FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1995
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-5924
TUCSON ELECTRIC POWER COMPANY
(Exact name of registrant as specified in its charter)
ARIZONA 86-0062700
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
220 WEST SIXTH STREET, TUCSON, ARIZONA P.O. BOX 711
85701 85702
(Address of principal executive offices) (Zip Code)
(520) 571-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
At July 31, 1995, 160,676,973 shares of the registrant's Common Stock,
no par value (the only class of Common Stock), were outstanding.
TABLE OF CONTENTS
Page
Definitions ii
Independent Accountants' Report 1
PART I - FINANCIAL INFORMATION
Item 1. -- Financial Statements
Comparative Consolidated Statements of Income (Loss) 2
Comparative Consolidated Balance Sheets 3
Comparative Consolidated Statements of Cash Flows 4
Supplemental Consolidated Cash Flow Information 4
Notes to Consolidated Financial Statements
Note 1. Rate Matters 5
Note 2. Springerville Unit 2 Deferrals 5
Note 3. Commitments and Contingencies
Coal and Transportation Contracts 5
Tax Assessments 6
SDGE/FERC Proceedings
San Diego Gas & Electric v. Tucson Electric Power Company 6
Alamito Company, Docket No. ER79-97-009 7
Note 4. Income Taxes 7
Note 5. Purchase of Debt Securities 7
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview 8
Proposed Holding Company 8
Nations Energy Corporation 9
Rate Matters 9
Competition
Wholesale 10
Retail 11
Accounting for the Effects of Regulation 11
Earnings 12
Dividends on Common Stock 12
Results of Operations
Results of Utility Operations
Sales and Revenues 13
Operating Expenses 14
Other Income 14
Interest Expense 14
Liquidity and Capital Resources 14
Cash Flows 14
PART II - OTHER INFORMATION
Item 1. -- Legal Proceedings
SDGE/FERC Proceedings
San Diego Gas & Electric v. Tucson Electric Power Company 16
Alamito Company, Docket No. ER79-97-009 16
Item 4. -- Submission of Matters to a Vote of Security Holders 16
Item 6. -- Exhibits and Reports on Form 8-K 16
Signature Page 17
Exhibit Index 18
DEFINITIONS
The abbreviations and acronyms used in the 1995 Second Quarter Form 10-Q are
defined below:
ACC Arizona Corporation Commission.
Articles Company's Amended and Restated Articles of Incorporation.
Banks Various banks with which the Company has credit
relationships.
Board of Directors The Company's board of directors.
Century Century Power Corporation, an indirect subsidiary of
Catalyst and formerly known as Alamito Company.
Common Stock The Company's common stock, without par value.
Company Tucson Electric Power Company.
Creditors Certain of the Company's creditors and lease
participants and Century and the Springerville Unit 1
Leases participants.
Energy Act The Energy Policy Act of 1992.
FAS 71 Statement of Financial Accounting Standards #71:
Accounting for the Effects of Certain Types of
Regulation.
FAS 92 Statement of Financial Accounting Standards #92:
Regulated Enterprises - Accounting for Phase-In Plans.
FAS 101 Statement of Financial Accounting Standards #101:
Regulated Enterprises - Accounting for the
Discontinuation of Application of FAS 71.
FERC The Federal Energy Regulatory Commission.
Financial
Restructuring The comprehensive restructuring of the Company's
obligations to Creditors and the reclassification of all
shares of the Company's previously outstanding preferred
stock into Common Stock, which closed on December 15,
1992.
First Mortgage Bonds The Company's first mortgage bonds issued under the
General First Mortgage.
General First
Mortgage The Indenture, dated as of April 1, 1941, of Tucson Gas,
Electric Light and Power Company to The Chase National
Bank of the City of New York, as trustee, as supplemented
and amended.
Holding Company Act The Public Utility Holding Company Act of 1935, as
amended.
Irvington Irvington Generating Station.
Irvington Lease The leveraged lease arrangement relating to Irvington
Unit 4.
kWh Kilowatt-hour(s).
LOC(s) Letter(s) of Credit.
MRA The master restructuring agreement between the
Company and the Banks which includes the Renewable Term
Loan, Revolving Credit and certain replacement
reimbursement agreement.
MSR Modesto, Santa Clara and Redding Public Power Agency.
MW Megawatt(s).
Nations Energy Nations Energy Corporation, a wholly-owned subsidiary of
the Company.
1994 Rate Order The ACC's January 11, 1994, Rate Order concerning an
increase in the Company's retail base rates and certain
regulatory write-offs.
Palo Verde The Palo Verde Nuclear Generating Station.
P&M Pittsburg & Midway Coal Mining Co.
PURPA The Public Utility Regulatory Policies Act of 1978,
as amended.
RTGs Regional Transmission Groups.
Renewable Term Loan The credit facility that replaced the Term Loan pursuant
to the MRA Sixth Amendment, dated as of November 1, 1994,
and completed March 7, 1995.
RUCO Residential Utility Consumers Office.
Revolving Credit The $50 million revolving credit facility entered
into between a syndicate of banks party to the Financial
Restructuring and the Company, as part of the Financial
Restructuring.
SDGE San Diego Gas & Electric.
SEC Securities and Exchange Commission.
Shareholders The Company's existing holders of Common Stock.
Springerville Springerville Generating Station.
Springerville Unit 1
Leases The leveraged lease arrangements relating to
Springerville Unit 1, and one half interest in certain
facilities at Springerville used in common with
Springerville Unit 1 and Springerville Unit 2.
DEFINITIONS
(concluded)
Springerville Common
Facilities Leases The leveraged lease arrangements relating to one-
half interest in certain facilities at Springerville used
in common with Springerville Unit 1 and Springerville
Unit 2.
SWRTA Southwest Regional Transmission Association.
Term Loan The $243.4 million original principal amount term
loan provided by a syndicate of certain Banks as part of
the Financial Restructuring.
Valencia Leases Valencia's leveraged lease arrangements relating to
the coal handling facilities serving Springerville.
WRTA Western Regional Transmission Association.
INDEPENDENT ACCOUNTANTS' REPORT
Tucson Electric Power Company:
We have reviewed the accompanying consolidated balance sheet of Tucson Electric
Power Company and subsidiaries (the Company) as of June 30, 1995 and the related
consolidated statements of income (loss) for the three-month and six-month
periods ended June 30, 1995 and 1994, and cash flows for the six-month periods
ended June 30, 1995 and 1994. These financial statements are the responsibility
of the Company''s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
As discussed in Note 2 (and Note 2 to the annual financial statements for the
year ended December 31, 1994 (not presented herein)), the timing of the recovery
of the costs associated with 37.5% of Springerville Unit 2 cannot presently be
determined because the Company has not yet received rate relief for such costs.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of capitalization of the
Company as of December 31, 1994 and the related consolidated statements of
income (loss) cash flows, and changes in stockholders'' equity (deficit) for the
year then ended (not presented herein); and in our report dated January 31, 1995
(March 7, 1995 as to Note 6) (which includes an explanatory paragraph relating
to the timing of the recovery of the costs associated with 37.5% of
Springerville Unit 2 which cannot presently be determined), we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1994 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Tucson, Arizona
July 24, 1995
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The June 30 consolidated financial statements are unaudited but reflect
all normal recurring accruals and other adjustments which are, in the opinion
of management, necessary for a fair statement of the results for the interim
periods covered. Due to seasonal fluctuations in sales, the quarterly
results are not indicative of annual operating results. Also see Item 2. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
COMPARATIVE CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
1995 1994
-Thousands of Dollars-
Operating Revenues
Retail Customers $140,008 $143,210
Amortization of MSR Option Gain Regulatory Liability 5,013 5,013
Other Utilities 17,284 22,874
--------- ---------
Total Operating Revenues 162,305 171,097
--------- ---------
Operating Expenses
Fuel and Purchased Power 47,815 55,259
Capital Lease Expense 23,813 23,254
Amortization of Springerville Unit 1 Allowance (7,108) (6,551)
Other Operations 24,474 23,377
Maintenance and Repairs 10,385 11,303
Depreciation and Amortization 22,977 22,341
Taxes Other Than Income Taxes 12,979 14,163
--------- ---------
Total Operating Expenses 135,335 143,146
--------- ---------
Operating Income 26,970 27,951
--------- ---------
Other Income
Interest Income 2,058 1,393
Other 1,610 1,468
--------- ---------
Total Other Income 3,668 2,861
--------- ---------
Interest Expense
Long-Term Debt - Net 17,632 16,796
Regulatory Interest 8,223 8,128
Other 2,053 1,759
Allowance for Borrowed Funds Used During Construction (284) (303)
--------- ---------
Total Interest Expense 27,624 26,380
--------- ---------
Net Income $ 3,014 $ 4,432
========= =========
Average Shares of Common Stock Outstanding (000) 160,689 160,724
========= =========
Net Income per Average Share $ 0.02 $ 0.03
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF LOSS
Six Months Ended
June 30,
1995 1994
-Thousands of Dollars-
Operating Revenues
Retail Customers $258,195 $258,952
Amortization of MSR Option Gain Regulatory Liability 10,026 10,026
Other Utilities 36,829 48,698
--------- ---------
Total Operating Revenues 305,050 317,676
--------- ---------
Operating Expenses
Fuel and Purchased Power 93,531 107,534
Capital Lease Expense 47,256 46,356
Amortization of Springerville Unit 1 Allowance (14,216) (13,102)
Other Operations 49,294 47,512
Maintenance and Repairs 21,068 20,453
Depreciation and Amortization 45,863 44,274
Taxes Other Than Income Taxes 28,536 28,439
--------- ---------
Total Operating Expenses 271,332 281,466
--------- ---------
Operating Income 33,718 36,210
--------- ---------
Other Income
Interest Income 4,779 2,444
Gains on Sales of Securities 2,958 -
Other 2,708 3,160
--------- ---------
Total Other Income 10,445 5,604
--------- ---------
Interest Expense
Long-Term Debt - Net 36,010 32,597
Regulatory Interest 16,568 16,362
Other 4,092 3,505
Allowance for Borrowed Funds Used During Construction (561) (502)
--------- ---------
Total Interest Expense 56,109 51,962
--------- ---------
Net Loss $(11,946) $(10,148)
========= =========
Average Shares of Common Stock Outstanding (000) 160,706 160,724
========= =========
Net Loss per Average Share $ (0.07) $ (0.06)
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
- Thousands of Dollars -
Utility Plant
Plant in Service $2,070,756 $2,053,123
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 46,802 40,870
----------- -----------
Total Utility Plant 3,010,622 2,987,057
Less Accumulated Depreciation and Amortization (825,543) (791,617)
Less Accumulated Amortization of Capital Leases (32,690) (25,595)
Less Allowance for Springerville Unit 1 (162,299) (162,423)
----------- -----------
Total Utility Plant - Net 1,990,090 2,007,422
----------- -----------
Investments
Investments and Other Property 36,440 4,307
Net Assets of Discontinued Operations - 8,685
----------- -----------
Total Investments 36,440 12,992
----------- -----------
Current Assets
Cash and Cash Equivalents 118,665 233,300
Accounts Receivable 65,079 66,332
Materials and Fuel 46,156 36,109
Deferred Income Taxes - Current 14,622 12,870
Other 9,804 8,376
----------- -----------
Total Current Assets 254,326 356,987
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 139,664 143,372
Deferred Common Facility Costs 64,573 65,843
Deferred Springerville Unit 2 Costs 48,507 54,983
Deferred Lease Expense 22,519 25,228
Deferred Fuel and Purchased Power Expense 2,343 5,872
Other Deferred Regulatory Assets 8,969 9,362
Deferred Debits - Other 16,214 17,532
----------- -----------
Total Deferred Debits 302,789 322,192
----------- -----------
Total Assets $2,583,645 $2,699,593
=========== ===========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
June 30, December 31,
1995 1994
- Thousands of Dollars -
Capitalization
Common Stock $ 645,330 $ 645,479
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (693,301) (681,355)
----------- -----------
Common Stock Deficit (54,328) (42,233)
Capital Lease Obligations 924,059 922,735
Long-Term Debt 1,296,935 1,381,935
----------- -----------
Total Capitalization 2,166,666 2,262,437
----------- -----------
Current Liabilities
Short-Term Debt 12,039 -
Current Maturities of Long-Term Debt 11,015 17,167
Accounts Payable 36,697 39,777
Interest Accrued 58,370 59,480
Taxes Accrued 17,218 29,215
Accrued Employee Expenses 8,742 15,247
Current Obligations Under Capital Leases 12,688 12,803
Other 7,715 6,624
----------- -----------
Total Current Liabilities 164,484 180,313
----------- -----------
Deferred Credits and Other Liabilities
MSR Option Gain Regulatory Liability 33,664 41,214
Accumulated Deferred Investment Tax Credits
Regulatory Liability 22,064 24,368
Deferred Income Taxes - Noncurrent 162,408 164,341
Other 34,359 26,920
----------- -----------
Total Deferred Credits and Other Liabilities 252,495 256,843
----------- -----------
Total Capitalization and Other Liabilities $2,583,645 $2,699,593
=========== ===========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1995 1994
-Thousands of Dollars-
Cash Flows from Continuing Operating Activities
Cash Receipts from Retail Customers $271,708 $267,513
Cash Receipts from Other Utilities 42,806 50,643
Fuel and Purchased Power Costs Paid (85,398) (89,410)
Wages Paid, Net of Amounts Capitalized (36,316) (25,452)
Payment of Other Operations and Maintenance Costs (40,323) (38,134)
Capital Lease Interest Paid (41,463) (40,744)
Interest Paid, Net of Amounts Capitalized (40,283) (35,556)
Taxes Paid, Net of Amounts Capitalized (66,651) (53,410)
Interest Received 4,886 2,232
--------- ---------
Net Cash Flows - Continuing Operating Activities 8,966 37,682
--------- ---------
Net Cash Flows - Discontinued Operations - 25,175
--------- ---------
Cash Flows from Capital Transactions
Construction Expenditures (27,950) (35,026)
Purchase of Debt Securities (17,697) -
Other 3,226 105
--------- ---------
Net Cash Flows - Capital Transactions (42,421) (34,921)
--------- ---------
Cash Flows from Financing Activities
Payments to Retire Long-Term Debt (35,492) (612)
Payments on Renewable Term Loan (55,660) -
Payments to Retire Capital Lease Obligations (5,500) (6,848)
Other 620 452
--------- ---------
Net Cash Flows - Financing Activities (96,032) (7,008)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (129,487) 20,928
Cash and Cash Equivalents, Beginning of Year * 248,152 161,996
--------- ---------
Cash and Cash Equivalents, End of Period ** $118,665 $182,924
========= =========
* Beginning of year balance includes cash and cash equivalents from
discontinued operations of $14,852,000 for 1995 and $22,179,000 for 1994.
** End of period balance includes cash and cash equivalents from discontinued
operations of $22,342,000 for 1994.
See Notes to Consolidated Financial Statements.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
Six Months Ended
June 30,
1995 1994
-Thousands of Dollars-
Net Loss $(11,946) $(10,148)
Adjustments to Reconcile Net Loss
to Net Cash Flows
Depreciation and Amortization Expense 45,863 44,274
Taxes Accrued (11,996) (801)
Deferred Investment Tax Credits (2,304) (2,606)
Deferred Fuel and Purchased Power 3,529 3,844
Lease Payments Deferred 16,637 16,317
Deferred Springerville Unit 2 Costs (560) (590)
Amortization of Regulatory Adjustments (7,675) (6,767)
Other (629) 1,465
Changes in Assets and Liabilities which
Provided (Used) Cash Exclusive of
Changes Shown Separately
Accounts Receivable - Other 5,921 2,339
Materials and Fuel (9,984) (6,732)
Unbilled Revenues (4,515) (5,321)
Other Current Assets and Liabilities (15,094) 462
Other Deferred Assets and Liabilities 1,719 1,946
--------- ---------
Net Cash Flows - Continuing Operating Activities $ 8,966 $ 37,682
========= =========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 1. RATE MATTERS
- ---------------------
On June 13, 1995, the Company filed an application with the ACC for an
overall 4.9% or approximately $28.4 million rate increase. The Company's
rate request seeks recovery of the operating and capital costs of the
remaining 37.5% of Springerville Unit 2 which is not currently being
recovered.
NOTE 2. SPRINGERVILLE UNIT 2 DEFERRALS
- ---------------------------------------
The Company is not presently recovering through retail rates the
depreciation, property taxes, operating and maintenance expenses other than
fuel, or interest costs associated with the 37.5% of Springerville Unit 2
capacity which is currently not deemed by the ACC to be used and useful for
the retail jurisdiction and therefore is not in rate base (hereinafter
referred to as "retail excess capacity deferrals"). These expenses are being
expensed as incurred. However, the 1994 Rate Order permits such costs to be
deferred for future recovery over the remaining useful life of Springerville
Unit 2. This phase-in plan does not qualify under FAS 92 and, therefore,
such retail excess capacity deferrals, while deferred for regulatory
purposes, cannot be deferred for financial reporting purposes. Such retail
excess capacity deferrals totaled $6 million during the six months ended June
30, 1995, bringing the total to $69 million at June 30, 1995. Either
inclusion in costs recoverable through retail rates or additional wholesale
sales at sufficient prices of an equivalent amount of capacity (or a
combination thereof) will be required to recover these retail excess capacity
deferrals.
In addition, the Company is not presently recovering through retail
rates 37.5% of the deferred Springerville Unit 2 rate synchronization costs
($27 million at June 30, 1995), which were non-fuel costs of Springerville
Unit 2 incurred from January 1, 1991 through October 14, 1991. This amount,
together with the balance of such costs ($22 million at June 30, 1995) that
the Company is presently recovering through rates, are reported in the
Company's Consolidated Balance Sheet as Deferred Springerville Unit 2 Costs.
The 1994 Rate Order provided that the rate synchronization and retail
excess capacity deferrals associated with the 37.5% of Springerville Unit 2
capacity not found to be used and useful for the retail jurisdiction will
continue to incur an interest charge of 7.19% until authorized to be included
in rate base or for a period of three years ending in 1997, whichever occurs
first.
NOTE 3. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Coal and Transportation Contracts
On October 14, 1991, amendments to the contract with the Springerville
coal supplier were entered into, and became effective, which, among other
things, reduced the price of coal shipments at Springerville. The amended
contract contains provisions which protect the claims of the Springerville
coal supplier under the original agreement in the event that the Company does
not perform its obligations under the terms of the amended agreement at any
time prior to August 23, 1995. If such a failure to perform occurs, the
Company would be responsible for approximately $7 million per year in
additional payments to the Springerville coal supplier. Also, at June 30,
1995, a $3 million accrued liability remained on the Company's Consolidated
Balance Sheet which will be forgiven if all conditions are met through August
23, 1995. To date the Company has met all the conditions of the contract.
The Company has contracted with P&M to supply coal to Irvington.
Originally, all units at Irvington were scheduled to be converted and coal
supplies were contracted for those units. The original contract required
annual minimum quantities of 650,000 tons. However, the conversion of Units
1, 2 and 3 at Irvington was canceled. The then-existing P&M contract
contained minimum take-or-pay provisions which required the Company to pay
one-half of the base price of coal for any contract quantities not scheduled
and delivered. On November 5, 1991, amendments to the contract with P&M were
entered into and became effective, which, among other things, substantially
reduced the minimum annual coal quantities to levels which the Company
estimates can be utilized by Irvington Unit 4 alone (Irvington Unit 4 is
expected to burn approximately 225,000 tons of coal per year) and extended
the expiration date of the agreement from 2002 to 2015. Additionally, to
satisfy an unpaid $8 million 1990 penalty, the amendments provided for P&M to
receive either the proceeds from any sale of, or, at P&M's option, the title
to an undeveloped parcel of land (book value of $2 million). P&M has not
exercised its option to take title to the land and no sale of the land has
occurred. If the Company continues to perform under the amended contract
through November 4, 1995, the $8 million penalty which remains an accrued
liability on the Company's Consolidated Balance Sheet at June 30, 1995 will
be forgiven. If the Company fails to perform at any time prior to November
4, 1995, the Company would be required, pursuant to the prior contract, to
pay for approximately 5.1 million tons, that would not be delivered to the
Company, at one-half the base price of coal through 2002, at an estimated
aggregate cost of $98 million. To date the Company has met all the
conditions of the contract.
Amendments to transportation agreements have also been executed,
effective October 18, 1991, with the Springerville and Irvington rail
transportation suppliers which, among other things, reduced the price for
coal shipments and limited annual changes in the contract price. The
Springerville amended rail transportation agreement includes provisions which
protect the supplier's claims under their original contract in the event the
Company does not perform its obligations under the terms of the amended
agreement at any time prior to September 19, 1995. If such a failure to
perform occurs, the Company would be responsible for approximately $3 million
per year to the Springerville transportation supplier at current contract
prices. At June 30, 1995, a $3 million accrued liability remained on the
Company's Consolidated Balance Sheet which will be forgiven, if all
conditions are met during the four years ending September 19, 1995. To date
the Company has met all the conditions of the contract.
Tax Assessments
The Arizona Department of Revenue has issued transaction privilege tax
assessments to the Company for the period November 1985 through May 1993
alleging that Valencia is liable for sales tax on gross income received from
coal sales, transportation, and coal-handling services to the Company during
such period. The Company protested the assessments. On March 11, 1994, the
Arizona Tax Court issued a Minute Entry granting Summary Judgment to the
Arizona Department of Revenue and upholding the validity of the assessment
issued for the period November 1985 through March 1990. The Company appealed
this decision to the Court of Appeals. Generally, Arizona law requires
payment of the assessment due prior to the appellate process. To date the
Company has paid, under protest, a total of $23 million ($14.6 million in
1995, $2.8 million in 1994 and $5.6 million in 1993) of the disputed sales
tax assessments, subject to refund in the event the Company prevails.
Also, the Arizona Department of Revenue has issued transaction privilege
tax assessments to the lessors from whom the Company leases certain property.
The assessments allege sales tax liability on a component of rents paid by
the Company on the Springerville Unit 1 Leases, Springerville Common
Facilities Leases, Irvington Lease and Valencia Leases. Assessments cover
the period August 1, 1988 to September 30, 1993. Under the terms of the
lease agreements, if the Arizona Department of Revenue prevails the Company
must reimburse the lessors for taxes paid by them pursuant to indemnification
provisions.
In the opinion of management, the Company has recorded, through the
Consolidated Statement of Income (Loss) in current and prior years, a
liability for the amount of federal and state taxes and interest thereon for
which the Company feels incurrence is probable as of June 30, 1995. In the
event that all or most of the Arizona Department of Revenue's proposed
assessments are sustained, additional liabilities would result. Based on the
current status of the legal proceedings, the Company believes that the
ultimate resolution of such disputes will occur over a period of one and a
half to four years. Although it is reasonably possible that the ultimate
resolution of such matters could result in a loss of up to approximately $25
million in excess of amounts accrued, management and outside tax counsel
believe that the Company has meritorious defenses to mitigate or eliminate
the assessed amounts. Based on consultations with counsel, the Company
believes that the resolution of the tax matters described herein should not
have a material adverse effect on the Company's Consolidated Financial
Statements.
SDGE/FERC Proceedings
San Diego Gas & Electric v. Tucson Electric Power Company
On February 11, 1993, SDGE filed a complaint and motion for summary
disposition against the Company and Century before the FERC (San Diego Gas &
Electric Company v. Tucson Electric Power Company and Century Power
Corporation, Docket No. EL93-13-000). The complaint alleged that the Company
and Century overbilled SDGE during Phases 3 through 5 of the Ten Year Power
Sale Agreement (Ten Year Agreement) and requested that the FERC order refunds
by the Company of an aggregate amount of approximately $14.5 million, plus
interest. On April 23, 1993, the Company filed an answer denying the
allegations of the complaint. On May 3, 1995, the FERC issued an order
dismissing SDGE's complaint. On July 19, 1995, the FERC partially granted
SDGE's request of rehearing of the May 3, 1995 Order and reinstituted
proceedings to determine what amounts SDGE and the Company may owe each other
for the period prior to November 1, 1984.
Alamito Company, Docket No. ER79-97-009
On September 27, 1993, SDGE filed a motion for decision by the FERC in
Alamito Company, Docket No. ER79-97-009. This proceeding involved the proper
capital structure and rate of return for rates under which Century Power
Corporation (formerly Alamito Company) sold Company system power to SDGE
during Phase 5 of the Ten Year Agreement, from June 1, 1987 through May 31,
1989. An initial decision of an administrative law judge in January 1986,
found the Company's capital structure was inflated and its return on equity
excessive. SDGE claimed that the Company would owe Century on SDGE's behalf
up to approximately $12 million, plus interest. On October 8, 1993, the
Company filed an answer opposing SDGE's motion. It was the Company's
position that the FERC's order of July 19, 1991 approving a settlement
between SDGE and Century in Docket No. ER79-97-009, as well as the Company's
and Century's mutual release of all claims against each other as part of
their Financial Restructuring, bars SDGE's claim. On December 23, 1993, the
FERC issued an order confirming that the July 19, 1991 order disposed of this
case, and denied SDGE's September 27, 1993 motion. On January 21, 1994, SDGE
requested rehearing of the FERC's order. On May 3, 1995, the FERC issued an
order denying SDGE's request for rehearing. On June 30, 1995, SDGE filed a
petition for review of the FERC's orders with the United States Court of
Appeals for the District of Columbia Circuit. The Company has moved to
intervene in that proceeding.
Based on consultations with counsel, the Company believes that the
resolution of the SDGE/FERC Proceedings described herein should not have a
material adverse effect, if any, on the Company's Consolidated Financial
Statements.
NOTE 4. INCOME TAXES
- ---------------------
The income tax benefit included in results of continuing operations for
the quarter and six months ended June 30, 1995 and 1994 was comprised solely
of the amortization of accumulated deferred investment tax credits. The
differences between income tax benefit and the amount obtained by multiplying
income (loss) before income taxes by the U.S. statutory federal income tax
rate for the quarter and six months ended June 30, 1995 and 1994 are as
follows:
Three Months Ended
June 30,
1995 1994
-------- --------
-Thousands of Dollars-
Federal Income Tax Expense at Statutory Rate $ (652) $(1,095)
Investment Tax Credit Amortization 1,152 1,303
Net Operating Loss Carryforwards 652 1,095
-------- --------
Total Benefit for Federal and
State Income Taxes $ 1,152 $ 1,303
======== ========
Six Months Ended
June 30,
1995 1994
-------- --------
-Thousands of Dollars-
Federal Income Benefit at Statutory Rate $ 4,988 $ 4,464
Investment Tax Credit Amortization 2,304 2,606
Loss for Which No Tax Benefit is Available (4,988) (4,464)
-------- --------
Total Benefit for Federal and
State Income Taxes $ 2,304 $ 2,606
======== ========
The income tax benefit is included in the Consolidated Statements of
Income (Loss) in the following accounts:
Three Months Ended
June 30,
1995 1994
-------- --------
-Thousands of Dollars-
Operating Expenses - Other Operations $ 23 $ 23
Other Income - Other 1,129 1,280
-------- --------
Total Income Tax Benefit $ 1,152 $ 1,303
======== ========
Six Months Ended
June 30,
1995 1994
-------- --------
-Thousands of Dollars-
Operating Expenses - Other Operations $ 45 $ 46
Other Income - Other 2,259 2,560
-------- --------
Total Income Tax Benefit $ 2,304 $ 2,606
======== ========
NOTE 5. PURCHASE OF DEBT SECURITIES
- ------------------------------------
In May 1995, the Company purchased approximately $18 million of debt
securities issued under the Springerville Unit 1 Leases. This purchase is
included in Investments and Other Property on the Consolidated Balance Sheet.
Also, in accordance with certain clauses of the MRA, the Renewable Term Loan
commitment was decreased by $10 million.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following contains information regarding the results of the Company's
operations during the second quarter and first six months of 1995 compared with
the second quarter and first six months of 1994, the outlook for dividends on
Common Stock, and changes in liquidity and capital resources of the Company
during the second quarter and first six months of 1995. Also management's
expectations of identifiable material trends are discussed.
OVERVIEW
The Company''s capital structure is highly leveraged and the Company''s
financial prospects and cash flows are subject to significant economic,
regulatory and other uncertainties, some of which are beyond the Company''s
control. These uncertainties include the degree of utilization of capacity
through either retail electric service or wholesale sales and the extent to
which the Company, due to continued high financial and operating leverage, can
alter operations and reduce costs in response to unanticipated economic
downturns or industry changes. The Company''s ability to recover the costs of
serving retail customers is dependent upon pricing of the Company''s services,
which requires ACC approval, and the level of sales to such customers. The
Company anticipates continued growth in sales over the next five years
primarily as a result of anticipated population and economic growth in the
Tucson area. However, a number of factors such as changes in economic
conditions and the increasingly competitive electric markets could affect the
Company''s levels of sales.
Increased revenues, including increases for the recovery of plant and
operating costs associated with the remaining 37.5% of Springerville Unit 2,
which is not currently included in rate base, may be required in order for the
Company to maintain its existing level of liquidity over the longer term as
obligations become due. The level of cash flow from wholesale sales is
affected generally by factors affecting the market for such sales, including
the availability of capacity and energy in the western United States. In
addition, because the Company has a significant amount of variable rate debt,
the Company''s future cash flows are also affected by the level of interest
rates. See Liquidity and Capital Resources below.
If the Company is unable to make sales at prices adequate to recover its
costs or if for other reasons the Company fails to maintain or improve its cash
flows, the Company''s ability to meet its obligations may be jeopardized.
During the 1997-2001 period, the Company has approximately $1.1 billion of
long-term debt maturing, including approximately $774 million in reimbursement
agreements relating to letters of credit which expire. The Company intends to
pay or refinance maturing bonds and bank loans and to replace or extend such
reimbursement agreements. There can be no assurance, however, that the Company
will be able to pay such debt or replace or extend such reimbursement
agreements.
In addition, the Company''s ability to raise capital (through either
public or private financings) is limited. The Company''s ability to obtain
debt financing will be limited by reason of limited free cash flow available
to meet additional interest expense and due to the restrictive covenants
contained in its obligations to creditors. Further, if the Company is
required to refinance its debt obligations in order to repay them when due,
such refinancing may be made on terms which are adverse to the Company.
Access to equity capital may be limited because of the Company''s likely
limited future profitability and its inability to pay dividends for the
foreseeable future. See Dividends on Common Stock below.
During the next twelve months, the Company does not expect any need to
obtain new debt financing to fund continuing operating activities and
construction expenditures. The Company instead expects to rely on internal
cash flows, existing cash balances, the Renewable Term Loan and, if necessary,
borrowings under the Revolving Credit. At June 30, 1995, the Company's cash
balance including cash equivalents was approximately $119 million. Cash
balances are invested in investment grade, money-market securities with an
emphasis on preserving the principal amount invested.
PROPOSED HOLDING COMPANY
The Company is currently seeking approvals to establish through a one-for-
one share exchange in early 1996 a new corporate structure in which the Company
will be a subsidiary of a new holding company, UniSource Energy Corporation
(UniSource). The Company seeks to establish a holding company structure
because the Company believes that it is in the best interests of its
shareholders for the Company to participate in various segments of the evolving
and expanding electric energy business. The Company believes that such
participation would be enhanced by the holding company structure, a commonly
used structure in the electric and other industries, to conduct different lines
of business.
In May 1995, shareholders of the Company approved the proposed holding
company. In addition to shareholder approval, consummation of the holding
company plan is predicated upon receiving approval from the ACC and FERC. The
Company also is seeking a "no action" position from the staff of the SEC under
the Public Utility Holding Company Act of 1935, as amended, or, in the
alternative, will seek approval of the SEC under such Act. The Company is in
the process of obtaining such approvals.
In February 1995, the Company filed a Notice of Intent to Form a Holding
Company with the ACC. In June 1995, the ACC staff filed testimony in which the
ACC staff recommended that the ACC deny the Company''s request on the basis
that retail customers would be exposed to certain risks resulting from
diversification. However, ACC staff recommended that, in the event that the ACC
approves formation of the holding company, the ACC impose various operating and
financial conditions on the Company and the holding company. In concurrently
filed testimony, RUCO did not oppose the formation of the holding company. The
Company filed rebuttal testimony on July 27, 1995, and a public hearing has
been set for August 22, 1995. Also, on April 26, 1995, the Company filed an
application with FERC requesting approval to form a holding company. This
application is pending.
If all required regulatory approvals are satisfactorily obtained, the
outstanding shares of the Company common stock would be exchanged, on a share-
for-share basis, for shares of UniSource. As a result, the holders of the
Company common stock will become the owners of UniSource common stock, and
UniSource will become the owner of the Company common stock. If the share
exchange is effected, it will not be necessary to turn in the Company''s common
stock certificates in exchange for UniSource common stock certificates. The
certificates for the Company''s common stock will automatically represent
shares of UniSource common stock. New certificates bearing the name of
UniSource will be issued in the future as certificates for presently
outstanding shares of the Company''s common stock are presented for transfer.
NATIONS ENERGY CORPORATION
On July 7, 1995, Nations Energy and Trigen Energy Corporation (Trigen)
signed a letter of intent with Coors Brewing Company (Coors) to enter
definitive agreements to purchase Coors'' energy assets and to provide Coors
with electric power under a long-term contract. Nations and Trigen would join
as partners to purchase and improve Coors'' energy production assets in Golden,
Colorado. The transaction also contemplates a 25 year powersale agreement
with Coors. Pending the completion of due diligence and final negotiations,
the transaction is expected to close in September 1995 at which time
Trigen/Nations partnership would pay $20 million for existing power plant
assets and would begin upgrading the facilities which would cost $40 million
over the next two years.
RATE MATTERS
On June 13, 1995, the Company filed an application with the ACC,
requesting an overall 4.9% increase in retail rates (approximately $28.4
million in annual revenues). The Company's request is based on original cost
rate base of approximately $1.17 billion, a rate of return on original cost
rate base of 8.2%, and a rate of return on common equity of 11.5%.
The proposed rate structure is a continuation of the Company's effort to
insure that the various retail customer classes pay their appropriate share of
the cost of providing service. The Company is proposing increases of 7.5% for
residential customers, 3.6% for commercial customers, and 5.0% for industrial
customers. The proposed increase would result in an increase of $5.37 in the
average monthly residential bill, from $70.92 (9.46 cents per kWh) to $76.29
(10.17 cents per kWh) for residential customers using an average 750 kilowatt-
hours per month.
The application requests recovery of the costs associated with the
remaining 37.5% (135 MW) of Springerville Unit 2 that the Company believes is
"used and useful" in accordance with ACC methodologies. Currently, the Company
is only allowed to recover 62.5% of the costs related to Springerville Unit 2.
In 1994, the Company's system peak demand was 139 MW over the demand upon which
current rates are based; therefore, the entire capacity of Springerville 2 was
utilized to meet retail requirements. Total proposed additions to rate base
due to the inclusion of the remaining 37.5% of Springerville Unit 2, including
related deferrals of previously incurred costs, amounted to approximately $191
million.
The Company's request contains elements of traditional cost of
service/rate of return ratemaking as well as several proposals designed to
maintain and increase the Company''s competitiveness. Such proposals include,
among others, the flexibility to enter into special contracts without specific
ACC approval at prices below previously approved tariffs' levels; allocation of
the savings resulting from improved operating efficiencies between the Company
and its customers; allocation of the benefits of the SCECorp litigation
settlement by allocating the net proceeds of the $40 million cash settlement
(approximately $27.5 million after litigation costs) to the Company and the
benefits of the 110 MW added generating capacity related to the SCE power
exchange to the retail customers; jurisdictional allocation of new long-term
wholesale sales based on marginal costs of a wholesale transaction rather than
the Company's average costs.
The Company further proposed that, if the ACC approves the Company's
request and proposals as filed, the Company would not file another rate case
until the year 2000, absent any emergencies.
The ACC has a self-imposed time schedule for receipt of orders in major
rate cases that would lead to an order being issued in the second quarter of
1996. On July 13, 1995, the ACC hearing officer issued a procedural order
which sets the hearing date for the rate case at March 21, 1996.
COMPETITION
WHOLESALE
Under current law, the Company is not in direct competition with any other
regulated electric utility for electric service in the Company''s retail
service territory. Regardless of such regulation, the Company competes for
retail markets against gas service suppliers and others who may provide energy
services which would be substitutes for, or bypass of, the Company''s services.
The Company does compete with other utilities, marketers and independent
power producers in the sale of electric capacity and energy in the wholesale
market. The Company''s rates for wholesale sales of capacity and energy,
generally, are not permitted to exceed rates determined on a cost of service
basis. With respect to wholesale sales, the Company''s prices are
substantially below costs determined on a fully allocated cost of service
basis, but, in all instances, prices exceed the level necessary to recover
fuel and other variable costs. It is expected that competition to sell
capacity will remain vigorous, and that prices will remain depressed for
several years, due to increased competition and surplus capacity in the
southwestern United States. Competition for the sale of capacity and energy
is influenced by many factors, including the availability of capacity of the
3,810 MW Palo Verde nuclear generating station and other generating stations
in the southwestern United States, the availability and prices of natural gas
and oil, spot energy prices and transmission access. In addition, the Energy
Act has promoted increased competition in the wholesale electric power markets.
The Energy Act addresses a wide range of energy issues, including several
matters affecting bulk power competition in the electric utility industry. It
creates exemptions from regulation under the Holding Company Act for persons or
corporations that own and/or operate in the United States certain generating
and interconnecting transmission facilities dedicated exclusively to wholesale
sales, thereby encouraging the participation of utility affiliates, independent
power producers and other non-utility participants in the development of power
generation. In order to facilitate competition in power generation, the Energy
Act also confers expanded authority upon FERC to issue orders requiring
electric utilities to transmit power and energy to or for wholesale purchasers
and sellers, and to require electric utilities to enlarge or construct
additional transmission capacity to provide these services. While the Energy
Act prohibits FERC from issuing any such order that would unreasonably impair
the continuing reliability of affected electric systems or that would be
conditioned upon or require transmission services directly to an ultimate
consumer, the Energy Act creates the potential for utilities and other power
producers to gain increased access to the transmission systems of other
entities to facilitate wholesale sales. FERC is encouraging all parties
interested in transmission access to form RTGs to facilitate access to and
development of transmission service and to assist in settling disputes
regarding such matters. RTGs will not relieve FERC of its responsibilities
related to transmission access; however, such organizations could provide for
more efficient handling of transmission service requests and planning for
regional transmission needs. The Company is currently involved in the
development of two RTGs in the West, SWRTA and WRTA. Both of these RTGs filed
applications for approval with the FERC during 1994. WRTA was approved by
FERC on May 16, 1995 and SWRTA''s approval is pending. The Company is a
member of SWRTA and is also considering membership in WRTA.
In late March 1995, the FERC issued two Notices of Proposed Rulemaking
(NOPR). The first NOPR on open access non-discriminatory transmission services
by public utilities and transmitting utilities is intended to facilitate
competition among suppliers to the bulk power market. If adopted, public
utilities would be required to open access to their transmission systems within
certain guidelines, and at pre-established tariffs. The second and
supplemental NOPR would provide a basis for recovery by regulated public
utilities of legitimate and verifiable stranded costs associated with existing
wholesale requirements customers and retail customers who become unbundled
wholesale transmission customers of the utility. A final rule on both NOPRs
is expected to take effect in early 1996.
RETAIL
On the retail level, customers, particularly industrial and large
commercial customers, may have the ability to own and operate facilities to
generate their own electric energy requirements and, if such facilities are
qualifying facilities, to require the displaced electric utility to purchase
the output of such facilities at "avoided costs" pursuant to PURPA. Such
facilities may be operated by the customers themselves or by other entities
engaged for such purpose.
The Company is active in marketing energy and customizing energy-related
services to meet customer needs. In part as a result of such efforts, the
Company has to date lost no customers to self-generation. The Company's two
mining customers, which provide approximately 11% of the Company's total annual
revenues from retail customers, each have considered self-generation. However,
following negotiations with the Company in 1993 and 1994, new contracts were
executed that included, among other things, rate reductions. These contracts
expire after the year 2000, subject to various provisions allowing the
customers to terminate partially or entirely, under certain circumstances upon
at least one and up to two years prior notice. The ability to enter into or
extend contracts, to avoid early termination, and to retain customers will be
dependent on, among other things, market conditions and alternatives available
to customers from time to time.
The legislatures and/or the regulatory commissions in several states have
considered or are considering "retail wheeling" which, in general terms, means
the transmission by an electric utility of energy produced by another entity
over its transmission and distribution system to a retail customer in such
utility''s service territory. A requirement to transmit directly to retail
customers could have the result of permitting retail customers to purchase
electric capacity and energy from, at the election of such customers, the
electric utility in whose service area they are located or from other electric
utilities or independent power producers.
In Arizona, the ACC Staff issued its first report on a retail electric
competition workshop held in October of 1994. This report is the first in a
series of reports that will be issued on various workshops that will be held
from time to time to identify and address policy issues related to competition.
While other states are considering competition proposals, the ACC effort is
designed to obtain information about competition. No specific proposals are
currently being considered. The report proposes that Staff develop a
comprehensive set of options to better inform the ACC about its choices. Staff
recommended that three options be considered: 1) encouraging retail
competition, 2) permitting limited retail competition, and 3) discouraging
retail competition by prohibiting retail wheeling and allowing distributed
energy services. The ACC has also established a working group on retail
electric competition. Membership in the working group includes ACC Staff,
Arizona utilities, and other interested parties, and the first meeting of the
group took place in January 1995. A report from the group is expected by
August 1995. The Company cannot predict what the working group will recommend
and what, if any, changes in electric regulation and competition will be
implemented by the ACC.
The Company continues to assess the impact of the Energy Act and other
possible legislation on the Company's ability to remain competitive in the
electric utility industry. The Company is unable to predict the ultimate
impact the Energy Act or any other possible legislation will have on its
operations.
ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company prepares its financial statements in accordance with the
provisions of FAS 71. A regulated enterprise can prepare its financial
statements in accordance with FAS 71 only if (i) the enterprise's rates for
regulated services are established by or subject to approval by an independent
third-party regulator, (ii) the regulated rates are designed to recover the
enterprise's costs of providing the regulated services and (iii) in view of
demand for the regulated services and the level of competition, it is
reasonable to assume that rates set at levels that will recover the
enterprise's costs can be charged to and collected from customers. FAS 71
requires a cost-based, rate-regulated enterprise to reflect the impact of
regulatory decisions in its financial statements. In certain circumstances,
FAS 71 requires that certain costs and/or obligations (such as incurred costs
not currently recovered through rates, but expected to be so recovered in the
future) be reflected in a deferral account in the balance sheet and not be
reflected in the statement of income or loss until matching revenues are
recognized.
If at some future point, the Company determines that it no longer meets
the criteria for continued application of FAS 71, the Company would be required
to adopt the provisions of FAS 101. Adoption of FAS 101 would require the
Company to write off its regulatory assets and liabilities as of the date of
adoption of FAS 101 and would preclude the future deferral in the balance
sheet of costs not recovered through rates at the time such costs were
incurred, even if such costs were expected to be recovered in the future.
Based on the balances of the Company's regulatory assets and liabilities as of
June 30, 1995, the Company estimates that the adoption of FAS 101 would have
resulted in an extraordinary loss of $137 million, which includes a reduction
for the related deferred income taxes. The Company does not expect that its
cash flows would be affected by the adoption of FAS 101. However, as a result
of the increase in the Company's accumulated deficit which would result from
such loss, the Company's ability to pay dividends could be further impaired.
EARNINGS
The Company recorded net income of $3.0 million in the second quarter of
1995 compared with net income of $4.4 million in the second quarter of 1994.
The net income per average share of Common Stock was $0.02 for the second
quarter of 1995 compared with a net income per average share of Common Stock of
$0.03 for the second quarter of 1994.
For the first six months of 1995, the Company recorded a net loss of $11.9
million, compared with a $10.1 million net loss recorded for the first six
months of 1994. The net loss per average share of Common Stock was $0.07 in
the first six months of 1995 compared with a net loss per average share of
Common Stock of $0.06 for the first six months of 1994.
DIVIDENDS ON COMMON STOCK
The Company does not expect to be able to pay cash dividends on its Common
Stock for the foreseeable future. The Company is currently precluded by
restrictive covenants in certain debt agreements from declaring or paying
dividends. Certain State statutes also limit the Company''s ability to pay
dividends. No dividends on Common Stock have been declared or paid since 1989.
Under current applicable provisions of the Arizona General Corporation
Law, the Company is permitted to declare and pay dividends on its shares in
cash, property, or its own shares, only out of unreserved and unrestricted
earned surplus or out of the unreserved and unrestricted net earnings of the
current fiscal year and the immediately preceding fiscal year taken as a single
period, except that the Company may not declare or pay dividends when the
Company is insolvent (unable to pay its debts as they become due in the
ordinary course of business) or when the payment of the dividend would render
the Company insolvent, or when the declaration or payment of the dividend
would be contrary to any restriction contained in the Articles.
At June 30, 1995, the Company had no earned surplus (its accumulated
deficit on that date was $693 million), and the Company expects limited net
earnings for the 1994 and 1995 fiscal years taken together. The Company
expects to have no earned surplus for the foreseeable future and limited net
earnings and cash flow for several years.
Under applicable provisions of amendments to the Arizona General
Corporation Law, which will be effective in 1996, a company will be permitted
to make distributions to shareholders unless, after giving effect to such
distribution, either (i) the company would not be able to pay its debts as they
come due in the usual course of business, or (ii) the company''s total assets
would be less than the sum of its total liabilities plus the amount necessary
to satisfy any liquidation preferences of shareholders with preferential
rights. As of June 30, 1995, the Company''s common stock deficit was $54
million.
Although the Company expects to meet the requirements under the amended
corporation law for making distributions to shareholders within several years,
restrictive covenants in certain existing debt agreements may continue to
preclude the Company from declaring or paying dividends.
The General First Mortgage contains covenants, applicable so long as
certain series of First Mortgage Bonds (aggregating $194 million in principal
amount) are outstanding, which restrict the payment of dividends on Common
Stock if certain cash flow coverage and retained earnings tests are not met.
The retained earnings test will prevent the Company from paying dividends on
its Common Stock until such time as the Company has positive retained earnings
rather than an accumulated deficit. Such covenants will remain in effect until
the First Mortgage Bonds of such series have been paid or redeemed. The latest
maturity of such First Mortgage Bonds is in 2003. The MRA includes a similar
dividend restriction based on retained earnings.
RESULTS OF OPERATIONS
RESULTS OF UTILITY OPERATIONS
SALES AND REVENUES
Comparisons of kilowatt-hour sales and electric revenues are shown below:
Increase/(Decrease)
Three Months Ended June 30 1995 1994 Amount Percent
Electric kWh Sales (000):
Retail Customers 1,675,538 1,696,389 (20,851) (1.2) %
Other Utilities 440,803 669,261 (228,458) (34.1)
--------- --------- --------
Total 2,116,341 2,365,650 (249,309) (10.5)
========= ========= ========
Electric Revenues (000):
Retail Customers $140,008 $143,210 $(3,202) (2.2) %
Amortization of MSR
Option Gain
Regulatory Liability 5,013 5,013 - -
Other Utilities 17,284 22,874 (5,590) (24.4)
-------- -------- -------
Total $162,305 $171,097 $(8,792) (5.1)
======== ======== =======
Increase/(Decrease)
Six Months Ended June 30 1995 1994 Amount Percent
Electric kWh Sales (000):
Retail Customers 3,168,840 3,162,422 6,418 0.2 %
Other Utilities 1,018,146 1,463,839 (445,693) (30.4)
--------- --------- --------
Total 4,186,986 4,626,261 (439,275) (9.5)
========= ========= ========
Electric Revenues (000):
Retail Customers $258,195 $258,952 $ (757) (0.3)%
Amortization of
MSR Option Gain
Regulatory Liability 10,026 10,026 - -
Other Utilities 36,829 48,698 (11,869) (24.4)
-------- -------- --------
Total $305,050 $317,676 $(12,626) (4.0)
======== ======== ========
KWh sales to retail customers decreased in the second quarter of 1995
compared with the second quarter of 1994 due to cooler than normal
temperatures. Based on billed cooling degree days, a commonly used measure in
the electric industry that are calculated by subtracting 75 from the average
of the high and low daily temperatures, the Tucson area registered an
approximate 47% decrease in such billed cooling degree days for the second
quarter of 1995 compared with the second quarter of 1994, and an approximate
29% decrease in such billed cooling degree days for the second quarter of 1995
compared with the 10 year average for the same period from 1985 to 1994. Such
billed cooling degree days were 157, 295, and 222 for the second quarter of
1995, 1994, and the 10 year average for the second quarter, respectively. The
decrease in sales was partially offset by a 2.8% growth in the average number
of retail customers.
KWh sales to retail customers increased less than 1% in the first six
months of 1995 compared with the same period in 1994. As in the second
quarter, milder weather dampened sales despite continued growth in the average
number of retail customers.
Revenues from sales to retail customers decreased in the second quarter of
1995 compared with the second quarter of 1994 due to lower kWh sales discussed
above. Revenues from sales to retail customers decreased less than 1% in the
first six months of 1995 compared with the same period in 1994 due to a 4% drop
in kWh sales to residential customers.
Lower kWh sales to other utilities in both the second quarter and first
six months of 1995 compared with the same periods in 1994 resulted from lower
regional loads due to mild weather conditions and the increased availability of
lower cost hydroelectric power in the western United States. Lower revenues
from sales to other utilities resulted from lower sales and lower energy prices
in the second quarter and first six months of 1995 than in the same periods of
1994.
OPERATING EXPENSES
Fuel and purchased power expense decreased in the second quarter and first
six months of 1995 compared with the same periods in 1994 as a result of lower
generation requirements due to lower sales to both retail and wholesale
customers, described above.
OTHER INCOME
Interest income increased as a result of higher interest rates during the
second quarter of 1995 than during the second quarter of 1994. Interest income
increased in the first six months of 1995 compared with the first six months of
1994 due to greater balances invested at higher rates in 1995.
Gains on Sales of Securities were earned in the first six months of 1995
because of gains realized on sales of certain equity securities by the
investment subsidiaries in the first quarter of 1995. During the periods when
the investment subsidiaries were classified as discontinued operations for
financial statement purposes, no income or loss related to discontinued
operations were recorded unless the estimates of proceeds from the disposition
of investment subsidiary assets changed materially. The Company ceased to
account for the investment subsidiaries as discontinued operations as of
January 1, 1995.
Other income decreased in the first six months of 1995 compared with the
same period in 1994 in part due to operating expenses relating to Nations
Energy and in part due to a decrease in the amortization of investment tax
credits.
INTEREST EXPENSE
Long-term debt interest expense increased in the first six months of 1995
compared with the same period in 1994 as a result of higher interest rates on
the Company''s variable rate debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to generate sufficient cash flows during 1995 to fund
its continuing operating activities and construction expenditures. Furthermore,
the Company believes it has sufficient cash flow along with adequate cash and
temporary investments to meet expected cash obligations for the remainder of
1995. If cash flows were to fall short of expectations, the Company would rely
on existing cash balances, the Renewable Term Loan and, if necessary,
borrowings under the Revolving Credit.
In May 1995, the Company purchased approximately $18 million of debt
securities. The Company expects yearly cash earnings of approximately $2.0
million as a result of the above-mentioned purchase. This purchase is shown on
the balance sheet under Investments and Other Property and the interest earned
is included in Interest Income on the income statement. Also, as a result of
the debt securities purchase, the Renewable Term Loan commitment was decreased
by $10 million to meet the prepayment provisions of the MRA.
The Company's cash and cash equivalents balance at July 31, 1995 was
approximately $87 million. Cash balances are invested in investment grade
money-market securities with an emphasis on preserving the principal amounts
invested.
CASH FLOWS
The Company''s cash and cash equivalents decreased $64 million or 35%,
from the first six months of 1994 ending balance of $183 million, to the first
six months of 1995 ending balance of $119 million. The reduction was
primarily due to debt repayments and purchases, and payment of taxes related
to tax appeals.
Net cash flows from continuing operating activities decreased in aggregate
$29 million in the first six months of 1995 compared with the first six months
of 1994 due primarily to a $14.6 million tax payment in the first quarter of
1995 made by the Company relating to an appeal of a transaction privilege tax
assessment. Increased wages paid due to the 1994 incentive plan and increased
employee compensation and pension benefits; and higher interest payments on
long-term debt and lower cash receipts from sales to other utilities. Cash
receipts from sales to other utilities decreased due to lower kWh sales and
lower energy prices as a result of lower regional loads and abundance of
hydroelectric power in the western United States. Increased cash expenditures
were partially offset during the first six months of 1995 by higher cash
receipts from retail customers, greater interest income received and lower
fuel and purchased power expenses.
Net cash flows from capital transactions decreased in the first six months
of 1995 compared with the same period in 1994 as a result of the purchase of
debt securities described above.
Net cash flows from financing activities decreased $89 million in the
first six months of 1995 compared with the same period in 1994 as a result of
$16 million of first mortgage bond maturities, a $19 million permanent
prepayment of the Term Loan and $56 million payment of the Renewable Term Loan,
an amount that can be reborrowed.
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
SDGE/FERC PROCEEDINGS
SAN DIEGO GAS & ELECTRIC V. TUCSON ELECTRIC POWER COMPANY
See Note 3 of Notes to Consolidated Financial Statements, San Diego Gas &
Electric v. Tucson Electric Power Company.
ALAMITO COMPANY, DOCKET NO. ER79-97-009
See Note 3 of Notes to Consolidated Financial Statements, Alamito Company,
Docket No. ER79-97-009.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company conducted its Annual Meeting of Shareholders on May 26, 1995.
At that meeting, in addition to electing members of the Board of Directors, the
shareholders of the Company approved two Company proposals, one relating to the
formation of a holding company and the second relating to amendments to the
1994 Omnibus Stock and Incentive Plan.
The total votes were as follows:
Against Broker
(i) Election of Directors For or Withheld Abstain Non-Votes
Elizabeth Alexander 137,417,576 4,553,677
Charles E. Bayless 137,884,555 14,235,276 -- --
Jose L. Canchola 137,774,894 14,191,643 -- --
John Jeter 138,351,053 13,686,364 -- --
R. B. O'Rielly 137,840,055 14,214,801 -- --
Martha R. Seger 137,503,608 14,557,891 -- --
Donald G. Shropshire 136,480,277 15,508,461 -- --
H. Wilson Sundt 137,843,464 14,198,688 -- --
J. Burgess Winter 136,344,241 15,723,032 -- --
(ii) Holding Company 130,266,567 7,421,683 3,965,749 --
(iii) 1994 Omnibus Stock
and Incentive Plan
Amendments 123,525,449 12,332,508 5,792,053 --
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
15 - Letter regarding unaudited interim financial information.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
- Dated July 3, 1995, reporting on filing of rate increase
application.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUCSON ELECTRIC POWER COMPANY
(Registrant)
Date: August 2, 1995 Ira R. Adler
------------
Ira R. Adler
Senior Vice President and Principal
Financial Officer
EXHIBIT INDEX
15(a) - Letter regarding unaudited interim financial information.
27(a) - Financial Data Schedule.
Exhibit 15
August 1, 1995
Tucson Electric Power Company
220 West Sixth Street
Tucson, Arizona 85701
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Tucson Electric Power Company and subsidiaries (the Company) for
the three month and six month periods ended June 30, 1995 and 1994, as indicated
in our report dated July 24, 1995 (which included an explanatory paragraph
relating to the timing of the recovery of the costs associated with 37.5% of
Springerville Unit 2 which cannot presently be determined); because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, is
incorporated by reference in Post-Effective Amendment No. 1 to Registration
Statement No. 33-55732 of the Company on Form S-3, Registration Statement
No. 33-58173 of UniSource Energy Corporation on Form S-4, and Registration
Statements No. 33-56523, No. 33-57233 and No. 33-57231 of the Company on
Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Tucson, Arizona
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