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): February 5, 1999
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
<PAGE>
Item 5. Other Events
------------
ACC Hearing Officer Recommends Changes to ACC Rules and
- -------------------------------------------------------
Stranded Cost Orders
- --------------------
On February 5, 1999, the Hearing Division of the
Arizona Corporation Commission (ACC) issued Proposed Orders
regarding Stranded Cost Recovery and Competition Rules for
Affected Utilities. TEP must file exceptions to these
Proposed Orders by February 17, 1999.
Stranded Cost Recovery
- ----------------------
As previously reported, on June 22, 1998, the ACC
adopted an order which outlined two options for stranded
cost recovery: (i) Divestiture/Auction of all generation
assets to determine the amount of stranded costs for 100
percent recovery, or (ii) a Transition Revenues Methodology,
where the Affected Utility would retain generation assets in
a separate affiliate with sufficient revenues necessary to
maintain financial integrity, such as avoiding default under
currently existing financial instruments for a period of ten
years.
On February 5, 1999, the ACC Hearing Officer issued a
Proposed Opinion and Order (Proposed Order) which recommends
modification of the June order so that divestiture is not
required for 100% stranded cost recovery. The recommended
order allows each Affected Utility to choose from the
following four options:
1) Net Revenues Lost Methodology -- Stranded costs would
be determined by comparing generation revenues with
competition versus revenues without competition. Stranded
costs would be separated between regulatory and generation
assets. Generation related stranded costs would be
recovered over a five-year period as follows: (i) standard
offer customers would pay 100% of their proportionate share
of stranded costs, and (ii) customers electing to purchase
energy from competitors would pay through a competitive
transition charge (CTC) on a declining percentage basis,
paying 100% in year one, 80% in year two, and decreasing 20%
each year. Regulatory assets would be recovered 100% from
all customers. Any return on unamortized regulatory assets
would be reduced by 20% per year over five years following
the initial five-year period.
2) Divestiture/Auction Methodology -- Stranded costs would
be the difference between the market value from sale of non-
essential generation assets and their book value. Each
generation asset would include its portion of appropriate
regulatory assets. The Affected Utility would be permitted
to recover 100% of stranded costs over a ten-year period,
with no return on the unamortized balance. All customers
would be charged either through the standard offer rate or
through a CTC.
3) Financial Integrity Methodology -- The Affected Utility
would maintain financial viability, that is, having revenues
sufficient to meet minimum financial ratios (similar to the
previous "Transition Revenues Methodology"). All customers
would pay their share over a ten-year period either through
the standard offer rate or through a CTC.
4) Settlement Methodology -- Some combination of Options
1, 2, and/or 3, submitted as a settlement option.
Under the Proposed Order, Affected Utilities may amend
their previously filed stranded cost implementation plans by
March 19, 1999. TEP's original stranded cost recovery plan,
filed on August 21, 1998, specified divestiture of
generation assets as the preferred method for recovery given
the then available options.
TEP intends to file exceptions to the Proposed Order.
If the Proposed Order on stranded cost recovery is approved,
thereby amending the June 1998 stranded cost order, TEP may
amend its stranded cost recovery proposal.
Retail Electric Competition Rules
- ---------------------------------
As previously reported, on December 11, 1998 the ACC
adopted the amended Retail Electric Competition Rules
(Rules). On January 5, 1999, the ACC stayed the Rules
pending additional proceedings to resolve a number of issues
required to implement competition.
<PAGE>
On February 5, 1999, the ACC Hearing Officer issued a
Proposed Opinion and Order recommending changes to the
Rules. These recommendations include:
- -- The date to open an Affected Utility's service
territory to competition would be set upon the resolution
its of Stranded Costs and Unbundled Tariffs by final ACC
order.
- -- If an Affected Utility's service territory is open
prior to January 1, 2001, the existing phase-in schedule is
retained, calling for 20 percent of the market to initially
have access to competitive generation supply. As part of
the 20 percent, each Affected Utility is to reserve an
increasing percentage for residential customers according to
a set schedule.
- -- Competitive Energy Service Provider affiliates of
Affected Utilities may not enter another Affected Utility's
service territory until its own territory is open to
competition.
- -- The requirement for energy generated from solar sources
was eliminated, citing it as prohibitively expensive and
potentially hindering competition in Arizona.
- -- Affected Utilities must file tariffs for unbundled
noncompetitive services with the ACC by March 19, 1999.
TEP intends to file exceptions on the Proposed Order.
If the Proposed Order amending the Rules is adopted, it will
be forwarded to the Secretary of State to start the
amendment process. The Arizona Administrative Procedures
Act requires that the Rules be filed with the Secretary of
State before they can be amended. We anticipate that the
stay of the Rules would probably remain in effect until
amendments are adopted.
1998 Earnings for UniSource Energy and TEP
- ------------------------------------------
On February 8, 1999, UniSource Energy Corporation (UNS:
NYSE) reported consolidated earnings for the year ended
December 31, 1998. Net income for 1998 was $28.0 million,
or $0.87 per share, compared to $83.6 million, or $2.60 per
share, for the same period in 1997. This difference was
primarily due to two items recognized in 1997, but not in
1998: (i) prior period net operating loss tax benefits of
$43.4 million; (ii) and reversal of a $6.1 million after-tax
loss provision upon dissolution of an investment subsidiary.
In addition, net losses related to new businesses
increased by $2.7 million, and after-tax interest expense
increased $6.4 million due to fixed-rate financings which
assured future interest payment stability and reduced
refinancing risk.
UniSource Energy's unregulated affiliates, held under
Millennium Energy Holdings, Inc., incurred a net loss in
1998 of $8.1 million, or $0.25 per share. This compares to a
1997 loss of $5.4 million, or $0.17 per share.
TEP recorded net income of $41.7 million in 1998,
compared with net income of $83.6 million in 1997. Other
than the losses incurred by UniSource Energy's unregulated
subsidiaries, the same factors that explain the year-to-year
change in UniSource Energy's earnings also explain the
change in TEP's earnings.
In addition to TEP, UniSource Energy's principal
subsidiaries include New Energy Ventures, Inc., a provider
of electric load aggregation, energy management and advisory
services to retail purchasers of electric energy; Advanced
Energy Technologies, Inc., a developer of renewable energy
and distributed generation technologies; Nations Energy
Corp., an independent power developer; Southwest Energy
Solutions; and SWPP Investment Co.
The following is a summary of UniSource Energy
consolidated results:
<PAGE>
UniSource Energy Corporation
Condensed Consolidated Statements of Income
(in thousands of dollars, except per share amounts)
(UNAUDITED)
Twelve Months Ended
December 31 Increase/(Decrease)
1998 1997 Amount Percent
Operating Revenues ---- ---- ------ -------
- ------------------
Retail Customers $625,407 $624,221 $1,186 0.2
Amortization of MSR Option Gain
Regulatory Liability - 8,105 (8,105) (100.0)
Sales for Resale 143,269 97,567 45,702 46.8
------- ------- ------ -----
Total Operating Revenues 768,676 729,893 38,783 5.3
------- ------- ------ ---
Operating Expenses
- ------------------
Fuel and Purchased Power 255,527 216,163 39,364 18.2
Capital Lease Expense 104,045 103,914 131 0.1
Amortization of Springerville Unit
1 Allowance (30,522) (28,037) (2,485) 8.9
Other Operations 109,170 107,199 1,971 1.8
Maintenance and Repairs 36,143 36,657 (514) (1.4)
Depreciation and Amortization 90,358 86,405 3,953 4.6
Taxes Other Than Income Taxes 50,395 51,339 (944) (1.8)
Voluntary Severance Plan Expense - Net - 2,933 (2,933)(100.0)
Income Taxes 18,372 19,297 (925) (4.8)
------- ------- ------ -----
Total Operating Expenses 633,488 595,870 37,618 6.3
------- ------- ------ -----
Operating Income 135,188 134,023 1,165 0.9
Other Income (Deductions)
- -------------------------
Income Taxes 4,537 38,563 (34,026) (88.2)
Reversal of Loss Provision - 10,154 (10,154)(100.0)
Interest Income 10,866 11,239 (373) (3.3)
Unregulated Energy Businesses - Net (8,109) (5,344) (2,765) 51.7
Other Income (Deductions) 3,150 1,812 1,338 73.8
------- ------- ------ ------
Total Other Income (Deductions) 10,444 56,424 (45,980) (81.5)
------- ------- ------ -----
Interest Expense
- ----------------
Long-Term Debt 72,672 66,247 6,425 9.7
Interest Imputed on Losses Recorded
at Present Value 34,179 32,657 1,522 4.7
Other Interest Expense 10,749 7,971 2,778 34.9
------- ------- ------ ------
Total Interest Expense 117,600 106,875 10,725 10.0
------- ------- ------ -----
Net Income $28,032 $83,572 $(55,540) (66.5)
------- ------- ------ ------
Average Shares of Common Stock
Outstanding (000) 32,178 32,138 - -
Basic Earnings per Share $0.87 $2.60 $(1.73) (66.5)
Diluted Earnings per Share $0.87 $2.59 $(1.72) (66.4)
12 Months Ended December 31
Electric kWh Sales (000): 1998 1997 Change Percent
---- ---- ------ -------
Retail Customers 7,630,485 7,470,414 160,071 2.1
Sales for Resale 4,509,93 3,429,455 1,080,481 31.5
--------- --------- --------- ----
Total 12,140,421 10,899,869 1,240,552 11.4
--------- --------- --------- ----
<PAGE>
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: February 16, 1999 Ira R. Adler
------------------------
Ira R. Adler
Executive Vice President and
Principal Financial Officer
TUCSON ELECTRIC POWER COMPANY
-----------------------------
(Registrant)
Date: February 16, 1999 Ira R. Adler
------------------------
Ira R. Adler
Executive Vice President and
Principal Financial Officer
