UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification Number
- ----------- ----------------------------- ---------------------
1-13739 UNISOURCE ENERGY CORPORATION 86-0786732
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
1-5924 TUCSON ELECTRIC POWER COMPANY 86-0062700
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Registrant Title of Each Class on Which Registered
- ---------- ------------------- -------------------
UniSource Energy Common Stock, no par value New York Stock Exchange
Corporation Pacific Stock Exchange
Tucson Electric First Mortgage Bonds
Power Company 8-1/8%Series due 2001 New York Stock Exchange
7.55% Series due 2002 New York Stock Exchange
7.65% Series due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether each 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of each registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ X ]
The aggregate market value of UniSource Energy Corporation voting Common
Stock held by non-affiliates of the registrant was $542,330,842.50 based on
the last reported sale price thereof on the consolidated tape on February 24,
1998.
At February 24, 1998, 32,138,124 shares of UniSource Energy Corporation
Common Stock, no par value (the only class of Common Stock), were
outstanding.
UniSource Energy Corporation is the sole holder of the 32,162,167 shares
of the outstanding Common Stock of Tucson Electric Power Company.
Documents incorporated by reference: Specified portions of UniSource
Energy Corporation's Proxy Statement relating to the 1998 Annual Meeting of
Shareholders are incorporated by reference into PART III.
<PAGE> K-ii
This combined Form 10-K is separately filed by UniSource Energy Corporation
and Tucson Electric Power Company. Information contained herein relating to
Tucson Electric Power Company is filed by UniSource Energy Corporation and
separately by Tucson Electric Power Company on its own behalf. Tucson
Electric Power Company makes no representation as to information relating to
UniSource Energy Corporation or its subsidiaries, except as it may relate to
Tucson Electric Power Company.
TABLE OF CONTENTS
Page
----
Definitions................................................................vii
- PART I -
Item 1. -- Business
The Company................................................................1
Certain Risks..............................................................2
Utility Operations
Peak Demand and Customers................................................3
Sales for Resale.........................................................4
Competition..............................................................4
Generating and Other Resources
TEP Resources............................................................5
Springerville Station..................................................5
Irvington Station......................................................6
SCE/TEP Power Exchange Agreement.........................................6
Future Generating Resources..............................................6
Other Purchases..........................................................7
Rates and Regulation
General..................................................................7
Holding Company Order....................................................8
1996 Rate Order..........................................................8
Rate Proposal Before the ACC.............................................9
ACC Rules on Retail Competition..........................................9
FERC Orders on Wholesale Transmission Access.............................9
Other Rate Matters.......................................................9
Fuel Supply
General.................................................................10
Coal....................................................................10
Springerville Coal Handling Facilities..................................11
Gas.....................................................................12
Water Supply..............................................................12
Environmental Matters
General.................................................................12
Navajo Generating Station...............................................13
San Juan Generating Station.............................................13
Employees.................................................................13
Energy-Related Ventures...................................................14
TEP Utility Operating Statistics..........................................16
Item 2. -- Properties.......................................................17
<PAGE> K-iii
TABLE OF CONTENTS
(continued)
Page
----
Item 3. -- Legal Proceedings
Tax Assessments...........................................................18
Item 4. -- Submission of Matters to a Vote of Security Holders..............18
- PART II -
Item 5. -- Market for Registrant's Common Equity and Related Stockholder
Matters
TEP ......................................................................19
UniSource Energy..........................................................19
Item 6. -- Selected Consolidated Financial Data.............................20
Item 7. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview..................................................................21
Competition
Wholesale...............................................................23
Retail..................................................................23
Investments in Energy-Related Ventures....................................25
Results of Operations.....................................................26
Results of Utility Operations
Sales and Revenues....................................................26
Operating Expenses....................................................27
Other Income (Deductions).............................................27
Interest Expense......................................................28
Accounting for the Effects of Regulation..................................28
Dividends on Common Stock
UniSource Energy........................................................29
TEP.....................................................................29
Liquidity and Capital Resources
Cash Flows
UniSource Energy and TEP..............................................30
TEP...................................................................31
UniSource Energy......................................................31
Financing Developments
TEP Sale of Bonds.....................................................31
TEP Bank Credit Agreements............................................32
TEP Financing Authority...............................................32
UniSource Energy......................................................32
Tax Exempt Local Furnishing Bonds.......................................33
Income Tax Position.......................................................33
Restrictive Covenants
General First Mortgage Covenants........................................34
General Second Mortgage Covenants.......................................34
Credit Agreement Covenants..............................................35
Construction Expenditures.................................................35
Impact of Year 2000 on Computer Systems and Applications..................35
Safe Harbor for Forward-Looking Statements................................36
Item 8. -- Consolidated Financial Statements and Supplementary Data.........36
Independent Auditors' Report..............................................37
UniSource Energy Corporation
Consolidated Statements of Income.......................................38
Consolidated Statements of Cash Flows...................................39
<PAGE> K-iv
TABLE OF CONTENTS
(continued)
Page
----
Consolidated Balance Sheets .............................................40
Consolidated Statements of Capitalization ...............................41
Consolidated Statements of Changes in Stockholders' Equity (Deficit).....42
Tucson Electric Power Company
Consolidated Statements of Income .......................................43
Consolidated Statements of Cash Flows ...................................44
Consolidated Balance Sheets .............................................45
Consolidated Statements of Capitalization ...............................46
Consolidated Statements of Changes in Stockholders' Equity (Deficit).....47
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations ....................................................48
Basis of Presentation ...................................................48
Use of Estimates ........................................................48
Regulation ..............................................................48
Accounting for the Effects of Regulation
Accounting Implications................................................49
Potential Discontinuation of Application of FAS 71 in the Future.......50
Recent Events That May Impact TEP's Application of FAS 71..............50
TEP's Utility Plant .....................................................51
Utility Plant Under Capital Leases ......................................51
Springerville Unit 1 Allowance ..........................................52
Deferred Springerville Common Facility Costs ............................52
Utility Operating Revenues ..............................................52
MSR Option Gain Regulatory Liability ....................................53
Fuel Costs ..............................................................53
Income Taxes ............................................................53
Emission Allowances .....................................................53
Fair Value of Financial Instruments .....................................54
Reclassification ........................................................54
Note 2. Rate Matters
Shared Savings Proposal .................................................54
Springerville Coal Contract Termination Fee .............................55
1996 Rate Order .........................................................55
Note 3. Income Taxes .....................................................56
Note 4. Consolidated Subsidiaries
MEH Subsidiaries
Nations Energy Corporation.............................................58
Advanced Energy Technologies, Inc......................................59
Millennium Energy Holdings, Inc........................................59
TEP Subsidiaries ........................................................59
Note 5. Long and Short-Term Debt and Capital Lease Obligations
Long-Term Debt ..........................................................59
TEP Sale of Bonds......................................................59
TEP Bank Credit Agreements.............................................60
TEP First and Second Mortgage..........................................60
TEP Letters of Credit..................................................61
TEP Capital Lease Obligations ...........................................61
TEP Maturities and Sinking Fund Requirements ............................61
Short-Term Debt .........................................................61
Note 6. Dividend and Loan Restrictions
Restrictive Covenants--Dividends
UniSource Energy.......................................................62
TEP....................................................................62
<PAGE> K-v
TABLE OF CONTENTS
(concluded)
Page
----
Restrictions on TEP's Ability to Make Loans and Advances................62
Note 7. Commitments and Contingencies
Utility Contractual Matters
Fuel Purchase Commitments.............................................63
Coal and Transportation Contracts - Reversal of Accrued Liabilities...63
Commitments-Environmental Regulation....................................63
Contingencies
Ruling on Arizona Sales Tax Assessments - Coal Sales..................64
Arizona Sales Tax Assessments - Leases................................65
Income Tax Assessments................................................65
Note 8. Jointly Owned Facilities..........................................66
Note 9. Employee Benefits Plans
Voluntary Severance Plan (VSP)..........................................66
Pension Plans...........................................................66
Postretirement Benefits Other Than Pensions.............................67
Stock Option Plans......................................................68
Note 10. Earnings Per Share(EPS)..........................................69
Note 11. Quarterly Financial Data (unaudited).............................70
Note 12. Supplemental Cash Flow Information...............................71
Item 9. -- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................72
- PART III -
Item 10. -- Directors and Executive Officers of the Registrants
Directors.................................................................72
Executive Officers........................................................72
Item 11. -- Executive Compensation..........................................75
Item 12. -- Security Ownership of Certain Beneficial Owners and Management
General...................................................................75
Security Ownership of Certain Beneficial Owners...........................75
Security Ownership of Management..........................................75
Item 13. -- Certain Relationships and Related Transactions..................75
- PART IV -
Item 14. -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K76
Signatures................................................................78
Exhibit Index.............................................................81
<PAGE> K-vi
DEFINITIONS
The abbreviations and acronyms used in the 1997 Form 10-K are defined below:
ACC.................... Arizona Corporation Commission.
ACC Staff.............. Staff of the Arizona Corporation Commission.
ADEQ................... Arizona Department of Environmental Quality.
AET.................... Advanced Energy Technologies, Inc., a wholly-owned
subsidiary of MEH Corporation.
AFDC................... Allowance for Funds Used During Construction.
APS.................... Arizona Public Service Company.
Banks.................. Various banks with which TEP has credit
relationships.
Brookland.............. Brookland Financial Corporation, a wholly-owned,
indirect subsidiary of SRI, which formerly
initiated and sold vehicle contract receivable
portfolios.
BTU.................... British Thermal Unit(s).
CAAA................... Federal Clean Air Act Amendments.
Century................ Century Power Corporation, an indirect subsidiary of
the Catalyst Corporation and formerly known as
Alamito Company.
Commission or SEC...... Securities and Exchange Commission.
Common Stock........... The Company's common stock, without par value.
Company or UniSource
Energy................. UniSource Energy Corporation.
Credit Agreement....... Credit Agreement between TEP and the Banks, dated
as of December 30, 1997.
EITF................... Emerging Issues Task Force of the Financial
Accounting Standards Board.
Emission Allowance(s).. An EPA issued allowance which permits emission of one
ton of sulfur dioxide. Such allowances can be sold.
EPA.................... The Environmental Protection Agency.
FAS 71................. Statement of Financial Accounting Standards No. 71:
Accounting for theEffects of Certain Types of
Regulation.
FAS 101................ Statement of Financial Accounting Standards No. 101:
Regulated Enterprises - Accounting for the
Discontinuation of Application of FAS 71.
FAS 121................ Statement of Financial Accounting Standards No. 121:
Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
FAS 123................ Statement of Financial Accounting Standards No. 123:
Accounting for Stock-Based Compensation.
FERC................... Federal Energy Regulatory Commission.
Financial Restructuring The comprehensive financial restructuring of TEP's
obligations to certain of TEP's creditors and lease
participants and Century and the Springerville Unit
1 Leases' participants and the reclassification of
all shares of the Preferred Stock into Common Stock
which occurred on December 15, 1992.
First Mortgage Bonds... First mortgage bonds issued under the General First
Mortgage.
Four Corners........... Four Corners Generating Station.
GAAP................... Generally Accepted Accounting Principles.
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.
General Second Mortgage The Indenture, dated as of December 1, 1992, of
Tucson Electric Power Company to Bank of Montreal
Trust Company of the City of New York, as trustee,
as supplemented.
<PAGE> K-vii
DEFINITIONS
(continued)
Global Solar........... Global Solar Energy, L.L.C., a corporation in which a
50% interest is owned by AET.
Holding Company Act.... The Public Utility Holding Company Act of 1935, as
amended.
IBEW 1116.............. International Brotherhood of Electrical Workers labor
union, Local Chapter 1116.
IDBs................... Industrial development revenue or pollution control
revenue bonds.
IRS.................... Internal Revenue Service.
Irvington.............. Irvington Generating Station.
Irvington Lease........ The leveraged lease arrangement relating to Irvington
Unit 4.
ITC.................... Investment tax credit.
kW..................... Kilowatt(s).
kWh.................... Kilowatt-hour(s).
kV..................... Kilovolt(s).
kVA.................... Kilovoltampere(s).
LOC.................... Letter of Credit.
MEH.................... MEH Corporation, a wholly-owned subsidiary of
UniSource Energy.
Millennium............. Millennium Energy Holdings, Inc., a wholly-owned
subsidiary of MEH.
MRA.................... Master restructuring agreement between TEP and the
Banks which included the Renewable Term Loan,
Revolving Credit, and certain replacement
reimbursement agreements, which was terminated on
December 30, 1997.
MSR................... Modesto, Santa Clara and Redding Public Power Agency.
MW.................... Megawatt(s).
MWh................... Megawatt-hour(s).
Nations Energy........ Nations Energy Corporation, a wholly-owned subsidiary
of MEH.
Navajo................ Navajo Generating Station.
NEV................... New Energy Ventures, L.L.C., a company in which a 50%
interest is owned by Millennium.
NOL................... Net Operating Losses.
1981 Apache B Bonds... $100 million principal amount of variable rate IDBs
which are secured by First Mortgage Bonds.
1996 Rate Order....... ACC Rate Order concerning an increase in TEP's retail
base rates and the recovery of Springerville Unit
2 costs, issued March 29, 1996.
1994 Rate Order........ ACC Rate Order concerning an increase in TEP's retail
base rates and regulatory write-offs, issued
January 11, 1994.
1991 Rate Order........ ACC Rate Order concerning an increase in TEP's retail
base rates, regulatory write-offs and rate and
accounting synchronization, issued October 11,
1991.
1989 Rate Order........ The ACC's October 24, 1989, Rate Order concerning
TEP's 1988 application for a rate increase.
NTUA................... Navajo Tribal Utility Authority.
PDEQ................... Pima County Department of Environmental Quality.
Preferred Stock........ TEP's previously outstanding Cumulative Preferred
Stock, $100 Par Value, and Cumulative Preferred
Stock (No Par)which were reclassified into Common
Stock pursuant to the Financial Restructuring.
PNM.................... Public Service Company of New Mexico.
Renewable Term Loan.... Credit facility that replaced the Term Loan pursuant
to the MRA Sixth Amendment, dated as of November 1,
1994, and effective March 7, 1995, and which was
terminated December 30, 1997.
Revolving Credit...... $100 million revolving credit facility entered into
under the Credit Agreement between a syndicate of
certain of the Banks and TEP.
San Carlos............ San Carlos Resources Inc., a wholly-owned subsidiary
of TEP.
San Juan............... San Juan Generating Station.
San Juan Unit 3........ Unit 3 of San Juan.
<PAGE> K-viii
DEFINITIONS
(concluded)
SCE.................... Southern California Edison Company, a subsidiary of
Edison International.
Second Mortgage Bonds.. TEP's second mortgage bonds issued under the General
Second Mortgage.
Securities Exchange Act The Securities Exchange Act of 1934, as
amended.
Shareholders........... Holders of Common Stock.
SES.................... Southwest Energy Solutions, Inc., a wholly-owned
subsidiary of MEH.
Springerville.......... Springerville Generating Station.
Springerville Coal
Handling Facilities
Leases............... Leveraged lease arrangements relating to the coal
handling facilities serving Springerville.
Springerville Common
Facilities........... Facilities at Springerville used in common with
Springerville Unit 1 and Springerville Unit 2.
Springerville Common
Facilities Leases.... Leveraged lease arrangements relating to an undivided
one-half interest in certain Springerville Common
Facilities.
Springerville Unit 1... Unit 1 of the Springerville Generating Station.
Springerville Unit 1
Leases............... Leveraged lease arrangement pursuant to
which Century leased Springerville Unit 1 and an
undivided one-half interest in certain
Springerville Common Facilities and which has been
assumed by TEP.
Springerville Unit 2... Unit 2 of the Springerville Generating Station.
SRI.................... Sierrita Resources Inc., a wholly-owned investment
subsidiary of TEP.
SRP.................... Salt River Project Agricultural Improvement and Power
District.
SSP.................... Shared Savings Proposal filed by TEP with the ACC
July 9, 1997 requesting a 1.1% annual retail rate
reduction.
SWPP................... SWPP Investment Company, a wholly-owned subsidiary of
SES.
SWPPI.................. SWPP International, a wholly-owned subsidiary of SES.
TEP.................... Tucson Electric Power Company, the principal
subsidiary of UniSource Energy.
TRI.................... Tucson Resources Inc., a wholly-owned investment
subsidiary of TEP.
UniSource Energy....... UniSource Energy Corporation.
Valencia............... Valencia Energy Company, previously a wholly-owned
subsidiary of TEP, merged into TEP on May 31, 1996.
VSP.................... Voluntary Severance Plan offered to TEP employees and
implemented in May 1996.
Warrants............... Warrants for purchase of TEP Common Stock which were
issued under the Financial Restructuring to the
owner participants in the Springerville Unit 1
Leases.
WSCC................... Western Systems Coordinating Council.
<PAGE> K-ix
PART I
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-
looking statements should be read with the cautionary statements and
important factors included in this Form 10-K. (See Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Safe Harbor for Forward-Looking Statements.) Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which
are other than statements of historical facts. Such forward-looking
statements may be identified, without limitation, by the use of the words
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The expectations, beliefs and
projections of UniSource Energy and TEP are expressed in good faith and are
believed by UniSource Energy and TEP to have a reasonable basis, including
without limitation, management's examination of historical operating trends,
data contained in the records of UniSource Energy and TEP and other data
available from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or
accomplished.
ITEM 1. -- BUSINESS
- -------------------------------------------------------------------------------
THE COMPANY
-----------
UniSource Energy Corporation (UniSource Energy or the Company) was
incorporated under the laws of the State of Arizona on March 8, 1995.
UniSource Energy is a holding company which owns all of the outstanding
common stock of Tucson Electric Power Company (TEP) and MEH Corporation
(MEH). On January 1, 1998, TEP and UniSource Energy completed a statutory
share exchange, pursuant to which the outstanding common stock of TEP was
exchanged, on a share-for-share basis, for shares of UniSource Energy common
stock, no par value. Following the share exchange, TEP transferred the stock
of its subsidiary, MEH, to UniSource Energy in exchange for a promissory note
in the approximate amount of $95 million. (See Note 1 of Notes to
Consolidated Financial Statements).
TEP was incorporated under the laws of the State of Arizona on December
16, 1963. TEP is the successor by merger as of February 20, 1964, to a
Colorado corporation which was incorporated on January 25, 1902. TEP is an
operating public utility engaged in the generation, purchase, transmission,
distribution and sale of electricity for customers in the City of Tucson and
the surrounding area and to wholesale customers. TEP holds a franchise which
expires in 2001 to provide electric service to customers in the City of
Tucson.
TEP owns all of the outstanding stock of San Carlos Resources Inc. (San
Carlos), which holds title to Springerville Unit 2. TEP also owns all of the
outstanding stock of two non-energy related subsidiaries, Tucson Resources
Inc. (TRI) and Sierrita Resources Inc. (SRI). In 1994, TRI and SRI
substantially completed the process of liquidating their respective
investments.
MEH owns all of the outstanding common stock of (i) Nations Energy
Corporation (Nations Energy), which is active in the development of
independent power projects worldwide, (ii) Millennium Energy Holdings, Inc.
(Millennium), which holds a 50% interest in New Energy Ventures, L.L.C.
(NEV), a buyer's agent providing electric load aggregation and advisory
services to retail purchasers of electric energy, (iii) Advanced Energy
Technologies, Inc. (AET), which holds a 50% interest in Global Solar Energy,
L.L.C. (Global Solar), a manufacturer of thin-film photovoltaic cells, and
(iv) Southwest Energy Solutions, Inc. (SES), a provider of ancillary energy
services to electric consumers. SES owns all of the outstanding common stock
of SWPP Investment Company (SWPP) and SWPP International, Ltd. (SWPPI), which
hold ownership interests in businesses engaged in the manufacture and sale of
concrete power poles. See Energy-Related Ventures below for a discussion of
these subsidiaries.
TEP is the principal subsidiary of UniSource Energy and accounts for
substantially all of its assets, revenues and net income. The financial
condition and results of operations of TEP are currently the principal
factors affecting the financial condition and results of operations of
UniSource Energy. Depending upon the nature of future investment
opportunities, UniSource Energy expects to make additional investments in MEH
and its subsidiaries, as well as other energy-related ventures. Over time,
investments in energy-related ventures may have a material impact on
UniSource Energy's future cash flow and profitability.
CERTAIN RISKS
-------------
For descriptions of certain factors affecting UniSource Energy and TEP,
including commitments and contingencies, which subject UniSource Energy and
TEP to continuing risks, see (i) Item 3., Legal Proceedings; (ii) Item 7.,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Overview and Safe Harbor for Forward-Looking Statements; and
(iii) Notes 1 and 7 of Notes to Consolidated Financial Statements, Nature of
Operations and Summary of Significant Accounting Policies, and Commitments
and Contingencies, respectively.
UTILITY OPERATIONS
- ------------------
PEAK DEMAND AND CUSTOMERS
Certain operating and system data related to TEP's utility operations
for each of the last five years are summarized in the following table:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
Peak Demand - MW -
<S> <C> <C> <C> <C> <C>
Retail Customers-Net One Hour 1,659 1,619 1,617 1,585 1,449
Other Utilities-Firm 177 177 223 226 225
----- ----- ----- ----- -----
Non-Coincident Peak Demand (A) 1,836 1,796 1,840 1,811 1,674
Total Generating Resources 1,992 1,952 1,952 1,952 1,952
Other Resources (1) 235 133 133 23 23
----- ----- ----- ----- -----
Total TEP Resources (B) 2,227 2,085 2,085 1,975 1,975
Total Reserves ((B) - (A)) 391 289 245 164 301
===== ===== ===== ===== =====
Reserve Margin (% of Non-Coincident
Peak Demand) 21% 16% 13% 9% 18%
===== ===== ===== ===== =====
<FN>
- ------------------------
(1) Other Resources include certain other capacity purchases and
interruptible retail load.
</TABLE>
The peak demand for TEP's retail service area occurs during the summer
months due to the space cooling requirements of its retail customers. TEP
has experienced growth in peak demand of retail customers at an average
annual rate of approximately 3.5% for the past five years. The load of its
mining customers comprised on average approximately 9.8% of the retail peak
demand for the past five years.
In 1997, based on non-coincident peak demand, TEP's reserve margin
increased to 21% compared with 16% in the prior year. This increase was due
to increases in the generating capability at Springerville and in the
percentage of retail load served on an interruptible basis. TEP seeks to
maintain a reserve margin equal to its largest single hazard plus 5% of its
non-coincident peak demand in accordance with guidelines established by the
WSCC. The targeted reserve requirement in 1997 was 304 MW, or 17% of non-
coincident peak demand. It is expected that near-term growth in demand will
be met with existing resources and additional resources as discussed in
Future Generating Resources below. Also, see TEP Resources below for a
discussion of TEP's electric generating resources.
TEP's total number of retail customers grew at a moderate rate in 1997.
As of year-end, the number of customers increased by 1.9% compared to the
five-year annual average rate of 2.6%. The growth rate in the number of
retail electric customers in TEP's service territory is expected to be
approximately 2.0% annually through the year 2002. Retail peak demand in
TEP's service territory is expected to grow at an average annual rate of 2.7%
during the same period. The average annual rate of growth of energy sales to
those retail customers is anticipated to be approximately 2.0% for the
remainder of the decade. On average, residential, non-mining industrial, and
mining energy sales are expected to account for 35%, 28%, and 16%,
respectively, of the projected sales for the remainder of the decade. The
expected growth in the number of customers, retail peak demand and retail
sales is based, in part, upon publicly available population and demographic
studies conducted by persons or entities unaffiliated with TEP. Such
statements are also based upon various assumptions including, without
limitation, assumptions relating to weather, economic and competitive
conditions, including the assumption that TEP will incur no significant loss
of retail customers due to self-generation or retail wheeling.
TEP has two principal mining customers. In 1997, the sales to these
customers totaled approximately 16% of TEP's total retail energy sales, and
their contract demands totaled approximately 12% of the 1997 retail peak
demand. Revenues from sales to mining customers accounted for approximately
9% of TEP's retail revenues in 1997 and 1996 and approximately 10% in 1995.
Sales to mining customers are expected to grow at a rate of approximately
1.6% over the next five years due to production facility expansions made in
late 1997. However, sales to mining customers are dependent on a variety of
factors including, but not limited to, changes in supply and demand factors
in the international copper market and the economics of self-generation.
TEP serves its two principal mining customers under reduced rate
contracts designed to induce them to continue to purchase electricity from
TEP rather than self-generate. These contracts expire after the year 2000.
However, such contracts contain various provisions allowing the customers to
terminate partially or entirely, under certain circumstances, provided that
TEP is notified at least one and up to two years prior to such termination.
No termination notices have been received by TEP. The ability to extend
contracts and to avoid early termination will depend on market conditions and
available alternatives. TEP expects growth in retail sales to compensate for
such reduced rate contracts.
Future markets and prices for fuel, as well as ACC decisions regarding
rate design and retail wheeling, will affect the sales of electric energy.
Such factors will affect customers' choice of source of supply, usage
characteristics, and may affect agreements between TEP and certain contract
customers (see Competition below).
SALES FOR RESALE
TEP makes sales for resale to others on both a firm and an
interruptible basis. To the extent electric generating capacity is not being
utilized in the provision of energy to TEP's retail customers, such as during
off-peak periods, TEP markets this capacity and energy at wholesale. Surplus
energy is sold from time to time under various power pooling arrangements.
TEP currently has contracts to sell firm capacity as follows:
<TABLE>
<CAPTION>
Minimum
Contract
Company Demand MW Contract Term
------- --------- -------------
<S> <C> <C>
SRP 100 June 1, 1991 - May 31, 2011
NTUA (Phase I) (1) 60 July 1, 1997 - May 31, 1999
NTUA (Phase II) (1) 40/50 June 1, 1999 - December 31, 2009
City of Farmington (2) 25 November 1, 1997 - February 29, 2000
<FN>
----------------------
(1) The agreement with NTUA was extended and restructured in 1997. Phase I
provides for a minimum contract demand of 60 MW during the contract period.
During Phase II, TEP will provide 40 MW of firm power in the summer months
(May - September) and 50 MW of firm power in the winter months (October -
April).
(2) The City of Farmington, New Mexico will purchase up to 25 MW of firm
power during the months of November, December, January and February.
</TABLE>
TEP continues to actively market available excess energy in the short-
term markets (hourly up to one year) and, to the extent that it is economic,
commitments for available generating capacity and energy in the longer term
markets (one year and longer). Competition to sell capacity is expected to
remain vigorous in the next few years as a result of surplus capacity in the
Southwestern United States, the restructuring of the electric utility
industry in California and other western states, and the presence of a highly
competitive spot market in the Western United States. Regarding the
contracts described above, TEP cannot currently make any predictions about
the replacement or extension of such contracts in the future.
COMPETITION
See Item 7. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations, Competition, for a discussion of
developments regarding competition in the industry at the wholesale as well
as at the retail level.
GENERATING AND OTHER RESOURCES
- ------------------------------
TEP RESOURCES
The total net generating capability owned or leased by
TEP at December 31, 1997, was 1,992 MW as set forth in the
following table:
<TABLE>
<CAPTION>
Net
Capa-
bili- Oper- TEP'S
Unit Fuel ly ating SHARE
Generating Source No. Location Type MW Agent % MW
- ----------------- ---- -------- ---- ---- ----- - --
<S> <C> <C> <C> <C> <C> <C> <C>
Springerville Station 1 Springerville, AZ Coal 380 TEP 100.0 380
Springerville Station 2 Springerville, AZ Coal 380 TEP 100.0 380
San Juan Station 1 Farmington, NM Coal 316 PNM 50.0 158
San Juan Station 2 Farmington, NM Coal 312 PNM 50.0 156
Navajo Station 1 Page, AZ Coal 750 SRP 7.5 56
Navajo Station 2 Page, AZ Coal 750 SRP 7.5 56
Navajo Station 3 Page, AZ Coal 750 SRP 7.5 56
Four Corners Station 4 Farmington, NM Coal 784 APS 7.0 55
Four Corners Station 5 Farmington, NM Coal 784 APS 7.0 55
Irvington Station 1 Tucson, AZ Gas/Oil 81 TEP 100.0 81
Irvington Station 2 Tucson, AZ Gas/Oil 81 TEP 100.0 81
Irvington Station 3 Tucson, AZ Gas/Oil 104 TEP 100.0 104
Irvington Station 4 Tucson, AZ Coal/Gas/ 156 TEP 100.0 156
Oil
Internal Combustion Tucson, AZ Gas/Oil 218 TEP 100.0 218
Turbines ---
Total Company Capiacity (1) 1,992
=====
<FN>
- -------------------
(1) Excludes 235 MW of additional resources, which consists
of certain other capacity purchases and interruptible
retail load. At December 31, 1997, total owned capacity
was 1,360 MW and leased capacity was 632 MW. Internal
combustion turbines with 96 MW of capacity are leased by
TEP. This lease expires in April 1998. TEP is
evaluating the purchase or continued leasing of such
turbines, or alternatively, the purchase of firm
capacity during summer months to meet targeted reserve
requirements.
</TABLE>
Springerville Station
The Springerville Station consists of two coal-fired units.
Springerville Unit 1 began commercial operation in 1985 and is leased and
operated by TEP. Springerville Unit 2 commenced commercial operation in June
1990 and is owned by San Carlos and operated by TEP. Based on a review of
generating unit capabilities and changes in certain operating procedures, the
net capacity rating for each unit was increased from 360 MW to 380 MW as of
January 1, 1997. Under emergency conditions, such units may be operated for
up to eight hours at a net capacity of 400 MW each.
The primary terms of the Springerville Unit 1 Leases expire on January
1, 2015. At December 31, 1997, the capitalized lease asset related to
Springerville Unit 1, net of allowance and accumulated amortization, was $243
million, or $639 per kW based on a 380 MW capacity rating. At the end of the
primary term, TEP may exercise fair market value purchase and renewal
options. Annual lease payments for the Springerville Unit 1 Leases will
range from $33 million to $176 million, averaging approximately $78 million.
In 1997, the cash cost to TEP of Springerville Unit 1 capacity attributable
to rent obligations and other operation and maintenance expenses was $77
million, or an average of approximately $17 per kW per month based on a 380
MW capacity rating. Such average cash cost is estimated to be approximately
$20 per kW per month (approximately $93 million per year) for the period from
January 1998 through December 2002 and will increase thereafter. However,
due to timing differences between cash and accrued expenses, capacity costs
attributable to rent obligations and other operation and maintenance expenses
were accrued in TEP's financial statements during 1997 at an average of
approximately $21 per kW per month, or $94 million for the year, before
amortization of the regulatory allowance and related interest expense. The
estimated expense is expected to average approximately $21 per kW per month
(approximately $97 million per year) for the period from January 1998 through
December 2002 and is expected to increase slightly thereafter. The 1991 Rate
Order allowed TEP to recover the cost of 360 MW of capacity for Springerville
Unit 1 (the then rated capacity for the unit), but limited such recovery to a
rate of $15 per kW per month (approximately $65 million per year).
Substantially all of the present value of disallowed Springerville Unit 1
costs was recorded as a loss in 1990, and as a result of the Financial
Restructuring, an additional loss was recorded in 1992. The losses together
reflect the present value of the difference between projected costs and the
amount TEP is allowed to recover through the lease term ending January 1,
2015. See Note 1 of Notes to Consolidated Financial Statements, Nature of
Operations and Summary of Significant Accounting Policies, Springerville Unit
1 Allowance.
In December 1985, pursuant to the Springerville Common Facilities
Leases, TEP sold and leased back a 50% interest in the Springerville Common
Facilities. The sales price of such facilities was $132 million. At
December 31, 1997, the capitalized lease asset related to this interest in
the Springerville Common Facilities, net of accumulated amortization, was
$119 million. The initial lease term for the Springerville Common Facilities
Leases expires in 2017 for one owner participant and 2021 for the other two
owner participants, subject to optional renewal periods and purchase options.
Annual lease payments under these leases vary with changes in the interest
rate on the underlying debt. Such lease payments totaled approximately $12
million per year in 1995, 1996 and 1997. Based on current interest rates,
average annual lease payments would total approximately $10 million.
Including one-half of the cost of the Springerville Common Facilities
(but excluding the cost of coal-handling facilities at Springerville which
were included in recoverable fuel costs), the total initial cost of
Springerville Unit 2 was $838 million, or $2,328 per kW based on the previous
360 MW capacity rating. In the 1991 Rate Order, the ACC disallowed recovery
from retail customers of $175 million of the book value of Springerville Unit
2. TEP recorded a loss for such disallowance in 1991. The net recoverable
cost, including the leased common facilities, is $663 million or $1,842 per
kW based on the previous 360 MW capacity rating.
Irvington Station
In January 1988, TEP began coal-fired commercial operation and entered
into a sale and leaseback arrangement for Irvington Unit 4 pursuant to the
Irvington Lease. The unit was sold at its cost of $152 million. At December
31, 1997, the capitalized lease asset related to Irvington Unit 4, net of
accumulated amortization, was $112 million. This lease calls for annual
payments which range from approximately $11 million to $14 million and which
average approximately $13 million. The lease term expires in 2011, but the
lease has optional renewal and purchase option provisions.
Irvington Unit 4 (156 MW capability) has the flexibility to operate on
coal, gas or fuel oil. Coal has been the primary fuel and natural gas the
secondary fuel.
SCE/TEP POWER EXCHANGE AGREEMENT
As part of a 1992 litigation settlement, TEP and SCE agreed to a ten-
year power exchange agreement. Under the agreement, which began in May 1995,
SCE provides firm system capacity of 110 MW to TEP during summer months, for
which TEP pays an annual capacity charge of approximately $1 million
increasing annually after the year 2000 to a maximum of approximately $2
million annually. TEP is entitled to schedule firm energy deliveries from
SCE during the summer (May 15 through September 15) of up to 36,300 MWh per
month, and is obligated to return to SCE on an interruptible basis the same
amount of energy the following winter season (November 1 through February
28). The energy provided pursuant to the exchange is expensed based upon the
estimated cost of interruptible energy to be provided to SCE. Pursuant to
the exchange agreement TEP received 136,508 MWh from SCE in 1997, of which
46,435 MWh was returned to SCE as of December 31, 1997.
FUTURE GENERATING RESOURCES
In December 1995, TEP filed an integrated resource plan pursuant to the
ACC's regulations governing resource planning. In its filing TEP projected
the need for an additional 128 MW of peaking resources in 1998 and additional
peaking resources in the year 2002 and beyond. No need for additional base
load generation facilities was forecast through the year 2010. Subsequently,
TEP has delayed the need for peaking resources to 2001 through a review of
net generating capabilities at Springerville and an increase in the
percentage of retail load served now on an interruptible basis. TEP's
reserve levels may be affected if the lease on certain gas turbines (96 MW)
expires in April 1998 without an agreement to purchase or continue leasing
such units. In that event, TEP would need to buy firm capacity or increase
the percentage of retail load served on an interruptible basis in order to
meet targeted reserve requirements.
In the 1995 integrated resource plan TEP projected that demand-side
management programs should reduce peak demand and, therefore, capacity
requirements, from what they would be without such programs by 60 MW by the
year 2000. As part of the integrated resource plan, TEP has committed to
adding 5 MW of renewable generation resources by the year 2000.
TEP's assessment of future generating resources is based upon the
premise of a continued requirement to serve customers in TEP's retail service
area. The need for all of these future resources may be affected by the
ACC's rules on retail competition and TEP's ability to retain and attract
customers. See Rates and Regulation, ACC Rules on Retail Competition below
and Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations, Competition.
OTHER PURCHASES
In addition to generating electricity at generating stations owned or
leased by TEP and the SCE/TEP Power Exchange, TEP participates in a number of
interchange agreements through which it can purchase additional electric
energy from other utilities. The amount of energy purchased from other
utilities varies substantially from time to time depending on the demand for
such energy, the cost of purchased energy as compared to TEP's cost of
generating energy and the availability of such energy. Through these same
agreements, TEP may also sell its surplus electric energy from time to time.
TEP has transmission access to and/or power transaction arrangements
with over 180 electric systems or suppliers, including those in the southern
California markets. TEP is a member of the Southwest Reserve Sharing Group,
which is comprised of a group of utilities serving customers in portions of
the southwestern United States. The Southwest Reserve Sharing Group provides
emergency assistance and reserve sharing among its members in order to
enhance system reliability in the Desert Southwest region. TEP is also a
member of the WSCC, a group of western electric systems and suppliers that
works cooperatively to assure the reliability of the region's interconnected
generation and transmission systems. In addition, TEP is a member of the
Western Systems Power Pool, a voluntary power pooling arrangement designed to
achieve more efficient use of electric generation and transmission facilities
among its members. See Competition for a discussion of possible changes in
transmission issues.
RATES AND REGULATION
- --------------------
GENERAL
TEP is subject to the jurisdiction of the ACC, which has authority,
among other things, to prescribe the classifications of accounts to be used
and the rates and charges to be made and collected from retail customers, and
to regulate the issuance of securities. The ACC also has authority to
approve affiliate transactions and the establishment of holding companies and
subsidiaries under ACC promulgated Affiliated Interest Rules. TEP is also
subject to regulation by FERC in certain respects, including the terms and
prices of sales to other utilities.
Arizona law requires that TEP's rates for retail sales of electric
energy be determined by the ACC on a "cost of service" basis and be designed
to provide, after recovery of allowable operating expenses, an opportunity to
earn a reasonable rate of return on "fair value rate base". Fair value rate
base is, generally, determined by the ACC by reference to the original cost
and the reproduction cost (in each case, net of depreciation) of utility
plant in service to the extent deemed used and useful, and to various
adjustments for deferred taxes and other items, plus a working capital
component. Thus, over time, rate base is increased by additions to utility
plant in service and reduced by depreciation and retirements of utility plant
from service. Both operating expenses and fair value rate base determination
are subject to the judgment of the ACC regarding prudence and recoverability.
To the extent that customer choice and retail wheeling are introduced into
TEP's retail service area in the future, retail rates may be changed to
reflect market levels which are different from traditional "cost of service"
rate levels.
TEP's rates for wholesale sales of capacity and energy, generally, are
not permitted by FERC to exceed rates determined on a cost of service basis.
In the fall of 1997, TEP applied for and was granted a tariff to sell at
market based rates. Rates have historically been set by the FERC in formal
rate application proceedings. With respect to long-term firm sales, TEP's
wholesale rates are substantially below rates determined on a fully allocated
cost of service basis, but, in all instances, rates exceed the level
necessary to recover fuel and other variable costs.
The ACC consists of three commissioners, each serving a six-year term.
One of the three is elected at each general election except when a vacancy
occurs prior to the expiration of a commissioner's term. The present
commissioners are:
James Irvin (Republican), Chairman, started his first term in 1997. His
term expires in 2003.
Renz D. Jennings (Democrat), began a third term in 1993. His term expires
in 1999.
Carl J. Kunasek (Republican), began his first term in 1995. His term
expires in 2001.
Under a 1992 Arizona law, commissioners cannot serve consecutive terms
and can be elected to another term only after the passing of six years after
the end of their previous term as commissioners.
HOLDING COMPANY ORDER
On November 19, 1997, the ACC voted unanimously in favor of TEP's
Notice of Intent to Organize a Public Utility Holding Company, filed with the
ACC in April 1997. On January 1, 1998, TEP and UniSource Energy completed a
statutory share exchange, pursuant to which the outstanding common stock of
TEP was exchanged, on a share-for-share basis, for shares of UniSource Energy
common stock, no par value. As a result of the transaction, TEP became a
wholly-owned subsidiary of UniSource Energy.
The ACC Order contained a number of conditions which will impact the
activities of UniSource Energy, TEP, and TEP's "sister companies" (i.e.,
other companies owned by UniSource Energy or its affiliates). These include:
- -The holding company and its subsidiaries will only conduct business
activities that are part of the electric energy business (as defined
therein).
- -For five years from the commencement of operations of the holding company,
the following proceeds will be used to reduce TEP's debt or added to TEP's
equity accounts: (i) 60% of any public equity issuance by UniSource Energy;
and (ii) 2% of the net after-tax profits attributable to the holding
company's equity interest in TEP's sister companies.
- -Until such time as TEP's equity ratio equals 37.5% of total capital
(excluding capital lease obligations), TEP may not pay dividends to
UniSource Energy in excess of 75% of its earnings.
- -TEP will target attainment of a 37.5% equity ratio in its capitalization
structure for regulatory purposes by December 31, 2000. If that capital
structure goal is not attained, the ACC may set rates based on TEP's
actual capital structure for regulatory purposes rather than the
hypothetical 37.5% equity ratio currently reflected in rates.
- -The capitalization (debt and equity) of TEP's sister companies may not
exceed 30% of TEP's capitalization unless otherwise approved by the ACC.
1996 RATE ORDER
In its order dated March 29, 1996, the ACC approved with certain
modifications a rate settlement agreement which was filed with the ACC on
March 8, 1996, and approved a one-time rate increase for TEP of 1.1%
(approximately $6.4 million annually), effective March 31, 1996.
The 1996 Rate Order recognizes all of Springerville Unit 2 as used and
useful for ratemaking purposes so that TEP is presently recovering the
operating and capital costs associated with that portion of the generating
unit not previously included in rates. See Note 2 of the Notes to
Consolidated Financial Statements, 1996 Rate Order. The 1996 Rate Order and
approved settlement agreement also establish a rate moratorium period for
TEP. TEP has committed not to file for a change in base rates prior to
January 1, 2000, except for conditions or circumstances which constitute an
emergency, for the sharing of benefits with customers of cost containment
efforts where appropriate, or in the event TEP is acquired or merged with
another company. By April 15 of each year TEP is required to provide the ACC
Staff with a report quantifying TEP's cost containment efforts.
The rates approved in the 1996 Rate Order are based on a rate of return
of 6.59% on a fair value rate base of approximately $1.36 billion, or 7.72%
on an original cost rate base of approximately $1.16 billion. The capital
structure adopted by the ACC for rate making purposes assumes 62.5% debt and
37.5% equity. Consistent with previous ACC rate orders, TEP's leasehold
interest in utility plant was reflected in rates through an allowance for
rental expense, and was therefore not included in rate base.
RATE PROPOSAL BEFORE THE ACC
On July 9, 1997, TEP filed with the ACC a request for an annual rate
reduction of $6.8 million (or 1.1%) for retail customers. This filing is in
the form of a Shared Savings Proposal (SSP) which promotes a sharing of
benefits with customers of cost containment efforts and the mitigation of
potential stranded costs associated with the introduction of retail electric
competition in Arizona. In the SSP, TEP identified approximately $23 million
in annual pre-tax cost containment measures of which $20.8 million is
allocable to ACC jurisdictional operation. These savings were realized
primarily from renegotiated fuel contracts and TEP's Voluntary Severance
Program, which reduced TEP's workforce by approximately 15%. No date has
been set for formal consideration of the matter by the ACC.
The proposed $6.8 million rate reduction represents a 50/50 sharing
with customers of $13.6 million of cost containment efforts. TEP proposed
that additional savings be used by TEP to mitigate potential stranded costs
through accelerated amortization of retail excess capacity deferrals. Retail
excess capacity deferrals represent those operating and capital costs
associated with Springerville Unit 2 capacity, which were deemed by the ACC
to not be recoverable in retail rates prior to the 1994 and 1996 Rate Orders.
Such retail excess capacity deferrals totaled $88.7 million and $93.6 million
at December 31, 1997 and 1996, respectively. The proposed $7.2 million
increase in annual amortization expense for such retail excess capacity
deferrals would decrease the amortization period from 20 years to 5.6 years
as of December 1996. The proposed increase in amortization expense would be
reflected in TEP's regulatory accounting records but would have no impact on
the expenses included in TEP's financial accounting statements.
ACC RULES ON RETAIL COMPETITION
In December 1996, the ACC voted to adopt certain rules on retail
electric competition. See Item 7. -Management's Discussion of Financial
Condition and Results of Operations, Competition, Retail, for a discussion of
these rules.
FERC ORDERS ON WHOLESALE TRANSMISSION ACCESS
In April 1996, the FERC issued two orders pertaining to wholesale
transmission access. See Item 7. -Management's Discussion of Financial
Condition and Results of Operations, Competition, Wholesale, for a discussion
of these orders.
OTHER RATE MATTERS
See Utility Operations, Peak Demand and Customers and Item 7. -
Management's Discussion of Financial Condition and Results of Operations,
Competition, Retail for a discussion of TEP's contracts and negotiations with
certain of its mining customers.
FUEL SUPPLY
-----------
GENERAL
TEP's principal fuel for electric generation is low-sulfur coal. The
following table provides fuel cost information for the years 1997 through
1993:
<TABLE>
<CAPTION>
Cost Per Million BTU Consumed Percentage of Total BTU Consumed
--------------------------------- --------------------------------
1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
----- ----- ----- ----- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal (A) $1.66 $1.76 $1.71 $1.75 $1.77 97% 98% 99% 98% 99%
Gas 2.74 2.24 1.69 1.86 2.76 3 2 1 2 1
All Fuels 1.68 1.77 1.71 1.75 1.79 100% 100% 100% 100% 100%
<FN>
(A) The average cost per ton of coal for each of the last
five years (1997 - 1993) was $31.33, $32.95, $32.11,
$33.12, and $33.11, respectively.
</TABLE>
COAL
TEP is the operator for the Springerville and Irvington generating
stations. Their coal supplies are transported from northwestern New Mexico
by railroad. In June 1997, TEP terminated its existing coal supply contract
for the Springerville Generating Station for a $50 million fee and entered
into a new contract with the same supplier, which expires in 2010, with an
option to extend the term for ten years thereafter. See Note 2 and 7 of
Notes to Consolidated Financial Statements, Rate Matters, Springerville Coal
Contract Termination Fee and Commitments and Contingencies, Fuel Purchase
Commitments. At Irvington, the contract termination date is the earlier of
2015 or the remaining life of Unit 4. The Springerville and Irvington
contracts have various adjustment clauses which will affect the future cost
of coal delivered. Coal reserves are expected to be sufficient to supply the
estimated requirements of Springerville and Irvington for their presently
estimated remaining lives. The coal quantities for the San Juan Station, a
mine-mouth operation, are partially contracted through the year 2017. TEP
also participates in jointly owned generating facilities under long-term
contracts entered into by the operating agents. Coal supplies are surface-
mined in northern Arizona and northwestern New Mexico. The contract for coal
for Four Corners terminates in 2005. The coal quantities under contract for
the Navajo mine-mouth coal fired generating station are expected to be
sufficient to supply the estimated requirements for its presently estimated
remaining life. Additional information concerning the coal contracts is set
forth below:
<TABLE>
<CAPTION>
Average
Year Contract Sulfur Cost Per Million BTU (A) Coal Obtained
Station Coal Supplier Terminates Content 1997 1996 1995 From (B)
------- ------------- ------------- ------- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Four Corners BHP Minerals International, 2005 0.8% $0.95 $1.34 $1.15 Navajo Indian
Inc. Tribe
San Juan San Juan Coal Company 2017 0.8% $1.74 $1.77 $1.76 Federal and State
Agencies
Navajo Peabody Western Coal Company 2011 0.6% $1.13 $1.18 $1.12 Navajo and Hopi
Indian Tribes
Springerville (C) Peabody Coalsales Company 2010 (D) 0.7% $1.77 $1.84 $1.73 Lee Ranch Coal
Company
Irvington The Pittsburg & Midway Coal 2015 0.4% $1.99 $2.21 $2.20 Navajo Indian
Mining Company Tribe and
Federal and
State Agencies
<FN>
- ----------------
(A) Includes costs of transportation and handling in addition to the purchase
price under the basic contract.
(B) Substantially all of the suppliers' leases extend at least as long as
coal is being mined in economic quantities.
(C) Coal handling facilities costs included in Springerville fuel costs above
were $0.23 per million BTU in 1997, $0.25 per million BTU in 1996, and
$0.34 per million BTU in 1995.
(D) The coal contract for Springerville expires in 2010 with an option to
extend the term for ten years thereafter. During the extension term, the
coal supplier has the right of first refusal to match competing offers for
a portion of the Springerville coal requirements.
</TABLE>
The Irvington coal supply contract contains take-or-pay provisions,
whereby TEP is required to make certain minimum payments for a base amount of
tonnage not taken at a rate of 50% of the contract price. Although TEP's
present fuel requirements are generally in excess of the stated take-or-pay
minimum amounts, from time to time TEP has purchased coal and natural gas in
the spot market or switched fuel burn from one generating station to another
in order to achieve lower overall fuel costs, while incurring take-or-pay
minimum charges. During 1996 TEP purchased coal for the Irvington Station
from an alternative supplier, resulting in a $4.4 million take-or-pay charge,
but reducing fuel costs at Irvington. TEP incurred no take-or-pay charges in
1997 or 1995.
TEP intends to continue to actively negotiate its fuel and
transportation contracts in 1998 and in the future.
SPRINGERVILLE COAL HANDLING FACILITIES
Pursuant to the Springerville Coal Handling Facilities Leases, TEP is
the lessee of the coal-handling facilities at Springerville under a capital
lease with a remaining initial lease term of approximately 18 years with
incremental extensions of five to six years depending on certain criteria at
the date of each extension. At December 31, 1997, the capitalized lease
asset related to the Springerville coal-handling facilities, net of
accumulated amortization, was $174 million. Annual rental payments range
from approximately $10 million to $28 million but average $21 million.
TEP allocates portions of its Springerville Coal Handling Facility
Lease costs to deferred expense for future recovery through rates. See Note
1 of Notes to Consolidated Financial Statements, Nature of Operations and
Summary of Significant Accounting Policies, for a description of the
accounting for Springerville coal handling facility lease costs.
Approximately half of the expenses of the coal handling facilities, including
lease costs and other operating and maintenance expenses, are charged to fuel
expense and amounted to $13 million, $15 million, and $17 million in 1997,
1996 and 1995, respectively.
GAS
In 1997, TEP purchased a small amount of natural gas for power
generation (approximately 3% of total TEP generation) from El Paso Gas
Marketing, Equitable Resources Marketing, Natural Gas Clearinghouse, and Penn
Union Energy Services. During 1997, TEP received natural gas sufficient to
meet all of its gas fuel requirements.
WATER SUPPLY
------------
TEP believes there will be sufficient water to supply the requirements
of existing and planned units of all electric generating stations in which
TEP has an interest for their estimated lives. A federal contract for water
at San Juan expires in 2005, and negotiations for extension are being
overseen by PNM.
ENVIRONMENTAL MATTERS
---------------------
GENERAL
TEP must operate its generating stations in accordance with numerous
local, state and federal guidelines, laws, regulations and ordinances
designed to preserve and enhance environmental integrity. Resource
extraction and waste disposal operations are also regulated for environmental
compatibility. Generally, air quality and water quality are under the most
stringent regulations. Land use is also regulated. TEP believes that all of
its facilities are operating in compliance with requirements currently in
effect.
Various federal, state and local laws, regulations and requirements for
air quality control continue to have a significant impact on TEP. Due to the
proximity of national parks, monuments, wilderness areas and Indian
reservations and relatively high air quality at such locations, the principal
generating units of TEP could be subject to control standards of best
available control technology (BACT) and best available retrofit technology
(BART). Such standards relate to the "prevention of significant
deterioration" of visibility and tall stack limitation rules.
Arizona and New Mexico have adopted emission regulations restricting
the emissions from both existing and future coal, oil and gas-fired plants.
These regulations are in some instances more stringent than those adopted by
the EPA.
TEP expended $19 million during 1997 for environmental construction
costs in maintaining compliance with environmental requirements. TEP
estimates that it will make expenditures for environmental facilities of
approximately $15 million in 1998 and $7 million in 1999. These amounts
include TEP's estimated share of expenditures for improvements to the
pollution control facilities at the Navajo and San Juan stations, as
discussed below. TEP believes that all existing generating facilities are or
will be in compliance with all existing or expected environmental regulations
except as described below.
In the fall of 1990, Congress adopted certain Federal Clean Air Act
Amendments (CAAA) with respect to facility permitting and to reductions in
sulfur dioxide and nitrogen oxide emissions which will affect TEP's
operations. The required reductions of sulfur dioxide emissions will be
implemented in two phases which are effective in 1995 and 2000, respectively.
TEP is not affected by the requirements for sulfur dioxide and nitrogen oxide
emissions which went into effect in 1995 (Phase I), but is subject to the
requirements that go into effect January 1, 2000 (Phase II). All of TEP's
generating facilities (except internal combustion turbines) are subject to
the Phase II sulfur dioxide and nitrogen oxide requirements. The estimated
cost of compliance with these requirements is approximately $1 million to $2
million, scheduled to be incurred between 1998 and 2000.
In 1993 affected TEP generating units were allocated sulfur dioxide
Emission Allowances based on past operational history. Beginning in the year
2000, Phase II generating station units must hold Emission Allowances (by
January 30 of the year following the compliance year) equal to the level of
emissions in the compliance year, or face penalties and a requirement to
offset excess emissions in future years. An analysis of the Emission
Allowances that were allocated to TEP shows that TEP may not have sufficient
allowances to permit normal plant operation and be in compliance with the
sulfur dioxide regulations once the Phase II requirements become effective
due to the increase in the rated capacity at Springerville. See Generating
and Other Resources, TEP Resources, Springerville Station. To the extent
that TEP does not have sufficient allowances, due to increased energy output
at Springerville or other factors, TEP would have to purchase additional
Emission Allowances. Based upon current estimates of additional required
Emission Allowances and the current market price of such allowances, TEP
believes that it will be able to acquire additional required allowances and
that such purchases will not have a material effect on TEP.
Title V of the CAAA requires that more complex air quality permits be
applied for and obtained for all of TEP's generating facilities.
Applications have been filed for all such facilities and TEP does not
anticipate (based on information and belief as to jointly owned facilities
operated by others) any material problems in obtaining the required permits.
TEP is required to pay an annual emission-based fee with respect to each
generating facility subject to a Title V permit. The aggregate fees payable
by TEP in 1998 with respect to all such facilities for emissions in 1996 are
not expected to exceed $1 million, and should remain approximately the same
in 1999.
The CAAA also require multi-year studies of visibility impairment in
specified areas and studies of hazardous air pollutants which relate to the
necessity of future regulations of electric utility generating units. Since
these activities involve the gathering of information not currently
available, TEP cannot predict the outcome of these studies.
As a result of recent and possible future changes in federal and state
environmental laws, regulations and permit requirements, because of and in
addition to the CAAA, TEP may incur additional costs for the purchase or
upgrading of pollution control emission monitoring equipment on existing
electric generating facilities and may experience a reduction in operating
efficiency. There may be a need for variances from certain environmental
standards and operating permit conditions until required equipment and
processes for control, handling and disposal of emissions are operational and
reliable. Failure to comply with any EPA or state compliance requirements
may result in substantial penalties or fines which are provided for by law
and which in some cases are mandatory.
NAVAJO GENERATING STATION
In 1991, the EPA adopted a rule for the reduction of Navajo's sulfur
dioxide emissions on an annual averaging basis by 90% to address visibility
impairment at Grand Canyon National Park. TEP estimates that its share of
the required capital expenditures remaining as of December 31, 1997 relating
to the rule's implementation will be approximately $8 million, including
AFDC, through 2000.
SAN JUAN GENERATING STATION
In order to improve the cost efficiency of sulfur dioxide removal at
the station, the existing removal process is being replaced with a new
process at an estimated cost to TEP of $20 million, including AFDC, during
the period 1997 through 1999. TEP estimates that its share of the required
capital expenditures remaining as of December 31, 1997 relating to this
process improvement will be approximately $11 million, including AFDC,
through 1999.
EMPLOYEES
---------
TEP and its subsidiaries had a combined total of 1,190 employees as of
December 31, 1997. Included in this total are 22 employees of subsidiaries
wholly-owned by MEH, which subsidiaries were transferred from TEP to
UniSource Energy on January 1, 1998.
The IBEW 1116, which represents about 60% of the total employees, and
TEP are parties to a two-year collective bargaining agreement for the period
from December 1, 1996 through November 30, 1998. The collective bargaining
agreement, which was negotiated with and approved by the IBEW 1116 in
December 1996 for classified employees in Tucson, includes annual wage
increases of 3.2% in December 1996 and 3.0% in December 1997, as well as
modifications to the pension plan. This same agreement was also approved by
the IBEW 1116 in January 1997 for classified employees at the Springerville
location. In April 1997 the classified employees agreed to put 1.6% (or 50%)
of the December 1996 negotiated across-the-board wage increase "at risk"
under the terms of the Classified Incentive Program (CIP). The CIP provides
for additional incentive payments based on attainment of individual,
departmental and corporate goals. The employee receives the "at risk"
portion of the wage increase only if individual goals are attained. In 1998
IBEW 1116 employees received additional incentive payments for achieving
these goals in 1997. This program will continue in 1998 with 1.5% of the
December 1997 salary increase "at risk".
ENERGY-RELATED VENTURES
-----------------------
MEH Corporation (MEH) is a wholly-owned subsidiary of UniSource Energy.
MEH owns all of the outstanding common stock of four subsidiaries (described
below) established for the purpose of pursuing various unregulated energy-
related investment opportunities.
Nations Energy Corporation was established in 1995 for the purpose of
developing and investing in independent power projects in the global energy
markets. In September 1995, Nations Energy and Trigen Energy Corporation
formed a limited partnership which purchased Coors Brewing Company's energy
production assets. Nations Energy has a 49% interest in such partnership.
In 1996, Nations Energy became actively involved in the development of the
ECKG power project near the City of Kladno, Czech Republic, for which it has
a 26.7% ownership option exercisable in May 1998. This project involves the
upgrading and expansion of an existing coal-fired thermal and electric
generating plant. In addition to these projects, Nations Energy is actively
involved in the development of other investment opportunities in the global
energy markets.
Millennium Energy Holdings, Inc. holds a 50% interest in New Energy
Ventures, L.L.C. Millennium exercised its option to acquire its 50%
ownership interest in NEV effective September 1, 1997. NEV was organized in
1995 for the purpose of acting as a buyer's agent in procuring electric
energy, performing energy services, engaging in power marketing and trading
and other energy related activities. Its principal focus is in California
and the Northeastern region of the United States. As of December 31, 1997,
NEV had signed contracts to provide advisory and load aggregation services
for customers in California having a combined electrical demand of 800 MW,
which will become effective when the California market is subject to open
access. NEV obtains its energy supply through purchase power contracts and
spot market purchases. Also, in January 1998, NEV announced the formation of
a strategic alliance with Allied Signal, Inc. to become the distributor of
TurboGeneratorTM Power Systems in 14 western states. The TurboGeneratorTM is
a lightweight microturbine (for applications requiring 40 kW-500 kW) which
can be used for distributed generation, off-grid power generation, portable
power, and cogeneration, and provides NEV with additional capabilities to
provide energy options to its customer base.
Advanced Energy Technologies, Inc. was established in May 1996. This
wholly-owned subsidiary of MEH develops renewable energy and distributed
generation technologies. In 1996 AET acquired a 50% ownership interest in
Global Solar Energy, L.L.C., an Arizona corporation which develops and
manufactures flexible thin-film photovoltaic cells. Commercial production of
photovoltaic cells is scheduled to commence in 1998. Global Solar's
manufacturing facility is expected to initially produce at a rate of up to
1,500 kW of solar generated electric capacity, or approximately 255,000
square-feet of photovoltaic film, per year.
Southwest Energy Solutions, Inc. was established in January 1997. SES
provides a variety of ancillary energy services to retail electric consumers
including dusk to dawn lighting, service restoration, and design, engineering
and construction services. SES owns all of the outstanding common stock of
SWPP and SWPPI. Established in 1996, SWPP entered into a joint venture with
three Mexican investment partners in July 1997 to form Sentinel Concrete
Utility Poles, a domestic distributor of concrete power poles and related
products. SWPP holds a 50% ownership interest in this joint venture. SWPPI
holds a 50% ownership interest in Productos de Concretos Internacionales,
C.V., a manufacturer and international distributor of concrete power poles
and related products.
In addition to the activities currently underway or planned for each of
these subsidiaries, UniSource Energy continues to evaluate potential
investment opportunities in other energy-related markets.
In the Consolidated Balance Sheet and Consolidated Statement of Income
for UniSource Energy as of December 31, 1997, investments in the energy-
related ventures of MEH and its subsidiaries (included in Investments and
Other Property) comprised less than 1% of total assets, while the net loss
related to such investments reduced consolidated net income by 6.5% in 1997.
Depending on the nature of future investment opportunities, UniSource Energy
expects to make additional investments in these subsidiaries and in other
energy-related ventures. Over time, investments in energy-related ventures
may have a material impact on UniSource Energy's future cash flow and
profitability. Pursuant to the ACC order issued in November 1997 allowing
the formation of a holding company, the capitalization (debt and equity) of
the subsidiaries which are the sister companies to TEP may not exceed 30% of
TEP's capitalization unless otherwise approved by the ACC.
<TABLE>
TEP's UTILITY OPERATING STATISTICS
For Years Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Generation and Purchased Power-kWh (000)
Remote Generation (Coal) 9,694,152 9,784,918 8,716,513 9,341,342 8,986,350
Local Generation (Oil, Gas & Coal) 806,819 723,232 500,958 825,385 615,100
Purchased Power 1,222,970 925,394 692,769 501,269 335,897
Total Generation and Purchased Power 11,723,941 11,433,544 9,910,240 10,667,996 9,937,347
Less Losses and Company Use 824,072 776,436 661,901 639,278 591,412
Total Energy Sold 10,899,869 10,657,108 9,248,339 10,028,718 9,345,935
Sales-kWh (000)
Residential 2,608,515 2,516,282 2,330,191 2,374,868 2,223,479
Commercial 1,316,360 1,306,826 1,280,752 1,281,050 1,242,367
Large Users 2,115,332 2,080,763 1,979,317 1,948,331 1,832,278
Mining 1,193,094 1,164,140 1,147,281 1,135,424 1,090,061
Public Authorities 237,113 228,800 204,746 183,525 159,310
Total - Retail Customers 7,470,414 7,296,811 6,942,287 6,923,198 6,547,495
Sales for Resale 3,429,455 3,360,297 2,306,052 3,105,520 2,798,440
Total 10,899,869 10,657,108 9,248,339 10,028,718 9,345,935
Operating Revenues (000)
Residential $246,251 $237,569 $218,208 $220,341 $197,368
Commercial 146,377 143,623 138,294 137,508 128,688
Large Users 158,266 154,547 146,409 144,677 131,858
Mining 53,231 56,240 54,948 53,821 53,510
Public Authorities 17,531 16,949 14,952 13,435 11,464
Other 2,565 2,636 2,114 1,651 1,925
Total - Retail Customers 624,221 611,564 574,925 571,433 524,813
Amortization of MSR Option Gain
Regulatory Liability 8,105 20,053 20,053 20,053 6,053
Sales for Resale 97,567 84,256 75,591 99,987 93,273
Total $729,893 $715,873 $670,569 $691,473 $624,139
Customers (End of Period)
Residential 287,857 282,060 273,976 266,060 258,168
Commercial 28,309 28,199 27,858 27,360 26,838
Large Users 664 626 620 588 551
Mining 4 4 4 4 4
Public Authorities 61 61 59 59 59
Total Retail Customers 316,895 310,950 302,517 294,071 285,620
Average Revenue per kWh Sold (cents)
Residential 9.4 9.4 9.4 9.3 8.9
Commercial 11.1 11.0 10.8 10.7 10.4
Large Users and Mining 6.4 6.5 6.4 6.4 6.3
Total Retail Customers 8.4 8.4 8.3 8.3 8.0
Average Revenue per Residential Customer $865 $854 $809 $841 $776
Average kWh Sales per Residential Customer 9,159 9,050 8,641 9,066 8,739
</TABLE>
ITEM 2. -- PROPERTIES
- -------------------------------------------------------------------------------
TEP's transmission facilities are located within the states of Arizona
and New Mexico. The primary purpose of TEP's transmission facilities is to
transmit electricity from TEP's remote electric generating stations at Four
Corners, Navajo, San Juan and Springerville to the Tucson area for use by
TEP's retail customers (see Item 1, Business, Generating and Other Resources
for the location of TEP's plants). The transmission system is directly
interconnected with systems operated by the following utilities:
Utility Location
------- --------
Arizona Public Service Co. Arizona
Arizona Electric Power Cooperative Arizona
El Paso Electric Co. New Mexico, Texas
Public Service Co. of New Mexico New Mexico
Salt River Project Arizona
TEP has arrangements with approximately 180 companies, including the
five listed above, which are utilized to interchange capacity and energy.
As of December 31, 1997, TEP owned or participated in an overhead
electric transmission and distribution system consisting of 511 circuit-miles
of 500 kV lines, 1,122 circuit-miles of 345 kV lines, 350 circuit-miles of
138 kV lines, 440 circuit-miles of 46 kV lines and 9,643 circuit-miles of
lower voltage primary lines. The underground electric distribution system
was comprised of 5,071 cable-miles. Approximately 24% of the poles upon
which the lower voltage lines are located are not owned by TEP. Electric
substation capacity associated with the above-described electric system
consisted of 173 substations with a total installed transformer capacity of
5,329,605 kVA.
The electric generating stations (except as noted below), TEP's general
office building, operating headquarters and the warehouse and service center
are located on land owned by TEP in fee. The electric distribution and
transmission facilities owned by TEP are located (1) on property owned in fee
by TEP, (2) under or over streets, alleys, highways and other public places,
the public domain and national forests and state lands under franchises,
easements or other rights which, with some exceptions, are subject to
termination, (3) under or over private property by virtue of easements
obtained for the most part from the record holder of title, and (4) over
Indian reservations under grant of easement by the Secretary of Interior or
lease by Indian tribes. In most instances, no examination has been made by
counsel for TEP as to the title to easements of TEP from the record holder or
to the property over which the easement has been granted, or as to possible
liens, encumbrances, reservations or restrictions thereon. Therefore, some
of the easements and the property over which the easements have been secured
may be subject to title defects and encumbered by, or subject to, mortgages
and liens existing at the time the easements were acquired.
Most of the land parcels comprising Springerville are held by TEP under
a long-term surface ownership agreement with the State of Arizona.
Four Corners and Navajo are located on properties held under easements
from the United States and under leases from the Navajo Indian Tribe. TEP,
individually and in conjunction with PNM in connection with San Juan, has
acquired easements and leases for transmission lines and a water diversion
facility located on the Navajo Indian Reservation. TEP has also acquired
easements for transmission facilities, related to San Juan and Navajo, across
the Zuni, Navajo and Tohono O'odham Indian Reservations.
TEP's rights under the various easements and leases described under
this heading may be subject to possible defects (including conflicting grants
or encumbrances not ascertainable because of absence of or inadequacies in
the recording laws or the record systems of the Bureau of Indian Affairs and
the Indian tribes, the possible inability of TEP to resort to legal process
to enforce its rights against certain possible adverse claimants and the
Indian tribes without Congressional consent, the possible failure or
inability of the Indian tribes to protect TEP's interests in, and use and
occupancy of, these facilities from interference or interruption, and, in the
case of the leases, possible impairment or termination under certain
circumstances by Congress, the Secretary of the Interior or certain possible
adverse claimants). However, these possible defects have not and are not
expected to materially interfere with TEP's interest in and operation of its
facilities.
TEP leases under separate sale and leaseback arrangements the following
facilities (which do not include land): (i) the coal handling facilities at
Springerville; (ii) a 50% undivided interest in the Springerville Common
Facilities; (iii) Springerville Unit 1 and the remaining 50% undivided
interest in Springerville Common Facilities; (iv) Irvington Unit 4 and
related common facilities; and (v) three internal combustion turbines having
a combined net generating capability of 96 MW. See Note 5 of Notes to
Consolidated Financial Statements, Long and Short-Term Debt and Capital Lease
Obligations for additional information on TEP's capital lease obligations.
Substantially all of the utility assets owned by TEP are subject to the
lien of the General First Mortgage and the General Second Mortgage.
Springerville Unit 2, legal title to which is held by San Carlos, is not
subject to such liens.
ITEM 3. -- LEGAL PROCEEDINGS
- -------------------------------------------------------------------------------
TAX ASSESSMENTS
---------------
See Contingencies in Note 7 of Notes to Consolidated Financial
Statements.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------------------
Not Applicable.
PART II
ITEM 5. -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- -------------------------------------------------------------------------------
On January 1, 1998, TEP and UniSource Energy completed a statutory
share exchange, pursuant to which the outstanding common stock of TEP was
exchanged, on a share-for-share basis, for shares of UniSource Energy common
stock.
TEP
---
Prior to the share exchange described above, the common stock of TEP
was traded on the New York and Pacific Stock Exchanges. The following table
sets forth, for the periods indicated, the high and low sale prices of TEP's
common stock on the consolidated tape as reported by Dow Jones. Sale prices
prior to May 20, 1996 have been adjusted to reflect the one-for-five reverse
split of TEP's common stock in May 1996. No dividends were paid on common
stock during such periods.
<TABLE>
<CAPTION>
Market Price per
Share of Common
Quarter Stock
------- ------------------
High Low
---- ---
<S> <C> <C>
1997
----
First $16.75 $14.00
Second 15.38 13.88
Third 18.25 14.38
Fourth 18.19 16.19
1996
----
First $16.88 $14.38
Second 15.00 13.13
Third 17.81 12.25
Fourth 20.75 16.25
</TABLE>
On January 1, 1998, TEP became a wholly-owned subsidiary of UniSource
Energy. As such, TEP's common stock is no longer publicly traded.
UniSource Energy
----------------
The common stock of UniSource Energy is listed on the New York and
Pacific Stock Exchanges, and began trading under the symbol of UNS on January
2, 1998. The closing price of the common stock on the consolidated tape on
February 24, 1998 was $16.875. At February 24, 1998, there were 28,204
shareholders of record of the common stock.
See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Dividends on Common Stock.
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA - UNISOURCE ENERGY AND TEP
- -------------------------------------------------------------------------------
<TABLE>
1997 1996 1995 1994 1993
(In thousands - except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Operating Revenues $729,893 $715,873 $670,569 $691,473 $624,139
Recognition of Prior Period NOLs - Part of
Income Taxes 43,443 88,638 23,282 - -
Income (Loss) from Continuing Operations 83,572 120,852 54,905 20,740 (21,816)
Income (Loss) from Continuing Operations
Per Average Share of Common Stock $2.60 $3.76 $1.71 $0.65 $(0.68)
Shares of Common Stock Outstanding
Average 32,138 32,136 32,138 32,145 32,109
End of Year 32,139 32,139 32,138 32,145 32,145
Book Value per Share $6.75 $4.15 $0.39 ($1.31) ($1.96)
Financial Position
Total Utility Plant - Net $1,935,513 $1,953,904 $1,978,126 $2,007,422 $2,029,764
Investments and Other Property 78,772 69,289 52,116 12,992 62,850
Total Assets 2,634,409 2,568,541 2,563,461 2,730,229 2,742,932
Long-Term Debt 1,215,120 1,223,025 1,207,460 1,381,935 1,416,352
Capital Lease Obligations 890,257 895,867 897,958 922,735 927,201
Common Stock Equity (Deficit) 216,878 133,288 12,488 (42,233) (62,973)
Total Capitalization 2,322,255 2,252,180 2,117,906 2,262,437 2,280,580
Selected Cash Flow Data
Net Cash Flows From Operations (A) $124,390 $151,267 $119,390 $143,616 $89,331
Construction Expenditures (B) 71,420 66,519 59,097 62,599 48,162
Free Cash Flow (A - B) 52,970 84,748 60,293 81,017 41,169
Ratio of Earnings to Fixed Charges 1.39 1.25 1.21 1.10 0.81
<FN>
Note: See Item 7., Management's Discussion and Analysis of Financial Condition and Results of
Operations.
</TABLE>
ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
The following contains information regarding the operations of
UniSource Energy and TEP during 1997 compared with 1996 and 1996 compared
with 1995 and changes in liquidity and capital resources of the Company and
TEP during 1997. Also, management's expectations of identifiable material
trends are discussed herein. TEP is the principal subsidiary of UniSource
Energy and accounts for substantially all of its assets, revenues and net
income. Except as otherwise noted, the following information relates to both
UniSource Energy and TEP.
OVERVIEW
--------
Earnings declined in 1997 relative to 1996 primarily due to the lower
recognition of non-cash income tax benefits in 1997. Net income was $83.6
million in 1997, compared with $120.9 million recorded in 1996 and $54.9
million recorded in 1995. Income tax benefits related to prior period net
operating losses totaled $43.4 million in 1997, $88.6 million in 1996 and
$23.3 million in 1995, accounting for the majority of the fluctuation in
reported net income for the last three years. See Income Tax Position below.
Common stock equity was $216.9 million at year-end, compared to $133.3
million as of December 31, 1996, benefiting from a fourth consecutive year of
profitability.
In addition to the reduction in income tax benefits described above,
items having a one-time effect on earnings resulted in net reductions to
earnings of $2.4 million in 1997 and $6.1 million in 1996. Excluding each of
these one-time items from the periods in which they were recorded, ongoing
net income increased by 11% to $42.6 million in 1997 from $38.3 million in
1996. The following table lists one-time items and compares 1997 operating
results with 1996 results exclusive of these one-time items and the
recognition of NOL carryforward benefits. See Notes 4, 7 and 9 of Notes to
Consolidated Financial Statements for information pertaining to certain of
these items.
1997 1996
--------- ---------
-Thousands of Dollars-
Net Income $83,572 $120,852
One-Time Items:
Effects on Operating Income:
Consulting Fees to New Business 6,315 0
Taxes Other Than Income Taxes (1) 0 7,331
Voluntary Severance Plan Expense - Net 2,933 10,555
Effects on Other Income:
Losses Related to Equity Investments in 7,758 0
New Businesses
Other Income - Interest Refund - Net (2,766) 0
Other Income - Reversal of Loss Provision (10,154) (8,472)
(2)
Other Income - Other (2) 0 (1,064)
Interest Expense - Other (1) 0 1,880
Estimated Income Taxes Associated with One-Time (1,651) (4,130)
Items (3) -------- --------
Net Adjustment for One-Time Items 2,435 6,100
NOL Carryforward Benefits (43,443) (88,638)
-------- --------
Total Adjustments to Net Income (41,008) (82,538)
-------- --------
Net Income, as Adjusted for One-Time Items and $42,564 $38,314
NOL Carryforward Benefits ======== ========
(1) Adjustments related to contested sales tax assessments.
(2) Adjustments related to TEP's non-energy related subsidiaries.
(3) Calculated based on composite income tax rate (state and federal)
of 40.4%.
Despite improvements in financial performance, the Company's and TEP's
financial prospects continue to be subject to significant regulatory,
economic, and other uncertainties, some of which are beyond the Company's and
TEP's control. These uncertainties include the extent to which TEP, due to
continued high financial and operating leverage, can alter operations and
reduce costs in response to industry changes or unanticipated economic
downturns. The Company's and TEP's success will depend, in part, on TEP's
ability to contain the costs of serving retail customers and the level of
sales to such customers. Until the uncertainties surrounding the
introduction of retail competition in Arizona are resolved, predicting the
level of TEP's future energy sales and the composition of its future revenues
is more difficult than projecting for a fully regulated market. However, it
is likely that some form of retail competition will exist in the next five
years. See Competition, Retail below. TEP may be required to unbundle
segments of its services. In a deregulated environment, revenues from sales
of energy may become less certain although revenues from transmission and
distribution services will likely continue to grow. Even in a deregulated
environment, TEP will continue to benefit from the anticipated population and
economic growth in the Tucson area through increased revenues from
distribution services.
The Company is addressing the uncertainties discussed above and is
positioning itself to benefit from the changing regulatory environment. The
Company is implementing enhanced cost measurement and management techniques,
re-engineering functions at TEP, extending contracts for large wholesale and
retail customers, and developing new entities to provide energy services to
markets beyond TEP's retail service territory. See Utility Operations, Sales
for Resale; Fuel Supply, Coal; Rates and Regulation, Rate Proposal Before the
ACC; and Investments in Energy-Related Ventures.
During 1997, the Company made significant progress in the
implementation of its financial strategy to extend maturities of long-term
debt and letters of credit and to reduce its exposure to variable interest
rates. TEP refinanced $276 million of long-term variable rate debt
obligations at fixed rates in 1997. As a consequence, TEP's balance of
variable rate debt supported by letters of credit fell from $805 million at
December 31, 1996 to $529 million as of December 31, 1997. With the
negotiation of a new bank Credit Agreement in 1997 to replace the MRA, TEP
extended its revolving credit availability to 2002 and extended expiration
dates on letters of credit supporting $429 million in variable rate debt
obligations to 2002. Long-term debt obligations totaling $192 million are
currently scheduled to mature between 1999 and 2003. TEP plans to refinance
a substantial portion of these obligations during 1998. See Financing
Developments, TEP Financing Authority, below.
Despite the improvements described above, the Company's and TEP's
capital structure remains highly leveraged. Although TEP was able to
refinance and extend the maturities of certain debt obligations at favorable
rates and terms in 1997, there can be no assurances that continued access to
the capital markets at such rates and terms will be available. Despite the
reduction in variable rate debt obligations in 1997, TEP's earnings and cash
flow would still be affected by changes in interest rate levels on its
remaining variable rate debt.
Dividend payment restrictions contained in certain of TEP's debt
agreements currently prohibit dividend payments from TEP to UniSource Energy,
thereby limiting cash flow at UniSource Energy and its ability to pay
dividends. See Dividends on Common Stock below.
During the next twelve months, TEP expects to be able to fund
operating activities and construction expenditures with internal cash flows,
existing cash balances, and, if necessary, borrowings under the Revolving
Credit. Net cash flows from operating activities were $124.4 million in
1997, $151.3 million in 1996 and $119.4 million in 1995. After capital
expenditures, scheduled debt maturities and payments to retire capital lease
obligations, net cash flows available for other investing and financing
activities were $38.1 million in 1997, $36.9 million in 1996, and $25.9
million in 1995. As of February 24, 1998, cash balances, including cash
equivalents for UniSource Energy, were approximately $131 million, of which
$89 million was held by TEP and its consolidated subsidiaries.
COMPETITION
- -----------
WHOLESALE
TEP competes with other utilities, marketers and independent power
producers in the sale of electric capacity and energy in the wholesale
market. TEP's prices for wholesale sales of capacity and energy, generally,
are not permitted to exceed rates determined on a cost of service basis. In
the fall of 1997, TEP applied for and was granted a tariff to sell at market-
based rates. This tariff permits TEP to meet market competition. In the
current market, wholesale prices are substantially below costs determined on
a fully allocated cost of service basis, but, in all instances, wholesale
sales have been made at prices which 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 may remain depressed for at
least the next 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 in the southwestern United States, the availability and prices of
natural gas and oil, spot energy prices and transmission access. In
addition, the Energy Policy Act of 1992 has promoted increased competition in
the wholesale electric power markets by encouraging the participation of
utility affiliates, independent power producers and other non-utility
participants in the development of power generation.
The FERC issued two orders pertaining to transmission access in April
1996. FERC Order No. 888, among other things, requires all public utilities
that own, control, or operate interstate transmission facilities to offer
transmission service to others under a single tariff that incorporates
certain minimum terms and conditions of transmission service established by
the FERC. This tariff must also be used by public utilities for their own
wholesale market transactions. Transmission and generation services for new
wholesale service are to be unbundled and priced separately. FERC Order No.
889 requires transmission service providers to establish or participate in an
open access same-time information system (OASIS) that provides information on
the availability of transmission capacity to wholesale market participants.
The order also establishes standards of conduct that are designed to prevent
employees of a public utility engaged in marketing functions from obtaining
preferential access to OASIS-related information or from engaging in unduly
discriminatory business practices. TEP is in compliance with the
requirements of FERC Orders 888 and 889.
TEP and several other electric utilities located in the southwestern
United States have recently begun to investigate the feasibility of forming
an independent system operator for the region. It is presently contemplated
that such an organization, if formed, would be responsible for ensuring
transmission reliability and nondiscriminatory access to the regional
transmission grid. All of the major transmission owners in the Southwest, as
well as a number of users of the transmission system, are involved in the
feasibility study. Three sets of public meetings were held in order to
obtain public input to the study. The initial feasibility study was
completed in September 1997 and the participants have begun the detailed
developmental work. The formation of an independent system operator would be
subject to approval by the FERC and state regulatory authorities in the
region. The financial aspects of forming an independent system operator,
including the potential effects on TEP's future results of operations, will
be examined as part of the development work.
RETAIL
Under current law, TEP is not in direct competition with any other
regulated electric utility for electric service in TEP's retail service
territory. However, TEP does compete against gas service suppliers and
others who may provide energy services which would be substitutes for, or
permit bypass of, TEP's services. In addition, in December 1996, the ACC
adopted rules that, if implemented, require a phase-in of retail electric
competition in Arizona over a four year period beginning January 1, 1999.
TEP actively markets energy and customized energy-related services to
meet customer needs. TEP has to date lost no customers to self-generation in
part because of such efforts. For example, TEP's two principal mining
customers, which provide approximately 9% of TEP's total annual revenues from
retail customers, each have executed new contracts and/or amendments that
included, among other things, price reductions, term extensions, and the
provision of interruptible service. Contracts with TEP's two principal
mining customers are scheduled to expire in March 2001 and January 2003.
Early terminations of the contracts by mining customers require at least one
and up to two years prior notice. No such notices have been received.
In December 1996, the ACC voted to adopt certain rules on retail
electric competition. The rules, if implemented, would require each
"Affected Utility" (TEP, APS, Citizens Utilities Company, and several
electric cooperatives) to open its retail service area to competing electric
service providers on a phased-in basis over the period 1999 to 2003.
Beginning no later than January 1, 1999, retail customers representing at
least 20% of each Affected Utility's 1995 peak demand would be eligible to
choose their electric service provider from companies certificated by the
ACC. Beginning no later than January 1, 2001, retail customers representing
at least 50% of each Affected Utility's 1995 peak demand would be eligible to
choose their service provider. All remaining retail customers would then be
eligible to choose from certificated service providers by January 1, 2003.
It is currently unclear which customers would make up those eligible during
the transition years. Electric service providers would include Affected
Utilities as well as other entities (including power marketers and out-of-
state utilities) that apply for and receive a certificate of convenience and
necessity from the ACC. Under the rules, Affected Utilities would be
required to provide distribution wheeling services (i.e., retail wheeling) at
rates approved by the ACC in order to facilitate sales by competing energy
providers. Such wheeling services would involve the transmission of energy
produced by other entities over TEP's transmission and distribution system to
consumers located in TEP's present retail service area. While retail
wheeling would expose TEP's service area to increased competition for energy
sales, it would also open additional retail markets into which TEP may sell
its electric power, since each of the Affected Utilities would be eligible to
offer electric service to customers of other certificated entities within
Arizona. Until such time as the ACC determines that retail competition has
been substantially implemented, each Affected Utility would also be required
to provide standard offer bundled service equivalent to the services
currently being provided at regulated rates to all consumers located in their
current retail service areas. Participation in competitive retail markets by
other electric utilities which are not regulated by the ACC, such as the Salt
River Project and certain municipal utilities, would be permitted, under the
ACC's rules, on a similar reciprocal basis (i.e., these utilities would have
to allow their service territories to be similarly open to competing service
providers), pursuant to an intergovernmental agreement with the ACC.
The rules, as adopted by the ACC, specify that the ACC would allow the
recovery of unmitigated stranded costs by Affected Utilities. Stranded cost
is defined in the rules as the net difference between the value of prudent
jurisdictional assets and obligations under traditional regulation and the
market value of those assets and obligations in a competitive retail market.
In order to recover stranded costs, utilities would have to demonstrate to
the ACC that they have taken every feasible, cost-effective measure to
mitigate or offset stranded costs, and utilities would have to file estimates
of unmitigated stranded costs with the ACC which are fully supported by
analyses and records of market transactions undertaken by willing buyers and
sellers. Furthermore, Affected Utilities would have to seek ACC approval of
distribution charges or other means of recovering unmitigated stranded costs
from customers who reduce or terminate service as a direct result of retail
competition. The rules specify that other issues related to the analysis and
recovery of stranded costs would be examined by a working group following
adoption of the rules.
Pursuant to the rules, working groups were formed to analyze various
issues related to retail competition. Each working group consisted of
members representing a wide variety of interests including the ACC Staff,
consumers, Affected Utilities, and potential new service providers. Separate
working groups were established to investigate issues related to the
quantification and recovery of stranded costs, the unbundling of utility
services and rates, the maintenance of system reliability and safety, the
methods to be used in determining consumer participation during the early
phase-in periods, and certain legal issues related to the rules. Reports by
the working groups have been delivered to the ACC.
In January 1998, TEP filed with the ACC its position regarding stranded
cost recovery. TEP believes that TEP, as well as other Affected Utilities,
should have the opportunity and right to recover all of their stranded costs
and that the most appropriate method of defining stranded costs would be to
calculate the difference between future revenues under traditional regulation
and future revenues in a competitive market.
Hearings commenced February 9, 1998 to resolve generic issues relating
to stranded cost recovery. TEP, as well as other Affected Utilities, the
Residential Utility Consumer Office, the ACC staff, and various intervenors
are participating in the hearings. Various proposals are being considered for
quantifying unmitigated stranded costs, including the methods used to identify
and value jurisdictional assets and obligations. The ACC may also consider
permitting divestiture of generation assets as a means of quantifying stranded
costs. Until specific guidelines for such identification and valuation have
been adopted by the ACC, TEP believes that any estimate of unmitigated stranded
costs would be highly speculative.
In February 1997, TEP filed an appeal of the ACC order adopting retail
electric competition rules in the Arizona Superior Court. To date, no final
judgments have been entered by the Court. At the present time, TEP is unable
to predict the outcome of the Superior Court appeal or the effects such
rules, in their present form, would have on future results of operations.
In 1996, legislation was passed by the Arizona Legislature requiring
the establishment of a joint legislative study committee on electric industry
competition. This committee was charged with studying and making
recommendations on a wide variety of issues related to electric industry
competition. An advisory committee on electric industry competition was also
created, consisting of members representing electric consumers, electric
utilities, various State offices and agencies, and other interested parties.
Three subcommittees of the advisory committee were formed for purposes of
evaluating the timing of retail competition, reviewing tax issues related to
retail competition and identifying specific legislative actions necessary to
implement retail competition. Reports have been issued and are currently
under consideration by the Legislature.
In January 1998, legislation was proposed before the Arizona
Legislature regarding the implementation of electric industry competition in
Arizona. This bill would require the introduction of customer choice to 20%
of each utility's retail load by December 31, 1998 and to all utility retail
customers by December 31, 1999.
TEP cannot predict the outcome of the proposed legislation or whether
other initiatives on industry restructuring will be proposed by the ACC or
the Arizona Legislature. However, TEP believes that certain matters
contained in the ACC's current rules on retail competition may require
legislative changes, while other matters may require constitutional
amendments. Additionally, several federal initiatives regarding retail
electric competition have been introduced in Congress which, if passed, could
modify, augment or preempt the actions taken by the ACC or the Arizona
Legislature. TEP will continue to assess the likely impact on TEP of the
ACC's rules on retail competition, proposed legislation on retail
competition, and other potential market reforms. At the present time TEP is
unable to predict the ultimate impact of increased retail competition on
future results of operations. See Accounting for the Effects of Regulation
below, and Note 1 of Notes to Consolidated Financial Statements, Nature of
Operations and Summary of Significant Accounting Policies, Accounting for the
Effects of Regulation for a discussion of the potential impact of increased
competition on the Company's accounting policies. See Tax Exempt Local
Furnishing Bonds, below for a discussion of the potential impact of increased
competition on TEP's tax-exempt bond status.
INVESTMENTS IN ENERGY-RELATED VENTURES
- --------------------------------------
In the Consolidated Balance Sheet and Consolidated Statement of Income
for UniSource Energy as of December 31, 1997, investments in the energy-
related ventures of MEH and its subsidiaries (included in Investments and
Other Property) comprised less than 1% of total assets, while the net loss
related to such investments reduced consolidated net income by 6.5% in 1997.
Depending on the nature of future investment opportunities, UniSource Energy
expects to make additional investments in these subsidiaries and in other
energy-related ventures. Over time, investments in energy-related ventures
may have a material impact on UniSource Energy's future cash flow and
profitability. Pursuant to the ACC order issued in November 1997 allowing
the formation of a holding company, the capitalization (debt and equity) of
the subsidiaries which are the sister companies to TEP may not exceed 30% of
TEP's capitalization unless otherwise approved by the ACC.
RESULTS OF OPERATIONS
---------------------
In 1997, net income was $83.6 million or $2.60 per average share of
common stock compared with $120.9 million or $3.76 per average share of
common stock in 1996, and $54.9 million or $1.71 per average share of common
stock in 1995.
The decline in earnings in 1997 resulted primarily from the lower
recognition of non-cash income tax benefits related to prior period net
operating losses. Excluding the impact of the recognition of tax benefits
and other one-time adjustments, on-going net income for 1997 was $42.6
million or $1.32 per share compared with $38.3 million or $1.19 per share in
1996.
TEP accounts for substantially all of UniSource Energy's assets,
revenues, and net income. The following discussion is related to TEP's
utility operations, unless otherwise noted.
RESULTS OF UTILITY OPERATIONS
Sales and Revenues
Retail sales and revenues are affected principally by price changes,
consumption and growth factors. In 1997, customer growth had the greatest
impact on the increase in retail sales and revenues.
KWh sales to retail customers increased by 2.4% in 1997 compared to
1996. The kWh sales increase resulted from an increase in the average number
of retail customers and increased sales to mining and residential customers.
The average number of retail customers grew by 2.3% to 313,755 in 1997.
Usage by mining customers increased in 1997 with the addition of service to a
reactivated mine.
KWh sales to retail customers increased by 5.1% in 1996 over 1995. The
increase resulted from a 3.0% increase in the average number of retail
customers, increased energy consumption by industrial customers and warmer
temperatures in 1996 compared with 1995.
Revenues from sales to retail customers were 2.1% greater in 1997 over
1996 as a result of the higher kWh sales discussed above. The impact of
lower average prices to large mining customers from contract renegotiations
and extensions somewhat offset the effects of higher KWh sales. In 1996,
revenues from sales to retail customers increased by 6.4%, benefiting from
the increased KWh sales discussed above, as well as the rate increase allowed
under the 1996 Rate Order.
TEP makes sales for resale on both a firm and interruptible basis to
the extent capacity is not needed for providing energy to TEP's retail
customers. See Utility Operations, Sales for Resale. Rates for economy
energy sales are substantially below rates determined on a fully allocated
cost of service basis, but, in all instances, rates exceed the level
necessary to recover fuel and other variable costs. KWh sales for resale
increased by 2% in 1997 compared with 1996 while revenues from sales for
resale increased by 16% for the same period, driven by higher market prices
in the wholesale energy market. Factors contributing to the higher market
prices include higher natural gas prices, increased demand due to warmer
temperatures in the southwestern United States in the third quarter of 1997,
WSCC imposed restrictions on the Pacific Intertie (limiting energy
availability from hydro-electric resources in the Northwest in the third
quarter of 1997), and a reduction in regional generating capacity resulting
from planned and forced outages of generating facilities in the Southwestern
United States in the first half of 1997.
In 1996, KWh sales for resale increased by 46% while the related
revenues increased by 11% over 1995. Revenues did not increase
proportionately with the increase in kWh sales with the loss of demand
revenues attributable to the expiration of a firm power sale agreement with
Nevada Power Company in December 1995.
Non-cash revenue from the Amortization of the MSR Option Gain
Regulatory Liability was $11.9 million lower in 1997 than in 1996. This
regulatory liability was fully amortized as of May 1997.
Operating Expenses
Fuel and Purchased Power expense increased in 1997 relative to 1996
because of increased energy requirements to meet increased kWh sales. Fuel
and Purchased Power expense increased in 1996 over 1995 because of increased
energy requirements to meet increased kWh sales and a one-time $12.2 million
reduction to fuel expense recorded in 1995. This one-time non-cash reduction
to fuel expense was related to the satisfaction of certain fuel contract
provisions. Excluding deferred fuel expenses and the one-time $12.2 million
reduction to fuel expenses in 1995, the average cost of fuel per kWh
generated was 1.77 cents, 1.83 cents, and 1.77 cents for 1997, 1996, and
1995, respectively. In 1997, fuel expense included $1.9 million related to
the amortization of the $50 million contract termination fee paid to TEP's
major coal supplier. See Note 2 of Notes to Consolidated Financial
Statements, Rate Matters, Springerville Coal Contract Termination Fee.
Expenses related to consulting fees caused Other Operations expense to
increase in 1997 compared with 1996. Such consulting fees consisted of
payments to NEV made prior to the exercise in September 1997 of the option
to acquire a 50% interest in NEV.
Depreciation and Amortization expense decreased in 1997 relative to
1996 with the completion in January 1997 of a three year amortization (at a
rate of $14 million per year) of Springerville Unit 2 rate synchronization
costs established in the 1994 Rate Order, as well as an extension of the
depreciable life for pollution control facilities as required by TEP's 1996
Rate Order. Depreciation and Amortization expense increased in 1996 compared
to 1995 due to the amortization of additional Springerville Unit 2 rate
synchronization costs to be recovered over a three year period pursuant to
the 1996 Rate Order. See Note 2 of Notes to Consolidated Financial
Statements, Rate Matters, 1996 Rate Order.
Taxes Other Than Income Taxes decreased in 1997 versus 1996 because of
a charge of $7.3 million in the third quarter of 1996 related to a court
ruling on contested sales tax assessments. Lower property taxes in 1997 also
contributed to the variance. See Note 7 of Notes to Consolidated Financial
Statements, Tax Assessments.
Voluntary Severance Plan Expense of $2.9 million in 1997 represents VSP
expense related to post-retirement benefits other than pensions recorded in
the first quarter. The $10.6 million net expense in 1996 reflects
implementation of TEP's Voluntary Severance Plan in the second quarter of
1996 and related pension settlements. The VSP was accepted by approximately
200 employees, or 15% of the total workforce.
Income tax expense included in Operating Expenses increased in 1997
compared with 1996 related to an increase in pre-tax operating income, net of
interest expense.
Other Income (Deductions)
Income Tax benefits included in Other Income (Deductions) decreased in
1997 as a result of decreased recognition of prior period NOL benefits in
1997. The recognition of a greater amount of prior period NOL benefits also
caused such income tax benefits to be higher in 1996 than in 1995. The
Company and TEP recognized $43.4 million, $88.6 million, and $23.3 million of
NOL benefit in 1997, 1996, and 1995, respectively. The recognition of these
benefits results from a revision in the estimated amount of NOLs that the
Company and TEP believe are likely to be used on future income tax returns. A
significant factor, among others, considered in estimating such amount is the
three year historical average book income before taxes. In future periods
when such NOLs are used on tax returns, the income tax expense shown on the
Company's and TEP's Consolidated Statements of Income will not be reduced to
reflect such utilization.
As of the end of December 31, 1997, on a cumulative basis, the Company
and TEP had recognized in their income statement the amount of prior period
NOL benefit that the Company and TEP expect to use on future income tax
returns. Additional amounts of prior period NOL benefit which may be
recognized in the future in the Company's and TEP's income statement are at
present indeterminate due to the interplay of open tax years for which tax
assessments may be made and varying expiration dates of federal and state NOL
carryforwards. See Income Tax Position below.
A Reversal of Loss Provision in the amount of $10.2 million was
recorded in the second quarter of 1997 as a result of the dissolution of
certain subsidiaries which formed part of TEP's former investment operations.
A Reversal of Loss Provision of $8.5 million was recorded in the third
quarter of 1996. The 1996 Reversal of Loss Provision relates to the
satisfaction by TEP's non-energy related subsidiaries of approximately $8.5
million of short-term debt obligations through the assignment of certain
finance receivables held by such subsidiaries. See Notes 4 and 5 of Notes to
Consolidated Financial Statements, Consolidated Subsidiaries, TEP
Subsidiaries and Long and Short-Term Debt and Capital Lease Obligations,
Short-Term Debt.
Other Income (Deductions) was lower in 1997 than in 1996 resulting from
equity in losses from new business investments.
Interest Expense
Interest Expense on Long-Term Debt increased in 1997 over 1996 as a
result of the refinancing of certain variable and fixed rate debt obligations
with unsecured fixed rate debt obligations, having later maturity dates, at
higher interest rates (see Financing Developments, TEP Sale of Bonds, below),
as well as higher average interest rates on TEP's variable rate debt
obligations. The weighted average interest rate on TEP's tax-exempt variable
rate debt obligations was 3.7% in 1997 and 3.5% in 1996, excluding letter of
credit fees.
Other Interest Expense was lower in 1997 than in 1996 due to $1.9
million in interest expense incurred in the third quarter of 1996 related to
the 1996 contested sales tax assessment of $7.3 million.
ACCOUNTING FOR THE EFFECTS OF REGULATION
----------------------------------------
TEP prepares its financial statements in accordance with the provisions
of FAS 71. This statement requires a cost-based rate-regulated utility to
reflect the effect of regulatory decisions in its financial statements. In
certain circumstances, FAS 71 requires that certain costs and/or obligations
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.
Therefore, the Company's and TEP's Consolidated Balance Sheets at December
31, 1997 and 1996, contain certain line items (for example, Deferred Debits -
Regulatory Assets, Accumulated Deferred Investment Tax Credits Regulatory
Liability, MSR Option Gain Regulatory Liability, Emission Allowance Gain
Regulatory Liability, and Other Regulatory Liabilities) solely as a result of
the application of FAS 71. In addition, a number of line items in the
Company's and TEP's Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 also reflect the application of FAS 71.
If at some point in the future TEP determines that all or a portion
of its regulated operations no longer meet the criteria for continued
application of FAS 71, TEP would be required to adopt the provisions of FAS
101 for that portion of the operations for which FAS 71 no longer applied.
As of the date of adoption of FAS 101, TEP would be required (unless
alternative regulatory recovery mechanisms were provided) to write off its
regulatory assets and liabilities and would be precluded in subsequent
periods from creating regulatory assets by deferring incurred costs expected
to be recovered through rates in the future. Based on the balances of the
regulatory assets and liabilities at December 31, 1997, TEP estimates that
future adoption of FAS 101 if applied to all of the regulated operations,
would result in an extraordinary loss of $181 million, which includes a
reduction for the related income tax benefit of $100 million. Cash flows
would not be affected by the adoption of FAS 101.
At the present time, TEP recovers the costs of its plant assets through
its regulated revenues. If in the future TEP discontinues accounting
according to the provisions of FAS 71, TEP would also need to consider
whether the markets in which it is then selling power will allow recovery of
the costs of its plant assets. If at that time, market prices are not
expected to allow TEP to recover the costs of its plant assets, additional
write-downs may be required in accordance with the provisions of FAS 121.
TEP is presently unable to predict the amounts, if any, of potential future
write-downs attributable to the provisions of FAS 121 under such
circumstances.
As noted in Competition, Retail above, in December 1996, the ACC voted
to adopt rules on retail electric competition in Arizona. However, the ACC
has not yet adopted specific guidelines for quantifying unmitigated stranded
costs, including the methods used to identify and value jurisdictional assets
and obligations. In February 1998 the ACC held hearings regarding stranded
costs, including, but not limited to, comparisons of methods of computation
of stranded costs and the appropriate level of stranded cost for which
recovery should be authorized. The hearing officer is expected to issue a
recommended order in the second quarter of 1998. Following the issuance of
the recommended order, the ACC will determine, following an open meeting,
whether to adopt the recommended order in whole or in part. The Company is
unable to predict whether such an order would provide guidance as to the
specific stranded costs allowable as recoverable by TEP, or whether an
additional set of hearings for individual companies will be needed to
determine the amounts recoverable by TEP. In addition, in January 1998,
legislation was proposed before the Arizona Legislature regarding the
introduction of electric industry competition in Arizona. TEP cannot predict
the outcome of the proposed legislation or whether the ACC and the Arizona
Legislature will propose other initiatives on industry restructuring. TEP,
in reliance on previous rate orders, believes that it will recover the full
costs of its investments in utility plant assets and regulatory assets. The
hearing officer's recommended order or the order as finally adopted by the
ACC may include language that precludes TEP from continuing to apply FAS 71
to the generation portion of its operations. If less than full recovery of
stranded costs is provided, significant write-offs of assets may occur
(relating to adoption of FAS 101 and application of FAS 121 as described
above). Approximately 65% of the regulatory assets described in Note 1 of
Notes to the Consolidated Financial Statements, Accounting for the Effects of
Regulation relate to the generation portion of TEP's operations.
Further, in response to legislative and other measures being developed
in various states to deregulate the electric generation business, the Company
is aware that the SEC and the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) have been reviewing the appropriateness of
electric utilities continuing to account for generation transactions in
accordance with FAS 71 in states where such deregulation is beginning to
develop. In general, the EITF concluded that utilities are no longer subject
to FAS 71 for the generation portion of their business when a deregulation plan
is in place and its terms are known. The EITF also concluded that utilities can
continue to carry previously recorded regulatory assets (including those
related to generation) on their balance sheets if regulators have provided a
regulated cash flow stream to recover the cost of their assets. The application
of the EITF consensus to specific factual circumstances remains unclear.
Based on the consensus issued by the EITF in May and July 1997, at
some point in the future, TEP may be unable to continue to apply FAS 71 to
the generation portion of the business, even if TEP believes it will recover
the full amount of its costs under the ACC competition phase-in plan.
The Company and TEP are unable to predict the outcome of these matters.
DIVIDENDS ON COMMON STOCK
-------------------------
UniSource Energy
The Company's ability to pay dividends is dependent upon cash flow from
its subsidiaries, TEP and MEH. TEP comprises substantially all of UniSource
Energy's assets. TEP is currently precluded by restrictive covenants in
certain debt agreements from declaring or paying dividends. No dividend on
common stock has been declared or paid by TEP since 1989. Until such time as
TEP is able to pay dividends to UniSource Energy, it is unlikely that
UniSource Energy would declare and pay dividends to holders of its Common
Stock.
TEP
So long as certain series of First Mortgage Bonds (aggregating $184
million in principal amount) are outstanding, the payment of dividends on TEP
Common Stock is prohibited if certain cash flow coverage and retained
earnings tests are not met. The cash flow coverage test would prevent TEP
from paying dividends on its Common Stock until such time as its cash flow
coverage ratio, as defined therein, is greater or equal to a ratio of 2 to 1,
and the retained earnings test would permit dividend payments so long as TEP
has positive retained earnings. As of December 31, 1997, TEP had a cash flow
coverage ratio in excess of 3 to 1 but did not meet the retained earnings
test as the accumulated deficit was $422 million. 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. In
order for TEP to pay a dividend before such maturity date, TEP would need to
have positive retained earnings or redeem all outstanding First Mortgage
Bonds of each series that contain such covenants or amend the supplemental
mortgage indentures pertaining to such series of First Mortgage Bonds. Such
an amendment would require approval by holders of 75% of all First Mortgage
Bonds.
During 1998, TEP plans to refinance or retire a substantial portion of
the First Mortgage Bonds that currently prohibit the payment of dividends.
See Financing Developments, TEP Financing Authority, below. TEP may also
seek bondholder approval to remove or revise covenants contained in the
supplemental indentures that currently prohibit the payment of dividends.
TEP's bank Credit Agreement allows for the payment of dividends so long
as TEP maintains compliance with the agreement and meets its financial
covenants, including a covenant which requires TEP to maintain a minimum
level of net worth. As of December 31, 1997, the required minimum net worth
was $166.4 million. See Additional Restrictive Covenants, below. As of
December 31, 1997, TEP was in compliance with the terms of the Credit
Agreement.
Pursuant to the ACC Holding Company Order, until such time as TEP's
equity ratio equals 37.5% of total capital (excluding capital lease
obligations), TEP may not pay dividends to UniSource Energy in excess of 75%
of its earnings. As of December 31, 1997, TEP's equity ratio was 15%.
In addition to such restrictive covenants, the Federal Power Act states
that dividends shall not be paid out of funds properly included in the
capital account. It is unclear whether such provisions of the Federal Power
Act restrict TEP from paying dividends.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH FLOWS
UniSource Energy and TEP
Due to growth in retail sales and cost containment efforts, net cash
flows from continuing operations were more than sufficient, in all three
years from 1995 to 1997, to cover all construction expenditures and debt
maturities.
Net cash flows from operating activities decreased in aggregate by $27
million in 1997 compared with 1996, after giving effect to a $40 million
payment to a major coal supplier in 1997 as part of a contract termination
fee. See Note 2 of Notes to Consolidated Financial Statements, Rate Matters,
Springerville Coal Contract Termination Fee. Excluding this contract
termination fee, net cash flows from operating activities increased by $13
million to $164 million from $151 million in 1996. This increase resulted
from a $27 million increase in cash receipts from retail and wholesale
customers and a $12 million decrease in wages paid (net of amounts
capitalized). This decrease in wages paid was related to the implementation
of TEP's Voluntary Severance Plan in the second quarter of 1996. These
increases to net cash flows were partially offset by a $24 million increase
in fuel and purchased power payments and $15 million in cash received from
the sale of emission allowances in 1996.
Net cash outflows from investing activities were relatively unchanged
in 1997 compared to 1996 as construction expenditures increased by $5
million, while investments in joint ventures decreased by $4 million.
Net cash outflows from financing activities increased in aggregate by
$3 million in 1997 compared with 1996. Despite a significant amount of debt
issuance activity in 1997, the majority constituted refinancing of existing
debt, with only $23 million in net new funds. See Financing Developments
below. TEP also repaid the outstanding principal balance of $31 million on
its Renewable Term Loan in 1997. Payments toward the retirement of capital
lease obligations decreased by $23 million due primarily to a scheduled
reduction in lease payments on Irvington Unit 4. Lease payments on Irvington
Unit 4 totaled $8.5 million in 1997 and $28.0 million during 1996. Future
scheduled lease payments on Irvington Unit 4 average approximately $13
million per year through the end of the lease term in 2011.
As a result of activities described above, cash and cash equivalents
increased by $16 million or 12% from the 1996 year-end balance of $130
million to the 1997 year-end balance of $146 million. The Company's
consolidated cash balance including cash equivalents at February 24, 1998,
was approximately $131 million. Of this amount, $89 million was held by TEP
and its wholly-owned subsidiaries. Cash balances are invested in investment
grade, money-market securities with an emphasis on preserving the principal
amounts invested.
TEP
During 1998, TEP expects to generate sufficient internal cash flows to
fund its operating activities and construction expenditures. However, TEP's
cash flows are subject to variation due to changes in wholesale revenues,
changes in short-term interest rates, and other factors. For example, an
increase in short-term interest rates of 100 basis points (1%) would result
in an approximate $5 million increase in annual interest payments at current
variable debt levels. If cash flows were to fall short of expectations, TEP
would rely on existing cash balances and, if necessary, borrowings under the
Revolving Credit.
UniSource Energy
During 1998 and beyond, the Company's sources of cash will be primarily
dividends from TEP (when allowed) and proceeds from the sale of securities.
Potential cash requirements may include funds to provide to subsidiaries,
funds to meet debt service obligations, and funds for the payment of
dividends to shareholders. See Dividends on Common Stock and Financing
Developments, UniSource Energy for details on these sources and uses of
funds.
FINANCING DEVELOPMENTS
TEP Sale of Bonds
In April 1997, the City of Farmington, New Mexico issued $80.4 million
of Pollution Control Revenue Bonds for the benefit of TEP. The net proceeds
made available to TEP were used in June 1997 to redeem $47.9 million
principal amount of previously issued 6.25% bonds that would have matured in
2003 and $32.5 million principal amount of previously issued 6.10% bonds that
would have matured in 2007. The new bonds, which are unsecured, bear
interest at 6.95% and mature in 2020. In addition to extending maturities,
this transaction eliminated sinking fund requirements under the previously
issued bonds and resulted in the retirement of $32.5 million in
collateralizing First Mortgage Bonds.
In April 1997, the Coconino County, Arizona Pollution Control
Corporation issued $36.7 million of Pollution Control Revenue Bonds for the
benefit of TEP. The net proceeds loaned to TEP were used, in part, to
redeem, in June 1997, $16.7 million principal amount of previously issued
variable rate bonds that would have matured in 2031 and the remaining portion
is being used to fund $20 million of construction costs of additional
pollution abatement facilities at Navajo Generating Station. The new bonds,
which are unsecured, bear interest at 7.125% and mature in 2032. The $16.7
million of previously issued bonds redeemed in this transaction were backed
by a letter of credit expiring in April 1999, which was collateralized by
$18.3 million aggregate principal amount of First Mortgage Bonds.
In April 1997, the Coconino County, Arizona Pollution Control
Corporation issued $14.7 million of Pollution Control Revenue Bonds for the
benefit of TEP. The net proceeds loaned to TEP were used in June 1997 to
redeem $14.7 million principal amount of previously issued variable rate
bonds that would have matured in 2031. The new bonds, which are unsecured,
bear interest at 7.00% and mature in 2032. The $14.7 million of previously
issued bonds redeemed in this transaction were backed by a letter of credit
expiring in April 1999, which was collateralized by $16.1 million aggregate
principal amount of First Mortgage Bonds.
In October 1997, the Industrial Development Authority of the County of
Pima, Arizona issued $247.5 million of Industrial Development Revenue Bonds
for the benefit of TEP. The net proceeds loaned to TEP were used in November
1997, to redeem $245 million principal amount of previously issued variable
rate bonds that would have matured between 2018 and 2025 and to finance
improvements to TEP's lower voltage electric transmission and distribution
system in Pima County, Arizona. The new bonds, which are unsecured, were
sold in three series: Series A ($22.5 million) bears interest at 6.10% and
matures in 2025; Series B ($150 million) and Series C ($75 million) bear
interest at 6.00% and mature in 2029. The previously issued bonds redeemed
in this transaction were backed by letters of credit expiring between 2000
and 2002. One of these letters of credit was collateralized by $20.7 million
aggregate principal amount of First Mortgage Bonds.
TEP Bank Credit Agreements
In February 1997, TEP repaid the outstanding balance of $31 million
under the Renewable Term Loan under the MRA. In December 1997, the MRA was
replaced with a new bank Credit Agreement (described below). Upon
termination of the MRA, a release of lien was obtained for Springerville Unit
2, title to which is held by San Carlos. Second Mortgage Bonds ($50 million
aggregate principal amount) held as collateral under the MRA were also
returned to TEP.
In December 1997, TEP entered into a new $544 million bank Credit
Agreement to replace the credit facilities provided under the MRA. The new
Credit Agreement consists of a $100 million Revolving Credit Facility for
general corporate purposes and a $444 million Letter of Credit Facility to
support $428.6 million aggregate principal amount of tax-exempt variable rate
debt obligations. The facilities mature on December 30, 2002 and are secured
by Second Mortgage Bonds ($544 million aggregate principal amount). The
Credit Agreement contains certain financial covenants, including interest
coverage, leverage and net worth tests. As of December 31, 1997, TEP was in
compliance with such financial covenants. See Restrictive Covenants below.
Borrowings, if any, under the Revolving Credit Facility bear interest
at a variable rate consisting of a spread over LIBOR or an alternate base
rate. The spread is based upon a pricing grid tied to the credit rating then
in effect on TEP's senior secured debt. The annual commitment fee payable on
the unused portion of the Revolving Credit Facility, as well as the fee
payable on the Letter of Credit Facility, are also determined based upon
TEP's credit ratings. At December 31, 1997, the commitment fee equaled
0.375% per annum, while the letter of credit fee (excluding LOC fronting fees
of 0.125%) and applicable LIBOR spread equaled 1.625% per annum. TEP had no
borrowings outstanding under the Revolving Credit Facility at December 31,
1997.
TEP Financing Authority
TEP obtained authority from the ACC in August 1997 to refinance up to
$450 million of tax-exempt variable rate debt obligations. As described
above in Sale of Bonds, TEP refinanced $245 million in tax-exempt variable
rate debt obligations with fixed rate unsecured debt in October 1997, leaving
$205 million in available refinancing authority. During the first half of
1998, TEP intends to refinance $100 million aggregate principal amount of its
1981 Series A Apache County Pollution Control Revenue Bonds and $100 million
aggregate principal amount of its 1981 Series B Apache County Pollution
Control Revenue Bonds. The 1981 Series A Apache Bonds are supported by
letters of credit which are collateralized by Second Mortgage Bonds under the
terms of TEP's Credit Agreement. The refinancing of these bonds would reduce
the amount of the Letter of Credit Facility from $444 million to $341 million
and reduce the amount of Second Mortgage Bonds collateralizing such LOCs by
$103 million. The 1981 Series B Apache Bonds are supported by a letter of
credit outside of the Credit Agreement and are collateralized by First
Mortgage Bonds. The refinancing of these bonds on a fixed rate unsecured
basis would eliminate a letter of credit which expires in 1999 and retire the
$103 million of First Mortgage Bonds collateralizing the LOC.
TEP also obtained authority from the ACC in 1997 to refinance up to
$184 million in First Mortgage Bonds scheduled to mature between 1999 and
2003, with the issuance of new securities consisting of debt and/or equity
securities. TEP intends to pursue the negotiation and consummation of such
transactions during 1998 with the objective of extending maturities and
eliminating restrictive covenants contained in the existing First Mortgage
Bonds.
There can be no assurance that any of the contemplated transactions
will be consummated or that the terms of any transactions which are
consummated will result in the realization of TEP's objectives. TEP may
incur increased financing costs as a result of the completion of the proposed
financings. TEP believes, however, that such costs are outweighed by related
benefits, including the extension of maturities, reduction in volatility of
capital costs, and elimination of certain restrictions on the payment of
dividends.
UniSource Energy
On January 1, 1998, the Company and TEP completed a statutory share
exchange, pursuant to which the outstanding common stock of TEP was
exchanged, on a share-for-share basis, for the common stock of the Company.
Following the share exchange, TEP transferred the stock of its subsidiary,
MEH Corporation to the Company in exchange for a ten-year promissory note
from UniSource Energy in the amount of $95 million. The promissory note was
issued in accordance with the ACC Order authorizing the formation of the
holding company. Pursuant to the ACC Order, the interest rate on the note
issued to TEP is 9.78%.
UniSource Energy plans to establish a direct stock purchase plan in the
first half of 1998, pursuant to which UniSource Energy will issue up to
1,000,000 shares of common stock.
Pursuant to the ACC Holding Company Order, 60% of the proceeds of any
public equity issuance undertaken by the Company in its first five years of
operations must be used to reduce TEP's debt or add to TEP's equity account.
TAX EXEMPT LOCAL FURNISHING BONDS
TEP has financed a substantial portion of utility plant assets with the
proceeds of the issuance and sale of industrial development revenue bonds by
the Industrial Development Authorities of Pima County and Apache County. The
interest on these bonds is, with certain exceptions, excluded from gross
income for federal tax purposes. Such exclusion is based, in part, upon the
qualification of the facilities "for the local furnishing of electric energy"
within the meaning of the Internal Revenue Code. Such qualification
requires, among other things, that such facilities be part of a system
providing electric service to the general populace of not more than two
contiguous counties and that the owner or operator of such facilities be
obligated to provide such service. TEP provides electric service to retail
customers in the city of Tucson and environs in Pima County, Arizona and to
Fort Huachuca in adjacent Cochise County.
As of December 31, 1997, there were approximately $580 million in
aggregate principal amount of local furnishing bonds outstanding. In
addition, approximately $98 million aggregate principal amount of debt
related to the Irvington Unit 4 lease obligation was issued on the basis of
local furnishing rules. The facilities financed by TEP with the proceeds of
such tax-exempt bonds include Springerville Unit 2, Irvington Unit 4, a
dedicated 345-kV transmission line from Springerville Unit 2 to TEP's retail
service area (the "Express Line"), and a portion of TEP's local transmission
and distribution system in the Tucson metropolitan area. Although the
introduction of retail competition and expanded wholesale competition could
affect energy flows on TEP's system, TEP does not expect future energy flows
to change in such a manner as to cause a loss of the two-county tax
exemption. Additionally, TEP does not expect its system to lose its
qualification as a local furnishing system as a result of the potential
formation of an independent system operator (see Competition, Wholesale) or
as a result of future sales of electricity on a competitive retail basis
outside of the current two-county service area. However, there can be no
assurance of continued qualification of the system. Should TEP's local
furnishing system become disqualified, due to unanticipated changes in tax
laws, industry structure, or system operations, TEP would likely be required
to redeem or defease all local furnishing bonds outstanding.
INCOME TAX POSITION
-------------------
At December 31, 1997, the Company and TEP had, for federal income tax
purposes, approximately $437 million of NOL carryforwards expiring in 2005
through 2009; $26 million of alternative minimum tax (AMT) loss carryforwards
expiring in 2008; $26 million of unused ITC, the use of which will expire
during 2002 through 2005; $11 million of capital loss carryforwards which
expire in 1999; and $6 million of AMT credit which will carry forward to
future years. For state income tax purposes, the Company and TEP had
approximately $29 million of NOL carryforwards expiring in 1998 and 1999.
Due to the Financial Restructuring in 1992, the Company and TEP
experienced a change in ownership under section 382 of the Internal Revenue
Code in December 1991. As a result, the amount of taxable income for any
post-change year which may be offset by pre-change NOL will be limited to the
section 382 limitation. The section 382 limitation is based on the value of
the Company and TEP on the ownership change date. The Company and TEP
estimate an annual section 382 limit of approximately $23 million. The total
section 382 limitation may be increased to the extent of gains recognized on
sales of assets whose fair market value was greater than tax basis at the
ownership change date, the built-in-gain. The section 382 limitation may
increase by built-in-gain recognized within a period of five years after the
change in ownership. During 1992 through 1996, the section 382 limitation
increased by approximately $102 million of built-in-gain recognized due to
asset sales. Unused section 382 limitation may be carried forward until the
pre-change tax attributes expire. At December 31, 1997, the Company and TEP
had pre-change federal NOL and ITC carryforwards of approximately $281
million and $26 million, respectively. Such amounts are included in the
amounts disclosed in the preceding paragraph. See Note 7 of Notes to
Consolidated Financial Statements, Contingencies, Income Tax Assessments, for
information regarding a recent IRS challenge to the Company's and TEP's
computation of the Section 382 limitation.
RESTRICTIVE COVENANTS
---------------------
GENERAL FIRST MORTGAGE COVENANTS
TEP's General First Mortgage constitutes a first mortgage lien on and
security interest in substantially all the utility plant assets of TEP.
(Springerville Unit 2, title to which is held by San Carlos, is not subject
to such lien and security interest.) Under the General First Mortgage, TEP
may issue additional First Mortgage Bonds (a) to the extent of 60% of net
additions to utility property if net earnings, as defined therein, for a
specified period of 12 consecutive calendar months out of the 15 calendar
months preceding the date of issuance are at least two (2.0) times the annual
interest requirements on all First Mortgage Bonds to be outstanding and (b)
to the extent of the principal amount of retired bonds. The net earnings
test specified in clause (a) above generally need not be satisfied prior to
the issuance of bonds in accordance with clause (b) above unless (x) (i) the
new bonds are issued within one year after the issuance of, or more than two
years prior to the stated maturity of, the retired bonds and (ii) the new
bonds bear a greater rate of interest than the retired bonds or (y) the new
bonds are issued in respect of retired bonds the interest charges on which
have been excluded from any net earnings certificate filed with the indenture
trustee since the retirement of such bonds. At December 31, 1997, TEP had
the ability to issue approximately $133 million of new First Mortgage Bonds
on the basis of property additions, as described above, and, in addition, TEP
had the ability to issue approximately $189 million of new First Mortgage
Bonds on the basis of retired bonds. However, TEP's Credit Agreement
provides that the amount of outstanding First Mortgage Bonds shall not exceed
$411 million, the amount outstanding as of December 31, 1997. Additionally,
the Credit Agreement contains certain financial covenants which serve to
limit the amount of new debt obligations TEP may issue. See Additional
Restrictive Covenants below.
See Dividends on Common Stock above for a discussion of restrictions on
the payment of Common Stock dividends under the General First Mortgage.
GENERAL SECOND MORTGAGE COVENANTS
TEP's General Second Mortgage constitutes a second mortgage lien on and
security interest in substantially all the utility plant assets of TEP (but
not of San Carlos). Under the General Second Mortgage, TEP may issue
additional Second Mortgage Bonds (a) to the extent of 70% of net additions to
utility property if net earnings, as defined therein, for a specified period
of 12 consecutive calendar months within the 16 calendar months preceding the
date of issuance are at least one and three-quarters (1-3/4) times the annual
interest requirements on all First Mortgage Bonds and Second Mortgage Bonds
to be outstanding and (b) to the extent of the principal amount of retired
Second Mortgage Bonds and First Mortgage Bonds. Issuance of Second Mortgage
Bonds on the basis of an amount of retired First Mortgage Bonds reduces by
the same amount the First Mortgage Bonds which could be issued under the
General First Mortgage on the basis of retired bonds. The net earnings test
specified in clause (a) above generally need not be satisfied prior to the
issuance of bonds in accordance with clause (b) above unless (x) (i) the new
bonds are issued within one year after the issuance of, or more than two
years prior to the stated maturity of, the retired bonds and (ii) the new
bonds bear a greater rate of interest than the retired bonds or (y) the new
bonds are issued in respect of retired bonds the interest charges on which
have been excluded from any net earnings certificate filed with the indenture
trustee since the retirement of such bonds. At December 31, 1997, TEP had
the ability to issue approximately $264 million aggregate principal amount of
new Second Mortgage Bonds on the basis of net property additions as described
above. Additionally, TEP had the ability to issue approximately $239 million
of new Second Mortgage Bonds on the basis of retired bonds. Using an assumed
interest rate of 8% per annum for the new issuances of Second Mortgage Bonds,
the net earnings test would not prohibit such issuances. The issuance of
such amounts of Second Mortgage Bonds assumes that no additional First
Mortgage Bonds would be issued other than to refund First Mortgage Bonds
outstanding at December 31, 1997. However, issuance of such amounts would be
limited by financial covenants in TEP's bank Credit Agreement.
See Financing Developments, TEP Bank Credit Agreements and Restrictive
Covenants, Credit Agreement Covenants for information regarding the new
Credit Agreement which is secured by $544 million in aggregate principal
amount of Second Mortgage Bonds.
CREDIT AGREEMENT COVENANTS
On December 30, 1997, TEP entered into a new Credit Agreement to
replace the facilities provided under the MRA. The Credit Agreement contains
a number of restrictive covenants. The entities governed by such covenants
are TEP and its Consolidated Subsidiaries (defined as San Carlos and each
other Subsidiary of TEP from time to time so designated by TEP). Such
restrictive covenants include, but are not limited to, covenants limiting,
with certain exceptions, (i) the incurrence of additional indebtedness, (ii)
the incurrence of liens, (iii) the sale of assets or the merger with or into
any other entity, (iv) the ability to make restricted payments (i.e.
dividends) in the event of a default, and (v) the Company's ability to enter
into sale-leaseback arrangements. In addition, TEP is required to maintain
certain financial covenants including (a) a minimum Consolidated Tangible Net
Worth equal to the sum of $133 million plus 40% of cumulative Consolidated
Net Income since January 1, 1997, (b) a minimum Cash Coverage Ratio ranging
from 1.30 in 1997 and gradually increasing to 1.55 in 2002, and (c) a maximum
Leverage Ratio ranging from 7.00 in 1997 and gradually decreasing to 6.20 in
2002. For the year ended December 31, 1997, TEP's Consolidated Tangible Net
Worth of $216.9 million exceeded the required minimum of $166.4 million; its
Cash Coverage Ratio was 1.67 and its Leverage Ratio was 6.64. See Dividends
on Common Stock for a discussion of the effects of such covenants on TEP's
ability to declare or pay dividends.
See Financing Developments, TEP Bank Credit Agreements for more
information regarding the new Credit Agreement.
CONSTRUCTION EXPENDITURES
-------------------------
Estimated construction expenditures of TEP, including AFDC, for the
five years 1998 through 2002, respectively, are $96 million, $78 million, $73
million, $59 million and $59 million. These amounts include the following:
$217 million for transmission and distribution facilities in the Tucson area;
$8 million for expenditures which are necessary to upgrade pollution control
facilities at Navajo (see Item 1., Business, Environmental Matters, Navajo
Generating Station); $11 million for expenditures associated with the
pollution control facilities at San Juan (see Item 1., Business,
Environmental Matters, San Juan Generating Station); and $129 million related
to existing production facilities, a small portion of which relates to the
potential purchase of gas combustion turbines currently under lease by TEP.
These estimated construction expenditures include costs to comply with
current federal and state environmental regulations. All of these estimates
are subject to continuing review and adjustment. Actual construction
expenditures may vary from these estimates due to factors such as changes in
business conditions, construction schedules and environmental requirements.
TEP plans to fund these construction expenditures through internally
generated funds.
Also, see Notes 5 and 7 of Notes to Consolidated Financial Statements,
Long and Short-Term Debt and Capital Lease Obligations, and Commitments and
Contingencies, respectively.
IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS AND APPLICATIONS
--------------------------------------------------------
The Company has and will continue to review, test and make
modifications to its computer systems and applications to ensure that its
generation, transmission and distribution facilities will provide
uninterrupted service and that year 2000 transactions can be processed. This
review process includes its information systems, the control and embedded
systems of TEP's utility plant (including that in which TEP has an ownership
interest but does not have operating control), as well as the status of major
vendors. The Company has identified the major vendors with which it has
major alliances or dependencies upon products or services and is in the
process of contacting such vendors to ascertain what plans they have to
correct any problems they may face with year 2000 compliance. TEP is also
involved in discussions with other electric service providers in the WSCC to
evaluate potential risks associated with this issue resulting from
interconnected electric and informational systems.
At this time it is the Company's assessment that all identified
modifications to systems within the Company's operating control will be made
within the required time frames. The Company currently estimates that the
costs associated with this project are not material to the Company's
operating results. The Company can make no assurances regarding the year
2000 compliance status of systems or parties outside of the Company's direct
control and the Company cannot assess the effect on the Company of non-
compliance by systems or parties outside of the Company's direct control.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
------------------------------------------
UniSource Energy and TEP are including the following cautionary
statements to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 for any
forward-looking statements made by, or on behalf, of UniSource Energy or TEP
in this Annual Report on Form 10-K. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are other
than statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and
similar expressions. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature. All such forward-
looking statements, whether written or oral, and whether made by or on behalf
of UniSource Energy or TEP, are expressly qualified by these cautionary
statements and any other cautionary statements which may accompany the
forward-looking statements. In addition, UniSource Energy and TEP disclaim
any obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
Forward-looking statements involve risks and uncertainties which could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements. The expectations, beliefs and projections of
UniSource Energy and TEP are expressed in good faith and are believed by
UniSource Energy and TEP to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the records of UniSource Energy and TEP and other data available
from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or
accomplished. In addition to other factors and matters discussed elsewhere
herein, some of the important factors that, in the view of UniSource Energy
and TEP, could cause actual results to differ materially from those discussed
in the forward-looking statements include the following:
1. Effects of restructuring initiatives in the electric industry and other
energy-related industries.
2. Changes in economic conditions, demographic patterns and weather
conditions in TEP's retail service area.
3. Changes affecting TEP's cost of providing electrical service including,
but not limited to, changes in fuel costs, generating unit operating
performance, interest rates, tax laws, environmental laws, and the general
rate of inflation.
4. Changes in governmental policies and regulatory actions with respect to
allowed rates of return, financings, and rate structures.
5. Changes affecting the cost of competing energy alternatives, including
changes in available generating technologies and changes in the cost of
natural gas.
6. Changes in accounting principles or the application of such principles to
UniSource Energy or TEP.
ITEM 8. -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------------------------------------------------------------------------------
See Item 14, page 76, for a list of the Consolidated Financial Statements
which are included in the following pages. See Note 11 of Notes to
Consolidated Financial Statements.
INDEPENDENT AUDITORS' REPORT
- ----------------------------
UniSource Energy Corporation and its Stockholders
Tucson Electric Power Company
We have audited the accompanying consolidated balance sheets and statements
of capitalization of UniSource Energy Corporation and its subsidiaries (the
Company) and Tucson Electric Power Company and its subsidiaries (TEP) as of
December 31, 1997 and 1996, and the related consolidated statements of
income, changes in stockholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's and TEP's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and TEP at December
31, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 23, 1998
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31,
1997 1996 1995
- Thousands of Dollars -
Operating Revenues
Retail Customers $ 624,221 $ 611,564 $ 574,925
Amortization of MSR Option Gain
Regulatory Liability 8,105 20,053 20,053
Sales for Resale 97,567 84,256 75,591
---------- ---------- ----------
Total Operating Revenues 729,893 715,873 670,569
---------- ---------- ----------
Operating Expenses
Fuel and Purchased Power 216,163 208,808 167,989
Capital Lease Expense 103,914 104,087 105,368
Amortization of Springerville
Unit 1 Allowance (28,037) (29,090) (28,432)
Other Operations 107,199 97,555 99,883
Maintenance and Repairs 36,657 36,449 41,801
Depreciation and Amortization 86,405 98,246 93,136
Taxes Other Than Income Taxes 51,339 61,902 58,733
Voluntary Severance Plan Expense - Net 2,933 10,555 -
Income Taxes 19,297 9,795 8,920
---------- ---------- ----------
Total Operating Expenses 595,870 598,307 547,398
---------- ---------- ----------
Operating Income 134,023 117,566 123,171
---------- ---------- ----------
Other Income (Deductions)
Income Taxes 41,401 91,950 29,356
Reversal of Loss Provision 10,154 8,472 -
Interest Income 8,565 6,271 8,222
Deferred Springerville Unit 2 Carrying
Costs - 286 1,127
Other Income (Deductions) (6,370) (1,020) 2,826
---------- ---------- ----------
Total Other Income (Deductions) 53,750 105,959 41,531
---------- ---------- ----------
Interest Expense
Long-Term Debt 63,573 59,647 69,174
Interest Imputed on Losses Recorded at
Present Value 32,657 32,599 32,633
Other Interest Expense 7,971 10,427 7,990
---------- ---------- ----------
Total Interest Expense 104,201 102,673 109,797
---------- ---------- ----------
Net Income $ 83,572 $ 120,852 $ 54,905
========== ========== ==========
Average Shares of
Common Stock Outstanding (000) 32,138 32,136 32,138
========== ========== ==========
Basic Earnings per Share $ 2.60 $ 3.76 $ 1.71
========== ========== ==========
Diluted Earnings per Share $ 2.59 $ 3.75 $ 1.70
========== ========== ==========
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,
1997 1996 1995
- Thousands of Dollars -
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $664,294 $653,933 $616,064
Cash Receipts from Sales for Resale 96,569 80,123 80,415
Fuel and Purchased Power Costs Paid (203,713) (180,134) (167,672)
Wages Paid, Net of Amounts Capitalized (61,369) (73,184) (63,412)
Payment of Other Operations and
Maintenance Costs (83,814) (76,529) (75,504)
Capital Lease Interest Paid (83,019) (84,383) (83,986)
Interest Paid, Net of Amounts Capitalized (65,848) (70,275) (78,743)
Taxes Paid, Net of Amounts Capitalized (99,126) (103,079) (120,759)
Contract Termination Fee Paid (40,000) - -
Emission Allowance Inventory Purchases (11,503) (12,340) (4,190)
Emission Allowance Inventory Sales - 14,710 11,255
Interest Received 8,152 6,342 7,882
Income Taxes Paid (984) (1,566) (1,960)
Other 4,751 (2,351) -
--------- --------- ---------
Net Cash Flows - Operating Activities 124,390 151,267 119,390
--------- --------- ---------
Cash Flows from Investing Activities
Construction Expenditures (71,420) (66,519) (59,097)
Purchase of Debt Securities - - (17,697)
Investments in and Loans to Joint Ventures (4,998) (9,173) (12,429)
Other Investments - Net 1,583 240 3,321
--------- --------- ---------
Net Cash Flows - Investing Activities (74,835) (75,452) (85,902)
--------- --------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 379,270 31,400 -
Undrawn Long-Term Debt Proceeds Held by
Trustee (5,309) - -
Proceeds from Borrowings Under the
Renewable Term Loan - 14,000 -
Payments to Retire Long-Term Debt (357,310) (26,275) (36,507)
Payments on Renewable Term Loan (31,000) (14,000) (143,060)
Payments to Retire Capital Lease Obligations (13,229) (36,292) (17,231)
Payments for Credit Agreement and Debt
Issuance Costs (7,470) (804) -
Other 1,458 1,353 252
--------- --------- ---------
Net Cash Flows - Financing Activities (33,590) (30,618) (196,546)
--------- --------- ---------
Net Increase (Decrease) in
Cash and Cash Equivalents 15,965 45,197 (163,058)
Cash and Cash Equivalents, Beginning of Year 130,291 85,094 248,152
--------- --------- ---------
Cash and Cash Equivalents, End of Year $146,256 $130,291 $ 85,094
========= ========= =========
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
- Thousands of Dollars -
ASSETS
Utility Plant
Plant in Service $2,194,150 $2,129,205
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 72,404 74,210
----------- -----------
Total Utility Plant 3,159,618 3,096,479
Less Accumulated Depreciation and Amortization (982,621) (922,947)
Less Accumulated Amortization of Capital Leases (73,728) (56,240)
Less Springerville Unit 1 Allowance (167,756) (163,388)
----------- -----------
Total Utility Plant - Net 1,935,513 1,953,904
----------- -----------
Investments and Other Property 78,772 69,289
----------- -----------
Current Assets
Cash and Cash Equivalents 146,256 130,291
Accounts Receivable 71,225 65,905
Materials and Fuel 34,005 30,356
Deferred Income Taxes - Current 14,910 10,223
Other 23,653 14,026
----------- -----------
Total Current Assets 290,049 250,801
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 170,034 173,731
Deferred Springerville Common Facility Costs 58,222 60,762
Deferred Contract Termination Fee 48,077 -
Deferred Springerville Unit 2 Costs 11,590 21,260
Deferred Lease Expense 11,571 15,067
Other Deferred Regulatory Assets 11,089 8,004
Deferred Debits - Other 19,492 15,723
----------- -----------
Total Deferred Debits 330,075 294,547
----------- -----------
Total Assets $2,634,409 $2,568,541
=========== ===========
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
- Thousands of Dollars -
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity $ 216,878 $ 133,288
Capital Lease Obligations 890,257 895,867
Long-Term Debt 1,215,120 1,223,025
----------- -----------
Total Capitalization 2,322,255 2,252,180
----------- -----------
Current Liabilities
Short-Term Debt - 3,567
Current Obligations Under Capital Leases 14,552 10,383
Current Maturities of Long-Term Debt 500 1,635
Accounts Payable 34,909 28,806
Interest Accrued 64,812 57,404
Taxes Accrued 24,397 24,007
Contract Termination Fee Payable 10,000 -
Other 19,051 15,614
----------- -----------
Total Current Liabilities 168,221 141,416
----------- -----------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 77,606 96,422
Accumulated Deferred Investment Tax Credits
Regulatory Liability 11,905 15,188
MSR Option Gain Regulatory Liability - 7,853
Emission Allowance Gain Regulatory Liability 17,591 17,596
Other 36,831 37,886
----------- -----------
Total Deferred Credits and Other Liabilities 143,933 174,945
----------- -----------
Commitments and Contingencies (Note 7)
Total Capitalization and Other Liabilities $2,634,409 $2,568,541
=========== ===========
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
COMMON STOCK EQUITY - Thousands of Dollars -
Common Stock--No Par Value 1997 1996
----------- -----------
Shares Authorized 75,000,000 75,000,000
Shares Outstanding 32,139,434 32,138,491
Warrants Outstanding* - - $ 638,904 $ 638,886
Accumulated Deficit (422,026) (505,598)
----------- -----------
Total Common Stock Equity 216,878 133,288
----------- -----------
PREFERRED STOCK
No Par Value, 1,000,000 Shares Authorized,
None Outstanding - -
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 483,421 474,523
Springerville Coal Handling Facilities 168,959 172,424
Springerville Common Facilities 127,986 131,743
Irvington Unit 4 121,150 122,818
Other Leases 3,293 4,742
----------- -----------
Total Capital Lease Obligations 904,809 906,250
Less Current Maturities (14,552) (10,383)
----------- -----------
Total Long-Term Capital Lease Obligations 890,257 895,867
----------- -----------
LONG-TERM DEBT
Interest
Issue Maturity Rate
- -----------------------------------------------------
First Mortgage Bonds
Corporate 1999 - 2009 7.55% to 8.50% 165,000 165,000
2000 12.22% 78,750 78,750
Industrial Development 2006 - 2021 6.10% to 7.50%
Revenue Bonds (IDBs) and variable*** 164,000 248,400
Second Mortgage Bonds
Industrial Development
Revenue Bonds (IDBs)** 2018 - 2022 variable*** 428,600 50,000
Other Secured IDBs**** 2018 - 2022 variable*** - 603,600
Unsecured IDBs 2020 - 2032 6.00% to 7.13% 379,270 47,910
Renewable Term Loan 1997 variable*** - 31,000
----------- -----------
Total Stated Principal Amount 1,215,620 1,224,660
Less Current Maturities (500) (1,635)
----------- -----------
Total Long-Term Debt 1,215,120 1,223,025
----------- -----------
Total Capitalization $2,322,255 $2,252,180
=========== ===========
(continued on next page)
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
* There are 12,054,278 Warrants outstanding to purchase common stock of
TEP, a wholly-owned subsidiary of the Company. The exercise terms are 5
Warrants plus an exercise price of $16 for each share of TEP common
stock. The Warrants are currently exercisable and expire in 2002.
** These IDBs outstanding at December 31, 1997 are backed by LOCs under
TEP's new Credit Agreement. TEP's obligations under the new Credit
Agreement are secured with Second Mortgage Bonds. See Note 5. The $50
million in Second Mortgage Bonds at December 31, 1996 reflects security
provided for LOCs under the MRA.
*** Interest rates on variable rate tax-exempt debt (IDBs) ranged from 2.50%
to 5.20% during 1997 and 1996, and averaged 3.70% in 1997 and 3.50% in
1996. Interest rates on the Renewable Term Loan ranged from 5.80% to
6.40% in 1997 and 1996, and averaged 6.00% in 1997 and 1996.
**** These IDBs outstanding at December 31, 1996 were backed by LOCs under
the MRA. The MRA was secured in part by a lien on Springerville Unit 2,
title to which is held by San Carlos.
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated
Common Earnings
Stock (Deficit)
------------------------------------
- Thousands of Dollars -
Balances at December 31, 1994 $639,122 $(681,355)
1995 Net Income - 54,905
10,509 Shares Purchased by Deferred
Compensation Trust (184) -
--------- ----------
Balances at December 31, 1995 638,938 (626,450)
1996 Net Income - 120,852
2,886 Shares Issued Under Stock
Option Plans 47 -
2,265 Shares Distributed by Deferred
Compensation Trust 33 -
3,881 Additional Shares Issued Under
Reverse Stock Split for Shareholders
with Fractional Shares - -
8,802 Shares Purchased by Deferred
Compensation Trust (132) -
--------- ----------
Balances at December 31, 1996 638,886 (505,598)
1997 Net Income - 83,572
6,630 Shares Issued Under Stock
Option Plans 108 -
3,996 Shares Distributed by Deferred
Compensation Trust 62 -
9,683 Shares Purchased by Deferred
Compensation Trust (152) -
--------- ----------
Balances at December 31, 1997 $638,904 $(422,026)
========= ==========
See Note 6. Dividend and Loan Restrictions for discussion of restrictions on
the Company's ability to pay dividends.
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31,
1997 1996 1995
- Thousands of Dollars -
Operating Revenues
Retail Customers $ 624,221 $ 611,564 $ 574,925
Amortization of MSR Option Gain
Regulatory Liability 8,105 20,053 20,053
Sales for Resale 97,567 84,256 75,591
---------- ---------- ----------
Total Operating Revenues 729,893 715,873 670,569
---------- ---------- ----------
Operating Expenses
Fuel and Purchased Power 216,163 208,808 167,989
Capital Lease Expense 103,914 104,087 105,368
Amortization of Springerville
Unit 1 Allowance (28,037) (29,090) (28,432)
Other Operations 107,199 97,555 99,883
Maintenance and Repairs 36,657 36,449 41,801
Depreciation and Amortization 86,405 98,246 93,136
Taxes Other Than Income Taxes 51,339 61,902 58,733
Voluntary Severance Plan Expense - Net 2,933 10,555 -
Income Taxes 19,297 9,795 8,920
---------- ---------- ----------
Total Operating Expenses 595,870 598,307 547,398
---------- ---------- ----------
Operating Income 134,023 117,566 123,171
---------- ---------- ----------
Other Income (Deductions)
Income Taxes 41,401 91,950 29,356
Reversal of Loss Provision 10,154 8,472 -
Interest Income 8,565 6,271 8,222
Deferred Springerville Unit 2 Carrying
Costs - 286 1,127
Other Income (Deductions) (6,370) (1,020) 2,826
---------- ---------- ----------
Total Other Income (Deductions) 53,750 105,959 41,531
---------- ---------- ----------
Interest Expense
Long-Term Debt 63,573 59,647 69,174
Interest Imputed on Losses Recorded at
Present Value 32,657 32,599 32,633
Other Interest Expense 7,971 10,427 7,990
---------- ---------- ----------
Total Interest Expense 104,201 102,673 109,797
---------- ---------- ----------
Net Income $ 83,572 $ 120,852 $ 54,905
========== ========== ==========
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,
1997 1996 1995
- Thousands of Dollars -
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $664,294 $653,933 $616,064
Cash Receipts from Sales for Resale 96,569 80,123 80,415
Fuel and Purchased Power Costs Paid (203,713) (180,134) (167,672)
Wages Paid, Net of Amounts Capitalized (61,369) (73,184) (63,412)
Payment of Other Operations and
Maintenance Costs (83,814) (76,529) (75,504)
Capital Lease Interest Paid (83,019) (84,383) (83,986)
Interest Paid, Net of Amounts Capitalized (65,848) (70,275) (78,743)
Taxes Paid, Net of Amounts Capitalized (99,126) (103,079) (120,759)
Contract Termination Fee Paid (40,000) - -
Emission Allowance Inventory Purchases (11,503) (12,340) (4,190)
Emission Allowance Inventory Sales - 14,710 11,255
Interest Received 8,152 6,342 7,882
Income Taxes Paid (984) (1,566) (1,960)
Other 4,751 (2,351) -
--------- --------- ---------
Net Cash Flows - Operating Activities 124,390 151,267 119,390
--------- --------- ---------
Cash Flows from Investing Activities
Construction Expenditures (71,420) (66,519) (59,097)
Purchase of Debt Securities - - (17,697)
Investments in and Loans to Joint Ventures (4,998) (9,173) (12,429)
Other Investments - Net 1,583 240 3,321
--------- --------- ---------
Net Cash Flows - Investing Activities (74,835) (75,452) (85,902)
--------- --------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 379,270 31,400 -
Undrawn Long-Term Debt Proceeds Held by
Trustee (5,309) - -
Proceeds from Borrowings Under the
Renewable Term Loan - 14,000 -
Payments to Retire Long-Term Debt (357,310) (26,275) (36,507)
Payments on Renewable Term Loan (31,000) (14,000) (143,060)
Payments to Retire Capital Lease Obligations (13,229) (36,292) (17,231)
Payments for Credit Agreement and Debt
Issuance Costs (7,470) (804) -
Other 1,458 1,353 252
--------- --------- ---------
Net Cash Flows - Financing Activities (33,590) (30,618) (196,546)
--------- --------- ---------
Net Increase (Decrease) in
Cash and Cash Equivalents 15,965 45,197 (163,058)
Cash and Cash Equivalents, Beginning of Year 130,291 85,094 248,152
--------- --------- ---------
Cash and Cash Equivalents, End of Year $146,256 $130,291 $ 85,094
========= ========= =========
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
- Thousands of Dollars -
ASSETS
Utility Plant
Plant in Service $2,194,150 $2,129,205
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 72,404 74,210
----------- -----------
Total Utility Plant 3,159,618 3,096,479
Less Accumulated Depreciation and Amortization (982,621) (922,947)
Less Accumulated Amortization of Capital Leases (73,728) (56,240)
Less Springerville Unit 1 Allowance (167,756) (163,388)
----------- -----------
Total Utility Plant - Net 1,935,513 1,953,904
----------- -----------
Investments and Other Property 78,772 69,289
----------- -----------
Current Assets
Cash and Cash Equivalents 146,256 130,291
Accounts Receivable 71,225 65,905
Materials and Fuel 34,005 30,356
Deferred Income Taxes - Current 14,910 10,223
Other 23,653 14,026
----------- -----------
Total Current Assets 290,049 250,801
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 170,034 173,731
Deferred Springerville Common Facility Costs 58,222 60,762
Deferred Contract Termination Fee 48,077 -
Deferred Springerville Unit 2 Costs 11,590 21,260
Deferred Lease Expense 11,571 15,067
Other Deferred Regulatory Assets 11,089 8,004
Deferred Debits - Other 19,492 15,723
----------- -----------
Total Deferred Debits 330,075 294,547
----------- -----------
Total Assets $2,634,409 $2,568,541
=========== ===========
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
- Thousands of Dollars -
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity $ 216,878 $ 133,288
Capital Lease Obligations 890,257 895,867
Long-Term Debt 1,215,120 1,223,025
----------- -----------
Total Capitalization 2,322,255 2,252,180
----------- -----------
Current Liabilities
Short-Term Debt - 3,567
Current Obligations Under Capital Leases 14,552 10,383
Current Maturities of Long-Term Debt 500 1,635
Accounts Payable 34,909 28,806
Interest Accrued 64,812 57,404
Taxes Accrued 24,397 24,007
Contract Termination Fee Payable 10,000 -
Other 19,051 15,614
----------- -----------
Total Current Liabilities 168,221 141,416
----------- -----------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 77,606 96,422
Accumulated Deferred Investment Tax Credits
Regulatory Liability 11,905 15,188
MSR Option Gain Regulatory Liability - 7,853
Emission Allowance Gain Regulatory Liability 17,591 17,596
Other 36,831 37,886
----------- -----------
Total Deferred Credits and Other Liabilities 143,933 174,945
----------- -----------
Commitments and Contingencies (Note 7)
Total Capitalization and Other Liabilities $2,634,409 $2,568,541
=========== ===========
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
COMMON STOCK EQUITY - Thousands of Dollars -
Common Stock--No Par Value 1997 1996
----------- -----------
Shares Authorized 75,000,000 75,000,000
Shares Outstanding 32,139,434 32,138,491
Warrants Outstanding* 2,410,856 2,410,856 $ 645,261 $ 645,243
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (422,026) (505,598)
----------- -----------
Total Common Stock Equity 216,878 133,288
----------- -----------
PREFERRED STOCK
No Par Value,1,000,000 Shares Authorized,
None Outstanding - -
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 483,421 474,523
Springerville Coal Handling Facilities 168,959 172,424
Springerville Common Facilities 127,986 131,743
Irvington Unit 4 121,150 122,818
Other Leases 3,293 4,742
----------- -----------
Total Capital Lease Obligations 904,809 906,250
Less Current Maturities (14,552) (10,383)
----------- -----------
Total Long-Term Capital Lease Obligations 890,257 895,867
----------- -----------
LONG-TERM DEBT
Interest
Issue Maturity Rate
- -----------------------------------------------------
First Mortgage Bonds
Corporate 1999 - 2009 7.55% to 8.50% 165,000 165,000
2000 12.22% 78,750 78,750
Industrial Development 2006 - 2021 6.10% to 7.50%
Revenue Bonds (IDBs) and variable*** 164,000 248,400
Second Mortgage Bonds
Industrial Development
Revenue Bonds (IDBs)** 2018 - 2022 variable*** 428,600 50,000
Other Secured IDBs**** 2018 - 2022 variable*** - 603,600
Unsecured IDBs 2020 - 2032 6.00% to 7.13% 379,270 47,910
Renewable Term Loan 1997 variable*** - 31,000
----------- -----------
Total Stated Principal Amount 1,215,620 1,224,660
Less Current Maturities (500) (1,635)
----------- -----------
Total Long-Term Debt 1,215,120 1,223,025
----------- -----------
Total Capitalization $2,322,255 $2,252,180
=========== ===========
(continued on next page)
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
* There are 12,054,278 Warrants outstanding to purchase common stock of
TEP. The exercise terms are 5 Warrants plus an exercise price of $16
for each share of TEP common stock. The Warrants are currently
exercisable and expire in 2002.
** These IDBs outstanding at December 31, 1997 are backed by LOCs under
TEP's new Credit Agreement. TEP's obligations under the new Credit
Agreement are secured with Second Mortgage Bonds. See Note 5. The $50
million in Second Mortgage Bonds at December 31, 1996 reflects
security provided for LOCs under the MRA.
*** Interest rates on variable rate tax-exempt debt (IDBs) ranged from 2.50%
to 5.20% during 1997 and 1996, and averaged 3.70% in 1997 and 3.50% in
1996. Interest rates on the Renewable Term Loan ranged from 5.80% to
6.40% in 1997 and 1996, and averaged 6.00% in 1997 and 1996.
**** These IDBs outstanding at December 31, 1996 were backed by LOCs under
the MRA. The MRA was secured in part by a lien on Springerville Unit 2,
title to which is held by San Carlos.
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
Capital Accumulated
Common Stock Earnings
Stock Expense (Deficit)
----------------------------------
- Thousands of Dollars -
Balances at December 31, 1994 $645,479 $(6,357) $(681,355)
1995 Net Income - - 54,905
10,509 Shares Purchased by Deferred
Compensation Trust (184) - -
--------- -------- ----------
Balances at December 31, 1995 645,295 (6,357) (626,450)
1996 Net Income - - 120,852
2,886 Shares Issued Under Stock
Option Plans 47 - -
2,265 Shares Distributed by Deferred
Compensation Trust 33 - -
3,881 Additional Shares Issued Under
Reverse Stock Split for Shareholders
with Fractional Shares - - -
8,802 Shares Purchased by Deferred
Compensation Trust (132) - -
--------- -------- ----------
Balances at December 31, 1996 645,243 (6,357) (505,598)
1997 Net Income - - 83,572
6,630 Shares Issued Under Stock
Option Plans 108 - -
3,996 Shares Distributed by Deferred
Compensation Trust 62 - -
9,683 Shares Purchased by Deferred
Compensation Trust (152) - -
--------- -------- ----------
Balances at December 31, 1997 $645,261 $(6,357) $(422,026)
========= ======== ==========
See Note 6. Dividend and Loan Restrictions for discussion of restrictions on
the ability to pay dividends.
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------------------------
NATURE OF OPERATIONS
UniSource Energy Corporation (UniSource Energy or the Company) is an
Arizona corporation, incorporated in 1995, and an exempt holding company
under the Public Utility Holding Company Act. The Company has no significant
operations of its own, holding instead the stock of Tucson Electric Power
Company (TEP) and other energy related businesses. TEP, a public utility
incorporated in Arizona since 1963, is the Company's largest operating
subsidiary and represents substantially all of the Company's assets.
As a regulated public utility, TEP is engaged in the business of
generation, transmission, distribution and sale of electricity. TEP's retail
service area encompasses 1,155 square miles in Pima and Cochise counties in
Southern Arizona. TEP also engages in sales for resale to other utilities
and other power marketing entities primarily located in Arizona, California,
Colorado, New Mexico, Oregon, Texas and Utah. Approximately 60% of TEP's
work force is subject to a collective bargaining unit. The collective
bargaining agreement in place at December 31, 1997 terminates on November 30,
1998.
BASIS OF PRESENTATION
On January 1, 1998, TEP and the Company completed a statutory share
exchange, pursuant to which the outstanding common stock of TEP was exchanged
on a share-for-share basis for the common stock of the Company. The share
exchange was effected pursuant to the terms of an Agreement and Plan of
Exchange dated as of March 20, 1995 between the Company and TEP and was
approved by TEP's shareholders in 1995. The formation of the holding company
was approved by the FERC and by the ACC in 1997.
Following the share exchange, in January 1998 TEP transferred the stock
of its subsidiary, MEH Corporation (MEH), to UniSource Energy in exchange for
a $95 million ten-year promissory note from UniSource Energy. MEH is the
parent company of Advanced Energy Technologies, Inc., Millennium Energy
Holdings, Inc., Nations Energy Corporation and Southwest Energy Solutions,
Inc. In accordance with the ACC order authorizing the formation of the
holding company, the note bears interest at 9.78%.
The Company's consolidated financial statements presented herein include
the financial results of operations of the Company and its wholly-owned
subsidiaries as if the Company's current holding company structure had
existed in all periods shown. The transfer by TEP of the stock of its
subsidiary, MEH Corporation, and the promissory note recorded by TEP in
January 1998 are not reflected in these financial statements. For the
periods presented the Company's operations and those of TEP are substantially
the same.
All significant intercompany balances and transactions have been
eliminated in consolidation. The equity method is used to account for all
investments in 50% or less owned limited liability corporations, partnerships
and joint ventures. All non-utility operating transactions are included in
Other Income (Deductions) in the Consolidated Statements of Income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REGULATION
TEP's utility accounting practices and electricity rates are subject to
regulation by the ACC and, in certain areas, by the FERC.
ACCOUNTING FOR THE EFFECTS OF REGULATION
Accounting Implications
TEP 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 (regulatory asset) in the balance
sheet and not be reflected in the statement of income or loss until matching
revenues are recognized. It is TEP's policy to assess the recoverability of
costs recognized as regulatory assets and the ability to continue to account
for its activities in accordance with FAS 71, based on each rate action and
the criteria set forth in FAS 71.
The Consolidated Balance Sheets contain certain amounts solely as a
result of the application of FAS 71:
December 31,
Assets (Liabilities) 1997 1996
-------------------- ----- -----
- Millions of Dollars -
Income Taxes Recoverable Through Future Rates $170 $174
Deferred Springerville Common Facility Costs 58 61
Deferred Contract Termination Fee 48 -
Deferred Springerville Unit 2 Costs 12 21
Deferred Lease Expense 12 15
Other Deferred Regulatory Assets 11 8
MSR Option Gain Regulatory Liability - (8)
Accumulated Deferred Investment Tax Credits
Regulatory Liability (12) (15)
Emission Allowance Gain Regulatory Liability (18) (18)
TEP recorded regulatory assets based on prior rate orders issued by the
ACC which provide a mechanism for recovery in regulated rates or historical
rate treatment which provides evidence as to the probability of future rate
recovery. The material regulatory assets listed above earn a return on
investment through inclusion in rate base and resultant recovery through
sales to retail customers.
The Consolidated Statements of Income include amounts which reflect the
application of FAS 71:
Years Ended December 31,
Income (Expense) 1997 1996 1995
---------------- ----- ----- -----
- Millions of Dollars -
Amortization of MSR Option Gain
Regulatory Liability $ 8 $ 20 $ 20
Amortization of Springerville Unit 2
Rate Synchronization (10) (21) (14)
Deferred Fuel and Purchased Power - - (6)
Amortization of Deferred Springerville Common
Facility Costs (3) (3) (3)
Deferred Springerville Unit 2 Carrying Costs - - 1
Investment Tax Credit Amortization 3 4 5
Interest Imputed on Loss (MSR Option Gain
Regulatory Liability) Recorded at Present Value - (2) (4)
Amortization of Deferred Contract Termination Fee (2) - -
If TEP had not applied the provisions of FAS 71 in these years, each of
these amounts included in the Consolidated Statements of Income would have
been reflected in the Consolidated Statements of Income or Loss in prior
periods, except for two items which would not have been recorded: 1) the
amortization of the MSR Option Gain Regulatory Liability, including interest
imputed on the loss recorded at present value; and 2) the Springerville Unit
2 carrying cost deferrals. Lease expense relating to the capital leases,
while the same over the life of the leases, would be recognized at different
annual amounts if TEP were to discontinue the application of FAS 71. See
Utility Plant Under Capital Leases below.
Potential Discontinuation of Application of FAS 71 in the Future
If at some point in the future TEP determines that all or a portion of
its regulated operations no longer meet the criteria for continued
application of FAS 71, TEP would be required to adopt the provisions of FAS
101 for that portion of the operations for which FAS 71 no longer applied.
As of the date of adoption of FAS 101, TEP would be required (unless
alternative regulatory recovery mechanisms were provided) to write off its
regulatory assets and liabilities and would be precluded in subsequent
periods from creating regulatory assets by deferring incurred costs expected
to be recovered through rates in the future. Based on the balances of the
regulatory assets and liabilities at December 31, 1997, TEP estimates that
future adoption of FAS 101 if applied to all of the regulated operations,
would result in an extraordinary loss of $181 million, which includes a
reduction for the related income tax benefit of $100 million. Cash flows
would not be affected by the adoption of FAS 101.
At the present time, TEP recovers the costs of its plant assets through
its regulated revenues. If in the future TEP discontinues accounting
according to the provisions of FAS 71, TEP would also need to consider
whether the markets in which it is then selling power will allow recovery of
the costs of its plant assets. If at that time market prices are not
expected to allow TEP to recover the costs of its plant assets, additional
write-downs may be required in accordance with the provisions of FAS 121.
TEP is presently unable to predict the amounts, if any, of potential future
write-downs attributable to the provisions of FAS 121 under such
circumstances.
Recent Events That May Impact TEP's Application of FAS 71
In December 1996, the ACC voted to adopt rules on retail electric
competition in Arizona. However, the ACC has not yet adopted specific
guidelines for quantifying unmitigated stranded costs, including the methods
used to identify and value jurisdictional assets and obligations. In February
1998, the ACC held hearings regarding stranded costs, including, but not
limited to, comparisons of methods of computation of stranded costs and the
appropriate level of stranded costs for which recovery should be authorized.
The hearing officer is expected to issue a recommended order in the second
quarter of 1998. Following the issuance of the recommended order, the ACC
will determine, following an open meeting, whether to adopt the recommended
order in whole or in part. The Company is unable to predict whether such
order would provide guidance as to the specific stranded costs allowable as
recoverable by TEP, or whether an additional set of hearings for individual
companies would be needed to determine the amounts recoverable by TEP. In
addition, in January 1998, legislation was proposed before the Arizona
Legislature regarding the implementation of electric industry competition in
Arizona. TEP cannot predict the outcome of the proposed legislation or
whether the ACC and the Arizona Legislature will propose other initiatives on
industry restructuring. TEP, in reliance on previous rate orders, believes
that it will recover the full costs of its investments in utility plant
assets and regulatory assets. The hearing officer's recommended order or the
order as finally adopted by the ACC may include language that precludes TEP
from continuing to apply FAS 71 to the generation portion of its operations.
If less than full recovery of stranded costs is provided, significant write-
offs of assets may occur (relating to adoption of FAS 101 and application of
FAS 121 as described above). Approximately 65% of the regulatory assets
described above relate to the generation portion of TEP's operations.
Further, in response to legislative and other measures being developed
in various states to deregulate the electric generation business, the Company
is aware that the SEC and the EITF have been reviewing the appropriateness of
electric utilities continuing to account for generation transactions in
accordance with FAS 71 in states where such deregulation is beginning to
develop. In general, the EITF concluded that utilities are no longer subject
to FAS 71 for the generation portion of their business when a deregulation
plan is in place and its terms are known. The EITF also concluded that
utilities can continue to carry previously recorded regulatory assets
(including those related to generation) on their balance sheets if regulators
have provided a regulated cash flow stream to recover the cost of their
assets. The application of the EITF consensus to specific factual
circumstances remains unclear. Based on the consensus issued by the EITF in
May and July 1997, at some point in the future, TEP may be unable to continue
to apply FAS 71 to the generation portion of the business, even if TEP
believes it will recover the full amount of its costs under the ACC
competition phase-in plan.
The Company and TEP are unable to predict the outcome of these matters.
TEP UTILITY PLANT
Utility Plant by major class is as follows:
December 31,
1997 1996
---------- ----------
- Thousands of Dollars -
Utility Plant:
Production Plant $1,045,423 $1,019,528
Transmission Plant 471,230 464,115
Distribution Plant 562,336 538,162
General Plant 104,344 95,779
Intangible Plant 9,175 10,608
Electric Plant Held for Future Use 1,642 1,013
---------- ----------
Total Utility Plant $2,194,150 $2,129,205
========== ==========
Utility plant is stated at original cost. In accordance with the
Uniform System of Accounts prescribed by the FERC and accepted by the ACC,
TEP capitalizes an Allowance for Funds Used During Construction (AFDC) based
on the cost of borrowed funds and a reasonable rate upon equity funds used to
finance CWIP, when recovery of such costs from ratepayers is probable. The
component of AFDC attributable to borrowed funds is presented as a reduction
of Interest Expense. For 1995 the Consolidated Statement of Income did not
reflect AFDC - Equity as all construction expenditures were deemed under FERC
prescribed rules to be financed with debt. In 1995, a gross AFDC rate of
5.59% was used for all CWIP. In 1997 and 1996 the gross AFDC rates for
equity were 1.18% and 0.33% and gross AFDC rates for debt were 4.37% and
3.91%, respectively.
Depreciation is computed on a straight-line basis at component rates
which are based on the economic lives of the assets. These component rates,
which are authorized by the ACC, averaged 3.44%, 3.56% and 3.79% in 1997,
1996 and 1995, respectively. The economic lives for production plant are
based on remaining lives. The economic lives for transmission plant,
distribution plant, general plant and intangible plant are based on average
lives. The component rates also reflect estimated removal costs, net of
estimated salvage value. Minor replacements and repairs are expensed as
incurred. Retirements of utility plant, together with removal costs less
salvage, are charged to accumulated depreciation.
TEP UTILITY PLANT UNDER CAPITAL LEASES
TEP's leases of the Springerville Common Facilities, Springerville Unit
1, Springerville Coal Handling Facilities and Irvington Unit 4 are classified
as capital leases in the Consolidated Balance Sheets. For rate making
purposes, the ACC treats these leases as operating leases and has allowed for
recovery of the lease costs by straight-line amortization of the total amount
of lease rent payments over the primary term of the leases, except for the
Springerville Coal Handling Facilities Leases. The Springerville Coal
Handling Facilities Leases are being amortized on a straight-line basis over
the primary term of the leases plus the first optional renewal period of six
years to reflect the recovery period mandated by the ACC. As a result of the
ACC mandate and application of FAS 71, the amortization of such costs is not
the primary term of the lease in accordance with GAAP. Interest and
depreciation relating to the leases are recorded as expense on a basis which
reflects the regulatory straight-line treatment. The amount of lease
amortization incurred for the four above-described leases, as well as TEP's
remaining leases are set forth in the following table:
Years Ended December 31,
1997 1996 1995
----- ----- -----
- Millions of Dollars -
Lease Amortization:
Interest $ 95 $ 95 $ 97
Depreciation 17 15 14
---- ---- ----
Total Lease Amortization $112 $110 $111
==== ==== ====
Lease Amortization Included In:
Operating Expenses - Fuel and
Purchased Power $ 10 $ 9 $ 10
Operating Expenses - Capital Lease Expense 104 104 105
Balance Sheet - Deferred Lease Expense (2) (3) (4)
----- ----- ----
Total Lease Amortization $112 $110 $111
===== ===== ====
The Deferred Lease Expense of $12 million and $15 million at December
31, 1997 and 1996, respectively, reflects: 1) the cumulative difference
between the straight-line method of amortizing the leases for regulatory
purposes and capital lease amortization as promulgated by GAAP; and 2) the
balance of the deferred costs described under Fuel below.
SPRINGERVILLE UNIT 1 ALLOWANCE
In the 1989 Rate Order the ACC limited TEP's recovery through retail
rates of non-fuel expenses of Springerville Unit 1 to a rate of only $15 per
kW per month based on a 360 MW capacity rating. Such costs averaged
approximately $22 per kW per month during the period 1995 through 1997. In
1990 and 1992, TEP recorded losses and a Springerville Unit 1 Allowance,
equal to the present value of the excess of TEP's costs estimated to be
incurred through 2014, the end of the primary term of the lease, over $15 per
kW per month using a discount rate of 13%.
The balance sheet contra asset Springerville Unit 1 Allowance increases
each year by the accrual of interest and decreases by the amount which is
amortized to income as a contra-expense, Amortization of Springerville Unit 1
Allowance. In 1997, 1996 and 1995, the accrual of such interest was $32.4
million, $30.3 million and $28.2 million, respectively, and the amount
amortized was $28.0 million, $29.1 million and $28.4 million, respectively.
The imputed interest expense associated with this liability, calculated using
a 13% discount rate, is included as part of Interest Imputed on Losses
Recorded at Present Value in the Interest Expense section in the Consolidated
Statements of Income.
DEFERRED SPRINGERVILLE COMMON FACILITY COSTS
Deferred Springerville Common Facility Costs are lease costs and
operating costs that TEP incurred for the Springerville Common Facilities
during the period after Springerville Unit 1 was placed in service and before
Springerville Unit 2 was placed in service. Pursuant to an accounting order
from the ACC, these costs were deferred and are being amortized, as
depreciation, over the primary term of the Springerville Common Facilities
Leases. The ACC has allowed for the recovery of the deferred costs plus a
return on investment in such deferred costs.
UTILITY OPERATING REVENUES
Operating Revenues include accruals for unbilled revenues, thereby
recognizing revenue that is earned, but not billed, at the end of an
accounting period.
MSR OPTION GAIN REGULATORY LIABILITY
In the 1989 Rate Order the ACC allocated to retail customers a portion
of the price paid to TEP upon the 1982 sale of an option to purchase a 28.8%
interest in San Juan Unit 4, asserting that such option was related to an
interconnection agreement which TEP also entered into with MSR at that time.
The ACC ordered TEP to recognize the MSR Option Gain by amortizing amounts to
operating revenue through May 1997. Therefore, in 1990, TEP recorded a loss
and the MSR Option Gain Regulatory Liability, equal to the present value of
the amount to be amortized to operating revenues through May 1997, calculated
using a 13% discount rate. The MSR Option Gain Regulatory Liability
increased each year by the accrual of interest and decreased by the amount
which was amortized to operating revenues. In 1997, 1996 and 1995, the
accrual of such interest was $0.3 million, $2.3 million and $4.4 million,
respectively, and the amount amortized was $8.1 million in 1997 and $20.1
million in 1996 and 1995. The imputed interest expense associated with this
liability, calculated using a 13% discount rate, is included as part of
Interest Imputed on Losses Recorded at Present Value in the Interest Expense
section in the Consolidated Statements of Income.
FUEL COSTS
Fuel inventory, primarily coal, is stated on a basis which approximates
weighted average cost. TEP uses full absorption costing.
Certain lease and interest costs related to the Springerville Coal
Handling Facilities are accounted for as deferred costs. These costs are
being amortized to fuel expense on a straight-line basis through the year
2030 pursuant to the 1994 Rate Order.
INCOME TAXES
The Income Taxes Recoverable Through Future Rates regulatory asset
consists primarily of the right to recover income taxes relating to
previously flowed-through differences, both timing and permanent, which
provided rate benefits to past ratepayers.
Reductions in federal income taxes resulting from ITC relating to
utility operations have been deferred. As authorized by the ACC, these
amounts are amortized over the tax lives of the related property. The income
tax benefits reflected in the Consolidated Statements of Income for the years
1997, 1996 and 1995 are primarily a result of the recognition of a portion of
the Company's net operating loss carryforwards, as well as ITC amortization.
See Note 3.
Income taxes are allocated to the subsidiaries based on contributions to
the consolidated tax return liability.
EMISSION ALLOWANCES
Purchased Emission Allowances are recorded in a noncurrent inventory
account included in Investments and Other Property on the Consolidated
Balance Sheets. Emission Allowance inventory is recorded using the weighted
average cost method. Gains on sales of Emission Allowances are deferred as
Emission Allowance Gain Regulatory Liability in the Consolidated Balance
Sheets and will be amortized as income in 2000 - 2024, the period TEP expects
to use the Emission Allowance inventory to meet EPA regulations. The
amortization reflects the expected regulatory treatment for the gains.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and fair value of the financial instruments are as
follows:
December 31,
1997 1996
------ ------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
- Thousands of Dollars -
Assets:
Debt Securities (Included
in Investments and Other
Property) 17,781 19,911 17,748 18,267
Liabilities:
Short-Term Debt - - (3,567) (3,567)
First Mortgage Bonds:
Corporate 243,750 255,928 243,750 252,443
IDBs
Variable Rate 100,000 100,000 151,400 151,400
Fixed Rate 64,000 64,000 97,000 95,573
Second Mortgage Bonds:
IDBs (Variable Rate) 428,600 428,600 50,000 50,000
Other Secured IDBs (Variable
Rate) - - 603,600 603,600
Unsecured IDBs 379,270 413,694 47,910 47,670
Renewable Term Loan
(Variable Rate) - - 31,000 31,000
TEP intends to hold the investment in Debt Securities to maturity
(January 1, 2013). Such Debt Securities are stated at amortized cost,
adjusted for the amortization of the discount to maturity, and the fair value
is based on current transactions for the same or similar debt. The carrying
amount of Short-Term Debt at December 31, 1996 was considered to be a
reasonable estimate of the fair value because of its short maturity.
The principal amounts of variable rate debt outstanding at December 31,
1997 and 1996 are considered reasonable estimates of their fair value as
these are variable interest rate liabilities. The fair value of TEP's fixed
rate obligations including the Corporate First Mortgage Bonds, the First
Mortgage Bonds-IDBs (fixed rate) and the Unsecured IDBs was determined by
calculating the present value of the cash flows of each fixed rate
obligation. The discount rate used for each calculation was a rate
consistent with market yields generally available as of December 1997 for
1997 amounts and December 1996 for 1996 amounts for bonds with similar
characteristics with respect to: credit rating, time-to-maturity, and the
tax status of the bond coupon for Federal income tax purposes. The use of
different market assumptions and/or estimation methodologies may yield
different estimated fair value amounts.
RECLASSIFICATION
Minor reclassifications have been made to the prior year financial
statements presented to conform to the current year's presentation.
NOTE 2. RATE MATTERS
- -------------------
SHARED SAVINGS PROPOSAL
On July 9, 1997, TEP filed with the ACC a request for an annual rate
reduction of $6.8 million (or 1.1%) for retail customers. This filing is in
the form of a Shared Savings Proposal (SSP) which promotes a sharing of
benefits with customers of cost containment efforts and the mitigation of
potential stranded costs associated with the introduction of retail electric
competition in Arizona. The cost containment savings were realized primarily
from renegotiated fuel contracts and the Voluntary Severance Program, which
reduced TEP's workforce by approximately 15% (see Note 9). No date has been
set for formal consideration of the matter by the ACC.
TEP proposed that additional savings be used to mitigate potential
stranded costs through accelerated amortization of retail excess capacity
deferrals. Retail excess capacity deferrals represent those operating and
capital costs associated with Springerville Unit 2 capacity, which were
deemed by the ACC to not be recoverable in retail rates prior to the 1994 and
1996 Rate Orders. Such retail excess capacity deferrals totaled $88.7
million and $93.6 million at December 31, 1997 and 1996, respectively. Such
deferrals are not reflected in the accompanying Consolidated Balance Sheets
because such retail excess capacity deferrals, while deferred for regulatory
purposes, were not deferred for financial reporting purposes but were
expensed as incurred. The proposed $7.2 million (after tax) increase in
annual amortization expense for such excess capacity deferrals would decrease
the amortization period from 20 years to 5.6 years as of December 1996. The
proposed increase in amortization expense would be reflected in TEP's
regulatory accounting records but would have no impact on the expenses
included in TEP's financial accounting statements.
SPRINGERVILLE COAL CONTRACT TERMINATION FEE
On June 27, 1997, TEP signed an agreement with the coal supplier for the
Springerville Generating Station to terminate the existing coal supply
contract and enter into a new, more cost effective contract with the same
supplier (see Note 7). A $50 million termination fee was incurred by TEP and
payable in three installments: $30 million paid on June 30, 1997; $10
million paid on September 30, 1997; and $10 million due March 31, 1998.
TEP applied, as part of the SSP, to the ACC requesting that the
termination fee be recorded as a regulatory asset and amortized to fuel
expense over the 13-year term of the new agreement. On July 29, 1997, the
ACC issued an interim accounting order allowing TEP to defer the $50 million
termination fee as a regulatory asset in the Consolidated Balance Sheet until
the ACC decides whether the $50 million termination fee should be recovered
through retail rates. The interim accounting order also allowed TEP to begin
amortizing the termination fee to fuel expense. If the ACC ultimately
disallows recovery, the unamortized portion of the $50 million termination
fee would immediately be expensed. No date has been set for formal
consideration of the matter by the ACC.
1996 RATE ORDER
On March 29, 1996, the ACC authorized a 1.1%, or $6.4 million, increase
in TEP's base rates effective March 31, 1996. Pursuant to the 1996 Rate
Order, TEP agreed to not seek an increase in base rates before January 1,
2000, subject to conditions specified in such order.
Prior to the 1996 Rate Order, TEP was not recovering through retail
rates 37.5% of the deferred Springerville Unit 2 rate synchronization costs
which were non-fuel costs of Springerville Unit 2 incurred from January 1,
1991 through October 14, 1991. Beginning March 31, 1996, these costs are
being amortized over a three-year period in accordance with the 1996 Rate
Order. These costs are reported in the Consolidated Balance Sheets as
Deferred Springerville Unit 2 Costs. In addition, the 62.5% of the deferred
Springerville Unit 2 rate synchronization costs that TEP was recovering
through rates pursuant to the 1994 rate order were fully amortized during
1996. The total amortization of the above costs included in Depreciation and
Amortization on the Consolidated Statements of Income in 1997, 1996 and 1995
amounted to $9.6 million, $21.1 million and $14.1 million, respectively.
NOTE 3. INCOME TAXES
- ---------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31,
1997 1996
----------- ----------
- Thousands of Dollars -
Gross Deferred Income Tax Liabilities:
Electric Plant - Net $(568,365) $(568,781)
Income Taxes Recoverable Through
Future Rates - Regulatory Asset (68,680) (70,173)
Deferred Inventory Costs (21,048) (21,371)
Deferred Lease Payments (13,273) (13,916)
Property Taxes (9,450) (9,970)
Deferred Springerville Unit 2 Costs (4,681) (8,584)
Other (12,075) (9,829)
---------- ----------
Gross Deferred Income Tax Liability (697,572) (702,624)
---------- ----------
Gross Deferred Income Tax Assets:
Capital Lease Obligations 364,445 365,935
Tax Operating Loss Carryforwards 141,048 163,046
Springerville Unit 1 Disallowed Costs 67,760 65,974
Investment Tax Credit Carryforwards 26,396 26,396
Lease Interest Payable 18,424 17,328
Regulatory Deferred Capital Lease Expense 17,163 16,018
Sales Tax Assessments Not Yet
Deductible for Tax Purposes 14,406 13,974
Investment in Loans and Property 3,522 10,276
Financial Restructuring Costs Not Yet
Deductible for Tax Purposes 7,568 7,782
Deferred Gain on Emission Allowances 6,926 6,923
Capital Loss Carryforwards 4,520 4,634
Alternative Minimum Tax 5,594 4,544
Gain on Financial Restructuring of
Long-Term Debt 3,207 4,289
MSR Option Gain Regulatory Liability - 3,171
Other 21,831 17,204
---------- ----------
Gross Deferred Income Tax Asset 702,810 727,494
Deferred Tax Assets Valuation Allowance (67,934) (111,069)
---------- ----------
Net Deferred Income Tax Liability $ (62,696) $ (86,199)
========== ==========
The decreases of approximately $43 million and $120 million in the
deferred tax assets valuation allowance in 1997 and 1996, respectively, are
primarily due to revisions in the estimated amount of prior period NOLs that
the Company and TEP believe are likely to reduce future taxable income. The
utilization of NOL carryforwards also contributed to the 1997 and 1996
decreases. Additionally, expiring state NOL carryforwards, utilization of
capital loss carryforwards, and a change in the effective tax rate used to
record NOL carryforwards contributed to the 1996 decrease.
The Company and TEP recognize benefits related to prior period NOLs
based on changes in the estimated amount of prior period NOLs that, in the
Company's and TEP's judgment, are more likely than not to be realized in the
future. A significant factor, among others, considered in estimating such
amount is the average annual book income before taxes for the prior three
years. Prior to 1995, the Company and TEP had provided a deferred tax assets
valuation allowance against all the NOL carryforwards, investment tax credit
carryforwards and capital loss carryforwards due to the uncertainty of their
future use. Because the results from operations have been steadily
improving, the amount the Company and TEP believe is likely to reduce future
taxable income has increased. Accordingly, the Company and TEP recognized in
1997, 1996 and 1995 income tax benefits of $43 million, $89 million and $23
million, respectively, related to the current and expected future utilization
of federal and state NOL carryforwards. These benefits are included in
Income Taxes in Other Income (Deductions) in the Consolidated Statements of
Income. In future periods when such NOLs are used on tax returns, the income
tax expense shown on the Consolidated Statements of Income will not be
reduced to reflect such utilization.
At December 31, 1997, on a cumulative basis the Company and TEP had
recognized in their income statements the amount of the prior period NOL
benefit that the Company and TEP expect to utilize on future income tax
returns. Additional amounts of prior period NOL benefit which may be
recognized in the future in the income statement are at present indeterminate
due to the interplay of open tax years for which assessments may be made and
varying expiration dates of federal and state NOL carryforwards.
The net deferred income tax liability is included in the Consolidated
Balance Sheets in the following accounts:
December 31,
1997 1996
---------- ----------
- Thousands of Dollars -
Deferred Income Taxes - Current $ 14,910 $ 10,223
Deferred Income Taxes - Noncurrent (77,606) (96,422)
---------- ----------
Net Deferred Income Tax Liability $ (62,696) $ (86,199)
========== ==========
The benefit for income taxes included in the Consolidated Statements of
Income consists of the following:
Years Ended December 31,
1997 1996 1995
---------- ---------- ----------
- Thousands of Dollars -
Operating Expenses:
Deferred Tax Expense
Federal $ 15,262 $ 7,836 $ 7,803
State 4,045 2,019 1,200
---------- ---------- ----------
Total 19,307 9,855 9,003
Investment Tax Credit Amortization (10) (60) (83)
---------- ---------- ----------
Total Expense Included in
Operating Expenses 19,297 9,795 8,920
---------- ---------- ----------
Other Income (Deductions):
Deferred Tax Expense
Federal 4,250 777 1,065
State 1,065 266 164
---------- ---------- ----------
Total 5,315 1,043 1,229
Reduction in Valuation
Allowance - Benefit (43,443) (88,638) (23,282)
Investment Tax Credit Amortization (3,273) (4,355) (4,683)
Other - - (2,620)
---------- ---------- ----------
Total Benefit Included in Other
Income (Deductions) (41,401) (91,950) (29,356)
---------- ---------- ----------
Total Benefit for Federal and State
Income Taxes $ (22,104) $ (82,155) $ (20,436)
========== ========== ==========
The differences between income tax benefit and the amount obtained by
multiplying income before income taxes by the U.S. statutory federal income
tax rate are as follows:
Years Ended December 31,
1997 1996 1995
---------- ---------- ----------
- Thousands of Dollars -
Federal Income Tax Expense
at Statutory Rate $ 21,514 $ 13,544 $ 12,064
State Income Tax Expense, Net of
Federal Deduction 3,314 2,081 1,364
Investment Tax Credit Amortization (3,283) (4,415) (4,766)
Reduction in Valuation Allowance - Benefit (43,443) (88,638) (23,282)
Net Operating Loss Carryforwards - - (5,122)
Capital Loss Carryforwards - (5,616) (1,045)
Other (206) 889 351
---------- ---------- ----------
Total Benefit for Federal and
State Income Taxes $ (22,104) $ (82,155) $ (20,436)
========== ========== ==========
At December 31, 1997, the Company and TEP had, for federal income tax
purposes, approximately $437 million of NOL carryforwards expiring in 2005
through 2009; $26 million of alternative minimum tax (AMT) loss carryforwards
expiring in 2008; $26 million of unused ITC, the use of which will expire
during 2002 through 2005; $11 million of capital loss carryforwards which
expire in 1999; and $6 million of AMT credit which will carry forward to
future years. For state income tax purposes, the Company and TEP had
approximately $29 million of NOL carryforwards expiring in 1998 and 1999.
Due to the Financial Restructuring, the Company and TEP experienced a
change in ownership under section 382 of the Internal Revenue Code in
December 1991. As a result, the amount of taxable income for any post-change
year which may be offset by pre-change NOL will be limited to the section 382
limitation. The section 382 limitation is based on the value of the Company
and TEP on the ownership change date. The Company and TEP estimate an annual
section 382 limit of approximately $23 million. The total section 382
limitation may be increased to the extent of gains recognized on sales of
assets whose fair market value was greater than the tax basis at the
ownership change date, the built-in-gain. The section 382 limitation may
increase by built-in-gain recognized within a period of five years after the
change in ownership. During 1992 through 1996, the section 382 limitation
increased by approximately $102 million of built-in-gain recognized due to
asset sales. Unused section 382 limitation may be carried forward until the
pre-change tax attributes expire. At December 31, 1997, the Company and TEP
had pre-change federal NOL and ITC carryforwards of approximately $281
million and $26 million, respectively. Such amounts are included in the
amounts disclosed in the preceding paragraph.
See Income Tax Assessments in Note 7.
NOTE 4. CONSOLIDATED SUBSIDIARIES
- ---------------------------------
On January 1, 1998, TEP transferred the stock of its subsidiary, MEH, to
UniSource Energy in exchange for a $95 million promissory note from UniSource
Energy. See Note 1. The net losses for 1997, 1996 and 1995 of the
subsidiaries which comprise MEH were $5 million, $2 million and $1 million,
respectively.
MEH SUBSIDIARIES
Nations Energy Corporation
In 1995 the Company established Nations Energy, a wholly-owned
subsidiary of MEH, for the purpose of developing and investing in independent
power projects in global energy markets. In September 1995, Nations Energy
and Trigen Energy Corporation formed a limited partnership and purchased
Coors Brewing Company's energy production (utility) assets. Nations Energy
has a 49% interest in such partnership. The partnership provides electricity
and steam for the brewery operation in Golden, Colorado. The investment of
approximately $12 million by Nations Energy is included in the Consolidated
Balance Sheets under Investments and Other Property at December 31, 1997 and
1996 and in the Consolidated Statement of Cash Flows for the year ended
December 31, 1995 as Investments in and Loans to Joint Ventures.
Advanced Energy Technologies, Inc.
In May 1996, Advanced Energy, a wholly-owned subsidiary of MEH, and ITN
Energy Systems formed Global Solar Energy, L.L.C. for the purpose of
developing and manufacturing photovoltaic materials. Advanced Energy has a
50% interest in Global Solar. The $5 million investment in Global Solar is
included in the Consolidated Balance Sheets at December 31, 1997 and 1996
under Investments and Other Property and in the Consolidated Statement of
Cash Flows for the year ended December 31, 1996 as Investments in and Loans
to Joint Ventures.
Millennium Energy Holdings, Inc.
Effective September 1, 1997, Millennium, a wholly-owned subsidiary of
MEH, exercised an option to acquire a 50% ownership in New Energy Ventures,
L.L.C. (NEV). NEV was organized in 1995 for the purpose of acting as a
buyer's agent in procuring electric energy, performing energy services,
engaging in power marketing and trading and other energy related activities.
Concurrently with the exercise of the option, Millennium made a capital
contribution in the amount of $0.8 million and extended a $3.0 million member
loan to NEV. The investment in NEV is included in the Consolidated Balance
Sheet at December 31, 1997 under Investments and Other Property and in the
Consolidated Statement of Cash Flows for the year ended December 31, 1997 as
Investments in and Loans to Joint Ventures.
In December 1997, Millennium committed to provide NEV with $20 million
of funding. At NEV's option, the funding can be in the form of additional
equity, preferred equity, or it can be partially satisfied with $10 million
in loans from Millennium, or a combination thereof. Based on formulas in the
funding agreement, funding of additional equity would increase Millennium's
financial interest percentage in NEV but not its 50% voting interest.
Pursuant to the funding agreement, at December 31, 1997, Millennium had
extended $1 million in loans to NEV. Millennium extended an additional $3
million in loans to NEV in February 1998.
TEP SUBSIDIARIES
In July 1996, Brookland satisfied approximately $8.5 million of short-
term debt obligations with the assignment of certain finance receivables.
Upon settlement, a provision for loss recorded against such receivables in
prior years was reversed, resulting in income of approximately $8.5 million.
Upon dissolution of certain subsidiaries which formed a part of TEP's
former investment operations, in June 1997, TEP reversed a provision for
loss, recorded in prior years, resulting in income of approximately $10.2
million.
NOTE 5. LONG AND SHORT-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
- ---------------------------------------------------------------
LONG-TERM DEBT
TEP Sale of Bonds
In April 1997, the City of Farmington, New Mexico issued $80.4 million
of Pollution Control Revenue Bonds for the benefit of TEP. The net proceeds
made available to TEP were used in June 1997 to redeem $47.9 million
principal amount of previously issued 6.25% bonds that would have matured in
2003 and $32.5 million principal amount of previously issued 6.10% bonds that
would have matured in 2007. The new bonds, which are unsecured, bear
interest at 6.95% and mature in 2020. In addition to extending maturities,
this transaction eliminated sinking fund requirements under the previously
issued bonds and resulted in the retirement of $32.5 million in
collateralizing First Mortgage Bonds.
In April 1997, the Coconino County, Arizona Pollution Control
Corporation issued $36.7 million of Pollution Control Revenue Bonds for the
benefit of TEP. The net proceeds loaned to TEP were used, in part, to
redeem, in June 1997, $16.7 million principal amount of previously issued
variable rate bonds that would have matured in 2031 and the remaining portion
is being used to fund $20 million of construction costs of additional
pollution abatement facilities at Navajo Generating Station. The new bonds,
which are unsecured, bear interest at 7.13% and mature in 2032. The $16.7
million of previously issued bonds redeemed in this transaction were backed
by a letter of credit expiring in April 1999, which was collateralized by
$18.3 million aggregate principal amount of First Mortgage Bonds.
In April 1997, the Coconino County, Arizona Pollution Control
Corporation issued $14.7 million of Pollution Control Revenue Bonds for the
benefit of TEP. The net proceeds loaned to TEP were used in June 1997 to
redeem $14.7 million principal amount of previously issued variable rate
bonds that would have matured in 2031. The new bonds, which are unsecured,
bear interest at 7.00% and mature in 2032. The $14.7 million of previously
issued bonds redeemed in this transaction were backed by a letter of credit
expiring in April 1999, which was collateralized by $16.1 million aggregate
principal amount of First Mortgage Bonds.
In October 1997, the Industrial Development Authority of the County of
Pima, Arizona issued $247.5 million of Industrial Development Revenue Bonds
for the benefit of TEP. The net proceeds loaned to TEP were used in November
1997 to redeem $245 million principal amount of previously issued variable
rate bonds that would have matured between 2018 and 2025 and to finance
improvements to TEP's lower voltage electric transmission and distribution
system in Pima County, Arizona. The new bonds, which are unsecured, were
sold in three series: Series A ($22.5 million) bears interest at 6.10% and
matures in 2025; Series B ($150 million) and Series C ($75 million) bear
interest at 6.00% and mature in 2029. The previously issued bonds redeemed
in this transaction were backed by letters of credit expiring between 2000
and 2002. One of these letters of credit was collateralized by $20.7 million
aggregate principal amount of First Mortgage Bonds.
TEP Bank Credit Agreements
In February 1997, TEP repaid the outstanding Renewable Term Loan balance
of $31 million under the MRA. In December 1997, the MRA was replaced with a
new bank Credit Agreement. Upon termination of the MRA, a release of lien
was obtained for Springerville Unit 2, title to which is held by San Carlos.
Second Mortgage Bonds ($50 million aggregate principal amount) held as
collateral under the MRA were also returned to TEP.
In December 1997, TEP entered into a new $544 million bank Credit
Agreement to replace the credit facilities provided under the MRA. The new
Credit Agreement consists of a $100 million Revolving Credit Facility for
general corporate purposes and a $444 million Letter of Credit Facility to
support $428.6 million aggregate principal amount of tax-exempt variable rate
debt obligations. The facilities mature on December 30, 2002 and are secured
by $544 million aggregate principal amount of Second Mortgage Bonds. The
Credit Agreement contains certain financial covenants, including interest
coverage, leverage and net worth tests. As of December 31, 1997, TEP was
in compliance with such covenants.
Borrowings, if any, under the Revolving Credit Facility bear interest at
a variable rate consisting of a spread over a base rate based upon a pricing
grid tied to the credit rating then in effect on TEP's senior secured debt.
The annual commitment fee payable on the unused portion of the Revolving
Credit Facility, as well as the fee payable on the Letter of Credit Facility,
are also determined based on TEP's credit ratings. At December 31, 1997, the
commitment fee equaled 0.38% per annum, and the letter of credit fee equaled
1.63% per annum. TEP had no borrowings outstanding under the Revolving
Credit Facility at December 31, 1997.
TEP FIRST AND SECOND MORTGAGE
TEP's utility plant, with the exception of Springerville Unit 2 (title
to which is held by San Carlos), is subject to the lien of the General First
Mortgage and the General Second Mortgage.
TEP Letters of Credit
At December 31, 1997, TEP had $528.6 million principal amount of
variable rate tax-exempt IDBs outstanding. Payment of principal and interest
on these bonds is secured by LOCs. A LOC supporting $100 million principal
amount of bonds will expire on December 31, 1999. The remaining LOCs, all of
which were issued under the new Credit Agreement, expire on December 30,
2002. The weighted average commitment fee on the LOCs is approximately 1.56%
through 1998, increasing to 1.61% in 1999 and 1.75% in 2000.
TEP CAPITAL LEASE OBLIGATIONS
The Irvington Lease has an initial term to January 2011 and provides for
renewal periods of two or more years through 2020. The Springerville Common
Facilities Leases have an initial term to 2017 for one owner participant and
2021 for the other two owner participants, subject to optional renewal
periods of two or more years through 2025. The Springerville Unit 1 Leases
have an initial term to January 2015 and provide for renewal periods of three
or more years through 2030. The Springerville Coal Handling Facilities
Leases have an initial term to April 2015 and provide for an initial renewal
period of six years, then additional renewal periods of five or more years
through 2035.
TEP MATURITIES AND SINKING FUND REQUIREMENTS
A schedule by years of the aggregate amount of maturities and sinking
fund requirements for TEP's long-term borrowings as of December 31, 1997
follows:
Expiring Scheduled
LOCs Long-Term
Supporting Debt Capital Lease
IDBs Retirements Obligations Total
-------- -------- ------------ ----------
Years Ending
December 31, - Thousands of Dollars -
1998 $ 500 $ 97,200 $ 97,700
1999 $100,000 16,725 120,815 237,540
2000 - 80,475 164,121 244,596
2001 - 26,725 101,781 128,506
2002 428,600 26,725 89,301 544,626
-------- -------- ------------ -----------
Total 1998 - 2002 528,600 151,150 573,218 1,252,968
Thereafter - 535,870 1,541,164 2,077,034
Imputed Interest - - (1,209,573) (1,209,573)
-------- -------- ----------- -----------
Total $528,600 $687,020 $ 904,809 $2,120,429
======== ======== =========== ===========
TEP expects to refinance the LOCs supporting IDBs at expiration. The
above schedule does not include sinking fund requirements for certain First
Mortgage Bonds of approximately $1.4 million for each of the next five years.
TEP expects to satisfy these sinking fund requirements with pledges of
additional property of approximately $2.3 million each year.
SHORT-TERM DEBT
Upon dissolution of certain subsidiaries which formed a part of TEP's
former investment operations, in June 1997, TEP eliminated the $4 million of
short-term debt outstanding at December 31, 1996.
NOTE 6. DIVIDEND AND LOAN RESTRICTIONS
- --------------------------------------
RESTRICTIVE COVENANTS - DIVIDENDS
UniSource Energy
The Company's ability to pay dividends is dependent upon cash flow from
its subsidiaries, TEP and MEH. TEP comprises substantially all of UniSource
Energy's assets. TEP is currently precluded by restrictive covenants in
certain debt agreements from declaring or paying dividends. No dividend on
common stock has been declared or paid by TEP since 1989. Until such time as
TEP is able to pay dividends to UniSource Energy, it is unlikely that
UniSource Energy would declare and pay dividends to holders of its Common
Stock.
TEP
So long as certain series of First Mortgage Bonds (aggregating $184
million in principal amount) are outstanding, the payment of dividends on TEP
common stock is prohibited if certain cash flow coverage and retained
earnings tests are not met. The cash flow coverage test would prevent TEP
from paying dividends on its common stock until such time as its cash flow
coverage ratio, as defined therein, is greater or equal to a ratio of 2 to 1,
and the retained earnings test would permit dividend payments so long as TEP
has positive retained earnings. As of December 31, 1997, TEP had a cash flow
coverage ratio in excess of 3 to 1 but did not meet the retained earnings
test as the accumulated deficit was $422 million. 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. In
order for TEP to pay a dividend before such maturity date, TEP would need to
have positive retained earnings or redeem all outstanding First Mortgage
Bonds of each series that contain such covenants or amend the supplemental
mortgage indentures pertaining to such series of First Mortgage Bonds. Such
an amendment would require approval by holders of 75% of all First Mortgage
Bonds.
TEP's bank Credit Agreement allows for the payment of dividends so long
as TEP maintains compliance with the agreement and meets its financial
covenants, including a covenant which requires TEP to maintain a minimum
level of net worth. As of December 31, 1997, TEP was in compliance with the
terms of the Credit Agreement.
Pursuant to the ACC Holding Company Order, until such time as TEP's
equity ratio equals 37.5% of total capital (excluding capital lease
obligations), TEP may not pay dividends to UniSource Energy in excess of 75%
of its earnings. As of December 31, 1997, TEP's equity ratio was 15% on that
basis.
In addition to such restrictive covenants, the Federal Power Act states
that dividends shall not be paid out of funds properly included in the
capital account. It is unclear whether such provisions of the Federal Power
Act restrict TEP from paying dividends.
RESTRICTIONS ON TEP'S ABILITY TO MAKE LOANS AND ADVANCES
Under the ACC Affiliated Interest Rules, TEP needs prior ACC approval to
make loans to affiliates for longer than one year or greater than $100,000.
The ACC Holding Company Order contained numerous other continuing
requirements. One of the requirements is that affiliates must pay for
services received from TEP on the same terms offered to non-affiliates.
NOTE 7. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
UTILITY CONTRACTUAL MATTERS
Fuel Purchase Commitments
TEP has contracts to purchase coal for use at the Springerville and
Irvington Generating Stations and at the joint projects in which TEP
participates. On June 27, 1997, TEP terminated the existing coal supply
contract for the Springerville Generating Station and entered into a new,
more cost effective contract with the same supplier (see Note 2). The
previous coal supply contract covered the useful lives of Springerville Units
1 and 2 and contained a bilateral option to renegotiate the contract price
and escalation procedures in 2009 and every five years thereafter. The new
coal contract has an initial term of 13 years, beginning July 1, 1997, with
an option to extend ten years thereafter. The new contract also contains
more favorable terms to TEP for certain volume, incremental volume, base
price, incremental price and price adjustment mechanism requirements.
The Irvington contract terminates on the earlier of 2015 or the
remaining useful life of the coal-fired unit, and includes an adjustment
clause that will affect the future cost of coal delivered. The Springerville
and Irvington contracts, in the aggregate, require TEP to take 2.1 million
tons of coal per year at an estimated annual cost of $62 million from 1998 to
2009.
TEP's contracts to purchase coal for use at the joint projects in which
TEP participates expire at various dates from 2005 to 2017 and, in the
aggregate, require TEP to take 1.5 million tons of coal per year at an
estimated annual cost of $45 million from 1998 to 2005.
TEP's contracts to purchase coal for use at Springerville, Irvington and
each of the joint projects in which TEP participates contain various
provisions calling for the payment of a take-or-pay amount, if certain
minimum quantities of coal are not scheduled and delivered. TEP's present
fuel requirements are generally in excess of the stated take-or-pay minimum
amounts; however, from time to time, TEP has purchased spot market
alternative fuels or switched fuel burn from one generating station to
another in order to achieve lower overall fuel costs, while incurring take-or-
pay minimum charges. For Irvington, TEP entered into an agreement with an
alternate coal supplier for 1996 resulting in a $4.4 million take-or-pay
charge but reducing coal costs overall at Irvington. TEP incurred no take-or-
pay charges in 1997 or 1995.
Coal and Transportation Contracts - Reversal of Accrued Liabilities
In 1991 amendments to the contracts with the Springerville coal
supplier, the Irvington coal supplier and the Springerville rail
transportation supplier were entered into which, among other things,
contained provisions which protected the claims of the suppliers under the
original agreements in the event TEP did not perform its obligations under
the terms of the amended agreements during the subsequent four year period.
In 1995, TEP satisfied all of the conditions of the amended contracts and,
consequently, reversed $12.2 million of accrued liabilities. The reversal of
the accrued liabilities reduced Fuel and Purchased Power expense by $12.2
million in 1995.
COMMITMENTS - ENVIRONMENTAL REGULATION
In the fall of 1990, Congress adopted certain Federal Clean Air Act
Amendments (CAAA) with respect to facility permitting and to reductions in
sulfur dioxide and nitrogen oxide emissions which will affect TEP's
operations. The required reductions of sulfur dioxide emissions will be
implemented in two phases which are effective in 1995 and 2000, respectively.
TEP is not affected by the requirements for sulfur dioxide and nitrogen oxide
emissions which went into effect in 1995 (Phase I), but is subject to the
requirements that go into effect January 1, 2000 (Phase II). All of TEP's
generating facilities (except internal combustion turbines) are subject to
the Phase II sulfur dioxide and nitrogen oxide requirements. The estimated
cost of compliance with these requirements is approximately $2 million,
scheduled to be incurred between 1998 and 2000.
In 1993 affected TEP generating units were allocated sulfur dioxide
Emission Allowances based on past operational history. Beginning in the year
2000, Phase II generating station units must hold Emission Allowances (by
January 30 of the year following the compliance year) equal to the level of
emissions in the compliance year, or face penalties and a requirement to
offset excess emissions in future years. An analysis of the Emission
Allowances that were allocated to TEP shows that TEP may not have sufficient
allowances to permit normal plant operation and be in compliance with the
sulfur dioxide regulations once the Phase II requirements become effective
due to the increase in the rated capacity at Springerville. To the extent
that TEP does not have sufficient allowances, due to increased energy output
at Springerville or other factors, TEP would have to purchase additional
Emission Allowances. Based upon current estimates of additional required
Emission Allowances and the current market price of such allowances, TEP
believes that it will be able to acquire additional required allowances and
that such purchases will not have a material effect on TEP.
Title V of the CAAA requires that more complex air quality permits be
applied for and obtained for all of TEP's generating facilities.
Applications have been filed for all such facilities and TEP does not
anticipate any material problems in obtaining the required permits. TEP is
required to pay an annual emission-based fee with respect to each generating
facility subject to a Title V permit. The annual emission-based fee paid in
1995, 1996 and 1997 was less than $1 million.
The CAAA also require multi-year studies of visibility impairment in
specified areas and studies of hazardous air pollutants which relate to the
necessity of future regulations of electric utility generating units. Since
these activities involve the gathering of information not currently
available, TEP cannot predict the outcome of these studies.
As a result of recent and possible future changes in federal and state
environmental laws, regulations and permit requirements, because of and in
addition to the CAAA, TEP may incur additional costs for the purchase or
upgrading of pollution control emission monitoring equipment on existing
electric generating facilities and may experience a reduction in operating
efficiency. There may be a need for variances from certain environmental
standards and operating permit conditions until required equipment and
processes for control, handling and disposal of emissions are operational and
reliable. Failure to comply with any EPA or state compliance requirements
may result in substantial penalties or fines which are provided for by law
and which in some cases are mandatory.
In 1991, the EPA adopted a rule for the reduction of Navajo's sulfur
dioxide emissions on an annual averaging basis by 90% to address visibility
impairment at Grand Canyon National Park. TEP estimates that its share of
the required capital expenditures remaining as of December 31, 1997 relating
to the rule's implementation will be approximately $8 million, including
AFDC, through 2000.
In order to improve the efficiency of sulfur dioxide removal at the
station, the existing removal process is being replaced with a new process at
an estimated cost to TEP of $20 million, including AFDC, during the period
1997 through 1999. TEP estimates that its share of the required capital
expenditures remaining as of December 31, 1997 relating to this process
improvement will be approximately $11 million, including AFDC, through 1999.
CONTINGENCIES
Ruling on Arizona Sales Tax Assessments - Coal Sales
The Arizona Department of Revenue (ADOR) issued transaction privilege
(sales) tax assessments to TEP alleging that Valencia (formerly a wholly-
owned subsidiary of TEP) was liable for sales tax on gross income received
from coal sales, transportation and coal-handling services to TEP for the
period November 1985 through May 1996. TEP protested these assessments. On
September 12, 1996, the Arizona Court of Appeals upheld the validity of the
assessment issued for the period November 1985 through March 1990. As a
result of the Court of Appeals decision, TEP recorded an additional expense
of approximately $9.2 million in the third quarter of 1996. TEP appealed to
the Arizona Supreme Court, which heard arguments in December 1997 and is
expected to render its opinion in the second quarter of 1998. Additionally,
TEP is protesting the assessments for the period April 1990 through May 1996.
Previously, TEP had recorded an expense through the Consolidated
Statements of Income and related liability for the amount of sales taxes and
interest thereon which TEP believed was probable of incurrence for the period
November 1985 through May 1996. Generally, Arizona law requires payment of
an assessment prior to pursuing the appellate process. TEP has previously
paid, under protest, a total of $23 million of the disputed sales tax
assessments, subject to refund in the event TEP prevails.
Since Valencia was merged into TEP on May 31, 1996, TEP acquires coal
directly from the supplier. As a result, TEP believes it is not liable for
transaction privilege tax computed on a basis similar to the assessments
described above subsequent to May 31, 1996. For periods subsequent to May
31, 1996 TEP continues to record an estimated interest expense on the above
assessments.
Arizona Sales Tax Assessments - Leases
The ADOR has issued transaction privilege (sales) tax assessments to the
lessors from whom TEP leases certain property. The assessments allege sales
tax liability on a component of rents paid by TEP under the Springerville
Unit 1 Leases, the Springerville Common Facilities Leases, the Irvington
Lease and the Springerville Coal Handling Facilities Leases. Assessments
cover the period August 1, 1988 to September 30, 1993. Pursuant to
indemnification provisions, if the ADOR prevails TEP must reimburse the
lessors for taxes paid by them.
In the opinion of management, TEP has recorded, through the Consolidated
Statements of Income in current and prior years, a liability for the amount
of sales taxes and interest thereon for which TEP feels incurrence is
probable as of December 31, 1997. In the event that the assessments by the
ADOR are sustained, an additional liability would result. Although it is
reasonably possible that the ultimate resolution of such matter could result
in an additional sales tax expense of up to approximately $21 million in
excess of amounts recorded, management and outside tax counsel believe that
TEP has meritorious defenses to mitigate or eliminate the assessed amounts.
Based on the current status of the legal proceedings, TEP believes that
the ultimate resolution of such dispute will occur over a period of two to
four years. Based on consultations with counsel and considering the amounts
already accrued, TEP believes that the resolution of this tax matter should
not have a material adverse effect on the Consolidated Financial Statements.
Income Tax Assessments
In February 1998, the Internal Revenue Service (IRS) issued an income
tax assessment to TEP asserting deficiencies in the amount of federal income
taxes for TEP's 1992 and 1993 tax years. The IRS is challenging TEP's
treatment of various items relating to the 1992 Financial Restructuring,
including TEP's computation of the section 382 limitation as described in
Note 3 and amounts of NOL available to offset taxable income in future
periods. TEP strongly disagrees with the IRS position and will vigorously
contest it. Although management cannot predict the outcome of the dispute
with certainty, management does not expect the resolution of the matter to
have a material adverse impact on the financial statements.
NOTE 8. JOINTLY-OWNED FACILITIES
- --------------------------------
At December 31, 1997, TEP's interests in jointly-owned generating and
transmission facilities were as follows:
Percent Plant Construction
Owned By in Work in Accumulated
Company Service Progress Depreciation
----------- -------- ------------ ------------
- Thousands of Dollars -
San Juan Units 1 and 2 50.0 $285,142 $11,221 $222,087
Navajo Station Units 1,2 and 3 7.5 102,988 13,856 45,151
Four Corners Units 4 and 5 7.0 78,242 522 57,412
Transmission Facilities 7.5 to 95.0 218,284 887 115,212
-------- ------- --------
Total $684,656 $26,486 $439,862
======== ======= ========
TEP has financed or provided funds for the above facilities and its
share of operating expenses is included in the Consolidated Statements of
Income.
NOTE 9. EMPLOYEE BENEFITS PLANS
- -------------------------------
VOLUNTARY SEVERANCE PLAN (VSP)
In May 1996, TEP implemented a VSP. The VSP resulted in an expense in
the second quarter of 1996 for termination benefits of approximately $14
million included in Voluntary Severance Plan Expense - Net on the
Consolidated Statement of Income. Approximately $10 million of the
termination benefits were paid in 1996 with the remaining benefits to be paid
over the subsequent three years. As a result of partial settlements and
curtailments of employee benefit plans due to the VSP, TEP recognized a gain
of approximately $3.4 million in the third quarter of 1996 and a loss of
approximately $3 million in the first quarter of 1997.
PENSION PLANS
TEP has noncontributory pension plans for all regular employees.
Benefits are based on years of service and the employee's average
compensation. TEP makes annual contributions to the plans that are not
greater than the maximum tax-deductible contribution and not less than the
minimum funding requirement by the Employee Retirement Income Security Act of
1974. Contributions are intended to provide for both current and future
accrued benefits.
The following table sets forth the plans' funded status and amount
recognized in the Consolidated Financial Statements at December 31, 1997 and
1996. The actuarial present value of the benefit obligation and
reconciliation of funding status at October 1, were as follows:
1997 1996
-------- --------
- Thousands of Dollars -
Accumulated Benefit Obligation
Vested $61,082 $60,711
Non-Vested 8,324 7,341
-------- --------
Total $69,406 $68,052
======== ========
Plan Assets at Fair Value, Principally Equity and
Fixed Income Securities $88,316 $86,387
Projected Benefit Obligation (80,380) (76,563)
-------- --------
Plan Assets in Excess of Projected Benefit Obligation 7,936 9,824
Unrecognized Net Gain from Past Experience (7,097) (8,088)
Prior Service Cost Not Yet Recognized in Net Periodic
Pension Cost 10,559 7,705
Unrecognized Net Assets at Transition Being Amortized
Over 15 Years (757) (1,405)
-------- --------
Prepaid Pension Cost Included in the Balance Sheet $10,641 $ 8,036
======== ========
The increases in the Accumulated Benefit Obligation and Projected
Benefit Obligation from 1996 to 1997 reflect the decrease in the discount
rate used from 8% in 1996 to 7.25% in 1997.
Years Ended December 31,
1997 1996 1995
-------- -------- --------
- Thousands of Dollars -
Components of Net Pension Cost
Service Cost of Benefits Earned During Period $ 3,462 $ 2,746 $ 3,236
Interest Cost on Projected Benefit Obligation 5,777 6,022 6,752
Actual (Gain) Loss on Plan Assets (7,955) (7,757) (8,417)
Net Amortization and Deferral 817 404 532
-------- -------- --------
Net Periodic Pension Cost $ 2,101 $ 1,415 $ 2,103
======== ======== ========
Actuarial Assumptions: 1997 1996 1995
---- ---- ----
Discount Rate - Funding Status 7.25% 8.0% 7.5%
Average Compensation Increase 4.0 5.0 5.0
Expected Long-Term Rate of Return on Plan Assets 9.0 9.0 9.0
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
TEP provides health care and life insurance benefits for retired
employees. All regular employees may become eligible for those benefits if
they reach retirement age while working for TEP. Those and similar benefits
are provided through an independent administrator handling health claims and
insurance companies that offer premiums based on group rates.
TEP is authorized by the ACC to recover through rates the costs of
benefits only as payments are made to retired employees; the postretirement
benefits are currently funded entirely on a pay-as-you-go basis. Under the
provisions of FAS 106 TEP cannot record a regulatory asset for the excess of
FAS 106 expense over actual benefit payments.
December 31,
1997 1996
--------- ---------
- Thousands of Dollars -
Accumulated Postretirement Benefit Obligation
Retirees $(15,396) $(15,471)
Fully Eligible Active Plan Participants (2,503) (1,817)
Other Active Participants (12,378) (14,100)
--------- ---------
Total Accumulated Postretirement Benefit Obligation (30,277) (31,388)
Unrecognized Net Loss from Past Experience 286 3,172
Unrecognized Obligation at Transition
Being Amortized Over 20 Years 13,025 13,893
--------- ---------
Accrued Postretirement Benefit Cost Included in the
Balance Sheet $(16,966) $(14,323)
========= =========
Years Ended December 31,
1997 1996 1995
------- ------- -------
- Thousands of Dollars -
Components of Net Postretirement Benefit Cost
Service Cost of Benefits Earned During Period $ 975 $1,025 $ 838
Interest Cost on Postretirement Benefit
Obligation 2,068 2,071 1,541
Amortization of the Unrecognized Transition
Obligation 868 913 958
Amortization of the Unrecognized Loss (Gain) - 42 (152)
------- ------- -------
Net Periodic Postretirement Benefit Cost $3,911 $4,051 $3,185
======= ======= =======
The accumulated postretirement benefit obligation was determined using a
7.00% and 7.25% discount rate for 1997 and 1996, respectively. The health
care cost trend rates were assumed to be 8.0% and 8.5% for 1997 and 1996,
respectively, gradually declining to 4.0% in 2003 and thereafter. The effect
of a one percentage point increase in the assumed health care cost trend rate
would increase the accumulated postretirement benefit obligation as of
December 31, 1997 by approximately $3.7 million and the net periodic cost by
$0.5 million for 1997.
STOCK OPTION PLANS
On May 20, 1994, the Shareholders of the Company approved two stock
option plans, the 1994 Outside Director Stock Option Plan (1994 Directors'
Plan) and the 1994 Omnibus Stock and Incentive Plan (1994 Omnibus Plan).
The 1994 Directors' Plan provides for the annual grant of 1,200 non-
qualified stock options to each eligible director, at an exercise price equal
to the market price of the Company's Common Stock at the grant date,
beginning January 3, 1995. These options vest ratably and become exercisable
in one-third increments on each anniversary date of the grant and expire on
the tenth anniversary.
The 1994 Omnibus Plan allows the Compensation Committee, a committee
comprised solely of non-employee directors, to grant any or all of the
following types of awards to each eligible employee of the Company: stock
options, including incentive stock options, non-qualified stock options and
discounted stock options; stock appreciation rights; restricted stock;
performance units; performance shares; and dividend equivalents. The total
number of shares of the Company's stock which may be awarded under the
Omnibus Plan cannot exceed 1.6 million.
In June 1997, the Compensation Committee awarded 69,363 shares of
restricted stock which had a fair value at the date of grant of $1 million to
officers. The restrictions lapse over a three-year period in one-third
increments on each anniversary date of the grant. The restricted stock was
awarded but not issued. Each officer is entitled to receive shares of stock
after the restrictions have lapsed, but may elect to defer receipt of such
stock to a future period. Compensation expense is charged to earnings over
the restriction period and amounted to $0.2 million in 1997.
The Compensation Committee granted stock options intended to qualify as
incentive stock options under the Internal Revenue Code to key employees
during 1997, 1996 and 1995 and to all employees during 1994 at exercise
prices greater than or equal to the market price of the Company's Common
Stock at the grant date. These options vest ratably and become exercisable
in one-third increments on each anniversary date of the grant and expire on
the tenth anniversary.
A summary of the activity of the 1994 Directors' Plan and 1994 Omnibus
Plan is as follows:
1997 1996 1995
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Options Outstanding,
Beginning of Year 688,123 $15.30 525,522 $16.26 442,952 $16.28
Granted 144,190 $14.59 212,684 $13.16 93,718 $16.19
Exercised (6,630) $16.25 (2,886) $16.25 - -
Forfeited (25,142) $15.18 (47,197) $16.25 (11,148) $16.18
------- ------- -------
Options Outstanding,
End of Year 800,541 $15.17 688,123 $15.30 525,522 $16.26
======= ======= =======
Options Exercisable,
End of Year 491,763 $15.84 286,944 $16.27 143,744 $16.28
Option Price Range of Options Outstanding at December 31, 1997: $13.00 to
$17.81
Weighted Average Remaining Contractual Life at December 31, 1997: 7.6 Years
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plans. No compensation cost has been
recognized for the plans during 1995 though 1997. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (FAS 123). Had compensation
costs for the Company's stock option plans been determined based on the fair
value at the grant date for awards in 1997, 1996 and 1995 consistent with the
provisions of FAS 123, net income and net income per average share would have
been reduced to the pro forma amounts indicated below:
Years Ended December 31,
1997 1996 1995
-------- ------- -------
- Thousands of Dollars -
(except per share data)
Net Income - As Reported $83,572 $120,852 $54,905
Pro Forma $83,201 $120,594 $54,833
Basic Earnings Per Share - As Reported $2.60 $3.76 $1.71
Pro Forma $2.59 $3.75 $1.71
Diluted Earnings per Share - As Reported $2.59 $3.75 $1.70
Pro Forma $2.58 $3.74 $1.70
The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
1997 1996 1995
-------- -------- -------
Expected life (years) 3 4 4
Interest rate 6.16% 6.51% 6.30%
Volatility 23.15% 23.51% 23.51%
Dividend yield None None None
NOTE 10. EARNINGS PER SHARE (EPS)
- ---------------------------------
The Company adopted FAS 128 in the fourth quarter of 1997. This
statement requires a dual presentation of basic and diluted EPS on the face
of the income statement. The adoption of FAS 128 required the restatement of
prior period EPS. A reconciliation of the numerators and denominators of the
basic and diluted per share computations is set forth in the following table:
Years Ended December 31,
1997 1996 1995
-------- ------- -------
- Thousands of Dollars -
(except per share data)
Basic Earnings Per Share:
Numerator: Net Income $83,572 $120,852 $54,905
Denominator: Average Shares
of Common Stock - Outstanding 32,138 32,136 32,138
------- -------- -------
Basic Earnings Per Share $ 2.60 $ 3.76 $ 1.71
======= ======== =======
Diluted Earnings per Share:
Numerator: Net Income $83,572 $120,852 $54,905
Denominator: Average Shares
of Common Stock - Outstanding 32,138 32,136 32,138
Effect of Dilutive Securities:
Warrants 53 81 70
Options 87 36 12
------- -------- -------
Total Shares 32,278 32,253 32,220
------- -------- -------
Diluted Earnings Per Share $ 2.59 $ 3.75 $ 1.70
======= ======== =======
The Warrants are exercisable into TEP common stock. However, the
dilutive effect is the same as it would be if the Warrants were exercisable
into UniSource Energy Common Stock.
NOTE 11. QUARTERLY FINANCIAL DATA (unaudited)
- ---------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
- Thousands of Dollars -
(except per share data)
1997
Operating Revenue $154,281 $182,970 $231,089 $161,553
Operating Income 20,790 33,830 56,110 23,293
NOL Benefit Recognition (see Note 3) 14,318 14,975 13,120 1,030
Net Income 11,492 29,901 43,415 (1,236)
Basic Earnings Per Share 0.36 0.93 1.35 (0.04)
Diluted Earnings Per Share 0.36 0.93 1.34 (0.04)
1996
Operating Revenue $148,028 $184,533 $223,078 $160,234
Operating Income 17,118 27,110 52,616 20,722
NOL Benefit Recognition (see Note 3) 4,849 6,164 70,283 7,342
Net Income 419 10,289 102,498 7,646
Basic Earnings Per Share 0.01 0.32 3.19 0.24
Diluted Earnings Per Share 0.01 0.32 3.19 0.23
DUE TO SEASONAL FLUCTUATIONS IN SALES, THE RECOGNITION OF NOL
CARRYFORWARD BENEFITS AND ONE-TIME ADJUSTMENTS, THE QUARTERLY RESULTS ARE NOT
INDICATIVE OF ANNUAL OPERATING RESULTS. SEE NOTE 4 REGARDING THE REVERSAL OF
A $8.5 MILLION AND $10.2 MILLION PROVISION FOR LOSS IN THE THIRD QUARTER OF
1996 AND SECOND QUARTER OF 1997, RESPECTIVELY, NOTE 7 REGARDING THE
RECOGNITION OF $9.2 MILLION IN SALES TAX EXPENSE IN THE THIRD QUARTER OF
1996, AND NOTE 9 REGARDING THE VSP RELATED AMOUNTS RECORDED IN 1996 AND 1997.
ADDITIONALLY, IN THE FOURTH QUARTER OF 1997, TEP RECEIVED AN INTEREST REFUND
OF $2.8 MILLION RELATING TO INCOME TAXES; SUCH INTEREST REFUND IS INCLUDED IN
OTHER INCOME (DEDUCTIONS) ON THE CONSOLIDATED STATEMENT OF INCOME FOR THE
YEAR ENDED DECEMBER 31, 1997.
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------
FOR PURPOSES OF THIS STATEMENT, THE COMPANY AND TEP DEFINE CASH AND CASH
EQUIVALENTS AS CASH (UNRESTRICTED DEMAND DEPOSITS) AND ALL HIGHLY LIQUID
INVESTMENTS PURCHASED WITH A MATURITY OF THREE MONTHS OR LESS. A
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES
FOLLOWS:
Years Ended December 31,
1997 1996 1995
---------- ---------- ----------
- Thousands of Dollars -
Net Income $ 83,572 $120,852 $ 54,905
Adjustments to Reconcile Net Income
to Net Cash Flows
Depreciation and Amortization Expense 86,405 98,246 93,136
Deferred Income Taxes and Investment
Tax Credits - Net (23,089) (83,722) (21,136)
Deferred Fuel and Purchased Power - - 5,872
Lease Payments Deferred 33,679 30,756 32,299
Deferred Springerville Unit 2 Costs - (286) (1,127)
Regulatory Amortizations, Net of Interest
Imputed on Losses Recorded at
Present Value (3,485) (16,544) (15,852)
Reversal of Loss Provision (10,154) (8,472) -
Deferred Contract Termination Fee (38,077) - -
Emission Allowances (11,463) 2,353 7,224
Other 5,188 (4,036) (1,691)
Changes in Assets and Liabilities which
Provided (Used) Cash Exclusive of
Changes Shown Separately
Accounts Receivable (5,320) (4,188) 4,615
Materials and Fuel (3,649) 11,812 (6,059)
Accounts Payable 6,103 1,644 (16,022)
Taxes Accrued 390 8,311 (13,519)
Other Current Assets and Liabilities 2,298 (9,926) (5,328)
Other Deferred Assets and Liabilities 1,992 4,467 2,073
---------- ---------- ----------
Net Cash Flows - Operating Activities $124,390 $151,267 $119,390
========== ========== ==========
Non-cash investing and financing activities of the Company and TEP that
affected recognized assets and liabilities but did not result in cash
receipts or payments were:
Years Ended December 31,
1997 1996 1995
---------- ---------- ----------
- Thousands of Dollars -
Capital Lease Obligations $ 11,788 $ 8,336 $ 8,095
---------- ---------- ----------
ITEM 9. -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
On November 7, 1997, based upon the recommendation of its audit
committee, the Board of Directors of TEP voted to appoint Price Waterhouse
LLP as TEP's independent accountants for the year ending December 31, 1998.
TEP chose not to renew the engagement of Deloitte & Touche LLP, TEP's present
independent accountants. Deloitte & Touche LLP continued to serve for the
1997 fiscal year, including rendering an opinion on the financial statements
for the year ended December 31, 1997, included herein.
The reports of Deloitte & Touche LLP on the Company's and TEP's
financial statements for each of the two most recent years ended December 31,
1997 did not contain any adverse opinion or disclaimer of opinion, nor were
the reports qualified in any manner.
During 1996, 1997 and the period from December 31, 1997 to the date of
this Form 10-K, there were no disagreements with Deloitte & Touche LLP on any
matter of accounting principle or practice, financial statement disclosure or
auditing scope or procedure. During this period, there were no "reportable
events" as that term is defined in Item 304 (a) (1) (v) of Regulation S-K.
The Company and TEP have requested Deloitte & Touche LLP to furnish
a letter addressed to the Securities and Exchange Commission stating whether
it agrees with the above statements for the two most recent years ended
December 31, 1997 to the date of this Form 10-K.
On November 14, 1997, TEP (and the Company) engaged Price Waterhouse
LLP as its principal accountants to audit the financial statements for the
year ending December 31, 1998. During 1996, 1997 and the period from
December 31, 1997 to the date of this Form 10-K, the Company and TEP have not
consulted Price Waterhouse LLP on items which concerned the application of
accounting principles generally, or to a specific transaction or group of
transactions, either completed or proposed, or the type of audit opinion that
might be rendered on the financial statements except as related to
transactions for the year ending December 31, 1998.
PART III
ITEM 10. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
- -------------------------------------------------------------------------------
DIRECTORS
---------
The individuals serving as Directors of UniSource Energy also serve as
the Directors of TEP. Information concerning Directors is contained under
Election of Directors in the Company's Proxy Statement relating to the 1998
Annual Meeting of Shareholders, which information is incorporated herein by
reference.
EXECUTIVE OFFICERS
------------------
Executive Officers of UniSource Energy who are elected annually by the
Company's Board of Directors, are as follows:
<TABLE>
<CAPTION>
Execitive
Name Age Title Officer
- ---- --- ----- Since
---------
<S> <C> <C> <C>
Charles E. Bayless 55 Chairman of the Board, President and
Chief Executive Officer (a) 1989
Ira R. Adler 47 Senior Vice President, Chief Financial 1988
Officer and Treasurer (b)
George W. Miraben 56 Senior Vice President - Policy and Human 1990
Resources (c)
James S. Pignatelli 54 Senior Vice President and Chief Operating 1994
Officer (d)
Karen G. Kissinger 43 Vice President, Controller and Principal 1991
Accounting
Officer (i)
Dennis R. Nelson 47 Vice President, General Counsel and 1991
Corporate
Secretary (k)
</TABLE>
Executive Officers of TEP who are elected annually by TEP's Board of
Directors, are as follows:
<TABLE>
<CAPTION>
Executive
Name Age Title Officer
- ---- --- ----- Since
---------
<S> <C> <C> <C>
Charles E. Bayless 55 Chairman of the Board, President and
Chief Executive Officer (a) 1989
Ira R. Adler 47 Senior Vice President and Chief Financial 1988
Officer (b)
George W. Miraben 56 Senior Vice President - Policy and Human 1990
Resources (c)
James S. Pignatelli 54 Senior Vice President and Chief Operating 1994
Officer (d)
Thomas A. Delawder 51 Vice President - Energy Resources (e) 1985
Gary L. Ellerd 47 Vice President - Operations (f) 1985
Steven J. Glaser 40 Vice President - Energy Services (g) 1994
Thomas N. Hansen 47 Vice President - Technical Services Advisor 1992
(h)
Karen G. Kissinger 43 Vice President and Controller (i) 1991
Kevin P. Larson 41 Vice President and Treasurer (j) 1994
Dennis R. Nelson 47 Vice President, General Counsel and
Corporate Secretary (k) 1991
<FN>
(a) Charles E. Bayless: Mr. Bayless joined TEP as Senior Vice President and
Chief Financial Officer in December 1989. He was elected President and Chief
Executive Officer in July 1990 and was elected to the Board of Directors in
June 1990. On January 28, 1992, Mr. Bayless was named Chairman of the Board
of Directors. He was named Chairman of the Board, President and Chief
Executive Officer of UniSource Energy in January 1998. Prior to joining TEP,
he was Senior Vice President and Chief Financial Officer of Public Service
Company of New Hampshire from 1981 through 1989.
(b) Ira R. Adler: Mr. Adler joined TEP in 1986 as Manager of Financial
Planning. In 1987 he was elected as Vice President and Treasurer of TRI, one
of TEP's investment subsidiaries, from which position he resigned in October
1988, when he was elected Treasurer of TEP. He was elected Vice President -
Finance and Treasurer in July 1989 and was elected Senior Vice President and
Chief Financial Officer in July 1990 and President of TRI and SRI in April
1992. He was named Senior Vice President, Chief Financial Officer and
Treasurer of UniSource Energy in January 1998. Prior to joining TEP, he was
Vice President - Finance of US WEST Financial Services, Inc.
(c) George W. Miraben: Mr. Miraben was elected Vice President, Public
Affairs, effective March 1990, was named Vice President - Human Resources and
Public Affairs in 1994, and became Senior Vice President - Policy and Human
Resources in 1996. He was named Senior Vice President of UniSource Energy in
January 1998. Prior to joining TEP, he was Director of External Affairs for
US WEST Communications' Arizona operation from 1981 through March 1990.
(d) James S. Pignatelli: Mr. Pignatelli joined TEP as Senior Vice President
in August 1994 and was elected Senior Vice President and Chief Operating
Officer in 1996. He was named Senior Vice President and Chief Operating
Officer of UniSource Energy in January 1998. Prior to joining TEP, he was
President and Chief Executive Officer from 1988 to 1993 of Mission Energy
Company, a subsidiary of SCE Corp.
(e) Thomas A. Delawder: Mr. Delawder joined TEP in 1974 and thereafter
served in various engineering and operations positions. In April 1985 he was
named Manager, Systems Operations and was elected Vice President - Power
Supply and System Control in November 1985. In February 1991, he became Vice
President - Engineering and Power Supply and in January 1992 he became Vice
President - System Operations. In 1994, he became Vice President - Energy
Resources.
(f) Gary L. Ellerd: Mr. Ellerd joined TEP as Vice President and Controller
in January 1985. He was elected Vice President - Services and Chief
Information Officer in January 1991 and in January 1992 he became Vice
President - Corporate Information Services and Chief Information Officer.
In 1994, he was named Vice President - Retail Customers. In 1995, he was
named Vice President - Operations.
(g) Steven J. Glaser: Mr. Glaser joined TEP in 1990 as a Senior Attorney
in charge of Regulatory Affairs. He was Manager of TEP's Legal department
from 1992 to 1994, and Manager of Contracts and Wholesale Marketing from 1994
until elected Vice President - Business Development. In 1995, he was named
Vice President - Wholesale/Retail Pricing and System Planning. He was named
Vice President - Energy Services in 1996.
(h) Thomas N. Hansen: Mr. Hansen joined TEP in December 1992 as Vice
President - Power Production. Prior to joining TEP, Mr. Hansen was Century's
Vice President - Operations from 1989 and Plant Manager at Springerville from
1987 through 1988. In 1994, he was named Vice President - Technical Advisor.
(i) Karen G. Kissinger: Ms. Kissinger joined TEP as Vice President and
Controller in January 1991. She was named Vice President, Controller and
Principal Accounting Officer of UniSource Energy in January 1998. Prior to
joining TEP, she was a Manager with Deloitte & Touche from 1986 through 1989
and a Senior Manager through 1990.
(j) Kevin P. Larson: Mr. Larson joined TEP in 1985 and thereafter held
various positions in its finance department and at TEP's investment
subsidiaries. In January 1991, he was elected Assistant Treasurer of TEP and
named Manager of Financial Programs. He was elected Treasurer of TEP in
August 1994 and Vice President in March 1997.
(k) Dennis R. Nelson: Mr. Nelson joined TEP as a staff attorney in 1976.
He was manager of the Legal Department from 1985 to 1990. He was elected Vice
President, General Counsel and Corporate Secretary in January 1991. He was
named Vice President, General Counsel and Corporate Secretary of UniSource
Energy in January 1998.
</TABLE>
ITEM 11. -- EXECUTIVE COMPENSATION
- -------------------------------------------------------------------------------
Information concerning Executive Compensation is contained under
Executive Compensation and Other Information in the Company's Proxy Statement
relating to the 1998 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
ITEM 12. -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------------
GENERAL
-------
At February 24, 1998, UniSource Energy had outstanding 32,138,124
shares of Common Stock. As of February 24, 1998, the number of shares of
Common Stock beneficially owned by all directors and officers of the Company
as a group amounted to less than 1% of the outstanding Common Stock.
At February 24, 1998, UniSource Energy owned all of the outstanding
shares of common stock of TEP.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
Information concerning the security ownership of certain beneficial
owners of UniSource Energy is contained under Security Ownership of Certain
Beneficial Owners in the Company's Proxy Statement relating to the 1998
Annual Meeting of Shareholders, which information is incorporated herein by
reference.
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
Information concerning the security ownership of the Directors and
Executive Officers of UniSource Energy and TEP is contained under Security
Ownership of Management in the Company's Proxy Statement relating to the 1998
Annual Meeting of Shareholders, which information is incorporated herein by
reference.
ITEM 13. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------------------------
None.
PART IV
ITEM 14. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
Page
----
(a) 1. Consolidated Financial Statements as of
December 31, 1997 and 1996 and for Each
of the Three Years in the Period Ended
December 31, 1997.
UniSource Energy Corporation
----------------------------
Independent Auditors' Report 37
Consolidated Statements of Income 38
Consolidated Statements of Cash Flows 39
Consolidated Balance Sheets 40
Consolidated Statements of Capitalization 41
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) 42
Notes to Consolidated Financial Statements 48
Tucson Electric Power Company
-----------------------------
Independent Auditors' Report 37
Consolidated Statements of Income 43
Consolidated Statements of Cash Flows 44
Consolidated Balance Sheets 45
Consolidated Statements of Capitalization 46
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) 47
Notes to Consolidated Financial Statements 48
2. Supplemental Consolidated Schedules for the Years
Ended December 31, 1995 to 1997.
Schedules I to V, inclusive, are omitted because they are not
applicable or not required.
3. Exhibits.
Reference is made to the Exhibit Index commencing on page 81
(b) Reports on Form 8-K and 8-K/A.
Tucson Electric Power Company
------------------------------
-- Form 8-K dated November 7, 1997 (filed November 14, 1997), reporting
on Change in the Registrant's Certifying Accountant.
-- Form 8-K/A dated November 7, 1997 (filed November 19, 1997),
reporting on Change in the Registrant's Certifying Accountant.
-- Form 8-K dated November 14, 1997 (filed November 17, 1997),
reporting on Change in the Registrant's Certifying Accountant.
-- Form 8-K dated November 19, 1997 (filed November 24, 1997),
reporting on the Company's Holding Company Application and Financing
Application.
UniSource Energy Corporation and Tucson Electric Power Company
--------------------------------------------------------------
-- Form 8-K dated December 30, 1997 (filed January 6, 1997), reporting
on the UniSource Energy/TEP share exchange and the new TEP Bank Credit
Agreement.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
UNISOURCE ENERGY CORPORATION
Date: March 2, 1998 By Ira R. Adler
------------------------------------
IRA R. ADLER
Senior Vice President and Principal
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 2, 1998 Charles E. Bayless*
------------------------------------
Charles E. Bayless
Chairman of the Board, President and
Principal Executive Officer
Date: March 2, 1998 Ira R. Adler
------------------------------------
Ira R. Adler
Principal Financial Officer
Date: March 2, 1998 Karen G. Kissinger*
------------------------------------
Karen G. Kissinger
Principal Accounting Officer
Date: March 2, 1998 Elizabeth T. Bilby*
------------------------------------
Elizabeth T. Bilby
Director
Date: March 2, 1998 Jose L. Canchola*
------------------------------------
Jose L. Canchola
Director
Date: March 2, 1998 John. L. Carter*
------------------------------------
John L. Carter
Director
Date: March 2, 1998 John A. Jeter*
------------------------------------
John A. Jeter
Director
Date: March 2, 1998 R. B. O'Rielly*
------------------------------------
R. B. O'Rielly
Director
Date: March 2, 1998 Martha R. Seger*
------------------------------------
Martha R. Seger
Director
Date: March 2, 1998 Donald G. Shropshire*
------------------------------------
Donald G. Shropshire
Director
Date: March 2, 1998 H. Wilson Sundt*
------------------------------------
H. Wilson Sundt
Director
Date: March 2, 1998 By Ira R. Adler
------------------------------------
Ira R. Adler
as attorney-in-fact for each
of the persons indicated
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 2, 1998 By Ira R. Adler
--------------------------------------
IRA R. ADLER
Senior Vice President and Principal
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 2, 1998 Charles E. Bayless*
------------------------------------
Charles E. Bayless
Chairman of the Board, President and
Principal Executive Officer
Date: March 2, 1998 Ira R. Adler
------------------------------------
Ira R. Adler
Principal Financial Officer
Date: March 2, 1998 Karen G. Kissinger*
------------------------------------
Karen G. Kissinger
Principal Accounting Officer
Date: March 2, 1998 Elizabeth T. Bilby*
------------------------------------
Elizabeth T. Bilby
Director
Date: March 2, 1998 Jose L. Canchola*
------------------------------------
Jose L. Canchola
Director
Date: March 2, 1998 John. L. Carter*
------------------------------------
John L. Carter
Director
Date: March 2, 1998 John A. Jeter*
------------------------------------
John A. Jeter
Director
Date: March 2, 1998 R. B. O'Rielly*
------------------------------------
R. B. O'Rielly
Director
Date: March 2, 1998 Martha R. Seger*
------------------------------------
Martha R. Seger
Director
Date: March 2, 1998 Donald G. Shropshire*
------------------------------------
Donald G. Shropshire
Director
Date: March 2, 1998 H. Wilson Sundt*
------------------------------------
H. Wilson Sundt
Director
Date: March 2, 1998 By Ira R. Adler
------------------------------------
Ira R. Adler
as attorney-in-fact for each
of the persons indicated
EXHIBIT INDEX
2(a) -- Agreement and Plan of Exchange, dated as of March 20, 1995, between
TEP, UniSource Energy and NCR Holding, Inc.
*3(a) -- Restated Articles of Incorporation of TEP, filed with the ACC on
August 11, 1994, as amended by Amendment to Article Fourth of the
Company's Restated Articles of Incorporation, filed with the ACC on
May 17, 1996. (Form 10-K for year ended December 31, 1996, File No.
1-5924--Exhibit 3(a).)
*3(b) -- Bylaws of TEP, as amended May 20, 1994. (Form 10-Q for the quarter
ended June 30, 1994, File No. 1-5924--Exhibit 3.)
*3(c) -- Amended and Restated Articles of Incorporation of UniSource Energy.
(Form 8-A/A, dated January 30, 1998, File No. 1-13739--Exhibit
2(a).)
*3(d) -- Bylaws of UniSource Energy, as amended December 11, 1997. (Form 8-
A, dated December 23, 1997, File No. 1-13739--Exhibit 2(b).)
*4(a)(1)-- Indenture dated as of April 1, 1941, to The Chase National Bank of
the City of New York, as Trustee. (Form S-7, File No. 2-59906--
Exhibit 2(b)(1).)
*4(a)(2)-- First Supplemental Indenture, dated as of October 1, 1946. (Form
S-7, File No. 2-59906--Exhibit 2(b)(2).)
*4(a)(3)-- Second Supplemental Indenture dated as of October 1, 1947. (Form
S-7, File No. 2-59906--Exhibit 2(b)(3).)
*4(a)(4)-- Third Supplemental Indenture, dated as of April 1, 1949. (Form S-
7, File No. 2-59906--Exhibit 2(b)(4).)
*4(a)(5)-- Fourth Supplemental Indenture, dated as of December 1, 1952.
(Form S-7, File No. 2-59906--Exhibit 2(b)(5).)
*4(a)(6)-- Fifth Supplemental Indenture, dated as of January 1, 1955. (Form
S-7, File No. 2-59906--Exhibit 2(b)(6).)
*4(a)(7)-- Sixth Supplemental Indenture, dated as of January 1, 1958. (Form
S-7, File No. 2-59906--Exhibit 2(b)(7).)
*4(a)(8)-- Seventh Supplemental Indenture, dated as of November 1, 1959.
(Form S-7, File No. 2-59906--Exhibit 2(b)(8).)
*4(a)(9)-- Eighth Supplemental Indenture, dated as of November 1, 1961.
(Form S-7, File No. 2-59906--Exhibit 2(b)(9).)
*4(a)(10)-- Ninth Supplemental Indenture, dated as of February 20, 1964.
(Form S-7, File No. 2-59906--Exhibit 2(b)(10).)
*4(a)(11)-- Tenth Supplemental Indenture, dated as of February 1, 1965.
(Form S-7, File No. 2-59906--Exhibit 2(b)(11).)
*4(a)(12)-- Eleventh Supplemental Indenture, dated as of February 1,
1966. (Form S-7, File No. 2-59906--Exhibit 2(b)(12).)
*4(a)(13)-- Twelfth Supplemental Indenture, dated as of November 1, 1969.
(Form S-7, File No. 2-59906--Exhibit 2(b)(13).)
*4(a)(14)-- Thirteenth Supplemental Indenture, dated as of January 20,
1970. (Form S-7, File No. 2-59906--Exhibit 2(b)(14).)
*4(a)(15)-- Fourteenth Supplemental Indenture, dated as of September 1,
1971. (Form S-7, File No. 2-59906--Exhibit 2(b)(15).)
*4(a)(16)-- Fifteenth Supplemental Indenture, dated as of March 1, 1972.
(Form S-7, File No. 2-59906--Exhibit 2(b)(16).)
*4(a)(17)-- Sixteenth Supplemental Indenture, dated as of May 1, 1973.
(Form S-7, File No. 2-59906--Exhibit 2(b)(17).)
*4(a)(18)-- Seventeenth Supplemental Indenture, dated as of November 1,
1975. (Form S-7, File No. 2-59906--Exhibit 2(b)(18).)
*4(a)(19)-- Eighteenth Supplemental Indenture, dated as of November 1,
1975. (Form S-7, File No. 2-59906--Exhibit 2(b)(19).)
*4(a)(20)-- Nineteenth Supplemental Indenture, dated as of July 1, 1976.
(Form S-7, File No. 2-59906--Exhibit 2(b)(20).)
*4(a)(21)-- Twentieth Supplemental Indenture, dated as of October 1,
1977. (Form S-7, File No. 2-59906--Exhibit 2(b)(21).)
*4(a)(22)-- Twenty-first Supplemental Indenture, dated as of November 1,
1977. (Form 10-K for year ended December 31, 1980, File No. 1-5924-
-Exhibit 4(v).)
*4(a)(23)-- Twenty-second Supplemental Indenture, dated as of January 1,
1978. (Form 10-K for year ended December 31, 1980, File No. 1-5924-
-Exhibit 4(w).)
*4(a)(24)-- Twenty-third Supplemental Indenture, dated as of July 1,
1980. (Form 10-K for year ended December 31, 1980, File No. 1-5924-
-Exhibit 4(x).)
*4(a)(25)-- Twenty-fourth Supplemental Indenture, dated as of October 1,
1980. (Form 10-K for year ended December 31, 1980, File No. 1-5924-
-Exhibit 4(y).)
*4(a)(26)-- Twenty-fifth Supplemental Indenture, dated as of April 1,
1981. (Form 10-Q for quarter ended March 31, 1981, File No. 1-5924-
-Exhibit 4(a).)
*4(a)(27)-- Twenty-sixth Supplemental Indenture, dated as of April 1,
1981. (Form 10-Q for quarter ended March 31, 1981, File No. 1-5924-
-Exhibit 4(b).)
*4(a)(28)-- Twenty-seventh Supplemental Indenture, dated as of October 1,
1981. (Form 10-Q for quarter ended September 30, 1982, File No. 1-
5924--Exhibit 4(c).)
*4(a)(29)-- Twenty-eighth Supplemental Indenture, dated as of June 1,
1990. (Form 10-Q for quarter ended June 30, 1990, File No. 1-5924--
Exhibit 4(a)(1).)
*4(a)(30)-- Twenty-ninth Supplemental Indenture, dated as of December 1,
1992. (Form S-1, Registration No. 33-55732--Exhibit 4(a)(30).)
*4(a)(31)-- Thirtieth Supplemental Indenture, dated as of December 1,
1992. (Form S-1, Registration No. 33-55732--Exhibit 4(a)(31).)
*4(a)(32)-- Thirty-first Supplemental Indenture, dated as of May 1, 1996.
(Form 10-K for the year ended December 31, 1996, File No. 1-5924--
Exhibit 4(a)(32).)
*4(a)(33)-- Thirty-second Supplemental Indenture, dated as of May 1,
1996. (Form 10-K for the year ended December 31, 1996, File No. 1-
5924--Exhibit 4(a)(33).)
*4(b)(1)-- Installment Sale Agreement, dated as of December 1, 1973, among
the City of Farmington, New Mexico, Public Service Company of New
Mexico and TEP. (Form 8-K for the month of January 1974, File No. 0-
269--Exhibit 3.)
*4(b)(2)-- Ordinance No. 486, adopted December 17, 1973, of the City of
Farmington, New Mexico. (Form 8-K for the month of January 1974,
File No. 0-269--Exhibit 4.)
*4(b)(3)-- Amended and Restated Installment Sale Agreement dated as of April
1, 1997, between the City of Farmington, New Mexico and TEP relating
to Pollution Control Revenue Bonds, 1997 Series A (Tucson Electric
Power Company San Juan Project). (Form 10-Q for the quarter ended
March 31, 1997, File No. 1-5924--Exhibit 4(a).)
*4(b)(4)-- City of Farmington, New Mexico Ordinance No. 97-1055, adopted
April 17, 1997, authorizing Pollution Control Revenue Bonds, 1997
Series A (Tucson Electric Power Company San Juan Project). (Form
10-Q for the quarter ended March 31, 1997, File No. 1-5924--Exhibit
4(b).)
*4(c)(1)-- Loan Agreement, dated as of September 15, 1981, between the
Industrial Development Authority of the County of Apache, Arizona
and TEP, relating to Floating Rate Monthly Demand Pollution Control
Revenue Bonds, 1981 Series A (Tucson Electric Power Company
Project). (Form 10-K for year ended December 31, 1981, File No. 1-
5924--Exhibit 4(d)(1).)
*4(c)(2)-- Indenture of Trust, dated as of September 15, 1981, between the
Apache County Authority and Morgan Guaranty Trust Company of New
York, authorizing Floating Rate Monthly Demand Pollution Control
Revenue Bonds, 1981 Series A (Tucson Electric Power Company
Project). (Form 10-K for year ended December 31, 1981, File No. 1-
5924--Exhibit 4(d)(2).)
*4(d)(1)-- Second Supplemental Loan Agreement, dated as of October 1, 1981,
between the Apache County Authority and TEP, relating to Floating
Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B
(Tucson Electric Power Company Project). (Form 10-K for year ended
December 31, 1982, File No. 1-5924--Exhibit 4(f)(1).)
*4(d)(2) -- Second Supplemental Indenture, dated as of October 1, 1981, between
the Apache County Authority and Morgan Guaranty, relating to Floating
Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B
(Tucson Electric Power Company Project). (Form 10-K for year ended
December 31, 1982, File No. 1-5924--Exhibit 4(f)(2).)
*4(d)(3) -- Third Supplemental Loan Agreement, dated as of
December 1, 1985, between the Apache County Authority and TEP,
relating to Floating Rate Monthly Demand Pollution Control Revenue
Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form
10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit
4(d)(3).)
*4(d)(4)-- Third Supplemental Indenture, dated as of December 1, 1985,
between the Apache County Authority and Morgan Guaranty, relating to
Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981
Series B (Tucson Electric Power Company Project). (Form 10-K for
the year ended December 31, 1987, File No. 1-5924--Exhibit 4(d)(4).)
*4(d)(5)-- Fourth Supplemental Indenture of Trust, dated as of March 31,
1992, between the Apache County Authority and Morgan Guaranty,
relating to Pollution Control Revenue Bonds, 1981 Series B (Tucson
Electric Power Company Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(d)(5).)
*4(d)(6)-- Fourth Supplemental Loan Agreement, dated as of March 31, 1992,
between the Apache County Authority and TEP, relating to Pollution
Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company
Project). (Form S-4, Registration No. 33-52860--Exhibit 4(d)(6).)
*4(e)(1)-- Loan Agreement, dated as of October 1, 1982, between the Pima
County Authority and TEP relating to Floating Rate Monthly Demand
Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric
Power Company Irvington Project). (Form 10-Q for quarter ended
September 30, 1982, File No. 1-5924--Exhibit 4(a).)
*4(e)(2)-- Indenture of Trust, dated as of October 1, 1982, between the Pima
County Authority and Morgan Guaranty authorizing Floating Rate
Monthly Demand Industrial Development Revenue Bonds, 1982 Series A
(Tucson Electric Power Company Irvington Project). (Form 10-Q for
quarter ended September 30, 1982, File No. 1-5924--Exhibit 4(b).)
*4(e)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992,
between the Pima County Authority and TEP relating to Industrial
Development Revenue Bonds, 1982 Series A (Tucson Electric Power
Company Irvington Project). (Form S-4, Registration No. 33-52860--
Exhibit 4(h)(3).)
*4(e)(4)-- First Supplemental Indenture of Trust, dated as of March 31, 1992,
between the Pima County Authority and Morgan Guaranty relating to
Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric
Power Company Irvington Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(h)(4).)
*4(f)(1)-- Loan Agreement, dated as of December 1, 1982, between the Pima
County Authority and TEP relating to Floating Rate Monthly Demand
Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric
Power Company Projects). (Form 10-K for year ended December 31,
1982, File No. 1-5924--Exhibit 4(k)(1).)
*4(f)(2)-- Indenture of Trust, dated as of December 1, 1982, between the Pima
County Authority and Morgan Guaranty authorizing Floating Rate
Monthly Demand Industrial Development Revenue Bonds, 1982 Series A
(Tucson Electric Power Company Projects). (Form 10-K for year ended
December 31, 1982, File No. 1-5924--Exhibit 4(k)(2).)
*4(f)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992,
between the Pima County Authority and TEP relating to Industrial
Development Revenue Bonds, 1982 Series A (Tucson Electric Power
Company Projects). (Form S-4, Registration No. 33-52860--Exhibit
4(i)(3).)
*4(f)(4)-- First Supplemental Indenture of Trust, dated as of March 31, 1992,
between the Pima County Authority and Morgan Guaranty relating to
Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric
Power Company Projects). (Form S-4, Registration No. 33-52860--
Exhibit 4(i)(4).)
*4(g)(1)-- Loan Agreement, dated as of December 1, 1983, between the Apache
County Authority and TEP relating to Floating Rate Monthly Demand
Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric
Power Company Springerville Project). (Form 10-K for year ended
December 31, 1983, File No. 1-5924--Exhibit 4(l)(1).)
*4(g)(2)-- Indenture of Trust, dated as of December 1, 1983, between the
Apache County Authority and Morgan Guaranty authorizing Floating
Rate Monthly Demand Industrial Development Revenue Bonds, 1983
Series A (Tucson Electric Power Company Springerville Project).
(Form 10-K for year ended December 31, 1983, File No. 1-5924--
Exhibit 4(l)(2).)
*4(g)(3)-- First Supplemental Loan Agreement, dated as of December 1, 1985,
between the Apache County Authority and TEP relating to Floating
Rate Monthly Demand Industrial Development Revenue Bonds, 1983
Series A (Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No. 1-5924--
Exhibit 4(k)(3).)
*4(g)(4)-- First Supplemental Indenture, dated as of December 1, 1985,
between the Apache County Authority and Morgan Guaranty relating to
Floating Rate Monthly Demand Industrial Development Revenue Bonds,
1983 Series A (Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No. 1-5924--
Exhibit 4(k)(4).)
*4(g)(5)-- Second Supplemental Loan Agreement, dated as of March 31, 1992,
between the Apache County Authority and TEP relating to Industrial
Development Revenue Bonds, 1983 Series A (Tucson Electric Power
Company Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(k)(5).)
*4(g)(6)-- Second Supplemental Indenture of Trust, dated as of March 31,
1992, between the Apache County Authority and Morgan Guaranty
relating to Industrial Development Revenue Bonds, 1983 Series A
(Tucson Electric Power Company Springerville Project). (Form S-4,
Registration No. 33-52860--Exhibit 4(k)(6).)
*4(h)(1)-- Loan Agreement, dated as of December 1, 1983, between the Apache
County Authority and TEP relating to Variable Rate Demand Industrial
Development Revenue Bonds, 1983 Series B (Tucson Electric Power
Company Springerville Project). (Form 10-K for year ended December
31, 1983, File No. 1-5924--Exhibit 4(m)(1).)
*4(h)(2)-- Indenture of Trust, dated as of December 1, 1983, between the
Apache County Authority and Morgan Guaranty authorizing Variable
Rate Demand Industrial Development Revenue Bonds, 1983 Series B
(Tucson Electric Power Company Springerville Project). (Form 10-K
for year ended December 31, 1983, File No. 1-5924--Exhibit 4(m)(2).)
*4(h)(3)-- First Supplemental Loan Agreement, dated as of December 1, 1985,
between the Apache County Authority and TEP relating to Floating
Rate Monthly Demand Industrial Development Revenue Bonds, 1983
Series B (Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No. 1-5924--
Exhibit 4(l)(3).)
*4(h)(4)-- First Supplemental Indenture, dated as of December 1, 1985,
between the Apache County Authority and Morgan Guaranty relating to
Floating Rate Monthly Demand Industrial Development Revenue Bonds,
1983 Series B (Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No. 1-5924--
Exhibit 4(l)(4).)
*4(h)(5)-- Second Supplemental Loan Agreement, dated as of March 31, 1992,
between the Apache County Authority and TEP relating to Industrial
Development Revenue Bonds, 1983 Series B (Tucson Electric Power
Company Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(l)(5).)
*4(h)(6)-- Second Supplemental Indenture of Trust, dated as of March 31,
1992, between the Apache County Authority and Morgan Guaranty
relating to Industrial Development Revenue Bonds, 1983 Series B
(Tucson Electric Power Company Springerville Project). (Form S-4,
Registration No. 33-52860--Exhibit 4(l)(6).)
*4(i)(1)-- Loan Agreement, dated as of December 1, 1983, between the Apache
County Authority and TEP relating to Variable Rate Demand Industrial
Development Revenue Bonds, 1983 Series C (Tucson Electric Power
Company Springerville Project). (Form 10-K for year ended December
31, 1983, File No. 1-5924--Exhibit 4(n)(1).)
*4(i)(2)-- Indenture of Trust, dated as of December 1, 1983, between the
Apache County Authority and Morgan Guaranty authorizing Variable
Rate Demand Industrial Development Revenue Bonds, 1983 Series C
(Tucson Electric Power Company Springerville Project). (Form 10-K
for year ended December 31, 1983, File No. 1-5924--Exhibit 4(n)(2).)
*4(i)(3)-- First Supplemental Loan Agreement, dated as of December 1, 1985,
between the Apache County Authority and TEP relating to Floating
Rate Monthly Demand Industrial Development Revenue Bonds, 1983
Series C (Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No. 1-5924--
Exhibit 4(m)(3).)
*4(i)(4)-- First Supplemental Indenture, dated as of December 1, 1985,
between the Apache County Authority and Morgan Guaranty relating to
Floating Rate Monthly Demand Industrial Development Revenue Bonds,
1983 Series C (Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No. 1-5924--
Exhibit 4(m)(4).)
*4(i)(5)-- Second Supplemental Loan Agreement, dated as of March 31, 1992,
between the Apache County Authority and TEP relating to Industrial
Development Revenue Bonds, 1983 Series C (Tucson Electric Power
Company Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(m)(5).)
*4(i)(6)-- Second Supplemental Indenture of Trust, dated as of March 31,
1992, between the Apache County Authority and Morgan Guaranty
relating to Industrial Development Revenue Bonds, 1983 Series C
(Tucson Electric Power Company Springerville Project). (Form S-4,
Registration No. 33-52860--Exhibit 4(m)(6).)
*4(j) -- Reimbursement Agreement, dated as of September 15, 1981, as amended,
between TEP and Manufacturers Hanover Trust Company. (Form 10-K for
the year ended December 31, 1984, File No. 1-5924--Exhibit 4(o)(4).)
*4(k)(1)-- Loan Agreement, dated as of December 1, 1985, between the Apache
County Authority and TEP relating to Variable Rate Demand Industrial
Development Revenue Bonds, 1985 Series A (Tucson Electric Power
Company Springerville Project). (Form 10-K for the year ended
December 31, 1985, File No. 1-5924---Exhibit 4(r)(1).)
*4(k)(2)-- Indenture of Trust, dated as of December 1, 1985, between the
Apache County Authority and Morgan Guaranty authorizing Variable
Rate Demand Industrial Development Revenue Bonds, 1985 Series A
(Tucson Electric Power Company Springerville Project). (Form 10-K
for the year ended December 31, 1985, File No. 1-5924--Exhibit
4(r)(2).)
*4(k)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992,
between the Apache County Authority and TEP relating to Industrial
Development Revenue Bonds, 1985 Series A (Tucson Electric Power
Company Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(o)(3).)
*4(k)(4)-- First Supplemental Indenture of Trust, dated as of March 31, 1992,
between the Apache County Authority and Morgan Guaranty relating to
Industrial Development Revenue Bonds, 1985 Series A (Tucson Electric
Power Company Springerville Project). (Form S-4, Registration No.
33-52860--Exhibit 4(o)(4).)
*4(l) -- Warrant Agreement and Form of Warrant, dated as of December 15,
1992. (Form S-1, Registration No. 33-55732--Exhibit 4(q).)
*4(m)(1)-- Indenture of Mortgage and Deed of Trust dated as of December 1,
1992, to Bank of Montreal Trust Company, Trustee. (Form S-1,
Registration No. 33-55732--Exhibit 4(r)(1).)
*4(m)(2)-- Supplemental Indenture No. 1 creating a series of bonds designated
Second Mortgage Bonds, Collateral Series A, dated as of December 1,
1992. (Form S-1, Registration No. 33-55732-Exhibit 4(r)(2).)
4(m)(3)--Supplemental Indenture No. 2 creating a series of bonds designated
Second Mortgage Bonds, Collateral Series B, dated as of December 1,
1997.
*4(n)(1)-- Loan Agreement, dated as of April 1, 1997, between Coconino
County, Arizona Pollution Control Corporation and TEP relating to
Pollution Control Revenue Bonds, 1997 Series A (Tucson Electric
Power Company Navajo Project). (Form 10-Q for the quarter ended
March 31, 1997, File No. 1-5924--Exhibit 4(c).)
*4(n)(2)-- Indenture of Trust, dated as of April 1, 1997, between Coconino
County, Arizona Pollution Control Corporation and First Trust of New
York, National Association, authorizing Pollution Control Revenue
Bonds, 1997 Series A (Tucson Electric Power Company Navajo
Project). (Form 10-Q for the quarter ended March 31, 1997, File No.
1-5924--Exhibit 4(d).)
*4(o)(1)-- Loan Agreement, dated as of April 1, 1997, between Coconino
County, Arizona Pollution Control Corporation and TEP relating to
Pollution Control Revenue Bonds, 1997 Series B (Tucson Electric
Power Company Navajo Project). (Form 10-Q for the quarter ended
March 31, 1997, File No. 1-5924--Exhibit 4(e).)
*4(o)(2)-- Indenture of Trust, dated as of April 1, 1997, between Coconino
County, Arizona Pollution Control Corporation and First Trust of New
York, National Association, authorizing Pollution Control Revenue
Bonds, 1997 Series B (Tucson Electric Power Company Navajo
Project). (Form 10-Q for the quarter ended March 31, 1997, File No.
1-5924--Exhibit 4(f).)
*4(p)(1)-- Loan Agreement, dated as of September 15, 1997, between The
Industrial Development Authority of the County of Pima and TEP
relating to Industrial Development Revenue Bonds, 1997 Series A
(Tucson Electric Power Company Project). (Form 10-Q for the quarter
ended September 30, 1997, File No. 1-5924--Exhibit 4(a).)
*4(p)(2)-- Indenture of Trust, dated as of September 15, 1997, between The
Industrial Development Authority of the County of Pima and First
Trust of New York, National Association, authorizing Industrial
Development Revenue Bonds, 1997 Series A (Tucson Electric Power
Company Project). (Form 10-Q for the quarter ended September 30,
1997, File No. 1-5924--Exhibit 4(b).)
*4(q)(1)-- Loan Agreement, dated as of September 15, 1997, between The
Industrial Development Authority of the County of Pima and TEP
relating to Industrial Development Revenue Bonds, 1997 Series B
(Tucson Electric Power Company Project). (Form 10-Q for the quarter
ended September 30, 1997, File No. 1-5924--Exhibit 4(c).)
*4(q)(2)-- Indenture of Trust, dated as of September 15, 1997, between The
Industrial Development Authority of the County of Pima and First
Trust of New York, National Association, authorizing Industrial
Development Revenue Bonds, 1997 Series B (Tucson Electric Power
Company Project). (Form 10-Q for the quarter ended September 30,
1997, File No. 1-5924--Exhibit 4(d).)
*4(r)(1)-- Loan Agreement, dated as of September 15, 1997, between The
Industrial Development Authority of the County of Pima and TEP
relating to Industrial Development Revenue Bonds, 1997 Series C
(Tucson Electric Power Company Project). (Form 10-Q for the quarter
ended September 30, 1997, File No. 1-5924--Exhibit 4(e).)
*4(r)(2)-- Indenture of Trust, dated as of September 15, 1997, between The
Industrial Development Authority of the County of Pima and First
Trust of New York, National Association, authorizing Industrial
Development Revenue Bonds, 1997 Series C (Tucson Electric Power
Company Project). (Form 10-Q for the quarter ended September 30,
1997, File No. 1-5924--Exhibit 4(f).)
*10(a)(1)--Lease Agreements, dated as of December 1, 1984, between
Valencia and United States Trust Company of New York, as Trustee,
and Thomas B. Zakrzewski, as Co-Trustee, as amended and
supplemented. (Form 10-K for the year ended December 31, 1984, File
No. 1-5924--Exhibit 10(d)(1).)
*10(a)(2)--Guaranty and Agreements, dated as of December 1, 1984,
between TEP and United States Trust Company of New York, as Trustee,
and Thomas B. Zakrzewski, as Co-Trustee. (Form 10-K for the year
ended December 31, 1984, File No. 1-5924--Exhibit 10(d)(2).)
*10(a)(3)--General Indemnity Agreements, dated as of December 1, 1984,
between Valencia and TEP, as Indemnitors; General Foods Credit
Corporation, Harvey Hubbell Financial, Inc. and J. C. Penney
Company, Inc. as Owner Participants; United States Trust Company of
New York, as Owner Trustee; Teachers Insurance and Annuity
Association of America as Loan Participant; and Marine Midland Bank,
N.A., as Indenture Trustee. (Form 10-K for the year ended December
31, 1984, File No. 1-5924--Exhibit 10(d)(3).)
*10(a)(4)--Tax Indemnity Agreements, dated as of December 1, 1984,
between General Foods Credit Corporation, Harvey Hubbell Financial,
Inc. and J. C. Penney Company, Inc., each as Beneficiary under a
separate Trust Agreement dated December 1, 1984, with United States
Trust of New York as Owner Trustee, and Thomas B. Zakrzewski as Co-
Trustee, Lessor, and Valencia, Lessee, and TEP, Indemnitors. (Form
10-K for the year ended December 31, 1984, File No. 1-5924--Exhibit
10(d)(4).)
*10(a)(5)--Amendment No. 1, dated December 31, 1984, to the Lease
Agreements, dated December 1, 1984, between Valencia and United
States Trust Company of New York, as Owner Trustee, and Thomas B.
Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31,
1986, File No. 1-5924--Exhibit 10(e)(5).)
*10(a)(6)--Amendment No. 2, dated April 1, 1985, to the Lease
Agreements, dated December 1, 1984, between Valencia and United
States Trust Company of New York, as Owner Trustee, and Thomas B.
Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31,
1986, File No. 1-5924--Exhibit 10(e)(6).)
*10(a)(7)--Amendment No. 3, dated August 1, 1985, to the Lease
Agreements, dated December 1, 1984, between Valencia and United
States Trust Company of New York, as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee. (Form 10-K for the year ended December
31, 1986, File No. 1-5924--Exhibit 10(e)(7).)
*10(a)(8)--Amendment No. 4, dated June 1, 1986, to the Lease Agreement,
dated December 1, 1984, between Valencia and United States Trust
Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-
Trustee, under a Trust Agreement dated as of December 1, 1984, with
General Foods Credit Corporation as Owner Participant. (Form 10-K
for the year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(8).)
*10(a)(9)--Amendment No. 4, dated June 1, 1986, to the Lease Agreement,
dated December 1, 1984, between Valencia and United States Trust
Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-
Trustee, under a Trust Agreement dated as of December 1, 1984, with
J. C. Penney Company, Inc. as Owner Participant. (Form 10-K for the
year ended December 31, 1986, File No. 1-5924--Exhibit 10(e)(9).)
*10(a)(10)--Amendment No. 4, dated June 1, 1986, to the Lease Agreement,
dated December 1, 1984, between Valencia and United States Trust
Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-
Trustee, under a Trust Agreement dated as of December 1, 1984, with
Harvey Hubbell Financial Inc. as Owner Participant. (Form 10-K for
the year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(10).)
*10(a)(11)--Lease Amendment No. 5 and Supplement No. 2, to the Lease
Agreement, dated July 1, 1986, between Valencia, United States Trust
Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-
Trustee and J. C. Penney as Owner Participant. (Form 10-K for the
year ended December 31, 1986, File No. 1-5924--Exhibit 10(e)(11).)
*10(a)(12)--Lease Amendment No. 5, to the Lease Agreement, dated June 1,
1987, between Valencia, United States Trust Company of New York as
Owner Trustee, and Thomas Zakrzewski as Co-Trustee and General Foods
Credit Corporation as Owner Participant. (Form 10-K for the year
ended December 31, 1988, File No. 1-5924--Exhibit 10(f)(12).)
*10(a)(13)--Lease Amendment No. 5, to the Lease Agreement, dated June 1,
1987, between Valencia, United States Trust Company of New York as
Owner Trustee, and Thomas Zakrzewski as Co-Trustee and Harvey
Hubbell Financial Inc. as Owner Participant. (Form 10-K for the year
ended December 31, 1988, File No. 1-5924--Exhibit 10(f)(13).)
*10(a)(14)--Lease Amendment No. 6, to the Lease Agreement, dated June 1,
1987, between Valencia, United States Trust Company of New York as
Owner Trustee, and Thomas Zakrzewski as Co-Trustee and J. C. Penney
Company, Inc. as Owner Participant. (Form 10-K for the year ended
December 31, 1988, File No. 1-5924--Exhibit 10(f)(14).)
*10(a)(15)--Lease Supplement No. 1, dated December 31, 1984, to Lease
Agreements, dated December 1, 1984, between Valencia, as Lessee and
United States Trust Company of New York and Thomas B. Zakrzewski, as
Owner Trustee and Co-Trustee, respectively (document filed relates
to General Foods Credit Corporation; documents relating to Harvey
Hubbel Financial, Inc. and JC Penney Company, Inc. are not filed but
are substantially similar). (Form S-4, Registration No. 33-52860--
Exhibit 10(f)(15).)
*10(a)(16)--Amendment No. 1, dated June 1, 1986, to the General Indemnity
Agreement, dated as of December 1, 1984, between Valencia and TEP,
as Indemnitors, General Foods Credit Corporation, as Owner
Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as
Loan Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form 10-K for the year ended December 31, 1986, File No.
1-5924--Exhibit 10(e)(12).)
*10(a)(17)--Amendment No. 1, dated June 1, 1986, to the General Indemnity
Agreement, dated as of December 1, 1984, between Valencia and TEP,
as Indemnitors, J. C. Penney Company, Inc., as Owner Participant,
United States Trust Company of New York, as Owner Trustee, Teachers
Insurance and Annuity Association of America, as Loan Participant,
and Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for
the year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(13).)
*10(a)(18)--Amendment No. 1, dated June 1, 1986, to the General Indemnity
Agreement, dated as of December 1, 1984, between Valencia and TEP,
as Indemnitors, Harvey Hubbell Financial, Inc., as Owner
Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as
Loan Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form 10-K for the year ended December 31, 1986, File No.
1-5924--Exhibit 10(e)(14).)
*10(a)(19)--Amendment No. 2, dated as of July 1, 1986, to the General
Indemnity Agreement, dated as of December 1, 1984, between Valencia
and TEP, as Indemnitors, J. C. Penney Company, Inc., as Owner
Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as
Loan Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form S-4, Registration No. 33-52860--Exhibit 10(f)(19).)
*10(a)(20)--Amendment No. 2, dated as of June 1, 1987, to the General
Indemnity Agreement, dated as of December 1, 1984, between Valencia
and TEP, as Indemnitors, General Foods Credit Corporation, as Owner
Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as
Loan Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form S-4, Registration No. 33-52860--Exhibit 10(f)(20).)
*10(a)(21)--Amendment No. 2, dated as of June 1, 1987, to the General
Indemnity Agreement, dated as of December 1, 1984, between Valencia
and TEP, as Indemnitors, Harvey Hubbell Financial, Inc., as Owner
Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as
Loan Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form S-4, Registration No. 33-52860--Exhibit 10(f)(21).)
*10(a)(22)-- Amendment No. 3, dated as of June 1, 1987, to the General
Indemnity Agreement, dated as of December 1, 1984, between Valencia
and TEP, as Indemnitors, J. C. Penney Company, Inc., as Owner
Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as
Loan Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form S-4, Registration No. 33-52860--Exhibit 10(f)(22).)
*10(a)(23)--Supplemental Tax Indemnity Agreement, dated July 1, 1986,
between J. C. Penney Company, Inc., as Owner Participant, and
Valencia and TEP, as Indemnitors. (Form 10-K for the year ended
December 31, 1986, File No. 1-5924--Exhibit 10(e)(15).)
*10(a)(24)--Supplemental General Indemnity Agreement, dated as of July 1,
1986, among Valencia and TEP, as Indemnitors, J. C. Penney Company,
Inc., as Owner Participant, United States Trust Company of New York,
as Owner Trustee, Teachers Insurance and Annuity Association of
America, as Loan Participant, and Marine Midland Bank, N.A., as
Indenture Trustee. (Form 10-K for the year ended December 31, 1986,
File No. 1-5924--Exhibit 10(e)(16).)
*10(a)(25)--Amendment No. 1, dated as of June 1, 1987, to the
Supplemental General Indemnity Agreement, dated as of July 1, 1986,
among Valencia and TEP, as Indemnitors, J. C. Penney Company, Inc.,
as Owner Participant, United States Trust Company of New York, as
Owner Trustee, Teachers Insurance and Annuity Association of
America, as Loan Participant, and Marine Midland Bank, N.A., as
Indenture Trustee. (Form S-4, Registration No. 33-52860--Exhibit
10(f)(25).)
*10(a)(26)--Valencia Agreement, dated as of June 30, 1992, among TEP, as
Guarantor, Valencia, as Lessee, Teachers Insurance and Annuity
Association of America, as Loan Participant, Marine Midland Bank,
N.A., as Indenture Trustee, United States Trust Company of New York,
as Owner Trustee, and Thomas B. Zakrzewski, as Co-Trustee, and the
Owner Participants named therein relating to the Restructuring of
Valencia's lease of the coal-handling facilities at the
Springerville Generating Station. (Form S-4, Registration No. 33-
52860--Exhibit 10(f)(26).)
*10(a)(27)--Amendment, dated as of December 15, 1992, to the Lease
Agreements, dated December 1, 1984, between Valencia, as Lessee, and
United States Trust Company of New York, as Owner Trustee, and
Thomas B. Zakrzewski, as Co-Trustee. (Form S-1, Registration No.
33-55732--Exhibit 10(f)(27).)
*10(b)(1)--Lease Agreements, dated as of December 1, 1985, between TEP
and San Carlos Resources Inc. (San Carlos) (a wholly-owned
subsidiary of the Registrant) jointly and severally, as Lessee, and
Wilmington Trust Company, as Trustee, as amended and supplemented.
(Form 10-K for the year ended December 31, 1985, File No. 1-5924--
Exhibit 10(f)(1).)
*10(b)(2)--Tax Indemnity Agreements, dated as of December 1, 1985,
between Philip Morris Credit Corporation, IBM Credit Financing
Corporation and Emerson Finance Co., each as beneficiary under a
separate trust agreement, dated as of December 1, 1985, with
Wilmington Trust Company, as Owner Trustee, and William J. Wade, as
Co-Trustee, and TEP and San Carlos, as Lessee. (Form 10-K for the
year ended December 31, 1985, File No. 1-5924--Exhibit 10(f)(2).)
*10(b)(3)--Participation Agreement, dated as of December 1, 1985, among
TEP and San Carlos as Lessee, Philip Morris Credit Corporation, IBM
Credit Financing Corporation, and Emerson Finance Co. as Owner
Participants, Wilmington Trust Company as Owner Trustee, The
Sumitomo Bank, Limited, New York Branch, as Loan Participant, and
Bankers Trust Company, as Indenture Trustee. (Form 10-K for the year
ended December 31, 1985, File No. 1-5924--Exhibit 10(f)(3).)
*10(b)(4)--Restructuring Commitment Agreement, dated as of June 30,
1992, among TEP and San Carlos, jointly and severally, as Lessee,
Philip Morris Credit Corporation, IBM Credit Financing Corporation
and Emerson Capital Funding William J. Wade, as Owner Trustee and
Co-Trustee, respectively, The Sumitomo Bank, Limited, New York
Branch, as Loan Participant and United States Trust Company of New
York, as Indenture Trustee. (Form S-4, Registration No. 33-52860--
Exhibit 10(g)(4).)
*10(b)(5)--Lease Supplement No. 1, dated December 31, 1985, to Lease
Agreements, dated as of December 1, 1985, between TEP and San
Carlos, jointly and severally, as Lessee Trustee and Co-Trustee,
respectively (document filed relates to Philip Morris Credit
Corporation; documents relating to IBM Credit Financing Corporation
and Emerson Financing Co. are not filed but are substantially
similar). (Form S-4, Registration No. 33-52860--Exhibit 10(g)(5).)
*10(b)(6)--Amendment No. 1, dated as of December 15, 1992, to Lease
Agreements, dated as of December 1, 1985, between TEP and San
Carlos, jointly and severally, as Lessee, and Wilmington Trust
Company and William J. Wade, as Owner Trustee and Co-Trustee,
respectively, as Lessor. (Form S-1, Registration No. 33-55732--
Exhibit 10(g)(6).)
*10(b)(7)--Amendment No. 1, dated as of December 15, 1992, to Tax
Indemnity Agreements, dated as of December 1, 1985, between Philip
Morris Credit Corporation, IBM Credit Financing Corporation and
Emerson Capital Funding Corp., as Owner Participants and TEP and San
Carlos, jointly and severally, as Lessee. (Form S-1, Registration
No. 33-55732--Exhibit 10(g)(7).)
*10(c)(1)--Amended and Restated Participation Agreement, dated as of
November 15, 1987, among TEP, as Lessee, Ford Motor Credit Company,
as Owner Participant, Financial Security Assurance Inc., as Surety,
Wilmington Trust Company and William J. Wade in their respective
individual capacities as provided therein, but otherwise solely as
Owner Trustee and Co-Trustee under the Trust Agreement, and Morgan
Guaranty, in its individual capacity as provided therein, but
Secured Party. (Form 10-K for the year ended December 31, 1987, File
No. 1-5924--Exhibit 10(j)(1).)
*10(c)(2)--Lease Agreement, dated as of January 14, 1988, between
Wilmington Trust Company and William J. Wade, as Owner Trust
Agreement described therein, dated as of November 15, 1987, between
such parties and Ford Motor Credit Company, as Lessor, and TEP, as
Lessee. (Form 10-K for the year ended December 31, 1987, File No. 1-
5924--Exhibit 10(j)(2).)
*10(c)(3)--Tax Indemnity Agreement, dated as of January 14, 1988,
between TEP, as Lessee, and Ford Motor Credit Company, as Owner
Participant, beneficiary under a Trust Agreement, dated as of
November 15, 1987, with Wilmington Trust Company and William J.
Wade, Owner Trustee and Co-Trustee, respectively, together as
Lessor. (Form 10-K for the year ended December 31, 1987, File No. 1-
5924--Exhibit 10(j)(3).)
*10(c)(4)--Loan Agreement, dated as of January 14, 1988, between the
Pima County Authority and Wilmington Trust Company and William J.
Wade in their respective individual capacities as expressly stated,
but otherwise solely as Owner Trustee and Co-Trustee, respectively,
under and pursuant to a Trust Agreement, dated as of November 15,
1987, with Ford Motor Credit Company as Trustor and Debtor relating
to Industrial Development Lease Obligation Refunding Revenue Bonds,
1988 Series A (TEP's Irvington Project). (Form 10-K for the year
ended December 31, 1987, File No. 1-5924--Exhibit 10(j)(4).)
*10(c)(5)--Indenture of Trust, dated as of January 14, 1988, between the
Pima County Authority and Morgan Guaranty authorizing Industrial
Development Lease Obligation Refunding Revenue Bonds, 1988 Series A
(Tucson Electric Power Company Irvington Project). (Form 10-K for
the year ended December 31, 1987, File No. 1-5924--Exhibit
10(j)(5).)
*10(c)(6)--Lease Amendment No. 1, dated as of May 1, 1989, between TEP,
Wilmington Trust Company and William J. Wade as Owner Trustee and
Co-trustee, respectively under a Trust Agreement dated as of
November 15, 1987 with Ford Motor Credit Company. (Form 10-K for the
year ended December 31, 1990, File No. 1-5924--Exhibit 10(i)(6).)
*10(c)(7)--Lease Supplement, dated as of January 1, 1991, between TEP,
Wilmington Trust Company and William J. Wade as Owner Trustee and
Co-Trustee, respectively, under a Trust Agreement dated as of
November 15, 1987, with Ford. (Form 10K for the year ended December
31, 1991, File No. 1-5924--Exhibit 10(i)(8).)
*10(c)(8)--Lease Supplement, dated as of March 1, 1991, between TEP,
Wilmington Trust Company and William J. Wade as Owner Trustee and
Co-Trustee, respectively, under a Trust Agreement dated as of
November 15, 1987, with Ford. (Form 10-K for the year ended December
31, 1991, File No. 1-5924--Exhibit 10(i)(9).)
*10(c)(9)--Lease Supplement No. 4, dated as of December 1, 1991, between
TEP, Wilmington Trust Company and William J. Wade as Owner Trustee
and Co-Trustee, respectively, under a Trust Agreement dated as of
November 15, 1987, with Ford. (Form 10-K for the year ended December
31, 1991, File No. 1-5924--Exhibit 10(i)(10).)
*10(c)(10)--Supplemental Indenture No. 1, dated as of December 1, 1991,
between the Pima County Authority and Morgan Guaranty relating to
Industrial Lease Development Obligation Revenue Project). (Form 10-K
for the year ended December 31, 1991, File No. 1-5924--Exhibit
10(I)(11).)
*10(c)(11)--Restructuring Commitment Agreement, dated as of June 30,
1992, among TEP, as Lessee, Ford Motor Credit Company, as Owner
Participant, Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, and Morgan Guaranty, as
Indenture Trustee and Refunding Trustee, relating to the
restructuring of the Registrant's lease of Unit 4 at the Irvington
Generating Station. (Form S-4, Registration No. 33-52860--Exhibit
10(i)(12).)
*10(c)(12)--Amendment No. 1, dated as of December 15, 1992, to Amended
and Restated Participation Agreement, dated as of November 15, 1987,
among TEP, as Lessee, Ford Motor Credit Company, as Owner
Participant, Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, Financial Security Assurance
Inc., as Surety, and Morgan Guaranty, as Indenture Trustee. (Form
S-1, Registration No. 33-55732--Exhibit 10(h)(12).)
*10(c)(13)--Amended and Restated Lease, dated as of December 15, 1992,
between TEP, as Lessee and Wilmington Trust Company and William J.
Wade, as Owner Trustee and Co-Trustee, respectively, as Lessor.
(Form S-1, Registration No. 33-55732--Exhibit 10(h)(13).)
*10(c)(14)--Amended and Restated Tax Indemnity Agreement, dated as of
December 15, 1992, between TEP, as Lessee, and Ford Motor Credit
Company, as Owner Participant. (Form S-1, Registration No. 33-
55732--Exhibit 10(h)(14).)
*10(d)-- Power Sale Agreement for the years 1990 to 2011, dated as of March
10, 1988, between TEP and Salt River Project Agricultural
Improvement and Power District. (Form 10-K for the year ended
December 31, 1987, File No. 1-5924--Exhibit 10(k).)
+*10(e)(1)--Employment Agreements between TEP and currently in effect
with Ira R. Adler, Charles E. Bayless, Thomas A. Delawder, Gary L.
Ellerd, Steven J. Glaser, Thomas N. Hansen, Karen G. Kissinger,
Kevin P. Larson, George W. Miraben, Dennis R. Nelson, James S.
Pignatelli and Romano Salvatori. (Form 10-K for the year ended
December 31, 1996, File No. 1-5924--Exhibit 10(g)(1).)
+*10(e)(2)--Employment Agreement between TEP and Romano Salvatori. (Form
10-K for the year ended December 31, 1996, File No. 1-5924--Exhibit
10(g)(2).)
*10(e)(3)--Letter, dated February 25, 1992, from Dr. Martha R. Seger to
TEP and Capital Holding Corporation. (Form S-4, Registration No. 33-
52860--Exhibit 10(k)(4).)
+10(e)(4)--Amendment No. 1 to Employment Agreement among Romano Salvatori,
TEP and Nations Energy Corporation.
+10(e)(5)--Amendment No. 1 to Amended and Restated Employment Agreement
between TEP and currently in effect with Ira R. Adler, Charles E.
Bayless, Thomas A. Delawder, Gary L. Ellerd, Steven J. Glaser,
Thomas N. Hansen, Karen G. Kissinger, Kevin P. Larson, George W.
Miraben, Dennis R. Nelson, James S. Pignatelli and Romano Salvatori.
*10(f)-- Power Sale Agreement, dated April 29, 1988, for the dates of May 16,
1990 to December 31, 1995, between TEP and Nevada Power Company.
(Form 10-K for the year ended December 31, 1988, File No 1-5924--
Exhibit 10(m)(2).)
*10(g)-- Participation Agreement, dated as of June 30, 1992, among TEP, as
Lessee, various parties thereto, as Owner Wilmington Trust Company
and William J. Wade, as Owner Trustee and Co-Trustee, respectively,
and LaSalle National Bank, as Indenture Trustee relating to TEP's
lease of Springerville Unit 1. (Form S-1, Registration No. 33-
55732--Exhibit 10(u).)
*10(h)-- Lease Agreement, dated as of December 15, 1992, between TEP, as
Lessee and Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, as Lessor. (Form S-1,
Registration No. 33-55732--Exhibit 10(v).)
*10(i)-- Tax Indemnity Agreements, dated as of December 15, 1992, between the
various Owner Participants parties thereto and TEP, as Lessee.
(Form S-1, Registration No. 33-55732, Exhibit 10(w).)
*10(j)-- Restructuring Agreement, dated as of December 1, 1992, between TEP
and Century Power Corporation. (Form S-1, Registration No. 33-
55732--Exhibit 10(x).)
*10(k)-- Voting Agreement, dated as of December 15, 1992, between TEP and
Chrysler Capital Corporation (documents relating to CILCORP Lease
Management, Inc., MWR Capital Inc., US West Financial Services, Inc.
and Philip Morris Capital Corporation are not filed but are
substantially similar). (Form S-1, Registration No. 33-55732--
Exhibit 10(y).)
*10(l)(1)--Wholesale Power Supply Agreement between TEP and Navajo
Tribal Utility Authority dated January 5, 1993. (Form 10-K for the
year ended December 31, 1992, File No. 1-5924--Exhibit 10(t).)
*10(l)(2)--Amended and Restated Wholesale Power Supply Agreement between
TEP and Navajo Tribal Utility Authority, dated June 25, 1997. (Form
10-Q for the quarter ended June 30, 1997, File No. 1-5924--Exhibit
10.)
10(m) -- Credit Agreement dated as of December 30, 1997, among TEP, Toronto
Dominion (Texas), Inc., as Administrative Agent, The Bank of New
York, as Syndication Agent, Societe Generale, as Documentation
Agent, the lenders party hereto, and the issuing banks party hereto.
+*10(n)-- 1994 Omnibus Stock and Incentive Plan of UniSource Energy. (Form S-
8 dated January 6, 1998, File No. 333-43767.)
+*10(o)-- 1994 Outside Director Stock Option Plan of UniSource Energy. (Form
S-8 dated January 6, 1998, File No. 333-43765.)
+*10(p)-- Management and Directors Deferred Compensation Plan of UniSource
Energy. (Form S-8 dated January 6, 1998, File No. 333-43769.)
11 -- Statement re computation of per share earnings--UniSource Energy.
12 -- Computation of Ratio of Earnings to Fixed Charges--TEP.
21 -- Subsidiaries of the Registrants.
23 -- Consents of experts and counsel.
24 -- Power of Attorney.
27(a) -- Financial Data Schedule--UniSource Energy.
27(b) -- Financial Data Schedule--TEP.
(*)Previously filed as indicated and incorporated herein by reference.
(+)Management contracts or compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K by item 601(b)(10)(iii) of Regulation
S-K.
EXHIBIT 2(a)
AGREEMENT AND PLAN OF EXCHANGE
THIS AGREEMENT AND PLAN OF EXCHANGE (this "Agreement"), dated as of
March 20, 1995, is between Tucson Electric Power Company, an Arizona
corporation ("TEP"), the company whose shares will be acquired pursuant to
the Exchange described herein, UniSource Energy Corporation an Arizona
corporation ("UniSource"), the acquiring company, and NCR Holding, Inc., a
Delaware corporation, the sole shareholder of UniSource ("Shareholder"). TEP
and UniSource are hereinafter referred to, collectively, as the
("Companies").
WITNESSETH:
WHEREAS, the authorized capital stock of TEP consists of (a) 200,000,000
shares of Common Stock without par value ("Company Common Stock"), of which
160,723,702 shares are issued and outstanding, and (b) 1,000,000 shares of
Preferred Stock, without par value ("Company Preferred Stock"), of which no
shares are issued and outstanding;
WHEREAS, the authorized capital stock of UniSource consists of (a)
250,000,000 shares of Common Stock, without par value ("UniSource Common
Stock"), of which 1,000 shares are issued and outstanding and owned of record
by Shareholder, and (b) 1,000,000 shares of Preferred Stock, without par
value ("UniSource Preferred Stock"), of which no shares are issued and
outstanding;
WHEREAS, the Boards of Directors of the respective Companies deem it
desirable and in the best interests of the Companies and their shareholders
that UniSource acquire each share of issued and outstanding Company Common
Stock and that each such share of Company Common Stock be exchanged for a
share of UniSource Common Stock with the result that UniSource becomes the
owner of all outstanding Company Common Stock and that each holder of Company
Common Stock becomes the owner of an equal number of shares of UniSource
Common Stock, all on the terms and conditions hereinafter set forth;
WHEREAS, Arizona corporation law has been amended, effective as of
January 1, 1996, to permit share exchanges which bind all of the shareholders
upon the approval of a plan of exchange by a majority of all votes entitled
to be cast;
WHEREAS, the Board of Directors of TEP and UniSource have recommended
that their respective shareholders approve the Share Exchange and this
Agreement, and this Agreement has been adopted by the requisite vote of the
Shareholder pursuant to the Arizona General Corporation Act, as amended by
H.B. 2124 (the "1996 Corporation Law").
NOW, THEREFORE, in consideration of the premises, and of the agreements,
covenants and conditions hereinafter contained, the parties hereto agree with
respect to the acquisition and exchange provided for herein (the "Share
Exchange") that at the Effective Time (as hereinafter defined) each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time will be exchanged for one share of UniSource Common Stock, and
that the terms and conditions of the Share Exchange and the method of
carrying the same into effect are as follows:
ARTICLE I
---------
Subject to the satisfaction of the conditions and obligations of the
parties hereto, the Share Exchange will be effective upon the filing, with
the Arizona Corporation Commission, on or after January 2, 1996 in accordance
with the 1996 Corporation Law, of articles of share exchange ("Articles of
Exchange") with respect to the Share Exchange or at such later time as may be
stated in the Articles of Exchange (the time at which the Share Exchange
becomes effective being referred to herein as the "Effective Time").
ARTICLE II
----------
At the Effective Time:
(1) each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall be acquired by
UniSource and shall be exchanged for one share of UniSource
Common Stock, which shall thereupon be fully paid and non-
assessable;
(2) UniSource shall become the owner and holder of each issued and
outstanding share of Company Common stock so exchanged;
(3) each share of UniSource Common Stock issued and outstanding
immediately prior to the Effective Time shall be canceled and
shall thereupon constitute an authorized and unissued share of
UniSource Common Stock; and
(4) the former owners of Company Common Stock shall be entitled
only to receive shares of UniSource Common Stock as provided
herein.
Shares of outstanding Company Preferred Stock, if any, shall not be
exchanged or otherwise affected in connection with the Share Exchange.
ARTICLE III
------------
The consummation of the Share Exchange is subject to the following
conditions precedent:
(1) the receipt of the requisite approval of shareholders of TEP;
(2) the satisfaction of the respective obligations of the parties
hereto in accordance with the terms and conditions herein
contained;
(3) the execution and filing of appropriate Articles of Exchange
with the Arizona Corporation Commission pursuant to the 1996
Corporation Law;
(4) the receipt of such orders, authorizations, approvals or
waivers from all jurisdictive regulatory bodies, boards or
agencies, which are required in connection with the Share
Exchange and related transactions.
ARTICLE IV
----------
Shareholder and UniSource agree that UniSource will not engage in any
business following the execution of this Agreement until the consummation of
the Share Exchange, other than such business as is necessary to organize and
maintain the corporate status and good standing of UniSource in the State of
Arizona.
ARTICLE V
----------
This Agreement may be amended, modified or supplemented, or compliance
with any provision or condition hereof may be waived, at any time, by the
mutual consent of the Boards of Directors of TEP and of UniSource; provided,
however, that no such amendment, modification, supplement or waiver shall be
made or effected, if such amendment, modification, supplement or waiver
would, in the judgment of the Board of Directors of TEP, materially and
adversely affect the shareholders of TEP.
This Agreement may be terminated and the Share Exchange and related
transactions abandoned at any time prior to the time the Articles of Exchange
are filed with the Arizona Corporation Commission, if the Board of Directors
of TEP determines, in its sole discretion, that consummation of the Share
Exchange would be inadvisable or not in the best interests of TEP or its
shareholders.
ARTICLE VI
----------
This Agreement has been submitted to the Shareholder for approval as
provided by the 1996 Corporation Law. The affirmative vote of the
Shareholder, as the holder of all of the outstanding shares of UniSource
Common Stock was received constituting the adoption of this Agreement.
ARTICLE VII
-----------
Following the Effective Time, each holder of an outstanding certificate
or certificates theretofore representing shares of Company Common Stock may,
but shall not be required to, surrender the same to UniSource for
cancellation and reissuance of a new certificate or certificates in such
holder's name or for cancellation and transfer, and each such holder or
transferee will be entitled to receive a certificate or certificates
representing the same number of shares of UniSource Common Stock as the
shares of Company Common Stock previously represented by the certificate or
certificates surrendered. Until so surrendered or presented for transfer,
each outstanding certificate which, immediately prior to the Effective Time,
represented Company Common Stock shall be deemed and treated for all
corporate purposes to represent the ownership of the same number of shares of
UniSource Common Stock as though such surrender or transfer and Share
Exchange had taken place. The holders of Company Common Stock at the
Effective Time shall have no right to have their shares of Company Common
Stock transferred on the stock transfer books of TEP, and such stock transfer
books shall be deemed to be closed for this purpose at the Effective Time.
IN WITNESS WHEREOF, each of TEP, UniSource and Shareholder, pursuant to
authorization and approval given by its Board of Directors, has caused this
Agreement to be executed by its President and its corporate seal to be
affixed hereto and attested by its Secretary as of the date first above
written.
TUCSON ELECTRIC POWER COMPANY
By /s/ Charles E. Bayless
-------------------------
President
ATTEST:
/s/Dennis R. Nelson
- -------------------
Secretary
UNISOURCE ENERGY CORPORATION
By /s/ Joseph Mirrione
----------------------
President
ATTEST:
/s/Howard Wagner
- ----------------
Secretary
NCR HOLDING, INC.
By /s/ Joseph Mirrione
---------------------
Vice President
ATTEST:
/s/Joan Wagner
- --------------
Secretary
Exhibit 4(m)(3)
SUPPLEMENTAL INDENTURE NO. 2
TUCSON ELECTRIC POWER COMPANY
TO
BANK OF MONTREAL TRUST COMPANY,
TRUSTEE
Dated as of December 1, 1997
Supplemental to Indenture of Mortgage and Deed of Trust,
dated as of December 1, 1992
Creating A Series of Bonds Designated
Second Mortgage Bonds, Collateral Series B
This instrument constitutes a mortgage, a deed of trust and a security
agreement.
SUPPLEMENTAL INDENTURE NO. 2, dated as of December 1, 1997, between TUCSON
ELECTRIC POWER COMPANY (hereinafter sometimes called (the "Company"), a
corporation organized and existing under the laws of the State of Arizona,
having its principal office at 220 West Sixth Street, in the City of Tucson,
Arizona, as trustor, and BANK OF MONTREAL TRUST COMPANY, a banking corporation
organized and existing under the laws of the State of New York and having its
principal office at 88 Pine Street, in the Borough of Manhattan, The City of
New York, New York, as trustee (hereinafter sometimes called the "Trustee"),
under the Indenture of Mortgage and Deed of Trust, dated as of December 1, 1992
(hereinafter called the "Original Indenture"), as heretofore supplemented, this
Supplemental Indenture No. 2 being supplemental thereto (the Original Indenture
as heretofore supplemented, and as supplemented hereby, and as it may from time
to time be further supplemented, modified, altered or amended by any
supplemental indenture entered into in accordance with and pursuant to the
provisions thereof, is hereinafter called the "Indenture").
RECITALS OF THE COMPANY
WHEREAS the Original Indenture was authorized, executed and delivered by
the Company to provide for the issuance from time to time of its Bonds (such
term and all other capitalized terms used herein without definition having the
meanings assigned to them in the Original Indenture), to be issued in one or
more series as therein contemplated, and to provide security for the payment of
the principal of and premium, if any, and interest, if any, on the Bonds; and
WHEREAS, the Company proposes to establish a series of Bonds designated
"Second Mortgage Bonds, Collateral Series B" and to be limited in aggregate
principal amount (except as contemplated in clause (b) of Section 2 of Article
II of the Original Indenture) to $543,875,000, such series of Bonds and such
Bonds to be hereinafter sometimes called, respectively, "Series 2" and "Series
2 Bonds"; and
WHEREAS, all acts and proceedings required by law and by the articles of
incorporation and by-laws of the Company, including all action requisite on the
part of its shareholders, directors and officers, necessary to make the Series
2 Bonds, when executed by the Company, authenticated and delivered by the
Trustee and duly issued, the valid, binding and legal obligations of the
Company, and to constitute this Supplemental Indenture a valid, binding and
legal instrument, in accordance with its and their terms, have been done and
taken; and the execution and delivery of this Supplemental Indenture No. 2
have been in all respects duly authorized.
GRANTING CLAUSES
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE NO. 2 WITNESSETH, that, in
order to secure the payment of the principal of and premium, if any, and
interest, if any, on all Bonds at any time Outstanding under the Indenture
according to their tenor, purport and effect, and to secure the performance and
observance of all the covenants and conditions therein and herein contained
(except any covenant of the Company with respect to the refund or reimbursement
of taxes, assessments or other governmental charges on account of the ownership
of the Bonds of any series or the income derived therefrom, for which the
Holders of the Bonds shall look only to the Company and not to the property
hereby mortgaged or pledged), and to declare the terms and conditions upon and
subject to which the Series 2 Bonds are to be issued, and for and in
consideration of the premises and of the mutual covenants herein contained and
of the purchase and acceptance of the Bonds by the Holders thereof, and of the
sum of $1 duly paid to the Company by the Trustee at or before the ensealing
and delivery hereof, and for other good and valuable consideration, the receipt
and sufficiency whereof are hereby acknowledged, the Company has executed and
delivered this Indenture, and by these presents does grant, bargain, sell,
release, convey, assign, transfer, mortgage, pledge, set over and confirm unto
the Trustee, and grant to the Trustee a security interest in:
All and singular the premises, property, assets, rights and
franchises of the Company (except Excepted Property), whether now or
hereafter owned, constructed or acquired, of whatever character and
wherever situated including, among other things (but reference to or
enumeration of any particular kinds, classes or items of property
shall not be deemed to exclude from the operation and effect of this
Indenture any kind, class or item not so referred to or enumerated),
all right, title and interest of the Company in and to the property
described as granted in "Schedule A" attached to this Supplemental
Indenture No. 2 and made part of these Granting Clauses to the same
extent as if fully set forth in the same, and all plants for the
generation of electricity by water, steam and/or other power; all
power houses, substations, transmission lines, distributing systems;
all offices, buildings and structures, and the equipment thereof; all
machinery, engines, boilers, dynamos, machines, regulators, meters,
transformers, generators and motors; all appliances whether
electrical, gas or mechanical, conduits, cables and lines; all pipes,
service pipes, fittings, valves and connections, poles, wires, tools,
implements, apparatus, furniture, and chattels; all municipal
franchises and other franchises; all lines for the transmission and/or
distribution of electric current, including towers, poles, wires,
cables, pipes, conduits, street lighting systems and all apparatus for
use in connection therewith; all real estate, lands, leaseholds; all
easements, servitudes, licenses, permits, rights, powers, franchises,
privileges, rights-of-way and other rights in or relating to real
estate or the occupancy of the same and all the right, title and
interest of the Company in and to all other property of any kind or
nature appertaining to and/or used and/or occupied and/or enjoyed in
connection with any property hereinbefore described; it being the
intention of the parties that all property of every kind, real,
personal or mixed (including, but not limited to, all property of the
types hereinbefore described), other than Excepted Property, which may
be acquired by the Company after the date hereof, shall, immediately
upon the acquisition thereof by the Company, to the extent of such
acquisition, and without any further conveyance or assignment, become
and be subject to the direct lien of the Indenture as fully and
completely as though now owned by the Company and described in said
"Schedule A"; it further being the intention of the paries, however,
that the lien of and security interest granted by this Indenture shall
not result in the Trustee having greater rights with respect to any
property of the Company, real, personal or mixed (including, but not
limited to, leasehold interests in property) than the rights of the
Company with respect to such property.
TOGETHER WITH all and singular the tenements, hereditaments and
appurtenances belonging or in any wise appertaining to the aforesaid premises,
property, assets, rights and franchises or any part thereof, with the reversion
and reversions, remainder and remainders, and all the estate, right, title and
interest and claim whatsoever, at law as well as in equity, which the Company
now has or may hereafter acquire in and to the aforesaid premises, property,
assets, rights and franchises and every part and parcel thereof.
Subject, however, to the reservations, exceptions, limitations and
restrictions contained in the several deeds, leases, servitudes, contracts,
decrees, judgments, or other instruments through which the Company acquired or
claims title to or enjoys the use of the aforesaid properties; and subject also
to such easements, leases, reservations, servitudes, reversions and other
rights and privileges of others and such mortgages, liens and other
encumbrances in, on, over, across or through said properties as existed at the
time of the acquisition of such properties by the Company or as have been
granted by the Company to other persons at or prior to the time of the issuance
and delivery of the Bonds of the Initial Series, including, but not limited to,
the lien of the 1941 Mortgage and the security interest created thereby; and
subject also to Permitted Encumbrances and, as to any property acquired by the
Company after the time of the issuance and delivery of the Bonds of the Initial
Series, to any easements, leases, reservations, servitudes, reversions and
other rights and privileges of others and mortgages, liens or other
encumbrances thereon existing, and to any mortgages, liens and other
encumbrances for unpaid portions of the purchase money placed thereon, at the
time of such acquisition, it being understood that with respect to any such
after-acquired property the Lien of the Indenture (as hereinafter defined)
shall at all times be junior, subject and subordinate to the lien of the 1941
Mortgage and the security interest created thereby; and subject also to the
provisions of Article XI of the Original Indenture;
TO HAVE AND TO HOLD the Trust Estate and all and singular the lands,
properties, estates, rights, franchises, privileges and appurtenances hereby
granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged,
pledged, set over and confirmed, together with all the appurtenances thereunto
appertaining, unto the Trustee and its successors and assigns, forever;
BUT IN TRUST, NEVERTHELESS, for the equal and proportionate use, benefit,
security and protection of those who from time to time shall hold the Bonds
authenticated and delivered hereunder and duly issued by the Company, without
any discrimination, preference or priority of any one Bond over any other by
reason of priority in the time of issue, sale or negotiation thereof or
otherwise, except as provided in Section 2 of Article IV of the Original
Indenture, so that, subject to said provisions, each and all of said Bonds
shall have the same right, lien and privilege under the Indenture and shall be
equally secured hereby (except as any sinking, amortization, improvement,
renewal or other fund, established in accordance with the provisions of the
Indenture, may afford additional security for the Bonds of any particular
series), and shall have the same proportionate interest and share in the Trust
Estate, with the same effect as if all of the Bonds had been issued, sold and
negotiated simultaneously on the date of the delivery hereof; and in trust for
enforcing payment of the principal of the Bonds, and premium, if any, and
interest, if any, thereon, according to the tenor, purport and effect of the
Bonds and of the Indenture, and for enforcing the terms, provisions, covenants
and agreements herein and in the Bonds set forth;
UPON CONDITION that, until the happening of a Default, the Company shall
be suffered and permitted to possess, use and enjoy the Trust Estate (except
money, securities and other personal property pledged or deposited with or
required to be pledged or deposited with the Trustee hereunder) and to receive
and use the rents, issues, income, revenues, earnings and profits therefrom,
all as more specifically provided in Section 1 of Article VII of the Original
Indenture;
AND UPON THE TRUSTS, USES AND PURPOSES and subject to the covenants,
agreements and conditions hereinafter set forth and declared.
ARTICLE I
ADDITIONAL DEFINITIONS
SECTION 1. APPLICABILITY OF ARTICLE
For all purposes of this Supplemental Indenture No. 2, except as otherwise
expressly provided or unless the context otherwise requires, the terms defined
in this Article shall have the meanings herein specified and include the plural
as well as the singular.
SECTION 2. ADDITIONAL DEFINITIONS.
"ADMINISTRATIVE AGENT" means Toronto Dominion (Texas), Inc., in its
capacity as Administrative Agent under the Credit Agreement.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of December 30,
1997, among the Company, the lenders parties thereto, the issuing banks parties
thereto, The Bank of New York, as Syndication Agent, Societe Generale, as
Documentation Agent, and Toronto Dominion (Texas), Inc., as Administrative
Agent, as amended, supplemented or otherwise modified from time to time.
"INTEREST PAYMENT DATE" means the last day of each March, June, September
and December; provided, however, that the first interest payment date shall be
March 31, 1998.
"MATURITY" means the date on which the principal of the Series 2 Bonds
becomes due and payable, whether at stated maturity, upon redemption or
acceleration, or otherwise.
The following terms shall have the meanings specified in the Credit
Agreement: "ALTERNATE BASE RATE", "COMMITMENTS", "ISSUING BANK", "LETTER OF
CREDIT", "LOANS", "MATURITY DATE" AND "OBLIGATIONS".
A copy of the Credit Agreement is filed at the office of the
Administrative Agent at 909 Fannin, Suite 1700, Houston, TX 77010 and at the
office of the Company at 220 West Sixth Street, Tucson, Arizona 85702.
ARTICLE II
SERIES 2 BONDS
There is hereby established a series of Bonds having the following terms
and characteristics (the lettered subdivisions set forth below corresponding to
the lettered subdivisions of Section 2 of Article II of the Indenture):
(a) the title of the Bonds of such series shall be "Second Mortgage
Bonds, Collateral Series B" (such Bonds being hereinafter sometimes called
the "Series 2 Bonds");
(b) the aggregate principal amount of Series 2 Bonds which may be
authenticated and delivered under the Indenture shall be limited to
$543,875,000, except as contemplated in subdivision (b) of Section 2 of
Article II of the Original Indenture;
(c) not applicable;
(d) the Series 2 Bonds shall mature on December 30, 2004;
(e) during the period from and including the date of the first
authentication and delivery of the Series 2 Bonds to and including the day
next preceding the first Interest Payment Date, the Series 2 Bonds shall
bear interest at the rate of ten per centum (10%) per annum; thereafter,
the Series 2 Bonds shall bear interest at a rate equal to the Alternate
Base Rate from time to time in effect plus 400 basis points; interest on
the Series 2 Bonds shall accrue from and including the date of the first
authentication and delivery of the Series 2 Bonds, except as otherwise
provided in the form of bond attached hereto as Exhibit A; interest on the
Series 2 Bonds shall be payable on each Interest Payment Date and at
Maturity, and the Regular Record Date for the interest payable on each
Interest Payment Date shall be the day next preceding such Interest
Payment Date; interest payable at Maturity shall be paid to the Person to
whom principal shall be paid; and interest on the Series 2 Bonds during
any period for which payment is made shall be computed in accordance with
the Credit Agreement;
(f) the office of the Trustee in New York, New York, shall be the
office or agency of the Company in The City of New York where (i) the
principal of the Series 2 Bonds and interest payable thereon at Maturity
shall be payable upon presentation thereof, (ii) notices, presentations
and demands to or upon the Company in respect of the Series 2 Bonds or the
Indenture may be served or made and (iii) Series 2 Bonds may be
surrendered for registration of transfer or exchange; the principal office
of the Company in Tucson, Arizona shall be an additional financial office
or agency where the principal of the Series 2 Bonds and interest payable
thereon at Maturity shall be payable upon presentation thereof; interest
payable on the Series 2 Bonds prior to Maturity shall be paid by the
Company directly to the Holders thereof.
(g) the Series 2 Bonds shall not be redeemable, in whole or in part,
at the option of the Company;
(h) upon (i) the occurrence of an Event of Default under the Credit
Agreement, and further upon the condition that, in accordance with the
terms of the Credit Agreement, the Commitments shall have been or shall
have terminated and the Loans shall have been declared to be or shall have
otherwise become due and payable immediately and the Administrative Agent
shall have delivered to the Company a notice demanding redemption of the
Series 2 Bonds which notice states that it is being delivered pursuant to
Article VII of the Credit Agreement, (ii) the occurrence of an Event of
Default under clause (h) or (i) of Article VII of the Credit Agreement, or
(iii) the Maturity Date, then all Series 2 Bonds shall be redeemed
immediately at the principal amount thereof plus accrued interest to the
date of redemption.
(i) the Series 2 Bonds shall be issued in denominations of $1,000
and any amount in excess thereof;
(j) not applicable;
(k) not applicable;
(l) not applicable;
(m) not applicable;
(n) no service charge shall be made for the registration of transfer
or exchange of Series 2 Bonds;
(o) (i) the Series 2 Bonds are to be issued and delivered to the
Administrative Agent in order to provide collateral security for the
obligation of the Company under the Credit Agreement to pay the
Obligations, to the extent and subject to the limitations set forth in
clauses (ii) and (iii) of this subdivision.
(ii) the obligation of the Company to pay interest on the Series
2 Bonds on any Interest Payment Date prior to Maturity (a) shall be deemed
to have been satisfied and discharged in full in the event that all
amounts then due in respect of the Obligations shall have been paid or
(b) shall be deemed to remain unsatisfied in an amount equal to the
aggregate amount then due in respect of the Obligations and remaining
unpaid (not in excess, however, of the amount otherwise then due in
respect of interest on the Series 2 Bonds).
(iii) the obligation of the Company to pay the principal of
and accrued interest on the Series 2 Bonds at or after Maturity (x) shall
be deemed to have been satisfied and discharged in full in the event that
all amounts then due in respect of the Obligations shall have been paid and
no Letter of Credit shall remain outstanding or (y) shall be deemed to
remain unsatisfied in an amount equal to the aggregate amount then due in
respect of the Obligations and remaining unpaid plus the aggregate stated
amount of the outstanding Letters of Credit (not in excess, however, of
the amount otherwise then due in respect of principal of and accrued
interest on the Series 2 Bonds).
(iv) the Trustee shall be entitled to presume that the
obligation of the Company to pay the principal of and interest on the
Series 2 Bonds as the same shall become due and payable shall have been
fully satisfied and discharged unless and until it shall have received a
written notice from the Administrative Agent, signed by an authorized
officer thereof,stating that the principal of and/or interest on the
Series 2 Bonds has become due and payable and has not been fully paid, and
specifying the amount of funds required to make such payment;
(p) in the event of an application by the Administrative Agent for
payment or for a substituted Series 2 Bond pursuant to Section 11 of
Article II of the Original Indenture, the Administrative Agent shall not
be required to provide any indemnity or pay any expenses or charges as
contemplated in said Section 11; and
(q) the Series 2 Bonds shall have such other terms as are set forth
in the form of bond attached hereto as Exhibit A, which form is hereby
designated as the form of the Series 2 Bonds.
ARTICLE III
MISCELLANEOUS PROVISIONS
This Supplemental Indenture No. 2 is a supplement to the Original
Indenture. As heretofore supplemented and further supplemented by this
Supplemental Indenture No. 2, the Original Indenture is in all respects
ratified, approved and confirmed, and the Original Indenture as heretofore
supplemented and this Supplemental Indenture No. 2 shall together constitute
one and the same instrument.
IN WITNESS WHEREOF, Tucson Electric Power Company has caused its corporate
name to be hereunto affixed, and this instrument to be signed by one of its
Vice Presidents, and its corporate seal to be hereunto affixed and attested by
one of its Assistant Secretaries for and in its behalf; and Bank of Montreal
Trust Company, in evidence of its acceptance of the trust hereby created, has
caused its corporate name to be hereunto affixed, and this instrument to be
signed by one of its Vice Presidents and its corporate seal to be hereunto
affixed and attested by one of its Vice Presidents for and in its behalf, all
as of the day and year first above written.
TUCSON ELECTRIC POWER COMPANY
By
--------------------------------------------
Vice President
Attest:
- -------------------------------
Assistant Secretary
------------------------------
BANK OF MONTREAL TRUST COMPANY,
Trustee
By
--------------------------------------------
Vice President
Attest:
- ------------------------------
Vice President
STATE OF ARIZONA )
)
) ss.:
COUNTY OF PIMA )
This instrument was acknowledged before me this --- day of December 1997
by KEVIN P. LARSON, as Vice President, and VINCENT NITIDO, as Assistant
Secretary, of TUCSON ELECTRIC POWER COMPANY, an Arizona corporation, known to
me to be the individuals who executed this instrument, and known to me to be a
Vice President and an Assistant Secretary, respectively, of said corporation,
and who personally acknowledged before me and stated that they executed said
instrument on behalf of said corporation for the purposes and consideration
therein expressed.
-----------------------------------
NOTARY PUBLIC
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
This instrument was acknowledged before me this 22nd day of December 1997
by Therese Gaballah, as Vice President, and Amy Roberts, as Vice President, of
BANK OF MONTREAL TRUST COMPANY, a New York banking corporation, known to me to
be the individuals who executed this instrument, and known to me to be Vice
Presidents of said corporation, and who personally acknowledged before me and
stated that they executed said instrument on behalf of said corporation for the
purposes and consideration therein expressed.
--------------------------------------
CARMELA F. MARABELLO
NOTARY PUBLIC, STATE OF NEW YORK
NO. 24-4763158
QUALIFIED IN KINGS COUNTY
COMMISSION EXPIRES NOVEMBER 30, 1998
Exhibit A
[Form of Bond]
This bond is non-transferable,
except to a successor Administrative Agent under the
Credit Agreement referred to herein.
No. --------------- $---------------------
TUCSON ELECTRIC POWER COMPANY
SECOND MORTGAGE BOND, COLLATERAL SERIES B
DUE DECEMBER 30, 2004
TUCSON ELECTRIC POWER COMPANY, a corporation of the State of Arizona
(hereinafter sometimes called the Company), for value received, promises to pay
to
as Administrative Agent under the Credit Agreement hereinafter referred to or
registered assigns, the principal sum of
DOLLARS
on December 30, 2004, in coin or currency of the United States of America which
at the time of payment shall be legal tender for the payment of public and
private debts, at the office or agency of the Company in The City of New York,
or in the City of Tucson, Arizona, upon presentation hereof, and quarterly, on
March 31, June 30, September 30 and December 31 in each year, commencing March
31, 1998 (each an "Interest Payment Date"), and at Maturity (as defined in
Supplemental Indenture No. 2 hereinafter referred to), to pay interest thereon
in like coin or currency at the rate specified below, from the Interest Payment
Date next preceding the date of this bond (unless this bond be dated on an
Interest Payment Date, in which case from the date hereof; or unless this bond
be dated prior to the first interest payment date, in which case from and
including the date of the first authentication and delivery of the bonds of
this series), until the Company's obligation with respect to such principal
sum shall be discharged.
During the period from and including the date of the first authentication
and delivery of the bonds of this series to and including the day next
preceding the first Interest Payment Date, the bonds of this series shall bear
interest at the rate of ten per centum (10%) per annum; thereafter, the bonds
of this series shall bear interest at a rate equal to the Alternate Base Rate
(as defined in Supplemental Indenture No. 2 hereinafter referred to) from time
to time in effect plus 400 basis points. Interest on the bonds of this series
during any period for which payment is made shall be computed in accordance
with the Credit Agreement.
This bond is one of an issue of bonds of the Company, issued and to be
issued in one or more series under and equally and ratably secured (except as
any sinking, amortization, improvement, renewal or other fund, established in
accordance with the provisions of the indenture hereinafter mentioned, may
afford additional security for the bonds of any particular series) by the
Indenture of Mortgage and Deed of Trust, dated as of December 1, 1992 (the
"Original Indenture"), from the Company to Bank of Montreal Trust Company,
trustee (the "Trustee"), as supplemented by two supplemental indentures
including Supplemental Indenture No. 2, dated as of December 1, 1997 (the
Original Indenture, as so supplemented, and such Supplemental Indenture being
hereinafter called the "Indenture" and "Supplemental Indenture No. 2",
respectively), to which Indenture reference is hereby made for a description of
the property mortgaged and pledged, the nature and extent of the security
provided by the Indenture, the rights and limitations of rights of the Company,
the Trustee and the holders of said bonds with respect to the security provided
by the Indenture, the powers, duties and immunities of the Trustee, the terms
and conditions upon which such bonds are and are to be secured, and the
circumstances under which additional bonds may be issued. The acceptance of
this bond shall be deemed to constitute the consent and agreement by the holder
hereof to all of the terms and provisions of the Indenture. This bond is one
of a series of bonds designated as the Second Mortgage Bonds, Collateral Series
B, of the Company.
The Indenture permits, with certain exceptions as therein provided, the
Trustee to enter into one or more supplemental indentures for the purpose of
adding any provisions to, or changing in any manner or eliminating any of the
provisions of, the Indenture with the consent of the holders of not less than
sixty per centum (60%) in aggregate principal amount of the bonds of all series
then outstanding under the Indenture, considered as one class; provided,
however, that if there shall be bonds of more than one series outstanding under
the Indenture and if a proposed supplemental indenture shall directly affect
the rights of the holders of bonds of one or more, but less than all, of such
series, then the consent only of the holders of bonds in aggregate principal
amount of the outstanding bonds of all series so directly affected, considered
as one class, shall be required; and provided, further, that if the bonds of
any series shall have been issued in more than one tranche and if the proposed
supplemental indenture shall directly affect the rights of the holder of bonds
of one or more, but less than all, of such tranches, then the consent only of
the holders of bonds in aggregate principal amount of the outstanding bonds of
all tranches so directly affected, considered as one class, shall be required;
and provided, further, that the Indenture permits the Trustee to enter into one
or more supplemental indentures for limited purposes without the consent of any
holders of bonds. Any such consent by the holder of this bond shall be
conclusive and binding upon such holder and upon all future holders of this
bond and of any bond issued upon the registration of transfer hereof or in
exchange therefor or in lieu hereof, whether or not notation of such consent
is made upon this bond.
The Company has issued and delivered the bonds of this series to Toronto
Dominion (Texas), Inc., as Administrative Agent (the "Administrative Agent")
under, the Credit Agreement, dated as of December 30, 1997, among the Company,
the lenders parties thereto, the issuing banks parties thereto, The Bank of New
York, as Syndication Agent, Societe Generale, as Documentation Agent, and
Toronto Dominion (Texas), Inc., as Administrative Agent, as amended,
supplemented or otherwise modified from time to time (the "Credit Agreement")
in order to provide collateral security for the obligation of the Company
thereunder to pay the Obligations (as defined in Supplemental Indenture No. 2).
Upon (i) the occurrence of an Event of Default under the Credit
Agreement,and further upon such additional conditions as are set forth in
subdivision (h) of Article II of Supplemental Indenture No. 2, or (ii) the
Maturity Date under the Credit Agreement, then all bonds of this series shall
be redeemed immediately at the principal amount thereof plus accrued interest
to the date of redemption.
The obligation of the Company to pay interest on the bonds of this Series
on any Interest Payment Date prior to Maturity (a) shall be deemed to have been
satisfied and discharged in full in the event that all amounts then due in
respect of the Obligations shall have been paid or (b) shall be deemed to
remain unsatisfied in an amount equal to the aggregate amount then due in
respect of the Obligations and remaining unpaid (not in excess, however, of the
amount otherwise then due in respect of interest on the bonds of this Series).
The obligation of the Company to pay the principal of and accrued interest
on the bonds of this series at or after Maturity (x) shall be deemed to have
been satisfied and discharged in full in the event that all amounts then due in
respect of the Obligations shall have been paid and no Letter of Credit (as
defined in Supplemental Indenture No. 2) shall remain outstanding or (y) shall
be deemed to remain unsatisfied in an amount equal to the aggregate amount then
due in respect of the Obligations and remaining unpaid plus the aggregate
stated amount of the outstanding Letters of Credit (not in excess, however, of
the amount otherwise then due in respect of principal of and accrued interest
on the bonds of this series).
The principal of this bond and the interest accrued hereon may become or
be declared due and payable before the stated maturity hereof, on the
conditions, in the manner and at the times set forth in the Indenture, upon the
happening of a default as therein provided.
This bond is non-transferable except as required to effect transfer to any
successor administrative agent under the Credit Agreement, any such transfer to
be made at the office or agency of the Company in The City of New York, upon
surrender and cancellation of this bond, and upon any such transfer a new bond
of this series, for the same aggregate principal amount and having the same
stated maturity date, will be issued to the transferee in exchange herefor.
Prior to due presentment for registration of transfer, the Company and the
Trustee may deem and treat the person in whose name this bond is registered as
the absolute owner hereof for the purpose of receiving payment and for all
other purposes. This bond, alone or with other bonds of this series, may in
like manner be exchanged at such office or agency for one or more bonds of this
series of the same aggregate principal amount and having the same stated
maturity date and interest rate, all as provided in the Indenture.
No recourse shall be had for the payment of the principal of or interest
on this bond, or for any claim based hereon or otherwise in respect hereof or
of the Indenture, against any incorporator, shareholder, director or officer,
as such, past, present or future, of the Company or of any predecessor or
successor corporation, either directly or through the Company or any
predecessor or successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or
by any legal or equitable proceeding or otherwise howsoever (including, without
limiting the generality of the foregoing, any proceeding to enforce any claimed
liability of shareholders of the Company, based upon any theory of disregarding
the corporate entity of the Company or upon any theory that the Company was
acting as the agent or instrumentality of the shareholders); all such liability
being, by the acceptance hereof and as a part of the consideration for the
issuance hereof, expressly waived and released by every holder hereof, and
being likewise waived and released by the terms of the Indenture under which
this bond is issued, as more fully provided in said Indenture.
This bond shall not be valid or become obligatory for any purpose until
the certificate of authentication hereon shall have been signed by Bank of
Montreal Trust Company, or its successor, as Trustee under the Indenture.
IN WITNESS WHEREOF, the Company has caused this bond to be signed in its
name by the manual or facsimile signature of its President or one of its Vice
Presidents, and its corporate seal, or a facsimile thereof, to be impressed or
imprinted hereon and attested by the manual by the manual or facsimile
signature of its Secretary or one of its Assistant Secretaries.
Dated
TUCSON ELECTRIC POWER COMPANY
By:
----------------------------------------------
Attest:
- -------------------------------
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This is one of the bonds, of the series designated therein, described in
the within-mentioned Indenture.
BANK OF MONTREAL TRUST COMPANY,
as Trustee
By:
----------------------------------------------
SCHEDULE A
DESCRIPTION OF MORTGAGED PROPERTY
GENERIC DESCRIPTION
All electric generating plants, gas generating plant, gas holders, steam
plant, gas regulating stations, substations and other properties of the
Company, including all power houses, transmission lines, buildings, pipes,
structures and works, and the lands of the Company on which the same are
situated, and all the Company's lands, easements, rights, rights-of-way, water
rights, rights to the use of water, including all of the Company's right, title
and interest in and to any and all decrees therefor, permits, franchises,
consents, privileges,licenses, poles, towers, wires, switch racks, insulators,
pipes, machinery,engines, boilers, motors, regulators, meters, tools,
appliances, equipment, appurtenances and supplies, forming a part of or
appertaining to said plants, holders, sites, stations or other properties, or
any of them, or used or enjoyed, or capable of being used or enjoyed in
conjunction or connection therewith; and
All electric substations and substation sites of the Company including all
buildings, structures, towers, poles, lines, and all equipment, appliances and
devices for transforming, converting and distributing electric energy, and all
the right, title and interest of the Company in and to the land on which the
same are situated, and all of the Company's lands, easements, rights-of-way,
rights, franchises, privileges, machinery, equipment, fixtures, appliances,
devices, appurtenances and supplies forming a part of said substation or any of
them, or used or enjoyed, or capable of being used or enjoyed, in conjunction
or connection therewith; and
All warehouses, buildings, structures, works and sites and the Company's
landson which the same are situated, and all easements, rights-of-way, permits,
franchises, consents, privileges, licenses, machinery, equipment, furniture and
fixtures, appurtenances and supplies forming a part of said warehouses,
buildings, structures, works and sites, or any of them, or used or enjoyed or
capable of being used or enjoyed in connection or conjunction therewith; and
All electric distribution systems of the Company, including towers, poles,
wires, insulators, appliances, devices, appurtenances and equipment, and all
the Company's other property, real, personal or mixed, forming a part of, or
used, occupied or enjoyed in connection with or in any way appertaining to said
distribution systems, or any of them,together with all of the Company's rights-
of-way, easements, permits, privileges, municipal or other franchises,licenses,
consents and rights for or relating to the construction, maintenance or
operation thereof through, over, under or upon any public streets or highways,
or public or private lands; and also all branches, extensions, improvements and
developments of or appertaining to or connected with said electric distribution
systems, or any of them, and all other electric distribution systems of the
Company and parts thereof wherever situated, and whether now owned or hereafter
acquired, as well as all rights-of-way, easements, privileges, permits,
municipal or other franchises, consents and rights for or relating to the
construction, maintenance or operation thereof, or any part thereof, through,
over, under or upon public or private lands, whether now owned or hereafter
acquired; and
All electric transmission and/or distribution lines of the Company,
including the towers, poles, pole lines, wires, switch racks, insulators,
supports, guys, telephone and telegraph lines and other appliances and
equipment, and all other property of the Company, real, personal or mixed,
forming a part thereof or appertaining thereto, together with all of the
Company's rights-of-way, easements, permits, privileges, municipal or other
franchises, consents, licenses and rights, for or relating to the construction,
maintenance or operation thereof, through, over, under or upon any public
streets or highways or other lands, public or private; also all extension,
branches, taps, developments and improvements of or to any and all of the above
described transmission and/or distribution lines, telephone and telegraph lines
or any of them, as well as all rights-of-way, easements, permits, privileges,
rights and municipal or other franchises, licenses and consents,for or relating
to the construction, maintenance or operation of said lines or any of them, or
any part thereof, through, over, under or upon any public streets or highways
or any public or private lands, whether now owned or hereafter acquired;
Excepting, however, any property of the character of "Excepted Property"
within the meaning of the Supplemental Indenture to which this Schedule A is
attached.
SPECIFIC DESCRIPTION OF ADDITIONAL REAL PROPERTY
Specific descriptions of additional portions of the Mortgaged Property
which constitute real property are contained in Annex 1 to this Schedule A.
Exhibit 10(e)(4)
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
----------------------------------------
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (this "Amendment"),
effective as of January 3, 1997, is entered into among ROMANO SALVATORI (the
"Employee"); TUCSON ELECTRIC POWER COMPANY, an Arizona corporation (the
"Parent"); and NATIONS ENERGY CORPORATION, an Arizona corporation and a
wholly-owned subsidiary of the Parent (the "Company").
RECITALS
--------
1. The Employee and the Parent entered into an Employment Agreement
effective as of December 1, 1994 (the "Agreement"). Section 3(c) of the
Agreement contemplated the development of a performance-based incentive plan
consistent with programs in the independent power industry which includes
opportunities for development fees, carried interest and equity
participation.
2. In lieu of participating in such a program in 1995 and 1996,
Employee participated in the annual incentive plan for the Parent's officers.
3. Subsequent to the effective date of the Agreement, a performance-
based IPP Plan was implemented for employees of the Company and it is
appropriate for Employee (in accordance with Section 3(c) of the Agreement)
to discontinue his participation in Parent's Annual Incentive Plan and
instead participate in the same type of plan applicable to other Company
employees. This Amendment also makes certain additional changes to conform
the Agreement to other employment agreements for the Company's employees.
4. In conjunction with the Employee's discontinuance as a participant
in Parent's Annual Incentive Plan, it is no longer appropriate for the
Employee to continue as an officer of the Parent.
AGREEMENTS
----------
In consideration of the foregoing and of the mutual agreements set forth
in the Agreement, the Employee, the Parent and the Company hereby agree as
follows:
5. PARENT OFFICER STATUS. Effective as of January 3, 1997, the
Employee shall continue his duties and responsibilities as President of the
Company but shall no longer serve as an officer of the Parent. Consistent
with such change, Employee's "Change of Control" Employment Agreement dated
as of December 1, 1994 (the "COC Agreement") shall be amended to reflect (a)
the fact that Employee's status as an officer of the Parent shall cease as of
January 3, 1997; (b) the additional provisions approved by the Board of
Directors of the Parent at the meeting held on December 6, 1996; and (c) the
fact that any payments made under Paragraph 9(a) of the COC Agreement shall
be reduced by any amounts paid as base salary under the Agreement. Except as
amended hereby, the benefits set forth in the COC Agreement shall remain in
effect.
6. EXTENSION OF INITIAL EMPLOYMENT PERIOD. The Initial Employment
Period shall be extended by a one-year period such that the Initial
Employment Period ends on December 1, 1998.
7. 1997 ANNUAL SALARY. Effective as of January 3, 1997, Employee's
1997 annual salary as President of the Company shall be set at $230,000.
8. ADDITIONAL BENEFITS AND COMPENSATION. Effective as of January 3,
1997, Employee shall no longer participate in the Parent's Short-Term or
Long-Term Officer Incentive Plans but instead shall participate in the
Company's incentive program set forth on Exhibit A hereto. This modification
shall in no way affect or reduce the "Fringe Benefits" itemized on Exhibit B
which shall continue in full force and effect for the term of this Agreement.
Additionally, notwithstanding Employee's prior capacity as an officer of the
Parent, Employee is entitled to a carried interest in the Coors Project at
the percentage set forth in Paragraph 3 of Exhibit A; provided, however,
Employee acknowledges and agrees that any entitlement to a carried interest
with respect to the Coors Project for the years 1995 and 1996 has been
satisfied through annual bonus payments for such years.
9. DEATH OR DISABILITY. Section 4 of the Agreement shall be amended
in its entirety to read as follows:
"4. DEATH OR DISABILITY. If the Employee becomes physically or
mentally disabled while employed by the Company, or if the Employee
dies while employed by the Company, this Agreement shall automatically
cease and terminate. Physical or mental disability shall mean that
the Employee shall be unable to perform his duties under this
Agreement. The Company's obligations to the Employee under this
Agreement shall end as of the date of the Employee's death or, in
the case of disability, the Employee's last day of active
employment. The Company's obligations to the Employee under any
compensation or benefit plans applicable to the Employee shall be
governed by the terms of such plans. The death or disability of the
Employee shall not affect any carried interest previously earned by
Employee pursuant to Paragraph 3 of Exhibit A or any "Added Value"
performance payment pursuant to Paragraph 5 of Exhibit A."
10. TERMINATION BY EMPLOYEE. Section 5 of the Agreement shall be
amended in its entirety to read as follows:
"5. TERMINATION BY EMPLOYEE. The Employee shall have the right to
terminate this Employment Agreement at any time. The Employee agrees
to provide the Company with thirty (30) days prior written notice of
any such termination. The Company's obligation to pay the
Employee's compensation pursuant to this Agreement shall cease as
of the Employee's last day of work. The Company's obligation to the
Employee under any compensation or benefit plans shall be governed
by the terms of such plans. Termination by Employee will not
affect any carried interest previously earned by Employee pursuant
to Paragraph 3 of Exhibit A or any "Added Value" performance
payment pursuant to Paragraph 5 of Exhibit A."
11. TERMINATION WITHOUT CAUSE. The Agreement shall be amended by
restating Section 6(b) in its entirety as follows:
"(b) TERMINATION WITHOUT CAUSE. The Company may also terminate
this Employment Agreement without cause, at any time before the
stated termination date of the Initial Employment Period. If
Employee's employment is terminated pursuant to this Paragraph,
however, the Company shall pay the Employee termination pay, less
required payroll taxes and related deductions, equal to the greater
of 100% of the Employee's annual base salary which would have been
paid to the Employee for the remainder of the Initial Employment Period
or six months of Employee's base salary then in effect under Paragraph
7 of this Amendment at the time of termination (the "Termination
Amount"). Said Termination Amount shall be paid in equal monthly
installments, beginning on the first business day of the calendar
month following the Employee's termination. Additionally, the
Employee shall receive a prorated annual bonus payment. The
Employee shall not be entitled to any other compensation or
benefits set forth in this Employment Agreement, except as may be
provided under the terms of any separate compensation or benefit
plan or as may be separately negotiated by the parties and approved
by the Board of Directors in writing in conjunction with the
Employee's termination under this Paragraph. In the event of
termination without cause, the Company's obligation to the Employee
under any compensation or benefit plans shall be governed by the
terms of such plans. Termination of Employee under this Section
6(b) shall not affect any of the provisions of Exhibit A."
12. EFFECT OF TERMINATION. The last paragraph of Section 7 of the
Agreement is modified as follows:
"Any payment due for services rendered prior to termination shall
be made as provided in the Employment Agreement, as amended."
13. RELEASE OF CLAIMS. For and in consideration of the mutual
covenants herein, Employee agrees to compromise, release and fully and
forever discharge and covenants not to sue the Parent or the Company,
including, but not in limitation thereof, all directors, officers, employees,
agents, or attorneys thereof, from and with respect to any and all claims of
whatever kind or nature, known or unknown, suspected or unsuspected and
however arising, including, but not in limitation thereof, all claims for
personal injury (including all claims for medical treatment related thereto),
pain and suffering, mental anguish, humiliation or embarrassment, loss or
diminution of self or professional esteem, reputation, or any and all claims
of whatever kind or nature, arising out of, resulting from or concerning any
information upon which the Employee relied in entering into the Agreement or
Employee's employment with the Parent or the Company through and including
the date of execution of this Amendment.
IN WITNESS WHEREOF, the Parent and the Company have caused this
Amendment to be executed by its duly authorized officers, and the Employee
has hereunto signed this Amendment, on the 1st day of August, 1997.
TUCSON ELECTRIC POWER COMPANY
/s/ Charles E. Bayless
By ---------------------------
Chairman, President and CEO
Its --------------------------
NATIONS ENERGY CORPORATION
/s/ J. S. Pignatelli
By ---------------------------
Chairman
Its --------------------------
/s/ Romano Salvatori
------------------------------
ROMANO SALVATORI
EXHIBIT A TO AMENDMENT NO. 1
TO EMPLOYMENT AGREEMENT
1. 1997 ANNUAL BONUS - Employee is eligible for an annual bonus for the
year 1997 based upon the following objectives. Such bonus will be a target
percentage of 40% of the Employee's Base Salary for the year based on
achieving the objectives described below. In the event each of the
objectives set forth below is achieved, the bonus shall be no less than 40%
of Employee's Base Salary for the year. To the extent that performance is
achieved above and beyond such objectives the annual bonus may be increased
to a maximum percentage of 60% of Employee's Base Salary for the year. The
annual bonus payment shall be paid by no later than March 1, 1998. The
actual percentage to be paid will be determined by the Board of Directors of
the Company, based upon the Company's progress in meeting the following
business objectives for the year 1997:
Objective No. 1 - Cash Flow
---------------------------
1997 cash flow from investment in Coors Project shall
equal or exceed $2.1 million.
Objective No. 2 - Project Closings
-----------------------------------
By no later than December 31, 1997, complete financial
closing for projects with customary representations,
warranties and commitments and no material post-closing
contingencies in which the total equity commitment by the
Company equals or exceeds the lesser of (a) $100 million
or (b) the maximum amount made available by Parent to
Company for such equity commitment.
Objective No. 3 - Expenditure Level
-----------------------------------
Maintain 1997 annual expenditures for general and
administrative and general project development at or
below $4.2 million.
2. DEVELOPMENT FEE BONUS POOL - Employee shall also be entitled to
participate in a bonus pool paid as a percentage of the development fee
received by the Company upon the financial closing of each Greenfield
project, calculated as follows:
Development Fee
Net of Expenses Bonus Pool to Participants
--------------- ---------------------------
First $ 200,000 100%
Next $ 300,000 50%
Next $ 500,000 40%
Beyond $1,000,000 25%
The share received by the Employee in each bonus pool shall be determined by
the Board of Directors of the Company; however, in no event shall such share
received by the Employee be less than 20% of each bonus pool.
3. CARRIED INTEREST - In addition, the Employee shall be entitled to a
carried interest in the amount of at least three and one-half percent (3-
1/2%) of pre-tax cash flow distributed to the Company associated with:
(a) projects in which the Company invests during the extended
term of this Agreement (December 1, 1994 through and
including December 1, 1998), and
(b) projects for which the Company during the extended term
of this Agreement obtains a Board-approved call option at
such time as the Company exercises such option.
In no event, shall any taxable income be allocated from a project to the
Employee associated with any carried interest. Carried interest to which the
Employee may become entitled under this paragraph 3 shall be paid to the
Employee at such time as distributions are made by the project(s) and shall
survive the termination of the Agreement.
4. ANNUAL BONUS OFFSET - Amounts payable to the Employee under paragraph 1
of this Exhibit A will be reduced by amounts received by the Employee
pursuant to paragraphs 2, 3 and 5 of this Exhibit A. In no event the annual
bonus shall be less than zero.
5. ADDED VALUE PERFORMANCE PAYMENT - In the event a definitive Board-
approved agreement is reached during the term of this Agreement for the
reduction of the Parent's ownership interest in the Company to 45 percent or
less, Employee shall be entitled to elect, at his sole discretion, upon the
closing of such sale, a payment equal to 5 percent of the Added Value of the
Company. For the purpose of this provision, the term "Added Value" means:
(i) the purchase price paid by the investors multiplied by a fraction, the
numerator of which is 1 and the denominator of which is the percentage of the
Company sold; less (ii) the Parent's Net Cash Contributions to the Company
for all periods up to the date of the sale, with interest imputed at the rate
of 10.75 percent per annum. For the purpose of this provision, the term "Net
Cash Contributions" shall mean all cash contributions made by the Parent to
the Company, less any project distribution and development fee received by
the Company. Projects upon which any calculation of Added Value is based
shall be specifically identified and the Carried Interest with respect to
such projects shall thereafter be reduced to one percent (1%). Carried
Interest on all other projects covered by paragraph 3 of Exhibit A shall be
in the amount of 3-1/2 percent.
EXHIBIT B TO AMENDMENT NO. 1
----------------------------
TO EMPLOYMENT AGREEMENT
------------------------
FRINGE BENEFITS
1. Annual vacation of 25 days
2. Ten (10) paid holidays annually
3. Salaried Employees Retirement Plan
4. Triple Investment Plan 401(k)
5. Business Travel Accident Insurance
6. Group Life and Medical/Dental Plans
7. A Company-provided vehicle
8. Employment Agreement (Change of Control)
Exhibit 10(e)(5)
AMENDMENT NO. 1 TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
between
TUCSON ELECTRIC POWER COMPANY
and
____________________
Dated as of January 1, 1998
WHEREAS, an Amended and Restated Employment Agreement (the "Agreement")
between Tucson Electric Power Company (the "Company") and ________________
(the "Employee") was executed on December 6, 1996; and
WHEREAS, effective as of January 1, 1998 pursuant to a statutory share
exchange, the Company became a wholly-owned subsidiary of UniSource Energy
Corporation ("UniSource"); and
WHEREAS, the completion of such share exchange requires a technical
amendment to the Agreement to reflect the fact that the Company's shares are
no longer publicly traded;
NOW, THEREFORE, it is agreed by and between the parties hereto as
follows:
Section 2 of the Agreement entitled "Change of Control" shall be amended
by deleting such section in its entirety and substituting in place thereof
the new Section 2 set forth on attached Exhibit A.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed
by the Chairman of the Compensation Committee of the Company's Board of
Directors thereunto duly authorized, and the Employee has signed this
Amendment, all as of the date first above written.
TUCSON ELECTRIC POWER COMPANY
By: __________________________________
H. Wilson Sundt, Chairman of the
Compensation Committee of the
Tucson Electric Power Company
Board of Directors
______________________________________
[Employee]
EXHIBIT A
---------
2. Change in Control. The term, "Change in Control," shall mean
-----------------
the happening of any of the following:
(i) UniSource receives a report on Schedule 13D filed with the
Securities and Exchange Commission pursuant to Section 13(d) of the
Securities Exchange Act of 1934 (hereinafter referred to as the
"Exchange Act") disclosing that any person, group, corporation or other
entity is the beneficial owner directly or indirectly of thirty percent
or more of the outstanding common stock of UniSource;
(ii) any person (as such term is defined in Section 13(d) of the
Exchange Act), group, corporation or other entity other than UniSource,
a wholly-owned subsidiary of UniSource, or an entity formed by UniSource
for the purpose of creating a holding company structure purchases shares
pursuant to a tender offer or exchange offer to acquire any common stock
of UniSource (or securities convertible into common stock) for cash,
securities or any other consideration, provided that after consummation
of the offer, the person, group, corporation or other entity in question
is the beneficial owner (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of thirty percent or more of the
outstanding common stock of UniSource (calculated as provided in para-
graph (d) of Rule 13d-3 under the Exchange Act in the case of rights to
acquire common stock);
(iii) the stockholders of UniSource approve (a) any
consolidation or merger of UniSource in which UniSource is not the
continuing or surviving corporation or pursuant to which shares of
common stock would be converted into cash, securities or other property,
or (b) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all or substantially all the
assets of UniSource;
(iv) there shall have been a change in a majority of the members of
the Board of Directors of UniSource within a 24-month period unless the
election or nomination for election by UniSource's stockholders of each
new director was approved by the vote of two-thirds of the directors
then still in office who were in office at the beginning of the 24-month
period; or
(v) there occurs a sale, exchange or transfer (a) of UniSource's
interest in the Company or (b) of all or substantially all of the
Company's generation or distribution facilities, other than to a wholly-
owned subsidiary of UniSource or an affiliate of UniSource under
circumstances which would not otherwise constitute a Change in Control.
Exhibit 10(m)
CREDIT AGREEMENT
dated as of
December 30, 1997
among
TUCSON ELECTRIC POWER COMPANY
The Lenders Party Hereto
The Issuing Banks Party Hereto
THE BANK OF NEW YORK
as Syndication Agent
SOCIETE GENERALE
as Documentation Agent
and
TORONTO DOMINION (TEXAS), INC.,
as Administrative Agent
___________________________
TD SECURITIES (USA) INC.,
as Lead Arranger
THE BANK OF NEW YORK
and
SOCIETE GENERALE
as Co-Arrangers
CREDIT AGREEMENT dated as of December 30, 1997, among
TUCSON ELECTRIC POWER COMPANY, the LENDERS party hereto, the
ISSUING BANKS party hereto, THE BANK OF NEW YORK, as
Syndication Agent, SOCIETE GENERALE, as Documentation Agent,
and TORONTO DOMINION (TEXAS), INC., as Administrative Agent.
The parties hereto agree as follows:
ARTICLE I
Definitions
------------
SECTION 1.01. Defined Terms. As used in this Agreement, the
following terms have the meanings specified below:
"ABR", when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Alternate Base Rate.
"ACC" means the Arizona Corporation Commission.
"Adjusted LIBO Rate" means, with respect to any Eurodollar
Borrowing for any Interest Period, an interest rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for
such Interest Period multiplied by (b) the Statutory Reserve Rate.
"Administrative Agent" means Toronto Dominion (Texas), Inc., in its
capacity as administrative agent for the Lenders hereunder.
"Administrative Questionnaire" means an Administrative
Questionnaire in a form supplied by the Administrative Agent.
"Affiliate" means, with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the Person
specified.
"Agents" means the Administrative Agent, the Documentation Agent
and the Syndication Agent.
"Alternate Base Rate" means, for any day, a rate per annum equal to
the greatest of (a) the Prime Rate in effect on such day, (b) the Base
CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective
Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base
Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds
Effective Rate shall be effective from and including the effective date of
such change in the Prime Rate, the Base CD Rate or the Federal Funds
Effective Rate, respectively.
"Applicable Percentage" means, with respect to any Lender, the
percentage of the total LC Commitments, Revolving Commitments or Commitments,
as the case may be, represented by such Lender's LC Commitment, Revolving
Commitment or Commitment, respectively, as the context may require depending
on whether reference is made to a Lender's share of any rights or obligations
in respect of Letters of Credit, Revolving Loans or other matters. If any
such Commitments have terminated or expired, the Applicable Percentages shall
be determined based upon such Commitments most recently in effect, giving
effect to any assignments.
"Applicable Rate" means, for any day, with respect to any ABR Loan
or Eurodollar Revolving Loan, or with respect to the commitment fees payable
hereunder, as the case may be, the applicable rate per annum set forth below
under the caption "ABR Spread", "Eurodollar Spread" or "Commitment Fee Rate",
as the case may be, based upon the Reference Ratings on such date:
ABR Eurodollar Commitment Fee
Reference Ratings: ---- ----------- --------------
------------------- Spread Spread Rate
------ ------- ----
Category 1
----------
rating of BBB or 0.000% 0.500% 0.125%
Baa2 or better
Category 2
----------
rating of BBB- or 0.000% 0.750% 0.250%
Baa3
Category 3
-----------
rating of BB+ or Ba1 0.125% 1.125% 0.250%
Category 4
----------
rating of BB or Ba2 0.375% 1.375% 0.375%
Category 5
----------
rating of BB- or Ba3 0.625% 1.625% 0.375%
Category 6
----------
rating below BB- or 1.000% 2.000% 0.500%
Ba3
For purposes of the foregoing, (i) if any Rating Agency shall not
have in effect a rating for the Index Debt (other than by reason of the
circumstances referred to in the last sentence of this definition), then such
Rating Agency shall be deemed to have established a rating in Category 6;
(ii) if the Reference Ratings established or deemed to have been established
for the Index Debt shall fall within different Categories, the Applicable
Rate shall be based on the lower of the two Reference Ratings; and (iii) if
the rating established or deemed to have been established by any Rating
Agency for the Index Debt shall be changed (other than as a result of a
change in the rating system of such Rating Agency), such change shall be
effective as of the date on which it is first announced by the applicable
Rating Agency. Each change in the Applicable Rate shall apply during the
period commencing on the effective date of such change and ending on the date
immediately preceding the effective date of the next such change. If at the
time the Second Mortgage Bonds become the Index Debt, the rating given to the
Second Mortgage Bonds by any Rating Agency would indicate a Category (the
"Resulting Category") having a higher number than the Category indicated by
the rating given by such Rating Agency to the First Mortgage Bonds in effect
immediately prior to such time (the "Prior Category"), then at all times
thereafter until the rating given to the Second Mortgage Bonds by such Rating
Agency would be in the Prior Category, the Category indicated by the rating
from time to time given to the Second Mortgage Bonds thereafter shall be
deemed to be the Category indicated by such rating minus the difference
between the Resulting Category and the Prior Category. If the rating system
of any Rating Agency shall change, or if any such Rating Agency shall cease
to be in the business of rating corporate debt obligations, the Borrower and
the Lenders shall negotiate in good faith to amend this definition to reflect
such changed rating system or the unavailability of ratings from such Rating
Agency and, pending the effectiveness of any such amendment, the Applicable
Rate shall be determined using the rating of such Rating Agency most recently
in effect prior to such change or cessation.
"Assessment Rate" means, for any day, the annual assessment rate in
effect on such day that is payable by a member of the Bank Insurance Fund
classified as "well-capitalized" and within supervisory subgroup "B" (or a
comparable successor risk classification) within the meaning of 12 C.F.R.
Part 327 (or any successor provision) to the Federal Deposit Insurance
Corporation for insurance by such Corporation of time deposits made in
dollars at the offices of such member in the United States; provided that if,
as a result of any change in any law, rule or regulation, it is no longer
possible to determine the Assessment Rate as aforesaid, then the Assessment
Rate shall be such annual rate as shall be determined by the Administrative
Agent to be representative of the cost of such insurance to the Lenders.
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an assignee (with the consent of any party whose
consent is required by Section 9.04), and accepted by the Administrative
Agent, in the form of Exhibit A or any other form approved by the
Administrative Agent.
"Availability Period" means the period from and including the
Effective Date to but excluding the earlier of the Maturity Date and the date
of termination of the Revolving Commitments.
"Base CD Rate" means the sum of (a) the Three-Month Secondary
CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment
Rate.
"Board" means the Board of Governors of the Federal Reserve System
of the United States of America.
"Bond Delivery Agreement" means the Bond Delivery Agreement between
the Borrower and the Administrative Agent, substantially in the form of
Exhibit B.
"Bonds" means the First Mortgage Bonds and the Second Mortgage
Bonds.
"Borrower" means Tucson Electric Power Company, an Arizona
corporation.
"Borrowing" means Revolving Loans of the same Type, made, converted
or continued on the same date and, in the case of Eurodollar Loans, as to
which a single Interest Period is in effect.
"Borrowing Request" means a request by the Borrower for a Revolving
Borrowing in accordance with Section 2.03.
"Business Day" means any day that is not a Saturday, Sunday or
other day on which commercial banks in New York City are authorized or
required by law to remain closed; provided that, when used in connection with
a Eurodollar Loan, the term "Business Day" shall also exclude any day on
which banks are not open for dealings in dollar deposits in the London
interbank market.
"Capital Lease Investment" of any Person means the aggregate
outstanding capitalized amount of Capital Lease Obligations of the Borrower
and the Consolidated Subsidiaries that are owned by such Person and in
respect of which such Person has the right to receive all future payments to
be made.
"Capital Lease Obligations" of any Person means the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"Change in Law" means (a) the adoption of any law, rule or
regulation after the date of this Agreement, (b) any change in any law, rule
or regulation or in the interpretation or application thereof by any
Governmental Authority after the date of this Agreement or (c) compliance by
any Lender or any Issuing Bank (or, for purposes of Section 2.15(b), by any
lending office of such Lender or by such Lender's or such Issuing Bank's
holding company, if any) with any request, guideline or directive (whether or
not having the force of law) of any Governmental Authority made or issued
after the date of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral" means the Collateral Mortgage Bonds and any and all
"Collateral", as defined in any applicable Security Document.
"Collateral Mortgage Bonds" means Second Mortgage Bonds, Collateral
Series B, substantially in the form attached to the Second Supplemental
Indenture.
"Commitment" means, with respect to each Lender, each of such
Lender's Revolving Commitment and LC Commitment.
"Consolidated Capital Expenditures" means, for any fiscal period,
the aggregate of all expenditures by the Borrower and the Consolidated
Subsidiaries for such period that, in accordance with GAAP, are or should be
included in "construction expenditures" or similar items for additions to
property, plant or equipment reflected in the statement of cash flows for the
Borrower and the Consolidated Subsidiaries, as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Capital Lease Expense" means, for any fiscal period,
"capital lease expense" reflected in the statement of income of the Borrower
and the Consolidated Subsidiaries, all as determined on a consolidated basis
in accordance with GAAP.
"Consolidated EBITDA" means, for any fiscal period, with respect to
the Borrower and the Consolidated Subsidiaries, Consolidated Net Income for
such period (excluding the Borrower's share of earnings or losses of Excluded
Subsidiaries) plus, to the extent deducted in computing such Consolidated Net
Income, without duplication, the sum of (a) income tax expense, (b) interest
expense, (c) depreciation and amortization expense, (d) any extraordinary or
non-recurring losses and (e) other noncash items reducing Consolidated Net
Income, minus, to the extent added in computing such Consolidated Net Income,
without duplication, the sum of (i) interest income, (ii) any extraordinary
or non-recurring gains and (iii) other noncash items increasing Consolidated
Net Income, all as determined on a consolidated basis in accordance with
GAAP.
"Consolidated Interest Expense" means, for any fiscal period, the
aggregate of all payments by the Borrower and the Consolidated Subsidiaries
for such period that, in accordance with GAAP, are or should be included in
"interest paid, net of amounts capitalized" and "capital lease interest paid"
reflected in the statement of cash flows for the Borrower and the
Consolidated Subsidiaries, less the amount of capital lease interest paid to
the Borrower or any Consolidated Subsidiary for such period that is not
reflected in Consolidated EBITDA for such period, all as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any fiscal period, net income
of the Borrower and the Consolidated Subsidiaries for such period, determined
on a consolidated basis in accordance with GAAP.
"Consolidated Subsidiary" means (a) San Carlos and (b) each other
Subsidiary from time to time designated by the Borrower by written notice to
the Administrative Agent and the Lenders as a Consolidated Subsidiary.
"Consolidated Tangible Net Worth" means, as of the last day of any
fiscal quarter, (a) common stock equity of the Borrower as of such day minus
(b) the aggregate amount of all intangible assets (other than intangible
assets eligible for cost recovery through regulatory rates) on the
consolidated balance sheet of the Borrower and the Consolidated Subsidiaries
as of such day, all as determined on a consolidated basis in accordance with
GAAP.
"Consolidated Total Indebtedness" means, as of the last day of any
fiscal quarter, (a) the sum for the Borrower and the Consolidated
Subsidiaries as of such day of (i) the aggregate outstanding principal amount
of the Loans and LC Disbursements, (ii) the aggregate outstanding principal
amount of Indebtedness for borrowed money, (iii) the principal amount of all
obligations in respect of Hedging Agreements of the Borrower and the
Consolidated Subsidiaries (computed as set forth in the penultimate sentence
of the definition of "Material Indebtedness") and (iv) the aggregate
outstanding capitalized amount of Capital Lease Obligations, minus (b) the
aggregate outstanding capitalized amount of the Capital Lease Investments of
the Borrower and the Consolidated Subsidiaries as of such day, all as
determined on a consolidated basis in accordance with GAAP.
"Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise. "Controlling" and "Controlled" have meanings correlative thereto.
"Credit Exposure" means, with respect to any Lender at any time,
the sum of such Lender's Revolving Credit Exposure and its LC Exposure at
such time.
"Default" means any event or condition which constitutes an Event
of Default or which upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"Disclosure Documents" means the Borrower's Annual Report on
Form 10-K dated December 31, 1996, the Borrower's Quarterly Reports on
Form 10-Q dated March 31, 1997, June 30, 1997, and September 30, 1997 and the
Borrower's Current Reports on Form 8-K/A dated November 19, 1997, and on
Form 8-K dated July 3, 1997, July 10, 1997, July 16, 1997, November 14, 1997,
November 17, 1997, and November 24, 1997, in each case, as filed with the
Securities and Exchange Commission.
"Documentation Agent" means Societe Generale, in its capacity as
documentation agent for the Lenders.
"dollars" or "$" refers to lawful money of the United States of
America.
"Effective Date" means the date on which the conditions specified
in Section 4.01 are satisfied (or waived in accordance with Section 9.02).
"Environmental Laws" means all laws, rules, regulations, codes,
ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or reclamation of
natural resources, the management, release or threatened release of any
Hazardous Material or to health and safety matters.
"Environmental Liability" means any liability, contingent or
otherwise (including any liability for damages, costs of environmental
remediation, fines, penalties or indemnities), of the Borrower or any
Subsidiary directly or indirectly resulting from or based upon (a) violation
of any Environmental Law, (b) the generation, use, handling, transportation,
storage, treatment or disposal of any Hazardous Materials, (c) exposure to
any Hazardous Materials, (d) the release or threatened release of any
Hazardous Materials into the environment or (e) any contract, agreement or
other consensual arrangement pursuant to which liability is assumed or
imposed with respect to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower, is treated as a single
employer under Section 414(b) or (c) of the Code or, solely for purposes of
Section 302 of ERISA and Section 412 of the Code, is treated as a single
employer under Section 414 of the Code.
"ERISA Event" means (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder with respect to a
Plan (other than an event for which the 30-day notice period is waived);
(b) the existence with respect to any Plan of an "accumulated funding
deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA),
whether or not waived; (c) the filing pursuant to Section 412(d) of the Code
or Section 303(d) of ERISA of an application for a waiver of the minimum
funding standard with respect to any Plan; (d) the incurrence by the Borrower
or any of its ERISA Affiliates of any liability under Title IV of ERISA with
respect to the termination of any Plan; (e) the receipt by the Borrower or
any ERISA Affiliate from the PBGC of any notice of its intent to institute
proceedings to terminate any Plan or to appoint a trustee to administer any
Plan or the receipt by the Borrower or any ERISA Affiliate from a plan
administrator of any notice relating to the administrator's intent to
terminate any Plan; (f) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability with respect to the withdrawal or partial
withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the
Borrower or any ERISA Affiliate of any notice, or the receipt by any
Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice,
concerning the imposition of Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA.
"Eurodollar", when used in reference to any Loan or Borrowing,
refers to whether such Loan, or the Loans comprising such Borrowing, are
bearing interest at a rate determined by reference to the Adjusted LIBO Rate.
"Event of Default" has the meaning assigned to such term in
Article VII.
"Excluded Subsidiary" means each Subsidiary that is not a
Consolidated Subsidiary.
"Excluded Taxes" means, with respect to the Administrative Agent,
any Lender, any Issuing Bank or any other recipient of any payment to be made
by or on account of any obligation of the Borrower hereunder, (a) income or
franchise taxes imposed on (or measured by) its net income by the
United States of America, or by the jurisdiction under the laws of which such
recipient is organized or in which its principal office is located or, in the
case of any Lender, in which its applicable lending office is located,
(b) any branch profits taxes imposed by the United States of America or any
similar tax imposed by any other jurisdiction in which the Borrower is
located and (c) in the case of a Foreign Lender (other than an assignee
pursuant to a request by the Borrower under Section 2.19(b)), any withholding
tax that is imposed on amounts payable to such Foreign Lender at the time
such Foreign Lender becomes a party to this Agreement (or designates a new
lending office) or is attributable to such Foreign Lender's failure to comply
with Section 2.17(e), except to the extent that such Foreign Lender (or its
assignor, if any) was entitled, at the time of designation of a new lending
office (or assignment), to receive additional amounts from the Borrower with
respect to such withholding tax pursuant to Section 2.17(a).
"Fair Value" means, with respect to any assets or property owned by
the Borrower or any of the Consolidated Subsidiaries, the fair market value
thereof as determined from time to time by the Board of Directors (or a duly
constituted committee thereof) of the Borrower or such Consolidated
Subsidiary in good faith.
"Federal Funds Effective Rate" means, for any day, the weighted
average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates
on overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers, as published on the next succeeding
Business Day by the Federal Reserve Bank of New York, or, if such rate is not
so published for any day that is a Business Day, the average (rounded
upwards, if necessary, to the next 1/100 of 1%) of the quotations for such
day for such transactions received by the Administrative Agent from three
Federal funds brokers of recognized standing selected by it.
"Fee Letters" means (i) the letter dated December 18, 1997, between
the Borrower and the Administrative Agent, (ii) the letter dated December 18,
1997, between the Borrower and the Documentation Agent and (iii) the letter
dated December 18, 1997, between the Borrower and the Syndication Agent.
"Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or controller of the Borrower.
"First Indenture" means the Indenture, dated as of April 1, 1941,
of the Tucson Gas, Electric Light and Power Company, a predecessor to the
Borrower, to The Chase National Bank of the City of New York, as trustee, a
predecessor to The Chase Manhattan Bank, as amended, supplemented or
otherwise modified from time to time.
"First Mortgage Bonds" means the Borrower's First Mortgage Bonds
issued under the First Indenture.
"Foreign Lender" means any Lender that is organized under the laws
of a jurisdiction other than that in which the Borrower is located. For
purposes of this definition, the United States of America, each State thereof
and the District of Columbia shall be deemed to constitute a single
jurisdiction.
"GAAP" means generally accepted accounting principles in the
United States of America.
"Governmental Authority" means the government of the United States
of America, any other nation or any political subdivision thereof, whether
state or local, and any agency, authority, instrumentality, regulatory body,
court, central bank or other entity exercising executive, legislative,
judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.
"Guarantee" of or by any Person (the "guarantor") means any
obligation, contingent or otherwise, of the guarantor guaranteeing or having
the economic effect of guaranteeing any Indebtedness or other obligation of
any other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor, direct or
indirect, (a) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation or to purchase (or to
advance or supply funds for the purchase of) any security for the payment
thereof, (b) to purchase or lease property, securities or services for the
purpose of assuring the owner of such Indebtedness or other obligation of the
payment thereof, (c) to maintain working capital, equity capital or any other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness or other obligation or
(d) as an account party in respect of any letter of credit or letter of
guaranty issued to support such Indebtedness or obligation; provided, that
the term Guarantee shall not include endorsements for collection or deposit
in the ordinary course of business.
"Hazardous Materials" means all explosive or radioactive
substances or wastes and all hazardous or toxic substances, wastes or other
pollutants, including petroleum or petroleum distillates, asbestos or
asbestos containing materials, polychlorinated biphenyls, radon gas,
infectious or medical wastes and all other substances or wastes of any nature
regulated pursuant to any Environmental Law.
"Hedging Agreement" means any interest rate protection agreement,
foreign currency exchange agreement, commodity price protection agreement or
other interest or currency exchange rate or commodity price hedging arrange-
ment.
"Indebtedness" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person
upon which interest charges are customarily paid, (d) all obligations of such
Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (e) all obligations of such Person in
respect of the deferred purchase price of property or services (excluding
current accounts payable incurred in the ordinary course of business),
(f) all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien on property owned or acquired by such Person, whether or not the
Indebtedness secured thereby has been assumed, (g) all Guarantees by such
Person of Indebtedness of others, (h) all Capital Lease Obligations of such
Person, (i) all obligations, contingent or otherwise, of such Person as an
account party in respect of letters of credit and letters of guaranty and
(j) all obligations, contingent or otherwise, of such Person in respect of
bankers' acceptances. The Indebtedness of any Person shall include the
Indebtedness of any other entity (including any partnership in which such
Person is a general partner) to the extent such Person is liable therefor as
a result of such Person's ownership interest in or other relationship with
such entity, except to the extent the terms of such Indebtedness provide that
such Person is not liable therefor.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
"Indentures" means the First Indenture and the Second Indenture.
"Index Debt" means the First Mortgage Bonds until the first date on
which the aggregate outstanding principal amount of the First Mortgage Bonds
shall be less than $100,000,000 and the Second Mortgage Bonds shall be rated
by at least two of the Rating Agencies, at which time the Index Debt shall be
the Second Mortgage Bonds.
"Information Memorandum" means the Confidential Information
Memorandum dated November 1997 relating to the Borrower and the Transactions.
"Interest Election Request" means a request by the Borrower to
convert or continue a Revolving Borrowing in accordance with Section 2.08.
"Interest Payment Date" means (a) with respect to any ABR Loan, the
last day of each March, June, September and December and (b) with respect to
any Eurodollar Loan, the last day of the Interest Period applicable to the
Borrowing of which such Loan is a part and, in the case of a Eurodollar
Borrowing with an Interest Period of more than three months' duration, each
day prior to the last day of such Interest Period that occurs at intervals of
three months' duration after the first day of such Interest Period.
"Interest Period" means, with respect to any Eurodollar Borrowing,
the period commencing on the date of such Borrowing and ending on the
numerically corresponding day in the calendar month that is one, three or
six months thereafter, as the Borrower may elect; provided, that (i) if any
Interest Period would end on a day other than a Business Day, such Interest
Period shall be extended to the next succeeding Business Day unless such next
succeeding Business Day would fall in the next calendar month, in which case
such Interest Period shall end on the next preceding Business Day and
(ii) any Interest Period that commences on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the last calendar month of such Interest Period) shall end on the last
Business Day of the last calendar month of such Interest Period. For
purposes hereof, the date of a Borrowing initially shall be the date on which
such Borrowing is made and thereafter shall be the effective date of the most
recent conversion or continuation of such Borrowing.
"Issuing Bank" means The Toronto-Dominion Bank and each other
Person executing this Agreement as an Issuing Bank, in its capacity as issuer
of Letters of Credit hereunder, and each of their successors in such capacity
as provided in Section 2.06(i).
"LC Commitment" means, with respect to each Lender, the commitment
of such Lender to acquire participations in Letters of Credit hereunder,
expressed as an amount representing the maximum aggregate amount of such
Lender's LC Exposure hereunder, as such commitment may be (a) reduced from
time to time pursuant to Section 2.09 and (b) reduced or increased from time
to time pursuant to assignments by or to such Lender pursuant to
Section 9.04. The initial amount of each Lender's LC Commitment is set forth
on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such
Lender shall have assumed its LC Commitment, as applicable. The initial
aggregate amount of the Lenders' LC Commitments is $443,874,718.39.
"LC Disbursement" means a payment made by an Issuing Bank pursuant
to a Letter of Credit.
"LC Exposure" means, at any time, the sum of (a) the aggregate
undrawn amount of all outstanding Letters of Credit at such time plus (b) the
aggregate amount of all LC Disbursements that have not yet been reimbursed by
or on behalf of the Borrower at such time. The LC Exposure of any Lender at
any time shall be its Applicable Percentage of the total LC Exposure at such
time.
"Lenders" means the Persons listed on Schedule 2.01 and any other
Person that shall have become a party hereto pursuant to an Assignment and
Acceptance, other than any such Person that ceases to be a party hereto
pursuant to an Assignment and Acceptance.
"Letter of Credit" means any letter of credit issued pursuant to
this Agreement.
"LIBO Rate" means, with respect to any Eurodollar Borrowing for any
Interest Period, the rate appearing on Page 3750 of the Telerate Service (or
on any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to those
currently provided on such page of such Service, as determined by the
Administrative Agent from time to time for purposes of providing quotations
of interest rates applicable to dollar deposits in the London interbank
market) at approximately 11:00 a.m., London time, two Business Days prior to
the commencement of such Interest Period, as the rate for dollar deposits
with a maturity comparable to such Interest Period. In the event that such
rate is not available at such time for any reason, then the "LIBO Rate" with
respect to such Eurodollar Borrowing for such Interest Period shall be the
rate at which dollar deposits of $5,000,000 and for a maturity comparable to
such Interest Period are offered by the principal London office of the
Administrative Agent in immediately available funds in the London interbank
market at approximately 12:00 noon, London time, two Business Days prior to
the commencement of such Interest Period.
"Lien" means, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, hypothecation, encumbrance, charge or security interest
in, on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or
any financing lease having substantially the same economic effect as any of
the foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.
"Lien of the Second Indenture" has the meaning assigned to the
phrases "Lien of this Indenture" and "lien hereof" in the Second Indenture.
"Loan Documents" means this Agreement, the Bond Delivery Agreement,
the Second Supplemental Indenture, the Collateral Mortgage Bonds, the Revenue
Bond Pledge Agreements and the other Security Documents.
"Loans" means the loans made by the Lenders to the Borrower
pursuant to this Agreement.
"Material Adverse Effect" means a material adverse effect on
(a) the financial condition, results of operations, business or prospects of
the Borrower and the Subsidiaries taken as a whole, (b) the ability of the
Borrower to perform any of its obligations under any Loan Document or the
Second Indenture or (c) the rights of or benefits available to the Lenders
under any Loan Document or the Second Indenture.
"Material Indebtedness" means Indebtedness (other than the Loans
and Letters of Credit), or obligations in respect of one or more Hedging
Agreements, of any one or more of the Borrower and the Significant
Subsidiaries in an aggregate principal amount exceeding $15,000,000. For
purposes of determining Material Indebtedness, the "principal amount" of the
obligations of the Borrower or any Subsidiary in respect of any Hedging
Agreement at any time shall be the maximum aggregate amount (giving effect to
any netting agreements) that the Borrower or such Subsidiary would be
required to pay if such Hedging Agreement were terminated at such time.
"Material Indebtedness" shall not include at any time any Indebtedness of any
Significant Subsidiary that is non-recourse to the Borrower and the
Subsidiaries.
"Maturity Date" means December 30, 2002.
"Moody's" means Moody's Investors Service, Inc.
"MRA" means the Master Restructuring Agreement dated as of June 30,
1992, among the Borrower, Escavada Company, Gallo Wash Development Company,
Valencia Energy Company, the banks party thereto and Barclays Bank PLC,
New York Branch, as Administrative Agent and Collateral Agent.
"Multiemployer Plan" means a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
"Obligations" means (a)(i) the principal of and premium, if any,
and interest (including interest accruing during the pendency of any
bankruptcy, insolvency, receivership or other similar proceeding, regardless
of whether allowed or allowable in such proceeding) on the Loans and
LC Disbursements, when and as due, whether at maturity, by acceleration, upon
one or more dates set for prepayment or otherwise, (ii) each other payment
required to be made by the Borrower under this Agreement in respect of any
Letter of Credit, when and as due, and (iii) all other monetary obligations,
including fees, costs, expenses and indemnities, whether primary, secondary,
direct, contingent, fixed or otherwise (including monetary obligations
incurred during the pendency of any bankruptcy, insolvency, receivership or
other similar proceeding, regardless of whether allowed or allowable in such
proceeding), of the Borrower under this Agreement and the other Loan
Documents and (b) the due and punctual performance of all other covenants,
agreements, obligations and liabilities of the Borrower under or pursuant to
this Agreement and the other Loan Documents.
"Other Taxes" means any and all present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies arising from any payment made under any Loan Document or from the
execution, delivery or enforcement of, or otherwise with respect to, any Loan
Document.
"PBGC" means the Pension Benefit Guaranty Corporation referred to
and defined in ERISA and any successor entity performing similar functions.
"Person" means any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership,
Governmental Authority or other entity.
"Plan" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or
Section 412 of the Code or Section 302 of ERISA, and in respect of which the
Borrower or any ERISA Affiliate is (or, if such plan were terminated, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"Prime Rate" means the rate of interest per annum adopted from time
to time by The Toronto-Dominion Bank at its principal office in New York City
as its prime commercial lending rate; each change in the Prime Rate shall be
effective from and including the date such change is publicly announced as
being effective.
"Rating Agencies" means Duff & Phelps Inc., Fitch Investors
Service, Inc., Moody's and S&P.
"Reference Ratings" means, at any time (a) whichever of the ratings
of S&P and Moody's applicable to the Index Debt shall be higher at such time
and (b) the highest of the ratings of the Rating Agencies (other than the
Rating Agency whose rating shall be employed as a Reference Rating pursuant
to the preceding clause (a)) applicable to the Index Debt at such time.
"Register" has the meaning set forth in Section 9.04.
"Related Parties" means, with respect to any specified Person, such
Person's Affiliates and the respective directors, officers, employees, agents
and advisors of such Person and such Person's Affiliates.
"Required Lenders" means, at any time, Lenders having Credit
Exposures and unused Commitments representing at least 66-_% of the sum of
the total Credit Exposures and unused Commitments at such time.
"Restricted Payment" means any dividend or other distribution
(whether in cash, securities or other property) with respect to any shares of
any class of capital stock of the Borrower, or any payment (whether in cash,
securities or other property), including any sinking fund or similar deposit,
on account of the purchase, redemption, retirement, acquisition, cancelation
or termination of any such shares of capital stock of the Borrower or any
option, warrant or other right to acquire any such shares of capital stock of
the Borrower.
"Revenue Bond Indenture" means, with respect to any Letter of
Credit, the Revenue Bond Indenture, as amended and supplemented from time to
time, in respect of the Revenue Bonds referenced on Schedule 2.05 for such
Letter of Credit.
"Revenue Bond Loan Agreement" means, with respect to any Letter of
Credit, the Revenue Bond Loan Agreement in respect of the Revenue Bonds
referenced on Schedule 2.05 for such Letter of Credit.
"Revenue Bonds" means, with respect to any Letter of Credit, the
Revenue Bonds referenced on Schedule 2.05 for such Letter of Credit.
"Revenue Bond Trustee" means, with respect to any Letter of Credit,
the trustee and/or agent, as applicable, named in such Letter of Credit's
Revenue Bond Indenture, and any successor or assign thereof.
"Revolving Commitment" means, with respect to each Lender, the
commitment of such Lender to make Revolving Loans hereunder, expressed as an
amount representing the maximum aggregate amount of such Lender's Revolving
Credit Exposure hereunder, as such commitment may be (a) reduced from time to
time pursuant to Section 2.09 and (b) reduced or increased from time to time
pursuant to assignments by or to such Lender pursuant to Section 9.04. The
initial amount of each Lender's Revolving Commitment is set forth on
Schedule 2.01, or in the Assignment and Acceptance pursuant to which such
Lender shall have assumed its Revolving Commitment, as applicable. The
initial aggregate amount of the Lenders' Revolving Commitments is
$100,000,000.
"Revolving Credit Exposure" means, with respect to any Lender at
any time, the sum of the outstanding principal amount of such Lender's
Revolving Loans at such time.
"Revolving Loan" means a Loan made pursuant to Section 2.03.
"Sale Leaseback" shall mean any transaction or series of related
transactions pursuant to which the Borrower or any of its Consolidated
Subsidiaries sells, transfers or otherwise disposes of any property, real or
personal, whether now owned or hereafter acquired, and thereafter rents or
leases such property or other property that it intends to use for
substantially the same purpose or purposes as the property being sold,
transferred or disposed of.
"San Carlos" means San Carlos Resources Inc., an Arizona
corporation.
"S&P" means Standard & Poor's.
"Second Indenture" means the Indenture of Mortgage and Deed of
Trust dated as of December 1, 1992, of the Borrower to Bank of Montreal Trust
Company, as trustee, as amended, supplemented or otherwise modified from time
to time.
"Second Mortgage Bonds" means the Borrower's Second Mortgage Bonds
issued under the Second Indenture.
"Second Supplemental Indenture" means Supplemental Indenture No. 2
under the Second Indenture, substantially in the form of Exhibit D.
"Security Documents" means the Second Supplemental Indenture, the
Collateral Mortgage Bonds, the Bond Delivery Agreement, the Revenue Bond
Pledge Agreements, and each other security agreement or other instrument or
document executed and delivered pursuant to Section 5.10 or pursuant to any
of the foregoing documents to secure any of the Obligations.
"Significant Subsidiary" means (a) San Carlos, (b) any Subsidiary
that directly or indirectly owns or Controls any other Significant Subsidiary
and (c) any other Subsidiary the Borrower's direct or indirect proportionate
share of consolidated total assets of which as of the end of the most recent
fiscal quarter for which financial statements have been delivered pursuant to
Section 5.01 were greater than or equal to 10% of the consolidated total
assets as of such date for the Borrower and the Consolidated Subsidiaries,
taken as a whole. For purposes of making the determinations required by this
definition, revenues and assets of foreign Subsidiaries shall be converted
into dollars at the rates used in preparing the consolidated balance sheet of
the Borrower included in the applicable financial statements.
"Statutory Reserve Rate" means a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including
any marginal, special, emergency or supplemental reserves) expressed as a
decimal established by the Board (a) with respect to the Base CD Rate, for
new negotiable nonpersonal time deposits in dollars of over $100,000 with
maturities approximately equal to three months and (b) with respect to the
Adjusted LIBO Rate, for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of the Board). Such reserve
percentages shall include those imposed pursuant to such Regulation D.
Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be
subject to such reserve requirements without benefit of or credit for
proration, exemptions or offsets that may be available from time to time to
any Lender under such Regulation D or any comparable regulation. The
Statutory Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in any reserve percentage.
"subsidiary" means, with respect to any Person (the "parent") at
any date, any corporation, limited liability company, partnership,
association or other entity the accounts of which would be consolidated with
those of the parent in the parent's consolidated financial statements if such
financial statements were prepared in accordance with GAAP as of such date,
as well as any other corporation, limited liability company, partnership,
association or other entity (a) of which securities or other ownership
interests representing more than 50% of the equity or more than 50% of the
ordinary voting power or, in the case of a partnership, more than 50% of the
general partnership interests are, as of such date, owned, controlled or
held, or (b) that is, as of such date, otherwise Controlled, by the parent or
one or more subsidiaries of the parent or by the parent and one or more
subsidiaries of the parent.
"Subsidiary" means any subsidiary of the Borrower.
"Syndication Agent" means The Bank of New York, in its capacity as
syndication agent for the Lenders.
"Taxes" means any and all present or future taxes, levies, imposts,
duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Three-Month Secondary CD Rate" means, for any day, the secondary
market rate for three-month certificates of deposit reported as being in
effect on such day (or, if such day is not a Business Day, the next preceding
Business Day) by the Board through the public information telephone line of
the Federal Reserve Bank of New York (which rate will, under the current
practices of the Board, be published in Federal Reserve Statistical
Release H.15(519) during the week following such day) or, if such rate is not
so reported on such day or such next preceding Business Day, the average of
the secondary market quotations for three-month certificates of deposit of
major money center banks in New York City received at approximately
11:00 a.m., New York City time, on such day (or, if such day is not a
Business Day, on the next preceding Business Day) by the Administrative Agent
from three negotiable certificate of deposit dealers of recognized standing
selected by it.
"Transactions" means the execution, delivery and performance by the
Borrower of this Agreement and the other Loan Documents, the borrowing of
Loans, the use of the proceeds thereof, the issuance of Letters of Credit
hereunder and the issuance of the Collateral Mortgage Bonds to the
Administrative Agent under the Second Supplemental Indenture and the Bond
Delivery Agreement.
"Type", when used in reference to any Loan or Borrowing, refers to
whether the rate of interest on such Loan, or on the Loans comprising such
Borrowing, is determined by reference to the Adjusted LIBO Rate or the
Alternate Base Rate.
"Utility Business" means the business of producing, developing,
generating, transmitting, distributing, selling or supplying electrical
energy for any purpose, or any business incidental thereto or necessary in
connection therewith, or any business reasonably desirable in connection
therewith which the ACC or other utility regulatory body shall have
authorized the Borrower to enter.
"Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Classification of Loans and Borrowings. For
purposes of this Agreement, Loans may be classified and referred to by Type
(e.g., a "Eurodollar Loan"). Borrowings also may be classified and referred
to by Type (e.g., a "Eurodollar Borrowing").
SECTION 1.03. Terms Generally. The definitions of terms herein
shall apply equally to the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without
limitation". The word "will" shall be construed to have the same meaning and
effect as the word "shall". Unless the context requires otherwise (a) any
definition of or reference to any agreement, instrument or other document
herein shall be construed as referring to such agreement, instrument or other
document as from time to time amended, supplemented or otherwise modified
(subject to any restrictions on such amendments, supplements or modifications
set forth herein), (b) any reference herein to any Person shall be construed
to include such Person's successors and assigns, (c) the words "herein",
"hereof" and "hereunder", and words of similar import, shall be construed to
refer to this Agreement in its entirety and not to any particular provision
hereof, (d) all references herein to Articles, Sections, Exhibits and
Schedules shall be construed to refer to Articles and Sections of, and
Exhibits and Schedules to, this Agreement and (e) the words "asset" and
"property" shall be construed to have the same meaning and effect and to
refer to any and all tangible and intangible assets and properties, including
cash, securities, accounts and contract rights.
SECTION 1.04. Accounting Terms; GAAP. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature
shall be construed in accordance with GAAP, as in effect from time to time;
provided that, if the Borrower notifies the Administrative Agent that the
Borrower requests an amendment to any provision hereof to eliminate the
effect of any change occurring after the date hereof in GAAP or in the
application thereof on the operation of such provision (or if the
Administrative Agent notifies the Borrower that the Required Lenders request
an amendment to any provision hereof for such purpose), regardless of whether
any such notice is given before or after such change in GAAP or in the appli-
cation thereof, then such provision shall be interpreted on the basis of GAAP
as in effect and applied immediately before such change shall have become
effective until such notice shall have been withdrawn or such provision
amended in accordance herewith.
ARTICLE II
The Credits
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SECTION 2.01. Revolving Commitments. Subject to the terms and
conditions set forth herein, each Lender agrees to make Revolving Loans to
the Borrower from time to time during the Availability Period in an aggregate
principal amount that will not result in (a) such Lender's Revolving Credit
Exposure exceeding such Lender's Revolving Commitment or (b) the sum of the
total Revolving Credit Exposures exceeding the total Revolving Commitments or
(c) the total Credit Exposures exceeding the total Commitments. Within the
foregoing limits and subject to the terms and conditions set forth herein,
the Borrower may borrow, prepay and reborrow Revolving Loans.
SECTION 2.02. Loans and Borrowings. (a) Each Revolving Loan
shall be made as part of a Borrowing consisting of Revolving Loans made by
the Lenders ratably in accordance with their respective Revolving
Commitments. The failure of any Lender to make any Loan required to be made
by it shall not relieve any other Lender of its obligations hereunder; pro-
vided that the Revolving Commitments of the Lenders are several and no Lender
shall be responsible for any other Lender's failure to make Loans as
required.
(b) Subject to Section 2.14, each Revolving Borrowing shall be
comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may
request in accordance herewith. Each Lender at its option may make any
Eurodollar Loan by causing any domestic or foreign branch or Affiliate of
such Lender to make such Loan; provided that any exercise of such option
shall not affect the obligation of the Borrower to repay such Loan in accord-
ance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any Eurodollar
Revolving Borrowing, such Borrowing shall be in an aggregate amount that is
not less than $5,000,000. At the time that each ABR Revolving Borrowing is
made, such Borrowing shall be in an aggregate amount that is not less than
$5,000,000; provided that an ABR Revolving Borrowing may be in an aggregate
amount that is equal to the entire unused balance of the total Revolving
Commitments or that is required to finance the reimbursement of an
LC Disbursement as contemplated by Section 2.06(e). Borrowings of more than
one Type may be outstanding at the same time; provided that there shall not
at any time be more than a total of five Eurodollar Revolving Borrowings
outstanding.
(d) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request, or to elect to convert or
continue, any Borrowing if the Interest Period requested with respect thereto
would end after the Maturity Date.
SECTION 2.03. Requests for Revolving Borrowings. To request a
Revolving Borrowing, the Borrower shall notify the Administrative Agent of
such request by telephone (a) in the case of a Eurodollar Borrowing, not
later than 12:00 noon, New York City time, three Business Days before the
date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not
later than 12:00 noon, New York City time, one Business Day before the date
of the proposed Borrowing; provided that any such notice of an ABR Revolving
Borrowing to finance the reimbursement of an LC Disbursement as contemplated
by Section 2.06(e) may be given not later than 11:00 a.m., New York City
time, on the date of the proposed Borrowing. Each such telephonic Borrowing
Request shall be irrevocable and shall be confirmed promptly by hand delivery
or telecopy to the Administrative Agent of a written Borrowing Request in a
form approved by the Administrative Agent and signed by the Borrower. Each
such telephonic and written Borrowing Request shall specify the following
information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day;
(iii) whether such Borrowing is to be an ABR Borrowing or a
Eurodollar Borrowing;
(iv) in the case of a Eurodollar Borrowing, the initial Interest
Period to be applicable thereto, which shall be a period contemplated by
the definition of the term "Interest Period"; and
(v) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of
Section 2.07.
If no election as to the Type of Revolving Borrowing is specified, then the
requested Revolving Borrowing shall be an ABR Borrowing. If no Interest
Period is specified with respect to any requested Eurodollar Revolving
Borrowing, then the Borrower shall be deemed to have selected an Interest
Period of one month's duration. Promptly following receipt of a Borrowing
Request in accordance with this Section, the Administrative Agent shall
advise each Lender of the details thereof and of the amount of such Lender's
Loan to be made as part of the requested Borrowing.
SECTION 2.04. Extension of Maturity Date. (a) The Borrower may
on each of the third and fourth anniversaries of the date hereof, by notice
to the Administrative Agent (which shall promptly deliver a copy to each of
the Lenders and the Issuing Banks) given not less than 60 days and not more
than 90 days prior to such anniversary, request that the Lenders and the
Issuing Banks extend the Maturity Date for an additional period of not more
than one year as specified in such notice. Any such notice shall specify any
fees that the Borrower agrees to pay as consideration for such extension, any
changes to the Applicable Rates that will apply during the term of such
extension, the amendments, if any, to Sections 6.06, 6.07 and 6.08 proposed
by the Borrower to be applicable during the term of such extension and any
other amendment proposed to be applicable to any Loan Document during the
term of such extension. Each Lender and Issuing Bank shall, by notice to the
Borrower and the Administrative Agent given not later than the 45th day after
the date of the Borrower's notice, advise the Borrower whether or not it
agrees to such extension on the terms set forth in such notice. Any Lender
or Issuing Bank that has not so advised the Administrative Agent by such day
shall be deemed to have declined to agree to such extension.
(b) If (and only if) all the Issuing Banks and all the Lenders
shall have agreed to extend the Maturity Date, then the Maturity Date shall
be extended for the additional period and on the terms specified in the
Borrower's notice provided for under subsection (a) and, if such terms vary
from those contained in this Agreement or any other Loan Document, the
Borrower, the Issuing Banks and the extending Lenders shall enter into an
amendment to this Agreement and each such Loan Document to be effective as of
the Maturity Date in effect prior to such extension pursuant to which such
terms shall be given effect. If such notice shall have specified any fees as
consideration for such extension, then such fees shall constitute additional
Obligations hereunder secured by the Security Documents.
(c) The decision to agree or withhold agreement to any extension
of the Maturity Date hereunder shall be at the sole discretion of each Lender
and Issuing Bank, subject to the rights of the Borrower under Section 2.06(i)
and 2.19(b).
SECTION 2.05. Issuance of Letters of Credit on the Effective Date.
Subject to the terms and conditions set forth herein, each Issuing Bank
agrees to issue on the Effective Date each Letter of Credit set forth next to
its name on Schedule 2.05 in the form thereof attached to Schedule 2.05. In
the event of any inconsistency between the terms and conditions of this
Agreement and the terms and conditions of any form of letter of credit
application or other agreement submitted by the Borrower to, or entered into
by the Borrower with, any Issuing Bank relating to any Letter of Credit, the
terms and conditions of this Agreement shall control.
SECTION 2.06. Letters of Credit--General Terms. (a) Limitation
of Amount. A Letter of Credit shall be issued, amended or extended only if
(and upon issuance, amendment or extension of each Letter of Credit the
Borrower shall be deemed to represent and warrant that), after giving effect
to such issuance, amendment, renewal or extension (i) the LC Exposure shall
not exceed the aggregate amount of the LC Commitments and (ii) the total
Credit Exposures shall not exceed the total Commitments.
(b) Requests for Amendments of Letters of Credit. To request the
amendment of an outstanding Letter of Credit, the Borrower shall hand deliver
or telecopy to the applicable Issuing Bank and the Administrative Agent
(reasonably in advance of the requested date of amendment) a notice identi-
fying the Letter of Credit to be amended and specifying the date of amendment
(which shall be a Business Day), the amount of such Letter of Credit, the
name and address of the beneficiary thereof and such other information as
shall be necessary to amend such Letter of Credit.
(c) Expiration Date. Each Letter of Credit shall expire at the
close of business on the Maturity Date. In the event the Maturity Date is
extended pursuant to Section 2.04, the Borrower shall hand deliver or
telecopy to each Issuing Bank and the Administrative Agent a notice
requesting that each Issuing Bank shall on a date on or after the effective
date of such extension specified in such notice either amend or replace each
Letter of Credit of such Issuing Bank to extend the expiration date thereof
to the new Maturity Date and each Issuing Bank shall on such date so amend or
replace each Letter of Credit issued by it hereunder. If requested by any
Issuing Bank, the Borrower also shall submit a letter of credit application
(which shall not impose any conditions on such amendment or replacement
beyond those contained in this Agreement) on such Issuing Bank's standard
form in connection with such amendment or replacement.
(d) Participations. By the issuance of a Letter of Credit (or an
amendment to a Letter of Credit increasing the amount thereof) and without
any further action on the part of the applicable Issuing Bank or the Lenders,
such Issuing Bank hereby grants to each Lender, and each Lender hereby
acquires from such Issuing Bank, a participation in such Letter of Credit
equal to such Lender's Applicable Percentage of the aggregate amount
available to be drawn under such Letter of Credit. In consideration and in
furtherance of the foregoing, each Lender hereby absolutely and
unconditionally agrees to pay to the Administrative Agent, for the account of
such Issuing Bank, such Lender's Applicable Percentage of each
LC Disbursement made by such Issuing Bank and not reimbursed by the Borrower
on the date due as provided in paragraph (e)(i) of this Section or, with
respect to any LC Disbursement referred to in paragraph (e)(ii) of this
Section, on the date reimbursement would have been due had such LC
Disbursement been governed by paragraph (e)(i), or of any reimbursement
payment required to be refunded to the Borrower for any reason. Each Lender
acknowledges and agrees that its obligation to acquire participations pur-
suant to this paragraph in respect of Letters of Credit is absolute and
unconditional and shall not be affected by any circumstance whatsoever,
including any amendment, renewal or extension of any Letter of Credit or the
occurrence and continuance of a Default or reduction or termination of the
LC Commitments, and that each such payment shall be made without any offset,
abatement, withholding or reduction whatsoever.
(e) Reimbursement. (i) If any Issuing Bank shall make any
LC Disbursement in respect of a Letter of Credit, the Borrower shall, except
as provided in paragraph (ii) below, reimburse such LC Disbursement by paying
to the Administrative Agent an amount equal to such LC Disbursement not later
than 1:00 p.m., New York City time, on the date that such LC Disbursement is
made, if the Borrower shall have received notice of such LC Disbursement
prior to 11:00 a.m., New York City time, on such date, or, if such notice has
not been received by the Borrower prior to such time on such date, then not
later than 1:00 p.m., New York City time, on (i) the Business Day that the
Borrower receives such notice, if such notice is received prior to
11:00 a.m., New York City time, on the day of receipt, or (ii) the Business
Day immediately following the day that the Borrower receives such notice, if
such notice is not received prior to such time on the day of receipt;
provided that the Borrower may, subject to the conditions to borrowing set
forth herein, request in accordance with Sections 2.01 and 2.03 that such
payment be financed with an ABR Revolving Borrowing in an equivalent amount
and, to the extent so financed, the Borrower's obligation to make such
payment shall be discharged and replaced by the resulting ABR Revolving
Borrowing. If the Borrower fails to make such payment when due, the
Administrative Agent shall notify each Lender of the applicable
LC Disbursement, the payment then due from the Borrower in respect thereof
and such Lender's Applicable Percentage thereof. Promptly following receipt
of such notice, each Lender shall pay to the Administrative Agent its
Applicable Percentage of the payment then due from the Borrower, in the same
manner as provided in Section 2.07 with respect to Loans made by such Lender
(and Section 2.07 shall apply, mutatis mutandis, to the payment obligations
of the Lenders), and the Administrative Agent shall promptly pay to the
applicable Issuing Bank the amounts so received by it from the Lenders.
Promptly following receipt by the Administrative Agent of any payment from
the Borrower pursuant to this paragraph, the Administrative Agent shall
distribute such payment to the applicable Issuing Bank or, to the extent that
Lenders have made payments pursuant to this paragraph to reimburse such
Issuing Bank, then to such Lenders and such Issuing Bank as their interests
may appear. Any payment made by a Lender pursuant to this paragraph to
reimburse an Issuing Bank for any LC Disbursement (other than the funding of
ABR Revolving Loans as contemplated above) shall not constitute a Loan and
shall not relieve the Borrower of its obligation to reimburse such
LC Disbursement.
(ii) In the case of any LC Disbursement to fund the payment of the
purchase price (to the extent such purchase price is attributable to the
principal of a Revenue Bond) of any Revenue Bond that the Borrower is unable
to remarket prior to the day on which payment of the purchase price of such
Revenue Bond is due to the holder or owner thereof (a "Purchase Price
Disbursement"), the Borrower shall reimburse such Purchase Price Disbursement
on or prior to the Maturity Date; provided that (A) such Revenue Bond shall
be promptly delivered and pledged to the applicable Issuing Bank under a
pledge agreement in substantially the form of Exhibit C and otherwise
satisfactory to such Issuing Bank and the Administrative Agent, (B) any
portion of such Purchase Price Disbursement may be repaid at any time by or
on behalf of the Borrower on one Business Day's notice stating the amount to
be repaid (which shall be $100,000 or a whole multiple thereof) and directing
such Issuing Bank to deliver Revenue Bonds held by or for the account of such
Issuing Bank to or upon the order of the Borrower against repayment of the
portion of such Purchase Price Disbursement attributable to such Revenue
Bonds with the proceeds of the remarketing of such Revenue Bonds and
specifying the principal amount of Revenue Bonds to be so delivered, and
(C) upon payment to the Administrative Agent for the account of such Issuing
Bank of the amount of any such repayment, together with accrued interest to
the date of such repayment on the amount of the Purchase Price Disbursement
to be repaid, the outstanding obligations of the Borrower in respect of such
Purchase Price Disbursement shall be reduced by the amount of such repayment,
interest shall cease to accrue on the amount so repaid and such Issuing Bank
shall release to or upon the order of the Borrower from the pledge and
security interest created by the applicable pledge agreement a principal
amount of Revenue Bonds held under such pledge agreement equal to the amount
of such repayment; provided that, prior to the release of such Revenue Bonds,
the Borrower shall have paid to such Issuing Bank the amount of any
LC Disbursement made in connection with the purchase of such Revenue Bonds to
pay the interest portion of the purchase price thereof. The provisions of
paragraph (i) above shall apply with respect to any portion of such an
LC Disbursement on the Maturity Date as if it were an LC Disbursement in
respect of which the Borrower received notice prior to 11:00 a.m., New York
City time, on the Maturity Date. Whenever an Issuing Bank is holding Revenue
Bonds pursuant to a pledge agreement in respect of a Letter of Credit and
accordingly receives a payment of interest on such pledged Revenue Bonds,
such Issuing Bank shall promptly deliver such interest so received to the
Administrative Agent for application to the payment of accrued and unpaid
interest on all outstanding Purchase Price Disbursements of such Issuing Bank
in respect of such Letter of Credit. If the amount of interest so received
exceeds the amount of accrued and unpaid interest on such Purchase Price
Disbursements on the date of receipt, such Issuing Bank shall hold the unused
balance of such interest received and apply it on a daily basis to interest
accrued on such Purchase Price Disbursements.
(f) Obligations Absolute. The Borrower's obligation to reimburse
LC Disbursements as provided in paragraph (e) of this Section shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement under any and all circumstances
whatsoever and irrespective of (i) any lack of validity or enforceability of
any Letter of Credit or this Agreement, or any term or provision therein,
(ii) any draft or other document presented under a Letter of Credit proving
to be forged, fraudulent or invalid in any respect or any statement therein
being untrue or inaccurate in any respect, (iii) payment by an Issuing Bank
under a Letter of Credit against presentation of a draft or other document
that does not comply with the terms of such Letter of Credit, or (iv) any
other event or circumstance whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section, constitute a
legal or equitable discharge of, or provide a right of setoff against, the
Borrower's obligations hereunder. None of the Administrative Agent, the
Lenders nor the Issuing Banks, nor any of their Related Parties, shall have
any liability or responsibility by reason of or in connection with the
issuance or transfer of any Letter of Credit or any payment or failure to
make any payment thereunder (irrespective of any of the circumstances
referred to in the preceding sentence), or any error, omission, interruption,
loss or delay in transmission or delivery of any draft, notice or other
communication under or relating to any Letter of Credit (including any
document required to make a drawing thereunder), any error in interpretation
of technical terms or any consequence arising from causes beyond the control
of the applicable Issuing Bank; provided that the foregoing shall not be
construed to excuse such Issuing Bank from liability to the Borrower to the
extent of any direct damages (as opposed to consequential damages, claims in
respect of which are hereby waived by the Borrower to the extent permitted by
applicable law) suffered by the Borrower that are caused by such Issuing
Bank's failure to exercise care when determining whether drafts and other
documents presented under a Letter of Credit comply with the terms thereof.
The parties hereto expressly agree that, in the absence of gross negligence
or wilful misconduct on the part of an Issuing Bank (as finally determined by
a court of competent jurisdiction), such Issuing Bank shall be deemed to have
exercised care in each such determination. In furtherance of the foregoing
and without limiting the generality thereof, the parties agree that, with
respect to documents presented which appear on their face to be in
substantial compliance with the terms of a Letter of Credit, the applicable
Issuing Bank may, in its sole discretion, either accept and make payment upon
such documents without responsibility for further investigation, regardless
of any notice or information to the contrary, or refuse to accept and make
payment upon such documents if such documents are not in strict compliance
with the terms of such Letter of Credit.
(g) Disbursement Procedures. Each Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent
a demand for payment under a Letter of Credit. Such Issuing Bank shall
promptly notify the Administrative Agent and the Borrower by telephone (con-
firmed by telecopy) of such demand for payment and whether such Issuing Bank
has made or will make an LC Disbursement thereunder; provided that any
failure to give or delay in giving such notice shall not relieve the Borrower
of its obligation to reimburse such Issuing Bank and the Lenders with respect
to any such LC Disbursement.
(h) Interim Interest. If an Issuing Bank shall make any
LC Disbursement, then, unless the Borrower shall reimburse such
LC Disbursement in full on the date such LC Disbursement is made, the unpaid
amount thereof shall bear interest, for each day from and including the date
such LC Disbursement is made to but excluding the date that the Borrower
reimburses such LC Disbursement, at the rate per annum then applicable to ABR
Revolving Loans; provided that, if the Borrower fails to reimburse such
LC Disbursement when due pursuant to paragraph (e) of this Section, then
Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph
shall be for the account of the applicable Issuing Bank, except that interest
accrued on and after the date of payment by any Lender pursuant to para-
graph (e) of this Section to reimburse an Issuing Bank shall be for the
account of such Lender to the extent of such payment.
(i) Replacement of an Issuing Bank. Any Issuing Bank may be
replaced at any time by written agreement among the Borrower and the
Administrative Agent; provided, however, that the Administrative Agent shall
review any such proposed agreement for form only and not with respect to the
identity of any successor Issuing Bank or the identity of the Issuing Bank to
be replaced (subject in the case of any replacement of any Affiliate of the
Administrative Agent to the provisions of the first paragraph of
Article VIII). The Administrative Agent shall notify the Lenders of any such
replacement of an Issuing Bank. At the time any such replacement shall
become effective, the Borrower shall pay all unpaid fees accrued for the
account of the replaced Issuing Bank pursuant to Section 2.12(b) and shall
return to such Issuing Bank each Letter of Credit issued by such Issuing
Bank. From and after the effective date of any such replacement, (i) the
successor Issuing Bank shall have all the rights and obligations of an
Issuing Bank under this Agreement with respect to Letters of Credit to be
issued by it on such effective date or thereafter and (ii) references herein
to the term "Issuing Bank" shall be deemed to refer to such successor or to
any previous Issuing Bank, or to such successor and all previous Issuing
Banks, as the context shall require. After the replacement of an Issuing
Bank hereunder, the replaced Issuing Bank shall remain a party hereto and
shall continue to have all the rights and obligations of an Issuing Bank
under this Agreement with respect to Letters of Credit issued by it prior to
such replacement, but shall not be required to issue additional Letters of
Credit.
(j) Acceleration of Revenue Bonds. If any Event of Default shall
occur and be continuing, the Administrative Agent may, and at the request of
the Required Lenders shall, direct the applicable Issuing Bank to take such
steps as are required and available to it under any Revenue Bond Indenture to
cause the Revenue Bond Trustee thereunder to declare the principal amount of
all Revenue Bonds then outstanding thereunder to be immediately due and
payable and, to the extent necessary to make all payments then due and
payable on the Revenue Bonds, require all necessary drawings under the
applicable Letter of Credit to be made in respect thereof, whereupon such
Issuing Bank shall pay from its general funds the amounts so drawn and such
amounts, all interest thereon and all other amounts payable by the Borrower
hereunder in respect thereof shall automatically be forthwith due and
payable.
SECTION 2.07. Funding of Borrowings. (a) Each Lender shall make
each Loan to be made by it hereunder on the proposed date thereof by wire
transfer of immediately available funds by 1:00 p.m., New York City time, to
the account of the Administrative Agent most recently designated by it for
such purpose by notice to the Lenders. The Administrative Agent will make
such Loans available to the Borrower by promptly crediting the amounts so
received, in like funds, to an account of the Borrower maintained with The
Toronto-Dominion Bank, New York Branch, in New York and designated by the
Borrower in the applicable Borrowing Request; provided that ABR Revolving
Loans made to finance the reimbursement of an LC Disbursement as provided in
Section 2.06(e) shall be remitted by the Administrative Agent to the
applicable Issuing Bank.
(b) Unless the Administrative Agent shall have received notice
from a Lender prior to the proposed date of any Borrowing that such Lender
will not make available to the Administrative Agent such Lender's share of
such Borrowing, the Administrative Agent may assume that such Lender has made
such share available on such date in accordance with paragraph (a) of this
Section and may, in reliance upon such assumption, make available to the
Borrower a corresponding amount. In such event, if a Lender has not in fact
made its share of the applicable Borrowing available to the Administrative
Agent, then the applicable Lender and the Borrower severally agree to pay to
the Administrative Agent forthwith on demand such corresponding amount with
interest thereon, for each day from and including the date such amount is
made available to the Borrower to but excluding the date of payment to the
Administrative Agent, at (i) in the case of such Lender, the greater of the
Federal Funds Effective Rate and a rate determined by the Administrative
Agent in accordance with banking industry rules on interbank compensation or
(ii) in the case of the Borrower, the interest rate applicable to ABR Loans.
If such Lender pays such amount to the Administrative Agent, then such amount
shall constitute such Lender's Loan included in such Borrowing.
SECTION 2.08. Interest Elections. (a) Each Borrowing initially
shall be of the Type specified in the applicable Borrowing Request and, in
the case of a Eurodollar Revolving Borrowing, shall have an initial Interest
Period as specified in such Borrowing Request. Thereafter, the Borrower may
elect to convert such Borrowing to a different Type or to continue such
Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect
Interest Periods therefor, all as provided in this Section. The Borrower may
elect different options with respect to different portions of the affected
Borrowing, in which case each such portion shall be allocated ratably among
the Lenders holding the Loans comprising such Borrowing, and the Loans
comprising each such portion shall be considered a separate Borrowing.
(b) To make an election pursuant to this Section, the Borrower
shall notify the Administrative Agent of such election by telephone by the
time that a Borrowing Request would be required under Section 2.03 if the
Borrower were requesting a Borrowing of the Type resulting from such election
to be made on the effective date of such election. Each such telephonic
Interest Election Request shall be irrevocable and shall be confirmed
promptly by hand delivery or telecopy to the Administrative Agent of a
written Interest Election Request in a form approved by the Administrative
Agent and signed by the Borrower.
(c) Each telephonic and written Interest Election Request shall
specify the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request applies
and, if different options are being elected with respect to different
portions thereof, the portions thereof to be allocated to each resulting
Borrowing (in which case the information to be specified pursuant to
clauses (iii) and (iv) below shall be specified for each resulting
Borrowing);
(ii) the effective date of the election made pursuant to such
Interest Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR Borrowing or a
Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the
Interest Period to be applicable thereto after giving effect to such
election, which shall be a period contemplated by the definition of the
term "Interest Period".
If any such Interest Election Request requests a Eurodollar Borrowing but
does not specify an Interest Period, then the Borrower shall be deemed to
have selected an Interest Period of one month's duration.
(d) Promptly following receipt of an Interest Election Request,
the Administrative Agent shall advise each Lender of the details thereof and
of such Lender's portion of each resulting Borrowing.
(e) If the Borrower fails to deliver a timely Interest Election
Request with respect to a Eurodollar Revolving Borrowing prior to the end of
the Interest Period applicable thereto, then, unless such Borrowing is repaid
as provided herein, at the end of such Interest Period such Borrowing shall
be converted to an ABR Borrowing. Notwithstanding any contrary provision
hereof, if an Event of Default has occurred and is continuing and the
Administrative Agent, at the request of the Required Lenders, so notifies the
Borrower, then, so long as an Event of Default is continuing (i) no
outstanding Revolving Borrowing may be converted to or continued as a
Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving
Borrowing shall be converted to an ABR Borrowing at the end of the Interest
Period applicable thereto.
SECTION 2.09. Termination and Reduction of Commitments.
(a) Unless previously terminated, the Commitments shall terminate on the
Maturity Date.
(b) The Borrower may at any time terminate, or from time to time
reduce, the Revolving Commitments or the LC Commitments; provided that
(i) each reduction of the Revolving Commitments or the LC Commitments shall
be in an amount that is an integral multiple of $1,000,000 and not less than
$5,000,000 and (ii) the Borrower shall not terminate or reduce any
Commitments if, after giving effect to any concurrent prepayment of the Loans
in accordance with Section 2.11, the total Revolving Credit Exposures would
exceed the total Revolving Commitments, the LC Exposure would exceed the
total LC Commitments or the total Credit Exposures would exceed the total
Commitments.
(c) In the event that any Revenue Bonds shall be redeemed, repaid
or otherwise retired, the Borrower shall to the extent permitted under the
documentation for such Revenue Bonds permanently reduce the stated amount of
the applicable Letter of Credit and the LC Commitments hereunder shall be
automatically and permanently reduced by an amount equal to the amount of
such reduction as of the date such reduction becomes effective.
(d) The Borrower shall notify the Administrative Agent of any
election or requirement to terminate or reduce the Commitments under
paragraph (b) or (c) of this Section at least three Business Days prior to
the effective date of such termination or reduction (or as soon as
practicable but in any event no later than such effective date, in the case
of a reduction under paragraph (c)), specifying such election and the
effective date thereof. Promptly following receipt of any notice, the
Administrative Agent shall advise the Lenders of the contents thereof. Each
notice delivered by the Borrower pursuant to this Section shall be irrevoc-
able; provided that a notice of termination of the Commitments delivered by
the Borrower may state that such notice is conditioned upon the effectiveness
of other credit facilities, in which case such notice may be revoked by the
Borrower (by notice to the Administrative Agent on or prior to the specified
effective date) if such condition is not satisfied. Any termination or
reduction of the Commitments shall be permanent. Each reduction of the
Commitments shall be made ratably among the Lenders in accordance with their
respective Commitments.
SECTION 2.10. Repayment of Loans; Evidence of Debt. (a) The
Borrower hereby unconditionally promises to pay to the Administrative Agent
for the account of each Lender the then unpaid principal amount of each
Revolving Loan on the Maturity Date.
(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing the indebtedness of the Borrower
to such Lender resulting from each Loan made by such Lender, including the
amounts of principal and interest payable and paid to such Lender from time
to time hereunder.
(c) The Administrative Agent shall maintain accounts in which it
shall record (i) the amount of each Loan made hereunder, the Type thereof and
the Interest Period applicable thereto, (ii) the amount of any principal or
interest due and payable or to become due and payable from the Borrower to
each Lender hereunder and (iii) the amount of any sum received by the
Administrative Agent hereunder for the account of the Lenders and each
Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
paragraph (b) or (c) of this Section shall be prima facie evidence of the
existence and amounts of the obligations recorded therein; provided that the
failure of any Lender or the Administrative Agent to maintain such accounts
or any error therein shall not in any manner affect the obligation of the
Borrower to repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced by a
promissory note. In such event, the Borrower shall prepare, execute and
deliver to such Lender a promissory note payable to the order of such Lender
(or, if requested by such Lender, to such Lender and its registered assigns)
and in a form approved by the Administrative Agent. Thereafter, the Loans
evidenced by such promissory note and interest thereon shall at all times
(including after assignment pursuant to Section 9.04) be represented by one
or more promissory notes in such form payable to the order of the payee named
therein (or, if such promissory note is a registered note, to such payee and
its registered assigns).
SECTION 2.11. Prepayment of Loans. (a) The Borrower shall have
the right at any time and from time to time to prepay any Borrowing in whole
or in part, subject to prior notice in accordance with paragraph (b) of this
Section.
(b) The Borrower shall notify the Administrative Agent by
telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case
of prepayment of a Eurodollar Revolving Borrowing, not later than 12:00 noon,
New York City time, three Business Days before the date of prepayment or
(ii) in the case of prepayment of an ABR Revolving Borrowing, not later than
12:00 noon, New York City time, one Business Day before the date of
prepayment. Each such notice shall be irrevocable and shall specify the
prepayment date and the principal amount of each Borrowing or portion thereof
to be prepaid; provided that, if a notice of prepayment is given in
connection with a conditional notice of termination of the Commitments as
contemplated by Section 2.09, then such notice of prepayment may be revoked
if such notice of termination is revoked in accordance with Section 2.09.
Promptly following receipt of any such notice relating to a Revolving
Borrowing, the Administrative Agent shall advise the Lenders of the contents
thereof. Each partial prepayment of any Revolving Borrowing shall be in an
amount that would be permitted in the case of an advance of a Revolving
Borrowing of the same Type as provided in Section 2.02. Each prepayment of a
Revolving Borrowing shall be applied ratably to the Loans included in the
prepaid Borrowing. Prepayments shall be accompanied by accrued interest to
the extent required by Section 2.13.
SECTION 2.12. Fees. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Lender a commitment fee, which
shall accrue at the Applicable Rate on the daily unused amount of the
Commitments of such Lender during the period from and including the date
hereof to but excluding the date on which the last such Commitment terminates
(it being understood that outstanding Letters of Credit and LC Disbursements
constitute usage of the LC Commitments). Accrued commitment fees shall be
payable in arrears on the last day of March, June, September and December of
each year and on the date on which the Commitments terminate, commencing on
the first such date to occur after the date hereof. All commitment fees
shall be computed on the basis of a year of 360 days and shall be payable for
the actual number of days elapsed (including the first day but excluding the
last day).
(b) The Borrower agrees to pay (i) to the Administrative Agent for
the account of each Lender a participation fee with respect to its
participations in Letters of Credit, which shall accrue at the same
Applicable Rate as interest on Eurodollar Revolving Loans, on the average
daily amount of such Lender's LC Exposure (excluding any portion thereof
attributable to unreimbursed LC Disbursements) during the period from and
including the Effective Date to but excluding the later of the date on which
such Lender's Commitment terminates and the date on which such Lender ceases
to have any LC Exposure, and (ii) to each Issuing Bank a fronting fee, which
shall accrue at the rate of 0.125% per annum on the average daily amount of
the aggregate face amount of the outstanding Letters of Credit of such
Issuing Bank during the period from and including the Effective Date to but
excluding the later of the date of termination of the Commitments and the
date on which there ceases to be any LC Exposure, as well as such Issuing
Bank's standard fees with respect to the issuance, amendment, renewal or
extension of any Letter of Credit or processing of drawings thereunder.
Accrued participation fees and fronting fees shall be due and payable on the
last day of March, June, September and December of each year, commencing on
the first such date to occur after the Effective Date; provided that all such
fees shall be payable on the date on which the LC Commitments terminate and
any such fees accruing after the date on which the LC Commitments terminate
shall be payable on demand. Any other fees payable to any Issuing Bank
pursuant to this paragraph shall be payable within 10 days after demand. All
participation fees and fronting fees shall be computed on the basis of a year
of 360 days and shall be payable for the actual number of days elapsed
(including the first day but excluding the last day).
(c) The Borrower agrees to pay to the Administrative Agent, the
Documentation Agent and the Syndication Agent, each for its own account, fees
payable in the amounts and at the times separately agreed in the Fee Letters.
(d) All fees payable hereunder shall be paid on the dates due, in
immediately available funds, to the Administrative Agent (or to the
applicable Issuing Bank, in the case of fees payable to any Issuing Bank) for
distribution, in the case of commitment fees and participation fees, to the
Lenders. Fees paid shall not be refundable under any circumstances.
SECTION 2.13. Interest. (a) The Loans comprising each
ABR Borrowing shall bear interest at the Alternate Base Rate plus the
Applicable Rate.
(b) The Loans comprising each Eurodollar Borrowing shall bear
interest at the Adjusted LIBO Rate for the Interest Period in effect for such
Borrowing plus the Applicable Rate.
(c) Notwithstanding the foregoing, if any principal of or interest
on any Loan or any fee or other amount payable by the Borrower hereunder is
not paid when due, whether at stated maturity, upon acceleration or
otherwise, such overdue amount shall bear interest, after as well as before
judgment, at a rate per annum equal to (i) in the case of overdue principal
of any Loan, 2% plus the rate otherwise applicable to such Loan as provided
in the preceding paragraphs of this Section or (ii) in the case of any other
amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a)
of this Section.
(d) Accrued interest on each Loan shall be payable in arrears on
each Interest Payment Date for such Loan and upon termination of the
Revolving Commitments; provided that (i) interest accrued pursuant to para-
graph (c) of this Section shall be payable on demand, (ii) in the event of
any repayment or prepayment of any Loan, accrued interest on the principal
amount repaid or prepaid shall be payable on the date of such repayment or
prepayment and (iii) in the event of any conversion of any Eurodollar
Revolving Loan prior to the end of the current Interest Period therefor,
accrued interest on such Loan shall be payable on the effective date of such
conversion.
(e) All interest hereunder shall be computed on the basis of a
year of 360 days, except that interest computed by reference to the Alternate
Base Rate at times when the Alternate Base Rate is based on the Prime Rate
shall be computed on the basis of a year of 365 days (or 366 days in a leap
year), and in each case shall be payable for the actual number of days
elapsed (including the first day but excluding the last day). The applicable
Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by
the Administrative Agent, and such determination shall be conclusive absent
manifest error.
SECTION 2.14. Alternate Rate of Interest. If prior to the
commencement of any Interest Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination shall
be conclusive absent manifest error) that adequate and reasonable means
do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate,
as applicable, for such Interest Period; or
(b) the Administrative Agent is advised by the Required Lenders
that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such
Interest Period will not adequately and fairly reflect the cost to such
Lenders (or Lender) of making or maintaining their Loans (or its Loan)
included in such Borrowing for such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower and
the Lenders by telephone or telecopy as promptly as practicable thereafter
and, until the Administrative Agent notifies the Borrower and the Lenders
that the circumstances giving rise to such notice no longer exist, (i) any
Interest Election Request that requests the conversion of any Revolving
Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar
Borrowing shall be ineffective and (ii) if any Borrowing Request requests a
Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR
Borrowing.
SECTION 2.15. Increased Costs. (a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit
or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender (except any such reserve
requirement reflected in the Adjusted LIBO Rate) or any Issuing Bank; or
(ii) impose on any Lender or any Issuing Bank or the London
interbank market any other condition affecting this Agreement or
Eurodollar Loans made by such Lender or any Letter of Credit or
participation therein;
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan (or of maintaining its
obligation to make any such Loan) or to increase the cost to such Lender or
such Issuing Bank of participating in, issuing or maintaining any Letter of
Credit or to reduce the amount of any sum received or receivable by such
Lender or such Issuing Bank hereunder (whether of principal, interest or
otherwise), then the Borrower will pay to such Lender or such Issuing Bank,
as the case may be, such additional amount or amounts as will compensate such
Lender or such Issuing Bank, as the case may be, for such additional costs
incurred or reduction suffered.
(b) If any Lender or any Issuing Bank determines that any Change
in Law regarding capital requirements has or would have the effect of
reducing the rate of return on such Lender's or such Issuing Bank's capital
or on the capital of such Lender's or such Issuing Bank's holding company, if
any, as a consequence of this Agreement or the Loans made by, or
participations in Letters of Credit held by, such Lender, or the Letters of
Credit issued by such Issuing Bank, to a level below that which such Lender
or such Issuing Bank or such Lender's or such Issuing Bank's holding company
could have achieved but for such Change in Law (taking into consideration
such Lender's or such Issuing Bank's policies and the policies of such
Lender's or such Issuing Bank's holding company with respect to capital
adequacy), then from time to time the Borrower will pay to such Lender or
such Issuing Bank, as the case may be, such additional amount or amounts as
will compensate such Lender or such Issuing Bank or such Lender's or such
Issuing Bank's holding company for any such reduction suffered.
(c) A certificate of a Lender or an Issuing Bank setting forth the
amount or amounts necessary to compensate such Lender or such Issuing Bank or
its holding company, as the case may be, as specified in paragraph (a) or (b)
of this Section shall be delivered to the Borrower and shall be conclusive
absent manifest error. The Borrower shall pay such Lender or such Issuing
Bank, as the case may be, the amount shown as due on any such certificate
within 10 days after receipt thereof.
(d) Failure or delay on the part of any Lender or any Issuing Bank
to demand compensation pursuant to this Section shall not constitute a waiver
of such Lender's or such Issuing Bank's right to demand such compensation;
provided that the Borrower shall not be required to compensate a Lender or an
Issuing Bank pursuant to this Section for any increased costs or reductions
incurred more than 270 days prior to the date that such Lender or such
Issuing Bank, as the case may be, notifies the Borrower of the Change in Law
giving rise to such increased costs or reductions and of such Lender's or
such Issuing Bank's intention to claim compensation therefor; provided
further that, if the Change in Law giving rise to such increased costs or
reductions is retroactive, then the 270-day period referred to above shall be
extended to include the period of retroactive effect thereof.
SECTION 2.16. Break Funding Payments. In the event of (a) the
payment of any principal of any Eurodollar Loan other than on the last day of
an Interest Period applicable thereto (including as a result of an Event of
Default), (b) the conversion of any Eurodollar Loan other than on the last
day of the Interest Period applicable thereto, (c) the failure to borrow,
convert, continue or prepay any Revolving Loan on the date specified in any
notice delivered pursuant hereto (regardless of whether such notice may be
revoked under Section 2.11(b) and is revoked in accordance therewith),
(d) the assignment of any Eurodollar Loan other than on the last day of the
Interest Period applicable thereto as a result of a request by the Borrower
pursuant to Section 2.19, then, in any such event, the Borrower shall
compensate each Lender for the loss, cost and expense attributable to such
event. In the case of a Eurodollar Loan, such loss, cost or expense to any
Lender shall be deemed to include an amount determined by such Lender to be
the excess, if any, of (i) the amount of interest which would have accrued on
the principal amount of such Loan had such event not occurred, at the
Adjusted LIBO Rate that would have been applicable to such Loan, for the
period from the date of such event to the last day of the then current
Interest Period therefor (or, in the case of a failure to borrow, convert or
continue, for the period that would have been the Interest Period for such
Loan), over (ii) the amount of interest which would accrue on such principal
amount for such period at the interest rate which such Lender would bid were
it to bid, at the commencement of such period, for dollar deposits of a
comparable amount and period from other banks in the Eurodollar market. A
certificate of any Lender setting forth any amount or amounts that such
Lender is entitled to receive pursuant to this Section shall be delivered to
the Borrower and shall be conclusive absent manifest error. The Borrower
shall pay such Lender the amount shown as due on any such certificate within
10 days after receipt thereof.
SECTION 2.17. Taxes. (a) Any and all payments by or on account
of any obligation of the Borrower hereunder or under any other Loan Document
shall be made free and clear of and without deduction for any Indemnified
Taxes or Other Taxes; provided that if the Borrower shall be required to
deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the
sum payable shall be increased as necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section) the Administrative Agent, Lender or Issuing Bank (as the case
may be) receives an amount equal to the sum it would have received had no
such deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.
(c) The Borrower shall indemnify the Administrative Agent, each
Lender and each Issuing Bank, within 10 days after written demand therefor,
for the full amount of any Indemnified Taxes or Other Taxes paid by the
Administrative Agent, such Lender or such Issuing Bank, as the case may be,
on or with respect to any payment by or on account of any obligation of the
Borrower hereunder or under any other Loan Document (including Indemnified
Taxes or Other Taxes imposed or asserted on or attributable to amounts
payable under this Section) and any penalties, interest and reasonable
expenses arising therefrom or with respect thereto, whether or not such
Indemnified Taxes or Other Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority. A certificate as to the
amount of such payment or liability delivered to the Borrower by a Lender or
an Issuing Bank, or by the Administrative Agent on its own behalf or on
behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest
error.
(d) As soon as practicable after any payment of Indemnified Taxes
or Other Taxes by the Borrower to a Governmental Authority, the Borrower
shall deliver to the Administrative Agent the original or a certified copy of
a receipt issued by such Governmental Authority evidencing such payment, a
copy of the return reporting such payment or other evidence of such payment
reasonably satisfactory to the Administrative Agent.
(e) Any Foreign Lender that is entitled to an exemption from or
reduction of withholding tax under the law of the jurisdiction in which the
Borrower is located, or any treaty to which such jurisdiction is a party,
with respect to payments under this Agreement shall deliver to the Borrower
(with a copy to the Administrative Agent), at the time or times prescribed by
applicable law, such properly completed and executed documentation prescribed
by applicable law or reasonably requested by the Borrower as will permit such
payments to be made without withholding or at a reduced rate.
SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of
Set-offs. (a) The Borrower shall make each payment required to be made by
it hereunder or under any other Loan Document (whether of principal,
interest, fees or reimbursement of LC Disbursements, or of amounts payable
under Section 2.15, 2.16 or 2.17, or otherwise) prior to 1:00 p.m., New York
City time, on the date when due, in immediately available funds, without set-
off, counterclaim, recoupment or deduction of any kind. Any amounts received
after such time on any date may, in the discretion of the Administrative
Agent, be deemed to have been received on the next succeeding Business Day
for purposes of calculating interest thereon. All such payments shall be
made to the Administrative Agent at its offices at 909 Fannin, Suite 1700,
Houston, Texas, except payments to be made directly to an Issuing Bank as
expressly provided herein and except that payments pursuant to Sections 2.15,
2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto
and payments pursuant to other Loan Documents shall be made to the Persons
specified therein. The Administrative Agent shall distribute any such
payments received by it for the account of any other Person to the
appropriate recipient promptly following receipt thereof. If any payment
hereunder or under any other Loan Document shall be due on a day that is not
a Business Day, the date for payment shall be extended to the next succeeding
Business Day, and, in the case of any payment accruing interest, interest
thereon shall be payable for the period of such extension. All payments
under each Loan Document shall be made in dollars.
(b) If at any time insufficient funds are received by and
available to the Administrative Agent to pay fully all amounts of principal,
unreimbursed LC Disbursements, interest and fees then due hereunder, such
funds shall be applied (i) first, towards payment of interest and fees then
due hereunder, ratably among the parties entitled thereto in accordance with
the amounts of interest and fees then due to such parties, and (ii) second,
towards payment of principal and unreimbursed LC Disbursements then due here-
under, ratably among the parties entitled thereto in accordance with the
amounts of principal and unreimbursed LC Disbursements then due to such
parties.
(c) If any Lender shall, by exercising any right of set-off or
counterclaim or otherwise, obtain payment in respect of any principal of or
interest on any of its Revolving Loans or participations in LC Disbursements
resulting in such Lender receiving payment of a greater proportion of the
aggregate amount of its Revolving Loans and participations in
LC Disbursements and accrued interest thereon than the proportion received by
any other Lender, then the Lender receiving such greater proportion shall
purchase (for cash at face value) participations in the Revolving Loans and
participations in LC Disbursements of other Lenders to the extent necessary
so that the benefit of all such payments shall be shared by the Lenders
ratably in accordance with the aggregate amount of principal of and accrued
interest on their respective Revolving Loans and participations in
LC Disbursements; provided that (i) if any such participations are purchased
and all or any portion of the payment giving rise thereto is recovered, such
participations shall be rescinded and the purchase price restored to the
extent of such recovery, without interest, and (ii) the provisions of this
paragraph shall not be construed to apply to any payment made by the Borrower
pursuant to and in accordance with the express terms of this Agreement or any
payment obtained by a Lender as consideration for the assignment of or sale
of a participation in any of its Loans or participations in LC Disbursements
to any assignee or participant, other than to the Borrower or any Subsidiary
or Affiliate thereof (as to which the provisions of this paragraph shall
apply). The Borrower consents to the foregoing and agrees, to the extent it
may effectively do so under applicable law, that any Lender acquiring a
participation pursuant to the foregoing arrangements may exercise against the
Borrower rights of set-off and counterclaim with respect to such
participation as fully as if such Lender were a direct creditor of the
Borrower in the amount of such participation.
(d) Unless the Administrative Agent shall have received notice
from the Borrower prior to the date on which any payment is due to the
Administrative Agent for the account of the Lenders or any Issuing Bank
hereunder that the Borrower will not make such payment, the Administrative
Agent may assume that the Borrower has made such payment on such date in
accordance herewith and may, in reliance upon such assumption, distribute to
the Lenders or such Issuing Bank, as the case may be, the amount due. In
such event, if the Borrower has not in fact made such payment, then each of
the Lenders or such Issuing Bank, as the case may be, severally agrees to
repay to the Administrative Agent forthwith on demand the amount so
distributed to such Lender or such Issuing Bank with interest thereon, for
each day from and including the date such amount is distributed to it to but
excluding the date of payment to the Administrative Agent, at the greater of
the Federal Funds Effective Rate and a rate determined by the Administrative
Agent in accordance with banking industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be
made by it pursuant to Section 2.06(d) or (e), 2.07(b) or 2.18(d), then the
Administrative Agent may, in its discretion (notwithstanding any contrary
provision hereof), apply any amounts thereafter received by the
Administrative Agent for the account of such Lender to satisfy such Lender's
obligations under such Sections until all such unsatisfied obligations are
fully paid.
SECTION 2.19. Mitigation Obligations; Replacement of Lenders.
(a) If any Lender requests compensation under Section 2.15, or if the
Borrower is required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to
Section 2.17, then such Lender shall use reasonable efforts to designate a
different lending office for funding or booking its Loans hereunder or to
assign its rights and obligations hereunder to another of its offices,
branches or affiliates, if, in the judgment of such Lender, such designation
or assignment (i) would eliminate or reduce amounts payable pursuant to
Section 2.15 or 2.17, as the case may be, in the future and (ii) would not
subject such Lender to any unreimbursed cost or expense and would not other-
wise be disadvantageous to such Lender. The Borrower hereby agrees to pay
all reasonable costs and expenses incurred by any Lender in connection with
any such designation or assignment.
(b) If any Lender requests compensation under Section 2.15, or if
the Borrower is required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to
Section 2.17, or if any Lender defaults in its obligation to fund Loans
hereunder, or if any Lender does not agree to any request for an extension of
the Maturity Date under Section 2.04(a), then the Borrower may, at its sole
expense and effort, upon notice to such Lender and the Administrative Agent,
require such Lender to assign and delegate, without recourse (in accordance
with and subject to the restrictions contained in Section 9.04), all its
interests, rights and obligations under this Agreement to an assignee that
shall assume such obligations (which assignee may be another Lender, if a
Lender accepts such assignment); provided that (i) the Borrower shall have
received the prior written consent of the Administrative Agent and the
Issuing Banks, which consent shall not unreasonably be withheld, (ii) such
Lender shall have received payment of an amount equal to the outstanding
principal of its Loans and participations in LC Disbursements, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder,
from the assignee (to the extent of such outstanding principal and accrued
interest and fees) or the Borrower (in the case of all other amounts) and
(iii) in the case of any such assignment resulting from a claim for
compensation under Section 2.15 or payments required to be made pursuant to
Section 2.17, such assignment will result in a reduction in such compensation
or payments. A Lender shall not be required to make any such assignment and
delegation if, prior thereto, as a result of a waiver by such Lender or
otherwise, the circumstances entitling the Borrower to require such
assignment and delegation cease to apply.
ARTICLE III
Representations and Warranties
-------------------------------
The Borrower represents and warrants to the Lenders that:
SECTION 3.01. Organization; Powers. Each of the Borrower and its
Consolidated Subsidiaries is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, has all
requisite corporate, partnership, limited liability company or other
applicable organizational power and authority to carry on its business as now
conducted and, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, is qualified to do business in, and is in good standing in, every
jurisdiction where such qualification is required.
SECTION 3.02. Authorization; Enforceability. The Transactions are
within the Borrower's corporate powers and have been duly authorized by all
necessary corporate and, if required, stockholder action. This Agreement has
been duly executed and delivered by the Borrower and constitutes, the Second
Indenture constitutes, and each other Loan Document to which the Borrower is
to be a party, when executed and delivered by the Borrower (and, in the case
of the Collateral Mortgage Bonds, authenticated by the trustee therefor),
will constitute, a legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors'
rights generally and subject to general principles of equity, regardless of
whether considered in a proceeding in equity or at law.
SECTION 3.03. Governmental Approvals; No Conflicts. The
Transactions (a) do not require any consent or approval of, registration or
filing with, or any other action by, any Governmental Authority, except for
the approval of the ACC, which has been obtained and is in full force and
effect and except filings necessary to perfect Liens created under the Loan
Documents (other than the Lien of the Second Indenture, in respect of which
all requisite filings have been made), (b) will not violate any applicable
law or regulation or the charter, by-laws or other organizational documents
of the Borrower or any of its Consolidated Subsidiaries or any order of any
Governmental Authority, (c) will not violate or result in a default under any
indenture, agreement or other instrument binding upon the Borrower or any of
its Consolidated Subsidiaries or its assets, or give rise to a right
thereunder to require any payment to be made by the Borrower or any of its
Consolidated Subsidiaries, and (d) will not result in the creation or
imposition of any Lien on any asset of the Borrower or any of its
Consolidated Subsidiaries, except Liens created under the Loan Documents or
under the Second Indenture.
SECTION 3.04. Financial Condition; No Material Adverse Change.
(a) The Borrower has heretofore furnished to the Lenders the consolidated
and consolidating balance sheet and statements of income, stockholders'
equity and cash flows for the Borrower and its consolidated Subsidiaries
(i) as of and for the fiscal year ended December 31, 1996, which, in the case
of the consolidated statements, are reported on by Deloitte & Touche LLP,
independent public accountants, and, in the case of the consolidating
statements, are certified by its chief financial officer or controller and
(ii) as of and for the fiscal quarter and the portion of the fiscal year
ended September 30, certified by its chief financial officer. Such financial
statements present fairly, in all material respects, the financial position
and results of operations and cash flows of the Borrower and its consolidated
Subsidiaries as of such dates and for such periods in accordance with GAAP,
subject to year-end audit adjustments and the absence of footnotes in the
case of the statements referred to in clause (ii) above. Neither the
Borrower nor any of its Consolidated Subsidiaries had, at the date of the
most recent balance sheet referred to above, any Guarantee, contingent
liability or liability for taxes, or any long-term lease or unusual forward
or long-term commitment, including any interest rate or foreign currency swap
or exchange transaction, which, in any case, is material to the Borrower and
its Consolidated Subsidiaries, taken as a whole, and which is not reflected
in the foregoing statements or in the notes thereto. During the period from
December 31, 1996 to and including the Effective Date there has been no sale,
transfer or other disposition by the Borrower or any of its Consolidated
Subsidiaries of any part of its business or property, and no purchase or
other acquisition of any business or property (including any capital stock of
any other Person), which, in either case, is material in relation to the
consolidated financial condition of the Borrower and its Consolidated
Subsidiaries taken as a whole at December 31, 1996.
(b) Except to the extent that any specific change explicitly
disclosed in the Disclosure Documents may be so considered, since
December 31, 1996, there has been no material adverse change in the financial
condition, results of operations, business or prospects of the Borrower and
its Consolidated Subsidiaries, taken as a whole.
SECTION 3.05. Properties. (a) Other than as explicitly disclosed
in the Disclosure Documents, each of the Borrower and its Consolidated
Subsidiaries has good title to, or valid leasehold interests in, and enjoys
peaceful and undisturbed possession of all its real and personal property
material to its business, except for minor defects in title that do not
interfere with its ability to conduct its business as currently conducted or
to utilize such properties for their intended purposes.
(b) Each of the Borrower and its Consolidated Subsidiaries owns,
or is licensed to use, all trademarks, tradenames, copyrights, patents and
other intellectual property material to its business, and the use thereof by
the Borrower and its Subsidiaries does not infringe upon the rights of any
other Person, except for any such infringements that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect.
SECTION 3.06. Litigation and Environmental Matters. (a) Except
as explicitly disclosed in the Disclosure Documents, there are no actions,
suits or proceedings by or before any arbitrator or Governmental Authority
pending against or, to the knowledge of the Borrower, threatened against or
affecting the Borrower or any of its Consolidated Subsidiaries (i) as to
which there is a reasonable possibility of an adverse determination and that,
if adversely determined, would individually or in the aggregate, result in a
Material Adverse Effect or (ii) that involve any of the Loan Documents, the
Second Indenture or the Transactions.
(b) Except as explicitly disclosed in the Disclosure Documents,
and except with respect to any other matters that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, neither the Borrower nor any of its Consolidated Subsidiaries (i) has
failed to comply with any Environmental Law or to obtain, maintain or comply
with any permit, license or other approval required under any Environmental
Law, (ii) has become subject to any Environmental Liability, (iii) has
received notice of any claim with respect to any Environmental Liability or
(iv) knows of any basis for any Environmental Liability.
(c) Since the date of this Agreement, there has been no change in
the status of any matter disclosed in the Disclosure Documents that,
individually or in the aggregate, has resulted in, or materially increased
the likelihood of, a Material Adverse Effect.
SECTION 3.07. Compliance with Laws and Agreements. Except as
explicitly disclosed in the Disclosure Documents, each of the Borrower and
its Consolidated Subsidiaries is in compliance with all laws, regulations and
orders of any Governmental Authority applicable to it or its property and all
indentures, agreements and other instruments binding upon it or its property,
except where the failure to do so, individually or in the aggregate, could
not reasonably be expected to result in a Material Adverse Effect. No
Default has occurred and is continuing.
SECTION 3.08. Investment and Holding Company Status. (a) Neither
the Borrower nor any of its Consolidated Subsidiaries is an "investment
company" or a company "controlled" by an "investment company" as defined in,
or subject to regulation under, the Investment Company Act of 1940.
(b) The Borrower and its Consolidated Subsidiaries are exempt from
all provisions of the Public Utility Holding Company Act of 1935, as amended
except Section 9(a)(2) thereof; and no order, consent, approval or
authorization is required under such Act in connection with the making of the
Loans hereunder or the consummation of any of the other Transactions.
SECTION 3.09. Taxes. Each of the Borrower and its Consolidated
Subsidiaries has timely filed or caused to be filed all Tax returns and
reports required to have been filed and has paid or caused to be paid all
Taxes required to have been paid by it, except (a) Taxes that are being
contested in good faith by appropriate proceedings and for which the Borrower
or such Subsidiary, as applicable, has set aside on its books adequate
reserves or (b) to the extent that the failure to do so could not reasonably
be expected to result in a Material Adverse Effect.
SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably
expected to occur that, when taken together with all other such ERISA Events
for which liability is reasonably expected to occur, would result in a
Material Adverse Effect. The present value of all accumulated benefit
obligations under each Plan (based on the assumptions used for purposes of
Statement of Financial Accounting Standards No. 87) did not, as of the date
of the most recent financial statements reflecting such amounts, exceed by
more than $25,000,000 the fair market value of the assets of such Plan, and
the present value of all accumulated benefit obligations of all underfunded
Plans (based on the assumptions used for purposes of Statement of Financial
Accounting Standards No. 87) did not, as of the date of the most recent
financial statements reflecting such amounts, exceed by more than $25,000,000
the fair market value of the assets of all such underfunded Plans.
SECTION 3.11. Security Documents. (a) The Collateral Mortgage
Bonds are entitled to the benefits of the Second Indenture and secured by the
Lien of the Second Indenture. Upon delivery of the Collateral Mortgage Bonds
to the Administrative Agent under the Bond Delivery Agreement and at all
times thereafter (except as contemplated by Section 9.14), the Collateral
Mortgage Bonds will be "Outstanding" and the Administrative Agent will be the
"Holder" of the Collateral Mortgage Bonds for all purposes of the Second
Indenture. The Second Indenture constitutes a valid mortgage lien on and a
valid and perfected security interest in the properties or franchises
described therein as being subject to the Lien of the Second Indenture. As
of the date hereof no material properties or franchises subject to the Lien
of the Second Indenture have been released from such Lien, and, as of any
subsequent date, no such properties or franchises shall have been released
from the Lien of the Second Indenture except in accordance with the terms
thereof.
(b) The provisions of the Security Documents not covered by
paragraph (a) above are effective to create, in favor of the Administrative
Agent for the benefit of the secured parties thereunder, legal, valid and
enforceable Liens on or in all of the Collateral subject thereto, and all
necessary deliveries of property to the Administrative Agent and all
necessary and appropriate recordings and filings have been made in all
necessary and appropriate public offices so that the Liens created by such
Security Documents constitute perfected Liens on or in all rights, titles,
estates and interests of the Borrower and any applicable Subsidiaries in the
Collateral covered thereby, prior and superior to all other Liens and all
necessary and appropriate consents to the creation and perfection of such
Liens have been obtained. No mortgage or financing statement or other
instrument or recordation covering all or any part of the Collateral is on
file in any recording office which has not been terminated or released,
except as may have been filed in favor of the Administrative Agent.
SECTION 3.12. Disclosure. The Borrower has disclosed to the
Lenders all agreements, instruments and corporate or other restrictions to
which it or any of its Subsidiaries is subject, and all other matters known
to it, that, individually or in the aggregate, would result in a Material
Adverse Effect. Neither the Information Memorandum nor any of the other
reports, financial statements, certificates or other information furnished by
or on behalf of the Borrower to the Administrative Agent or any Lender in
connection with the negotiation of this Agreement or any other Loan Document
or delivered hereunder (as modified or supplemented by, and taken together
with other information so furnished) contains any misstatement of a material
fact or omits to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided that, with respect to forward looking statements, the
Borrower represents only that such information was prepared in good faith
based upon assumptions believed to be reasonable at the time and notes that
there can be no assurance that such expectations, beliefs or projections will
be achieved or accomplished and that such projections are subject to an
increasing degree of uncertainty as they relate to later periods of time.
ARTICLE IV
Conditions
----------
SECTION 4.01. Effective Date. The obligations of the Lenders to
make Loans and of the Issuing Banks to issue Letters of Credit hereunder
shall not become effective until the date on which each of the following
conditions is satisfied (or waived in accordance with Section 9.02):
(a) The Administrative Agent (or its counsel) shall have received
from each party hereto either (i) a counterpart of this Agreement signed
on behalf of such party or (ii) written evidence satisfactory to the
Administrative Agent (which may include telecopy transmission of a
signed signature page of this Agreement) that such party has signed a
counterpart of this Agreement.
(b) The Administrative Agent shall have received a favorable
written opinion (addressed to the Administrative Agent and the Lenders
and dated the Effective Date) of each of (i) Dennis R. Nelson, General
Counsel for the Borrower, substantially in the form of Exhibit E-1,
(ii) Reid & Priest LLP, New York, counsel for the Borrower,
substantially in the form of Exhibit E-2, (iii) Snell & Wilmer, LLP,
special Arizona real estate counsel for the Borrower, substantially in
the form of Exhibit E-3, and (iv) Rodey, Dickason, Sloan, Akin & Robb,
PA, special New Mexico counsel for the Borrower, substantially in the
form of Exhibit E-4, and covering such other matters relating to the
Borrower, the Loan Documents, the Second Indenture, the Lien of the
Second Indenture or the Transactions as the Required Lenders shall
reasonably request. The Borrower hereby requests such counsel to
deliver such opinion.
(c) The Administrative Agent shall have received such documents
and certificates as the Administrative Agent or its counsel may
reasonably request relating to the organization, existence and good
standing of the Borrower, the authorization of the Transactions and any
other legal matters relating to the Borrower, the Loan Documents, the
Second Indenture, the Lien of the Second Indenture or the Transactions,
all in form and substance satisfactory to the Administrative Agent and
its counsel.
(d) The Administrative Agent shall have received a certificate,
dated the Effective Date and signed by the President, a Vice President
or a Financial Officer of the Borrower, confirming compliance with the
conditions set forth in paragraphs (a) and (b) of Section 4.02.
(e) The Administrative Agent, the Documentation Agent and the
Syndication Agent shall have received all fees and other amounts due and
payable on or prior to the Effective Date, including all up-front fees
and, to the extent invoiced, reimbursement or payment of all out-of-
pocket expenses required to be reimbursed or paid by the Borrower here-
under or under any other Loan Document.
(f) The Administrative Agent shall have received a counterpart of
the Bond Delivery Agreement signed on behalf of the Borrower, together
with (i) Collateral Mortgage Bonds in an aggregate principal amount not
less than $543,874,718.39, duly issued and authenticated under the
Second Indenture; (ii) a duly executed copy of the Second Supplemental
Indenture and all other documents, instruments and filings relating to
the issuance and authentication of the Collateral Mortgage Bonds under
the Second Indenture; (iii) all documents instruments and filings
creating or perfecting the Lien of the Second Indenture; and (iv) all
other documents and instruments required by law or reasonably requested
by the Administrative Agent to be filed, registered or recorded to
create or perfect the Liens intended to be created under the Security
Documents.
(g) The Administrative Agent shall have received copies of the ACC
order authorizing the Transactions certified by an officer of the
Borrower as being a true and complete copy thereof and as being in full
force and effect.
(h) Simultaneously with the making of the Loans and the issuance
of the Letters of Credit on the Effective Date, (A) the Borrower shall
have repaid in full the principal of all loans outstanding, interest
thereon and other amounts due under the MRA; (B) all commitments of
lenders and issuing banks under the MRA shall have been terminated;
(C) all letters of credit outstanding under the MRA shall have been
returned and canceled (or the Administrative Agent shall be satisfied
with the arrangements made for such cancelation); (D) all Liens securing
any obligation in respect of the MRA shall have been discharged (or the
Administrative Agent shall be satisfied with the arrangements made for
such discharge) and all collateral pledged in respect thereof shall have
been returned to the Borrower or San Carlos; and (E) the Administrative
Agent shall have received a certificate, dated the Effective Date and
signed by the President, a Vice President or a Financial Officer of the
Borrower, confirming compliance with the conditions set forth in
clauses (A) through (D) of this paragraph (h).
Notwithstanding the foregoing, the obligations of the Lenders to make Loans
and of the Issuing Banks to issue Letters of Credit hereunder shall not
become effective unless each of the foregoing conditions is satisfied (or
waived pursuant to Section 9.02) at or prior to 3:00 p.m., New York City
time, on January 31, 1998, (and, in the event such conditions are not so
satisfied or waived, the Commitments shall terminate at such time).
SECTION 4.02. Each Credit Event. The obligation of each Lender to
make a Loan on the occasion of any Borrowing that increases the amount of the
Loans of any Lender outstanding, and of any Issuing Bank to issue, amend or
extend any Letter of Credit, is subject to the satisfaction of the following
conditions:
(a) The representations and warranties of the Borrower set forth
in the Loan Documents shall be true and correct on and as of the date of
such Borrowing or the date of issuance, amendment or extension of such
Letter of Credit, as applicable.
(b) At the time of and immediately after giving effect to such
Borrowing or the issuance, amendment or extension of such Letter of
Credit, as applicable, no Default shall have occurred and be continuing.
Each such Borrowing and each issuance, amendment or extension of a Letter of
Credit shall be deemed to constitute a representation and warranty by the
Borrower on the date thereof as to the matters specified in paragraphs (a)
and (b) of this Section.
ARTICLE V
Affirmative Covenants
----------------------
Until the Commitments have expired or been terminated and the
principal of and interest on each Loan and all fees payable hereunder shall
have been paid in full and all Letters of Credit shall have expired or
terminated and all LC Disbursements shall have been reimbursed, the Borrower
covenants and agrees with the Lenders that:
SECTION 5.01. Financial Statements and Other Information. The
Borrower will furnish to the Administrative Agent and each Lender (or in any
instance in which the Borrower shall so request, the Borrower will furnish
copies to the Administrative Agent and the Administrative Agent will forward
such copies to the Lenders):
(a) as soon as available and in any event within 60 days after the
end of each of the first three fiscal quarterly periods of each fiscal
year of the Borrower, or 15 days after the date on which its quarterly
report for such fiscal quarterly period is required to be filed with the
Securities and Exchange Commission, whichever is later, consolidated
and, consolidating statements of income and cash flows of the Borrower
and its consolidated Subsidiaries for such period and for the period
from the beginning of the respective fiscal year to the end of such
period, and the related consolidated and consolidating balance sheets as
of the end of such period, setting forth in each case in comparative
form the corresponding consolidated and consolidating figures for the
corresponding period in the preceding fiscal year, accompanied by a
certificate of a Financial Officer of the Borrower, which certificate
shall state that the financial statements fairly present in all material
respects the consolidated and consolidating financial condition and
results of operations, as the case may be, of the Borrower and its
consolidated Subsidiaries in accordance with GAAP, consistently applied
(except where noted), as of the end of, and for, such period (subject to
normal year-end audit adjustments);
(b) as soon as available and in any event within 105 days after the
end of each fiscal year of the Borrower, or 15 days after the date on
which its annual report for such fiscal year is required to be filed
with the Securities and Exchange Commission, whichever is later,
consolidated and consolidating statements of income and cash flows of
the Borrower and its consolidated Subsidiaries for such year and the
related consolidated and consolidating balance sheets as of the end of
such year, setting forth in each case in comparative form the
corresponding consolidated and consolidating figures for the preceding
fiscal year, and accompanied (i) in the case of the consolidated
financial statements, by an opinion of independent public accountants of
recognized national standing selected by the Borrower, which opinion
shall not contain any qualification or exception as to the scope of such
audit and shall state that the consolidated financial statements fairly
present in all material respects the consolidated financial condition
and results of operations of the Borrower and its consolidated
Subsidiaries as of the end of, and for, such fiscal year and have been
prepared with GAAP, consistently applied (except where noted), and
(ii) in the case of the consolidating financial statements, (A) by a
certificate of a Financial Officer of the Borrower, which certificate
shall state that the consolidating financial statements fairly present
in all material respects the financial condition and results of
operations of the Borrower and its consolidated Subsidiaries as of the
end of, and for, such fiscal year and have been prepared in accordance
with GAAP, consistently applied (except where noted), and (B) by a
certificate of the independent public accountants referred to in
clause (i) above, which certificate should state that such consolidating
financial statements are the consolidating financial statements that
served as the basis for the audited consolidated financial statements in
respect of which such accountants delivered the opinion referred to in
clause (i) above;
(c) concurrently with any delivery of financial statements under
clause (a) or (b) above, a certificate of a Financial Officer of the
Borrower (i) certifying as to whether a Default has occurred and, if a
Default has occurred, specifying the details thereof and any action
taken or proposed to be taken with respect thereto, (ii) setting forth
reasonably detailed calculations demonstrating compliance with
Sections 6.06, 6.07 and 6.08 and (iii) stating whether any change in
GAAP or in the application thereof not disclosed in any prior such
certificate has occurred since the date of the audited financial
statements referred to in Section 3.04 and, if any such change has
occurred, specifying the effect of such change on the financial
statements accompanying such certificate;
(d) concurrently with any delivery of financial statements under
clause (b) above, a certificate of the accounting firm that reported on
such financial statements stating whether they obtained knowledge during
the course of their examination of such financial statements of any
Default (which certificate may be limited to the extent required by
accounting rules or guidelines);
(e) promptly upon their becoming available, copies of all
registration statements (other than on Form S-8 or any successor form)
and regular periodic reports, if any, that the Borrower shall have filed
pursuant to Section 13(a) or 15 of the Securities Exchange Act of 1934,
as amended, with the Securities and Exchange Commission (or any
governmental agency substituted therefor) or filed with any national
securities exchange;
(f) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and
proxy statements so mailed;
(g) promptly upon their becoming available, copies of all current
reports on Form 8-K filed by the Borrower with the Securities and
Exchange Commission, and all similar reports filed with any national
securities exchange;
(h) promptly upon their becoming available, copies of (i) any
certified resolutions of the Board of Directors of the Borrower and net
earnings certificates delivered under the Second Indenture in connection
with the issuance of Bonds upon the basis of net property additions or
deposits of cash; any certificates of a Financial Officer under either
Indenture with respect to amounts charged to replacement reserve,
detailing insurance on the Borrower's property or showing compliance by
the Borrower with the covenants contained in such Indenture; any
supplemental indentures to either Indenture; any redemption notices
under either Indenture; and any notices of defaults under either
Indenture or accelerations of Bonds; (ii) any notices of default under
the documentation for any Sale Leaseback of the Borrower or any
Consolidated Subsidiary, any notices of non-payment of rent or any other
material amounts owing under any such Sale Leaseback documentation and
any notices of acceleration of any amounts due under any such Sale
Leaseback documentation; and (iii) any written notices from the ACC of
non-compliance by the Borrower or its Consolidated Subsidiaries with any
material ACC decision or with any other rules, regulations or orders of
the ACC, and any written notices of any extraordinary audit or investi-
gation by the ACC into the business, affairs or operations of the
Borrower or its Consolidation Subsidiaries;
(i) as soon as practicable and in any event within five Business
Days after the Borrower receives written notice of an upgrading or a
downgrading of the First Mortgage Bonds or the Second Mortgage Bonds by
any Rating Agency, a notice of such upgrading or downgrading; and
(j) promptly following any request therefor, such other information
regarding the operations, business affairs and financial condition of
the Borrower or any Subsidiary, or compliance with the terms of any Loan
Document or the Second Indenture, as the Administrative Agent or any
Lender may reasonably request.
So long as the Borrower is subject to the financial reporting
requirements of the Securities Exchange Act of 1934, as amended, and the
financial statements contained in any quarterly or annual reports filed with
the Securities and Exchange Commission in accordance with such Act and the
rules and regulations promulgated thereunder, such financial statements may
be delivered by the Borrower in satisfaction of its obligations to deliver
consolidated and consolidating financial statements pursuant to clauses (a)
or (b), as the case may be, of this Section 5.01.
SECTION 5.02. Notices of Material Events. The Borrower will
furnish to the Administrative Agent and each Lender prompt written notice of
the following:
(a) the occurrence of any Default;
(b) the filing or commencement of any action, suit or proceeding by
or before any arbitrator or Governmental Authority against or affecting
the Borrower or any Affiliate thereof as to which there is a reasonable
possibility of an adverse determination and that, if adversely
determined, would reasonably be expected to result in a Material Adverse
Effect;
(c) the occurrence of any ERISA Event that, alone or together with
any other ERISA Events that have occurred, would result in liability of
the Borrower and its Subsidiaries in an aggregate amount exceeding
$25,000,000; and
(d) any other development that results in, or would reasonably be
expected to result in, a Material Adverse Effect.
Each notice delivered under this Section shall be accompanied by a statement
of a Financial Officer or other executive officer of the Borrower setting
forth the details of the event or development requiring such notice and any
action taken or proposed to be taken with respect thereto.
SECTION 5.03. Existence; Conduct of Business. The Borrower will,
and will cause each of its Consolidated Subsidiaries to, do or cause to be
done all things necessary to preserve, renew and keep in full force and
effect its legal existence and the rights, licenses, permits, privileges and
franchises material to the conduct of its business, except to the extent the
failure to do so would not reasonably be expected to result in a Material
Adverse Effect; provided that the foregoing shall not prohibit any merger,
consolidation, liquidation or dissolution permitted under Section 6.03.
SECTION 5.04. Payment of Obligations. The Borrower will, and will
cause each of its Consolidated Subsidiaries to, pay its obligations,
including Tax liabilities and assessments (including water assessments by the
Arizona State Land Department), that, if not paid, could result in a Material
Adverse Effect before the same shall become delinquent or in default, except
where (a) the validity or amount thereof is being contested in good faith by
appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on
its books adequate reserves with respect thereto to the extent required by
and otherwise in accordance with GAAP and (c) the failure to make payment
pending such contest could not reasonably be expected to result in a Material
Adverse Effect.
SECTION 5.05. Maintenance of Properties; Insurance. The Borrower
will, and will cause each of its Consolidated Subsidiaries to, (a) keep and
maintain all property material to the conduct of its business in good working
order and condition, ordinary wear and tear excepted, provided that the
Borrower or any of its Consolidated Subsidiaries may discontinue the
operation of any of its properties to the extent, in the judgment of the
Borrower, it is no longer advisable to operate such property, or to the
extent the Borrower or such Subsidiary intends to sell or otherwise dispose
of such property, which disposition is not prohibited by Section 6.04. and
(b) maintain, with financially sound and reputable insurance companies, or
through its own program of self-insurance, insurance in such amounts and
against such risks as are customarily maintained by companies engaged in the
same or similar businesses operating in the same or similar locations.
SECTION 5.06. Books and Records; Inspection Rights. The Borrower
will, and will cause each of its Consolidated Subsidiaries to, keep proper
books of record and account in which entries are made of all dealings and
transactions in relation to its business and activities, all in accordance
with customary and prudent business practices. The Borrower will, and will
cause each of its Consolidated Subsidiaries to, permit any representatives
designated by the Administrative Agent or any Lender, upon reasonable prior
notice, to visit and inspect its properties, and, subject to contractual or
statutory limitations regarding confidential or proprietary information, to
examine and make extracts from its books and records, and to discuss its
affairs, finances and condition with its officers, all at such reasonable
times and as often as reasonably requested.
SECTION 5.07. Compliance with Laws. The Borrower will, and will
cause each of its Consolidated Subsidiaries to, comply with all laws, rules,
regulations and orders of any Governmental Authority applicable to it or its
property, except where the failure to do so, individually or in the
aggregate, would not reasonably be expected to result in a Material Adverse
Effect.
SECTION 5.08. Use of Proceeds and Letters of Credit. The proceeds
of the Loans will be used only for general corporate purposes. No part of
the proceeds of any Loan will be used, whether directly or indirectly, for
any purpose that entails a violation of any of the Regulations of the Board,
including Regulations G, U and X. Letters of Credit will be issued only to
support the Revenue Bonds set forth on Schedule 2.05 for such Letters of
Credit.
SECTION 5.09. Environmental Laws. (a) The Borrower and the
Consolidated Subsidiaries will comply with, and use commercially reasonable
efforts to insure compliance by all tenants and subtenants, if any, with, all
Environmental Laws and obtain and comply with and maintain, and use
commercially reasonable efforts to insure that all tenants and subtenants
obtain and comply with and maintain, any and all licenses, approvals,
registrations or permits required by Environmental Laws, except to the extent
that failure to do so would not reasonably be expected to have a Material
Adverse Effect;
(b) The Borrower and the Consolidated Subsidiaries will conduct
and complete all investigations, studies, sampling and testing, and all
remedial, removal and other actions required under Environmental Laws, except
to the extent that the failure to take such actions would not reasonably be
expected to have a Material Adverse Effect and promptly comply with all
lawful orders and directives of all Governmental Authorities respecting
Environmental Laws, except to the extent that the same are being contested in
good faith by appropriate proceedings and the pendency of such proceedings
would not reasonably be expected to have a Material Adverse Effect
SECTION 5.10. Further Assurances. The Borrower will, and will
cause each of its Consolidated Subsidiaries to, execute any and all further
documents, financing statements, agreements and instruments, and take all
such further actions (including the filing and recording of financing
statements, fixture filings, mortgages, deeds of trust and other documents),
which may be required under any applicable law, or which the Administrative
Agent or the Required Lenders may reasonably request, to effectuate the
transactions contemplated by the Loan Documents or under the Second Indenture
or to grant, preserve, protect or perfect the Liens created or intended to be
created by the Second Indenture or the Security Documents or the validity or
priority of any such Lien, all at the expense of the Borrower. The Borrower
also agrees to provide to the Administrative Agent, from time to time upon
request, evidence reasonably satisfactory to the Administrative Agent as to
the perfection and priority of the Liens created or intended to be created by
the Security Documents or by or under the Second Indenture.
ARTICLE VI
Negative Covenants
------------------
Until the Commitments have expired or terminated and the principal
of and interest on each Loan and all fees payable hereunder have been paid
in full and all Letters of Credit have expired or terminated and all
LC Disbursements shall have been reimbursed, the Borrower covenants and
agrees with the Lenders that:
SECTION 6.01. Indebtedness. The Borrower will not permit:
(a) the aggregate principal amount of First Mortgage Bonds
outstanding at any time to exceed $411,313,000;
(b) the aggregate principal amount of Second Mortgage Bonds
outstanding at any time to exceed $543,875,000, unless such greater
amount is permitted by the Second Indenture;
(c) the aggregate amount of Guarantees by the Borrower and the
Consolidated Subsidiaries (other than Guarantees of the Obligations and
other than Guarantees by the Borrower or any Consolidated Subsidiary of
Indebtedness or obligations of the Borrower or a Consolidated
Subsidiary) outstanding at any time to exceed $30,000,000; or
(d) the aggregate principal amount outstanding at any time of
Indebtedness of Excluded Subsidiaries in which the Borrower owns more
than 50% of the common stock to exceed $185,000,000; provided that
Indebtedness that is non-recourse to the Excluded Subsidiaries shall not
be counted for purposes of determining compliance with this paragraph
(d).
SECTION 6.02. Liens. The Borrower will not, and will not permit
any Consolidated Subsidiary to, create, incur, assume or permit to exist any
Lien on any property or asset now owned or hereafter acquired by it, or
assign or sell any income or revenues or rights in respect of any thereof,
except:
(a) Liens created or existing on the Effective Date; provided that
no such Lien is spread to cover any additional property and the amount
of the Indebtedness secured thereby is not increased;
(b) Liens created pursuant to the Loan Documents;
(c) Liens created pursuant to the Indentures;
(d) any "permitted encumbrances", "prepaid liens" or permitted
"prior liens" (as such terms are defined in the Indentures);
(e) Liens on property not subject to the Lien of the Second
Indenture;
(f) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other similar Liens arising by operation of law in the
ordinary course of business that are not overdue for a period of more
than 90 days;
(g) Liens on property of San Carlos, provided that in the event any
Lien is placed on property of San Carlos, the Indebtedness secured by
such Lien shall be deemed to be Indebtedness of the Borrower for
purposes of all calculations under Sections 6.06, 6.07 and 6.08;
(h) any Lien on any property or asset which Lien existed prior to
the acquisition thereof by the Borrower or any Consolidated Subsidiary;
provided that such Lien is not created in contemplation of or in
connection with such acquisition, such Lien is not spread to cover any
other property of the Borrower and its Consolidated Subsidiaries, and
the amount of Indebtedness secured thereby is not increased; and
(i) any Liens created to secure Indebtedness (i) which refinances
Indebtedness outstanding on the date of this Agreement, so long as such
Liens apply to no more property, have no greater priority and secure
Indebtedness in a principal amount no greater than the Liens in effect
on the date hereof securing the Indebtedness being refinanced; (ii) in
the form of industrial development revenue bonds, the Borrower's
Indebtedness to the issuer thereon and any Indebtedness incurred to
provide security or credit support therefore; or (iii) created pursuant
to a Sale Leaseback in effect on the date hereof or pursuant to a Sale
Leaseback entered into under Section 6.10.
SECTION 6.03. Fundamental Changes. (a) The Borrower will not,
and will not permit any of its Consolidated Subsidiaries to, merge into or
consolidate with any other Person, or permit any other Person to merge into
or consolidate with it, or sell, transfer, lease or otherwise dispose of (in
one transaction or in a series of transactions) its assets as an entirety or
substantially as an entirety, or all or substantially all of the stock of any
of its Consolidated Subsidiaries (in each case, whether now owned or here-
after acquired), or liquidate or dissolve, except that, if at the time
thereof and immediately after giving effect thereto no Default shall have
occurred and be continuing (i) any Person may merge into the Borrower in a
transaction in which the Borrower is the surviving corporation (ii) any
Consolidated Subsidiary may merge with any other Consolidated Subsidiary, and
(iii) the Borrower may merge with or into or consolidate with or transfer its
assets as an entirety or substantially as an entirety to any Person, so long
as (A) immediately prior to and immediately after giving effect to such
merger, consolidation or transfer, the Person with or into which the Borrower
shall ultimately merge or consolidate or to whom the Borrower shall
ultimately transfer its assets as an entirety or substantially as an entirety
is in the Utility Business, (B) the Required Lenders shall have determined
(so long as such determination is exercised in good faith and after
consultation with the Borrower) that the rating of the first mortgage bonds
(or bonds otherwise denominated that benefit from a first Lien on such
Person's utility assets, or, if such Person has no first mortgage bonds, the
rating of the senior unsecured long-term Indebtedness of such Person that is
not guaranteed and does not benefit from any other credit enhancement) of the
surviving Person of any such merger, consolidation, acquisition or transfer
of assets shall be at least BBB- or higher by S&P and Baa3 or higher by
Moody's (unless the requirements of this clause (B) shall have been waived by
the Required Lenders); provided that the requirement of this clause (B) shall
be deemed to have been satisfied if, prior to the consummation of any such
merger, consolidation or transfer, the Borrower shall have delivered written
evidence from each such rating agency to the effect that, upon such merger,
consolidation or transfer, the applicable rating of such surviving Person
would be equal to or higher than the ratings specified in this clause (B),
(C) in the case of any merger or consolidation or transfer of assets in which
the Borrower is not the surviving corporation, the Person formed by any such
consolidation or transfer of assets or into which the Borrower shall be
merged or consolidated or to which such assets are transferred shall have
executed an agreement in form reasonably satisfactory to the Administrative
Agent containing an assumption by the surviving Person of the due and
punctual performance of each obligation, agreement, covenant and condition of
each of the Loan Documents and the Second Indenture to be performed or
complied with by the Borrower, and (D) the Administrative Agent shall have
received an opinion of counsel, in form and substance reasonably satisfactory
to the Administrative Agent and its counsel, with respect to the due
authorization, execution, delivery, validity and enforceability of the
assumption agreement referred to in clause (C) of this Section 6.03, of the
enforceability and continuation of the Liens created pursuant to the Security
Documents and such other matters as the Required Lenders may reasonably
require.
(b) The Borrower will not, and will not permit any of its
Consolidated Subsidiaries to, engage to any material extent in any business
other than the Utility Business.
SECTION 6.04. Sale of Assets. The Borrower will not, and will not
permit any of its Consolidated Subsidiaries to, convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including leasehold interests), whether owned or hereafter acquired, except:
(a) inventory and other property in the ordinary course of
business;
(b) sales of accounts receivable;
(c) property, businesses or assets (including receivables and
leasehold interests) with an aggregate Fair Value not in excess of
$250,000,000; provided that the aggregate Fair Value of such property,
businesses or assets permitted to be disposed of pursuant to this
clause (c) shall be increased on a dollar for dollar basis by the
aggregate amount of each reduction of the Commitments in respect of
which the Borrower shall have given the Administrative Agent, for the
benefit of the Lenders, written evidence of the Borrower's agreement not
to issue Indebtedness under the Second Indenture based upon the Second
Mortgage Bonds retired in connection with such reduction;
(d) property in connection with any securitization (e.g., stranded
costs) or sale of assets required by law; provided that not less than
80% of the proceeds of such securitization or sale are applied to reduce
outstanding Indebtedness of the Borrower;
(e) any or all of the Borrower's interests in the capital stock of
any Excluded Subsidiary; and
(f) any sale of the Borrower's assets as an entirety or
substantially as an entirety in accordance with Section 6.03, provided
that any assets of the Borrower not included in such sale shall be
deemed to have been disposed of in a transaction subject to the
limitations of this Section 6.04, including the dollar limit set forth
in clause (c) above.
provided, that any Consolidated Subsidiary may convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets to
the Borrower or any other Consolidated Subsidiary. Investments by the
Borrower and the Consolidated Subsidiaries in, and contributions by the
Borrower and the Consolidated Subsidiaries to, Consolidated Subsidiaries or
Excluded Subsidiaries shall be deemed not to constitute transfers of assets
subject to the limitations of this Section 6.04 to the extent such
investments or contributions are made in cash.
SECTION 6.05. Restricted Payments. The Borrower will not declare
or make, or agree to pay or make, directly or indirectly, any Restricted
Payment at any time that any Default or Event of Default has occurred and is
continuing or would occur as a result of such action, except that (a) the
Borrower may declare and pay dividends with respect to its capital stock
payable solely in additional shares of its common stock and (b) the Borrower
may make Restricted Payments pursuant to and in accordance with stock option
plans or other benefit plans for management or employees of the Borrower and
its Subsidiaries.
SECTION 6.06. Consolidated Tangible Net Worth. The Borrower will
not permit Consolidated Tangible Net Worth as of the last day of any fiscal
quarter following the Effective Date to be less than (a) the sum of
(i) $133,000,000, (ii) 40% of Consolidated Net Income for each fiscal year
after December 31, 1996, for which Consolidated Net Income is positive and
(iii) with respect to each of the first three fiscal quarters of a fiscal
year after the most recent fiscal year end, 40% of Consolidated Net Income as
of the end of such fiscal quarter, taken on a fiscal year-to-date basis, if
positive, minus (b) the least of (x) $175,000,000, (y) the aggregate amount
of non-cash charges taken by the Borrower after the date hereof pursuant to
the requirements of SFAS 101 and (z) in the event that either Reference
Rating shall be downgraded within 90 days after the public disclosure of any
decision by the Borrower to apply SFAS 101, zero.
SECTION 6.07. Cash Coverage Ratio. The Borrower will not permit
the ratio of (a) Consolidated EBITDA plus Consolidated Capital Lease Expense
minus Consolidated Capital Expenditures to (b) Consolidated Interest Expense,
in each case for the twelve-month period ended on the last day of any fiscal
quarter commencing with the fiscal quarter ended December 31, 1997, to be
less than the amount specified in the chart below for any such day occurring
in the applicable calendar year:
Year Minimum Ratio
---- -------------
1997 and 1998 1.30
1999 1.40
2000 1.40
2001 1.50
2002 1.55
SECTION 6.08. Leverage Test. The Borrower will not permit the
ratio of (a) Consolidated Total Indebtedness to (b) the sum of Consolidated
EBITDA and Consolidated Capital Lease Expense, in each case for the twelve-
month period ended on the last day of any fiscal quarter commencing with the
fiscal quarter ended December 31, 1997, to be more than the amount specified
in the chart below for any such day occurring in the applicable calendar
year:
Year Maximum Ratio
---- -------------
1997 and 1998 7.00
1999 6.80
2000 6.60
2001 6.40
2002 6.20
SECTION 6.09. Amendments to Documents. The Borrower will not, and
will not permit any Consolidated Subsidiary to, amend, modify or change, or
consent or agree to any amendment, modification or change to the Second
Indenture, the Second Supplemental Indenture, any Revenue Bond Indenture, any
Revenue Bond Loan Agreement or any Revenue Bonds without the prior written
consent of the Required Lenders and any Issuing Bank affected thereby,
provided that (a) such consent shall not be required in connection with any
amendment of the Second Indenture for which the Second Indenture does not
require the consent of any bondholder and (b) such consent shall not be
unreasonably withheld with respect to any amendment of the Second Indenture
that has been approved by bondholders entitled to vote under the Second
Indenture who hold bonds in an aggregate principal amount greater than the
principal amount of the Collateral Mortgage Bonds.
SECTION 6.10. Sale Leaseback Transactions. The Borrower will not,
and will not permit any of its Consolidated Subsidiaries to, enter into any
Sale Leaseback if the aggregate annual basic rent payments under all Sale
Leasebacks entered into by the Borrower and its Consolidated Subsidiaries
after the date hereof would exceed $20,000,000 in any fiscal year after
giving effect to such Sale Leaseback.
SECTION 6.11. Excluded Subsidiaries. (a) The Borrower will not
fail to designate any Excluded Subsidiary as a Consolidated Subsidiary
promptly upon becoming aware that the calculations demonstrating compliance
with Sections 6.06, 6.07 or 6.08 contained in the certificate most recently
delivered under Section 5.01(c) would have been different in any respect had
such Excluded Subsidiary not existed or not conducted any business during the
period reported on therein (other than as a result of any adjustment of the
equity account of any Person owning such Subsidiary and other than as a
result of the removal of transactions conducted with such Subsidiary on an
arm's-length basis or otherwise in accordance with the safeguards set forth
for transactions by the Borrower with certain Affiliates in Decision
No. 60480 of the ACC or as specifically permitted under Section 6.01(c)
("arm's-length transactions")).
(b) The Borrower will not, and will not permit any of its
Consolidated Subsidiaries to, engage in any transaction with any Excluded
Subsidiary other than arm's-length transactions.
ARTICLE VII
Events of Default
------------------
If any of the following events ("Events of Default") shall occur:
(a) the Borrower shall fail to pay any principal of any Loan or any
reimbursement obligation in respect of any LC Disbursement when and as
the same shall become due and payable, whether at the due date thereof
or at a date fixed for prepayment thereof or otherwise, subject in the
case of any such reimbursement obligation to a grace period of two days;
(b) the Borrower shall fail to pay any interest on any Loan or any
fee or any other amount (other than an amount referred to in clause (a)
of this Article) payable under this Agreement or any other Loan
Document, when and as the same shall become due and payable, and such
failure shall continue unremedied for a period of five days;
(c) any representation or warranty made or deemed made by or on
behalf of the Borrower or any Consolidated Subsidiary in or in
connection with any Loan Document or any amendment or modification
hereof or waiver hereunder, or in any report, certificate, financial
statement or other document furnished pursuant to or in connection with
any Loan Document or any amendment or modification hereof or waiver
hereunder, shall prove to have been incorrect when made or deemed made;
(d) the Borrower shall fail to observe or perform any covenant,
condition or agreement contained in Section 5.02, 5.03 (with respect to
the Borrower's existence) or 5.08 or in Article VI;
(e) the Borrower shall fail to observe or perform any covenant,
condition or agreement contained in any Loan Document (other than those
specified in clause (a), (b) or (d) of this Article), and such failure
shall continue unremedied for a period of 30 days after notice thereof
from the Administrative Agent to the Borrower (which notice will be
given at the request of any Lender);
(f) the Borrower or any Significant Subsidiary shall fail to make
any payment of principal (regardless of amount) in respect of any
Material Indebtedness, when and as the same shall become due and
payable;
(g) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that
enables or permits (with or without the giving of notice, the lapse of
time or both) the holder or holders of any Material Indebtedness or any
trustee or agent on its or their behalf to cause any Material
Indebtedness to become due, or to require the prepayment, repurchase,
redemption (other than pursuant to provisions permitting the tendering
of such Indebtedness from time to time for repurchase or redemption
without regard to the occurrence or non-occurrence of any event or
condition) or defeasance thereof, prior to its scheduled maturity;
provided that this clause (g) shall not apply to secured Indebtedness
that becomes due as a result of the voluntary sale or transfer of the
property or assets securing such Indebtedness;
(h) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (i) liquidation, reorganization or other
relief in respect of the Borrower or any Consolidated Subsidiary or its
debts, or of a substantial part of its assets, under any Federal, state
or foreign bankruptcy, insolvency, receivership or similar law now or
hereafter in effect or (ii) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the
Borrower or any Consolidated Subsidiary or for a substantial part of its
assets, and, in any such case, such proceeding or petition shall
continue undismissed for 60 days or an order or decree approving or
ordering any of the foregoing shall be entered;
(i) the Borrower or any Consolidated Subsidiary shall
(i) voluntarily commence any proceeding or file any petition seeking
liquidation, reorganization or other relief under any Federal, state or
foreign bankruptcy, insolvency, receivership or similar law now or here-
after in effect, (ii) consent to the institution of, or fail to contest
in a timely and appropriate manner, any proceeding or petition described
in clause (h) of this Article, (iii) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator, conservator
or similar official for the Borrower or any Consolidated Subsidiary or
for a substantial part of its assets, (iv) file an answer admitting the
material allegations of a petition filed against it in any such
proceeding, (v) make a general assignment for the benefit of creditors
or (vi) take any action for the purpose of effecting any of the fore-
going;
(j) the Borrower or any Consolidated Subsidiary shall become
unable, admit in writing its inability or fail generally to pay its
debts as they become due;
(k) one or more judgments for the payment of money in an aggregate
amount in excess of $15,000,000 shall be rendered against the Borrower,
any Consolidated Subsidiary or any combination thereof and the same
shall remain undischarged for a period of 30 consecutive days during
which execution shall not be effectively stayed, or any action shall be
legally taken by a judgment creditor to attach or levy upon any assets
of the Borrower or any Consolidated Subsidiary to enforce any such
judgment;
(l) an ERISA Event shall have occurred that, when taken together
with all other ERISA Events that have occurred, would result in a
Material Adverse Effect; or
(m) (i) any Lien purported to be created under any Security
Document or the Second Indenture shall cease to be, or shall be asserted
by the Borrower or any Consolidated Subsidiary not to be, a valid and
perfected Lien on any collateral subject thereto, with the priority
required by the applicable Security Document or the Second Indenture, as
applicable, except (A) as a result of the sale or other disposition of
the applicable Collateral in a transaction permitted under the Loan
Documents or (B) as a result of the Administrative Agent's failure to
maintain possession of any stock certificates, promissory notes or other
instruments delivered to it under any Security Document or (ii) any
Collateral Mortgage Bond shall for any reason (x) cease to be entitled
to the benefits of the Second Indenture or to be secured by the Lien of
the Second Indenture equally and ratably with all other bonds, if any,
outstanding under the Second Indenture or (y) cease to be a legal, valid
and binding obligation of the Borrower;
then, and in every such event (other than an event with respect to the
Borrower described in clause (h) or (i) of this Article), and at any time
thereafter during the continuance of such event, the Administrative Agent
may, and at the request of the Required Lenders shall, by notice to the
Borrower, take any or all of the following actions, at the same or different
times: (i) terminate the Commitments, and thereupon the Commitments shall
terminate immediately, (ii) declare the Loans and LC Disbursements then out-
standing to be due and payable in whole (or in part, in which case any
principal not so declared to be due and payable may thereafter be declared to
be due and payable), and thereupon the principal of the Loans and LC
Disbursements so declared to be due and payable, together with accrued
interest thereon and all fees and other obligations of the Borrower accrued
hereunder, shall become due and payable immediately, without presentment,
demand, protest or other notice of any kind, all of which are hereby waived
by the Borrower, (iii) take any action under Section 2.06(j) and (iv) deliver
a notice of redemption under the Second Supplemental Indenture stating that
such notice is being delivered pursuant to this Article VII; and in case of
any event with respect to the Borrower described in clause (h) or (i) of this
Article, the Commitments shall automatically terminate and the principal of
the Loans and LC Disbursements then outstanding, together with accrued
interest thereon and all fees and other obligations of the Borrower accrued
hereunder, shall automatically become due and payable, without presentment,
demand, protest or other notice of any kind, all of which are hereby waived
by the Borrower.
ARTICLE VIII
The Administrative Agent
------------------------
Each of the Lenders and the Issuing Banks hereby irrevocably
appoints the Administrative Agent as its agent and authorizes the
Administrative Agent to take such actions on its behalf and to exercise such
powers as are delegated to the Administrative Agent by the terms of the Loan
Documents, together with such actions and powers as are reasonably incidental
thereto. The Borrower (a) may at any time, with the consent of the Required
Lenders, replace the Administrative Agent and (b) simultaneously with the
replacement of any Affiliate of the Administrative Agent as Issuing Bank
under Section 2.06(i), shall replace the Administrative Agent (it being
understood that any such replacement Administrative Agent shall be a Person
that serves as administrative agent for other credit facilities of a
comparable size), provided that the Borrower may not replace such
Administrative Agent or Issuing Bank unless, after giving effect to such
replacement and each contemporaneous assignment the Borrower shall have
arranged in connection with such replacement (i) neither the Administrative
Agent nor any of its Affiliates shall have outstanding any Letter of Credit,
Loan, LC Disbursement, Commitment or other obligation of any kind under this
Agreement or any other Loan Document and (ii) each of the Administrative
Agent and its Affiliates shall have received payment in full of all amounts
owing to it under or in respect of this Agreement and each other Loan
Document.
The bank serving as the Administrative Agent hereunder shall have
the same rights and powers in its capacity as a Lender as any other Lender
and may exercise the same as though it were not the Administrative Agent, and
such bank and its Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with the Borrower or any Subsidiary
or other Affiliate thereof as if it were not the Administrative Agent
hereunder.
The Administrative Agent shall not have any duties or obligations
except those expressly set forth in the Loan Documents. Without limiting the
generality of the foregoing, (a) the Administrative Agent shall not be
subject to any fiduciary or other implied duties, regardless of whether a
Default has occurred and is continuing, (b) the Administrative Agent shall
not have any duty to take any discretionary action or exercise any
discretionary powers, except discretionary rights and powers expressly
contemplated by the Loan Documents that the Administrative Agent is required
to exercise in writing by the Required Lenders (or such other number or
percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 9.02), and (c) except as expressly set forth in the Loan
Documents, the Administrative Agent shall not have any duty to disclose, and
shall not be liable for the failure to disclose, any information relating to
the Borrower or any of its Subsidiaries that is communicated to or obtained
by the bank serving as Administrative Agent or any of its Affiliates in any
capacity. The Administrative Agent shall not be liable for any action taken
or not taken by it with the consent or at the request of the Required Lenders
(or such other number or percentage of the Lenders as shall be necessary
under the circumstances as provided in Section 9.02) or in the absence of its
own gross negligence or wilful misconduct. The Administrative Agent shall be
deemed not to have knowledge of any Default unless and until written notice
thereof is given to the Administrative Agent by the Borrower or a Lender, and
the Administrative Agent shall not be responsible for or have any duty to
ascertain or inquire into (i) any statement, warranty or representation made
in or in connection with any Loan Document, (ii) the contents of any
certificate, report or other document delivered hereunder or in connection
herewith, (iii) the performance or observance of any of the covenants, agree-
ments or other terms or conditions set forth in any Loan Document, (iv) the
validity, enforceability, effectiveness or genuineness of any Loan Document
or any other agreement, instrument or document, or (v) the satisfaction of
any condition set forth in Article IV or elsewhere in any Loan Document,
other than to confirm receipt of items expressly required to be delivered to
the Administrative Agent. Notwithstanding anything herein to the contrary,
no Lender identified as Syndication Agent or Documentation Agent shall have
any separate duties, responsibilities, obligations or authority as
Syndication Agent or Documentation Agent.
The Administrative Agent shall be entitled to rely upon, and shall
not incur any liability for relying upon, any notice, request, certificate,
consent, statement, instrument, document or other writing believed by it to
be genuine and to have been signed or sent by the proper Person. The
Administrative Agent also may rely upon any statement made to it orally or by
telephone and believed by it to be made by the proper Person, and shall not
incur any liability for relying thereon. The Administrative Agent may
consult with legal counsel (who may be counsel for the Borrower), independent
accountants and other experts selected by it, and shall not be liable for any
action taken or not taken by it in accordance with the advice of any such
counsel, accountants or experts.
The Administrative Agent may perform any and all its duties and
exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and
powers through their respective Related Parties. The exculpatory provisions
of the preceding paragraphs shall apply to any such sub-agent and to the
Related Parties of the Administrative Agent and any such sub-agent, and shall
apply to their respective activities in connection with the syndication of
the credit facilities provided for herein as well as activities as
Administrative Agent.
Subject to the appointment and acceptance of a successor
Administrative Agent as provided in this paragraph, the Administrative Agent
may resign at any time by notifying the Lenders, the Issuing Banks and the
Borrower. Upon any such resignation, the Required Lenders shall have the
right, in consultation with the Borrower, to appoint a successor. If no
successor shall have been so appointed by the Required Lenders and shall have
accepted such appointment within 30 days after the retiring Administrative
Agent gives notice of its resignation, then the retiring Administrative Agent
may, on behalf of the Lenders and the Issuing Banks, appoint a successor
Administrative Agent which shall be a bank with an office in New York,
New York, or an Affiliate of any such bank. Upon the acceptance of its
appointment as Administrative Agent hereunder by a successor, such successor
shall succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder. The fees payable by the Borrower to a successor Administrative
Agent shall be the same as those payable to its predecessor unless otherwise
agreed between the Borrower and such successor. After the Administrative
Agent's resignation hereunder, the provisions of this Article and
Section 9.03 shall continue in effect for the benefit of such retiring
Administrative Agent, its sub-agents and their respective Related Parties in
respect of any actions taken or omitted to be taken by any of them while it
was acting as Administrative Agent.
Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make
its own decisions in taking or not taking action under or based upon this
Agreement, any other Loan Document or related agreement or any document
furnished hereunder or thereunder.
ARTICLE IX
Miscellaneous
-------------
SECTION 9.01. Notices. Except in the case of notices and other
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
(a) if to the Borrower, to it at 220 West Sixth Street, Tucson,
Arizona 85701, Attention of Chief Financial Officer (Telecopy
No. (520) 884-3888);
(b) if to the Administrative Agent, to Toronto Dominion (Texas),
Inc., 909 Fannin, Suite 1700, Houston, TX 77010, Attention of Manager,
Agency (Telecopy No. (713) 951-9921); and
(c) if to any other Agent, any Issuing Bank, or any Lender, to it
at its address (or telecopy number) set forth in its Administrative
Questionnaire.
Any party hereto may change its address or telecopy number for notices and
other communications hereunder by notice to the other parties hereto. All
notices and other communications given to any party hereto in accordance with
the provisions of this Agreement shall be deemed to have been given on the
date of receipt.
SECTION 9.02. Waivers; Amendments. (a) No failure or delay by
the Administrative Agent, any Issuing Bank or any Lender in exercising any
right or power hereunder or under any other Loan Document or the Second
Indenture shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further
exercise thereof or the exercise of any other right or power. The rights and
remedies of the Administrative Agent, the Issuing Banks and the Lenders here-
under and under the other Loan Documents and the Second Indenture are
cumulative and are not exclusive of any rights or remedies that they would
otherwise have. No waiver of any provision of any Loan Document or consent
to any departure by the Borrower therefrom shall in any event be effective
unless the same shall be permitted by paragraph (b) of this Section, and then
such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. Without limiting the generality of the
foregoing, the making of a Loan or issuance of a Letter of Credit shall not
be construed as a waiver of any Default, regardless of whether the Admini-
strative Agent, any Lender or any Issuing Bank may have had notice or
knowledge of such Default at the time.
(b) Neither this Agreement nor any other Loan Document nor any
provision hereof or thereof may be waived, amended or modified except, in the
case of this Agreement, pursuant to an agreement or agreements in writing
entered into by the Borrower and the Required Lenders or by the Borrower and
the Administrative Agent with the consent of the Required Lenders or, in the
case of any other Loan Document, pursuant to an agreement or agreements in
writing entered into by the Administrative Agent and the Borrower, in each
case with the consent of the Required Lenders or, in the case of the Second
Supplemental Indenture or the Collateral Mortgage Bonds, in each case with
the consent of the Required Lenders and as provided by the Second Indenture
with the Administrative Agent exercising the rights of the holder of the
Collateral Mortgage Bonds and acting at the direction of the Required
Lenders; provided that no such agreement shall (i) increase any Commitment of
any Lender without the written consent of such Lender, (ii) reduce the
principal amount of any Loan or LC Disbursement or reduce the rate of
interest thereon, or reduce any fees payable hereunder, without the written
consent of each Lender affected thereby, (iii) postpone the scheduled date of
payment of the principal amount of any Loan or LC Disbursement, or any
interest thereon, or any fees payable hereunder, or reduce the amount of,
waive or excuse any such payment, or postpone the scheduled date of
expiration of any Commitment, without the written consent of each Lender
affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would
alter the pro rata sharing of payments required thereby, without the written
consent of each Lender, (v) change any of the provisions of this Section or
the definition of "Required Lenders" or any other provision of any Loan
Document specifying the number or percentage of Lenders required to waive,
amend or modify any rights hereunder or make any determination or grant any
consent hereunder, without the written consent of each Lender, (vi) change
any provisions of any Loan Document in a manner that by its terms adversely
affects the rights in respect of payments or Collateral of Lenders holding
Revolving Commitments or Loans, on the one hand, differently than those
holding LC Commitments or any LC Exposure, on the other hand, without the
written consent of Lenders holding a majority in interest of each affected
class, or (vii) release all or substantially all the Collateral Mortgage
Bonds or release all or substantially all of any other Collateral from the
Liens of the Security Documents without the consent of each Lender; provided
further that no such agreement shall amend, modify or otherwise affect the
rights or duties of any Agent or any Issuing Bank hereunder without the prior
written consent of such Agent or Issuing Bank, as the case may be; and
provided further any amendment contemplated by Section 2.04(b) in connection
with any extension of the Maturity Date shall require the prior written
consent of the Borrower, the Administrative Agent and each party to this
Agreement that consents to such extension.
SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The
Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the
Administrative Agent and its Affiliates, including the reasonable fees,
charges and disbursements of counsel for the Administrative Agent, in
connection with the syndication of the credit facilities provided for herein,
the preparation and administration of the Loan Documents or any amendments,
modifications or waivers of the provisions hereof (whether or not the trans-
actions contemplated hereby or thereby shall be consummated), (ii) all
reasonable out-of-pocket expenses incurred by any Issuing Bank in connection
with the issuance, amendment or extension of any Letter of Credit or any
demand for payment thereunder and (iii) all out-of-pocket expenses incurred
by the Administrative Agent, any Issuing Bank or any Lender, including the
fees, charges and disbursements of any counsel for the Administrative Agent,
any Issuing Bank or any Lender, in connection with the enforcement or
protection of its rights in connection with the Loan Documents, including its
rights under this Section, or in connection with the Loans made or Letters of
Credit issued hereunder, including all such out-of-pocket expenses incurred
during any workout, restructuring or negotiations in respect of such Loans
or Letters of Credit.
(b) The Borrower shall indemnify the Administrative Agent, each
Issuing Bank and each Lender, and each Related Party of any of the foregoing
Persons (each such Person being called an "Indemnitee") against, and hold
each Indemnitee harmless from, any and all losses, claims, damages,
liabilities and related expenses, including the fees, charges and
disbursements of any counsel for any Indemnitee, incurred by or asserted
against any Indemnitee arising out of, in connection with, or as a result of
(i) the execution or delivery of any Loan Document or any agreement or
instrument contemplated hereby, the performance by the parties of the Loan
Documents of their respective obligations hereunder or the consummation of
the Transactions or any other transactions contemplated hereby, (ii) any Loan
or Letter of Credit or the use of the proceeds therefrom (including any
refusal by any Issuing Bank to honor a demand for payment under a Letter of
Credit if the documents presented in connection with such demand do not
strictly comply with the terms of such Letter of Credit), (iii) any actual or
alleged presence or release of Hazardous Materials on or from any property
owned or operated by the Borrower or any of its Subsidiaries, or any
Environmental Liability related in any way to the Borrower or any of its
Subsidiaries, or (iv) any actual or prospective claim, litigation,
investigation or proceeding relating to any of the foregoing, whether based
on contract, tort or any other theory and regardless of whether any
Indemnitee is a party thereto; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the
gross negligence or wilful misconduct of such Indemnitee.
(c) To the extent that the Borrower fails to pay any amount
required to be paid by it to any Agent or any Issuing Bank under
paragraph (a) or (b) of this Section, each Lender severally agrees to pay to
such Agent or Issuing Bank, as the case may be, such Lender's Applicable
Percentage (determined as of the time that the applicable unreimbursed
expense or indemnity payment is sought) of such unpaid amount; provided that
the unreimbursed expense or indemnified loss, claim, damage, liability or
related expense, as the case may be, was incurred by or asserted against such
Agent or Issuing Bank in its capacity as such.
(d) To the extent permitted by applicable law, the Borrower shall
not assert, and hereby waives, any claim against any Indemnitee, on any
theory of liability, for special, indirect, consequential or punitive damages
(as opposed to direct or actual damages) arising out of, in connection with,
or as a result of, this Agreement, any other Loan Document or any agreement
or instrument contemplated hereby or thereby, the Transactions, any Loan or
Letter of Credit or the use of the proceeds thereof.
(e) All amounts due under this Section shall be payable promptly
after written demand therefor.
SECTION 9.04. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns permitted hereby
(including any Affiliate of any Issuing Bank that issues any Letter of
Credit), except that the Borrower may not assign or otherwise transfer any of
its rights or obligations hereunder without the prior written consent of each
Lender (and any attempted assignment or transfer by the Borrower without such
consent shall be null and void). Nothing in this Agreement, expressed or
implied, shall be construed to confer upon any Person (other than the parties
hereto, their respective successors and assigns permitted hereby (including
any Affiliate of any Issuing Bank that issues any Letter of Credit) and, to
the extent expressly contemplated hereby, the Related Parties of each of the
Administrative Agent, the Issuing Banks and the Lenders) any legal or
equitable right, remedy or claim under or by reason of this Agreement.
(b) Any Lender may assign to one or more assignees all or a
portion of its rights and obligations under this Agreement (including all or
a portion of its Revolving Commitment or LC Commitment and the Loans at the
time owing to it); provided that (i) except in the case of an assignment to a
Lender or an Affiliate of a Lender, each of the Borrower and the
Administrative Agent (and, in the case of an assignment of all or a portion
of an LC Commitment or any Lender's obligations in respect of its
LC Exposure, the Issuing Banks) must give their prior written consent to such
assignment (which consent shall not be unreasonably withheld), (ii) except in
the case of an assignment to a Lender or an Affiliate of a Lender or an
assignment of the entire remaining amount of the assigning Lender's Revolving
Commitment or LC Commitment, the aggregate amount of the Commitments of the
assigning Lender subject to each such assignment (determined as of the date
the Assignment and Acceptance with respect to such assignment is delivered to
the Administrative Agent) shall not be less than $10,000,000 unless each of
the Borrower and the Administrative Agent otherwise consent, (iii) each
partial assignment of any Lender's Revolving Commitment or Revolving Credit
Exposure, or of any Lender's LC Commitment or LC Exposure shall be made as an
assignment of a proportionate part of all the assigning Lender's rights and
obligations under this Agreement in respect of its Revolving Commitment and
Revolving Credit Exposure or its LC Commitment and LC Exposure, as the case
may be (it being understood that assignments of Revolving Commitments or
Revolving Credit Exposures on the one hand shall not be required to be made
on a proportionate basis with assignments of LC Commitments or LC Exposures
on the other hand), (iv) the parties to each assignment shall execute and
deliver to the Administrative Agent an Assignment and Acceptance, together
with a processing and recordation fee of $3,500, and (v) the assignee, if it
shall not be a Lender, shall deliver to the Administrative Agent an
Administrative Questionnaire; and provided further that any consent of the
Borrower otherwise required under this paragraph shall not be required if an
Event of Default under clause (h) or (i) of Article VII has occurred and is
continuing. Subject to acceptance and recording thereof pursuant to para-
graph (d) of this Section, from and after the effective date specified in
each Assignment and Acceptance the assignee thereunder shall be a party
hereto and, to the extent of the interest assigned by such Assignment and
Acceptance, have the rights and obligations of a Lender under this Agreement,
and the assigning Lender thereunder shall, to the extent of the interest
assigned by such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance
covering all of the assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto but shall continue to
be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any
assignment or transfer by a Lender of rights or obligations under this
Agreement that does not comply with this paragraph shall be treated for
purposes of this Agreement as a sale by such Lender of a participation in
such rights and obligations in accordance with paragraph (e) of this Section.
(c) The Administrative Agent, acting for this purpose as an agent
of the Borrower, shall maintain at one of its offices in Houston, Texas a
copy of each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitments
of, and principal amount of the Loans and LC Disbursements owing to, each
Lender pursuant to the terms hereof from time to time (the "Register"). The
entries in the Register shall be conclusive, and the Borrower, the
Administrative Agent, the Issuing Banks and the Lenders may treat each Person
whose name is recorded in the Register pursuant to the terms hereof as a
Lender hereunder for all purposes of this Agreement, notwithstanding notice
to the contrary. The Register shall be available for inspection by the
Borrower, any Issuing Bank and any Lender, at any reasonable time and from
time to time upon reasonable prior notice.
(d) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee, the assignee's completed
Administrative Questionnaire (unless the assignee shall already be a Lender
hereunder), the processing and recordation fee referred to in paragraph (b)
of this Section and any written consent to such assignment required by para-
graph (b) of this Section, the Administrative Agent shall accept such
Assignment and Acceptance and record the information contained therein in the
Register. No assignment shall be effective for purposes of this Agreement
unless it has been recorded in the Register as provided in this paragraph.
(e) Any Lender may, without the consent of the Borrower, the
Administrative Agent or any Issuing Bank, sell participations to one or more
banks or other entities (a "Participant") in all or a portion of such
Lender's rights and obligations under this Agreement (including all or a
portion of its Commitments and the Loans owing to it); provided that (i) such
Lender's obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations and (iii) the Borrower, the Administrative
Agent, the Issuing Banks and the other Lenders shall continue to deal solely
and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement. Any agreement or instrument pursuant to
which a Lender sells such a participation shall provide that such Lender
shall retain the sole right to enforce the Loan Documents and to approve any
amendment, modification or waiver of any provision of the Loan Documents;
provided that such agreement or instrument may provide that such Lender will
not, without the consent of the Participant, agree to any amendment,
modification or waiver described in the first proviso to Section 9.02(b) that
affects such Participant. Subject to paragraph (f) of this Section, the
Borrower agrees that each Participant shall be entitled to the benefits of
Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and
had acquired its interest by assignment pursuant to paragraph (b) of this
Section. To the extent permitted by law, each Participant also shall be
entitled to the benefits of Section 9.08 as though it were a Lender, provided
such Participant agrees to be subject to Section 2.18(c) as though it were a
Lender.
(f) A Participant shall not be entitled to receive any greater
payment under Section 2.15 or 2.17 than the applicable Lender would have been
entitled to receive with respect to the participation sold to such
Participant, unless the sale of the participation to such Participant is made
with the Borrower's prior written consent. A Participant that would be a
Foreign Lender if it were a Lender shall not be entitled to the benefits of
Section 2.17 unless the Borrower is notified of the participation sold to
such Participant and such Participant agrees, for the benefit of the
Borrower, to comply with Section 2.17(e) as though it were a Lender.
(g) Any Lender may at any time pledge or assign a security
interest in all or any portion of its rights under this Agreement to secure
obligations of such Lender, including any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section shall not apply to
any such pledge or assignment of a security interest; provided that no such
pledge or assignment of a security interest shall release a Lender from any
of its obligations hereunder or substitute any such pledgee or assignee for
such Lender as a party hereto.
SECTION 9.05. Survival. All covenants, agreements,
representations and warranties made by the Borrower in the Loan Documents and
in the certificates or other instruments delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the other parties hereto and shall survive the
execution and delivery of the Loan Documents and the making of any Loans and
issuance of any Letters of Credit, regardless of any investigation made by
any such other party or on its behalf and notwithstanding that any Agent, any
Issuing Bank or any Lender may have had notice or knowledge of any Default or
incorrect representation or warranty at the time any credit is extended
hereunder, and shall continue in full force and effect as long as the
principal of or any accrued interest on any Loan or any fee or any other
amount payable under this Agreement is outstanding and unpaid or any Letter
of Credit is outstanding and so long as any Commitment has not expired or
terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and
Article VIII shall survive and remain in full force and effect regardless of
the consummation of the transactions contemplated hereby, the repayment of
the Loans, the expiration or termination of the Letters of Credit and the
Commitments or the termination of this Agreement or any provision hereof.
SECTION 9.06. Counterparts; Integration; Effectiveness. This
Agreement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all
of which when taken together shall constitute a single contract. This
Agreement, the other Loan Documents and any separate letter agreements with
respect to fees payable to the Administrative Agent, the Syndication Agent
and the Documentation Agent constitute the entire contract among the parties
relating to the subject matter hereof and supersede any and all previous
agreements and understandings, oral or written, relating to the subject
matter hereof. Except as provided in Section 4.01, this Agreement shall
become effective when it shall have been executed by the Administrative Agent
and when the Administrative Agent shall have received counterparts hereof
which, when taken together, bear the signatures of each of the other parties
hereto, and thereafter shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. Delivery of an
executed counterpart of a signature page of this Agreement by telecopy shall
be effective as delivery of a manually executed counterpart of this
Agreement.
SECTION 9.07. Severability. Any provision of this Agreement held
to be invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability
of the remaining provisions hereof; and the invalidity of a particular
provision in a particular jurisdiction shall not invalidate such provision in
any other jurisdiction.
SECTION 9.08. Right of Setoff. If an Event of Default shall have
occurred and be continuing, each Lender and each of its Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted
by law, to set off and apply any and all deposits (general or special, time
or demand, provisional or final) at any time held and other obligations at
any time owing by such Lender or Affiliate to or for the credit or the
account of the Borrower against any of and all the obligations of the
Borrower now or hereafter existing under this Agreement held by such Lender,
irrespective of whether or not such Lender shall have made any demand under
this Agreement and although such obligations may be unmatured. The rights of
each Lender under this Section are in addition to other rights and remedies
(including other rights of setoff) which such Lender may have.
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of
Process. (a) This Agreement shall be construed in accordance with and
governed by the law of the State of New York.
(b) The Borrower hereby irrevocably and unconditionally submits,
for itself and its property, to the nonexclusive jurisdiction of the Supreme
Court of the State of New York sitting in New York County and of the
United States District Court of the Southern District of New York, and any
appellate court from any thereof, in any action or proceeding arising out of
or relating to any Loan Document, or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the
extent permitted by law, in such Federal court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be con-
clusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement or any other
Loan Document shall affect any right that the Administrative Agent, any
Issuing Bank or any Lender may otherwise have to bring any action or
proceeding relating to this Agreement or any other Loan Document against the
Borrower or its properties in the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection which
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any other Loan
Document in any court referred to in paragraph (b) of this Section. Each of
the parties hereto hereby irrevocably waives, to the fullest extent permitted
by law, the defense of an inconvenient forum to the maintenance of such
action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service
of process in the manner provided for notices in Section 9.01. Nothing in
this Agreement or any other Loan Document will affect the right of any party
to this Agreement to serve process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY
HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY
HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER
PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings. Article and Section headings and the
Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and shall not affect the construction of, or be taken
into consideration in interpreting, this Agreement.
SECTION 9.12. Confidentiality. Each of the Administrative Agent,
the Issuing Banks and the Lenders agrees to maintain the confidentiality of
the Information (as defined below), except that Information may be disclosed
(a) to its and its Affiliates' directors, officers, employees and agents,
including accountants, auditors, legal counsel and other advisors (it being
understood that the Persons to whom such disclosure is made will be informed
of the confidential nature of such Information and instructed to keep such
Information confidential), (b) to the extent requested by any regulatory
authority, (c) to the extent required by applicable laws or regulations or
by any subpoena or similar legal process, (d) to any other party to this
Agreement, (e) in connection with the exercise of any remedies hereunder or
any suit, action or proceeding relating to this Agreement or any other Loan
Document or the enforcement of rights hereunder, (f) subject to an agreement
containing provisions substantially the same as those of this Section, to any
assignee of or Participant in, or any prospective assignee of or Participant
in, any of its rights or obligations under this Agreement, (g) with the
consent of the Borrower or (h) to the extent such Information (i) becomes
publicly available other than as a result of a breach of this Section or
(ii) becomes available to any Agent, any Issuing Bank or any Lender on a
nonconfidential basis from a source other than the Borrower. For the
purposes of this Section, "Information" means all information received from
the Borrower relating to the Borrower or its business, other than any such
information that is available to any Agent, any Issuing Bank or any Lender on
a nonconfidential basis prior to disclosure by the Borrower; provided that,
in the case of information received from the Borrower after the date hereof,
such information is clearly identified at the time of delivery as
confidential. Any Person required to maintain the confidentiality of
Information as provided in this Section shall be considered to have complied
with its obligation to do so if such Person has exercised the same degree of
care to maintain the confidentiality of such Information as such Person would
accord to its own confidential information.
SECTION 9.13. Interest Rate Limitation. Notwithstanding anything
herein to the contrary, if at any time the interest rate applicable to any
Loan, together with all fees, charges and other amounts which are treated as
interest on such Loan under applicable law (collectively the "Charges"),
shall exceed the maximum lawful rate (the "Maximum Rate") which may be
contracted for, charged, taken, received or reserved by the Lender holding
such Loan in accordance with applicable law, the rate of interest payable in
respect of such Loan hereunder, together with all Charges payable in respect
thereof, shall be limited to the Maximum Rate and, to the extent lawful, the
interest and Charges that would have been payable in respect of such Loan but
were not payable as a result of the operation of this Section shall be
cumulated and the interest and Charges payable to such Lender in respect of
other Loans or periods shall be increased (but not above the Maximum Rate
therefor) until such cumulated amount, together with interest thereon at the
Federal Funds Effective Rate to the date of repayment, shall have been
received by such Lender.
SECTION 9.14. Release of Liens. In the circumstances set forth in
Section 2.2(a) of the Bond Delivery Agreement, the Administrative Agent shall
promptly (and the Lenders hereby authorize the Administrative Agent to) upon
the request of the Borrower take such action and execute such documents as
may be reasonably requested by the Borrower and at the Borrower's expense to
release all the Liens created under the Loan Documents and shall surrender to
or upon the order of the Borrower all Second Mortgage Bonds then held by the
Administrative Agent. In addition, in the circumstances set forth in
Section 2.2(b) of the Bond Delivery Agreement, the Administrative Agent shall
promptly (and the Lenders hereby authorize the Administration Agent to) upon
the request of the Borrower and at the Borrower's expense, return to the
Borrower Second Mortgage Bonds held by the Administrative Agent under the
Bond Delivery Agreement in a principal amount equal to the excess of the
aggregate principal amount of such Bonds held by the Administrative Agent
over the greater at such time of the total Commitments and the total Credit
Exposures.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their respective authorized officers as of the day and
year first above written.
TUCSON ELECTRIC POWER COMPANY,
by
/s/Kevin Larson
------------------------
Name:Kevin Larson
Title:Vice President &
Treasurer
TORONTO DOMINION (TEXAS), INC., as
Administrative Agent,
by
/s/ Deborah Gravinese
----------------------
Name:Deborah Gravinese
Title:Managing Director
THE TORONTO-DOMINION BANK, individually and as
Issuing Bank,
by
/s/ Deborah Gravinese
----------------------
Name:Deborah Gravinese
Title:Managing Director
THE BANK OF NEW YORK, individually and as Issuing Bank and Syndication Agent,
by
/s/ Nathan S. Howard
---------------------
Name:Nathan S. Howard
Title:Vice President
SOCIETE GENERALE, individually and as Issuing Bank and Documentation Agent,
by
/s/ J. Blaine Shaum
------------------------
Name:J. Blaine Shaum
Title:Regional Manager
CIBC INC.
by
/s/ Neal Sobol
-------------------------
Name:Neal Sobol
Title:Executive Director
BANK OF SCOTLAND,
by
/s/ Annie Chin Tat
------------------------
Name:Annie Chin Tat
Title:Vice President
LEHMAN COMMERCIAL PAPER, INC.,
by
/s/ Dennis Dall
------------------------
Name:Dennis Dall
Title:
BANKERS TRUST COMPANY,
by
/s/ Mary Kay Coyle
------------------------
Name:Mary Kay Coyle
Title:Managing Director
THE SUMITOMO TRUST & BANKING
CO. LTD., LOS ANGELES AGENCY,
by
/s/ Akifumi Shiozaki
-------------------------
Name:Akifumi Shiozaki
Title:Deputy General Manger
WELLS FARGO BANK, N.A.,
by
/s/ Paul C. Hornung
------------------------
Name:Paul C. Hornung
Title:Vice President
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.,
by
/s/ Koh Takemoto
------------------------
Name:Koh Takemoto
Title:General Manager
THE INDUSTRIAL BANK OF JAPAN
LIMITED, ACTING THROUGH ITS
LOS ANGELES AGENCY,
by
/s/ Shusai Nagai
------------------------
Name:Shusai Nagai
Title:General Manager
THE MITSUBISHI TRUST AND BANKING CORPORATION,
LOS ANGELES AGENCY,
by
/s/ Yasushi Satomi
------------------------
Name:Yasushi Satomi
Title:Senior Vice President
BHF-BANK AKTIENGESELLSCHAFT,
GRAND CAYMAN BRANCH,
by
/s/ Dan Dobrjanskyj
------------------------
Name:Dan Dobrjanskyj
Title:Assistant Vice President
by
/s/ Linda Pace
------------------------
Name:Linda Pace
Title:Vice President
ABN AMRO BANK N.V.,
by
/s/ Kevin S. McFadden
------------------------
Name:Kevin S. McFadden
Title:Vice President
by
/s/ David B. Bryant
--------------------
Name:David B. Bryant
Title:Vice President
UNION BANK OF CALIFORNIA,
N.A.,
by
/s/ Jason P. DiNapoli
------------------------
Name:Jason P. DiNapoli
Title:Vice President
TABLE OF CONTENTS
Page
ARTICLE I Definitions
-----------
SECTION 1.01. Defined Terms...........................................1
SECTION 1.02. Classification of Loans and Borrowings.................20
SECTION 1.03. Terms Generally........................................20
SECTION 1.04. Accounting Terms; GAAP.................................21
ARTICLE II The Credits
-----------
SECTION 2.01. Revolving Commitments..................................21
SECTION 2.02. Loans and Borrowings...................................22
SECTION 2.03. Requests for Revolving Borrowings......................23
SECTION 2.04. Extension of Maturity Date.............................23
SECTION 2.05. Issuance of Letters of Credit on the
Effective Date.......................................24
SECTION 2.06. Letters of Credit--General Terms. .....................25
SECTION 2.07. Funding of Borrowings..................................31
SECTION 2.08. Interest Elections.....................................31
SECTION 2.09. Termination and Reduction
of Commitments.......................................33
SECTION 2.10. Repayment of Loans; Evidence of Debt...................34
SECTION 2.11. Prepayment of Loans....................................35
SECTION 2.12. Fees...................................................36
SECTION 2.13. Interest...............................................37
SECTION 2.14. Alternate Rate of Interest.............................38
SECTION 2.15. Increased Costs........................................39
SECTION 2.16. Break Funding Payments.................................40
SECTION 2.17. Taxes..................................................41
SECTION 2.18. Payments Generally; Pro Rata Treatment;
Sharing of Set-offs..................................42
SECTION 2.19. Mitigation Obligations; Replacement of
Lenders..............................................44
ARTICLE III
Representations and Warranties
------------------------------
SECTION 3.01. Organization; Powers...................................45
SECTION 3.02. Authorization; Enforceability..........................46
SECTION 3.03. Governmental Approvals; No Conflicts...................46
SECTION 3.04. Financial Condition; No Material Adverse
Change...............................................46
SECTION 3.05. Properties.............................................47
SECTION 3.06. Litigation and Environmental Matters...................48
SECTION 3.07. Compliance with Laws and Agreements....................48
SECTION 3.08. Investment and Holding Company Status..................48
SECTION 3.09. Taxes..................................................49
SECTION 3.10. ERISA..................................................49
SECTION 3.11. Security Documents.....................................49
SECTION 3.12. Disclosure.............................................50
ARTICLE IV
Conditions
-----------
SECTION 4.01. Effective Date.........................................51
SECTION 4.02. Each Credit Event......................................53
ARTICLE V
Affirmative Covenants
----------------------
SECTION 5.01. Financial Statements and
Other Information....................................54
SECTION 5.02. Notices of Material Events.............................57
SECTION 5.03. Existence; Conduct of Business.........................58
SECTION 5.04. Payment of Obligations.................................58
SECTION 5.05. Maintenance of Properties; Insurance...................58
SECTION 5.06. Books and Records; Inspection Rights...................59
SECTION 5.07. Compliance with Laws...................................59
SECTION 5.08. Use of Proceeds and Letters of Credit..................59
SECTION 5.09. Environmental Laws.....................................59
SECTION 5.10. Further Assurances.....................................60
ARTICLE VI
Negative Covenants
------------------
SECTION 6.01. Indebtedness...........................................60
SECTION 6.02. Liens..................................................61
SECTION 6.03. Fundamental Changes....................................62
SECTION 6.04. Sale of Assets.........................................63
SECTION 6.05. Restricted Payments....................................64
SECTION 6.06. Consolidated Tangible Net Worth. ......................65
SECTION 6.07. Cash Coverage Ratio....................................65
SECTION 6.08. Leverage Test..........................................65
SECTION 6.09. Amendments to Documents................................66
SECTION 6.10. Sale Leaseback Transactions............................66
ARTICLE VII
Events of Default .........................67
----------------
ARTICLE VIII
The Administrative Agent......................70
------------------------
ARTICLE IX
Miscellaneous
--------------
SECTION 9.01. Notices................................................73
SECTION 9.02. Waivers; Amendments....................................74
SECTION 9.03. Expenses; Indemnity; Damage Waiver.....................75
SECTION 9.04. Successors and Assigns.................................77
SECTION 9.05. Survival...............................................80
SECTION 9.06. Counterparts; Integration; Effectiveness...............81
SECTION 9.07. Severability...........................................81
SECTION 9.08. Right of Setoff........................................81
SECTION 9.09. Governing Law; Jurisdiction; Consent to
Service of Process...................................82
SECTION 9.10. WAIVER OF JURY TRIAL...................................82
SECTION 9.11. Headings...............................................83
SECTION 9.12. Confidentiality........................................83
SECTION 9.13. Interest Rate Limitation...............................84
SECTION 9.14. Release of Liens.......................................84
SCHEDULES:
- ---------
Schedule 2.01 -- Commitments
Schedule 2.05 -- Letters of Credit
EXHIBITS:
- --------
Exhibit A -- Form of Assignment and Acceptance
Exhibit B -- Form of Bond Delivery Agreement
Exhibit C -- Form of Revenue Bond Pledge Agreement
Exhibit D -- Form of Second Supplemental Indenture
Exhibit E-1 -- Form of Opinion of Dennis R. Nelson, General Counsel for the
Borrower
Exhibit E-2 -- Form of Opinion of Reid & Priest, New York Counsel for the
Borrower
Exhibit E-3 -- Form of Opinion of Snell & Wilmer, special Arizona real estate
counsel for the Borrower
Exhibit E-4 -- Form of Opinion of Rodey, Dickason, Sloan, Akin & Robb, PA,
special New Mexico counsel for the Borrower
UNISOURCE ENERGY CORPORATION
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31,
1997 1996 1995
------ ------ ------
- Thousands of Dollars -
(except per share data)
BASIC EARNINGS PER SHARE:
Net Income $83,572 $120,852 $54,905
Average Shares of Common Stock -
Outstanding 32,138 32,136 32,138
-------- --------- --------
Basic Earnings Per Share $2.60 $3.76 $1.71
======== ========= ========
DILUTED EARNINGS PER SHARE:
Net Income $83,572 $120,852 $54,905
Average Shares of Common Stock -
Outstanding 32,138 32,136 32,138
Effect of Dilutive Securities:
Warrants* 53 81 70
Options 87 36 12
-------- --------- --------
Total shares 32,278 32,253 32,220
-------- --------- --------
Diluted Earnings Per Share $2.59 $3.75 $1.70
======== ========= ========
*The Warrants are for TEP common stock. However, the dilutive effect is the
same as it would be if the Warrants were for UniSource Energy's Common Stock.
Exhibit 12
TUCSON ELECTRIC POWER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(MILLIONS)
1997 1996 1995 1994 1993
Fixed Charges:
Interest on Long-Term 63,573 59,647 69,174 69,353 68,053
Debt
Other Interest* 9,640 11,721 9,113 7,591 9,175
Interest on Capital 83,019 84,383 83,986 82,511 81,932
Lease Obligations**
Total Fixed Charges 156,232 155,751 162,273 159,455 159,160
Net Income 83,572 120,852 54,905 20,740 (25,816)
Add (Deduct):
Income Taxes - 19,297 9,795 8,920 (91) (91)
Operating Expense
Income Taxes - Other (41,401) (91,950) (29,356) (4,820) (5,186)
Total Fixed Charges 156,232 155,751 162,273 159,455 159,160
Total Earnings before
Taxes and Fixed
Charges 217,700 194,448 196,742 175,284 128,067
Ratio of Earnings to 1.393 1.248 1.212 1.099 0.805
Fixed Charges
* Excludes recognition of Allowance for Borrowed Funds Used During
Construction.
** Capital Lease Interest Paid from Statement of Cash Flows.
<PAGE>
Exhibit 21
UniSource Energy Corporation Subsidiaries
State or Other Jurisdiction
Subsidiary of Incorporation or Organization
---------- --------------------------------
Tucson Electric Power Company (TEP) Arizona
Subsidiaries of TEP
-------------------
Escavada Company Arizona
Sabino Investing Inc. Delaware
San Carlos Resources Inc. Arizona
Santa Cruz Resources Inc. Delaware
Sierrita Resources Inc. Delaware
Tucson Resources Inc. Delaware
Tucsonel Inc. Arizona
MEH Corporation (MEH) Arizona
Subsidiaries of MEH
-------------------
Advanced Energy Technologies, Inc. Arizona
Biomasa Generacion, S. de R.L. de C.V. Honduras
Global Solar Energy, L.L.C. Arizona
Millennium Energy Holdings, Inc. Arizona
Nations Biogen Ltd. Cayman Islands
Nations Curacao Ltd. Cayman Islands
Nations Energy Corporation Arizona
Nations Energy Holland Holding B.V. Netherlands
Nations International Ltd. Cayman Islands
Nations Kladno B.V. Netherlands
Nations Kladno II B.V. Netherlands
Nations-Colorado Energy Corporation Delaware
NEV California, L.L.C. Arizona
NEV East, L.L.C. Arizona
NEV Midwest, L.L.C. Arizona
NEV Technologies, L.L.C. Arizona
New Energy Ventures, L.L.C. Arizona
Productos de Concreto Internacionales,
S. de R.L. de C.V. Mexico
Sentinel Concrete Utility Poles, L.L.C. Arizona
Southwest Energy Solutions, Inc. Arizona
Suministradora de Materiales Organicos,
S.R.L. de C.V. Honduras
SWPP International Ltd. Cayman Islands
SWPP Investment Company Arizona
Exhibit 23
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Post-Effective
Amendment No. 1 to Registration Statement No. 33-55732 of
Tucson Electric Power Company (TEP) on Form S-3, Registration
Statement No. 33-58173 of UniSource Energy Corporation (the
Company) on Form S-4, and in Registration Statements No. 333-
43765, No. 333-43767 and No. 333-43769 of the Company on Form
S-8, of our report dated February 23, 1998, appearing in this
Annual Report on Form 10-K of the Company and TEP for the year
ended December 31, 1997.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 27, 1998
EXHIBIT 24
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Principal Executive
Officer, Principal Financial Officer, Principal Accounting Officer, officers
and/or directors of UniSource Energy Corporation, an Arizona corporation, and
Tucson Electric Power Company, an Arizona corporation, which corporations
propose to file with the Securities and Exchange Commission an Annual Report
on Form 10-K for the year ended December 31, 1997, under the Securities
Exchange Act of 1934, as amended, does each for himself and not for one
another, hereby constitute and appoint Ira R. Adler, Dennis R. Nelson and
Karen G. Kissinger and each of them, his true and lawful attorneys, in his
name, place and stead, to sign his name to said proposed Annual Report on
Form 10-K and any and all amendments thereto, and to cause the same to be
filed with the Securities and Exchange Commission, it being intended to grant
and hereby granting to said attorneys, and each of them, full power and
authority to do and perform any act and thing necessary and proper to be done
in the premises as fully and to all intents and purposes as the undersigned
could do if personally present; and each of the undersigned for himself
hereby ratifies and confirms all that said attorneys, or any one of them,
shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set their hand
as of the 2nd day of March, 1998.
Charles E. Bayless Elizabeth T. Bilby
- -------------------------------- ------------------------------
Charles E. Bayless Elizabeth T. Bilby, Director
Principal Executive Officer
And Chairman of the Board of
Directors
Ira R. Adler Jose L. Canchola
- -------------------------------- -------------------------------
Ira R. Adler Jose L. Canchola, Director
Principal Financial Officer
Karen G. Kissinger John L. Carter
- -------------------------------- ------------------------------
Karen G. Kissinger John L. Carter, Director
Principal Accounting Officer
John A. Jeter
------------------------------
John A. Jeter, Director
R. B. O'Reilly
------------------------------
R. B. O'Reilly, Director
Martha R. Seger
------------------------------
Martha R. Seger, Director
Donald G. Shropshire
------------------------------
Donald G. Shropshire, Director
H. Wilson Sundt
------------------------------
H. Wilson Sundt, Director
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