ML20216E046
| ML20216E046 | |
| Person / Time | |
|---|---|
| Site: | Seabrook  |
| Issue date: | 12/31/1986 |
| From: | UNITED ILLUMINATING CO. |
| To: | |
| Shared Package | |
| ML20216D932 | List: |
| References | |
| NUDOCS 8706300631 | |
| Download: ML20216E046 (45) | |
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,g q fellow Sharcowners g; Last year, I described how we had sci difficult, but achievabic goals for ourselves in a determined effort to regain our financial -
h health and to attain a greater degree of control over Ult future. Those goals continue as the bedrock of all our actions on behalf 4 d? of those who have invested in that future. y o ;
@ l remain not only confident that we are meeting our goals, but excited about the strategic direction in which we are headed. ;l ,y Our strategic direction is driven by a clear and simpic vision: we are determined to manage your company as a competitive f G
k business enterprise and to do so with excellence. I M F9 i firmly believe the key to success of Ul as a business enterprise means first and foremost that we must be customer driven in all i j our actions, meeting their needs and doing so in an environment of cooperation with the public sector. That surely means .
% providing our customers with high quality service and at a competitive price. It also means we must at all times treat our I NI customers, our employees, our regulators and legislators with respect and courtesy, carefully listening to them and communicat- j '
d,z ing with them openly and candidly. It means we will be an active and contributing community partner in the 17 towns we'scrve. l In short, I believe the better we serve our customers, the better we will serve the interests of our shareholders. There is in place f$ h9, a c! car vision for UI's pathway to a successful future. That vision, and the enabling strategics, are understood by a 1500-member s { F ; team of dedicated UI employees who are working hard to make a successful future become reality for our shareholders. 3 h na I am pleased to report on the Company's strong performance during 1986. Much remains to be donc, however, and continued effort will be required. I will point out these areas, but first I offer some very positive highlights that speak of a bright future.
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!; l We reduced the average price of electricity to our customers approximately 13%, a feat that goes to the heart of achieving and maintainirig price competitiveness.
f I We essentially completed our nuclear construction program. Seabrook 1 is fueled, conditionally licensed and ready for commercial operation when fully authorized by the Nuclear llegulatory Commission. p g We embarked on an ambitious program to stimulate economic growth in our service area, with encouraging early 7 ' results. i k ! R We expanded our fuel diversity / flexibility program by adding natural gas, hydro electricity and additional nuclear power g . h; to our already flexible fuel mix. e. p ' While our financial performance was marked by record earnings,it was also significantly marked by several innovative ! financial actions as we continue through a transitional period toward full financial health. Q l And perhaps most important for our future, my senior management team is in place, a unified team charged with a sharp I [i sense of Ul's strategic direction and driven by the need to operate a lean and competitive business enterprise. f m e h i n r N f L . I,f i l i ? 3 Ik Cee,p W Edwards Jr. l
y wh i Again .this year, I urge a careful reading of this report. It has been organized into four broad areas th g employec team working in extraordinary unison. kh, Scabrook developments during the year were positive, except for one important element. While Scabrookht is oplk best built nuclear plants in the world and is now ready to produce electricity, we have been unable to persua hj officials to cooperate in the emergency evacuation planning process. IIowever, Ui and the other joint owne g
~
our efforts to solve this problem and we continue to pursue alternative courses of action to achieve commerci h plant. [ Seabrook is a needed and invaluable asset to the energy and economic future of Ul and New England.The 7 apro plant being politically prevented from serving customers and contributing to the continuing economic % senseless; I remain convinced that will ultimately be unacceptable to the public and that Seabrook will be hp Meanwhile, we have carefully analyzed and provided for our financial obligations in light of Scabrookh unc date. N$ Our supply side capability was significantly enhanced during the year with the addition of 42.4 megawatts Q generating capacity in Waterford, Connecticut and the equivalent of 39.7 megawatts from the flydro-Quebec M q k> nection with Canada. Future capability will be enhanced by our participation in cogeneration projects such as the 60 trash-to-energy facility now under construction in Bridgeport. Following on the heels of the uniquely successful 1985 reconversion ofmo capability, we also now have gas and oil fuct capability at our New llaven liarbor Station plant. T operational flexibility and our control over costs in rapidly changing and competitive fuel markets. h Under Dick Grossi's abic leadership, our ficxibility of fuel supply is already outstandi r delivers energy at a 99.08% reliability standard, we are strongly positioned to meet shifting customer ener 6 all our supply-side actions are driven by the singular purpose of meeting customer needs in the most costg% ef Recognizing the increasingly vital importance of demand-side management, seve rates and energy planning - were combined early in 1986 into a new integrated marketing organization un Senior Vice President Jim Crowc, Encouraging results are already occurring. ko n + A basic demand side management strategy is to reshape how and when our customers use energy so thatE nw Ulh capacity and thereby maximize savings for our customers. In 1986, we not only reduced theWav H clectricity by 13%, but we also achieved a 1.9% increase in customer sales and a 3.3% reduction in peak lo significant gains. f I continue in my unbridled admiration of, and respect for, the dedication of UI employees. They are the bed all our aspirations for the future. More than ever before, UI people are innovatively developing new and better y; yw t customers, ranging from creative problem solving to hi-tech hardware. For example, an innovative package of optional rates introduced in 1986 has already helped more th industrial customers reduce their energy costs. For some, that reduction hac meant the difference between not [ relocating their operations elsewhere. And UI has benefited from these innovative rates, not only by. re g also by making available over 10 megawatts of capacity which was then sold to other utilities. V V si! I Y
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. ,I !
l This customer driven philosophy was vividly demonstrated by our recent response to an announcement by a major customer of j; its intention to generate its own electricity. After intense negotiations, an incentive payment agreement was reached retaining the customer on Ulh system as a full scrvice - and much valued - customer with benefits to UI and to our other customers. l Also reflecting an entrepreneurial bias is our new Economic Development program which has already retained at least one major j customer and saved 450 manufacturingjobs in our service area. These are significant achievements. This Economic Development h effort will be broadened in 1987, with the introduction of a Business Retention and Expansion program designed to enhance the !I cconomic development efforts of municipal government and local business in our service area. ; These actions signify that UI does more than just talk about competition. We are taking such actions as are necessary to maintain Ulk competitive position in our marketplace. It is our intention to seek from legislators and regulators additional 1 t: pricing tools with which to achieve more flexibility in order to allow us to shape demand and to capture other competitive j' opportunitics. i S Our overriding financial challenge continues to be integration of our Scabrook investment into the rate structurc, without j increasing our rates to the point where our price competitiveness is disrupted. We are committed to manage this integration (J proactively and we will not sit idly by, just reacting to events. To that end, several important steps have been taken. L Ulk financial program is proceeding on the basis of providing for further delay in Scabrookt commercial operation; and several j h components of the plan have a common objective of maintaining adequate liquidity in this event. We are providing for availability - U of short term funds, while doing everything possible to control and reduce expenses and to maximize cash flow. l We have sQned a new $160 million revolving credit agreement with a number of banks which provides working capital to cover l any delay in the commercial operation of Seabrook to as late as mid 1988. Another component of the plan was redemption of $50 million of the Company's outstanding 15.88% Preference Stock and 16% Preferred Stock, the refinancing of $46 million of 18% First Mortgage Bonds and obtaining regulatory approval for issuance and sale of up to $400 million of new, lower cost debt in order to redeem ot her currently outstanding higher cost debt and Preferred Stock issues. , j The purposes of this extensive refinancing program are to reduce our capital costs, improve cash flow and extend current ){ . maturity dates, which call for a high level of securities redemptions and retirements during the next few years. Given the demanding challenges we have faced, our financial performance continues to be remarkably solid. I am extremely proud of the ability of Ulk financial people who, under the leadership of Bob Fiscus, have been able to develop creative solutions i to those challenges. It gives me the utmost confidence that we will meet our financial goals. Earnings per share increased to a record level of $5.97, a 2.6% gain over 1985, although more than 90% of those earnings were 3 non cash as a result of increasing Scabrook related construction balances. Our return on average common equity was 15.321 C One of the best indicators that we are on the road to financial recovery is continued strength in the market value of the [w Companyt Common Stock during the year. It was at the $30 level at year end with an upward trend continuing during the first part of 1987. f a - q Managing constructive relationships with all our external publics is vital to our continued success. Reficcting that, another key j 1986 development was the formation of a Corporate Affairs organization, combining the critical Public Affairs and Commumca- I tions Departments of the Company. UI is fortunate to have as the newest member of our senior management team, Rollie i I ha p} . hl 1 l
1 provement and renewed strength al. l though the stock continued to sell below book value. Starting off the year trading on the New York Stock Exchange around a $27 per share level,UI stock rose to
,,.... Just above $36 in the third quarter be-
-4 fore closing 1986 at $29.25.
1 Another favorable financial develop-ment that occurred during 1986 was an upgrading in ratings of UI debt securi-
* ~ *i ties by two major investment services
,f
,i
, # g q .}[ ,d agencies. Standard & Poort upgraded v
' , '.,' ,ik M the Companyt ratings to BBB- and j -
ggh kk rc I Moodyb moved Ulh rating up to Baa 3, (f both within investment grade category. g 7 h' The key to Ult financial future remains dependent on the rate treatment that
. will be given to its Seabrook investment by regulators, including resolution of ! ^
phase-in and prudency matters concern-
. t. M .
,g ing that project.
, i ,~1 i , g4 The Companywillattempt to obtain a i decision on the rate treatment of Sea-i' brook 1 byits commercialoperation 1
date. UI presently expects to propose a rate treatment that willinclude a
' L, , , .
phase-in plan which fairly balances the
~
r , . Interests ofits sharcowners and customers.
, While Seabrook I construction is essen-tially complete and fuel has been loaded, the timing of commercial opera-
~
i tion is currently uncertain. Accordingly, E'$$'"EM".7,$,Tc".slg=+ UIt financial program is proceeding on
$".'rC.5?."/"E.$'"'s.YY.7 the basis of providing for delay in Sea-Manager Ch.rles Pept brookt commercial operation. Several components of this program have the common objective of maintaining ade-quate liquidity.
. m; l MW n;d
. LWh , bWp One component of this plan accom- eventual rate treatment of Scabrook pg ,% l . plished in 1986 was the arrangement of and other factors affecting the Compa-
] m.
I a $100 million revolving credit facility ny's financial condition and prospects. e}g p qi OWV with a consortium of commercial banks At the close of the 1986 calendar year, Qpg which extends through 1988 and will af- the Company was addressing the im- l hhh ford sufficient working capital to cover pacts of a variety of events upon its fi- j i any delay in the Scabrook I in-service nancial condition. Among other things, gh 3 date through at least mid 1988. these included the effect of the'lhx Re- l r hih 94 As for earnings, Ul posted a record high form Act, new industry accounting rules
] Mgg per share level of $5.97 for 1980.The 2.6% gain over the previous year was due pertaining to abandonments and disal-lowances of plant costs and rapidly ris-
"Our objective is to continue to do fh
{ everything possible to hold down our to increased kiloWalt hour Sales as Well inginsurance and health care cost 3 rates white continuing to gain appro-I @p,fy } as additional allowance for funds used which are part of a national trend. priate returns for investors. our pro- hkj 1 i during construction (AFUDC).While Ul prepared and distributed a share- grams to use the fuels of least cost, l DE these record carnings are impressive,it owner surveyin mid 1980 and appreci- to create, promote and implement l @WJ dp; Q l must be recognized that a large percent- ated the time and effort expended by demand-contral programs and to re-age of those carnings- more than 90% many who responded. Expanded commu- strict our spending to bare necessities h , hik mA
-were non-cash AFUDC as a result of nications withits sharcowncrs are demonstrate our commitment to p f >:Mi increased construction balances. This planned and, in conjunction with this achieving the goal of minimizing elec-n bm l trend is anticipated to continue until effort, the Company was preparing a tricity costs."
{-j{ l Scabrook 1 is placed in operation and complete summary of the results of the N
.x its costs are reflected in rates. survey to be mailed to all shareowners gig $
An unbroken tradition of 87 years of early in 1987. ,
, p
- ' 9@
pg consecutive quarterly cash dividends As the Company advances with confi- _. J.g continued at UI in 1986, with the level dence in 1987,it adheres to the dual y l
;t.A of 58 cents per share remainingin ef- objective of continuing to do everything 1 f,;;u%
gh
~
feet. This marked an increase in divi- possible to hold down rates while carn-dends from $2.00 per share in 1985 to ing appropriate returns for investors. UI hw ftpe
$2.32 per share in 1986.The Company firmly believes that its programs to use (hV[
x,uf g retains the objective of fully restoring the fuels of Icast cost, to create, pro- , Qg .A the dividend to early 1984 levels when it mote and implement demand control i
))p$N y%
7 4 is deemed prudent, depending upon the programs and to contain spending to j7Ng
,,s absolute necessitics demonstrates the s l M Vi
.p.i 1 Companyt commitment to achieving the f l +$ @ w goal of minimizing electricity costs. i i r...m ;n However, the Company is also convinced Robert L Hscus ig that achievement of this goal can only n.cowe vic. Pr sie., /l,l" <t d , 9. !
and Chiet knanciai0ffa w hi4 d' be attained if UI is financially healthy. ' d ! y> m n' I o
J 1 i Managing Our Own identity 1986: A Year of Strong Performance y u N i % yj Ul Residential Customers Paid 8.5% Less in 1986 l New Haven Register i Nothing brings UI more happiness than Seabrook Scabrook Unit I approached )q t i the downward trend in the cost of elec. full commercial operation with several j n
! tricity. Since Ulh last rate case in Dc- important milestones last year. [ ! q cember IDS 4, cost of electricity to the Within the space of severalweeksin q ! average UI customer has dropped 15%. October, the plant was granted a full, j December 1986 bills for residential, 40-year operating license, subject to sev- j commercial and industrial customers cral conditions; fuel. loading of the reac- 5 1 ! were 13.7% less than in December 1985. tor was accomplished; and zero-power 1 i
These customers paid an average of 0.33 testing was initiated. cents per kilowatt hour for their elec- Those conditions for granting a license i tricity in the last month of 1986, down continue to center around the accep-I more than 1.5 cents from the 10.82 tance of emergency response and evacu-cents per kilowatt hour paid the pre- ation plans for the area around the Sea-vious December.The 500 hTII residen- brook site, tial customers, who are typical of Ulh in June, New flampshire Yankee an-265,000 residential customers, saw an nounced that Scabrook Station had j $8.18 drop in their monthly bills from once again received high marks in an in-l the December to December pericd. depth U.S. Nuclear Regulatory Commis-
; Tids reduction is due inlarge part to sion (NRC) cvaluation of the quality of dramatic advancements made in 1986 in work and nuclear safety programs at the our quest to achieve a diverse, yet bal- project.
anced, energy mix and as a result of a in one impact of the Scabrook project world wide drop in oil prices. As the within Ulh service area, the first phase Company achieves price stabilization of a $15 million, multi-year transmis-
- for our customers, a better fuel mix is sion-line project was completed ahead ;
i allowing UI to follow the fuel ofleast of schedule and under budget. The proj- {
! cost, while assuring an adequate energy cet entails upgrading the transmission supply for the future. line system between Newllaven and From a fuel mix that included a signifi- Bridgeport to approximately 300 mega-cant reliance on oil and a lesser reli- watts per circuit, in anticipation of ance on nuclear energy in 1984, UI has power received from the Millstone 3 and f
progressed toward a diverse energy pic Scabrook 1 Units. that by 1991 willfeature coaland nu Millstone 3,in which UI has a 3.7 per-i clear energy, as well as hydroelectricity, cent ownership, began commercial oper-q , gas, refuse, cogeneration- and a signif- ation on April 23. UI roccives 42.4 mega-icantly reduced reliance upon oil. watts of power from the unit.
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J ' UI Generating Plants in further testi- The successfulcoal reconversion at UI forced its coal costs to remain com-many to the overall outstanding per- Bridgeport Ilarbor Station in 1985 re- petitive with oil, resulting in even formance by UI's own generating units, suited in a $15 million savings for Ul greater absolute savings to customers. the August 1986 issue ofElectric Light customers that year, showing both BIIS In 1986, the output for the coal-burning and Power magazine ranked the com- as a key element in the Ul fuel mix. Last Unit 3 increased from 350 to 375 mega-pany lith among the nation's 100 larg. year, the dramatic drop in oil prices watts, thereby further decreasing the l cst investor owned utilities in the effi- nearly climinated any such relative sav- Company's use of oil for electric clency of its generating system. Within ings. Ilowever, since Ul managers re- generation. l the six-state New England region, Ul tained the unith oil-burning capability, was the second highest ranked company. New llaven llarbor Station had a banner # year as it gained the distinction of bemg m
;Qg% AR J
- y. 3 the country's most efficient oil fired ).8
,. 8 %>e>
k: .. 3e , . . . plant, according to statistics compiled ...' #. NY 3 by the Utility Data Institute. The listing y 5 2 - n revealed that the 447-megawatt station g g p, .kg ,g j g( , had the best heat rate among all oil- '"'ks '
.4'.2 *
* %' 3 E
fired plants in the nation, based on 1985 ,.j ,?Q.y data representing the latest available national statistics.
- e: ,
in addition, NilllSjoined Bridgeport ,g .
' og:.r . -
Ilarbor Unit 3 in dual fuel capability, with a successful overhaul and conver- 8 sion to natural gas. The conversion al-v lows the p! ant to burn either oil or gas, from which the Company can pass the savings derived directly to customers ' through the fuel cost adjustment. The Company expects to burn in excess of five billion cubic feet of gas cach summer. f Pres den iMap . et les Best Presideal and CEO David Carson; and. Bridgeport Meyer Thomas Basal at the a el Peep 's new Estory downtown i
1
- N.
M N; w h Hydro-Quebec Ilydroelectric power at Lion Awards from the Energy Division of gg UI became a realityin 1986 as Phase I the Connecticut Oflice of Policy and Nk my of the New England /Ilydro-Quebec In- Management.The award-winning pro-
, g%
terconnection came on line in October. gramsincluded the development and I, m y l p u, e UI, with a 5.75% share of the project, is use of " Breakout," a personal computer l3l $h entitled to 39.7 megawatts of equivalent energy from Phase Ih total of 600 nacga-program which analyzes residential bills, dh l watts. Phase I will account for 3.3% of Energy conservation was a big part of UIh overall capacity, in addition. when { Ulh overall customer effort last year. Phase ilis completed in 1990, U1 will Ulh successful Southern Connecticut kk receive a similar percentage of the Action Team (SCAT) program com- j gp h 2,000-megawatt capacity generafed by plcted a $500,000 grant project in fine that agreement. As an energy pndcct, fashion by providing energy conserva- l w w "UIis moving from a period when its j~ llydro-Quebec represents a significant tion measures to 513 service territory condition has been substantially influ- I benefit for U1 customers in terms of pro- homes,13 over the SCKrgoal. hr)g yg viding a secure, long-term energy supply, " Operation Fuc!" contributions by enced by its major programs to reduce t Q[ the risk and cost of heavy oil reliance j while helping us achieve our fuel llexi- United illuminating and its customers to one where we have greater diver- . p 5Y
@r, bility goal. also reached an all-time high of sity and flexibility in the fuel market- 4 M.p g
Ne,1 Connecticut Resources Recovery $102,353 in 1986. The customer portion place and can exert more control over Authority Construction of a trash-to-en- represented a 15% increase over the h NhE our destiny and product cost." crgy plant in Bridgeport continues to previous year. U1 matched customer con-
@a:
move forward. The solid waste facility tributions with an additional $25,000. e
\
\ GgM.
willprovide another 60 megawatts of UIbelieves that good environmental q gg] cogenerated power to the UI system managementis good business manage-
. j upon its completion later this decade. ment. In keeping with this philosophy, n
$g@{
i :N . Othersmallpower and cogeneration the Companyin 1986 began the most l' l
$gOp,4 sources,like the existing Amtrak gas ambitious and thorough polychlorinated ' '
I M,rl
%p0 Pi a i
turbine located in New llaven, are cur- biphenyls (PCB) management program jl
%e rently being explored by the Company, that any utility has ever undertaken. Ul Lower Costs and Innovative Programs is testing all of the approximately 1,400 !
gg,y in addition to the smooth operation of UI-owned transformers in customer 6 D this diversified energy mix system, the buildings even though regulation does j Company has focused on innovative en-9Qq not require the testing of transformers crgy programs which can help reduce of unknown PCB concentrations. All p, g[: customer rates. transformers with PCB concentrations t
,1
[ UI, and its people, received recognition greater than one part per million are sichardJ Grossa y y7i/I for efforts to improve service and lower being replaced.The PCB program is t.oh. v c. p h>,' W Ml and Ch ef Opersung Ofheer h ' Aav. customer costs. In Octcber, four UI pro- an example of Ulh commitment toits i
<9g grams were honored with 1986 Innova- customers;a commitment that goes ,
1 beyondjust meetingits mandated ;U [ L responsibilitics. _ _ _ _ _ _ _ _ _ _ __ __ _____ _b
l Meeting Customers' Needs Sharpening our Marketing Skills i
,1 1 t l l UICited For Being Efficient Utility l..
Doctric Powsf & bgM i
! In a move directly related to the Compa- The rates accomplish this by: offering i
ny's desire to provide the best possible incentives to companies that can shift q service to its 205,000 residential, com- substantial portions of their electrical mercial and industrial customers, sev- usage to off peak hours, by assisting eral key areas were consolidated into a businesses already located in the serv-f , new marketing section in 1986. Under ice territory to increase their produc-the direction of Senior Vice President - tion, and by encouraging businesses to Marketing James E Crowe, the new sec- relocate to the Greater New Ilaven and tion has responsibility for three areas: Greater Bridgeport areas. I customer service, energy planning and Nearly 100 firms were a$le to take ad-l l rates. These areas represent both vantage of these rates which helped UI wholesale and retail markets for energy reduce its 1986 peak by approximately sales. 10 megawatts while contributing to the j More thanjust selling more electricity, Companyt ability to maximize its reve-I the marketing section directs all activi. nues and at the same time assist an ties and areas of the Company to be important segment of its customers to responsive to customers' needs, now and control or reduce their costs. in the future. Its marketing strategy is Lowered energy costs and innovative designed to control the price of electric- rates are examples of UPs renewed dedi-ity through load management tech- cation to the region it serves. That dedi-niques that better utilize the Companyt cation is under the corporate steward-facilities, and by holding down the peak ship of UI's Economic Development usage of c!cetricity which,in turn, section, which is working to achieve the avoids the need for expensive new gen- long-term retention and expansion of crating facilities. business customers and to attract new One elementin this strategy which ones. In 1986, UI's Economic Develop-proved to be extremely beneficial was ment program helped retain at least 500 the development of an innovative op- local manufacturingjobs and recruited tional rate plan, which was approved by at least one major plant expansion. the Connecticut DPUC in the spring. The two metropolitan centersin Ult The rates were designed to help com- territory - Bridgeport and New llaven mercial and industrial businesses grow - are poised for dramatic develop-and prosperin Ulh service territory ments in their economy. The State without increasing Ulh need to expand Labor Department reported employ. its plant. ment reached a record high of more t
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N. o E..' . THE UNITED ILLUMINATING COMPANY
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than 1.65 million by the end of1986 some 53,100 ahead of 1985h record-setting pace. Unemployment through-out Ulh 17 municipalitics was under 4L New Ilaven real estate is already boom-Ing. Last May, real estate in the New llaven areajumped 30%in value,and housing starts are running 10% ahead of last year. Ulis already feeling the effects of . growth in its territory, particularly the shift from industry to commerce. While industrial sales declined 4.1%, commer-cial sales per kilowatt-hour increased 5.7% This, coupled with a 2.8% increase in residential sales resulted in an over-allincrease of1.0%in energy demand for the area. There is no end in sight for the contin-ucd growth. Several projects, both big and small, were completed during 1986. As those projects opened, new projects came off architects' drawing boards. In New llaven, the most exciting develop-ment continues to be the growth around the entertainment district. The reno-vated Shubert and Palace Theaters at-tracted 26 new satellite businesses to ! I
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downtown New llaven. An arts-oriented g-- - project is blossoming under a $20 mil-
! L-- " lion proposal that will include condomi-O niums, office space and parking m ,
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Plans call for the completion of 320 con- in the city. About 300,000 square-fect of dominiums,250,000 ',quare feet of office office space is opening up at Lafayette space and 42,000 square feet of commer- Square where the Lynmark Group of l 1 cial space by 1990. New York City is completing a $10 mil-l Some other New llaven projects in var- lion renovation of a former coat factory. l ious stages of development include a Another 100,000 square fect of office j conference center in Science Park, a space will be developed at the $6 mil-25-story office tower which will house lion project downtown, city government, additional phases of A $24 million hotel, The Bridgeport Hil-the Long Wharf Maritime Center, and ton, is to open in downtown Bridgeport continued development around the Ilos- with 240 first-class guest rooms in the i pital of Saint Raphael and the Yale med- first few months of 1987. Additionally, "We want to provide an adequate, relia-leal complex. L' Ambiance Plaza, a $17 million housing ble, safe and courteous electric serv-in Bridgeport, some $200 million of new project is the largest housing project in that encourages custorners to con-development is under way. Centerpiccc Bridgeport in 20 years. It will provide trol their costs through wise and of the growth is the 3.5 acre project un. 218 apartments for sale and rentin a efficient use and through reshaping [ der construction by Peoplet Bank.The 15-story building. their demand.We also want to in-steel skeleton for the 16 story complex The future lies in Bridgeport's inner ! crease the econornic vitality of our f is now pushing up the Bridgeport sky- harbor where developers-The Stcr- . service area by regaining price line. Plans include some $5 million for ling Group -are proposing a huge com-competitiveness.,, j renovations to the historic P.T. Barnum plex called liarbor Pointe that will take Museum, which is located in the two 20 years and $700 million to complete. It city blocks occupied by what will be is p'articularly exciting to UI because it called The Bridgeport Center. More thanjust a new bank headquarters, would include Ulb Stect Point Site. The Steel Point generating station was re-h
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Ilridgeport Center epitomizes the phi- moved from service in 1982. Plans in-j losophy that the future of Ilridgeport clude waterfront condominiums, town- { belongs to the people and businesses houses, a marina, a heliport, f b there now. restaurants, theaters, retail outlets, spc- i l The Ilridgeport Centerk 425,000 square cialty shops, a hotel, an arena and office I feet of office space is the largest, but not towers along the 8,000-foot waterfront. k the only, portion of one million square This isjust the first phase of what may - (
'a feet of oCice space under construction be the key to Bridgeporth renaissance.
h e' James F. Csews Senor %ce P,es. dent - t Marketmg r l i I.
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' Extnding the Corporate Presence l w UI Expands Outreach Program to Milford New Haven Journal Counst Recognising the increasing importance For Ulb Public Affairs Department,1986 of managing constructive relationships was an active and challengingyear.
with a variety of UI's external and inter- Nearly a hundred bills were introduced nal publics, an organizational change of in Connecticut whichimpacted UI. mWor significance was madein 1986 Among them, considerable legislative with the formation of a Corporate Af- activity was directed to cogeneration. fairs organization. UI continues to endorse the concept of Under Senior Vice President Corporate cogeneration as provjding a valuable Affairs Ilollie Comstock, the new organi- component of long term capacity plan-zation is charged with planning and im- ning. But, Ith important that such c.a-plcmenting programn designed to pro- pacity additions occur not onlyin a U mote UIinitiativ'se in its vital . timely way, but in a manner both relationships with legislative and regu- cost-effective and fair to all of UI's latory government-local, state an'd ratepayers. j federal, the news media, the 17 commu- During the year, a program to establish l niticsin Uth service-area and with a UI presence in Washington was initi-employees. ated.That effort willbe expandedin A basic and continuing thrust of all Ulb 1987. efforts on the Connecticut legislative - A key element of achieving constructive and regulatory fronts is to provide a pos- and supportive relationships with var-itive and constructive political climate tous publicsis Ulh commitment to be a p in which the interests of sharcowners ' contributing and constructive partner and customers can best be pursued. In helping to address community con-Specifically, efforts in 1986 were fo- cerns and needs of the 17 towns which - cused on retaining sufficient flexibility we serve.To that end, the new Corpo-in current law and regulation to ensure rate Affairs organization initiated a eventual recovery of UIb Scabrook in- broad-ranging effort to marshall UI re-vestment. In addition to that primary sources in support of the social and eco-focus, close attention was paid to any nomic development of our region.
- j legislation or regulation which would Such community relations efforts are 1
cither enhance or detract from Ulh con- only as effective as the grass-roots net- -a tinuing efforts to further reduce operat- work of employees that supports them. ing expenses. All employees are being actively encour- '(p 1
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aged to assist in area developnient and again provided one of the more success-community relations through their par- fuland innovative programsin the j- ticipation in local civic, government and nation. social organizations. Employees have re- In all, approximately 80,000 students sponded enthusiastically as evidenced were reached last year, which repre.
-l by a dramatic increase in voluntecrism sents nearly two of every three students throughout the Company. In our service territory.
Corporate Affairs also directs the activi- In keeping with the desire to increase ties of a speakers bureau,which uses UI's profile in the communitics it serves, employees from all sections of UI to in- the corporate advertising program was form a cross section of business, commu- substantially expanded in 1986. In addi-nity and professional groups about a va- tion to conservation advertising, the riety of Company and industry subjects Company moved ahead with generalim- j ofimportance. age and awareness advertising to better ! For manyyears, UI has recognized the communicate Uit strategic direction l 1 importance of the educational commu- and goals. Using print and electronic ! f nity to the attainment of Company media, themes underscoring the impor- ! ur.n 6 ii.,s,k.,.e , goals. In 1986, educational services tance or electricity to the quality of our
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l lives, the reliability of Ulk service and manufacturing companies, was elected our long-range goals were produced and at the Company's 87th annual meeting strategically disseminated to maximize . of sharcowners in April. Ilridgeport-sat uration. based businessman William S. Warner, To develop meaningful customer infor- president, chief executive o!11cer and a mation programs,it is imperative to directer of The Hydraulic Company i have accurate data on the needs, de- which is engaged in public water supply stres and attitudes of our customer and other businesses, was elected to l base. This can only be done by conduct- Board membership in July replacing l ing careful research surveys. During the Frank Kenna who resigned at mid year l past year, two surveys were conducted, because of the demands of his own "N"'"" d '" Sh" P " "" d i"'3 " """ " """ business, tudes and perceptions among those one profiling general customer opinions aumencu using au ninha tonns so and a second more specifically designed in moves desigacd to meet customer diat our cupmate v ice is heard not for area opinion leaders. needs more efficiently and competi-only in our service area. but in Hart-Doth surveys statistically demonstrated lively, two members of the Company ford, New tngland and even Washing - Ul's respected standing in the commu- management team were promoted to nity and have served to focus attention senior vice president. James E Crowe, " A 8'ochialview P of our business opuauon is simply not in the best in-l on those key areas where further atten- formerly vice president - engineering tion is warranted, and energy planning, was named senior '""'"'""' invest rs and our The public information section, respon- vice president - marketing and David W. ""5'""'"5-" sible for news media contact, expended lloskinson, formerly vice president - - considerable effort providing electronic operations, was named senior vice - and print reporters and editorial staff president- operations. , with in depth background material on The mid year appointments of Roland W. all significant Company developments. Comstock, a nationally known and re-Informational tours of Ul generating fa- spected electric utility executive from cilities and distribution centers were Minnesota to the newly created position , conducted. Such tours give reporters ex- of senior vice president- corporate cellent " hands on" experience with affairs and of Albert N. llenricksen, a ; Company operations and help assure ac. 23-year veteran of UI service who had curate and balanced reporting. been serving as director of engineering, Organization to the post of vice president - engineer-The lloard of Directors was 81rength- ing essentially completed Ulk current i ened during the year with the election management team, of two new members. New llaven indus.
. trialist Geoffrey Etherington II, prest-Anne G. Spinney, who had served as vice president - communications since 1977, noi ,c.,,,,a 4
dent and owner of Etherington Indus- retired in June following 42 years of $,"",j,"Jl,"*"' ' tries,Inc., a diversified group of Company service.
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. JheUnitedIlluminatingCompany Ten-Year Summary of Selected Financial and Statistical Data O
1986 1985 1984 ! 1983i Kilowatt flour Sales (000) Residential 1,700,302 1,654,591 1,642,564 , 1,637,581j Commercial 1,914,889 1,810,192 1,729,027 F 1,657,518l Industrial 1,232,209 1,286,402 I 1,314,328 1,255,824 l Other 65,533 68,064 71,998 i 71,085 Tbtal 4,912,933 4,819,249 4,757,917 / 4,622,0 , Financial Results (000) Sales of electricity-Residentia! $ 178,268 8 190,880 $ 185,209 $ 166,3 Commercial 180,888 192,658 187,112 5 163,458 l Industrial 99,939 118,637 124,118 107,724 l Other 9,516 10,367 10,664 g 9,771 j Other operating revenues 2,508 2,394 2,367 j? 2,283 Totaloperating revenues 471,119 514,936 509,470 'E 449,586 Operating expenses, exc'uding income tax expense 333,651 368,200 400,773 l 356,38 % Income tax expense (crtdit) 51,419 62,047 44,371 ; 37,74 } Allowance for funds used during construction 78,044 62,623 57,242 52,40$ Otherincome 28,290 29,755
';E 13,981 19,083 Interest charges Netincome 90,833 77,402 52,351 .f '41,341 101,550 99,605 88,300 ( 80,501 Preferred and preference dividends 18,969 20,339 16,883 i f} 14,084 Income applicable to common stock $ 82,581 $ 79,266 8 71,417 }p 4 66,419 Capitalization (000)
Long term debt Preferred and preference stock
$ 680,215 $ 668,315 $ 571,403 f[f 1
$ 394,111 Not subject to mandatory redemption 70,000 70,000 70,000 '9 70,000 Subject to mandatory redemption 63,000 96,000 99,000 ,! 65,000 Common stock equity 502,384 509,750 453,919 1 408,331
'Ibtal $ 1,375,599 $ 1,344,065 $ 1,194,322 y $ 937,441 Common Stock ,f Number of shares at year-end 13,886,566 13,720,050 13,429,443 4 12,972,344 Average number of shares outstanding 13,827,431 13,623,093 13,213,526 11,708,571 Earnings per share (a) $5.97 $5.82 $5.40 f $5.6%
g Dividends declared per share $2.32 $2.08 $2.30 g $3.08 Book value per share $40.50 $37.15 $33.80 t $31.48 Shareowners-Total 29,888 35,426 38,848 , j 41,061 In Connecticut 14,008 15,606 16,774 j y 17,86? In Company territory 9,282 10,056 13,539 13,74? {d
.s General ft Peak load -kilowatts 985,710 1,019,980 998,910 l 969,500 Generating capability at year end - kilowatts (b) 1,239,530 1,197,150 1,229,440 : 1,235,851 Number of customers 298,484 294,320 290,591 i 287,371 Kilowatt hours per residential customer 6,356 6,265 6,293 j 6,331 Number of employees 1,576 1,501 1,559 ; ~
i* 1,561 Totalpayroll(000) $ 52,782 $ 49,150 $ 46,911 $ 44,116 l lbtal taxes (000) $ 70,609 8 83,618 $ 76,284 l 8 66,3M Utility plant at year end (000) $ 1,652,485 $ 1,494,218 $ 1,333,076 ) $ 1,238,091 Gross property additions (000) $ 183,978 $ 179,103 $ 210,378 j $ 197,418 Total assets at year end (000) $ 1,729,967 $ 1,655,008 $ 1,486,593 $ 1,179,401 ) (a) Earnings per share based on the average number of shares outstanding.
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(b) Represents maximum dependable net load-carrying ablHty during the winter period for New England Power Pool purposes, Including l'n share of capacity in Connecticut Yankee Atomic Power Company (65,290 KW).
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[ 1982 1981 1980 1979 1978 1977 l l 1,593,854 , t 1,611,212 1,660,353 1,677,431 1,683,363 1,664,029 1,578,433 e .1,551,228 1,568,638 1,565,380 1,541,127 1,505,879 ) 1,232,942 1,315,172 1,415,274 1,467,969 1,419,297 1,356,652 69,935 70,299 70,813 69,971 68,621 67,541 1 4,475,164 4,547,911 4,715,0,78 4,780,751 4,712,408 4,594,101
]
l $ 161:237 $ 164,595 8 133,763 $ 104,512 $ 82,316 8 84,099 156,902 157,386 122,904 94,400 72,361 73,323 i 106,788 117,624 98,303 75,316 54,994 55,348 i 9,652 9,613 7,697 6,330 5,463 5,530 { 2,151 1,804 1,455 1,320 1,181 1,203 i
~436,730 451,022 364,122 281,878 216,315 219,503 353,070 386,279 328,253 238,605 183,289 182,696 q 31,810 22,454 (387) 4,963 (164) 2,259 >
40,349 28,113 27,555 15,501 8,268 4,937 8,595 9,040 710 1,102 740 143 35,039 29,904 30,055 25,245 20,721 15,970 f 65,755 49,538 34,466 29,668 21,477 23,658 14,084 12,351 0,296 5,744 4,751 4,751 $ 51,671 $ 37,187 $ 25,170 $ 23,924 $ 16,726 8 18,907 6 373,015 $ 303,643 $ 295,581 8 251,976 $ 233,953 $ 241,931 70,000 70,000 70,000 70,000 70,000 70,000 65,000 65,000 45,000 15,000 - - 319,720 262,198 222,861 186,326 177,526 140,099 $ 827,735 $ 700,846 8 633,442 $ 523,302 $ 481,470 $ 461,030 10,693,605 9,154,578 7,660,132 6,090,448 6,047,018 5,020,119 9,579,312 8,775,667 7,061,241 6,072,725 5,458,428 5,012,122
$5.39 $4.24 $3.56 $3.94 $3.06 $3.77
$2.92 $2.70 $2.68 $2.62 $2.56 $2.47
$29.90 $28.64 $29.09 $30.59 $29.36 $29.70 39,213 -37,868 36,447 34,554 35,285 32,354 17,750 17,765 18,372 18,439 19,018 18,695 13,439 11,815 12,456 12,155 12,343 12,201 951,700 949,100 971,100 915,300 952,900 944,100 1,235,850 1,281,050 1,299,360 1,299,360. 1,322,800 1,331,020 m 34 7
284,586 282,890 280,800 278,523 276,289 274,432 6,213 1,517 6,312 1,514 6,545 1,481 6,664 1,460 6,739 1,424 6,711 1,421 APERTURn $ 40,310 $ 35,581 $ 31,653 $ 28,405 $ 25,894 8 23,317 CARD $ 64,319 $ 54,510 $ 34,777 $ 32,424 $ 23,180 $ 24,198 $ 1,049,761 $ 922,734 8 830,034 $ 764,651 8 681,585 $ 612,237 $ 167,924 $ 115,540 $ 98,413 $ 86,643 $ 70,731 8 48,300 fAlso Available On $ 982,852 $ 836,508 $ 739,027 $ 666,387 8 575,110 $ 515,037 hperture Card 97M30063/- ol page 29
i 0 TheUnitedIllumir tingcomp ny M:nagement's Discussion and Analysis of j Fin:ncial ConNion tnd Results of Operati:ns i Major influences on Financial Condition }_ During 1986, the Company made substantial progress toward achiev. Connecticut law prohibits the inclusion of construction work m prop ing a diversilled and flexible enerEy supply with the conversion of ress (CWIP) in rate base, except in the case of Seabrook Unit I and New ilaven liarbor Station to a dual-fired oil and gas capability, the inclusion is further limited to companies that have experienced, or completion and placing into service of the Millstone Unit 3 nuclear would experience, " negative cash flow" without C%1P in rate base. unit in April and the virtual completion of construction of the Acting pursuant to this exception, the DPUC, in its December 1984 Seabrook nuclear unit by year end. The successful accomplishment decision on the Companyh request for a general rate increase, al- 4 of these mWor milestones in the Companyh construction program lowed the Company to include in rate base approximately $183 mil-makes the primary financial concern for 1987 the achievement of lion ofits investment in Seabrook Unit 1, an increase of $63 million commercial operation status for Seabrook Unit I and, more particu- over the amount which had been allowed in its August 1983 rate larly, obtaining a Department of Public Utility Control (DPUC) rate decision. The CWIP amount in rate base was reduced to approxi-decision that will parmit a return on, and recovery of, Ulh invest. mately $48 million by the final determination concerning the ex-ment in this unit. A corollary of this concern is that lengthy delays in change in rate base of approximately $135 million of Millstone Unit 3 achieving commercial operation of Scabrook Unit I and obtaining a costs, including $5 million of nuclear fuel costs, for a like amount of DPUC decision regarding rate treatment of the unith costs will Seabrook Unit I costs, coincident with the commencement of com-further constrain the Companyh cash flow due to ongoing carrying mercial operation of Millstone Unit 3. costs ofits investment in the project. Under Connecticut law, a condition of the inclusion in rate base of Construction Program Seabrook Unit 1 CWIP is that an amount equal to the CWIP amount
* * * '" "8' " *"" "8 "I'"
The mWor portion of the Companyh construction program consists of period of time equal to the time the CWIP amount had bee'n in rate ' participation in the construction of Seabrook Unit 1 in Seabrook, base. Additionally, the amount of the Companyt investment which New llampshire, a nuclear unit in which the Company has a 17.5% can be included in rates is currently limited to its share of the $4.7 ownership share. At December 31,1986, the Company had invested billion cost ' cap established by Connecticut legislation and regula-
$814 million in the Seabrook unit (excluding nuclear fuel and includ-tion. Although certain cost increases are excepted from this cost ing $270 million in allowance for funds used during construction). ,
limit and the Company has filed a court appeal with respect to the ; While construction of the unit is virtually complete and a 40-year limit, any c sts exceeding the established limit may be unrecovera-
- conditional operating license has been roccived from the Nuclear ble. Furthermore, the Companyt investment in the Seabrook unit is Regulatory Commission, the inability to resolve issues related to ,
subject to a prudence review and, under Connecticut law, phase-in of the development of off-site emergency response plans for the Com- l the investment in Seabrook Unit 1 into rates over a period of time ; monwealth of Massachusetts continues to prevent the unit from will be required. 0ther Connecticut legislation requires the DPUC to achieving commercial operation status. As a result of this delay, the determine the appropriate level of generating reserve capacity for a Companyb share of the cost of this unit is expected to increase by utility prosecuting a rate proceeding and to exclude from the utill-approximately $10 million per month. The Company had previously tyh rates the costs associated with any excess capacity, estimated a total prqject completion cost of $4.56 billion and an in-service date of October 1986. Ilowever, the unit is not likely to Liquidity and Capital Resources f achieve commercial operation before early 1988.
, The Company financed its 1986 construction program with internally Another portion of the Companyh construction program has involved generated funds and special deposits. ,
the Millstone Unit 3 nuclear generating unit, in which the Company During 1986,23% of construction expenditures were provided by has a 3.685% ownership share. This unit was placed in commercial internally generated funds. This decrease from 41% in 1985 was due operation on April 23,1986, i primarily to higher financing and non-fuel operating costs and lower The Companyt financ!al condition is influenced by both the size and investment tax credit benefits. The balance of construction expendi-the cost of financing its accumulated investment in construction. To tures for the year was financed by special deposits, which repre-the extent that this investment is not included in rate base, cash sented the unexpended proceeds, plus accumulated interest, of two r recovery applicable to the investment is limited to the income tax M84 tax exempt debt issues and a Bridgeport Electric Company benefits of construction until such time as the plant is placed in (BEC) debt issue. BEC, a wholly owned subsidiary of UI, is a single-operation and the investment is reflected in rates charged to cus- purpose corporation which owns, and leases to UI, Bridgeport liarbor [q tomerr,. Ilowever, from an earnings standpoint, the cost of financing Station Unit 3. In 1984 and 1985, BEC issued and sold First Mortgage p construction balances is offset by a non cash credit to allowance for Bonds, which are secured by a first mortgage lien on this generating d funds used during construction. unit and by an assignment of all lease rental payments from UI to a BEC.
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W.aD In June 1986, the Company fmanced substantially all ofits ownership loan agreement with a financial institution. The Company then share of the cost of certain pollution control facilities at the Mill- loaned the proceeds of this borrowing to BEC, which in turn reput-q stone Unit 3 nuclear generating station by borrowing from the Con- chased $46 million principal amount of the outstanding 18% First 9 necticut Development Authority the proceeds of the Authorityh Mortgage Bonds, paying a $17 million premium to the bondholden. 3 issuance of $7.5 million of tax-exempt 9%% Pollution Control Reve- BEC has arranged, subject to certain conditions precedent to closim,
.d
',g nue Bonds.The proceeds have been used to reimburse the Company's a long-term First Mwtgage Bond issue in the principal amount of $6 treasury forits shaec of the costs of the facilities. million maturing over a five-year period ending February,1999 at an iO b In August 1986, the Company entered into a sale and leaseback agreement with a financial institution providing for the financing of interest rate of 9.44% per annum.The $17 million bond purchase premium was taken as a deduction for income tax purposes m 1986, thereby providing the Company with $9 million of tax benefits. Tius up to $10 million of its ownership share in the nuclear fuel for amount, t gether with the proceeds of BEC's $54 million financing, M Millstone Unit 3. Under this arrangement, the Company sold its will be used to repay the financial institution borrowing. These interest in existing fuel for its book value of approximately $6 million transactions, which will reduce annualinterest expense by approxi-
,h]$ (including allowance for funds used during construction). The Com-pany is paying rent for the fuel based on the direct costs to the lessor mately $1.5 million, are consistent with the Companyt objective to replace high-cost securities issued in recent years with lower-cost of the fuel, plus the lessort flnancing costs, in addition, the Company Anancings.
)M d continues to utilize a sale and leaseback arrangement with the same 1[y financial institution for the financing of nuclear fuel for Seabrook Unit 1, and a fuel reserve and supply agreement, also with the same Results of Operations Earnings per share for 1986 increased 15 cents from 1985, due prl-
, ;g financial institution, to finance fossil fuel purchases of up to $135 marily to an increase in kilowatt-hour sales and a greater arnount of
- W million,less the outstanding Millstone Unit 3 ar.,1 Seabrook Unit i non cash allowance for funds used during construction due to in-g nuclear fuel lease obligations. At December 31,1985, approximately creased CWIP balances associated with Seabrook Unit 1, offset in g $63 million of nuclear fuel and $77 mi!Mn of fossH fuel purchases, part by higher costs associated with a scheduled refueling and over-gw including coal, were being financed under these arrangements. The haul of the Connecticut Yankee nuclear unit. Earnings per share for ggg Company expects to expand the fuel reserve and supply agreement to 1985 increased 42 cents from 1984, due primarily to increased sales 1 g include purchases of natural gas for use as fuel at New flaven liarbor egnesulting from the continuance of several cash conservation' Station and to extend its tenn to November 30, IE. )
,4 measures adopted in May 1984 and a gmter amount of non cash j Pi
, hj in September 1986, the Company negotiated a $160 million revolving allowance for funds used during construction due to increased CWIP credit agreement with a group of banks, extending to December 31, balances. Earnings for 1985 were adversely impacted by the effect of n ,d
# 1988, to replace an earlier $66 million revolving credit agreement which expired on September 30,1986. As of December 31,1986, the costs associated with flurricane Gloria, which amounted to 25 cents per share, ff ag Company had short term borrowings of $17 milliun outstanding un-der this agreement. The Company and the banks have also agreed to Kilowatt-hour sales for 1986 and 1985 were up 1.9% and 1.3%, respec-tively, over comparable prior periods, reflecting improved commer-
)
I g extend the term of an existing $40 million accounts receivable skle cial activity and higher residential use. l
?M agreement to December 31,1988. To date, this agreement has not 1
% been utilized. , Operating revenues for 1986 decreased by $44 million from 1985, despite a higher volume of kilowatt hour sales, due to lower fossil j m JC In September 1986, the Company and BEC filed an application with fuel and energy costs rehmed in billings to customers through the M the DPUC seeking approval of the sale of up to $400 million oflong- I fuel adjustment clause (FFAC) in the Companyt rates. In 1985, dF term fixed-interest debt securitics during the period ending Decem-ber 31,1987. The objective is to lower the Companyh effective cost of operatlng revenues exceeded 1984 by $5 million, as the effects of the d December 1984 rate increase and increased sales volume were sub-capital by refinancing outstanding long term debt and preferred stantially offset by the effects oflower fossil fuel costs through the
"@$l. stock issues which were issued in the 1979-1985 period, when inter-est and preferred stock dividend rates were at high levels. The DPUC operati n of the FFAC, l
approved this application in November 1986. Fuel and interchange energy expense in 1986 decreased by 28% from ! 1985, due primarily to the burning of coal at Bridgeport liarbor Unit
h ' '
in April 1986, the Company redeemed 1b0,000 shares of 15.88%, Preference Stock at $25 per share, plus accrued dividends. In Novem- 3 and lower fuel oil prices. These reductions in expense were offset in part by the lack of availability of the Connecticut Yankee nuclear ber 1986, the remaining 1,040,000 shares of this stock outstanding ) were redeemed at the call price of $27.75 per share, plus accrued unit fr m January to May 1986 during a scheduled refueling and I verhaul, and by increased kilowatt hour sales during 1986. The V dividends. The $29 million redemption payment in November was decrease in 1985 fuel and energy expense from 198( was also due l E made from available cash on hand. s 4 primarily to the burning of coal at Bridgeport liarbor Unit 3 and 1j On November 24,1986, the Company called for redemption all of the lower fuel oilprices. Q e outstanding shares ofits 16% Preferred Stock 0n January 15,1987, these shares were redeemed at the call price of $27.75 per share, fd plus accrued dividends. The $22 million redemption payment was
, Q made from the proceeds of short term borrowings.
In 1984 and 1985 BEC issued and sold an aggregate of $200 million y i principal amount of its 18% First Mortgage Bonds. In December 1986, the Company borrowed $63 million under the terms of a short term
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l Outlook j Other operation and maintenance expenses increased in 1986, due in In 1987 the Companyt financial condition will be heavily influenced I part to higher insurance costs and increased expenditures associated by the cost of carrying its investment in the Seabrook Unit I nuclear , ) with the scheduled maintenance of three mWor generating units. In unit until it is placed in commercial operation and, more particu. 1985, operation expense increased due to higher pension expense larly, by the DPUCh treatment of the Companyh investment in this related to a voluntary early retirement program which was in effect unit in a rate proceeding. during early 1985, higher costs associated with real estate rental
- Pos tive Seabrook Unit I developments during 1986, including com-charges and higher insurance costs. Maintenance expense increased pletion of construction financing, achievement of mWor construction in 1985, due primarily to Hurricane Gloria and increases associated milestories on schedule and under budget, and reafilrmation of Con-with the overhaul of generating units.
necticut regulatory support for completion of the unit, have allowed g Depreciation expense increased in 1986, due primarity to the addi- construction of the unit to be virtually completed; and a full 40-year , tion to depreciable plant of the Millstone Unit 3 nuclear generating operating license has been issued by the Nuclear Regulatory Com-unit which was placed in commercial operation in April 1986. In mission. While the risk of cancellation of the unit has been reduced - 1985, depreciation expense increased due mainly to the commence- by these events, both the occurrence and timing of the operation of ) ment of depreciation of plant costs associated with the coal recon- the unit continue to be depbndent on acomplishment of necessary i version et Bridgeport liarbor Unit 3. remaining steps which are largely beyond the Companyb control, l especially the timely and successful resolution of difficulties in se-Amortization of cancelled nuclear projects decreased in 1986 from l curing approvals of off site emergency response plans. The State of the prior year, reflecting the completion in March 1986 of the Pilgrim Unit 2 amortization, which commenced in 1983. In 1985, amortiza- New llampshire has filed offgite emergency response plans with the Nuclear Regulatory Commission, but the Governor of Massachusetts . Lion of cancelled nuclear projects increased over 1984, reflecting the has announced that he does not intend to do so, since he does not inclusion of a full yeath amortization for Seabrook Unit 2, on which . believe that plans can be developed which will adequately protect 1 amortization commenced in December 1984. health and safety if an accident were to occur. While the receipt of . I Income tax expense decreased in 1986 from 1985, due principally to an operating license is an encouraging development and project reductions in taxable income resulting from higher interest and non- management has stated its intention to pursue other available op- i tions to resolve the emergency response issue, the Company is unable ! fuel operating expenses. In 1985, income tax expense rose over 1984, , reflecting increases in pre-tax income. Other taxes decreased in 1986 to predict if and when all the obstacles to commercial operation of compared to 1985, reflecting a reduction in state gross carnings Seabrook Unit I will be cleared. A lengthy delay will add substan- : taxes associated with lower revenues. In 1985, other taxes decreased tially to the final cost of the unit. In the event cancellation of the 2 from the 1984 level, due primarily to lower local property tax unit were to occur, it would have serious effects on the Compr.ny, and expense. the Companyt financial viability would be dependent upon the rate ; treatment afforded its investment in the unit by the DPUC. Allowance for equity funds used during construction increased sub-stantially in 1986 over 1985, due primarily to a higher CWIP balance The Companyt future financial condition will be adversely affected for Seabrook Unit 1. In 1986, other income and deductions, excluding by changes in accounting rules, effective by 1988, concerning ac-the allowance for equity funds used during construction, decreased counting for the cost of abandoned plant investments and for substantially from 1985, due primarily to a reduction in interest amounts of plant investment reduced or disallowed for rate making income resulting from lower average balances in temporary cash purposes. The Company presently estimates that, by 1988,it will investments and the depletion of special deposits for construction as have to recognize a loss against current income of approximately payments were made for the Seabrook Unit I project. In 1985, other $145 million, net of applicable income taxes, consisting of $8 million income and deductions increased over 1984, reflecting the tax bene- on account of the cancelled Seabrook Unit 2, $12 million for the fits associated with debt carrying costs applicable to the cancelled partial disallowance of Millstone Unit 3 costs, and $125 million on Seabrook Unit 2 and interest income on temporary cash investments account of Seabrook Unit 1. The estimate with respect to Seabrook and special deposits held for construction. Unit I assumes a January 1988 commercial operation date and 1987 m nthly costs of $10 million on account of the Company 517.5% l The 1986 increase in net interest charges over 1985 reflects primarily wnership share. If finalized as presently proposed, pending changes ) the full yeart effect of the $100 million increase in BECh First ] in accounting rules regarding phase-in plans for large plut additions Mortgage Bonds in November 1985. In 1985, net interest charges rose sharply over 1984, primarily as a result of debt issued in the last half c uld also be e,xpected to have a negative effect on M Nw and general financial condition. of 1984 to finance construction and climination of the allowance for l borrowed funds used during construction associated with the inclu- The Tax Reform Act of 1986 will also have an adec impact on the ; sion of additional Seabrook Unit 1 CWIP in rate base. Company's financial condition. Although the reduction in tax rates j will result in I wer perating income tax expense, various other ! Dividends on preferred and preference stock for 1986 decreased from 1985, due to the redemption of preferred and preference stock in # 8 " ' " " "" 88 " *" * '
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1986. In 1985, dividends on preferred and preference stock increased Mec e ce mpan$ casMow Met kwyeaa over 1984, reflecting a full yearh dividends on the 19% Preferred Stock issued in the second half of 1984. v i t I f 1 . 2 l , L I i i i
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4f . c. The Company will attempt to obtain a decision on the rate titatment funds Required for Construction i of Seabrook Unit i by its commercial operation date. The Company 5"'*** presently expects to propose a rate treatment that will include a :o e a e a phase in plan for Seabrook Unit I that is within the three-to ten-year
,; - phase-in period prescribed by Connecticut law.The Companyt m2 -
. "P phase in proposal, which may be influenced by pending changes in accounting rules, will reflect the Companyb strategic goal of keeping rates relatively stable in real price terms.
' m e From a financing standpoint, the Company currently anticipates that ,,,,,,,,,,,,, ,,
its external financing requirements for construction and refunding of maturing securities in 1987 will be approximately $55 million, llow-ever, the Company has obtained DPUC approval of a $400 million long term debt program, having as its objective the refinancing of a substantial amount of high cost securities currently outstanding. In addition, the Company has arranged for an increase in the capac-
. ity ofits revolving credit facility to $160 million in order to provide 0 20 e so inos sufficient working capital for possible delays in the commercial oper. la ttion date of Seabrook Unit i extending to mid-ID88. i'2
, positive developments in connection with the construction and fi-nancing of Scabrook Unit I permitted the Company to increase the quarterly common stock dividend by 8 cents per share on January 1, 1986.While this increase is intended to represent the first step
, to rard restoration of the dividend to the levelin effect prior to the E ""d " " " " " ' " ""
30 cents per share decrease in 1984, future dividend increases will depend on continued progress at the Seabrook project, regulatory ' r:te treatment of the Companyt nuclear investments and other fac-tors affecting the Companyt financial condition and prospects. Although delays in the in-service date of the Seabrook nuclear unit are the most likely cause of adverse changes in the Companyt finan-o : a a ins eing outicok and plans, the latter are also sensitive to many other
, factors, including conditions in the securities markets, economic im le le la lio la
' ' ' ' l
' conditions, legislative developments, the level of the Companyh sales a
.tnd its ability to obtain adequate and timely rate relief. m l l , l Inflatiin ", , , , i , , ,
As a result ofinflation and increased environmental and regulatory a,iio , n ,cio,i requirements, the estimated cost of replacing the Companyt produc-Live capacity today would substantially exceed the historical cost of
.such facilities reported in the financial statements. Since the Com-panyb rates for service to its customers have been based in the past on the cost of providing such service and have been revised from
- time to time to reflect increased costs of service, the Company N"9 '""'"'" l believes that any higher replacement costs it may experience in the !
8' *
- future will be recovered through the normal regulatory process.
m l" l" l" j 1 m f i 28 EIEElEM'E I l. ises 1980 s cansunciian amewress a redempiians l Retained Earnings inmeans l s0 50 iOD 1$0 200 250 3 10 l 1 1982 m
* , , , i 1986
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ne unked inuminating company Cons:lidated Statement ofincome . For the Years Ended December 31,1986,1986 and 1984 (nouawmuptpaave.,-au) 1986 1985 1984 Operating Revenues $471,119 $514,936 $509,470 Operating Expenses Operation Fueland interchange energy-net 126,778 175,764 233,423
'hpacity purchased- net 13,484 10,014 11,724
(,ther 88,970 78,275 70,182 ; Maintenance 31,124 29,927 21,503 Depreciation 22,112 18,128 15,952 Amortization of deferred fossil fuel costs 04 283 (4,000) Amortization of cancelled nuclear projects 11,260 14,082 7,633 ; income taxes 51,419 62,047 44,371 i Other tt.xes 39,829 41,787 44,365 3 Total 385,070 430,307 445,144 J OperatingIncome 86,049 84,629 64,326 j OtherIncome and Deductions j- Allowance for equity funds used during construction 57,393 46,083 44,495 Other-net 5,729 11,686 5,157 ;
'Ibtal 63,122 57,769 49,652 ~j Income Before Interest Charges 149,171 142,398 113,978 Interest Charges l 88,610 Interest on long-term debt 72,068 45,417 Otherinterest 2,223 5,334 6,934 ! ,
Allowance for borrowed funds used during construction (20,651) (16,540) (12,747) _ { Income tax benefits attributable to the allowance for i borrowed funds (22,561) (18,069) (13,926) { l NetInterest Charges - 47,621 42,793 25,678 j ! Net income 101,550 99,605 88,300 h Dividends on Preferred and Preference Stock 18,969 20,339 16,883 j income Applicable to Common Stock 4 82,581 $ 79,266 $ 71,417 I 4 Average Number of Common Shares Outstanding 13,827 13,623 13,214 t Earnings per Share of Common Stock $5.07 $5.82 $5.40 Dividends per Share of Common Stock {
$2.32 $2.08 $2.30 5
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- f. The United Illuminating company Consolidated St:tement of Sources of Funt's for Gr:ss Prop:rty Additions For the Years Ended December 31,1986,1985 and 1984 Sources of Funds (nouano vt,ouanj 1986 1985 1984 Internally Generated NetIncome $101,550 $ 09,005 8 88,300 Add (deduct)
Depreciation and amortization 34,477 33,602 18,200 Dcferred income taxes 15,816 (2,737) 38,944 Deferred investment tax credits - net (007) 28,073 (8,310) t Deferred gain on sale ofland 2,864 - - 3 Allowance for funds used during construction (78,044) (62,623) (57,242) Funds provided from operations 75,756 95,920 79,892 Deduct dividends declared 51,050 48,681 47,490 Internally Generated Funds 24,706 47,239 32,402 External Financing Securitics sold Common stock 5,087 4,994 7,383 Preferred stock - - 34,000 Long-term debt 61,500 100,513 167,887 Expenses ofissues (420) (1,629) (6,178) 66,167 103,878 203,092 Retirement of long-term debt, including 1986 premium of $16,675 (66,342) (3,667) (10,667) Redemption of preferred and preference stock, including 1986 premium of $2,860 (35,860) (3,000) - Increase in nuclear iuct financing obligation 11,059 8,644 6,503 Increasein otherlong-term debt - - 20,000 Increase (decrease) in notes payable 25,675 (34,000) 3,000 Punds Obtained from External Financing 699 71,855 221,928 Other Sources (Uses)
.i (Increase) decrease in working capital, excluding notes I payable, current portion of long-term debt and specialdeposits (17,298) (19,475) 6,744 Specialdeposits 91,691 13,477 (106,803)
Deferralof fossilfuelcosts 5,024 3,333 841 Other changes in noncurrent balance sheet items 1,112 51 (1,976) Other Sources (Uses) 80,529 (2,614) (101,194) Funds for Property Additions from Above Sources 105,934 116,480 153,136 Allowance for funds used during construction 78,044 62,623 57,242
- Gross Property Additions $183,978 $179,103 $210,378 The Unitedilluminating company Consolidated Statement of Retained Earnings For the Years Ended December 31,1986,1986 and 1984 i (nomana vonnan) 1986 1985 1984 Balance January 1 $245,154 $194,251 $153,441 Net Income 101,550 99,605 88,300 Premium applicable to redemption of preference stock (2,860) - -
Expenses associated with preferred and preference stock redeemed (1,572) (21) - 342,272 293,835 241,741 L Deduct Cash Dividends Declared Preferred and Preference Stock 18,969 20,339 17,135 Common Stock 32,081 28,342 30,355
'Ibtal 51,050 48,681 47,490 B11ance December 31 $291,222 $245,154 $194,251
- l. The accom330C Statement of Accounting PnHeles and Notes to consolidated Financial Statements are intopal pts of the financial statements.
4 pas yn if N United !!!uminnung company Consolidated Balance Sheet
.; .g December 31, IM6,1986 and 1984 j ah=mdevaithnr 1986 1985 1984 l
'~
UtilityI'lant at OriginalCost -! In service $ 820,314 $ 649,106 - 8. 583,510
- h. less accumulated provision for depreciation 251,013 233,370 223,456 j 569,301. 415,736 360,054 .
l Constructionworkin progress 832,171 845,112 749,566' -! Net Utility Plant 1,401,472 1,260,848 1,109,620 " j l - l l! Plant and property under capitalleases 1 Nuclear fuel 62,376 51,528 42,884 Other 19,721 10,137 9,712 - Total 82,097- 61,665 52,596 l l. Other Property and Investments 8,551 8,599 8,570 Current Assets Cash and temporarycashinvestments ' 22,806 20,160 '12,057
- Special deposits 1,635 93,326 106,803 Accounts receivable Customers, less allowance for doubtful accounts of
$1,720,81,620 and $1,740 40,140 50,645 46,897 Other 5,496 12,064 6,012 Accrued utilityrevenues 19,397 20,310 18,151 INel, materials and supplies, at average cost 13,623 15,515 7,404 Prepayments 4,302 2,037 1,208
'Ibtal 107,399 214,057 198,532 Deferred Debits Unamortized cancelled nuclear projects 93,939 95,682 100,153 Unamortized bond redemption costs 17,264 - --
Deferredincome taxes 9,669 5,239 1,227
, Other 0,576 8,918 6,895
'Ibtal 130,448 109,839 117,275
$1,729,967 41,655,008 $1,486,593
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? . i Capitalizallon and Liabilities (rrouand,puan) 1986 1985 1984 !.(;
O Capitalization l{ Common stock equity [ Common stock $ 277,932 $ 272,845 $ 267,851 ;- Capitalstock expense (6,770) (8,249) (8,183) Retained earnings 291,222 245,154 194,251 562,384 509,750 453,919 f! Preferred and preference stock ; Not subject to mandatory redemption 70,000 70,000 70,000 i Subject to mandatory redemption 63,000 96,000 99,000 , Long term debt 661,548 664,648 567,736 Total 1,356,932 1,340,398 1,190,655 s Obligations under capitalleases - noncurrent 81,263 59,814 51,242 F Current Liabilities i Current portion oflong-term debt 18,667 3,667 3,667 'i ' Notes payable 25,675 - 34,000 Accounts payable 40,302 69,731 67,278 a Dividends payable 11,862 13,025 11,849 i Taxes accrued 24,756 22,345 20,164 Interest accrued 11,339 11,250 9,451 T Obligations under capitalleases 1,244 1,851 1,354 Other accruedliabilities 11,163 13,601 11,536 3
'Ibtal 145,008 135,470 159,299 , 1 Deferred Credits '1 Customers' advances for construction 2,014 1,898 1,800 i Accumulated deferred investment tax credits 61,132 62,039 33,966 T Deferredincome taxes 71,472 51,225 49,082 ;
Deferred gain on sale of utility plant 2,864 - - 4, Deferred fossilfuelcosts 9,282 4,164 549 Total 146,764 119,326 85,397 :/ Commitments and Contingencies - - -
$1,729,967 $1,655,008 $1,486,593 41 De aCCOmpaDying Statement Of Accounting Policies and Notes to Consolidated Financial Statements are integral parts of the financial statements.
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. De United Illuminating company Statement of Acc unting P:licies Accounting Hecords The accounting records are maintained in accordance with the uni- fired capability, are computed on a straight line basis, using esti-form systems of accounts prescribed by the Feder al Energy Regula- mated service lh'es determined by independent engineers. One-half tory Commission (PERC) and the Connecticut Department of Public yearb depreciation is taken in the year of addition and disposition of Utility Control (DPUC). The financial statements of the Company utility plant, except in 1,he case of m40r operating units on which and its wholly owned subsidiary, Bridgeport Electric Company depreciation commences in the month they are placed in service and (BEC), are presented on a consolidated basis, ceases in the month they are removed from service. Depreciation Utility Plant ' associated with the reconversion costs is computed on an annuity basis over the ten years that this plant is being leased to the Com-The cost of additions to utility plant and the cost of renewals and pany by BEC. The aggregate annual provisions for depreciation for betterments are capitalized. Cost consists of labor, materials, serv- the years 1984,1985 and 1986 were equivalent to approximately ices and certain indirect construction costs, including an allowance 2.87%,2.99% and 2.87%, respectively, of the original cost of deprecia-for funds used during construction. The cost of current repairs and ble property. minor replacements is charged to appropriate operating expense accounts. The original cost of utility plant retired or otherwise dis- I"C8" d "*** posed of and the cost of removalless salvage are charged to the The Company has adopted the policy of full normalization account-accumulated provision for depreciation. lag for income tax benefits with respect to book-tax timing differ. Allowance for Funds Used During Construction ences applicable to post 1980 property additions and all investment tax credits used to reduce current federal income taxes. The mWor in accordance with the applicable regulatory systems of accounts, portion of the credits generated result from the Companyh electbn the Company capitalizes an allowance for funds used during con- to take investment tax credits applicable to long term projects on a l struction (AFUDC), which represents the approximate cost of debt progress-of construction basis. I and equity capital devoted to plant under construction. In accord-ance with FERC prescribed accounting, the portion of the allowance Accrued Utility Revenues applicable to borrowed funds is presented in the Consolidated State- The estimated amount of utility revenues (less related expenses and ment of Income as a reduction ofinterest charges, while the portion applicable taxes) for service rendered but not billed is accrued at of the allowance applicable to equity funds is presented as other the end of each arcounting period. Income. Although the allowance does not represent current cash Investments income, it has historically been recoverable under the rate-making process over the service lives of the related properties. The Company The Companyk investment in the Connecticut Yankee Atomic Power compounds semi-annually the allowance applicable to mWor con- Companyjoint venture, a nuclear generating company in which the struction projects. Pursuant to the DPUCh August 1983 rate decision, Company has a 9%% stock interest,is accounted for on an equity the Company ceased recording AFUDC on $120 mi!!!on of construc- basis. tion work in progress (CWIP) allowed in rate base. This amount was Fossil Fuel Costs increased to $183 million pursuant to the DPUCh rate decision of December 1984. In accordance with the November 1986 DPUC deci- The amount of fossil fuel costs that, pursuant to the fuel adjustment sion on the rate treatment for Millstone Unit 3, the amount of CWIP clause in the Companyt rates, cannot be reflected currently in cus-allowed in rate base was decreased to $48 million, retroactive to tomers' bills is deferred at the end of each accounting period. Since April 23,1986, the in-service date of the unit, adoption of the deferred accounting procedure in 1974, rate deci-sions by the DPUC and its predecessors have consistently made The Company accounts for the portion of the allowance applicable to specific provision for amortization and rate-making treatment of the borrowed funds on a netsf tax basis. During 1984,1985 and 1986, the Companyh existing deferred fossil fuel cost balances. average rates used for computing the allowance were 10.5%,10.75% and 11%, respectively, Research and Development Costs Depreciation Research and development costs, including environmental studies, are capitalized if related to specific construction projects and depre-Provisions for depreciation on utility plant for book purposes, ex-cluding costs associated with the reconversian of a plant to a dual- clated over the lives of the related assets. 0ther research and devel-opment costs are charged to expense as incurred, i ( i I 1 j 1 1 Ii
%"g y _ . L Jhe tinited Illuminating Company Notes to Consolidated Financial Statements (Collar amounts, except per share ar.nunts, are in thousands unless otherwise indicated) w 4A) Capitalization at December 31,1986 ) Common Stock Equity (a) long-term Debt (d) . Common stock,no parvalue $277,932 17,500,000 Long-term debentures: -l Sharcs authorized 4%%,1987 Series, due November 1,1987 $ 10,000 1 Sharcs outstanding at December 31: 15%%,1988 Series, due December 6,1988 20,000 . 1984 13,429,443 1985 13,720,W 13%%,1990 Series, due July 1,1990 4.65%,1990 Series, due August 15,1990 40,000 15,000 f; 1986 .
. 13,886,566 10,000 4%%,1991 Series, due July 15,1991
. Capitalstock expense (6,770) 15,000 5%%,1996 Series, due August 15,1996 Retained earnings (b) 291,222 i 6%,1997 Series, due June 15,1997 22,500
'Ibtal common stock equity - 562,384 7%,1999 Series, due January 15,1999 15,000 {
10%%,2000 Series, due June 15,2000 30,000 J 7%%,2002 Series,due October I;2002 25,000 Preferred and Preference Stock (c) 8%%,2003 Series, due December 15,2003 30,000 Authorized: Cumulative preferred stock: Serialdebentures: .
$100 par value,1,350,000 sharen 8%%, maturing serial &'as to $1,667 principal I
. $25 par value,2,400,000 shares tanount on November 15 in each of the years 1987 '
Cumulative preference stock: to 1997, inclusive ($1,667 matured in 1986) 18,333 ;
$25 par value,5,000,000 shares - 11%, maturing serially as to $2,000 principal Outstanding at December 31,1986: amount on November 15 in each of the years 1987 to 1999, inclusive ($2,000 matured in 1986) ' 26,000 Not subject to mandatory redemption: 16%%, mcturing serially as to $5,000 principal Cumulative preferred stock, $ 100 par value: .
amount on November 21 in each of the years 1987 4.35%, Series A,50,000 shares - 5,000 and 1988, and as to $20,000 principal amount 4.72%, Series D,75,000 shares 7,500 on November 21,1989 - 30,000 4.64%, Series C,75,000 shares - 7,2 306,833 5%%, Series D,75,000 shares 7,500 7,60%, Series E,125,000 shares 12,500 First Mortgage Bonds- Bridgeport Electric Company: 7,60%, Series F,150,000 shares - 15,000 18%, Series A, maturing serially as ta
$33,333 principal amount on November 30 l Cumulative preferred stock, $25 par value, in eacti of the years 1989 to 1992 and $20,668 principal 8.80%,1976 Series,600,000 shares' 15,000 _ ,-
- amount on November 30,1993
'Ibtal preferred stock not ($46,000 principal amount repurchased in 70,000 December 1986) 154,000 suNect to mandatory redemption ..
" Bridge" loan at 9%, placed in December 1986
- SuNect to mandatory redemption: > pending the planned sale of Series B, First M rtgage Bonds during February 1987 54,000 j Cumulative preferred stock, $100 par value, 9%%, Series 0,90,000 r, hares, . Other:
SuWect to mandatory redemption of 30,000 Pollution Control Revenue Bonds: shares on April 15 in each of the years - 14%%,1984 Series, due October 1,2009 40,000
~ 1987 to 1989, inclusive, at $100 per share, plus - 14%%,1984 Series B, due December 1,2000 28,400 accrued dividends (30,000 shares 9%%,1986 Series,due June 1,2016 redeemed in 1986) 9,000 (imued in June 1986) 7,500 10%,1984 Series,340,000 shares, i SuWect to mandatory redemption of 68,000 Id' shares each year beginning July 15,1990,
{%due cem er1989 50'000 l '9% ($20,000), and 13.1% ($20,000), maturing 12. at $100 per share, plus accrued dividenda 34,000 as to $15,000 in 1992, $15,000 in 1993 and Camulative preferred stock, $25 par value, $10,000 in 1994 40,000 16%,1981 Series,800,000 shares, 680,733 SuWect to mandatory redemption of 40.000 shares cach year beginning July 15,1987, Unamortized debt discount less premium at at $25 per share, plus accrued dividends December 31,1986 (518) (fully redeemed at $27.75 per share 20,000 lbtallong-term debt 680,215 on January 15,1987) Ibtal preferred stock subject to mandatory redemption 63,000 Totallong-term debtincluded in ; Capitalization 661,548 1 l lbtal Capitalization $1,356,932 l i I l
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[ l (a) Common Stock
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On October 21,1986 the Companyh Automatic Dividend Reinvestment and Common Stock Purchase Plan (DRP) was changed to a market f share plan from an original lasue plaa. On that date 290,507 shares representing the remainder of the 1,750,000 shares originally reserved for j the DRP were rernoved from reserve status. j Common stock, no par value, authorized at December 31,1986, included 400,000 shares reserved for the Companyt Employee Stock Ownership ! Plan (ESOP). I t Shares issued during 1986,1985 and 1984 and increases to the common stock account from the proceeds of these issues were as follows: 1986 1985 [ 1984 -l Shares Shares Shares 5 Amount Amount Balance, January 1 (000) (000) Amount (000) f
$272,845 13,720 Additions resulting frorn:
$267,851 13,429 $260,468 12,972 hd DRP 4,847 !$9 4,394 ESOP 240 8' -
291 5,876 346 I 1,507 111 Balance, December 31 ( 8277332 13,887 $272.845 13,720 $267,851 13,429 j
'In 1986, shares contributed to ESOP included an additiona: 26,081 shares purchased on the open market.
f Expenses related to these issues were charged to capital stock expense. [ k (b) Retained Earnings Restriction The indenture under which all of the Companyt debentures are issued places limitations on the payment of cash dividends on the common .? stock of the Company and on the amounts that can be expended to purchase or redeem shares of common stock. Under the most restrictive j provision of the indenture, retained earnings in the amount of $246 million were free from such limitations r2 December 31,1986. t (c)Prderred andPrderence Stock i The par value of each of these issues was credited to the appropriate stock account and expenses related to these issues were charged to p capital styk expense, i In April 1986, the Company redeemed 160,000 shares of 15.88%,1980 Series, Preference Stock at $25 per share, plus accrued divid 3nds. In $' November 1986, the remaining 1,040,000 shares were redeemed at the call price of $27.75 per share, plus accrued dividends. The $2D million redemption payment in November was n,ade from available cash on hand. On November 24,1986, the Company called for redemption all of the outstanding shares ofits 16% Preferred Stock. On January 15,1987, h t shares were redeemed at the call price 'of $27.75 per share, plus accrued dividends. The $22 million redemption payment was made from; the proceeds of short term borrowings. 1 The aggregate redemption requirements for preferred stock, excluding amounts associated with the January 1987 redemption, during; each the nye years 1987-1991 are: 1987 - $3,000; 1988 - $3,000; 1989 - $3,000; 1990 - $6,800; 1991 - 86,800. ; Shares of preferred stock have preferential dividend and liquidation rights over shares of common stock. Preferred shareholders are not entitled to general voting rights. llowever, if any preferred dividends are in arrears for six or more quarters, or if some other event of default j 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. r (d) famp-Term Debt ( In June 1986, the Company financed substantially all ofits ownership share of the cost of certain pollution control facilities at the Millstone i Unit 3 nuclear generating station by borrowing from the Connecticut Development Authority the proceeds of the Authorityh issuance of $7.5 l million of tax exempt 9%% Pollution Control Revenue Bonds. The proceeds have been used to reimburse the Company for the Company shareofcostsof thefacilities, i; in December 1986, the Company borrowed $63 million under the terms of a short term loan agreement with a financialinstitution 'I te Company then loaned the proceeds of this borrowing to BEC, which in turn repurchased $46 million of the outstanding principal amount o , 18% mortgage bonds, paying a $17 million premium to the bondholders. BEC has also arranged, subject to certain conditions precedi i nt to closing, a long term bond issue amounting to $54 million maturing over a five-year period ending February 1999 at an interest rate of 0.44%
- per annum. The $17 million premium was taken as a loss for income tax purposes in 1986, but will be amortized in future periods.
Accordingly, since the $63 million in short-term borrowings is a " bridge" loan, to be repaid from the proceeds of the $54 million bond issue and the current tax benefit, approximately $9 million, of the $17 million premium, the Company has reclassihed $54 million to long-term debt. These transactions, which will reduce annual interest expense by approximately $1.5 million, are in accordance with the Compan plans to replace high-cost securities issued in recent years with lower cost financings. See Note (E), " Compensating Balances and Short-te Borrowings". The aggregate maturities of long-term debt during each of the five years 1987-1991 are: 1987 - $18,667; 1988- $28,667; 1989- $107, 1990 - $92,000; 1991 - $47,000.
k e M a j
, (B) Accounting for Abandonments and Disallowances 8
of Plant Costs f (a) Changesin Accountingitules equity, the recovery of the Companyt investment in Seabrook Unit 2 In Dacember 1086, the Financial Accounting Standards Board " " {',"U e Nucl ari c ' , he a or n of (FASB) issued Statement of Fm, ancial Accounting Standards No. 90 the Companyt remaining unamortized investment of $4.0 million in (SFAS 90)," Regulated Enterprises - Accounting for Abandonments the cancelled Pilgrim Unit 2 over a sixteen-month period, the write-and Disallowances of Plant Costs." SFAS 90, which will be effective in 1988, amends Statement of Financial Accounting Standards No. off of accumulated deferred fossil fuel costs over a sixteen-month period and the inclusion in rate base of a revised total of $183 71,"Accountbg for the Eficcts of Certain Types of Regulation,, million of construction work in progress (CWIP) associated with hereaf ter referred to as current accounting rules. The following Seabrook Unit 1, an increase of $63 million over the amount allowed describes the effects of the amendments promulgated by SFAS 90. in the August 1983 rate decision. Under Connecticut law, a condition (b) Accounting for Abandonments (Cancelled Plants) of the inclusion in rate base of Seabrook Unit 1 CWIP la that an am unt equal to the CWIP amount will be excluded from rate base Under current accounting rules, no current loss against net income has to be recorded if the Company is allowed recovery ofits full ah& unit is b seMor a period he equaM&e h
. !nver,tment. SPAS 90 regulics that a current ler.: be recorded for any CWIP amount had been in rate base. The Connecticut Division of disallowance of the costs of an abandoned plant, including the disal- C nsumer Counsel had taken an appeal from the DPUC decisim Tius appeal was dismissed by the Superior Court of Connecticut in lowance of an allowed return oa investment. The loss to be recorded August 1986.
for the absence of an allowed return is measured by the difference between the recoverable cost and the present value of such cost. On May 6,1986, the DPUC approved the Companyt proposal with fc) Accounting for Disallowance of Plant Costs respect to the accounting treatment of the Companyt investment in the Millstone Unit 3 nuclear generating unit, which commenced Under current acco mting rules, disallowances of recovery of plant commercial operation on April 23,1986. As a result, $135 million of investments do not have to be written off against current income, but the Companyt $148 million construction investment in the unit and may be amortized over the lives of the investments, so long as future $5 million of nuclear fuel were placed in rate base with an equal revenues attributable to the investments are expected to be suffi- amount of Seabrook Unit 1 CWIP being removed from rate base, thus cient to permit recovery of their entire costs, including the interest leaving rate base unchanged. The DPUC decision did not provide for charge components applicable to the carrying costs of their undepre- recovery through rates of the Companyh operation, maintenance or cicted balances. SFAS 90 requires that, for completed plants, all other expenses related to Millstone Unit 3 from its commercial oper-costs disallowed for ratemaking purposes shall be recognized as a ation date to the date of the decision in the Companyt next rate loss gainst current income as soon as the disallowance becomes application. However, in the interim, the Company expects that these probable and can be reasonably estimated. expenses will be substantially offset by fuel cost savings due to With respect to disallowances of plant costs resulting from a cost operation of the unit. On November 25,1986, the DPUC reduced the
" cap," SFAS 90 requires that a loss be rec <>gnized as soon as it Millst ne Utdt 3 construction investment included in rate base from becomes probable that the total costs of the plant investment will $135 million to $130.3 milhon and increased the amount of Seabrook exceed the " cap."This loss is measured by the difference between Unit I CWIP included in rate base by a corresponding amount. This i the estimated totalinvestment cost and the cost " cap.,, decision r.lso terminated the pending prudence investigation of Mill-stone Unit 3 and was made effective retroactive to the commercial ) As described herein, The Company expects to record losses by 1988 in operation date of the unit. Since the Company has not been allowed , ; connection with recovery ofits investments in nuclear plants, in to recover its fullinvestment in the unit,it will be required to !
i particular its substantial investment in Scabrook Unit 1, that may reduce its investment to $130.3 million and recognize a loss against j have a material adverse effect on its future financial condition. See current income of $12 million, net of related income tax effects, by g Note (C), " Rate Proceedings," Note (I),"Unsmortized Cancelled 1988. See Note (B) " Accounting for Abandonments and Disallow-t Nuclear Plants" and Note (L), " Commitments and Contingencies." ances of Plant Costs." l
; (C) Rete Proceedings On October 1,1986, the DPUC lasued a notice that it would conduct a general review of financial and operational results of the Statch j On July 2,1984, the Company filed with the DPUC an application for major public service companies, including UI. UI is projecting a both inter'm and permanent rate relief. On August 7,1984, the DPUC return on equity, as calculated for rate-making purposes, of over 18%
denied Qc Companyt request for $30 million ofinterim rate relief. for the year ended 1987 and has offered several alternative ways of The Company initially requested $60 million of permanent rate relief reducing its earnings to or below the allowed level of 16.4% without redued to a net increase of $45 million try the $15 million net reducing rates and revenues. The DPUC, recognizing Ulh cash flow sai mgs in revenue requirements resulting from lower fuel costs needs, has accepted the concept of non-rate actions to reduce the anociated with the reconversion of Bridgeport Unit 3 to a coal-equity return, and it has initiated a proceeding to examine the j b arning unit. In October 1984, the net amount of permanent rate appropriateness of non rate adjustment actions such as accelerated t r allef requested was revised downward to $38 million to reflect the depreciation of facilities and a shorter amortization period for pre-t ontinuance into 1985 of certain cash conservation measures insti-mium costs associated with redemption of high-cost securities as a y I ated in May 1984 and the updating of various operating costs. In its means of lowering Ulh projected equity return. rate decision on December 18,1984, the DPUC provided for a net increase in annual revenues of approximately $23 million ($38 mil-tion, less the $15 million net savings associated with the coal recon-version). The decision allowed a 16.4% return on common stock
f I. f i I (D)lncome Taxes {e I income tax expense consists of: The amounts reported for federal income tax expense for the years j 1986 1985 1984 1986,1985 and 1984 were less than the amounts computed by apply- j ing the federal incorae tax statutory rates to book income before 4 a ome e reasons k sucWeremes ne as foUm Cu ent $22,964 $17,558 $ (189) f 1986 1985 1984 Deferred: l Income tax attribatable to the Netincome $101,550 $ 99,605 $ 88,300 A allowance for berrowed funds 22,561 18,069 13,926 Totalincome tax expense 49,420 56,310 42,620 k Accelerated depreciation 7,710 2,948 1,422 Less state income tax expense 11,374 12,819 9,282 [ Construction overheads 2,304 3,200 2,429 Federalincome tax expense 38,046 43,491 33,338 f Cancelled Seabrook Unit 2 1,552 (2,421) 36,386 ? Pension costs - (1,612) - Bookincome before federalincome Accelerated amortization (56) (56) (57) taxes 130,596 143,096 121,638 {, Cancelled Pilgrirn nuclear Federalincome tax statutory rate 46%. 46% 46% { project (277) (1,528) (2,927) Federalincome taxes at statutory 1 inve6tment tax credits (net of rate 64,214 65,824 55,953 1 amortization) (007) 28,073 (8,310) Less tax effects of: Gain on sale of utility plant (1,146) - - A!!owance for equity funds used Deferred fossil fuelcosts (2,672) (1,888) 1,621 during construction capitalized Other-tjet (614) (296) 70 for book purposes, not taxane I Total deferred 28,455 44,489 44,560 income 26,401 21,198 20,468 Totaloperating income tax Equityin carning of subsidiary expense 51,419 62,047 44,371 e mpanicsfotbookpurposes, I Other income and deductions (1,999) (5,737) (1,751) n ttaxableincene 918 853 813 Amortization of delstred l-Totalincome tax expense $49,420 $56,310 $42,620 investment tax credits 907 750 222 ! Tax depreciationir excess of book I Accumulsted deferred income tax assets at December 31: depreciation applicable to pre- l' Deferred fossiliuct costs 8 4,838 $ 2,166 $ 278 1981 property additions (215) 1,095 1,408 Pension costs 2,318 2,180 (20) Amortization of allowance for Gain on sale of utility plant 1,146 - - funds used during construction g UncoHectible accounts 882 829 892 applicable to cancelled nuclear j Other 485 64 77 prqjects (1,538) (1,895) (940) J
$ 9,669 $ 5.239 $ 1,227 Other items-net (305) 332 644 ;
+
Federalincome tax expense $ 38,046 8 43,491 $ 33,338 Accumulated deferred income tax - liatilities at December 31: Effective federalincome tax rates 27.3% 30.4% 27A% Cancelled Seabrook Unit 2 $35,517 $33,965 $36,386 Accelerated depreciation 14,326 6,616 3,668 During 1984, the Company recorded a tax write off for Scabrook Construction overheads 12,342 10,038 ' 6,838 Unit 2, a ntclear unit that was cancelled in that year. This write-off l Unamortized bond redemption climinated 1984 taxable income and resulted in a net operating loss ! costs 0,013 ' - - carryback to 1981 amounting to approximately $22 million.This 4 Accelerated amortization Cancelled Pilgrim nuclear 274 329 385 write off had no effect on net income in 1984 since all tax effects i j' were deferred for accounting purposes. project 1,805 277
$71,472 $51,225 $49,082 The cumulative net amount ofincome tax timing differences for which deferred taxes have not been provided is approximately $113
[ l million, as of December 31,1986. These timing differences arise j principally from accelerated tax depreciation on pre 1981 property s additions. Under cunent rate-making practice, these taxes will be ; recovered through future revenues. 4 The 1975 Tax Reduction Act and succeeding amendments provide { that for 1984,1P85 and 1986 up to 85% of federal income taxes y currently payable may be offset by investment tax credits. During i 1984, no credits were utilized due to the recording of the tax effects i of the write-off of the Companyt investment in Seabrook Unit 2. The } total credits utilized in 1985 amounted to $28,823 and no credits + were utilized in 1986. There are no investment tax credit carryfor- t wards available at December 31,19S6. l 4 l 1 l l f
e I (F) Supplementary income Statement Information hreestment credits of approximately $5,400, carried forward at De- The amount of maintenance, advertising costs, and the provisions for cember 31,1985, were eliminated since, under the provisions of the depreciation and amortization, other than set forth in the Consoll-Tax Reform Act of 1986, $5,200 of credits generated by the Companyt dated Statement of Income, are not significant, and there are no investment in nuclear fuel for Seabrook Unit I were lost because the royalties. nuclear fuel was not placed in service prior to January 1,1987. The
,Ihxes, other than income taxes charged to costs and expen.scs, are remaining $200 was utilized to reduce the additional tax liability set f rth below:
resulting from the adjustments made by the Internal Revenue Serv-Ice on the Companyt federalincome tax return for 1979. 1986 1985 1984-The Tax Reform Act of 1986 repealed the regular investment tax State gross earnings $21,845 $25,226 $25,474 credit for property placed in service after December 31,1985, except Local real estate and personal for certain transition property (Millstone Unit 3 and Seabrook property 17,866 16,538 18,618 Unit 1). Minimal investment tax credits may have been generated for Other, principally payroll 4,038 3,935 3,671 these transition properties in 1986. $43,749 $45.699 $47,763 (E) Compensating Balances and Short-Term Borrowings Ch ed to The Company has had a $66 million revolving credit agreement with Other accounts 3,920 3,912 3,398 several banks since 1984.This agreement, which terminated on Sep- $43,749 $45,699 $47,763 tember 30,1986, was replaced by a $160 million agreement with a group of banks, including the banks that participated in the original agreement. The new agreement extends to December 31,1988. As of (G) Pension Plan and Retirement Benents December 31,1986, the Company had $17 million of short-term in December 1985, the Financial Accounting Standards Board borrowings outstanding under this agreement. (FASB) issued a new standard of accounting for pension costs-The Company also has an agreement, which has not been utilized to Statement of Financial Accounting Standards No. 87 (SFAS 87). The d:te, to sell to the banks involved in the revolving credit agreement principal objective of SFAS 87 is to reaffirm accrual accounting by up to $40 million ofits accounts receivable. The Company and the providing a standardized method for measuring net periodic pension banks have agreed to extend the termination date of this agreement cost that is intended to improve comparability and understandability from February 28,1987 to December 31,1988. by recognizing the compensation cost of employees' pensions over their approximate service periods. Although compliance is not re-On December 30,1986, the Company received $63 million under a quired until 1987, the Company adopted SFAS 87 in December 1986. : short term loan agreement, dated December 29,1986, with a finan. In accordance with this standard, all previous interim periods have ! clalinstitution. Approximately $54 million has been classified as ' been restated' long term debt. See Note (A)(d) %ng Term Debt." information with respect to short term borrowings is as follows: paWnsbn Man,WNaschn M amagyay, covers substantially all ofits employees and its entire cost is borne 1986 , 1985 1984 by the Company. The pension costs for the years 1984 and 1985 were Maximum aggregate principalamount $4,177 and $2,897, respectively, excluding $3,207 in 1985 of additional j of short term borrowings retirement benelits provided under a voluntary early retirement ; outstanding at any month end $25,675 $45,000 $66,000 program. For 1984 and 1985 pension costs and funding contributions j Average aggregate short-term were determined by the Entry Age Norn.al Cost method with frozen j borrowings outstanding during the Initial Liability. The costs decreased during these periods due to ; year
- 1,491 39,841 45,814 changing actuarial assumptions and a negotiated change in the for- !
Weighted average interest rate' 7.5% 10.0% 12.1% mula and covered population. Principal amounts outstanding at in 1986, pension cost decreased to $157 reflecting the adoption of year-end $25,675 - $34,000 SFAS 87. If the Company had delayed the adoption of this new Annualized interest rate on principal standard until 1987,its 1987 pension cost would have been $2,023. amounts outstanding at year end 8.0% - 10.8% The principal reasons for this decline were adoption of the Projected
' Average short term borrowings represent the sum of daily borrowings out. Unit Credit Method for determining service cost, use of r,horter term stinding, weighted for the number of days outstanding and divided by the market rates for interest assumption purposes and use of shorter number of days in the period. De weighted average intercat rate is deter. lives for amortizing prior service costs; all as prescribed by the new mined by dividing intercat expense by the amount of average borrowings, standard.
Commitment fees of $607,4498 and $351 paid during 1986, ID8f3 and 1984, respectively, are excluded from the calculation of the weighted average For 1986 funding purposes, the Company changed its methodology to interest rate. There were no short term borrowings for 1986 until December. the Entry Age Nnrmal Cost and changed its method of plan asset valuation. These changes resulted in the pension fund being over-funded for income tax purposes, thereby reducing the Companyt 1986 funding contribution from approximately $3,000 to zero. The plant irrevocable trust fund consists principally of equity and fixed. income securities within the following targeted portfolio mix: Percentage of Total Fund Asset Category Minimum Maximum Equity Securities 45 65 i Fixed income Securities 35 55 l l l 1
1
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(l) Unamortired Cancelled Nuclear Projects l The components of net pension cost for 1986 were as follows In 1981, Boston Edison Company cancelled plans for the construc- N i (in thousands): tion of its Pilgrim Unit 2, a proposed nuclear generating unit in j ! which the Company had a 3.3% ownership interest, due to escalating l Service cost of benefits carned during the period $ 1,892 l Interest cost on projected benefit obligation 7,221 c2an@n u ng regulatory menainues. In its August 22, M83 I rate decision, the DPUC allowed recovery and amortization over a Actual return on P lan assets (7,848) q two-year period of the Companyt $14.7 milhon m construction costs ; Net amortization and deferral (1,108) associated with this unit. In its December 18,1984 rate decision, the Net pension cost $ 157 DPUC allowed recovery and amortization of the remaining unamor- 1 tized balance of $4.9 million over a sixteen-month period. Amortiza- ; Assumptions used to determine pension cost for 1986 were: ti n was completed in March 1986. i- { Discount rate 8.75% All e nstruction on Seabrook Unit 2 was terminated in April 1084, 1 Av; rage wage increase 5.50% and the unit was cancelled in that year. On November 6,1986, the j I Expected long-term rate of plan assets 8.00% participants directed project management to dispose of Unit 2 by j i surrendering its NRC construction permit and selling all property s i The funded status and amounts recognized in the balance having a net salvage value. In its December 1984 rate decision, the I sheet at December 31,1986 were as follows: DPUC allow ed recovery and amortization of, but no return on, the l Actuarial presentvalue of benefit Companyt $104 million investment in Seabrook Unit 2 over a ten-obligations: year peri d. Ilowever, the DPUC has reserved the right to a@ust the 4 ; Vested benefit obligation 8 63,648 amortization amount in the future to reflect several variables, j including cash flow needs, additional costs, salvage value and a 1 Accumulated benefit obligation $71,114 prudence evaluation. As of December 31,1986, the Company had ~ accumulated an additional $11 million of Seabrook Unit 2 costs, representing principally costs that have been transferred from Sea-( Reconcillation of Accrued Pension Liability: i , brook Unit 1, but UI believes that recovery of these additional costs
.Prqjected benefit obligation I
$107,P90 would be consistent with the DPUCh reservation. In any event, the I ess: Pun assets (fair value) 110,000 Company does not believe that any aQustment which might result , l Projected benellt obligation greater (less) from a prudence evaluation would have a material effect on the I than plan assets (2,110) Companyt financial condition. Ilowever, since the Company is not g Unrecognized gain (loss) from past experience (14,223) allowed a return on the investment that it is recovering through ;
Unrecognized net asset (obligation) at date rates, it will be required to record a loss against current income of ofinitial application 20,820 approximately $8 million, net of related income tax effects, by 1988. See Note (B) " Accounting for Abandonments and Disallowances of Accrued pension liability at December 31,1986 $ 4,496 Plant Costs." In addition to providing pension benefits, the Company provides (J) Fuel Financing Obligations l J certain health care and life insurance benefits for retired c'mployees. By amendments in May and August 1086 the Company amended its d ! Subst nti lly all of the Companyh employees may become eligible for I fuel reserve and supply agreement to extend the expiration date to ! these benellts if they reach normal retirement age while working for I February 28,1987 and to increase the amount of fossil fuel pur-the Company. These and similar benefits for active employees are I chases which may be financed from $100 million to $135 million, less provided through insurance companies whose premiums are based I the amount of the Companyt outstandinglease obligations for nu-on the benefits paid during the year. The Company recognizes the ! clear fuel. At December 31,1986, approximately $27 million of fossil cost of pnwiding those benefits by expensing the annual insurance fuel purchases, including coal, were being financed under this agree- 1 I premiums, which were $3,353, $3,020 and $4,600 1985 and 1986, respectively. At December 31,1986, the Company wa for the years ment. 1984's The Company expects that the agreement will be expanded to I include purchases of natural gas for use ai fuel at New Haven Harbor providing these benefits for 1,560 active employees and approxl. ' Station and that its term will be extended to November 30,1987. niately 490 retirees or their beneficiaries. The cost of providing these i benellts for retirees is not separable from the cost of providing in September 1986, the Company amended its r, ale and leaseback i benellts for active employees. agreement covering nuclear fuel for Sca%wk Unit 1, increasing the ( aggregate amount of nuclear fuel purchases which may be financed i (H) Jointly Owned Plant under the agreement from $60 million to $70 million. At December I The Companyk D3.7% ownership share of the New Haven Farbor 31,1986, $57 million of Seabrook Unit I nuclear fuel was being i financed under this agreement. Stttion generating unit represented $131.9 million of utility plant in ; j service and $36.8 million of accumulated provision for depreciation in August 1986, the Company also entered into a sale and leaseback at December 31,1986. The Companyt ownership share of Millstone agreement which provides for the financing of up to $10 nJllion ofits Unit 3,which was placed in service in April 1986, is 3.685%, repre- ownership share in the nuclear fuel for MilLtone Unit 3. At Decem-sented at December 31,1986 by $149.6 million in plant in service and ber 31,1986, the amount of fuel being financed under this agreement l $2.0 million in accumulated provision for depreciation. The Compa- was approximately $6 million (including allowance for funds used nyt share of the operating costs is included in the appropriate during construction). The Company is paying rent for the fuel based 8 expense captions in the Consolidated Statement of Income, on the direct costs to the lessor of the fuel, plus the lessort financing The Company also has a 17.5% ownership share in Scabrook Unit 1, a nuclear generating unit under construction. See Note (L)," Commit- t ments tnd Contingencies." i I ( i l
e le e < i l (K) Leeses in addition to the nuclear fuel leases described in Note (J), the On October 17,1986, the Nuclear Regulatory Commission (NRC) Company has entered into other lease arrangements for the use of issued a full 40-year operating license for Seabrook Unit 1. This data processing and o!!!ce equipment, vehicles, and office space license is subject to several conditions, which must be satisfied to : (some of which are capital leases). The gross amount of assets permit an orderly progression from fuel loading, which was com-recorded under capital leases and the related obligations of those pleted on October 29, to low-power (5%) testing and finally to full-leases as of December 31,1986 are recorded on the balance r,heet, power operation. The latter two steps are subject to the conditions of Future minimum lease payments under capital leases are estimated the license, which include obtaining a favorable decision from the to be (in thousands): Atomic Safety and Licennng Board on certain on-site safety issues j and the satisfactory resolution of off-site emergency response plan q 1987 8 3'273 issues. Tirnely resolution of the latter issues may be delayed or ; 1988 2 707 prevented by, among other things, the failure of governmental enti-1989 l ties to develop and file required off site emergency response plans. j 1990 2l773 2 894 The governmental entities in New flampshire have prepared such j 1991 2 303 plans and the State of New llampshire has filed them with the NRC - i Aftu 1901 24385 for approval. Ilowever, the state government, which is responsible for j Total minimum lease payments 38,335 the development of such plans in Massachusetts, has not filed its < Less: Amount representing plans and, in a statement issued September 20,1986, the Governor of l Interest 18.614 Massachusetts stated that he does not intend to do so, since he does Present value of net minimum not believe that it is possible to develop phns that would adequately l capitallease paymenta $19,721 protect public health and safety if an accident were to occur. Prqject i management has acknowledged that off site emergency response i Capitalization of leases has no impact on income since the sum of plans are required before commercial operation of Seabrook Unit 1 the amortization of a leased asset and the interest on the lease will be permitted and, on December 18,1986, requested that the obligation equals the rental expense currently allowed for rate- NRC consider reducing the official emergency planning zone for i making purposes. Seabrook to a one mile radius, thus climinating the need for an !
""" " "" #8""' "8#" " " " " " E Rental payments charged to operating crpenses in 1984,1985 and ns aanenc ura ngbehmen@edubndcenain 1986 amounted to $8,873, $10,184 and $10,730, respectively.
remaining issues, in particular the NRCh response to the emergency Oper: ting leases, which account for the largest part of rental and response issue, is necessary in order for the unit to be placed in lease payments chuged to operating expense, consist of a large commercialoperation. f number of small, relatively short4crm, renewable agreements for a Assuming that commercial operation of Scabrook Unit 1 is achieved, wide variety of equipment. the Companyt future financial condition will be heavily influenced by the ratemaking treatment accorded its investment in the unit. (L) Commitments and Contingencies Accordingly, the Company will attempt to obtam a decision on the The Company has entered into substantial commitments in connec. ratemaking treatment by the unith prqjected commercial operation tion with its continuing construction program, which is presently date. Due to Connecticut legislation, desccibed in further detail estimated at approximately $300 million, for 1987 through 1991. A below, which has established a " cap" on recoverable costs of Sea-mWor item in the construction program has been the Companyt brook Unit I and which will require the Company to phase-in the 17.6% ownership share in Seabrook Unit 1, which is virtually com- unit % costs, and due to a DPUC-mandated prudence audit, the Com-plete.The Company estimated that the cost of this unit would have pany is unabic to predict the extent of recovery ofits investment in been approximately $4.56 billion, including AFUDC,if the unit had the unit. A material write down could have a serious adverse effect gone into service on its scheduled date of October 1986. Ilowever, it is on the Companyt future financial condition. Additionally,if the j not likely that the unit will achieve commercial operation before necessary remaining steps to achieve commercial operation are not i 1988, since the operating license for the unit will not permit com. successful and cancellation of the unit were to occur,it would have , mercial operation until various conditions are met, the most difficult serious adverse c!Iects on the Company that couldjeopardize the of which is the development of satisfactory off site emergency re- Companyt financial viability and business operations. sponse plans. Each month of delay in commercial operation beyond Regulatory proceedings with respect to the transfer of responsibility October 1986 willincrease the cost of the Companyt share of the
, for management of construction and for operation of Seabrook Unit 1 ,
unit by approximately $10 million, primarily AFUDC. Tlus amount is ' to New llampshire Yankee Electric Corporation, an entity which has reflected throur,h 1987 in the $300 million estimate of construction been created for these express purposes, are pending before the program costs for 1987 through 1991. Massachusetts Department of Public Utilities. Approval of this trans-Seabrook Unit 1 fer by the NRC also willbe required. The ecenomic viability of Sca' brook Unit I was seriouslyjeopardized A financing plan adopted by the Seabrook participants on May 14, in the Spring of 1984 by substantialincreases in cost estimates and 1984 required each participant to provide to the others assurances by the attendant financial problems of Public Service Company of acceptable to them that financing of such participanth ownership New llampshire (PSNil). Events since that time, including the imple- share of Seabrook Unit it cash construction expenditures subse-
- nentation of financing pitns by thejoint owners and the attainment quent to July 1984 as great as $1.3 billion (amended to $370 million ri construction milestone events on or ahead of schedule and within as of January 1,1986) was available. Although these assurances were project managementh cost estimates, have allowed construction of the unit to be virtually completed While the risk of cancellation of the unit has been reduced by these events, both the occurrence and timing of operation of the unit continue to be dependent on accom-plishment of necessary remaining steps which are largely beyond the Cempanyt control.
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i provided, subsequent developments prevented a resumption of full Connecticut challenging both the DPUCh order and the constitution-construction funding until October 1985, during which time several ality of the 1984 legislation. In 1985, the Connecticut legislature s participants, as a result ofjurisdictional regulatory decisions, agreed amended the 1984 legislation to embody the terms of the DPUC 4 to sell their interests in the Seabrook project '.o Eastern Utilities order, and the Company expects to challenge the constitutionality Associates (EUA), a Massachusetts public utility holding company of this amendment. system, which, prior to November 1986, owned a 2.9% share of the Based on changes in accounting rules, effective in 1988, if the consti- , unit. These participants include Central Mair,e Power Company, Ban- ' tutionality of the cost " cap" is upheld, the Company will be required gor Ilydro Electric Company, Maine Public Service Company, to record a loss against current income of approximately $125 mil-Pitchburg Gas and Electric Light Company (Pitchburg) and Central lion, net of related income tax effects, assuming additional monthly Vermont Public Service Corporation, each of which sold all of its costs of $10 mi!! ion for 1987 and a January 1988 commercial opera-resp t ve ownership shares, aggregating 12.135%, to EUA in Novem-tion date. If the Company is not permitted to recover its share of the cost " cap" due to prudence disallowances, as a result of the audit Fitchburg had failed to makc required construction payments for the mentiont:d above, or any other reason, the Company will be required 7 Seabrook project since May 15,1985. UI and several other partici- to recognize a further loss against net income as soon as the amount 7 pants had made up the difference in construction funding by making of the disallowance becomes probable and can be reasonably esti- , j advance payments against future construction and other costs. in mated. At this time, the Company is unable to predict that such ! connection with its purchase of Fitchburgh ownership interest, EUA additional disallowance la probable; however, if such a disallowance $ reimbursed the project for all of Fitchburgh construction funding were to occur and it were to be substantial, the loss could have a I deficiencies. material adverse effect on the Companyh financial condition. See A Vermont participant, Vermont Electric Generation and 'lYansmis- c un E for Manknments anNowances Madosts% , sion Cooperative, Inc. (Vt Coop), which holds a 0.4% ownership share, ln 1985, the Connecticut legislature also enacted a statute which is currently delinquent, having failed to make payments due since provides that,if the DPUC determines that a regulatory or court ! January 1986. Ilowever, the deficiency in project construction fund. decision in another state may substantially affect the construction I ing on account of Vt Coopt delinquencies is being made up by other costs or the completion date of Seabrook Unit 1, the DPUC must I participants, including the Company. The Companyt share of ad. require that any construction costs of the unit incurred by the vance payments on account of these delinquencies amounted to Company after the date of the DPUCh determination not be re-approximately $312 thousand at December 31,1986. covered through rates, unless the unit is subsequently completed and bec mes used and useful. Following hearings held on October 7,1985 : Commencing in April 1985, the Connecticut DPUC has periodically und November 6,1985, the DPUC determined that neither the con- 1; conducted reopened public hearings in the proceedings in which it struction costs not the completion date of Unit I had been substan- I found, in November and December 1984, that Seabrook Unit I will tially affected by a 1985 Massachusetts Supreme Judicial Court deci-become used and useful for public service and is economically viable. i si n which prevented the Massachusetts Municipal Wholesale ! The DPUC has not reversed its 1984 findings as a result of any of Electric Company (MMWEC) from issumg long-term debt to pay for these hearings, including those which were concluded in March 1986. Seabrook construction costs and resulted in MMWECh issuance of Legislation enacted by Connecticut in 1984 directed the DPUC to more expensive short term debt. The Connecticut Division of Con. establish a limit on the cost of Seabrook Unit I that may be re- sumer Counsel has filed an appeal with the Connecticut Superior covered through rates, which limit will be subject to escalation only Court challenging this DPUC determination. for labor and material cost increases due to inflation exceeding 10% Legislation enacted by Connecticut in 1985 requires the DPUC to per year, increases in the Companyh weighted average allowance for funds used during construction rate after December 31,1983 above phase-in the cost of large electric generating facilities into a utilityb rates in approximately equal installments over a period of not less 10%% per year, cost increases directly attributable to new NRC regulations, and costs due to unforeseeable and unavoidable labor than 3 years nor more than 10 years from the in-service date of the stoppages. On September 27,1984, the DPUC issued an order limiting facility if the inclusion of all costs would increase the utilityt reve-the costs of Seabrook Unit I that may be recovered through rates by nue requirements by more than 10E This legislation will be applica- 1 ble to the Companyh Seabrook Unit I costs when it is placed in the Company to its share of costs not in excess of $4.7 billion (which service.The DPUC has commenced a proceeding to consider whether figure includes $200 million ofindirect construction costs previously allocated to Seabrook Unit 2), subject to increase only for the rea- all of the costs of Seabrook Unit I have been prudently incurred, for use in determining the amount of Seabrook cost to be included in the sons noted in the preceding sentence. Seabrook project manage-menth estimate of the total costs of Unit I was $4.56 billion, assum- Companyh rates. 0ther 1985 Connecticut legislation will require the DPUC to determine the appropriate level of generating reserve ca-ing completion in October 1986. Ilowever, due to delays in achievmg commercial operation of the unit, the $4.7 billion cost limitation pacity for a utility prosecuting a rate proceeding and to exclude from will be exceeded. Each month of delay in the unitt in-service date the utilityt rates the costs associated with any excess capacity. beyond October 1986 increases the total cost of the unit to the Com- The FASB is also proposing to revise the current a:: counting rules pany by approximately $10 million. On December 11,1984, the with regard to the phase-in of the costs of a newly completed operat-Company filed an appeal with the Superior Court of the State of ing unit into the rates. Such proposed revisions, which would be 1 applicable to a phase-in of the Companyt investment in Seabrook j Unit 1, would require, among other things, that costs could be de-ferred under a phase-in plan only if the DPUC allowed recovery of these costs within a specified period of time. During 1986, the FASB ; held public hearings on these proposed accounting rule changes in ' June, and conducted deliberations in October, November and Decem-ber. At a December meeting, the FASB decided to defer action on changes to accounting for phase-in plans until 1987. The Company cannot predict the outcome of the FASBh ongoing deliberations on these revisions. l
?
is o Other (M) Quarterly Financial Data (Unaudited) On November 22,1985, the DPUC approved the issuance and sale by Selected quarterly financial data for 1986 and 1985 are set forth Bridgeport Electric Company, a wholly-owned subsidiary of the Com- below: pany, of approximately $100 million principal amount of 18% First Earnings Mortgage Bonds. The sale of the bonds was consummated and the Per Share Company received the proceeds on the same date. On November 25, Operating Operating Net ofCommon 1985, the Division of Consumer Counsel appealed to the Superior Quarter Revenues Income income Stock (1) Court of Connecticut from the DPUCh decision, alleging that the 1986 DPUC did not comply with statutory procedures in reaching its deci- First $127,290 $21,635 $26,100 $1.53 sion and that said decision violated the DPUCh regulations and its Second 112,088 18,594 23,050 1.32 previous decisions. This appeal has not yet been heard liy the Supe- Third i18,686 24,624 28,001 1.68 rior Court. Under Connecticut law, the additional bonds are valid and Fourth 113,055 21,196 24,399 1.45 binding obligations irrespective of the disposition of this appeal. 1985 A class action on behalf of persons who purchased shares of the First $135,188 $24,076 $27,095 $1.62 Companyh stock during the period January 30,1984 through April Second 121,080 18,589 21,970 1.24 18,1984 has been brought against the Company and each ofits Third 129,776 21,962 26,202 1.55 Directors, based on allegations that the Companyh 1983 annual re. Fourth 128,892 20,002 24,338 1.40 port to its shareholders contained misstatements regarding the im-pact of the problems associated with the Seabrook project on the (!) Based on weighted average number of shares outstanding each quarter. future carnings and ability of the Company to pay dividends, that the The quarterly Anancial data for 1986 has been restated to reflect adjustments increase in the Companyh Common Stock dividend declared by the for the adoption in December 1986 of SFAS 87, a new accounting standard for Companyh Directors on February 27,1984 was made to conceal these pensions, problems, that the Companyh Current Report on Form 8-K, dated Earnings for the third and fourth quarters of 1985 were adversely impacted by April 17,1984 and filed with the Securities and Exchange Commis- the effect of costs associated with Hurricane Gloria, which amounted to sion, incorrectly stated that the Seabrook problem described therein approximately 18 cents and 7 cents per share, respectively, would not "in and of itself' affect the Companyh ability to pay dividends, and that the Chairman of the Board of Directors misin. Common Stock Data formed the shareholders present at the annual meeting on April 18' Ulh Common Stock is traded on the New York Stock Exchange, where i 1984 as to the status of the Companyh quarterly dividend, and seek-the high and low sale prices during 1986 and 1985 were as follows: ing damages in an unspecified amount. The Company does not be-lieve that resciution of thia action will have a material adverse effect 1986 Sale Price 1985 Sale Price on the Companyh financial condition. High Low High Low Connecticut Yankee Atomic Power Company (Connecticut Yankee), First Quarter 33 % 26% 17 % 13 % in which the Company has a 9.5% common stock ownership share, 35 % 27 % 19 15 Second Quarter owns and operates a nuclear electric generating station in Haddam Third Quarter 36 % 30% 22 % 18 % Neck, Connecticut, The Company is obligated to furnish 9.5% of - 28 % P7% Fourth Quarter 33 % 21 % Connecticut Yankech capital requirements, within specified limits. Connecticut Yankee has engaged in a construction program which is UI has paid quarterly dividends on its Common Stock since 1900. The Srst essenf tal to maintain its station as a dependable source oflow cost three quarterly dividends declared in 1985 were at a rate of 50 cents per electric power in New England. As a condition of the debt financing share. The fourth quarterly dividend declared in 1985 and the four quarterly arraagt ments for this construction program, the lenders have re. dividends declared in 1086 were all at a rate of 58 cents per share. quired guarantees from the sharcowners of Connecticut Yankee. Ac- The Trust indenture under which all of the Company's Debentures are issued cordingly, the Company has guaranteed payment of its share of a $25 places limitations on the payment of cash dividends on the Common Stock of .. million revolving credit agreement and a $37 million long-term debt the Company and on the amounts that can be expended to purchase or j issue of ConnecticutYankee. redeem shares of Common Stock. Under the most restrictive provision of the / Trust indenture, retained earnings in the amount of approximately $246 I milhon were free from such limitations at December 31,1986. As of January 31,1987, there were 29,634 Common Stock shareowners of I record. l l l I l 1 1
.y I Report of Independent Certified Public Accountants '
e. To the Shereewners and Directo1s of - The United liluminating Company
, We have examined the consolidated balance theets of The United
. Illuminating Company as of December 31,1986,1985 and 1984, and ;
the related consolidated statements ofincome, retained earnings -..
= and sources of funds for gross property additions for the years then -
ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of i the accounting records and such other auditing procedures as we -l l considered necessary in the circumstances, j Tlie Company is a 17.5% participant in the Seabrook Unit I nuclear project (the Unit). As more fully described in Note (L) in the " Notes
. to Consolidated Financial Statements" there are uncertainties relat-.
Ing to those events necessary for the Unit to achieve commercial operation and to the extent of the recovery,in rates, of the Compa-nytinvestment in the Unit. The outcome of these uncertainties could have a material effect on the financial position and results of operations of the Company, and it is uncertain whether such mate-rial effects would permit the realization of assets and liquidation of
- liabilities in the ordinary course of business operations.
~
In out opinion, subject to the effects on the 1986,1985 and 1984 consolidated financial statements of such adjustments,if any, as i might have been required had the outcome of the uncertainties l described in the preceding paragraph been known, the consolidated j
. financial statements referred to above present fairly the financial position of The United Illuminating Company as of December 31, 1986,1985 and 1984 and the results ofits operations and sources of l funds for gross property additions for the years then ended in con-formity with generally accepted accounting principles applied on a consistent basis.-
Coopers & Lybrand New York, New York January 26,1987 - l' I: 1 I (; I: 1 1 a ;l I' 1 I' L (' I I 1
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f; 9 , i f Yh* l 1 l l General Counsel Stock Listing Wiggin & Dana New York Stock Exchange Independent Certified Public Accountants Common Stock 8.80% Preferred Stock,1976 Series Coopers & Lybrand 19% Depositary Preferred Stock,1984 Series , i
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C2-Transfer and Dividend Disbursing Agent: j Dividend Reinvestment Plan The United Illuminating Company j Common Stock shareowners of record interested in obtaining infor-801cmple Street mati n restrding the benefits of participating in Ult dividend re-P.a Box 1948 nvestment plan may write or call: New flaven, Connecticut 06500-1948 Attention: Shareowner Services Kathryn A. Krause Telephone:(203) 777 7050 Investor Relations Manager l United illuminating l Registrar and Co Transfer Agent: P.O. Box 1564 Continental Stock 1Yansfer & Trust Company New Haven,CT 06506 1 203-777 6010 i 72 Reade Street l New York,New York 10007 Annual Wedng Date. Attention: Stock Transfer Department Telephone:(212) 406 2740 The Companyt Annual Meeting will be held in the auditorium of the Western Service Center,801 Bridgeport Avenue, Shelton, CT on Wednesday, April 22,1987 beginning at 10:00 a.m. ____ __mL . _j
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