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):
November 22, 1999
Commission Registrant; State of IRS Employer
File Number Incorporation; Identification Number
Address; and Telephone 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
Item 5. Other Events
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Settlement Agreement Approved
-----------------------------
On November 22, 1999, the Arizona Corporation Commission (ACC)
voted to approve the Settlement Agreement (Settlement) that was
entered into between Tucson Electric Power Company (TEP) and
certain customer groups relating to the TEP's stranded costs and
unbundled distribution tariffs, with some modifications. The ACC's
approval became effective upon signing of the written order by the
Commissioners on November 30, 1999.
The major provisions of the Settlement, as approved, are:
- - Consumer choice for energy supply will begin in January 2000, 60
days after the effective date of the order, and will be phased in
as required by the ACC's retail competition rules. Initially,
377 megawatts of load, representing over 20 percent of TEP's
retail customers, will be eligible to choose competitive energy
suppliers. By January 1, 2001, consumer choice will be
available to all customers. Under the ACC's electric
competition rules, TEP will be required to provide energy to any
distribution customer who does not choose another energy
service provider.
- - In accordance with the Rate Settlement Agreement approved by the
ACC in 1998, TEP decreased rates to retail customers by 1.1% on
July 1, 1998, 1% on July 1, 1999 and will decrease rates an
additional 1% on July 1, 2000. These reductions apply to all
retail customers except for certain customers that have
negotiated non-standard rates. The Settlement provides that,
after these reductions, TEP's retail rates will be frozen until
December 31, 2008, except under certain circumstances. TEP will
recover the costs of transmission and distribution under
regulated unbundled rates.
- - TEP will recover its stranded costs, including regulatory
assets, through two Competition Transition Charge (CTC)
components:
- A Fixed CTC component will equal a fixed charge per
kilowatt-hour. It will terminate when $450 million has been
recovered, or on December 31, 2008, whichever occurs first.
When the Fixed CTC terminates, TEP's unbundled service rates
will decrease by the amount of the Fixed CTC.
- A Floating CTC component will equal the amount of the frozen
tariff rates less the sum of all unbundled charges including
the amount for an energy price component based on the Palo
Verde Futures Index for electric energy. Because TEP's total
retail rate will be frozen, the Floating CTC will enable TEP
to recoup the balance of stranded costs not otherwise recovered
through the Fixed CTC. The Floating CTC will terminate no later
than December 31, 2008.
- - By June 1, 2004, TEP will be required to file a general rate
case including an updated cost-of-service study. Any rate change
resulting from this rate case would be effective no sooner than
June 1, 2005 and would not result in a net rate increase.
- - By December 31, 2002, TEP will transfer its generation and other
competitive assets to a subsidiary of TEP. TEP, as a utility
distribution company (UDC), will acquire energy in the wholesale
market for its retail customer energy requirements through a
competitive bidding process. TEP's generation subsidiary will
sell energy into the wholesale market.
- - TEP will dismiss all pending litigation brought by TEP against
the ACC once the order is no longer subject to appeal.
Approval of the Settlement causes TEP to discontinue regulatory
accounting for its generation operations using Financial Accounting
Standard No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71). As a result, approximately $23 million of
extraordinary net income will be recognized in the fourth quarter
of 1999. The $23 million net amount consists of the following
after-tax items:
- $32 million in income from recognizing all remaining usable
investment tax credit benefits offset by:
- $2 million of expense from a change in accounting related to
certain emission allowance transactions, plus
- $7 million expense true-up from recording generation-related
property-tax expense on an accrual basis rather than the
regulatory basis.
The regulatory assets of the generation business, together with
certain above-market generation plant costs, totaling $450 million,
have been reclassified as Stranded Cost assets. No net gain or
loss to TEP or UniSource Energy results from the establishment of
these assets. The Stranded Cost assets will be amortized over the
period ending in 2008 on a modified mortgage basis.
Certain expenses will be recognized differently than previously
scheduled. The following table summarizes the key effects of the
change from regulatory accounting for the generation segment of TEP
under FAS 71 to the application of Financial Accounting Standard
No. 101, "Regulated Enterprises - Accounting for the
Discontinuation of Application of FAS 71" (FAS 101).
Summary of Projected Expense Item Changes
-----------------------------------------
1999 2000
---- ----
- millions of dollars -
Operating Expenses - increases/(decreases)
Fuel & Purchased Power (a) $(4) $(14)
Impact of changes in generation
asset accounting methodologies (b) (10) (50)
Stranded Asset Amortization (c) 4 17
Income Taxes (d) (2) (4)
-----------
Total Operating Expenses (12) (51)
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Operating Income - increase/(decrease) 12 51
Other Income - Income Taxes: ITCs (e) 0 (4)
Interest Expense - increase/(decrease)
Capital Lease "interest method"
interest expense (f) 23 92
Interest on Losses recorded at
present value (g) (9) (35)
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Total Interest Expense 14 57
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Extraordinary Item - net of tax (h) 23 0
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After-tax impact on Net Income $21 $(10)
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(a) The lease costs for the coal handling facility lease will be
reflected as depreciation expense and interest expense in the
income statement, rather than fuel expense. The fuel contract
termination fee amortization will be included in stranded asset
amortization expense rather than fuel expense.
(b) Changes in accounting for leased and owned generating assets
include:
- - a portion of capital lease expense is included in depreciation
expense;
- - the amortization of the Springerville Unit 1 Allowance contra
asset, which has been reclassified as an offset to Stranded
Assets is eliminated; and
- - amortization and depreciation expense is reduced due to the
write-down of generation plant assets.
(c) This expense results from the amortization of the reclassified
generation-related regulatory assets to a stranded cost
regulatory asset totaling a net $414 million. Stranded costs of
$450 million includes $414 million presently on the balance
sheet and $36 million which has previously been expensed for
financial statement purposes.
(d) A 40% composite federal and state tax benefit from all the
other changes in expense noted in the table is projected.
(e) The reduction in ITC reflects the elimination of amortization
of ITC, see (h) below.
(f) Interest expense related to capital lease liabilities will be
recognized as a component of interest expense on the income
statement.
(g) The imputed interest expense related to the Springerville Unit
1 Allowance is eliminated because the Springerville Unit 1
Allowance has been reclassified to offset Stranded Assets.
(h) TEP has recorded extraordinary income as a result of ceasing
to account for generation operations in accordance with FAS 71,
as described earlier in this document.
Overall, earnings will increase in 1999 from the recognition of
the extraordinary item described above. The extraordinary item
also results in an approximate $23 million increase in TEP's
equity. In the few years following 1999, earnings will be reduced
due to the changes in expense recognition as a result of ceasing to
apply FAS 71 to generation related assets. However, TEP expects
that the changes in expense recognition may be offset, and earnings
provided by, the following factors:
- - customer growth in TEP's service territory is expected to
continue at its current pace, about 2% to 3% annually;
- - margins on wholesale sales are expected to increase as market
prices increase over time in the region; and
- - a portion of free cash flow may be used to reduce TEP's debt,
thereby lowering interest expense.
TEP's cash flows will be largely unaffected by the accounting
changes resulting from ceasing to apply FAS 71 and adopting FAS 101
for generation operations.
This analysis reflects TEP's Settlement as approved by the ACC on
November 22, 1999. This analysis involves estimates; actual
results in the future may differ materially from those expressed
above. TEP's analysis is expressed in good faith and is believed
by management to have reasonable basis, including without
limitation, examination of historical operating trends, data
contained in TEP's records and other data available from third
parties. It is not intended to be a forecast of TEP's or UniSource
Energy's earnings.
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: December 2, 1999 Ira R. Adler
----------------------------
Ira R. Adler
Executive Vice President and
Principal Financial Officer
Tucson Electric Power
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(Registrant)
Date: December 2, 1999 Ira R. Adler
---------------------------
Ira R. Adler
Executive Vice President and
Principal Financial Officer
