UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): August 18, 1998
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification Number
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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
<PAGE>
Item 5. Other Events
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TEP Files Divestiture Plan With ACC
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On August 21, 1998, Tucson Electric Power Company (TEP)
filed a plan for stranded cost recovery (Plan) with the Arizona
Corporation Commission (ACC). The Plan was filed in response to
the ACC order adopted on June 22, 1998, requiring Arizona
utilities to choose from two options for stranded cost recovery
resulting from the implementation of retail electric competition.
The options outlined in the ACC order were: (1) a
Divestiture/Auction Methodology, which provided the opportunity
for 100% recovery of stranded costs and (2) a Transition Revenues
Methodology, which would provide an unspecified level of revenues
sufficient to maintain the affected utility's financial
integrity. TEP expects the ACC to make a decision and to issue a
final order regarding its stranded cost recovery plan by year-end
1998.
Under the Plan, TEP would seek to divest all of its
generating assets and associated property. TEP owns, leases or
co-owns 1,895 MW of generating capacity at five fossil-fueled
power plants in Arizona and New Mexico. Of that total, 1,182 MW
are TEP-operated facilities, including the Springerville
Generating Station and the Irvington Generating Station. The net
book value of TEP's generating plant assets was approximately
$1.3 billion at December 31, 1997.
In its filing with the ACC, TEP estimated its stranded costs
may range from $600 million to $1.1 billion. The amount of
stranded costs is the difference between the value of generation
assets under traditional regulation, and their market value
determined through an auction process. Stranded costs would
include regulatory assets, reasonable costs incurred for
premiums, penalties, and/or other payments necessary to implement
divestiture. Reasonable employee severance and retraining costs
necessitated by competition would also be included in the total
stranded cost figure. Under the ACC order and the Plan, TEP
would recover stranded costs and a return on any unamortized
balance over a ten-year period ending December 31, 2008.
TEP's leveraged leases relating to generating assets are not
terminable or assignable except under limited circumstances. TEP
will seek to negotiate the termination of such leases. TEP
expects that substantial cash payments to lease participants
would be required in connection with any such terminations. In
order to complete divestiture of both owned and leased assets,
TEP also expects to be required to make cash payments to various
creditors and other parties. In addition, a substantial portion
of the generating assets have been financed through tax-exempt
bonds as "facilities for the local furnishing of electric
energy". TEP expects that such bonds would need to be redeemed
as a result of the divestiture.
TEP expects that cash payments required to effect
divestiture will exceed the proceeds of the sale of owned assets.
Under the Plan, TEP requested approval to finance the cash
requirements described above through a "securitization" of the
competitive transition charge (CTC) described below.
Conditions to Divestiture
As a condition to its election to divest its generating
assets, TEP will require from the ACC an order that provides,
among other things, the following:
(1) Approval of TEP's proposed auction process;
(2) An interim mechanism for recovery of stranded costs relating
to the period between the implementation of retail electric
competition (January 1, 1999) and completion of divestiture (no
later than January 1, 2001);
(3) A definitive mechanism for calculation of stranded costs
based on the market value of TEP's generating assets, as
determined by divestiture of the assets, along with the approval
of the recovery of costs associated with such divestiture;
(4) A definitive mechanism for full recovery of stranded costs
determined through divestiture, and an alternative mechanism for
full recovery in the event TEP is unable to successfully divest,
in either case supported by findings and orders sufficient to
allow the sale and collateralization of the revenue stream
associated with stranded cost recovery;
(5) The adoption of Rules which insure that a generation
affiliate of a Utility Distribution Company cannot provide
services to a marketing affiliate on more favorable terms than to
any market entrant; and
(6) Modification or waiver of the ACC rules, decisions and
orders which inhibit the ability of TEP to compete effectively in
the retail electric market. These rules include operating and
financial conditions placed on TEP when the ACC authorized the
formation of its parent company, UniSource Energy.
Stranded Cost Recovery Mechanism
TEP's Plan proposes a two step recovery process for recovery
of TEP's stranded costs. Upon the phase-in of competition for
certain customers beginning January 1, 1999, TEP would set an
interim competitive transition charge (ICTC). The ICTC will be
charged to standard offer customers and customers purchasing
energy from competitive suppliers until the completion of
divestiture and determination of TEP's stranded costs. The
proposed ICTC will be the difference between the embedded cost of
generation under traditional ratemaking and a market price for
electric power. TEP has proposed that the ICTC be estimated by
quarter based on forward market prices and trued up based on
actual costs as measured by the Dow Jones Palo Verde Index. The
NYMEX Palo Verde future price would serve as the measure of
market price of electric power at Palo Verde by quarter from
January 1, 1999.
Once actual stranded costs are quantified, recovery of
stranded costs would then be collected over the remaining period
through a CTC. TEP will seek to securitize all or a portion of
this amount by issuing bonds through a special purpose entity.
If the auction of one or more generating units is
unsuccessful, TEP would seek to recover stranded costs relating
to such unit(s) based on a "Net Revenues Lost" approach. Under
that approach, stranded cost is determined based on the net
present value of the annual differences between the expected
revenues under a continuation of regulation and those likely to
be received after the introduction of retail competition.
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TEP Rate Settlement Agreement
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On August 25, 1998, the ACC voted to approve a rate
settlement agreement which provides TEP's retail customers with
base price decreases over the next two years. TEP's base price
will decrease by the following percentages:
-- an initial 1.1% (about $7.0 million) decrease effective July
1, 1998;
-- a second decrease of 1.0% (about $5.5 million) on July 1,
1999; and
-- an additional 1.0% (about $5.5 million) decrease on July 1,
2000.
The latter two decreases will apply to all standard offer
customers who do not have access to retail competition during the
two-year phase-in of the ACC's Electric Competition Rules
beginning January 1, 1999.
The agreement resolves TEP's application for a price
decrease in its Shared Savings Proposal filed with the ACC on
July 9, 1997. The settlement also provides for TEP to mitigate
potentially stranded costs through the accelerated recovery of an
additional $4.3 million of deferred regulatory assets. This
increase in amortization expense will be reflected in TEP's
regulatory accounting records but will have no impact on the
expenses included in its financial statements.
The agreement further affirms an interim accounting order
issued by the ACC in July 1997. That order authorizes TEP to
record a $50 million coal contract termination fee as a deferred
regulatory asset and amortize that asset over approximately 13
years, or $3.8 million per year. As of June 30, 1998, $46.2
million of this regulatory asset remained unamortized. This fee
was incurred when TEP negotiated a new coal contract with the
coal supplier to the Springerville Generating Station which
reduced its annual fuel bill by approximately $10 million
annually.
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Warrant Exchange Offer
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On August 18, 1998, the Company commenced an offer to
exchange any and all outstanding warrants previously issued by
TEP, the principal subsidiary of the Company. The outstanding
TEP Warrants entitle the holder of five warrants to purchase one
share of TEP common stock (not UniSource Energy common stock) for
$16.00. Currently, UniSource Energy owns 100% of the common
stock of TEP and TEP is not publicly traded. For each TEP
Warrant surrendered to and accepted by the Company pursuant to
the exchange offer, the holder will receive:
-- 0.20 1999 UniSource Energy Warrant, expiring March 15, 1999;
and
-- 0.20 2000 UniSource Energy Warrant, expiring December 15,
2000.
There are 12,054,279 aggregate number of TEP Warrants currently
outstanding. The new warrants will be exercisable into
approximately 4.8 million shares of UniSource Energy common
stock. Each new UniSource Energy Warrant will entitle the holder
to purchase one share of UniSource Energy common stock at a
purchase price of $16.00.
The Exchange Offer will expire at 5:00 p.m. New York City
time, September 23, 1998, unless the offer is extended by the
Company.
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
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(Registrant)
Date: August 27, 1998
Ira R. Adler
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Ira R. Adler
Executive Vice President and
Principal Financial Officer
TUCSON ELECTRIC POWER COMPANY
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(Registrant)
Date: August 27, 1998
Ira R. Adler
-----------------------------
Ira R. Adler
Executive Vice President and
Principal Financial Officer
