken out of service on July 23, 1996. For more on the status of the Connecticut Yankee and Millstone Unit 3 units, see the LOOKING FORWARD section. Retail fuel and energy expenses also increased by about $1.6 million in 1997 compared to 1996, due to higher fossil fuel prices. By order of the DPUC, these costs are not passed on to customers through the FAC. Operating expenses for operations, maintenance and purchased capacity charges decreased by $1.7 million, excluding the impact of one-time items, in 1997 compared to 1996:
. Purchased capacity expense decreased $6.9 million, due to declining costs from the retired Connecticut Yankee nuclear generating unit, and also due to slightly lower cogeneration costs.
- Operation and maintenam e expense increased by $5.1 million. General, refueling and unscheduled outage expenses at the Seabrook nuclear generating unit increased about $2.9 million, and general expenses at the Millstone 3 nuclear generating unit increased $4.8 million. Expenses associated with the Company's re-engineering efforts increased by a net $1.0 million. Other general expenses increased by about $2.9 million. These increases were partly offset by a $4.6 million reduction in pension expense due to investment performance and changes in actuarial assumptions and methodologies, and health benefit reductions of $1.9 milli;n. The increase at Millstone Unit 3 was partly offset by the reversal of a portion of a 1996 provision in "Other income (deductions)".
Depreciation expense, excluding the impact of one-time items, increased by $2.3 million in 1997 compared to 1996. Income taxes, exclusive of the effects of one-time items, changed based on changes in taxable income and tax rates. C-6
Other net income increased by $4.6 million in 1997 compared to 1996 due to an improvement in earnings (reduction in losses) from unregulated subsidiaries. The Company's largest unregulated subsidiary, American Payment Systems, earned about $101,000 ($47,000 after-tax) in 1997, an improvement of $3.8 million ($2.2 million after-tax) over 1996 losses, excluding one-time items, of about $3.7 million ($2.1 million after-tax). Other Ul subsidiaries lost $1.0 million ($0.6 million after-tax) compared to a loss of $0.8 million in 1996. The remainder of the improvement in other net income was due to an increase of $0.8 million in interest income. Interest charges continued their significant decline, decreasing by $7.5 million, or 1i percent, in 1997 compared to 1996 as a result of the Company's refinancing program and strong cash flow. Also, total preferred dividends (net-of-tax) decreased slightly in 1997 compared to 1996 as a result of purchases of preferred stock by the Company in 1996. 1996 vs.1995 Earnings for the year 1996 were $40.6 million, or $2.88 basic carnings per share, down $10.6 million, or $.76 per share, from 1995. Earnings from operations, which exclude one-time items, were $55.6 million, or $3.94 per share for 1996, up $4.9 million, or $.33 per share, from 1995. The one-time items recorded in 1996, that totaled to a charge of $1.06 per share, were: a gain of $1.8 million (after-tax), or $.13 per share, from the purchase of preferred stock by the Company at a discount to par value, charges of $23.0 million ($13.4 million after-tax), or $.95 per share, reflecting the estimated costs of early retirements and voluntary separations as part of the Company's on-going organization review and cost reduction program, a charge of $1.4 million ($0.8 million after-tax), or 5.06 per share, for the cumulative loss on an office space sublease, and a charge of $2.6 million (after-tax), or $.18 per share, that the Company was required to make provisions for losses associated with agent collections and miscellaneous other items at its American Payment Systems, Inc. subsidiary. The one-time items recorded in 1995, that totaled to a gain of S.03 per share, were: a charge of S.12 per share, taken in the third quarter of 1995, to reflect the effects oflegislated future state income tax rate reductions that reduced future tax benefits on plant previously written off, and gains of S.15 per share from the purchase of preferred stock by the Company at a discount to par value. Retail operating revenues increased by about $10.8 million in 1996 compared to 1995: e Retail kilowatt-hour sales for 1996 were virtually unchanged from 1995. The Company's calculation of the impact of weather on kilowatt-hour sales indicates that sales decreased by about 1.3% in 1996 compared to 1995 due to weather factees. Weather was deemed to be more severe than normal in 1995, particularly in the summer months, and milder than normal in 1996, particularly la the summer months. Retail kilowatt-hour sales also increased by 0.3% due to the leap year day in 1996. His indicates that there was a "real" (i.e. not attributable to abnormal weather or leap year) kilowatt-hour sales increase of about 1.0% in 1996 compared to 1995. Because sales were lower in the summer months when rates are generally higher, retail revenues decreased by $0.7 million.
. Other factors increased retail revenues by $11.5 million: $6.4 million from the recovery, through the Conservation Adjustment Mechanism, of previously recorded and projected conservation program costs f
mandated by the Department of Public Utility Control (DPUC), partially offset by competitive pricing and other price reduction mechanisms, and a net $5.1 million increase from " pass through" charges for certain expense changes including increases in fuel costs. l Wholesale " capacity" revenues increased by $1,1 million in 1996 compared to 1995. Wholesale " energy" f revenues are a direct offset to wholesale energy expense and do not contribute to sales margin (revenue less fuel expense and revenue-based taxes). These energy revenues, as well as the associated fuel expense, increased during 1996 compared to 1995. C-7 l l
+ , .- -- - -_ _ _
l l l Retail fuel and energy expenses decreased by $1.2 million in 1996 compared to 1995. A decrease of $9.0 million was due to lower nuclear fuel prices, primarily at the Seabrook nuclear generating unit. Higher ' kilowatt-hour generation at the Seabrook nuclear generating unit, that had a refueling outage in 1995, reduced fuel ; and energy expenses by $1.9 million, while lower kilowatt-hour generation, due to the shutdowns at the Connecticut ! Yankee and Millstone Unit 3 nuclear generating units, increased fuel and energy expense by $5.3 million. For more on the status of the operation of these units, see the LOOKING FORWARD section. Other fuel and energy expenses increased by $4.4 million, primarily from increases in " pass through" charges, including fossil fuel costs. Operating expenses for operations, maintenance and purchased capacity charges increased by $10.9 million in 1996 compared to 1995: e Purchased capacity expense was $0.6 million lower, e Operation and maintenance expense increased by $11.5 million. Expenses associated with the Company's re-engineering efforts increased by a net $2.0 million. Expenses increased by $1.5 million at the Millstone Unit 3 nuclear generating unit, by $4.9 million for overhauls at the Company's fossil fuel generating units, by $1.0 million for a major dredging project at one of the generating stations, by $1.3 million from the expensing of previously capitalized costs associated with software purchases and development, and by $4.0 million in general. Expenses at the Seabrook nuclear generating unit decreased by $3.2 million absent the refueling outage that occurred in the fourth quarter of 1995. Other operating expenses increased in 1996 compared to 1995, from higher depreciation expense and income taxes (excluding the income tax effects of one-time items). Other net income increased in 1996 compared to 1995 primarily because of the absence of expenses, associated with canceled construction projects, w hich were recorded in 1995. Interest charges continued their significant decline, decreasing by $6.8 million in 1996 compared to 1995 as a result of the Company's refinancing program and strong cash flow. The Company was successful in purchasing $67 million of the approximately $200 million outstanding Seabrook Lease Obligation Bonds, to hold in its own account, using proceeds from a lower cost bank term loan. The interest income that the Company receives from its
$67 million investment in these bonds appears on the income statement as a credit to interest expense and partially offsets the interest expense incurred on the Seabrook lease obligation. Also, total preferred dividends (net-of-tax) decreased slightly in 1996 compared to 1995 as a result of the purchases of preferred stock by the Company.
LOOKING FORWARD (The following discussion contains forward-looking statements, which are subject to uncertainties that could cause actual results to differ materially from those currently expected. Readers are cautioned that the Company regards specific numbers as only the "most likely" to occur within a range of possible values.) Five-year rate nlan i On December 31,1996, the DPUC issued an order (the Order) that implemented a 5-year regulatory framework that would reduce the Company's retail prices and accelerate the recovery of certain " regulatory" assets beginning with deferred conservation costs. The Order's schedule of price reductions and accelerated amortizations was based on a DPUC pro forma financial analysis that anticipated the Company would be able to implement such changes and earn an allowed return on common stock equity invested in utility assets of i1.5% over the period 1997 to 2001. The Order established a set formula to share any income that would produce a return above the 11.5% level: one-third would be applied to customer bill reductions, one-third would be applied to additional amortization of regulatory assets, and one-third would be retained by shareowners. C-8
It should be noted that, although the Order was for the five-year period 1997-2001 and the Company agreed that it would begin to implement the multi-year plan, it did not agree to commit to the five-year period. In addition, the DPUC, in the Order, acknowledged that the Order could be revisited in tne light of any new legislation. The Connecticut legislature did not pass an electric utility restructuring bill in the 1997 legislative session, but such legislation has been reintroduced in 1998. 1998 Earnings The Company's income from its utility business is greatly affected by: retail sales that fluctuate with weather conditions and economic activity, fossil fuel prices, nuclear generating unit availability and operating costs, and interest rates. These are all items over which the Company has little control, although the Company engages in economic development activities to increase sales, and hedges its exposure to volatile fuel ccsts and interest rates. The Company's revenues are principally dependent on the level of retail sales. The two primary factors that affect retail sales volume are economic conditions and weather. The Company estimates that mild 1997 weather reduced retail kilowatt-hour sales by about 0.5 percent for the year. Because much of the mild weather occurred in the summer months, when prices are higher than average, the revenue impact was exacerbated. It is estimated that mild weather may have reduced revenues by as much as $5.2 million for the year, and sales margin (revenue less fuel expense and revenue-based taxes) by as much as $4.2 million. Weather corrected retail sales for 1997 were probably in the 5,375-5,420 gigawatt-hour range. On this basis, the Company experienced about 1-1.5 percent of "real" sales growth in 1997 (i.e. exclusive of weather and leap year factors) over " normal" 1996 sales, with almost all of the growth occurring in the last half of the year. A similar level of growth in 1998 compared to 1997 from all customer groups would add about $6-$8 million to sales margin. Reductions in revenues could occur for several reasons. The Company has dealt with the potential loss of customers as a result of self-generation, relocation or discontinuation of operations by successfully negotiating 62 multi-year contracts with major customers. Such a contract has been signed with Yale University, the Company's largest customer, which is constructing a cogeneration unit that will produce approximately one half of its annual electricity requirements (about 1.5 percent of the Company's total 1997 retail sales) commencing sometime in early 1998. While providing cost reduction and price stability for customers and helping the Company maintain its customer base for the long term, these contracts are expected to cause future reductions in retail revenues. They reduced retail revenues by about $3 million in 1997 compared to 1996, but are not expected to approach that level of change in 1998. Additionally, rate migr; tion (customers switching to rates that are more favorable because of usage patterns) reduced retail revenues by about $3 million in 1997 compared to 1996; but the impact of rate migration on revenues in 1998 compared to 1997 is expected to be less than $1 million. Also, as part of the Order, the operation of the Company's long-standing fossil fuel adjustment clause (FAC) mechanism that allowed for recovery in retail rates of changes in fossil fuel costs was suspended within a broad range of fuel prices. FAC revenues will decline by about $2 million in 1998, to zero, compared to 1997, due to this suspension of the FAC. To summarize, assuming 1997 rates of "real" growth and the expected loss of sales due to Yale University cogeneration, little change in retail kilowatt-hour sales is expected in 1998 compared to 1997. Retail revenues should decline by several million dollars or more if the Company is in the " sharing" range above an 11.5% return on , common stock equity. The overall average retail price anticipated for 1998 is about 11.6 cents per kilowatt-hour, I almost 5 percent below the 1996 peak level. t Wholesale capacity prices strengthened in short-term markets during 1997, due to outages of regional nuclear l generating plants and changes in the New England Power Pool (NEPOOL) capability responsibliity requirements L for its participants. Wholesale capacity and transmission sales revenues increased $2.1 million in 1997 compared to 1996. The strength of these markets for 1998 will depend on the timing of the return to service of the nuclear units at Millstone Station, on the addition of new generation sources, and on how the capacity and energy markets perform under the new NEPOOL open competition system, designed to meet Federal Energy Regulatory Commission (FERC) open access orders, when it is implemented. Implementation of this system is currently C-9
expected in mid-1998; but this date is subject to NEPOOL information system development and testing and further . orders from the FERC. No significant sales margin improvement is expected from wholesale capacity sales. Wholesale energy revenues should remain similar to wholesale energy expense and not contribute significantly to sales margin. Another major factor affecting the Company's 1998 earnings prospects will be the Company's ability to control operating expenses. The Company offered voluntary early retirement programs and a voluntary severance program to union, nonunion and management employees in 1996. A portion of the resulting personnel cost savings occurred in 1996 and 1997, but the majority of the savings will be realized in 1998. Savings of $6 million from personnel reductions are estimated. The Company is expecting other significant expense declines in 1998 compared to 1997 from a number of sources. From the nuclear generating units, it is expected that operation and maintenance expenses associated with the Seabrook and Connecticut Yankee units should decline by a total of about $9 million. The Seabrook unis should have no refueling outage in 1998 and, ifit operates at an assumed 95% availability (it was available virtually 100% between outages in 1997), net fuel expense should decline by about $2 million. Millstone Unit 3 was taken out of service on March 30,1996, and will remain shut down pending a comprehensive Nuclear Regulatory Commission (NRC) inquiry into the conformity of the unit and its operations with all applicable NRC regulations and standards. The Company anticipates that, once NRC deficiencies are corrected a id Unit 3 is returned to service, operating costs should ramp down to more normal levels for an efficient and safe nuclear unit of this class. Also, if Millstone Unit 3 returns to service, net fuel expense should decline by
$400,000 per month for every month of operation, net of the replacement fuel provision of about $100,000 per month...up to $3.6 million for the year, if full power is reached by May 1,1998.
Pension and health benefit expenses, excluding one-time items, are expected to decrease by about $2.5 million in 1998 compared to 1997. NEPOOL expenses are expected to increase by about $1.0 million, and information system expenses associated with the " year 2000 issue" are expected to increase by $2.0 million. Other operation l and maintenance expenses may increase or decrease by amounts that cannot be predicted at this time. , Interest costs are expected to continue to decline by about $10 million in 1998, reaching a level of about $52 million, a level that was last experienced in 1984. This interest cost reduction is largely a result of 1997 debt refinancings and debt paydown (long-term debt was reduced by $85 million in 1997) and an expected 1998 debt paydown of more than $70 million. Other factors should increase costs. Other operation and maintenance expense should increase in 1998, compared to 1997, by about $6 million, reflecting increased fossil-fueled generating unit scheduled maintenance and provisions for future outages. Base depreciation, excluding accelerated amortization, should increase about
$2.0 million; and accelerated amortization per the DPUC Order will increase by about $7 million. Other operating expenses will have some increases and some decreases that should more or less offset one another.
In summary, the Company expects substantial net expense reductions that should more than compensate for the loss of one-time items realized in 1997, cover the increase in accelerated conservation and load management amortization, and allow utility earnings to increase above an 11.5% return on common stock equity into the
" sharing" range of the DPUC Order. The 11.5% return level would produce utility earnings of about $3.40-$3.45 per share, while " shared" earnings should add an additional $.05-$.10 per share. Non-utility earnings should increase by about $.05-$.10 per share in 1998 compared to 1997, primarily from an anticipated improvement in the earnings of American Payment Systems, Inc. The other subsidiaries are expected to break even in 1998. The Company expects that 1998 quarterly earnings from operations will follow a pattern similar to that of 1997 on a weather-normalized basis.
Although the current $2.88 indicated annual common stock dividend level for 1997 represented a payout of 88% of total 1997 earnings, the Company's cash flow remains, and is expected to remain, very strong. Net cash C-10
l l provided by operating ar*.ivities was $168 million in 1997, over 4 times the common stock dividend payout, one of l the highest such "co'.erage" levels in the utility industry. The DPUC Order will limit earnings from utility l operations such thr; further dividend increases may have to be delayed for several years. Ilowever, the Order . should allow the Company to recover regulatory assets more rapidly, help it prepare for competition in the electric ) utility industry, and help maintain cash How at its excellent current level through the end of the decade. If the l Company is able to grow income and earnings in 1998 to the extent indicated above, the common stock dividend l payout ratio at the current indicated annual dividend rate would be reduced to approximately 80%. I Longer Teim t I l On June 30,1997, the Company's unionized employees accepted a new Ove-year agreement, amending and l extending the existing agreement that was scheduled to remain in effect through May 15,1998. The new agreement provides for, among other things,2% annual wage increases beginning in May 1998, and annual lump sum bonuses ) of 2.5% of base annual straight time wages (not cumulative). These provisions will restrict the growth of the l Company's bargaining unit base wage expense to about $500,000 per year. The agreement also provides for job ; security for longer-term bargaining unit employees, and will allow the Company some Dexibility in adjusting work i methods, as part ofits ongoing process re-engineering efforts, j Connecticut Yankee expenses are expected to continue to decline by substantial amounts before leveling out at about $6 million per year afler 1999, compared to $11.8 million in 1997, until decommissioning is complete. However, the ability of the Company to recover its ownership share of future costs associated with the retirement of l the Connecticut Yankee unit will be dependent upon the outcome of pending regulatory filings with the Federal Energy Regulatory Commission. 4 On August 7,1997, the Company and the other nine minority joint owners of Millstone Unit 3 that are not ' subsidiaries of Northeast Utilities (NU) filed lawsuits against NU and its trustees, as well as a demand for arbitration against The Connecticut Light and Power Company and Western Massachusetts Electric Company, the operating electric utility subsidiaries of NU that are the majorityjoint owners of the unit and have contracted with the minority joint owners to operate it. The ten non-NUjoint owners, who together own about 19.5% of the unit, claim that NU l and its subsidiaries failed to comply with NRC regulations, fai!ed to operate Millstone Station in accordance with i l good utility operating practice and concealed their failures from the non-operating joint owners and the NRC. The l arbitration and lawsuits seek to recover costs of purchasing replacement power and increraed operation and i maintenance costs resulting from the shutdown of Milbtone Unit 3.
)
1 The Company's planning and operations functions, and its cash flow, are dependent on the timely flow of electronic data to and from its customers, suppliers and other electric utility system rnanagers and operators. In order to l assure that this data flow will not be disturbed by the problems emanating from the fact that many existing computer programs were designed without considering the impact of the year 2000 and use only two digits to identify the year in the date field of the programs (the Year 2000 issue), the Company initiated in mid-1997, and is pursuing, an aggressive program to identify and correct all deficiencies in its computer systems and in the computer systems of the critical suppliers and other persons with whom data must be exchanged. A complete inventory and assessment of the Company's computer system applications, hardware, sosRware and embedded technologies has been completed, and recommended solutions to all identified risks and exposures have been generated. A remediation, retirement, renovation and testing program has commenced. Necessary upgrades to mainframe hardware and soflware are expected to be completed and tested during 1998, and a parallel program with respect to desktop hardware and software is currently projected to be completed and tested by March 31,1999. Request for documented compliance information have been sent to all critical suppliers, data sharers and facility building owners and, as responses are received, appropriate solutions and testing programs are being developed and executed. The Company believes that the i successfu! implementation of this program, which is currently estimated to cost approximately $2.6 million, wi,1 ( preclude any significant adverse impact of the Year 2000 issue on its operations and financial condition. i C-11
. . . , . . . ~ .,. . . ~ - - - . .. -
1177 Avenue of the Americas Telephone 212 596 7000 Neo York, NY 10036 Facsimile 212 596 G910 l- , i { JVice Waterhousew & Report ofIndependent Accountants January 26,1998
- To the Shareowners and Board of Directors l
ofThe United lliuminating Company In our opinion, the accompanying consolidated balance sheet and the related consolh 42 statements ofincome, of cash flows and of retained earnings present fairly,
~ in all m .erial respects, the consolidated financial position of The United Illuminating Company and its subsidiaries at December 31,1997 and 1996, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31,1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management; our
- responsibility is to express an opinion on inese financial statements based on our audits.
We conducted our audits of these statements in accordance with generally accepted - auditing standards which req'uire that we plan and perfonn the audit to obtain ~ l reasonable assurance about whether the fimancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the i amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, a'nd evaluating the overall l financial statement presentation. We believe that our audits provide a reasonable basis l , for the opinion expressed above.
/t tz U t,L p i
I e 4 e C-12
C003erS "*"" " * * "
&Ly3 rand a professional services hrm REPORT OF INDEPENDENT ACCOUNTANTS l To the Shareowners and Directors of The United Illuminating Company:
We have audited the accompanying consolidated balance sheet of The United Illuminating Company as of December 31,1995, and the related consolidated statements ofincome, retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards I require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. i i In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The United Illuminating Company as of December 31,1995, and the consolidated results of its operations and its cash flows for the year then ended in conformity with ,enerally I accepted accounting principles.
,< ~ ) f. t.e Hartford, Connecticut January 29,1996 I
l I l i C-13 I Coopers & Lybrand LL P,. a registered hmded babaty partnership. is a member hrm of Coopers & Lybrand (Intemahonal)
THE UNITEDILLUMINATING COMPANY CONSOLIDATED STATEMENT OF INCOME For the Years Ended December 31,1997,1996 and 1995 (Thousands escept per share amounts) 1222 1951 1225
$710.267 $726,020 $690,449 Operating Revenues (Note G)
Operating Expenses
~ Operation : 182,666 160,517 138,169 Fuel and energy 39,976 46,830 47,420 Capacity purchased - 23,033 -
Early retirement program charges - 158,600 158,945 147,660 Other 42,203 37,652 36,089 Maintenance - 74,618 65,921 61,426 Depreciation 13,758 13,758 13,758 Amortization of cancelled nuclear project and deferred return (Note D and J) 59,823 41,333 53,090 Income taxes (Note A and F) 52,540 57,139 58,943 Other taxes (Note G) 616,885 563,293 605.694 Total 104,573 109.135 127,156 , Operating income Other hcome and (Deductions) 336 940 390 Allowance for equity funds used during construction (4;272) 4,lE6 (7,166) Other-net (Note G) 2.496 9,332 4,901
' Non-operating income taxes 3,106 1,019 7,018 Total 112,241 128,175 12come Before Interest Charges !I1.591 I:terest Charges 63,063 66,305 63.431 Interest on long-term debt (1,259) -
Interest on Seabrook obligation bonds owned by the company (6,905) 3,280 2,092 9,002 , Other interest (Note G) (1,239) (1,435 (2,37-2 ) l Allowance for borrowed funds used during construction 65 7, 63], 70,061 58,199 2,778 2.629 4,138 Amortization of debt expense and redemption premiums 60,987 68,332 74,199 Net interest Charges 4.813 4,813 3,583 Minority Interest in Preferred Securities 45,791 39,096 50,393 Net income (2,183) (48) (1,840) Discount on preferred stock redemptions 205 330 1,329 Dividends on preferred stock
$45,634 $40,606 $51,247 IIcome Applicable to Common Stock 13,976 14,101 14,090 Average Number of Common Shares Outstanding - Basle 13,992 14,131 14,108 Average Number of Common Shares Outstanding - Diluted
$3.27 $2.88 $3.64 Earnings per share of Common Stock- Basic
$3.26 $2.87 $3.63 Earnings per share of Common Stock - Diluted
$2.88 $2.88 $2.82 Cash Dividends Declared per share of Common Stock He accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
C-14
i THE UNITED ILLUMINATING COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended December 31,1997,1996 and 1995 l (Thousands of Douars)
' Cash Flows From Operating Activities i Net income $45,791 Adjustments to reconcile net income $39,096 $50,393 to net cash provided by operating activities:
Depreciation and amortization 79,487 70,363 66,958 Deferred income taxes 7,986 (2,276) 27,495 Deferred investment tax credits - net (762) (762) (762) Amortization of nuclear fuel 5,799 5,690 13,571 Allowar,ce for funds used during construction (1,575) , (2,375) (2,762) ' Amortization of deferred return 12,586 12,586 Early retirement costs accrued 12,586 23,033 - Changes in: Accounts receivable - net 16,944 (23,555) 9,489 Fuel, materials and supplies 2,863 Prepayments 239 69 211 (557) 9,256 Accounts payable 641 22,657 2,555 Interest accrued (3,569) Taxes accrued (671) (6,420) 3,663 (4,794) (11,310) Other assets and liabilities (1,644) 6,078 (9,627) Total Adjustments 122,630 105,656 111,098 Net Cash provided by Operating Activities 168,421 144,752 161,491 { Cash Flows from Financing Activities Common stock (6,432) - 40 440 Long-term debt 98,500 82,500 150,000 Preferred securities of subsidiary 50,000 Notes payable 26,786 i 10,965 (67,000) Securities redeemed and retired: ) Preferred stock ! (110) (6,078) (34,161) Long-term debt (151,199) -{ (72,895) (165,103) Discount on preferred stock redemption 48 1,840 l Expenses ofissues - 2,183 (1,500) (442) (2,222) Lease obligations i (315) (291) (1,169) Dividends Preferred stock (206) (410) (1,944) l Common stock (40,408) (40,399) (39,514) Net Cash used in Financing Activities (74,836) (25,170), (108,490) l Cash Flows from Investing Activities Plant expenditures, including nuclear fuel (33,436) (47,174) (59,363) ! Investment in Seabrook obligation bonds (34,541) (71,084) - Net Cash used in Investing Activitics (67,977) (118,258) (59.363) Cash and Temporary Cash investments: Net change for the period 25,608 1,324 (6,362)
. Balance at beginning of period 6,394 5,070 11,432 Balance at end of period $32,002 $6,394 $5,070 Cash paid during the period for:
Interest (net of amount capitalized) g $69,669 $76,271 income taxes $26,773 $51,415 $32.100 i The accompanying Notes to Consolidated Financial t I Statements are an integral part of the financial statements. l I C-15~
Tile UNITED ILLUMINATING COMPANY CONSOLIDATED BALANCE SilEET December 31,1997,1996 and 1995 ASSETS (Thousands of Douars) 1222 122fz 1921 Utility Plant at Original Cost $1,843,952 $1,809,925
$1,867,145 In service 644,971 585,646 532,015 Less, accumulated provision for depreciation 1,277,910 1,222.174 1,258,306 25,448 40,998 41,817 Construction work in progress 23,010 25,967 25,990 Nuclear fuel 1,322.314 1,345,694 1,273,612 Net Utility Plant 32,451 26,081 27,388 Other Property and Investments Current Assets 6,394 5,070 32,002 Cash and temporary cash investments Accounts receivabic Customers, less allowance for doubtful 57,231 63,722 63,987 accounts of $1,800, $2,300 and $6,300 27,914 38,367 14,547 Other 28,318 25,269 29,139 Accrued utility revenues 22,249 19,147 22,010 Fuel, materials and supplies, at average cost 3,397 3,608 3,051 Prepayments 55 67 110 Onher 137,277 165,027 163,350 Total Deferred Charges 7,577 6,611 6,580 Unamortized debt issuance expenses 5,727 1,485 2,377 Other 8,065 9,954 12,338 Total Regulatory Assets (future amounts duefrom customers through the ratemakingprocess)
Income taxes due principally to book tax 228,992 289,672 358,168 differences (Note A) 64,851 - 51,313 Connecticut Yankee 50,343 25,171 37,757 Deferred retum - Seabrook Unit i 23,027 25,063 22.244 Unamortized redemption costs 12,125 13:297 24,620 Unamortized cancelled nuclear project 1,312 1,377 1,505 Uranium enrichment decommissioning costs 6,357 9,068 8,424 Other 465,304 348.297 441,085 Total
$1,960,895 $1,985,617
$1,831,725_
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. C-16
THE UNITED ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEET December 31,1997,1996 and 1995 CAPITALIZATION AND LIABILITIES (Thousands of Dollars) 1221 122fi 1221 Capitalization (Note B) Common stock equity Common stock $288,730 $284,579 $284,542 Paid-in capital . 1,349 772 769 Capital stock expense (2,182) (2,182) (2,207) Unearned employee stock ownership plan equity (11,160) . . Retained earnings 162,226 156.847 156,877 438,963 440,016 439,981 , Preferred stock 4,351 4,461 10,539 Minority interest in preferred securities 50,000 50,000 50,000 Long-term debt - Long-term debt 746,058
, 826,527 845,684 Investment in Seabrook obligation bonds (101J88) (66,847) .
Net long-term debt 644,670 759,680 845,684 Total 1,137,984 1,254,157 1,346,204 Noncurrent Liabilities Connecticut Yankee contract obligation 40,821 54,752 - Pensions accrued (Note H) - 39,149 49,205 33,832 Nuclear decommissioning obligation 17,538 12.851 10,317 Obligations under capitalleases 16,853 17,193 17,508 Other 5,507 4,815 4,090 Total 119,868 138,816 65,747 Current Liabilities Current portion orlong-term debt 100,000 69,900 40,800
- Notes payable 37,751 10,965 -
Accounts payable 68,699 68,058 45,401 Dividends payable 10,051 10,205 10,072 Taxes accrued 4,166 503 5.297
. Interest accrued 10,266 13,835 14,506 Obligations under capital leases 340 315 291 Other accrued liabilities 37,471 36,091 26,769 Total ' 268,744 209,872 143,136 Customers' Advances for Construction 1,878 1,888 2.655 Rtgulatory Liabl1itles (future amounts owedto customers through the ratemakingprocess)
Accumulated deferred investment tax credits 16,385 17,147 17,909 Other 2,356 1,811 1,990 Total - 18,741 18,958 19,899 Deferred Income Taxes (future tarliabilities owed to taxingauthorities) 284,510 337,204 407,976 Commitments and Contingencies (Note L)
$1.831,725 $1,960,895 $1.985,617 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements, C . - . . - - . ~ . .. ~. . . - . .. . - _ . .~ .- . _ . . - . .
I THE UNITED ILLUMINATING COMPANY CONSOLIDATED STATEMENT OF RETAINED EARNINGS For the Years Ended December 31,1997,1996 and 1995 (Thousands of Dollars) 1222 122fi 1221 ,
. $156,847 $156,877 $145,559 Balance, January I 45,791 39,096 50,393 <
Net income . Adjustments associated with repurchase 48 1,815 1,988
. of preferred stock 202,686 197,788 197,940 Total t
Deduct Cash Dividends Declared 205 330 1,329 Preferred stock 39,734 40,255 40,611 Common stock 41,063 40,460 40,941 Total
$162,226 $156,847 $156,877 Balance, December 31 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
C-18
Tile UNITED ILLUMINATING COMPANY i NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l The United illuminating Company (UI or the Company) is an operating electric public utility compan principally in the production, purchase, transmission, distribution and sale of electricity for residential, commerc industrial purposes in a service area of about 335 square miles in the southwestern part of the State of Connec service area, largely urban and suburban in character, includes the principal cities of Bridgeport 137,000) (populatio and New Haven (population i 124,000) and their surrounding areas. Situated in the service arca are retail trade and service centers, as well as large and small industries producing a wide variety of products, including he other transportation equipment, electrical equipment, chemicals and pharmaceuticals. l In addition, the Company has created, and owns, unregulated subsidiaries. The Board of Directors of I has authorized the investment of a maximum of $27 million in the unregulated subsidiaries, and, at Decem
$27 million had been invested. A wholly-owned subsidiary, United Resources, Inc., serves as the parent c American Payment Systems, Inc., (APS) which manages a national network of agents for the processing o I payments made by customers of other utilities.
(A) STATEMENT OF ACCOUNTING POLICIES Accounting Records i The accounting records are maintained in accordance with the uniform systems of accounts prescribed by t! Federal Energy Regulatory Commission (FERC) and the Connecticut Department of Public Utility Control (DPU Use of Estimates l The preparation of financial statements in conformity with generally accepted accounting principles requires managem;st to use estimates and assumptions that afTect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation 1 The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiar United Resources Inc. Intercompany accounts and transactions have been eliminated in consolidation. i Regulatory Accounting ! The consolidated financial statements of the Company are in confomiity with generally accepted accounting principles and with accounting for regulated electric utilities prescribed by the Federal Energy Regulatory Commission (FERC) and the Connecticut Department of Public Utility Control (DPUC). Generally accepted accounting principles , for regulated entities allow the Company to give accounting recognition to the actions of regulatory authorities in ' accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, " Accounting for the Effects of Certain Types of Regulation". In accordance with SFAS No. 71, the Company has deferred recognition of costs (a regulatory asset) or has recognized obligations (a regulatory liability) if it is probable that such costs will be recovered or obligations relieved in the future through the ratemaking process. In addition to the Regulatory Assets and Liabilities separately identified on the Consolidated Balance Sheet, there are other regulatory assets and liabilities such as conservation and load management costs and certain deferred tax liabilities. The Company also has obligations under long-term power contracts, the recovery of which is subject to regulation. C-19
THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) The effects of competition 'could cause the operations of the Company, or a portion of its assets or operations, to
- cease meeting the criteria for application of these accounting rules. While the Company expects to continue to meet these criteria in the foreseeable future, if the Company, or a portion of its assets or operations, were to cease meeting these criteria, accounting standards for businesses in general would become applicable and immediate recognition of any previously deferred costs, or a portion of deferred costs, would be required in the year in which the criteria are no longer met. . If this change in accounting were to occur, it could have a material adverse effect on the Company's earnings and retained earnings in that year and could have a material adverse effect on the Company's ongoing financial condition as well. See Note (C), Rate-Related Regulatory Proceedings.
Reclassification of Previously Reported Amounts Certain amounts previously reported have been reclassified to conform with current year presentations. 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 (AFUDC). He 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 the accumulated provision for depreciation. He Company's utility plant in service as of December 31,1997,1996 and 1995 was comprised as follows: 1291 122ft 1225 (000's) Production $1,131,285 $1,124,113 $1,122,001 161,288 160,970 158,373 Transmission 401,426 387,825 375,962 Distribution General 52,776 47,889 45,924 Future use plant 30,594 32,751 32,762 Other 89.776 90.404 74.903
$1867.145 S L843.952 $1aQ9J21 Allowance for Funds Used During Construction in accordance with the applicable regulatory systems of accounts, the Company capitalizes AFUDC, which represents the approximate cost of deP and equity capital devoted to plant under construction. in necordance with FERC prescribed accounting, the portion of the allowance applicable to borrowed funds is presented in the Consolidated Statement of Income as a reduction of interest charges, while the portion of the allowance applicable to equity funds is presented as other income. ' Although the allowance does not represent current cash income, it has historically been recoverable under the ratemaking process over the service lives of the related properties. The Company cornpounds the allowance applicable to major construction projects semi-annually. Weighted average AFUDC rates in effect for 1997,1996 and 1995 were 7.5%,9.0% and 8.0%, respectively.
Depreciation - Provisions for depreciation on utility plant for book purposes are computed on a straight-line basis, using estimated service lives determined by independent engineers. One-half year's depreciation is taken in the year of addition and disposition of utility plant, except in the case of major operating units on which depreciation commences in the month C-20
_ _ .. _ . _ .- _ . _. ~ _--.___._._.__..._____.m ___ l l TIIE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) they are placed in service and ceases in the month they are removed from service. The aggregate annual provisions for depreciation for the years 1997,1996 and 1995 were equivalent to approximately 3.15%, 3.12% and 3.07%, 1 respectively, of the original cost of depreciable property. I l IncomeTaxes in accordance with Statement of Financial Accounting Standards (SFAS) No.109 " Accounting for income Taxes", the Company has provided deferred taxes for all temporary book-tax differences using the liability method. The liability method requires that deferred tax balances be adjusted to reDect enacted future tax rates that are anticipated to be in effect when the temporary differences reverse, in accordance with generally accepted accounting principles for regulated industries, the Company has established a regulatory asset for the net revenue requirements to be recovered from customers for the related future tax expense associated with certain of these temporary differences. For ratemaking purposes, the Company normalizes all investment tax credits (lTC) related to recoverable plant investments except for the ITC related to Seabrook Unit 1, which was taken into income in accordance with provisions of a 1990 DPUC retail rate decision. Accrued Utility Revenues The estimated amount of utility revenues (less related expenses and applicable taxes) for service rendered but not billed is accrued at the end of each accounting period. Cash and Temporary Cash investments - For cash flow purposes, the Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash and temporary cash investments. The Company records outstanding checks as accounts payable until the checks have been honored by the banks. i ne Company is required to maintain an operating deposit with the project disbursing agent related to its 17.5% ownership interest in Seabrook Unit 1. His operating deposit, which is the equivalent to one and one half months of the funding requirement for operating expenses, is testricted for use and amounted to $2.3 million, $3.4 million and
$3.9 million, at December 31,1997,1996 and 1995, respectively.
4 Investments The Company's investment in the Connecticut Yankee Atomic Power Company, a nuclear generating company in which the Company has a 91/2% ' stock interest, is accounted for on an equity basis. This investment amounted to
$10.5 million, $10.1 million and $9.6 million at December 31,1997,1996 and 1995, respectively, and is included on the Consolidated Balance Sheet in "Other Property and investments" at December 31,1995 and as a regulatory asset at December 31,1997 and 1996. See Note (L), Commitments and Contingencies - Other Commitments and Contingencies - Connecticut Yankee.
Fossil Fuel Costs Historically, the amount of fossil fuel costs that cannot be reflected currently in customers' bills pursuant to the fossil fuel adjustment clause in the Company's rates has been 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 specinc provision for amortization and ratemaking treatment of the Company's existing deferred fossil fuel cost balances. As a result of a December 1996 DPUC decision, the Company has suspended this deferred C-21
. .. - -_ . _ ~ . - - ~-
l THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLID ATED FIN ANCI AL STATEMENTS - (continued) accounting procedure unless the average fossil fuel oil prices increase or decrease outside a certain bandwidth prescribed in the decision. Interest Rate and Fuel Price Management The Company utilizes interest rate and fuel oil price management instruments to manage interest rate and fuel oil price risk. Interest rate swap agreements have been entered into that effectively convert the interest rates on $225 l million of variable rate term loan borrowings to fixed rate borrowings. Amounts receivable or payable under these swap agreements are accrued and charged to interest expense. The Company enters into basic fuel oil price ! management instruments to help minimize fuel oil price risk by fixing the future price for fuel oil used for generation. Amounts receivable or payable under these instruments are recognized in income when realized. As of December 31,1997, the Company had entered into swap agreements for 1998 for 795,000 barrels of fuel oil at a weighted average price of $16.33 per barrel and had call options for 590,000 barrels of fuel oil at a weighted average price of $18.45 per barrel. l
- Research and Development Costs Research and development costs, including environmental studies, are capitalized if related to specific construction l
I projects and depreciated over the lives of the related assets. Other research and development costs are charged to I expense as mcurred. l Pension and Other Postemployment Benefits The Company accounts for normal pension plan costs in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 87, " Employers' Accounting for Pensions", and for supplemental retirement plan costs and supplemental early retirement plan costs in accordance with the provisions of SFAS No. 88, " Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits". He Company accounts for other postemployment benefits, consisting principally of health and life insurance, under the provisions of SFAS No.106, " Employers' Accounting for Postretirement Benefits Other Than Pensions", l which requires, among other things, that the liability for such benefits be accrued over the employment period that encompasses eligibility to receive such benefits. De annual incremental cost of this accrual has been alle.ved in retail rates in accordance with a 1992 rate decision of the DPUC. Uranium Enrichment Obligation Under the Energy Policy Act of 1992 (Energy Act), the Company will be assessed for its proportionate share of the costs of the decontamination and decommissioning of uranium enrichment facilities operated by the Department of Energy. He Energy Act imposes an overall cap of $2.25 billion on the obligation assessed to the nuclear utility industry and limits the annual assessment to $150 million each year over a 15-year period. At December 31,1997, the Company's unfunded share of the obligation, based on its ownership interest in Seabrook Unit I and Millstone Unit 3, was approximately $1.2 million. Effective January 1,1993, the Company was allowed to recover these assessments in rates as a component of fuel expense. Accordingly, the Company has recognized these costs as a regulatory asset on its Consolidated Balance Sheet. C-22
THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued) l Nuclear Decommissioning Trusts ! External trust funds are maintained to fund the estimated future decommissioning costs of the nuclear generating units in which the Company has an ownership interest. These costs are accrued as a charge to depreciation expense over the estimated service lives of the units and are recovered in rates on a current basis. De Company paid ,
$2,571,000, $2,130,000 and $1,882,000 during 1997,1996 and 1995 into the decommissioning trust funds for '
Seabrook Unit I and Millstone Unit 3. At December 31,1997, the Company's shares of the trust fund balances, which l included accumulated earnings on the funds, were $12.4 million and S5.1 million for Seabrook Unit I and Millstone ' Unit 3, respectively. These fund balances are included in "Other Property and investments" and the accrued decommissioning obligation is included in "Noncurrent Liabilities" on the Company's Consolidated Balance Sheet. Impairment of Long-Lived Assets 1 Statement of Financial Accounting Standards (SFAS) No.121, " Accounting for the impairment of Long-Lived Assets to Be Disposed Of" requires the recognition ofimpairment losses on long-lived assets when the book value of an asset exceeds the sum of the expected future undiscounted cash flows that result from the use of the asset and its eventual disposition. This standard also requires that rate-regulated companies recognize an impairment loss when a regulator excludes all or part of a cost from rates, even if the regulator allows the company to earn a return on the remaining allowable costs. Under this standard, the probability of recovery and the recognition of regulatory assets under the criteria of SFAS No. 71 must be assessed on an ongoing basis. The Company does not have any assets that are impaired under this standard. APS Revenues and Agent Collections
)
l
- APS recognized revenue of $31.7 million, $19.2 million and $6.8 million for the years 1997,1996 and 1995, I respectively, based on established fees per payment transaction processed. Cash associated with customer payments are the property of other utilities and have not been reflected in UI's consolidated financial statements.
Earnings per Share In February 1997, the Financial Accounting Standards Board issued SFAS No.128, " Earnings per Share", his l statement, which is effective for financial statements issued for periods ending after December 15,1997, including ' interim periods, establishes simplified standards for computing and presenting earnings per share (EPS). It requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and disclosure of the calculation of each EPS amount. C-23
THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (continued) The following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations for the years 1997,1996 and 1995: (In thousands except per share amounts) Income Applicable to Average Number of I Common Stock Shares Outstanding Earnings ! (Numerator) (Denominator) oer Share 1222-Basic earnings per share $45,634 13,976 $3.27 Effect ofdilutive stock options - 16 . f.01) Diluted earnings per share $41 G4 13.992 $12ft 122ft Basic earnings per share $40,606 14,101 $2.88 Effect of dilutive stock options - 10 (.01) Diluted eamings per share S40.606 14.131 $2J12 1991 Basic eamings per share $51,247 14,090 $3.64 Effect of dilutive stock options - 18 (,01) Diluted earnings per share $51.247 14.108 $le Stock-Based Compensation
%e Company accounts for employee stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No.123, " Accounting for Stock-Based Compensation". Bis statement establishes financial accounting and reporting standards for stock-based employee compensation plans, such as stock purchase plans, stock options, restricted stock, and stock appreciation rights. He statement defines the methods of determining the fair value of stock-based compensation and requires the recognition of compensation exp:nse for book purposes, liowever, the statement allows entities to continue to measure compensation expense in accordance with the prior authoritative literature, APB No.25, " Accounting for Stock Issued to Employees", but requires that pro forma net income and eamings per share be disclosed for each year for which an income statement is presented as if SFAS No.123 had been applied. De accounting requirements of this statement are efTective for transactions entered into after 1995. Ilowever, pro forma disclosures must include the efTects of all awards granted after January 1,1995. As of December 31,1997, there were no options granted to which this statement would apply. De Company has not elected to adopt the expense recognition provisions of SFAS No.123. 9 New Accounting Standards in June 1997, the Financial Accounting Standards Board issued SFAS No.131," Disclosures about Segments of an Enterprise and Related Information". This statement, which is effective for financial statements issued for fiscal years beginning after December 15,1997, requires entities to disclose specific financial and descriptive information about its reportable operating segments. Reportable operating segments are components of an entity about which separate financial information is available that is regularly used when evaluating segment performance and determining the allocation of resources. He Company cunently does not have separate reportable segments to which this standard would apply.
C 24
Tile UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued) (B) CAPITALIZATION December 31, 1997 1996 1995 Shares Shares Shares Outstanding $(000's) Outstanding $(000's) Outstanding 5(000's) C:mmon Stock Equity Common stock, no par value, at December 31(a) 13,907,824 $288,730 14,101,291 $284,579 14,100,091 $284,J42 Shares authorized - 1995 30,000,000 1996 -30,000,000 1997 30,000,000 Paid-in capital 1,349 772 769 Capital stock expense (2,182) (2,182) (2,207) Unearned employee stock ow nership plan equity (11,160) - - Retained earnings (b) 162,226 156.847 156,877 Total common stock equity 438,963 440,016 439,98i Preferred and Preference Stock (c) Cumulative preferred stock,
$100 par value, shares tuthorized at December 31, 1995 1,180,394 1996 '1,119,612 1997 1,119,612 Preferred stock issues:
4.35% Series A 10,894 11,297 21.247 4.72% Series B - 17,158 17,658 30,490 4.64% Series C - 12,745 12,945 12,945 5 5/8% Series D 2,712 2.712 40,712 43,509 4,351 44.61T 4.461 105,394 10.539 Cumulative preferred stock, $25 par value: 2,400,000 shares authorized Preferred stock issues - - - - - -
- Cumulative preference stock, $25 par value: 5,000,000 shares authorized Preference stock issues - - - - - -
Total preferred stock not subject to mandatory redemption 4,351 4,461 10,539 Miurity Interest in Preferred Securities (d) 50,G00 50,000 50,000 C-25
- . - . . . -. . - . . - - - -- .-_ ~.- . - . . . . ~ . - . ~.- - -
I l THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued) December 31, 1997 1996 1995
$(000's) $(000's) $f000's) i Lorg-t:rm Debt (e) l First Mortgage Bonds:
- $32,400 $43,200 9.44%, Series B 6
Other Long-term Debt -
- Pollution Control Revenue Bonds:
91/2%,1986 Series, duc June 1,2016
- 7,500 l.
Vcriable rate,1996 Series, due June 26,2026 7,500 7,500 - l- 25,000 25,000 l 9 3/8%,1987 Series, duc July 1,2012 -
'10 3/4%,1987 Series, due November 1,2012 - 43,500 43,500 '
8%,1989 Series A due December 1,2014 25,000 25,000 25,000 l 5 7/8%,1993 Series, duc October 1,2033 64,460 64,460 64,460 l: - Solid Waste Disposal Revenue Bonds:
- 30,000 30,000 I- ' Adjustable rate 1990 Series A, due September 1,2015 l Pollution Control Refunding Revenue Bonds:
Variable rate,1997 Series, due July 30,2027 98,500 - - Notes: 7.00%,1992 Series E, due January 15,1997 - - 50,000 i 7 3/8%,1992 Series 0,duc January 15,1998 100,000 100,000 100,000 l-l 6.20%,1993 Series H, due January 15,1999 100,000 100,000 100,000
. Tenn Loans:
6.95%, due August 29,2000 50,000 50,000 50,000 l 6.47%, due September 6,2000 50,000 50,000 50,000 l 6.4375%, due September 6,2000 50,000 50,000 50,000 l l 6.675%, ble October 25,2001 25,000 25,000 - ! 7.005% due October 25,2001 50,000 50,000 - Obligation under the Seabrook Unit 1 sale / leaseback agreement 225,601 243,660 248.030 846,061 896,520 886,690 Unamortized debt discount less premium (3) (93) (206) Totallong-term debt 846,058 896,427 886,484 l
- Less:
Current portion included in Current Liabilities (e) 100,000 69,900 40,800 l l Investment-Seabrook Lease Obligation Bonds 101,388 66.847 - 759,680 I
. Total long-term debt included in Capitalization 644.670 845.684
$1,137,984 $1.254.157 $1.346,204 Total Capitalization l I i
l L i- 1 C-26
~ ~ - - - -. - -- - - _ - _ - - . . _ ~ . . - . . - . - . . - - .
i. l TliE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) (a) Common Stock The Company had 14,236,124 shares ofits common stock, no par value, outstanding at December 31,1997, of 4 which 328,300 shares were unallocated shares held by the Company's Employee Stock Ownership Plan ("ESOP") and i not recognized as outstanding for accounting purposes. I' ,, he Company issued 134,833 shares of common stock in 1997,1,200 shares of common stock in 1996 and 13,400 shares of common stock in 1995, pursuant to a stock option plan. In 1990, the Company's Board of Directors and the shareowners approved a stock option plan for officers and key employees of the Company. The plan provides for the awarding of options to purchase up to 750,000 shares of the Company's common stock over periods from one to ten years following the dates when the options are granted. The Connecticut Department of Public Utili.ty Control (DPUC) has approved the issuance of 500,000 shares of stock pursuant to this plan. He exercise price of each option cannot be less than the market value of the stock on the date of the grant. Options to purchase 17,799 shares of stock at an exercise price of S30 per share,54,500 shares of stock at an
- exercise price of $30.75 per share,4,000 shares of stock at an exercise price of $35.625 per share,3),799 shares of l, stock at an exercise price of $39.5625 per share, and S/ 30 sharas of stock at an exercise price of $42.375 per share have been granted by the Board of Directors and remained outstanding at December 31,1997.
i ( The Company has entered into an arrangement under which it loaned $11.5 million to The United Illuminating Company ESOP, He trustee for the ESOP used the funds to purchase shares of the Company's common stock in open ! market transactions. He shares will be allocated to employees' ESOP accounts, as the loan is repaid, to cover a portion i of the Company's required ESOP contributions. De loan will be repaid by the ESOP over a twelve-year period, using the Company contributions and dividends paid on the unallocated shares of the stock held by the ESOP, As of December 31,1997,328,300 shares, with a fair market value of $15.1 million, had been purchased by the ESOP and 1
- had not been committed to be released or allocated to ESOP participants.
l (b) Retained Earnings Restriction j l l De indenture under which $200 million principal amount of Notes are issued places limitations on the payment of cash dividends on common stock and on the purchase or redemption of common stock. Retained earnings in the amount of $104.1 million were free from such limitations at December 31,1997. l
- (e) Preferred and Preference Stock l l
The par value of each of these issues was credited to the appropriate stock account and expenses related to these issues were charged to capital stock expense. In February 1997, the Company purchased at a discount on the open market, and canceled,403 shares ofits $100 par value 4.35%, Series A preferred stock. De shares, having a par value of $40,300, were purchased for $21,271, creating a net gain of$19,029, j in August 1997, the Company purchased at a discount on the open market, and canceled,500 shares ofits $100 i j par value 4.72%, Series B preferred stock and 200 shares of its $100 par value 4.64%, Series C preferred stock. l These shares, having a par value of $70,000, were purchased for $41,100, creating a net gain of $28,900. Shares of preferred stock have preferential dividend and liquidatica rights over shares of common stock. Preferred
- shareholders are not entitled to general voting rights. Ilowever, if any preferred dividends are in arrears for six or more i
l C-27 l
_ _~ _ _._ m. _ ___. _ _ . _ _ . _ _ . _ _ _ _ _ _ _ . _ _ _ . _ _ . _ TIIE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) quarters, or if certain other events of default occurs, preferred shareholders are entitled to elect a majority of the Board of Directors until all preferred dividend arrears are paid and any event of default is terminated. Preference stock is a form of stock that isjunior to preferred stock but senior to common stock. It is not subject to the camings coverage requirements or minimum capital and surplus requirements governing the issuance of preferred
- stock. Dere were no shares of preference stock outstanding at December 31,1997. y (d) Preferred Capital Securities United Capital Funding Partnership L.P. (" United Capital") is a special purpose limited partnership in which the Company owns all of the general partner interests. United Capital has $50 million of its monthly income 9 5/8%
Preferred Capital Securities, Series A. (" Preferred Capital Securities") outstanding, representing limited partnership ' interests in United Capital. United Capital loaned the proceeds of the issuance and sale of the Preferred Capital Securities to the Company in return for the Company's 9 5/8% Junior Subordinated Deferrable Interest Debentures, Series A, Due 2025. United Capital and the Company have registered an additional $50 million of Capital Securities and/or Subordinated Debentures for sale to the public from time to time, in one or more series, under the Securities Act of 1933. (e) Long-Tum Debt The expenses to issue long-term debt are deferred and amortized over the life of the respective debt issue. On December 30,1996, the Company transferred $51.3 million to a trustee under an escrow agreement. The funds, which were invested in Treasury Notes, were used to pay $50 million principal amount of 7% Notes that matured on January 15,1997 plus accrued interest. On February 15,1997, the Company repaid $10.8 million principal amount of maturing 9.44% First Mortgage Bonds, Series B, and redeemed, at a premium of $185,328, the remaining $21.6 million outstanding principal amount cf 9.44% First Mortgage Bonds, Series B, issued by Bridgeport Electric Company, a wholly-owned subsidiary of the Company that was merged with and into the Company in September 1994. On July 30,1997, the Company borrowed $98.5 million from the Business Finance Authority of the State of New Hampshire (BFA), representing the proceeds from the issuance by the BFA of $98.5 million principal amount of tax-exempt Pollution Control Refunding Revenue Bonds (PCRRBs). The Company is obligated, under its ! l borrowing agreement with the BFA, to pay to a trustee for the PCRRBs' bondholders such amounts as will pay, when due, the principal of and the premium, if any, and interest on the PCRRBs. The PCRRBs will mature in 2027, ! and their interest rate is adjusted periodically to reflect prevailing market conditions. The PCRRBs' interest rate, i which is being adjusted weekly, was 3.75% at December 31,1997. The Company has used the proceeds of this
$98.5 million borrowing to cause the redemption and repayment of $25 million of 9 3/8%,1987 Series A, Pollution Control Revenue Bonds, $43.5 million of 10 3/4 %, 1987 Series B, Pollution Control Revenue Bonds, and $30 j million of Adjustable Rate,1990 Series A, Solid Waste Disposal Revenue Bonds, three outstanding series of j tax-exempt bonds on which the Company also had a payment obligation to a trustee for the bondholders. Expenses associated with this transaction, including redemption premiums totaling $2,055,000 and other expenses of f approximately $1,500,000, were paid by the Company.
On November 12,1997, the Company refmanced the secured lease obligation bonds that were issued in 1990 in connection with the sale and leaseback by the Company of a portion ofits ownership share in Seabrook Unit 1. All C-28 1 1
i l TIIE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) of 'the outstanding $69,593,000 principal amount of 9.76% Series 2006 Seabrook Lease Obligation Bonds (the "9.76% Bonds") and $129,055,000 principal amount of 10.24% Series 2020 Seabrook Lease Obligation Bonds (the "10.24% Bonds") were redeemed.. The redemption premiums paid on the 9.76% Bonds and the 10.24% Bonds were f
$1,884,549 and $8,589,901, respectively. The Bonds were refunded with the proceeds from the issuance of l
$203,088,000 principal amount of 7.83% Seabrook Lease Obligation Bonds due January 2,2019 (the "7.83% ']
Bonds") the principal of which will be payable from time to time in installments. Transaccion expenses totaling '
$1,530,022 and redemption premiums totaling $8,139,978 were paid from the proceeds of the 7.83% Bonds and I will be repaid as part of the Company's Lease payments over the remaining temi of the Lease. The remainder of the redemption premiums ($2,334,472) and transaction expenses were paid by the Company and will be amortized over the remainder of the Lease term. The transaction reduces the interest rate on the leaseback arrangement, which is treated as long-term debt on the Company's Consolidated Balance. Sheet, from 8.45% to 7.56%. The Company ;
owned $16,997,000 principal amount of the 9.76% Bonds and $49,850,000 principal amount of the 10.24% Bonds. The Company used the proceeds from the redemption of these bonds ($70,662,688, including redemption premiums totaling $3,815,688), plus available funds and short-term borrowings, to purchase $101,388,000 principal amount of the 7.83% Bonds. The Company intends to hold the 7.83% Bonds until maturity and has recognized the investment as an offset to long-term debt on its Consolidated Balance Sheet. On January 13,1998, the Company issued and sold $100 million principal amount of 6.25% four-year and eleven month Notes. The yield on the Notes, which were issued at a discount, is 6.30%; and the Nous will mature on December 15, 2002. The proceeds from the sale of the Notes were used to rept. $100 million prin ipal amount of 7 3/8% Notes, which matured on January 15,1998. j e e f C 29 i
l l THE UNITED ILLUMINATING COMPANY t NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (continued) Maturities and mandatory redemptions / repayments are set forth below: l 1928 1922 M M' M (000's) j' Maturities $100,000 $100,000 $150,000 $75,000 $- Mandatory redemptions / repayments (l) 4.194 3.410 430 m 131 , Maturities, Mandatory and Optional redemptions / repayments $104.194 $103.410 $150.430 $75.333 $131 I !- (1) Principal component of Seabrook lease obligation, net of principal repayment of Seabrook Lease Obligation Bonds j held as an iwestment. l l As of December 31,1997, the Company had $200 million principal amount of Notes for sale to the public from [ time to time, in one or more series, registered under the Securities Act of 1933. On January 13,1998, the Company l issued and sold $100 million principal r, mount of these Notes. l (C) RATE-RELATED REGULATORY PROCEEDINGS Utilities are entitled by Connecticut law to charge retail rates that are determined by the DPUC to be suflicient to i allow them to cover their operating and capital costs, to attract needed capital and maintain their financial integ 'ty, ! while also protecting the public interest. However, a company may earn up to 1% above its DPUC-authorized retum
'on equity for six consecutive months before a mandatory review is required by the DPUC. A Connecticut statute requires the DPUC to review and investigate the financial and operating records of each electric utility company, at intervals ofnot more than four years, to determine whether the company's rates comply with statutory standards.
On December 31,1996, the DPUC completed a financial and operational review of the Company and ordered a five-year incentive regulation plan for the years 1997-2001. The DPUC did not change the existing retail base rates charged to customers; but its order increased amortization of the Company's conservation and load management , program investments during 1997-1998, and accelerated the recovery of unspecified regulatory assets during 1999 2001 if the Company's common stock equity return on utility investment exceeds 10.5% after recording the increased conservation and load management amortization. The order also reduced the level of conservation adjustment mechanism revenues in retail prices, provided a reduction in customer prices through a surcredit in each of the five plan years, and accepted the Company's proposal to modify the operation of the fossil fuel clause mechanism. The Company's authorized return on utility common stock equity was reduced from 12.4% to 11.5%. Eamings swe 11.5%, on an annual basis, are to be utilized one-third for customer price reductions, one-third to increase as..ortization of regulatory assets, and one-third retained as earnings. A reopening of this docket will be requested by the Company in 1998 to determine the regulatory assets to be , subjected to accelerated recovery in 1999,2000 and 2001. , l in its 1997 session, the Connecticut legislature drafted, but failed to bring to a vote, comprehensive legislation that *; would have introduced retail access in Connecticut over a period of several years, with a provision for the recovery of stranded costs by service area utilities. The legislature is currently considering legislation of this same sort in its 1998
-session. Among many other factors, decisions and actions concerning retail access in other states could impact the timing and form of this legislation.
Since January 1971, U1 has had a fossil fuel adjustment clause (FCA) in virtually all of its retail rates. As a result of the DPUC Order described above, the Company's FCA has been modified so that the clause will not be implemented C-30
1 Tile UNI'IED ILLUMINATING COSIPANY I NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued) unless the monthly average price for fuel oil increases above $28 per barrel or decreases below $10 per barrel for six consecutive months. (D) ACCOUNTING FOR PilASE-IN PLAN De Company phased into rate base its allowable investment in Seabrook Unit 1, amounting to $640 million, during the period January 1,1990 to January 1,1994. In conjunction with this phase-in plan, the Company was allowed to record a deferred retum on the portion of allowable investment excluded from rate base during the phase-in period. Accordingly, the Company is amortir.ing the net-of-tax accumulated deferred return of $62.9 million over a five-year period that commenced January 1,1995. (E) SliORT-TERM CREDIT ARRANGEMENTS The Company has a revolving credit agreement with a group of banks that currently extends to December 9,1998. He borrowing limit of this facility is $75 million. The facility permits the Company to borrow funds at a fluctuating interest rate determined by the prime lending market in New York, and also permits the Company to borrow money for fixed periods of time specified by the Company at fixed interest rates determined by the Eurodollar interbank market in London, or by bidding, at the Company's option. If a material adverse change in the business, operations, affairs, assets or condition, financial or otherwise, or prospects of the Company and its subsidiaries, on a consolidated basis, should occur, the banks may decline to lend additional money to the Company under this revolving credit agreement, although borrowings outstanding at the time of such an occurrence would not then become due and payable. As of December 31,1997, the Company had $30 million of short-temt borrowings outstanding under this facility. In addition, as of December 31,1997, one of the Company's subsidiaries, American Payment Systems, Inc., had borrowings of $7.8 million outstanding under a bank line of credit agreement. The Company's long-term debt instruments do not limit the amount of short-term debt that the Company may issue. The Company's revolving credit agreement described above requires it to maintain an available earnings / interest charges ratio of not less tnan 1,5:1.0 for each 12-month period ending on the last day of each calendar quarter. For the 12-month period ended December 31,1997, this coverage ratio was 3.23:1.0. C-31
.. _ . - . . .. . .. - . . - . . - . . . - . . . . ~ _ . - . . . ~ . . . . - -
Ti1E UNITED ILLUMINATING COMPANY , NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) Information with respect to short-term borrowings under the Company's revolving credit agreement is as follows: 1922 1216 1225 (000's) Maximum aggregate principal amount of short-term borrowings
- outstanding at any month-end $50,000 $30,000 $195,000 Average aggregate short-term borrowings outstanding during the year * $41,441 $15,380 $117,980 Weighted average interest rate * .
5.9% 5.7*/o 6.5% Principal amounts outstanding at year-end $30,000 $0 $0 Annualized interest rate on principal amounts outstanding at year-end 6.2% N/A N/A
- Average short-term borrowings represent the sum of daily borrowings outstanding, weighted for the number of days outstanding and divided by the number of days in the period. The weighted average interest rate is determined by dividing interest expense by the amount of average borrowings. Commitment fees of approximately $114,000,
$130,000 and $426,500 paid during.1997,1996 and 1995, respectively, are excluded from the calculation of the weighted average interest rate. t I
L l l' s I f C-32 i
THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued) (F) INCOME TAXES 1922 122fi 19.25 Income tax expense consists of: (000's) Income tax provisions: Current Federal $23,940 $35,398 $18,031 State 7,673 11,398 10,163 Total current 31,613 46,796 28,194 Deferred Federal 7,008 616 24,682 State 978 (2,892) 2,813 TotsIdeferred 7,986 (2,276) 27,495 investment tax credits (762) (762) (762) Totalincome tax expense $38,837 $43,758 $54,927 income tax components charged as follows: Operating expenses - $41,333 $53,090 $59,828 Other income and deductions - net (2,496) (9,332) (4,901) Totalincome tax expense $38,837 $43,758 $54,927 The following table details the components of the deferred income taxes:
' Tax depreciation on unrecoverable plant investment $8,089 $5,745 $8,889 Fossil plants decommissioning reserve (7,286) - -
Conservation & load management (5,768) 804 (367) Accelerated depreciation 5,681 5,617 9,410 Pension benefits 4,911 (9,066) (1,460) Seabrook sale / leaseback transaction 2,664 (598) (397) Deferred fossil fuelcosts (686) 755 (122) Cancelled nuclear project (467) (4,729) (467) Unit overhaul and replacement power costs 212 (1,491) -
- Alternative minimum tax - - 11,404 Other - net - 636 1,858
, (566) Deferred income taxes - net $7,986 ($2,276) $27,495 C-33
l l t THE UNITED ILLUMINATING COMPANY l NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued) ! Total income taxes differ from the amounts computed by applying the federal statutory tax rate to income before ! ' taxes. The reasons for the differences are as follows: 1222 L92ft 1925 Pre-Tax . Tax Pre-Tax Tax Pre-Tax _.I.a.1._ , (000's) l Computed tax at federal statutory rate $29,619 $28,999 $36,862 , increases (reductions) resulting from: l' Deferred retum Seabrook Unit i 12,586 4,405 12,586 4,405 12,586 4,405 ITC taken into income (762) (762) (762) (762) (762) (762) l Allowance for equity funds used during
' construction (336) (118) (940) (329) (390) (136) l L Fossil plant decommissioning reserce (15,591) (5,457) - - - -
Book depreciation in excess of non-normalized tax depreciation 23,926 8,374 22,703 7,946 21,586 7,555 State income taxes, net of federal income tax benefits 8,651 5,622 8,506 5,529 12,976 8,434 l Other items - net (8,134) (2.846) (5,797) _(2.039) (4,090) _(JJ31) Totalincome tax expense $38.837 $43.758 $54.927 Book income before income taxes $84.628 $.82J14 $105.320 ! . EfTective income tax rates 45.9 % $22% 52.1 % i At December 31,1997 the Company had deferred tax liabilities for taxable temporary difTerences of $400 million l
' and deferred tax assets for deductible temporary differences of $115 million, resulting in a net deferred tax liability of '
! $285 million. Significant components of deferred tax liabilities and assets were as follows: tax liabilities on book / tax plant basis differences and on the cumulative amount # income taxes on temporary differences previously flowed , through to ratepayers, $237 million; tax liabilities on normalization of book / tax depreciation timing difTerences, $122 l million and tax assets on the disallowance of plant costs, $47 million. i C-34
THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) (G) SUPPLEMENTARY INFORMATION 1991 122fi 1991 (000's) Oneratino Revenues i Retail $623,571 $649,876 $639,108 Wholesale - capacity 9,747 7,686 6,601
- energy 73,124 65,158 41,631 Other. . ,
3,825 3,300 3,109 Total Operating Revenues . $710,267 $726,020 $690,449 Emlem by Cimaar MWH's)- Unaudited , Retail Residential 1,903,096 1,891,988 1,890,,375 Commercial 2,253,488 2,258,501 2,273,965 Industrial 1,170,815 1,141,109 1,126,458 Other 48,717 48,291 48,435 5,376,116 5,339,889 5,339,433 Wholesale 2,700.393 2,260,423 1,708,837 Total Sales by Class 8,076,509 7,600.312 7,048,270 1 Other Taxes Charged to: Operating:
- State gross earnings $23,618 $26,757 $27,379 Local real esta:e and personal property 22,974 24,854 25,761 Payroll taxes 5,948 5,528 5,800 Other - -
3 52,540 57,139 58,943 Nonoperating and other accounts 459 628 527 Total Other Taxes $52,999 $57,767 $59,470 Other Income and (Deductions)- net Interest income $2,317 $1,505 $2,624 Equity earnings from Connecticut Yankee 1,343 1,225 1,440 Loss from subsidiary companies (814) (8,422) (4,898) Engineering study costs - - (849) Miscellaneous other income and (deductions)- net 1,340 (1,474) (2,589) Total Other Income and (Deductions) - net $4,186 ($7,166) ($4,272) Other Interest Charees
. Notes Payable $2,462 $882 $7,660 Other 818 1,210 1,342 Total Other Interest Charges S3,280 $2,092 $9,002 C-35
T11E UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) (11) PENSION AND OTilER BENEFITS ne Company's qualified pension plan, which is based on the highest three years of py, covers substantially all of
. its employees, and its entire cost is borne by the Company. The Company also has a non-qualified supplemental plan for certain executives and a non-qualified retiree only plan for certain early retirement benefits. The net pension costs for these plans for 1997,1996 and I995 were ($4,626,000), $18,403,000 and $3,842,000, respectively.
The Company's funding policy for the qualified plan is to make annual contributions that satisfy the minimum funding requirements of ERISA but that do not exceed the maximum deductible limits of the Internal Revenue Code. These amounts are determined each year as a result of an actuarial valuation of the plan. In accordance with this policy, no pensien fund contributions were made in 1995, in 1996, the Company contributed $2.8 million for 1995 funding requirements. In 1997, the Company contributed $2.7 million for 1996 funding requirements and $2.5 million for 1997 . funding requirements. During 1996, the Company established a supplemental retirement benefit trust and through this trust purchased life insurance policies on the officers of the Company to fund the future liability under the supplemental plan. De cash surrender value of these policies is shown as an investment on the Company's Consolidated Balance Sheet. The qualified plan's irrevocable trust fund consists principally of equity and fixed-income securities and real estate investments in approximately the following percentages at December 31,1997: Percentage of Asset Catenory Total Fund Equity Securities 72.8 % Fixed income Securities 24.2 % Real Estate 3.0% 1221 122fz (000's) The components ofnet pension costs were as follows: Service cost of benefits camed during the period S 3,791 $ 4,456 Interest cost on projected benefit obligation 17,565 15,882
' Actual return on plan assets (43,225) (24,167)
Net amortization and deferral 19.967 _fi,LM Net pension cost $ (l .902)* * $ 2.507*
- In addition, a cost of $15,896,000 was recognized under SFAS No. 88 as a result of special termination benefits provided under the Pension Plan.
** In addition, a credit of $2,724,000 was recognized under SFAS No. 88 as a curtailment gain resulting from a 1996 voluntary early retirement program.
Assumptions used to determine pension costs were: Discount rate 7.75 % 7.25 % Average wage increase 4.50% 4.50 % Retum on plan assets 11.00 % 9.00 % C-36
. . ., . . . . .. - .~.- .- - .-. - _ - - - . - . .. ..-
1 l Tile UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) December 31.1997 December 31.1996 Qualified Non-Qualified Qualified Non-Qualified Elan Elans flan Elans
; (000's)
. The funded status and amounts recognized in the balance sheet are as follows:
Actuarial present value of benefit obligations: Vested benefit obligation $181011 $1216 $165.919 $1112 Accumulated benefit obligation $192.556 $1720 $111251 $1112 Reconciliation of accrued pension liability: Projected benefit obligation $254,192 $5,353 $227,631 $5,152 Less fair value ofplan assets (243.73?) 208.863 - Projected benefit greater than plan assets 10,45.3 5,353 18,768 5,152 Unrecognized prior service cost (4,217) (68) (5,078) (81) Unrecognized net gain (loss) from past experience 19,272 (13) 21,038 (28) Unrecognized net asset (obligation) at date ofinitial application 8.446 (77) 9,94 (120) Accrued pension liability S 33.954 $5125 $_41282 $1921 Assumptions used in estimating benefit obligations: Discount rate 7.25 % 7.25 % 7.75 % 7.75 % Average wage increase - 4.50 % ' 4.50% 4.50 % 4.50 % in addition to providing pension benefits, the Company also provides other postretirement benefits (OPED), consisting principally of health care and life insurance benefits, for retired employees and their dependents. Employees with 25 years of service are eligible for full benefits, while employees with less than 25 years of service but greater than 15 years of service are entitled to partial benefits. Years of service prior to age 35 are not included in determining the number of years of service. For funding purposes, the Company established a Voluntary Employees' Benefit Association Trust (VEBA) to fund OPEB for union employees who retire on or after January 1,1994. Approximately 46% of the Company's employees are represented by Local 470-1, Utility Workers Union of America, AFL-CIO, for collective bargaining purposes.. The Company established a 401(h) account in connection with the qualified pension plan to fund OPEB for
. non-union employees who retire on or after January 1,1994. He funding policy assumes contributions to these trust funds to be the total OPEB expense calculated under SFAS No.106, adjusted to reflect a share of amounts expensed as a result of voluntary early retirement programs minus pay-as-you-go benefit payments for pre-January 1,1994 retirees, allocated in a manner that minimizes current income tax liability, without exceeding maximum tax deductible limits. In accordance with this policy, the Company contributed approximately $3.1 million, $3.8 million and $0 to the union VEBA in 1995,1996 and 1997, respectively. The Company contributed $0, $0.9 million and 51.7 million to the 401(h) account in 1995,1996 and 1997, respectively, Plan assets for both the union VEBA and 401(h) account consist primarily of equity and fixed-income securities.
C-37
l T11E UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) The components of the net cost of OPEB were as follows: 1221 122fi (000's) Service cost $ 925 $1,379 Interest cost 2,434 2,524 Actual return on plan assets (3,836) (1,838) Amortizations and deferrals - net 152,2 2J32 Net Cost ofPostretirement Benefit $1050** $L424*
- In addition, a cost of $4,126,000 was recognized as a result of special termination programs.
" includes a credit of $186,000 recognized under SFAS No. 88 as a curtailment gain resulting from a 1996 voluntary early retirement program.
Assumptions used to determine OPEB costs were: Discount rate 7.75 % 7.25 % 11ealth Care Cost Trend Rate 5.50 % 5.50*A Return on plan assets i1.00 % 8.50 % A one percentage point increase in the assumed health care cost trend rate would have increased the aggregate service cost and interest cost components of the 1997 net cost of periodic postretirement benefit by approximately $400,000
'and would increase the accumulated postretirement benefit obligation for health care benefits by approximately $3,000,000.
The following table reconciles the funded status of the plan with the amount recognized in the Consolidated Balance Sheet as of December 31,1997 and 1996: 1222 122fi (000's) Accumulated Postretirement Benefit Obligat5n: Retirees and dependents $22,847 $22,614 Fully eligible active plan participants 299 929 Other active plan participants . I1.966 12.677 Total Accumulated Postretirement Benefit Obligation 35,112 36,220 Plan assets at fair value 21.168 16.720 Accumulated Postrethenient Benefit Obligation in Excess of Plan Assets 13,944 19,500 Unrecognized net gain (loss) 6,380 2,731 Unamortized transition obligation (17.537) (19.443) C Accrued Postretirement Benefit Obligation $.2.282 $ 2.788 The weighted average discount rates used to measure the accumulated postretirement benefit obligation at December 31,1997 and 1996 were 7.25% and 7.75%, respectively. The Company has an Employee Savings Plan (401(k) Plan) in which substantially all employees are eligible to panicipate. The 401(k) Plan enables employees to defer receipt of up to 15% of their compensation and to invest such C-38 l
l l THE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (continued) funds in a number of investment alternatives. The Company makes matching contributions in the form of Company common stock for each employee. During 1995 and the first five months of 1996, the matching contributions were made into the 401(k) Plan. Beginning in June 1996, the matching contribudons were made into the Employee Stock , Ownership Plan (ESOP). He Company's matching contributions to the 401(k) Plan during 1995 and the first five months of 1996 were $1.6 million and $0.8 million, respectively. In June 1996, all shares of the Company's common stock in the 401(k) Plan were transferred to the ESOP. He Company has an ESOP for substantially all its employees. In June 1996, the Company began making matching contributions to the ESOP based on each employee's salary deferrals in the 401(k) Plan. The matching contribution currently equals fifly cents for each dollar of the employee's compensation deferred, but is not more than three and three-eighths percent of the employee's annual salary. The Company's matching contributions to the ESOP during the period June 1996 - December 1996 and the year 1997 were $0.8 million and $1.7 million, respectively. The Company pays dividends on the shares of stock in the ESOP to the participant and the Company receives a tax deduction on the dividends paid. The participant is given the option of reinvesting the dividends into the ESOP, as an after-tax contribution. The Company also makes an annual contribution to the ESOP equal to 25% of the dividends paid to each participant. He Company's annual contributions during 1997,1996 and 1995 were $417,000, $324,000 and $192,000, respectively. (1) JOINTLY OWNED PLANT l At December 31,1997, the Company had the following interests in jointly owned plants: Ownership / Leaschold Plant in Accumulated Share Sgnkt Depreciation (Millions) Seabrook Unit 1 17.5 % $650 $131 Millstone Unit 3 3.685 135 59 New Haven liarbor Station 93.7 143 74 he Company's share of the operating costs ofjointly owned plants is included in the appropriate expense captions in the Consolidated Statement ofIncome. (J) UNAMORTIZED CANCELLED NUCLEAR PROJECT From December 1984 through December 1992, the Company had been recovering its investment in Seabrook Unit 2, a partially constructed nuclear generating unit that was cancelled in 1984, over a regulatory approved ten-year period without a return on its unamortized investment. In the Company's 1992 rate decision, the DPUC adopted a proposal by the Company to write ofTits remaining investment in Seabrook Unit 2, beginning January 1,1993, over a 24-year period, corresponding with the flowback of certain Connecticut Corporation Business Tax (CCBT) credits. Such decision will allow the Company to retain the Seabrook Unit 2/CCBT amounts for ratemaking purposes, with the accumulated CCBT credits not deducted from rate base during the 24-year period of amortization in recognition of a longer period of time for amortization of the Seabrook Unit 2 balance. As a result of reducing its remaining l unamortized investment in Seabrook Unit 2 with proceeds from the sale of certain Seabrook Unit 2 equipment, the Company expects to completely amortize its unamortized investment in the year 2008. C-39
. . . - _ - _ . ,_ ~. . . -_ _. ..- .-_.- ._ .
4 Tile UNITED ILLUMINATING COMPANY l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) (K) FUEL FINANCING OBLIGATIONS AND OTHER LEASE OBLIGATIONS The Company has a Fossil Fuel Supply Agreement with a financial institution providing for financing up to $37.5 j million of fossil fuel purchases. Under this agreement, the financing entity may acquire and/or store natural gas, coal l and fuel oil for sale to the Company, and the Company mr.y purchase these fossil fuels from the financing entity at a
- price for each type of fuel that reimburses the financing entity for the direct costs it has incurred in purchasing and l storing the fuel, plus a charge for maintaining an inventory of the fuel determined by reference to the fluctuating j interest rate on thirty-day, dealer-placed commercial paper in New York. The Company is obligated to insure the fuel inventories and to indemnify the financing entity against all liabilities, taxes and other expenses incurred as a result of l
i its ownership, storage and sste of fossil fuel to the Company. This agreement currently extends to March 1999. At + December 31,1997, approximately $28.1 million of fossil fuel purchases were being financed under this agreement. l The Company also has lease arrangements for data processing equipment, office equipment, vehicles and office space, including the lease of a distribution service facility, which is recognized as a capital lease. The gross amount of l assets recorded under capital leases and the related obligations of those leases as of December 31,1997 are recorded on l the balance sheet. Future minimum lease payments under capital leases, excluding the Seabrook sale / leaseback transaction, which is being treated as a long-term financing, are estimated to be as follows: (000's) l 1998 $1,715 1999 1,696 2000 1,696 2001 1,696 i 2002 1,696 l After 2002 17.695 Total minimum capital lease payments 26,194 l Less: Amount representing interest 9.001 ! Present value of minimum capital lease payments $17.193 Capitalization of leases has no impact on income, since the sum of the amortization of a leased asset and the l interest on the lease obligation equals the rental expense allowed for ratemaking purposes. Operating leases, which are charged to operating expense, consist principally of a large number of small, relatively short-term, renewable agreements for a wide variety of equipment. In addition, the Company has an operating lease for its corporate headquarters. Future minimum lease payments under this lease are estimated to be as follows: (000's) 1998 $ 6,125 1999 6,426 2000 6,524 2001 6,837 2002 8,168 2003-2012 100.334 Total $ 134.414_. C-40
Tile UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued)
- Rental payments charged to operating expenses in 1997,1996 and 1995, including rental payments for its corporate headquarters, were $12.2 million, $12.8 million and $11.5 million, respectively.
(L) COMMITMENTS AND CONTINGENCIES ! Capital Expenditure Program l The Company's continuing capital expenditure program is presently estimated at approximately $170.0 million, excluding AFUDC, for 1998 through 2002. Nuclear Insurance Contingencies The Price-Anderson Act, currently extended through August 1,2002, limits public liability resulting from a single i incident at a nuclear power plant. The first $200 million ofliability coverage is provided by purchasing the maximum amount of commercially available insurance. Additional liability coverage will be provided by an assessment of up to
$75.5 million per incident, levied on each of the nuclear units licensed to operate in the United States, subject to a maximum assessment of $10 million per incident per nuclear unit in any year. In addition, if the sum of all public liability claims and legal costs resulting from any nuclear incident exceeds the maximum rnount of financial protection, each reactor operator can be assessed an additional 5% of $75.5 million, or $3.775 million. The maximum assessment is adjusted at least every five years to reflect the impact of inflation. With respect to each of the three nuclear generating units in which the Company has an interest, the Company will be obligated to pay its ownership and/or leaschold share of any statutory assessment resulting from a nuclear incident at any nuclear generating unit. l Based on its imnests in these nuclear generating units, the Company estimates its maximum liability would be $23.2 million per incident. Ilowever, any assessment would be limited to $3.1 million per incident per year.
The NRC requires each nuclear generating unit to obtain property insurance coverage in a minimum amount of
$1.06 billion and to establish a system of prioritized use of the insurance proceeds in the event of a nuclear incident.
The system requires that the first $1.06 billion ofinsurance proceeds be used to stabilize the nuclear reactor to prevent any significant risk to public health and safety and then for decentamination and cleanup operations. Only following completion of these tasks would the balance, if any, of the segregated insurance proceeds become available to the unit's ; owners. For each of the three nuclear generating units in which the Company has an interest, the Company is required to pay its ownership and/or leasehold share of the cost of purchasing such insurance. Although each of these units has purchased $2.75 billion of property insurance coverage, representing the limits of coverage currently available from conventional nuclear insurance pools, the cost of a nuclear incident could exceed available insurance proceeds. Under those circumstances, the nuclear insurance pools that provide this coverage may levy assessments against the insured owner companies if pool losses exceed the accumulated funds available to the pool. The maximum potential assessments against the Company with respect to losses occurring during current policy years are approximately $5.0 million. Other Commitments and Conting . les Connecticut Yankee On December 4,1996, the Board of Directors of the Connecticut Yankee Atomic Power Company (Connecticut
' Yankee) voted unanimously to retire the Connecticut Yankee nuclear plant (the Connecticut Yankee Unit) from commercial operation. The Company has a 9.5% stock ownership share in Connecticut Yankee and had relied on the Connecticut Yankee Unit for approximauly 3.7% of the Company's 1995 total generating resources. The power purchase contract under which the Company has purchased its 9.5% entitlement to the Connecticut Yankee Unit's power output permits Connecticut Yankee to recover 9.5% of all ofits costs from UI. Connecticut Yankee has filed C-41
TIIE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) revised decommissioning cost estimates and amendments to the power contracts with its owners with the Federal Energy Regulatory Commission (FERC). The estimate of the sum of future payments for the closing, decommissioning and recovery of the remaining investment in the Connecticut Yankee Unit is approximately $606 million at December 31,1997. Based on regulatory precedent, Connecticut Yankee believes it will continue to collect from its owners its decommissioning costs, the unrecovered investment in the Connecticut Yankee Unit and other costs associated with the permanent shutdown of the Connecticut Yankee Unit. Ul expects that it will continue to be allowed to recover all FERC-approved costs from its customers through retail rates. The Company's estimate of its remaining share of costs, including decommissioning, less return of investment (approximately $10.5 million) and retum on investment (approximately $6.3 million) at December 31,1997, is approximately $40.8 million. This estimate, which is subject to ongoing review and revision, has been recorded by the Company as a regulatory asset and an obligation on the Consolidated Balance Sheet, flydro-Quebec The Company is a participant in the liydro-Quebec transmission intertie facility linking New England and Quebec, Canada. Phasei pf tb4 facility, which became operational in 1986 and in which the Company has a 5.75% participat%g share, has a ( 90 megawatt equivalent capacity value; and Phase 11, in which the Company has a 5.45% participating share, increased the equivalent capacity value of the intertie from 690 megawatts to a maximum of 2000 megawatts in 1991. A ten-year Firm Energy Contract, which provides for the sale of 7 million megawatt-hours per year by Hydro-Quebec to the New England participants in the Phase 11 facility, became effective on July 1,1991. Additionally, the Company is obligated to fumish a guarantee for its participating share of the debt financing for the Phase 11 facility. As of December 31,1997, the Company's guarantee liability for this debt was approximately $7.4 mill:on. i Property Taxes On November 2,1993, the Company received " updated" personal property tax bills from the City of New Haven (the City) for the tax year 1991-1992, aggregating $6.6 million, based on an audit by the City's tax assessor. On May 7, 1994, the Company received a " Certificate of Correction....to correct a clerical omission or mistake" from the City's tax assessor relative to the assessed value of the Company's personal property for the tax year 1994-1995, which certificate purports to increase said assessed value by approximately 53% above the tax assessor's valuation at February 28,1994, generating tax claims of approximately $3.5 million. On March 1,1995, the Company received notices of assessment changes relative to the assessed value of the Company's personal property for the tax year 1995-1996, which notices purport to increase said assessed value by approximately 48% over the valuation declared by the Company, generating tax claims of approximately $3.5 million. On May 11,1995, the Company received notices of assessment changes relative to the assessed values of the Company's personal property for the tax years 1992-1993 and 1993-1994, which notices purport to increase said assessed values by approximately 45% and 49%, respectively, over the valuations declared by the Company, generating tax claims of approximately $4.1 million and $3.5 million, respectively. On March 8,1996, the Company received notices of asseument changes relative to the assessed value of the Company's personal property for the tax year 1996-1997, which notices purport to increase said assessed value by approximately 57% over the valuations declared by the Company and are expected to generate tax claims of approximately $3.8 million. On March 7,1997, the Company received notices of assessment changes relative to the assessed value of the Company's personal property for the tax year 1997 1998, which notices purport to increase said assessed value by approximately 54% over the valuations declared by the Company and are expected to generate tax claims of approximately $3.7 million. The Company is vigorously contesting each of these actions by the City's tax assessor. In January 1996, the Connecticut Superior Court granted the Company's motion for summary judgment against the City relative to the earliest tax year at issue, 1991 1992, ruling that, afler January 31,1992, the tax assessor had no statutory authority to revalue personal property listed and valued on the Company's tax list for the tax year 1991-1992. This Superior Court decision, which would also have been applicable to and defeated the assessor's valuation increases for C-42 l
Tile UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) the two subsequent tax years, 1992-1993 and 1993-1994, was appealed by the City. On April 11,1997, the Connecticut Supreme Court reversed the Superior Court's decisions in this and two other companion cases involving other taxpayers, ruling that the tax assessor had a three-year period in which to audit and revalue personal property listed and valued on the Company's tax list for the tax year 1991-1992. It is currently anticipated that all of the pending cases for all of the tax years in dispute will now be scheduled for trial in the Superior Court relative to the Company's claim that the tax assessor's increases in personal propeny tax assessments for the three earliest years were unlawful for other reasons and relative to the vigorously contested issue, for all of the tax years, as to the reasonableness of the tax assessor's valuation method, both as to amount and methodology. It is the present opinion of the Company that the ultimate outcome of this dispute will not have a significant impact on the long-term financial position of the Company, The Company would seek permission from the DPUC to recover from its retail customers the expense of any adverse court decision or settlement. Environmental Concerns in complying with existing environmental statutes and regulations and further developments in areas of environmental concern, including legislation and studies in the fields of water and air quality (particularly " air toxics" and " global warming"), hazardous waste handling and disposal, toxic substances, and electric and magnetic fields, the Company may incur substantial capital expenditures for equipment modifications and additions, monitoring equipment and recording devices, and it may incur additional operating expenses. Litigation expenditures may also increase as a result of scientific investigations, and speculation and debate, concerning the possibility of harmful health effects of l electric and magnetic fields. The total amount of these expenditures is not now detenninable.
)
l Site Decontamination, Demolition and Remediation Costs i The Company has estimated that the total cost of decontaminating and demolishing its Steel Point Station and completing requisite environmental remediation of the site will be approximately $11.3 million, of which approximately $8.3 million had been incurred as of December 31,1997, and that the value of the property following , remediation will not exceed $6.0 million. As a result of a 1992 DPUC retail rate decision, beginning January 1,1993, j the Company has been recowring through retail rates $1.075 million of the remediation costs per year. The ' remediation costs, property va' n and recovery from customers will be subject to true-up in the Company's next retail rate proceeding based on actual remediation costs and actual gain on the Company's disposition of the prcperty. The Company is presently remediating an area of PCB contamination at its English Station generating site, including repair an&or replacement of approximately 560 linear feet of sheet piling. The total cost of the remediation and sheet piling repair is presently estimated at $3.5 million, and the Company plans to repair / replace a major portion of l the remaining sheet piling at this location at an estimated cost of $6 million. (M) NUCLEAR FUEL DISPOSAL AND NUCLEAR PLANT DECOMMISSIONING Costs associated with nuclear plant operations include amounts for disposal of nuclear wastes, including spent fuel, i and for the ultimate decommissioning of the plants. Under the Nuclear Waste Policy Act of 1982, the federal i Department of Energy (DOE) is required to design, license, construct and operate a permanent repository for high level l radioactive wastes and spent nuclear fuel. The Act requires the DOE to provide, beginning in 1998, for the disposal of spent nuclear fuel and high level radioactive waste from commercial nuclear plants through contracts with the owners and generators of such waste; and the DOE has established disposal fees that are being paid to the federal government by electric utilities owning or operating nuclear generating units. In return for payment of the prescribed fees, the federal government was required to take title to and dispose of the utilities' high level wastes and spent nuclear fuel beginning no later than January 1998. Ilowever, the DOE has announced that its first high level waste repository will l C-43 l 1
Tile UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) not be in operation earlier than 2010 and possibly not earlier than 2013, notwithstanding the DOE's statutory and contractual responsibility to begin disposal of high-level radioactive waste and spent fuel beginning not later than January 31,1998. The DOE also announced that, absent a repository, the DOE has no statutory obligation to begin taking high level wastes and spent nuclear fuel for disposal by January 1998. However, numerous utilities and states have obtained a judicial declaration that the DOE has a statutory responsibility to take title to and dispose of high level wastes and spent nuclear fuel beginning in January 1998, and that the contracts between the DOE and the plant owners and generators of such waste will provide a potentially adequate remedy for the latter if the DOE fails to fulfill its contractual obligations j by that date. The DOE is contesting thesejudicial declarations; and it is unclear at this time whether the United States Congress will enact legislation to address spent fuel'high level waste disposal issues. l Until the federal government begins receiving such materials, nuclear generating units will need to retain high level wastes and spent nuclear fuel on-site or make other provisions for their storage. Storage facilities for the Connecticut Yankee Unit are deemed adequate, and storage facilities for Millstone Unit 3 are expected to be adequate for the projected life of the unit. Storage facilities for Seabrook Unit I are expected to be adequate until at least 2010. Fuel consolidation and compaction technologies are being considered for Seabrook Unit I and may provide adequate storage capability for the projected life of the unit. In addition, other licensed technologies, such as dry storage casks, may satisfy spent nuclear fuel storage requirements. Disposal costs for low-level radioactive wastes (LLW) that result from operation or decommissioning of nuclear generating units have increased significantly in recent years and may continue to rise. The cost increases are a function of increased packaging and transportation costs, and higher fees and surcharges imposed by the disposal facilities. Currently, the Chem Nuclear LLW facility at Barnwell, South Carolina, is open to the Connecticut Yankee Unit, Millstone Unit 3, and Seabrook Unit I for disposal of LLW. The Envirocare LLW facility at Clive, Utah, is also open to these generating units for portions of their LLW. All three units have contracts in place for LLW disposal at these disposal facilities. Because access to LLW disposal may be lost at any time, Millstone Unit 3 and Seabrook Unit I have storage plans that will allow on-site retention of LLW for at least five years in the event that disposal is interrupted. The Connecticut Yankee Unit, which has been retired from commercial operation, has a similar storage program, although disposal of its LLW will take place in connection with its decommissioning. The Company cannot predict whether or when a LLW disposal site will be designated in Connecticut. The State of New Hampshire has not met deadlines for compliance with the Low-Level Radioactive Waste Policy Act and has stated that the state is unsuitable for a LLW disposal facility. Both Connecticut and New Hampshire are also pursuing other options for out-of-state disposal of LLW. NRC licensing requirements and restrictions are also applicable to the decommissioning of nuclear generating units at the end of their service lives, and the NRC has adopted comprehensive regulations concerning decommissioning planning, timing, funding and environmental reviews. Ul and the other owners of the nuclear generating units in which UI has interests estimate decommissioning costs for the units and attempt to recover sufficient amounts through their allowed electric rates, together with earnings on the investment of funds so recovered, to cover expected decommissioning costs. Changes in NRC requirements or technology, as well as inflation, can increase estimated decommissioning costs. New Hampshire has enacted a law requiring the creation of a government-managed fund to finance the decommissioning of nuclear generating units in that state. The New llampshire Nuclear Decommissioning Financing Committee (NDFC) has established $473 million (in 1998 dollars) as the decommissioning cost estimate for Seabrook C-44 l
Tile UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) Unb 1, of which the Company's share would be approximately $83 million. This estimate assumes the prompt rem and dismantling of the unit at the end of its estimated 36 year energy producing life. Monthly decommissioning payments are being made to the state-managed decommissioning trust fund. Urs share of the decommissioning payments made during 1997 was St.9 million. UI's share of the fund at December 31,1997 was approximately $12.4 million. Connecticut has enacted a law requiring the operators of nuclear generating units to file periodically with the DPUC their plans for financing the decommissioning of the units in that state. The current decommissioning cost estimate for Millstone Unit 3 is $557 million (in 1998 dollars), of which the Company's share would be approximately
$21 million. His estimate assumes the prompt removal and dismantling of the unit at the end of its estimated 40-year energy producing life. Monthly decommissioning payments, based on these cost estimates, are being made to n decommissioning trust fund managed by Northeast Utilities (NU). UI's share of the Millstone Unit 3 decommissioning payments made during 1997 was $487,000. Urs share of the fund at December 31,1997 was approximately $5.1 million. The decommissioning trust fund for the Connecticut Yankee Unit is also managed by NU. For the Company's 9.5% equity ownership in Connecticut Yankee, decommissioning costs of $2.1 million were funded by UI during 1997, and Urs share of the fund at December 31,1997 was $24.9 million. The current decommissioning cost estimate for the Connecticut Yankee Unit, assuming the prompt removal and dismantling of the unit commencing in 1997, is $456 million, of which Urs share would be $43 million.
The Financial Accounting Standards Board (FASB) has issued an exposure draft related to the accounting for the closure and removal costs of long-lived assets, including nuclear plant decommissioning. If the proposed accounting standard were adopted, it may result in higher annual provisions for decommissioning to be recognized earlier in the operating life of nuclear units and an accelerated recognition of the decommissioning obligation. He FASB will be ' deliberating this issue, and the resulting final pronouncement could be different from that proposed in the exposure draft. C-45
TIIE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(continued) (0) FAIR VALUE OF FINANCIAL INSTRUMENTS (l) The estimated fair values of the Company's financial instruments are as follows: 1991 122ft Carrying Fair Carrying Fair Amount Value Amount Value
- (000's) (000's)
Cash and temporary cash investments $32,002 $32,002 $ 6,394 $ 6,394 Long-term debt (2)(3)(4) . $620,457 $624,192 $652,767 $655,582 (1) Equity investments were not valued because they were not considered to be material.
- (2) Excludes the obligation under the Seabrook Unit I sale / leaseback agreement.
(3) 1he fair market value of the Company's long-term debt is estimated by brokers based on market conditions at December 31,1997 and 1996, respectively. (4) See Note (B), Capitalization - Long-Term Debt. i C-46 l l _----- ___- ______________ __ ~ J
TIIE UNITED ILLUMINATING COMPANY NOTES TO CONSOLIDATED FINANCI AL STATEMENTS -(continued) (P) QUARTERLY FINANCI AL DATA (UNAUDITED) Selected quarterly fmancial data for 1997 and 1996 are set forth below: Operating Operating Net Earnings Per Share of Quarter Retenues Income laceme Common Stock (1) (000's) - (000's) (000's) Dasic Diluted 1997 First $180,325 $22,150 $7,710 $.54 $.54 Second(2)(3) 163,774 22,692 8,542 .61 .61 Rird 196,563 38,351 23,402 1.68 1.68 Fourth 169,605 21,380 6,137 .44 .44 1996 First(4) $170,860 '$29,042 $11,721 $ .82 $ .82 Second(4)(5) 168,790 25,871 8,883 .75 .75 Third (4) 209,167 34,466 17,904 1.27 1.26 Fourth (6) 177,203 19,756 588 .04 .04 (1) Based on weighted average number of shares outstanding each quarter. (2) Operating income, net income and earnings per share for the second quarter of 1997 included an after-tax credit of
$6.7 million, or S.48 per share, to provide for the cumulative tax benefits associated with future fossil generation decommissioning.
(3) Operating income, net income and earnings per share for the second quarter of 1997 int luded an after tax charge of
$4.1 million, or $.30 per share, to record additional amortization of conservation and '.oad management costs.
(4) Operating income, net income and earnings per share for the first, second and third quarters of 1996 included after. tax charges of $4.2 million, or $.30 per share, $0.5 million, or $.03 per share and $8.7 million, or $.62 per l share, respectively, for early retirement and voluntary separation programs. I (5) Operating income, net income and eamings per share for the second quarter of 1996 included an after-tax charge of
$0.8 million, or $.06 per share, for the cumulative loss on an office space sublease.
(6) Net income and eamings per share for the founh quarter of 1996 included an after-tax charge of $2.6 million, or
$.18 per share, for losses associated with the Company's unregulated subsidiaries.
C-47
I MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
' UI's Common Stock is traded on the New York Stock Exchange, where the high and low sale prices during 1997 and 1996 were as follows:
1997 Sale Price 1996 Sale Price liigh Lim High LQE First Quarter 32 5/8 24 1/2 39 3/4 36 1/4 Second Quarter 30 7/8 24 1/2 38 35 3/4 Third Quarter 37 31 1/2 37 1/2 33 7/8 Fourth Quarter 45 15/16 37 35 31 3/8 UI has paid quarterly dividends on its Common Stock since 1900. The quarterly dividends declared in 1996 and 1997 were at a rate of 72 cents per share. The indenture under which $200 million principal amount of Notes are issued places 1:mitations on the payment of
, cash dividends on common stock and on the purchase or redemption of common stock. Retained camings in the amount of $104,1 million were free from such limitations at December 31,1997.
As of December 31,1997, there were 16,057 Common Stock shareowners of record. EXECUTIVE OFFICERS OFTHE COMPANY Richard J. Grossi Chairman of the Board of Directors and Chief Executive Officer Robert L Fiscus Vice Chairman of the Board of Directors and Chief Financial Officer Nathaniel D. Woodson President l James F. Crowe Group Vice President Power Supply Services l Albert N. Henricksen Group Vice President Support Services Anthony J. Vallillo Group Vice President Client Services Rita L. Bowlby Vice President Corporate Affairs Stephen F. Goldschmidt Vice President Planning and Information Resources i E. Jon Majkowski Vice President / President Subsidiaries (URI, PPI & TEI) James L. Benjamin Controller Kurt D. Mohlman - Treasurer and Secretary Charles J. Pepe Assistant Treasurer and Assistant Secretary C-48 1 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - -)
- 4. . , + .. _ a._ a -_ a 5.a.at4 44 4 . ah,.m.. m. 1. ,~..a.a.o 4 m4.s a m__4a_m._a4e 4mm ya..u u. -. - A,a1.,A2. _.-u... m m. -
1 l-t l l I I l i [THIS PAGE INTENTIONALLY LEFT BLANK] i i i l 1 l- ) i i n l 1 l + l
l Selected Fin:nclil Dita 1997 1996 1993 Financial Results cf Operation ($000's) Sales of electricity Retail
$259,842 $265,562 $260,694 Residential 248,984 263,609 259,715 Commercial 102,967 108,825 106,963 Industrial i I,778 11,880 11,736 Other 623,571 649,876 639,108 Total Retail 82,871 72,844 43,232 Wholesale (!)
3,825 3,300 3,109 Other operating rcvenues 710.267 726.020 690,449 Total operating revenues Fuel and interchange energy -net 109,542 95,399 96,538 Retail-cwn load 73,124 65,158 41,631 Whole' e 39,976 46,830 47,420 Capacity purchased-net 74,618 (3) 65,921 61,426 Depreciation 13,758 13,758 13,758 Other amortization, principally deferred return and cancelled plant 200,803 219,630 (5) 183,749 Other operating expenses, excluding tax expense 23,618 26,757 27,379 - Gross carnings tax 28,922 30,382 31.564 Other non-income taxes 564.361 563,795 503,465 Total operating expenses, excluding income taxes o 0 0 Deferred return - Seabrook Unit I I,575 2,375 2,762 AFUDC 4,186 (7.166) (4,272) Other non-operating income (loss) Interest expense 56,158 65 s46 63,431 Long-term debt - net 6,068 4,721 13,140 Other 62.226 69,767 76,57i Total 4.813 4,863 3,583 Minority interest in preferred securities Income tax expense 41,333 (4) 53,090 59,828 Operating income tax (2,496) (9.332) (4,90l) Non-operating income tax Total 38.837 43,758 5(OIT' 45,791 39,096 50,393 income (loss) before cumulative effect of accounting change Cumulative effect of change in accounting net of tax 0 0 0 45,791 39,u96 (6) 50,393 Net income (loss) Discount on preferred stock redemption (48) (1,840) (2,183) 205 330 1,329 Preferred and preference stock dividends income (loss) applicable to common stock 545,634 540,606 551,247 Operating income $104,573 5109.135 5127,156 Fiaancial Condition (5000's)
$1,222,174 $1,258,306 $1,277,910 Plant in service-net Construction work in progress 25,448 40,998 4i,817 Plant-related regulatory asset 0 0 0 Other property and investments 58,441 49,091 53,355 165,027 163,350 137,277 Current assets Deferred charges and regulatory assets 360,635 449.150 475,258 Total Assets 51,831,725 51,900,895 51,985,617 Common stock equity 5438,963 5440,016 5439,981 Preferred, preference stock and preferred securities 54,351 54,461 60,539 Long-term debt excluding current portion 644,670 759,680 845,684 119,868 138,816 65,747 Noncurrent liabilities (7)
Current portion oflong-term debt 100,000 69,900 40,800 l Notes payable 37,751 10,965 0 i 130,993 129,007 102,336 1 Other current liabilities (7) Deferred income tax liabilities and other 305.129 358,050 430,530 Total Capitalization and Liabilities 51,831,725 51,900,895 51,985,617 (1) Operating Revenues, for 3 cars prior to 1992, include w holesale power exchange contract sales that were reclassified from Fuel and Capacity expenses in accordance with Federal Energy Regulatory Commission requirements. , (2) Includes reclassification of certain Commercial and Industrial customers. l (3) Includes the etTect of charges of $6.4 million, before tax, for additional amortization of conservation & load management costs. (4) Includes the efTect of credits of 56.7 million, before-tax, to provide tax provision for fossil generation decommissioning. l (5) Includes the etTect of charges of $23.0 million, before-tax, associated with voluntary early retirement programs. C-49
1994 1993 1992 9 91 i 1990 1989 1988 my l
$252,386 5238,185 1226,455 $226,751 1211,891 $205,l83 $200,170 250,771 (2) 256,559 253,456 (2) 255,782 234,704 219,852 208,801 104,242 (2) 97,466 97,010 (2) 91,895 94,526 92,855 96,665 11,469 11,349 11,065 10,886 10,536 9,943 9,732 618,868 bu3,559 587,986 585,314 551,657 527,833 34,927 565.368 45,931 75,484 84,236 85,657 77,925 63,263 2,953 3,533 3,855 3,821 3332 3348 3,570 656,748 653,023 667,325 673,371 640,646 609.106 582.206 99,589 98,694 108,084 123.010 119,285 128,739 121,425 27,765 39,356 55,169 61,858 69,i17 62,681 53,837 44,769 47,424 43,560 44,668 42,827 50,234 35,465 58,165 56,287 50,706 48,181 36.526 35,618 24,069 1,172 1,780 10,415 10,415 4,173 10,415 10.415 193,098 203.427 (8) 183,426 178,912 176,419 144,867 133,407 27,403 27,955 27,362 27,223 25,595 24,506 23,948 32,458 29,977 31,869 28,673 24,648 20,294 21,695 484,419 504,900 510.591 $22,940 498,590 477,354 424,261 0 7,497 15,959 17,970 21,503 0 0 3,463 4,067 3,232 5,190 3,443 65,443 75,656 (1,907) 71 18,545 2,697 22,654 (219,742) (23,369) 73,772 80,030 88,666 94,056 90.296 91.126 90,022 10.301 12,260 12,882 9.847 15,468 22.849 12.069 84,073 92,290 101,548 100,143 109,524 113,975 102,094__
0 0 0 0 0
~
0 0 44,937 33,309 48,712 47,231 43,493 37,963 44,045 (3,214) (6.322) (12,558) (19,299) (17,409) (101,135) (14.548) l 41,723 26.987 36,154 ?~ 27,932 26,084 (63,172) 29,497 48,089 40,481 56,768 48,213 54,048 l' (73,350) 78,639 (1,294) 0 0 7.337 0 0 0 40,795 40,48) (9) 56,768 55.55u $4,048 (73.350) 78,639 0 0 0 0 0 0 0 3,323 4,318 4.338 4,751 4.530 8.233 11.348 543,472 536,163 552,430 551,020 549,297 (181,583) 567,294 5127,392 5l 14,814 5108,022 5103,200 598,563 593.789 5113,895
$1,268,145 $1,243,426 51,224,058 51,219,871 $1,209,173 $562,473 5560,930 57,669 77,395 59,809 54,771 50,257 675,831 812,246 0 0 0 0 0 81,768 88,339
'53,267 58,096 65,320 79,009 90,006 91,648 83,860 157,309 187,981 247,954 164,839 161 066 170,823 166,270 538,601 567.394 556.493 553,986 554.365 605.696 653,4'8 52,074,991 12.134,292 52,153,634 52,072,855 52,064,488 52,188,239 52.365,06T 5428,028 5423,324 5422 /46 5401,771 5379,812 5362,544 5473,674 44,700 60,945 60,945 62,640 69,700 70,000 104300 708,340 875,268 893,457 909,998 899,993 868,884 862,287
$9,458 62,666 44,56', 110,217 110,850 117,200 119,165 193,133 143,333 92,833 37,500 41,667 18,667 3,667 l 67,000 0 84,099 13,000 15,000 45,000 0 122,084 117,343 114,757 114.280 138,173 133,459 115.043 452,248 451,413 440,230 423,449 409,293 572,445 687,227 52,074,991 52.134,292 52,153,634 52.072.855 52,064,488 52,188,239 52,365,06)
(6) includes the clTect of charges of $13.4 million, after-tax, associated with voluntary early retirement programs. (7) Amounts for years prior to 1996 were reclassined in 1996. (8) Includes the effect of a reorganization charge of $13.6 million, before 4ax, assoelated with a voluntary early retirement program. (9) includes the effect of a reorganization charge of 57.8 million, after-tax. C 50
, - -. _ . _ . . _ . _ _ - . - - . - .m _ _ _ . , - _ _ ,_ - m . ~ .--m- - . _ _ . - - l: i t IC94 . 1993 1992- 1991 l 1990 1989 1988
$252,386 _ $238,185 $226,455 $226,751 $211,891 $205,183 $200,170 250,771 (2) 256,559 253,456 (2) 255,782 234,704 219,852 208,801 l 104,242 (2) 97,466 97,010 (2) 91,895 94,526 92,855 96,665 '
11,469 11,349 11,065 10,886 10,536 9,943 9,732 618.868 . 603,559 587,986 585,314 551,657 527,833 515,368 s 34,927 45,931 75,484 84,236 ' 85,657 77,925 63,263 2,953 3,533 3,855 3,821
' 3,332 3,348 3.570 656,748 653,023 667.325 673,371 i
640,646 609,106 582,201 '
- 99,589 ' 98,694 '108,084 ' .I23,010 II9,285 128,739 ' 12I,425
.27,765 s 39,356 - 55,169 61,858 69,117 62,681 53.337 44,769 - 47,424 43,560 44,668 ~ 42,827 50,234 35,465 f 58,165 56,287 _ 50,706 48,181 36,526 35,618' 24,069
< 1,172 ' 1,780 10,415 I 10,415 4,173 10,415 '
I 10.415
- 193,098 ' 203,427 (8) 183,426 178,912 - 176,419 144,867 133,407 27,403 27,955 27.362 27,223 25,595 24,506 23,948 32,458 29,977 31,869 28,673 24,648 20,294 21,695 484,419 - 504,900 _ 510.591 522,940 498,590 477,354 424,261 0- 7,49T 15,959 17,970 21,503 0 0
- 3,463 4,067 3,232 5,190 3,443 65,443 75,656 i (1,907) 71 18,545 2,697 22,654 l (219,742) (23,369) '
- 73,772 80,030 ' 88,666 90,296 '
94,056 91,126 90,022 ' 10,301 12,260 12,882 9,847 15,468 22,849 '12.069 84,073 ; , 92,290 101,548 100,143 109,524 113,975 102,091 l 1 0 0 .0 0 0 0 0 l 44,937 ' 33,309 48,712 47,231 43,493 37,963 44,045 (3,214) (6,322) (12,558) (19,299) (17,409) (101,135) (14,548) l 41,723 26,987 36,I54 27,932 26.084 t63,t72) 29,497 l 48,089, 40,481 56,768 48,213 54,048 ' (73,350) 78,639 (1,29C 0 0 7,337 0 0 0 46,795 40,48; (9) " 36,768 55,550 54,048 (73,350) 78,639 0 0 0 0 0 o' o
'3,323 4.318 4,338 4,530 4,751 8,233 11.348 543,472 536,163 552,430 551,020 549,297 '
1581,583) 567,294
$127,392 5114,814 1108,022 5103,200 598.563 593 789 5113.895 l
$1,268,145 $1,243,426 - $1,224,058 $1,219.871 $1,209,173
' $562.473 $$60,930 ;
. 57,669 77,395 59,809 54,77) 50,257 675,831 812,246 0 0 0 0 0 81,768 88,339 '
53,267 58,096 65,320 79,009 90,006 91,648 83,860 157,309 187,981 247,954 164,839 161,066 170,823 166,270 538,601 567,394 . 556,493 554,365 553,986 605,696 653,418 52,074,991 52,134 70 7 52,153,634 52,072,855 52,064,488 52,188,239 52,365,063
. 5428,028 5423,324 5422,746 {
, 5401,771 5379,812 5362.584 5473,674 r ! 44,700 60,945 . 60,945 62,640 69,700 70,000 104.000 l- 708,340- 875,268 893,457 909,998 899,993 868,884 862,287 l 59,458 62,666 44,567 110,217 l10,850 117,200 119,165 I. 193,133 143,333 92,833 37,500 41,667 18,667 3,667 I. 67,000 - 0 84,099 13,000 15,000 45,000 0 122,084 ' !!7,343 ~ 114,757 114,280 -138,173 133,459 115.043 452,248 451,413 440,230 423,449 409.293
$72.445 687.227 !
52,074,991 52,134.292 52.153,034 52,072,855 52,064,488 52,188,239 52,365,063
- j .' l(6) Includes the effect of charges of $13.4 million, after-tax, associated with voluntary early retirem nt programs,
+ (7) Amounts for years prior to 1996 were reclassified in 1996. , (8) Includes the effect of a reorganization char 8e of $13.6 million, before-tax, associated with a voluntary early :
' retirement program. '
l (9) includes the effect of a reorganization charge of $7.8 million, after-tax. ' 1 [ L C-50 I i
Selected Fininci:1 Data (continued) 1995 1997 1996 Ccmmon Stock Data I3,975,802 14,100,806 14,089,835 Average number of shares outstanding 13,997,824 14,101.291 14,100,091 Number of shares outstanding at year.cnd
$3.27 $2.88 $3.64 Earnings (loss) per share (average) basic
$3.26 $2.87 $3.63 Earnings 00ss) per share (average) diluted
$3.11 $3.94 $3.61 Recurring earnings (loss) per share (average)(1)
$31.56 $31.20 $31.20 Book value per share Average return on equity 10.45% 9.20 % 11.84 %
Total 13.04 % 11.54 % 11.51 % Utility $2.82
$2.88 $2.88 Dividends declared per share Market Price:
$45.9375 $39.750 $38.500 liigh 529.500
$24.5000 $31.375 Low $31.375 $37.375
$45.9375 Year-end 5127,807 5103,943 5120,033
~ Net cash provider by operatmg activities, less dividends (5000's) $47,174 559,363
$33,436 Capital expenditures, excluding AFUDC Other Financial and Statistical Data Sales by class (MWh's) 1,890.575 1,903,096 1,891,988 Residential 2,258,501 2,273,965 2.253,488 Commercial 1,141,109 1,126,458 1,170.815 indmirial 48,435 48.717 48.291 Other 5.339,433 5.376,i16 5.339.869 ~
Total Number of retail customers by class (average) 280,283 279,024 278,326 Residential 28,666 28,550 29,228 Commercial 1,652 1,599 1,697 Industrial 1,141 1,122 1,163 Other 3u9,597 312.371 360.483 Total Revenue per kilowatt hour by class (cents) 13.65 14.04 13.79 Residential 11.42 11.05 11.67 Commercial 9.50 8.79 9.54 Industrial 8.12 8.26 8.53 Average large industrial customers time of use rate (cents) 5,631,296 5,640,957 5,647,690 System requirements (MWh) 1,156,740 1,173,160 1,044,620 Peak load - kilowatts 1,434,102 I,356,100 1,522,350 Generating capability- peak (kilowatts) 54.80 % 61.64 % 55.74 % Load factor Fuel generation mix percentages 44 38 37 Coal 7 15 8 Oil 37 25 37 Nuclear 9 9 9 Cogeneration 5 2 3 Gu 5 5 5 Ilydro Revenues - retail sales (5u00's) $637,219
$621,874 $642,106 Dase 1,889 1,697 7,770 Fuel adjustment clause 0 0 0 Sales provision adjustment 5639,108 5623.574 5649.876 Total Revenues - retail sales per kWh (cents) 11.57 12.02 11.93 Hase 0.03 0.15 0.04 Fuct adjustm at clause 0 00 0.00 0.00 Sales provision adjustment i 1.(e 12.17 l 1.97 Total 1,71 1.95 1.69 Fuel and energy cost per kW h (cents) 2.39 2.41 2.22 Fossil 0.61 0.46 0.85 Nuclear 1,358 1,175 1.287 Number of employees at year-end $72,984
$68.640 $69,276 Total payrnil($000 'S1 (1) Recurring earnings (loss) per share (average) is not a generally accepted accounting principic measurement.
Management provides this measurement for informational purposes only. (2) includes reclassification of certain Commercial and Industrial customers. I C-51
1994 1993 1992 1991 1990 1989 1988 14,085,452 .14,063,854 13,941,150 . 13,899,906 i
' 13,887,748 13,887,748 13,887,748
! 14,086,691 14,083,291 14,033,148 13,932,348 13,887,748 13,887,748 13,887,748 i ! $3.09 - $2.57 $3.76 $3.67 $3.55 ($5.87) $4.85 ( $3.08 - $2.56 $3.74 $3.66 $3.55 ($5.87) $4.85 l $3.28 $3.13 $3.17 $2.90 $3.55 ($5.87) $4.85 i' $3039 $30.06 $30.12 ' $18.84 $2735 $26.11 $34.11 40.19 % 8.45 % 12.67 % 13.01*/. 1339% 18.88 % I4.75 % 12.50 % 10.97 % 14.46 % 1339% ' 13.97 % 20.21 % 32.91 %
$2.76 $2.66 $2.56 $2.44 $232 $232 $232 i
l $39.500 $45.875 $42.000 $39.125 $34.125 $34.250 $27.500 i $29.000 $38.500 $34.125 $30.000 $26.875 $24.750 $19.125 i
$29.500 - $40.250 - $41.500 $39.000 $31.125 $34.250 $26.875 394,507 3104,347 3109,U20 573,563 339,159 b31,437 540,607
$63,044 $94,743 $66,390 - $63,157 $64,018 $77,041 $83,735 i i
l 1,892,955 1,844,041 1,799,456 1,851,447 1,826,700 1,883,363 1,870,318 l 2,285,942 (2) 2,359,023 2,303,216 (2) 2,347,757 2,259,340 2,254,099 2,174,200 ! i,135,831 (2) ' I,036,547 997,168 (2) 980,071 1,060,751 1,109.119 1,186,336
' 48,718 50,715 52,984 55.118 58,013 l 60.427 61303 i 5,363.446 5,290.326 5,152,824 5,234,393 5,204.804 '
5,307.008 5,292,157 i l ' 275,44I 273,752 273,936 274,064 275,637 276,385 274,884 l 28,394 (2) 28,968 28,848 (2) 29,768 29,808 29,526 i 28,826 l 1,538 (2) 959 1,017 ~ (2) 268 319 3d.7 367 '
- l. 1,127 1,175 1,35' l 361 1,352
' 1.316 1,267 l 306,500 304,854 305,159" 30,461 307.116 307,574 305,344 l 1333 12.92 12.58 l'2.25 11.60 10.89 10,70 10.97 10.88 11.00 10.89 10.39 9.75 9.60 9.18 9.40 9.73 938 8.91 8 37 8 15 8.69 8.89 8.84 8.64 8.06 7.58 7.14 i
. 5,652,657 5,630,58I 5,475,664 5,541,477 5,501,495 5,603,502 5,581,897 1,130,780 1,114,900 1.034,440 1,145,820 1,054,600 1,094,400 1,132,100
! 1,462,290 1,515,420 1,402,800 1,474,17') I,449,600 1.289,800 1,271,500 57.07 % 57.65 % 60.26 % 55.21 % 59.55 % 58 45 % 56.13 % 35 31 34 34 43 39 37 14 16 17 21 24 37 41 32 38 35 29 20 11 11 9 8 8 9 9 9 7 4 1 1 4 3 3 0 6 6 5 3 I I 4.,
$619,097 $605,887 $608,176 $607,997 $589,346 $577,611 $574,422 (229) (2,328) (41,221) (37,497) (45,900) (49,778) (59,054) 0 0 21.031 14.814 8,211 0 0 5618,868 5603,559 5587,986 5585,314 5551,657 5527,833 5515,368 11.54 11.45 11.80 11.62 IIJ2 10.88 10.85 0.00 (0.04) (0.80) (0.72) (0.88) (0.93) (I.I1) 0.00 0.00 0.41 0.28 0.16 0.00 0.00 f I1.54 11.41 11.41 11.18 10.00 9.95 9.74 l 1,76 1,75 2.43 2.67 2.63 2.78 2.53 2.14 2.08 2.98 3.II 2.89 2.98 2.74 .
0.94 1.23 ( 1.42 8.62 1.55 0.89 0.87 1,377 1,490 1,554 1,571 1,587. 1,627 1,620
$75,441 $75.305 $74.052 $71,888 $69,237 $65.175 $62,387 l
? L C-52 s ~ ,
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6
1 MThe UnitedIlluniinating Cornpany \ l I
. Notice of 1998 Annual Meeting
. Proxy Statement Notice ofAnnualMeeting D-1 Shareowners Entitledto Vote D-2 Nominees For Election as Directors D-3 Corporate Governance Standards D-6 Stock Ownership ofDirectors and Officers D-7 Executive Compensation D-9 Retirement Plans D-12 Board ofDirectors Report on Executive Compensation D-13 Director Cg npensation D-15 Shareowner Return Presentation D-16 Proposalto Amendthe Certificate of Incorporation Relative to the Number
. ofDirectors D-17 Directions to AnnualMeeting Inside Back Cover i InvestorInformation Back Cover Please sign and return your proxy promptly.
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i l [THIS PAGE INTENTIONALLY LEFT BLANK] l i 4 l l t r i l l l i I l l I ( i
THE UNITED ILLUMINATING COMPANY : NOTICE OF ANNUAL MEETING OF THE SHAREOWNERS TO THE SHAREOWNERS: Notice is hereby given that the Annual Meeting of the Shareowners of The United illuminating Company will be held at the New Haven Lawn Club,193 Whitney Avenue, New Haven, Connecticut, on Wednesday, May 20, 1998 at ten o' clock in the forenoon, for the following purposes:
- 1. To elect a Board of Directors for the ensuing year.
- 2. To vote on the approval of the employment, by the Board of Directors, of Price Waterhouse LLP as the firm of independent public accountants to audit the books and affairs of the Company for the fiscal year 1998.
- 3. To consider and act on a proposal to amend the Company's Certificate ofIncorporation relative to the number of members of the Board of Directors.
- 4. To transact such other business as may properly come before the meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on March 12,1998 as the record date for determination of the shareowners of the Company entitled to notice of, and to vote at, the meeting and any adjournments thereof. Regardless of whether you plan to atterd the meeting, please fillin, sign, date and return promptly the
. enclosed proxy in the accompanying envelope, which requires no postage if mailed in the United States.
Dated at New Haven, Connecticut, this 27th dn.y of March,1998. By Order of the Board of Directors, KURT MOHLMAN, Treasurer andSecretary YOUR VOTE IS IMPORTANT In order to save the Company the expense of further solicitation to ensure that a quorum is present at the Annual Meeting, please mail your proxy promptly - regardless of the number of shares you own, and regardless of whether you plan to attend the meeting. l A diagram showing the location oftheNew Haven Lawn Club appears on the inside ofthe back cover ofthe Proxy Statement. I L D-I l
PROXY STATEMENT This statement and the accompanying proxy form are furnished on or about March 27,1998, to security holders of record as of the close of business on March 12,1998, in connection with the solicitation of proxies for use at the Annual Meeting of the Shareowners of The United Illumiaating Company to be held at the New Haven Lawn Club, 193 Whitney Avenue, New Haven, Connecticut, on Wednesday, May 20,1998 at 10:00 a.m. for the purposes set forth in the accompanying Notice of Annual Meeting of the Shareowners. The mailing address of the principal executive offices of the Company is 157 Church Str-* D.O. Box 1564, New Haven, Connecticut 06506. The solicitation is made by the Company, and the expea . printing and mailing proxy material will be borne by the Company The Company will request banks, brokers and other custodians, nominees and fiduciaries to send proxy material to beneficial owners of shares and to secure their voting instructions, if necessary, and the Company will reimburse them for their reasonable expenses in so doing. Directors, officers and employees of the Company may also solicit proxies personally or by telephone, but no compensation will be paid specifically for any such solicitation. In addition, Georgeson & Company, Inc. of New York, New York, has been retained to aid in the solicitation of proxies by similar methods at a cost to the Company of approximately $11,500, plus expenses. SilAREOWNERS ENTITLED TO VOTE: At the close of business on March 12,1998, the record date for the meeting, 14,334,922 shares of Common Stock of the Company were outstanding and will be entitled to vote at the meeting, each share being entitled to one vote, on each matter coming before the meeting as set forth in the accompanying Notice of Annual Meeting of the Shareowners and commented on in this Proxy Statement. All votes on each matter coming before the meeting will be counted and tabulated by inspectors of Proxies and Tellers appointed by the President of the Company pursuant to its Bylaws. Common Stock shareowners who are participants in the Company's Automatic Dividend Reinvestment and Common Stock Purchase Plan (DRP) will receive proxy forms that will include the shares in their accounts ender the DRP. The Bank of New York, the Company's agent under the DRP, has authorized the Company to vote shares held in the DRP according to the instructions received on such proxy forms. Shares of Common Stock for which a proxy in the form that accompanies this Proxy Statement is properly signed and returned (a) will be voted or not voted, in accordance with the choice indicated on the proxy, to fix the number of directors for the ensuing year at twelve and elect as directors the twelve persons named in this Proxy Statement (or such other person or persons as the present Board of Directors shall determine, if one or more of the twelve persons named is unable to serve); (b) will be voted for or against, or not voted, in accordance with the choice indicated on the proxy, with respect to the proposal to approve the employment of Price Waterhouse LLP as independent public accountants for the fiscal year 1998; (c) will be voted for or against, or not voted, in accordance with the choice indicated on the proxy, with respect to the proposal to amend the Certificate of incorporation of the Company; and (d) will be voted in accordance with the discretion of the person or persons voting them with respect to such other matters, if any, as may come before the meeting. The Company is not aware of any such other matters to be presented at the meeting. Any proxy may be revoked by the shareowner at any time prior to its use. A proxy may be revoked by filing with the Secretary of the Company a written notice of revocation or a properly signed proxy bearing a later date. A shareowner wht attends the meeting in person may, if he or she wishes, vote by ballot at the meeting, thereby canceling any proxy vote previously given. Under Connecticut law and the Company's Bylaws, shareowners holding a majority of the shares of Common Stock represented at the meeting, in person or by proxy, will constitute a quorum for purposes of considering and acting upon the matters set forth in the accompanying Notice of Annual Meeting of the Shareowners. Assuming that a quorum is present at the meeting, directors will be elected by a plurality of the votes cast at the meeting. Withholding authority to vote for a director nominee will not prevent that director nominee from being elected. Cumulatin voting for directors is not permitted under Connecticut law unless a corporation's certificate of incorporation provides for cumulative voting rights; and the Company's Certificate of Incorporation contains no l D-2
provisic,a for such rigtm ibder Connecticut law, assuming that a quorum is present at the meeting, action on approval of the employmem s - independent public accountants, action on approval of the proposal to amend the Certificate of incorporation, and action on any mher matter that may come before the meeting, will be approved if the votes cast in favor of the action exceed the votes cast against approval of the action. Proxies marked to abstain from voting with respect to any such action will not have the legal effect of voting against approval of such action. PRINCIPAL SilAREOWNERS: Statements filed with the Securities and fuchange Commission (SEC), pursuant to Section 13(d) of the Securities Exchange Act of 1934 (the 1934 Act), by the following persons disclose beneficial ownership of shares of the Company's Common Stock (percentages are of the 14,334,922 shares outstanding as of the close of business on March 12,1998): (1) Rhoda L Chase,400,000 shares, or approximately 2.79%; (2) her daughter, Cheryl A. Chase, 79,000 shares, or approximately 0.55%; (3) her son, Arnold L Chase,225,000 shares, or approximately 1.57%; (4) The Darland Trust, a trust for the benerit of Cheryl A. Chase and her children, and its trustee, Rothschild Trust Cayman Limited, 146,000 shares, or approximately 1.02%; (5) David T. Chase, husband of Rhoda and father of Cheryl and Arnold,850,000 shares, or approximately 5.93%, wnich are the same shares listed in (1), (2), (3) and (4) of this sentence; and (6) American Ranger, Inc. (American Ranger), 200,000 shares, or approximately 1.40%. American Ranger is a wholly-owned subsidiary of D.T. Chase Enterprises, Inc. (DTCE) and is owned and controlled by David, Rhoda, Arnold and Cheryl Chase, trusts for the benefit of Arnold Chase and his children, and trusts for the benefit of Cheryl Chase and her children. David, Rhoda, Arnold and Cheryl Chase, American Ranger and DTCE all have as a business address One Commercial Plaza, Hartford, CT 06103. In the statements filed with the SEC, none of the shareholders listed above except David T. Chase has admitted beneficial ownership of any shares of the Company's Common Stock not held in their individual names, and all of them have disclaimed membership in any " group" with respect to the Common Stock for purposes of Section 13(d) of the 1934 Act. l There is no other person or group of persons known to the Company to be the beneficial owner of more than 5% of the shares ofits Common Stock as of the close of business on March 12,1998. ! NOMINEES FOR ELECTION AS DIRECTORS: It is intended that shares of Common Stock represented by proxies who are authorized to vote for the election of a Board of Directors on the form that accompanies this Proxy Statement will be voted to fix the number of directors at twelve and (unless instructed otherwise on the form) in favor of the persons listed below for election as directors of the Company. While it is not anticipated that any of the persons listed below will be unable to serve as ; a director, if that should occur, the proxies will be voted for such other person or persons as the present Board of Directors shall determine. All of the nominees listed below were elected directors at the last annual meeting, i Name, PrincipalOccupation, Other { Corporate Affiliations and Principal Occupations Director During the Pasr Five 1* ears ofNominee dg[' Since Thelma R. Albright 51 1995 President, Carter Products Division, Carter-Wallace, Inc., Cranbury, New Jersey. From 1994 through 1995, Ms. Albright was General Manager and Executhe Vice President of Revlon Beauty Care Division. From 1992 through 1993 Ms. Albright was Executive Vice President of Marketing of Carter-Wallace, Inc. Also, Director, CTFA (Cosmetics, Toiletry and Fragrance Association) and NDMA (Non-Prescription Drug Manufacturers Association). Marc C. Breslawsky 55 1995 President and Chief Operating Officer, Pitney Bowes, Inc., Stamford, Connecticut. Also, Director, Pitney Bowes, Inc., Pitney Bowes Credit Corp., C.R. Bard, Inc., the Family Foundation of North America, Connecticut Business and industry Association and United Way of Eastern Fairfield County; Member, Board of Governors, the Landmark Club; and Trustee, Norwalk Hospital. D-3
Name, Principal Occupation, Other Corporate Affiliations and Principal Occupations Director During the Past Five Years ofNominee dgg* Since David E. A. Carson 63 1993 President, Chief Executive Officer and Director, People's Bank, Bridgeport, Connecticut, and President, Chief Executive Omcer and Trustee, People's Mutual Holdings, Bridgeport, Connecticut. Also, Chairman, Bridgeport Public Education Fund, Business Advisory Committee of Connecticut Commission on Children and Bridgeport Area Foundation; Trustee, Connecticut Public Broadcasting; and Director, Mass Mutual Institutional Funds, MML Series Investment Funds, American Skandia Trust, Old State House, Hartford, Connecticut, The Bushnell, Hartford, Connecticut, and Hartford Stage Company. John F. Crowcak 61 1987 Chairman of the Board of Directors, Anthem Blue Cross & Blue Shield of Connecticut, Inc., North Haven, Connecticut. Prior to his retirement in 1997, Mr. Croweak served as Chairman of the Board of Directors and Chief Executive Omcer of Anthem Blue Cross & Blue Shield of Connecticut, Inc. and its predecessor, Blue Cross & Blue Shield of Connecticut, Inc. Also, Director, The New Haven Savings Bank, Quinnipiac College and Anthem, Inc., Indianapolis, Indiana. J. Hugh Devlin 55 1989 Managing Director, SG-Barr Devlin, New York, New York. From 1975 through 1988, Mr. Devlin was a Managing Director of Morgan Stanley & Co., Inc., during which time he served as head of its Public Utility Group. From January 1989 to April 1990, Mr. Devlin served as Advisory Director of Morgan Stanley & Co., Inc. Also, Trustee, Meridian liealth System. Robert L. Fiscus 60 1992 Vice Chairman of the Board of Directors and Chief Financial Omcer, The United Illuminating Company. Mr. Fiscus served as President and Chief Financial Omcer of the Company during the period May 1991 to February 1998. Also, Chairman of the Board of Directors, Grimn Health Services Corporation; Director, The Aristotle Corporation, Bridgeport Area Foundation, Bridgeport Regional Business Council, United Way of Greater New Haven and Susquehanna University; Governor, University of New Haven; and Trustee, Central Connecticut Coast Young Men's Christian Association, Inc. Richard J. Grossi 62 1988 Chairman of the Board of Directors and Chief Executive Officer, The United Illuminating Company. Also, Director, The New Haven Savings Bank, Anthem Blue Cross & Blue Shield of Connecticut, Inc., Connecticut Business and Industry Association and University of Connecticut Foundation: Trustee, Yale-New Haven Hospital; and Chairman of the Executive Committee of the Seabrook Joint Owners. Betsy Henley-Cohn 45 1989 Chairman of the Board of Directors, Joseph Cohn & Son, Inc., New Haven, Connecticut. Also, Chairwoman of Birmingham Utilities, Inc.; and Director, The Aristotle Corporation and Citizens Bank of Connecticut. DA
Name, Principal Occupation, Other Corporate Affiliations and Principal Occupations Director During the Past Five Years ofNominee Aggm Since John L. Lahey 51 1994 President, Quinnipiac College, Hamden, Connecticut. Also, Director, Council for the Advancement and Support of Education and Long Wharf 1 heater; Trustee, Yale-New Haven Hospital; Vice Chairman and Director, Regional Plan Association Board, New York, New York: Co-Chairman, Connecticut Committee of the Regional Plan Association Board; and Member, Greater New Haven Regional Leadership Council and Accreditation Committee of the American Bar Association. F. Patrick McFadden, Jr. 60 1987 Vice Chairman, Citizens Bank of Connecticut, New Haven, Connecticut. From 1993 through 1997, Mr. McFadden was President, Chief Executive Omcer and Director, The Bank of New Haven.and BNil Bancshares, Inc. Also, Chairman of the Board of Directors, Yale-New ilaven Health Services Corporation. Frank R. O'Keefe, Jr. 68 1989 Retired; former President, Long Wharf Capital Partners, Inc. 1988-1990; retired Chairman and Chief Executive Officer, Armtek Corporation 1986-1988; President and Chief Operating Officer, Armstrong Rubber Company 1980-1986; and Director, Aetna Inc. and Southern New England Telecommunications Corporation. James A. Thomas 59 1992 Associate Dean, Yale Law School. Also, Trustee, Yale-New Haven Hospital and People's Mutual Holdings; and Director, People's Bank and Sea Research Foundation. (1) Age at May 20,1998. The Board of Directors has adopted a policy pursuant to which a director will not be a candidate for re-election after his or her 70th birthday. The Board of Directors held 9 meetings during 1997. The average attendance record of the directors was 93.7% for meetings of the Board of Directors and its committees held during 1997. Ms. Henley-Cohn and Messrs. Croweak, Grossi and McFadden serve on the Executive Committee of the Board of Directors. The Executive Committee, a standing committee that has and may exercise all the powers of the Board of Directors when it is not in session, met twice during 1997. Ms. Albright and Messrs. Carson, Devlin, Lahey, McFadden, O'Keefe and Thomas serve on the Audit Committee of the Board of Directors. The Audit Committee, a standing committee that oversees the Company's financial accounting and reporting practices; evaluates the reliability of the Company's system of internal controls; assures the objectivity ofindependent audits; explores other issues that it deems may potentially affect the Company and its employees; and makes recommendations in these regards to the officers and to the Board of Directors, held three meetings during 1997. Msses. Albright and Henley-Cohn and Messrs. Breslawsky, Crowcak and Thomas serve on the Compensation and Executive Developmet.t Committee of the Board of Directors. The Compensation and Executive Development Committee, a standing committee that reviews the performance of the officers of the Company; reviews and recommends to the Board of Directors the levels of compensation and other benefits paid and to be paid to the officers of the Company; reviews and administers incentive compensation programs for the ofilcers of the Company; recommends to the Board of Directors changes in said programs; reviews the recommendations of management for its succession planning and the selection of officers of the Company; and reviews the investment standards, policies and objectives established for, and the performance and methods of, the Cc,mpany's pension plan investment managers, held four meetings during 1997. D-5
Ms. Albright and Messrs. Breslawsky, Carson, Croweak and Lahey serve on the Strategic Direction Committee i of the Board of Directors. The Strategic Direction Committee, a standing committee that assists the Chief Executive l Officer and senior management with the development of an overall strategic plan for the Company, taking into account the key strategic issues facing the Company and the electric utility industry and providing a focus for defining and implementing the annual goals and projects comprising the Company's corporate business and operational plans, held three meetings during 1997. Ms. Henley-Cohn and Messrs. Carson, Devlin, McFadden, O'Keefe and Thomas serve on the Committee on Directors. The Committee on Directors, a standing committee that recommends policy with respect to the composition, organization, practices and compensation of the Board of Directors and performs the nominating function for the Board, held two meetings in 1997. The Committee on Directors will consider nominees for election as directors recommended by shareowners upon the timely submission of the names of such nominees with their qualifications and biographical information forwarded to the Committee in care of the Treasurer and Secretary of ( the Company. CORPORATE GOVERNANCE STANDARDS The Board of Directors has approved the following Corporate Governance Standards for the discharge of its duties to the Company and its shareowners: The Board of Directors (the Board) of The United Illuminating Company (the Company) will discharge its duties in accordance with both the letter and the spirit of all of the laws and governmental regulations that are applicable to the Company and its operations, including the Standards of Conduct prescribed for individual Directors by the Connecticut Business Corporation Act. This is the Board's primary governance standard; and the following requirements and proscriptions, which are reviewed by the Board annually and are subject to revision from time to time, are intended to serve as supportive standards in this regard. Board Members
- The entire Board will be elected annually.
- A Director will not be a candidate for reelection after his or her seventieth birthday.
- As a general rule, former executive officers of the Company will not be candidates for election as Directors.
l
*- A Director will not be a candidate for election to a sixth term unless he or she is the beneficial owner,
! directly or indirectly, of at least 1,200 shares of the Company's Common Stock. Board Committees
. Committees of the Board, and members of committees of the Board, will be appointed by affirmative vote of Directors holding a majority of the Directorships.
- The membership of the Audit Committee and the Compensation and Executive Development Committee will consist entirely of independent Directors.
- The Committee on Directors will assess, annually, the effectiveness of the Board.
Functionine of the Board
. Directors will receive materials relative to agenda items as far in advance of Board meetings as feasible.
.. When the Chief Executive Officer of the Company serves as the Chairman of the Board, the senior independent Director, in terms of service, will preside at meetings of the Board at which the Chairman of the Board and Chief Executive Officer is not in attendance, and at executive sessions of independent Directors of the Board, and will also serve as an ex officio member of the Committee on Directors of the Board.
. The Board will review and approve, annually, a strategic plan and an operating plan for the Company.
D-6
1 Officers I I The Board will evaluate, annually, in an executive session ofindependent Directors of the Board, the performance of the Chief Executive Ofncer of the Company. ' The Chief Executive Omcer will report, annually, to the Compensation and Executive Development Committee of the Board, and to the Board, regarding succession planning and management development. l Acceptance by any omcer of the Company of a compensated appointment to the governing body of I another business entity will be subject to prior approval by the Board. ! Officers of the Company will be required to be beneficial owners, directly or indirectly, of shares of the Common Stock of the Company in amounts and within time periods determined by the Chist fixecutive Officer of the Company. Incentive compensation plans will link compensation directly and objectively to measurable goals set in advance by the Board on the recommendation of the Compensation and Executive Development Committee of the Board. Awarded stock options will not be repriced, except in the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets or other change , in the corporate structure or shares of the Company. ' STOCK OWNERSillP OF DIRECTORS AND OFFICERS: The following table sets forth the nu aber of shares of Common Stock of the Company beneficially owned, directly or indirectly, by each director, by :ach of the five most highly compensated officers during 1997 and by all directors and officers as a group, as of ? larch 12,1998: Shares Name ofIndividualor Beneficially Number ofPersons in l' Groun Owned Directyl' or Indirectly "" Thelma R. Albright 1,944 Marc C. Bredawsky 3,557 David E.A. Carson 6,602 John F. Croweak 3,094 J. Hugh Devlin 5,727 Robert L Fiscus 31,818 Richard J. Grossi 13,249 Betsy Henley-Cohn 3,460 John L Lahey 1,555 F. Patrick McFadden, Jr. 3,437 Frank R. O'Keefe, Jr. 4,409 James A. Thomas 1,904 James F. Crowe 6,806 Albert N. llenricksen 2,956 Anthony J. Vallillo 2,148 l 22 Directors and Omcers as a group, including those named above 111,582 (IT Based on reports furnished by the directors and officers. The shares include, in some instances, shares held by the immediate families of directors and officers or entities controlled by directors and officers, the reporting of which is not to be construed as an admission of beneficial ownership. Each of the persons included in the foregoing table has soie voting and investment power as to the shares of Common Stock beneficially owned, directly or indirectly, by him or her, except for the following (i) as to which such powers are shared: 16,646 shares with respect to Mr. Fiscus,4,265 shares with respect to Mr. Grossi,110 shares with respect to Mr. Thomas,668 shares with respect to Mr. Crowe,405 shares with respect to Mr. Henricksen and 22,939 shares D-7
l with respect to all directors and officers as a group, (ii) as to which such powers are held by other people or entities: 141 shares with respect to Mr. Carson,700 shares a respect to Mr. Fiscus,5,723 shares with respect to Mr. Grossi,2,035 shares with respect to Ms. Henley-Cohn,650 shares with respect to Mr. O'Keefe,50 shares with respect to Mr. Thomas,10 shares with respect to Mr. Crowe, and 9,516 shares with respect to all directors and officers as a group. (2) The number of shares includes those held for the benefit of omcers in the Company's Employee Stock Ownership Plan and, in the cases of Robert L Fiscus,10,500 shares, and all directors and omcers as a group, 16,300 shares, that may be acquired currently through the exercise of stock options under the Company's 1990 Stock Option Plan. (3) Includes Stock Units, for which neither investment nor voting power is held as follows: 1,722 shares with respect to Ms. Albright,3,457 shares with respect to Mr. Breslawsky,6,191 shares with respect to Mr. Carson, 2,211 shares with respect to Mr. Croweak,5,227 shares with respect to Mr. Devlin,378 shares with respect to Ms. Henley-Cohn,212 shares with respect to Mr. Lahey,1,968 shares with respect to Mr. McFadden,3,545 shares with respect to Mr. O'Keefe and 744 shares with respect to Mr. Thomas. These Stoc!- Units are in stock accounts under the Company's Directors' Deferred Compensation Plan, described below at " Director Compensation". Stock Units in stock accounts under this plan are payable, in an equivalent number of shares of the Company's Common Stock, upon termination of service on the Board of Directors. The nun.ber of shares of Common Stock beneficially owned by each of the persons included in the foregoing table is less than 1% of the 14,334,922 shares of Common Stock outstanding as of March 12,1998. The number of shares of Common Stock benefivially owned by all of the directors and oflicers as a group represents approximately 0.8% of the outstanding shares of Common Stock as of March 12,1998. SECTION 16(a) BENEFICIAL OWNERSillP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and omcers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (SEC) and The New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Directors, officers and grester-than-ten-percent shareowners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31,1997 all Section 16(a) filing requirements applicable to its directors, omcers and greatenthanen-percent shareowners were complied with, except that, due to an administrative error at the Company, the year-end reports of changes in ownership filed by the non-employee directors, which were due to be filed with the SEC on or before February 17, i 1998, were not filed until February 28,1998. D-8
EXECUTIVE COMPENSATION ' He following table shows the annual and long-term compensation, for services in all capacities to the Company for the years 1997,1996 and 1995, of the only person who served as the chief executive officer during 1997 and of the four other most highly compensated persons during 1997 who were serving as executive officers at December 31,1997: Name and Annual ComneamatiaaN Lone-Term Comneaemelaa AllOther Princiaal nesiden Ygat Salary 15) Bonum 5)m LTIP Pavoutnisim CompenandonW Richard 1 Grossi 1997 $324,000 $125,000 $119,700 $6,925 Chairman of the Board ofDirectors 1996 $318,000 $125,000 $6,287 and ChiefExecutive Officer 1995 $318,000 $150,000 $5,364 Robert L Fiscus 1997, $220,400 $70,000 559,850 $7,360 President and Chief Financial Officer 1996 $218,400 566,000 56,692 1995 $220,500 $80,000 $5,676 s James F.Crowe 1997 5177,600 - 555,000 542,750 56,830 Group Vice President 1996 $176,600 $51,000 56,235 1995 $178,000 560,000 55,380 - Anthony J. Vallillo 1997 $55,000 56,840 . $6,144 Group Vice President , 1996 . $125,875
$170,000 $36,000 . $5,701 1995~ $106,000 $31,000 $4,292 Albert N. II:nricksen 1997 $140,600 $38,000 $13,680 $6,401 Group Vice President 1996 $136,900 $37,000 $5,871 1995 $130,000 540,000 55,164
( None of the persons named received any cash compensation in any of the years shown other than the amounts
,1) appearing in the columns captioned " Salary," " Bonus," "LTIP Payouts" and "All Other Compensation." None of these persons received, in any of the years shown, any cash-equivalent form of compensation, other than through participation in the Company's group life, health and hospitalization plans, which are available on a uniform basis to all salaried employees of the Company and the dollar value of which, together with the dollar value of all other non-cash perquisites 'and other personal benefits received by such person, did not exceed the lesser of
$50,000 or 10% of the total salary and bonus compensation received by him for such year.
(2)De amounts appearing in this column are awards earned in the years 1995,1996 and 1997 pursuant to the Company's Executive incentive Compensation Program described below. (3)The amounts appearing in this column are the amounts earned for the 1995-1997 performance period under the Company's 1993 Dividend Equivalent Program, Under this program, which was terminated when the Long Term incentive Program described below was established in 1996, each officer of the Company was awarded a number of Dividend Equivalent Units (Units) prior to the 1995 commencement of the performance period and, due to the ranking of the Company's total shareowner return during the performance period relative
. to the total shareowner returns of a preselected peer group of companies, the officer earned a number of Units and a cash payment equal to that number of Units multiplied by the sum of all dividends paid per share on the Company's Common Stock during the performance period. He cash payments were made in February,1998.
(4) The amounts appearing in this column are cash contributions by the Company to its Employee Stock Ownership Plan (ESOP) on behalf of each of the persons named for (i) a match of pre-tax elective deferral contributions by him to the Company's 401(k) Plan from his salary and bonus compensation (included in the columns captioned
" Salary" and Bonus"), and (ii) an additional contribution by the Company equal to 25% of the dividends paid on his shares in the ESOP.
D-9
The Company's Executive incentive Compensation Program was established in 1985 for the purposes of (i) helping to attract and retain executives and key managers of high ability,(ii) heightening the motivation of those executives and key managers to attain goals that are in the interests of shareowners and customers, and (iii) encouraging effective management teamwork among the executives and key managers of the Company. Under this program, cash awards may be made each year to omcers and key employees based on their achievement of pre-established performance levels with respect to specific shareowner goals, customer goals and individual goals for , the preceding year, and upon an assessment of the officers' performance as a group with respect to strategic j l opportunities during that year. Eligible officers and key employees, performance levels and specific goals are determined each year by directors who are not employees of the Company, and incentive awards are paid following action by the Board of Directors after the close of the year. Incentive awards are made from individual target incentive award amounts, which are prescribed percentages of the individval participants' salaries, ranging from 20% to 35% depending on each participant's payroll salary grade. A panicipant may, by achieving his or her pre-established performance levels with respect to specific shareowner goals, customer goals and individual goals for a year, become eligible for an incentive award of up to 150% of his or her target incentive award amount for that year. The Company's Long-Term Incentive Program was established in 1996 for the purposes of(i) promoting the long-term success of the Company by attracting, retaining and providing financial incentives to key employees who are in a position to make significant contributions toward that success, (ii) linking the interests of these key employees to the interests of the shareowners, and (iii) encouraging these key employees to maintain proprietary interests in the Company and achieve extraordinary job performance level Under the program, an initial three-year Performance Period commenced on January 1,1996, three-year Perfonnance Periods commenced on January 1,1997 and January 1,1998, and a series of three-year Performance Periods will commence on January 1,1999 and on each January 1 thereafter to and including January 1,2005. The Board of Directors designates the officers of the Company, if any, who will be participants in the program for each Performance Period, the number of Contingent Perfonnance Shares to be awarded each officer-participant for that Performance Period, and a peer group of companies comparable to the Company for that Performance Period. Each Contingent Performance Share is a share unit, equivalent to one share of tne Company's Common Stock, credited to an officer-participant's performance share account in the program on a conditional basis at the beginning of a Performance Period. At the end of each Performance Period, the number of Performance Shares earned for the Performance Period is calculated on the basis of the Company's total shareowner return during the Performance Period relative to the peer group of companies preselected by the Board of Directors for that Performance Period. Total shareowner return for the Company, and for each member of the peer group, for a Performance Period is measured by the formula: Change in Market Price from + Dividends Declared During the Period Beginning to End of Period Market Price at Beginning of Period if the Company's total shareowner return for the Performance Period ranks at the ninetieth percentile among the total shareowner returns of the peer group companies, the number of Perfonnance Shares earned by the officer-participant is equal to the number of Contingent Performance Shares awarded to that officer-panicipant at the commencement of the Performance Period. If the Company's total shareowner return ranks below the thirtieth percentile among those of the peer group companies, no Performance Shares are earned for the Performance Period. If the Company's total shareowner return ranks between the thirtieth and the ninetieth percentiles, the number of Performance Shares earned is calculated from a scale rising from 15% to 100%. On each dividend payment date with respect to the Company's Common Stock, the earned Performance Shares in an officer-participant's Performance Share account are credited with an additional number of Performance Shares in an amount equal to the dividend payable on the earned Performance Shares in the account divided by the market price of the Company's Common Stock on the dividend payment date. Upon the termination of an officer-participant's employment by the Company, the officer-participant is paid, in cash, an amount equal to the number of earned Performance Shares in his or her Performance Share account multiplied by the market price of the Company's Common Stock on the employment termination date. An officer-participant is also entitled to payment at any time, in cash, of the value of the earned Performance Shares in his or her Performance Share account, provided that the officer-participant is in compliance with the minimum stock ownership requirement for such officer prescribed by the Board of Directors at that time. In 1997, for the 1997-1999 three-year Performance Period, the Board of Directors awarded Messrs. D-10
i Grossi, Fiscus, Crowe, Vallillo and Henricksen 11,500, 6,500, 5,000, 5,000 and 3,000 Contingent Performance ' Shares, respectively, under the Long-Term Incentive Program. The Company has entered into employment agreements with Messrs. Grossi, Fiscus and Crowe, each of which will continue in effect until terminated by the Company on three years' notice or by the officer on six months' notice. These agreements provide that the annual salary rates of Messrs. Grossi, Fiscus and Crowe will be
$318,000, $218,400 and $176,600, respectively, subject to upward revision by the Board of Directors at such times as the salary rates of other officers of the Company are reviewed by the directors, and subject to downward revision by the Board of Directors contemporaneously with any general reduction of the salary rates of other officers of the Company, except in the event of a change in control of the Company. The salaries paid to Messrs. Grossi, Fiscus and Crowe in 1995,1996 and 1997, shown on the above table, were paid pursuant to these agreements. Each of these agreements also provides that when the officer's employment by the Company terminates after he has served in accordance with its terms, the Company will pay him an annual supplemental retirement benefit in an amount equal to the excess, if any, of(A) over (B), where (A) is 2.2% of his highest three-year average total salary and bonus compensation from the Company times the number of years (not to exceed thirty) of his service deemed as an employee of the Company, and (B) is the annual benefit payable to him under the Company's pension plan. If the Company terminates the officer's employment without cause, he will be paid the actuarial present value of this supplemental retirement benefit and, if the termination occurs in connection with a change in control of the Company, the officer will be entitled to either a severance payment of two years compensation at his then-current salary and bonus rate, or an increase of a total of six years of age and/or service in the calculation of his retirement benefit, at his election Mr. Grossi has given the Company notice of the termination of his employment agreement at the end of 1998.
The Company has also entered into employment agreements with Messrs. Vallillo and Henricksen, each of which will continue in effect until terminated by the Company at any time or by the officer on six months' notice. These agreements provide that the annual salary rates of Messrs. Vallillo and Henricksen will be $140,000 and
$136,900, respectively, subject to upward revision by the Board of Directors at such times as the salary rates for other officers of the Company are reviewed by the Directors, and subject to downward revision by the Board of Directors contemporaneously with any general reduction of the salary rates of other officers of the Company, exc in the event of a change in control of the Company. The salaries paid to Messrs. Vallillo and Henricksen in 1996 and 1997, shown on the above table, were paid pursuant to these agreements. Each of these agreements also provides that when the officer's employment by the Company terminates afler he has served in accordance with its terms, the Company will pay him an annual supplemental retirement benefit in an amount equal to the excess, if any, of(A) over (B), where (A) is 2.0% of his highest three-year average total salary and bonus compensation from the Company times the number of years (not to exceed 30) of his service as an employee of the Company, and (B) the annual benefit payable to him under the Company's pension plan. If the Company terminates the officer's employment without cause, he will be paid the actuarial present value of this supplemental retirement benefit and either a severance payment of two years compensation at his then-current salary and bonus rate, or an increase of a total of six years of age and'or service in the calculation of his retirement benefit, at his election.
A trust fund has been established by the Company for the funding of the supplemental retirement benefits accruing under the employment agreements with Messrs. Grossi, Fiscus, Crowe, Vallillo and Henricksen, and to ensure the performance of the Company's other payment obligations under each of these employment agreements in the event of a change in control of the Company. STOCK OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES The following table shows aggregated Common Stock option exercises during 1997 by the chief executive officer and each of the other four most highly compensated executive officers of the Company, including the aggregate value of gains realized on the dates of exercise. In addition, this table shows the number of shares covered by both exercisable and non-exercisable options as of December 31,1997. Also reported are the values as of December 31,1997 for "in-the-money" options, calculated as the positive spread between the exercise price of existing options and the year-end fair market value of the Company's Common Stock. The Company has never awarded stock appreciation rights (SARs) to any employee. I D-lI
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
- Number of Securities Value of Unexercised f
Underlying Unexercised in-the-Money Options Shares Ontions at FY-End(#YU at FY-End ($1"' Acquired on Value Nams Dercise(#) _ Reali7ed(SY2) 34,000 Exercisable 7,000 Not Exercisable
$393,000 $111,562
- Exercisable N
.40,000 $388,229 Richard J. Grossi.. 3,500 $500,250 $ 55,781
.35,000 $355,352 37,000 Robert L. Fiscus.. 2,500 $ 31,875 $ 39,844
.36,000 $360,000 5,000 James F. Crowe., $ 5,100 $ 6,375
. 1,200 $ 13,050 800 400 Anthony J. Vallillo.. $ 10,200 $ 12,750 6,000 $ 72,500 1,600 800 Albert N. Henricksen..
(1) The Company has never awarded stock or stock appreciation rights (S ARs) to any employee. (2) Fair market value at exercise date less exercise price. (3) The shares represented could not be acquired by the person named as of December 31,1997. (4) Fair market value of shares at December 31,1997 ($4515/16)iess exercise price. RETIREMENT PLANS The following table shows the estimated annual bene 0ts payable as a single life annuity under the Company's qualified defined benefit pension plan on retirement at age 65 to persons in the earnings classifications years of service shown. Retirement benefits under the plan are determined by a fixed formula, based on
' service and the person's average annual earnings from the Company during the three years during which the person's earnings from the Company were the highest, appliea uniforrr ly to all persons.
Average Annual Earnings During Estimated Annualllenefits Payable at Ace 65* the Highest 3 20 Years"' 25 Years"' 30 Years"' 35 YearsO ' 40 Years") Years of Service ** $ 47,597 5 48,197
$ 37,117 $ 46,397 S 46,997
$100,000 $ 73,197
$ 57,i17 $ 71,397 $ 71,997 $ 72,597
$150,000 $115,632
$ 94,112 S114,432 S115,032
$200.000 $ 74,929
$110,598* $ 114,432* $115,032* SI15,632*
$250,000 $ 87,831*
$110,598* $114,432* Si l5,032* Sil5,632m
$300,000 $ 87,831*
$110,598* $114,432* $115,032* $115,632*
$350,000 $ 87,831*
$114,431* $115,032* $115,632*
$400,000 $ 87,831* $110.598*
S110,598* $114,431* $115,032* $115,632*
$450,000 $ 87,831*
(1) Earnings include annual salary and cash bonus awards paid pursuant to the Company's Executive incentiv Compensation Program. See " Executive Compensation" above. Internal Revenue Code Section 401(a)(17) limits earnings used to calculate qualified plan benefits to (2)
$160,000 for 1998. This limit was used in the preparation of this table. (in addition, qualified plan benefits cannot exceed an Internal Revenue Code Section 415(b) limit of $125,000 for 1998). The Board of Directors has adopted a supplemental executive retirement plan that permits the Directors to award supplemental retirement benefits to Messrs. Grossi, Fiscus, Crowe, Vallillo and Henricksen and to other officers individually selected by the Directors in amounts sufficient to prevent these Internal Revenue Code limitations from adversely affecting their retirement benefits determined by the pension plan's fixed formula.
The amounts shown in the table are not subject to any deduction for Social Security or other offset amounts. (3) As of their last employment anniversary dates, Messrs. Grossi, Fiscus, Crowe, Vallillo and Henricksen had (4) accrued 40,25,33,29, and 34 years of service, respectively. 1 I D-12
BOARD OF DIRECTOILS COMPENSATION AND EXECUTIVE DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE COMPENSATION All of the members of the Compensation and Executive Development Committee of the Board of Directors (the Committee) are non-employee Directors. The Committee formulates all of the objectives and policies relative to the compensation of the officers of the Company, subject to approval by the entire Board of Directors; and the Committee recommends to the Board of Directors all of the elements of the omcers' compensation arrangements, including the design and adoption of compensation programs, the identity of program participants, salary grades and structure, annual payments of salaries and any awards under the annual incentive compensation program and the long-term incentive program. The Company's basic executive compensation program consists of three components: annual salaries, bonuses under an annual incentive compensation program, and long-term incentive program awards. The overall objective of this program is to attract and retain qualified executives and to produce strong financial perfonnance for the benefit of the Company's shareowners while providing a high level of customer service and value for its customers. Accordingly, all of the Committee's decisions, in 1997 and in prior years, have ultimately been based on the Committee's assessment of the Company's overall performance relative to other electric utilities of comparable size, the compensation practices and programs of other companies that are most likely to compete with the Comp,.ay for services of executive officers, the Company's strategic objectives, and the challenges it faces. The Committee formulates annual salary ranges for omcers by periodic comparisons to rates of pay for comparable positions in other electric utilities as reported in the Edison Electric Institute's Executive Compensation Survey (the eel Survey). Within the applicable range, each individual officer's annual salary is then set at a level that will compensate the officer for day-to-day performance, in the light of the officer's level of responsibility, past performance, prior year's salary and bonus, and potential future contributions to the Company's strategic objectives. As described in detail above at " Executive Compensation", the Company's annual bonus program and its long-term incentive program have somewhat different purposes. Under the annual Executive incentive Compensation Program, cash awards may be made each year to officers based on their achievement of performance levels formulated by the Committee with respect to (1) specific shareowner goals, (2) specific customer goals, (3) specific team / individual goals, and (4) a qualitative assessment of the officers' performance as a group with respect to strategic opportunities of the Company during that year. The Company's Long-Term incentive Program rewards officers for achieving a return to shareowners over three-year periods of time. The Long-Term Incentive Program links long-term incentive awards to total return to shareowners compared to a peer group of electric utilities. Although this program is designed to provide strong incentives for superior future performance, it also encourages officers to continue serving the Company, because the earning of each incentive award is conditioned upon the omcer's continued service for the award's three-year performance period. For 1997, the annual bonus opportunities of the Company's officers were targeted by the Committee such that the combination of each omcer's 1997 salary and annual Executive incentive Compensation Program award, assuming that pre-established performance goals were met, would approximate, on average, the 50th percentile of compensation for comparable positions as reported in the 1996 eel Survey. Goals were established to focus the officers' attention on a "ba'anced scorecard," covering financial, operational, customer and human resource measures. A prerequisite th eshold level of recurring income for Common Stock was specified in order for any bonus to be earned. For 1997, the pre-established performance goals, accounting for 50% of each officer's bonus award, included measures of: recurring income for Common Stock, recurring cash available to pay down debt, gigawatt-hour sales, utility costs, customer satisfaction, reliability, safety, innovation and training. For each of the business unit leaders, the President and the Chief Executive Officer,30% of the bonus award for 1997 was based on the achievement of businest unit " balanced scorecard" goals. The remaining 20% of each officer's bonus award for 1997 was based on the Cort mittee's qualitative assessment of the performance of the Company's officers as a group with respect to 1997 strategic opportunities. For 1997, this assessment focused on the officers' achievements in the D-13
development and implementation of a comprehensive plan to prepare for the eventuality of either retail customer choice or some other form of competition that is more intense than the current framework. The comprehensive plan was to include items such as: addressing the issues of(i) price, (ii) past investment costs and (iii) ratio of Common Stock equity to total capitalization; and meeting the objectives of the Company's becoming competitive in both the customer and financial markets. Some of the officers' achievements with respect to 1997 pre-established performance goals were especially strong, including 150% of the recurring cash available to pay down debt goal,150% of the gigawatt-hour sales goal, and 150% of the customer satisfaction and reliability goals. The recurring income for Common Stock goal was achieved at just over the threshold level, and the utility costs goal did not achieve the threshold level. For the remaining goals, innovation, safety and training, achievements were 66%,142% and 145%, respectively. Business unit leader, President and Chief Executive Omccr achievements of business unit goals ranged between 100% and 145% of the several goals. Overall, the Committee's bonus awards for 1997 under the Executive Incentive Compensation Program ranged between 108% and 126% of the pre-established targeted awards, depending on the individual omcer's achievements, reflecting a strong performance by the Company's omcers. Under the Company's Long-Term Incentive Program, a total of 37,100 Contingent Performance Shares were awarded in 1997 to 10 officers of the Company for the three-year Performance Period 1997-1999. It is not expected that any compensation paid to an executive officer during 1998 will become non-deductible under Internal Revenue Code Section 162(m)(the "million dollar pay cap"). CillEF EXECUTIVE OFFICER COMPENSATION FOR 1997 in March of 1997, the Committee recommended, and the Board of Directors approved, a 1997 annual salary of
$324,400 for Mr. Grossi, as Chairman of the Board of Directors and Chief Executive Officer of the Company. This annual salary was below the median salary for this officership position at other electric utilities of comparable size, as reported in the 1996 EEI Survey; but it was consistent with the Committee's judgment that a greater proportion of the targeted combination of base salary and targeted annual performance bonus should be shifted to the performance bonus component of his compensation. Mr. Grossi's annual bonus performance target for 1997 under the Executive incentive Compensation Program was set at $113,540, consisting of a prerequisite threshold level recurring income for Common Stock goa: and pre-established goals with respect to recurring cash available to pay down debt, gigawatt-hour sales, utility costs, customer satisfaction, reliability, innovation, safety, training, business unit, and strategic opportunities, as detailed above. At the conclusion of 1997, the Committee recommended, and the Board of Directors approved, a 1997 bonus award of $125,000 to Mr. Grossi, representing 110% of his targeted annual performance bonus. As described above, achievements with respect to recurring cas' available to pay down debt and gigawatt-hour sales for 1997 were at 150% of target goals, and recurring income wr Common Stock and utility costs goal achievements were slightly above threshold and below threshold, respectively. The Committee's qualitative assessment of the performance of the officers as a group with respect to strategic opportunities during 1997 was positive and, in the judgment of the Committee, reflected favorably on Mr. Grossi's leadership.
COMPENSATION AND EXECUTIVE DEVELOPMENT COMMITTEE Marc C. Breslawsky, Chair Thelma R. Albright John F. Croweak Betsy Henley-Cohn James A. Thomas D-14
i l COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION l No director of the Company who served as a member of the Compensation and Executive Development l Committee during 1997 was, during 1997 or at any time prior thereto, an officer or employee of the Company. i During 1997, no director of the Company was an executive officer of any other entity on whose Board of Directors l ar executive ofncer of the Company served, except that John F. Croweak, a director of the Company and a member of the Compensation and Executive Development Committee of the Company's Board of Directors, served as I t j Chairman of the Board of Directors and Chief Executive Officer of Blue Cross & Blue Shield of Connecticut, Inc. i and its successor, Anthem Blue Cross & Blue Shield of Connecticut, Inc., and Richard J. Grossi, Chairman of the Board of Directors and Chief Executive Officer of the Company, served as a director of Blue Cross & Blue Shield of Connecticut, Inc. and its successor, Anthem Blue Cross & Blue Shield of Connecticut, Inc. l DIRECTOR COMPENSATION i Directors who are employees of the Company receive no compensation for their service as directors of the Company. l The remuneration of non-employee directors of the Company includes a retainer fee of $4,000 per quaner year (the retainer fee for the first quarter of the calendar year is payable in shares of Common Stock or by credit to a stock account under the Non-Employee Directors' Common Stock and Deferred Compensation Plan described l below), plus a fee of $1,000 for each meeting of the Board of Directors or committee of the Board of Directors l ' attended. Committee chairpersons receive an additional fee of $500 per quarter year. Non employee directors are also provided travel / accident insurance coverage in the amount of $200,000. ] l The Company's Non-Employee Directors' Common Stock and Deferred Compensation Plan (the " Plan") has two l features: a mandatory Common Stock feature; and an optional Deferred Compensation feature. Each non- [ l employee director has two accounts in the Plan: a stock account, for the accumulation of units that are equivalent to i shares of Common Stock (" Stock Units"), and on which amounts equal to cash dividends on the shares of Common Stock represented by Stock Units in the account accrue as additional Stock Units; and a cash account for the accumulation of director's fees payable in cash that the director elects to defer, on which interest accrues at the prime rate in effect at the beginning of each month at Citibank, N.A. Under the Common Stock feature of the Plan, a credit of Stock Units to each non-employee director's stock l account in the Plan is made on or about the first day of March in each year, unless the director elects to receive shares of Common Stock in lieu of having an equivalent number of Stock Units so credited to his or her stock I l account. Each annual credit consists of a number of whole and fractional Stock Units equal to the sum of 200 plus ! the quotient resulting from dividing one-fourth of the annual retainer fee by the market value of the Common Stock on the date of the credit. Under the Deferred Compensation feature of the Plan, a non-employee director may elect to defer receipt of all or part of (i) three-quaners of his or her annual retainer fee, (ii) his or her committee chairperson fees, and/or (iii) his or her meeting fees, which are payable in cash. All amounts deferred are credited when payable, at the director's t election, to either the director's cash account or to the director's stock account (in a number of whole and fractional Stock Units based on the market value of the Common Stock on the date the fee - payable) in the Plan. . All amounts credited to a non-employee director's cash account or stock account in the Plan are at all times fully vested and nonforfeitable, and are payable only upon termination of the director's service on the Board of Directors. At that time, the cash account is payable in cash and the stock account is payable in an equivalent number of shares { of Common Stock of the Company. 1 D-15
SHAREOWNER RETURN PRESENTATION Set forth below is a line graph comparing the yearly change in the Company's cumulative total shareowner return on its Common Stock with the cumulative total return on the S&P Composite-500 Stock Index, the S&P Public Utility Index and the S&P Electric Power Companies Index for the period of five fiscal years commencing 1993 and ending 1997. Comparison of Five-Year Cumulative o
$240 Total Retum*
+ Ull - -o _ . S&P 600 ,i
$220 . . o . .S&P Public Utility index . . o . .S&P Elect Pwr. Ca Index f'
$200 j
$180 ,-
$160 ,- ,J
,g...........e
$140 y..... ...o'
$120 ,'
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Dec. Dec. Dec. Dec. Dec. Dec. 31 31 31 31 31 31 1992 1993 1994 1995 1996 1997 1222 itu itM DH itM HEI UIL $100 $104 $ 85 $115 $107 $163 S&P 500 100 110 111 153 187 249 S&P Pub. Uty. 100 114 106 147 152 187 S&P El. Co. 100 113 98 127 127 159
- Assumes that the value of the investment in the Company's Common Stock and each index was $100 on December 31 1992 and that all dividends were reinvested. For purposes of this graph, the yearly change in cumulative shareowner retum is measured by dividing (1) the sum of (A) the cumulative amount of dividends for the year, assuming dividend
' reinvestment, and (B) the difference in the fair market value at the end and the beginning of the year, by (ii) the fair market value at the beginning of the year. The changes displayed are not necessarily indicative of future retums measured by this or any method.
EMPLOYMENT OF INDEPENDENT PUBLIC ACCOUNTANTS: The Board of Directors of the Company, at a meeting held on December 8,1997, and in accordance with the recommendation ofits Audit Committee, voted to employ the firm of Price Waterhouse LLP to make an audit of the books and affairs of the Company for the fiscal year 1998. One or more representatives of Price Waterhouse LLP will attend the annual meeting, will be afforded the opportunity to make a statement if they desire to do so, and will be available to answer questions that may be asked by shareowners. If the sharcowners do not, by the affirmative vote of a majority of the shares of Common Stock represented at the meeting, approve the employment of Price Waterhouse LLP as independent public accountants, their employment will be reconsidered by the Board of Directors. l D-16
PROPOSAL OF DIRECTORS:TO AMEND THE CERTIFICATE OF INCORPORATION RELATIVE TO THE N The Company is a " specially chartered" Connecticut corpor, tion, whyh means that it has been incorpo the Connecticut legislature instead of being incorporated under tic %te's general business comoration statutes. One of the consequences of this special status is that the Company's Certificate of Incorporation - its charter document on file with the Secretary of the State of Connecticut - includes a provision governing the number and qualifications ofits directors that appears in a 1939 Special Act of the Connecticut legislature: "The government an direction of the affairs of said corporation shall be vested in a board of not less than three nor more than twelve directors, who shall be stockholders." The Company's Bylaws - its internal governance document - state that the number of directors within this 3 - 12 range is to be fixed by vote of the shareowners. The statutory limitation of twelve on the number of directors has been problematic when, with twelve directors in ofHce, the Board of Directors has had reason to add a new member. The current situation with respect to Nathaniel D. Woodson's joining the Company as a senior executive officer exemplifies this problem. With a full complement of twelve directors in office and standing for reelection, it has not been possible to elect Mr. Woodson to the Board of Directors, although the authority and responsibilities he has assumed as President of the Compan clearly call for his being a director. A comprehensive revision of Connecticut's general business corporation statutes, which became effective January 1,1997, affords the Company a means of resolving this problem. These statutes are generally applicable to the Company (in addition to the Special Acts that apply only to the Company). Under these statutes, the Company i shareowners can amend the Company's Certificate ofIncomoration to remove from it the problematic provisions of the Special Act of 1939 (and its predecessor, a Special Act of 1899) and substitute for them a provision specifyin an expanded range in the number of directors and permitting the Bylaws to control the number of directors within j the specified range. Since the Company's Bylaws can be amended by the Board of Directors from time-to-time, the i substitute provision can be used by the Board of Directors to remedy a " full Board" problem by amending the ' Bylaws to sper% an increased number of directors (within the limit set by the shareowners in the substitute provision), snereby creating a vacant seat on the Board of Directors, to which an additional individual can be elected by tk other directors or by the shareowners. The Board of Directors has recommended that the shareowners approve an amendment to the Company's Certificate of fncorporation implementing these changes, by approving the
;ollowing resolution that will be submitted to the meeting:
RESOLVED: That the Certificate of Incorporation of the Company be and it hereby is amended by deleting therefrom Section seven of the Resolution of the Senate and House of Representatives of the General Assembly of the State of Connecticut, approved June 15,1899, entitled " INCORPORATING THE NEW HAVEN ILLUMINATING COMPANY", and Section three of the Resolution of the Senate and i House of Representatives of the General Assembly of the State of Connecticut, approved May 26,1939, j entitled "AN ACT AMENDING THE CHARTER OF THE UNITED ILLUMINATING COMPANY", and i by adding a new Section 5 to said Certificate ofIncorporation, reading as follows: Section 5. All corporate powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, a Board of Directors 3 consisting of not less than three nor more than fifteen individuals, with the number fixed in, and increased I or decreased from time-to-time by amendment of, the Bylaws of the Company, each of which individuals shall be a shareowner of the Company. If the shareowners adopt this resolution, an appropriate Certificate of Amendment will be filed with the Secretary of the State of Connecticut amending the Company's Certificate of Incorporation. The Board of Directors will then amend the Bylaws of the Company to increase the number of members of the Board of Directors from twelve to thirteen and elect Mr. Woodson to fill the vacant seat on the Board of Directors and to serve (as do all of the directors of the Company) until the 1999 Annual Meeting of the Shareowners. D-17
l J ne adoption of this resolution will be approved if the number of votes cast in favor of the proposal to amend the Certificate ofIncorporation exceeds the number of votes cast against the proposal. Proxies marked to abstain from voting with respect to this action will not have the legal effect of voting against the proposal. The Board of Directors recommends a vote FOR the proposed amendment to the Company's Certificate of Incorporation. DATE FOR SUBMISSION OF PROPOSALS BY SECURITY IIOLDERS: Shareowners who intend to present proposals for action at the 1999 Annual Meeting of the Shareowners of the Company are advised that such proposals must be received at the principal executive offices of the Company by November 30,1998 in order to be included in the Company's proxy statement and form of proxy for that meeting. The Company has filed with the Securities and Exchange Commission, pursuant to Rule 13a 1 of the Commission under Section 13 of the Securities Exchange Act of 1934, an Annual Report (Form 10-K) for the fiscal year ended December 31,1997. The Company will provide a copy of said Form 10-K, including the financial statements and the schedule thereto, without charge, to each person from whom the Board of Directors has solicited a proxy for use at the Annual Meeting of the Shareowners of the Company as set forth in the foregoing Proxy Statement, on the written request of such person directed to Kurt Mohlman, Treasurer and Secretary, The United Illuminating Company,157 Church Street, P.O. Box 1564, New Ilaven, Connecticut 06506. Copies of said Form 10-K furnished without charge will not include all of the exhibits thereto. The Company will furnish a copy of any such exhibit upon the payment of a fee to defray the Company's expense (10 cents per page, plus postage) of furnishing it. By Order of the Board of Directors March 27,1998 KURT MOHLM AN, Treasurer andSecretary l l D-18
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2xit 861 Wilbur Cross Parkway (Route 15) Exit #61 Directions to The New Haven Lawn Club N 193 Whitney Ave \ d New Haven, CT 06511 \ g j (203)777 3494 N > Wb \ W From I 95 \
\ sishop se Exit s3 Follow signs to I-91and then \ North follow directions below. g N Exit #3 Peabody H 5 South From I 91 Mu**um }h,umphrey { St Sachem St 2 , a -
Take Exit #3 (Trumbull Street Exit). Go straight two blocks to ,I ~ j Whitney Avenue. Right on y Bradley St j Whitney. Club sign and entrance on right. e j Trumbull St From Wilbur Cross Parkway (Route 15)
- 4 l ll l Audubon St Exit 61 A, Take Whimey Avenue Exit. Go gl l l l towards New Haven approximately _
< cr n se five miles. Club sign and entrance y on left. .c h
WellSt From Downtown New Haven Take Church Street towards Hamden. Church Street becomes Elm St Whitney Avenue. The Club is on g e the right hand side (diagonally e across from the Peabody Museum). 2e 3 Small sign at Club's entrance. G E f3 court sa g g to _ m -
= t 5 $ m Please note: } g g cupelSt .
The Club is set back on Whitney Avenue. (You must go down a 4 j o o l 0 . long driveway to see it.) There are buildings in front ofit making it oY difficult to see from Whitney Avenue. 1
0 EH The United Illuminating Company 157 Church Street P0. B(a 1564 New Haven, CT 06506 0901 203 499 2591 www uinet com Investor Information Transfer, Registrar and Dividend Dividend Reinvestment Plan Analysts: Disbursing Agent Common Stock shareowners of record Equity
Contact:
Kurt Mohlman at %e Bank of New York interested in obtaining information (203)499-2591 or mohlmak@uinet.com Telephone inquiries: regarding the benefits of participating Debt
Contact:
Susan Allen at 1 888-269-8845 in UI's dividend reinvestment plan (203) 499-2409 or aliens @uinet.com may write to: The United illuminating Company E-Mail Address: Shareowner-sycs@Eankofny.com The Bank of New York P. O. Box 1564 Shareholder Relations Dept - 1 IE New Haven CT 06506-0901 Website Address: http:// stock.bankofny.com P.O. Box i1258 Fax: (203? 499-2594 or (203) 499-2414 Church Street Station Internet Ajdress: Address Shareowners Inquiries To: New York. NY 10286 bbc:65a@ prodigy.com The Bank of New York Shareholder Relations Department-ilE Investor Relations llotline: General Counsel For information on UI's earnings, Wiggin & Dana P.O. Box 11258 Church Street Station press releases, media articles and New York,NY 10286 dividend information, including Stock Listing ex-dividend dates and dividend New York Stock Exchange; payment dates, call: Common Stock Send Certificates For Transfer and Address Changes To: From within the New Haven Area: The Bank of New York (203) 499-3333 or Receive and Deliver Department - 11W From outside the New Haven Area: P.O. Box 11002 1-800-7-CALL UI Church Street Station (1-800-722-5584) New York,NY 10286 Annual Meeting Date he Company's Annual Meeting will be held at: The New Haven Lawn Club 193 Whitney Avenue New Haven, CT on Wednesday, May 20,1998, beginning at 10:00 a.m.
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December 31,1997,1996 and 1995 i i i l' l li Independent Auditors' Report.. . ..1 ,i iI !i t Financial Statements i Statements of Financial Position.. . ... . . 2 I I Statements of 0perations.. .. . . 3 !l. l Statements of Cash Flows.. ..4 i' ,. Notes to Financial Statements.. ... . 5 iI , I i l Supplementary Schedules j Independent Auditors' Report on Supplementary Information.. . . .18 e i Schedule I - Project Statements of Financial Position.. . . . 19 l1 l Schedule II - Project Statements of Operations .20 d 3 l' Schedule Ill - Project Statements of Cash Flows.. .. ... 21 < l l-t I 4 i s !( i! i t i 4 J i I
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Ar.t-h si.AMJf4 L.s ..b'.- . %.c m nw-- ___ ,,-,_..m ; _ ,s , INDEPENDENT AUDITORS' REPORT l The Board of Directors Massachusetts Municipal Wholesale Electric Company We have audited the accompanying statements of financial position of Massachusetts
! Municipal Wholesale Electric Company (a Massachusetts public corporation) as of December l 31,1997,1996 and 1995 and the related statements of operations and cash flows for the years i then ended. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits. l i We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes l examining, on a test basis, evidence supporting the amounts and disclosures in the financial i statements. .An audit also includes assessing the accounting principles used and significant l estimates made by management, as well as evaluating the overall financial statement j presentation. We believe that our audits provide a reasonable basis for our opinion. l In our opinion, the financial statements referred to above present fairly, in all material j respects, the financial position of Massachusetts Municipal Wholesale Electric Company as of l December 31,1997,1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. f i i March 11,1998
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s- , . ;)99h 22 c199L , m u1995j 1 Electric Plant i In Service (Note 4) $ 1,239,161 5 1,237,306 $ 1,234,808 'i Accumulated Depreciation (414,028l (371,762) (327,459) i j 825,133 865,544 907,349
' l Nuclear Fuel - Net of Amortization 11,452 13,500 13,814 Total Electric Plant 836,585 879,044 921,163 I
Special Funds (Notes 2 and 7) 226,141 223,702 202,096 l
; Current Assets Cash and Temporary Investments (Note 7) 1,307 1,390 1,259 Accounts Receivable 9,234 6,113 8,044 Unbilled Revenues 5,593 6.620 5,561 Inventories 14,463 13,873 13,815 Prepaid Expenses 7,023 12,393 6,018 Total Current Assets 37,620 40,489 34,697 Total Special Funds and Current Assets 263,761 264,191 236,793 Deferred Charges Amounts Recoverable Under Terms of the Power Sales Agreements (Note 2) 208,314 212,853 213,572 i
, Unamortized Debt Discount and Expenses 27,147 29,865 32,739 l Nuclear Decommissioning Trusts 12,072 9,676 7,763
; Other 3,340 4,473 6,167 250 873 256.867 260,241
$ 1,351,219 $ 1,400,102 $ 1,418,197 m m _. .. - . ., ,- _ ,, _ _
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LIABlyTIESi . . _ _o ;m _ _ , . _ Long-Term Debt Bonds Payable (Note 3) $ 1,222,735 $ 1,264,050 $ 1,303,465
; Current Liabilities , Current Maturities of Long-Term Debt (Note 3) 41,315 39,415 37,750 ! Accounts Payable 12,241 16,068 8,622 Accruca Expenses 14,712 14,623 10,596 l
Member and Participant Advances and Reserves 47,302 55,338 49.001 115,570 , 125,444 105,969 Deferred Credits 12,914 10,608 8,763 Commitments and Contingencies (Note 6)
$ 1,351.219 $ 1,400,102 $ 1,418.197 nmn w - n r. - - -- ~ ~ , , . - , , ~ , , , . + , -
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. The accompanying notes are an integralpart of these tinancial statements.
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E o na atums 3; Massachusetts Municipal Wholesale Electric Company .q r, ~ , 2.. _duna..a.Wiaruzuaw Statements of Operations .__..m .. _mm wm.: a.s . aaJ Years Ended December 31,1997,1996 and 1995 (In Thousands) w ,w ,.mr.mgp:n < , , 7 g, .n,n ,,m-nm ~ ~ ~ , ,,.-r f~nsa-m m e.wn > a., .m,a ._ n d e i .: m .u i 19972 , A . 11996 1 ,, J1995J Revenues (Note 2) $ 242,502 $ 211,217 $ 212,173 interest Income 14,553 14,494 13,780 Total Revenues and Interest income $ 257,055 $ 225,711 $ 225.953 Operating and Service Expenses: Fuel Used in Electric Generation $ 27,824 $ 16,997 $ 24,129 Purchased Power 45,421 45,389 40,398 Other Operating 36,796 30,660 28,741 Maintenance 19,206 11,645 9,561 Depreciation 44,699 44,607 44,492 6,443 6,348 Taxes Other Than Income 6,298 180,244 155,741 153,669 Interest Expense: Interest Charges 72,854 74,470 76,732 l Interest Charged to Projects During j Construction (Note 2) (45) (62) (104) 72,809 74,408 76,628 i Total Operating Costs and Interest Expense 253,053 230,149 230,297 J Gain on Cancelled Units - Net (Note 4) - (6,737) (156) Decrease (Increase) in Amounts Recoverable Under the Power Sales Agreements (Note 2) 4,002 2,299 (4,188)
$ 257,055 $ 225,711 $ 225.953 wyeqr.w3gnme _ _ cy~ ,
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!The accompanying notes are an integralpart of these financial statements. . 3 4 II ,
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j Total Revenues and Interest income $ 257,055 $ 225,711 $ 225,953 3, Total Costs and Expenses, net (253,053) (223,412) (230,141) l! Adjustments to arrive at net cash ll provided by eperating activities: ji Depreciation and Decommissioning 46,405 45,977 45,677 j Amortization 6,693 7,956 10,633 i Change in current assets and liabilities: l; Accounts Receivable (3,021) 1,831 (3,017) ij Unbilled Revenues 1,027 (1,059) (457) ji Inventories (590) (58) 1,782
- Prepaid Expenses 5,370 (6,375) 1,395 l Accounts Payable (3,827) 7,446 97 j Accrued Expenses and Other 687 5,855 (2,246) l Member and Participant Advances and Reserves (8,036) 6,337 12,522
- Net cash provided by operating activities 48,710 70,209 62,198 4
i i Cash flows from investing activities: Construction Expenditures and Purchases of Nuclear Fuel (6,363) (7,673) (9,693) Interest Charged to Projects During Construction (45) (62) (104) Net increase in Special Funds (2,439) (21,606) (19,266) Change in net Unrealized Gain (Loss) on Special Funds 537 (1,579) 4,833
} Decommissioning Trust Payments, net (2,396) (1,913) (1,654)
Other 1,328 505 384 Net cash used for investing activities (9,378) (32.328) (25,500) i
} Cash flows from financing activities: ; Payment for Bond issue Costs - -
(8) Payments for Principal of lAng-Term Debt (39,415) (37,750) (36,420)
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Net cash used for financing activities (39,415) (37,750) (36,4281 l I 1 l ' Net increase (decrease) in cash and temporary investments (83) 131 270 Cash and Temporary Investments at Beginning of Year 1,390 1,259 989 Cash and Temporary Investments at End of Year 5 1,307 $ 1,390 $ 1,259 Cash paid during the year for interest 1 (Net of amount capitalized as shown above) $ 69,854 $ 71.313 $ 73.317 e- n
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3>. , 1 4 i Massachusetts Municipal Wholesale Electric Company 1 Notes to Financial Statements i
*~ Years Ended December 31,1997,1996 and 199a l l
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1 J (1) Nature of Goerations The Massachusetts Municipal Wholesale Electric Company (MMWEC) is a public corporation and a political subdivision of the Commonwealth of Massachusetts formed to be a joint action agency and to develop a bulk power supply for its i member Massachusetts municipal electric systems and other utilities. MMWEC is authorized to construct, own, or purchase ownership interests in, and te issue revenue bonds to finance, electric facilities (Projects) secured by revenues
- derived from Power Sales Agreements (PSAs) with its members and other utilities. The power supply program consists of
) power purchase arrangements, power brokering services, planning and financial services, and the Projects relating to [ generating facilities built and operated by MMWEC and other regional utilities. j A Massachusetts city or town having a municipal electric system, authorized by majority vote of the city or town, may become a member of MMWEC by applying for admission and agreeing to comply with the terms and conditions of i membership as the MMWEC By-Laws may require. As of December 31,1997, twenty-seven Massachusetts municipal electric systems were members. During 1997, five member municipal electric systems notified MMWEC of their intent to terminate their membership in 1998. Termination of membership does not relieve a system of its PSA obligations. { (2) Significant Accounting Policies j MMWEC presents its financial statements in accordance with generally accepted accounting principles as promulgated j by the Financial Accounting Standards Board which requires management to make estimates and assumptions that affect { the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the fic.c.cial i statements. Actual results could differ from those estimates. Inigrest Charyg_d to Projects During Construction
- MMWEC capitalizes interest as an element of the cost of electric plant and nuclear fuel in process. A corresponding j amount is reflected as a reduction of interest expense. The amount of interest capitalized is based on the cost of debt, l l including amortization of debt discount and expenses, related to each Project, net of investment gains and losses and l interest income derived from unexpended Project funds. l j
l Nuclear Fuel Nuclear fuel, net of amortization, includes MMWEC's ownership interest of fuel in use, in stock and in process for Millstone Unit 3 and Seabrook Station. The cost of nuclear fuel is amortized to Fuel Used in Electric Generation based on the relationship of energy produced in the current period to total expected energy production for fuel in the reactor. A provision for fuel disposal costs is included in Fuel Used in Electric Generation based upon disposal contracts with the Department of Energy (DOE). In addition, Fuel Used in Electric Generation includes the annual assessment, under the Energy Policy Act of 1992, for the cost of decontamination and decommissioning of uranium enrichment plants operated by the DOE. Billings from the DOE will occur over the next 10 years. At December 31,1997, MMWEC's share of Millstone Unit 3 and Seabrook Station unbilled assessments was $400.000 and $607,000, respectively. The amounts are included in Other Deferred Charges and Deferred Credits on the Statements of Financial Position. prqmv3 w , w-- -
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. The composition of Special Funds is as follows:
Fund 192I 1996 1995 l
- l Un Thousands)
Bond Fund Interest, Principal and Retirement 4 i
-! Account to pay principal and interest on bonds $ 37,507 $ 30,636 $ 21,939 l Bond Fund Reserve Account set at the maximum annual interest obligation to make up any deficiencies in the Bond Fund Interest,
- Principal and Retirement Account 79,942 79,740 81,331 Reserve and Contingency Fund to make up I deficiencies in the Bond Fund and pay for renewals and extraordinary costs 21,559 19,748 17,787
, Revenue Fund to receive revenues and disburse
- l them to other funds 67,669 73,616 60,605 Working Capital Funds to maintain funds to cover
, operating expenses 19,464 19,962 20,434 , l Total Special Funds $ 226,141 $ 223.702 $ 202.096 l The Special Funds, other than certain Working Capital Funds, are restricted as to their use by the General Bond l I,esolution (GBR), which also prescribes investment thereof. Investments are limited to direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by the United States, certificates or receipts j representing direct ownership of future interest or principal payments on direct obligations of, or obligations where the principal of, and interest are guaranteed by the United States, certain federal government agency securities, new housing authority bonds issued by public agencies or municipalities, tax-exempt obligations rated in the three highest rating categories or shares of investment companies wliich solely invest in such obligations, time deposits and certificates of deposits issued by banks insured by the Federal Deposit Insurance Corporation (FDIC) which deposits are either fully insured by the FDIC, collateralized by government securities or are issued by a party whose long-term unsecured debt is rated in one of the three highest long-term rating categories, and repurchase agreements provided that a specific written i repurchase agreement governs the transaction and the security underlying the repurchase agreement is held by an independent third party. Also included are bonds or other obligations of any state of the United States or any agency or local government unit of a state which have been advance refunded and are not callable, domestic dollar denominated money market mutual funds rated in the two highest rating categories, participation units in the combined investments fund zwr .
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Special Funds (continued) , created under Massachusetts laws for the purposes of investment by local governments, and shares of investment ; companies which are authorized to invest in assets or securities comprised of government securities, agency securities, new l housing bonds, tax-exempt bonds, and repurchase agreements noted above. Certain Special Funds held in trust under Power Purchase Agreements, working capital arrangements and agency contracts not governed by the GBR are more restricted as to which of the aforementioned investments can be purchased. 1 Cash and Temocrary Investments Certain cash and temporary investment amounts used for power purchases and working capital requirements of MMWEC are not governed by the CBR. In addition to the investment securities delineated in the GBR, MMWEC invests in repurchase agreements with banks where MMWEC has established accounts. Reyenues and Unbilled Revennel Revenues include electric sales for resale provided under MMWEC's power supply program which consists of billings under the PSAs, Power Purchase Agreements and related power brokering arrangements. MMWEC provides its members with power supply planning and related services which are billed as Service Revenues. Amounts which are not yet billed are included in Unbilled Revenues on the Statements of Financial Position. These and additional details of revenues are as follows: Revenues E91 1996 1945 tin Thousands) Electric sales for resale $ 237,795 $ 207,414 $ 208,091 Service 1,653 1,803 2,082 PSNil Settlement 2,000 2,000 2,000 Gain on land taken by eminent domain 1,054 - - Total Revenues $ 242,502 $ 211.217 $ 212.173 Inrentaliel Fuel oil and spare parts inventory are recorded and accounted for by the average cost method. At December 31,1997, 1996 and 1995, fuel oil inventory was valued at $4.6, $4.4 and $2.9 million, and spare parts inventory amounted to $9.6,
$9.5 and $10.9 million, respectively.
Amounts Respverable Under Terms of the Power Sales Agreements Billings to Project Participants are designed to recover costs in accordance with the PSAs. The billings are structured on a Project-by-Project basis to .~ ovide for debt service, operating funds and reserve requirements. Expenses are reflected in the Statements of Operation in accordance with generally accepted accounting principles. The timing difference between amounts billed versus expensed is charged or credited to Amounts Recoverable Under Terms of the PSAs. Amounts will be (mmm Qs Xy, mm- m-mww
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; recovered through future billings or an expense will be recognized to offset credit balances. The principal differences ir.clude depreciation, fuel amortization, costs associated with canceled Projects, cost of refunding, billing for certain interest, reserves, net unrealized gain or loss on securities available for sale and other costs. Individual Projects have a cumulative deferral of costs which total $212.9, $217.0 and $217.6 million and Projects have cumulative billings in excess I of costs which total $4.6, $4.2 and $4.0 million at December 31,1997,1996 and 1995, respectively. These amounts have l been netted in the Statements of Financial Position.
J The December 31,1997,1996 and 1995 balances of $208.3, $212.9 and $213.6 million, respectively, reflects the I Statements of Operations net decrease (increase) of $4.0, $2.3 and ($4.2) million for the years then ended and the change
! in net unrealized gain (loss) on securities available for sale of $.6, ($1.6) and $4.8 million for 1997,1996 and 1995, respectively.
l l Nuclear Decommissioning Trusts i MMWEC maintains external trust funds, as promulgated by Nuclear Regulatory Commission and state regulations, te provide for the decommissioning activities of Millstone Unit 3 and Seabrook Station. The December 31,1997 Millstone Unn l 3 and Seabrook Station balances of $6.0 and $6.1 million, respectively, are stated at cost and are included as part of the Deferred Charges and Deferred Credits on the Statements of Financial Position. MMWEC's share of the estimated reserve requirement for the prompt dismantling and removal of the Millstone Unit 3 and Seabrook Station, at the expiration of their original operating licenses in 2025 and 2026, is $26 and $55 million, respectively. Deoreciation Electric plant in service is depreciated using the straight-line method. The aggregate annual provisions for depreciation for 1997,1996 and 1995 averaged 4% of the original cost of depreciable property. Interest Rate Protection Agreement j Premiums paid for the purchase of an Interest Rate Protection Agreement are amortized to interest expense over the term I of the agreement. Unamortized premiums are included in Other Deferred Charges in the Statements of Financial Position. j (3) D.th! I Power Sunolv Svdem Revenue Bonds To finance the ownership interests in electric generating facilities under its GBR, MMWEC issued Power Supply System Revenue Bonds (Bonds). The Bonda are secured under the GBR by a pledge of the revenues derived by MMWEC under the terms of the PSAs and from the ownership and operation of the Projects in its power supply system. Pursuant to the PSAs, l each Project Participant is obligated to pay its share of the actual costs relating to the generating units planned, under ! construction or in operation. The Project Participants' obligations are not contingent upon the completion or operational status of the units.
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aw.n C J2 (3) Dshi (continued) Power Sunolv System Hevenue Bonds (continued) MMWEC financings, other than obligations maturing within one year, require Massachusetts Department of k Telecommunications and Energy's authorization. The aggregate balances of defeased debt at December 31,1997,1996 and 1995 was $100.6, $285.2 and $285.2 million, respectively. Bonds Payable consists of serial, term and variable-rate bonds and are comprised of the fobowing issues. Net Interest December 31, , h1 LLC Colt 193Z 19K1 1995 (In Thousands)
! 1987 Series A 8.9% $ 8,525 $ 9,150 $ 9,720
! 1992 Series A 7.0% 94,625 96,825 98,905 1992 Series B 7.0% 186,170 191,525 196,600 1992 Series C 6.9% 57,095 58,375 59,585 1992 Series D 6.3% 80,460 82,805 85,045 1992 Series E 6.0% 92,865 100,715 108,195 1993 Series A 5.3% 356,030 367,980 379,515 1993 Series B 5.9% -
190 370 1994 Series A 5.3% 114,195 114,690 115,175 1994 Series B 5.1% 176,485 183,610 190,505 1994 Series C Variable 97,600 97,600 97,600 Bonds Payable 1,264,050 1,303,465 1,341,215 Less: Current Maturities (41,315) (39,415) (37,750) i Total Long-Term Debt $ 1.222.735 $ 1.264.050 $ 1.303,465 The serial and term bonds are generally subject to optional redemption approximately ten years after the issue date, at 103% of the principal amount, descending periodically thereafter to 100%. The aggregate annual principal payments due on the bonds in the next five years are as follows: 1998 - $41,315,000; 1999 - $44,650,000 2000 -$47,870,000; 2001- $50,580,000 and 2002 - $53,370,000. The interest rates on the 1994 Series C variable-rate bonds are adjusted from time-to-time. Bondholders may require
! repurchase of the 1994 Series C bonds at the time of such interest rate adjustment. In 1997, MMWEC substituted the 1994 Series C bonds letter of credit facility with an insurance policy guaranteeing the payment of the principal and interest on the 1994 Series C Bonds and a liquidity facility with a bank providing for the purchase, by the bank, of the 1994 Series C bonds if the bonds cannot be remarketed. The debt service on the 1994 Series C bonds is on a parity with the senior lien fixed-rate bonds to the extent that the debt service on the 1994 Series C bonds is equal to or less than the debt service on ! the bonds refunded by the 1994 Series C bonds in a given bond year.
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} [6 , i [: ~ 56 mn _.- - . _ . - a 'bd. + . - .- ak lt 1, (3) Dght (continued) i Debt Service Forward Deliverv Agreement l I In conjunction with the issuance < the 1994 Series C bonds, MMWEC entered into a seven year Debt Service Forward j Delivery Agreement (Forward Agreement) for purposes other than trading. MMWEC makes monthly deposits to the various { accounts within the Bond Fund for the semiannual payment of its debt service on its outstanding bonds. In exchange for the right to dictate the investment of such monies, the counterparty pays a fixed amount to MMWEC on a periodic basis, l jI providing MMWEC a fixed yield that could be earned on a security with a five to seven year maturity purchased at the time } the contract was executed, while complying with the maturity limitation: for investments in the Bond Fund under the jl terms of the GBR. The counterparty has the right to sell to MMWEC Govemment Obligations that mature prior to the relevant debt service payment dates during the term of the Forward Agreement. {
- I MMWEC reserves the right to terminate the Forward Agreement in whole or in part in connection with any
- l purchase, redemption or refunding of fixed-rate bonds, counterparty default or counterparty credit rating j deterioration to below investment grade. The Forward Agreement provides for the calculation and payment of j liquidated damages to the counterparty reflecting market interest rates at the time of the termination compared to the rate levels in the Forward Agreement.
- The cash requirement under the Forward A;!reement requires MMWEC to make available to the counterparty an average 4 balance of $30.3 million over the seven year term of the agreement in exchange for investments in Government Securities, l to be held by MMWEC's trustee, that mature prior to MMWEC's debt payment dates.
1; jj The Forward Agreement is not recognized in the Statements of Financial Position to the extent that settlement of cash j in exchange for financial instruments has not occurred. To the extent cash has been exchar.ged for Government Securities, j the Government Securities are recorded on the Statements of Financial Position as Special Funds.
, Interest Rate Protection Agreement il The 1994 Series C bonds provide a hedge against interest rate risk on the net funding cost of approximately $100 million of short-term floating rate investment assets. MMWEC purchased a $41 million Interest Rate Protection Agreement (Cap
! Agreement), comprised of an $11 million tranche with a protection rate of 6.85% expiring on June 30,2000, and a $30 j million tranche with a protection rate of 7.25% expiring on June 30,2002, to limit the interest rate exposure on a portion of the 1994 Series C variable-rate debt to the extent that the variable debt costs exceed the fixed-rate received on the Forward Agreement described above.
l
- MMWEC purchased the right to receive annually an amount by which an index-based interest rate, which approximates j the interest rate on the 1994 Series C bonds, exceeds the protection rate in the Cap Agreement. MMWEC has the right to terminate the Cap Agreement if the provider or its guarantor's credit rating falls below a double A and receive payment of i
! liquidation damages designed to enable MMWEC to enter into an equivalent agreement. The cost of the Cap Agreernent was paid up front and is included in Other Deferred Charges on the Statements of Financial Position. There are no future l
MMWEC cash requirements under the terms of the Cap Agreement. The Cap Agreement was purchased for purposes other than trading.
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I _Matacm. _., -__.na, u m J j l (3) Dfht (continued) i Ngt Revenue Available for Debt Service il l )I In accordance with the provisions of MMWEC's GBR, MMWEC covenants that it shall fix, revise and collect rates, tolls, l J' rents and other fees and charges, sufficient to produce revenues to pay all operating and maintenance expenses and l i principal of, premium, if any, and the interest on the Bonds and to pay all other obligations against its revenue. Revenues, l il! which include applicable interest earnings from investments, are required to equal 1.10 times the annual debt service for 1!. each contract year ending June 30, after deduction of certain operating and maintenance expenses and exclusive of a
- depreciation. For the contract years ended June 30,1997,1996,1995 and prior years, MMWEC met the CBR debt service l
coverage requirements for the applicable MMWEC Projects. ! Contract Year Ended June 30. i I i Debt Service Coverace: L9E 1Hfi 1M5 l (In Thousands) l j; Revenues $171,378 $161,324 $163,777 l Other Billings 576 576 577 l. Reserve and Contingency Fund Billings 11,159 10,972 11,085 .J' l Total 183,113 172,872 175,439 Less: Operating & Maintenance Expenses (60,371) (52,184) (53,508) Available Revenues Net of Expenses $122,742 $121,931 ll Debt Service Requirement
$120.688
$109,716
$111.583 $110.846 i e Coverage (110% Required) 110 % 110 % 110 %
1 , Notes Payable l MMWEC maintains a $5 million revolving line of credit to finance temporarily certain power purchases made by MMWEC f for resale under power purchase contracts. The balances outstanding were $0 as of December 31,1997,1996 and 1995,
! respectively, with a maximum outstanding balance of $167,600, $4,000 and $216,000 during 1997,1996 and 1995, l
! respectively. Interest charged on borrowings under the line of credit is at the bank's prime rate. In addition, a commitment fee of one quarter of 1% per annum is charged on the unused portion of the line based on the average daily principal amount of the loan outstanding.
j (4) Electric Generation Facilities and Financing l MMWEC's power supply capacity includes interests in the Stony Brook Peaking and intermediate unit.s which it operates.
! MMWEC is a nonoperating joint owner in the W.E Wyman Unit No. 4, Millstone Unit 3 and Seabrook Station units. Electric Plant In Service also includes MMWEC's Service Operations which totalled $2.7, $2.6 and $2.5 million in 1997,1996 and 1995, respectively.
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D mmmm _._ , 4u.mn:A$Ekashdha l (4) Electric Generation Facilities and Financing (continued) j Facility and MMWEC Amounts as of December 31. Projects Share of Canability (MW) l M L94fi M Un Thousands) Peaking Project Stony Brook 170.0 $ 56,310 $ 56,588 $ 56,255 Intermediate Project Stony Brook 311.3 152,786 151,363 l 150,658 j Wyman Project W.F.Wyman No. 4 22.7 7,361 7,359 7,376 Nuclear Project No. 3 Millstone Unit 3 36.8 129,595 129,296 129,145 I
- Nuclear Mix No.1 Millstone Unit 3 18.4 51,290 51,140 51,064 Nuclear Mix No.1 Seabrook Station 1.9 8,589 8,587 8,572 j Nuclear Project No. 4 Seabrook Station 49.8 258,925 258,882 258,467 Nuclear Project No. 5 Seabrook Station 12.6 70,859 70,849 70,744 Project No. 6 Seabrook Station 69.0 500,712 500,652 500,077
$ 1.236.427 $ 1.234,716 $ 1.232.358 MMWEC's investment in Seabrook Station represents a substantial portion of its plant investment and financing. In June 1992, Northeast Utilities acquired Public Service of New Hampshire (PSNH), the lead owner of Seabrook Station, and placed Seabrook Station in a separate single asset subsidiary corporation.
In 1997, the Nuclear Regulatory Commission (NRC) issued a rulemaking indicating that it may deem it necessary to promulgate rules making joint owners of nuclear power plants jointly and severally liable for decommissioning costs. In addition, several bills have been introduced in the New Hampshire Legislature, the effect of which would accelerate decommissioning payments for Seabrook Station and make the Seabrook Station joint owners jointly and severally liable for decommissioning costs. No such statute has been enacted to date. In addition, MMWEC has a 4.8% ownership interest in the Millstone Unit 3 nuclear unit. Millstone Unit 3 was taken out of service on March 30,1996 and will remain shut down pending a comprehensive NRC review and an affirmative vote of the NRC Commission to restart the unit. Northeast Utilities' management has indicated that a firm start-up date cannot be { determined at this time. MMWEC has been meeting its Millstone Unit 3 sharing agreement obligations. MMWEC, together { with certain of the other non-operatingjoint owners of Millstone Unit 3, filed for arbitration against Connecticut Light and j Power and Western Massachusetts Electric Company. MMWEC also filed a complaint against Northeast Utilities and its Trustees, citing negligence, negligent misrepresentation, fraud and violation of state laws, relating to the cause for the shutdown of Millstone 3. MMWEC is seeking recovery of damages it sustained as a result of the continued shutdown. l MMWEC's net costs, including capitalized interest expenses and $119.7 million incurred for the canceled Seabrook Unit 2, have been deferred and are being recovered under the terms of the PSAs. During 1996, MMWEC recordcd a gain of $6.7
! million in connection with the sale of equipment from Seabrook Unit 2.
In January 1998, Central Maine Power Company (CMP) agreed, subject to Maine Public Utilities Commission approval, to sell its hydro, fossil and biomass power plants to Florida Power & Light. Included in this sale is CMP's 59% share of W.E Wyman Unit No. 4 for which it is the lead owner. MMWEC owns 3.7% of the W.E Wyman Unit No. 4. pm .
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(5) Bingfit Plans i MMWEC has two non-contributory defined benefit pension plans covering substantially all full-time active employees. One plan covers union employees (union plan) and the other plan covers non-union employees (non-union plan). The ! amount shown below as the Pension Benefit Obligation for MMWEC is a standardized disclosure measure of the present l value of pension benefits, adjusted for the effect of projected salary increases, estimated to be payable in the future as a ' result of employee service to date. The measure is the actuarial present value of credited projected benefits and is independent of the funding method used to determine contributions to the plans. The Pension Benefit Obligation was computed as part of an actuarial valuation performed as of January 1,1997. l Significant actuarial assumptions used in the valuation include a weighted-average discount rate of 7.5% a year I compounded annually, and projected salary increases of 5.5% a year compounded annually. The Pension Benefit Obligation for both plans is as follows: l Amounts as of Januarv_L 1991 1Efi 19.95 On Thousands) Retirees currently receiving benefits and terminated employees not yet receiving benefits $ 384 $ 299 $ 324 Current Employees: Vested 3,295 2,677 2,391
. Non-vested 3,081 2,602 2,110 Total Pension Benefit Obligation 6,760 5,578 4,825 Net assets available for benefits, at market 5,898 4,850 3,598 Unfunded Pension Benefit Obligation $ 862 $ 728 $ 1.227 ; Net assets available for benefits, at market, as a percentage of the Pension Benefit Obligation, were 87.3%,86.9% and I
74.6%, as of Januan 1,1997,1996 and 1995, respectively. The unfunded Pension Benefit Obligation as a percentage of j covered payroll was 13.9%,12.2% and 20.6% for the years ended January 1,1997,1996 and 1995, respectively, ! MMWEC makes annual contributions to the pension plans equal to the amounts recorded as pension expense, which were i
- $896,000, $557,000 and $887,000, for the years ended December 31,1997,1996 and 1995, respectively. Contributions as a l
! percentage of MMWEC's covered payroll were 14.3%,9.0% and 14.6% for the years ended December 31,1997,1996 and 199a, respectively. The union plan uses the aggregate actuarial cost method and the non-union plan uses the frozen initial liability actuarial cost method in determining pension expense. In addition to the actuarial assumptions outlined above, the assumed long term rate of return used in determining pension expense was 8.5%. Pension costs applicable to prior years'sentice are amortized over thirty years. A ten-year historical trend and other information which is required to be disclosed in accordance with Governmental Accounting Standards Statement No. 5 is not considered material and therefore is not presented. wwgg.egmt:y mgm.r.---~~- - - - mu a . . y Nf$ ] IS
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l l (5) Benefit Plans (continued) MMWEC contributes to an employee savings plan administered by an insurance company. All full-time employees meeting the service requirements are eligible to participate in this defined contribution plan. Under the provisions of the
! plan, MMWEC's contributions vest immediately. MMWEC contributed $114,000, $107,000 and $105,000 while the i employees contributed $184,000, $175,000 and $169,000 during the years ended December 31,1997,1996 and 1995,
; respectively.
~ ' (6) Commitments and Contingencies l Power Purcham MMWEC entered into agreements for participation in the transmission interconnection between New England utilities l and the Hydro-Quebec electric system near Sherbrooke, Quebec (Phase 1), which began commercial operation in October i ! 1986. The New England portion of the interconnection was constructed at a total cost of about $140 million, of which I 3.65% or $5 million is MMWEC's share to support. MMWEC also entered into similar agreements for participation in the interconnection between New England utilities and the Hydro-Quebec electric system for the expansion of the Hydro-I Quebec interconnection (Phase II), which went into comr1ercial operation in November 1990. MMWEC's Phase Il equity investment appreximates 0.6% or $3.3 million. MMWEC has corresponding agreements with certain of its members and another utility to recever MMWEC's share of the costs associated with the interconnection. Eower Sales Agreements MMWEC sells the Project Capability of each of its Projects to certain of its members and other utilities (Project Participants) under PSAs. In 1988, the Vermont Supreme Court ruled that the Project No. 6 PSAs between MMWEC and the Vermont Project Participants were void since inception. Consequently, pursuant to the PSAs, MMWEC increased the remaining Project No. 6 Participants pro rata shares of Project Capability to cover the shortfall (step-up), which action was challenged by certain Massachusetts Participants. The Supreme Judicial Court (SJC) for the Commonwealth of Massachusetts in MMWEC et. al. l v. Town of Danvers et. al. noted that "the Project 6 PSAs executed by the defendants are valid and that the step-up provisions therein have been properly invoked." i MMWEC is involved in various legal actions. Based on bond counsels' opinions regarding the validity of the PSAs and j general counsel representations regarding the litigation, discussions with such counsel, and other considerations, management believes that the ultimate resolution of the litigation will not have a material, adverse effect on the financial position of MMWEC. In November 1997, the Commonwealth of Massachusetts enacted legislation to restructure the electric utility industry. MMWEC and the municipal light departments are not specifically subjected to the legislation. However, it is management's
! belief that industry restructuring and customer choice, promulgated within the legislation, will have an effect on MMWEC i
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Massachusetts Municipal Wholesale Electric Company j - Notes to Financial Statements l } 93, Years Ended December 31,1997,1996 and 1995 3 , j i d.I $ MRam ~ _ _ _ . _ . - - - - ~ li j; (6) Commitments and Contingencies (continued) )i Power Sales Mrnmmh (continued) ' !f MMWEC performed an extensive study of the potential effects of restructuring of the electric utility industry on l MMWEC, and in February 1997, the Board of Directors adopted an amendment to the General Bond Resolution permitting , , MMWEC to collect funds from the Project Participants for purposes of utilizing those funds to mitigate the adverse j consequences of competition. Six Project Participants sought a declaratory judgment and an injunction on whether the MMWEC Board of Directors has the authority to adopt the amendment. The court denied the injunction and the issue has been referred to arbitration. i l Other Ism jj 1 The Price-Anderson Act (the Act), a federal statute amended in 1988 to extend to the year 2002, mandates an industry-wide program ofliability insurance for nuclear facilities. The Act now provides approximately $8.9 billion for public liability ) i claims from a single incident at a nuclear facility. The $200 million primary !ayer of insurance for the liability has been ) j purchased in the commercial market. Secondary coverage of $8.3 billion is to be provided through a $79.3 million per mcident assessment of each of the currently licensed nuclear units in the United States. The maximum assessment is $10 million per incident per unit in any year. The maximum assessment is subject to adjustment for inflation every five years, i MMWEC's interest in Millstone Unit 3 and Seabrook Station could result in a maximum assessment of $3.8 and $9.2 i million, respectively. 4 ] Insurance has been purchased from Nuclear Electric Insurance Limited (NEIL) to cover the cost of repair, replacement, 4 decontamination or premature decommissioning of utility property resulting from insured occurrences at Millstone Unit } ; 3 and Seabrook Station. The system is subject to retroactive assessments iflosses exceed the accumulated funds available l to the insurer. MMWEC is potentially subject to a $.6 and $2.1 million assessment for its participation in Millstone Unit 3 and Seabrook Station, respectively, for excess property damage, decontamination and premature decommissioning. 5 MMWEC is not currently covered under gradual pollution liability insurance related to MMWEC's Stony Brook power l plant Nothing has come to management's attention concerning any material pollution liability claims made during 1997
} or outstanding as of December 31,1997.
I MMWEC has established a trust fund to enhance its Directors' and Officers' liability coverage. The purpose of the fund is
, to make available funds for the purchase of Directors' and Officers' liability insurance or indemnification of the Directors or Officers.
(7) Investments and Denosik All bank deposits, which amounted to $1,065,000 at December 31,1997, are maintained at one financial institution. The j j Federal Deposit Insurance Corporation currently ins"'s up to $100,000 per depositor. MMWEC's uninsured deposits ranged from zero to $4.2 million auring 1997 due to seasonal cash flows, and the timing of daily cash receipts. At December 31,1997,1996 and 1995 investments are classified as available for sale and reported at fair value with unrealized gains of l l vyn.7gmm: y, -- - - ~ ~ g u N l .1
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- (7) Investments and Deoosits (continued) ll $1.8, $1.4 and $2.8 million, respectively, and unrealized losses of $76,000, $235,000 and $44,000 excluded from earnings j, and reported as a component of Amounts Recoverable Under the Terms of the Power Sales Agreement on the Statements j of Financial Position. At December 31,1997, all securities underlying repurchase agreements, and all other investments,
- j were held in MMWEC's name by custodians consisting of the Construction Fund Trustees, Bond Fund Trustee or MMWEC's
!' depository bank. Investments, representing the Special Funds and Cash and Temporary Investments, as well as certain additional amounts disbursed but available for investment, and accrued interest, are presented below: lI 1997 1996 1995 l, Amortized Market Amortized Market Amortized Market jj Tvoe of Investment Cost Basis blue Cost Basis Value fast Basis Value i' (In Thousands) l Repurchase Agreements $ 1,523 $ 1,573 $ -
$ 278 $ 285 Other Investments:
lI U.S. Treasury bills 19,215 19,799 18,420 18,917 17,626 18,044 i U.S. Treasury notes 83,141 84,049 65,727 66,214 68,811 70,743 l U.S. Agency bonds - - - - 6,707 6,797 ) Municipal bonds 7,159 7,381 7,252 7,469 7,346 7,672 U.S. Agency discount notes _l14,086 114,053 133,054 133,047 100,671 100,671 l j Total Other Investments 223,601 225,282 224,453 225,647 201,161 203,927 4 ll Total lnvestments $225,124 $ 226,855 $ 224,453 $225.647 $ 201,439 $ 204.212
- j During 1997,1996 and 1995, the proceeds from the sale of available for sale securities were $.5, $.3 and $2.0 million
, resulting in gross realized gains of $0, $37 and $0 and gross realized losses of $67, $0 and $84, respectively. The basis on l!
l which cost was determined in computing realized gain or loss was specific identification. Including repurchase agreements, l! the average contractual maturity of the investments in debt securities at December 31,1997,1996 and 1995 were 393,345 4 and 433 days, respectively. !jl i A portion cf temporary investments, made up of funds available from amounts for which the expense has been recognized but not cleared by the bank, approximate $.8, $1.3 and $3.5 million in 1997,1996 and 1995, respectively, and are included
! in the total investments noted above.
l Due to seasonal cash flows during 1997,1996 and 1995, MMWEC, from time-to-time, invested in repurchase agreements with its depository bank that were collateralized by securities in MMWEC's name held by the depository bank. MMWEC's l practice is to monitor le market value of the underlying securities to ensure that the market value equals or exceeds the i amount invested. Management estimated market values of the securities based on independent quoted market prices.
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' Massachusetts Municipal Wholesale Electric Company Notes to Financial Statements .-
]%' , ?'" m, Years Ended December 31,1997,1996 and 1995 f { 112 minnindda s $51.u!%:w m. ~_.. .. _ . -- - .5 ax, - " i (8) Fair Values of Financial Instruments j The following methods and assumptions were used to estimate the fair value of each class of financial instrument for l which it is practicable to estimate that value: 2 Investments and Decommissionind Trusts - The fair values estimated are based on quoted market prices for those or l ! similar investments. 4 ii Lond-Term Debt - The fair value is estimated based on quoted market prices for the same or similar issues. 1 < l 1 } Interest Rate Protection Adreement - The fair value is based on average quoted market prices of agreements with similar j , duration and strike prices. i Debt Service Forward Deliverv Acreement - The fair value generally reflects the estirnated amounts that MMWEC would ! receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. The estimated fair values of MMWEC's financial instruments are as follows:
! 1997 1996 1995 i Carrying Estimated Carrying Estimated Carrying Estimated l Value Fair Value Yalue Fair Value Value Fair Value i
(In Thousands) Financial Assets: Investments $ 226,855 $ 226,855 $ 225,647 $ 225,647 $ 204,212 $ 204,212 Decommissioning Trusts 12,072 13,290 9,676 S37 7,763 7,960 Interest Rate Protection Agreement 375 178 486 275 597 418 Financial liabilities: Long-Term Debt 1,222,735 1,262,465 1,264,050 1,270,771 1,303,465 1,335,963 Unrecognized Financial Instruments: l
! Debt Service Forward Delivery Agreement -
3,313 - 3,326 - 3,969 l The carrying arnounts for Cash, Accounts Receivable, Notes Payable, Accounts Payable and Accrued Expenses approximate their fair value due to the short-term nature of these instruments. w mnymw - mmm q vw ~~- -m -
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l i 1 ,i l 'i i I INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION l! The Board of Directors I i Massachusetts Municipal Wholesale Electric Company
- , We have audited and reported separately herein on the financial statements of Massachusetts Municipal Wholesale Electric Company as of and for the years ended l December 31,1997,1996 and 1995, s
l Our audits were made for the purpose of forming an opinion on the basic financial j statements of the Massachusetts Municipal Wholesale Electric Company taken as a j whole. The supplementary information included in Schedules I through III is presented
- l. for purposes of additional analysis and is not a required part of the basic fic.ancial jl statements. Such supplementary information has been subjected to the auditing lI procedures applied in the audit of the basic financial statements and, in our opinion, is l! fairly stated in all material respects in relation to the basic financial statements taken as a i; whole.
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i i 1 1 3 i s hedule i 1 j Massachusetts Municipal Wholesale Electric Company
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uPro'ect s.a.- - Statements of Financial Position _
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, L EC11AR NL'CLIAR NUCLEAR ECl.BR PROJEC7 HYDRO Ql'EBEC d
! SEWICE MN! PR013 PR0f 4 PROJ$ NO. 6 PEAKING lh7ERMEDIATE %YMAN Pil6E il 70TAL k Electric Plant in Service $ 2,734 $ 59,B79 $ 129,595 $ 258,925 $ 70,859 $ 500.712 $ 56,310 $ 152,786 3 7,361 $1,239,161 1
i Accumulated Depreciation (2 414? (19,877) (45.198) (66.265) (18,1981 (129,841) (33.722) (94,4051 " (4.108) - (414.028) l 320 40,002 84,397 192,660 52,661 370,871 22,588 58.381 3,253 825,133 l Nuclear Fuel-Net of Amortization - 880 1.507 3.366 859 4A40 - - 11.452 ! Total Electric Plant 320 40,882 85.904 196.026 53.520 375,711 22.5R8 58.381 3.253 - 836,585 i i i ' Special Funds t Bond Fund 1 Interest, Principal & Retirement Account - 3,039 2,285 6,674 1,977 5,753 15.219 2279 281 37,507 l Reserve Account 6,990 11.549 14.396 4.493 33,437 2,463 6,323 291 - 79,942 ! Reserve and Contingency Fund 3,516 3,143 4,325 1,218 6,482 875 1,701 299 - 21,559 ! Revenue Fund - 2,658 4.932 7,862 1,948 20,817 6,658 21,695 1,099 67,669 l Working Capital Funds 19,496 - - - - - - - (32) 19.464 19.496 16.203 21.909 33.257 9,636 75.955 12275 35.472 1,970 226,141 (32) Current Assets Cash & Temporary Investments 1,294 - - 2 3 1,307 8 . Accounts Receivable 5,426 20 38 15 4 21 136 3,060 399 i 115 9234 IJnbilled Revenues 5.593 - - - 5,593 Inventories - 58 - 1,543 391 2,136 2,189 7,884 262 I 14.463
- Advances to (from) Projects 1,370 (126) (227) (93) 712 (1,290)
(28) (309) (9) - - t, Prepaid Expenses 885 725 1,332_ l.516 384 2.100 7,023 6 13 62 i l Total Current Assets 14.568 677 1,143 2,983 751 3.951 3.043 9.667 714 123 37,620 l Total Special Funds & Current Assets 34.064 16,880 23.052 36,240 10.387 79,906 2,684 15.318 45.139 91 263.761 i i Deferred Charges I Amounts Recoverable (Payable) Under Terms f of the Power Sales Agreements (45) 68,434 90,668 (767) 5,229 37,231 (2,565) 11,319 (447) (743) 208,314 ! Unamortized Debt Discount and Expenses - 2.254 3.588 5,606 2.186 11,850 236 1,428 27,147 (1) l Nuclear Decommissioning Trusts - 2,081 3,978 2,279 577 3,157 - 12.072 { Other 21 213 337 676 175 1,006 27 78 65 742 3.340 1 (24) 72,982 98.571 7,794 8.167 53244 (2,302) 12.825 (383) (1) 250.873 3 y 5 34.360 $130.744 $ 207.527 $ 240.060 $ 72.074 $ 508.861 $ 35.604 $ 116.345 $ 5.554 $ 90 $1.351.219
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4 e ,> . , n .- , k ma.s;._ a w , m ., . m ;._ _ . long-Term Debt l Bonds Payable 5 $121,875 $ 197.230 $ 225,675 $ 68.395 $ 476,960 $ 30.270 $ 97.795 $ 4.535
$1.222.735 Current Liabilities ,l Current Maturities of
'l Long-Term Debt 5,380 4,145 6,185 1,745 12,460 3.360 7,705 335 41,315 Accounts Payable 4.464 109 100 1.546 391 2,141 288 2,879 12,241 302 21 Accrued Expenses 5,150 1,101 1,712 2,495 592 3,232 43 353 34 14.712 Member and Participant Advances and Reserves 24,746 90 160 1.678 323 10,632 1.643 7,613 348 69 47.302 34,360 6 680 6Y 7, 11.904 3.051 28.465 5.334 18.5 5 1.019 90 115,570 Deferred Credits - 2.189 4.160 2.481 628 3A36 - - 12.914
$ 34.360 $130.744 $ 207.527 $ 240.060 $ 72.074 $ 508.861 $ 35 604 $ 116.345 $ 5.554 $ 90 $1.351.219 ny m*crn-w~ - ~ ' : ggc=w~~~ ~ -
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i s hedule 11 1 i j s - Massachusetts Municipal Wholesale Electric Company .,
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1 q m Project Statements of Operations uuw -_ - ,,--nem an u dm.a; bce.-u JAh ;
i Year Ended December 31,1997 (in Thousands)
NUCl. EAR NUCl. EAR NUC1. EAR NUCLEAR PROJECT llYDRO QlIBEC SERVICE MTX 1 PROJ. 3 PROJ 4 PROI 5 NO 6 PEAKING INTERMEDIATE MW PHASE 11 TOTM. i l Revenues $ 45,548 $ 18.061 $ 27,441 $ 31,430 $ C,880 $ 59.538 $ 7,934 $ 41,090 $ 2,005 $ 575 $242,502 Interest !ncome 1,140 1,059 1,551 2,104 632 4.984 763 2,116 126 78 14.553 ) Total Revenues and Interest Income $ 46.688 $ 19.120 $ 28,992 $ 33.534 $ 9.512 $ 64.522 $ 8.697 5 43.206 $ 2,131 $ 653 $257,055 l: 1.t Operating and Service Expenses: j Fuel Used in Elecuic Generation $ -5 79 $ 29 $ 1,775 $ 455 $ 2,617 $ 1,135 $ 20,787 $ 947 $ - $ 27,824 i i Purchased Power 44,806 - - - - - - - - 615 45,421
! Other Operating 1,815 3,715 6,832 6,179 1,609 10,018 1,459 4,823 346 - 36,7 %
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-! Maintenance 22 3,188 6,137 2,907 736 4,027 289 1,812 88 - 19,206 f <' Depreciation 34 8,943 4,105 9,329 2,551 17,996 2,263 6,247 231 - 44,699 Taxes Other Than locome 5 446 N4 1,286 326 1,782 390 1078 191 - 6,298 46,682 9,371 17,897 21.476 5.677 36,440 5,536 34,747 1,803 615 180 244
{ i' l Interest Expense: Interest Charges 6 6,390 10.812 13,170 4,132 30,707 1,917 5.492 228 - 72,854 ! Interest Charged to Projects During Construction - (1) - (14) (4) (26) - - - - (45) 6 6.389 10.812 13.156 4,128 30,681 1,917 5,492 228 - 72,809 Total Operating Costs and Interest Expense 46,688 15,760 28,709 34.632 9,805 67,121 7.453 40.239 2,031 615 253,053 !i 8 Decrease (Increase)in Amounts lI ,i Recoverable Under the Power Sales ! Agreements - 3.3N) 283 (1,098) (293) (2,599) 1.244 2.967 100 38 4.002
$ 46.688 $ 19.120 $ 28,992 5 33.534 $ 9,512 $ 64.522 $ 8,697 $ 43.206 $ 2.131 5 653 $257.055 I
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Project Statements of Cash Flows l
... . _n.m Year Ended December 31,1997 (In Thousands)
NL' CLEAR NUCt. EAR NUCLEAR NtetIAR PROJEC7 HYDH0 QUEBEC S W ICE MIX 1 PROJ 3 PRn14 PRni. 5 i NO. 6 PEAKING INTERMEDIATE HYMAN PHASE !! TOTAL I l Cash flaws from operating activities: ' Total Revenues and Interest income
$ 46,688 $ 19,120 $ 28,992 3 33,534 $ 9,512 5 64,522 3 8,697 3 43,206 $ 2,131 $ 653 $25',055 !
Total Costs and Expenses, net (46,688) (15,760) (28,709) (34,632) (9,805) (67,121) (7,453) (40,239) (2,031) (615) (253,053) l Adjustments to arrive at net cash a provided by operating activities: Depreciation and Decommissioning 34 2,163 4,513 9,762 2,662 18,596 2,249 6,195 231 - 46,405 1 Amortization 314 383 1,931 556 3.145 67 294 3 - 6,693 Change in current assets and liabilities: Accounts Receivable 315 - 35 9 52 (136) (2,907) (399) 10 (3,021) l l'nbilled Revenues 1,027 - . . . -
- - 1,027 i inventories -
2 - 44 11 62 (733) 98 (74) - (590) l Prepaid Expenses (564) 168 2,112 175 534 2,925 - (1) 21 - 5,370 Accounts Payable (89) (32) 147 (2,808) (712) (3,793) (1,155) 4,349 246 20 (3,827) Accrued Expenses & Other (1,659) 468 849 412' 95 528 46 1 6 (59) 687 Member & Participant Advances i and Reserves (72) (1,182) (3.231) (1,967) (554) (2.074) (95) 1,186 (50) 3 (8.036) Net cash provided by (used for) operating activities (1,008) 5,261 3,119 8,423 i 2 308 16,842 1,497 12.182 84 12 48,710 Cash flows from investing activities: l Construction Expenditures and { Purchascs of Nuclear Fuel (212) (237) (352) (1,612) (408) (2,232) 2 73 (1,5 78) (5) - (6,363) Interest Charged to Projects During Construction (1) - (14) (4) (26) - - - - (45) Net (Increase) Decrease in Special Funds 502 363 1,544 (522) (183) (2,426) 1,414 (3,375) 248 (4) (2,439) Change in net Unrealized Cain on Special Funds 47 29 71 66 37 244 21 24 (2) - 537 Decommissioning Trust Payments - (324) (605) (557) (140) (770) - - - - (2,396) Other 577 99 188 122 31 169 - 142 - - 1,328 Net cash provided by (used for) investing activitics 914 (71) 846 (2,517) 1667) (5,041) 1308 (4.787) 241 (4) (9378) Cash flows frorn financing activities: Payments for Principal oflong-Term Debt - (5,190) (3.965) (5,905) (1,640) (11,800) (3,195) (7.395) (325) - (39,415) Net cash used for financing activities - (5,190) _ (3,%51 (5.905) (1.640) _{ll,800) (3,195) (7,395) (325) 139.415) Net increase (decrease)in cash and temporary investments (94) -
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Cash and Temporary Investments at Begmning of Year 1,388 - 1
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