As filed with the Securities and Exchange Commission on September
30, 1998 Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TUCSON ELECTRIC POWER COMPANY
(Exact name of registrant as specified in its charter)
ARIZONA 86-0062700
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
220 WEST SIXTH STREET
TUCSON, ARIZONA, 85701
(520) 571-4000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Dennis R. Nelson, Esq. J. Anthony Terrell, Esq.
Tucson Electric Power Company John T. Hood, Esq.
220 West Sixth Street Thelen Reid & Priest LLP
Tucson, Arizona, 85701 40 West 57th Street
(520) 571-4000 New York, New York 10019
(212) 603-2000
(Names and addresses, including zip codes, and telephone numbers,
including area codes, of agents for service)
-------------------
Approximate date of commencement of proposed sale of the
securities to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
effective.
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If the securities being registered on this Form are being
offered in connection with the formation of a holding company and
there is compliance with General Instruction G, check the
following box. [ ]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
[ ]
-----------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE
SECURITIES TO BE REGISTERED TO BE REGISTERED PER UNIT (1)
First Collateral Trust
Bonds,
7-1/2% Series B Due 2008 $140,000,000 100%
Proposed maximum
aggregate offering Amount of
price (1) registration fee
$140,000,000 $41,300
(1) Determined solely for the purpose of calculating the
registration fee pursuant to Rule 457(f)(2) promulgated
under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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Subject to completion, dated September __, 1998
TUCSON ELECTRIC POWER COMPANY
OFFER TO EXCHANGE
ANY OR ALL
FIRST COLLATERAL TRUST BONDS, 7 1/2% SERIES A DUE 2008
FOR
FIRST COLLATERAL TRUST BONDS, 7 1/2% SERIES B DUE 2008
OF
TUCSON ELECTRIC POWER COMPANY
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, __________, 1998 UNLESS EXTENDED
Tucson Electric Power Company, an Arizona corporation (the
"Company"), hereby offers upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (the "Letter of Transmittal") to exchange
(the "Exchange Offer") its newly issued First Collateral Trust
Bonds, 7-1/2% Series B Due 2008 (the "New Bonds"), for any and
all outstanding First Collateral Trust Bonds, 7-1/2% Series A Due
2008 (The "Old Bonds"), of which an aggregate of $140,000,000 in
principal amount is outstanding. The form and terms of the New
Bonds will be the same as the form and terms of the Old Bonds,
except that the New Bonds have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and
will not be subject to restrictions on the transfer thereof. The
New Bonds and the Old Bonds are sometimes referred to herein
collectively as the "Bonds."
The New Bonds will bear interest from _______________ and
interest on the New Bonds will be payable semiannually on
February 1 and August 1 (each an "Interest payment Date"),
commencing February 1, 1999. The New Bonds will mature on August
1, 2008. The New Bonds will be redeemable at the option of the
Company, in whole at any time or in part from time to time, at a
redemption price equal to the greater of (a) 100% of the
principal amount thereof and (b) the sum of the present values of
the remaining scheduled payments of principal and interest in
respect thereof discounted to the date of redemption on a
semiannual basis (assuming a 360-day year consisting of twelve
30-day months) at the Treasury Rate (as defined herein) plus 50
basis points, plus, in either case, accrued interest to the date
of redemption. The New Bonds will have no sinking fund
provisions. See "Description Of The New Bonds".
(continued on next page)
-----------------------
THE NEW BONDS INVOLVE A SIGNIFICANT DEGREE OF INVESTMENT RISK.
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED (IN ADDITION TO OTHER MATTERS SET FORTH
HEREIN) IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING
THE INVESTMENT QUALITY OF THE NEW BONDS.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Information contained herein is subject to completion or
amendment. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any
sale of these securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such jurisdiction.
Until the Collateral Release Date (as defined herein), the
New Bonds will enjoy the benefit of an equal aggregate principal
amount of the Company's first mortgage bonds delivered to and
held by the Trustee. On the Collateral Release Date, such first
mortgage bonds will be surrendered, and thereafter the New Bonds
will be unsecured obligations and will rank pari passu with other
unsecured and unsubordinated indebtedness of the Company. See
"DESCRIPTION OF THE INDENTURE SECURITY".
Based on a previous interpretation any the staff of the
Securities and Exchange Commission (the "SEC") set forth in no-
action letters to third parties, the Company believes that New
Bonds acquired in the Exchange Offer may be offered for resale,
resold and otherwise transferred by a holder thereof (other than
(i) a broker-dealer who purchases such New Bonds directly from
the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) a person
that is an affiliate of the Company (within the meaning of Rule
405 under the Securities Act)) without compliance with the
registration and prospectus delivery provisions of the Securities
Act, provided that the holder or any other such person is
acquiring the New Bonds in its ordinary course of business and is
not participating, and has no arrangement or understanding with
any person to participate, in the distribution of the New Bonds.
Holders of Old Bonds wishing to accept the Exchange Offer must
represent to the Company that such conditions have been met.
Each broker-dealer that receives New Bonds for its own
account in the Exchange Offer must acknowledge that it will
deliver a Prospectus in connection with any resale of such New
Bonds. The Letter of Transmittal states that by so acknowledging
and by delivering a Prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter," within the meaning
of the Securities Act, in connection with resales of New Bonds
received in exchange for Old Bonds where such Old Bonds were
acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "PLAN OF DISTRIBUTION."
Prior to this Exchange Offer, there has been no public
market for the Old Bonds. The Company does not intend to list
the New Bonds on any securities exchange or to seek approval for
quotation through any automated quotation system. There can be no
assurance that an active market for the New Bonds will develop.
To the extent that a market for the New Bonds does develop, the
market value of the New Bonds will depend on market conditions
(including yields on alternative investments), general economic
conditions, the Company's financial condition and other
conditions. The Company has not entered into any arrangement or
understanding with any person to distribute the New Bonds to be
received in the Exchange Offer.
The Company will not receive any proceeds from the Exchange
Offer. No underwriter is being used in connection with the
Exchange Offer.
The Company will accept for exchange any and all Old Bonds
which are properly tendered to Bank of Montreal Trust Company, as
Exchange Agent, in the Exchange Offer prior to 5:00 p.m., New
York City time, on , unless the Exchange Offer is
--------------
extended by the Company at its sole discretion (if and as
extended, the "Expiration Date"). Tenders of Old Bonds may be
withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "THE EXCHANGE OFFER."
Holders of Old Bonds not tendered and accepted in the
Exchange Offer will continue to hold such Old Bonds and will
continue to be entitled to all the rights and benefits of, and be
subject to the limitations under, Indenture, dated as of August
1, 1998 (the "Original Indenture") between the Company and Bank
of Montreal Trust Company, as trustee (the "Trustee"), the
Original Indenture, as amended and supplemented from time to time
being hereinafter referred to as the "Indenture." See "THE
EXCHANGE OFFER1."
The date of this Prospectus is , 1998.
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TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . 2
SELECTED INFORMATION . . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . 7
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . 8
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 9
THE EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . 10
DESCRIPTION OF THE NEW BONDS . . . . . . . . . . . . . . . . 17
DESCRIPTION OF THE INDENTURE . . . . . . . . . . . . . . . . 21
DESCRIPTION OF THE 1941 MORTGAGE . . . . . . . . . . . . . . 31
DESCRIPTION OF THE 1992 MORTGAGE . . . . . . . . . . . . . . 41
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . 51
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . 55
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 56
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
APPENDIX A - Annual Report on Form 10-K for
the year ended December 31, 1997, as
amended by Form 10-K/A, dated MArch 5, 1998
APPENDIX B - Quarterly Report on form 10-Q for the quarter
ended March 31, 1998
APPENDIX C - Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998
No person has been authorized to give any information or to
make any representations other than those contained in this
Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized
by the Company. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as
of any time subsequent to the date of such information. This
Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the
securities described in this Prospectus or an offer to sell or
the solicitation of any offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the
"SEC"). Such reports and other information can be inspected and
copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
the Regional Offices of the SEC located at 500 West Madison
Street, 14th Floor, Chicago, Illinois 60661-2511 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of
such documents can be obtained from the Public Reference Section
of the SEC at prescribed rates by writing to it at 450 Fifth
1
<PAGE>
Street, N.W., Washington, D.C. 20549. The SEC maintains a web
site on the Internet that contains reports and other information
regarding the Company; the address of such site is
http://www.sec.gov. Reports and other information concerning the
Company are also available for inspection and copying at the
offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended by Form 10-K/A, dated March 5, 1998
(as so amended, the "1997 10-K"), Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1998 (the "First Quarter 10-Q")
and June 30, 1998 (the "Second Quarter 10-Q") and Current Reports
on Form 8-K dated June 26, 1998, July 16, 1998, July 22, 1998 and
August 28, 1998 (the "August 28 8-K"), which have been filed by
the Company with the SEC pursuant to the Exchange Act, are
incorporated in this Prospectus by reference and copies of the
1997 10-K, the First Quarter 10-Q and the Second Quarter 10-Q,
excluding the exhibits thereto, are attached hereto as Appendices
A, B and C, respectively. All documents subsequently filed by
the Company pursuant to Section 13 or 14 of the Exchange Act,
prior to the termination of the offering made by this Prospectus,
shall be deemed to be incorporated herein by reference and to be
a part hereof from the respective dates of filing thereof. All
documents incorporated herein by reference are hereinafter
referred to as the "Incorporated Documents". Any statement
contained in an Incorporated Document shall be deemed to be
modified or superseded for all purposes to the extent that a
statement contained in any subsequently filed Incorporated
Document modifies or replaces such statement.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM THIS PROSPECTUS IS DELIVERED, UPON THE REQUEST OF ANY SUCH
PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED HEREIN
BY REFERENCE, EXCLUDING THE EXHIBITS THERETO. REQUESTS FOR SUCH
DOCUMENTS SHOULD BE DIRECTED TO KEVIN P. LARSON, VICE PRESIDENT
AND TREASURER, BY MAIL AT 220 WEST SIXTH STREET, TUCSON, ARIZONA
85702, OR BY TELEPHONE AT (520) 884-3660.
2
<PAGE>
SELECTED INFORMATION
The following information, which is presented herein solely
to furnish limited introductory information regarding the
Exchange Offer, is selected from or based upon the more detailed
information contained in this Prospectus, is qualified in its
entirety by reference thereto and, accordingly, should be read
together therewith.
THE COMPANY
The Company is an operating public utility engaged in
delivering energy services to retail customers primarily in the
Tucson, Arizona metropolitan area and to wholesale customers
throughout the Western United States.
THE EXCHANGE OFFER
The Exchange Offer .............. The Company is offering to
exchange $1,000 in principal
amount of New Bonds for each
$1,000 in principal amount of
Old Bonds that are properly
tendered and accepted. The
Company will issue the New
Bonds on or promptly after the
Expiration Date. There are
$140,000,000 aggregate
principal amount of Old Bonds
outstanding. See "THE EXCHANGE
OFFER."
Resale of New Bonds ............. Based on an interpretation by
the staff of the SEC set forth
in no-action letters issued to
third parties, including
"Exxon Capital Holdings
Corporation" (available May
13, 1988), "Morgan Stanley &
Co. Incorporated" (available
June 5, 1991), "Mary Kay
Cosmetics, Inc." (available
June 5, 1991), "Warnaco, Inc."
(available October 11, 1991)
and "K-III Communications
Corp." (available May 14,
1993), the Company believes
that New Bonds issued in the
Exchange Offer in exchange for
Old Bonds may be offered for
resale, resold and otherwise
transferred by any holder
thereof (other than any such
holder which is an "affiliate"
of the Company within the
meaning of Rule 405 under the
Securities Act) without
compliance with the
registration and prospectus
delivery provisions of the
Securities Act, provided that
such New Bonds are acquired in
the ordinary course of such
holder's or any other such
person's business and that
such holder or any other such
person has no arrangement or
understanding with any person
to participate in the
distribution of such New
Bonds. Under no circumstances
may this Prospectus be used
for an offer to resell or
other retransfer of New Bonds,
except as set forth below. In
the event that the Company's
belief is inaccurate, holders
of New Bonds who transfer New
Bonds in violation of the
prospectus delivery provisions
of the Securities Act and
without an exemption from
registration thereunder may
incur liability thereunder.
The Company does not assume or
indemnify holders against such
liability. The Exchange Offer
is not being made to, nor will
the Company accept tenders for
exchange from, holders of Old
Bonds (i) in any jurisdiction
in which the Exchange Offer or
the acceptance thereof would
not be in compliance with the
securities or blue sky laws of
such jurisdiction or (ii) who
are engaged or intend to
engage in a distribution of
the New Bonds. Each broker-
dealer that receives New Bonds
for its own account in
exchange for Old Bonds, where
such Old Bonds were acquired
by such broker-dealer as a
result of market-making
activities or other trading
activities, must acknowledge
that it will deliver a
prospectus in connection with
any resale of such New Bonds.
The Company has not entered
into any arrangement or
understanding with any person
to distribute the New Bonds to
be received in the Exchange
Offer. See "PLAN OF
DISTRIBUTION."
Expiration Date ................ The Exchange Offer will expire
at 5:00 p.m., New York City
time, on , 1998
-----------
unless extended, in which case
the term "Expiration Date"
shall mean the latest date and
time to which the Exchange
Offer is extended. The Company
will accept for exchange any
and all Old Bonds which are
properly tendered in the
Exchange Offer prior to 5:00
p.m., New York City time, on
the Expiration Date. The New
Bonds issued in the Exchange
Offer will be delivered on or
promptly after the Expiration
Date.
3
<PAGE>
Conditions to the Exchange
Offer .................... The Company may terminate the
Exchange Offer if it
determines that its ability to
proceed with the Exchange
Offer could be materially
impaired due to any legal or
governmental action, any new
law, statute, rule or
regulation, or any
interpretation by the staff of
the SEC of any existing law,
statute, rule or regulation.
Upon any such determination
prior to the Expiration Date,
the Company will not be
required to exchange any New
Bonds for Old Bonds and may
terminate the Exchange Offer.
Procedures for Tendering Old
Bonds ..................... Each registered holder of Old
Bonds and each participant in
the Depositary Trust Company
("DTC") wishing to participate
in the Exchange Offer must
complete, sign and date the
Letter of Transmittal, or a
facsimile thereof (or in the
case of DTC participants,
cause an Agent's Message, as
hereinafter defined, to be
transmitted), in accordance
with the instructions
contained herein and therein,
and mail or otherwise deliver
such Letter of Transmittal, or
such facsimile (or in the case
of DTC participants, cause an
Agent's Message to be
transmitted), together with
such Old Bonds and any other
required documentation to the
Bank of Montreal Trust
Company, as exchange agent for
the Bonds (the "Exchange
Agent"), at the address set
forth herein. By executing the
Letter of Transmittal (or in
the case of DTC participants,
causing an Agent's Message to
be transmitted), each holder
will represent to the Company
that, among other things, the
New Bonds to be acquired in
the Exchange Offer are being
acquired in the ordinary
course of business of the
person receiving such New
Bonds, whether or not such
person has an arrangement or
understanding with any person
to participate in the
distribution of such New Bonds
and that neither the holder
nor any such other person is
an "affiliate," as defined in
Rule 405 under the Securities
Act, of the Company.
Special Procedures for Beneficial
Owners ..................... Any beneficial owner whose Old
Bonds are registered in the
name of a broker, dealer,
commercial bank, trust company
or other nominee and who
wishes to tender such Old
Bonds in the Exchange Offer
should contact such registered
holder promptly and instruct
such registered holder to
tender on such beneficial
owner's behalf. SUCH
BENEFICIAL HOLDERS SHOULD
FOLLOW THE INSTRUCTIONS
RECEIVED FROM THEIR BROKER OR
NOMINEE WITH RESPECT TO
TENDERING PROCEDURES AND
SHOULD CONTACT THEIR BROKER OR
NOMINEE DIRECTLY.
Guaranteed Delivery
Procedures ................. Holders of Old Bonds who wish
to tender their Old Bonds and
whose Old Bonds are not
immediately available or who
cannot deliver their Old Bonds
or the Letter of Transmittal
to the Exchange Agent prior to
the Expiration Date, must
tender their Old Bonds
according to the guaranteed
delivery procedures set forth
in "THE EXCHANGE OFFER
GUARANTEED Delivery
Procedures."
Withdrawal Rights ................ Tenders of Old Bonds may be
withdrawn at any time prior to
5:00 p.m., New York City time,
on the Expiration Date.
4
<PAGE>
Certain Federal Income Tax
Considerations .............. The exchange of New Bonds for
Old Bonds will not constitute
a taxable event for U.S.
federal income tax purposes.
As a result, holders of New
Bonds will not recognize any
income, gain or loss with
respect to such exchange. For
a discussion of the material
U.S. federal income tax
considerations relating to the
exchange of the New Bonds for
the Old Bonds, which are
addressed in the opinion of
Thelen Reid & Priest LLP, see
"CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS."
Exchange Agent .................. Bank of Montreal Trust Company
is the Exchange Agent. Its
telephone number is (212)
701-7624. The address of
Exchange Agent is 88 Pine
Street, Wall Street Plaza,
19th Floor, New York, New York
10005.
THE NEW BONDS
Offered Securities ............. $140,000,000 principal amount
of First Collateral Trust
Bonds, 7-1/2% Series B due
2008
Maturity Date................... August 1, 2008
Interest Payment Dates ........... February 1 and August 1 of
each year, commencing _______
Optional Redemption .............. The New Bonds will be
redeemable at the option of
the Company, in whole at any
time or in part from time to
time, at redemption prices as
set forth herein under
DESCRIPTION OF THE NEW BONDS
"Redemption".
Security; Ranking................ The New Bonds will not be
secured by a direct mortgage
or other lien on property of
the Company. However, until
the Collateral Release Date
(as hereinafter defined), the
New Bonds will enjoy the
benefit of an equal aggregate
principal amount of the
Company's first mortgage bonds
("Class A Bonds") delivered to
and held by the Trustee.
At the date of this
Prospectus, the Class A Bonds
are bonds issued under the
1941 Mortgage (as hereinafter
defined) which, currently, is
the Company's first mortgage
bond indenture. When the 1941
Mortgage is to be satisfied
and discharged, the Trustee
will surrender the Class A
Bonds issued under the 1941
Mortgage. If the 1992
Mortgage (as hereinafter
defined) remains in effect at
that time, the Company will
deliver to the Trustee, in
exchange for the Class A Bonds
so surrendered, an equal
aggregate principal amount of
Class A Bonds issued under the
1992 Mortgage. The 1992
Mortgage is, currently, the
Company's second mortgage bond
indenture but, upon the
satisfaction and discharge of
the 1941 Mortgage, will become
the Company's first mortgage
bond indenture. When both the
1941 Mortgage and the 1992
Mortgage have been or are to
be satisfied and discharged
and if at that time the
Company has no Secured Debt
except Permitted Secured Debt
(as such terms are hereinafter
defined) the Trustee will
surrender the Class A Bonds
then held by it (the date of
this surrender being the
"Collateral Release Date").
After the Collateral Release
Date, the New Bonds will be
unsecured obligations and will
be pari passu with all other
unsecured and unsubordinated
indebtedness of the Company.
See DESCRIPTION OF THE
INDENTURE - "SECURITY",
DESCRIPTION OF THE 1941
MORTGAGE - "SECURITY" AND
DESCRIPTION OF THE 1992
MORTGAGE - "SECURITY".
Limitation on Secured Debt........ After the Collateral Release
Date, the Indenture will
impose limitations on the
issuance or assumption by the
Company of Secured Debt except
5
<PAGE>
Permitted Secured Debt. See
DESCRIPTION OF THE INDENTURE -
"Limitation on Secured Debt".
6
<PAGE>
RISK FACTORS
The New Bonds are subject to certain material risks. The
following summary of such risks is qualified in its entirety by
reference to the detailed information contained elsewhere herein
and in the Incorporated Documents. Prior to deciding whether or
not to make an investment in the New Bonds, investors should
consider carefully all the information contained herein and in
the Incorporated Documents.
OVERVIEW
The financial prospects of Tucson Electric Power Company
(the "Company") are subject to significant regulatory, economic,
and other uncertainties, some of which are beyond the Company's
control. These uncertainties include the extent to which the
Company, in light of its continued high financial and operating
leverage, can alter operations and reduce costs in response to
industry changes or unanticipated economic downturns. The
Company's success will depend, in part, on its ability to contain
and/or reduce the costs of serving retail customers and the level
of sales to such customers. In a deregulated environment,
revenues from sales of energy may become less certain.
RETAIL COMPETITION
In December 1996, the Arizona Corporation Commission (the
"ACC") adopted rules that require a phase-in of retail electric
competition in Arizona beginning January 1, 1999. The rules were
adopted as a framework to implement competition. On August 5,
1998, the ACC adopted amendments to the rules which, in part,
provide a two-year phase-in schedule in which all retail
customers will have access to competitive generation by January
1, 2001. Among other things, the rules state that "all
competitive generation assets and services shall be separated
from an Affected Utility prior to January 1, 2001. Such
separation shall either be to an unaffiliated party or to a
separate corporate affiliate or affiliates. If an Affected
Utility chooses to transfer its competitive generation assets or
competitive services to a competitive electric affiliate, such
transfer shall be at a value determined by the ACC to be fair and
reasonable." It is difficult to predict the outcome of this
process and the ultimate impact of increased retail competition
on the Company's future sales, revenues or profitability. See
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - "COMPETITION, RETAIL" AND
"ACCOUNTING FOR THE EFFECTS OF REGULATION" IN THE SECOND QUARTER
10-Q.
As discussed in the Second Quarter 10-Q, the ACC has issued
an order concerning stranded cost quantification and recovery.
The order provides the Company with two methods for quantifying
and recovering stranded costs: (1) Divestiture/Auction
Methodology and (2) Transition Revenues Methodology. The order
encourages, but does not require, full divestiture of generating
assets through an auction to unaffiliated third parties. The
order states that only those Affected Utilities choosing
divestiture through the Divestiture/Auction Methodology shall
have the opportunity to recover 100% of unmitigated stranded
costs. The Company filed a plan for stranded cost recovery (the
"Plan") with the ACC on August 21, 1998. Under the Plan, the
Company would seek to divest all of its generating assets and
associated property. In its filing with the ACC, the Company
estimated its stranded costs may range from $600 million to $1.1
billion. The Company expects the ACC to make a decision and
issue a final order regarding the Plan by year-end 1998. See the
August 28 8-K.
It is likely that any divested assets subject to the lien of
the 1941 Mortgage and the 1992 Mortgage would have to be released
from such liens as described in DESCRIPTION OF THE 1941 MORTGAGE
- "Release of Property" and DESCRIPTION OF THE 1992 MORTGAGE -
"Release of Property".
DEBT LEVERAGE
The Company's capital structure is highly leveraged.
Although the Company was able to refinance and extend the
maturities of certain debt obligations at favorable rates and
terms in 1997 and 1998, there can be no assurance that continued
access to the capital markets at such rates and terms will be
available. Despite a reduction in variable rate debt obligations
in 1997 and 1998, the Company's earnings and cash flow would
still be affected by changes in interest rate levels on its
remaining variable rate debt. As of June 30, 1998, the Company
had $329 million aggregate principal amount of variable rate debt
obligations. See ITEM 8. - CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA in the 1997 10-K, and ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - "OVERVIEW" IN THE SECOND QUARTER 10-Q.
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TAX EXEMPT LOCAL FURNISHING BONDS
A substantial portion of utility plant assets qualify as
"facilities for the local furnishing of electric energy" within
the meaning of the Internal Revenue Code, and have been financed
with the proceeds from the issuance of industrial development
revenue bonds (approximately $580 million at the date of this
Prospectus). The interest on these bonds is, generally, excluded
from gross income for federal income tax purposes. Should the
Company's local furnishing system become disqualified, in whole
or in part, due to asset divestitures or unanticipated changes in
tax laws, industry structure or system operations, it likely
would be necessary for some or all of these bonds to be redeemed
or defeased. See ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "Liquidity and
Capital Resources, Tax Exempt Local Furnishing Bonds," in the
1997 10-K.
OTHER RISKS
See "Certain Risks" in ITEM 1. - BUSINESS of the 1997 10-K,
for a discussion of certain other risk factors that should be
considered in evaluating the investment quality of the New Bonds.
THE COMPANY
Tucson Electric Power Company, an Arizona corporation, is an
operating public utility engaged in delivering energy services to
retail customers primarily in the Tucson, Arizona metropolitan
area and to wholesale customers throughout the Western United
States. As a public utility, the Company falls under the
jurisdiction of the ACC which has the authority to approve rates
and certain corporate actions. The Company is a wholly-owned
subsidiary of UniSource Energy Corporation, whose stock is traded
on the New York Stock Exchange and the Pacific Exchange under the
ticker symbol UNS.
The Company provides electric power to approximately 317,000
retail customers. In 1997, the Company generated and sold more
than 7,400 gigawatt hours of energy to retail customers and 3,400
gigawatt hours to other customers at wholesale. Operating
revenues from such sales exceeded $729 million. The Company owns
or leases approximately 1,896 MW of generating capacity located
in Arizona and New Mexico. The Company also has transmission and
distribution assets to transmit electricity from the Company's
remote generating facilities to the Tucson area for use by the
Company's retail customers and to provide interconnections to
neighboring utilities.
In 1997, earnings for the Company declined 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 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS "Income Tax Position," in the
1997 10-K. The Company's 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. See ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -"Overview" and
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Notes 4, 7 and 9 of Notes to Consolidated Financial Statements in
the 1997 10-K for information pertaining to certain of these
items.
8
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Net cash flows from operating activities were $124.4 millon
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.
The Company recorded net income of $8.1 million for the
second quarter of 1998, compared with net income of $29.9 million
in the second quarter of 1997. The second quarter earnings
decrease was primarily attributable to lower tax benefit
recognition, nonrecurring items, lower retail sales due to mild
weather conditions, lower non-cash regulatory revenues and higher
interest expense from refinancings. Earnings for the six-months
ended June 30, 1998 were $6.5 million, compared with net income
of $41.4 million for the same period in 1997. Earnings for the
six-month period were affected by the same factors as discussed
above for the second quarter. SEE ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS "Overview", "Earnings", and "Results of Operations" in
the Second Quarter 10-Q.
Net cash flows from operating activities increased in
aggregate by $32.9 million in the first six months of 1998
compared with the same period in 1997. This increase was due
mainly to the payment of $30 million in contract termination fees
to the coal supplier at the Company's Springerville Generating
Station in the first half of 1997 compared to only $10.0 million
paid in the first half of 1998 and the receipt of $11.3 million
in June 1998 from the sale of emission allowances. SEE ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS "Liquidity and Capital Resources, Cash
Flows on the Second Quarter 10-Q. During the remainder of 1998
the Company expects to be able to fund operating activities and
construction expenditures with internal cash flows, existing cash
balances, and, if necessary, borrowings under a revolving credit
facility.
On June 23, 1998, James S. Pignatelli was elected Chairman,
President and Chief Executive Officer of the Company and its
parent holding company, UniSource Energy Corporation, replacing
Charles E. Bayless, who accepted the positions of Chairman,
President and CEO of Illinova Corporation. Mr. Pignatelli, 54,
had been Executive Vice President and Chief Operating Officer of
the Company since 1996. He was named UniSource Energy Senior
Vice President and Chief Operating Officer upon formation of
UniSource Energy as the Company's holding company. In 1998, he
was named Executive Vice President of the Company and elected to
the Company's Board of Directors.
Additionally, Ira R. Adler, previously the Company's
Executive Vice President and Chief Financial Officer and
UniSource Energy Corporation's Senior Vice President and Chief
Financial Officer, was named Executive Vice President of
UniSource Energy and elected to UniSource Energy's Board of
Directors. George W. Miraben, the Company's Senior Vice
President of Policy and Human Resources, was named Executive Vice
President of the Company and elected to the Company's Board of
Directors.
See RISK FACTORS for a discussion of certain risks that
should be considered (in addition to other matters set forth
herein) in evaluating the investment quality of the New Bonds.
The principal executive office of the Company is located at
220 West Sixth Street, Tucson, Arizona 85702, where the telephone
number is (520) 571-4000.
USE OF PROCEEDS
The net proceeds of the Old Bonds were used to redeem $105
million in aggregate principal amount of the 1941 Mortgage Bonds
(as hereinafter defined) maturing in 1999, 2001, 2002 and 2003,
which have interest rates ranging from 7.55% to 8.5% per annum,
as well as $31.9 million in aggregate principal amount of the
1941 Mortgage Bonds, 12.22% Series due 2000.
9
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Bonds were sold by Morgan Stanley & Co.
Incorporated, TD Securities (USA) Inc., Prudential Securities
Incorporated, Salomon Brothers Inc and BNY Capital Markets, Inc.
(the "Initial Purchasers") on August 1, 1998 to a limited number
of institutional investors (the "Purchasers"). In connection with
the sale of the Old Bonds, the Company and the Initial Purchasers
entered into a Registration Rights Agreement, dated August 1,
1998 (the "Registration Rights Agreement"), which requires, among
other things, the Company (i) to register the Old Bonds under the
Securities Act or (ii) file with the SEC a registration statement
under the Securities Act with respect to New Bonds identical in
all material respects to the Old Bonds and use its reasonable
effort to cause such registration statement to be declared
effective under the Securities Act. The Company is further
obligated, upon the effectiveness of that registration statement,
to offer the holders of the Old Bonds the opportunity to exchange
their Old Bonds for a like principal amount of New Bonds which
will be issued without a restrictive legend and may be reoffered
and resold by the holder without restrictions or limitations
under the Securities Act. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Exchange Offer
is being made pursuant to the Registration Rights Agreement to
satisfy the Company's obligations thereunder. The term "Holder"
with respect to the Exchange Offer means any person in whose name
Old Bonds are registered on the Company's books or any other
person who has obtained a properly completed assignment from the
registered holder. At the date of this Prospectus, the sole
Holder of Old Bonds is DTC.
In participating in the Exchange Offer, a Holder is deemed
to represent to the Company, among other things, that (i) the New
Bonds acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such
New Bonds, whether or not such person is the Holder, (ii) neither
the Holder nor any such other person is engaging in or intends to
engage in a distribution of such New Bonds, (iii) neither the
Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution
of such New Bonds, and (iv) neither the Holder nor any such other
person is an "affiliate," as defined in Rule 405 under the
Securities Act, of the Company.
Based on a previous interpretation by the staff of the
Commission set forth in no-action letters issued to third-
parties, including "Exxon Capital Holdings Corporation"
(available May 13, 1988), "Morgan Stanley & Co. Incorporated"
(available June 5, 1991), "Mary Kay Cosmetics, Inc." (available
June 5, 1991), "Warnaco, Inc." (available October 11, 1991) and
"K-III Communications Corp." (available May 14, 1993), the
Company believes that the New Bonds issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise
transferred by any Holder of such New Bonds (other than any such
Holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities
Act, provided that such New Bonds are acquired in the ordinary
course of such Holder's business and such Holder has no
arrangement or understanding with any person to participate in
the distribution of such New Bonds. Any Holder who tenders in the
Exchange Offer for the purpose of participating in a distribution
of the New Bonds cannot rely on such interpretation by the staff
of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Under no
circumstances may this Prospectus be used for an offer to resell,
resale or other retransfer of the New Bonds. In the event that
the Company's belief is inaccurate, Holders of the New Bonds who
transfer New Bonds in violation of the prospectus delivery
provisions of the Securities Act and without an exemption from
registration thereunder may incur liability thereunder. The
Company does not assume or indemnify Holders against such
liability. The Exchange Offer is not being made to, nor will the
Company accept tenders for exchange from, Holders of Old Bonds in
any jurisdiction in which the Exchange Offer or the acceptance
thereof would not be in compliance with the securities or blue
sky laws of such jurisdiction. Each broker-dealer that receives
New Bonds for its own account in exchange for Old Bonds, where
such Old Bonds were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with
any resale of such New Bonds. The Company has not entered into
any arrangement or understanding with any person to distribute
the New Bonds to be received in the Exchange Offer. See "Plan of
Distribution."
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in
this Prospectus and in the Letters of Transmittal, the Company
will accept any and all Old Bonds validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the
Expiration Date. The Company will issue $1,000 in principal
amount of New Bonds in exchange for each $1,000 in principal
amount of outstanding Old Bonds surrendered in the Exchange
Offer. However, Old Bonds may be tendered only in integral
multiples of $1,000.
The form and terms of the New Bonds will be the same as the
form and terms of the Old Bonds except that the New Bonds will be
registered under the Securities Act and hence will not be subject
to restrictions on the transfer thereof. The New Bonds will
evidence the same debt as the Old Bonds. The New Bonds will be
issued under and entitled to the benefits of the Indenture, which
also authorized the issuance of the Old Bonds, such that both
series will be treated as a single class of debt securities under
the Indenture.
As of the date of this Prospectus, $140,000,000 in aggregate
principal amount of the Old Bonds is outstanding. This
Prospectus, together with the Letter of Transmittal, is being
sent to all registered Holders of the Old Bonds.
The Company will be deemed to have accepted validly tendered
Old Bonds when, as and if the Company shall have given oral or
written notice thereof to the Exchange Agent. The Exchange Agent
will act as agent for the tendering Holders for the purposes of
receiving the New Bonds from the Company.
Old Bonds that are not tendered for exchange in the Exchange
Offer will remain outstanding and will be entitled to the rights
and benefits such Holders have under the Indenture. If any
tendered Old Bonds are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Old
Bonds will be returned, without expense, to the tendering Holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Bonds in the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to
the instructions in the Letter of Transmittal, transfer taxes
with respect to the exchange pursuant to the Exchange Offer. The
Company will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the Exchange
Offer. See "- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York
City time on __________, 1998, unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which
the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will
notify the Exchange Agent of any extension by oral or written
notice and will mail to the registered Holders an announcement
thereof, prior to 9:00 a.m., New York City time, on the next
business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i)
to delay accepting any Old Bonds, to extend the Exchange Offer or
to terminate the Exchange Offer if any of the conditions set
forth below under "-Conditions" shall not have been satisfied by
giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptances,
extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the
registered Holders. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the
Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered
Holders of the Old Bonds, and the Company will extend the
Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner
of disclosure to the registered Holders, if the Exchange Offer
would otherwise expire during such five to ten business day
period.
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<PAGE>
Without limiting the manner in which the Company may choose
to make a public announcement of any delay, extension, amendment
or termination of the Exchange Offer, the Company will have no
obligation to publish, advertise, or otherwise communicate any
such public announcement, other than by making a timely release
to an appropriate news agency.
Upon satisfaction or waiver of all the conditions to the
Exchange Offer, the Company will accept, promptly after the
Expiration Date, all Old Bonds properly tendered and will issue
the New Bonds promptly after acceptance of the Old Bonds. See "-
Conditions." For purposes of the Exchange Offer, the Company will
be deemed to have accepted properly tendered Old Bonds for
exchange when, as and if the Company shall have given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of the New Bonds for Old Bonds that
are accepted for exchange pursuant to the Exchange Offer will be
made only after timely receipt by the Exchange Agent of a
properly completed and duly executed Letter of Transmittal and
all other required documents; provided, however, that the Company
reserves the absolute right to waive any defects or
irregularities in the tender or conditions of the Exchange Offer.
If any tendered Old Bonds are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Old
Bonds are submitted for a greater principal amount or a greater
principal amount, respectively, than the Holder desires to
exchange, then such unaccepted or non-exchanged Old Bonds
evidencing the unaccepted portion, as appropriate, will be
returned without expense to the tendering Holder thereof as
promptly as practicable after the expiration or termination of
the Exchange Offer.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the
Company will not be required to exchange any New Bonds for any
Old Bonds and may terminate the Exchange Offer before the
acceptance of any Old Bonds for exchange, if:
(a) any action or proceeding is instituted or
threatened in any court or by or before any
governmental agency with respect to the Exchange Offer
which, in the Company's reasonable judgment, might
materially impair the ability of the Company to proceed
with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed,
adopted or enacted, or any existing law, statute, rule
or regulation is interpreted by the staff of the SEC,
which, in the Company's reasonable judgment, might
materially impair the ability of the Company to proceed
with the Exchange Offer.
If the Company determines in its sole discretion that any of
these conditions are not satisfied, the Company may (i) refuse to
accept any Old Bonds and return all tendered Old Bonds to the
tendering Holders, (ii) extend the Exchange Offer and retain all
Old Bonds tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of Holders who tendered such Old
Bonds to withdraw their tendered Old Bonds or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Old Bonds which have not been
withdrawn. If such waiver constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the
registered Holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon
the significance of the waiver and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
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<PAGE>
PROCEDURES FOR TENDERING-REGISTERED HOLDERS AND DTC PARTICIPANTS
REGISTERED HOLDERS OF OLD BONDS, AS WELL AS BENEFICIAL
OWNERS WHO ARE DIRECT PARTICIPANTS IN DTC, WHO DESIRE TO
PARTICIPATE IN THE EXCHANGE OFFER SHOULD FOLLOW THE DIRECTIONS
SET FORTH BELOW AND IN THE LETTER OF TRANSMITTAL.
ALL OTHER BENEFICIAL OWNERS SHOULD FOLLOW THE INSTRUCTIONS
RECEIVED FROM THEIR BROKER OR NOMINEE AND SHOULD CONTACT THEIR
BROKER OR NOMINEE DIRECTLY. THE INSTRUCTIONS SET FORTH BELOW AND
IN THE LETTER OF TRANSMITTAL DO NOT APPLY TO SUCH BENEFICIAL
OWNERS.
To tender in the Exchange Offer, a Holder must complete,
sign and date the Letter of Transmittal, or facsimile thereof,
have the signatures thereon guaranteed if required by the Letter
of Transmittal, and mail or otherwise deliver such Letter of
Transmittal or such facsimile to the Exchange Agent prior to the
Expiration Date. In addition, either (i) certificates for such
Old Bonds must be received by the Exchange Agent along with the
Letter of Transmittal, or (ii) a timely confirmation of
book-entry transfer (a "Book-Entry Confirmation") of such Old
Bonds, if such procedure is available, into the Exchange Agent's
account at DTC pursuant to the procedure for book-entry transfer
described below must be received by the Exchange Agent prior to
the Expiration Date, or (iii) the Holder must comply with the
guaranteed delivery procedures described below. To be tendered
effectively, the Letter of Transmittal and other required
documents must be received by the Exchange Agent at the address
set forth below under "-Exchange Agent" prior to the Expiration
Date.
The tender by a Holder which is not withdrawn prior to the
Expiration Date will constitute an agreement between such Holder
and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD BONDS AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE
AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD BONDS SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES
TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed by an Eligible
Institution (as defined below) unless the Old Bonds tendered
pursuant thereto is tendered (i) by a registered Holder who has
not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined
below). In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantor must be a member firm of a registered
national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other
than the registered Holder of any Old Bonds listed therein, such
Old Bonds must be endorsed or accompanied by a properly completed
bond power signed by such registered Holder as such registered
Holder's name appears on such Old Bonds.
If the Letter of Transmittal or any Old Bonds or bond or
stock powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons
should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority
to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility
(including time of receipt), acceptance of tendered Old Bonds and
withdrawal of tendered Old Bonds will be determined by the
Company in its sole discretion, which determination will be final
and binding. The Company reserves the absolute right to reject
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<PAGE>
any and all Old Bonds not properly tendered or any Old Bonds the
Company's acceptance of which would, in the opinion of counsel
for the Company, be unlawful. The Company also reserves the right
to waive any defects, irregularities or conditions of tender as
to particular Old Bonds. The Company's interpretation of the
terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Bonds must be
cured within such time as the Company shall determine. Although
the Company intends to notify Holders of defects or
irregularities with respect to tenders of Old Bonds, none of the
Company, the Exchange Agent, or any other person shall incur any
liability for failure to give such notification. Tenders of Old
Bonds will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Bonds received
by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering Holders,
unless otherwise provided in the Letter of Transmittal, as soon
as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole
discretion to purchase or make offers for any Old Bonds that
remain outstanding subsequent to the Expiration Date or, as set
forth above under "-Conditions," to terminate the Exchange Offer
and, to the extent permitted by applicable law, purchase Old
Bonds in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ
from the terms of the Exchange Offer.
By tendering, each Holder or the Person receiving the New
Bonds, as the case may be will be deemed to represent to the
Company that, among other things, (i) the New Bonds acquired
pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the Person receiving such New Bonds,
whether or not such person is the Holder, (ii) neither the Holder
nor any such other person is engaging in or intends to engage in
a distribution of such New Bonds, (iii) neither the Holder nor
any such other person has an arrangement or understanding with
any Person to participate in the distribution of such New Bonds,
and (iv) neither the Holder nor any such other Person is an
"affiliate," as defined in Rule 405 of the Securities Act, of the
Company.
In all cases, issuance of New Bonds that are accepted for
exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old
Bonds or a timely Book-Entry Confirmation of such Old Bonds into
the Exchange Agent's account at DTC, a properly completed and
duly executed Letter of Transmittal and all other required
documents. If any tendered Old Bonds are not accepted for any
reason set forth in the terms and conditions of the Exchange
Offer or if Old Bonds are submitted for a greater principal
amount than the Holder desires to exchange, such unaccepted or
non-exchanged Old Bonds will be returned without expense to the
tendering Holder thereof (or, in the case of Old Bonds tendered
by book-entry transfer into the Exchange Agent's account at DTC
pursuant to the book-entry transfer procedures described below,
such non-exchanged Old Bonds will be credited to an account
maintained with such DTC) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent each will make a request to establish an
account with respect to the Old Bonds at DTC for purposes of the
Exchange Offer within two business days after the date of this
Prospectus, and any financial institution that is a participant
in the DTC's systems may make book-entry delivery of Old Bonds by
causing DTC to transfer such Old Bonds into the Exchange Agent's
account at DTC in accordance with DTC's procedures for transfer.
Although delivery of Old Bonds may be effected through book-entry
transfer at DTC, such delivery must be accompanied be either (i)
the Letter of Transmittal or facsimile thereof, with any required
signature guarantees or (ii) an Agent's Message (as hereinafter
defined) in connection with a book-entry delivery of Old Bonds,
and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address
set forth below under "-Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described
below must be complied with.
The term "Agent's Message" means a message, transmitted by
DTC, received by the Exchange Agent and forming part of a book-
entry transfer where a tender is initiated, which states that DTC
has received an express acknowledgement from a participant
tendering Old Bonds that such participant has received and agrees
to be bound by the terms of the Letter of Transmittal and that
the Company may enforce such agreement against the participant.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Bonds and (i) whose Old
Bonds are not immediately available or (ii) who cannot deliver
their Old Bonds, the Letter of Transmittal or any other required
documents to the Exchange Agent prior to the Expiration Date, may
effect a tender if:
(a) The tender is made through an Eligible
Institution;
(b) Prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Old
Bonds and the principal amount of Old Bonds tendered stating that
the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Old Bonds and any other
documents required by the Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of
Transmittal (or facsimile thereof), as well as the certificate(s)
representing all tendered Old Bonds in proper form for transfer
(or a Book-Entry Confirmation) and other documents required by
the Letter of Transmittal are received by the Exchange Agent
within three New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent a Notice of Guaranteed
Delivery will be sent to Holders who wish to tender their Old
Bonds according to the guaranteed delivery procedures set forth
above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Bonds
may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date.
To withdraw a tender of Old Bonds in the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth herein
prior to 5:00 p.m., New York City time, on the Expiration Date.
Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Bonds to be withdrawn (the
"Depositor"), (ii) identify the Old Bonds to be withdrawn
(including the certificate number or), (iii) be signed by the
Holder in the same manner as the original signature on the Letter
of Transmittal by which such Old Bonds were tendered (including
any required signature guarantees) or be accompanied by documents
of transfer sufficient to have the Trustee with respect to the
Old Bonds register the transfer of such Old Bonds in the name of
the person withdrawing the tender and (iv) specify the name in
which any such Old Bonds are to be registered, if different from
that of the Depositor. If Old Bonds have been tendered pursuant
to book-entry transfer, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the
withdrawn Old Bonds, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by any method of
delivery described in this paragraph. All questions as to the
validity, form and eligibility (including time of receipt) of
such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old
Bonds so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New Bonds will
be issued with respect thereto unless the Old Bonds so withdrawn
are validly retendered. Any Old Bonds which have been tendered
but which are not accepted for payment will be returned to the
Holder thereof without cost to such Holder as soon as practicable
after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Bonds may be retendered by
following one of the procedures described above under "-
Procedures for Tendering" at any time prior to the Expiration
Date.
EXCHANGE AGENT
Bank of Montreal Trust Company has been appointed as
Exchange Agent of the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery with respect to the exchange of the Old Bonds
should be directed to the Exchange Agent addressed as follows:
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Bank of Montreal Trust Company
88 Pine Street
Wall Street Plaza
19th Floor
New York, New York 10005
By Telephone:
(212) 701-7624
By Facsimile:
(212) 701-7640
FEES AND EXPENSES
The expenses of soliciting tenders will be paid by the
Company. The principal solicitation is being made by mail;
however, additional solicitation may be made by telecopier,
telephone or in person by officers and regular employees of the
Company and its affiliates.
The Company has not retained any dealer-manager in
connection with the Exchange Offer and will not make any payments
to brokers-dealers or others soliciting acceptances of the
Exchange Offer. The Company, however, will pay the Exchange Agent
reasonable and customary fees for their services and will
reimburse them for their reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the
Exchange Offer will be paid by the Company and are estimated in
the aggregate to be approximately $100,000. Such expenses include
registration fees, fees and expenses of the Exchange Agent
accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable
to the exchange of the Old Bonds pursuant to the Exchange Offer.
If, however, certificates representing New Bonds for principal
amounts or number of shares not tendered or accepted for exchange
are to be delivered to, or are to be issued in the name of, any
person other than the registered Holder of Old Bonds tendered, or
if tendered the Old Bonds are registered in the name of, any
person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other than the
exchange of the Old Bonds pursuant to the Exchange Offer, then
the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the
tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
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DESCRIPTION OF THE NEW BONDS
GENERAL
The New Bonds will be issued under the Indenture. See
DESCRIPTION OF THE INDENTURE. The terms of the New Bonds will
include those stated therein and those stated or incorporated in
the Indenture. The following summary of certain terms of the New
Bonds does not purport to be complete and is subject in all
respects to the provisions of, and is qualified in its entirety
by reference to, the New Bonds and the Indenture.
PAYMENT AND PAYING AGENTS
Interest on the New Bonds, at the rate of 7 1/2% per annum,
will be payable on February 1 and August 1 of each year,
commencing February 1, 1999, and will be paid to the person in
whose name such New Bond is registered as of the close of
business on the January 15 or July 15 next preceding each such
Interest Payment Date; provided, however, that interest payable
at maturity (whether at stated maturity, upon redemption or
otherwise, hereinafter "Maturity") will be paid to the person to
whom principal is paid. However, if there has been a default in
the payment of interest on any New Bond, such defaulted interest
may be payable to the holder of such New Bond as of the close of
business on a date selected by the Trustee which is not more than
15 days and not less than 10 days prior to the date proposed by
the Company for payment of such defaulted interest or in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which such New Bond may be listed, if the
Trustee deems such manner of payment practicable. Interest on
the New Bonds will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
The principal of and premium, if any, and interest on the
New Bonds at Maturity will be payable upon presentation of the
New Bonds at the corporate trust office of Bank of Montreal Trust
Company in New York, New York, as paying agent for the Company.
The Company may change, may appoint one or more additional paying
agents (including the Company) and may remove any paying agent,
all at its discretion.
REGISTRATION AND TRANSFER
The transfer of New Bonds may be registered, and New Bonds
may be exchanged for other New Bonds of authorized denominations
and of like tenor and aggregate principal amount, at the
corporate trust office of Bank of Montreal Trust Company in New
York, New York, as Security Registrar. The Company may change
the place for registration of transfer and exchange of the New
Bonds and may designate one or more additional places for such
registration and exchange, all at its discretion. No service
charge will be made for any transfer or exchange of the New
Bonds, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of the
New Bonds. The Company will not be required to execute or to
provide for the registration of transfer of or the exchange of
(a) any New Bond during a period of 15 days prior to giving any
notice of redemption or (b) any New Bond selected for redemption
in whole or in part, except the unredeemed portion of any New
Bond being redeemed in part.
REDEMPTION
The New Bonds will be redeemable at the option of the
Company, in whole at any time or in part from time to time, at a
redemption price equal to the greater of (a) 100% of the
principal amount of the New Bonds to be redeemed and (b) the sum
of the present values of the remaining scheduled payments of
principal of and interest on the New Bonds discounted to the date
fixed for redemption on a semiannual basis (assuming a 360-day
year consisting of twelve 30-day months) at a discount rate equal
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to the Treasury Rate plus 50 basis points, plus, in either case,
accrued interest to the date of redemption. For this purpose:
"Comparable Treasury Issue" means the United States
Treasury security selected by an Independent Investment
Banker as having a maturity comparable to the remaining term
to the Stated Maturity of the New Bonds that would be
utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the
remaining term of the New Bonds.
"Comparable Treasury Price" means, with respect to the
redemption of any New Bonds, the Reference Treasury Dealer
Quotation (expressed as a percentage of principal amount) on
the third Business Day next preceding the date fixed for
such redemption or, if such New Bonds are to be defeased as
described in DESCRIPTION OF THE INDENTURE "Satisfaction and
Discharge" prior to such redemption date, then on the third
Business Day next preceding the date of such defeasance;
provided, however, that if more than one Reference Treasury
Dealer has been appointed, "Comparable Treasury Price" means
the arithmetical mean of the Reference Treasury Dealer
Quotations.
"Independent Investment Banker" means an independent
investment banking institution of national standing
appointed by the Company.
"Reference Treasury Dealer" means each primary United
States government securities dealer in The City of New York
appointed by the Company.
"Reference Treasury Dealer Quotation" means, with
respect to a Reference Treasury Dealer and the redemption of
any New Bonds, the average, as determined by the Company, of
the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal
amount and quoted in writing to the Company by such
Reference Treasury Dealer at 5:00 p.m. on the third Business
Day next preceding the date fixed for such redemption or, if
such New Bonds are to be defeased prior to such redemption
date, then on the third Business Day next preceding such
defeasance).
"Treasury Rate" means, with respect to any date fixed
for the redemption of any New Bonds or, if such New Bonds
are to be defeased prior to such redemption date, the date
of such defeasance (i) the yield, under the heading which
represents the average for the immediately preceding week,
appearing in the most recently published statistical release
designated "H.15(519)" or any successor publication which is
published weekly by the Board of Governors of the Federal
Reserve System and which establishes yields on actively
traded United States Treasury securities adjusted to
constant maturity under the caption "Treasury Constant
Maturities", for the maturity corresponding to the
Comparable Treasury Issue (if no maturity is within three
months before or after the Stated Maturity of the New Bonds,
yields for the two published maturities most closely
corresponding to the Comparable Treasury Issue shall be
determined and the Treasury Rate shall be interpolated or
extrapolated from such yields on a straight line basis,
rounding to the nearest month) or (ii) if such release (or
any successor release) is not published during the week
preceding the calculation date or does not contain such
yields, the rate per annum equal to the semi-annual
equivalent yield to maturity of the Comparable Treasury
Issue, calculated using a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such redemption
date or defeasance date, as the case may be. The Treasury
Rate will be calculated on the third Business Day preceding
such redemption date or defeasance date, as the case may be.
The New Bonds will be redeemable only upon notice by mail
not less than 30 nor more than 60 days prior to the date fixed
for redemption, and, if less than all the New Bonds are to be
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redeemed, the particular New Bonds to be redeemed will be
selected by such method as the Security Registrar deems fair and
appropriate.
Any notice of redemption at the option of the Company may
state that such redemption will be conditional upon receipt by
the Paying Agent, on or prior to the dates fixed for such
redemption, of money sufficient to pay the principal of and
premium, if any, and interest on such New Bonds and that if such
money has not been so received, such notice will be of no force
or effect and the Company will not be required to redeem such New
Bonds.
BOOK-ENTRY SYSTEM
The Depository Trust Company ("DTC") will act as securities
depositary for the New Bonds. At the request of the holder, the
New Bonds may be issued as fully-registered securities registered
in the name of Cede & Co., as nominee of DTC, and deposited with
DTC or a custodian acting on behalf of DTC.
The following is based upon information furnished by DTC:
DTC is a limited-purpose trust company organized under
the New York Banking Law, a "banking organization" within
the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC holds securities that
its participants ("Participants") deposit with DTC. DTC also
facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the
need for physical movement of securities certificates.
"Direct Participants" in DTC include securities brokers and
dealers, banks, trust companies, clearing corporations and
certain other organizations. DTC is owned by a number of
its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to the DTC
system is also available to others, such as securities
brokers and dealers, banks and trust companies that clear
transactions through or maintain a custodial relationship
with a Direct Participant either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and
its Participants are on file with the SEC.
Purchases of New Bonds within the DTC system must be
made by or through Direct Participants, which will receive a
credit for the New Bonds on DTC's records. The ownership
interest of each actual purchaser of each New Bond
("Beneficial Owner") is in turn to be recorded on the Direct
and Indirect Participants' records. Beneficial Owners will
not receive written confirmation from DTC of their purchase,
but Beneficial Owners are expected to receive written
confirmation providing details of the transaction, as well
as periodic statements of their holdings, from the Direct or
Indirect Participants through which the Beneficial Owners
entered into the transaction. Transfers of ownership
interests in the New Bonds are to be accomplished by entries
made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the
New Bonds, except in the event that use of the book-entry
system for the New Bonds is discontinued, as discussed
below.
The deposit of New Bonds with DTC and their registration in
the name of Cede & Co. effect no change in beneficial ownership.
DTC has no knowledge of the actual Beneficial Owners of the New
Bonds; DTC's records reflect only the identity of the Direct
Participants to whose accounts such New Bonds are credited, which
may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on
behalf of their customers.
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The delivery of notices and other communications by DTC
to Direct Participants, by Direct Participants to Indirect
Participants, and by Direct Participants and Indirect
Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to
time.
Redemption notices will be sent to Cede & Co., as
registered Holder of the New Bonds. If less than all of the
New Bonds are being redeemed, DTC's practice is to determine
by lot the amount of the interest of each Direct Participant
to be redeemed.
Neither DTC nor Cede & Co. will itself consent or vote
with respect to New Bonds. Under its usual procedures, DTC
mails an Omnibus Proxy to the Company as soon as possible
after the record date. The Omnibus Proxy assigns Cede &
Co.'s consenting or voting rights to those Direct
Participants to whose accounts the New Bonds are credited on
the record date (identified in a listing attached to the
Omnibus Proxy).
Payments on the New Bonds will be made to DTC. DTC's
practice is to credit the accounts of Direct Participants on
the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on such
payment date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary
practices, as is the case with securities held for the
accounts of customers in bearer form or registered in
"street name", and will be the responsibility of such
Participants and not of DTC or the Company, subject to any
statutory or regulatory requirements as may be in effect
from time to time. Payment to DTC will be the responsibility
of the Company, disbursement of payments to Direct
Participants will be the responsibility of DTC, and further
disbursement of payments to the Beneficial Owners will be
the responsibility of Direct Participants and Indirect
Participants.
DTC may discontinue providing its services as securities
depositary with respect to the New Bonds at any time by giving
notice to the Company. Under such circumstances, in the event
that a successor securities depositary is not obtained,
certificates representing New Bonds will be delivered to the
Beneficial Owners. Additionally, the Company may decide to
discontinue use of the system of book-entry transfers through DTC
(or a successor depositary). In that event, certificates
representing the New Bonds will be delivered.
The information in this section concerning DTC and DTC's
book-entry system and procedures has been obtained from sources
considered to be reliable, but the Company takes no
responsibility for the accuracy thereof. None of the Company,
the Trustee or the Initial Purchasers will have any
responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership
interests in the New Bonds or for maintaining, supervising or
reviewing any records relating thereto maintained by DTC or any
of its Direct or Indirect Participants or for any other matter
relating to the actions and practices of DTC or any of its Direct
or Indirect Participants.
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DESCRIPTION OF THE INDENTURE
GENERAL
The New Bonds will be issued under the Indenture, dated as
of August 1, 1998 (the "Original Indenture"), between the Company
and Bank of Montreal Trust Company, as trustee (the "Trustee"),
the Original Indenture, as amended and supplemented from time to
time, being hereinafter referred to as the "Indenture". The
terms of the New Bonds will include those stated in the Indenture
and those made part of the Indenture by the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain terms of the Indenture does not purport to be
complete and is subject in all respects to the provisions of, and
is qualified in its entirety by reference to, the Indenture, and
the Trust Indenture Act. Capitalized terms used under this
heading which are not otherwise defined in this Prospectus shall
have the meanings ascribed thereto in the Indenture. Whenever
particular provisions or defined terms in the Indenture are
referred to herein, such provisions or defined terms are
incorporated by reference herein.
The Indenture provides for the issuance thereunder of
multiple series of debt securities, in addition to the New Bonds.
The New Bonds and all other debt securities issued under the
Indenture are collectively referred to herein as the "Indenture
Securities". Each series of Indenture Securities will rank pari
passu with all other series of Indenture Securities, except as
otherwise provided in the Indenture.
SECURITY
General
The Indenture does not constitute a direct mortgage or other
lien on properties of the Company. However, as described below,
until the Collateral Release Date (as hereinafter defined) the
Trustee will hold, for the benefit of the Holders of all
Indenture Securities, Class A Bonds (as hereinafter defined)
equal in aggregate principal amount to the Outstanding Indenture
Securities. The Class A Bonds, in turn, are secured by a first
mortgage lien on substantially all the utility plant assets of
the Company. See DESCRIPTION OF THE 1941 MORTGAGE and
DESCRIPTION OF THE 1992 MORTGAGE. However, after the Collateral
Release Date, the Indenture Securities will be unsecured and will
rank pari passu with all other unsecured and unsubordinated
indebtedness of the Company. As described under "Limitation on
Secured Debt", after the Collateral Release Date the Indenture
will impose a limitation on the issuance or assumption by the
Company of Secured Debt (as hereinafter defined).
"Class A Bonds" means (a) as of any time while the 1941
Mortgage remains in effect, bonds or other obligations now or
hereinafter issued under the 1941 Mortgage and (b) as of any time
after the 1941 Mortgage has been satisfied and discharged and
while the 1992 Mortgage remains in effect, bonds or other
obligations now or hereinafter issued under the 1992 Mortgage.
"Class A Mortgage" means either the 1941 Mortgage or the
1992 Mortgage;
"1941 Mortgage" means the Indenture, dated as of April 1,
1941, of the Company to The Chase Manhattan Bank, as trustee, as
such indenture has been heretofore and is hereafter amended and
supplemented. The 1941 Mortgage secures the Company's
outstanding 1941 Mortgage Bonds.
"1992 Mortgage" means the Indenture of Mortgage and Deed of
Trust, dated as of December 1, 1992, of the Company to Bank of
Montreal Trust Company, as trustee, as such indenture has been
heretofore and is hereafter amended and supplemented. The 1992
Mortgage secures the Company's outstanding 1992 Mortgage Bonds.
(See Sec. 101.)
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Class A Bonds
Except as otherwise contemplated below under this heading
and under "Defeasance", all Outstanding Indenture Securities,
equally and ratably, will enjoy the benefit of Class A Bonds
delivered to the Trustee as the basis for the authentication and
delivery of an equal principal amount of Indenture Securities.
So long as the Collateral Release Date (as hereinafter
defined) has not occurred, prior to the authentication and
delivery of Indenture Securities of any series the Company will
issue a corresponding series of Class A Bonds. Such Class A
Bonds (a) will be delivered to, and registered in the name of,
the Trustee or its nominee and will be owned and held by the
Trustee, subject to the provisions of the Indenture, for the
benefit of the Holders of all Indenture Securities Outstanding
from time to time; (b) will mature (or be redeemed) on the same
dates, and in the same principal amounts, as such Indenture
Securities; (c) will contain, in addition to any mandatory
redemption provisions applicable to all Class A Bonds Outstanding
under the related Class A Indenture, mandatory redemption
provisions correlative to provisions for mandatory redemption, or
redemption at the option of the Holder, of such Indenture
Securities; and (d)(i) may, but need not, bear interest and (ii)
may, but need not, contain provisions for the redemption thereof
at the option of the Company, any such redemption to be made at a
redemption price or prices not less than the principal amount of
such Class A Bonds. To the extent that Class A Bonds do not bear
interest, Holders of Indenture Securities will not have the
benefit of the lien of a Class A Mortgage in respect of an amount
equal to accrued interest, if any, on the Indenture Securities.
The Class A Bonds delivered in connection with the authentication
and delivery of the New Bonds will not bear interest. (See Sec.
312.)
Any payment by the Company of principal of or premium or
interest on the Class A Bonds delivered to and held by the
Trustee will be applied by the Trustee to the payment of any
principal, premium or interest, as the case may be, in respect of
the Indenture Securities which is then due and, to the extent of
such payment, the obligation of the Company under the Indenture
to make such payment in respect of the Indenture Securities will
be deemed satisfied and discharged. If, at the time of any such
payment of principal of Class A Bonds, there is no principal then
due in respect of the Indenture Securities, such payment will be
held by the Trustee, in trust, and applied to the payment of the
principal of an equal principal amount of Indenture Securities at
Maturity. Pending such application, the proceeds of such payment
will be invested, at the direction of the Company, in Investment
Securities. If, at the time of any such payment of premium or
interest on Class A Bonds, there is no premium or interest then
due in respect of the Indenture Securities, such payment will be
remitted to the Company at its request. Any payment by the
Company of principal of or premium or interest on Indenture
Securities authenticated and delivered on the basis of the
delivery to the Trustee of Class A Bonds (other than by
application of the proceeds of a payment in respect of such Class
A Bonds) will, to the extent thereof, be deemed to satisfy and
discharge the obligation of the Company, if any, to make a
payment of principal, premium or interest, as the case may be, in
respect of such Class A Bonds which is then due. (See Sec. 314.)
The Trustee may not sell, assign or otherwise transfer any
Class A Bonds except to a successor trustee under the Indenture.
At the time any Indenture Securities which have been
authenticated and delivered upon the basis of Class A Bonds cease
to be outstanding (other than as a result of the application of
the proceeds of the payment or redemption of such Class A Bonds),
and upon the satisfaction of certain conditions, the Trustee will
surrender to, or upon the order of, the Company an equal
principal amount of such Class A Bonds having the same Stated
Maturity and mandatory redemption provisions as such Indenture
Securities. (See Secs. 315 and 316.)
Release of Class A Bonds
When no Class A Bonds are outstanding under a Class A
Mortgage except for Class A Bonds delivered to and held by the
Trustee, then, at the request of the Company and subject to the
satisfaction of certain conditions, the Trustee will surrender
such Class A Bonds for cancellation, the related Class A Mortgage
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will be satisfied and discharged and the lien of such Class A
Mortgage on the Company's property subject thereto will cease to
exist; provided, however, if, at the time of any such surrender
of Class A Bonds outstanding under the 1941 Mortgage, any Class A
Bonds are outstanding under the 1992 Mortgage, the Company will
deliver to the Trustee Class A Bonds outstanding under the 1992
Mortgage in the same aggregate principal amount or amounts,
bearing interest at the same rate or rates and having the same
Stated Maturity or Maturities as the Class A Bonds to be
surrendered. (See Sec. 318.)
On and after the date on which the Trustee surrenders all
Class A Bonds then held by it as contemplated in the preceding
paragraph without any new Class A Bonds being delivered in
substitution therefor (such date being sometimes herein called
the "Collateral Release Date"), the Indenture Securities will be
unsecured obligations of the Company and will rank pari passu
with all other unsecured and unsubordinated indebtedness of the
Company. However, on and after the Collateral Release Date, the
Indenture will impose limitations on the issuance or assumption
by the Company of Secured Debt. See "Limitation on Secured
Debt".
Limitation on Secured Debt
The Indenture provides that, on and after the Collateral
Release Date, the Company will not create, issue, incur or assume
any Secured Debt other than Permitted Secured Debt (as
hereinafter defined) without the consent of the Holders of a
majority in principal amount of the Outstanding Indenture
Securities of all series and Tranches, considered as one class;
provided, however, that the foregoing covenant will not prohibit
the creation, issuance, incurrence or assumption of any Secured
Debt if either (a) the Company shall make effective provision
whereby all Indenture Securities then Outstanding will be secured
equally and ratably with such Secured Debt; or (b) the Company
delivers to the Trustee bonds, notes or other evidences of
indebtedness secured by the Lien (as hereinafter defined) which
secures such Secured Debt in an aggregate principal amount equal
to the aggregate principal amount of the Indenture Securities
then Outstanding and meeting certain other requirements set forth
in the Indenture.
"Debt", with respect to any Person, means (a) indebtedness
of such Person for borrowed money evidenced by a bond, debenture,
note or other written instrument or agreement by which such
Person is obligated to repay such borrowed money and (b) any
guaranty by such Person of any such indebtedness of another
Person. "Debt" does not include, among other things, (x)
indebtedness of such Person under any installment sale or
conditional sale agreement or any other agreement relating to
indebtedness for the deferred purchase price of property or
services, (y) obligations of such Person under any lease
agreement (including any lease intended as security), whether or
not such obligations are required to be capitalized on the
balance sheet of such Person under generally accepted accounting
principles, or (z) liabilities secured by any Lien on any
property owned by such Person if and to the extent that such
Person has not assumed or otherwise become liable for the payment
thereof.
"Excepted Property" includes, among other things, cash,
deposit accounts, securities; contracts, leases and other
agreements of all kinds; contract rights, bills, notes and other
instruments; revenues, accounts and accounts receivable and
unbilled revenues, claims, demands and judgments; governmental
and other licenses, permits, franchises, consents and allowances;
certain intellectual property rights and other general
intangibles; vehicles, movable equipment and aircraft; all goods,
stock in trade, wares, merchandise and inventory held for sale or
lease in the ordinary course of business; materials, supplies,
inventory and other personal property consumable in the operation
of any property of the Company; fuel; portable tools and
equipment; furniture and furnishings; computers and data
processing, telecommunications and other facilities used
primarily for administrative or clerical purposes or otherwise
not used in connection with the operation or maintenance of
electric, gas or water utility facilities; coal, ore, gas, oil
and other minerals and timber; electric energy, gas (natural or
artificial), steam, water and other products generated, produced,
manufactured, purchased or otherwise acquired by the Company;
real property, gas wells, pipe lines, and other facilities used
primarily for the production or gathering of natural gas; all
property which is the subject of a lease agreement designating
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the Company as lessee and the Company's interest in such property
and such lease agreement, whether or not such lease agreement is
intended as security.
"Lien" means any mortgage, deed of trust, pledge, security
interest, conditional sale or other title retention agreement or
any lease in the nature thereof.
"Permitted Secured Debt" means, as of any particular time,
(a) Secured Debt which matures less than one year from the date
of the issuance or incurrence thereof and is not extendible at
the option of the issuer; and any refundings, refinancings and/or
replacements of any such Secured Debt by or with similar Secured
Debt; (b) Secured Debt secured by Purchase Money Liens or any
other Liens existing or placed upon property at the time of, or
within one hundred eighty (180) days after, the acquisition
thereof by the Company, and any refundings, refinancings and/or
replacements of any such Secured Debt; provided, however, that no
such Purchase Money Lien or other Lien shall extend to or cover
any property of the Company other than (i) the property so
acquired and improvements, extensions and additions to such
property and renewals, replacements and substitutions of or for
such property or any part or parts thereof and (ii) with respect
to Purchase Money Liens, other property subsequently acquired by
the Company; (c) Secured Debt relating to governmental
obligations the interest on which is not included in gross income
for purposes of federal income taxation pursuant to Section 103
of the Internal Revenue Code of 1986, as amended (or any
successor provision of law), for the purpose of financing or
refinancing, in whole or in part, costs of acquisition or
construction of property to be used by the Company, to the extent
that the Lien which secures such Secured Debt is required either
by applicable law or by the issuer of such governmental
obligations or is otherwise necessary in order to establish or
maintain such exclusion from gross income; and any refundings,
refinancings and/or replacements of any such Secured Debt by or
with similar Secured Debt; (d) Secured Debt (i) which is related
to the construction or acquisition of property not previously
owned by the Company or (ii) which is related to the financing of
a project involving the development or expansion of property of
the Company and (iii) in either case, the obligee in respect of
which has no recourse to the Company or any property of the
Company other than the property constructed or acquired with the
proceeds of such transaction or the project financed with the
proceeds of such transaction (or the proceeds of such property or
such project); and any refundings, refinancings and/or
replacements of any such Secured Debt by or with Secured Debt
described in clause (iii) above; (e) Secured Debt permitted as
described in the first paragraph under this heading; and (f) in
addition to the Permitted Secured Debt described in clauses (a)
through (e) above, Secured Debt not otherwise so permitted in an
aggregate principal amount not exceeding 10% of the Consolidated
Tangible Net Worth (as defined in the Indenture, which term, as
so defined, includes utility regulatory assets) of the Company
and its consolidated subsidiaries, as shown on the latest balance
sheet of the Company and its consolidated subsidiaries, audited
by independent certified public accountants, dated prior to the
date of the creation, issuance, incurrence or assumption of such
Secured Debt.
"Purchase Money Lien" means, with respect to any property
being acquired by the Company, a Lien on such property which (a)
is taken or retained by the transferor of such property to secure
all or part of the purchase price thereof; (b) is granted to one
or more Persons other than the transferor which, by making
advances or incurring an obligation, give value to enable the
grantor of such Lien to acquire rights in or the use of such
property; (c) is held by a trustee or agent for the benefit of
one or more Persons described in clause (a) or (b) above,
provided that such Lien may be held, in addition, for the benefit
of one or more other Persons which shall have theretofore given,
or may thereafter give, value to or for the benefit or account of
the grantor of such Lien for one or more other purposes; or (d)
otherwise constitutes a purchase money mortgage or a purchase
money security interest under applicable law; and, without
limiting the generality of the foregoing, for purposes of the
Indenture, the term Purchase Money Lien will be deemed to include
any Lien described above whether or not such Lien (x) shall
permit the issuance or other incurrence of additional
indebtedness secured by such Lien on such property, (y) shall
permit the subjection to such Lien of additional property and the
issuance or other incurrence of additional indebtedness on the
basis thereof and/or (z) shall have been granted prior to the
acquisition of such property, shall attach to or otherwise cover
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property other than the property being acquired and/or shall
secure obligations issued prior and/or subsequent to the issuance
of the obligations delivered in connection with such acquisition.
"Secured Debt", with respect to any Person, means Debt
created, issued, incurred or assumed by such Person which is
secured by a Lien upon any property (other than Excepted
Property) of the Company, real, personal or mixed, of whatever
kind or nature and wherever located, whether owned at the date of
the initial authentication and delivery of the Indenture
Securities or thereafter acquired.
(See Sec. 508.)
MODIFICATION OF INDENTURE
Without the consent of any Holders of Indenture Securities,
the Company and the Trustee may enter into one or more
supplemental indentures for any of the following purposes:
(a) to evidence the succession of another Person to
the Company and the assumption by any such successor of the
covenants of the Company in the Indenture and in the
Indenture Securities; or
(b) to add one or more covenants of the Company or
other provisions for the benefit of all Holders of Indenture
Securities or for the benefit of the Holders of, or to
remain in effect only so long as there shall be Outstanding,
Indenture Securities of one or more specified series, or one
or more Tranches thereof, or to surrender any right or power
conferred upon the Company by the Indenture; or
(c) to change or eliminate any provision of the
Indenture or to add any new provision to the Indenture,
provided that if such change, elimination or addition
adversely affects the interests of the Holders of the
Indenture Securities of any series or Tranche in any
material respect, such change, elimination or addition will
become effective with respect to such series or Tranche only
when no Indenture Security of such series or Tranche remains
Outstanding; or
(d) to provide additional collateral security for the
Indenture Securities; or
(e) to establish the form or terms of the Indenture
Securities of any series or Tranche as permitted by the
Indenture; or
(f) to provide for the authentication and delivery of
bearer securities and coupons appertaining thereto
representing interest, if any, thereon and for the
procedures for the registration, exchange and replacement
thereof and for the giving of notice to, and the
solicitation of the vote or consent of, the holders thereof,
and for any and all other matters incidental thereto; or
(g) to evidence and provide for the acceptance of
appointment by a successor trustee, co-trustee or separate
trustee; or
(h) to provide for the procedures required to permit
the utilization of a non-certificated system of registration
for all, or any series or Tranche of, the Indenture
Securities; or
(i) to change any place or places where (1) the
principal of and premium, if any, and interest, if any, on
all or any series of Indenture Securities, or any Tranche
thereof, will be payable, (2) all or any series of Indenture
Securities, or any Tranche thereof, may be surrendered for
registration of transfer, (3) all or any series of Indenture
Securities, or any Tranche thereof, may be surrendered for
exchange and (4) notices and demands to or upon the Company
in respect of all or any series of Indenture Securities, or
any Tranche thereof, and the Indenture may be served; or
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(j) to cure any ambiguity, to correct or supplement
any provision therein which may be defective or inconsistent
with any other provision therein, or to make any other
changes to the provisions thereof or to add other provisions
with respect to matters and questions arising under the
Indenture, so long as such other changes or additions do not
adversely affect the interests of the Holders of Indenture
Securities of any series or Tranche in any material respect.
(See Sec. 1101.)
Without limiting the generality of the foregoing, if the
Trust Indenture Act is amended after the date of the Original
Indenture in such a way as to require changes to the Indenture or
the incorporation therein of additional provisions or so as to
permit changes to, or the elimination of, provisions which, at
the date of the Original Indenture or at any time thereafter,
were required by the Trust Indenture Act to be contained in the
Indenture, the Indenture will be deemed to have been amended so
as to conform to such amendment or to effect such changes or
elimination, and the Company and the Trustee may, without the
consent of any Holders of Indenture Securities, enter into one or
more supplemental indentures to evidence or effect such
amendment.
Except as provided above, the consent of the Holders of a
majority in aggregate principal amount of the Indenture
Securities of all series then Outstanding, considered as one
class, is required for the purpose of adding any provisions to,
or changing in any manner, or eliminating any of the provisions
of, the Indenture pursuant to one or more supplemental
indentures; provided, however, that if less than all of the
series of Indenture Securities Outstanding are directly affected
by a proposed supplemental indenture, then the consent only of
the Holders of a majority in aggregate principal amount of
Outstanding Indenture Securities of all series so directly
affected, considered as one class, will be required; and
provided, further, that if the Indenture Securities of any series
have been issued in more than one Tranche and if the proposed
supplemental indenture directly affects the rights of the Holders
of one or more, but less than all, of such Tranches, then the
consent only of the Holders of a majority in aggregate principal
amount of the Outstanding Indenture Securities of all Tranches so
directly affected, considered as one class, will be required; and
provided, further, that no such supplemental indenture may
(a) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any Indenture
Security other than pursuant to the terms thereof, or reduce the
principal amount thereof or the rate of interest thereon (or the
amount of any installment of interest thereon) or change the
method of calculating such rate or reduce any premium payable
upon the redemption thereof, or reduce the amount of the
principal of any Discount Security that would be due and payable
upon a declaration of acceleration of Maturity or change the coin
or currency (or other property) in which any Indenture Security
or any premium or the interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment
on or after the Stated Maturity of any Indenture Security (or, in
the case of redemption, on or after the redemption date) without,
in any such case, the consent of the Holder of such Indenture
Security, (b) permit the creation of any Lien ranking prior to
the Lien of the Indenture with respect to any Class A Bond, or
(except in accordance with the Indenture) terminate the Lien of
the Indenture or any Class A Bond or deprive the Holders of the
benefit of the Lien of the Indenture on any Class A Bond without,
in any such case the consent of the Holders of all Indenture
Securities then Outstanding, (c) reduce the percentage in
principal amount of the Outstanding Indenture Securities of any
series, or any Tranche thereof, the consent of the Holders of
which is required for any such supplemental indenture, or the
consent of the Holders of which is required for any waiver of
compliance with any provision of the Indenture or of any default
thereunder and its consequences, or reduce the requirements for
quorum or voting, without, in any such case, the consent of the
Holder of each Outstanding Indenture Security of such series or
Tranche, or (d) modify certain of the provisions of the Indenture
relating to supplemental indentures, waivers of certain covenants
and waivers of past defaults with respect to the Indenture
Securities of any series, or any Tranche thereof, without the
consent of the Holder of each Outstanding Indenture Security of
such series or Tranche.
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A supplemental indenture which changes or eliminates any
covenant or other provision of the Indenture which has expressly
been included solely for the benefit of the Holders of, or which
is to remain in effect only so long as there shall be
Outstanding, Indenture Securities of one or more specified
series, or one or more Tranches thereof, or modifies the rights
of the Holders of Indenture Securities of such series or Tranches
with respect to such covenant or other provision, will be deemed
not to affect the rights under the Indenture of the Holders of
the Indenture Securities of any other series or Tranche.
If the supplemental indenture or other document establishing
any series or Tranche of Indenture Securities so provides the
Holders of such Indenture Securities will be deemed to have
consented, by virtue of their purchase of such Indenture
Securities, to a supplemental indenture containing the additions,
changes or eliminations to or from the Indenture which are
specified in such supplemental indenture or other document, no
Act of such Holders will be required to evidence such consent and
such consent may be counted in the determination of whether the
Holders of the requisite principal amount of Indenture Securities
have consented to such supplemental indenture. (See Sec. 1102.)
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following
described events that has occurred and is continuing constitutes
an "Event of Default":
(a) failure to pay any interest on any Indenture
Security within 60 days after the same becomes due and
payable if such failure shall occur prior to the Collateral
Release Date, or within a period of 30 days after the same
becomes due and payable if such failure shall occur on or
after the Collateral Release Date; provided, however, that
no such failure shall constitute an Event of Default if the
Company shall have made a valid extension of the interest
payment period with respect to the Indenture Securities of
the series of which such Indenture Security is a part, if so
provided with respect to such series; or
(b) failure to pay any principal or premium, if any,
on any Indenture Security when due; provided, however, that
no such failure shall constitute an Event of Default if the
Company shall have made a valid extension of the maturity of
Indenture Securities of the series of which such Indenture
Security is a part, if so provided with respect to such
series; or
(c) failure to perform, or breach of, any covenant or
warranty of the Company contained in the Indenture for 90
days after written notice to the Company from the Trustee or
to the Company and the Trustee by the Holders of at least
25% in principal amount of the Indenture Securities then
Outstanding as provided in the Indenture unless the Trustee,
or the Trustee and the Holders of a principal amount of
Indenture Securities not less than the principal amount of
Indenture Securities the Holders of which gave such notice,
as the case may be, agree in writing to an extension of such
period prior to its expiration; provided, however, that the
Trustee, or the Trustee and the Holders of such principal
amount of Indenture Securities, as the case may be, will be
deemed to have agreed to an extension of such period if
corrective action is initiated by the Company within such
period and is being diligently pursued; or
(d) default under any bond, debenture, note or other
evidence of Debt of the Company or under any mortgage,
indenture, or other instrument to secure or evidence any
Debt of the Company, which default (1) shall constitute a
failure to make any payment in excess of $5,000,000 of the
principal of, or interest on, such Debt or (2) shall have
resulted in such Debt in an amount in excess of $10,000,000
becoming or being declared due and payable prior to the date
it would otherwise have become due and payable, without such
payment having been made, such Debt having been discharged,
or such acceleration having been rescinded or annulled,
within a period of 90 days after written notice to the
Company by the Trustee or to the Company and the Trustee by
the Holders of at least 25% in principal amount of the
Indenture Securities then Outstanding, as provided in the
Indenture; it being understood, however, that no event
described in this clause (d) will constitute an "Event of
Default" prior to the Collateral Release Date; or
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(e) certain events in bankruptcy, insolvency or
reorganization of the Company.
(f) so long as the Trustee holds any Outstanding Class
A Bonds which were delivered to the Trustee as the basis for
the authentication and delivery of Indenture Securities
which remain outstanding, the occurrence of a matured event
of default under the Class A Mortgage under which such Class
A Bonds were delivered (other than any such matured event of
default which is of similar kind or character to the Event
of Default described in (c) above and which has not resulted
in the acceleration of the Class A Bonds Outstanding under
such Class A Mortgage); provided that the waiver or cure of
any such event of default and the rescission and annulment
of the consequences thereof shall constitute a cure of the
corresponding Event of Default under the Indenture and a
rescission and annulment of the consequences thereof. (See
Sec. 701.)
REMEDIES
If an Event of Default occurs and is continuing, then either
the Trustee or the Holders of not less than 33% in aggregate
principal amount of the Indenture Securities then Outstanding may
declare the principal amount (or if any of the Indenture
Securities are Discount Securities, such portion of the principal
amount thereof as may be specified in the terms thereof) of all
of such Indenture Securities, together with premium, if any, and
accrued interest, if any, thereon, to be due and payable
immediately by written notice to the Company (and to the Trustee
if given by the Holders of Indenture Securities).
At any time after such a declaration of acceleration of the
Maturity of the Indenture Securities then Outstanding, but before
a judgment or decree for payment of the money due has been
obtained, such declaration and its consequences will, without
further act, be deemed to have been rescinded and annulled, if
(a) the Company has paid or deposited with the Trustee
a sum sufficient to pay
(1) all overdue interest, if any, on all
Indenture Securities then Outstanding;
(2) the principal of and premium, if any, on any
Indenture Securities then Outstanding which have
become due otherwise than by such declaration of
acceleration and interest, if any, thereon at the
rate or rates prescribed therefor in such
Indenture Securities;
(3) interest, if any, upon overdue interest, if
any, at the rate or rates prescribed therefor in
such Indenture Securities, to the extent that
payment of such interest is lawful; and
(4) all amounts due to the Trustee under the
Indenture; and
(b) all Events of Default with respect to Indenture
Securities of such series, other than the non-payment of the
principal of the Indenture Securities of such series which
has become due solely by such declaration of acceleration,
have been cured or waived as provided in the Indenture.
(See Sec. 702.)
If an Event of Default occurs and is continuing, the Holders
of a majority in principal amount of the Outstanding Indenture
Securities will have the right to direct the time, method and
place of conducting any proceedings for any remedy available to
the Trustee or exercising any trust or power conferred on the
Trustee; provided, however, that (a) such direction does not
conflict with any rule of law or with the Indenture, and could
not involve the Trustee in personal liability in circumstances
where indemnity would not, in the Trustee's sole discretion, be
adequate and (b) the Trustee may take any other action deemed
proper by the Trustee which is not inconsistent with such
direction. (See Sec. 712.)
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The Indenture provides that no Holder of any Indenture
Security will have any right to institute any proceeding,
judicial or otherwise, with respect to the Indenture or for the
appointment of a receiver or for any other remedy thereunder
unless (a) such Holder has previously given to the Trustee
written notice of a continuing Event of Default; (b) the Holders
of a majority in aggregate principal amount of the Outstanding
Indenture Securities have made written request to the Trustee to
institute proceedings in respect of such Event of Default and
have offered the Trustee reasonable indemnity against costs and
liabilities to be incurred in complying with such request; and
(c) for 60 days after receipt of such notice, the Trustee has
failed to institute any such proceeding and no direction
inconsistent with such request has been given to the Trustee
during such 60 day period by the Holders of a majority in
aggregate principal amount of Indenture Securities then
Outstanding. Furthermore, no Holder of any Indenture Securities
will be entitled to institute any such action if and to the
extent that such action would disturb or prejudice the rights of
any other Holders of Indenture Securities. Notwithstanding that
the right of a Holder to institute a proceeding with respect to
the Indenture is subject to certain conditions precedent, each
Holder of an Indenture Security will have the right, which is
absolute and unconditional, to receive payment of the principal
of and premium, if any, and interest, if any, on such Indenture
Security when due and to institute suit for the enforcement of
any such payment, and such rights may not be impaired or affected
without the consent of such Holder. The Indenture provides that
the Trustee give the Holders notice of any default under the
Indenture to the extent required by the Trust Indenture Act,
unless such default shall have been cured or waived, except that
no such notice to Holders of a default of the character described
in clause (c) under " Events of Default" may be given until at
least 75 days after the occurrence thereof. For purposes of the
preceding sentence, the term "default" means any event which is,
or after notice or lapse of time, or both, would become, an Event
of Default. The Trust Indenture Act currently permits the
Trustee to withhold notices of default (except for certain
payment defaults) if the Trustee in,good faith determines the
withholding of such notice to be in the interests of the Holders.
(See Secs. 707, 708 and 802.).
In addition to every other right and remedy provided in the
Indenture, the Trustee may exercise any right or remedy available
to the Trustee in its capacity as owner and holder of Class A
Bonds which arises as a result of a default or matured event of
default under Class A Mortgage, whether or not an Event of
Default under the Indenture has occurred and is continuing. (See
Sec. 716.)
The Company is required to file annually with the Trustee a
certificate as to whether or not the Company is in compliance
with all the conditions and covenants applicable to it under the
Indenture.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not
consolidate with or merge into any other Person, or convey or
otherwise transfer, or lease, all of its properties, as or
substantially as an entirety, to any Person, unless the Person
formed by such consolidation or into which the Company is merged
or the Person which acquires by conveyance or other transfer, or
which leases (for a term extending beyond the last Stated
Maturity of the Indenture Securities then Outstanding), all of
the properties of the Company, as or substantially as an
entirety, shall be a Person organized and existing under the laws
of the United States, any State or Territory thereof or the
District of Columbia or under the laws of Canada or any Province
thereof and shall expressly assume the due and punctual payment
of the principal of and premium, if any, and interest, if any, on
all the Indenture Securities then Outstanding and the performance
and observance of every covenant and condition of the Indenture
to be performed or observed by the Company. In the case of the
conveyance or other transfer, or lease, of all of the properties
of the Company, as or substantially as an entirety, to any Person
as contemplated above, the Company would be released and
discharged from all obligations under the Indenture and on all
Indenture Securities then Outstanding unless the Company elects
to waive such release and discharge. Upon any such consolidation
or merger or any such conveyance, transfer or lease of properties
of the Company, the successor, transferee or lessee shall succeed
to, and be substituted for, and may exercise every power and
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right of, the Company under the Indenture. For purposes of the
Indenture, the conveyance, other transfer, or lease by the
Company of all of its facilities (a) for the generation of
electric energy, (b) for the transmission of electric energy or
(c) for the distribution of electric energy, in each case
considered alone, or all of its facilities described in clauses
(a) and (b), considered together, or all of its facilities
described in clauses (b) and (c), considered together, shall in
no event be deemed to constitute a conveyance or other transfer
of all the properties of the Company, as or substantially as an
entirety, unless, immediately following such conveyance, transfer
or lease, the Company shall own no unleased properties in the
other such categories of property not so conveyed or otherwise
transferred or leased. (See Sec. 1001.)
If, at any time after the Collateral Release Date, the
Company shall convey or otherwise transfer any part of its
properties which does not constitute the entirety, or
substantially the entirety, thereof to another Person meeting the
requirements set forth in the preceding paragraph, and if
(a) such transferee shall expressly assume the due and punctual
payment of the principal of and premium, if any, and interest, if
any, on all Indenture Securities then Outstanding and the
performance and observance of every covenant and condition of the
Indenture to be performed or observed by the Company, and
(b) there shall be delivered to the Trustee an independent
expert's certificate (i) describing the property so conveyed or
transferred and identifying the same as facilities for the
generation, transmission or distribution of electric energy and
(ii) stating that the aggregate principal amount of the Indenture
Securities then Outstanding does not exceed 70% of the fair value
of such property, then the Company shall be released and
discharged from all obligations and covenants under the Indenture
and on all Indenture Securities then Outstanding unless the
Company elects to waive such release and discharge. In such
event, the transferee shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the
Indenture. (See Sec. 1005.)
SATISFACTION AND DISCHARGE
Any Indenture Securities, or any portion of the principal
amount thereof, will be deemed to have been paid for purposes of
the Indenture and, at the Company's election, the entire
indebtedness of the Company in respect thereof will be deemed to
have been satisfied and discharged, if there shall have been
irrevocably deposited with the Trustee or any Paying Agent (other
than the Company), in trust: (a) money in an amount which will be
sufficient, or (b) in the case of a deposit made prior to the
maturity of such Indenture Securities, Eligible Obligations,
which do not contain provisions permitting the redemption or
other prepayment thereof at the option of the issuer thereof, the
principal of and the interest on which when due, without any
regard to reinvestment thereof, will provide moneys which,
together with the money, if any, deposited with or held by the
Trustee or such Paying Agent, will be sufficient, or (c) a
combination of (a) and (b) which will be sufficient, to pay when
due the principal of and premium, if any, and interest, if any,
due and to become due on such Indenture Securities. For this
purpose, Eligible Obligations include direct obligations of, or
obligations unconditionally guaranteed by, the United States
entitled to the benefit of the full faith and credit thereof and
certificates, depositary receipts or other instruments which
evidence a direct ownership interest in such obligations or in
any specific interest or principal payments due in respect
thereof and such other obligations or instruments as shall be
specified with respect to the Indenture Securities of any
particular series. (See Sec. 601.)
The Indenture will be deemed to have been satisfied and
discharged when no Indenture Securities remain Outstanding
thereunder and the Company has paid or caused to be paid all
other sums payable by the Company under the Indenture. (See Sec.
602.)
INFORMATION CONCERNING THE TRUSTEE
The Trustee will have, and will be subject to, all the
duties and responsibilities specified with respect to an
indenture trustee under the Trust Indenture Act. Subject to such
provisions, the Trustee will be under no obligation to exercise
any of the powers vested in it by the Indenture at the request of
any Holder of Indenture Securities, unless offered reasonable
indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby. The Trustee will
not be required to expend or risk its own funds or otherwise
incur personal financial liability in the performance of its
duties if the Trustee reasonably believes that repayment or
adequate indemnity is not reasonably assured to it. (See Secs.
801 and 803.)
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The Trustee may resign at any time by giving written notice
thereof to the Company or may be removed at any time by Act of
the Holders of a majority in principal amount of the Indenture
Securities then outstanding delivered to the Trustee and the
Company. No resignation or removal of the Trustee and no
appointment of a successor trustee will become effective until
the acceptance of appointment by a successor trustee in
accordance with the requirements of the Indenture. So long as no
Event of Default or event which, after notice or lapse of time,
or both, would become an Event of Default has occurred and is
continuing, if the Company has delivered to the Trustee an
instrument appointing a successor trustee and such successor has
accepted such appointment in accordance with the terms of the
Indenture, the Trustee will be deemed to have resigned and the
successor will be deemed to have been appointed as trustee in
accordance with the Indenture. (See Sec. 810.)
EVIDENCE TO BE FURNISHED TO THE TRUSTEE
Compliance with the Indenture provisions is evidenced by
written statements of Company officers or persons selected or
paid by the Company. In certain cases, opinions of counsel and
certifications of an engineer, appraiser or other expert (who in
some cases must be independent) must be furnished. In addition,
the Indenture requires that the Company give the Trustee, not
less than annually, a brief statement as to the Company's
compliance with the conditions and covenants under the Indenture.
(See Sec. 507.)
GOVERNING LAW
The Indenture and the Indenture Securities will be governed
by and construed in accordance with the laws of the State of New
York, except to the extent that the Trust Indenture Act shall be
applicable. (See Sec. 112.)
DESCRIPTION OF THE 1941 MORTGAGE
GENERAL
Class A Bonds may be issued under the Indenture, dated as of
April 1, 1941 (the "Original 1941 Mortgage"), between the Company
and The Chase Manhattan Bank, as trustee (the "1941 Mortgage
Trustee"), the Original 1941 Mortgage, as amended and
supplemented from time to time, being hereinafter referred to as
the "1941 Mortgage". The terms of such Class A Bonds will
include those stated therein and in the 1941 Mortgage and those
made part of the 1941 Mortgage by the Trust Indenture Act. The
following summary of certain terms of the 1941 Mortgage does not
purport to be complete and is subject in all respects to the
provisions of, and is qualified in its entirety by reference to,
the 1941 Mortgage, and the Trust Indenture Act. Capitalized
terms used under this heading which are not otherwise defined in
this Prospectus have the meanings ascribed thereto in the 1941
Mortgage. Whenever particular provisions or defined terms in the
1941 Mortgage are referred to herein, such provisions or defined
terms are incorporated by reference herein.
The 1941 Mortgage provides for the issuance thereunder of
multiple series of bonds, as discussed below under "Issuance of
Additional 1941 Mortgage Bonds". All bonds issued under the 1941
Mortgage are collectively referred to herein as the "1941
Mortgage Bonds".
At the date of this Prospectus, approximately $305 million
in aggregate principal amount of 1941 Mortgage Bonds are
Outstanding. The Company's Credit Agreement, referred to under
DESCRIPTION OF THE 1992 MORTGAGE "General", limits the aggregate
principal amount of 1941 Mortgage Bonds which may be Outstanding
under the 1941 Mortgage at any time to approximately $411
million.
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SECURITY
General
The 1941 Mortgage constitutes a lien on substantially all
the real property and tangible personal property of the Company,
other than property excepted from the lien thereof and such
property as may have been released from the lien thereof in
accordance with the terms thereof, subject to no liens prior to
the lien of the 1941 Mortgage other than Permitted Encumbrances
and certain other liens permitted to exist.
The 1941 Mortgage provides that after-acquired property
(other than excepted property) will be subject to the lien of the
1941 Mortgage except as otherwise set forth under "Consolidation,
Merger, Etc." In addition, after-acquired property may be
subject to liens existing or placed thereon at the time of
acquisition thereof, including, but not limited to, purchase
money liens and, in certain circumstances, to liens attaching to
such property prior to the recording and/or filing of an
instrument specifically subjecting such property to the lien of
the 1941 Mortgage.
Excepted Property
There are excepted from the lien of the 1941 Mortgage, among
other things (a) bills, notes and accounts receivable, cash,
choses in action, operating agreements and leases in which the
Company is the lessor; (b) shares of stock, bonds and other
securities (except those specifically subjected to such lien or
required to be pledged); (c) goods and merchandise acquired for
the purpose of sale in the ordinary course of business; and fuel,
materials, supplies and other personal property which are
consumable in their use in the operation of, or are not in use in
connection with or connected as fixtures to, the plants and
systems of the Company; (d) the Company's franchise to be a
corporation; and (e) other property excepted as described under
"Consolidation, Merger, Etc." (See Granting Clauses.)
Properties held by subsidiaries of the Company, as well as
properties leased from other Persons, are not subject to the lien
of the 1941 Mortgage.
Permitted Encumbrances
For purposes of the 1941 Mortgage, Permitted Encumbrances
and such other liens include, without limitation (a) liens for
taxes or governmental charges which are not delinquent; (b) liens
for taxes or governmental charges which are being contested in
good faith and by appropriate proceedings; (c) liens, securing
obligations neither assumed nor paid by the Company, on real
estate acquired for transmission or distribution purposes; (d)
easements or reservations in property of the Company for roads,
railroads, telephone lines, pipelines, gas transportation lines,
transmission lines and other like purposes, water rights,
building and use restrictions, and defects in title to, and
leases of, minor parts or the trust estate which do not in the
opinion of counsel materially impair the use of the affected
property in the Utility Business; (e) undetermined liens and
charges incidental to current construction or current operation;
(f) duties or contractual obligations to any municipality or
public authority; (g) defects in title to rights-of-way for
transmission or distribution lines which, in the opinion of
counsel, do not materially impair the operation of the Utility
Business; or may be remedied without undue burden or expense; (h)
rights reserved to or vested in any municipality or public
authority to terminate any right, power, franchise, grant,
license, or permit, or to purchase or recapture or designate a
purchaser of any property of the Company; (i) leases existing at
April 1, 1941 and renewals thereof; and (j) rights granted or
created or burdens assumed by the Company under joint use and
similar agreements or under any law or governmental regulation or
permit relating to the Company's occupancy of or interference
with public lands, rivers, streams, navigable waters, bridges or
highways.(See Art. I, Sec. 3.)
Trustee's Lien
The 1941 Mortgage provides that the 1941 Mortgage Trustee
will have a lien, prior to the lien on behalf of the holders of
1941 Mortgage Bonds, upon the Mortgaged Property for the payment
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of its reasonable compensation and expenses and for indemnity
against certain liabilities. (See Art. XII, Sec. 8.).
ISSUANCE OF ADDITIONAL 1941 MORTGAGE BONDS
General
The aggregate principal amount of 1941 Mortgage Bonds which
may be authenticated and delivered under the 1941 Mortgage is
effectively unlimited. 1941 Mortgage Bonds of any series may be
issued from time to time on the basis of, and in an aggregate
principal amount not exceeding:
(a) 60% of the Cost or fair value to the Company
(whichever is less) of Net Property Additions (as described
below) which do not constitute Funded Property;
(b) the aggregate principal amount of Retired Bonds;
and
(c) an amount of cash deposited with the 1941 Mortgage
Trustee.
(See Art. III.)
Property Additions generally include any property which is
properly chargeable to the utility plant accounts of the Company
and is used or useful or to be used in the Utility Business. Net
Property Additions means, generally, Property Additions (not
theretofore funded by use as the basis for the authentication and
delivery of 1941 Mortgage Bonds, the withdrawal of cash or the
release of Funded Property) after deducting the amount of
Property Retirements not previously deducted (net of cash,
obligations and other property delivered to the 1941 Mortgage
Trustee in connection with such Property Retirements). (See Art.
I, Sec. 4.)
Retired Bonds means 1941 Mortgage Bonds which have been
retired (but not by use of certain cash proceeds including
proceeds of the release of or insurance on Funded Property) and
have not theretofore been used for any purpose under the 1941
Mortgage.
Net Earnings Test
In general, the issuance of 1941 Mortgage Bonds is subject
to the delivery to the 1941 Mortgage Trustee of a Net Earnings
Certificate showing net earnings of the Company for 12
consecutive months within the preceding 15 months to be at least
two times the annual interest requirements on all 1941 Mortgage
Bonds at the time Outstanding (except any to be retired in
connection with the new issue), new 1941 Mortgage Bonds then
applied for and all other indebtedness (with certain exceptions)
secured by a lien prior to the lien of the 1941 Mortgage. Net
earnings are calculated before, among other things, provisions
for income taxes. The calculation of net earnings also does not
take into account profits or losses from the sale or disposal of
capital assets or securities, and, for purposes of the Net
Earnings Certificate, not more than 15% of net earnings may
consist of net nonoperating income and/or net operating revenue
from sources other than the Utility Business. (See Art. I,
Sec. 5 and Art. III, Sec. 5.)
The Company is not required to deliver a Net Earnings
Certificate prior to issuance of 1941 Mortgage Bonds on the basis
of Retired Bonds unless (a)(i) the new 1941 Mortgage 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 1941 Mortgage Bonds bear a greater rate of interest than
such Retired Bonds or (b) the new 1941 Mortgage Bonds are issued
in respect of Retired Bonds the interest charges on which have
been excluded from any Net Earnings Certificate filed with the
1941 Mortgage Trustee since the retirement of such 1941 Mortgage
Bonds.
1941 Mortgage Bonds Issuable
As of August 31, 1998, there was no material amount of Net
Property Additions available to be used as the basis for the
authentication and delivery of 1941 Mortgage Bonds; and as of
September 3, 1998, the amount of Retired Bonds was $445 million.
Such Retired Bonds would permit, and the net earnings test would
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not prohibit, the authentication and delivery of $445 million in
aggregate principal amount of 1941 Mortgage Bonds at an assumed
interest rate of 7.5% per annum.
Net Property Additions and Retired Bonds may also be made
the basis of the withdrawal of cash deposited in connection with
the release of property from the lien of the 1941 Mortgage, as
discussed in "Withdrawal of Cash".
RELEASE OF PROPERTY
Unless a Default has happened and is continuing, the Company
may obtain the release from the lien of the 1941 Mortgage of any
property (except for cash, obligations or other personal property
held by the 1941 Mortgage Trustee) upon delivery to the 1941
Mortgage Trustee of, among other things, cash and purchase money
obligations having an aggregate fair value at least equal to the
fair value of the property to be released; provided, however,
that the aggregate principal amount of such purchase money
obligations will not exceed 66 2/3% of the fair value of such
property; and provided, further, that the aggregate principal
amount of purchase money obligations and governmental obligations
delivered in connection with a taking of Company property by
eminent domain at any one time held as part of the Trust Estate,
shall not exceed 15% of the aggregate principal amount of 1941
Mortgage Bonds then Outstanding. (See Art. VII, Sec. 3.)
The 1941 Mortgage provides simplified procedures for the
release of minor properties and property taken by eminent domain,
and provides for dispositions of certain obsolete property and
grants or surrender of certain rights without any release or
consent by the 1941 Mortgage Trustee.
WITHDRAWAL OF CASH
Unless a Default has happened and has not been remedied, all
or any part of the moneys received by the 1941 Mortgage Trustee
in consideration of any release, including payments on account of
purchase money obligations or governmental obligations so
received, at the election of the Company, shall
(a) be withdrawn from time to time by the Company (i)
in an amount equal to 166 2/3% of the principal amount of
1941 Mortgage Bonds to the authentication and delivery of
which the Company is entitled on the basis of Net Property
Additions and/or (ii) in an amount equal to the principal
amount of 1941 Mortgage Bonds to the authentication and
delivery of which the Company is entitled on the basis of
Retired Bonds; or
(b) be applied by the 1941 Mortgage Trustee to the
purchase or redemption of 1941 Mortgage Bonds, as directed
by the Company, but subject to the deposit by the Company of
certain additional moneys to pay premium and accrued
interest. (See Art. VII, Secs. 9 and 10.)
See "Issuance of Additional 1941 Mortgage Bonds 1941
Mortgage Bonds Issuable" for information regarding available Net
Property Additions and Retired Bonds.
CONSOLIDATION, MERGER, ETC.
Nothing in the 1941 Mortgage prevents any consolidation or
merger of the Company or of any successor company with or into
which it has been lawfully consolidated or merged, with or into
any corporation, or any conveyance, transfer or lease, subject to
the 1941 Mortgage, of the Mortgaged Property as an entirety or
substantially as an entirety to any corporation lawfully entitled
to acquire or lease and operate the same; provided, however, that
any such lease shall be made expressly subject to immediate
termination by the Company or by the 1941 Mortgage Trustee at any
time during the continuance of a Default, and also by the
purchaser of the property so leased at any sale thereof under the
1941 Mortgage; and provided, further, that upon any such
consolidation, merger, conveyance or transfer, or upon any such
lease the term of which extends beyond the date of maturity of
any of the 1941 Mortgage Bonds then Outstanding, the payment of
the principal, premium, if any, and interest, if any, on all of
the 1941 Mortgage Bonds then Outstanding, and the performance of
all the covenants in the 1941 Mortgage shall be assumed by the
corporation formed by such consolidation or into which such
merger shall have been made, or by the lessee under any such
lease the term of which extends beyond the date of maturity of
any of the 1941 Mortgage Bonds. (See Art. XI, Sec. 1.)
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In case the Company is so consolidated with or merged into
any other corporation, or shall so convey or transfer, subject to
the 1941 Mortgage, the Mortgaged Property as aforesaid, the 1941
Mortgage will not (unless the successor corporation elects
otherwise) become and be a lien upon any of the properties and
franchises of the successor corporation owned or acquired at the
time of such merger, consolidation, conveyance or transfer, or
thereafter, except those acquired by it from the Company and
except, among other things (a) betterments, extensions,
improvements, additions, repairs, renewals, replacements,
substitutions and alterations to, upon, for and of the Mortgaged
Property, (b) property acquired or constructed with the proceeds
of any insurance on any part of the Mortgaged Property or with
the proceeds of any part of the Mortgaged Property released from
the lien of the 1941 Mortgage or taken by the exercise of the
power of eminent domain, and (c) property acquired to maintain
and preserve and keep the Mortgaged Property in good condition,
repair and working order. (See Art. XI, Sec. 3.)
MODIFICATION OF 1941 MORTGAGE
Without the consent of any holders of 1941 Mortgage Bonds,
the Company and the 1941 Mortgage Trustee may enter into one or
more supplemental indentures for any of the following purposes:
(a) to correct the description of any property
mortgaged or pledged or to subject to the lien of the 1941
Mortgage, additional property then owned by the Company;
(b) to add to the limitations specified in the 1941
Mortgage on the authorized amount, issue and purposes of
issue of the 1941 Mortgage Bonds, or of any series thereof,
other limitations thereafter to be observed;
(c) to provide for creation of any series of 1941
Mortgage Bonds specifying the form and provisions thereof;
(d) to provide for the creation of a sinking
amortization, improvement, renewal or other fund for the
benefit of all or any of the 1941 Mortgage Bonds of any one
or more series specifying the terms and conditions thereof;
(e) to vary the basic redemption provisions contained
in the Original 1941 Mortgage, or to fix new provisions, in
respect of the redemption of 1941 Mortgage Bonds of any
series;
(f) to evidence the succession of another corporation
to the Company or successive successions, and assumption by
a successor corporation of the covenants and obligations of
the Company under the 1941 Mortgage;
(g) to provide for the issue under the 1941 Mortgage,
of particular series of 1941 Mortgage Bonds convertible, at
the option of the holders thereof, into other obligations or
into capital stock of any class of the Company, specifying
the terms and conditions of such conversion;
(h) to add further covenants for the protection of the
mortgaged premises and of the holders of 1941 Mortgage
Bonds, and to make the occurrence and continuance of a
default in any of such additional covenants an event of
default permitting the enforcement of all or any of the
several remedies provided in the 1941 Mortgage.
(i) to cure any ambiguity, or correct or supplement
any inconsistent or defective provision contained in the
1941 Mortgage;
(j) to make such provision in regard to matters or
questions arising under the 1941 Mortgage or to add to the
1941 Mortgage such other provisions as may be necessary of
desirable and not inconsistent with the 1941 Mortgage;
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(k) to give effect to action taken by bondholders at a
meeting or by consent; and
(l) to alter, amend or add to any and all the
provisions of the 1941 Mortgage in any particular whatsoever
as shall be required to qualify the 1941 Mortgage and any
supplemental indenture under the Trust Indenture Act.
(See Art. XIII, Sec. 1)
Except as provided above, any change or alteration of the
1941 Mortgage requires the consent of the holders of not less
than 75% in principal amount of the 1941 Mortgage Bonds then
Outstanding and of not less than 75% in principal amount of the
Outstanding 1941 Mortgage Bonds of any one or more series which
may be affected by any such modification differently from other
series; except that the bondholders, without the consent of the
holder of each 1941 Mortgage Bond affected, have no power to (a)
extend the maturity of any 1941 Mortgage Bonds, (b) reduce the
premium, if any, or the rate of interest thereon or otherwise
modify the terms of payment of principal, premium or interest,
(c) permit the creation of any lien ranking prior or on a parity
with the lien of the 1941 Mortgage with respect to any of the
Mortgaged Property, (d) deprive any nonassenting bondholder of a
lien upon the Mortgaged Property for the security of his 1941
Mortgage Bonds, or (e) reduce the percentage of bondholders
authorized to take such action. The Company has reserved the
right to amend the 1941 Mortgage, without any consent or other
action by holders of the 1941 Mortgage Bonds of any series
created after July 31, 1976 to reduce the required consent of
bondholders as described above from 75% to 60%.
(See Art XIV, Sec. 6.)
The Trustee, as holder of the Class A Bonds delivered to it
under the Indenture, and possibly the holders of additional 1941
Mortgage Bonds issued subsequent to the date of this Prospectus,
will be deemed to have consented to the execution and delivery of
a supplemental indenture containing one or more, or all, of the
amendments to the 1941 Mortgage described below:
(a) to expand the definition of property additions to
eliminate geographical restrictions to certain states and
allow the inclusion of properties located anywhere in the
United States and in Canada and Mexico, or their coastal
waters; to include space satellites and stations, solar
power satellites and other analogous facilities; and to
delete the requirement that property additions have been
acquired or constructed within five years;
(b) to remove the requirement that certificates
delivered to the 1941 Mortgage Trustee be verified;
(c) to eliminate the dividend and redemption
restriction;
(d) (i) to eliminate the provisions for the
replacement reserve; or, in the alternative
(ii) to change the amount required to be credited
to replacement reserve to an amount not less than
10% of the Company's gross operating revenues from
the Utility Business (remaining after deducting
the cost to the Company of fuel used in the
Utility Business and of electricity purchased for
resale or exchange) less the amounts expended for
maintenance of the property of the Company
pertaining to the Utility Business; or, in the
alternative
(iii) to change the amount required to be
credited to replacement reserve to an amount not
less than the lower of (A) (i) 2% of the cost of
the depreciable property of the Company subject to
the lien of the 1941 Mortgage less (ii) the
amounts expended for maintenance of the property
of the Company pertaining to the Utility Business
or (B) 10% of the Company's gross operating
revenues from the Utility Business (remaining
after deducting the cost to the Company of fuel
used in the Utility Business and of electricity
purchased for resale or exchange) less the amounts
expended for maintenance of the property of the
Company pertaining to the Utility Business;
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(e) to change the opinion of counsel required to be
delivered upon the certification of property additions to
delete the requirement that the Company have all necessary
permission from governmental authorities to use and operate
such property additions;
(f) to specifically allow the inclusion of earnings
collected subject to refund in net earnings for purposes of
the interest coverage requirement for the issuance of 1941
Mortgage Bonds;
(g) to specifically permit the debt component, in
addition to the equity component, of the allowance for funds
used during construction to be included in net earnings for
purposes of the interest coverage requirement for the
issuance of 1941 Mortgage Bonds;
(h) to increase the maximum percentage of net non-
operating income in relation to total net earnings, in the
application of the interest coverage test, from 15% to 25%;
(i) to change the interest coverage requirement for
the issuance of 1941 Mortgage Bonds to a requirement that
net earnings be at least equal to the lower of (A) 2 (or any
higher amount) times interest charges on, or (B) 15% (or any
higher percentage) of the principal amount of, Outstanding
1941 Mortgage Bonds, including the 1941 Mortgage Bonds
applied for, and prior lien indebtedness;
(j) to raise the minimum dollar amount of fire and
other losses that must be payable to the 1941 Mortgage
Trustee from $10,000 to 5% (or any lower percentage) of the
principal amount of Outstanding 1941 Mortgage Bonds; and to
specifically permit the Company to carry insurance policies
with deductible provisions equal to 5% (or any lower
percentage) of the principal amount of Outstanding 1941
Mortgage Bonds or any higher deductible amount usually
contained in the policies of other companies owning and
operating similar properties;
(k) to modify the special release provision of the
1941 Mortgage to increase the amount of the fair value of
property which may be released from the lien of the 1941
Mortgage without compliance with all the conditions of the
general release provision from $15,000 to the greater of
$25,000 or 1% of the aggregate principal amount of
Outstanding 1941 Mortgage Bonds and to eliminate the
requirement that a certified resolution of the Board of
Directors of the Company be delivered to the 1941 Mortgage
Trustee in connection with a release of property under such
provision;
(l) to qualify the covenant of the Company to "observe
and conform to all valid requirements of any governmental
authority relative to any of the mortgaged property" so as
not to require such observance and conformance so long as
the Company is doing all things technologically and
economically feasible toward such observance and compliance;
(m) to modify the general release provision to allow
property, the ownership of which (rather than the use of
which) by the Company is no longer desirable in the
judicious management and maintenance of the mortgaged
property or in the conduct of the business of the Company,
to be released from the lien of the 1941 Mortgage;
(n) to add a definition of the term "fair value",
providing, among other things, that "fair value" with
respect to any property will be determined by reference to
(i) the amount which would be likely to be obtained in an
arm's length transaction with respect to such property
between an informed and willing buyer and an informed and
willing seller, under no compulsion, respectively, to buy or
sell, (ii) the amount of investment with respect to such
property which, together with a reasonable return thereon,
would be likely to be recovered through ordinary business
operations or otherwise, (iii) the cost, accumulated
depreciation and replacement cost with respect to such
property and (iv) any other relevant factors;
(o) to add a definition of the term "purchase money
mortgage" to mean, generally, a lien on the property being
acquired or disposed of by the Company or being released
from the lien of the 1941 Mortgage which is retained by the
transferor of such property or granted to one or more
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persons in connection with the transfer or release thereof,
or granted to or held by a trustee or agent for any such
persons, and which would include, among other things, liens
which (i) permit the incurrence of indebtedness secured
thereby in addition to indebtedness incurred in connection
with the transfer of specific property, (ii) permit the
subjection of other property to the lien thereof and/or
(iii) were granted prior to any particular transfer of
property, which cover other property and/or which secure
other obligations issued prior or subsequent to the
obligations delivered in connection with any particular
acquisition, disposition or release of property; and to add
a definition of the term "purchase money obligation" to mean
an obligation secured by a purchase money mortgage;
(p) to modify the provision described in clause
(a)(ii) in the first paragraph under "Withdrawal of Cash" to
refer to 166 2/3% of the principal amount of 1941 Mortgage
Bonds in lieu of the principal amount thereof;
(q) to modify the provisions described in the second
proviso to the first paragraph under "Release of Property"
(i) to delete such provisions or to provide that the same
may be disregarded upon specified conditions; or (ii) to
delete from such provisions the limitation of 15%; or (iii)
to change such percentage to any higher percentage not
exceeding 100%; and/or
(r) to eliminate any requirement to deliver a Net
Earnings Certificate in connection with the authentication
and delivery of 1941 Mortgage Bonds on the basis of Retired
Bonds.
(See Art. IV, Sec.3 of Thirty-Fourth Supplemental
Indenture.)
The prospective amendments described in clauses (o), (p) and
(q) in the preceding paragraph, if adopted, would have the
effect, among other things, of facilitating transactions which
would result in a disaggregation of the generation, transmission
and/or distribution segments of the Company's business, including
transfers to other entities whether or not affiliated with the
Company. See RISK FACTORS "Retail Competition" for information
regarding the possible divestiture by the Company of its
generation assets.
DEFAULTS
The following events are defined for all purposes of the
1941 Mortgage as "Defaults":
(a) failure to pay the interest on any 1941 Mortgage
Bond, or to make any sinking fund payment required hereunder
in respect of 1941 Mortgage Bonds of any series, for a
period of 60 days after such interest or sinking fund
payment, as the case may be, shall have become due and
payable; or
(b) failure to pay the principal of or premium, if
any, on any 1941 Mortgage Bond when and as the same shall
become due and payable, whether at stated maturity, upon
redemption or otherwise; or
(c) failure to perform or observe any other covenant
or condition required to be performed or observed by the
Company (except in respect of the refund or reimbursement of
taxes, assessments or other governmental charges, for which
the holders of 1941 Mortgage Bonds may look only to the
Company), for a period of 90 days after written notice
thereof shall have been given to the Company by the 1941
Mortgage Trustee or to the Company and the 1941 Mortgage
Trustee by the holders of at least 10% in principal amount
of the 1941 Mortgage Bonds at the time Outstanding; or
(d) certain events relating to the bankruptcy,
insolvency or reorganization of the Company or the
appointment of a receiver or trustee for its property; or
(e) so long as the Trustee under the Indenture holds
any 1941 Mortgage Bonds as Class A Bonds under the
Indenture, an "Event of Default" under the Indenture;
provided, however, that the waiver or cure of such "Event of
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Default" under the Indenture will constitute a cure of the
corresponding Default under the 1941 Mortgage and a
rescission and annulment of the consequences thereof.
(See Art. VIII, Sec. 1 of Original 1941 Mortgage, and Art. IV,
Sec. 1 of Thirty-Fourth Supplemental Indenture).
REMEDIES
Upon the occurrence of a Default under the 1941 Mortgage,
the 1941 Mortgage Trustee may, and upon the written request of
the holders of a majority in aggregate principal amount of the
1941 Mortgage Bonds then Outstanding shall, by notice in writing
given to the Company, declare the principal of all 1941 Mortgage
Bonds then Outstanding and the interest accrued thereon, if any,
immediately due and payable. If, at any time after such
declaration, and prior to the stated maturity of the latest
maturing 1941 Mortgage Bonds then Outstanding, and before any
judgment or decree for the payment of the moneys due shall have
been entered, all arrears of interest upon all 1941 Mortgage
Bonds then Outstanding, with interest (if and to the extent
permitted by law) on the overdue installments of interest at the
respective rates borne by such 1941 Mortgage Bonds, and the
reasonable expenses of the 1941 Mortgage Trustee and all other
sums payable under the 1941 Mortgage (except the principal of
1941 Mortgage Bonds so declared to be due and payable, unless
such 1941 Mortgage Bonds shall in the meantime have matured by
their terms, and except interest accrued thereon since the last
preceding interest payment date) shall have been duly paid, and
all other Defaults, if any, have been cured or adequate
arrangements have been made therefor, then in every such case the
holders of at least a majority in aggregate principal amount of
the 1941 Mortgage Bonds then Outstanding may waive the Default by
reason of which the principal of the 1941 Mortgage Bonds shall
have so become due and payable, and may rescind and annul such
declaration and its consequences, but no such waiver or
rescission or annulment shall extend to or affect any subsequent
or other then existing Default or impair any right or remedy
consequent thereon. (See Art. VIII, Sec. 3.)
The 1941 Mortgage provides that, in case one or more
Defaults have happened and have not been remedied, the Company,
upon demand of the 1941 Mortgage Trustee, will forthwith
surrender to the 1941 Mortgage Trustee possession of, and, to the
extent permitted by law, the 1941 Mortgage Trustee, may enter and
take possession of, the Trust Estate, and may use, operate,
manage and control the same and conduct the business thereof or,
with or without entry, may sell the same to the highest bidder.
(See Art. VIII, Secs. 4 and 5.) In case of any sale of the Trust
Estate or any part thereof, whether made under power of sale or
by virtue of judicial proceedings, the principal of and interest,
if any, on all 1941 Mortgage Bonds then Outstanding, if not
already due, will immediately become due and payable. (See Art.
VIII, Sec. 1)
The holders of not less than a majority in aggregate
principal amount of the 1941 Mortgage Bonds at the time
Outstanding may, during the continuance of a Default, (a)
require the 1941 Mortgage Trustee to take all such steps for the
protection and enforcement of its rights and the rights of the
holders of 1941 Mortgage Bonds or to take appropriate judicial
proceedings as the 1941 Mortgage Trustee shall deem most
expedient; and (b) direct the time, method, and place of
conducting any proceeding for any remedy available to the 1941
Mortgage Trustee, or exercise any trust or power conferred upon
the 1941 Mortgage Trustee or (c) on behalf of the holders of all
the 1941 Mortgage Bonds, consent to the waiving of any past
Default and its consequences except a Default with respect to the
payment of principal or interest; provided, however, that (x)
such direction shall not be otherwise than in accordance with law
or the 1941 Mortgage, and that the 1941 Mortgage Trustee may
decline to follow any such direction which, in its opinion, or as
it may be advised, would be prejudicial to the holders of 1941
Mortgage Bonds not parties thereto. (See Art. VIII, Sec. 6 and
21.)
The 1941 Mortgage provides that no holder of any 1941
Mortgage Bond will have any right to institute any proceeding in
equity or at law for the collection of any sum due from the
Company on account of principal, and premium, if any, or
interest, or for the appointment of a receiver or trustee, or for
any other remedy, unless (a) such holder previously has given to
the 1941 Mortgage Trustee written notice of Default and of the
continuance thereof, and (b) the holders of not less than a
majority in aggregate principal amount of the 1941 Mortgage Bonds
then Outstanding have made written request upon the 1941 Mortgage
Trustee to institute such proceeding and shall have offered to
the 1941 Mortgage Trustee reasonable indemnity and security
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against the costs, expenses and liabilities to be incurred
therein or thereby, (c) the 1941 Mortgage Trustee for 60 days
after receipt of such notice, request and offer of indemnity has
failed to institute such proceeding, and (d) no directions
inconsistent with such request have been given by other holders;
it being understood that no one or more holders of 1941 Mortgage
Bonds will have any right to affect, disturb or prejudice the
rights of the holders of any other 1941 Mortgage Bonds. (See
Art. VIII, Sec. 16.)
Nothing contained in the 1941 Mortgage will affect or impair
the right of action, which is absolute and unconditional, of the
holders of the 1941 Mortgage Bonds to institute suit to enforce
the payment of the principal thereof and the premium, if any, and
interest, if any, thereon. (See Art. VIII, Sec. 16.)
The 1941 Mortgage provides that the 1941 Mortgage Trustee
will, within 90 days after the occurrence thereof, give to the
bondholders notice of all defaults under the 1941 Mortgage
(without regard to periods of grace or notices) known to the 1941
Mortgage Trustee, unless such defaults have been cured or waived,
except that no notice of a default of the character described in
clause (a) or (c) under "Defaults", or certain events of the
character referred to in clause (d), will be given until at least
60 days after the occurrence thereof; provided, that, except in
the case of a default of the character described in clause (a) or
(b) under "Defaults", the 1941 Mortgage Trustee may withhold such
notice if the 1941 Mortgage Trustee in good faith determines that
the withholding of such notice is in the interests of the
bondholders. (See Art. VIII, Sec. 2.)
As a condition precedent to certain actions by the 1941
Mortgage Trustee in the enforcement of the lien of the 1941
Mortgage and/or the institution of action on the 1941 Mortgage
Bonds, the 1941 Mortgage Trustee may require reasonable indemnity
against costs, expenses and liabilities to be incurred therein or
thereby. (See Art. VIII, Sec. 16; Art XII, Sec. 8.)
The laws of the States of Arizona and New Mexico, being the
states in which the Mortgaged Property is located, may limit or
deny the ability of the 1941 Mortgage Trustee or the bondholders
to enforce certain rights and remedies provided in the 1941
Mortgage in accordance with their terms.
RESIGNATION OR REMOVAL OF THE 1941 MORTGAGE TRUSTEE
The 1941 Mortgage Trustee may resign at anytime by giving
written notice thereof to the Company or may be removed at any
time by the holders of a majority in principal amount of 1941
Mortgage Bonds then Outstanding. (See Art XII, Sec. 14 and 15.)
EVIDENCE TO BE FURNISHED TO THE 1941 MORTGAGE TRUSTEE
Compliance with the provisions of the 1941 Mortgage is
evidenced by written statements of Company officers or persons
selected or paid by the Company. In certain cases, opinions of
counsel and certification of an engineer, accountant, appraiser
or other expert (who in some cases must be independent) must be
furnished. In addition, the Trust Indenture Act currently
requires that the Company give the 1941 Mortgage Trustee, not
less often than annually, a brief statement as to the Company's
compliance with the conditions and covenants under the 1941
Mortgage.
GOVERNING LAW
The duties, liabilities, rights, privileges and immunities
of the 1941 Mortgage Trustee in relation to the holders of the
1941 Mortgage Bonds are governed by the laws of the State of New
York except to the extent that the Trust Indenture Act is
applicable. (See Art. XII, Sec. 20)
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DESCRIPTION OF THE 1992 MORTGAGE
GENERAL
Class A Bonds may be issued under the Indenture of Mortgage
and Deed of Trust, dated as of December 1, 1992 (the "Original
1992 Mortgage"), between the Company and Bank of Montreal Trust
Company, as trustee (the "1992 Mortgage Trustee"), the Original
1992 Mortgage, as amended and supplemented from time to time,
being hereinafter referred to as the "1992 Mortgage." The terms
of such Class A Bonds will include those stated therein and in
the 1992 Mortgage and those made part of the 1992 Mortgage by the
Trust Indenture Act. The following summary of certain terms of
the 1992 Mortgage does not purport to be complete and is subject
in all respects to the provisions of, and is qualified in its
entirety by reference to, the 1992 Mortgage, and the Trust
Indenture Act. Capitalized terms used under this heading which
are not otherwise defined in this Prospectus have the meanings
ascribed thereto in the 1992 Mortgage. Whenever particular
provisions or defined terms in the 1992 Mortgage are referred to
herein, such provisions or defined terms are incorporated by
reference herein.
The 1992 Mortgage provides for the issuance thereunder of
multiple series of bonds, as discussed below under "Issuance of
Additional 1992 Mortgage Bonds". All bonds issued under the 1992
Mortgage are collectively referred to herein as the "1992
Mortgage Bonds".
At the date of this Prospectus, $441 million in aggregate
principal amount of 1992 Mortgage Bonds are Outstanding. All of
such 1992 Mortgage Bonds were issued and are held as collateral
security for the obligations of the Company under the Credit
Agreement, dated as of December 30, 1997 (the "Credit
Agreement"), among the Company, the lenders party thereto, the
issuing banks party thereto, the syndication and documentation
agents thereunder and Toronto Dominion (Texas), Inc., as
Administrative Agent. Letters of credit issued pursuant to the
Credit Agreement secure $328.6 million in aggregate principal
amount of industrial development revenue bonds issued for the
benefit of the Company (together with amounts in respect of
accrued interest thereon). In addition, the Credit Agreement
provides for a $100 million revolving credit facility under
which, at the date of this Prospectus, there were no borrowings
outstanding.
SECURITY
General
The 1992 Mortgage constitutes a lien on substantially all
the real property and tangible personal property of the Company,
other than property excepted from the lien thereof and such
property as may have been released from the lien thereof in
accordance with the terms thereof, subject to no liens prior to
the lien of the 1992 Mortgage other than the lien of the 1941
Mortgage, other Permitted Encumbrances and certain other liens
permitted to exist.
The 1992 Mortgage provides that after-acquired property
(other than excepted property) will be subject to the lien of the
1992 Mortgage except as otherwise set forth under "Consolidation,
Merger, Etc." In addition, after-acquired property may be
subject to liens existing or placed thereon at the time of
acquisition thereof, including, but not limited to, purchase
money liens and, in certain circumstances, to liens attaching to
such property prior to the recording and/or filing of an
instrument specifically subjecting such property to the lien of
the 1992 Mortgage.
Excepted Property
There are excepted from the lien of the 1992 Mortgage, among
other things (a) bills, notes and accounts receivable, cash,
choses in action, operating agreements and leases in which the
Company is the lessor; (b) shares of stock, bonds and other
securities (except those specifically subjected to such lien or
required to be pledged); (c)(i) goods and merchandise acquired
for the purpose of sale in the ordinary course of business; and
fuel, materials, supplies and other personal property which are
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consumable in their use in the operation of, or are not in use in
connection with or connected as fixtures to, the plants and
systems of the Company; (ii) automobiles, buses, trucks,
tractors, trailers and similar vehicles and rolling stock and
other railroad equipment; and (iii) to the extent not properly
chargeable to the utility plant accounts of the Company, hand
tools, furniture, and computers, machinery and equipment used
exclusively for corporate administrative or clerical purposes;
(d) the Company's franchise to be a corporation; and (e) other
property excepted as described under "Consolidation, Merger,
Etc.".
(See Granting Clauses.)
Properties held by subsidiaries of the Company, as well as
properties leased from other Persons, are not subject to the lien
of the 1992 Mortgage.
Permitted Encumbrances
For purposes of the 1992 Mortgage, Permitted Encumbrances
and such other liens include, without limitation (a) liens for
taxes or governmental charges which are not delinquent; (b) liens
for taxes or governmental charges which are being contested in
good faith and by appropriate proceedings, and certain liens of
mechanics, materialmen and suppliers; (c) liens, securing
obligations neither assumed nor paid by the Company, on real
estate acquired for transmission, distribution or communications
purposes; (d) easements, leases and other rights of others in
respect of the Mortgaged Property, and laws and regulations
affecting, and defects or irregularities in title to, the
Mortgaged Property; provided, however, that such easements,
leases, rights, laws, regulations, defects and irregularities (i)
to the extent that the same existed at December 15, 1992, did not
in the aggregate materially impair the use by the Company of the
Mortgaged Property considered as a whole in the Utility Business
or (ii) to the extent that the same arose after such date, or
relate to or affect any part of the Mortgaged Property acquired
after such date, do not materially impair the use by the Company
of such part of the Mortgaged Property in the Utility Business;
(e) undetermined liens and charges incidental to current
construction or current operation; (f) duties or contractual
obligations to any municipality or public authority; (g) defects
or irregularities in title to rights-of-way or properties held
under lease, easement or similar right, including without
limitation rights-of-way or properties held under lease, easement
or similar right from Indian Tribes, which do not materially
impair the use by the Company of the Mortgaged Property
considered as a whole or which may be remedied without undue
burden or expense; (h) rights reserved to or vested in any
municipality or public authority to terminate any right, power,
franchise, grant, license, easement or permit, or to purchase or
recapture or designate a purchaser of any property, or to impose
controls, restrictions or obligation upon any property; (i)
leases existing at December 15, 1992 and renewals thereof; (j)
rights granted or created or burdens assumed by the Company under
joint use and similar agreements or under any law or governmental
regulation or permit relating to the Company's occupancy of or
interference with public lands, rivers, streams, navigable
waters, bridges or highways; (k) laws in respect of judgments or
awards being appealed which have been stayed pending appeal; and
(l) the lien of the 1941 Mortgage and "permitted encumbrances" as
therein defined. (See Art. I, Sec. 3.)
Trustee's Lien
The 1992 Mortgage provides that the 1992 Mortgage Trustee
will have a lien, prior to the lien on behalf of the holders of
1992 Mortgage Bonds, upon the Mortgaged Property for the payment
of its reasonable compensation and expenses and for indemnity
against certain liabilities. (See Art. XII, Sec. 6.).
1941 Mortgage
The lien of the 1992 Mortgage is junior, subject and
subordinate to the lien of the 1941 Mortgage.
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ISSUANCE OF ADDITIONAL 1992 MORTGAGE BONDS
General
The aggregate principal amount of 1992 Mortgage Bonds which
may be authenticated and delivered under the 1992 Mortgage is
effectively unlimited. 1992 Mortgage Bonds of any series may be
issued from time to time on the basis of, and in an aggregate
principal amount not exceeding:
(a) 70% of the Cost or fair value to the Company
(whichever is less) of Net Property Additions (as described
below) which do not constitute Funded Property;
(b) the aggregate principal amount of Retired Bonds;
and
(c) an amount of cash deposited with the 1992 Mortgage
Trustee.
(See Art. III.)
Property Additions generally include any property which is
properly chargeable to the utility plant accounts of the Company
and is used or useful or to be used in the Utility Business. Net
Property Additions means, generally, Property Additions (not
theretofore funded by use as the basis for the authentication and
delivery of 1992 Mortgage Bonds, the withdrawal of cash or the
release of Funded Property) after deducting the amount of
Property Retirements not previously deducted (net of cash,
obligations and other property delivered to the 1992 Mortgage
Trustee in connection with such Property Retirements). (See Art.
I, Sec. 4.)
Retired Bonds means 1992 Mortgage Bonds and 1941 Mortgage
Bonds (a) which have been retired (but not by use of certain cash
proceeds including proceeds of the release of or insurance on
Funded Property), (b) which have not theretofore been used for
any purpose under either of such mortgages and (c) with respect
to 1992 Mortgage Bonds retired prior to the first certification
of Net Property Additions and to be used as Retired Bonds after
such certification, which have been reflected in such
certification and matched by an appropriate amount of Net
Property Additions. 1941 Mortgage Bonds used as Retired Bonds
under the 1992 Mortgage may not thereafter be used as such under
the 1941 First Mortgage.
Net Earnings Test
In general, the issuance of 1992 Mortgage Bonds is subject
to the delivery to the 1992 Mortgage Trustee of a Net Earnings
Certificate showing net earnings of the Company for 12
consecutive months within the preceding 16 months to be at least
1 3/4 times the annual interest requirements on all 1992 Mortgage
Bonds at the time Outstanding (except any to be retired in
connection with the new issue), new 1992 Mortgage Bonds then
applied for, all 1941 Mortgage Bonds then outstanding and all
other indebtedness (with certain exceptions) secured by a lien
prior to the lien of the 1992 Mortgage, except that no such net
earnings requirement need be met if the additional 1992 Mortgage
Bonds to be issued are not stated by their terms to bear simple
interest. Net earnings are calculated before, among other
things, provisions for income taxes; depreciation or amortization
of property; interest and amortization of debt discount or
expense; any non-recurring charge to income of whatever kind or
nature (including without limitation the recognition of expense
due to the non-recoverability of investment), whether or not
recorded as a non-recurring item in the Company's books of
account; and any refund of revenues previously collected or
accrued by the Company subject to possible refund. The
calculation of net earnings also does not take into account
profits or losses from the sale or disposal of capital assets or
securities or extraordinary items of any kind or nature, and for
purposes of the net Earnings Certificate, not more than 20% of
net earnings, may consist of net non-operating income and/or net
operations revenue from sources other than the Utility Business.
(See Art. I, Sec. 5 and Art. III, Sec. 5.)
The Company is not required to deliver a Net Earnings
Certificate prior to issuance of 1992 Mortgage Bonds on the basis
of Retired Bonds unless (a)(i) the new 1992 Mortgage 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 1992 Mortgage Bonds bear a greater rate of interest than
such Retired Bonds or (b) the new 1992 Mortgage Bonds are issued
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in respect of Retired Bonds the interest charges on which have
been excluded from any Net Earnings Certificate filed with the
1992 Mortgage Trustee since the retirement of such 1992 Mortgage
Bonds. In general, the interest requirement with respect to
variable interest rate indebtedness, if any, is determined with
reference to the rate or rates in effect on the date immediately
preceding such determination or the rate to be in effect upon
initial authentication. (See Art. I, Sec. 5 and Art. III,
Sec. 7.)
1992 Mortgage Bonds Issuable
As of September 3, 1998, the amount of Net Property
Additions, as recorded at Cost, available to be used as the basis
for the authentication and delivery of 1992 Mortgage Bonds was
approximately $722 million (assuming that no 1992 Mortgage Bonds
are issued on the basis of Retired Bonds, as set forth below, and
that no additional 1941 Mortgage Bonds are issued). Such Net
Property Additions would permit (on the basis of such
assumption), and the net earnings test would not prohibit, the
authentication and delivery of approximately $505 million in
aggregate principal amount of 1992 Mortgage Bonds at an assumed
interest rate of 7.5% per annum. As of September 3, 1998, the
amount of Retired 1992 Mortgage Bonds was $153 million and the
amount of Retired 1941 Mortgage Bonds was $445 million (assuming
that no 1992 Mortgage Bonds are issued on the basis of Net
Property Additions, as set forth above, and that no additional
1941 Mortgage Bonds are issued). Such Retired Bonds would permit
(on the basis of such assumption), and the net earnings test
would not prohibit, the authentication and delivery of $598
million in aggregate principal amount of 1992 Mortgage Bonds at
an assumed interest rate of 7.5% per annum.
Net Property Additions and Retired Bonds may also be made
the basis of the withdrawal of cash deposited in connection with
the release of property from the lien of the 1992 Mortgage, as
discussed in "Withdrawal of Cash."
RELEASE OF PROPERTY
Unless a Default has happened and is continuing, the Company
may obtain the release from the lien of the 1992 Mortgage of any
property (except for cash, obligations or other personal property
held by the 1992 Mortgage Trustee) upon delivery to the 1992
Mortgage Trustee of, among other things, cash and purchase money
obligations having an aggregate fair value at least equal to the
fair value of the property to be released; provided, however,
that the aggregate principal amount of such purchase money
obligations will not exceed 70% of the fair value of such
property; and provided, further, that the aggregate principal
amount of purchase money obligations and governmental obligations
delivered in connection with a taking of Company property by
eminent domain at any one time held as part of the Trust Estate,
and/or the trust estate under the 1941 Mortgage, shall not exceed
15% of the sum of (x) the aggregate principal amount of 1992
Mortgage Bonds then Outstanding and (y) the aggregate principal
amount of 1941 Mortgage Bonds then outstanding. (See Art. VII,
Sec. 3.)
The 1992 Mortgage provides simplified procedures for the
release of minor properties and property taken by eminent domain,
and provides for dispositions of certain obsolete property and
grants or surrender of certain rights without any release or
consent by the 1992 Mortgage Trustee.
So long as the 1941 Mortgage is in effect, in lieu of other
release provisions, unless a Default has happened and is
continuing, the Company may in the alternative obtain the release
from the lien of the 1992 Mortgage of any property (except cash,
obligations or personal property held by the 1992 Mortgage
Trustee) by delivery to the 1992 Mortgage Trustee of, among other
things, (a) a copy of the release of such property from the lien
of the 1941 Mortgage and (b) a certificate or receipt of the 1941
Mortgage Trustee stating that the cash constituting any part of
the consideration received in payment for the property to be
released is held by 1941 Mortgage Trustee under an irrevocable
order of the Company directing 1941 Mortgage Trustee to pay over
the same to the 1992 Mortgage Trustee if and to the extent that
the Company shall become entitled to withdraw such cash from 1941
Mortgage Trustee on the basis of property additions, as
contemplated in the 1941 Mortgage.
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WITHDRAWAL OF CASH
Unless a Default has happened and has not been remedied, all
or any part of the moneys received by the 1992 Mortgage Trustee
in consideration of any release, including payments on account of
purchase money obligations or governmental obligations so
received, at the election of the Company, shall
(a) be withdrawn from time to time by the Company (i)
in an amount equal to 10/7 of the principal amount of 1992
Mortgage Bonds to the authentication and delivery of which
the Company is entitled on the basis of Net Property
Additions and/or (ii) in an amount equal to the principal
amount of 1992 Mortgage Bonds to the authentication and
delivery of which the Company is entitled on the basis of
Retired Bonds; or
(b) be applied by the 1992 Mortgage Trustee to the
purchase or redemption of 1992 Mortgage Bonds, as directed
by the Company, but subject to the deposit by the Company of
certain additional moneys to pay premium and accrued
interest. (See Art. VII, Secs. 9, 10 and 11.)
See "Issuance of Additional 1992 Mortgage Bonds - 1992
Mortgage Bonds Issuable" for information regarding available Net
Property Additions and Retired Bonds.
CONSOLIDATION, MERGER, ETC.
Nothing in the 1992 Mortgage prevents any consolidation or
merger of the Company or of any successor company with or into
which it has been lawfully consolidated or merged, with or into
any corporation, or any conveyance, transfer or lease, subject to
the 1992 Mortgage, of the Mortgaged Property as an entirety or
substantially as an entirety to any corporation lawfully entitled
to acquire or lease and operate the same; provided, however, that
any such lease shall be made expressly subject to immediate
termination by the Company or by the 1992 Mortgage Trustee at any
time during the continuance of a Default, and also by the
purchaser of the property so leased at any sale thereof under the
1992 Mortgage; and provided, further, that upon any such
consolidation, merger, conveyance or transfer, or upon any such
lease the term of which extends beyond the date of maturity of
any of the 1992 Mortgage Bonds then Outstanding, the payment of
the principal, premium, if any, and interest, if any, on all of
the 1992 Mortgage Bonds then Outstanding, and the performance of
all the covenants in the 1992 Mortgage shall be assumed by the
corporation formed by such consolidation or into which such
merger shall have been made, or by the lessee under any such
lease the term of which extends beyond the date of maturity of
any of the 1992 Mortgage Bonds. (See Art. XI, Sec. 1.)
In case the Company is so consolidated with or merged into
any other corporation, or shall so convey or transfer, subject to
the 1992 Mortgage, the Mortgaged Property as aforesaid, the 1992
Mortgage will not (unless the successor corporation elects
otherwise) become and be a lien upon any of the properties and
franchises of the successor corporation owned or acquired at the
time of such merger, consolidation, conveyance or transfer, or
thereafter, except those acquired by it from the Company and
except, among other things (a) betterments, extensions,
improvements, additions, repairs, renewals, replacements,
substitutions and alterations to, upon, for and of the Mortgaged
Property, (b) property acquired or constructed with the proceeds
of any insurance on any part of the Mortgaged Property or with
the proceeds of any part of the Mortgaged Property released from
the lien of the 1992 Mortgage or taken by the exercise of the
power of eminent domain, and (c) property acquired to maintain
and preserve and keep the Mortgaged Property in good condition,
repair and working order. (See Art. XI, Sec. 3.)
Nothing in the 1992 Mortgage prevents any consolidation or
merger after the consummation of which the Company would be the
surviving or resulting corporation or any conveyance, transfer or
lease, subject to the lien of the 1992 Mortgage, of any part of
the Mortgaged Property which does not constitute the entirety, or
substantially the entirety, thereof. Unless, in the case of a
consolidation or merger described in the preceding sentence, a
supplemental indenture otherwise provides, the 1992 Mortgage will
not become or be a lien upon any of the properties acquired by
the Company in or as a result of such transaction or any
improvements, extensions or additions to such properties or any
betterments, extensions, improvements, additions, repairs,
renewals, replacements, substitutions or alterations to, upon,
for or of such properties or any part thereof. (See Art. XI,
Sec. 6.)
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MODIFICATION OF 1992 MORTGAGE
Without the consent of any Holders, the Company and the 1992
Mortgage Trustee may enter into one or more supplemental
indentures for any of the following purposes:
(a) to evidence the succession of another Person to
the Company and the assumption by any such successor of the
covenants of the Company in the 1992 Mortgage and in the
1992 Mortgage Bonds; or
(b) to add one or more covenants of the Company or
other provisions for the benefit of all Holders or for the
benefit of the Holders of, or to remain in effect only so
long as there shall be Outstanding, 1992 Mortgage Bonds of
one or more specified series, or one or more Tranches
thereof, to add additional "Defaults" which may be limited
so as to remain in effect only so long as 1992 Mortgage
Bonds of one or more specified series, or one or more
Tranches thereof, shall remain Outstanding or to surrender
any right or power conferred upon the Company by the 1992
Mortgage; or
(c) to correct or amplify the description of any
property at any time subject to the lien of the 1992
Mortgage or better to assure, convey and confirm to the 1992
Mortgage Trustee any property subject or required to be
subject to the lien of the 1992 Mortgage; or
(d) to change or eliminate any provision of the 1992
Mortgage or to add any new provision to the 1992 Mortgage,
provided that no such change, elimination or addition shall
adversely affect the interests of the Holders of the 1992
Mortgage Bonds of any series or Tranche in any material
respect; or
(e) to establish the form or terms of the 1992
Mortgage Bonds of any series or Tranche as permitted by the
1992 Mortgage; or
(f) to provide for the authentication and delivery of
bearer securities and coupons appertaining thereto
representing interest, if any, thereon and for the
procedures for the registration, exchange and replacement
thereof and for the giving of notice to, and the
solicitation of the vote or consent of, the holders thereof,
and for any and all other matters incidental thereto; or
(g) to evidence and provide for the acceptance of
appointment by a successor trustee or by a co-trustee of
separate trustee; or
(h) to provide for the procedures required to permit
the utilization of a non-certificated system of registration
for all, or any series or Tranche of, the 1992 Mortgage
Bonds; or
(i) to change any place or places where (i) the
principal of and premium, if any, and interest, if any, on
all or any series of 1992 Mortgage Bonds, or any Tranche
thereof, will be payable, (ii) all or any series of 1992
Mortgage Bonds, or any Tranche thereof, may be surrendered
for registration of transfer, (iii) all or any series of
1992 Mortgage Bonds, or any Tranche thereof, may be
surrendered for exchange and (iv) notices and demands to or
upon the Company in respect of all or any series of 1992
Mortgage Bonds, or any Tranche thereof, and the 1992
Mortgage may be served; or
(j) to cure any ambiguity, to correct or supplement
any provision therein which may be defective or inconsistent
with any other provision therein; or to make any other
changes to the provisions thereof or to add other provisions
with respect to matters and questions arising under the 1992
Mortgage, so long as such changes or additions do not
adversely affect the interests of the Holders of 1992
Mortgage Bonds of any series or Tranche in any material
respect.
(See Art. XIII, Sec. 1.)
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Without limiting the generality of the foregoing, if the
Trust Indenture Act is amended so to require changes to the 1992
Mortgage or the inclusion therein of additional provisions or so
as to permit changes to, or the elimination of, provisions which
at the date of the Original 1992 Mortgage or at any time
thereafter, were required by the Trust Indenture Act to be
contained in the 1992 Mortgage, the 1992 Mortgage will be deemed
to have been amended so as to conform to such amendment or to
effect such changes or elimination, and the Company and the 1992
Mortgage Trustee may, without the consent of any Holders, enter
into one or more supplemental indentures to evidence or effect
such amendment. (See Art. XIII, Sec. 1.)
Except as provided above, with the consent of the Holders of
not less than 60% in aggregate principal amount of the 1992
Mortgage Bonds of all series then Outstanding, considered as one
class, the Company and the 1992 Mortgage Trustee may 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 1992 Mortgage; provided, however, that if
there are 1992 Mortgage Bonds of more than one series Outstanding
and if a proposed supplemental indenture directly affects the
rights of the Holders of one or more, but less than all, of such
series then the consent only of the Holders of 60% in aggregate
principal amount of Outstanding 1992 Mortgage Bonds of all series
so directly affected, considered as one class, will be required;
and provided, further, that if the 1992 Mortgage Bonds of any
series have been issued in more than one Tranche and if the
proposed supplemental indenture directly affects the rights of
the Holders of one or more, but less than all, such Tranches,
then the consent only of the Holders of 60% in aggregate
principal amount of the Outstanding 1992 Mortgage Bonds of all
Tranches so directly affected, considered as one class, will be
required; and provided, further, that no such amendment or
modification may, without the consent of the Holder of each
Outstanding 1992 Mortgage Bond of each series or Tranche so
directly affected, (a) change the stated maturity of the
principal of, or any installment of principal of or interest on,
any 1992 Mortgage Bond, or reduce the principal amount thereof or
the rate of interest thereon or the method of calculating such
rate (or the amount of any installment of interest thereon) or
any premium payable upon the redemption thereof, or reduce the
amount of the principal of any Discount Bond that would be due
and payable upon a declaration of acceleration of the maturity
thereof, or change the coin or currency (or other property) in
which any 1992 Mortgage Bond or any premium or the interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the stated maturity
thereof (or, in the case of redemption, on or after the
redemption date), (b) permit the creation of any lien ranking
prior to the lien of the 1992 Mortgage with respect to all or
substantially all of the Mortgaged Property (except Prepaid Liens
or Permitted Encumbrances) or terminate the lien of the 1992
Mortgage on all or substantially all of the Mortgaged property,
or deprive the Holders of the benefit of the lien of the 1992
Mortgage, (c) reduce the percentage in principal amount of the
Outstanding 1992 Mortgage Bonds of such series or Tranche, the
consent of whose Holders is required for any such supplemental
indenture, or for any waiver of compliance with any provision of
the 1992 Mortgage or of any default thereunder and its
consequences, or reduce the requirements for quorum or voting or
(d) modify certain of the provisions of the 1992 Mortgage
relating to supplemental indentures, control of remedial
proceedings or waivers of past defaults except to increase the
percentage in principal amount referred to therein. A
supplemental indenture which changes or eliminates any covenant
or other provision of the 1992 Mortgage which has expressly been
included solely for the benefit of the Holders of, or which is to
remain in effect only so long as there shall be Outstanding, 1992
Mortgage Bonds of one or more specified series, or one or more
Tranches thereof, or modifies the rights of the Holders of 1992
Mortgage Bonds of such series or Tranches with respect to such
covenant or other provision, will be deemed not to affect the
rights under the 1992 Mortgage of the Holders of the 1992
Mortgage Bonds of any other series or Tranche. (See Art. XIII,
Sec. 2.)
It is the current intention of the Company that the Holders
of additional 1992 Mortgage Bonds issued subsequent to the date
of this Prospectus (including Class A Bonds delivered to the
Trustee under the Indenture) will be deemed to have consented to
the execution and delivery of a supplemental indenture containing
one or more, or all, of the amendments to the 1992 Mortgage
described below:
(a) to add a definition of the term "fair value",
providing, among other things, that "fair value" with
respect to any property will be determined by reference to
(i) the amount which would be likely to be obtained in an
arm's length transaction with respect to such property
between an informed and willing buyer and an informed and
willing seller, under no compulsion, respectively, to buy or
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sell, (ii) the amount of investment with respect to such
property which, together with a reasonable return thereon,
would be likely to be recovered through ordinary business
operations or otherwise, (iii) the cost, accumulated
depreciation and replacement cost with respect to such
property and (iv) any other relevant factors;
(b) to add a definition of the term "purchase money
mortgage" to mean, generally, a lien on the property being
acquired or disposed of by the Company or being released
from the lien of the 1992 Mortgage which is retained by the
transferor of such property or granted to one or more
persons in connection with the transfer or release thereof,
or granted to or held by a trustee or agent for any such
persons, and which would include, among other things, liens
which (i) permit the incurrence of indebtedness secured
thereby in addition to indebtedness incurred in connection
with the transfer of specific property, (ii) permit the
subjection of other property to the lien thereof and/or
(iii) were granted prior to any particular transfer of
property, which cover other property and/or which secure
other obligations issued prior or subsequent to the
obligations delivered in connection with any particular
acquisition, disposition or release of property; and to add
a definition of the term "purchase money obligation" to mean
an obligation secured by a purchase money mortgage;
(c) to modify the provision described in clause
(a)(ii) in the first paragraph under "Withdrawal of Cash" to
refer to 10/7 of the principal amount of 1992 Mortgage Bonds
in lieu of the principal amount thereof;
(d) to modify the provisions described in the second
proviso to the first paragraph under "Release of Property"
(i) to delete such provisions or to provide that the same
may be disregarded upon specified conditions; or (ii) to
delete from such provisions the limitation of 15%; or (iii)
to change such percentage to any higher percentage not
exceeding 100%; and/or
(e) to eliminate any requirement to deliver a Net
Earnings Certificate in connection with the authentication
and delivery of 1992 Mortgage Bonds on the basis of Retired
Bonds.
(See Art. II, Sec.2 of Supplemental Indenture No.3.)
The prospective amendments described in clauses (b), (c) and
(d) in the preceding paragraph, if adopted, would have the
effect, among other things, of facilitating transactions which
would result in a disaggregation of the generation, transmission
and/or distribution segments of the Company's business, including
transfers to other entities whether or not affiliated with the
Company. See Risk Factors "Retail Competition" for information
regarding the possible divestiture by the Company of its
generation assets.
DEFAULTS
The following events are defined for all purposes of the
1992 Mortgage as "Defaults":
(a) failure to pay the interest on any 1992 Mortgage
Bond, or to make any sinking fund payment required hereunder
in respect of 1992 Mortgage Bonds of any series, for a
period of 60 days after such interest or sinking fund
payment, as the case may be, shall have become due and
payable; or
(b) failure to pay the principal of or premium, if
any, on any 1992 Mortgage Bond when and as the same shall
become due and payable, whether at stated maturity, upon
redemption or otherwise; or
(c) failure to perform or observe any other covenant
or condition required to be performed or observed by the
Company (except in respect of the refund or reimbursement of
taxes, assessments or other governmental charges, for which
the holders of 1992 Mortgage Bonds may look only to the
Company), for a period of 90 days after written notice
thereof shall have been given to the Company by the 1992
Mortgage Trustee or to the Company and the 1992 Mortgage
Trustee by the holders of at least 25% in principal amount
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of the 1992 Mortgage Bonds at the time Outstanding, unless
the 1992 Mortgage Trustee, or the 1992 Mortgage Trustee and
the Holders of a principal amount of the 1992 Mortgage Bonds
not less than the principal amount of 1992 Mortgage Bonds
the Holders of which gave such notice, as the case may be,
shall agree in writing to an extension of such period prior
to its expiration; provided, however, that the 1992 Mortgage
Trustee, or the 1992 Mortgage Trustee and the Holders of
such principal amount of the 1992 Mortgage Bonds, as the
case may be, shall be deemed to have agreed to an extension
of such period if corrective action is initiated by the
Company within such period and is being diligently pursued;
or
(d) certain events relating to the bankruptcy,
insolvency or reorganization of the Company or the
appointment of a receiver or trustee for its property; or
(e) the happening of a "Default" within the meaning of
the 1941 Mortgage; provided, however, that the waiver or
cure of such "Default" under the 1941 Mortgage and the
rescission and annulment of the consequences thereof shall
constitute a waiver or cure of the corresponding Default
under the 1992 Mortgage and a rescission and annulment of
the consequences thereof; and provided, further, that no
such waiver, cure, rescission or annulment shall affect any
other Default.
(f) so long as the Trustee under the Indenture holds
any 1992 Mortgage Bonds as Class A Bonds under the
Indenture, an "Event of Default" under the Indenture;
provided, however, that the waiver or cure of such "Event of
Default" under the Indenture will constitute a cure of the
corresponding Default under the 1992 Mortgage and a
rescission and annulment of the consequences thereof.
(See Art. VIII, Sec. 1 of Original 1992 Mortgage, and Art. III,
Sec. 1 of Supplemental Indenture No. 3.)
REMEDIES
Upon the occurrence of a Default under the 1992 Mortgage,
the 1992 Mortgage Trustee may, and upon the written request of
the Holders of a majority in aggregate principal amount of the
1992 Mortgage Bonds then Outstanding shall, by notice in writing
given to the Company, declare the principal (or, in the case of a
Discount Bond, such portion of the principal as may be specified
in the terms thereof) of all 1992 Mortgage Bonds then Outstanding
and the premium, if any, and interest accrued thereon, if any,
immediately due and payable. If, at any time after such
declaration, and prior to the stated maturity of the latest
maturing 1992 Mortgage Bonds then Outstanding, and before any
sale of any of the Trust Estate has been made and before any
judgment or decree for the payment of the moneys due shall have
been entered, all arrears of interest upon all 1992 Mortgage
Bonds then Outstanding, with interest (if and to the extent
permitted by law) on the overdue installments of interest at the
respective rates borne by such 1992 Mortgage Bonds, and the
reasonable expenses of the 1992 Mortgage Trustee and all other
sums payable under the 1992 Mortgage (except the principal of
1992 Mortgage Bonds so declared to be due and payable, unless
such 1992 Mortgage Bonds shall in the meantime have matured by
their terms, and except interest accrued thereon since the last
preceding interest payment date) shall have been duly paid, and
all other Defaults, if any, have been cured or adequate
arrangements have been made therefor, then in every such case the
Holders of at least a majority in aggregate principal amount of
the 1992 Mortgage Bonds then Outstanding may waive the Default by
reason of which the principal of the 1992 Mortgage Bonds shall
have so become due and payable, and may rescind and annul such
declaration and its consequences, but no such waiver or
rescission or annulment shall extend to or affect any subsequent
or other then existing Default or impair any right or remedy
consequent thereon. (See Art. VIII, Sec. 3.)
The 1992 Mortgage provides that, in case one or more
Defaults have happened and have not been remedied, the Company,
upon demand of the 1992 Mortgage Trustee, will forthwith
surrender to the 1992 Mortgage Trustee possession of, and, to the
extent permitted by law, the 1992 Mortgage Trustee, may enter and
take possession of, the Trust Estate, and may use, operate,
manage and control the same and conduct the business thereof or,
with or without entry, may sell the same to the highest bidder.
(See Art. VIII, Secs. 4 and 5.) In case of any sale of the Trust
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Estate or any part thereof, whether made under power of sale or
by virtue of judicial proceedings, the principal (or, in the case
of a Discount Bond, such portion of the principal as may be
specified in the terms thereof) of and premium, if any, and
interest, if any, on all 1992 Mortgage Bonds then Outstanding, if
not already due, will immediately become due and payable. (See
Art. VIII, Sec. 10.)
The Holders of not less than a majority in aggregate
principal amount of the 1992 Mortgage Bonds at the time
Outstanding have the right, during the continuance of a Default,
(a) to require the 1992 Mortgage Trustee to proceed to enforce
the 1992 Mortgage, either by judicial proceedings for the
enforcement of the payment of the 1992 Mortgage Bonds and the
foreclosure of the 1992 Mortgage, the sale of the Trust Estate or
otherwise or, at the election of the 1992 Mortgage Trustee, by
the exercise of the power of entry and/or sale hereby conferred;
and (b) to direct the time, method, and place of conducting any
proceeding for any remedy available to the 1992 Mortgage Trustee,
or exercise any trust or power conferred upon the 1992 Mortgage
Trustee or (c) on behalf of the Holders of all the 1992 Mortgage
Bonds, consent to the waiving of any past Default and its
consequences except a Default with respect to the payment of
principal, premium or interest; provided, however, that (x) such
direction shall not be in conflict with any rule of law or the
1992 Mortgage or expose the 1992 Mortgage Trustee to personal
liability in circumstances in which indemnity would not, in the
reasonable judgment of the 1992 Mortgage Trustee, be adequate,
(y) the 1992 Mortgage Trustee may take any other action deemed
proper by the 1992 Mortgage Trustee which is not inconsistent
with such direction, and (z) the 1992 Mortgage Trustee shall not
determine that the action so directed would be unjustly
prejudicial to the Holders not taking part in such direction.
(See Art. VIII, Sec. 19.)
The 1992 Mortgage provides that no Holder of any 1992
Mortgage Bond will have any right to institute any proceeding in
equity or at law for the collection of any sum due from the
Company on account of principal, and premium, if any, or
interest, or for the appointment of a receiver or trustee, or for
any other remedy, unless (a) such Holder previously has given to
the 1992 Mortgage Trustee written notice of Default and of the
continuance thereof, (b) the Holders of not less than a majority
in aggregate principal amount of the 1992 Mortgage Bonds then
Outstanding have made written request upon the 1992 Mortgage
Trustee to institute such proceeding and shall have offered to
the 1992 Mortgage Trustee reasonable indemnity and security
against the costs, expenses and liabilities to be incurred
therein or thereby, (c) the 1992 Mortgage Trustee for 60 days
after receipt of such notice, request and offer of indemnity has
failed to institute such proceeding, and (d) no directions
inconsistent with such request have been given by the Holders; it
being understood that no one or more Holders of 1992 Mortgage
Bonds will have any right to affect, disturb or prejudice the
rights of the Holders of any other 1992 Mortgage Bonds. (See
Art. VIII, Sec. 14.)
Nothing contained in the 1992 Mortgage will affect or impair
the right of action, which is absolute and unconditional, of the
Holders of the 1992 Mortgage Bonds to institute suit to enforce
the payment of the principal thereof and the premium, if any, and
interest, if any, thereon. (See Art. VIII, Sec. 14.)
The 1992 Mortgage provides that the 1992 Mortgage Trustee
will, within 90 days after the occurrence thereof, give to the
Bondholders notice of all defaults under the 1992 Mortgage
(without regard to periods of grace or notices) known to the 1992
Mortgage Trustee, unless such defaults have been cured or waived,
except that no notice of a default of the character described in
clause (a) or (c) under "Defaults" will be given until at least
60 days after the occurrence thereof; provided, however, that,
except in the case of a default of the character described in
clause (a) or (b) under "Defaults", the 1992 Mortgage Trustee may
withhold such notice if the 1992 Mortgage Trustee in good faith
determines that the withholding of such notice is in the
interests of the Bondholders. (See Art. VIII, Sec. 2.)
As a condition precedent to certain actions by the 1992
Mortgage Trustee in the enforcement of the Lien of the 1992
Mortgage and/or the institution of action on the 1992 Mortgage
Bonds, the 1992 Mortgage Trustee may require reasonable indemnity
against costs, expenses and liabilities to be incurred therein or
thereby. (See Art. VIII, Sec. 14; Art XII, Sec. 2.)
The laws of the States of Arizona and New Mexico, being the
states in which the Mortgaged Property is located, may limit or
deny the ability of the 1992 Mortgage Trustee or the Bondholders
to enforce certain rights and remedies provided in the 1992
Mortgage in accordance with their terms.
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SATISFACTION AND DISCHARGE
Any 1992 Mortgage Bond or Bonds, or any portion of the
principal amount thereof, will be deemed to have been paid for
purposes of the 1992 Mortgage, and, at the election of the
Company, the entire indebtedness of the Company in respect
thereof will be deemed to have been satisfied and discharged, if
there has been irrevocably deposited with the 1992 Mortgage
Trustee, in trust: (a) money in an amount which will be
sufficient, or (b) in the case of a deposit made prior to the
maturity of such 1992 Mortgage Bonds, Eligible Obligations (as
described below), which do not contain provisions permitting the
redemption or other prepayment thereof at the option of the
issuer thereof, the principal of and the interest on which when
due, without any regard to reinvestment thereof, will provide
monies which, together with the money, if any, deposited with or
held by the 1992 Mortgage Trustee, will be sufficient, or (c) a
combination of (a) and (b) which will be sufficient, to pay when
due the principal of and premium, if any, and interest, if any,
due and to become due on such 1992 Mortgage Bond or Bonds or
portions thereof. (See Art. XV, Sec. 1. of Original 1992
Mortgage; Art. III, Sec.1(a) of Supplemental Indenture No. 3.).
For this purpose, Eligible Obligations include direct obligations
of, or obligations unconditionally guaranteed by, the United
States of America, entitled to the benefit of the full faith and
credit thereof, and certificates, depositary receipts or other
instruments which evidence a direct ownership interest in such
obligations or in any specific interest or principal payments due
in respect thereof.
The 1992 Mortgage will be deemed to have been satisfied and
discharged when no 1992 Mortgage Bonds remain Outstanding
thereunder and the Company has paid all other sums payable by it
under the 1992 Mortgage.
RESIGNATION OR REMOVAL OF THE 1992 MORTGAGE TRUSTEE
The 1992 Mortgage Trustee may resign at anytime by giving
written notice thereof to the Company or may be removed at any
time by the Holders of a majority in principal amount of 1992
Mortgage Bonds then Outstanding. No resignation or removal of
the 1992 Mortgage Trustee and no appointment of a successor
trustee will become effective until the acceptance of appointment
by a successor trustee in accordance with the requirements of the
1992 Mortgage. So long as no Default or event which, after
notice or lapse of time, or both, would become a Default has
occurred and is continuing, if the Company has delivered to the
1992 Mortgage Trustee a Certified Resolution of its Board of
Directors appointing a successor trustee and such successor has
accepted such appointment in accordance with the terms of the
1992 Mortgage, the 1992 Mortgage Trustee will be deemed to have
resigned and the successor will be deemed to have been appointed
as contemplated above. (See Art XII, Sec. 9.)
EVIDENCE TO BE FURNISHED TO THE 1992 MORTGAGE TRUSTEE
Compliance with the provisions of the 1992 Mortgage is
evidenced by written statements of Company officers or persons
selected or paid by the Company. In certain cases, opinions of
counsel and certification of an engineer, accountant, appraiser
or other expert (who in some cases must be independent) must be
furnished. In addition, the Trust Indenture Act currently
requires that the Company give the 1992 Mortgage Trustee, not
less often than annually, a brief statement as to the Company's
compliance with the conditions and covenants under the 1992
Mortgage.
GOVERNING LAW
The 1992 Mortgage and the 1992 Mortgage Bonds are governed
by and construed in accordance with the law of the State of New
York except to the extent that the Trust Indenture Act or the law
of any jurisdiction wherein the Mortgaged Property is located is
applicable.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain United States
income tax considerations of the acquistion, ownership and
disposition of the New Bonds, and is based on the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations promulgated thereunder ("Regulations"),
administrative rulings and judicial decisions, all as in effect
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as of the date of this Prospectus. Such authorities may be
repealed, revoked or modified with possible retroactive effect so
as to result in federal income tax consequences different from
those discussed below. Except where otherwise noted, this
discussion deals only with New Bonds held as capital assets
(within the meaning of Code section 1221) by holders that
purchased the Old Bonds directly from the Initial Purchasers,
and not with special classes of holders such as banks, insurance
companies, dealers in securities or currencies, traders in
securities that elect to mark to market, tax-exempt
organizations, persons holding the New Bonds as part of a
straddle, hedging or conversion transaction, or persons whose
functional currency is not the U.S. dollar. All persons
considering the purchase of the New Bonds are advised to consult
their own tax advisors concerning the consequences, in their
particular circumstances, under the Code and the laws of any
other taxing jurisdiction, of the acquisition, ownership and
disposition, of the New Bonds.
TAX CONSEQUENCES TO U.S. HOLDERS
As used herein, the term "U.S. Holder" means a beneficial
owner of a New Bond that is for United States federal income tax
purposes (a) a citizen or resident of the United States, (b) a
corporation, partnership or other entity created or organized in
or under the laws of the United States or any political
subdivision thereof, (c) an estate the income of which is subject
to United States federal income tax without regard to its source,
or (d) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust
and one or more United States persons have the authority to
control all substantial decisions of the trust. A "Non-U.S.
Holder" is a beneficial owner of the New Bonds that is not a U.S.
Holder.
Exchange of Old Bonds for New Bonds
An exchange of Old Bonds for New Bonds should not constitute
a taxable event for federal income tax purposes because the New Bonds
should not be considered to differ materially in kind or extent
from the Old Bonds. Rather, the New Bonds should be treated as a
continuation of the Old Bonds in the hands of a U.S. Holder. As a
result, U.S. Holders who exchange their Old Bonds for New Bonds
should not recognize any income, gain or loss for federal income
tax purposes with respect to such exchange, and a U.S. Holder will
have the same tax base and holding period in the New Bonds as such
U.S. Holder had in the Old Bonds.
Payments of Interest on the New Bonds
For U.S. federal income tax purposes, the New Bonds will be
treated as indebtedness of the Company. Stated interest on a New
Bond will generally be taxable to a U.S. Holder as ordinary
income at the time it is paid or accrued in accordance with the
U.S. Holder's method of accounting for tax purposes.
Sale, Exchange, or Redemption of the New Bonds
Upon the sale, exchange or redemption of a New Bond, a U.S.
Holder will recognize gain or loss equal to the difference
between the amount realized upon the sale, exchange, or
redemption (other than amounts attributable to accrued but unpaid
interest), and such U.S. Holder's adjusted tax basis in the New
Bond. A U.S. Holder's adjusted tax basis in a New Bond will be,
in general, the issue price of the New Bond. Such gain or loss
will be capital gain or loss and will be long term capital
gain or loss if at the time of exchange or redemption, the New Bonds
have been held for more than one year. The net capital gains of
individuals are taxed, under certain circumstances, at lower rates
than ordinary income. The deductibility of capital
losses is subject to limitations.
Information Reporting and Backup Withholding
In general, information reporting will apply to certain
payments of principal and interest on the New Bonds, and to
payments of the proceeds upon the sale of the New Bonds to U.S.
Holders other than certain exempt recipients (such as
corporations). A 31% backup withholding tax will apply to such
payments if the U.S. Holder (i) fails to provide a taxpayer
identification number ("TIN"), (ii) furnishes an incorrect TIN,
(iii) is notified by the Internal Revenue Service ("IRS") that it
has failed to properly report payments of interest and dividends,
or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has
not been notified by the IRS that it is subject to backup
withholding. In the case of interest paid after December 31,
1999, a U.S. Holder generally will be subject to backup
withholding at a 31% rate unless certain IRS certification
procedures are complied with directly or through an intermediary.
The Company will furnish annually to the IRS and to record
holders of the New Bonds (other than with respect to certain
exempt holders) information relating to interest paid during the
calendar year.
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Any amounts withheld under the backup withholding rules will
be allowed as a refund or a credit against such U.S. Holder's
U.S. federal income tax liability provided the required
information is furnished to the IRS.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Payments of Interest on the New Bonds
Subject to the discussion below concerning backup
withholding, no withholding of United States federal income tax
will be required with respect to the payment by the Company or
any paying agent of principal or interest on a New Bond held by a
Non-U.S. Holder, provided that the beneficial owner (i) does not
actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to
vote within the meaning of Section 871(h)(3) of the Code and the
regulations thereunder, (ii) is not a controlled foreign
corporation related, directly or indirectly, to the Company
through stock ownership, (iii) is not a bank whose receipt of
interest on a New Bond is described in Section 881(c)(3)(A) of
the Code and (iv) satisfies the statement requirement (described
generally below) set forth in Section 871(h) and Section 881(c)
of the Code and the Regulations thereunder.
To satisfy the requirement referred to in (iv) above, the
beneficial owner of a New Bond, or a financial institution
holding the New Bond on behalf of such owner, must provide, in
accordance with specified procedures, the Company or its paying
agent with a statement to the effect that the beneficial owner is
not a U.S. person. These requirements will be met if (1) the
beneficial owner provides his name and address, and certifies,
under penalties of perjury, that he is not a U.S. person (which
certification may be made on an IRS Form W-8 (or successor form)
or (2) a financial institution holding the New Bond on behalf of
the beneficial owner certifies, under penalties of perjury, that
such statement has been received by it and furnishes a paying
agent with a copy thereof.
In the event that any of the above requirements are not
satisfied, the Company will nonetheless not withhold federal
income tax on interest paid to a Non-U.S. Holder if it receives
IRS Form 4224 (or, after December 31, 1999, a Form W-8) from that
Non-U.S. Holder, establishing that such income is effectively
connected with the conduct of a trade or business in the United
States, unless the Company has knowledge to the contrary.
Interest paid to a Non-U.S. Holder (other than a partnership)
that is effectively connected with the conduct by the holder of a
trade or business in the United States is generally taxed at the
graduated rates that are applicable to United States persons. In
the case of a Non-U.S. Holder that is a corporation, such
effectively connected income may also be subject to the United
States federal branch profits tax (which is generally imposed on
a foreign corporation on the deemed repatriation from the United
States of effectively connected earnings and profits) at a 30%
rate (unless the rate is reduced or eliminated by an applicable
income tax treaty and the Non-U.S. Holder is a qualified resident
of the treaty country).
Sale, Exchange or Redemption of the New Bonds
A Non-U.S. Holder will generally not be subject to United
States federal income tax with respect to gain recognized on a
sale, exchange or redemption of New Bonds unless (i) the gain is
effectively connected with a trade or business of the Non-U.S.
Holder in the United States, (ii) in the case of a Non-U.S.
Holder who is an individual and hold the New Bonds as capital
assets, such holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition
and certain other conditions are met, or (iii) the Non-U.S.
Holder is subject to tax pursuant to certain provisions of the
Code applicable to United States expatriates.
Gains derived by a Non-U.S. Holder (other than a
partnership) from the sale or other disposition of New Bonds that
are effectively connected with the conduct by the Holder of a
trade or business in the United States are generally taxed at the
graduated rates that are applicable to United States persons. In
the case of a Non-U.S. Holder that is a corporation, such
effectively connected income may also be subject to the United
States branch profits tax. If any individual Non-U.S. Holder
falls under clause (ii) above, such holder will be subject to a
flat 30% tax on the gain derived from the sale or other
disposition, which may be offset by United States source capital
losses recognized within the same taxable year as such sale or
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other disposition (notwithstanding the fact that he is not
considered a resident of the United States).
Information Reporting and Backup Withholding
No information reporting or backup withholding will be
required with respect to payments made by the Company or any
paying agent to Non-U.S. Holders if a statement described in (iv)
under "Tax Consequences to Non-U.S. Holders Payments of Interest
on the New Bonds" has been received and the payor does not have
actual knowledge that the beneficial owner is a United States
person.
Information reporting and backup withholding will not apply
to interest on a New Bond paid or collected by a custodian,
nominee, or agent on behalf of the beneficial owner of such New
Bond if such custodian, nominee, or agent has documentary
evidence in its records that the beneficial owner is not a U.S.
person and certain other conditions are met, or the beneficial
owner otherwise establishes an exemption.
Payments on the sale, exchange or other disposition of a New
Bond made to or through a foreign office of a broker generally will
not be subject to backup withholding. However, payments made by a
broker that is a United States person, a controlled foreign
corporation for United States federal income tax purposes, a
foreign person 50 percent or more of whose gross income is
effectively connected with a United States trade or business for
a specified three year period, or (with respect to payments after
December 31, 1999) a foreign partnership with certain connections
to the United States, will be subject to information reporting
unless the broker has in its records documentary evidence that the
beneficial owner is not a United States person and certain other
conditions are met, or the beneficial owner otherwise establishes
an exemption. Backup withholding may apply to any payment that
such broker is required to report if the broker has actual
knowledge that the payee is a United States person. Payments to or
through the United States office of a broker will be subject to
information reporting and backup withholding unless the Holder
certifies, under penalties of perjury, that it is not a United
States person or otherwise establishes an exemption.
For payments made after December 1, 1999, with respect to New
Bonds held by foreign partnerships, IRS regulations require that
the certification described in (iv) under "Payments of Interest
on the New Bonds" above be provided by the partners, rather than by
the foreign partnership, and that the partnership provide certain
information, including a United States taxpayer identification
number. A look-through rule will apply in the case of tiered
partnerships.
Non-U.S. Holders should consult their tax advisors regarding
the application of information reporting and backup withholding in
their particular situations, the availability of an exemption
therefrom, and the procedures for obtaining such an exemption, if
available. Any amounts withheld under the backup withholding
rules will be allowed as a refund or credit against the Non-U.S.
Holder's U.S. federal income tax liability and may entitle such
Holder to a refund, provided the required information is
furnished to the IRS.
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PLAN OF DISTRIBUTION
Except as described below, a broker-dealer may not
participate in the Exchange Offer in connection with a
distribution of the New Bonds. Each broker-dealer that receives
New Bonds for its own account in the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with
any resale of such New Bonds. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Bonds received in
exchange for Old Bonds where such Old Bonds were acquired as a
result of market-making activities or other trading activities.
The Company shall for a period of 90 days after the Expiration
Date make this Prospectus, as amended or supplemented, available
to any broker-dealer for use in connection with any such resale.
In addition, until , 1998 all dealers effecting
--------------
transactions in the New Bonds may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of
New Bonds by broker-dealers. New Bonds received by broker-dealers
for their own account in the Exchange Offer may be sold from time
to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of
options on the New Bonds or a combination of such methods of
resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in the
form of commissions or concessions from any such broker-dealer
and/or the purchasers of any such New Bonds. Any broker-dealer
that resells New Bonds that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such New Bonds may be
deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Bonds and
any commissions or concessions received by any such persons may
be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the
Exchange Offer other than commissions or concessions of any
brokers or dealers and expenses of counsel for the holders of the
New Bonds and will indemnify the holders of the New Bonds
(including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
55
<PAGE>
LEGAL MATTERS
The validity of the New Bonds will be passed upon for the
Company by Dennis R. Nelson, Esq., Vice President, General
Counsel and Corporate Secretary of the Company and Thelen Reid &
Priest LLP. In giving their opinions, Thelen Reid & Priest LLP
may rely, as to all matters of Arizona law, upon the opinion of
Mr. Nelson and, as to all matters of New Mexico law, upon the
opinion of Rodey, Dickason, Sloan, Akin & Robb P.A. In giving
his opinion, Mr. Nelson may rely as to all matters of New York
law and certain federal laws upon the opinion of Thelen Reid &
Priest LLP.
EXPERTS
To the extent that any of the statements made under
DESCRIPTION OF THE INDENTURE - "Security", DESCRIPTION OF THE
1941 MORTGAGE "SECURITY" AND DESCRIPTION OF THE 1992 MORTGAGE
"Security" are, or refer to, statements of law or legal
conclusions, such statements have been reviewed (a) insofar as
Arizona law is concerned, by Snell & Wilmer L.L.P. and (b)
insofar as New Mexico law is concerned, by Rodey, Dickason,
Sloan, Akin & Robb, P.A., and have been set forth herein in
reliance upon the authority of such firms as experts.
To the extent that the statements made in the 1997 10-K in
"Rates and Regulation" and "Environmental Matters" under ITEM 1.
- BUSINESS and under ITEM 3. - LEGAL PROCEEDINGS are, or refer
to, statements of law or legal conclusions, and insofar as
Arizona law is concerned, such statements have been prepared or
reviewed by Dennis R. Nelson, Esq., Vice President, General
Counsel and Corporate Secretary of the Company, and have been
incorporated herein by reference in reliance upon the authority of
Mr. Nelson as an expert.
The statements made under CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS have been prepared or reviewed by Thelen Reid &
Priest LLP and have been set forth herein in reliance upon the
authority of such firm as experts.
The consolidated financial statements incorporated in this
prospectus by reference from the Company's 1997 Form 10-K have been
audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and have
been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
With respect to the unaudited consolidated financial
information of the Company for the three-month period ended,
March 31, 1998 and the three-month and six-month periods ended June
30, 1998 incorporated by reference in this Prospectus,
PricewaterhouseCoopers LLP reported that
they have applied limited procedures in accordance with
professional standards for a review of such information.
However, their separate reports dated May 5, 1998 and August 4,
1998 incorporated by reference herein, state that they did not
audit and they do not express an opinion on that unaudited
consolidated financial information. PricewaterhouseCoopers has not
carried out any significant or additional audit tests beyond those
which would have been necessary if their report had not been
included. Accordingly, the degree
of reliance on their reports on such information should be
restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers LLP is not subject to
the liability provisions of Section 11 of the Securities Act for
their report on the unaudited consolidated financial information
because that report is not a "report" or a "part" of the
registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of sections 7 and 11
of the Securities Act.
56
<PAGE>
Appendix A
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.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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.
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.
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 March 2, 1998,
the date of the 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 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 March 2, 1998, the date of the Form 10-K. A copy of such
letter, dated March 2, 1998, is filed as Exhibit 16 to this Form 10-K/A.
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 March 2, 1998, the date of the 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 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 5, 1998 By Ira R. Adler
------------------------------------
IRA R. ADLER
Senior Vice President and Principal
Financial Officer
TUCSON ELECTRIC POWER COMPANY
Date: March 5, 1998 By Ira R. Adler
--------------------------------------
IRA R. ADLER
Senior Vice President and Principal
Financial Officer
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.
16 -- Letter re change in certifying accountant.
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.
Appendix B
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
----- ------
Commission 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
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
-------- ---------
At May 6, 1998, 32,137,409 shares of UniSource Energy Corporation's
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.
This combined Form 10-Q 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............................................................. iv
Report of Independent Accountants........................................1
Independent Accountants' Review Report...................................2
PART I - FINANCIAL INFORMATION
Item 1. -- Financial Statements
UniSource Energy Corporation
Comparative Condensed Consolidated Statements of Income (Loss).....3
Comparative Condensed Consolidated Statements of Cash Flows........4
Comparative Condensed Consolidated Balance Sheets..................5
Tucson Electric Power Company
Comparative Condensed Consolidated Statements of Income (Loss).....6
Comparative Condensed Consolidated Statements of Cash Flows........7
Comparative Condensed Consolidated Balance Sheets..................8
Notes to Condensed Consolidated Financial Statements
Note 1. Accounting for the Effects of Regulation......................9
Note 2. Tax Assessments..............................................10
Note 3. Transfer of MEH from TEP to UniSource Energy.................11
Note 4. Loans and Guarantees for NEV.................................11
Note 5. Long-Term Debt...............................................11
Note 6. Rate Matters.................................................12
Note 7. Income Taxes.................................................13
Note 8. Reclassifications............................................13
Note 9. Review by Independent Public Accountants.....................13
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview..............................................................14
Competition
Wholesale.........................................................15
Retail............................................................16
Shared Savings Proposal Before ACC....................................18
Accounting for the Effects of Regulation
Accounting Implications...........................................18
Recent Events That May Impact TEP's Application of FAS 71.........19
Investments in Energy Related Ventures................................19
Dividends on Common Stock
UniSource Energy..................................................20
TEP...............................................................20
Earnings..............................................................21
Results of Operations
Utility Sales and Revenues.......................................21
Operating Expenses..............................................22
Other Income (Deductions)........................................22
Interest Expense........... ....................................22
Events Affecting Future Results of Utility Operations
TEP Generating Resources........................................22
Liquidity and Capital Resources
Cash Flows
UniSource Energy................................................23
TEP.............................................................23
Financing Developments
TEP Sale of Bonds...............................................23
TEP Credit Agreement............................................24
TEP First Mortgage Bonds........................................24
UniSource Energy................................................24
UniSource Energy--Loans and Guarantees..........................25
Impact of Year 2000 on Computer Systems and Applications..............25
Safe Harbor for Forward-Looking Statements............................25
PART II - OTHER INFORMATION
Item 1. -- Legal Proceedings
Tax Assessments.......................................................27
Item 5. - Other Information
Additional Financial Data.............................................27
Item 6. -- Exhibits and Reports on Form 8-K...............................27
Signature Page.............................................................28
Exhibit Index..............................................................29
DEFINITIONS
The abbreviations and acronyms used in the 1998 First Quarter Form 10-Q are
defined below:
- -------------------------------------------------------------------------------
ACC............... Arizona Corporation Commission.
ADOR.............. Arizona Department of Revenue.
AET............... Advanced Energy Technologies, Inc., a wholly-owned
subsidiary of MEH Corporation.
Banks............. The financial institutions party to the Credit
Agreement dated as of December 30, 1997.
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.
FAS 71............ Statement of Financial Accounting Standards #71:
Accounting for the Effects of Certain Types of
Regulation.
FAS 101........... Statement of Financial Accounting Standards #101:
Regulated Enterprises - Accounting for the
Discontinuation of Application of FAS 71.
FAS 121........... Statement of Financial Accounting Standards #121:
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of.
FERC.............. Federal Energy Regulatory Commission.
First Mortgage
Bonds............ First mortgage bonds issued under the General First
Mortgage.
General First
Mortgage......... The Indenture, dated as of April 1, 1941, of Tucson
Gas, Electric Light and Power Company to The Chase
National Bank of the City of New York, as trustee, as
supplemented and amended.
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.
Global Solar...... Global Solar Energy, L.L.C., a corporation in which a
50% interest is owned by AET.
Holding Company
Order............. ACC Order issued November 25, 1997 granting TEP the
authority to organize a public utility holding
company.
IDBs.............. Industrial development revenue or pollution control
bonds.
IRS............... Internal Revenue Service.
Irvington......... Irvington Generating Station.
Irvington Lease... The leveraged lease arrangement relating to Irvington
Unit 4.
ISO............... Independent System Operator.
ITC............... Investment Tax Credit.
kWh............... Kilowatt-hour(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 certain
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).
NEV............... New Energy Ventures, L.L.C., a company in which a 50%
interest is owned by Millennium.
NEV California.... NEV California, L.L.C., a wholly-owned subsidiary of
NEV.
1994 Rate Order... ACC Rate Order concerning an increase in TEP's retail
base rates and certain regulatory write-offs, issued
January 11, 1994.
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.
NOL............... Net Operating Loss carryforward for income tax
purposes.
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.
SEC............... Securities and Exchange Commission.
Second Mortgage
Bonds............ TEP's second mortgage bonds issued under the General
Second Mortgage.
SES............... Southwest Energy Solutions, Inc., a wholly-owned
subsidiary of MEH.
Shareholders...... Holders of UniSource Energy Common Stock.
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 Leases..... Leveraged lease arrangements relating to
Springerville Unit 1, and an undivided one-half
interest in certain Springerville Common Facilities
and which has been assumed by TEP.
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.
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.
WSCC.............. Western Systems Coordinating Council.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
UniSource Energy Corporation and
to the Board of Directors of
Tucson Electric Power Company
We have reviewed the accompanying condensed consolidated balance sheet and
the related condensed consolidated statements of income and of cash flows of
UniSource Energy Corporation and its subsidiaries (the Company) and of
Tucson Electric Power Company and its subsidiaries (TEP) as of and for the
three-month period ended March 31, 1998. This financial information is the
responsibility of the Company's and TEP's management. The financial
statements as of March 31, 1997 were reviewed by other independent
accountants whose report dated February 23, 1998 stated that they were not
aware of any material modifications that should be made to such financial
information for it to be in conformity with generally accepted accounting
principles.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information as of and for the
three-month period ended March 31, 1998 for it to be in conformity with
generally accepted accounting principles.
The financial statements of the Company and of TEP for the year ended
December 31, 1997 were audited by other independent accountants whose report
dated February 23, 1998 expressed an unqualified opinion on those
statements.
Price Waterhouse LLP
Phoenix, Arizona
May 5, 1998
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
UniSource Energy Corporation and its Stockholders
Tucson Electric Power Company
220 West Sixth Street
Tucson, Arizona 85701
We have reviewed the condensed consolidated statements of income and cash
flows of UniSource Energy Corporation and its subsidiaries (the Company) and
Tucson Electric Power Company (TEP) for the three-month period ended March
31, 1997. These financial statements are the responsibility of the
Company's and TEP's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets and statements of capitalization
of the Company and TEP as of December 31, 1997 and the related statements of
income, cash flows, and changes in stockholders' equity (deficit) for the
year then ended (not presented herein); and in our report dated February 23,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheets as of December 31, 1997 is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which they have been derived.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 23, 1998
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The weather causes seasonal fluctuations in UniSource Energy's sales. As a
result, quarterly results are not indicative of annual operating results. The
quarterly financial statements that follow are unaudited but reflect all normal
recurring accruals and other adjustments which we believe are necessary for a
fair presentation of the results for the interim periods presented. Also see
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations. This quarterly report should be reviewed in conjunction
with the Company's 1997 Form 10-K.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended
March 31,
1998 1997
-Thousands of Dollars-
Operating Revenues
Retail Customers $138,087 $129,937
Amortization of MSR Option Gain Regulatory Liability - 5,013
Sales for Resale 22,854 19,331
--------- ---------
Total Operating Revenues 160,941 154,281
--------- ---------
Operating Expenses
Fuel and Purchased Power 48,400 45,646
Capital Lease Expense 25,778 26,276
Amortization of Springerville Unit 1 Allowance (7,631) (7,009)
Other Operations 26,298 23,363
Maintenance and Repairs 10,724 10,231
Depreciation and Amortization 22,563 21,774
Taxes Other Than Income Taxes 12,926 12,625
Employee Severance Plan Expense - Net - 2,933
Income Taxes (1,937) (2,348)
--------- ---------
Total Operating Expenses 137,121 133,491
--------- ---------
Operating Income 23,820 20,790
--------- ---------
Other Income (Deductions)
Income Taxes (631) 14,558
Interest Income 1,716 1,709
Unregulated Energy Businesses - Net (4,036) (932)
Other 810 (31)
--------- ---------
Total Other Income (Deductions) (2,141) 15,304
--------- ---------
Interest Expense
Long-Term Debt 17,111 14,117
Interest Imputed on Losses Recorded at Present Value 8,545 8,279
Other 3,058 2,206
--------- ---------
Total Interest Expense 28,714 24,602
--------- ---------
Net Income (Loss) $ (7,035) $ 11,492
========= =========
Average Shares of Common Stock Outstanding (000) 32,139 32,139
========= =========
Basic and Diluted Earnings per Share $ (0.22) $ 0.36
========= =========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1998 1997
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $146,532 $142,918
Cash Receipts from Sales for Resale 25,549 22,402
Fuel and Purchased Power Costs Paid (41,527) (39,847)
Wages Paid, Net of Amounts Capitalized (23,257) (20,259)
Payment of Other Operations and Maintenance Costs (23,690) (18,876)
Capital Lease Interest Paid (41,319) (37,512)
Interest Paid, Net of Amounts Capitalized (17,198) (13,400)
Taxes Paid, Net of Amounts Capitalized (11,519) (11,121)
Interest Received 2,361 2,262
Contract Termination Fee Paid (10,000) -
Other 1,982 410
--------- ---------
Net Cash Flows - Operating Activities 7,914 26,977
--------- ---------
Cash Flows from Investing Activities
Construction Expenditures (16,957) (15,602)
Investments in Joint Ventures (6,000) (1,338)
Other (35) 988
--------- ---------
Net Cash Flows - Investing Activities (22,992) (15,952)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 1,105 -
Payments on Renewable Term Loan - (31,000)
Payments to Retire Capital Lease Obligations (8,737) (4,061)
Other (1,751) 383
--------- ---------
Net Cash Flows - Financing Activities (9,383) (34,678)
--------- ---------
Net Decrease in Cash and Cash Equivalents (24,461) (23,653)
Cash and Cash Equivalents, Beginning of Year 146,256 130,291
--------- ---------
Cash and Cash Equivalents, End of Period $121,795 $106,638
========= =========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
Three Months Ended
March 31,
1998 1997
-Thousands of Dollars-
Net Income (Loss) $ (7,035) $ 11,492
Adjustments to Reconcile Net Income (Loss)
to Net Operating Cash Flows
Depreciation and Amortization Expense 22,563 21,774
Deferred Income Taxes and Investment Tax Credits-Net (4,117) (16,907)
Lease Payments Deferred (12,616) (8,306)
Amortization of Regulatory Assets & Liabilities,
Net of Interest Imputed on Losses Recorded at
Present Value 914 (3,743)
Deferred Contract Termination Fee (9,038) -
Loss (Unremitted Earnings) of Unconsolidated
Subsidiaries 6,591 (538)
Other (174) (1,416)
Changes in Assets and Liabilities which Provided
(Used) Cash Exclusive of Changes Shown Separately
Accounts Receivable 987 7,534
Materials and Fuel 251 153
Accounts Payable 508 2,369
Taxes Accrued 11,961 11,826
Other Current Assets and Liabilities (3,260) (436)
Other Deferred Assets and Liabilities 379 3,175
--------- ---------
Net Cash Flows - Operating Activities $ 7,914 $ 26,977
========= =========
Non-Cash Financing Activities (these activities do not affect the statements of
cash flows):
The proceeds from the issuance of $200 million of Pollution Control Revenue
Bonds in March 1998 are held in trust and will be released by the trustee in May
1998 to redeem $200 million of previously issued bonds. See Note 5.
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
- Thousands of Dollars -
Utility Plant
Plant in Service $2,211,650 $2,194,150
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 70,692 72,404
----------- -----------
Total Utility Plant 3,175,406 3,159,618
Less Accumulated Depreciation and Amortization (1,001,685) (982,621)
Less Accumulated Amortization of Capital Leases (78,435) (73,728)
Less Springerville Unit 1 Allowance (168,670) (167,756)
----------- -----------
Total Utility Plant - Net 1,926,616 1,935,513
----------- -----------
Investments and Other Property 78,855 78,772
----------- -----------
Current Assets
Cash and Cash Equivalents 121,795 146,256
Accounts Receivable 70,238 71,225
Materials and Fuel 33,754 34,005
Deferred Income Taxes - Current 7,777 14,910
Long-Term Debt Proceeds Held by Trustee 205,721 6,960
Other 16,079 16,693
----------- -----------
Total Current Assets 455,364 290,049
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 169,212 170,034
Deferred Springerville Common Facility Costs 57,587 58,222
Deferred Springerville Contract Termination Fee 47,115 48,077
Deferred Springerville Unit 2 Costs 9,267 11,590
Deferred Lease Expense 10,982 11,571
Other Deferred Regulatory Assets 10,858 11,089
Deferred Debits - Other 21,005 19,492
----------- -----------
Total Deferred Debits 326,026 330,075
----------- -----------
Total Assets $2,786,861 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
March 31, December 31,
1998 1997
- Thousands of Dollars -
Capitalization
Common Stock $ 638,873 $ 638,904
Accumulated Deficit (429,061) (422,026)
----------- -----------
Common Stock Equity 209,812 216,878
Capital Lease Obligations 883,607 890,257
Long-Term Debt 1,215,120 1,215,120
----------- -----------
Total Capitalization 2,308,539 2,322,255
----------- -----------
Current Liabilities
Current Obligations Under Capital Leases 15,238 14,552
Current Maturities of Long-Term Debt 200,500 500
Accounts Payable 35,417 34,909
Interest Accrued 47,004 64,812
Taxes Accrued 36,358 24,397
Contract Termination Fee Payable - 10,000
Other 12,412 19,051
----------- -----------
Total Current Liabilities 346,929 168,221
----------- -----------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 66,107 77,606
Accumulated Deferred Investment Tax Credits
Regulatory Liability 11,332 11,905
Emission Allowance Gain Regulatory Liability 17,609 17,591
Other 36,345 36,831
----------- -----------
Total Deferred Credits and Other Liabilities 131,393 143,933
----------- -----------
Total Capitalization and Other Liabilities $2,786,861 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
The weather causes seasonal fluctuations in TEP's sales. As a result, quarterly
results are not indicative of annual operating results. The quarterly financial
statements that follow are unaudited but reflect all normal recurring accruals
and other adjustments which we believe are necessary for a fair presentation of
the results for the interim periods presented. Also see Item 2. - Management's
Discussion and Analysis of Financial Condition and Results of Operations. This
quarterly report should be reviewed in conjunction with the TEP's 1997 Form 10-
K.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended
March 31,
1998 1997
-Thousands of Dollars-
Operating Revenues
Retail Customers $138,149 $129,937
Amortization of MSR Option Gain Regulatory Liability - 5,013
Sales for Resale 22,854 19,331
--------- ---------
Total Operating Revenues 161,003 154,281
--------- ---------
Operating Expenses
Fuel and Purchased Power 48,400 45,646
Capital Lease Expense 25,778 26,276
Amortization of Springerville Unit 1 Allowance (7,631) (7,009)
Other Operations 26,298 23,363
Maintenance and Repairs 10,724 10,231
Depreciation and Amortization 22,563 21,774
Taxes Other Than Income Taxes 12,926 12,625
Employee Severance Plan Expense- Net - 2,933
Income Taxes (1,937) (2,348)
--------- ---------
Total Operating Expenses 137,121 133,491
--------- ---------
Operating Income 23,882 20,790
--------- ---------
Other Income (Deductions)
Income Taxes (1,560) 14,558
Interest Income 1,716 1,756
Interest Income-Note Receivable from UniSource Energy 2,300 -
Other 769 (1,010)
--------- ---------
Total Other Income (Deductions) 3,225 15,304
--------- ---------
Interest Expense
Long-Term Debt 17,111 14,117
Interest Imputed on Losses Recorded at Present Value 8,545 8,279
Other 3,058 2,206
--------- ---------
Total Interest Expense 28,714 24,602
--------- ---------
Net Income (Loss) $ (1,607) $ 11,492
========= =========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1998 1997
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $146,532 $142,918
Cash Receipts from Sales for Resale 25,549 22,402
Fuel and Purchased Power Costs Paid (41,527) (39,847)
Wages Paid, Net of Amounts Capitalized (22,428) (20,259)
Payment of Other Operations and Maintenance Costs (22,106) (18,876)
Capital Lease Interest Paid (41,319) (37,512)
Interest Paid, Net of Amounts Capitalized (17,198) (13,400)
Taxes Paid, Net of Amounts Capitalized (11,477) (11,121)
Interest Received 1,828 2,262
Contract Termination Fee Paid (10,000) -
Other 937 410
--------- ---------
Net Cash Flows - Operating Activities 8,791 26,977
--------- ---------
Cash Flows from Investing Activities
Construction Expenditures (16,957) (15,602)
Transfer of MEH (45,412) -
Investments in Joint Ventures - (1,338)
Other (6) 988
--------- ---------
Net Cash Flows - Investing Activities (62,375) (15,952)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 1,105 -
Payments on Renewable Term Loan - (31,000)
Payments to Retire Capital Lease Obligations (8,737) (4,061)
Other (1,884) 383
--------- ---------
Net Cash Flows - Financing Activities (9,516) (34,678)
--------- ---------
Net Decrease in Cash and Cash Equivalents (63,100) (23,653)
Cash and Cash Equivalents, Beginning of Year 146,256 130,291
--------- ---------
Cash and Cash Equivalents, End of Period $ 83,156 $106,638
========= =========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
Three Months Ended
March 31,
1998 1997
-Thousands of Dollars-
Net Income (Loss) $ (1,607) $ 11,492
Adjustments to Reconcile Net Income (Loss) to Net
Operating Cash Flows
Depreciation and Amortization Expense 22,563 21,774
Deferred Income Taxes and
Investment Tax Credits - Net (377) (16,907)
Lease Payments Deferred (12,616) (8,306)
Amortization of Regulatory Assets & Liabilities, Net
of Interest Imputed on Losses Recorded at
Present Value 914 (3,743)
Deferred Contract Termination Fee (9,038) -
Unremitted Earnings of Unconsolidated Subsidiaries (213) (538)
Other (1,911) (1,416)
Changes in Assets and Liabilities which Provided
(Used) Cash Exclusive of Changes Shown Separately
Accounts Receivable (74) 7,534
Materials and Fuel 250 153
Accounts Payable 1,561 2,369
Taxes Accrued 11,962 11,826
Other Current Assets and Liabilities (3,002) (436)
Other Deferred Assets and Liabilities 379 3,175
--------- ---------
Net Cash Flows - Operating Activities $ 8,791 $ 26,977
========= =========
Non-Cash Financing Activities (these activities do not affect the statements of
cash flows):
The proceeds from the issuance of $200 million of Pollution Control Revenue
Bonds in March 1998 are held in trust and will be released by the trustee in May
1998 to redeem $200 million of previously issued bonds. See Note 5.
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
- Thousands of Dollars -
Utility Plant
Plant in Service $2,211,650 $2,194,150
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 70,692 72,404
----------- -----------
Total Utility Plant 3,175,406 3,159,618
Less Accumulated Depreciation and Amortization (1,001,685) (982,621)
Less Accumulated Amortization of Capital Leases (78,435) (73,728)
Less Springerville Unit 1 Allowance (168,670) (167,756)
----------- -----------
Total Utility Plant - Net 1,926,616 1,935,513
----------- -----------
Investments and Other Property 58,029 78,772
----------- -----------
Note Receivable from UniSource Energy 71,640 -
---------- -----------
Current Assets
Cash and Cash Equivalents 83,156 146,256
Accounts Receivable 71,155 71,225
Materials and Fuel 33,715 34,005
Deferred Income Taxes - Current 7,777 14,910
Long-Term Debt Proceeds Held by Trustee 205,721 6,960
Other 14,904 16,693
----------- -----------
Total Current Assets 416,428 290,049
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 169,212 170,034
Deferred Springerville Common Facility Costs 57,587 58,222
Deferred Springerville Contract Termination Fee 47,115 48,077
Deferred Springerville Unit 2 Costs 9,267 11,590
Deferred Lease Expense 10,982 11,571
Other Deferred Regulatory Assets 10,858 11,089
Deferred Debits - Other 21,005 19,492
----------- -----------
Total Deferred Debits 326,026 330,075
----------- -----------
Total Assets $2,798,739 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
March 31, December 31,
1998 1997
- Thousands of Dollars -
Capitalization
Common Stock $ 645,261 $ 645,261
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (423,633) (422,026)
----------- -----------
Common Stock Equity 215,271 216,878
Capital Lease Obligations 883,607 890,257
Long-Term Debt 1,215,120 1,215,120
----------- -----------
Total Capitalization 2,313,998 2,322,255
----------- -----------
Current Liabilities
Current Obligations Under Capital Leases 15,238 14,552
Current Maturities of Long-Term Debt 200,500 500
Accounts Payable 35,642 34,909
Interest Accrued 47,004 64,812
Taxes Accrued 36,327 24,397
Contract Termination Fee Payable - 10,000
Other 12,442 19,051
----------- -----------
Total Current Liabilities 347,153 168,221
----------- -----------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 72,381 77,606
Accumulated Deferred Investment Tax Credits
Regulatory Liability 11,332 11,905
Emission Allowance Gain Regulatory Liability 17,609 17,591
Other 36,266 36,831
----------- -----------
Total Deferred Credits and Other Liabilities 137,588 143,933
----------- -----------
Total Capitalization and Other Liabilities $2,798,739 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING FOR THE EFFECTS OF REGULATION
- -------------------------------------------------
Accounting Implications
The ACC regulates TEP's utility business. TEP generally uses the same
accounting policies and practices used by nonregulated companies for financial
reporting under generally accepted accounting principles. However, sometimes
these principles, such as FAS 71, require special accounting treatment for
regulated companies to show the effect of regulation. For example, in setting
TEP's retail rates, the ACC may not currently allow TEP to charge its customers
to recover certain expenses but; instead, require that these charges be charged
to customers in the future. In this situation, FAS 71 requires TEP not to show
these expenses on its current income statements but to "defer" these items and
show them as "regulatory assets" on the balance sheet until TEP is allowed to
charge its customers. TEP then amortizes these items to the income statement as
charges are billed to customers. Similarly, certain items of revenue may be
deferred as regulatory liabilities which also are eventually amortized to the
income statement.
We have recorded regulatory assets and liabilities in our balance sheets in
accordance with FAS 71. A regulated company must satisfy certain conditions to
apply the accounting policies and practices of FAS 71. These conditions
include:
- an independent regulator sets rates;
- the regulator sets the rates to cover specific costs of delivering service;
and
- the service territory lacks competitive pressures to reduce rates below the
rates set by the regulator.
We periodically assess whether we continue to meet these conditions. If we were
required to stop applying FAS 71 to all or a portion of TEP's regulated utility
operations, we would write off the related balances of TEP's regulatory assets
and liabilities as a charge in our income statement. This means our earnings
would be reduced by the net amount of regulatory assets and liabilities, after
applicable deferred income taxes. Based on the balances of TEP's regulatory
assets and liabilities at March 31, 1998, if we stopped applying FAS 71 to all
of TEP's regulated operations, we would record an extraordinary loss of
approximately $178 million, net of the related deferred income tax benefit of
$99 million. While our cash flows may be affected by regulatory orders and
market conditions, our cash flows would not be affected if we stopped applying
FAS 71.
If we stop applying FAS 71, we would need to evaluate the likelihood that
we could recover the cost of TEP's electric plant in the marketplace using the
criteria in FAS 121. If undiscounted cash flows are less than the carrying
value of those assets, then we would need to write off as an expense a portion
of those plant assets to reflect their current market value. We cannot predict
if we would write off any plant assets as a result of applying FAS 121.
Recent Events That May Impact TEP's Application of FAS 71
Legislative and other regulatory measures are being developed in various
states to deregulate the electric generation business. The SEC and the EITF
have been reviewing whether electric utilities should stop applying FAS 71 to
the business transactions in states where deregulation is occurring. In
general, the EITF consensus states that utilities must stop accounting for the
electric generation portion of their business under FAS 71 when a deregulation
plan is in place and its terms are known. The EITF also concludes that
utilities do not need to write off regulatory assets(including those related to
generation) if the cash flow stream from regulated rates includes recovery of
the regulatory assets. We are uncertain how the EITF consensus will impact TEP
as deregulation activities develop in Arizona. In the future, we may need to
stop applying FAS 71 to the electric generation portion of TEP's business, even
if we believe that we will recover the full amount of our costs under the ACC
competition phase-in plan. Approximately 55% of TEP's net regulatory assets on
the balance sheet relate to electric generation.
In December 1996, the ACC adopted rules which would introduce retail
electric competition in Arizona. If implemented as adopted, the rules would
require each "Affected Utility" (TEP, Arizona Public Service Company, Citizens
Utilities Company and several cooperatives) to open its retail service area to
competing electric service providers on a phased-in basis over the period 1999
to 2003. However, the ACC has not adopted specific guidelines for
identification and recovery of stranded costs. Stranded costs represent costs
incurred by a utility in a regulated market that would not likely be recovered
through the prices charged for electricity and other services in a competitive
market.
Hearings were held in February 1998 to resolve issues relating to stranded
cost recovery. TEP, other Affected Utilities, the Residential Utility Consumer
Office, the ACC staff, and various intervenors participated in the hearings.
On May 6, 1998, the Hearing Officer issued a Proposed Order. The Proposed
Order indicates that the Affected Utilities should have a reasonable
opportunity to recover 100% of their stranded costs and gives the Affected
Utilities three options for stranded cost recovery. However, it is unclear
whether Affected Utilities would be able to recover 100% of their stranded
costs. The Proposed Order also specifies that some form of rate cap will be in
place for customers on standard offer during the transition period.
TEP is currently evaluating the financial implications if the Proposed
Order is adopted, including whether we would be able to apply FAS 71 to the
generation portion of TEP's business. TEP anticipates filing exceptions to the
Proposed Order. We cannot determine when the ACC will hold an open meeting to
consider the Proposed Order or whether the ACC will approve, modify or reject
the Proposed Order. If the Proposed Order is adopted,TEP would have 30 days to
file its choice of one of the three options for stranded cost recovery. At the
same time, TEP would file an implementation plan, including its estimate of
stranded costs related to generation and regulatory assets. Until such time, we
believe that any estimate of unrecoverable amounts of stranded costs would be
highly speculative.
Also in January 1998, the Arizona Legislature proposed legislation
introducing retail electric competition in Arizona. We cannot predict the
outcome of the proposed legislation or whether the ACC and the Arizona
Legislature will propose other initiatives on electric utility industry
restructuring. We believe, based on previous rate orders, that it is likely
that we will recover the full costs of our investments in electric utility
plant and regulatory assets. The ACC's final order may require us to stop
applying FAS 71 to the electric generation portion of TEP's utility
operations. If the order provides less than full recovery of stranded costs,
significant write-offs of assets may occur as discussed above.
Based on the activities that have occurred to date, TEP believes it
continues to meet the criteria to apply FAS 71 to its regulated activities.
However, we cannot predict the outcome of the deregulation efforts in Arizona
described above.
NOTE 2. TAX ASSESSMENTS
- ------------------------
Ruling on Arizona Sales Tax Assessments - Coal Sales
We have received sales tax assessments from the ADOR alleging that Valencia
is liable for sales tax on gross income from coal sales, transportation and
coal-handling services provided to TEP from November 1985 through May 1996. We
have protested these assessments. In September 1996, the Arizona Court of
Appeals upheld the validity of the assessment issued for the period November
1985 through March 1990. In July 1997, the Arizona Supreme Court granted a
Petition for Review, and oral arguments were held during December 1997. We
expect the Arizona Supreme Court to render its opinion in the second quarter of
1998. We are also protesting the assessments for the period April 1990 through
May 1996.
We have previously recorded an expense and a related liability for the
sales taxes and interest that we believe are probable of incurrence for the
period November 1985 through May 1996. Arizona law generally requires payment
of an assessment prior to pursuing the appellate process. We previously paid,
under protest, a total of $23 million of the disputed sales tax assessments.
These payments will be refunded if we are successful in the appeals process.
On May 31, 1996, Valencia was merged into TEP. Because TEP now acquires
coal directly from other companies, we do not believe we are liable for sales
tax computed on a basis similar to the assessments described above after May
31, 1996. For periods prior to May 31, 1996, we continue to record an
estimated interest expense on the disputed assessments.
Arizona Sales Tax Assessments - Leases
The ADOR has issued sales tax assessments to some of TEP's lessors of
generation-related facilities and equipment. The assessments allege sales tax
liability on a component of rents we paid on the Springerville Unit 1 Leases,
the Springerville Common Facilities Leases, the Irvington Lease and the
Springerville Coal Handling Facilities Lease from August 1, 1988 to September
30, 1993. Due to indemnification provisions in the lease agreements, if the
ADOR prevails, we would be required to reimburse the lessors for the sales
taxes that they pay.
We have recorded a liability for the probable amount of sales taxes and
interest due as of March 31, 1998. If the ADOR prevails, we would need to
record an additional expense and related liability. Even though it is
reasonably possible that the resolution of this issue could result in
approximately $22 million of additional sales tax expense, we do not believe
this outcome is likely. We do not expect that the resolution of this assessment
will have a material negative impact on the financial statements. We believe
that the ultimate resolution of this issue will occur over a period of two to
four years.
Income Tax Assessments
In February 1998, the IRS issued an income tax assessment for the 1992 and
1993 tax years. The IRS is challenging our treatment for income tax purposes of
various items relating to the 1992 Financial Restructuring, including the amount
of NOL and ITC generated before December 1991 that may be used to reduce taxes
in future periods.
Due to the Financial Restructuring, a change in ownership of TEP occurred
for tax purposes in December 1991. As a result, the use of the NOL and ITC
generated before December 1991 may be limited under the tax code. The IRS is
challenging our calculation of this limitation. At March 31, 1998, pre-change
federal NOL and ITC carryforwards were approximately $281 million and $26
million, respectively. In addition to the pre-change NOL and ITC which are
subject to the limitation, $180 million of federal NOL at March 31, 1998,is not
subject to the limitation.
Resolution of this matter is not expected to have a material adverse impact
on the financial statements.
NOTE 3. TRANSFER OF MEH FROM TEP TO UNISOURCE ENERGY
- -----------------------------------------------------
On January 1, 1998, TEP became a subsidiary of UniSource Energy. At the
same time,TEP transferred MEH to UniSource Energy and received as consideration
from UniSource Energy a $95 million 10-year promissory note with a yearly
interest rate of 9.78%. Approximately $25 million of this note represents a
gain to TEP. TEP has not recorded this gain. Instead, this gain will be
reflected as an increase in TEP's common equity when UniSource Energy pays the
principal portion of the note. The note receivable appears on TEP's
consolidated balance sheet but does not appear on UniSource Energy's
consolidated balance sheet because intercompany balances and transactions are
eliminated when financial statements are consolidated.
MEH owns Advanced Energy Technologies, Inc., Millennium Energy Holdings,
Inc., Nations Energy Corporation and Southwest Energy Solutions, Inc.
The transfer of MEH's cash balance of $45.4 million as part of the transfer
of MEH to UniSource Energy is included in the Cash Flows from Investing
Activities in TEP's cash flow statement for the three months ended March 31,
1998.
NOTE 4. LOANS AND GUARANTEES FOR NEV
- -------------------------------------
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, guarantees or it can be partially satisfied with $10 million
in loans from Millennium, or a combination of these alternatives. At April 30,
1998, NEV had received the following under the $20 million commitment:
- Millennium provided $7 million in loans to NEV.
- UniSource Energy issued guarantees in the aggregate amount of $5 million to
secure the obligations of NEV to counterparties to energy purchase and sale
agreements.
- UniSource Energy also issued a $1 million guarantee to secure the
obligations of NEV under its Agreement for Services with LG&E Energy
Marketing, Inc.
As a result of these loans and guarantees, the remaining commitment amount
available was $7 million at April 30, 1998.
UniSource Energy is the guarantor of $16.65 million of performance bonds
that secure the amounts NEV California owes to the California utility
distribution companies (UDCs) for services provided by the UDCs in connection
with NEV California's sales in the California retail electric market. NEV
California bills its customers for these UDC charges.
NOTE 5. LONG-TERM DEBT
- -----------------------
In March 1998, the Apache County, Arizona Industrial Development Authority
issued $200 million of Pollution Control Revenue Bonds and loaned the proceeds
to TEP. These bonds are included in Long-Term Debt on our balance sheet. The
new bonds, which are unsecured, were sold in three series: Series A ($83.7
million) bears interest at 5.85% and matures in 2028; Series B ($99.8 million)
bears interest at 5.875% and matures in 2033;and Series C ($16.5 million) bears
interest at 5.85% and matures in 2026.
The proceeds from the issuance of the new bonds will be used in May 1998 to
redeem $200 million of previously issued variable interest rate bonds that would
have matured in 2020 and 2021. The previously issued bonds are included in
Current Maturities of Long-Term Debt in our balance sheet at March 31, 1998.
Until the previously issued bonds are redeemed, the proceeds from issuance of
the new bonds will be recorded in the balance sheets under Current Assets as
Long-Term Debt Proceeds Held by Trustee.
NOTE 6. 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 includes a sharing of cost
containment benefits with customers and a reduction of potentially stranded
costs associated with the introduction of retail electric competition in
Arizona. The SSP identifies $20.8 million in savings allocable to ACC
jurisdictional operations. The cost containment savings were realized primarily
from renegotiated fuel contracts and a 15% reduction in our workforce from the
1996 Voluntary Severance Program. The ACC has not set a date to decide on this
matter.
The proposed $6.8 million rate reduction represents a 50/50 sharing between
TEP and its customers of $13.6 million of the cost savings. The SSP would allow
TEP to use the remaining $7.2 million of cost savings to reduce (mitigate)
potentially stranded costs by accelerating the amortization of Retail Excess
Capacity Deferrals. Retail Excess Capacity Deferrals represent operating and
capital costs associated with Springerville Unit 2 capacity which the ACC did
not allow TEP to recover in rates until the 1994 and 1996 Rate Orders. These
Retail Excess Capacity Deferrals totaled $87.5 million and $88.7 million at
March 31, 1998 and December 31, 1997, respectively. These deferrals are only
reflected in our regulatory calculations. The accompanying balance sheets do
not include these deferrals as the costs were expensed when incurred for
financial reporting purposes. The proposed $7.2 million (after tax) increase in
annual amortization expense for those 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 the financial 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 then-existing coal supply
contract and enter into a new, more cost effective contract with the same
supplier. TEP paid a $50 million termination fee in three installments: $30
million paid on June 30, 1997; $10 million paid on September 30, 1997; and $10
million paid on March 31, 1998.
TEP asked the ACC, as part of the SSP, to allow the termination fee to be
recorded as a regulatory asset and to be 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 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 be expensed immediately. The ACC has
not set a date to decide on this matter.
NOTE 7. INCOME TAXES
- ---------------------
The differences between the income tax expense (benefit) and the amount
obtained by multiplying income before income taxes by the U.S.statutory federal
income tax rate are as follows:
UniSource Energy TEP
---------------- ------------
Three Months Ended Three Months Ended
March 31, March 31,
1998 1997 1998 1997
---------------------------------------
- Thousands of Dollars -
Federal Income Tax Benefit
at Statutory Rate $(3,903) $ (1,895) $ (694) $ (1,895)
State Income Tax Benefit,
Net of Federal Deduction (601) (291) (107) (291)
Depreciation Differences
(Flow Through Basis) 1,040 - 1,040 -
Investment Tax Credit
Amortization (573) (976) (573) (976)
Reduction in Valuation
Allowance - (14,318) - (14,318)
Other (80) 574 (43) 574
-------- --------- ------- ---------
Total Benefit for Federal
and State Income Taxes $(4,117) $(16,906) $ (377) $(16,906)
======== ========= ======= =========
Income taxes are included in the income statements as follows:
UniSource Energy TEP
---------------- ------------
Three Months Ended Three Months Ended
March 31, March 31,
1998 1997 1998 1997
---------------------------------------
- Thousands of Dollars -
Operating Expenses $(1,937) $ (2,348) $(1,937) $ (2,348)
Other Income (Deductions) 631 (14,558) 1,560 (14,558)
Unregulated Energy
Businesses - Net (2,811) - - -
-------- --------- -------- ---------
Total Income Tax Benefit $(4,117) $(16,906) $ (377) $(16,906)
======== ========= ======== =========
The reduction in the valuation allowance and corresponding NOL benefit in
1997 are primarily due to revisions in the estimated amount of NOLs that we
expect to offset future taxable income. As of December 31, 1997, both UniSource
Energy and TEP had recorded the amount of prior period NOL benefit that we
expect to utilize on future income tax returns. At the present time, we are not
able to estimate future additional amounts of NOL benefit that we may recognize
in the income statements of either UniSource Energy or TEP. This is because
there are still open tax years for which there may be additional assessments
and because federal and state NOL carryforwards have varying expiration dates.
We do not expect to recognize additional amounts of NOL benefit until such
items are resolved.
NOTE 8. RECLASSIFICATIONS
- --------------------------
Minor reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
NOTE 9. REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
- -------------------------------------------------
With respect to the unaudited consolidated financial information of
UniSource Energy and TEP for the three-month periods ended March 31,1998, Price
Waterhouse LLP reported that they have applied limited procedures in accordance
with professional standards for a review of such information. However, their
separate report dated May 5, 1998 appearing herein, states that they did not
audit and they do not express an opinion on that unaudited consolidated
financial information. Price Waterhouse LLP has not carried out any significant
or additional audit tests beyond those which would have been necessary if their
report had not been included. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. Price Waterhouse LLP is not subject to the
liability provisions of section 11 of the Securities Act of 1933 for their
report on the unaudited consolidated financial information because that report
is not a "report" or a "part" of a registration statement prepared or certified
by Price Waterhouse LLP within the meaning of sections 7 and 11 of the Act.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------
UniSource Energy is a holding company which owns all of the outstanding
common stock of TEP and MEH. TEP is an operating public utility engaged in
the generation, purchase, transmission, distribution and sale of electricity
for customers in the greater Tucson, Arizona area and to wholesale
customers. MEH owns all of the outstanding common stock of four
subsidiaries established for the purpose of operating or investing in
various unregulated energy-related businesses.
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 on an annual basis.
Management's Discussion and Analysis explains the general financial
condition and the results of operations for UniSource Energy and its
business subsidiaries including:
-operating results during the first quarter compared with the same period
in the prior year,
-the outlook for dividends on common stock,
-changes in liquidity and capital resources during the first quarter of
1998, and
-expectations of identifiable material trends which may affect our
business in the future.
Management's Discussion and Analysis should be read along with the
Company's Condensed Consolidated Financial Statements, beginning on page 2,
which present the results of operations for the quarters ended March 31,
1998 and 1997. Management's Discussion and Analysis analyzes and explains
the differences between periods for specific line items of the Condensed
Consolidated Financial Statements.
OVERVIEW
- --------
UniSource Energy recorded a net loss of $7.0 million for the first
quarter of 1998, compared with net income of $11.5 million in the first
quarter of 1997. The results in the first quarter of 1997 included the
effect of non-recurring tax benefits, which was partially offset by non-
recurring expenses, as set forth below:
-$14.3 million net operating loss carryforward tax benefits,
-$2.9 million in pre-tax VSP expense, and
-$1.1 million in pre-tax consulting fees paid to new business ventures.
Excluding these one-time adjustments, we would have recorded a net loss of
$0.3 million in the first quarter of 1997. Our results in the first quarter
of 1998 were affected primarily by the following factors: losses from
unregulated energy-related subsidiaries ($4.0 million after-tax), lower non-
cash regulatory revenues ($5.0 pre-tax), and higher interest expense ($4.1
million pre-tax). These factors are discussed in more detail in Results of
Operations and Investments in Energy-Related Ventures, below.
Utility operating revenues grew by 4% while operating income grew by
15% in the first quarter of 1998 compared with the first quarter of 1997.
Growth in the number of customers in TEP's retail service area, increased
kilowatt-hour sales to both retail and wholesale customers due to cooler
weather, and a moderate 3% overall increase in operating expenses
contributed to this improvement in the first quarter of 1998.
The Company's and TEP's financial prospects continue to be subject to
regulatory, economic, and other uncertainties. These uncertainties include
the extent to which TEP can alter operations and reduce costs in response to
industry changes or unanticipated economic downturns, which may be limited
by continued high financial and operating leverage. Our future success will
depend, in part, on our ability to contain and/or reduce the costs of
serving retail customers and the level of sales to those 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 difficult. However, we expect
retail competition will exist in our local market within the next five
years. See Competition, Retail below. In a deregulated environment,
revenues from energy sales will be less certain, although revenues from
transmission and distribution services, which we expect to remain regulated,
would likely continue to grow. Even in a deregulated environment, TEP
expects to continue to benefit from population and economic growth in the
Tucson area through increased revenues from its regulated distribution
services.
The Company is addressing the uncertainties discussed above and is
positioning itself to benefit from the changing regulatory environment. We
are improving cost measurement and management techniques and are re-
engineering various functions at TEP. We have also extended contracts,
where appropriate, for large wholesale and retail customers, and are
developing new affiliates to provide energy services to markets beyond TEP's
retail service territory. See Results of Operations; Competition, Retail;
Shared Savings Proposal Before the ACC; and Investments in Energy-Related
Ventures, below.
Since April 1997, we have made significant progress in our financial
strategy to reduce refinancing risk by extending maturities of long-term
debt and letters of credit and to reduce exposure to variable interest rates
by refinancing with fixed interest rates. TEP refinanced variable rate debt
obligations at fixed rates and entered into a new bank Credit Agreement to
replace the MRA. Long-term debt obligations totaling $192 million currently
mature between 1999 and 2003. TEP plans to refinance a substantial portion
of these obligations during 1998. See Financing Developments, TEP First
Mortgage Bonds, below.
Despite these improvements, TEP's and UniSource Energy's consolidated
capital structures remain highly leveraged. Although TEP refinanced and
extended the maturities of certain debt obligations at favorable rates and
terms in 1997 and during the first quarter of 1998, the Company might not
have continued access to the capital markets at similar rates and terms.
Despite the reduction in variable rate debt obligations, changes in interest
rates on its remaining variable rate debt will continue to affect TEP's
earnings and cash flow. Following the redemption of certain pollution
control revenue bonds on May 15, 1998, TEP will have $329 million aggregate
principal amount of variable debt obligations. On March 31, 1997, variable
rate debt totaled $805 million. See Financing Developments, TEP Sale of
Bonds, below.
TEP is currently unable to pay dividends to UniSource Energy because it
fails to meet certain requirements contained in some of its First Mortgage
Bond obligations. As a result, cash flow from TEP to UniSource Energy is
limited. This, in turn, limits UniSource Energy's ability to pay dividends.
See Dividends on Common Stock below.
During the next twelve months, TEP expects to fund its operating
activities and construction expenditures with internal cash flows, existing
cash balances, and, if necessary, borrowings under the Revolving Credit. As
of May 6, 1998, cash balances, including cash equivalents for UniSource
Energy, were approximately $104 million, of which $65 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. FERC generally does not permit TEP's prices for wholesale sales of
capacity and energy to exceed rates determined on a cost of service basis.
However, in the fall of 1997, FERC granted TEP a tariff to sell at market-
based rates. In the current market, wholesale prices are substantially
below total cost of service, but in all instances, we make wholesale sales
at prices which exceed fuel and other variable costs. In addition, we
expect competition to sell capacity to remain vigorous. 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 the following factors:
-availability of capacity in the southwestern United States,
-the availability and prices of natural gas and oil,
-spot energy prices, and
-transmission access.
The FERC issued two orders pertaining to transmission access in April
1996. FERC Order No. 888 requires all public utilities that own, control,
or operate interstate transmission facilities to offer transmission service
to others under a single tariff. This tariff must incorporate certain
minimum terms and conditions of transmission service established by the FERC
and 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 to prevent
employees of a public utility engaged in marketing functions from obtaining
preferential access to OASIS-related information or from engaging in
discriminatory business practices. TEP is in compliance with the
requirements of FERC Orders 888 and 889.
TEP, along with other transmission owners and users located in the
southwestern United States, is investigating the feasibility of forming an
independent system operator (ISO) for the region. An ISO would be
responsible for ensuring transmission reliability and nondiscriminatory
access to the regional transmission grid. The working group held three sets
of public meetings to obtain input to the study and completed the initial
feasibility study in September 1997. The participants have begun detailed
developmental work. The formation of an ISO 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 does not compete with other companies for
electric service in TEP's retail service territory. However, TEP competes
against gas service suppliers and others who provide energy services. TEP
actively markets energy and customized energy-related services. We have not
lost any customers to self-generation partly because of these efforts. For
example, in recent years, TEP executed new contracts with two principal
customers that provide approximately 9% of TEP's total annual retail
revenues. Both customers are in the copper mining business. The new
contracts include price reductions, term extensions, and a provision for
interruptible service. These contracts expire in March 2001 and January
2003. These mining customers cannot terminate the contracts early without
giving us at least one and up to two years prior notice. We have not
received any such notices.
In December 1996, the ACC adopted rules that, if implemented as
adopted, would require a phase-in of retail electric competition in Arizona
over a four-year period beginning January 1, 1999. The adopted rules are a
framework to implement competition. The ACC rules, if implemented as
adopted, 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 over the period 1999 to 2003 and
would permit Affected Utilities to sell power at unregulated market prices.
Beginning January 1, 1999, 20% of retail customers would be eligible to
choose their electric service provider from companies certificated by the
ACC. This percentage increases to 50% beginning January 1, 2001 and to 100%
by January 1, 2003. Under the adopted rules, it is unclear which customers
would be eligible to choose 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. Other
electric utilities not regulated by the ACC, such as the Salt River Project
and certain municipal utilities, would be granted certificates to compete
under the ACC's rules if these utilities would allow their service
territories to be similarly open to competing service providers.
Under the rules, Affected Utilities would be required to provide
distribution wheeling services (i.e., retail wheeling) at rates approved by
the ACC. Retail wheeling involves a utility transmitting energy produced by
other entities over its transmission and distribution system to consumers
located in its present retail service area. The availability of wheeling
services will make it easier for entities to provide services outside their
traditional service territory. This exposes TEP to the risk that TEP's
distribution customers may choose to purchase their energy from competitors.
However, TEP would have the opportunity to sell power at market prices to
retail customers outside of TEP's current service area. Until retail
competition has been substantially implemented, each Affected Utility would
be required to offer services to all consumers located in their present
retail service areas.
The rules, as adopted by the ACC, specify that the ACC would allow
recovery of unmitigated stranded costs by Affected Utilities. Stranded
costs represent costs incurred by a utility in a regulated market that
likely would not be recovered through the prices charged for electricity and
other services in a competitive market. According to the adopted rules, to
recover stranded costs, utilities will need to demonstrate to the ACC that
they have taken every feasible, cost-effective measure to mitigate or offset
stranded costs. Also, Affected Utilities would have to seek ACC approval of
distribution charges or other means of recovering stranded costs from
current customers who elect to use another electricity provider.
In January 1998, TEP filed its position regarding stranded cost
recovery with the ACC. We believe that TEP and other Affected Utilities
should have the opportunity to recover all of their stranded costs and that
stranded costs should be calculated as the difference between future
revenues under traditional regulation and future revenues in a competitive
market.
Hearings were held in February 1998 to resolve issues relating to
stranded cost recovery. TEP, other Affected Utilities, the Residential
Utility Consumer Office, the ACC staff, and various intervenors participated
in the hearings. On May 6, 1998, the Hearing Officer issued a Proposed
Order. The Proposed Order indicates that the Affected Utilities should have
a reasonable opportunity to recover 100% of their stranded costs and gives
the Affected Utilities three options for stranded cost recovery.
(1) Net Revenues Lost Methodology--This option would provide for recovery
of stranded costs through a Competitive Transition Charge (CTC) using a
net revenues lost approach for a five-year period beginning in 1999. A
net revenues lost approach would compare estimates of generation
revenues under competition to generation revenues under continued
regulation. The difference, if any, would represent stranded costs.
Under this option, customers remaining on standard offer service would
pay 100% of their proportionate share of stranded costs each year.
Customers who elect to purchase energy from competitors would pay 100%
of their proportionate share of stranded costs in the first year
through the CTC, and during each successive year, this percentage would
decrease by 20%. The Proposed Order indicates that through customer
growth and other mitigation efforts, Affected Utilities should still be
able to collect 100% of their stranded costs despite the annual
reduction in the CTC.
(2) Divestiture/Auction Methodology--This option would provide for an
auction and divestiture of generation assets where the difference
between market and book value would represent stranded costs. The
Affected Utility would be permitted to collect 100% of stranded costs
through a CTC over a 10-year period. However, no return would be
provided on the unamortized balance of stranded costs during this 10-
year period.
(3) Financial Integrity Methodology--This option would provide for stranded
cost recovery through a CTC which would be calculated to provide
sufficient revenues for the Affected Utility to maintain its financial
integrity and to meet minimum financial ratios (not specified in the
Proposed Order) for a 10-year period.
The Proposed Order also specifies that some form of rate cap would be in
place for customers on standard offer during the transition period.
TEP is currently evaluating the Proposed Order to determine the
potential financial implications to the Company if it is adopted. TEP
anticipates filing exceptions to the Proposed Order. We cannot determine
when the ACC will hold an open meeting to consider the Proposed Order or
whether the ACC will approve, modify or reject the Proposed Order. If the
Proposed Order is adopted, TEP would have 30 days to file its choice of one
of the three options for stranded cost recovery. At the same time, TEP
would need to file an implementation plan, including its estimate of
stranded costs related to generation and regulatory assets. Until such
time, we believe that any estimate of unrecoverable amounts of 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. The Company filed
a motion for summary judgment, claiming, among other things that the
Competition Rules: (a) violated the Regulatory Compact between TEP and the
State of Arizona; (b) confiscated TEP's property; and (c) violated due
process. The Court did not grant summary judgment but ruled that the
Commission must hold hearings before it can modify TEP's Certificate of
Convenience and Necessity (CC&N). No trial date has been set in the case
and no final order has been issued. We are unable to predict the outcome
of the appeal or the effects such rules would have on future results of
operations.
A legislative study committee established by the Arizona Legislature
issued a report on retail electric competition in December 1997. The report
identified tax and other issues for the legislature to address. In January
1998, Arizona legislators introduced HB 2663 regarding the implementation of
retail electric competition in Arizona. This bill is currently under
consideration in the Arizona State Legislature, and 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, 2000.
This legislation only relates directly to government-owned utility companies
such as SRP; however, the bill encourages broader application of the
legislation's principles by the ACC to the state's investor-owned utilities
and cooperatives, including TEP.
We cannot predict the outcome of the proposed legislation or the ACC's
retail competition rules. However, we believe that certain matters in the
ACC's current retail competition rules may require legislative changes,
while others may require amendments to the Arizona state constitution.
Additionally, federal legislators introduced several retail competition
initiatives in Congress which, if passed, could modify or override the
actions taken by the ACC or the Arizona Legislature. We will continue to
assess the likely impact on TEP of the ACC's retail competition rules,
proposed legislation, and other potential market reforms. We are unable to
predict the ultimate impact of increased retail competition on future
results of our operations. See Accounting for the Effects of Regulation
below for a discussion of the potential impact of increased competition on
the Company's accounting policies.
SHARED SAVINGS 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 includes a sharing of cost
containment benefits with customers and a reduction of potentially stranded
costs associated with the introduction of retail electric competition in
Arizona. The SSP identifies $20.8 million in savings allocable to ACC
jurisdictional operations. The cost containment savings were realized
primarily from renegotiated fuel contracts and a 15% reduction in our
workforce from the 1996 Voluntary Severance Program. The ACC has not set a
date to decide on this matter.
The proposed $6.8 million rate reduction represents a 50/50 sharing
between TEP and its customers of $13.6 million of the cost savings. The SSP
would allow TEP to use the remaining $7.2 million of cost savings to reduce
(mitigate) potentially stranded costs by accelerating the amortization of
Retail Excess Capacity Deferrals. Retail Excess Capacity Deferrals
represent operating and capital costs associated with Springerville Unit 2
capacity which the ACC did not allow TEP to recover in rates until the 1994
and 1996 Rate Orders. Those Retail Excess Capacity Deferrals totaled $87.5
million and $88.7 million at March 31, 1998 and December 31, 1997,
respectively. Those deferrals are only reflected in our regulatory
calculations. The accompanying balance sheets do not include these
deferrals as the costs were expensed when incurred for financial reporting
purposes. The proposed $7.2 million increase in annual amortization expense
for those 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 the financial
statements.
ACCOUNTING FOR THE EFFECTS OF REGULATION
- ----------------------------------------
Accounting Implications
The ACC regulates TEP's utility business. TEP generally uses the same
accounting policies and practices used by nonregulated companies for
financial reporting under generally accepted accounting principles.
However, sometimes these principles, such as FAS 71, require special
accounting treatment for regulated companies to show the effects of
regulation. For example, in setting TEP's retail rates, the ACC may not
currently allow TEP to charge its customers to recover certain expenses but,
instead, require that these charges be charged to customers in the future.
In this situation, FAS 71 requires TEP not to show these expenses on its
current income statements but to "defer" these items and show them as
"regulatory assets" on the balance sheet until TEP is allowed to charge its
customers. TEP then amortizes these items to the income statement as
charges are billed to customers. Similarly, certain items of revenue may
be deferred as regulatory liabilities which are also eventually amortized
to the income statement.
We have recorded regulatory assets and liabilities in our balance
sheets in accordance with FAS 71. A regulated company must satisfy certain
conditions to apply the accounting policies and practices of FAS 71. These
conditions include:
- an independent regulator sets rates;
- the regulator sets the rates to cover specific costs of delivering
service; and
- the service territory lacks competitive pressures to reduce rates
below the rates set by the regulator.
We periodically assess whether we continue to meet these conditions. If we
were required to stop applying FAS 71 to all or a portion of TEP's regulated
utility operations, we would write off the related balances of TEP's
regulatory assets and liabilities as a charge in our income statement. This
means our earnings would be reduced by the net amount of regulatory assets
and liabilities, after applicable deferred income taxes. Based on the
balances of TEP's regulatory assets and liabilities at March 31, 1998, if we
stopped applying FAS 71 to all of TEP's regulated operations, we would
record an extraordinary loss of approximately $178 million, net of the
related deferred income tax benefit of $99 million. While our cash flows
may be affected by regulatory orders and market conditions, our cash flows
would not be affected if we stopped applying FAS 71.
If we stop applying FAS 71, we would need to evaluate the likelihood
that we could recover the cost of TEP's electric plant in the marketplace
using the criteria in FAS 121. If undiscounted cash flows are less than the
carrying value of those assets, then we would need to write-off as an
expense a portion of those plant assets to reflect their current market
value. We cannot predict if we would write-off any plant assets as a result
of applying FAS 121.
Recent Events That May Impact TEP's Application of FAS 71
Legislative and other regulatory measures are being developed in
various states to deregulate the electric generation business. The SEC and
the EITF have been reviewing whether electric utilities should stop applying
FAS 71 to the business transactions in states where deregulation is
occurring. In general, the EITF consensus states that utilities must stop
accounting for the electric generation portion of their business under FAS
71 when a deregulation plan is in place and its terms are known. The EITF
also concludes that utilities do not need to write off regulatory assets
(including those related to generation) if the cash flow stream from
regulated rates includes recovery of the regulatory assets. We are uncertain
how the EITF consensus will impact TEP as deregulation activities develop in
Arizona. In the future, we may need to stop applying FAS 71 to the electric
generation portion of TEP's business, even if we believe that we will
recover the full amount of our costs under the ACC competition phase-in
plan. Approximately 55% of TEP's net regulatory assets on the balance sheet
relate to electric generation.
In December 1996, the ACC adopted rules that, if implemented as
adopted, would introduce retail electric competition in Arizona. See
Competition, Retail for a discussion of the ACC competition rules. Hearings
were held in February 1998 to resolve issues relating to stranded cost
recovery. On May 6, 1998, the Hearing Officer issued a Proposed Order. The
Proposed Order indicates that the Affected Utilities should have a
reasonable opportunity to recover 100% of their stranded costs and gives
the Affected Utilities three options for stranded cost recovery.
However, it is unclear whether Affected Utilities would be able to recover
100% of their stranded costs. See Competition, Retail for a discussion of
the Proposed Order.
TEP is currently evaluating the financial implications if the Proposed
Order is adopted, including whether we would be able to continue to apply
FAS 71 to the generation portion of TEP's business. TEP anticipates filing
exceptions to the Proposed Order. We cannot determine when the ACC will
hold an open meeting to consider the Proposed Order or whether the ACC will
approve, modify or reject the Proposed Order. If the Proposed Order is
adopted, TEP would have 30 days to file its choice of one of the three
options for stranded cost recovery. At the same time, TEP would need to
file an implementation plan, including its estimate of stranded costs
related to generation and regulatory assets. Until such time, we believe
that any estimate of unrecoverable amounts of stranded costs would be highly
speculative.
Also in January 1998, the Arizona Legislature proposed legislation
introducing retail electric competition in Arizona. We cannot predict the
outcome of the proposed legislation or whether the ACC and the Arizona
Legislature will propose other initiatives on electric utility industry
restructuring. We believe, based on previous rate orders, that it is likely
that we will recover the full costs of our investments in electric utility
plant and regulatory assets. The ACC's final order may require us to stop
applying FAS 71 to the electric generation portion of TEP's utility
operations. If the order provides less than full recovery of stranded
costs, significant write-offs of assets may occur as discussed above.
Based on the activities that have occurred to date, TEP believes it
continues to meet the criteria to apply FAS 71 to its regulated activities.
However, we cannot predict the outcome of the deregulation efforts in
Arizona described above.
INVESTMENTS IN ENERGY-RELATED VENTURES
- --------------------------------------
MEH Corporation (MEH), a wholly-owned subsidiary of UniSource Energy,
owns 100% of the stock of four subsidiaries. We established these
subsidiaries to pursue various unregulated energy-related investment
opportunities:
1) Nations Energy Corporation (Nations Energy) develops independent
power projects worldwide.
2) Millennium Energy Holdings, Inc. (Millennium) holds a 50% interest
in New Energy Ventures, L.L.C. (NEV). NEV, a buyer's agent, provides
electric load aggregation and advisory services to retail purchasers of
electric energy. As of March 31, 1998, NEV had contracts to purchase
energy for and sell energy to customers principally in California with
a combined electrical demand of more that 1,000 MW. NEV began serving
its California customers on March 31, 1998 when the California retail
electricity market opened to competition.
3) Advanced Energy Technologies, Inc. (AET) holds a 50% interest in
Global Solar Energy, L.L.C. (Global Solar), a manufacturer of thin-film
photovoltaic cells.
4) Southwest Energy Solutions, Inc. (SES) provides ancillary energy
services to electric consumers. SES owns 100% of the 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.
Our investments in the energy-related ventures described above
(included in Investments and Other Property in UniSource Energy's
consolidated balance sheet) comprise less than 1% of total assets. However,
the net loss related to these start-up operations totaled $4.0 million for
the first quarter of 1998. This loss is included in the Other Income
(Deductions) section on UniSource Energy's income statement. Almost all of
MEH's loss in the first quarter of 1998 occurred at NEV. The California
electricity market was originally scheduled to open to competitors such as
NEV on January 1, 1998. However, technical matters related to the
California Independent System Operator and the California Power Exchange
delayed the opening of the electricity market until March 31, 1998.
Therefore, NEV could not make retail power sales in California in the first
quarter. Although the delays in establishment of the competitive market
caused losses at NEV in the first quarter, and may continue to cause losses
in the second quarter, NEV expects losses to decline as more customers are
added throughout the year.
Depending on the nature of future investment opportunities, we expect
to make additional investments in these subsidiaries and in other energy-
related ventures. Over time, investments in unregulated energy-related
ventures may have a material impact on our profitability and cash flows.
The ACC Holding Company Order requires that the capitalization (debt and
equity) of TEP's sister companies not exceed 30% of TEP's capitalization
unless otherwise approved by the ACC.
DIVIDENDS ON COMMON STOCK
- -------------------------
UniSource Energy
UniSource Energy's ability to pay dividends depends upon cash flow
from TEP and MEH. TEP comprises substantially all of UniSource Energy's
assets. As described below, TEP is currently unable to declare or pay
dividends. TEP has not declared or paid a dividend on common stock since
1989. Until TEP is able to pay dividends to UniSource Energy, UniSource
Energy will probably be unable to declare or pay dividends on its Common
Stock.
TEP
Five outstanding issues of First Mortgage Bonds (aggregating $184
million in principal amount) prevent TEP from paying dividends until
specific cash flow coverage and retained earnings tests are met. As of
March 31, 1998, TEP met the cash flow coverage test, but did not meet the
retained earnings test, which requires positive retained earnings. These
covenants will apply until these First Mortgage Bonds have been paid or
redeemed or the applicable mortgage indentures have been amended. The
latest maturity of these First Mortgage Bonds is in 2003. To amend these
bonds would require approval by 75% of all First Mortgage Bonds holders.
During 1998, TEP plans to refinance or retire all of the First Mortgage
Bonds that prohibit the payment of dividends. See Financing Developments,
TEP First Mortgage Bonds, below.
TEP's Credit Agreement allows TEP to pay dividends if it maintains
compliance with the agreement and meets certain financial covenants,
including a covenant that requires TEP to maintain a minimum level of net
worth. As of March 31, 1998, the required minimum net worth was $166.4
million. See Financing Developments, TEP Credit Agreement, below. As of
March 31, 1998, TEP is in compliance with the terms of the Credit Agreement.
The ACC Holding Company Order states that TEP may not pay dividends to
UniSource Energy in excess of 75% of its earnings until TEP's equity ratio
equals 37.5% of total capital (excluding capital lease obligations). As of
March 31, 1998, TEP's equity ratio was 15%.
In addition to these restrictive covenants, the Federal Power Act
states that dividends shall not be paid out of funds properly included in
the capital account. Although the terms of the Federal Power Act provisions
are unclear, we believe that there is a reasonable basis to pay dividends
from current year earnings. We are continuing to evaluate this situation.
EARNINGS
- --------
UniSource Energy recorded a net loss of $7.0 million in the first
quarter of 1998 compared with net income of $11.5 million in the first
quarter of 1997. The net loss per average share of Common Stock was $0.22
for the first quarter of 1998 compared with net income per average share of
Common Stock of $0.36 for the first quarter of 1997. We would have recorded
a net loss of $0.3 million or $0.01 per share in the first quarter of 1997
excluding the recognition of tax benefits and other one-time adjustments.
The major reasons for the variance between the results for the first quarter
of 1998 and the adjusted results for the first quarter of 1997 were:
-higher losses from investments in unregulated energy-related businesses,
-lower non-cash regulatory revenues, and
-higher interest expense.
RESULTS OF OPERATIONS
- ---------------------
Currently, TEP's financial condition and results of operations are the
primary factors affecting the financial condition and results of operations
of UniSource Energy on an annual basis. We note any fluctuations that are
not primarily due to TEP activities. All nonutility operating transactions
are reflected in Other Income (Deductions) on the UniSource Energy
Consolidated Statement of Income.
Utility Sales and Revenues
Comparisons of TEP's kilowatt-hour sales and electric revenues are
shown below:
<TABLE>
<CAPTION>
Increase/(Decrease)
-------------------
Three Months Ended March 31 1998 1997 Amount Percent
- --------------------------- --------- ----------- ------- --------
<S> <C> <C> <C> <C>
Electric kWh Sales (000):
Retail Customers 1,790,309 1,622,441 167,868 10.3%
Sales for Resale 850,132 715,187 134,945 18.9
--------- --------- -------
Total 2,640,441 2,337,628 302,813 13.0
Electric Revenues (000):
Retail Customers $138,149 $129,937 $8,212 6.3%
Amortization of MSR Option
Gain Regulatory Liability 0 5,013 (5,013) (100.0)
Sales for Resale 22,854 19,331 3,523 18.2
-------- -------- -------
Total $161,003 $154,281 $6,722 4.4
</TABLE>
TEP's kWh sales to retail customers increased by 10.3% during the first
quarter of 1998 compared to the first quarter of 1997. This increase is
because: 1) our average number of retail customers increased 1.8%; 2) the
weather was cooler in February and March of 1998 than in 1997, which
increased the electric heating load; 3) sales to our mining customers
increased after contract amendments went into effect in mid-1997; and 4)
reported sales in 1998 were impacted by various billing adjustments.
Revenues from sales to retail customers increased by 6.3% in the first
quarter of 1998 compared to the same period in 1997 because of the higher
kWh sales. This increase in retail revenues did not correspond exactly to
the increase in kWh sales as a result of new long-term contracts with large
commercial, industrial and mining customers. These contracts went into
effect after the first quarter of 1997 and have lower rates than the prior
contracts.
Our kWh sales for resale increased by 18.9% and the related revenues
grew by 18.2% in the first quarter of 1998 relative to the same period in
1997. There were higher economy energy sales in 1998 because cooler weather
in the southwestern United States during the first quarter resulted in
increased use of electricity for heat.
TEP's non-cash revenue from the Amortization of the MSR Option Gain
Regulatory Liability was $5.0 million lower in the first quarter of 1998
compared to the same period in 1997. This regulatory liability was fully
amortized in May 1997. If we exclude the revenue from the MSR Option Gain
amortization, total operating revenues were 7.9% higher in the first quarter
of 1998 than the first quarter of 1997.
Operating Expenses
Fuel and Purchased Power expense increased by 6% in the first quarter
of 1998 compared with the same period in 1997 because of the increased sales
we discussed above. Savings from the new Springerville coal contract helped
reduce the cost per kWh sold to 1.83 cents in the first quarter of 1998 from
1.95 cents in the same period in 1997.
If we exclude the growth in Fuel and Purchased Power expense, other
operating expenses increased in total by only 1% in the first quarter of
1998 over the same period in 1997. Other Operations expense was $2.9
million higher in the first quarter of 1998 than during the first quarter of
1997. This change was mainly due to increases in salaries, pension and
benefit expense. Employee Severance Plan Expense of $2.9 million in 1997
represents VSP costs for non-pension post-retirement benefits that we
recognized in the first quarter.
Other Income (Deductions)
Compared with the first quarter of 1997, 1998 income tax benefits
included in Other Income (Deductions) decreased by $15.2 million and $16.1
million for UniSource Energy and TEP, respectively. This change is due
mainly to lower recognition of Net Operating Loss (NOL) benefit. UniSource
Energy and TEP recognized $14.3 million of NOL benefit in the first quarter
of 1997 and none in the first quarter of 1998. As of December 31, 1997,
both UniSource Energy and TEP had recorded the amount of prior period NOL
benefit that we expect to use on future income tax returns. At the present
time, we are not able to estimate future additional amounts of NOL benefit
that we may recognize in the income statements of either UniSource Energy or
TEP. This is because there are still open tax years for which there may be
additional assessments and because federal and state NOL carryforwards have
varying expiration dates. We do not expect to recognize additional amounts
of NOL benefit until such items are resolved.
The unregulated energy subsidiaries owned by MEH reported a net loss of
$4.0 million for the first quarter of 1998, compared with a net loss of $0.9
million for the first quarter of 1997. The delayed implementation of
California's competitive electricity market until March 31, 1998 and other
subsidiary development activities affected the financial results for these
businesses. See Investments in Energy-Related Ventures.
Interest Expense
Interest expense increased by $4.1 million in the first quarter of 1998
relative to the same period in 1997. We had higher letter of credit fees in
TEP's new Credit Agreement, as well as higher interest rates from the
refinancing of certain variable rate debt obligations with fixed rate debt
obligations. (See Financing Developments, TEP Sale of Bonds, below). These
refinancings benefited TEP by extending debt maturities and reducing the
risk from changes in variable interest rates.
EVENTS AFFECTING FUTURE RESULTS OF UTILITY OPERATIONS
TEP Generating Resources
On May 1, 1998, TEP allowed a lease to expire on three internal
combustion turbine generating units having a combined generating capacity of
96 MW. As a result, TEP may need to purchase firm capacity during the
summer months to meet operating reserve requirements. TEP will re-evaluate
the need for additional peaking generation resources. Firm capacity
purchases needed to replace the expired leased capacity are not expected to
have a material negative impact on UniSource Energy or TEP financial
results.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
UniSource Energy
Cash and cash equivalents increased by $15.2 million, or 14%, from the
March 31, 1997 ending balance of $106.6 million to the March 31, 1998 ending
balance of $121.8 million. For the twelve-month period ended March 31,
1998, net cash flows from operating activities exceeded the cash needed for
investing and financing activities.
Net cash flows from operating activities decreased in aggregate by
$19.1 million in the first three months of 1998 compared with the same
period in 1997. This decrease was due mainly to the payment of $10.0
million in contract termination fees to the Springerville coal supplier in
the first quarter of 1998 (see Note 6 of Notes to Condensed Consolidated
Financial Statements--Rate Matters). In addition to the contract
termination fees, we had higher cash outflows for the following: 1) Other
Operations and Maintenance Costs increased $4.8 million; 2) Interest Paid
increased $3.8 million; 3) Capital Lease Interest Paid increased $3.8
million; and 4) Wages Paid increased $3.0 million. These increases in cash
outflows were partially offset by a $6.8 million increase in cash receipts
from retail and wholesale customers.
Total net cash outflows from investing activities increased by $7.0
million during the first quarter of 1998 compared with the same period in
1997. A $4.7 million increase in Loans and Investments to Joint Ventures
and a $1.4 million increase in Construction Expenditures were the primary
reasons for this change.
Total net cash outflows from financing activities decreased by $25.3
million in the first quarter of 1998 compared with the same period in 1997.
In the first quarter of 1997, TEP repaid the $31 million balance outstanding
on its Renewable Term Loan. The new bond issuance activity described below
in Financing Developments, TEP Sale of Bonds had no impact on net cash flow
in the first quarter of 1998. This is because the cash from the bonds
issued is being held in trust until the 1981 Apache Series A and Series B
bonds are redeemed on May 15, 1998.
Our consolidated cash balance, including cash equivalents, at May 6,
1998 was approximately $104 million. Of this amount, $65 million was held
by TEP and its wholly-owned subsidiaries. We invest cash balances in high-
grade money market securities with an emphasis on preserving the principal
amounts invested.
During 1998 and beyond, our sources of cash will be primarily dividends
from TEP (when allowed) and proceeds from sales of securities. Potential
cash needs may include funds for subsidiaries, funds to meet debt
obligations and funds to pay dividends to shareholders. See Dividends on
Common Stock and Financing Developments, UniSource Energy for details on
these sources and uses of funds.
TEP
Cash and cash equivalents decreased by $23.5 million, or 22%, from the
March 31, 1997 ending balance of $106.6 million to the March 31, 1998 ending
balance of $83.2 million. This decrease is due to the transfer of MEH's
cash balance of $45.4 million, included in Cash Flows from Investing
Activities in TEP's Statement of Cash Flows for the quarter ended March 31,
1998. See Note 3 of Notes to the Condensed Consolidated Financial
Statements--Transfer of MEH from TEP to UniSource Energy.
TEP expects to generate enough cash flow during 1998 to fund continuing
operating activities and construction expenditures. Actual cash flows may
vary from projections if there are changes in wholesale revenues, changes in
short-term interest rates or other factors. If cash flows were to fall
short of our expectations, TEP would use existing cash balances and, if
necessary, borrow from the Revolving Credit Facility. At May 6, 1998, there
was no outstanding balance due under the Revolving Credit Facility.
FINANCING DEVELOPMENTS
TEP Sale of Bonds
On March 17, 1998, the Apache County, Arizona Industrial Development
Authority issued $200 million of new bonds for the benefit of TEP. These
bonds are included in Long-Term Debt on TEP's balance sheet. The proceeds
will be used on May 15, 1998 to redeem the 1981 Series A Apache County
Pollution Control Revenue Bonds due 2020 ($100 million) and the 1981 Series
B Apache County Pollution Control Revenue Bonds due 2021 ($100 million).
Until the previously issued bonds are redeemed, they are included in the
balance sheet as Current Maturities of Long-Term Debt. The proceeds from
the issuance of the new bonds are recorded in the balance sheet under
Current Assets as Long-Term Debt Proceeds Held by Trustee. The new bonds,
which are unsecured, were issued in three series: Series A Pollution Control
Revenue Bonds ($83.7 million) bears interest at 5.85% and matures in 2028;
Series B Pollution Control Revenue Bonds ($99.8 million) bears interest at
5.875% and matures in 2033; and Series C Industrial Development Revenue
Bonds ($16.5 million) bears interest at 5.85% and matures in 2026.
The 1981 Series A Apache Bonds are supported by a letter of credit.
This LOC is collateralized by Second Mortgage Bonds under the terms of TEP's
Credit Agreement. When TEP redeems these bonds, the Letter of Credit
Facility will decrease from $444 million to $341 million and the Second
Mortgage Bonds collateralizing those LOCs will decrease by $103 million.
The 1981 Series B Apache Bonds are supported by a letter of credit outside
of the Credit Agreement. This LOC is collateralized by First Mortgage
Bonds. When TEP redeems these bonds, this will eliminate the supporting LOC
and retire $103 million of First Mortgage Bonds collateralizing the LOC.
TEP Credit Agreement
As of March 31, 1998 and as of May 6, 1998, TEP had no borrowings
outstanding under its $100 million Revolving Credit Facility.
As described above in TEP Sale of Bonds, after TEP redeems the 1981
Series A Apache County Pollution Control Revenue Bonds on May 15, 1998, the
amount of its Letter of Credit Facility will be $341 million and the amount
of its total facilities under the Credit Agreement, which includes the
Revolving Credit Facility discussed above, will be $441 million.
TEP is required by its Credit Agreement 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 1998
and gradually increasing to 1.55 in 2002, and (c) a maximum Leverage Ratio
ranging from 7.00 in 1998 and gradually decreasing to 6.20 in 2002. For the
quarter ended March 31, 1998, TEP was in compliance with each of these
covenants.
TEP First Mortgage Bonds
In 1997 the ACC granted authority to TEP to refinance up to $184
million of its First Mortgage Bonds scheduled to mature between 1999 and
2003, as well as any redemption premiums, by issuing new debt and/or equity
securities. As described below, TEP plans to negotiate and complete these
transactions during 1998. TEP's objective is to extend maturities and
eliminate certain restrictive covenants contained in the existing First
Mortgage Bonds.
On April 29, 1998, TEP sent an offering memorandum to registered
holders of its 12.22% First Mortgage Bonds due 2000. TEP is offering to
exchange existing 12.22% First Mortgage Bonds for an identical amount of new
12.22% Exchange Series First Mortgage Bonds due 2000. With the exception of
a covenant pertaining to the payment of dividends, the new bonds would have
substantially the same terms and conditions as the existing bonds. The
Exchange Series Bonds are structured to allow TEP to pay dividends. This
exchange offer expires May 15, 1998 and may be extended or withdrawn by TEP
prior to that time at its discretion.
During the second quarter of 1998, TEP intends to issue up to $195
million of Second Mortgage Bonds and use the proceeds to redeem all of its
First Mortgage Bonds due in 1999, 2001, 2002, and 2003, as well as any of
the 12.22% First Mortgage Bonds not tendered for exchange as described
above. If TEP redeems the bonds as described above, TEP would eliminate
covenants that currently prohibit it from paying common stock dividends so
long as it has an accumulated earnings deficit (see Dividends on Common
Stock).
There is no assurance that any of the transactions described above will
be completed.
UniSource Energy
UniSource Energy plans to establish a direct stock purchase plan in
1998. Under this plan, we may issue up to 1,000,000 shares of common stock.
The ACC Holding Company Order states that 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.
UniSource Energy--Loans and Guarantees
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, guarantees or it can be partially satisfied with
$10 million in loans from Millennium, or a combination of these
alternatives. At April 30, 1998, NEV had received the following under the
$20 million commitment:
-Millennium provided $7 million in loans to NEV.
-UniSource Energy issued guarantees in the aggregate amount of $5 million
to secure the obligations of NEV to counterparties to energy purchase and
sale agreements.
-UniSource Energy also issued a $1 million guarantee to secure the
obligations of NEV under its Agreement for Services with LG&E Energy
Marketing, Inc.
As a result of these loans and guarantees, the remaining commitment amount
available was $7 million at April 30, 1998.
UniSource Energy is the guarantor of $16.65 million of performance
bonds that secure the amounts NEV California owes to the California utility
distribution companies (UDCs) for services provided by the UDCs in
connection with NEV California's sales in the California retail electric
market. NEV California bills its customers for these UDC charges.
IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS AND APPLICATIONS
- --------------------------------------------------------
The Company continues 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. We are reviewing our
information systems, the control and embedded systems of TEP's utility plant
(including the units that TEP owns part of but does not operate), as well as
whether major vendors are addressing the problem. The Company has
identified the major vendors from whom we purchase products or services. We
are contacting those vendors to determine their plans to correct any
problems they may face with year 2000 compliance and investigate any
potential impact on TEP. TEP and other electric service providers in the
WSCC are evaluating potential year 2000 risks resulting from interconnected
electric and informational systems.
At this time we believe that all identified modifications to systems
which the Company operates will be made within the required time frames.
We currently estimate that the year 2000 project costs are not material to
the Company's operating results. We cannot assure the year 2000 compliance
status of systems or parties that the Company does not control. We cannot
assess the effect on the Company of non-compliance by systems or parties
that the Company does not control.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
- ------------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
UniSource Energy and TEP include the following cautionary statements to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or for,
UniSource Energy or TEP in this Quarterly Report on Form 10-Q. Forward-
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance and underlying assumptions. They
include statements which are not statements of historical fact. Such
forward-looking statements may be identified by the use of words such as
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. UniSource Energy and TEP may
occasionally publish or make available forward-looking statements of this
nature. These cautionary statements and any other cautionary statements
which may accompany the forward-looking statements expressly qualify all
such forward-looking statements, whether written or oral, and whether made
by or for UniSource Energy or TEP. In addition, UniSource Energy and TEP
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances after the date we make forward-looking statements.
Forward-looking statements involve risks and uncertainties which could
cause actual results or outcomes to differ materially from those we express
in the forward-looking statements. We express in good faith the
expectations, beliefs and projections contained in this document. We
believe we have a reasonable basis to make such statements based on our
examination of historical operating trends, data contained in our records
and other data available from third parties. However, we cannot assure that
we will achieve our expectations, beliefs or projections. In addition to
other factors and matters discussed in this document, we believe some of the
important factors that could cause actual results to differ materially from
those we discuss 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
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, rate structures, and methods of
establishing rates.
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, TEP, or any subsidiary.
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
- ------------------------------------------------------------------------------
TAX ASSESSMENTS
See Note 2 of Notes to Condensed Consolidated Financial Statements, Tax
Assessments.
ITEM 5. - OTHER INFORMATION
- ------------------------------------------------------------------------------
ADDITIONAL FINANCIAL DATA
The following table reflects the ratio of earnings to fixed charges for TEP:
12 Months Ended
----------------
March 31, December 31,
1998 1997
---- ----
Ratio of Earnings to Fixed 1.41 1.39
Charges
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------------
(a) Exhibits.
-- See Exhibit Index.
(b) Reports on Form 8-K.
-- The Company and TEP have not filed any Current Reports on Form 8-K
since filing the Form 10-K for 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
each registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized. The signature for each
undersigned company shall be deemed to relate only to matters having
reference to such company or its subsidiary.
UNISOURCE ENERGY CORPORATION
-----------------------------
(Registrant)
Date: May 13, 1998 Ira R. Adler
----------------------------------
Ira R. Adler
Senior Vice President and
Principal Financial Officer
TUCSON ELECTRIC POWER COMPANY
-----------------------------
(Registrant)
Date: May 13, 1998 Ira R. Adler
----------------------------------
Ira R. Adler
Executive Vice President and
Principal Financial Officer
EXHIBIT INDEX
4a - Loan Agreement, dated as of March 1, 1998, between The Industrial
Development Authority of the County of Apache and TEP relating to
Pollution Control Revenue Bonds, 1998 Series A (Tucson Electric
Power Company Project).
4b - Indenture of Trust, dated as of March 1, 1998, between The
Industrial Development Authority of the County of Apache and First
Trust of New York, National Association, authorizing Pollution
Control Revenue Bonds, 1998 Series A (Tucson Electric Power Company
Project).
4c - Loan Agreement, dated as of March 1, 1998, between The Industrial
Development Authority of the County of Apache and TEP relating to
Pollution Control Revenue Bonds, 1998 Series B (Tucson Electric
Power Company Project).
4d - Indenture of Trust, dated as of March 1, 1998, between The
Industrial Development Authority of the County of Apache and First
Trust of New York, National Association, authorizing Pollution
Control Revenue Bonds, 1998 Series B (Tucson Electric Power Company
Project).
4e - Loan Agreement, dated as of March 1, 1998, between The Industrial
Development Authority of the County of Apache and TEP relating to
Industrial Development Revenue Bonds, 1998 Series C (Tucson
Electric Power Company Project).
4f - Indenture of Trust, dated as of March 1, 1998, between The
Industrial Development Authority of the County of Apache and First
Trust of New York, National Association, authorizing Industrial
Development Revenue Bonds, 1998 Series C (Tucson Electric Power
Company Project).
11 - Statement re computation of per share earnings - UniSource Energy.
12 - Computation of Ratio of Earnings to Fixed Charges - TEP.
15a - Letter regarding unaudited interim financial information (Price
Waterhouse LLP).
15b - Letter regarding unaudited interim financial information
(Deloitte &Touche LLP).
27a - Financial Data Schedule - UniSource Energy.
27b - Financial Data Schedule - TEP.
Appendix C
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1998
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
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701 86-0062700
(520) 571-4000
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
-------- --------
At August 7, 1998, 32,147,080 shares of UniSource Energy Corporation's
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.
This combined Form 10-Q 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..................................................................iv
Report of Independent Accountants.............................................1
Independent Accountants' Review Report........................................2
PART I - FINANCIAL INFORMATION
Item 1. -- Financial Statements
UniSource Energy Corporation
Comparative Condensed Consolidated Statements of Income (Loss).......3
Comparative Condensed Consolidated Statements of Cash Flows..........4
Comparative Condensed Consolidated Balance Sheets....................5
Tucson Electric Power Company
Comparative Condensed Consolidated Statements of Income .............6
Comparative Condensed Consolidated Statements of Cash Flows..........7
Comparative Condensed Consolidated Balance Sheets....................8
Notes to Condensed Consolidated Financial Statements
Note 1. Accounting for the Effects of Regulation........................9
Note 2. Tax Assessments................................................10
Note 3. Transfer of MEH from TEP to UniSource Energy...................11
Note 4. Loans and Guarantees for NEV...................................11
Note 5. Long-Term Debt........................................... .....12
Note 6. Rate Matters...................................................12
Note 7. Income Taxes...................................................13
Note 8. New Accounting Standard........................................14
Note 9. Reclassifications..............................................14
Note 10. Review by Independent Public Accountants......................14
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview................................................................15
Competition
Retail..............................................................16
Wholesale...........................................................19
Shared Savings Proposal.................................................20
Accounting for the Effects of Regulation................................20
Investments in Energy Related Affiliates................................21
Dividends on Common Stock
UniSource Energy....................................................22
TEP.................................................................22
Earnings................................................................22
Results of Operations
Utility Sales and Revenues.........................................23
Operating Expenses................................................24
Other Income (Deductions)..........................................24
Interest Expense..................................................25
Events Affecting Future Results of Utility Operations
TEP Generating Resources..........................................25
Liquidity and Capital Resources
Cash Flows
UniSource Energy..................................................25
TEP...............................................................26
Financing Developments
TEP Sale of Bonds.................................................26
TEP Credit Agreement..............................................26
TEP First Mortgage Bonds..........................................27
UniSource Energy--Loans and Guarantees............................27
Impact of Year 2000 on Computer Systems and Applications................28
Safe Harbor for Forward-Looking Statements..............................28
PART II - OTHER INFORMATION
Item 1. -- Legal Proceedings
Tax Assessments.........................................................30
Item 4. - Submission of Matters to a Vote of Security Holders................30
Item 5. - Other Information
Directors and Executive Officers of the Registrants.....................30
Shareholder Proposal Deadline for 1999 Annual Meeting...................31
Additional Financial Data...............................................31
Item 6. -- Exhibits and Reports on Form 8-K.................................31
Signature Page...............................................................32
Exhibit Index................................................................33
DEFINITIONS
The abbreviations and acronyms used in the 1998 Second Quarter Form 10-Q are
defined below:
ACC............... Arizona Corporation Commission.
ADOR.............. Arizona Department of Revenue.
AET............... Advanced Energy Technologies, Inc., a wholly-owned
subsidiary of MEH Corporation.
Affected Utilities Electric utilities regulated by the ACC, including TEP,
Arizona Public Service, Citizens Utilities Company, and
several electric cooperatives.
Banks............. The financial institutions party to the Credit Agreement
dated as of December 30, 1997.
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.
FAS 71............ Statement of Financial Accounting Standards #71:
Accounting for the Effects of Certain Types of
Regulation.
FAS 101........... Statement of Financial Accounting Standards #101:
Regulated Enterprises - Accounting for the
Discontinuation of Application of FAS 71.
FAS 121........... Statement of Financial Accounting Standards #121:
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of.
FERC.............. Federal Energy Regulatory Commission.
First Collateral Trust
Bonds............ Bonds issued under the First Collateral Trust
Indenture.
First Collateral Trust
Indenture........ The Indenture, dated as of August 1,
1998, of Tucson Electric Power Company to Bank of
Montreal Trust Company of the City of New York, as
trustee.
First Mortgage
Bonds............ First mortgage bonds issued under the General First
Mortgage.
General First
Mortgage......... The Indenture, dated as of April 1, 1941, of Tucson
Gas, Electric Light and Power Company to The Chase
National Bank of the City of New York, as trustee, as
supplemented and amended.
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.
Global Solar...... Global Solar Energy, L.L.C., a corporation in which a 50%
interest is owned by AET.
Holding Company
Order............ ACC Order issued November 25, 1997 granting TEP the
authority to organize a public utility holding company.
IDBs.............. Industrial development revenue or pollution control bonds.
IRS............... Internal Revenue Service.
Irvington......... Irvington Generating Station.
Irvington Lease... The leveraged lease arrangement relating to Irvington Unit
4.
ISO............... Independent System Operator.
ITC............... Investment Tax Credit.
kWh............... Kilowatt-hour(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 certain
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).
NEV............... New Energy Ventures, L.L.C., a company in which a 50%
interest is owned by Millennium.
NEV California.... NEV California, L.L.C., a wholly-owned subsidiary of NEV.
1994 Rate Order... ACC Rate Order concerning an increase in TEP's retail base
rates and certain regulatory write-offs, issued January
11, 1994.
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.
NOL............... Net Operating Loss carryforward for income tax purposes.
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.
SEC............... Securities and Exchange Commission.
Second Mortgage
Bonds............ TEP's second mortgage bonds issued under the General
Second Mortgage.
SES............... Southwest Energy Solutions, Inc., a wholly-owned
subsidiary of MEH.
Shareholders...... Holders of UniSource Energy Common Stock.
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
Leases...... Leveraged lease arrangements relating to
Springerville Unit 1, and an undivided one-half interest
in certain Springerville Common Facilities and which has
been assumed by TEP.
SSP............... Shared Savings Proposal filed by TEP with the ACC July 9,
1997 requesting a 1.1% annual retail rate reduction.
Standard Offer.... Bundled service offered to all consumers in a designated
service territory at regulated rates.
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.
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.
WSCC.............. Western Systems Coordinating Council.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
UniSource Energy Corporation and
to the Board of Directors of
Tucson Electric Power Company
We have reviewed the accompanying condensed consolidated balance sheet and the
related condensed consolidated statements of income and of cash flows of
UniSource Energy Corporation and its subsidiaries (the Company) and of Tucson
Electric Power Company and its subsidiaries (TEP) as of and for the three-month
and six-month periods ended June 30, 1998. This financial information is the
responsibility of the Company's and TEP's management. The financial statements
as of June 30, 1997 were reviewed by other independent accountants whose report
dated February 23, 1998 stated that they were not aware of any material
modifications that should be made to such financial information for it to be in
conformity with generally accepted accounting principles.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards,the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information as of and for the three-month
and six-month periods ended June 30, 1998 for it to be in conformity with
generally accepted accounting principles.
The financial statements of the Company and of TEP for the year ended December
31, 1997 were audited by other independent accountants whose report dated
February 23, 1998 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Phoenix, Arizona
August 4, 1998
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
UniSource Energy Corporation and its Stockholders
Tucson Electric Power Company
220 West Sixth Street
Tucson, Arizona 85701
We have reviewed the condensed consolidated statements of income of UniSource
Energy Corporation and its subsidiaries (the Company) and Tucson Electric Power
Company (TEP) for the three-month and six-month periods ended June 30, 1997 and
cash flows for the six-month period ended June 30, 1997. These financial
statements are the responsibility of the Company's and TEP's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets and statements of capitalization of
the Company and TEP as of December 31, 1997 and the related statements of
income, cash flows, and changes in stockholders' equity (deficit) for the year
then ended (not presented herein);and in our report dated February 23, 1998, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheets as of December 31, 1997 is fairly stated, in all
material respects, in relation to the consolidated balance sheets from which
they have been derived.
DELOITTE & TOUCHE LLP
Tucson, Arizona
February 23, 1998
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The weather causes seasonal fluctuations in UniSource Energy's sales. As a
result, quarterly results are not indicative of annual operating results. The
quarterly financial statements that follow are unaudited but reflect all
normal recurring accruals and other adjustments which we believe are
necessary for a fair presentation of the results for the interim periods
presented. Also see Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations. This quarterly report should
be reviewed in conjunction with the Company's 1997 Form 10-K.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Operating Revenues
Retail Customers $150,652 $159,249
Amortization of MSR Option Gain Regulatory Liability - 3,092
Sales for Resale 28,951 20,629
--------- ---------
Total Operating Revenues 179,603 182,970
--------- ---------
Operating Expenses
Fuel and Purchased Power 56,693 51,493
Capital Lease Expense 26,558 26,388
Amortization of Springerville Unit 1 Allowance (7,630) (7,010)
Other Operations 27,130 28,087
Maintenance and Repairs 8,431 11,384
Depreciation and Amortization 22,883 21,445
Taxes Other Than Income Taxes 12,634 13,093
Income Taxes 3,038 4,260
--------- ---------
Total Operating Expenses 149,737 149,140
--------- ---------
Operating Income 29,866 33,830
--------- ---------
Other Income (Deductions)
Income Taxes 3,016 11,385
Reversal of Loss Provision - 10,154
Interest Income 3,524 2,778
Unregulated Energy Businesses - Net (5,649) 488
Other 1,134 (1,341)
--------- ---------
Total Other Income (Deductions) 2,025 23,464
--------- ---------
Interest Expense
Long-Term Debt 19,792 16,660
Interest Imputed on Losses Recorded at Present Value 8,545 8,175
Other 2,496 2,558
--------- ---------
Total Interest Expense 30,833 27,393
--------- ---------
Net Income (Loss) $ 1,058 $ 29,901
========= =========
Average Shares of Common Stock Outstanding (000) 32,138 32,138
========= =========
Basic and Diluted Earnings per Share $ 0.03 $ 0.93
========= =========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Six Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Operating Revenues
Retail Customers $288,739 $289,186
Amortization of MSR Option Gain Regulatory Liability - 8,105
Sales for Resale 51,805 39,960
--------- ---------
Total Operating Revenues 340,544 337,251
--------- ---------
Operating Expenses
Fuel and Purchased Power 105,093 97,139
Capital Lease Expense 52,336 52,664
Amortization of Springerville Unit 1 Allowance (15,261) (14,019)
Other Operations 53,428 54,383
Maintenance and Repairs 19,155 21,615
Depreciation and Amortization 45,446 43,219
Taxes Other Than Income Taxes 25,560 25,718
Income Taxes 1,101 1,912
--------- ---------
Total Operating Expenses 286,858 282,631
--------- ---------
Operating Income 53,686 54,620
--------- ---------
Other Income (Deductions)
Income Taxes 2,385 25,943
Reversal of Loss Provision - 10,154
Interest Income 5,240 4,487
Unregulated Energy Businesses - Net (9,685) (444)
Other 1,944 (1,372)
--------- ---------
Total Other Income (Deductions) (116) 38,768
--------- ---------
Interest Expense
Long-Term Debt 36,903 30,777
Interest Imputed on Losses Recorded at Present Value 17,090 16,454
Other 5,554 4,764
--------- ---------
Total Interest Expense 59,547 51,995
--------- ---------
Net Income (Loss) $ (5,977) $ 41,393
========= =========
Average Shares of Common Stock Outstanding (000) 32,138 32,138
========= =========
Basic and Diluted Earnings per Share $ (0.19) $ 1.29
========= =========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $293,242 $293,113
Cash Receipts from Sales for Resale 51,935 42,635
Fuel and Purchased Power Costs Paid (93,168) (90,574)
Wages Paid, Net of Amounts Capitalized (36,389) (32,899)
Payment of Other Operations and Maintenance Costs (46,763) (45,359)
Capital Lease Interest Paid (44,594) (40,774)
Interest Paid, Net of Amounts Capitalized (35,157) (34,777)
Taxes Paid, Net of Amounts Capitalized (48,752) (48,559)
Interest Received 3,959 3,958
Emission Allowance Inventory Sales 11,368 -
Contract Termination Fee Paid (10,000) (30,000)
Other (789) 660
--------- ---------
Net Cash Flows - Operating Activities 44,892 17,424
--------- ---------
Cash Flows from Investing Activities
Construction Expenditures (38,220) (33,870)
Investments in Joint Ventures (11,066) (2,117)
Other 1,731 980
--------- ---------
Net Cash Flows - Investing Activities (47,555) (35,007)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 2,328 12,312
Payments on Renewable Term Loan - (31,000)
Payments to Retire Long-Term Debt (2,600) (500)
Payments to Retire Capital Lease Obligations (9,676) (4,751)
Other (1,547) (568)
--------- ---------
Net Cash Flows - Financing Activities (11,495) (24,507)
--------- ---------
Net Decrease in Cash and Cash Equivalents (14,158) (42,090)
Cash and Cash Equivalents, Beginning of Year 146,256 130,291
--------- ---------
Cash and Cash Equivalents, End of Period $132,098 $ 88,201
========= =========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
Six Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Net Income (Loss) $ (5,977) $ 41,393
Adjustments to Reconcile Net Income (Loss)
to Net Operating Cash Flows
Depreciation and Amortization Expense 45,446 43,219
Deferred Income Taxes and Investment Tax Credits-Net (7,816) (24,280)
Lease Payments Deferred 12,350 17,750
Amortization of Regulatory Assets & Liabilities,
Net of Interest Imputed on Losses Recorded at
Present Value 1,828 (5,669)
Deferred Contract Termination Fee (8,077) (30,000)
Loss (Unremitted Earnings) of Unconsolidated
Subsidiaries 15,689 (909)
Emission Allowances 11,368 -
Other (3,214) (10,490)
Changes in Assets and Liabilities which Provided
(Used) Cash Exclusive of Changes Shown Separately
Accounts Receivable (16,850) (16,314)
Materials and Fuel (577) (7,342)
Accounts Payable 1,189 9,113
Other Current Assets and Liabilities (2,629) (2,989)
Other Deferred Assets and Liabilities 2,162 3,942
--------- ---------
Net Cash Flows - Operating Activities $ 44,892 $ 17,424
========= =========
Non-Cash Financing Activities (these activities do not affect the statements
of cash flows):
The proceeds from the issuance of $200 million of Pollution Control Revenue
Bonds in March 1998 were held in trust and used in May 1998 to redeem $200
million of previously issued bonds. In May 1998, TEP exchanged $46.9 million
of its existing 12.22% First Mortgage Bonds due 2000 for an identical amount
of new 12.22% Exchange Series First Mortgage Bonds. See Note 5. Also, the
proceeds from the issuance of $111.8 million of Pollution Control Revenue
Bonds in April 1997 were held in trust and used in June 1997 to redeem $111.8
million of previously issued bonds.
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
- Thousands of Dollars -
Utility Plant
Plant in Service $2,227,912 $2,194,150
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 74,786 72,404
----------- -----------
Total Utility Plant 3,195,762 3,159,618
Less Accumulated Depreciation and Amortization (1,020,317) (982,621)
Less Accumulated Amortization of Capital Leases (82,937) (73,728)
Less Springerville Unit 1 Allowance (169,584) (167,756)
----------- -----------
Total Utility Plant - Net 1,922,924 1,935,513
----------- -----------
Investments and Other Property 76,694 78,772
----------- -----------
Current Assets
Cash and Cash Equivalents 132,098 146,256
Accounts Receivable 88,075 71,225
Materials and Fuel 34,954 34,005
Deferred Income Taxes - Current 15,268 14,910
Other 26,455 23,653
----------- -----------
Total Current Assets 296,850 290,049
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 165,633 170,034
Deferred Springerville Common Facility Costs 56,952 58,222
Deferred Springerville Contract Termination Fee 46,154 48,077
Deferred Springerville Unit 2 Costs 6,944 11,590
Deferred Lease Expense 10,382 11,571
Other Regulatory Assets 11,672 11,089
Deferred Debits - Other 19,690 19,492
----------- -----------
Total Deferred Debits 317,427 330,075
----------- -----------
Total Assets $2,613,895 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
June 30, December 31,
1998 1997
- Thousands of Dollars -
Capitalization
Common Stock $ 638,847 $ 638,904
Accumulated Deficit (428,003) (422,026)
----------- -----------
Common Stock Equity 210,844 216,878
Capital Lease Obligations 884,720 890,257
Long-Term Debt 1,211,795 1,215,120
----------- -----------
Total Capitalization 2,307,359 2,322,255
----------- -----------
Current Liabilities
Current Obligations Under Capital Leases 13,578 14,552
Current Maturities of Long-Term Debt 1,225 500
Accounts Payable 36,098 34,909
Interest Accrued 69,284 64,812
Taxes Accrued 24,161 24,397
Contract Termination Fee Payable - 10,000
Other 15,707 19,051
----------- -----------
Total Current Liabilities 160,053 168,221
----------- -----------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 66,892 77,606
Accumulated Deferred Investment Tax Credits
Regulatory Liability 10,760 11,905
Emission Allowance Gain Regulatory Liability 31,357 17,591
Other 37,474 36,831
----------- -----------
Total Deferred Credits and Other Liabilities 146,483 143,933
----------- -----------
Total Capitalization and Other Liabilities $2,613,895 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME
The weather causes seasonal fluctuations in TEP's sales. As a result,
quarterly results are not indicative of annual operating results. The
quarterly financial statements that follow are unaudited but reflect all
normal recurring accruals and other adjustments which we believe are
necessary for a fair presentation of the results for the interim periods
presented. Also see Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations. This quarterly report should
be reviewed in conjunction with the TEP's 1997 Form 10-K.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Operating Revenues
Retail Customers $150,735 $159,249
Amortization of MSR Option Gain Regulatory Liability - 3,092
Sales for Resale 28,951 20,629
--------- ---------
Total Operating Revenues 179,686 182,970
--------- ---------
Operating Expenses
Fuel and Purchased Power 56,693 51,493
Capital Lease Expense 26,558 26,388
Amortization of Springerville Unit 1 Allowance (7,630) (7,010)
Other Operations 27,130 28,087
Maintenance and Repairs 8,431 11,384
Depreciation and Amortization 22,883 21,445
Taxes Other Than Income Taxes 12,634 13,093
Income Taxes 3,038 4,260
--------- ---------
Total Operating Expenses 149,737 149,140
--------- ---------
Operating Income 29,949 33,830
--------- ---------
Other Income (Deductions)
Income Taxes 2,076 11,385
Reversal of Loss Provision - 10,154
Interest Income 3,526 2,850
Interest Income-Note Receivable from UniSource Energy 2,326 -
Other 1,029 (925)
--------- ---------
Total Other Income (Deductions) 8,957 23,464
--------- ---------
Interest Expense
Long-Term Debt 19,792 16,660
Interest Imputed on Losses Recorded at Present Value 8,545 8,175
Other 2,496 2,558
--------- ---------
Total Interest Expense 30,833 27,393
--------- ---------
Net Income $ 8,073 $ 29,901
========= =========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Operating Revenues
Retail Customers $288,884 $289,186
Amortization of MSR Option Gain Regulatory Liability - 8,105
Sales for Resale 51,805 39,960
--------- ---------
Total Operating Revenues 340,689 337,251
--------- ---------
Operating Expenses
Fuel and Purchased Power 105,093 97,139
Capital Lease Expense 52,336 52,664
Amortization of Springerville Unit 1 Allowance (15,261) (14,019)
Other Operations 53,428 54,383
Maintenance and Repairs 19,155 21,615
Depreciation and Amortization 45,446 43,219
Taxes Other Than Income Taxes 25,560 25,718
Income Taxes 1,101 1,912
--------- ---------
Total Operating Expenses 286,858 282,631
--------- ---------
Operating Income 53,831 54,620
--------- ---------
Other Income (Deductions)
Income Taxes 516 25,943
Reversal of Loss Provision - 10,154
Interest Income 5,242 4,606
Interest Income-Note Receivable from UniSource Energy 4,626 -
Other 1,798 (1,935)
--------- ---------
Total Other Income (Deductions) 12,182 38,768
--------- ---------
Interest Expense
Long-Term Debt 36,903 30,777
Interest Imputed on Losses Recorded at Present Value 17,090 16,454
Other 5,554 4,764
--------- ---------
Total Interest Expense 59,547 51,995
--------- ---------
Net Income $ 6,466 $ 41,393
========= =========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $293,242 $293,113
Cash Receipts from Sales for Resale 51,935 42,635
Fuel and Purchased Power Costs Paid (93,168) (90,574)
Wages Paid, Net of Amounts Capitalized (34,765) (32,899)
Payment of Other Operations and Maintenance Costs (43,632) (45,359)
Capital Lease Interest Paid (44,594) (40,774)
Interest Paid, Net of Amounts Capitalized (35,157) (34,777)
Taxes Paid, Net of Amounts Capitalized (48,690) (48,559)
Emission Allowance Inventory Sales 11,368 -
Interest Received 2,963 3,958
Contract Termination Fee Paid (10,000) (30,000)
Other 869 660
--------- ---------
Net Cash Flows - Operating Activities 50,371 17,424
--------- ---------
Cash Flows from Investing Activities
Construction Expenditures (38,220) (33,870)
Transfer of MEH (45,412) -
Investments in Joint Ventures - (2,117)
Other 1,841 980
--------- ---------
Net Cash Flows - Investing Activities (81,791) (35,007)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 2,328 12,312
Payments to Retire Long-Term Debt (2,600) (500)
Payments on Renewable Term Loan - (31,000)
Payments to Retire Capital Lease Obligations (9,676) (4,751)
Other (1,686) (568)
--------- ---------
Net Cash Flows - Financing Activities (11,634) (24,507)
--------- ---------
Net Decrease in Cash and Cash Equivalents (43,054) (42,090)
Cash and Cash Equivalents, Beginning of Year 146,256 130,291
--------- ---------
Cash and Cash Equivalents, End of Period $103,202 $ 88,201
========= =========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
Six Months Ended
June 30,
1998 1997
-Thousands of Dollars-
Net Income (Loss) $ 6,466 $ 41,393
Adjustments to Reconcile Net Income (Loss) to Net
Operating Cash Flows
Depreciation and Amortization Expense 45,446 43,219
Deferred Income Taxes and
Investment Tax Credits - Net 745 (24,280)
Lease Payments Deferred 12,350 17,750
Amortization of Regulatory Assets & Liabilities, Net
of Interest Imputed on Losses Recorded at
Present Value 1,828 (5,669)
Deferred Contract Termination Fee (8,077) (30,000)
Unremitted Earnings of Unconsolidated Subsidiaries (528) (909)
Emission Allowances 11,368 -
Interest Income-Note Receivable from UniSource
Energy (4,626) -
Other (1,404) (10,490)
Changes in Assets and Liabilities which Provided
(Used) Cash Exclusive of Changes Shown Separately
Accounts Receivable (18,327) (16,314)
Materials and Fuel (577) (7,342)
Accounts Payable 2,223 9,113
Other Current Assets and Liabilities 1,377 (2,989)
Other Deferred Assets and Liabilities 2,107 3,942
--------- ---------
Net Cash Flows - Operating Activities $ 50,371 $ 17,424
========= =========
Non-Cash Financing Activities (these activities do not affect the statements
of cash flows):
The proceeds from the issuance of $200 million of Pollution Control Revenue
Bonds in March 1998 were held in trust and used in May 1998 to redeem $200
million of previously issued bonds. In May 1998, TEP exchanged $46.9 million
of its existing 12.22% First Mortgage Bonds due 2000 for an identical amount
of new 12.22% Exchange Series First Mortgage Bonds. See Note 5. Also, the
proceeds from the issuance of $111.8 million of Pollution Control Revenue
Bonds in April 1997 were held in trust and used in June 1997 to redeem $111.8
million of previously issued bonds.
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
- Thousands of Dollars -
Utility Plant
Plant in Service $2,227,912 $2,194,150
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 74,786 72,404
----------- -----------
Total Utility Plant 3,195,762 3,159,618
Less Accumulated Depreciation and Amortization (1,020,317) (982,621)
Less Accumulated Amortization of Capital Leases (82,937) (73,728)
Less Springerville Unit 1 Allowance (169,584) (167,756)
----------- -----------
Total Utility Plant - Net 1,922,924 1,935,513
----------- -----------
Investments and Other Property 59,422 78,772
----------- -----------
Note Receivable from UniSource Energy 74,759 -
---------- -----------
Current Assets
Cash and Cash Equivalents 103,202 146,256
Accounts Receivable 88,642 71,225
Materials and Fuel 34,914 34,005
Deferred Income Taxes - Current 15,268 14,910
Other 21,527 23,653
----------- -----------
Total Current Assets 263,553 290,049
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 165,633 170,034
Deferred Springerville Common Facility Costs 56,952 58,222
Deferred Springerville Contract Termination Fee 46,154 48,077
Deferred Springerville Unit 2 Costs 6,944 11,590
Deferred Lease Expense 10,382 11,571
Other Regulatory Assets 11,672 11,089
Deferred Debits - Other 19,690 19,492
----------- -----------
Total Deferred Debits 317,427 330,075
----------- -----------
Total Assets $2,638,085 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
June 30, December 31,
1998 1997
- Thousands of Dollars -
Capitalization
Common Stock $ 645,660 $ 645,261
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (415,560) (422,026)
----------- -----------
Common Stock Equity 223,743 216,878
Capital Lease Obligations 884,720 890,257
Long-Term Debt 1,211,795 1,215,120
----------- -----------
Total Capitalization 2,320,258 2,322,255
----------- -----------
Current Liabilities
Current Obligations Under Capital Leases 13,578 14,552
Current Maturities of Long-Term Debt 1,225 500
Accounts Payable 36,414 34,909
Interest Accrued 69,284 64,812
Taxes Accrued 24,141 24,397
Contract Termination Fee Payable - 10,000
Other 15,693 19,051
----------- -----------
Total Current Liabilities 160,335 168,221
----------- -----------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 77,985 77,606
Accumulated Deferred Investment Tax Credits
Regulatory Liability 10,760 11,905
Emission Allowance Gain Regulatory Liability 31,357 17,591
Other 37,390 36,831
----------- -----------
Total Deferred Credits and Other Liabilities 157,492 143,933
----------- -----------
Total Capitalization and Other Liabilities $2,638,085 $2,634,409
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
NOTE 1. ACCOUNTING FOR THE EFFECTS OF REGULATION
- -------------------------------------------------
Accounting Implications
The ACC regulates TEP's utility business. TEP generally uses the
same accounting policies and practices used by nonregulated companies
for financial reporting under generally accepted accounting principles.
However, sometimes these principles, such as FAS 71, require special
accounting treatment for regulated companies to show the effect of
regulation. For example, in setting TEP's retail rates, the ACC may
not currently allow TEP to charge its customers to recover certain
expenses but; instead, require that these expenses be charged to
customers in the future. In this situation, FAS 71 requires that TEP
not show these expenses on its current income statements but "defer"
these items and show them as "regulatory assets" on the balance sheet
until TEP is allowed to charge its customers. TEP then amortizes these
items to the income statement as charges are billed to customers.
Similarly, certain items of revenue may be deferred as regulatory
liabilities, which also are eventually amortized to the income
statement.
We have recorded regulatory assets and liabilities in our balance
sheets in accordance with FAS 71. A regulated company must satisfy
certain conditions to apply the accounting policies and practices of
FAS 71. These conditions include:
- an independent regulator sets rates;
- the regulator sets the rates to cover specific costs of delivering
service; and
- the service territory lacks competitive pressures to reduce rates
below the rates set by the regulator.
We periodically assess whether we continue to meet these
conditions. If we were required to stop applying FAS 71 to all or a
portion of TEP's regulated utility operations, we would write off the
related balances of TEP's regulatory assets and liabilities as a charge
in our income statement. In that event, our earnings would be reduced
by the net amount of regulatory assets and liabilities, after
applicable deferred income taxes. Based on the balances of TEP's
regulatory assets and liabilities at June 30, 1998, if we ceased
applying FAS 71 to all of TEP's regulated operations, we would record
an extraordinary loss of approximately $152 million, net of the related
deferred income tax benefit of $103 million. While our cash flows may
be affected by regulatory orders and market conditions, our cash flows
would not be affected if we ceased to apply FAS 71.
If we stop applying FAS 71, we would need to evaluate the
likelihood that we could recover the cost of TEP's electric plant in
the marketplace using the criteria in FAS 121. If undiscounted cash
flows are less than the carrying value of those assets, then we would
need to write off as an expense a portion of those plant assets to
reflect their current market value. We cannot predict if we would
write off any plant assets as a result of applying FAS 121.
Recent Events That May Impact TEP's Application of FAS 71
Legislative and other regulatory measures are being developed in
various states to deregulate the electric generation business. The SEC
and the EITF have been reviewing whether electric utilities should stop
applying FAS 71 to the business transactions in states where
deregulation is occurring. In general, the EITF consensus states that
utilities must stop accounting for the electric generation portion of
their business under FAS 71 when a deregulation plan is in place and
its terms are known. The EITF also concluded that utilities do not
need to write off regulatory assets (including those related to
generation) if the cash flow stream from regulated rates includes
recovery of the regulatory assets. We are uncertain how the EITF
consensus will impact TEP as deregulation activities develop in
Arizona. In the future, we may need to stop applying FAS 71 to the
electric generation portion of TEP's business, even if we believe that
we will recover the full amount of our costs under the ACC competition
phase-in plan. Approximately 55% of TEP's net regulatory assets on the
balance sheet relate to electric generation.
In December 1996, the ACC adopted rules which would introduce
retail electric competition in Arizona. If implemented as adopted, the
rules would require each "Affected Utility" TEP, Arizona Public Service
Company, Citizens Utilities Company and several cooperatives) to open
its retail service area to competing electric service providers on a
phased-in basis over the period 1999 to 2003. On August 5, 1998, the
ACC adopted amendments to the rules which, in part, provide a two-year
phase-in schedule in which all retail customers will have access to
competitive generation by January 1, 2001.
On June 22, 1998, the ACC adopted an order which outlines its
policy for stranded cost recovery by Arizona utilities in a competitive
energy market. Stranded costs represent costs recoverable by a utility
in a regulated market that would not likely be recovered through the
prices charged for electricity and other services in a competitive
market. The order allows the Affected Utilities to choose one of the
following two methods for stranded cost recovery:
(1) Divestiture/Auction Methodology
- This method requires the sale of all electric generation assets
through an auction by January 1, 2001;
- Stranded costs are calculated as the difference between book value
of generation assets (including related regulatory assets) and the
proceeds from the sale;
- 100% of the stranded costs will be recovered over a 10-year period,
including a return on the unamortized balance;
- All customers of Affected Utilities will pay for the stranded
costs; and
- Affected Utilities that choose this option must file a divestiture
plan for ACC approval no later than October 1, 1998.
(2) Transition Revenues Methodology
- The ACC would determine the revenues necessary to maintain
financial integrity (such as avoiding default under currently existing
financial instruments); and
- Affected Utilities would recover the determined amount of stranded
costs over a period of ten years.
The order encourages, but does not require, full divestiture of
generating assets through an auction. The order states that only those
Affected Utilities choosing divestiture through the Divestiture/Auction
Methodology shall have the opportunity to recover 100% of unmitigated
stranded costs. TEP must elect one of the two stranded cost recovery
options and file an implementation plan, including its estimate of
stranded costs related to generation and regulatory assets, by August
21, 1998. The order also specifies that some form of rate cap will be
in place for customers on standard offer electric service during the
transition period.
TEP will cease to account for its generation operations using FAS
71 at the time the ACC approves a cost recovery plan specific to TEP,
including the specific amount of stranded costs that TEP can recover
and a cost recovery method. The amount and method of recovery that the
ACC approves for TEP will determine whether write-offs will be incurred
at that time. The ACC is not expected to approve a final stranded cost
recovery plan for TEP until at least the fourth quarter of 1998. We
are unable to predict the amount of write-offs, if any, that may be
incurred at that time.
In May 1998 the Arizona State Legislature approved and the
Governor signed a bill regarding retail electric competition. The
legislation requires 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, 2000. This legislation only relates directly
to public power entities such as SRP; however, the bill encourages
broader application of the legislation's principles by the ACC to the
state's investor-owned utilities, including TEP, and cooperatives.
We cannot predict the outcome of the legislation or the ACC's
retail competition rules. Additionally, federal legislators introduced
several retail competition initiatives in Congress which, if passed,
could modify or override the actions taken by the ACC or the Arizona
Legislature.
NOTE 2. TAX ASSESSMENTS
- ------------------------
Ruling on Arizona Sales Tax Assessments - Coal Sales
We have received sales tax assessments from the ADOR alleging that
Valencia is liable for sales tax on gross income from coal sales,
transportation and coal-handling services provided to TEP from November
1985 through May 1996. We have protested these assessments. In
September 1996, the Arizona Court of Appeals upheld the validity of the
assessment issued for the period November 1985 through March 1990. In
May 1998, the Arizona Supreme Court remanded the case back to the
Arizona Tax Court to be reheard. We are also protesting the
assessments for the period April 1990 through May 1996.
We have previously recorded an expense and a related liability for
the sales taxes and interest that we believe are probable of incurrence
for the period November 1985 through May 1996. Arizona law generally
requires payment of an assessment prior to pursuing the appellate
process. We previously paid, under protest, a total of $23 million of
the disputed sales tax assessments. These payments will be refunded if
we are successful in the appeals process.
On May 31, 1996, Valencia was merged into TEP. Because TEP now
acquires coal directly from other companies, we do not believe we are
liable for sales tax computed on a basis similar to the assessments
described above after May 31, 1996. For periods prior to May 31, 1996,
we continue to record an estimated interest expense on the disputed
assessments.
Arizona Sales Tax Assessments - Leases
The ADOR has issued sales tax assessments to some of TEP's lessors
of generation-related facilities and equipment. The assessments allege
sales tax liability on a component of rents we paid on the
Springerville Unit 1 Leases, the Springerville Common Facilities
Leases, the Irvington Lease and the Springerville Coal Handling
Facilities Lease from August 1, 1988 to June 30, 1997. Due to
indemnification provisions in the lease agreements, if the ADOR
prevails, we would be required to reimburse the lessors for the sales
taxes that they pay. We filed an appeal of the assessments in the
Arizona Tax Court in February 1998. In July 1998, the Arizona Tax
Court ruled against us on the Irvington lease. We plan to appeal the
Tax Court's decision.
We have recorded a liability for the probable amount of sales
taxes and interest due as of June 30, 1998. If the ADOR prevails, we
would need to record an additional expense and related liability. Even
though it is reasonably possible that the resolution of this issue
could result in approximately $22 million of additional sales tax
expense, we do not believe this outcome is likely. We do not expect
that the resolution of this assessment will have a material negative
impact on the financial statements. We believe that the ultimate
resolution of this issue will occur over a period of two to four years.
INCOME TAX ASSESSMENTS
In February 1998, the IRS issued an income tax assessment for the
1992 and 1993 tax years. The IRS is challenging our treatment for
income tax purposes of various items relating to the 1992 Financial
Restructuring, including the amount of NOL and ITC generated before
December 1991 that may be used to reduce taxes in future periods.
Due to the Financial Restructuring, a change in ownership of TEP
occurred for tax purposes in December 1991. As a result, the use of
the NOL and ITC generated before December 1991 may be limited under the
tax code. The IRS is challenging our calculation of this limitation.
At June 30, 1998, pre-change federal NOL and ITC carryforwards were
approximately $267 million and $26 million, respectively. In addition
to the pre-change NOL and ITC which are subject to the limitation, $166
million of federal NOL at June 30, 1998, is not subject to the
limitation.
Resolution of this matter is not expected to have a material
adverse impact on the financial statements.
NOTE 3. TRANSFER OF MEH FROM TEP TO UNISOURCE ENERGY
- -----------------------------------------------------
On January 1, 1998, TEP became a subsidiary of UniSource Energy.
At the same time, TEP transferred MEH to UniSource Energy and received
as consideration from UniSource Energy a $95 million 10-year promissory
note with a yearly interest rate of 9.78%. Approximately $25 million
of this note represents a gain to TEP. TEP has not recorded this gain.
Instead, this gain will be reflected as an increase in TEP's common
equity when UniSource Energy pays the principal portion of the note.
The note receivable appears on TEP's consolidated balance sheet but
does not appear on UniSource Energy's consolidated balance sheet
because intercompany balances and transactions are eliminated when
financial statements are consolidated.
MEH owns Advanced Energy Technologies, Inc., Millennium Energy
Holdings, Inc., Nations Energy Corporation and Southwest Energy
Solutions, Inc.
The transfer of MEH's cash balance of $45.4 million as part of the
transfer of MEH to UniSource Energy is included in the Cash Flows from
Investing Activities in TEP's cash flow statement for the six months
ended June 30, 1998.
NOTE 4. LOANS AND GUARANTEES FOR NEV
- -------------------------------------
In December 1997, Millennium committed to provide NEV with $20
million of funding. At July 31, 1998, NEV had received the following
under the $20 million commitment:
- Millennium provided $10 million in loans to NEV.
- Millennium provided $4 million for NEV preferred equity.
- UniSource Energy issued guarantees in the aggregate amount of $5.5
million to secure the obligations of NEV to counterparties to energy
purchase and sale agreements.
As a result of these loans and guarantees, the remaining commitment
amount available was $0.5 million at July 31, 1998.
UniSource Energy is the guarantor of $32.8 million of performance
bonds that secure the amounts NEV California owes to the California
utility distribution companies (UDCs) for services provided by the UDCs
in connection with NEV California's sales in the California retail
electric market. NEV California bills its customers for these UDC
charges.
In August 1998, UniSource Energy agreed to guarantee a $10 million
loan that NEV obtained from an unrelated party. The debt underlying
the guarantee is not due until 1999.
From September 1997, the inception of Millennium's ownership in
NEV, through June 30, 1998, Millennium recorded approximately $23.8
million of NEV losses. The amount equals the total funds and
commitments provided by Millennium and UniSource Energy to NEV.
Accounting principles limit the amount of the loss to be recorded by
Millennium to the total amount invested and committed by Millennium and
UniSource Energy. Under its current obligations, NEV is expected to
continue to incur losses and require additional funds to fulfill its
obligations. Should Millennium or UniSource Energy provide additional
funding to NEV, the amounts provided would need to be immediately
expensed if NEV has incurred losses in excess of $23.8 million since
September 1997. NEV is seeking sources other than Millennium and
UniSource Energy to provide necessary funding. There can be no
assurance that any such financing will be obtained.
NOTE 5. LONG-TERM DEBT
- -----------------------
In March 1998, the Apache County, Arizona Industrial Development
Authority issued $200 million of Pollution Control Revenue Bonds and
loaned the proceeds to TEP. The new bonds, which are unsecured, were
sold in three series: Series A ($83.7 million) bears interest at 5.85%
and matures in 2028; Series B ($99.8 million) bears interest at 5.875%
and matures in 2033; and Series C ($16.5 million) bears interest at
5.85% and matures in 2026. The proceeds from the issuance of the new
bonds were used in May 1998 to redeem $200 million of previously issued
variable interest rate bonds that would have matured in 2020 and 2021.
On May 15, 1998, TEP exchanged $46.9 million of its existing
12.22% First Mortgage Bonds due 2000 for an identical amount of new
12.22% Exchange Series First Mortgage Bonds due 2000. With the
exception of the elimination of a covenant restricting the payment of
dividends, the new bonds have substantially the same terms and
conditions as the existing bonds.
On August 4, 1998, TEP issued $140 million of First Collateral
Trust Bonds, Series A, and will use the proceeds on September 3, 1998
to redeem all of its First Mortgage Bonds due in 1999, 2001, 2002 and
2003, as well as $31.9 million of 12.22% First Mortgage Bonds due 2000
not tendered for exchange as described above. The bonds to be redeemed
bear interest at rates ranging from 7.55% to 12.22%. When TEP redeems
these bonds, covenants that currently prohibit TEP from paying common
stock dividends so long as it has an accumulated earnings deficit will
be eliminated. Dividends would thereafter be permitted if certain
other, more flexible financial covenants have been met. The First
Collateral Trust Bonds bear interest at 7.50% and mature in 2008. The
First Collateral Trust Bonds are secured by an equal aggregate
principal amount of bonds issued under TEP's General First Mortgage and
held by the trustee.
NOTE 6. 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 includes
a sharing of cost containment benefits with customers and a reduction
of potentially stranded costs associated with the introduction of
retail electric competition in Arizona. The SSP identifies $20.8
million in savings allocable to ACC jurisdictional operations. The
cost containment savings were realized primarily from renegotiated fuel
contracts and a 15% reduction in our workforce from the 1996 Voluntary
Severance Program. The ACC has not set a date to decide on this
matter.
The proposed $6.8 million rate reduction represents an equal
sharing between TEP and its customers of $13.6 million of the cost
savings. The SSP would allow TEP to use the remaining $7.2 million of
cost savings to reduce (mitigate) potentially stranded costs by
accelerating the amortization of Retail Excess Capacity Deferrals.
Retail Excess Capacity Deferrals represent operating and capital costs
associated with Springerville Unit 2 capacity which the ACC did not
allow TEP to recover in rates until the 1994 and 1996 Rate Orders.
These Retail Excess Capacity Deferrals totaled $86.3 million and $88.7
million at June 30, 1998 and December 31, 1997, respectively. These
deferrals are only reflected in our regulatory calculations. The
accompanying balance sheets do not include these deferrals as the costs
were expensed when incurred for financial reporting purposes. The
proposed $7.2 million (after tax) increase in annual amortization
expense for those 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 the financial 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 then-existing
coal supply contract and enter into a new, more cost effective contract
with the same supplier. TEP paid a $50 million termination fee in
three installments: $30 million paid on June 30, 1997; $10 million
paid on September 30, 1997; and $10 million paid on March 31, 1998.
TEP asked the ACC, as part of the SSP, to allow the termination
fee to be recorded as a regulatory asset and to be 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 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 be expensed immediately. The ACC
has not set a date to decide on this matter.
NOTE 7. INCOME TAXES
- ---------------------
The differences between the income tax expense (benefit) and the
amount obtained by multiplying income before income taxes by the U.S.
statutory federal income tax rate are as follows:
UniSource Energy
---------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------
- Thousands of Dollars -
Federal Income Tax (Benefit)
Expense at Statutory Rate $ (923) $ 7,972 $(4,826) $ 6,077
State Income Tax (Benefit)
Expense, Net of Federal
Deduction (144) 1,225 (745) 934
Depreciation Differences
(Flow Through Basis) 2,419 - 3,459 -
Capital Loss Carryforwards (4,463) - (4,463) -
Investment Tax Credit
Amortization (572) (966) (1,145) (1,942)
Reduction in Valuation
Allowance - (14,975) - (29,293)
Other (12) (381) (92) 193
-------- --------- -------- ---------
Total Benefit for Federal
and State Income Taxes $(3,695) $ (7,125) $(7,812) $(24,031)
======== ========= ======== =========
TEP
---------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------
- Thousands of Dollars -
Federal Income Tax (Benefit)
Expense at Statutory Rate $ 3,162 $ 7,972 $2,468 $ 6,077
State Income Tax (Benefit)
Expense, Net of Federal
Deduction 488 1,225 381 934
Depreciation Differences
(Flow Through Basis) 2,419 - 3,459 -
Capital Loss Carryforwards (4,463) - (4,463) -
Investment Tax Credit
Amortization (572) (966) (1,145) (1,942)
Reduction in Valuation
Allowance - (14,975) - (29,293)
Other (72) (381) (115) 193
-------- --------- ------- ---------
Total (Benefit) Expense for
Federal and State Income Taxes $ 962 $ (7,125) $ 585 $(24,031)
======== ========= ======= =========
Income taxes are included in the income statements as follows:
UniSource Energy
---------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------
- Thousands of Dollars -
Operating Expenses $ 3,038 $ 4,260 $ 1,101 $ 1,912
Other Income (Deductions) (3,016) (11,385) (2,385) (25,943)
Unregulated Energy
Businesses - Net (3,717) - (6,528) -
-------- --------- -------- ---------
Total Income Tax Benefit $(3,695) $ (7,125) $(7,812) $(24,031)
======== ========= ======== =========
TEP
---------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------
- Thousands of Dollars -
Operating Expenses $ 3,038 $ 4,260 $ 1,101 $ 1,912
Other Income (Deductions) (2,076) (11,385) (516) (25,943)
-------- --------- -------- ---------
Total Income Tax (Benefit)
Expense $ 962 $ (7,125) $ 585 $(24,031)
======== ========= ======== =========
The reduction in the valuation allowance and corresponding NOL
benefit in 1997 are primarily due to revisions in the estimated amount
of NOLs that we expect to offset future taxable income. As of December
31, 1997, both UniSource Energy and TEP had recorded the amount of
prior period NOL benefit that we expect to utilize on future income tax
returns. At the present time, we are not able to estimate future
additional amounts of NOL benefit that we may recognize in the income
statements of either UniSource Energy or TEP. This is because there
are still open tax years for which there may be additional assessments
and because federal and state NOL carryforwards have varying expiration
dates. We do not expect to recognize additional amounts of NOL benefit
until such items are resolved.
NOTE 8. NEW ACCOUNTING STANDARD
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (FAS 133),
Accounting for Derivative Instruments and Hedging Activities. This
Statement requires that all derivative financial instruments be
recognized as either assets or liabilities in the balance sheet.
Measurement is at fair value and if the derivative is not designated as
a hedging instrument, changes in fair values (i.e., gains and losses)
are to be recognized in earnings in the period of change. If certain
conditions are met, a derivative may be designated a hedge, in which
case the accounting for changes in fair value will depend on the
specific exposure being hedged. The Company is required to adopt FAS
133 in the first quarter of 2000. We are still evaluating the impact,
if any, that the adoption of FAS 133 will have on our financial
statements.
NOTE 9. RECLASSIFICATIONS
- --------------------------
Minor reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
NOTE 10. REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------
With respect to the unaudited consolidated financial information
of UniSource Energy and TEP for the three-month and six-month periods
ended June 30, 1998, PricewaterhouseCoopers LLP reported that they have
applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report dated
August 4, 1998, appearing herein, states that they did not audit and
they do not express an opinion on that unaudited consolidated financial
information. PricewaterhouseCoopers LLP has not carried out any
significant or additional audit tests beyond those which would have
been necessary if their report had not been included. Accordingly, the
degree of reliance on their report on such information should be
restricted in light of the limited nature of the review procedures
applied. PricewaterhouseCoopers LLP is not subject to the liability
provisions of section 11 of the Securities Act of 1933 for their report
on the unaudited consolidated financial information because that report
is not a "report" or a "part" of a registration statement prepared or
certified by PricewaterhouseCoopers LLP within the meaning of sections
7 and 11 of the Act.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------
UniSource Energy is a holding company which owns all of the
outstanding common stock of TEP and MEH. TEP is an operating public
utility engaged in the generation, purchase, transmission, distribution and
sale of electricity for customers in the greater Tucson, Arizona area and
to wholesale customers. MEH owns all of the outstanding common stock of
four subsidiaries established for the purpose of operating or investing in
various unregulated energy-related businesses.
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 on an annual basis, although losses from energy-related
ventures of MEH and its subsidiaries have resulted in losses reported by
the Company for the six-months ended June 30, 1998.
Management's Discussion and Analysis explains the general financial
condition and the results of operations for UniSource Energy and its
business subsidiaries including:
- operating results during the second quarter and the first six months
compared with the same periods in the prior year,
- the outlook for dividends on common stock,
- changes in liquidity and capital resources during the second quarter
and first six months of 1998, and
- expectations of identifiable material trends which may affect our
business in the future.
Management's Discussion and Analysis should be read along with the
Company's Condensed Consolidated Financial Statements, beginning on page 3,
which present the results of operations for the quarters and the six month
periods ended June 30, 1998 and 1997. Management's Discussion and Analysis
analyzes and explains the differences between periods for specific line
items of the Condensed Consolidated Financial Statements.
OVERVIEW
- --------
UniSource Energy recorded net income of $1.1 million for the quarter
ended June 30, 1998, and a net loss of $6.0 million for the first six
months of 1998. This compares with net income of $29.9 million in the
second quarter and $41.4 million for the first six months of 1997.
Our results in the second quarter of 1998 were affected primarily by
the following factors: losses from unregulated energy-related subsidiaries
($5.6 million after-tax), lower non-cash regulatory revenues ($3.1 million
pre-tax), and higher interest expense ($3.4 million pre-tax). Also, the
results in the second quarter of 1997 included the effect of the following
non-recurring items:
- $15.0 million net operating loss carryforward tax benefits,
- $10.2 million in pre-tax other income from a reversal of loss
provision, and
- $2.6 million in pre-tax consulting fees paid to NEV.
Excluding these adjustments, we would have recorded net income of $10.4
million in the second quarter of 1997. These changes are discussed in more
detail in Results of Operations and Investments in Energy-Related
Affiliates, below.
Our results in the first six months of 1998 were affected primarily by
the following factors: losses from unregulated energy-related subsidiaries
($9.7 million after-tax), lower non-cash regulatory revenues ($8.1 million
pre-tax), and higher interest expense ($7.6 million pre-tax). The results
of the first six months of 1997 also included the effects of the following
non-recurring items:
- $29.3 million net operating loss carryforward tax benefits,
- $10.2 million in pre-tax other income from a reversal of loss
provision,
- $2.9 million in pre-tax VSP expense, and
- $3.7 million in pre-tax consulting fees paid to NEV.
Excluding these adjustments, net income would have been $10.0 million in
the first six months of 1997. These factors are discussed in more detail in
Results of Operations and Investments in Energy-Related Affiliates, below.
The Company's and TEP's financial prospects are subject to regulatory,
economic, and other uncertainties. These uncertainties include the extent
to which TEP can alter operations and reduce costs in response to industry
changes or unanticipated economic downturns, which may be limited by
continued high financial and operating leverage. Our future success will
depend, in part, on our ability to contain and/or reduce the costs of
serving retail customers and the level of sales to those 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 difficult. However, we expect
retail competition will exist in our local market within the next three
years. See Competition, Retail below. In a deregulated environment,
revenues from energy sales will be less certain, although revenues from
transmission and distribution services, which we expect to remain
regulated, would likely continue to grow. Even in a deregulated
environment, TEP expects to continue to benefit from population and
economic growth in the Tucson area through increased revenues from its
regulated distribution services.
The Company's financial prospects are also subject to uncertainties
relating to the start-up and developmental activities of the unregulated
energy-related affiliates. Although the Company's investments in
unregulated energy-related affiliates comprise less than 1% of total
assets, start-up costs and other subsidiary developmental activities have
contributed to losses from these activities in 1998. These losses have
contributed to the losses reported by the Company for the six-month period
ended June 30, 1998.
The Company is addressing the uncertainties discussed above and is
positioning itself to benefit from the changing regulatory environment. We
are improving cost measurement and management techniques and are re-
engineering various functions at TEP. We have also extended contracts,
where appropriate, for large wholesale and retail customers, and are
developing new affiliates to provide energy services to markets beyond
TEP's retail service territory. See Competition, Retail; Shared Savings
Proposal; Investments in Energy-Related Affiliates; and Results of
Operations below.
Since April 1997, we have made significant progress in our financial
strategy to reduce refinancing risk by extending maturities of long-term
debt and letters of credit and to reduce exposure to variable interest
rates by refinancing with fixed interest rates. TEP refinanced variable
rate debt obligations at fixed rates and entered into a new bank Credit
Agreement to replace the MRA. On August 4, 1998, TEP issued bonds to
refinance all of the First Mortgage Bonds that prohibit the payment of
dividends, and called for the redemption of these bonds (which mature
between 1999 and 2003) on September 3, 1998. See Financing Developments,
TEP First Mortgage Bonds and Dividends on Common Stock, below.
Despite these improvements, TEP's and UniSource Energy's consolidated
capital structures remain highly leveraged and include $329 million of
variable rate debt obligations which will impact TEP's earnings and cash
flow if interest rates change.
During the next twelve months, TEP expects to fund its operating
activities and construction expenditures with internal cash flows, existing
cash balances, and, if necessary, borrowings under the Revolving Credit.
As of August 7, 1998, cash balances, including cash equivalents for
UniSource Energy, were approximately $132 million, of which $102 million
was held by TEP and its consolidated subsidiaries.
COMPETITION
- -----------
RETAIL
Under current law, TEP does not compete with other companies for
electric service in TEP's retail service territory. However, TEP competes
against gas service suppliers and others who provide energy services. TEP
actively markets energy and customized energy-related services. We have
not lost any customers to self-generation partly because of these efforts.
For example, in recent years, TEP executed new contracts with two principal
customers that provide approximately 9% of TEP's total annual retail
revenues. Both customers are in the copper mining business. The new
contracts include price reductions, term extensions, and a provision for
interruptible service. These contracts expire in March 2001 and January
2003. These mining customers cannot terminate the contracts early without
giving us at least one and up to two years prior notice. We have not
received any such notices.
Retail Electric Competition Rules
In December 1996, the ACC adopted rules that require a phase-in of
retail electric competition in Arizona beginning January 1, 1999. The
rules were adopted as a framework to implement competition. On August 5,
1998 the ACC adopted amendments to the rules which, in part, provide a two-
year phase-in schedule in which all retail customers will have access to
competitive generation by January 1, 2001.
The key provisions of the rules include the following:
- Each Affected Utility shall make available at least 20% of its 1995
system retail peak demand for competitive generation supply on a
first-come, first-served basis, as follows: (1) All Affected Utility
customers with non-coincident peak demand load of 1 MW or greater will
be eligible for competitive electric services no later than January 1,
1999. (2) Groups of Affected Utility customers with individual non-
coincident peak load demands of 40 kW or greater aggregated into a
combined load of 1 MW or greater will also be eligible for competitive
service no later than January 1, 1999. Each Affected Utility shall
also offer a residential phase-in program with a minimum of 1/2 of 1%
of residential customers having access to competitive electric
services on January 1, 1999, with the number of customers eligible in
this program to increase by 1/2 of 1% every quarter until January 1,
2001. All retail customers shall be entitled to obtain competitive
electric services no later than January 1, 2001.
TEP currently serves about 80 customers who qualify under the 1 MW or
greater category described above, representing 351 MW of load. Of
this load, 60% is under contract through 2001.
- Each Affected Utility shall file a report detailing possible
mechanisms to provide benefits, such as rate reductions of 3% - 5%, to
all Standard Offer customers.
- Each Affected Utility shall make available to all customers in its
service territory Standard Offer bundled generation, transmission,
ancillary, distribution and other necessary services at regulated
rates. After January 1, 2001, Standard Offer service shall be
provided by the Affected Utilities, which will become Utility
Distribution Companies (UDCs), who shall also act as providers of last
resort.
- The Affected Utilities shall provide non-discriminatory open access to
transmission and distribution facilities to serve all customers. The
ACC supports the development of an Independent System Operator (ISO)
or, absent an ISO, an Independent Scheduling Administrator (ISA).
- All competitive generation assets and services shall be separated from
an Affected Utility prior to January 1, 2001. Such separation shall
either be to an unaffiliated party or to a separate corporate
affiliate or affiliates. If an Affected Utility chooses to transfer
its competitive generation assets or competitive services to a
competitive electric affiliate, such transfer shall be at a value
determined by the ACC to be fair and reasonable.
Appeal of ACC Order
In February 1997, TEP filed in the Arizona Superior Court an appeal
of the ACC order adopting the rules. TEP filed a motion for summary
judgment, claiming, among other things that the Competition Rules: (a)
violated the Regulatory Compact between TEP and the State of Arizona; (b)
confiscated TEP's property; and (c) violated due process. The Court did
not grant summary judgment but ruled that the Commission must hold hearings
before it can modify TEP's Certificate of Convenience and Necessity (CC&N).
No trial date has been set in the case and no final order has been issued.
We are unable to predict the outcome of the appeal.
Stranded Cost Recovery
On June 22, 1998, the ACC adopted an order which outlines its policy
for stranded cost recovery by Arizona utilities in a competitive energy
market. The order is an amended version of the original order proposed by
the ACC Hearing Officer on May 6, 1998. The proposed order was discussed
in the Company's and TEP's Report on Form 10-Q for the period ended March
31, 1998.
The order provides two methods for stranded cost recovery for the
Affected Utilities: (1) Divestiture/Auction Methodology and (2) Transition
Revenues Methodology. The order encourages, but does not require, full
divestiture of generating assets through an auction to unaffiliated third
parties. The order states that only those Affected Utilities choosing
divestiture through the Auction/Divestiture Methodology shall have the
opportunity to recover 100% of unmitigated stranded costs. The key
components of the order are summarized below:
Divestiture/Auction Methodology
-------------------------------
- Affected Utilities choosing divestiture through the auction method
must file a divestiture plan for ACC approval no later than October 1,
1998. Divestiture must be completed by January 1, 2001.
- The amount of stranded costs shall be the difference between the value
of generation assets (generating plants, purchased power contracts,
fuel contracts, and related regulatory assets) under traditional
regulation and the market value of the assets after divestiture. The
definition of stranded costs shall include reasonable costs incurred
for premiums, penalties or other payments necessary to effect
divestiture, income tax ramifications of divestiture, redemption costs
associated with tax-exempt two-county debt which may have to be
redeemed upon transfer of the assets, and other reasonable costs
necessarily incurred to accomplish divestiture. Unmitigated stranded
costs shall also include reasonable employee severance and retraining
costs necessitated by electric competition.
- An Affected Utility shall be permitted to collect 100% of its stranded
costs, including a return on its unamortized balance over a ten-year
period, with a true-up mechanism.
- The ACC will work with the Affected Utility to provide sufficient
assurances in order to avoid triggering write-offs related to the
application of FAS 71.
- An Affected Utility's generation affiliate may acquire the generation
assets of its parent or sister company, or the generation assets of
another Affected Utility in the auction if it establishes that it is
the highest bidder and that the acquisition will not result in the
entity having more than 40% of the state's total generation megawatts
of capacity.
- An Affected Utility that divests all its generation costs to non-
affiliated entities, that results in negative stranded costs (not
including regulatory assets), shall be entitled to keep 50% of the
negative stranded costs.
- All Affected Utilities' customers shall pay their appropriate share of
stranded costs either through a Competitive Transition Charge (CTC) or
a standard offer rate, collected over a maximum of ten years.
Transition Revenues Methodology
-------------------------------
- The order states that "this option would be to provide sufficient
revenues necessary to maintain financial integrity, such as avoiding
default under currently existing financial instruments for a period of
ten years, at the end of which time there would be no remaining
stranded costs, or for the Commission to otherwise provide an
allocation of stranded cost responsibilities and risks between
ratepayers and shareholders as is determined to be in the public
interest for a given Affected Utility."
Each Affected Utility must file its choice of options for stranded
cost recovery by August 21, 1998. In addition, the Affected Utility will
need to file an implementation plan that would include the following items,
if appropriate, for their option choice: the estimation of stranded costs
separated out into regulatory assets and other generation related assets; a
preliminary plan for auction/divestiture; the minimum financial ratios to
maintain financial viability for ten years; the amount of regulatory assets
requested, how much of those assets are generation related, and the
Commission Decision Number that approved such assets; and other information
as necessary.
TEP will cease to account for its generation operations using FAS 71
at the time the ACC approves a cost recovery plan specific to TEP,
including the specific amount of stranded costs that TEP can recover and a
determination of a cost recovery method. The amount and method of recovery
that the ACC approves for TEP will determine whether write-offs will be
incurred at that time. The ACC is not expected to make a final
determination of a stranded cost recovery plan for TEP until at least the
fourth quarter of 1998. We are unable to predict the amount of write-offs,
if any, that may be incurred at that time.
State and Federal Legislative Initiatives on Retail Electric
Competition
A legislative study committee established by the Arizona Legislature
issued a report on retail electric competition in December 1997. The
report identified tax and other issues for the legislature to address. In
January 1998, Arizona legislators introduced HB 2663 regarding the
implementation of retail electric competition in Arizona. This bill was
passed by the Arizona State Legislature and signed by the Governor in May
1998. The legislation requires 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, 2000. This legislation only relates
directly to public-power entities such as SRP; however, the bill encourages
broader application of the legislation's principles by the ACC to the
state's investor-owned utilities, including TEP, and cooperatives.
We believe that certain matters in the ACC's current retail
competition rules may require legislative changes, while others may require
amendments to the Arizona state constitution. Additionally, federal
legislators introduced several retail competition initiatives in Congress
which, if passed, could modify or override the actions taken by the ACC or
the Arizona Legislature. Congress is not expected to act on the
legislation in 1998. We will continue to assess the likely impact on TEP
of the ACC's retail competition rules, proposed legislation, and other
potential market reforms. We are unable to predict the ultimate impact of
increased retail competition on future results of our operations. See
Accounting for the Effects of Regulation below for a discussion of the
potential impact of increased competition on the Company's accounting
policies.
WHOLESALE
TEP competes with other utilities, marketers and independent power
producers in the sale of electric capacity and energy in the wholesale
market. FERC generally does not permit TEP's prices for wholesale sales of
capacity and energy to exceed rates determined on a cost of service basis.
However, in the fall of 1997, FERC granted TEP a tariff to sell at market-
based rates. In the current market, wholesale prices are substantially
below total cost of service, but in all instances, we make wholesale sales
at prices which exceed fuel and other variable costs. In addition, we
expect competition to sell capacity to remain vigorous. 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 the following factors:
- availability of capacity in the southwestern United States,
- the availability and prices of natural gas and oil,
- spot energy prices, and
- transmission access.
The FERC issued two orders pertaining to transmission access in April
1996. FERC Order No. 888 requires all public utilities that own, control,
or operate interstate transmission facilities to offer transmission service
to others under a single tariff. This tariff must incorporate certain
minimum terms and conditions of transmission service established by the
FERC and 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 to
prevent employees of a public utility engaged in marketing functions from
obtaining preferential access to OASIS-related information or from engaging
in discriminatory business practices. TEP is in compliance with the
requirements of FERC Orders 888 and 889.
TEP, along with other transmission owners and users located in the
southwestern United States, is investigating the feasibility of forming an
ISO for the region. An ISO would be responsible for ensuring transmission
reliability and nondiscriminatory access to the regional transmission grid.
Over 50 participants have signed a Development Agreement and expect to
complete the detailed developmental work by the end of 1998. The formation
of an ISO 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.
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 includes a sharing of
cost containment benefits with customers and a reduction of potentially
stranded costs associated with the introduction of retail electric
competition in Arizona. The SSP identifies $20.8 million in savings
allocable to ACC jurisdictional operations. The cost containment savings
were realized primarily from renegotiated fuel contracts and a 15%
reduction in our workforce from the 1996 Voluntary Severance Program. The
ACC has not set a date to decide on this matter.
The proposed $6.8 million rate reduction represents an equal sharing
between TEP and its customers of $13.6 million of the cost savings. The
SSP would allow TEP to use the remaining $7.2 million of cost savings to
reduce (mitigate) potentially stranded costs by accelerating the
amortization of Retail Excess Capacity Deferrals. Retail Excess Capacity
Deferrals represent operating and capital costs associated with
Springerville Unit 2 capacity which the ACC did not allow TEP to recover in
rates until the 1994 and 1996 Rate Orders. These Retail Excess Capacity
Deferrals totaled $86.3 million and $88.7 million at June 30, 1998 and
December 31, 1997, respectively. These deferrals are only reflected in our
regulatory calculations. The accompanying balance sheets do not include
these deferrals as the costs were expensed when incurred for financial
reporting purposes. The proposed $7.2 million (after-tax) increase in
annual amortization expense for those 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 the financial statements.
ACCOUNTING FOR THE EFFECTS OF REGULATION
- ----------------------------------------
The ACC regulates TEP's utility business. TEP generally uses the same
accounting policies and practices used by nonregulated companies for
financial reporting under generally accepted accounting principles.
However, sometimes these principles, such as FAS 71, require special
accounting treatment for regulated companies to show the effect of
regulation. For example, in setting TEP's retail rates, the ACC may not
currently allow TEP to charge its customers to recover certain expenses
but, instead, require that these expenses be charged to customers in the
future. In this situation, FAS 71 requires that TEP not show these
expenses on its current income statements but "defer" these items and show
them as "regulatory assets" on the balance sheet until TEP is allowed to
charge its customers. TEP then amortizes these items to the income
statement as charges are billed to customers. Similarly, certain items of
revenue may be deferred as regulatory liabilities, which are also eventually
amortized to the income statement.
We have recorded regulatory assets and liabilities in our balance
sheets in accordance with FAS 71. A regulated company must satisfy certain
conditions to apply the accounting policies and practices of FAS 71. These
conditions include:
- an independent regulator sets rates;
- the regulator sets the rates to cover specific costs of delivering
service; and
- the service territory lacks competitive pressures to reduce rates
below the rates set by the regulators.
We periodically assess whether we continue to meet these conditions. If we
were required to stop applying FAS 71 to all or a portion of TEP's
regulated utility operations, we would write off the related balances of
TEP's regulatory assets and liabilities as a charge in our income
statement. In that event, our earnings would be reduced by the net amount
of regulatory assets and liabilities, after applicable deferred income
taxes. Based on the balances of TEP's regulatory assets and liabilities at
June 30, 1998, if we ceased to apply FAS 71 to all of TEP's regulated
operations, we would record an extraordinary loss of approximately $152
million, net of the related deferred income tax benefit of $103 million.
While our cash flows may be affected by regulatory orders and market
conditions, our cash flows would not be affected if we ceased to apply FAS
71.
If we cease to apply FAS 71, we would need to evaluate the likelihood
that we could recover the cost of TEP's electric plant in the marketplace
using the criteria in FAS 121. If undiscounted cash flows are less than
the carrying value of those assets, then we would need to write-off as an
expense a portion of those plant assets to reflect their current market
value. We cannot predict if we would write-off any plant assets as a
result of applying FAS 121.
Legislative and other regulatory measures are being developed in
various states to deregulate the electric generation business. The SEC and
the EITF have been reviewing whether electric utilities should stop
applying FAS 71 to the business transactions in states where deregulation
is occurring. In general, the EITF consensus states that utilities must
cease to account for the electric generation portion of their business
under FAS 71 when a deregulation plan is in place and its terms are known.
The EITF also concluded that utilities do not need to write off regulatory
assets (including those related to generation) if the cash flow stream from
regulated rates includes recovery of the regulatory assets. We are
uncertain how the EITF consensus will impact TEP as deregulation activities
develop in Arizona. In the future, we may need to stop applying FAS 71 to
the electric generation portion of TEP's business, even if we believe that
we will recover the full amount of our costs under the ACC competition
phase-in plan. Approximately 55% of TEP's net regulatory assets on the
balance sheet relate to electric generation.
On June 22, 1998, the ACC adopted an order which outlines its policy
for stranded cost recovery by Arizona utilities in a competitive energy
market. On August 5, 1998, the ACC adopted amendments to the Retail
Electric Competition Rules which, in part, provide a two-year phase-in
schedule in which all retail customers will have access to competitive
generation by January 1, 2001. See Competition, Retail for a discussion of
the ACC order regarding stranded cost recovery and the ACC competition
rules.
TEP will cease to account for its generation operations using FAS 71
at the time the ACC approves a cost recovery plan specific to TEP,
including the specific amount of stranded costs that TEP can recover and a
cost recovery method. The amount and method of recovery that the ACC
approves for TEP will determine whether write-offs will be incurred at that
time. The ACC is not expected to approve a final stranded cost recovery
plan for TEP until at least the fourth quarter of 1998. We are unable to
predict the amount of write-offs, if any, that may be incurred at that
time.
In May 1998, the Arizona Legislature passed and the Governor signed a
bill regarding retail electric competition in Arizona. See Competition,
Retail for a discussion of legislative initiatives on retail competition.
INVESTMENTS IN ENERGY-RELATED AFFILIATES
- ----------------------------------------
MEH Corporation (MEH), a wholly-owned subsidiary of UniSource Energy,
owns 100% of the stock of four subsidiaries. We established these
subsidiaries to pursue various unregulated energy-related investment
opportunities:
- Nations Energy Corporation (Nations Energy) develops independent power
projects worldwide.
- Millennium Energy Holdings, Inc. (Millennium) holds a 50% interest in
New Energy Ventures, L.L.C. (NEV). NEV, a buyer's agent, provides
electric load aggregation and advisory services to retail purchasers
of electric energy. As of June 30, 1998, NEV had contracts to
purchase energy for and sell energy to customers principally in
California and New York with a combined electrical demand of more that
1,500 MW. NEV began serving its California customers on March 31,
1998 when the California retail electricity market opened to
competition.
- Advanced Energy Technologies, Inc. (AET) holds a 50% interest in
Global Solar Energy, L.L.C. (Global Solar), a manufacturer of thin-
film photovoltaic cells.
- Southwest Energy Solutions, Inc. (SES) provides ancillary energy
services to electric consumers. SES owns 100% of the 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.
Our investments in the energy-related ventures described above
(included in Investments and Other Property in UniSource Energy's
consolidated balance sheet) comprise less than 1% of total assets.
However, the net loss related to these start-up operations totaled $5.6
million for the second quarter and $9.7 million for the first six months of
1998. This loss is included in the Other Income (Deductions) section on
UniSource Energy's income statement. Almost all of MEH's losses in both
the second quarter and first six months of 1998 occurred at NEV. The
California electricity market was originally scheduled to open to
competitors such as NEV on January 1, 1998. However, technical matters
related to the California Independent System Operator and the California
Power Exchange delayed the opening of the electricity market until March
31, 1998. Therefore, NEV could not make retail power sales in California
in the first quarter. Start-up costs associated with expansion into
additional regions of the country also contributed to the losses in the
first half of 1998. Although the delays in establishment of the
competitive market caused losses at NEV in the first six months, NEV
expects losses to decline as more customers are added throughout the year.
From September 1997, the inception of Millennium's ownership
in NEV, through June 30, 1998, Millennium recorded approximately $23.8
million of NEV losses. The amount equals the total funds and commitments
provided by Millennium and UniSource Energy to NEV. Accounting principles
limit the amount of the loss to be recorded by Millennium to the total
amount invested and committed by Millennium and UniSource Energy. Under
its current obligations, NEV is expected to continue to incur losses and
require additional funds to fulfill its obligations. Should Millennium or
UniSource Energy provide additional funding to NEV, the amounts provided
would need to be immediately expensed if NEV has incurred losses in excess
of $23.8 million since September 1997. NEV is seeking sources other than
Millennium and UniSource Energy to provide necessary funding. There can be
no assurance that any such financing will be obtained.
Depending on the nature of future investment opportunities, we expect
to make additional investments in energy-related ventures. The ACC Holding
Company Order requires that the capitalization (debt and equity) of the
Company's affiliates other than TEP not exceed 30% of TEP's capitalization
unless otherwise approved by the ACC.
DIVIDENDS ON COMMON STOCK
- -------------------------
UniSource Energy
UniSource Energy's ability to pay dividends depends upon cash flow
from TEP and MEH. As described below, TEP has called for the redemption of
those First Mortgage Bonds which have covenants restricting the payment of
dividends. TEP has not declared or paid a dividend on common stock since
1989. Until TEP is able to pay dividends to UniSource Energy, UniSource
Energy will probably be unable to declare or pay dividends on its Common
Stock.
TEP
On August 4, 1998, TEP called for the redemption on September 3, 1998
of the five outstanding issues of First Mortgage Bonds (aggregating $137
million in principal amount) which prevent TEP from paying dividends unless
specific cash flow coverage and retained earnings tests are met. As of
June 30, 1998, TEP met the cash flow coverage test, but did not meet the
retained earnings test, which requires positive retained earnings. These
covenants will apply until these First Mortgage Bonds have been redeemed.
See Financing Developments, TEP First Mortgage Bonds, below.
TEP's Credit Agreement allows TEP to pay dividends if it maintains
compliance with the agreement and meets certain financial covenants,
including a covenant that requires TEP to maintain a minimum level of net
worth. As of June 30, 1998, the required minimum net worth was $169
million. TEP's actual net worth at June 30, 1998 was $223.7 million. See
Financing Developments, TEP Credit Agreement, below. As of June 30, 1998,
TEP is in compliance with the terms of the Credit Agreement.
The ACC Holding Company Order states that TEP may not pay dividends
to UniSource Energy in excess of 75% of its earnings until TEP's equity
ratio equals 37.5% of total capital (excluding capital lease obligations).
As of June 30, 1998, TEP's equity ratio on that basis was 15.6%.
In addition to these restrictive covenants, the Federal Power Act
states that dividends shall not be paid out of funds properly included in
the capital account. Although the terms of the Federal Power Act
provisions are unclear, we believe that there is a reasonable basis to pay
dividends from current year earnings. We are continuing to evaluate this
situation.
EARNINGS
- --------
UniSource Energy recorded net income of $1.1 million in the second
quarter of 1998 compared with net income of $29.9 million in the second
quarter of 1997. Net income per average share of Common Stock was $0.03
for the second quarter of 1998 compared with net income per average share
of Common Stock of $0.93 for the second quarter of 1997. Net income would
have been $10.4 million or $0.32 per share in the second quarter of 1997 if
the recognition of tax benefits and other one-time adjustments had been
excluded. The major reasons for the variance between the results for the
second quarter of 1998 and the adjusted results for the second quarter of
1997 were:
- higher losses from investments in unregulated energy-related
businesses,
- lower retail sales due to mild weather conditions,
- lower non-cash regulatory revenues, and
- higher interest expense.
For the first six months of 1998, the Company recorded a net loss of
$6.0 million, compared with net income of $41.4 million for the first six
months of 1997. The net loss per average share of Common Stock was $0.19
for the first six months of 1998 compared with net income per average share
of Common Stock of $1.29 for the first six months of 1997. We would have
recorded net income of $10.0 million or $0.31 per share in the first six
months of 1997 excluding the recognition of tax benefits and other one-time
adjustments. The major reasons for the variance between the results for
the first half of 1998 and the adjusted results for the first half of 1997
were the same factors that impacted the second quarter as described above.
TEP recorded net income of $8.1 million for the second quarter of
1998, compared with net income of $29.9 million in the second quarter of
1997. The second quarter earnings decrease was primarily attributable to
lower tax benefit recognition, nonrecurring items, lower retail sales due
to mild weather conditions, lower non-cash regulatory revenues and higher
interest expense from refinancings. Earnings for the six-months ended June
30, 1998 were $6.5 million, compared with net income of $41.4 million for
the same period in 1997. Earnings for the six-month period were affected
by the same factors as discussed above for the second quarter.
RESULTS OF OPERATIONS
- ---------------------
Currently, TEP's financial condition and results of operations are the
primary factors affecting the financial condition and results of operations
of UniSource Energy on an annual basis. We note any fluctuations that are
not primarily due to TEP activities. All nonutility operating transactions
are reflected in Other Income (Deductions) on the UniSource Energy
Consolidated Statement of Income.
Utility Sales and Revenues
Comparisons of TEP's kilowatt-hour sales and electric revenues are
shown below:
<TABLE>
<CAPTION>
Increase/(Decrease)
-------------------
Three Months Ended June 30 1998 1997 Amount Percent
- -------------------------- ---- ---- ----- -------
<S> <C> <C> <C> <C>
Electric kWh Sales (000):
Retail Customers 1,819,112 1,886,216 (67,104) (3.6)%
Sales for Resale 1,036,756 749,074 287,682 38.4
--------- --------- -------
Total 2,855,868 2,635,290 220,578 8.4
Electric Revenues (000):
Retail Customers $150,735 $159,249 $(8,514) (5.3)%
Amortization of MSR Option
Gain Regulatory Liability 0 3,092 (3,092) (100.0)
Sales for Resale 28,951 20,629 8,322 40.3
-------- -------- -------
Total $179,686 $182,970 $(3,284) (1.8)
</TABLE>
<TABLE>
<CAPTION>
Increase/(Decrease)
-------------------
Six Months Ended June 30 1998 1997 Amount Percent
- ------------------------ ---- ---- ----- -------
<S> <C> <C> <C> <C>
Electric kWh Sales (000):
Retail Customers 3,609,421 3,508,657 100,764 2.9%
Sales for Resale 1,886,888 1,464,261 422,627 28.9
--------- --------- -------
Total 5,496,309 4,972,918 523,391 10.5
Electric Revenues (000):
Retail Customers $288,884 $289,186 $(302) (0.1)%
Amortization of MSR Option
Gain Regulatory Liability 0 8,105 (8,105) (100.0)
Sales for Resale 51,805 39,960 11,845 29.6
-------- -------- ------
Total $340,689 $337,251 $3,438 1.0
</TABLE>
TEP's kWh sales to retail customers decreased by 3.6% during the
second quarter of 1998 compared with the second quarter of 1997. Although
TEP experienced retail customer growth of 1.8%, moderate weather conditions
in the quarter contributed to the decline in retail kWh sales. Based on
cooling degree days, a commonly used measure in the electric industry that
is calculated by subtracting 75 from the average of the high and low daily
temperatures, the Tucson area registered a decrease of approximately 36% in
cooling degree days for the second quarter of 1998 compared with the same
period in 1997, and a decrease of approximately 41% in cooling degree days
compared with the ten year average for the same period from 1988 to 1997.
Cooling degree days for the second quarter of 1998 were 256, compared to
402 for the second quarter of 1997 and 435 for the ten-year average.
For the first six months of 1998, kWh sales to retail customers were
2.9% higher than the same period in 1997. Although the weather was milder
in the second quarter, which reduced retail electric usage, the weather in
the first quarter was cooler than in 1997, which increased the electric
heating load for that quarter. KWh sales to the Company's mining customers
also increased for the six-month period of 1998 due to contract amendments
that went into effect in mid-1997.
Revenues from sales to retail customers decreased by 5.3% in the
second quarter of 1998 compared to the same period in 1997 because of the
lower kWh sales. This decrease in retail revenues is slightly larger than
the decrease in kWh sales as a result of new long-term contracts with large
commercial, industrial and mining customers. These contracts went into
effect after the first quarter of 1997 and have lower rates than the prior
contracts. Retail revenues for the six-month period of 1998 were
relatively flat, with the increase in kWh sales noted above offset by the
impacts of lower rates under long-term contracts to large customers.
The lower retail demand in the second quarter allowed TEP to increase
its wholesale sales activity. Our kWh sales for resale increased by 38.4%
and the related revenues grew by 40.3% in the second quarter of 1998
relative to the same period in 1997. For the six months ending June 30,
1998, sales for resale were up 28.9% and wholesale revenues increased 29.6%
compared to the same period in 1997.
Retail electric sales rebounded in late June and in July 1998, as a
result of higher summer temperatures and increased humidity in TEP's retail
service territory. On July 16, 1998, TEP set a record for retail
electricity sold in a 24-hour period, distributing 33,959 megawatt-hours to
its retail customers, a 7.0% increase over the previous record set in 1997.
In addition, on July 16, 1998, TEP experienced a new record peak demand of
1,786 MW, an increase of 7.7% over the previous record of 1,659 MW set on
August 10, 1997.
TEP's non-cash revenue from the Amortization of the MSR Option Gain
Regulatory Liability was $3.1 million lower in the second quarter and $8.1
million lower in the first half of 1998 compared to the same periods in
1997. This regulatory liability was fully amortized in May 1997. If we
exclude the revenue from the MSR Option Gain amortization, total operating
revenues were unchanged in the second quarter and 3.5% higher in the first
half of 1998 than the same periods in 1997.
Operating Expenses
Fuel and Purchased Power expense increased by 10% in the second
quarter and 8% in the first half of 1998 compared with the same period in
1997 because of the increased purchased power to support the higher
wholesale sales we discussed above. If we exclude the growth in Fuel
and Purchased Power expense, other operating expenses decreased in total by
5% in the second quarter and by 2% in the first half of 1998 over the same
periods in 1997.
Maintenance and Repairs expense was lower in both the second quarter
and first half of 1998 than in the same periods of 1997. Maintenance
expense was higher for those periods in 1997 due to scheduled maintenance
work at the Springerville station.
Other Income (Deductions)
UniSource Energy and TEP recognized $15 million of NOL benefit in the
second quarter of 1997 and none in 1998. This reduced benefit recognition,
offset by lower tax expense resulting from decreased income, caused the
second quarter 1998 income tax benefits included in Other Income
(Deductions) to decrease by $4.7 million and $9.3 million for UniSource
Energy and TEP, respectively, from the second quarter of 1997.
Compared with the first six months of 1997, 1998 income tax benefits
included in Other Income (Deductions) decreased by $17.0 million and $25.4
million for UniSource Energy and TEP, respectively. These changes are
mainly due to lower recognition of Net Operating Loss (NOL) benefits offset
by greater tax benefits as a result of lower income. UniSource Energy and
TEP recognized $29.3 million of NOL benefit in the first six months of 1997
and none in 1998.
As of December 31, 1997, both UniSource Energy and TEP had recorded
the amount of prior period NOL benefit that we expect to use on future
income tax returns. At the present time, we are not able to estimate
future additional amounts of NOL benefit that we may recognize in the
income statements of either UniSource Energy or TEP. This is because there
are still open tax years for which there may be additional assessments and
because federal and state NOL carryforwards have varying expiration dates.
We do not expect to recognize additional amounts of NOL benefit until such
items are resolved.
A Reversal of Loss Provision of $10.2 million was recorded in the
second quarter of 1997. The Reversal of Loss Provision relates to the
dissolution of a subsidiary which formed part of TEP's former investment
operations.
Other Income for TEP includes interest income on the promissory note
it received from the Company in exchange for the transfer of its stock in
MEH. See Note 3 of Notes to the Condensed Consolidated Financial
Statement--Transfer of MEH from TEP to UniSource Energy. TEP recorded
interest income of $2.3 million in the second quarter and $4.6 million in
the first half of 1998 from this note. On the Consolidated Statement of
Income for the Company, this income is eliminated as an inter-company
transaction.
The unregulated energy subsidiaries owned by MEH reported a net loss
of $5.6 million for the second quarter and $9.7 million for the first half
of 1998, compared with net income of $0.5 million in the second quarter and
a net loss of $0.4 million for the first half of 1997. The delayed
implementation of California's competitive electricity market until March
31, 1998, expansion into additional regions of the country, and other
subsidiary development activities affected the financial results for these
businesses. See Investments in Energy-Related Affiliates.
Interest Expense
Interest expense increased by $3.4 million in the second quarter and
by $7.6 million of the first six months of 1998 relative to the same
periods in 1997. Higher letter of credit fees for TEP's new Credit
Agreement, as well as higher interest rates from the refinancing of certain
variable rate debt obligations with fixed rate debt obligations accounted
for the increase. (See Financing Developments, TEP Sale of Bonds, below).
These refinancings benefit TEP by extending debt maturities and reducing
the risk from changes in variable interest rates.
EVENTS AFFECTING FUTURE RESULTS OF UTILITY OPERATIONS
TEP Generating Resources
On May 1, 1998, the lease on three internal combustion turbine
generating units having a combined generating capacity of 96 MW ended. TEP
is in the process of evaluating the need for this type of peaking
generation resource in the near term. Firm capacity purchases needed to
replace the expired leased capacity are not expected to have a material
negative impact on UniSource Energy or TEP financial results.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
UniSource Energy
Cash and cash equivalents increased by $43.9 million, or 50% during
the twelve months ended June 30, 1998. The June 30, 1998 ending balance
was $132.1 million compared with the June 30, 1997 ending balance of $88.2
million. For the twelve-month period ended June 30, 1998, net cash flows
from operating activities exceeded the cash needed for investing and
financing activities.
Net cash flows from operating activities increased in aggregate by
$27.5 million in the first six months of 1998 compared with the same period
in 1997. This increase was mainly due to the payment of $30 million in
contract termination fees to the Springerville coal supplier in the first
half of 1997 compared to $10.0 million paid to the coal supplier in the
first half of 1998 (see Note 6 of Notes to Condensed Consolidated Financial
Statements--Rate Matters). In addition to the contract termination fees,
we received $11.3 million in June 1998 from the sale of emission
allowances.
Total net cash outflows from investing activities increased by $12.5
million during the first half of 1998 compared with the same period in
1997. An $8.9 million increase in Investments in Joint Ventures and a $4.4
million increase in Construction Expenditures were the primary reasons for
this change.
Total net cash outflows from financing activities decreased by $13.0
million in the first half of 1998 compared with the same period in 1997.
Net retirements of long-term debt and capital lease obligations were
greater in the first half of 1997, primarily due to the repayment of the
$31 million balance outstanding on TEP's Renewable Term Loan.
Our consolidated cash balance, including cash equivalents, at August
7, 1998 was approximately $132 million. Of this amount, $102 million was
held by TEP and its wholly-owned subsidiaries. These amounts exclude the
proceeds from the sale of TEP's First Collateral Trust Bonds on August 4,
1998, which will be used for the redemption of five series of First
Mortgage Bonds on September 3, 1998 (see Financing Developments, TEP First
Mortgage Bonds, below). We invest cash balances in high-grade money market
securities with an emphasis on preserving the principal amounts invested.
During 1998 and beyond, our sources of cash will be primarily
dividends from TEP (when allowed) and proceeds from sales of securities.
Potential cash needs may include funds for subsidiaries, funds to meet debt
obligations and funds to pay dividends to shareholders. See Dividends on
Common Stock and Financing Developments, UniSource Energy for details on
these sources and uses of funds.
TEP
Cash and cash equivalents increased by $15.0 million, or 17%, from the
June 30, 1997 ending balance of $88.2 million to the June 30, 1998 ending
balance of $103.2 million. TEP expects to generate enough cash flow
during 1998 to fund continuing operating activities and construction
expenditures. Actual cash flows may vary from projections if there are
changes in wholesale revenues, changes in short-term interest rates or
other factors. If cash flows were to fall short of our expectations, TEP
would use existing cash balances and, if necessary, borrow from the
Revolving Credit Facility. At August 7, 1998, there was no outstanding
balance due under the Revolving Credit Facility.
FINANCING DEVELOPMENTS
TEP Sale of Bonds
On March 17, 1998, the Apache County, Arizona Industrial Development
Authority issued $200 million of new bonds for the benefit of TEP. The
proceeds were used on May 15, 1998 to redeem the 1981 Series A Apache
County Pollution Control Revenue Bonds due 2020 ($100 million) and the 1981
Series B Apache County Pollution Control Revenue Bonds due 2021 ($100
million). The new bonds, which are unsecured, were issued in three series:
Series A Pollution Control Revenue Bonds ($83.7 million) bears interest at
5.85% and matures in 2028; Series B Pollution Control Revenue Bonds ($99.8
million) bears interest at 5.875% and matures in 2033; and Series C
Industrial Development Revenue Bonds ($16.5 million) bears interest at
5.85% and matures in 2026.
The 1981 Series A Apache Bonds were supported by a letter of credit.
This LOC was collateralized by Second Mortgage Bonds under the terms of
TEP's Credit Agreement. When TEP redeemed these bonds, the Letter of
Credit Facility decreased from $444 million to $341 million and the Second
Mortgage Bonds collateralizing those LOCs decreased by $103 million. The
1981 Series B Apache Bonds were supported by a letter of credit outside of
the Credit Agreement. This LOC was collateralized by First Mortgage Bonds.
When TEP redeemed these bonds, it eliminated the supporting LOC and retired
$103 million of First Mortgage Bonds collateralizing the LOC.
TEP Credit Agreement
As of June 30, 1998 and as of August 7, 1998, TEP had no borrowings
outstanding under its $100 million Revolving Credit Facility.
As described above in TEP Sale of Bonds, after TEP redeemed the 1981
Series A Apache County Pollution Control Revenue Bonds on May 15, 1998, the
amount of its Letter of Credit Facility decreased to $341 million and the
amount of its total facilities under the Credit Agreement, which includes
the Revolving Credit Facility discussed above, decreased to $441 million.
TEP is required by its Credit Agreement 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 1998 and gradually increasing to 1.55 in 2002, and (c) a maximum
Leverage Ratio ranging from 7.00 in 1998 and gradually decreasing to 6.20
in 2002. For the quarter ended June 30, 1998, TEP was in compliance with
each of these covenants.
TEP First Mortgage Bonds
In 1997 the ACC granted authority to TEP to refinance up to $184
million of its First Mortgage Bonds scheduled to mature between 1999 and
2003, as well as any redemption premiums, by issuing new debt and/or equity
securities. As described below, TEP plans to complete these transactions
by the end of the third quarter 1998. TEP's objective is to extend
maturities and eliminate certain restrictive covenants contained in the
existing First Mortgage Bonds.
On May 15, 1998, TEP exchanged $46.9 million of its existing 12.22%
First Mortgage Bonds due 2000 for an identical amount of new 12.22%
Exchange Series First Mortgage Bonds due 2000. With the exception of the
elimination of a covenant restricting the payment of dividends, the new
bonds have substantially the same terms and conditions as the existing
bonds.
On August 4, 1998, TEP issued $140 million of First Collateral Trust
Bonds, Series A, and will use the proceeds on September 3, 1998 to redeem
all of its First Mortgage Bonds due in 1999, 2001, 2002, and 2003, as well
as the $31.9 million of 12.22% First Mortgage Bonds due 2000 not tendered
for exchange as described above. The bonds to be redeemed bear interest at
rates ranging from 7.55% to 12.22%. When TEP redeems the bonds as
described above, TEP will have eliminated covenants that currently prohibit
it from paying common stock dividends so long as it has an accumulated
earnings deficit (see Dividends on Common Stock). The First Collateral
Trust Bonds, Series A bear interest at 7.50% and mature in 2008. The First
Collateral Trust Bonds are not secured by a direct mortgage or other lien
on property of TEP, but instead are collateralized by an equal aggregate
principal amount of bonds issued under TEP's General First Mortgage and
held by the trustee. If and when the bonds collateralizing the First
Collateral Trust bonds constitute all bonds outstanding under TEP's General
First Mortgage, the bonds issued under the General First Mortgage may be
surrendered and substituted with an equal amount of bonds issued under the
General Second Mortgage. If and when the bonds collateralizing the First
Collateral Trust bonds constitute all bonds outstanding under the General
Second Mortgage, the bonds may be surrendered and the First Collateral
Trust Bonds, Series A will become unsecured obligations of TEP.
UniSource Energy--Loans and Guarantees
In December 1997, Millennium committed to provide NEV with $20 million
of funding. At July 31, 1998, NEV had received the following under the $20
million commitment:
- Millennium provided $10 million in loans to NEV.
- Millennium provided $4 million for NEV preferred equity.
- UniSource Energy issued guarantees in the aggregate amount of $5.5
million to secure the obligations of NEV to counterparties to energy
purchase and sale agreements.
As a result of these loans and guarantees, the remaining commitment amount
available was $0.5 million at July 31, 1998.
UniSource Energy is the guarantor of $32.8 million of performance
bonds that secure the amounts NEV California owes to the California utility
distribution companies (UDCs) for services provided by the UDCs in
connection with NEV California's sales in the California retail electric
market. NEV California bills its customers for these UDC charges.
In August 1998, UniSource Energy agreed to guarantee a $10 million
loan that NEV obtained from an unrelated party. The debt underlying the
guarantee is not due until 1999.
IMPACT OF YEAR 2000 ON COMPUTER SYSTEMS AND APPLICATIONS
- --------------------------------------------------------
The Company continues to review, test and make modifications to its
computer systems and applications in an effort to ensure that its
generation, transmission and distribution facilities will provide
uninterrupted service and that year 2000 transactions can be processed.
The Company's year 2000 program commenced in 1996.
We have completed an inventory and assessment for each of our critical
enterprise information systems. The remediation of these systems began in
1996 and is expected to be completed by the end of 1998, including testing
and implementation.
We are reviewing the control and embedded systems of TEP's utility
plant (including the units that TEP owns part of but does not operate), as
well as whether major vendors are addressing the problem. We anticipate
the inventory and assessment stages of the control and embedded systems
program to be substantially completed in the third quarter of 1998. We
expect remediation efforts to begin in the third quarter of 1998 and to
be substantially completed by the end of the second quarter of 1999.
The Company intends to begin contingency planning to attempt to address
the possibility that not all remediation efforts will succeed.
The Company has also identified the major vendors from whom we
purchase products or services. We are contacting those vendors to
determine their plans to correct any problems they may face with year 2000
compliance and investigate any potential impact on TEP. TEP and other
electric service providers in the WSCC are evaluating potential year 2000
risks resulting from interconnected electric and informational systems.
Such interconnected systems are critical to the reliability and integrity
of each interconnected electric service provider. It is possible that the
failure of one such interconnected provider to achieve year 2000 compliance
could disrupt the provision of electric services by others. TEP and other
providers in the WSCC are working together in an effort to avoid such
disruptions.
From 1996 through June 30, 1998, year 2000 project costs of
approximately $600,000 have been incurred, all of which were expensed. A
budget of $1.35 million has been established for year 2000 project costs.
All 2000 remediation costs will be expensed as incurred.
At this time we believe that all identified modifications to systems
which the Company operates will be made within the required time frames.
Notwithstanding the Company's efforts, there can be no assurance that all
year 2000 problems with systems the Company operates will be identified and
remediated in a timely fashion. Although the Company believes that, as a
result of its year 2000 program, any problems arising from the failure to
achieve year 2000 compliance will be minor, it is possible that non-
compliance could disrupt the generation, transmission or distribution of
electric energy. We cannot assure the year 2000 compliance status of
systems or parties that the Company does not control. We cannot assess
the effect on the Company of non-compliance by systems or parties that
the Company does not control.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
- ------------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking
statements as defined by the Private Securities Litigation Reform Act of
1995. UniSource Energy and TEP include the following cautionary statements
to take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made by,
or for, UniSource Energy or TEP in this Quarterly Report on Form 10-Q.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions.
They include statements which are not statements of historical fact. Such
forward-looking statements may be identified by the use of words such as
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. UniSource Energy and TEP may
occasionally publish or make available forward-looking statements of this
nature. These cautionary statements and any other cautionary statements
which may accompany the forward-looking statements expressly qualify all
such forward-looking statements, whether written or oral, and whether made
by or for UniSource Energy or TEP. In addition, UniSource Energy and TEP
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances after the date we make forward-looking statements.
Forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those we
express in the forward-looking statements. We express in good faith the
expectations, beliefs and projections contained in this document. We
believe we have a reasonable basis to make such statements based on our
examination of historical operating trends, data contained in our records
and other data available from third parties. However, we cannot assure
that we will achieve our expectations, beliefs or projections. In addition
to other factors and matters discussed in this document, we believe some of
the important factors that could cause actual results to differ materially
from those we discuss 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
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, rate structures, and methods of
establishing rates.
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, TEP, or any subsidiary.
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
- -----------------------------------------------------------------------------
TAX ASSESSMENTS
See Note 2 of Notes to Condensed Consolidated Financial Statements,
Tax Assessments.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------------------
The Company conducted its Annual Meeting of Shareholders on May 8,
1998. At that meeting, the shareholders of the Company elected members of
the Board of Directors.
The total votes were as follows:
<TABLE>
Against Broker
(i)Election of Directors For or Withheld Abstain Non-Votes
- ------------------------ --- ---------- ------- ---------
<S> <C> <C> <C> <C>
Charles E. Bayless 29,532,611 470,128 -- --
Larry W. Bickle 29,553,180 449,559 -- --
Elizabeth T. Bilby 29,539,126 463,613 -- --
Harold W. Burlingame 29,555,633 447,106 -- --
Jose L. Canchola 29,524,772 477,967 -- --
John L. Carter 29,579,686 423,053 -- --
John A. Jeter 29,543,949 458,790 -- --
R. B. O'Rielly 29,514,936 487,803 -- --
Martha R. Seger 29,547,476 455,263 -- --
H. Wilson Sundt 29,541,023 461,716 -- --
</TABLE>
ITEM 5. - OTHER INFORMATION
- -----------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
UniSource Energy
Daniel W. L. Fessler was elected to the Board of Directors effective
May 8, 1998. Mr. Fessler, 56, was the President of the California Public
Utilities Commission from 1991 to 1996, and is a partner in the law firm of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., in San Francisco, CA.
James S. Pignatelli was elected Chairman, President and Chief
Executive Officer of the Company effective July 6, 1998, replacing Charles
E. Bayless, who accepted the positions of Chairman, President and CEO of
Illinova Corporation, in Decatur, IL. Mr. Pignatelli had been Senior Vice
President and Chief Operating Officer of TEP since 1996. He was named
UniSource Energy Senior Vice President and Chief Operating Officer upon
formation of UniSource Energy as TEP's holding company. In 1998, he was
named TEP Executive Vice President and was elected to TEP's Board of
Directors.
Ira R. Adler was named Executive Vice President and elected to the
Company's Board of Directors effective July 6, 1998. Mr. Adler had been
Senior Vice President and Chief Financial Officer of TEP since 1990. He
was named UniSource Energy Senior Vice President and Chief Financial
Officer upon formation of UniSource Energy as TEP's holding company. In
1998, he was named TEP Executive Vice President and was elected to TEP's
Board of Directors.
TEP
James S. Pignatelli was elected Chairman, President and Chief
Executive Officer of TEP effective July 6, 1998, replacing Charles E.
Bayless.
George W. Miraben was named Executive Vice President and elected to
TEP's Board of Directors effective July 6, 1998. Mr. Miraben has been
Senior Vice President of Policy and Human Resources since 1996.
The Board of Directors of TEP consists of Mr. Pignatelli, Mr. Adler,
Mr. Miraben, and the following members (who are also members of the
UniSource Energy Board of Directors): Elizabeth T. Bilby, Harold W.
Burlingame, John L. Carter, John A. Jeter, and Martha R. Seger.
SHAREHOLDER PROPOSAL DEADLINE FOR 1999 ANNUAL MEETING
Rule 14a-4 of the Securities and Exchange Commission's proxy rules
allows the Company to use discretionary voting authority to vote on a
matter coming before an annual meeting of the shareholders which are not
included in the Company's proxy statement, if the Company does not have
notice of the matter at least 45 days before the date on which the Company
first mailed its proxy materials for the prior year's annual meeting of the
shareholders. In addition, discretionary voting authority may generally
also be used if the Company receives timely notice of such matter (as
described in the preceding sentence) and if, in the proxy statement, the
Company describes the nature of such matter and how the Company intends to
exercise its discretion to vote on such matter. Accordingly, for the 1999
Annual Meeting of the Company, any such notice must be submitted to the
Secretary of the Company on or before February 13, 1999.
This requirement is separate and apart from the Securities and
Exchange Commission's requirements that a shareholder must meet in order to
have a shareholder proposal included in the Company's proxy statement.
Shareholder proposals intended to be presented at the 1999 Annual Meeting
of the Company must be received by the Company no later than December 2,
1998 in order to be eligible for inclusion in the Company's proxy statement
and the form of proxy relating to that meeting.
ADDITIONAL FINANCIAL DATA
The following table reflects the ratio of earnings to fixed charges for
TEP:
12 Months Ended
---------------
June 30, December 31,
1998 1997
---- ----
Ratio of Earnings to Fixed 1.32 1.39
Charges
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------------------------------------
(a) Exhibits.
-- See Exhibit Index.
(b) Reports on Form 8-K.
-- Dated June 26, 1998, reporting on the ACC order regarding stranded
cost recovery and certain changes in Executive Officers and
Directors of the Registrants.
-- Dated July 16, 1998, reporting on the Proposed Revisions of the
Retail Electric Competition Rules before the ACC.
-- Dated July 22, 1998 reporting on the Earnings for the Second
Quarter 1998 of the Registrants.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
each registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized. The signature for each
undersigned company shall be deemed to relate only to matters having
reference to such company or its subsidiary.
UNISOURCE ENERGY CORPORATION
-----------------------------
(Registrant)
Date: August 13, 1998 Ira R. Adler
-------------------------------
Ira R. Adler
Executive Vice President and Principal
Financial Officer
TUCSON ELECTRIC POWER COMPANY
------------------------------
(Registrant)
Date: August 13, 1998 Ira R. Adler
-------------------------------
Ira R. Adler
Executive Vice President and Principal
Financial Officer
EXHIBIT INDEX
4(a)- Thirty-third Supplemental Indenture, dated as of May 1,
1998.
4(b)- Thirty-fourth Supplemental Indenture dated as of August 1,
1998.
4(c)- Supplemental Indenture No. 3 creating a series of bonds
designated Second Mortgage Bonds, Collateral Series, dated as of
August 1,1998.
4(d)- Indenture of Trust, dated as of August 1, 1998, between TEP and
the Bank of Montreal Trust Company.
11 - Statement re computation of per share earnings - UniSource
Energy.
12 - Computation of Ratio of Earnings to Fixed Charges - TEP.
15(a)- Letter regarding unaudited interim financial information
(PricewaterhouseCoopers LLP).
15(b)- Letter regarding unaudited interim financial information
(Deloitte &Touche LLP).
27(a)- Financial Data Schedule - UniSource Energy.
27(b)- Financial Data Schedule - TEP.
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of the Restated Articles of Incorporation of
the Company, as amended provides in pertinent part as follows:
(B) No director of the Corporation shall be personally
liable for monetary damages for breach of fiduciary duty as a
Director; provided, however, that nothing herein shall be deemed
to eliminate or limit any liability which may not be so
eliminated or limited under the laws of the State of Arizona, as
in effect at the effective date of this paragraph (B) of Article
SEVENTH or as thereafter amended. No amendment, modification or
repeal of this paragraph (B) shall eliminate or limit the
protection afforded by this paragraph (B) to a director with
respect to any act or omission occurring before the effective
date thereof.
(C) (1) The Corporation shall, to the maximum extent
permitted by applicable law, as from time to time in effect,
indemnify any person who is or was a party to or otherwise
involved in (or threatened to be made a party to or otherwise
involved in) any threatened, pending or completed action, suit or
proceeding (hereinafter called an "Action"), whether civil,
criminal, administrative or investigative (including without
limitation any Action by or in the right of the Corporation to
procure a judgment in its favor) by reason of the fact that he is
or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or
officer of another corporation, of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee
benefit plan or any other entity or enterprise, against expenses,
including attorneys' fees, and against judgments, fines and
amounts paid in settlement incurred by him in connection with
such Action or any appeal therein.
(2) The Corporation shall pay any expenses incurred by
a director or officer of the Corporation in defending any such
Action in advance of the final disposition thereof upon receipt
of any undertaking by or on behalf of such person to repay such
advances to the extent of the amount to which such person shall
ultimately be determined not to be entitled.
(3) The Corporation, by resolution of the Board of
Directors, may extend the benefits of this paragraph (C) Article
SEVENTH to employees, agents and other representatives of the
Corporation (each director, officer, employee, agent and other
representative entitled to benefits under this paragraph (C)
being hereinafter sometimes called an "Indemnified Person").
(4) All rights to indemnification and to the
advancement of expenses granted under or pursuant to this
paragraph (C) shall be deemed to arise out of a contract between
the Corporation and each person who is an Indemnified Person at
any time while this paragraph (C) is in effect and may be
evidenced by a separate contract between the Corporation and each
Indemnified Person; and such rights shall be effective in respect
of all Actions commenced after the effective date of this
paragraph (C), whether arising from acts or omissions occurring
before or after such date. No amendment, modification or repeal
of this Article shall affect any rights or obligations
theretofore existing.
(5) The Corporation may purchase and maintain
insurance on behalf of, or insure or cause to be insured, any
person who is an Indemnified Person against any liability
asserted against him and incurred by him in any capacity in
respect of which he is an Indemnified Person, or arising out of
his status in such capacity, whether or not the Corporation would
have the power to indemnify him against such liability under this
Article. As used in this Section, "insurance" includes
retrospectively rated and self-insured programs, provided,
however, that no such program shall provide coverage for
directors and officers which is prohibited by applicable law.
The Corporation's indemnity of any person who is an Indemnified
Person shall be reduced by any amounts such person may collect
with respect to such liability (a) under any policy of insurance
purchased and maintained on his behalf by the Corporation or (b)
from any other entity or enterprise served by such person.
II-1
<PAGE>
(6) The rights to indemnification and to the
advancement of expenses and all other benefits provided by, or
granted pursuant to, this Article shall continue as to a person
who has ceased to serve in the capacity in respect of which such
person was an Indemnified Person and shall inure to the benefit
of the heirs, executors and administrators of such person.
(7) The Board of Directors shall have the power and
authority to make, alter, amend and repeal such procedural rules
and regulations relating to indemnification and the advancement
of expenses as it, in its discretion, may deem necessary or
expedient in order to carry out the purposes of this Article,
such rules and regulations, if any, to be set forth in the Bylaws
of the Corporation or in a resolution of the Board of Directors.
ITEM 21. EXHIBITS.
Reference is made to the Exhibit Index on page II-6 hereof.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933 (the
"Securities Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under
the Securities Act, each filing of the registrant's Annual Report
pursuant to Section 13(a) or Section 15(d) of the Exchange Act
that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to
the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items
4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents
II-2
<PAGE>
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
II-3
<PAGE>
POWER OF ATTORNEY
EACH DIRECTOR AND/OR OFFICER OF REGISTRANT WHOSE
SIGNATURE APPEARS BELOW HEREBY APPOINTS IRA R. ADLER, DENNIS R.
NELSON, KAREN G. KISSINGER AND J. ANTHONY TERRELL, AND EACH OF
THEM SEVERALLY, AS HIS ATTORNEY-IN-FACT TO SIGN IN HIS NAME AND
BEHALF, IN ANY AND ALL CAPACITIES STATED BELOW, AND TO FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION, ANY AND ALL AMENDMENTS,
INCLUDING POST-EFFECTIVE AMENDMENTS, TO THIS REGISTRATION
STATEMENT AND THE REGISTRANT HEREBY ALSO APPOINTS EACH SUCH AGENT
FOR SERVICE AS ITS ATTORNEY-IN-FACT WITH THE AUTHORITY TO SIGN
AND FILE ANY SUCH AMENDMENTS IN ITS NAME AND BEHALF.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tucson, State of Arizona on September
30, 1998.
TUCSON ELECTRIC POWER COMPANY
By: /s/ Ira R. Adler
-----------------------------
IRA R. ADLER
Executive Vice President
Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Date: September 30, 1998 /s/ James S. Pignatelli
James S. Pignatelli
Chairman of the Board, President
and Principal Executive Officer
Date: September 30, 1998 /s/ Ira R. Adler
Ira R. Adler
Executive Vice President, Principal
Financial Officer and Director
Date:_________, 1998
--------------------
Elizabeth T. Bilby
Director
Date: September 24, 1998 /s/ Harold W. Burlingame
Harold W. Burlingame
Director
Date:September 30, 1998 /s/ John L. Carter
John L. Carter
Director
Date: September 28, 1998 /s/ Daniel W.L. Fessler
Daniel W.L. Fessler
Director
II-4
<PAGE>
Date:_________, 1998 -----------------
John A. Jeter
Director
Date:_________, 1998
-----------------
George W. Miraben
Director
Date: September 24, 1998 /s/ Martha R. Seger
Martha R. Seger
Director
II-5
<PAGE>
EXHIBIT INDEX
The Exhibits designated by an asterisk are filed
herewith. Exhibits not so designated have been provided to the
Commission, and are incorporated herein by reference.
Exhibit No. Description of Exhibit
---------- ----------------------
*1 - Purchase Agreement, dated July 30, 1998,
by and among Tucson Electric Power
Company and Morgan Stanley & Co.
Incorporated, as representative for
itself, TD Securities (USA) Inc.,
Prudential Securities Incorporated,
Salomon Brothers Inc and BNY Capital
Markets, Inc.
3(a) - Restated Articles of Incorporation 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 as amended May 20, 1994. (Form
10-Q for the Quarter ended June 30,
1994, File No. 1-5924 -Exhibit 3.)
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.
259906-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).)
II-6
<PAGE>
4(a)(13) - Twelfth Supplemental Indenture, dated as
of November 1, 1969. (Form S-7, File No.
2-59906-Exhibit 2(b)(1 3).)
4(a)(14) - Thirteenth Supplemental Indenture, dated
as of January 20, 1970. (Form S-7, File
No. 259906-Exhibit 2(b)(14).)
4(a)(15) - Fourteenth Supplemental Indenture, dated
as of September 1, 1971. (Form S-7, File
No. 259906-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. 259906--Exhibit 2(b)(18).)
4(a)(19) - Eighteenth Supplemental Indenture, dated
as of November 1, 1975. (Form S-7, File
No. 259906--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).)
II-7
<PAGE>
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(a)(34) - Thirty-third Supplemental Indenture,
dated as of May 1, 1998. (Form 10-Q for
quarter ended June 30, 1998, File No. 1-
5924-Exhibit 4(a).)
4(a)(35) - Thirty-fourth Supplemental Indenture,
dated as of August 1, 1998. (Form 10-Q
for quarter ended June 30, 1998, File
No. 1-5924-Exhibit 4(b).)
4(b)(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(b)(2) - Supplemental Indenture No. 1,
dated as of December 1, 1992. (Form S-1,
Registration No. 33-55732-Exhibit
4(r)(2).)
4(b)(3) - Supplemental Indenture No. 2,
dated as of December 1, 1997. (Form 10-
K for the year ended December 31, 1997,
File No. 1-5924-Exhibit 4(m)(3).)
4(b)(4) - Supplemental Indenture No. 3,
dated as of August 1, 1998. (Form 10-Q
for quarter ended June 30, 1998, File
No. 1-5924-Exhibit 4(c).)
4(c)(1) - Indenture of Trust, dated as of August
1, 1998, between TEP and Bank of
Montreal Trust Company. (Form 10-Q for
quarter ended June 30, 1998, File No. 1-
5924-Exhibit 4(d).)
*4(c)(2) - Officer's Certificate establishing
the New Bonds and the form and terms thereof.
*4(d) - Registration Rights Agreement between
Tucson Electric Power Company and Morgan
Stanley & Co. Incorporated.
*4(e) - Form of Letter of Transmittal.
*5(a) - Opinion of Dennis R. Nelson, Esq.
*5(b) - Opinion of Thelen Reid & Priest LLP.
*15(a) - Letter of Deloitte & Touche LLP
regarding unaudited interim financial
information
*15(b) _ Letter of PricewaterhouseCoopers
regarding unaudited interim financial
information
*23(a) - The Consents of Dennis R. Nelson and
Thelen Reid & Priest LLP are contained
in their opinions as Exhibit 5(a) and
5(b), respectively.
*23(b) - The Consent of Deloitte & Touche LLP.
II-8
<PAGE>
*23(c) - The Consent of Snell & Wilmer L.L.P.
*23(d) - The Consent of Rodey, Dickason, Sloan,
Akin & Robb, P.A.
*24 - Power of Attorney is contained herein at
page II-4.
*25 - Statement of Eligibility of Trustee of
Bank of Montreal Trust Company dated as
of September 21, 1998.
II-9
Exhibit 1
$140,000,000
Tucson Electric Power Company
First Collateral Trust Bonds, 7 1/2% Series A Due 2008
PURCHASE AGREEMENT
July 30, 1998
<PAGE>
Morgan Stanley & Co. Incorporated
TD Securities (USA) Inc.
Prudential Securities Incorporated
Salomon Brothers Inc
BNY Capital Markets, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Tucson Electric Power Company, an Arizona corporation (the
"COMPANY"), proposes to issue and sell to the several purchasers
named in Schedule I hereto (the "INITIAL PURCHASERS")
$140,000,000 in aggregate principal amount of its First
Collateral Trust Bonds, 7 1/2% Series A due 2008 (the "BONDS") to
be issued under the Indenture, dated as of August 1, 1998 (the
"INDENTURE"), from the Company to Bank of Montreal Trust Company,
trustee (the "TRUSTEE").
As a condition to the authentication and delivery by the
Trustee of the Bonds, there shall have been delivered to the
Trustee, to be held by the Trustee for the benefit of the holders
of the Bonds and any other obligations outstanding under the
Indenture, as equal aggregate principal amount of bonds ("1941
Mortgage Bonds") of the Company issued under and secured by the
Indenture, dated as of April 1, 1941 (the "Original 1941
Mortgage"), from the Company to The Chase Manhattan Bank,
trustee, as heretofore amended and supplemented and to be amended
and supplemented by the Thirty-Fourth Supplemental Indenture, to
be dated as of August 1, 1998 (the Original 1941 Mortgage, as so
amended and supplemented and said Thirty-Fourth Supplemental
Indenture being hereafter called, respectively, the "1941
Mortgage" and the "1941 Mortgage Supplement").
Upon the satisfaction of certain conditions specified in the
Indenture, the Trustee is required to surrender the 1941 Mortgage
Bonds then held by it in exchange for an equal aggregate
principal amount of bonds ("1992 Mortgage Bonds") issued under
and secured by the Indenture of Mortgage and Deed of Trust, dated
as of December 1, 1992 (the "Original 1992 Mortgage"), from the
Company to Bank of Montreal Trust Company, trustee, as heretofore
supplemented and to be amended and supplemented by a supplemental
indenture substantially in the form of the form of Supplemental
Indenture No. 3 (the Original 1992 Mortgage, as so amended and
supplemented, and such supplemental indenture being hereinafter
called, respectively, the "1992 Mortgage" and the "1992 Mortgage
Supplement").
The Bonds will be offered without being registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), to
qualified institutional buyers in compliance with the exemption
from registration provided by Rule 144A under the Securities Act
and in offshore transactions in reliance on Regulation S under
the Securities Act ("REGULATION S").
The Initial Purchasers and their direct and indirect
transferees will be entitled to the benefits of a Registration
Rights Agreement dated the date hereof between the Company and
the Initial Purchasers (the "REGISTRATION RIGHTS AGREEMENT").
In connection with the sale of the Bonds, the Company has
prepared a preliminary offering memorandum (the "PRELIMINARY
MEMORANDUM") and will prepare a final offering memorandum (the
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"FINAL MEMORANDUM" and, with the Preliminary Memorandum, each a
"MEMORANDUM") including or incorporating by reference a
description of the terms of the Bonds, the terms of the offering
and a description of the Company. As used herein, the term
"Memorandum" shall include in each case the documents
incorporated by reference therein. The terms "SUPPLEMENT",
"AMENDMENT" and "AMEND" as used herein with respect to a
Memorandum shall include all documents deemed to be incorporated
by reference in the Preliminary Memorandum or Final Memorandum
that are filed subsequent to the date of such Memorandum with the
Securities and Exchange Commission (the "COMMISSION") pursuant to
the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT").
1. Representations and Warranties. The Company represents
and warrants to, and agrees with, you that:
(a) (i) Each document, if any, filed or to be filed
pursuant to the Exchange Act and incorporated by reference
in the Final Memorandum complied or will comply when so
filed in all material respects with the Exchange Act and the
applicable rules and regulations of the Commission
thereunder and (ii) the Final Memorandum, in the form used
by the Initial Purchasers to confirm sales and on the
Closing Date (as defined in Section 4), will not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in
the light of the circumstances under which they were made,
not misleading, except that the representations and
warranties set forth in this paragraph do not apply to
statements or omissions in the Final Memorandum based upon
information furnished to the Company in writing by any
Initial Purchaser through you expressly for use therein.
(b) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of
the State of Arizona, has the corporate power and authority
to own its property and to conduct its business as described
in the Final Memorandum and is duly qualified to transact
business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or
leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(c) Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Final Memorandum and is duly qualified to transact business
and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole; all of the issued shares
of capital stock of each subsidiary of the Company have been
duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company, free
and clear of all liens, encumbrances, equities or claims.
(d) This Agreement has been duly authorized, executed
and delivered by the Company; and the Registration Rights
Agreement has been duly authorized by the Company.
(e)(i) The Bonds have been duly authorized and, when
executed and authenticated in accordance with the provisions
of the Indenture and delivered to and paid for by the
Initial Purchasers in accordance with the terms of this
Agreement, will be valid and binding obligations of the
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Company, enforceable in accordance with their terms, subject
to laws or principles of equity relating to or affecting
generally the enforcement of mortgagee's and other
creditors' rights, including without limitation bankruptcy
and insolvency laws, and will be entitled to the benefits of
the Indenture.
(ii) The Indenture has been duly authorized by the
Company; and, when duly executed and delivered by the
Company, the Indenture will be a valid and binding agreement
of the Company, enforceable in accordance with its terms,
subject to laws or principles of equity relating to or
affecting generally the enforcement of creditors' rights,
including without limitation bankruptcy and insolvency laws.
(f)(i) The 1941 Mortgage Bonds have been duly
authorized and, when executed and authenticated in
accordance with the provisions of the 1941 Mortgage and
delivered to the Trustee in accordance with the terms of the
Indenture, will be valid and binding obligations of the
Company, enforceable in accordance with their terms, subject
to laws or principles of equity relating to or affecting
generally the enforcement of mortgagee's and other
creditors' rights, including without limitation bankruptcy
and insolvency laws and laws which may affect the
enforcement of certain remedial provisions of the 1941
Mortgage, and will be entitled to the benefits of the 1941
Mortgage.
(ii) The Original 1941 Mortgage as heretofore amended
and supplemented has been duly authorized, executed and
delivered by the Company; the 1941 Mortgage Supplement has
been duly authorized by the Company; and, when duly executed
and delivered by the Company, the 1941 Mortgage will be a
valid and binding agreement of the Company, enforceable in
accordance with its terms, subject to laws or principles of
equity relating to or affecting generally the enforcement of
mortgagee's other creditors' rights, including without
limitations bankruptcy and insolvency laws and laws which
may affect the enforcement of certain remedial provisions
thereof.
(g)(i) The 1992 Mortgage Bonds have been duly
authorized and, if and when executed and authenticated in
accordance with the provisions of the 1992 Mortgage and
delivered to the Trustee in accordance with the terms, will
be valid and binding obligations of the Company, enforceable
in accordance with their terms, subject to laws or
principles of equity relating to or affecting generally the
enforcement of mortgagee's and other creditors' rights,
including without limitation bankruptcy and insolvency laws
and laws which may affect the enforcement of certain
remedial provisions of the 1992 Mortgage, and will be
entitled to the benefits of the 1992 Mortgage.
(ii) The Original 1992 Mortgage as heretofore
supplemented has been duly authorized, executed and
delivered by the Company; the 1992 Mortgage Supplement has
been duly authorized by the Company; and, when duly executed
and delivered by the Company, the 1992 Mortgage will be a
valid and binding agreement of the Company, enforceable in
accordance with its terms, subject to laws or principles of
equity relating to or affecting generally the enforcement of
mortgagee's and other creditors' rights, including without
limitation bankruptcy and insolvency laws and laws which may
affect the enforcement of certain remedial provisions
thereof.
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(h) The execution and delivery by the Company of, and
the performance by the Company of its obligations under,
this Agreement, the Registration Rights Agreement, the
Bonds, the Indenture, the 1941 Mortgage Bonds, the 1941
Mortgage, the 1992 Mortgage Bonds and the 1992 Mortgage
(collectively, the "Company Obligations") will not
contravene any provision of applicable law or the articles
of incorporation or by-laws of the Company or any agreement
or other instrument binding upon the Company or any of its
subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or
qualification with, any governmental body or agency is
required for the performance by the Company of its
obligations under the Company Obligations, except (i) such
as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the
Bonds, (ii) such as may be required by Federal and state
securities laws with respect to the Company's obligations
under the Registration Rights Agreement, and (iii) the
authorization of the Arizona Corporation Commission which
has been obtained and remains in full force and effect.
(i) Except as may otherwise be reflected in or
contemplated by the Final Memorandum, since the respective
dates as of which information is given therein, there has
not occurred any material adverse change in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole.
(j) There are no legal or governmental proceedings
pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of
the Company or any of its subsidiaries is subject which are
reasonably likely to be determined adversely and, if so
determined, would (i) have a material adverse effect on the
authority or corporate power of the Company to perform its
obligations under the Company Obligations or otherwise to
consummate the transactions contemplated by the Final
Memorandum or (ii) except as may otherwise be reflected in
or contemplated by the Final Memorandum, have a material
adverse effect on the Company and its subsidiaries taken as
a whole or materially impair the ability of the Company to
perform its obligations under the Company Obligations.
(k) The Company is not, and after giving effect to the
offering and sale of the Bonds and the application of the
proceeds thereof as described in the Final Memorandum, will
not be an "investment company" as such term are defined in
the Investment Company Act of 1940, as amended.
(l) It is not necessary in connection with the offer,
sale and delivery of the Bonds to the Initial Purchasers in
the manner contemplated by this Agreement to register the
Bonds, the 1941 Mortgage Bonds or the 1992 Mortgage Bonds
under the Securities Act or to qualify the Indenture, the
1941 Mortgage or the 1992 Mortgage under the Trust Indenture
Act of 1939, as amended.
(m) The Bonds satisfy the requirements set forth in
Rule 144A(d)(3) under the Securities Act.
2. Agreements to Sell and Purchase. The Company hereby
agrees to sell to the several Initial Purchasers, and each
Initial Purchaser, upon the basis of the representations and
warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to
purchase from the Company the principal amount of Bonds set forth
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in Schedule I hereto opposite its name at a purchase price of
98.270% of the principal amount thereof (the "PURCHASE PRICE")
plus accrued interest, if any, to the Closing Date.
3. Terms of Offering. You have advised the Company that
the Initial Purchasers will make an offering of the Bonds
purchased by the Initial Purchasers hereunder on the terms to be
set forth in the Final Memorandum, as soon as practicable after
this Agreement is entered into as in your judgment is advisable.
4. Payment and Delivery. Payment for the Bonds shall be
made to the Company in Federal or other funds immediately
available in New York City against delivery of the Bonds for the
respective accounts of the several Initial Purchasers at 10:00
a.m., New York City time, on August 4, 1998, or at such other
time on the same or such other date, not later than [August 18],
1998, as shall be designated in writing by you. The time and
date of such payment are hereinafter referred to as the "CLOSING
DATE."
The Bonds shall be in global form and registered in the name
of Cede & Co., as nominee for The Depository Trust Company (the
"DEPOSITARY"). The certificates evidencing the Bonds shall be
delivered to or upon the order of the Depositary on the Closing
Date for the respective accounts of the several Initial
Purchasers, against payment of the Purchase Price therefor plus
accrued interest, if any, to the date of payment and delivery.
5. Conditions to the Initial Purchasers' Obligations. The
several obligations of the Initial Purchasers to purchase and pay
for the Bonds on the Closing Date are subject to the following
conditions:
a. Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date:
i. there shall not have occurred any
downgrading, nor shall any notice have been given of
any intended or potential downgrading or of any review
for a possible change that does not indicate the
direction of the possible change, in the rating
accorded any of the Company's securities by any
"nationally recognized statistical rating
organization," as such term is defined for purposes of
Rule 436(g)(2) under the Securities Act; and
ii. except as otherwise reflected in or
contemplated by the Final Memorandum (exclusive of any
amendments or supplements thereto subsequent to the
execution and delivery of this Agreement) there shall
not have occurred any change in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken
as a whole, that, in your reasonable judgment, is
material and adverse and that makes it, in your
judgment, impracticable to market the Bonds on the
terms and in the manner contemplated in the Final
Memorandum.
b. The Initial Purchasers shall have received on the
Closing Date a certificate, dated the Closing Date and
signed by an executive officer of the Company, to the effect
set forth in Section 5(a)(ii) and to the effect that the
representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements
and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing
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Date. The officer signing and delivering such certificate
may rely upon the best of his or her knowledge as to
proceedings threatened.
c. The Initial Purchasers shall have received on the
Closing Date opinions of Dennis R. Nelson, Esq. Vice
President, General Counsel and Corporate Secretary of the
Company, Thelen Reid & Priest LLP, counsel to the Company,
Snell & Wilmer L.L.P., special Arizona counsel to the
Company, and Rodey, Dickason, Sloan, Akin & Robb, P.A.,
special New Mexico counsel to the Company, all dated the
Closing Date, substantially in the respective forms thereof
set forth in Exhibits A, B, C and D. Such opinions shall be
rendered to the Initial Purchasers at the request of the
Company and shall so state therein.
d. The Initial Purchasers shall have received on the
Closing Date an opinion of Kutak Rock, counsel for the
Initial Purchasers, dated the Closing Date, substantially in
the form thereof set forth in Exhibit E.
e. The Initial Purchasers shall have received on the
Closing Date a letter, dated the Closing Date, to the effect
set forth in Exhibit F, from Deloitte & Touche LLP,
independent public accountants.
f. The Initial Purchasers shall have received on the
Closing Date a letter, dated the Closing Date, to the effect
set forth in Exhibit G, from PricewaterhouseCoopers LLP,
independent public accountants.
6. Covenants of the Company. In further consideration of
the agreements of the Initial Purchasers contained in this
Agreement, the Company covenants with each Initial Purchaser as
follows:
a. The Company shall furnish to you in New York City,
without charge, prior to 10:00 a.m. New York City time on
the business day next succeeding the date of this Agreement
and during the period mentioned in Section 6(c), as many
copies of the Final Memorandum, any documents incorporated
by reference therein and any supplements and amendments
thereto as you may reasonably request.
b. Before amending or supplementing either
Memorandum, the Company shall furnish to you a copy of each
such proposed amendment or supplement and, subject to
requirements of law as expressed in an opinion of counsel to
the Company, not to use any such proposed amendment or
supplement which you reasonably disapprove in writing.
c. If, during such period after the date hereof and
prior to the date on which all of the Bonds shall have been
sold by the Initial Purchasers, any event shall occur or
condition exist as a result of which it is necessary to
amend or supplement the Final Memorandum in order to make
the statements therein, in the light of the circumstances
when the Final Memorandum is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Initial
Purchasers, it is necessary to amend or supplement the Final
Memorandum to comply with applicable law, the Company shall
forthwith prepare and furnish to the Initial Purchasers, or
file, either amendments or supplements to the Final
Memorandum so that the statements in the Final Memorandum as
so amended or supplemented will not, in the light of the
circumstances when the Final Memorandum is delivered to a
purchaser, be misleading or so that the Final Memorandum, as
amended or supplemented, will comply with applicable law.
During the first nine months after the date hereof, the cost
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<PAGE>
of so preparing and furnishing, or filing, such amendments
or supplements will be borne by the Company and, thereafter,
by the Initial Purchaser or Purchasers who request the same;
provided, however, that should such amendment or supplement
relate solely to the activities of any Initial Purchaser or
Purchasers, then such cost shall in any event be borne by
such Initial Purchasers. For purposes of this
subsection (c) the Company shall be entitled to assume that
all Bonds have been sold by the Initial Purchasers from and
after the forty-fifth day after the date of this Agreement,
unless it shall have received notice from you to the
contrary. Whenever a Final Memorandum is to be delivered,
the Initial Purchasers will deliver the Final Memorandum, as
it may have been amended or supplemented at the time of such
delivery.
d. The Company shall endeavor to qualify the Bonds
for offer and sale under the securities or Blue Sky laws of
such jurisdictions as you shall reasonably request;
provided, however, that the Company shall not be required to
qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction.
e. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is
terminated, the Company shall pay or cause to be paid all
expenses incident to the performance of its obligations
under this Agreement, including: (i) the fees, disbursements
and expenses of the Company's counsel and the Company's
accountants in connection with the issuance and sale of the
Bonds and all other fees or expenses in connection with the
preparation of each Memorandum and all amendments and
supplements thereto, including all printing costs associated
therewith, and the delivering of copies thereof to the
Initial Purchasers, in the quantities herein above
specified, (ii) all costs and expenses related to the
transfer and delivery of the Bonds to the Initial
Purchasers, including any transfer or other taxes payable
thereon, (iii) the cost of printing or producing any Blue
Sky or legal investment memorandum in connection with the
offer and sale of the Bonds under state securities laws and
all expenses in connection with the qualification of the
Bonds for offer and sale under state securities laws as
provided in Section 6(d) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the
Initial Purchasers in connection with such qualification and
in connection with the Blue Sky or legal investment
memorandum, (iv) any fees charged by rating agencies for the
rating of the Bonds, (v) the fees and expenses, if any,
incurred in connection with the admission of the Bonds for
trading in PORTAL or any appropriate market system, (vi) the
costs and charges of the Trustee and any transfer agent,
registrar or depositary, (vii) the cost of the preparation,
issuance and delivery of the Bonds, (viii) the costs and
expenses of the Company relating to investor presentations
undertaken in connection with the offering of the Bonds and
(ix) all other cost and expenses incident to the performance
of the obligations of the Company hereunder for which
provision is not otherwise made in this Section. It is
understood, however, that except as provided in this
Section, Section 8, and the last paragraph of Section 10,
the Initial Purchasers will pay all of their costs and
expenses, including fees and disbursements of their counsel,
transfer taxes payable on resale of any of the Bonds by them
and any advertising expenses connected with any offers they
may make.
f. Neither the Company nor any Affiliate will sell,
offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the
Securities Act) which could be integrated with the sale of
the Bonds in a manner which would require the registration
under the Securities Act of the Bonds.
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g. The Company shall not solicit any offer to buy or
offer or sell the Bonds by means of any form of general
solicitation or general advertising (as those terms are used
in Regulation D under the Securities Act) or in any manner
involving a public offering within the meaning of Section
4(2) of the Securities Act.
h. While any of the Bonds remain "restricted
securities" within the meaning of the Securities Act, the
Company shall make available, upon request, to any seller of
such Bonds the information specified in Rule 144A(d)(4)
under the Securities Act, unless the Company is then subject
to Section 13 or 15(d) of the Exchange Act.
i. If requested by you, the Company shall use
commercially reasonable efforts to assist you in causing the
Bonds to be designated PORTAL securities in accordance with
the rules and regulations adopted by the National
Association of Securities Dealers, Inc. relating to trading
in the PORTAL Market.
j. None of the Company, its Affiliates or any person
acting on its or their behalf (other than the Initial
Purchasers) shall engage in any directed selling efforts (as
that term is defined in Regulation S) with respect to the
Bonds, and the Company and its Affiliates and each person
acting on its or their behalf (other than the Initial
Purchasers) shall comply with the offering restrictions
requirement of Regulation S.
k. During the period of two years after the Closing
Date, the Company shall not, and shall not permit any of its
affiliates (as defined in Rule 144A under the Securities
Act) to resell any of the Bonds which constitute "restricted
securities" under Rule 144A that have been reacquired by any
of them.
7. Offering of Securities; Restrictions on Transfer. a.
Each Initial Purchaser, severally and not jointly, represents and
warrants that such Initial Purchaser is a qualified institutional
buyer as defined in Rule 144A under the Securities Act (a "QIB").
Each Initial Purchaser, severally and not jointly, agrees with
the Company that (i) it will not solicit offers for, or offer or
sell, such Bonds by any form of general solicitation or general
advertising (as those terms are used in Regulation D under the
Securities Act) or in any manner involving a public offering
within the meaning of Section 4(2) of the Securities Act and (ii)
it will solicit offers for such Bonds only from, and will offer
such Bonds only to, persons that it reasonably believes to be (A)
in the case of offers inside the United States, QIBs and (B) in
the case of offers outside the United States, to persons other
than U.S. persons ("FOREIGN PURCHASERS," which term shall include
dealers or other professional fiduciaries in the United States
acting on a discretionary basis for foreign beneficial owners
(other than an estate or trust)) in reliance upon Regulation S
under the Securities Act that, in each case, in purchasing such
Bonds are deemed to have represented and agreed as provided in
the Final Memorandum under the caption "Transfer Restrictions".
b. Each Initial Purchaser, severally and not jointly,
represents, warrants, and agrees with respect to offers and sales
outside the United States that:
i. such Initial Purchaser understands that no
action has been or will be taken in any jurisdiction by
the Company that would permit a public offering of the
Bonds, or possession or distribution of either
Memorandum or any other offering or publicity material
relating to the Bonds, in any country or jurisdiction
where action for that purpose is required;
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ii. such Initial Purchaser will comply with all
applicable laws and regulations in each jurisdiction in
which it acquires, offers, sells or delivers Bonds or
has in its possession or distributes either Memorandum
or any such other material, in all cases at its own
expense;
iii. the Bonds have not been registered under the
Securities Act and such Initial Purchaser shall not
offer or sell Bonds within the United States or to, or
for the account or benefit of, U.S. persons except in
accordance with Rule 144A under the Securities Act or
pursuant to another exemption from the registration
requirements of the Securities Act;
iv. such Initial Purchaser has offered the Bonds
and will offer and sell the Bonds (A) as part of their
distribution at any time and (B) otherwise until 40
days after the later of the commencement of the
offering and the Closing Date, only in accordance with
Rule 903 of Regulation S or as otherwise permitted in
Section 7(a); accordingly, neither such Initial
Purchaser, its Affiliates nor any persons acting on its
or their behalf have engaged or will engage in any
directed selling efforts (within the meaning of
Regulation S) with respect to the Bonds, and any such
Initial Purchaser, its Affiliates and any such persons
have complied and will comply with the offering
restrictions requirement of Regulation S;
v. such Initial Purchaser has (A) not offered or
sold and, prior to the date six months after the
Closing Date, will not offer or sell any Bonds to
persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or
agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and
will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (B) complied and will
comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it
in relation to the Bonds in, from or otherwise
involving the United Kingdom, and (C) only issued or
passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with
the issue of the Bonds to a person who is of a kind
described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order
1996 or is a person to whom such document may otherwise
lawfully be issued or passed on;
vi. such Initial Purchaser understands that the
Bonds have not been and will not be registered under
the Securities and Exchange Law of Japan, and
represents that it has not offered or sold, and agrees
not to offer or sell, directly or indirectly, any Bonds
in Japan or for the account of any resident thereof
except pursuant to any exemption from the registration
requirements of the Securities and Exchange Law of
Japan and otherwise in compliance with applicable
provisions of Japanese law; and
vii. such Initial Purchaser agrees that, at or
prior to confirmation of sales of the Bonds, it will
have sent to each distributor, dealer or person
receiving a selling concession, fee or other
remuneration that purchases Bonds from it during the
restricted period a confirmation or notice to
substantially the following effect:
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"The Bonds covered hereby have not been
registered under the U.S. Securities Act of 1933
(the "Securities Act") and may not be offered and
sold within the United States or to, or for the
account or benefit of, U.S. persons (i) as part of
their distribution at any time or (ii) otherwise
until 40 days after the later of the commencement
of the offering and the closing date, except in
either case in accordance with Regulation S (or
Rule 144A if available) under the Securities Act.
Terms used above have the meaning given to them by
Regulation S."
Terms used in this Section 7b. have the meanings given to them by
Regulation S.
8. Indemnity and Contribution. a. The Company agrees
to indemnify and hold harmless each Initial Purchaser and each
person, if any, who controls any Initial Purchaser within the
meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal
or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material
fact contained in either Memorandum (as amended or supplemented
if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state
therein a material fact necessary to make the statements therein
in the light of the circumstances under which they were made not
misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission
or alleged untrue statement or omission based upon information
furnished to the Company in writing by any Initial Purchaser
through you expressly for use therein; provided, however, that,
the indemnity agreement contained in this subsection a. shall not
inure to the benefit of any Initial Purchaser on account of any
such losses, claims, damages or liabilities (or actions in
respect thereof) arising from the sale of the Bonds by or through
such Initial Purchaser to any person if a copy of the Final
Memorandum as it then may be amended or supplemented (exclusive
of the incorporated documents) shall not have been given or sent
to such person with or prior to the written confirmation of the
sale involved to the extent that the Final Memorandum as so
amended or supplemented would have cured the defect in such
document giving rise to such losses, claims, damages or
liabilities.
b. Each Initial Purchaser agrees, severally and not
jointly, to indemnify and hold harmless the Company, its
directors, its officers and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such Initial Purchaser,
but only with reference to information furnished to the Company
in writing by such Initial Purchaser through you expressly for
use in either Memorandum or any amendments or supplements
thereto.
c. In case any proceeding (including any governmental
investigation) shall be instituted involving any person in
respect of which indemnity may be sought pursuant to Section 8a.
or 8b., such person (the "INDEMNIFIED PARTY") shall promptly
notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing. The indemnifying party shall
be entitled to participate in such proceeding and, to the extent
that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party and, upon such
assumption, shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel,
but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and
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the indemnified party shall have mutually agreed to the retention
of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual
or potential differing interests between them. It is understood
that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be
liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all such indemnified
parties and that all such fees and expenses shall be reimbursed
as they are incurred. Such firm shall be designated in writing
by Morgan Stanley & Co. Incorporated, in the case of parties
indemnified pursuant to Section 8a., and by the Company, in the
case of parties indemnified pursuant to Section 8b. The
indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled
with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by
reason of such settlement or judgment. No indemnifying party
shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder
by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all
liability on claims that are the subject matter of such
proceeding.
d. To the extent the Indemnification provided for in
Section 8a. or 8b. is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying party
under such paragraph, in lieu of indemnifying such indemnified
party thereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to
reflect both the relative benefits received by the Company on the
one hand and the Initial Purchasers on the other hand from the
offering of the Bonds and the relative fault of the Company on
the one hand and of the Initial Purchasers on the other hand in
connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The benefits received by the
Company in connection with the offering of the Bonds shall be
deemed to bear the same ratio to the benefits received by the
Initial Purchasers in such connection as the net proceeds from
the offering of the Bonds (before deducting expenses) received by
the Company bear to the total discounts and commissions received
by the Initial Purchasers, in each case as set forth in the Final
Memorandum. The relative fault of the Company on the one hand
and of the Initial Purchasers on the other hand shall be
determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Initial Purchasers
and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement
or omission. The Initial Purchasers' respective obligations to
contribute pursuant to this Section 8 are several in proportion
to the respective principal amounts of Bonds they have purchased
hereunder, and not joint.
e. The Company and the Initial Purchasers agree that
it would not be just or equitable if contribution pursuant to
this Section 8 were determined by pro rata allocation (even if
the Initial Purchasers were treated as one entity for such
purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section
8d. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to
in Section 8d. shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Initial
Purchaser shall be required to contribute any amount in excess of
the amount by which the total price at which the Bonds resold by
12
<PAGE>
it in the initial placement of such Bonds were offered to
investors exceeds the amount of any damages that such Initial
Purchaser has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall
be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The remedies provided for in
this Section 8 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified
party at law or in equity.
f. The indemnity and contribution provisions
contained in this Section 8 and the representations, warranties
and other statements of the Company contained in this Agreement
shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation
made by or on behalf of any Initial Purchaser or any person
controlling any Initial Purchaser or by or on behalf of the
Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Bonds.
9. Termination. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after
the execution and delivery of this Agreement and prior to the
Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange or the NASDAQ
Stock Market, (ii) trading of any securities of the Company or
its parent shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial
banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have
occurred any outbreak or escalation of hostilities or any change
in financial markets or any calamity or crisis that, in your
judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such
event, singly or together with any other such event, makes it, in
your reasonable judgment, impracticable to market the Bonds on
the terms and in the manner contemplated in the Final Memorandum.
10. Effectiveness; Defaulting Initial Purchasers. This
Agreement shall become effective upon the execution and delivery
hereof by the parties hereto.
If, on the Closing Date, any one or more of the Initial
Purchasers shall fail or refuse to purchase Bonds that it or they
have agreed to purchase hereunder on such date, and the aggregate
principal amount of Bonds which such defaulting Initial Purchaser
or Initial Purchasers agreed but failed or refused to purchase is
not more than one-tenth of the aggregate principal amount of
Bonds to be purchased on such date, the other Initial Purchasers
shall be obligated severally in the proportions that the
principal amount of Bonds set forth opposite their respective
names in Schedule I bears to the aggregate principal amount of
Bonds set forth opposite the names of all such non-defaulting
Initial Purchasers, or in such other proportions as you may
specify, to purchase the Bonds which such defaulting Initial
Purchaser or Initial Purchasers agreed but failed or refused to
purchase on such date; provided, however, that in no event shall
the principal amount of Bonds that any Initial Purchaser has
agreed to purchase pursuant to this Agreement be increased
pursuant to this Section 10 by an amount in excess of one-ninth
of such principal amount of Bonds without the written consent of
such Initial Purchaser. If, on the Closing Date any Initial
Purchaser or Initial Purchasers shall fail or refuse to purchase
Bonds which it or they have agreed to purchase hereunder on such
date and the aggregate principal amount of Bonds with respect to
which such default occurs is more than one-tenth of the aggregate
principal amount of Bonds to be purchased on such date, and
arrangements satisfactory to you and the Company for the purchase
of such Bonds are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of
13
<PAGE>
any non-defaulting Initial Purchaser or of the Company. In any
such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven
days, in order that the required changes, if any, in the Final
Memorandum or in any other documents or arrangements may be
effected. Any action taken under this paragraph shall not
relieve any defaulting Initial Purchaser from liability in
respect of any default of such Initial Purchaser under this
Agreement.
14
<PAGE>
If this Agreement shall be terminated by the Initial
Purchasers, or any of them, because of any failure or refusal on
the part of the Company to comply with the terms or to fulfill
any of the conditions of this Agreement, or if for any reason the
Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Initial Purchasers or
such Initial Purchasers as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses
(including the fees and disbursements of their counsel)
reasonably incurred by such Initial Purchasers in connection with
this Agreement or the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon
the same instrument.
12. Applicable Law. This Agreement shall be governed by
and construed in accordance with the internal laws of the State
of New York.
13. Headings. The headings of the sections of this
Agreement have been inserted for convenience of reference only
and shall not be deemed a part of this Agreement.
Very truly yours,
Tucson Electric Power Company
By:
--------------------------------
Name:
Title:
15
<PAGE>
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
TD Securities (USA) Inc.
Prudential Securities Incorporated
Salomon Brothers Inc
BNY Capital Markets, Inc.
Acting severally on behalf of themselves and
the several Initial Purchasers named in
Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
------------------------------------
Name:
Title:
16
<PAGE>
SCHEDULE I
PRINCIPAL AMOUNT
INITIAL PURCHASER OF BONDS TO BE PURCHASED
--------------------------------- --------------------------
Morgan Stanley & Co. Incorporated $73,500,000
TD Securities (USA) Inc. . . . . $28,000,000
Prudential Securities Incorporated
Salomon Brothers Inc . . . . . . $14,000,000
BNY Capital Markets, Inc. . . . . $10,500,000
Total: . . . . . . . . . . . . . $140,000,000
=================
<PAGE>
Exhibit 4(c)
(2)
=================================================================
TUCSON ELECTRIC POWER COMPANY
--------------------
OFFICER'S CERTIFICATE
(Under Section 301 of the Indenture,
dated as of August 1, 1998)
Establishing Two Series of Securities Designated
First Collateral Trust Bonds, 7 1/2% Series A Due 2008
and
First Collateral Trust Bonds, 7 1/2% Series B Due 2008
--------------------
August 4, 1998
=================================================================
<PAGE>
TUCSON ELECTRIC POWER COMPANY
OFFICER'S CERTIFICATE
(Under Section 301 of the Indenture,
dated as of August 1, 1998)
I, Kevin P. Larson, a Vice President and the Treasurer
of TUCSON ELECTRIC POWER COMPANY (the "Company"), in accordance
with Section 301 of the Indenture, dated as of August 1, 1998
(the "Indenture", capitalized terms used herein and not defined
herein having the meanings specified in the Indenture), of the
Company to Bank of Montreal Trust Company, trustee (the
"Trustee"), do hereby establish two series of Securities having
the terms and characteristics set forth in this Officer's
Certificate.
PART I
Basic Terms of Series 1A Bonds
Set forth below in this Part I are the terms and
characteristics of one of the series of Securities established
hereby referred to in clauses (a) through (t) in the second
paragraph of Section 301 of the Indenture (the lettered clauses
set forth herein corresponding to such clauses in said Section
301).
(a) the title of the Securities of such series, being
Series No. 1A under the Indenture, shall be "First Collateral
Trust Bonds, 7 1/2% Series A due 2008" (the Securities of such
series, for purposes of this Officer's Certificate, being
sometimes hereinafter called the "Series 1A Bonds");
(b) the aggregate principal amount of Series 1A Bonds
which may be authenticated and delivered under the Indenture
shall be limited to $140,000,000, except as contemplated in
clause (b) of the second paragraph of Section 301 of the
Indenture;
(c) interest on the Series 1A Bonds shall be payable
to the Person or Persons in whose names the Series 1A Bonds are
registered at the close of business on the Regular Record Date
for such interest, except as otherwise expressly provided in the
form of Series 1A Bond attached hereto and hereby authorized and
approved;
(d) the principal of the Series 1A Bonds shall be
payable on August 1, 2008;
(e)(i) the Series 1A Bonds shall bear interest at
the rate of 7 1/2% per annum of the principal amount hereof,
payable semi-annually in arrears on February 1 and August 1
of each year (each, an "Interest Payment Date"), commencing
February 1, 1999;
(ii) interest on the Series 1A Bonds shall accrue from,
and including, August 1, 1998 or from, and including, the
most recent interest payment date to which interest has been
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<PAGE>
paid or duly provided for; and the Regular Record Dates for
interest payable on the Series 1A Bonds shall be January 15
and July 15 immediately preceding the respective Interest
Payment Dates;
(f) the corporate trust office of Bank of Montreal
Trust Company in New York, New York shall be the place at which
(i) the principal of, premium, if any, and interest, if any, on
the Series 1A Bonds at Maturity shall be payable upon
presentment, interest prior to Maturity to be paid as specified
in the forms of Series 1A Bond attached hereto, (ii) registration
of transfer of the Series 1A Bonds may be effected, (iii)
exchanges of Series 1A Bonds may be effected and (iv) notices and
demands to or upon the Company in respect of the Series 1A Bonds
and the Indenture may be served; and Bank of Montreal Trust
Company shall be the Security Registrar and a Paying Agent for
the Series 1A Bonds; provided, however, that the Company reserves
the right to change, by one or more Officer's Certificates
supplemental to this Officer's Certificate, any such place or the
Security Registrar or such Paying Agent; and provided, further,
that the Company reserves the right to designate, by one or more
Officer's Certificates supplemental to this Officer's
Certificate, its principal corporate office in Tucson, Arizona as
any such place or itself as the Security Registrar;
(g) The Series 1A Bonds shall be redeemable at the
option of the Company, in whole at any time or in part from time
to time, at a redemption price equal to the greater of (i) 100%
of the principal amount of the Series 1A Bonds to be redeemed and
(ii) the sum of the present values of the remaining scheduled
payments of principal of and interest on the Series 1A Bonds
discounted to the date fixed for redemption on a semiannual basis
(assuming a 360-day year consisting of twelve 30-day months) at a
discount rate equal to the Treasury Yield plus 50 basis points,
plus, in either case, accrued interest to the date of redemption.
For this purpose:
"Comparable Treasury Issue" means the United States
treasury security selected by an Independent Investment
Banker as having a maturity comparable to the remaining
term to the Stated Maturity of the Series 1A Bonds that
would be utilized, at the time of selection and in
accordance with customary financial practice, in
pricing new issues of corporate debt securities of
comparable maturity to the remaining term of the Series
1A Bonds.
"Comparable Treasury Price" means, with respect to the
redemption of any Series 1A Bonds, the Reference
Treasury Dealer Quotation (expressed as a percentage of
principal amount) on the third Business Day next
preceding the date fixed for such redemption or, if
such Series 1A Bonds are to be defeased in accordance
with Section 601 of the Indenture prior to such
redemption date, then on the third Business Day next
preceding the date of such defeasance; provided,
however, that if more than one Reference Treasury
Dealer shall have been appointed, "Comparable Treasury
Price" shall mean the arithmetical mean of the
Reference Treasury Dealer Quotations.
"Independent Investment Banker" means an independent
investment banking institution of national standing
appointed by the Company.
"Reference Treasury Dealer" means each primary United
States government securities dealer in The City of New
York appointed by the Company.
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<PAGE>
"Reference Treasury Dealer Quotation" means, with
respect to a Reference Treasury Dealer and the
redemption of any Series 1A Bonds, the average, as
determined by the Company, of the bid and asked prices
for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount and quoted
in writing to the Company by such Reference Treasury
Dealer at 5:00 p.m. on the third Business Day net
preceding the date fixed for such redemption or, if
such Series 1A Bonds are to be caused to be deemed to
have been paid in accordance with Section 601 of the
Indenture prior to such redemption date, then on the
third Business Day next preceding such defeasance).
"Treasury Rate" means, with respect to any date fixed
for the redemption of any Series 1A Bonds or, if such
Series 1A Bonds are to be defeased prior to such
redemption date, the date of such defeasance (i) the
yield, under the heading which represents the average
for the immediately preceding week, appearing in the
most recently published statistical release designated
"H.15(519)" or any successor publication which is
published weekly by the Board of Governors of the
Federal Reserve System and which establishes yields on
actively traded United States Treasury securities
adjusted to constant maturity under the caption
"Treasury Constant Maturities", for the maturity
corresponding to the Comparable Treasury Issue (if no
maturity is within three months before or after the
Stated Maturity of the Series 1A Bonds, yields for the
two published maturities most closely corresponding to
the Comparable Treasury Issue shall be determined and
the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight line basis, rounding to
the nearest month) or (ii) if such release (or any
successor release) is not published during the week
preceding the calculation date or does not contain such
yields, the rate per annum equal to the semi-annual
equivalent yield to maturity of the Comparable Treasury
Issue, calculated using a price for the Comparable
Treasury Issue (expressed as a percentage of its
principal amount) equal to the Comparable Treasury
Price for such redemption date or defeasance date, as
the case may be. The Treasury Rate shall be calculated
on the third Business Day preceding such redemption
date or defeasance date, as the case may be.
(h) inapplicable;
(i) the Series 1A Bonds shall be issued in
denominations of $100,000 and any amount in excess
thereof that is an integral multiple of $1,000;
(j) inapplicable;
(k) inapplicable;
(l) inapplicable;
(m) inapplicable;
(n) inapplicable;
(o) inapplicable;
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<PAGE>
(p) inapplicable;
(q) the Series 1A Bonds are initially to be issued in
global form, registered in the name of Cede & Co., as nominee for
The Depository Trust Company (the "Depositary"). Such Series 1A
Bonds shall not be transferable or exchangeable, nor shall any
purported transfer be registered, except as follows:
(i) such Series 1A Bonds may be transferred in whole,
and appropriate registration of transfer effected, if such
transfer is by such nominee to the Depositary, or by the
Depositary to another nominee thereof, or by any nominee of
the Depositary to any other nominee thereof, or by the
Depositary or any nominee thereof to any successor
securities depositary or any nominee thereof; and
(ii) such Series 1A Bonds may be exchanged for
definitive Series 1A Bonds registered in the respective
names of the beneficial holders thereof, and thereafter
shall be transferable without restriction, if:
(A) The Depositary, or any successor securities
depositary, shall have notified the Company and the
Trustee that it is unwilling or unable to continue to
act as securities depositary with respect to such
Series 1A Bonds and the Trustee shall not have been
notified by the Company within ninety (90) days of the
identity of a successor securities depositary with
respect to such Series 1A Bonds; or
(B) the Company shall have delivered to the Trustee a
Company Order to the effect that such Series 1A Bonds
shall be so exchangeable on and after a date specified
therein;
it being understood that any such registration of transfer or
exchange shall be effected in accordance with Section 305 of the
Indenture;
(r) inapplicable;
(s) no service charge shall be made for the
registration of transfer or exchange of the Series 1A Bonds, or
any Tranche thereof; provided, however, that the Company may
require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection with such transfer or
exchange; and
(t) inapplicable.
PART II
Additional Terms of Series 1A Bonds
Set forth below in this Part II are additional terms of
the First Collateral Trust Bonds, 7 1/2% Series A due 2008, as
contemplated by clause (u) in the second paragraph of Section 301
of the Indenture.
-4-
<PAGE>
(a) the Series 1A Bonds shall have such further terms
as are set forth in the form of Series 1A Bond attached hereto as
Exhibit A;
(b) if the Company shall make any deposit of money
and/or Government Obligations with respect to any Series 1A
Bonds, or any portion of the principal amount thereof, as
contemplated by Section 601 of the Indenture, the Company shall
not deliver an Officer's Certificate described in clause (z) in
the first paragraph of said Section 601 unless the Company shall
also deliver to the Trustee, together with such Officer's
Certificate, either:
(i) an instrument wherein the Company, notwithstanding
the satisfaction and discharge of its indebtedness in
respect of the Series 1A Bonds, shall assume the obligation
(which shall be absolute and unconditional) to irrevocably
deposit with the Trustee or Paying Agent such additional
sums of money, if any, or additional Government Obligations
(meeting the requirements of Section 601), if any, or any
combination thereof, at such time or times, as shall be
necessary, together with the money and/or Government
Obligations theretofore so deposited, to pay when due the
principal of and premium, if any, and interest due and to
become due on such Series 1A Bonds or portions thereof, all
in accordance with and subject to the provisions of said
Section 601; provided, however, that such instrument may
state that the obligation of the Company to make additional
deposits as aforesaid shall be subject to the delivery to
the Company by the Trustee of a notice asserting the
deficiency accompanied by an opinion of an independent
public accountant of nationally recognized standing showing
the calculation thereof (which opinion shall be obtained at
the expense of the Company); or
(ii) an Opinion of Counsel to the effect that the
Holders of such Series 1A Bonds, or portions of the
principal amount thereof, will not recognize income, gain or
loss for United States federal income tax purposes as a
result of the satisfaction and discharge of the Company's
indebtedness in respect thereof and will be subject to
United States federal income tax on the same amounts, at the
same times and in the same manner as if such satisfaction
and discharge had not been effected.
PART III
Basic Terms of Series 1B Bonds
Set forth below in this Part III are the terms and
characteristics of one of the series of Securities established
hereby referred to in clauses (a) through (t) in the second
paragraph of Section 301 of the Indenture (the lettered clauses
set forth herein corresponding to such clauses in said Section
301).
(a) the title of the Securities of such series, being
Series No. 1B under the Indenture, shall be "First Collateral
Trust Bonds, 7 1/2% Series B due 2008" (the Securities of such
series for purposes of this Officer's Certificate, being
sometimes hereinafter called the "Series 1B Bonds");
(b) the aggregate principal amount of Series 1B Bonds
which may be authenticated and delivered under the Indenture
shall be limited to $140,000,000, except as contemplated in
clause (b) of the second paragraph of Section 301 of the
Indenture;
-5-
<PAGE>
(c) interest on the Series 1B Bonds shall be payable
to the Person or Persons in whose names the Series 1B Bonds are
registered at the close of business on the Regular Record Date
for such interest, except as otherwise expressly provided in the
form of Series 1B Bond attached hereto and hereby authorized and
approved;
(d) the principal of the Series 1B Bonds shall be
payable on August 1, 2008;
(e)(i) the Series 1B Bonds shall bear interest at
the rate of 7 1/2% per annum of the principal amount hereof,
payable semi-annually in arrears on February 1 and August 1 of
each year (each, an "Interest Payment Date), commencing February
1, 1999;
(ii) interest on the Series 1A Bonds shall accrue from,
and including, the most recent interest payment date to which
interest on the Series 1A Bonds has been paid or duly provided
for; and the Regular Record Dates for interest payable on the
Series 1B Bonds shall be January 15 and July 15 immediately
preceding the respective Interest Payment Dates;
(f) the corporate trust office of Bank of Montreal
Company in New York, New York shall be the place at which (i) the
principal of premium, if any, and interest, of any, on the Series
1B Bonds at Maturity shall be payable upon presentment, interest
prior to Maturity to be paid as specified in the forms of Series
1B Bond attached hereto, (ii) registration of transfer of the
Series 1B Bonds may be effected, (iii) exchanges of Series 1B
Bonds may be effected and (iv) notices and demands to or upon the
Company in respect of the Series 1B Bonds and the Indenture may
be served; and Bank of Montreal Trust Company shall be the
Security Registrar and a Paying Agent for the Series 1B Bonds;
provided, however, that the Company reserves the right to change,
by one or more Officer's Certificates supplemental to this
Officer's Certificate, any such place or the Security Registrar
or such Paying Agent; and provided, further, that the Company
reserves the right to designate, by one or more Officer's
Certificates supplement to this Officer's Certificate, its
principal corporate office in Tuscon, Arizona as any such place
or itself as the Security Registrar;
(g) The Series 1B Bonds shall be redeemable at the
option of the Company, in whole at any time or in part from time
to time, at a redemption price equal to the greater of (i) 100%
of the principal amount of the Series 1B Bonds to be redeemed and
(ii) the sum of the present values of the remaining scheduled
payments of principal of and interest on the Series 1B Bonds
discounted to the date fixed for redemption on a semiannual basis
(assuming a 360-day year consisting of twelve 30-day months) at a
discount rate equal to the Treasury Yield plus 50 basis points,
plus, in either case, accrued interest to the date of redemption.
For this purpose:
"Comparable Treasury Issue" means the United States
treasury security selected by an Independent Investment
Banker as having a maturity comparable to the remaining
term to the Stated Maturity of the Series 1B Bonds that
would be utilized, at the time of selection and in
accordance with customary financial practice, in
pricing new issues of corporate debt securities of
comparable maturity to the remaining term of the Series
1B Bonds.
"Comparable Treasury Price" means, with respect to the
redemption of any Series 1B Bonds, the Reference
Treasury Dealer Quotation (expressed as a percentage of
principal amount) on the third Business Day next
preceding the date fixed for such redemption or, if
-6-
<PAGE>
such Series 1B Bonds are to be defeased in accordance
with Section 601 of the Indenture prior to such
redemption date, then on the third Business Day next
preceding the date of such defeasance; provided,
however, that if more than one Reference Treasury
Dealer shall have been appointed, "Comparable Treasury
Price" shall mean the arithmetical mean of the
Reference Treasury Dealer Quotations.
"Independent Investment Banker" means an independent
investment banking institution of national standing
appointed by the Company.
"Reference Treasury Dealer" means each primary United
States government securities dealer in The City of New
York appointed by the Company.
"Reference Treasury Dealer Quotation" means, with
respect to a Reference Treasury Dealer and the
redemption of any Series 1B Bonds, the average, as
determined by the Company, of the bid and asked prices
for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount and quoted
in writing to the Company by such Reference Treasury
Dealer at 5:00 p.m. on the third Business Day net
preceding the date fixed for such redemption or, if
such Series 1B Bonds are to be caused to be deemed to
have been paid in accordance with Section 601 of the
Indenture prior to such redemption date, then on the
third Business Day next preceding such defeasance).
"Treasury Rate" means, with respect to any date fixed
for the redemption of any Series 1B Bonds or, if such
Series 1B Bonds are to be defeased prior to such
redemption date, the date of such defeasance (i) the
yield, under the heading which represents the average
for the immediately preceding week, appearing in the
most recently published statistical release designated
"H.15(519)" or any successor publication which is
published weekly by the Board of Governors of the
Federal Reserve System and which establishes yields on
actively traded United States Treasury securities
adjusted to constant maturity under the caption
"Treasury Constant Maturities", for the maturity
corresponding to the Comparable Treasury Issue (if no
maturity is within three months before or after the
Stated Maturity of the Series 1B Bonds, yields for the
two published maturities most closely corresponding to
the Comparable Treasury Issue shall be determined and
the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight line basis, rounding to
the nearest month) or (ii) if such release (or any
successor release) is not published during the week
preceding the calculation date or does not contain such
yields, the rate per annum equal to the semi-annual
equivalent yield to maturity of the Comparable Treasury
Issue, calculated using a price for the Comparable
Treasury Issue (expressed as a percentage of its
principal amount) equal to the Comparable Treasury
Price for such redemption date or defeasance date, as
the case may be. The Treasury Rate shall be calculated
on the third Business Day preceding such redemption
date or defeasance date, as the case may be.
(h) inapplicable;
(i) the Series 1B Bonds shall be issued in
denominations of $100,000 and any amount in excess
thereof that is an integral multiple of $1,000;
-7-
<PAGE>
(j) inapplicable;
(k) inapplicable;
(l) inapplicable;
(m) inapplicable;
(n) inapplicable;
(o) inapplicable;
(p) inapplicable;
(q) the Series 1B Bonds are initially to be issued in
global form, registered in the name of Cede & Co., as nominee for
The Depository Trust Company (the "Depositary"). Such Series 1B
Bonds shall not be transferable or exchangeable, nor shall any
purported transfer be registered, except as follows:
(i) such Series 1B Bonds may be transferred in whole,
and appropriate registration of transfer effected, if such
transfer is by such nominee to the Depositary, or by the
Depositary to another nominee thereof, or by any nominee of the
Depositary to any other nominee thereof, or by the Depositary or
any nominee thereof to any successor securities depositary or any
nominee thereof; and
(ii) such Series 1B Bonds may be exchanged for
definitive Series 1B Bonds registered in the respective names of
the beneficial holders thereof, and thereafter shall be
transferable without restriction, if:
(A) The Depositary, or any successor securities
depositary, shall have notified the Company and the
Trustee that it is unwilling or unable to continue to
act as securities depositary with respect to such
Series 1B Bonds and the Trustee shall not have been
notified by the Company within ninety (90) days of the
identity of a successor securities depositary with
respect to such Series 1B Bonds; or
(B) the Company shall have delivered to the Trustee a
Company Order to the effect that such Series 1B Bonds
shall be so exchangeable on and after a date specified
therein;
it being understood that any such registration of transfer or
exchange shall be effected in accordance with Section 305 of the
Indenture;
(r) inapplicable;
-8-
<PAGE>
(s) no service charge shall be made for the
registration of transfer or exchange of the Series 1B Bonds, or
any Tranche thereof; provided, however, that the Company may
require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection with such transfer or
exchange; and
(t) inapplicable.
PART IV
Additional Terms of Series 1B Bonds
Set forth below in this Part II are additional terms of
the First Collateral Trust Bonds, 7 1/2% Series B due 2008, as
contemplated by clause (u) in the second paragraph of Section 301
of the Indenture.
(a) the Series 1B Bonds shall have such further terms
as are set forth in the form of Series 1B Bond attached hereto as
Exhibit A;
(b) if the Company shall make any deposit of money
and/or Government Obligations with respect to any Series 1B
Bonds, or any portion of the principal amount thereof, as
contemplated by Section 601 of the Indenture, the Company shall
not deliver an Officer's Certificate described in clause (z) in
the first paragraph of said Section 601 unless the Company shall
also deliver to the Trustee, together with such Officer's
Certificate, either:
(i) an instrument wherein the Company, notwithstanding
the satisfaction and discharge of its indebtedness in
respect of the Series 1B Bonds, shall assume the obligation
(which shall be absolute and unconditional) to irrevocably
deposit with the Trustee or Paying Agent such additional
sums of money, if any, or additional Government Obligations
(meeting the requirements of Section 601), if any, or any
combination thereof, at such time or times, as shall be
necessary, together with the money and/or Government
Obligations theretofore so deposited, to pay when due the
principal of and premium, if any, and interest due and to
become due on such Series 1B Bonds or portions thereof, all
in accordance with and subject to the provisions of said
Section 601; provided, however, that such instrument may
state that the obligation of the Company to make additional
deposits as aforesaid shall be subject to the delivery to
the Company by the Trustee of a notice asserting the
deficiency accompanied by an opinion of an independent
public accountant of nationally recognized standing showing
the calculation thereof (which opinion shall be obtained at
the expense of the Company); or
(ii) an Opinion of Counsel to the effect that the
Holders of such Series 1B Bonds, or portions of the
principal amount thereof, will not recognize income, gain or
loss for United States federal income tax purposes as a
result of the satisfaction and discharge of the Company's
indebtedness in respect thereof and will be subject to
United States federal income tax on the same amounts, at the
same times and in the same manner as if such satisfaction
and discharge had not been effected.
-9-
<PAGE>
PART V
Exchange of Series 1B Bonds for Series 1A Bonds
The Series 1B Bonds are to be offered to the holders of the
Series 1A Bonds in exchange for Series 1A Bonds. To the extent
that such offer is accepted and Series 1A Bonds shall be
surrendered for such exchange, Series 1B Bonds shall be
authenticated and delivered by the Trustee and shall be issued
and delivered to such holders in exchange for Series 1A Bonds of
like principal amount so surrendered.
The sum of (a) the aggregate principal amount of Series 1A
Bonds Outstanding at any time and (b) the aggregate principal
amount of Series 1B Bonds Outstanding at such time shall be
limited to $140,000,000, except as contemplated in clause (b) of
the second paragraph of Section 301 of the Indenture.
IN WITNESS WHEREOF, I have executed this Officer's
Certificate this 4th day of August, 1998.
/s/ Kevin P. Larson
------------------------------
Name: Kevin P. Larson
Title: Vice President and
Treasurer
EXHIBIT A
FORM OF BOND
(See legend at the end of this Security for
restrictions on transfer and change of form)
TUCSON ELECTRIC POWER COMPANY
First Collateral Trust Bond, 7 1/2% Series A due 2008
Interest Rate: 7 1/2% per annum
Stated Maturity: August 1, 2008
Original Interest Accrual Date: August 1, 1998
Initial Redemption Date: Anytime prior to Stated Maturity
Interest Payment Dates: February 1 and August 1
Redemption Price: 100% plus premium as set forth in Indenture
Regular Record Dates: January 15 and July 15
OID: Yes__ No [CHECKMARK]
-------------------------
This Security is not a Discount Security
within the meaning of the within-mentioned Indenture.
-------------------------
Principal Amount Registered No.
$ CUSIP
TUCSON ELECTRIC POWER COMPANY, a corporation organized and
existing under the laws of the State of Arizona (herein called
the "Company," which term includes any successor corporation
under the Indenture referred to below), for value received,
hereby promises to pay to
or registered assigns, the principal sum of
DOLLARS
on the Stated Maturity specified above, and to pay interest
thereon from the Original Interest Accrual Date specified above
or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, semi-annually in arrears on
the Interest Payment Dates specified above in each year,
commencing with the Interest Payment Date next succeeding the
Original Interest Accrual Date specified above, and at Maturity,
at the Interest Rate per annum specified above, until the
principal hereof is paid or duly provided for. The interest so
payable, and paid or duly provided for, on any Interest Payment
Date shall, as provided in such Indenture, be paid to the Person
in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular
Record Date specified above (whether or not a Business Day) next
preceding such Interest Payment Date. Notwithstanding the
foregoing, interest payable at Maturity shall be paid to the
Person to whom principal shall be paid. Except as otherwise
provided in said Indenture, any such interest not so paid or duly
provided for shall forthwith cease to be payable to the Holder on
such Regular Record Date and may either be paid to the Person in
whose name this Security (or one or more Predecessor Securities)
is registered at the close of business on a Special Record Date
for the payment of such Unpaid Interest to be fixed by the
Trustee, notice of which shall be given to Holders of Securities
of this series not less than 15 days prior to such Special Record
Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on
which the Securities of this series may be listed, and upon such
notice as may be required by such exchange, all as more fully
provided in said Indenture.
Payment of the principal of and premium, if any, on this
Security and interest hereon at Maturity shall be made upon
presentation of this Security at the Corporate Trust Office of
Bank of Montreal Trust Company in New York, New York, or at such
other office or agency as may be designated for such purpose by
the Company from time to time. Payment of interest on this
Security (other than interest at Maturity) shall be made by check
mailed to the address of the Person entitled thereto as such
address shall appear in the Security Register, except that (a) if
such Person shall be a securities depositary, such payment may be
made by such other means in lieu of check, as shall be agreed
upon by the Company, the Trustee and such Person and (b) upon the
written request of a Holder of not less than $10 million in
aggregate principal amount of Securities (as hereinafter defined)
of the same series delivered to the Company and the Paying Agent
at least ten days prior to any Interest Payment Date, payment of
interest on such Securities to such Holder on such Interest
Payment Date shall be made by wire transfer of immediately
available funds to an account maintained within the continental
United States specified by such Holder or, if such Holder
maintains an account with the entity acting as Paying Agent, by
deposit into such account. Payment of the principal of and
premium, if any, and interest on this Security, as aforesaid,
shall be made in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Security is one of a duly authorized issue of
securities of the Company (herein called the "Securities"),
issued and issuable in one or more series under and equally
secured by an Indenture, dated as of August 1, 1998 (such
Indenture as originally executed and delivered and as
supplemented or amended from time to time thereafter, together
with any constituent instruments establishing the terms of
particular Securities, being herein called the "Indenture"),
between the Company and Bank of Montreal Trust Company, trustee
(herein called the "Trustee," which term includes any successor
trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a
description of the respective rights, limitations of rights,
duties and immunities of the Company, the Trustee and the Holders
of the Securities thereunder and of the terms and conditions upon
which the Securities are, and are to be, authenticated and
delivered and secured. The acceptance of this Security shall be
deemed to constitute the consent and agreement by the Holder
hereof to all of the terms and provisions of the Indenture. This
Security is one of the series designated above.
If any Interest Payment Date, any Redemption Date or the
Stated Maturity shall not be a Business Day (as hereinafter
defined), payment of the amounts due on this Security on such
date may be made on the next succeeding Business Day; and, if
such payment is made or duly provided for on such Business Day,
no interest shall accrue on such amounts for the period from and
after such Interest Payment Date, Redemption Date or Stated
Maturity, as the case may be, to such Business Day.
This Security is subject to redemption at any time, as a
whole or in part, at the election of the Company at a redemption
price equal to the principal hereof plus accrued interest, if
any, to the redemption date and plus a premium as set forth in
the Indenture.
Notice of redemption shall be given by mail to Holders of
Securities, not less than 30 days nor more than 60 days prior to
the date fixed for redemption, all as provided in the Indenture.
As provided in the Indenture, notice of redemption at the
election of the Company as aforesaid may state that such
redemption shall be conditional upon the receipt by the Trustee
of money sufficient to pay the principal of and premium, if any,
and interest, if any, on this Security on or prior to the date
fixed for such redemption; a notice of redemption so conditioned
shall be of no force or effect if such money is not so received
and, in such event, the Company shall not be required to redeem
this Security.
In the event of redemption of this Security in part only, a
new Security or Securities of this series, of like tenor, for the
unredeemed portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the
principal of this Security may be declared due and payable in the
manner and with the effect provided in the Indenture.
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 a
majority in aggregate principal amount of the Securities of all
series then Outstanding under the Indenture, considered as one
class; provided, however, that if there shall be Securities of
more than one series Outstanding under the Indenture and if a
proposed supplemental indenture shall directly affect the rights
of the Holders of Securities of one or more, but less than all,
of such series, then the consent only of the Holders of a
majority in aggregate principal amount of the Outstanding
Securities of all series so directly affected, considered as one
class, shall be required; and provided, further, that if the
Securities 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 Holders of Securities of one or more,
but less than all, of such Tranches, then the consent only of the
Holders of a majority in aggregate principal amount of the
Outstanding Securities 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 Securities. The Indenture also
contains provisions permitting the Holders of a majority in
principal amount of the Securities then Outstanding, on behalf of
the Holders of all Securities, to waive compliance by the Company
with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future
Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange therefor or in
lieu hereof, whether or not notation of such consent or waiver is
made upon this Security.
As provided in the Indenture and subject to certain
limitations therein set forth, this Security or any portion of
the principal amount hereof will be deemed to have been paid for
all purposes of the Indenture and to be no longer Outstanding
thereunder, and, at the election of the Company, the Company's
entire indebtedness in respect thereof will be satisfied and
discharged, if there has been irrevocably deposited with the
Trustee or any Paying Agent (other than the Company), in trust,
money in an amount which will be sufficient and/or Eligible
Obligations, the principal of and interest on which when due,
without regard to any reinvestment thereof, will provide moneys
which, together with moneys so deposited, will be sufficient to
pay when due the principal of and interest on this Security when
due.
The Indenture contains terms, provisions and conditions
relating to the consolidation or merger of the Company with or
into, and the conveyance or other transfer, or lease, of assets
to, another Person, to the assumption by such other Person, in
certain circumstances, of all of the obligations of the Company
under the Indenture and on the Securities and to the release and
discharge of the Company, in certain circumstances, from such
obligation.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is
registrable in the Security Register, upon surrender of this
Security for registration of transfer at the corporate trust
office of Bank of Montreal Trust Company in New York, New York or
such other office or agency as may be designated by the Company
from time to time, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and
the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more
new Securities of this series of authorized denominations and of
like tenor and aggregate principal amount, will be issued to the
designated transferee or transferees.
The Securities of this series are issuable only as
registered Securities, without coupons, and in denominations of
$100,000 and any amount in excess thereof that is an integral
multiple of $1,000. As provided in the Indenture and subject to
certain limitations therein set forth, Securities of this series
are exchangeable for a like aggregate principal amount of
Securities of the same series, of any authorized denominations,
as requested by the Holder surrendering the same, and of like
tenor upon surrender of the Security or Securities to be
exchanged at the corporate trust office of Bank of Montreal Trust
Company in New York, New York or such other office or agency as
may be designated by the Company from time to time.
No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Prior to due surrender of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company
or the Trustee may treat the Person in whose name this Security
is registered as the absolute owner hereof for all purposes
(subject to Section 307 of the Indenture), whether or not this
Security be overdue, and neither the Company, the Trustee nor any
such agent shall be affected by notice to the contrary.
The Indenture and the Securities shall be governed by and
construed in accordance with the laws of the State of New York,
except to the extent that the Trust Indenture Act shall be
applicable.
As used herein, "Business Day" means any day, other than a
Saturday or Sunday, which is not a day on which banking
institutions or trust companies in The City of New York, New York
or other city in which is located any office or agency maintained
for the payment of principal, premium, if any, or interest on
this Security, are authorized or required by law, regulation or
executive order to remain closed. All other terms used in this
Security which are defined in the Indenture shall have the
meanings assigned to them in the Indenture.
As provided in the Indenture, no recourse shall be had for
the payment of the principal of or premium, if any, or interest
on any Securities, or any part thereof, or for any claim based
thereon or otherwise in respect thereof, or of the indebtedness
represented thereby, or upon any obligation, covenant or
agreement under the Indenture, against, and no personal liability
whatsoever shall attach to, or be incurred by, any incorporator,
shareholder, officer or director, as such, past, present or
future of the Company or of any predecessor or successor
corporation (either directly or through the Company or a
predecessor or successor corporation), whether by virtue of any
constitutional provision, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being
expressly agreed and understood that the Indenture and all the
Securities are solely corporate obligations and that any such
personal liability is hereby expressly waived and released as a
condition of, and as part of the consideration for, the execution
of the Indenture and the issuance of the Securities.
Unless the certificate of authentication hereon has been
executed by the Trustee or an Authenticating Agent by manual
signature, this Security shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed.
TUCSON ELECTRIC POWER COMPANY
By:
--------------------------------
[Title]
<PAGE>
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated
therein referred to in the within-mentioned Indenture.
Dated:
-----------------------
------------------------- OR -------------------------
-------------------------,
------------------------------
AS TRUSTEE AS TRUSTEE
By: BY:[ ],
------------------------
Authorized Officer AS AUTHENTICATING AGENT
By:
---------------------------
Authorized Officer
<PAGE>
RESTRICTIONS ON TRANSFER, ETC.
THIS SECURITY MAY NOT BE TRANSFERRED OR EXCHANGED, NOR MAY
ANY PURPORTED TRANSFER BE REGISTERED, EXCEPT (A) THIS SECURITY
MAY BE TRANSFERRED IN WHOLE, AND APPROPRIATE REGISTRATION OF
TRANSFER EFFECTED, IF SUCH TRANSFER IS BY CEDE & CO., AS NOMINEE
FOR THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY"), TO THE
DEPOSITARY, OR BY THE DEPOSITARY TO ANOTHER NOMINEE THEREOF, OR
BY ANY NOMINEE OF THE DEPOSITARY TO ANY OTHER NOMINEE THEREOF, OR
BY THE DEPOSITARY OR ANY NOMINEE THEREOF TO ANY SUCCESSOR
SECURITIES DEPOSITARY OR ANY NOMINEE THEREOF; AND (B) THIS
SECURITY MAY BE EXCHANGED FOR DEFINITIVE SECURITIES REGISTERED IN
THE RESPECTIVE NAMES OF THE BENEFICIAL HOLDERS HEREOF, AND
THEREAFTER SHALL BE TRANSFERABLE WITHOUT RESTRICTIONS IF (1) THE
DEPOSITARY, OR ANY SUCCESSOR SECURITIES DEPOSITARY, SHALL HAVE
NOTIFIED THE COMPANY AND THE TRUSTEE THAT IT IS UNWILLING OR
UNABLE TO CONTINUE TO ACT AS SECURITIES DEPOSITARY WITH RESPECT
TO THE SECURITIES AND THE TRUSTEE SHALL NOT HAVE BEEN NOTIFIED BY
THE COMPANY WITHIN NINETY (90) DAYS OF THE IDENTITY OF A
SUCCESSOR SECURITIES DEPOSITARY WITH RESPECT TO THE SECURITIES;
OR (2) THE COMPANY SHALL HAVE DELIVERED TO THE TRUSTEE A COMPANY
ORDER TO THE EFFECT THAT THE SECURITIES SHALL BE SO EXCHANGEABLE
ON AND AFTER A DATE SPECIFIED THEREIN.
-------------------------
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH BELOW. BY ITS
ACQUISITION HEREOF, THE HOLDER (A) REPRESENTS THAT (1) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT) OR (2) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (B) AGREES
THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF
THIS SECURITY RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT
(1) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (2) INSIDE THE
UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE
WITH RULE 144A UNDER THE SECURITIES ACT, (3) OUTSIDE THE UNITED
STATES TO PERSONS OTHER THAN U.S. PERSONS IN OFFSHORE
TRANSACTIONS MEETING THE REQUIREMENTS OF RULE 904 UNDER
REGULATION S UNDER THE SECURITIES ACT, (4) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT AND (C) AGREES THAT IT WILL GIVE TO EACH PERSON TO
WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.
-------------------------
THE ACCEPTANCE OF THIS SECURITY SHALL BE DEEMED TO
CONSTITUTE THE CONSENT AND AGREEMENT BY THE HOLDER HEREOF TO ALL
OF THE TERMS AND PROVISIONS OF THE REGISTRATION RIGHTS AGREEMENT,
DATED AUGUST 4, 1998, BETWEEN THE COMPANY AND THE INITIAL
PURCHASERS OF THE SECURITIES OF THIS SERIES.
<PAGE>
FOR VALUE RECEIVED the undersigned hereby sells, assigns and
transfers unto
-----------------------------------------------------------------
[please insert social security or other identifying
number of assignee]
-----------------------------------------------------------------
[please print or typewrite name and
address of assignee]
-----------------------------------------------------------------
the within Security of TUCSON ELECTRIC POWER COMPANY and does
hereby irrevocably constitute and appoint
----------------------,
Attorney, to transfer said Security on the books of the
within-mentioned Company, with full power of substitution in the
premises.
Dated:
----------------------
---------------------------------------------
Notice: The signature to this assignment must correspond with
the name as written upon the face of the Security in every
particular without alteration or enlargement or any change
whatsoever.
<PAGE>
EXHIBIT B
FORM OF BOND
(See legend at the end of this Security for
restrictions on transfer and change of form)
TUCSON ELECTRIC POWER COMPANY
First Collateral Trust Bond, 7 1/2% Series B due 2008
Interest Rate: 7 1/2% per annum
Stated Maturity: August 1, 2008
Original Interest Accrual Date:
Initial Redemption Date: Anytime prior to Stated Maturity
Interest Payment Dates: February 1 and August 1
Redemption Price: 100% plus premium as set forth in Indenture
Regular Record Dates: January 15 and July 15
OID: Yes__ No [CHECKMARK]
-------------------------
This Security is not a Discount Security
within the meaning of the within-mentioned Indenture.
-------------------------
Principal Amount Registered No.
$ CUSIP
TUCSON ELECTRIC POWER COMPANY, a corporation organized and
existing under the laws of the State of Arizona (herein called
the "Company," which term includes any successor corporation
under the Indenture referred to below), for value received,
hereby promises to pay to
or registered assigns, the principal sum of
DOLLARS
on the Stated Maturity specified above, and to pay interest
thereon from the Original Interest Accrual Date specified above
or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, semi-annually in arrears on
the Interest Payment Dates specified above in each year,
commencing with the Interest Payment Date next succeeding the
Original Interest Accrual Date specified above, and at Maturity,
at the Interest Rate per annum specified above, until the
principal hereof is paid or duly provided for. The interest so
payable, and paid or duly provided for, on any Interest Payment
Date shall, as provided in such Indenture, be paid to the Person
in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular
Record Date specified above (whether or not a Business Day) next
preceding such Interest Payment Date. Notwithstanding the
foregoing, interest payable at Maturity shall be paid to the
Person to whom principal shall be paid. Except as otherwise
provided in said Indenture, any such interest not so paid or duly
provided for shall forthwith cease to be payable to the Holder on
such Regular Record Date and may either be paid to the Person in
whose name this Security (or one or more Predecessor Securities)
is registered at the close of business on a Special Record Date
for the payment of such Unpaid Interest to be fixed by the
Trustee, notice of which shall be given to Holders of Securities
of this series not less than 15 days prior to such Special Record
Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on
which the Securities of this series may be listed, and upon such
notice as may be required by such exchange, all as more fully
provided in said Indenture.
Payment of the principal of and premium, if any, on this
Security and interest hereon at Maturity shall be made upon
presentation of this Security at the Corporate Trust Office of
Bank of Montreal Trust Company in New York, New York, or at such
other office or agency as may be designated for such purpose by
the Company from time to time. Payment of interest on this
Security (other than interest at Maturity) shall be made by check
mailed to the address of the Person entitled thereto as such
address shall appear in the Security Register, except that (a) if
such Person shall be a securities depositary, such payment may be
made by such other means in lieu of check, as shall be agreed
upon by the Company, the Trustee and such Person and (b) upon the
written request of a Holder of not less than $10 million in
aggregate principal amount of Securities (as hereinafter defined)
of the same series delivered to the Company and the Paying Agent
at least ten days prior to any Interest Payment Date, payment of
interest on such Securities to such Holder on such Interest
Payment Date shall be made by wire transfer of immediately
available funds to an account maintained within the continental
United States specified by such Holder or, if such Holder
maintains an account with the entity acting as Paying Agent, by
deposit into such account. Payment of the principal of and
premium, if any, and interest on this Security, as aforesaid,
shall be made in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Security is one of a duly authorized issue of
securities of the Company (herein called the "Securities"),
issued and issuable in one or more series under and equally
secured by an Indenture, dated as of August 1, 1998 (such
Indenture as originally executed and delivered and as
supplemented or amended from time to time thereafter, together
with any constituent instruments establishing the terms of
particular Securities, being herein called the "Indenture"),
between the Company and Bank of Montreal Trust Company, trustee
(herein called the "Trustee," which term includes any successor
trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a
description of the respective rights, limitations of rights,
duties and immunities of the Company, the Trustee and the Holders
of the Securities thereunder and of the terms and conditions upon
which the Securities are, and are to be, authenticated and
delivered and secured. The acceptance of this Security shall be
deemed to constitute the consent and agreement by the Holder
hereof to all of the terms and provisions of the Indenture. This
Security is one of the series designated above.
If any Interest Payment Date, any Redemption Date or the
Stated Maturity shall not be a Business Day (as hereinafter
defined), payment of the amounts due on this Security on such
date may be made on the next succeeding Business Day; and, if
such payment is made or duly provided for on such Business Day,
no interest shall accrue on such amounts for the period from and
after such Interest Payment Date, Redemption Date or Stated
Maturity, as the case may be, to such Business Day.
This Security is subject to redemption at any time, as a
whole or in part, at the election of the Company at a redemption
price equal to the principal hereof plus accrued interest, if
any, to the redemption date and plus a premium as set forth in
the Indenture.
Notice of redemption shall be given by mail to Holders of
Securities, not less than 30 days nor more than 60 days prior to
the date fixed for redemption, all as provided in the Indenture.
As provided in the Indenture, notice of redemption at the
election of the Company as aforesaid may state that such
redemption shall be conditional upon the receipt by the Trustee
of money sufficient to pay the principal of and premium, if any,
and interest, if any, on this Security on or prior to the date
fixed for such redemption; a notice of redemption so conditioned
shall be of no force or effect if such money is not so received
and, in such event, the Company shall not be required to redeem
this Security.
In the event of redemption of this Security in part only, a
new Security or Securities of this series, of like tenor, for the
unredeemed portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the
principal of this Security may be declared due and payable in the
manner and with the effect provided in the Indenture.
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 a
majority in aggregate principal amount of the Securities of all
series then Outstanding under the Indenture, considered as one
class; provided, however, that if there shall be Securities of
more than one series Outstanding under the Indenture and if a
proposed supplemental indenture shall directly affect the rights
of the Holders of Securities of one or more, but less than all,
of such series, then the consent only of the Holders of a
majority in aggregate principal amount of the Outstanding
Securities of all series so directly affected, considered as one
class, shall be required; and provided, further, that if the
Securities 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 Holders of Securities of one or more,
but less than all, of such Tranches, then the consent only of the
Holders of a majority in aggregate principal amount of the
Outstanding Securities 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 Securities. The Indenture also
contains provisions permitting the Holders of a majority in
principal amount of the Securities then Outstanding, on behalf of
the Holders of all Securities, to waive compliance by the Company
with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future
Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange therefor or in
lieu hereof, whether or not notation of such consent or waiver is
made upon this Security.
As provided in the Indenture and subject to certain
limitations therein set forth, this Security or any portion of
the principal amount hereof will be deemed to have been paid for
all purposes of the Indenture and to be no longer Outstanding
thereunder, and, at the election of the Company, the Company's
entire indebtedness in respect thereof will be satisfied and
discharged, if there has been irrevocably deposited with the
Trustee or any Paying Agent (other than the Company), in trust,
money in an amount which will be sufficient and/or Eligible
Obligations, the principal of and interest on which when due,
without regard to any reinvestment thereof, will provide moneys
which, together with moneys so deposited, will be sufficient to
pay when due the principal of and interest on this Security when
due.
The Indenture contains terms, provisions and conditions
relating to the consolidation or merger of the Company with or
into, and the conveyance or other transfer, or lease, of assets
to, another Person, to the assumption by such other Person, in
certain circumstances, of all of the obligations of the Company
under the Indenture and on the Securities and to the release and
discharge of the Company, in certain circumstances, from such
obligation.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is
registrable in the Security Register, upon surrender of this
Security for registration of transfer at the corporate trust
office of Bank of Montreal Trust Company in New York, New York or
such other office or agency as may be designated by the Company
from time to time, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and
the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more
new Securities of this series of authorized denominations and of
like tenor and aggregate principal amount, will be issued to the
designated transferee or transferees.
The Securities of this series are issuable only as
registered Securities, without coupons, and in denominations of
$100,000 and any amount in excess thereof that is an integral
multiple of $1,000. As provided in the Indenture and subject to
certain limitations therein set forth, Securities of this series
are exchangeable for a like aggregate principal amount of
Securities of the same series, of any authorized denominations,
as requested by the Holder surrendering the same, and of like
tenor upon surrender of the Security or Securities to be
exchanged at the corporate trust office of Bank of Montreal Trust
Company in New York, New York or such other office or agency as
may be designated by the Company from time to time.
No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Prior to due surrender of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company
or the Trustee may treat the Person in whose name this Security
is registered as the absolute owner hereof for all purposes
(subject to Section 307 of the Indenture), whether or not this
Security be overdue, and neither the Company, the Trustee nor any
such agent shall be affected by notice to the contrary.
The Indenture and the Securities shall be governed by and
construed in accordance with the laws of the State of New York,
except to the extent that the Trust Indenture Act shall be
applicable.
As used herein, "Business Day" means any day, other than a
Saturday or Sunday, which is not a day on which banking
institutions or trust companies in The City of New York, New York
or other city in which is located any office or agency maintained
for the payment of principal, premium, if any, or interest on
this Security, are authorized or required by law, regulation or
executive order to remain closed. All other terms used in this
Security which are defined in the Indenture shall have the
meanings assigned to them in the Indenture.
As provided in the Indenture, no recourse shall be had for
the payment of the principal of or premium, if any, or interest
on any Securities, or any part thereof, or for any claim based
thereon or otherwise in respect thereof, or of the indebtedness
represented thereby, or upon any obligation, covenant or
agreement under the Indenture, against, and no personal liability
whatsoever shall attach to, or be incurred by, any incorporator,
shareholder, officer or director, as such, past, present or
future of the Company or of any predecessor or successor
corporation (either directly or through the Company or a
predecessor or successor corporation), whether by virtue of any
constitutional provision, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being
expressly agreed and understood that the Indenture and all the
Securities are solely corporate obligations and that any such
personal liability is hereby expressly waived and released as a
condition of, and as part of the consideration for, the execution
of the Indenture and the issuance of the Securities.
Unless the certificate of authentication hereon has been
executed by the Trustee or an Authenticating Agent by manual
signature, this Security shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed.
TUCSON ELECTRIC POWER COMPANY
By:
--------------------------------
[Title]
<PAGE>
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated
therein referred to in the within-mentioned Indenture.
Dated:
-----------------------
------------------------- OR -------------------------
-------------------------,
------------------------------
AS TRUSTEE AS TRUSTEE
By: BY:[ ],
------------------------
Authorized Officer AS AUTHENTICATING AGENT
By:
---------------------------
Authorized Officer
<PAGE>
RESTRICTIONS ON TRANSFER
THIS SECURITY MAY NOT BE TRANSFERRED OR EXCHANGED, NOR MAY
ANY PURPORTED TRANSFER BE REGISTERED, EXCEPT (A) THIS SECURITY
MAY BE TRANSFERRED IN WHOLE, AND APPROPRIATE REGISTRATION OF
TRANSFER EFFECTED, IF SUCH TRANSFER IS BY CEDE & CO., AS NOMINEE
FOR THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY"), TO THE
DEPOSITARY, OR BY THE DEPOSITARY TO ANOTHER NOMINEE THEREOF, OR
BY ANY NOMINEE OF THE DEPOSITARY TO ANY OTHER NOMINEE THEREOF, OR
BY THE DEPOSITARY OR ANY NOMINEE THEREOF TO ANY SUCCESSOR
SECURITIES DEPOSITARY OR ANY NOMINEE THEREOF; AND (B) THIS
SECURITY MAY BE EXCHANGED FOR DEFINITIVE SECURITIES REGISTERED IN
THE RESPECTIVE NAMES OF THE BENEFICIAL HOLDERS HEREOF, AND
THEREAFTER SHALL BE TRANSFERABLE WITHOUT RESTRICTIONS IF (1) THE
DEPOSITARY, OR ANY SUCCESSOR SECURITIES DEPOSITARY, SHALL HAVE
NOTIFIED THE COMPANY AND THE TRUSTEE THAT IT IS UNWILLING OR
UNABLE TO CONTINUE TO ACT AS SECURITIES DEPOSITARY WITH RESPECT
TO THE SECURITIES AND THE TRUSTEE SHALL NOT HAVE BEEN NOTIFIED BY
THE COMPANY WITHIN NINETY (90) DAYS OF THE IDENTITY OF A
SUCCESSOR SECURITIES DEPOSITARY WITH RESPECT TO THE SECURITIES;
OR (2) THE COMPANY SHALL HAVE DELIVERED TO THE TRUSTEE A COMPANY
ORDER TO THE EFFECT THAT THE SECURITIES SHALL BE SO EXCHANGEABLE
ON AND AFTER A DATE SPECIFIED THEREIN.
-------------------------
<PAGE>
FOR VALUE RECEIVED the undersigned hereby sells, assigns and
transfers unto
-----------------------------------------------------------------
[please insert social security or other identifying
number of assignee]
-----------------------------------------------------------------
[please print or typewrite name and
address of assignee]
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the within Security of TUCSON ELECTRIC POWER COMPANY and does
hereby irrevocably constitute and appoint
----------------------,
Attorney, to transfer said Security on the books of the
within-mentioned Company, with full power of substitution in the
premises.
Dated:
----------------------
---------------------------------------------
Notice: The signature to this assignment must correspond with
the name as written upon the face of the Security in every
particular without alteration or enlargement or any change
whatsoever.
Exhibit 4(d)
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of August 4, 1998
(this "Agreement"), among TUCSON ELECTRIC POWER COMPANY, an
Arizona corporation (the "Company"), and MORGAN STANLEY & CO.
INCORPORATED, TD SECURITIES (USA) INC., PRUDENTIAL SECURITIES
INCORPORATED, SALOMON BROTHERS INC, and BNY CAPITAL MARKETS INC.
as the initial purchasers (the "Initial Purchasers") of the First
Collateral Trust Bonds, 7 1/2% Series A Due 2008 of the Company.
1. Certain Definitions.
For purposes of this Registration Rights Agreement, the
following terms shall have the following respective meanings.
(a) "Additional Amounts" has the meaning assigned
thereto in Section 2(c).
(b) "Closing Date" means the date on which the
Securities are initially issued.
(c) "Commission" means the Securities and Exchange
Commission, or any other federal agency at the time
administering the Exchange Act or the Securities Act,
whichever is the relevant statute for the particular
purpose.
(d) "Effective Time" in the case of (i) an Exchange
Offer, means the time and date as of which the Commission
declares the Exchange Offer Registration Statement effective
or as of which the Exchange Offer Registration Statement
otherwise becomes effective and (ii) a Shelf Registration,
means the time and date as of which the Commission declares
the Shelf Registration effective or as of which the Shelf
Registration otherwise becomes effective.
(e) "Exchange Act" means the Securities Exchange Act
of 1934, or any successor thereto, as the same shall be
amended form time to time.
(f) "Exchange Offer" has the meaning assigned thereto
in Section 2(a).
(g) "Exchange Offer Registration Statement" has the
meaning assigned thereto in Section 2(a).
(h) "Exchange Registration" has the meaning assigned
thereto in Section 3(f).
(i) "Holder" means each Initial Purchaser for so long
as it owns any Registrable Securities, and such of its
respective successors and assigns who acquire Registrable
Securities, directly or indirectly, from such person or from
any successor or assign of such person, in each case for so
long as such person owns any Registrable Securities.
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<PAGE>
(j) "Indenture" means the Indenture, dated as of
August 1, 1998, between the Company and Bank of Montreal
Trust Company, as Trustee, as the same shall be amended from
time to time.
(k) "New Securities" has the meaning assigned thereto
in Section 2(a).
(l) "Participant" has the meaning as assigned thereto
in Section 6(a).
(m) "Person" means a corporation, association,
partnership, organization, business, individual, government
or political subdivision thereof or governmental agency.
(n) "Purchase Agreement" means the Purchase Agreement
dated as of July 30, 1998 among the Company and the Initial
Purchasers.
(o) "Registrable Securities" means the Securities:
provided, however, that such Securities shall cease to be
Registrable Securities when (i) such Securities have been
exchanged for New Securities in an Exchange Offer as
contemplated in Section 2(a); (ii) in the circumstances
contemplated by Section 2(b), a registration statement
registering such Securities under the Securities Act has
been declared or becomes effective and such Securities have
been sold or otherwise transferred by the Holder thereof
pursuant to such effective registration statement; (iii)
such Securities are sold pursuant to Rule 144 under
circumstances in which any legend borne by such Securities
relating to restrictions on transferability thereof, under
the Securities Act or otherwise, is removed or such
Securities are eligible to be sold pursuant to paragraph (k)
of Rule 144; or (iv) such Securities shall cease to be
outstanding.
(p) "Registration Default" has the meaning assigned
thereto in Section 2(c).
(q) "Registration Expenses" has the meaning assigned
thereto in Section 4.
(r) "Resale Period" means the period beginning on the
date the Shelf Registration becomes effective and ending on
the earlier of (i) the Shelf Registration ceasing to be
effective or (ii) the second anniversary of the Closing
Date.
(s) "Restricted Holder" means (i) a Holder that is an
affiliate of the Company within the meaning of Rule 405,
(ii) a Holder who acquires New Securities outside the
ordinary course of such Holder's business, (iii) a Holder
who has arrangements or understandings with any person to
participate in the Exchange Offer for the purpose of
distributing New Securities, or (iv) a broker-dealer who
receives Securities for its own account but did not acquire
the Securities as a result of market-making activities or
other trading activities.
2
<PAGE>
(t) "Rule 144," "Rule 405" and "Rule 415" means, in
each case, such rule promulgated under the Securities Act.
(u) "Securities" means the First Collateral Trust
Bonds, 7 1/2% Series A due 2008 to be issued under the
Indenture and sold by the Company to the Initial Purchasers.
(v) "Securities Act" means the Securities Act of 1933,
as amended.
(w) "Shelf Registration" has the meaning assigned
thereto in Section 2(b).
(x) "Trust Indenture Act" means the Trust Indenture
Act of 1939, or any successor thereto, and the rules,
regulations and forms promulgated thereunder, all as the
same shall be amended from time to time.
Unless the context otherwise requires, any reference herein
to a "Section" or "clause" refers to a Section or clause, as the
case may be, of this Agreement, and the words "herein," "hereof"
and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular Section or other
subdivision. Unless the context otherwise requires, any
reference to a statute, rule or regulation refers to the same
(including any successor statute, rule or regulation thereto) as
it may be amended from time to time.
2. Registration Under the Securities Act.
(a) Except as set forth in Section 2(b), the Company
agrees to file under the Securities Act a registration
statement (the "Exchange Offer Registration Statement")
relating to an offer to exchange (the "Exchange Offer") any
and all of the Securities for a like aggregate amount of
securities issued by the Company, which have the same terms
as the Securities (and are entitled to the benefits of a
trust indenture which has been qualified under the Trust
Indenture Act), except that they have been registered
pursuant to an effective registration statement under the
Securities Act, do not contain restrictions on transfers and
do not contain provisions for the additional interest
contemplated in Section 2(c) below (such new securities
hereinafter called "New Securities"). The Company agrees to
use its reasonable best efforts to cause the Exchange Offer
Registration Statement to become effective under the
Securities Act within 180 days after the Closing Date. The
Exchange Offer will be registered under the Securities Act
on the appropriate form and will comply in all material
respects with all applicable tender offer rules and
regulations under the Exchange Act. The Company further
agrees to commence and complete the Exchange Offer
reasonably promptly after the Exchange Offer Registration
Statement has become effective for all Securities that have
been properly tendered and not withdrawn on or prior to the
expiration of the Exchange Offer. The Exchange Offer will
be deemed completed only if the New Securities received by
Holders (other than Restricted Holders) in the Exchange
Offer for Securities are, upon receipt, transferable by each
such Holder without restriction imposed thereon by the
3
<PAGE>
Securities Act or the Exchange Act and without material
restrictions imposed thereon by the blue sky or securities
laws of a substantial majority of the States of the United
States of America. The Exchange Offer shall be deemed to
have been completed upon the Company having exchanged
pursuant to the Exchange Offer, New Securities for all
Securities that have been properly tendered and not
withdrawn before the expiration of the Exchange Offer, which
shall be on a date that is at least 30 days following the
commencement of the Exchange Offer.
(b) If (i) because of any change in law or in
applicable interpretations by the staff of the Commission,
the Company is not permitted to effect the Exchange Offer or
(ii) in the case of any Holder, other than a Restricted
Holder, that participates in the Exchange Offer, such Holder
does not receive New Securities on the date of the exchange
that may be sold without restriction under state and federal
securities laws (other than due solely to the status of such
Holder as an affiliate of the Company within the meaning of
the Securities Act), then in addition to or in lieu or
conducting the Exchange Offer contemplated by Section 2(a),
the Company shall file under the Securities Act as promptly
as practicable a "shelf" registration statement providing
for the registration of, and the sale a continuous or
delayed basis by any such Holder of, all of the Registrable
Securities held by such Holder, pursuant to Rule 415 or any
similar rule that may be adopted by the Commission (the
"Shelf Registration"). The Company agrees to use its
reasonable best efforts to cause the Shelf Registration to
become to be declared effective and to keep such Shelf
Registration continuously effective for a period (the
"Effectiveness Period") ending on the earlier of (i) the
second anniversary of the Closing Date or (ii) such time as
there are no longer any Registrable Securities outstanding.
The Company further agrees to supplement or make amendments
to the Shelf Registration during the Effectiveness Period,
as and when required by the rules, regulations or
instructions applicable to the registration form used for
such Shelf Registration or by the Securities Act or rules
and regulations thereunder for shelf registration, and the
Company agrees to furnish to the Holders of the Registrable
Securities copies of any such supplement or amendment prior
to its being used or promptly following its filing with the
Commission. Notwithstanding the foregoing, if the Board of
Directors of the Company determines in good faith that it is
in the best interests of the Company not to disclose the
existence of or facts surrounding any proposed or pending
material corporate transaction involving the Company, the
Company may allow the Shelf Registration Statement to fail
to be effective and usable as a result of such nondisclosure
for up to 60 days during the two year period of
effectiveness required by Section 2 hereof, but in no event
for any period in excess of 30 consecutive days.
(c) If any of the following events (any such event a
"Registration Default") shall occur, then, as liquidated
damages, additional amounts (the "Additional Amounts") shall
become payable as follows:
(i) if the Exchange Offer Registration Statement
or a Shelf Registration is not filed with the
Commission within 150 days following the Closing Date,
then commencing on the 151st day after the Closing
Date, or
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<PAGE>
(ii) if neither the Exchange Offer Registration
Statement nor a Shelf Registration is declared
effective by the Commission on or prior to the 180th
day following the Closing Date, then commencing on the
181st day after the Closing Date, or
(iii) if either (A) the Company has not
exchanged New Securities for all Securities validly
tendered and not withdrawn, in accordance with the
terms of the Exchange Offer, on or prior to 35 days
after the date on which the Exchange Offer Registration
Statement was declared effective, or (B) if applicable,
the Shelf Registration has been declared effective but,
to the extent required by Section 2(b) above, such
Shelf Registration ceases to be effective during the
Effectiveness Period, then commencing on (x) the 36th
day after such effective date, in the case of (A)
above, or (y) the day such Shelf Registration ceases to
be effective, in the case of (B) above
Additional Amounts will accrue and be payable to the holders
of the Securities in amounts equivalent to the additional
amounts of interest which would accrue and be payable if the
interest rate of the Securities was increased by 25 basis
points, such amounts to be payable to the same holders and
at the same times as interest on the Securities; provided,
however, that the Additional Amounts rate on the Securities
shall not exceed in the aggregate 0.25% per annum; provided
further, however, that (1) upon the filing of the Exchange
Offer Registration Statement or a Shelf Registration (in the
case of clause (i) above), (2) upon the effectiveness of the
Exchange Offer Registration Statement or a Shelf
Registration (in the case of clause (ii) above), (3) upon
the exchange of New Securities for all Securities validly
tendered and not withdrawn (in the case of clause (iii)(A)
above), or upon the effectiveness of the Shelf Registration
which had ceased to remain effective (in the case of clause
(iii)(B) above), or (4) upon the termination of certain
transfer restrictions on the Securities as a result of the
application of Rule 144(k), Additional Amounts on the
Securities as a result of such clause (or the relevant
subclause thereof), as the case may be, shall cease to
accrue. Any additional Amounts due pursuant to clauses (i),
(ii), (iii) above will be payable in cash, on the interest
payment dates for the Securities. The aggregate Additional
Amounts payable at any time will be determined by
multiplying .25% by the principal amount of the Securities,
multiplied by a fraction, the numerator of which is the
number of days such Additional Amounts accrued during such
period (determined on the basis of a 360-day year comprised
of twelve 30-day months), and the denominator of which is
360.
(d) Any reference herein to a registration statement
shall be deemed to include any document incorporated therein
by reference as of the applicable Effective Time and any
reference herein to any post-effective amendment to a
registration statement shall be deemed to include any
document incorporated therein by reference as of a time
after such Effective Time.
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<PAGE>
(e) Notwithstanding any other provision of this
Agreement, no Holder of Registrable Securities who does not
comply with the provisions of Section 3(d), if applicable,
shall be entitled to receive Additional Amounts unless and
until such Holder complies with the provisions of such
Section, if applicable.
3. Registration Procedures.
The following provisions shall apply to registration
statements filed pursuant to Section 2:
(a) At or before the Effective Time of the Exchange
Offer or the Shelf Registration, as the case may be, the
Company shall qualify the Indenture under the Trust
Indenture Act.
(b) In connection with the Company's obligations with
respect to the Shelf Registration, if applicable, the
Company shall, as soon as reasonable practicable (or as
otherwise specified herein):
(i) prepare and file with the Commission a
registration statement with respect to the Shelf
Registration on any form which may be utilized by the
Company and which shall permit the disposition of the
Registrable Securities in accordance with the intended
method or methods thereof, as specified in writing by
the Holders of the Registrable Securities, and use its
reasonable best efforts to cause such registration
statement to become effective as soon as practicable
thereafter;
(ii) prepare and file with the Commission such
amendments and supplements to such registration
statement and the prospectus included therein as may be
necessary to effect and maintain the effectiveness of
such registration statement for the period specified in
Section 2(b) and as may be required by the applicable
rules and regulations of the Commission and the
instructions applicable to the form of such
registration statement, and furnish to the Holders of
the Registrable Securities copies of any such
supplement or amendment simultaneously with or prior to
its being used or filed with the Commission;
(iii) comply in all material respects as to
all matters within the Company's control, with the
provisions of the Securities Act with respect to the
disposition of all of the Registrable Securities
covered by such registration statement in accordance
with the intended methods of disposition by the Holders
thereof provided for in such registration statement;
(iv) permit any of (A) the Holders of the
Registrable Securities to be included in such
registration statement, (B) the underwriters (which
term, for purposes of this Agreement, shall include a
person deemed to be an underwriter within the meaning
of Section 2(11) of the Securities Act), if any,
thereof, (C) the sales or placement agent, if any,
6
<PAGE>
therefor, (D) counsel for such underwriters or agent
and (E) not more than one counsel for all the Holders
of such Registrable Securities who so request of the
Company in writing to participate in the preparation of
such registration statement, each prospectus included
therein or filed with the Commission and each amendment
or supplement thereto;
(v) for a reasonable period prior to the filing
of such registration statement, and throughout the
Resale Period, make available at reasonable times at
the Company's principal place of business or such other
reasonable place for inspection by the persons referred
to in Section 3(b)(iv), who shall certify to the
Company that they have a current intention to sell
their Registrable Securities pursuant to the Shelf
Registration, such financial and other information and
books and records of the Company, and cause the
officers, employees, counsel and independent certified
public accountants of the Company to respond to such
inquiries, as shall be reasonably necessary, in the
judgment of the respective counsel referred to in such
Section, to conduct a reasonable investigation within
the meaning of Section 11 of the Securities Act;
provided, however, that each such party shall be
required to maintain in confidence and not to disclose
to any other person any information or records
reasonably designated by the Company in writing as
being confidential, until such time as (A) such
information becomes a matter of public record (whether
by virtue of its inclusion in such registration
statement or otherwise), or (B) such person shall be
required so to disclose such information pursuant to a
subpoena or order of any court or other governmental
agency or body having jurisdiction over the matter
(subject to the requirements of such order, and only
after such person shall have given the Company prompt
prior written notice of such requirement and the
opportunity to contest the same or seek an appropriate
protective order), or (C) such information is required
to be set forth in such registration statement or the
prospectus included therein or in an amendment to such
registration statement or an amendment or supplement to
such prospectus in order that such registration
statement, prospectus, amendment or supplement, as the
case may be, does not contain an untrue statement of a
material fact or omit to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading.
(vi) promptly notify the selling Holders of
Registrable Securities, the sales or placement agent,
if any, therefor and the managing underwriter or
underwriters, if any, thereof named in the Shelf
Registration or a supplement thereto, and confirm such
notice in writing, (A) when such registration statement
or the prospectus included therein or any prospectus
amendment or supplement or post-effective amendment has
been filed, and, with respect to such registration
statement or any post-effective amendment, when the
same has become effective, (B) of the issuance by the
Commission of any stop order suspending the
effectiveness of such registration statement or the
initiation or written threat of any proceedings for
that purpose, (C) of the receipt by the Company of any
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<PAGE>
notification with respect to the suspension of the
qualification of the Registrable Securities for sale in
any jurisdiction or the initiation or written threat of
any proceeding for such purpose, or (D) at any time
when a prospectus is required to be delivered under the
Securities Act, that such registration statement,
prospectus, prospectus amendment or supplement or post-
effective amendment does not conform in all material
respects to the applicable requirements of the
Securities Act and the Trust Indenture Act and the
rules and regulations of the Commission thereunder;
(vii) use its reasonable best efforts to
obtain the withdrawal of any order suspending the
effectiveness of such registration statement or any
post-effective amendment thereto at the earliest
practicable date;
(viii) if requested by any managing underwriter
or underwriters, any placement or sales agent or any
Holder of Registrable Securities, promptly incorporate
in a prospectus supplement or post-effective amendment
such information as is required by the applicable rules
and regulations of the Commission relating to the terms
of the sale of such Registrable Securities, including
information with respect to the principal amount of
Registrable Securities being sold by such Holder or
agent or to any underwriters, the name and description
of such Holder, agent or underwriter, the offering
price of such Registrable Securities and any discount,
commission or other compensation payable in respect
thereof, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the
offering of the Registrable Securities to be sold by
such Holder or agent or to such underwriters; and make
all required filings of such prospectus supplement or
post-effective amendment promptly after notification of
the matters to be incorporated in such prospectus
supplement or post-effective amendment;
(ix) furnish to each Holder of Registrable
Securities, each placement or sales agent, if any,
therefor, each underwriter, if any, thereof and the
respective counsel referred to in Section 3(b)(iv) an
executed copy (or, in the case of a Holder of
Registrable Securities, a conformed copy) of such
registration statement, each such amendment or
supplement thereto (in each case including all exhibits
thereto) and such number of copies of such registration
statement (excluding exhibits thereto) and of the
prospectus included in such registration statement
(including each preliminary prospectus and any summary
prospectus), in conformity in all material respects
with the applicable requirements of the Securities Act
and the Trust Indenture Act and the rules and
regulations of the Commission thereunder; and the
Company hereby consents to the use of such prospectus
(including any such preliminary or summary prospectus)
and any amendment or supplement thereto by each such
Holder and by any such agent and underwriter, in each
case, in the form most recently provided to such person
by the Company in connection with the offering and sale
of the Registrable Securities covered by the prospectus
(including any such preliminary or summary prospectus)
or any supplement or amendment thereto; and
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<PAGE>
(x) use its reasonable best efforts to (A)
register or qualify the Registrable Securities to be
included in such registration statement under such
securities laws or blue sky laws of such United States
jurisdictions as any Holder of such Registrable
Securities and each placement or sales agent, if any,
therefor and underwriter, if any, thereof shall
reasonably request, and (B) keep such registrations or
qualifications in effect and comply with such laws so
as to permit the continuance of offers, sales and
dealings therein in such jurisdictions during the
period the Shelf Registration is required to remain
effective under Section 2(b) and for so long as may be
necessary to enable any such Holder, agent or
underwriter to complete its distribution of Securities
pursuant to such registration statement but in any
event not later than the date through which the Company
is required to keep the Shelf Registration effective
pursuant to Section 2(b); provided, however, that the
Company shall not be required for any such purpose to
(1) qualify as a foreign corporation in any
jurisdiction wherein it would not otherwise be required
to qualify but for the requirements of this Section
3(b)(x), (2) consent to general service of process in
any such jurisdiction or (3) make any changes to its
certificate of incorporation or by-laws or any
agreement between it and its stockholders.
In case any of the foregoing obligations is dependent upon
information provided or to be provided by a party other than the
Company, such obligation shall be subject to the provision of
such information by such party.
(c) In the event that the Company would be required,
pursuant to Section 3(b)(vi)(D), to notify the selling
Holders of Registrable Securities, the placement or sales
agent, if any, therefor or the managing underwriters, if
any, thereof named in the Shelf Registration or a supplement
thereto of the existence of the circumstances described
therein, the Company shall promptly prepare and furnish to
each such Holder, to each placement or sales agent, if any,
and to each such underwriter, if any, a reasonable number of
copies of a prospectus supplemented or amended so that, as
thereafter delivered to purchasers of Registrable
Securities, such prospectus shall conform in all material
respects to the applicable requirements of the Securities
Act and the Trust Indenture Act and the rules and
regulations of the Commission thereunder. Each Holder of
Registrable Securities agrees that upon receipt of any
notice from the Company, pursuant to Section 3(b)(vi)(D),
such Holder shall forthwith discontinue (and cause any
placement or sales agent or underwriters acting on their
behalf to discontinue) the disposition of Registrable
Securities pursuant to the registration statement applicable
to such Registrable Securities until such Holder (i) shall
have received copies of such amended or supplemented
prospectus and, if so directed by the Company, such Holder
shall deliver to the Company (at the Company's expense) all
copies, other than permanent file copies, then in such
Holder's possession of the prospectus covering such
Registrable Securities at the time of receipt of such notice
or (ii) shall have received notice from the Company that the
disposition of Registrable Securities pursuant to the Shelf
Registration may continue.
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<PAGE>
(d) The Company may require each Holder of Registrable
Securities as to which any registration pursuant to Section
2(b) is being effected to furnish to the Company such
information regarding such Holder and such Holder's intended
method of distribution of such Registrable Securities as the
Company may from time to time reasonably request in writing,
but only to the extent that such information is required in
order to comply with the Securities Act. Each such Holder
agrees to notify the Company as promptly as practicable of
any inaccuracy or change in information previously furnished
by such Holder to the Company or of the occurrence of any
event in either case as a result of which any prospectus
relating to such registration contains or would contain an
untrue statement of a material fact regarding such Holder or
such Holder's intended method of disposition of such
Registrable Securities required to be stated therein or
necessary to make the statements therein not misleading, and
promptly to furnish to the Company any additional
information required to correct and update any previously
furnished information or required so that such prospectus
shall not contain, with respect to such Holder or the
disposition of such Registrable Securities, an untrue
statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading.
(e) Until the expiration of two years after the
Closing Date, the Company will not, and will not permit any
of its "affiliates" (as defined in Rule 144) to, resell any
of the Securities that have been reacquired by any of them
except pursuant to an effective registration statement under
the Securities Act.
(f) In connection with the Company's obligations with
respect to the registration of New Securities as
contemplated by Section 2(a) (the "Exchange Registration"),
if applicable, the Company shall, as soon as reasonably
practicable (or as otherwise specified):
(i) prepare and file with the Commission such
amendments and supplements to the Exchange Offer
Registration Statement and the prospectus included
therein as may be necessary to effect and maintain the
effectiveness thereof for the periods and purposes
contemplated in Section 2(a) hereof and as may be
required by the applicable rules and regulations of the
Commission and the instructions applicable to the form
of the Exchange Offer Registration Statement, and
promptly provide each broker-dealer holding New
Securities with such number of copies of the prospectus
included therein (as then amended or supplemented), in
conformity in all material respects with the
requirements of the Securities Act and the Trust
Indenture Act and the rules and regulations of the
Commission thereunder, as such broker-dealer reasonably
may request for use in connection with resales of New
Securities;
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<PAGE>
(ii) for a period of 180 days from the date on
which the Exchange Offer Registration Statement is
declared effective (the "180 Day Period"), promptly
notify each broker-dealer that has requested or
received copies of the prospectus included in the
Exchange Offer Registration Statement, and confirm such
advice in writing, (A) when any prospectus amendment or
supplement or post-effective amendment to the Exchange
Offer Registration Statement has been filed, and, with
respect to any post-effective amendment to the Exchange
Offer Registration Statement, when the same has become
effective, (B) of the issuance by the Commission of any
stop order suspending the effectiveness of the Exchange
Offer Registration Statement or the initiation or
threatening of any proceedings for that purpose, (C) of
the receipt by the Company of any notification with
respect to the suspension of the qualification of the
New Securities for sale in any United States
jurisdiction or the initiation or threatening in
writing of any proceeding for such purpose, or (D) at
any time when a prospectus is required to be delivered
under the Securities Act, that the Exchange Offer
Registration Statement, prospectus, prospectus
amendment or supplement or post-effective amendment
does not conform in all material respects to the
applicable requirements of the Securities Act and the
Trust Indenture Act and the rules and regulations of
the Commission thereunder.
(iii) in the event that the Company would be
required, pursuant to Section 3(f)(ii)(D), to notify
any broker-dealers holding New Securities, promptly
prepare and furnish to each such Holder a reasonable
number of copies of a prospectus supplemented or
amended so that, as thereafter delivered to purchasers
of such New Securities, such prospectus shall conform
in all material respects to the applicable requirements
of the Securities Act and the Trust Indenture Act and
the rules and regulations of the Commission thereunder
or notify such broker-dealers that the offer and sale
of New Securities pursuant to the Exchange Offer
Registration Statement may continue;
(iv) use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of
the Exchange Offer Registration Statement or any post-
effective amendment thereto at the earliest practicable
date;
(v) use its reasonable best efforts to register
or qualify the New Securities under the securities laws
or blue sky laws of such jurisdictions as are
contemplated by Section 2(a) no later than the
commencement of the Exchange Offer, provided, however,
that the Company shall not be required for any such
purpose to (1) qualify as a foreign corporation in any
jurisdiction wherein it would not otherwise be required
to qualify but for the requirements of this Section
3(f)(v), (2) consent to general service of process in
any such jurisdiction or (3) make any changes to its
certificate of incorporation or by-laws or any
agreement between it and its stockholders; and
11
<PAGE>
(vi) make generally available to its security
Holders as soon as practicable but no later than
eighteen months after the effective date of such
registration statement, an earning statement of the
Company and its subsidiaries complying with Section
11(a) of the Securities Act (including, at the option
of the Company, Rule 158 thereunder).
In case of any of the foregoing obligations is
dependent upon information provided or to be provided by a
party other than the Company, such obligation shall be
subject to the provision of such information.
4. Registration Expenses.
The Company agrees to bear and to pay or cause to be paid
promptly upon request being made therefor all expenses incident
to the Company's performance of or compliance with this
Agreement, including (a) all Commission and any NASD registration
and filing fees and expenses, (b) all fees and expenses in
connection with the qualification of the Securities or New
Securities for offering and sale under the state securities and
blue sky laws referred to in Section 3(b)(x) and Section 3(f)(v)
hereof, including reasonable fees and disbursements of one
counsel for the placement or sales agent or underwriters, if any,
in connection with such qualifications, (c) all expenses relating
to the preparation, printing, distribution and reproduction of
each registration statement required to be filed hereunder, each
prospectus included therein or prepared for distribution pursuant
hereto, each amendment or supplement to the foregoing, the
certificates representing the Securities and all other documents
relating hereto, (d) fees and expenses of the Trustee under the
Indenture, and of any escrow agent or custodian, (e) internal
expenses (including all salaries and expenses of the Company's
officers and employees performing legal or accounting duties),
(f) fees, disbursements and expenses of counsel and independent
certified public accountants of the Company (including the
expenses of any opinions or "cold comfort" letters required by or
incident to such performance and compliance) and (g) reasonable
fees, disbursements and expenses of one counsel for the Holders
of Registrable Securities retained in connection with a Shelf
Registration, as selected by the Holders of at least a majority
in aggregate principal amount of the Registrable Securities being
registered and approved by the Company, and fees, expenses and
disbursements of any other persons, including special experts,
retained by the Company in connection with such registration
(collectively, the "Registration Expenses"). To the extent that
any Registration Expenses are incurred, assumed or paid by any
Holder of Registrable Securities or any placement or sales agent
therefor or underwriter thereof, the Company shall reimburse such
person for the full amount of the Registration Expenses so
incurred, assumed or paid promptly after receipt of a documented
request therefor. Notwithstanding the foregoing, the Holders of
the Registrable Securities being registered shall pay all agency
fees and commissions and underwriting discounts and commissions
attributable to the sale of such Registrable Securities and the
fees and disbursements of any counsel or other advisors or
experts retained by such Holders (severally or jointly), other
than the counsel and experts specifically referred to above.
5. Representations and Warranties.
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<PAGE>
The Company represents and warrants to, and agrees with, the
Initial Purchasers and each of the Holders from time to time of
Registrable Securities that:
(a) Each registration statement covering Registrable
Securities and each prospectus (including any preliminary or
summary prospectus) contained therein or furnished pursuant
to Section 3(c) or Section 3(f) hereof and any further
amendments or supplements to any such registration statement
or prospectus, when it becomes effective or is filed with
the Commission, as the case may be, and, in the case of an
underwritten offering of Registrable Securities, at the time
of the closing under the underwriting agreement relating
thereto, will conform in all material respects to the
applicable requirements of the Securities Act and the Trust
Indenture Act and the rules and regulations of the
Commission thereunder and will not contain an untrue
statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading; and during the 180 Day
Period and subject to Section 2(b) hereof, other than from
(i) such time as a notice has been given to Holders of
Registrable Securities pursuant to Section 3(b)(vi)(B) or
(D) or Section 3(f)(ii)(B) or (D) hereof until (ii) such
time as the Company furnishes an amended or supplemented
prospectus pursuant to Section 3(c) or Section 3(f)(iii)
hereof or such time as the Company provides notice that
offers and sales pursuant to the Exchange Offer Registration
Statement or the Shelf Registration, as the case may be, may
continue, each such registration statement, and each
prospectus (including any summary prospectus) contained
therein or furnished pursuant to Section 3(b) or
Section 3(f) hereof, as then amended or supplemented, will
conform in all material respects to the applicable
requirements of the Securities Act and the Trust Indenture
Act and the rules and regulations of the Commission
thereunder; provided, however, that this representation and
warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of a
Holder of Registrable Securities or any underwriter
expressly for use therein.
(b) Any documents incorporated by reference in any
prospectus referred to in Section 5(a) hereof, when they
become or became effective or are or were filed with the
Commission, as the case may be, will conform or conformed in
all material respects to the requirements of the Securities
Act or Exchange Act, as applicable, and none of such
documents will contain or contained an untrue statement of a
material fact or will omit or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in
conformity with information furnished in writing to the
Company by a Holder of Registrable Securities or any
underwriter expressly for use therein.
(c) The compliance by the Company with all of the
provisions of this Agreement and the consummation of the
transactions herein contemplated will not contravene any
provision of applicable law or the certificate of
incorporation or by-laws of the Company or, except to the
13
<PAGE>
extent that any such contravention would not have a material
adverse effect on the Company and its subsidiaries, taken as
a whole, any indenture or instrument relating to
indebtedness for money borrowed or any agreement to which
the Company is a party or any order, rule, regulation or
decree of any court or governmental agency or authority
located in the United States having jurisdiction over the
Company or any property of the Company; and, to the best
knowledge of the Company, no consent, authorization or order
of, or filing or registration with, any court or
governmental agency or authority is required for the
consummation by the Company of the transactions contemplated
by this Agreement, except the registration under the
Securities Act contemplated hereby, qualification of the
Indenture under the Trust Indenture Act and such consents,
approvals, authorizations, registrations or qualifications
as may be required under state securities or blue sky laws.
(d) This Agreement has been duly authorized, executed
and delivered by the Company.
6. Indemnification.
(a) Indemnification by the Company. In connection
with a Shelf Registration, the Company agrees to indemnify
and hold harmless each of the Holders of Registrable
Securities included in such Shelf Registration and each
person, if any, who controls any such Holder within the
meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act (each, a "Participant"), from
and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a
material fact contained in such Shelf Registration (as
amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any
omission or alleged omission to state therein a material
fact necessary to make the statements therein in the light
of the circumstances under which they were made not
misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon
information furnished to the Company in writing by any
Holder expressly for use therein; provided, however, that,
the indemnity agreement contained in this subsection (a)
shall not inure to the benefit of any Participant on account
of any such losses, claims, damages or liabilities (or
actions in respect thereof) arising from the sale of the
Registrable Securities by or through such Holder to any
person if a copy of the final prospectus as it then may be
amended or supplemented (exclusive of the incorporated
documents) shall not have been given or sent to such person
with or prior to the written confirmation of the sale
involved to the extent that the final prospectus as so
amended or supplemented would have cured the defect in such
document giving rise to such losses, claims, damages or
liabilities.
14
<PAGE>
(b) Indemnification by Participants. Each Participant
agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, its officers and each
person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Participant, but only
with reference to information furnished to the Company in
writing by a Holder or a Holder controlled by such
Participant expressly for use in the Shelf Registration or
any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in
respect of which indemnity may be sought pursuant to Section
6(a) or (b), such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may
be sought (the "indemnifying party") in writing. The
indemnifying party shall be entitled to participate in such
proceeding and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably
satisfactory to the indemnified party and, upon such
assumption, shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding,
any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have
mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and
the indemnified party and representation of both parties by
the same counsel would be inappropriate due to actual or
potential differing interests between them. It is
understood that the indemnifying party shall not, in respect
of the legal expenses of any indemnified party in connection
with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more
than one separate firm (in addition to any local counsel)
for all such indemnified parties and that all such fees and
expenses shall be reimbursed as they are incurred. The
indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. No
indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and
indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all
liability on claims that are the subject matter of such
proceeding.
(d) To the extent the Indemnification provided for in
Section 6(a) or (b) is unavailable to an indemnified party
or insufficient in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying
party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of
such losses, claims, damages or liabilities in such
15
<PAGE>
proportion as is appropriate to reflect both the relative
benefits received by the Company on the one hand and the
Participants on the other hand from the Shelf Registration
and the relative fault of the Company on the one hand and of
the Participants on the other hand in connection with the
statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault of the
Company on the one hand and of the Participants on the other
hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company
or by the Participants and the parties' relative intent,
knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Participants'
respective obligations to contribute pursuant to this
Section 6 are several in proportion to the respective
principal amounts of Registrable Securities they have sold
under the Shelf Registration, and not joint.
(e) The Company and the Participants agree that it
would not be just or equitable if contribution pursuant to
this Section 6 were determined by pro rata allocation (even
if the Participants were treated as one entity for such
purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in
Section 6(d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages and
liabilities referred to in Section 6(d) shall be deemed to
include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the
provisions of this Section 6, no Participant shall be
required to contribute any amount in excess of the amount by
which the total price at which the Registrable Securities
resold by it pursuant to the Shelf Registration exceeds the
amount of any damages that such Participant has otherwise
been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in
this Section 6 are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) The indemnity and contribution provisions
contained in this Section 6 and the representations,
warranties and other statements of the Company contained in
this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement,
or (ii) any investigation made by or on behalf of any Holder
or any participant controlling any Holder or by or on behalf
of the Company, its officers or directors or any person
controlling the Company.
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<PAGE>
7. Rule 144.
The Company covenants to the Holders of Registrable
Securities that the Company shall use its reasonable best efforts
to timely file the reports required to be filed by it under the
Exchange Act or the Securities Act (including the reports under
Section 13 and 15(d) of the Exchange Act referred to in
subparagraph (c)(1) of rule 144 adopted by the Commission under
the Securities Act) and the rules and regulations adopted by the
Commission thereunder, all to the extent required from time to
time to enable such Holder to sell Registrable Securities without
registration under the Securities Act within the limitations of
the exemption provided by Rule 144 under the Securities Act, as
such Rule may be amended from time to time, or any similar or
successor rule or regulation hereafter adopted by the Commission.
Upon the request of any Holder of Registrable Securities in
connection with that Holder's sale pursuant to Rule 144, the
company shall deliver to such Holder a written statement as to
whether it has complied with such requirements.
8. Remedies
The Company agrees that monetary damages (including
Additional Amounts contemplated hereby) would not be adequate
compensation for any loss incurred by reason of a breach by if of
the provisions of this Agreement and hereby agrees to waive the
defense in any action for specific performance that a remedy at
law would be adequate.
9. Miscellaneous.
(a) No Inconsistent Agreements. The Company
represents, warrants, covenants and agrees that is has not
granted, and shall not grant, registration rights with
respect to Registrable Securities which would be
inconsistent with the terms contained in this Agreement.
(b) Notices. All notices, requests, demands, waivers
and other communications required or permitted to be given
under this Agreement shall be in writing and shall be deemed
to have been duly given if (a) delivered personally,
(b) mailed, certified or registered mail with postage
prepaid, (c) sent by next-day or overnight mail or delivery
or (d) sent by telecopy or telegram, as follows:
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<PAGE>
(i) If to the Initial Purchasers:
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Telecopy No.: (212) 761-0781
Attention: Liability Management Group
with a copy to:
Kutak Rock
1650 Farnam Street
Omaha, Nebraska 68102-2186
Telecopy No.: (402) 346-1148
Attention: Curtis L. Christensen, Esq.
(ii) If to the Company at:
Tucson Electric Power Company
220 West Sixth Street
P.O. Box 711
Tucson, Arizona 85702
Telecopy No.: (520) 884-3888
Attention: Mr. Kevin P. Larson
with a copy to:
Thelen Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Telecopy No.: (212) 603-2001
Attention: J. Anthony Terrell, Esq.
or, in each case, at such other address as may be specified in
writing to the other parties hereto.
(c) Parties in Interest. All the terms and provisions
of this Agreement shall be binding upon, shall inure to the
benefit of and shall be enforceable by the respective
successors and assigns of the parties hereto. In the event
that any transferee of any Holder of Registrable Securities
shall acquire Registrable Securities, in any manner, whether
by gift, bequest, purchase, operation of law or otherwise,
such transferee shall, without any further writing or action
of any kind, be deemed a party hereto for all purposes and
such Registrable Securities shall be held subject to all of
the terms of this Agreement, and by taking and holding such
Registrable Securities such transferee shall be entitled to
receive the benefits of, and be conclusively deemed to have
agreed to be bound by and to perform, all of the applicable
terms and provisions of this Agreement.
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<PAGE>
(d) Survival. The respective indemnities, agreements,
representations, warranties and each other provision set
forth in this Agreement or made pursuant hereto shall remain
in full force and effect regardless of any investigation (or
statement as to the results thereof) made by or on behalf of
the Company, any officer, director or agent of the Company,
any Holder of Registrable Securities, any director, officer
or partner of such Holder, any agent or underwriter or any
director, officer or partner thereof, or any controlling
person of any of the foregoing, and shall survive delivery
of and payment for the Registrable Securities pursuant to
the Purchase Agreement and the transfer and registration of
Registrable Securities by such Holder and the consummation
of an Exchange Offer.
(e) LAW GOVERNING. THIS REGISTRATION RIGHTS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAW OF THE STATE OF NEW YORK.
(f) Headings. the descriptive headings of the several
Sections and paragraphs of this Agreement are inserted for
convenience only, do not constitute a part of this Agreement
and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) Entire Agreement: Amendments. This Agreement and
the other writings referred to herein (including the
Indenture) or delivered pursuant hereto which from a part
hereof contain the entire understanding of the parties with
respect to its subject matter. This Agreement supersedes
all prior agreements and understandings between the parties
with respect to its subject matter. This Agreement may be
amended and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and
either retroactively or prospectively) only by a written
instrument duly executed by the Company and the Holders of
at least a majority in aggregate principal amount of the
Registrable Securities at the time outstanding. Each holder
of any Registrable Securities at the time or thereafter
outstanding shall be bound by any amendment or waiver
effected pursuant to this Section 8(g), whether or not any
notice, writing or marking indicating such amendment or
waiver appears on such Registrable Securities or is
delivered to such Holder.
(h) Inspection. For so long as this Agreement shall
be in effect, this Agreement and a complete list of the
names and addressed of all the Holders of Registrable
Securities shall be made available for inspection and
copying on any business day by any Holder of Registrable
Securities for proper purposes only (which shall include any
purpose related to the rights of the Holders of Registrable
Securities under the Securities, the Indenture and this
Agreement) at the offices of the Company at the address
thereof set forth in Section 8(b) above, or at the office of
the Trustee under the Indenture.
19
<PAGE>
(i) Counterparts. This Agreement may be executed by
the parties in counterparts, each of which shall be deemed
to be an original, but all such respective counterparts
shall together constitute one and the same instrument.
Agreed to and accepted as of the date referred to above.
TUCSON ELECTRIC POWER COMPANY
By: /s/ Kevin P. Larson
-------------------------------------
Name: Kevin P. Larson
Title: Vice President and Treasurer
Morgan Stanley & Co. Incorporated
TD Securities (USA) Inc.
Prudential Securities Incorporated
Salomon Brothers Inc
BNY Capital Markets Inc.
Acting severally on behalf of themselves
and the several Initial Purchasers
By: MORGAN STANLEY & CO. INCORPORATED
By: /s/ Harold Hendershot III
-------------------------------------
Name:
Title:
20
<PAGE>
Exhibit 4(e)
Form of
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE
ALL OUTSTANDING FIRST COLLATERAL TRUST BONDS,
7 1/2% SERIES A DUE 2008
FOR
FIRST COLLATERAL TRUST BONDS,
7 1/2% SERIES B DUE 2008
OF
TUCSON ELECTRIC POWER COMPANY
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON OCTOBER , 1998
UNLESS EXTENDED (THE "EXPIRATION DATE").
Deliver To:
Bank of Montreal Trust Company, Exchange Agent
By Registered or By Facsimile: By Hand or Overnight
Certified Mail: (212) 701-7636 Courier:
Wall Street Station (212) 701-7637 Wall Street Plaza
P.O. Box 1010 Confirm by 88 Pine Street, 19th
New York, NY 10268- Telephone: Floor
1010 (212) 701-7624 New York, NY 10005
Attn: Reorganization Attn: Reorganization
Department Department
Delivery of this instrument to an address other than as set forth
above or transmission of instructions via a facsimile number
other than the one listed above will not constitute a valid
delivery. The instructions accompanying this Letter of
Transmittal should be read carefully before this Letter of
Transmittal is completed.
The undersigned acknowledges that he or she has received and
reviewed the Prospectus dated October , 1998 (the
----
"Prospectus") of Tucson Electric Power Company (the "Issuer") and
this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute (i) the Issuer's offer (the "Exchange Offer")
to exchange its outstanding First Collateral Trust Bonds, 7 1/2%
Series A Due 2008 (the "Old Bonds"), of which an aggregate of
$140,000,000 in principal amount is outstanding as of the date
hereof, for an equal principal amount of newly issued First
Collateral Trust Bonds, 7 1/2% Series B Due 2008 (the "New
Bonds"). The New Bonds have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which the Prospectus is a part. Old
Bonds may be tendered only in integral multiples of $1,000.
Other capitalized terms used but not defined herein have the
meaning given to them in the Prospectus.
This Letter of Transmittal is to be completed by a Holder of
Old Bonds either if certificates are to be forwarded herewith or
if a tender of certificates for Old Bonds, if available, is to be
made by book-entry transfer to the account maintained by the
Exchange Agent at the Depository Trust Company ("DTC") pursuant
to the procedures set forth in "The Exchange Offer--Book-Entry
Transfer" section of the Prospectus. Holders of Old Bonds whose
certificates are not immediately available, or who are unable to
deliver their certificates or confirmation of the book-entry
tender of their Old Bonds into the Exchange Agent's account at
DTC (a "Book-Entry Confirmation") and all other documents
required by this Letter of Transmittal to the Exchange Agent on
or prior to the Expiration Date, must tender their Old Bonds
according to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus. See Instruction 1. Delivery of Documents to the DTC
does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means
any person in whose name Old Bonds are registered on the books of
the Issuer or any other person who has obtained a properly
completed bond power from the registered Holder. The undersigned
has completed, executed and delivered this Letter of Transmittal
to indicate the action the undersigned desires to take with
respect to the Exchange Offer. Holders who wish to tender their
Old Bonds must complete this letter in its entirety.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOX
DESCRIPTION OF OLD BONDS
PRINCIPAL
AMOUNT
NAMES AND ADDRESS(ES) AGGREGATE TENDERED
OF PRINCIPAL (MUST BE IN
REGISTERED HOLDERS AMOUNT INTEGRAL
(PLEASE FILL IN, IF CERTIFICATE REPRESENTED BY MULTIPLES OF
BLANK) NUMBER(S) CERTIFICATE(S) $1,000)*
TOTAL
* Unless indicated in the column labeled "Principal Amount
Tendered," any tendering Holder of Old Bonds will be deemed
to have tendered the entire aggregate principal amount
represented by the column labeled "Aggregate Principal
Amount Represented by Certificate(s)."
If the space provided above is inadequate, list the
certificate numbers and principal amounts on a separate
signed schedule and affix the list to this Letter of
Transmittal.
The minimum permitted tender is $1,000 in principal amount
of Old Bonds. All other tenders must be in integral
multiples of $1,000.
[ ] CHECK HERE IF TENDERED OLD BONDS ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED OLD BONDS ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE
EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING (FOR USE
BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED) ONLY):
Name of Tendering Institution
------------------------------
Account Number
----------------------------------------------
Transaction Code Number
[ ] CHECK HERE IF TENDERED OLD BONDS ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED
HEREWITH AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE
INSTITUTIONS ONLY):
Name(s) of Tendering Institution(s)
-------------------------
Date of Execution of Notice of Guaranteed Delivery
----------
Window Ticket Number (if available)
-------------------------
Name of Institution which Guaranteed Delivery
---------------
Account Number (if delivered by book-entry transfer)
--------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 4, 5 and 6) (See Instructions 4, 5 and 6)
To be completed ONLY (i) if To be completed ONLY if
certificates for Old Bonds certificates for Old Bonds
not tendered, or New Bonds not tendered, or New Bonds
issued in exchange for Old issued in exchange for Old
Bonds accepted for exchange, Bonds accepted for exchange,
are to be issued in the name are to be sent to someone
of someone other than the other than the undersigned,
undersigned, or (ii) if Old or to the undersigned at an
Bonds tendered by book-entry address other than that shown
transfer which are not above.
exchanged are to be returned
by credit to an account Mail to:
maintained at DTC.
Name
Issue certificate(s) to: -------------------------
(Please Print)
Name
------------------------- Address
(Please Print) ----------------------
Address
---------------------- -----------------------------
(Include Zip Code)
-----------------------------
(Include Zip Code)
-----------------------------
(Tax Identification or
----------------------------- Social Security No.)
(Tax Identification or
Social Security No.)
Credit Old Bonds not
exchanged and delivered by
book-entry transfer to the
DTC account set forth below:
-----------------------------
DTC Account Number
<PAGE>
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer,
the undersigned hereby tenders to the Issuer the principal amount
of Old Bonds indicated above. Subject to and effective upon the
acceptance for exchange of the principal amount of Old Bonds
tendered in accordance with this Letter of Transmittal, the
undersigned sells, assigns and transfers to, or upon the order
of, the Issuer all right, title and interest in and to the Old
Bonds tendered hereby. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent
also acts as the agent of the Issuer) with respect to the
tendered Old Bonds with full power of substitution to (i) deliver
certificates for such Old Bonds, or transfer ownership of such
Old Bonds on the account books maintained by DTC, to the Issuer
and deliver all accompanying evidences of transfer and
authenticity to, or upon the order of, the Issuer and
(ii) present such Old Bonds for transfer on the books of the
Issuer and receive all benefits and otherwise exercise all rights
of beneficial ownership of such Old Bonds, all in accordance with
the terms of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed to be irrevocable and coupled
with an interest.
The undersigned hereby represents and warrants that he or
she has full power and authority to tender, sell, assign and
transfer the Old Bonds tendered hereby and that the Issuer will
acquire good and unencumbered title thereto, free and clear of
all liens, restrictions, charges and encumbrances and not subject
to any adverse claim, when the same are acquired by the Issuer.
The undersigned hereby further represents that (i) any New Bonds
acquired in exchange for Old Bonds tendered hereby will have been
acquired in the ordinary course of business of the person
receiving such New Bonds, whether or not the undersigned, (ii)
neither the undersigned nor any such other person is engaging in
or intends to engage in a distribution of the New Bonds, (iii)
neither the Holder nor any such other person has an arrangement
or understanding with any person to participate in the
distribution of such New Bonds and (iv) neither the Holder nor
any such other person is an "affiliate," as defined in Rule 405
under the Securities Act, of the Issuer.
The undersigned also acknowledges that this Exchange Offer
is being made in reliance upon interpretations contained in
letters issued to third parties by the staff of the Securities
and Exchange Commission (the "SEC") that the New Bonds issued in
exchange for the Old Bonds pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by Holders
thereof (other than any such Holder that is an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Bonds
are acquired in the ordinary course of such Holders' business and
such Holders are not engaging in and do not intend to engage in a
distribution of the New Bonds and have no arrangement or
understanding with any person to participate in distribution of
such New Bonds. If the undersigned is not a broker-dealer, the
undersigned represents that it is not engaged in, and does not
intend to engage in, a distribution of New Bonds. If the
undersigned is a broker-dealer that will receive New Bonds for
its own account in exchange for Old Bonds that were acquired as a
result of market-making activities or other trading activities,
it acknowledges that it will deliver a prospectus in connection
with any resale of such New Bonds; however, by so acknowledging
and by delivering a prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The undersigned will, upon request, execute and deliver any
additional documents deemed by the Exchange Agent or the Issuer
to be necessary or desirable to complete the assignment, transfer
and purchase of the Old Bonds tendered hereby.
For purposes of the Exchange Offer, the Issuer shall be
deemed to have accepted validly tendered Old Bonds when, as and
if the Issuer has given oral or written notice thereof to the
Exchange Agent.
If any tendered Old Bonds are not accepted for exchange
pursuant to the Exchange Offer for any reason, certificates for
any such unaccepted Old Bonds will be returned, without expense,
to the undersigned at the address shown below or at a different
address as may be indicated herein under "Special Delivery
Instructions" as promptly as practicable after the Expiration
Date.
All authority conferred or agreed to be conferred by this
Letter of Transmittal shall survive the death, incapacity or
dissolution of the undersigned, and every obligation of the
undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives,
successors and assigns.
The undersigned understands that tenders of Old Bonds
pursuant to the procedures described under the caption "The
Exchange Offer--Procedures for Tendering" in the Prospectus and
in the instructions hereto will constitute a binding agreement
between the undersigned and the Issuer upon the terms and subject
to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance
Instructions," please issue the certificates representing the New
Bonds issued in exchange for the Old Bonds accepted for exchange
and return any Old Bonds not tendered or not exchanged, in the
name(s) of the undersigned. Similarly, unless otherwise indicated
under "Special Delivery Instructions," please send the
certificates representing the New Bonds issued in exchange for
the Old Bonds accepted for exchange and any certificates for Old
Bonds not tendered or not exchanged (and accompanying documents,
as appropriate) to the undersigned at the address shown below the
undersigned's signature(s). In the event that both "Special
Payment Instructions" and "Special Delivery Instructions" are
completed, please issue the certificates representing the New
Bonds issued in exchange for the Old Bonds accepted for exchange
in the name(s) of, and return any Old Bonds not tendered or not
exchanged and send said certificates to, the person(s) so
indicated. The undersigned recognizes that the Issuer has no
obligation pursuant to the "Special Payment Instructions" and
"Special Delivery Instructions" to transfer any Old Bonds from
the name of the registered Holder(s) thereof if the Issuer does
not accept for exchange any of the Old Bonds so tendered.
Holders of Old Bonds who wish to tender their Old Bonds and
(i) whose Old Bonds are not immediately available, or (ii) who
cannot deliver their Old Bonds, this Letter of Transmittal or any
other documents required hereby to the Exchange Agent prior to
the Expiration Date (or who cannot comply with the book-entry
transfer procedure on a timely basis), may tender their Old Bonds
according to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offers--Guaranteed
Delivery Procedures." See Instruction 1 regarding the completion
of this Letter of Transmittal, printed below.
<PAGE>
PLEASE SIGN HERE WHETHER OR NOT
OLD BONDS ARE BEING PHYSICALLY TENDERED HEREBY
X
----------------------------- ------------------------------
Date
X ------------------------------
----------------------------- Date
Signature(s) of Registered
Holder(s) or Authorized Signatory
Area Code and
Telephone Number:
-----------
The above lines must be signed by the registered Holder(s)
of Old Bonds as their name(s) appear(s) on the Old Bonds or by
person(s) authorized to become registered Holder(s) by a properly
completed bond power from the registered Holder(s), a copy of
which must be transmitted with this Letter of Transmittal. If
Old Bonds to which this Letter of Transmittal relate are held of
record by two or more joint Holders, then all such Holders must
sign this Letter of Transmittal. If signature is by trustee,
executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or
representative capacity, then such person must (i) set forth his
or her full title below and (ii) unless waived by the Issuer,
submit evidence satisfactory to the Issuer of such person's
authority so to act. See Instruction 4 regarding the completion
of this Letter of Transmittal, printed below.
Name(s):
---------------------------------------------------------
-----------------------------------------------------------------
(Please Print)
Capacity:
--------------------------------------------------------
Address:
---------------------------------------------------------
-----------------------------------------------------------------
(Include Zip Code)
Signature(s) Guaranteed by an Eligible Institution (as
hereinafter defined):
(If required by Instruction 4)
-------------------------------------------------------
(Authorized Signature)
-------------------------------------------------------
(Title)
-------------------------------------------------------
(Name of Firm)
Dated: , 1998
-----------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD BONDS.
The tendered Old Bonds or any confirmation of a book-entry
transfer (a "Book-Entry Confirmation"), as well as a properly
completed and duly executed copy of this Letter of Transmittal or
facsimile hereof and any other documents required by this Letter
of Transmittal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. The method of delivery of the tendered
Old Bonds, this Letter of Transmittal and all other required
documents to the Exchange Agent is at the election and risk of
the Holder and, except as otherwise provided below, the delivery
will be deemed made only when actually received or confirmed by
the Exchange Agent. Instead of delivery by mail, it is
recommended that the Holder use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to
assure delivery to the Exchange Agent before the Expiration Date.
No Letter of Transmittal or Old Bonds should be sent to the
Issuer.
Holders who wish to tender their Old Bonds and (i) whose Old
Bonds are not immediately available, or (ii) who cannot deliver
their Old Bonds, this Letter of Transmittal or any other
documents required hereby to the Exchange Agent prior to the
Expiration Date or (iii) who are unable to complete the procedure
for book-entry transfer on a timely basis, must tender their Old
Bonds according to the guaranteed delivery procedures set forth
in the Prospectus. Pursuant to such procedure: (i) such tender
must be made by or through an Eligible Institution (as
hereinafter defined); (ii) prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a
properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old
Bonds, the certificate number or numbers of such Old Bonds and
the principal amount of Old Bonds tendered, stating that the
tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date,
this Letter of Transmittal (or facsimile hereof) together with
the certificate(s) representing the Old Bonds (or a Book-Entry
Confirmation) and any other required documents will be deposited
by the Eligible Institution with the Exchange Agent; and (iii)
such properly completed and executed Letter of Transmittal (or
facsimile hereof), as well as all other documents required by
this Letter of Transmittal and the certificates(s) representing
all tendered Old Bonds (or a Book-Entry Confirmation) in proper
form for transfer, must be received by the Exchange Agent within
five New York Stock Exchange trading days after the Expiration
Date, all as provided in the Prospectus under the caption "The
Exchange Offers--Guaranteed Delivery Procedures." Any Holder of
Old Bonds who wishes to tender his or her Old Bonds pursuant to
the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed
Delivery prior to 5:00 p.m., New York City time, on the
Expiration Date. Upon request of the Exchange Agent, a Notice of
Guaranteed Delivery will be sent to Holders who wish to tender
their Old Bonds according to the guaranteed delivery procedures
set forth above.
All questions as to the validity, form, eligibility
(including time of receipt), acceptance of tendered Old Bonds and
withdrawal of tendered Old Bonds will be determined by the Issuer
in its sole discretion, which determination will be final and
binding. The Issuer reserves the absolute right to reject any
and all Old Bonds not properly tendered or any Old Bonds the
Issuer's acceptance of which would, in the opinion of counsel for
the Issuer, be unlawful. The Issuer also reserves the right to
waive any irregularities or conditions of tender as to particular
Old Bonds. The Issuer's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in
this Letter of Transmittal) shall be final and binding on all
parties. Unless waived, any defects or irregularities in
connection with tenders of Old Bonds must be cured within such
time as the Issuer shall determine. Neither the Issuer, the
Exchange Agent nor any other person shall be under any duty to
give notification of defects or irregularities with respect to
tenders of Old Bonds, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Bonds will
not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Bonds received
by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering Holders
of Old Bonds, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration
Date.
2. TENDER BY HOLDER. Only a Holder of Old Bonds may
tender such Old Bonds in the Exchange Offer. Any beneficial
Holder of Old Bonds who is not the registered Holder and who
wishes to tender should arrange with the registered Holder to
execute and deliver this Letter of Transmittal on his behalf or
must, prior to completing and executing this Letter of
Transmittal and delivering his Old Bonds, either make appropriate
arrangements to register ownership of the Old Bonds in such
Holder's name or obtain a properly completed bond power from the
registered Holder.
3. PARTIAL TENDERS. Tenders of Old Bonds will be accepted
only in integral multiples of $1,000. If less than the entire
principal amount of any Old Bonds is tendered, the tendering
Holder should fill in the principal amount tendered in the third
column of the box entitled "Description of Old Bonds" above. The
entire principal amount of Old Bonds delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise
indicated. If the entire principal amount of all Old Bonds is
not tendered, then Old Bonds for the principal amount of Old
Bonds not tendered and a certificate or certificates representing
New Bonds issued in exchange for any Old Bonds accepted will be
sent to the Holder at his or her registered address, unless a
different address is provided in the appropriate box on this
Letter of Transmittal, promptly after the Old Bonds are accepted
for exchange.
4. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS
AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of
Transmittal (or facsimile hereof) is signed by the registered
Holder(s) of the Old Bonds tendered hereby, the signature must
correspond with the name(s) as written on the face of the Old
Bonds without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile hereof) is
signed by the registered Holder or Holders of Old Bonds tendered
and the certificate or certificates for New Bonds issued in
exchange therefor is to be issued (or any untendered principal
amount of Old Bonds is to be reissued) to the registered Holder,
the said Holder need not and should not endorse any tendered Old
Bonds, nor provide a separate bond power. In any other case,
such Holder must either properly endorse the Old Bonds tendered
or transmit a properly completed separate bond power with this
Letter of Transmittal, with the signatures on the endorsement or
bond power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is
signed by a person other than the registered Holder or Holders of
any Old Bonds listed, such Old Bonds must be endorsed or
accompanied by appropriate bond powers, in each case signed as
the name of the registered Holder or Holders appears on the Old
Bonds.
If this Letter of Transmittal (or facsimile hereof) or any
Old Bonds or bond powers are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, or officers of
corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and,
unless waived by the Issuer, evidence satisfactory to the Issuer
of their authority so to act must be submitted with this Letter
of Transmittal.
Endorsements on Old Bonds or signatures on bond powers
required by this Instruction 4 must be guaranteed by an Eligible
Institution.
Except as otherwise provided below, all signatures on this
Letter of Transmittal must be guaranteed by a participant in a
Recognized Signature Guarantee Medallion Program (an "Eligible
Institution"). Signatures on this Letter of Transmittal need not
be guaranteed if (a) this Letter of Transmittal is signed by the
registered Holder(s) of the Old Bonds tendered herewith and such
Holder(s) have not completed the box set forth herein entitled
"Special Payment Instructions" or the box entitled "Special
Delivery Instructions," or (b) if such Old Bonds are tendered for
the account of an Eligible Institution.
5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering
Holders should indicate, in the applicable box or boxes, the name
and address to which New Bonds or substitute Old Bonds for
principal amounts not tendered or not accepted for exchange are
to be issued or sent, if different from the name and address of
the person signing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or
social security number of the person named must also be
indicated.
6. TRANSFER TAXES. The Issuer will pay all transfer
taxes, if any, applicable to the exchange of Old Bonds pursuant
to the Exchange Offer. If, however, certificates representing
New Bonds or Old Bonds for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the
registered Holder of the Old Bonds tendered hereby, or if
tendered Old Bonds are registered in the name of any person other
than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of
Old Bonds pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered Holder or
on any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with this Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such
tendering Holder.
Except as provided in this Instruction 6, it will not be
necessary for transfer tax stamps to be affixed to the Old Bonds
listed in this Letter of Transmittal.
7. WAIVER OF CONDITIONS. The Issuer reserves the absolute
right to amend, waive or modify specified conditions in the
Exchange Offer in the case of any Old Bonds tendered.
8. MUTILATED, LOST, STOLEN OR DESTROYED OLD BONDS. Any
tendering Holder whose Old Bonds have been mutilated, lost,
stolen or destroyed should contact the Exchange Agent at the
address indicated herein for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions and requests for assistance and requests for additional
copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at (212) 701-7624. Holders may
also contact their broker, dealer, commercial bank, trust company
or other nominee for assistance concerning the Exchange Offer.
(DO NOT WRITE IN SPACE BELOW)
==================================
CERTIFICATE OLD BONDS OLD BONDS
SURRENDERED TENDERED ACCEPTED
==================================
Delivery Prepared by Checked By Date
------------ ---------- ------
<PAGE>
NOTICE OF GUARANTEED DELIVERY FOR
TUCSON ELECTRIC POWER COMPANY
This form or one substantially equivalent hereto must be
used to accept the Exchange Offer of Tucson Electric Power
Company (the "Issuer") made pursuant to the Prospectus, dated
, 1998 (the "Prospectus"), if certificates for Old
--------------
Bonds of the Issuer are not immediately available or if the
procedure for book-entry transfer cannot be completed on a timely
basis or time will not permit all required documents to reach the
Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date of the Exchange Offer. Such form may be
delivered or transmitted by telegram, telex, facsimile
transmission, mail or hand delivery to Bank of Montreal Trust
Company (the "Exchange Agent") as set forth below. In addition,
in order to utilize the guaranteed delivery procedure to tender
Old Bonds pursuant to the Exchange Offer, a completed, signed and
dated Letter of Transmittal (or facsimile thereof) must also be
received by the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. Capitalized terms not defined
herein are defined in the Prospectus.
Deliver To:
Bank of Montreal Trust Company, Exchange Agent
By Registered or By Facsimile: By Hand or Overnight
Certified Mail: (212) 701-7636 Courier:
Wall Street Station (212) 701-7637 Wall Street Plaza
P.O. Box 1010 Confirm by 88 Pine Street, 19th
New York, NY 10268- Telephone: Floor
1010 (212) 701-7624 New York, NY 10005
Attn: Reorganization Attn: Reorganization
Department Department
Delivery of this instrument to an address other than as set
forth above, or transmission of instructions via facsimile other
than as set forth above, will not constitute a valid delivery.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus
and the accompanying Letter of Transmittal, the undersigned
hereby tenders to the Issuer the principal amount at maturity of
Old Bonds set forth below, pursuant to the guaranteed delivery
procedure described in "The Exchange Offers--Guaranteed Delivery
Procedures" section of the Prospectus. By so tendering, the
undersigned hereby does make, at and as of the date hereof, the
representations and warranties of a tendering Holder of Old Bonds
set forth in the Letter of Transmittal.
Principal Amount of Old Bonds If Old Bonds will be delivered
Tendered: by book-entry transfer to
Depository Trust Company,
$ provide account number.
-----------------------------
Certificate Nos. (if
available):
------------------------------
Total Principal Amount
Represented by Old Bonds
Certificate(s):
Account Number
$ ----------------
-----------------------------
-----------------------------------------------------------------
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED
SHALL SURVIVE THE DEATH OR INCAPACITY OF THE UNDERSIGNED AND
EVERY OBLIGATION OF THE UNDERSIGNED HEREUNDER SHALL BE BINDING
UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS
OF THE UNDERSIGNED.
-----------------------------------------------------------------
PLEASE SIGN HERE
X
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X
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Signatures of Owner(s) Date
or Authorized Signatory
Area Code and Telephone
Number:
------------------
Must be signed by the Holder(s) of Old Bonds as their
name(s) appear(s) on certificates for Old Bonds or on a security
position listing, or by person(s) authorized to become registered
Holder(s) by endorsement and documents transmitted with this
Notice of Guaranteed Delivery. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity,
such person must set forth his or her full title below.
Please print name(s) and address(es)
Name(s):
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Capacity:
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Address:
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GUARANTEE
The undersigned, a member of a registered national
securities exchange, or a member of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company
having an officer or correspondent in the United States, hereby
guarantees that the certificates representing the principal
amount of Old Bonds tendered hereby in proper form or transfer,
or timely confirmation of the book-entry transfer of such Old
Bonds into the Exchange Agent's account at Depository Trust
Company pursuant to the procedures set forth in "The Exchange
Offers--Guaranteed Delivery Procedures" section of the
Prospectus, together with a properly completed and duly executed
Letter of Transmittal (or a manually signed facsimile thereof)
with any required signature guarantee and any other documents
required by the Letter of Transmittal, will be received by the
Exchange Agent at the address set forth above, no later than five
New York Stock Exchange trading days after the date of execution
hereof.
------------------------------- -------------------------------
Name of Firm Authorized Signature
------------------------------- -------------------------------
Address Title
------------------------------- Name:
Zip Code -------------------------
(Please Type or Print)
Area Code and Tel. No. Dated:
------- ------------------------
NOTE: DO NOT SEND CERTIFICATES FOR OLD BONDS WITH THIS FORM.
CERTIFICATES FOR OLD BONDS SHOULD ONLY BE SENT WITH YOUR LETTER
OF TRANSMITTAL.
Exhibit 5(a)
New York, New York
September 30, 1998
Tucson Electric Power Company
220 West Sixth Street
Tucson, Arizona 85701
Ladies and Gentlemen:
I am Vice President, General Counsel and Corporate
Secretary of Tucson Electric Power Company (the "Company"), and
have acted as such in connection with the filing by the Company
of a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the
"Act"), relating to the registration of $140,000,000 in aggregate
principal amount of First Collateral Trust Bonds, 7 1/2% Series B
Due 2008 (the "Bonds") in connection with an offer by the Company
to exchange the Bonds for any and all outstanding First
Collateral Trust Bonds, 7 1/2% Series A Due 2008, of which an
aggregate of $140,000,000 in principal amount is outstanding, as
described in the Registration Statement.
Subject to the qualifications hereinafter expressed, I
am of the opinion that the Bonds, when issued and sold as
contemplated in the Registration Statement, will be legally
issued and will be binding obligations of the Company.
As a member of the Bar of the State of Arizona, I do
not hold myself out as an expert on the laws of other
jurisdictions other than the laws of the United States. In
giving the foregoing opinion, I have relied as to matters
governed by New York law, the Federal Power Act, as amended, the
Public Utility Holding Company Act of 1935, as amended, and the
Trust Indenture Act of 1939, as amended, upon the opinion of even
date herewith rendered to you by Thelen Reid & Priest LLP.
<PAGE>
I hereby consent to the filing of this opinion with the
Securities and Exchange Commission as Exhibit 5(a) to the
Registration Statement and to the references to me under the
headings "Legal Matters" and "Experts" in the Prospectus which is
a part of the Registration Statement. In giving the foregoing
consent, I do not thereby admit that I belong to the category of
persons whose consent is required under Section 7 of the Act, or
the rules and regulations promulgated by the Securities and
Exchange Commission thereunder, except with respect to the
statements prepared or reviewed by me as indicated under the
headings "Legal Matters" and Experts" in the Prospectus.
Very truly yours,
/s/ Dennis R. Nelson
DENNIS R. NELSON
Vice President, General
Counsel and Secretary
Exhibit 5(b) & 8
New York, New York
September 30, 1998
Tucson Electric Power Company
220 West Sixth Street
Tucson, Arizona 85701
Ladies and Gentlemen:
We are acting as counsel to Tucson Electric Power
Company, an Arizona corporation (the "Company"), in connection
with the filing by the Company of a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Act"), relating to the registration of
$140,000,000 in aggregate principal amount of First Collateral
Trust Bonds, 7 1/2% Series B Due 2008 (the "Bonds"), in
connection with an offer by the Company to exchange the Bonds for
any and all outstanding First Collateral Trust Bonds, 7 1/2%
Series A Due 2008, of which an aggregate of $140,000,000 in
principal amount is outstanding, all as described in the
Registration Statement.
Subject to the qualifications hereinafter expressed, we
are of the opinion that the Bonds, when issued and sold as
contemplated in the Registration Statement, will be legally
issued and will be binding obligations of the Company.
We are further of the opinion that the information
contained in the Registration Statement under the caption "CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS" constitutes an
accurate description, in general terms, of the indicated federal
income tax consequences to holders of the Bonds of the exchange
offer contemplated in the Registration Statement.
As members of the New York bar, we do not hold
ourselves out as experts of the laws of other states. To the
extent the opinions expressed are dependent upon matters governed
by the law of the State of Arizona, we have relied, with your
consent, upon the opinion of even date herewith rendered to you
by Dennis R. Nelson, Esq.
We hereby consent to the filing of this opinion with
the Securities and Exchange Commission as Exhibits 5(b) and 8 to
the Registration Statement and to the references to our firm
contained therein. In giving the foregoing consent, we do
not thereby admit that we belong to the category of persons whose
consent is required under Section 7 of the Act, or the rules and
regulations promulgated by the Securities and Exchange Commission
thereunder, except with respect to the statements prepared or
reviewed by us as indicated under "EXPERTS" in the Registration
Statement.
Very truly yours,
/s/ Thelen Reid & Priest LLP
THELEN REID & PRIEST LLP
Exhibit 15(a)
Deloitte & Suite 205 Telephone: (520) 745-6300
Touche LLP 333 North Wilmot Road
Tucson, Arizona Facsimile: (520) 750-9916
85711-2636
Tucson Electric Power Company
220 West Sixth Street
Tucson, Arizona 85701
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of the
unaudited interim financial information of Tucson Electric Power
Company and subsidiaries (the Company) for the periods ended
March 31, 1997 and June 30, 1997 as indicated in our reports
dated February 23, 1998; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our reports referred to above, which were
included in your Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998 and June 30, 1998, are incorporated by
reference in this Registration Statement of the Company on Form
S-4.
We also are aware that the aforementioned reports, pursuant to
Rule 436(c) under the Securities Act of 1933, are not considered
a part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
September 29, 1998
-------------------
Deloitte Touche
Tohmatsu
International
-------------------
Exhibit 15 (b)
September 29, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Tucson Electric Power Company has included our
reports dated May 5, 1998 and August 4, 1998 (issued pursuant to
the provisions of Statement on Auditing Standards No. 71) in the
Prospectus constituting part of its Registration Statement on
Form S-4 to be filed on or about September 30, 1998. We are also
aware of our responsibilities under the Securities Act of 1933.
Yours very truly,
/s/ PricewaterhouseCoopers LLP
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration
Statement of Tucson Electric Power Company on Form S-4 of our
report dated February 23, 1998, appearing in the Annual Report on
Form 10-K of Tucson Electric Power Company, as amended by Form
10K/A, dated March 5, 1998, for the year ended December 31, 1997
and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
Tucson, Arizona
September 29, 1998
Exhibit 23(c)
CONSENT OF COUNSEL
We have reviewed the statements which are or refer to statements
of law and legal conclusions made in this Registration Statement
on Form S-4, under Description of the Indenture -- "Security",
Description of the 1941 Mortgage - "Security" and
Description of the 1992 Mortgage - "Security", and we hereby
consent to the reference to us under the heading "Experts" in the
Prospectus, which is a part of this Registration Statement.
/s/ Snell & Wilmer LLP
SNELL & WILMER L.L.P.
September 30, 1998
Phoenix, Arizona
Exhibit 23(d)
CONSENT OF COUNSEL
We have reviewed this Registration Statement on Form S-4,
including the statements made under Description of the Indenture
-- "Security", Description of the 1941 Mortgage - "Security" and
Description of the 1992 Mortgage - "Security", and we hereby
consent to the references to us under the headings Legal Matters
and Experts in the Prospectus, which is a part of this
Registration Statement.
/s/ Rodey, Dickason, Sloan, Akin & Robb, P.A.
RODEY, DICKASON, SLOAN, AKIN & ROBB, P.A.
September 30, 1998
Albuquerque, New Mexico
Exhibit 25
=================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility of a trustee
Pursuant to Section 305(b)
------
BANK OF MONTREAL TRUST COMPANY
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
New York 13-4941093
(JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION IDENTIFICATION NO.)
IF NOT A US NATIONAL BANK)
Wall Street Plaza, 10005
88 Pine Street (ZIP CODE)
New York, New York
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
Mark F. McLaughlin
Bank of Montreal Trust Company
Wall Street Plaza, 88 Pine Street, New York, NY 10005
(212) 701-7602
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
-------------------------
Tucson Electric Power Company
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
Arizona 86-0062700
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION
220 West Sixth Street
Tucson, Arizona 85701
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
-------------------------
FIRST COLLATERAL TRUST BONDS
7 1/2% SERIES "A" DUE 2008
(TITLE OF THE INDENTURE SECURITIES)
=================================================================
<PAGE>
- 2 -
ITEM 1. GENERAL INFORMATION.
-------------------
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
Federal Reserve Bank of New York
33 Liberty Street, New York NY 10045
State of New York Banking Department
2 Rector Street, New York, NY 10006
(b) Whether it is authorized to exercise corporate
trust powers.
The Trustee is authorized to exercise corporate
trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
-----------------------------
If the obligor is an affiliate of the trustee, describe
each such affiliation.
The obligor is not an affiliate of the trustee.
ITEM 16. LIST OF EXHIBITS.
-----------------
List below all exhibits filed as part of this statement
of eligibility.
1. Copy of Organization Certificate of Bank of
Montreal Trust Company to transact business and
exercise corporate trust powers; incorporated
herein by reference as Exhibit "A" filed with Form
T-1 Statement, Registration No. 33-46118.
2. Copy of the existing By-Laws of Bank of Montreal
Trust Company; incorporated herein by reference as
Exhibit "B" filed with Form T-1 Statement,
Registration No. 33-80928.
3. The consent of the Trustee required by Section
31(b) of the Act; incorporated herein by reference
as Exhibit "C" with Form T-1 Statement,
Registration No. 33-46118.
4. A copy of the latest report of condition of Bank
of Montreal Trust Company published pursuant to
law or the requirements of its supervising or
examining authority, attached hereto as
Exhibit "D".
SIGNATURE
Pursuant to the requirements of the Trust
Indenture Act of1939 the Trustee, Bank of Montreal
Trust Company, a corporation organized and existing
under the laws of the State of New York, has duly
caused this statement of eligibility to be signed on
its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of
New York, on the 1st day of September, 1998.
BANK OF MONTREAL TRUST COMPANY
By /s/ Therese Gaballah
--------------------------
Therese Gaballah
Vice President & Trust
Officer
EXHIBIT "D"
STATEMENT OF CONDITION
BANK OF MONTREAL TRUST COMPANY
NEW YORK
_________________________________
ASSETS
Due From Banks $ 677,400
-------------
Investment Securities:
State & Municipal 16,513,582
Other 100
-------------
TOTAL SECURITIES 16,513,682
Loans and Advances
Federal Funds Sold 20,900,000
Overdrafts 12,169
-------------
TOTAL LOANS AND ADVANCES 20,912,169
Investment in Harris Trust, NY 8,725,608
Premises and Equipment 475,614
Other Assets 2,636,845
-------------
11,838,067
-------------
TOTAL ASSETS $49,941,318
=============
LIABILITIES
Trust Deposits $ 8,191,549
Other Liabilities 16,944,443
-------------
TOTAL LIABILITIES 25,135,992
CAPITAL ACCOUNTS
Capital Stock, Authorized, Issued and 1,000,000
Fully Paid - 10,000 Shares of $100
Each
Surplus 4,222,188
Retained Earnings 19,605,350
Equity - Municipal Gain/Loss (22,212)
-------------
TOTAL CAPITAL ACCOUNTS 24,805,326
-------------
TOTAL LIABILITIES $49,941,318
AND CAPITAL ACCOUNTS =============
I, Mark F. McLaughlin, Vice President, of the above-named
bank do hereby declare that this Report of Condition is true and
correct to the best of my knowledge and belief.
Mark F. McLaughlin
June 30, 1998
We, the undersigned directors, attest to the correctness of
this statement of resources and liabilities. We declared that it
has been examined by us, and to the best of our knowledge and
belief has been prepared in conformance with the instructions and
is true and correct.
Sanjiv Tandon
Kevin O. Healy
Steven R. Rothbloom
