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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Registrant; State of
Commission 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 4, 2000, 32,371,541 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 32,139,434
shares of the outstanding Common Stock of Tucson Electric Power Company.
<PAGE>
This combined Form 10-Q is separately filed by UniSource Energy Corporation
and Tucson Electric Power Company. Information contained in this document
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
Review Report of Independent Accountants..........................1
PART I - FINANCIAL INFORMATION
Item 1. -- Financial Statements
UniSource Energy Corporation
Comparative Condensed Consolidated Statements
of Income (Loss)...............................................2
Comparative Condensed Consolidated Statements
of Cash Flows..................................................3
Comparative Condensed Consolidated Balance Sheets...............4
Tucson Electric Power Company
Comparative Condensed Consolidated Statements of Loss...........5
Comparative Condensed Consolidated Statements
of Cash Flows..................................................6
Comparative Condensed Consolidated Balance Sheets...............7
Notes to Condensed Consolidated Financial Statements
Note 1. Regulatory Accounting...................................8
Note 2. Business Segments.......................................8
Note 3. Millennium Energy Businesses............................9
Note 4. Contingencies...........................................9
Note 5. New Accounting Standards...............................10
Note 6. Review by Independent Public Accountants...............10
Note 7. Reclassifications......................................10
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview........................................................12
Factors Affecting Results of Operations
Competition
Retail......................................................13
TEP's Settlement Agreement and Retail Electric
Competition Rules...........................................13
Wholesale...................................................14
Transmission Access.........................................14
Regulatory Matters............................................15
Market Risks..................................................15
Results of Operations...........................................16
Contribution by Business Segment..............................16
Utility Sales and Revenues....................................17
Operating Expenses............................................17
Other Income (Deductions).....................................17
Interest Expense..............................................18
Results of Millennium Energy Businesses.........................18
AET and Global Solar..........................................18
MEH and NewEnergy.............................................18
Nations Energy................................................19
Dividends on Common Stock
UniSource Energy..............................................19
TEP...........................................................19
Millennium....................................................19
Liquidity and Capital Resources
Cash Flows
UniSource Energy............................................19
TEP.........................................................20
Investing and Financing Activities
UniSource Energy
Loans and Guarantees.......................................21
TEP
Capital Expenditures.......................................21
TEP Credit Agreement.......................................21
Millennium -- Unregulated Energy Businesses
Sale of NewEnergy, Inc.....................................21
Capital Requirements.......................................21
Safe Harbor for Forward-Looking Statements......................22
Item 3. -- Quantitative And Qualitative
Disclosures About Market Risk..... ............................22
PART II - OTHER INFORMATION
Item 1. -- Legal Proceedings
Tax Assessments.................................................23
ACC Order on the Sierrita Contract..............................23
Item 5. -- Other Information
Additional Financial Data.......................................23
Item 6. -- Exhibits and Reports on Form 8-K......................23
Signature Page...................................................24
Exhibit Index....................................................25
<PAGE>
DEFINITIONS
The abbreviations and acronyms used in the 2000 First Quarter Form 10-Q
are defined below:
- -----------------------------------------------------------------------------
ACC................. Arizona Corporation Commission.
AET................. Advanced Energy Technologies, Inc., a wholly-owned
subsidiary of Millennium.
Affected Utilities.. Electric utilities regulated by the ACC,
including TEP, Arizona Public Service, Citizens
Utilities company, and several electric cooperatives.
Common Stock........ UniSource Energy's common stock, without par value.
Company............. UniSource Energy Corporation.
Credit Agreement.... Credit Agreement between TEP and the banks,
dated as of December 30, 1997.
FAS 71.............. Statement of Financial Accounting Standards No.
71: Accounting for the Effects of Certain Types of
Regulation.
FAS 101............. Statement of Financial Accounting Standards No. 101:
Regulated Enterprises-Accounting for the Discontinuation
of FASB STatement No. 71.
FERC................ Federal Energy Regulatory Commission.
First Mortgage
Bonds ............. First mortgage bonds issued under the General
First Mortgage.
GAAP................ Generally Accepted Accounting Principles.
Global Solar........ Global Solar Energy, L.L.C., a corporation which is
50% owned by AET and 50% owned by ITN.
Heating Degree Days. Calculated by subtracting the average of the high and
low daily temperatures from 75.
ION................. ION International, Inc., a wholly-owned subsidiary of
Millennium.
IRS................. Internal Revenue Service.
ISO................. Independent System Operator.
ITC................. Investment tax credit.
ITN................. ITN Energy Systems, Inc., a company which owns
50% of Global Solar.
kWh................. Kilowatt-hour(s).
MEH................. MEH Corporation, a wholly-owned subsidiary of
Millennium.
Millennium.......... Millennium Energy Holdings, Inc., a wholly-
owned subsidiary of UniSource Energy.
Nations Energy...... Nations Energy Corporation, a wholly-owned subsidiary
of Millennium.
NEV Southwest....... New Energy Ventures Southwest, L.L.C., a wholly-
owned subsidiary of NewEnergy.
NewEnergy........... NewEnergy, Inc., formerly New Energy Ventures, Inc., a
company in which a 50% interest was owned by MEH.
NOL................. Net Operating Loss carryforward for income tax
purposes.
Rate Settlement..... TEP's Rate Settlement agreement approved by the
ACC in August 1998, which provides retail base price
decreases over a two-year period.
Revolving Credit
Facility........... $100 million revolving credit facility entered
into under the Credit Agreement between a
syndicate of banks and TEP.
RTO................. Regional Transmission Organization.
Rules............... Retail Electric Competition Rules.
Settlement
Agreement.......... TEP's Settlement Agreement approved by the ACC in
November 1999 provided for electric retail competition
and transition asset recovery.
Springerville....... Springerville Generating Station.
Springerville
Unit 1............. Unit 1 of the Springerville Generating Station.
Springerville
Unit 1 Lease....... Leveraged lease arrangement relating to
Springerville Unit 1 and an undivided one-half
interest in certain Springerville Common Facilities.
TEP................. Tucson Electric Power Company, the principal
subsidiary of UniSource Energy.
UniSource Energy.... UniSource Energy Corporation.
<PAGE>
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 sheets of
UniSource Energy Corporation and its subsidiaries (the Company) and of
Tucson Electric Power Company and its subsidiaries (TEP) as of March 31,
2000, and the related condensed consolidated statements of income (loss)
for each of the three-month periods ended March 31, 2000 and 1999 and the
condensed consolidated statements of cash flows for the three-month periods
ended March 31, 2000 and 1999. These financial statements are the
responsibility of the Company's and TEP's management.
We conducted our reviews 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 reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with generally accepted accounting
principles.
We previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheets and statements of capitalization
as of December 31, 1999, and the related consolidated statements of income,
of cash flows, and changes in stockholders' equity for the year then ended
(not presented herein), and in our report dated February 2, 2000 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, 1999, is fairly
stated in all material respects in relation to the consolidated balance
sheets from which it has been derived.
PricewaterhouseCoopers LLP
Los Angeles, California
May 5, 2000
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 UniSource Energy's 1999 Form 10-K.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended
March 31,
2000 1999
(Unaudited)
- ----------------------------------------------------------------------------
-Thousands of Dollars-
Operating Revenues
Retail Customers $131,786 $128,654
Sales for Resale 44,761 31,859
- ----------------------------------------------------------------------------
Total Operating Revenues 176,547 160,513
- ----------------------------------------------------------------------------
Operating Expenses
Fuel and Purchased Power 60,540 54,919
Capital Lease Expense - 25,461
Amortization of Springerville Unit 1 Allowance - (8,729)
Other Operations 28,873 23,623
Maintenance and Repairs 8,344 9,637
Depreciation and Amortization 27,387 23,081
Amortization of Transition Recovery Asset 903 -
Taxes Other Than Income Taxes 12,194 12,154
Income Taxes (1,062) (2,559)
- ----------------------------------------------------------------------------
Total Operating Expenses 137,179 137,587
- ----------------------------------------------------------------------------
Operating Income 39,368 22,926
- ----------------------------------------------------------------------------
Other Income (Deductions)
Income Taxes 649 599
Interest Income 2,470 1,638
Millennium Energy Businesses (380) (3,624)
Other Income 584 655
- ----------------------------------------------------------------------------
Total Other Income Deductions 3,323 (732)
- ----------------------------------------------------------------------------
Interest Expense
Long-Term Debt 16,874 16,325
Interest on Capital Leases 23,254 -
Interest Imputed on Losses Recorded at Present Value - 8,748
Other Interest Expenses 2,321 2,649
- ----------------------------------------------------------------------------
Total Interest Expense 42,449 27,722
- ----------------------------------------------------------------------------
Net Income (Loss) $ 242 $ (5,528)
============================================================================
Average Shares of Common Stock Outstanding (000) 32,374 32,286
============================================================================
Basic and Diluted Earnings (Loss) per Share $ 0.01 $ (0.17)
============================================================================
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2000 1999
(Unaudited)
- ----------------------------------------------------------------------------
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $153,005 $147,388
Cash Receipts from Sales for Resale 41,107 31,511
Fuel and Purchased Power Costs Paid (61,835) (59,315)
Wages Paid, Net of Amounts Capitalized (18,500) (15,857)
Payment of Other Operations and Maintenance Costs (25,536) (24,460)
Capital Lease Interest Paid (43,733) (44,505)
Taxes Paid, Net of Amounts Capitalized (11,450) (11,110)
Interest Paid, Net of Amounts Capitalized (23,564) (24,004)
Income Taxes Paid (2) (4,819)
Interest Received 4,618 2,222
Other 2,146 1,294
- ----------------------------------------------------------------------------
Net Cash Flows - Operating Activities 16,256 (1,655)
- ----------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital Expenditures (26,409) (16,729)
Investments in and Loans to
Millennium Energy Businesses (2,118) (5,050)
Sale of Interest in Millennium Energy Businesses 19,950 500
Investment in Lease Debt (27,633) -
Other (96) 227
- ----------------------------------------------------------------------------
Net Cash Flows - Investing Activities (36,306) (21,052)
- ----------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt - 255
Payments to Retire Long-Term Debt (1,225) (1,225)
Payments to Retire Capital Lease Obligations (20,725) (16,552)
Common Stock Dividends Paid (2,583) -
Other 795 837
- ----------------------------------------------------------------------------
Net Cash Flows - Financing Activities (23,738) (16,685)
- ----------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (43,788) (39,392)
Cash and Cash Equivalents, Beginning of Year 145,288 145,167
- ----------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 101,500 $ 105,775
============================================================================
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
Three Months Ended
March 31,
2000 1999
(Unaudited)
- ----------------------------------------------------------------------------
-Thousands of Dollars-
Net Income (Loss) $ 242 $ (5,528)
Adjustments to Reconcile Net Income (Loss) to
Net Operating Cash Flows
Depreciation and Amortization Expense 27,387 23,081
Amortization of Regulatory Assets & Liabilities,
Net of Interest Imputed on Losses Recorded at
Present Value 903 18
Amortization of Deferred Debt Related Costs
Included in Interest Expense 1,192 1,257
Deferred Income Taxes and Investment Tax Credit 5,587 (8,459)
Lease Payments Deferred - (16,404)
Deferred Contract Termination Fee - 962
Unremitted Losses of Unconsolidated Subsidiaries 685 1,385
Gain on Sale of Nations Holland Holding B.V. (2,527) -
Market Value Adjustments Related to Nations Energy 1,499 -
Other 1,024 1,826
Changes in Assets and Liabilities which Provided
(Used) Cash Exclusive of Changes Shown Separately
Accounts Receivable 6,264 6,379
Materials and Fuel (998) (3,146)
Accounts Payable (2,985) (7,947)
Interest Accrued (25,862) (6,734)
Taxes Accrued 10,671 8,311
Other Current Assets and Liabilities (7,206) 4,156
Other Deferred Assets and Liabilities 380 (812)
- ----------------------------------------------------------------------------
Net Cash Flows - Operating Activities $ 16,256 $ (1,655)
============================================================================
See Notes to Condensed Consolidated Financial Statements
<PAGE>
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
(Unaudited)
- ---------------------------------------------------------------------------
- Thousands of Dollars -
ASSETS
Utility Plant
Plant in Service $2,312,951 $2,301,645
Utility Plant Under Capital Leases 741,446 741,446
Construction Work in Progress 107,435 96,565
- ---------------------------------------------------------------------------
Total Utility Plant 3,161,832 3,139,656
Less Accumulated Depreciation and Amortization (1,126,554) (1,105,371)
Less Accumulated Depreciation of Capital Lease
Assets (311,649) (304,429)
- ---------------------------------------------------------------------------
Total Utility Plant - Net 1,723,629 1,729,856
- ---------------------------------------------------------------------------
Investments and Other Property 128,025 114,483
- ---------------------------------------------------------------------------
Current Assets
Cash and Cash Equivalents 101,500 145,288
Accounts Receivable 61,662 67,926
Materials and Fuel 43,139 42,119
Deferred Income Taxes - Current 5,007 17,148
Prepaid Pension Costs 15,942 15,818
Tax Settlement Deposit 8,791 13,471
Other 36,750 31,368
- ---------------------------------------------------------------------------
Total Current Assets 272,791 333,138
- ---------------------------------------------------------------------------
Deferred Debits - Regulatory Assets
Transition Recovery Asset 369,388 370,291
Income Taxes Recoverable Through Future Revenues 78,564 79,497
Other Regulatory Assets 7,866 8,639
Deferred Debits - Other 18,411 20,351
- ---------------------------------------------------------------------------
Total Deferred Debits 474,229 478,778
- ---------------------------------------------------------------------------
Total Assets $2,598,674 $2,656,255
===========================================================================
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
(Unaudited)
- ----------------------------------------------------------------------------
- Thousands of Dollars -
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock $ 641,975 $ 641,723
Accumulated Deficit (317,237) (317,475)
- ----------------------------------------------------------------------------
Common Stock Equity 324,738 324,248
Capital Lease Obligations 866,986 880,427
Long-Term Debt 1,134,595 1,135,820
- ----------------------------------------------------------------------------
Total Capitalization 2,326,319 2,340,495
- ----------------------------------------------------------------------------
Current Liabilities
Current Obligations Under Capital Leases 29,085 36,335
Current Maturities of Long-Term Debt 48,603 48,603
Accounts Payable 28,715 32,390
Interest Accrued 39,125 66,311
Taxes Accrued 38,888 31,374
Accrued Employee Expenses 9,286 10,782
Other 4,995 8,934
- ----------------------------------------------------------------------------
Total Current Liabilities 198,697 234,729
- ----------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 35,039 42,526
Other 38,619 38,505
- ----------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 73,658 81,031
- ----------------------------------------------------------------------------
Total Capitalization and Other Liabilities $2,598,674 $2,656,255
============================================================================
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF 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 TEP's 1999 Form 10-K.
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF LOSS
Three Months Ended
March 31,
2000 1999
(Unaudited)
- ----------------------------------------------------------------------------
-Thousands of Dollars-
Operating Revenues
Retail Customers $131,862 $128,780
Sales for Resale 44,761 31,859
- ----------------------------------------------------------------------------
Total Operating Revenues 176,623 160,639
- ----------------------------------------------------------------------------
Operating Expenses
Fuel and Purchased Power 60,540 54,919
Capital Lease Expense - 25,461
Amortization of Springerville Unit 1 Allowance - (8,729)
Other Operations 28,873 23,623
Maintenance and Repairs 8,344 9,637
Depreciation and Amortization 27,387 23,081
Amortization of Transition Recovery Asset 903 -
Taxes Other Than Income Taxes 12,194 12,154
Income Taxes (1,062) (2,559)
- ----------------------------------------------------------------------------
Total Operating Expenses 137,179 137,587
- ----------------------------------------------------------------------------
Operating Income 39,444 23,052
- ----------------------------------------------------------------------------
Other Income (Deductions)
Income Taxes (1,956) (1,169)
Interest Income 2,036 1,465
Interest Income-Note Receivable from UniSource Energy 2,326 2,525
Other Income 513 529
- ----------------------------------------------------------------------------
Total Other Income (Deductions) 2,919 3,350
- ----------------------------------------------------------------------------
Interest Expense
Long-Term Debt 16,874 16,325
Interest on Capital Leases 23,254 -
Interest Imputed on Losses Recorded at Present Value - 8,748
Other Interest Expenses 2,321 2,649
- ----------------------------------------------------------------------------
Total Interest Expense 42,449 27,722
- ----------------------------------------------------------------------------
Net Loss $ (86) $ (1,320)
============================================================================
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2000 1999
(Unaudited)
- ----------------------------------------------------------------------------
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $153,005 $147,388
Cash Receipts from Sales for Resale 41,107 31,511
Fuel and Purchased Power Costs Paid (61,835) (59,315)
Wages Paid, Net of Amounts Capitalized (16,489) (14,406)
Payment of Other Operations and Maintenance Costs (22,953) (22,475)
Capital Lease Interest Paid (43,721) (44,505)
Taxes Paid, Net of Amounts Capitalized (11,344) (11,000)
Interest Paid, Net of Amounts Capitalized (23,564) (24,004)
Income Taxes Paid (2) (4,818)
Interest Received 3,333 1,962
Other - 86
- ----------------------------------------------------------------------------
Net Cash Flows - Operating Activities 17,537 424
- ----------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital Expenditures (23,718) (15,493)
Other Investments - Net 159 (269)
- ----------------------------------------------------------------------------
Net Cash Flows - Investing Activities (23,559) (15,762)
- ----------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt - 255
Payments to Retire Long-Term Debt (1,225) (1,225)
Payments to Retire Capital Lease Obligations (20,705) (16,552)
Other 630 703
- ----------------------------------------------------------------------------
Net Cash Flows - Financing Activities (21,300) (16,819)
- ----------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (27,322) (32,157)
Cash and Cash Equivalents, Beginning of Year 88,402 118,236
- ----------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $61,080 $86,079
============================================================================
See Notes to Condensed Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
Three Months Ended
March 31,
2000 1999
(Unaudited)
- ---------------------------------------------------------------------------
-Thousands of Dollars-
Net Loss $ (86) $ (1,320)
Adjustments to Reconcile Net Loss
to Net Operating Cash Flows
Depreciation and Amortization Expense 27,387 23,081
Amortization of Regulatory Assets & Liabilities,
Net of Interest Imputed on Losses Recorded at
Present Value 903 18
Amortization of Deferred Debt Related Costs Included
in Interest Expense 1,192 1,257
Deferred Income Taxes and Investment Tax Credit 5,767 (7,117)
Lease Payments Deferred - (16,404)
Deferred Contract Termination Fee - 962
Unremitted (Earnings) Losses of Unconsolidated
Subsidiaries 114 (234)
Interest on Note Receivable from UniSource Energy (2,326) (2,525)
Other 830 194
Changes in Assets and Liabilities which Provided
(Used) Cash Exclusive of Changes Shown Separately
Accounts Receivable 8,070 10,306
Materials and Fuel (1,000) (2,792)
Accounts Payable (3,185) (7,488)
Interest Accrued (25,862) (6,734)
Taxes Accrued 10,788 8,390
Other Current Assets and Liabilities (5,429) 1,637
Other Deferred Assets and Liabilities 374 (807)
- ---------------------------------------------------------------------------
Net Cash Flows - Operating Activities $ 17,537 $ 424
===========================================================================
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
(Unaudited)
- ---------------------------------------------------------------------------
ASSETS
Utility Plant
Plant in Service $2,312,951 $2,301,645
Utility Plant Under Capital Leases 741,446 741,446
Construction Work in Progress 107,435 96,565
- ---------------------------------------------------------------------------
Total Utility Plant 3,161,832 3,139,656
Less Accumulated Depreciation and Amortization (1,126,554) (1,105,371)
Less Accumulated Depreciation of Capital Lease
Assets (311,649) (304,429)
- ---------------------------------------------------------------------------
Total Utility Plant - Net 1,723,629 1,729,856
Investments and Other Property 67,595 67,838
- ---------------------------------------------------------------------------
Note Receivable from UniSource Energy 72,459 70,132
- ---------------------------------------------------------------------------
Current Assets
Cash and Cash Equivalents 61,080 88,402
Accounts Receivable 62,754 70,739
Materials and Fuel 43,057 42,035
Deferred Income Taxes - Current 5,048 17,190
Prepaid Pension Costs 15,942 15,818
Tax Settlement Deposit 8,791 13,471
Other 9,676 6,249
- ---------------------------------------------------------------------------
Total Current Assets 206,348 253,904
- ---------------------------------------------------------------------------
Deferred Debits - Regulatory Assets
Transition Recovery Asset 369,388 370,291
Income Taxes Recoverable Through Future Revenues 78,564 79,497
Other Regulatory Assets 7,866 8,639
Deferred Debits - Other 18,411 20,351
- ---------------------------------------------------------------------------
Total Deferred Debits 474,229 478,778
- ---------------------------------------------------------------------------
Total Assets $2,544,260 $2,600,508
===========================================================================
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
(Unaudited)
- ---------------------------------------------------------------------------
- Thousands of Dollars -
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock $ 647,618 $ 647,366
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (370,961) (370,875)
- ---------------------------------------------------------------------------
Common Stock Equity 270,300 270,134
Capital Lease Obligations 866,664 880,111
Long-Term Debt 1,134,595 1,135,820
- ---------------------------------------------------------------------------
Total Capitalization 2,271,559 2,286,065
- ---------------------------------------------------------------------------
Current Liabilities
Current Obligations Under Capital Leases 29,005 36,263
Current Maturities of Long-Term Debt 48,603 48,603
Accounts Payable 36,578 41,277
Interest Accrued 39,125 66,311
Taxes Accrued 35,369 27,738
Accrued Employee Expenses 8,947 10,591
Other 4,899 6,285
- ---------------------------------------------------------------------------
Total Current Liabilities 202,526 237,068
- ---------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 31,605 38,913
Other 38,570 38,462
- ---------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 70,175 77,375
- ---------------------------------------------------------------------------
Total Capitalization and Other Liabilities $2,544,260 $2,600,508
===========================================================================
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. REGULATORY ACCOUNTING
- ------------------------------
TEP generally uses the same accounting policies and practices used
by unregulated companies for financial reporting under GAAP. 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 allow TEP
to currently charge its customers to recover certain expenses, but
instead requires that these expenses be charged to customers in the
future. In this situation, FAS 71 requires that TEP 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 as
expense to the income statement as those charges are recovered from
customers. Similarly, certain revenue items may be deferred as
regulatory liabilities, which are also eventually amortized to the
income statement.
In November 1999, upon approval by the ACC of a Settlement
Agreement relating to recovery of TEP's transition costs and standard
retail rates, we discontinued application of FAS 71 to our generation
operations. As a result, many costs in the UniSource Energy and TEP
income statements are reflected in different line items in the first
quarter of 2000 than they were in the first quarter of 1999. The
primary differences are:
- Amortization associated with Utility Plant Under Capital Leases is
included in Depreciation and Amortization and the new line Interest on
Capital Leases in 2000 while it appeared as Capital Lease Expense in
1999.
- Amortization of Springerville Unit 1 Allowance and Interest Imputed
on Losses Recorded at Present Value are no longer presented in 2000.
- Amortization of Transition Recovery Asset appears as an expense
beginning in 2000.
- Amortization of Investment Tax Credit no longer contributes to
Income Taxes included in Other Income (Deductions) in 2000. All ITC
was recognized in 1999.
We continue to apply FAS 71 to the distribution and transmission
portions of TEP's business, our regulated operations. The conditions a
regulated company must satisfy to apply the accounting policies and
practices of FAS 71 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 can continue to apply FAS 71 to
these operations. If we stopped applying FAS 71 to TEP's remaining
regulated operations, we would write off the related balances of TEP's
regulatory assets as a charge in our income statement. Based on the
balances of TEP's regulatory assets at March 31, 2000, if we had
stopped applying FAS 71 to TEP's remaining regulated operations, we
would have recorded an extraordinary loss of approximately $274
million, after the related income tax benefit of $182 million. While
regulatory orders and market conditions may affect our cash flows, our
cash flows would not be affected if we stopped applying FAS 71.
NOTE 2. BUSINESS SEGMENTS
- ----------------------------------------
We determine our business segments based on the way we organize
our operations and evaluate performance. We currently have two
reportable business segments that are managed separately based on
fundamental differences in their operations. UniSource Energy's
principal business segment is TEP, an electric utility business. The
other reportable business segment is comprised of the unregulated
energy businesses of Millennium:
- Advanced Energy Technologies, Inc. (AET) which currently owns 50% of
Global Solar Energy, L.L.C., a developer and manufacturer of
photovoltaic materials. In November 1999, Millennium entered into an
agreement whereby Millennium's share of Global Solar will increase to
67%. See Note 3 regarding this agreement;
- Nations Energy Corporation (Nations Energy) which is an independent
power developer. See Note 3 regarding the sale of Nations Energy
Holland Holding;
- Southwest Energy Solutions, Inc. which provides energy support
services to electric consumers; and
- ION International, Inc. which intends to provide technology
applications to commerce, health care and industry organizations to
help them more efficiently manage their energy needs.
We disclose selected financial data for our business segments in
the following table:
- ----------------------------------------------------------------------
Segments
----------------------
UniSource
Reconciling Energy
TEP Millennium Adjustments Consolidated
- ----------------------------------------------------------------------
- Thousands of Dollars -
Income Statement
- ----------------
Three months ended
March 31, 2000:
Operating Revenues $ 176,623 $ 1,095 $ (1,171) $176,547
- -----------------------------------------------------------------------
Net Income (Loss)
Before Income Taxes 808 (380) (1,897) (1,469)
- -----------------------------------------------------------------------
Net Income (Loss) (86) 1,469 (1,141) 242
- -----------------------------------------------------------------------
Three months ended
March 31, 1999:
Operating Revenues 160,639 1,627 (1,753) 160,513
- -----------------------------------------------------------------------
Net Loss Before
Income Taxes (2,710) (3,624) (2,352) (8,686)
- -----------------------------------------------------------------------
Net Loss (1,320) (2,793) (1,415) (5,528)
- -----------------------------------------------------------------------
Balance Sheet
- -------------
Total Assets,
March 31, 2000 2,544,260 140,003 (85,589) 2,598,674
Total Assets,
December 31, 1999 2,600,508 100,289 (44,542) 2,656,255
- -----------------------------------------------------------------------
Intersegment revenues are not material. The reconciling adjustments
include the following:
- Elimination of the revenues and expenses of Millennium Energy
Businesses to show this activity in the Other Income (Deductions)
section of UniSource Energy's income statements;
- - Elimination of TEP's Note Receivable from UniSource Energy and
related interest; and
- - Elimination of intercompany activity and balances.
NOTE 3. MILLENNIUM ENERGY BUSINESSES
- -------------------------------------
Sale of Interest in Nations Holland and COPESA Market Adjustment
In January 2000, Nations Energy sold Nations Energy Holland
Holding, including its minority interest in a power project located in
the Czech Republic. Nations Energy recorded a pre-tax gain of $2.5
million on the sale.
Nations International, a wholly owned subsidiary of Nations
Energy, recorded a $1.4 million decrease in the market value of its
minority interest investment in the COPESA project. At March 31, 2000,
Nations International's investment in COPESA was $3.2 million. Nations
International intends to sell its 40% equity interest in COPESA. We
can not predict whether future market adjustments will be necessary for
the COPESA project.
Agreement to Acquire Additional Interest in Global Solar
AET currently owns 50% of Global Solar Energy, L.L.C., which
develops and manufactures photovoltaic materials. The other 50% is
owned by ITN Energy Systems, Inc. (ITN). In November 1999, Millennium
and ITN entered into an agreement in which Millennium's share of Global
Solar will increase to 67%. Under this agreement, ITN has transferred
its rights to certain assets and proprietary and intellectual property,
including thin-film battery technology, to Global Solar. In addition,
Millennium will contribute to Global Solar up to $14 million in
additional equity upon the occurrence of certain agreed-upon production
and business milestones. We expect Global Solar to reach these
milestones in the next 2 years. The principal documents relating to
the increase in Millennium's share in Global Solar have been executed
and Millennium and ITN are currently finalizing the transaction. As of
March 31, 2000, Millennium funded $3.7 million under this agreement,
including $2 million in the first quarter of 2000.
Expiration of NewEnergy Guarantees
In July 1999, UniSource Energy sold its interest in NewEnergy and
issued termination notices on all guarantees of performance bonds and
contractual obligations that were made on behalf of NewEnergy. All
obligations incurred prior to the termination notices were extinguished
in 1999 with the exception of one in the amount of up to $1 million
which terminated in March 2000.
NOTE 4. CONTINGENCIES
- ------------------------
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 of
various items relating to a 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 TEP's ownership
occurred for tax purposes in December 1991. As a result, our use of
the NOL and ITC generated before 1992 may be limited under the tax
code. The IRS is challenging our calculation of this limitation. At
March 31, 2000, pre-1992 federal NOL and ITC carryforwards were
approximately $168 million and $20 million, respectively. In addition
to the pre-1992 NOL and ITC which are subject to the limitation, $239
million of federal NOL at March 31, 2000, is not subject to the
limitation.
We do not expect the resolution of these issues to have a material
adverse impact on the financial statements.
ACC Order on the Sierrita Contract
On May 14, 1999, TEP filed a complaint with the ACC against Cyprus
Sierrita Corporation (now known as Phelps Dodge Sierrita, Inc.)
(Sierrita) over energy costs that TEP charged to Sierrita under an ACC-
approved contract, which charges Sierrita disputes. The dispute
concerns the proper method of calculating energy charges under the
contract. TEP does not record revenue for these disputed energy
charges billed to Sierrita. In March 2000, the ACC ruled in favor of
TEP and ordered Sierrita to pay the disputed charges from May 14, 1999
forward. Sierrita has appealed the ACC's order, and we are unable to
predict the resolution of the appeal, but anticipate that the appeal
process will take between one and two years. If TEP ultimately
prevails, TEP would recognize pre-tax income equal to the amounts
billed after May 14, 1999. At March 31, 2000, this amounted to $1.4
million.
NOTE 5. NEW ACCOUNTING STANDARDS
- ---------------------------------
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. A
derivative financial instrument or other contract derives its value
from another investment or designated benchmark. This Statement
requires all derivative instruments to be recognized as either assets
or liabilities in the balance sheet. Some derivative instruments
offset, or hedge, exposure to a specific risk. If the derivative is
not a hedging instrument, measurement is at fair value and changes in
fair value (i.e., gains and losses) are recognized in earnings in the
period of change. If a derivative qualifies as a hedge, the accounting
for changes in fair value will depend on the specific exposure being
hedged. We are required to comply with FAS 133 effective January 1,
2001. We are still in the process of quantifying the effect, if any,
that compliance with FAS 133 will have on our financial statements.
NOTE 6. REVIEW BY INDEPENDENT ACCOUNTANTS
- ------------------------------------------
With respect to the unaudited consolidated financial information
of UniSource Energy and TEP for the three-month periods ended March 31,
2000 and 1999, 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
May 5, 2000, appearing herein, states that they did not audit and they
do not express an opinion on that unaudited consolidated financial
information. 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.
NOTE 7. RECLASSIFICATIONS
- --------------------------
We have made reclassifications to the prior year financial
statements for comparative purposes. These reclassifications had no
effect on net income.
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UniSource Energy is a holding company that owns all of the outstanding
common stock of TEP and Millennium. 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. Millennium owns all of the outstanding common stock
of four subsidiaries established for the purpose of operating or investing
in various unregulated energy-related businesses.
Management's Discussion and Analysis centers on the general financial
condition and the results of operations for UniSource Energy and its two
primary business segments, the electric utility business of TEP and the
unregulated energy businesses of Millennium, and includes the following:
* operating results during the first quarter compared with the same
period in the prior year,
* changes in liquidity and capital resources during the first quarter
of 2000, and
* expectations of identifiable material trends which may affect our
business in the future.
TEP is the principal operating subsidiary of UniSource Energy and
accounts for substantially all of its assets and revenues. 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. The seasonal nature of the electric
utility business causes operating results to vary significantly from
quarter to quarter. The results from energy related businesses of
Millennium and certain of its subsidiaries and interests have also had a
significant impact on earnings reported by UniSource Energy for the
quarters ended March 31, 2000 and 1999.
Management's Discussion and Analysis should be read in conjunction
with the Condensed Consolidated Financial Statements, beginning on page 2,
which present the results of operations for the quarters ended March 31,
2000 and 1999. 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 $242,000 for the first quarter
of 2000, compared with a net loss of $5.5 million in the first quarter of
1999. The improvement in first quarter performance over the prior year is
due primarily to stronger kWh sales by TEP and a gain on the sale of a
minority interest in a power project of one of our unregulated energy
businesses. See Results of Operations and Results of Millennium Energy
Businesses below for further detail.
Our financial prospects are subject to significant competitive,
regulatory, economic and other uncertainties. The approval of TEP's
Settlement Agreement in November 1999 resolved a significant amount of
regulatory uncertainty and provides TEP with a reasonable opportunity to
recover 100 percent of its transition recovery assets. However, we cannot
predict with certainty the full impact of retail competition on TEP's
future operating results or financial condition. Some of the factors which
may affect our future financial results include weather variations which
may affect customer usage, load growth and demand levels in the current TEP
service territory, and market prices for wholesale and retail energy. See
Competition, Retail below.
Other uncertainties include the extent to which, in response to
industry changes or unanticipated economic downturns, TEP can alter
operations and reduce costs, which may be limited due to high financial and
operating leverage. Future results will depend, in part, on our ability
to contain and/or reduce the costs of serving retail customers and the
level of sales to such customers.
We are addressing the uncertainties discussed above by positioning our
subsidiaries to benefit from the changing regulatory and energy market
environment. In November 1998, TEP organized its utility business
activities into two separate business units: (1) generation and (2)
transmission and distribution, and in January 1999, TEP formed a third
business unit which provides administrative services to the utility
business units. We are improving cost measurement and management
techniques at TEP. We have also extended contracts, where appropriate, for
large wholesale and retail customers. We are investing in our unregulated
affiliates to provide energy products and services to markets both within
and beyond TEP's retail service territory. See Competition, Retail;
Results of Operation and Results of Millennium Energy Businesses below.
Our financial prospects are also subject to uncertainties relating to
the start-up and developmental activities of the Millennium Energy
Businesses segment. At March 31, 2000, Millennium's unregulated energy-
related affiliates comprised approximately 5% of total assets, but at times
have had a significant impact on our consolidated net income and cash
flows. We continue to evaluate these affiliates for opportunities to
realize value from our investments. In the third quarter of 1999, we sold
our ownership interest in affiliate NewEnergy and recorded a pre-tax gain
of $35 million on the transaction. In January 2000, we sold our interest
in a power project in which Nations Energy had invested, recording a pre-
tax gain of $2.5 million on the transaction. See Results of Millennium
Energy Businesses below.
Our consolidated capital structure remains highly leveraged. Since
April 1997, however, 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 by reducing exposure to variable interest
rates by refinancing over $475 million in variable rate debt with fixed
interest rate securities. With a more stabilized regulatory outlook and
with ongoing improvements in our capital structure, UniSource Energy paid
its first dividend to common shareholders in March 2000. We had not paid a
common dividend to public shareholders since 1989. See Dividends on Common
Stock and Investing and Financing Activities, below.
TEP's capital requirements include construction expenditures and
scheduled maturities of debt and capital lease obligations. 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 Facility. While
some of Millennium's unregulated energy businesses have required
significant amounts of capital and credit, management currently expects to
make limited investments in these businesses. We expect to use existing
cash balances to fulfill these needs, or if necessary, we may seek
investments by unaffiliated parties to meet the ongoing capital
requirements of some of these businesses. See Liquidity and Capital
Resources, Investing and Financing Activities, below.
FACTORS AFFECTING RESULTS OF OPERATIONS
- ---------------------------------------
COMPETITION
-----------
RETAIL
The electric utility industry is undergoing significant regulatory
change designed to encourage competition in the sale of electricity and
related services. Approximately 20% of TEP's retail customers are currently
eligible to choose an alternate energy supplier. However, no competitors
are currently providing electric service to customers in our retail service
area nor has TEP lost any significant customers to self-generation. It is
likely that, with open access in our retail service territory, some
customers will elect to purchase their energy requirements from other
energy suppliers when available. TEP competes against gas service
suppliers and others who provide energy services.
In November 1999, the ACC approved the Settlement Agreement that was
entered into between TEP and certain customer groups relating to recovery
of TEP's transition recovery assets and unbundling of tariffs. For TEP,
the Retail Electric Competition Rules (Rules) provide a framework for the
introduction of retail electric competition in Arizona. The Rules became
effective in January 2000, 60 days after the effective date of the
Settlement Agreement. However, certain conditions must be met before
competitive electricity will be sold in TEP's service territory, such as
certification of Energy Service Providers (ESPs) by the ACC and execution
of and compliance with direct access service agreements by ESPs and other
service providers with TEP. Currently, no ESPs have met the necessary
conditions to sell electricity in TEP's service territory.
TEP'S Settlement Agreement and Retail Electric Competition Rules
As required by the Rules consumer choice for energy supply beginning
in 2000 will be phased in until January 1, 2001 when consumer choice will
be available to all customers.
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
Agreement approved in November 1999 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's frozen rates will
include two Competition Transition Charge (CTC) components, a Fixed CTC and
a Floating CTC, which are designated for the recovery of its transition
recovery assets.
Other major provisions of the Settlement Agreement were reported in
the 1999 Form 10-K. See TEP's Settlement Agreement and Retail Electric
Competition Rules in the 1999 Form 10-K.
Approval of the Settlement Agreement caused TEP to discontinue
regulatory accounting for its generation operations using FAS 71 in
November 1999. See Note 1 of Notes to Condensed Consolidated Financial
Statements, Regulatory Accounting.
Lawsuits have been filed challenging the ACC's competition rules
order and the ACC's order approving TEP's Settlement Agreement. It is
contended that allowing marketplace competition to determine rates violates
the ACC's constitutional duty to set rates. We cannot predict the outcome
of these actions.
WHOLESALE
TEP competes with other utilities, power marketers and independent
power producers in the sale of electric capacity and energy at market-based
rates in the wholesale market. In the current market, wholesale prices are
typically substantially below TEP's total cost of service. However, we
make wholesale sales only at prices which exceed fuel and other variable
costs. We expect competition to sell capacity to remain vigorous.
Competition for the sale of capacity and energy is influenced by the
following factors:
* availability of capacity in the southwestern United States;
* restructuring of the electric utility industry in Arizona,
California and other western states;
* the availability and prices of natural gas, oil and coal;
* spot energy prices;
* precipitation; and
* transmission access.
Transmission Access
In December 1999, the FERC issued FERC Order No. 2000 which requires
all public utilities that are transmission owners to file by October 15,
2000 a proposal for a Regional Transmission Organization (RTO). An RTO is
an organization or institution which is envisioned by the FERC to operate
an electric transmission system on a regional basis, enhance operational
transmission efficiencies and reliability and remove remaining
discriminatory transmission practices. The FERC has not dictated specific
RTO structures but has instead adopted a flexible approach to considering
proposed organizational structures, including the possibility of a
transmission company which would own and operate all of the transmission
assets in a particular region. As an alternative to an RTO proposal,
transmission-owning public utilities must file a description of any efforts
made by the utility to participate in an RTO, the reasons for not
participating and any obstacles to participation, and any plans for further
work toward participation. This order is a culmination of the FERC's
efforts to promote the regional development of transmission system
operation and contemplates that RTOs will be operational by December 15,
2001. While FERC Order 2000 takes a voluntary approach to participation in
RTOs, the FERC has indicated that it will take any action it considers
necessary, including requiring RTO formation, to address any undue market
power that may exist on the part of transmission owners.
TEP, along with other transmission owners and users located in the
southwestern United States, is continuing to investigate the feasibility of
forming an Independent System Operator (ISO) for the region. An ISO, which
could potentially satisfy the requirements of an RTO, would be responsible
for ensuring transmission reliability and nondiscriminatory access to the
regional transmission grid. 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 ISO, including the potential effects on
TEP's future results of operations, will be examined as part of the
developmental work.
The ACC Retail Electric Competition Rules require the formation and
implementation of an Arizona Independent Scheduling Administrator
Association (AISA). The AISA is anticipated to be a temporary organization
until the formation of an ISO or RTO. TEP, as an Affected Utility,
participated in the creation of the AISA. This includes its incorporation
as a not-for-profit entity, the filing (when complete) at the FERC for
approval of its proposed structure, rates and procedures, and drafting of
its protocols for operation. Recently, the board of AISA approved a set of
operating protocols that are in the process of being prepared for filing
with the FERC. TEP continues to participate with the other Affected
Utilities in developing the AISA's structure and protocols in response to
retail competition.
REGULATORY MATTERS
------------------
TEP generally uses the same accounting policies and practices used by
unregulated companies for financial reporting under GAAP. 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 allow TEP to
currently charge its customers to recover certain expenses, but instead
requires that these expenses be charged to customers in the future. In this
situation, FAS 71 requires that TEP 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 as expense to the income
statement as those charges are recovered from customers. Similarly, certain
revenue items may be deferred as regulatory liabilities, which are also
eventually amortized to the income statement.
The conditions a regulated company must satisfy to apply the
accounting policies and practices of FAS 71 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.
Under GAAP, FAS 71 should be discontinued once sufficiently detailed
deregulation guidance is issued for a separable portion of a business.
However, a company may continue to recognize regulatory assets formerly
associated with the deregulated portion of the business, to the extent the
transition plan provides for their recovery through the regulated
transmission and distribution portion of the business.
Effective November 1, 1999, we stopped applying FAS 71 to our
generation operations because the Settlement Agreement provided sufficient
details regarding the deregulation of TEP's generation operations. As a
result, we changed certain accounts in our financial statements. See
Regulatory Matters in the 1999 Form 10-K for a iscussion of these
accounting changes.
We continue to apply FAS 71 in accounting for the distribution and
transmission portions of TEP's business, our regulated operations. We
periodically assess whether we can continue to apply FAS 71. If we stopped
applying FAS 71 to TEP's remaining regulated operations, we would write off
the related balances of TEP's regulatory assets as a charge in our income
statement. Based on the balances of TEP's regulatory assets at March 31,
2000, if we had stopped applying FAS 71 to TEP's remaining regulated
operations, we would have recorded an extraordinary loss of approximately
$274 million, after the related income tax benefit of $182 million. While
regulatory orders and market conditions may affect our cash flows, our cash
flows would not be affected if we stopped applying FAS 71.
See Note 1 of Notes to Condensed Consolidated Financial Statements,
Regulatory Accounting.
MARKET RISKS
------------
We are potentially exposed to various forms of market risk. Changes
in interest rates, returns on marketable securities, changes in foreign
currency exchange rates, and changes in commodity prices may affect our
future financial results. TEP currently uses derivative commodity
instruments such as forward contracts to buy or sell energy, but does not
use derivative commodity or derivative financial instruments for either
trading or speculative purposes. TEP continues to evaluate to what extent,
if any, it may use derivative financial and commodity instruments in the
normal course of its future business. The market risks described above have
not changed materially from the market risks reported in the 1999 Form 10-
K, except as noted below.
Foreign Currency Exchange Risk
We are subject to foreign currency exchange risk arising from equity
investments by our unregulated businesses in foreign countries. Nations
Energy's investment in a power project in the Czech Republic, which was
sold in January 2000, was subject to foreign currency exchange risk. The
impact of recording the exchange rate fluctuations on UniSource Energy's
income statement for 1999 and the first quarter of 2000 was not material.
Foreign currency risk related to current investments made by Nations Energy
and other Millennium businesses is not material due to the small amount of
such investments.
RESULTS OF OPERATIONS
- ---------------------
UniSource Energy recorded net income of $242,000 or $0.01 per average
share of Common Stock in the first quarter of 2000. This compares with a
net loss of $5.5 million or $0.17 per average share of Common Stock in the
first quarter of 1999. The primary factors affecting the results of
operations in the first quarter of 2000 were improved kWh sales by TEP and
a gain on the sale of a minority interest in a power project by Nations
Energy.
Contribution By Business Segment
The table below shows the contributions to our consolidated after-tax
earnings by our two business segments, as well as parent company expenses
and inter-company eliminations, for the first quarter of 2000 and 1999:
Three Months Ended March 31,
-----------------------------
(Millions)
- -------------------------------------------------------------------
Business Segment 2000 1999
- -------------------------------------------------------------------
Electric Utility $(0.1) $(1.3)
Millennium Energy Businesses 1.5 (2.8)
Parent Company and Inter-Company Eliminations (1.2) (1.4)
- -------------------------------------------------------------------
Consolidated Net Income (Loss) $ 0.2 $(5.5)
===================================================================
Parent company results include the after-tax interest expense accrued
on a note payable from UniSource Energy to TEP. This note was provided to
TEP in exchange for the stock of Millennium in January 1998. Electric
Utility results include interest income from this note.
TEP's electric utility business accounts for substantially all of
UniSource Energy's assets and revenues. 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. The following discussion is related to TEP's utility
operations, unless otherwise noted. The results of our unregulated energy
businesses are discussed in Results of Millennium Energy Businesses below.
During the fourth quarter of 1999, the ACC approved TEP's Settlement
Agreement which resulted in the discontinuation of regulatory accounting
for its generation operations under FAS 71. The effects of this change in
accounting for generation operations were recorded in accordance with FAS
101. The changes resulted in the reclassification and changes in
presentation of certain financial statement line items.
TEP will experience downward pressure on earnings due to the changes
in expense recognition as a result of ceasing to apply FAS 71 to our
generation operations. 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 approximately 2% annually;
* margins on wholesale sales are expected to increase as market prices
in the region increase over time; and
* a portion of free cash flow may be used to reduce TEP's debt, thereby
lowering interest expense.
Utility Sales and Revenues
Comparisons of TEP's kilowatt-hour sales and electric revenues are
shown below:
Increase/(Decrease)
-------------------
Three Months Ended March 31, 2000 1999 Amount Percent
- ------------------------------- ---- ---- ------ -------
Electric kWh Sales (000):
Retail Customers 1,721,597 1,662,543 59,054 3.6%
Sales for Resale 1,491,661 1,179,286 312,375 26.5%
--------- --------- -------
Total 3,213,258 2,841,829 371,429 13.1%
========= ========= =======
Electric Revenues (000):
Retail Customers $131,862 $128,780 $ 3,082 2.4%
Sales for Resale 44,761 31,859 12,902 40.5%
------- ------- ------
Total $176,623 $160,639 $15,984 10.0%
======== ======== =======
TEP's kWh sales to retail customers increased by 3.6% in the first
quarter of 2000 compared with the same period in 1999. The retail kWh
sales increase was due to a 2.9% increase in the number of retail customers
and cooler winter temperatures as measured by a 19% increase in Heating
Degree Days compared with the first quarter of 1999. Retail revenues
increased by 2.4% in the first quarter of 2000 compared with the same
period in 1999, reflecting the higher kWh sales and the impact of the 1.0%
rate decrease effective July 1, 1999.
Kilowatt-hour sales for resale increased 26.5% and the related
revenues grew by 40.5% in the first quarter of 2000 compared with the same
period in 1999. Wholesale sales volume increased due to both increased
buy/resale activity as well as an increase in generation available for
resale. Market prices were significantly higher in the three months ended
March 31, 2000 than in the prior year period, causing the revenue increase
to exceed the volume increase. Generation availability increased due to a
reduction in scheduled maintenance in the first quarter 2000 compared to
the same prior year period. Higher natural gas prices contributed to higher
market prices.
Operating Expenses
Fuel and Purchased Power expense increased by 10% in the first quarter
of 2000 compared with the same period the year before. Fuel expense at
TEP's generating plants increased primarily due to higher energy
requirements to meet increased kWh sales. Purchased Power expense also
increased primarily because of increased purchases in response to the large
increase in wholesale energy sales made by TEP during the quarter. Other
Operations and Maintenance expense increased to support customer growth and
higher kWh sales for the first quarter 2000 compared to the same prior year
period.
The discontinuation of regulatory accounting for TEP's generation
operations under FAS 71 and the resulting adoption of FAS 101 resulted in
reclassification and changes in presentation of certain financial statement
line items which has impacted several operating expense line items.
Accordingly, beginning in November 1999, Capital Lease expense is now being
reflected in Depreciation and Amortization and in Interest on Capital
Leases. The increase in Depreciation and Amortization for the first
quarter of 2000 compared to the same quarter the year before is primarily
due to this reclassification. Because we stopped applying FAS 71, we
discontinued Amortization of the Springerville Unit 1 Allowance contra-
asset and the recognition of Interest Imputed on Losses Recorded at Present
Value.
Other Income (Deductions)
Interest Income
TEP's income statements for the quarters ended March 31, 2000 and 1999
include $2.3 million and $2.5 million, respectively, of interest income on
the promissory note TEP received from UniSource Energy in exchange for the
transfer of its stock in Millennium. On UniSource Energy's consolidated
income statement, this income is eliminated as an inter-company
transaction.
Higher interest income for the quarter ended March 31, 2000 was due
primarily to lease debt investments. See Liquidity and Capital Resources
below.
Income (Losses) from Millennium Energy Businesses
The unregulated energy businesses of Millennium contributed net income
of $1.5 million for the first quarter ended March 31, 2000, compared with a
net loss of $2.8 million in the first quarter of 1999. See Note 3 of Notes
to Condensed Consolidated Financial Statements, Millennium Energy Businesses
and Results of Millennium Energy Businesses below for more information on
the results of this business segment.
Interest Expense
Because we stopped applying FAS 71 to generation operations, we had
the following changes which had the net effect of increasing interest
expense:
* We reclassified Capital Lease Interest Expense from Operating
Expenses to Interest Expense; and
* We no longer record the Interest Imputed on Losses Recorded at
Present Value due to the elimination of the Springerville Unit 1
Allowance.
Absent these accounting changes, there would have been no significant
change in Interest Expense for the first quarter of 2000 compared to the
same quarter of the prior year.
RESULTS OF MILLENNIUM ENERGY BUSINESSES
- ---------------------------------------
The table below provides a breakdown by Millennium-owned subsidiaries
of the after tax net income/(losses) recorded for the three months ended
March 31, 2000 and 1999.
------------------------------------------------
Three Months Ended
March 31,
------------------------------------------------
Subsidiary 2000 1999
------------------------------------------------
-Thousands of Dollars-
AET $(538) $(374)
MEH 314 (577)
Nations Energy 1,634 (1,942)
Other 59 100
------------------------------------------------
Total Millennium $1,469 $(2,793)
================================================
AET and Global Solar
Advanced Energy Technologies, Inc. (AET) currently owns a 50% interest
in Global Solar Energy, L.L.C. (Global Solar), a manufacturer of thin-film
photovoltaic cells. In November 1999, Millennium and ITN, the other 50%
owner of Global Solar, entered into an agreement in which Millennium's
share of Global Solar will increase to 67%. See Note 3 of Notes to
Condensed Consolidated Financial Statements, Millennium Energy Businesses.
AET's net losses in the first quarters of 1999 and 2000 were due to startup-
related and small scale manufacturing expenses. Commercial production is
scheduled in 2000 to manufacture solar-powered photovoltaic electric
generating systems.
MEH and NewEnergy
Prior to the third quarter of 1999, MEH held a 50% interest in
NewEnergy, a provider of electricity, energy products, services and
technology based energy solutions to customers in deregulating energy
markets. NewEnergy was sold to The AES Corporation in the third quarter of
1999. See discussion of NewEnergy and the terms of the sale below at
Investing and Financing Activities, Millennium - Unregulated Energy
Businesses. The net loss of $577,000 for the first quarter of 1999 was
related to NEV Southwest operating expenses.
MEH's net income for the first quarter of 2000 was derived primarily
from interest income from a note receivable as part of the sale of NewEnergy
to AES Corporation.
Nations Energy
Nations Energy Corporation (Nations Energy) develops independent power
projects worldwide. For the first quarter of 2000, Nations Energy recorded
net income of $1.6 million. These earnings included a $2.5 million pre-tax
gain on the sale of a minority interest in a power project in the Czech
Republic. Nations Energy also recorded a $1.4 million decrease in the
market value of its minority investment in the COPESA project in the first
quarter of 2000. Nations Energy recorded a net loss of $1.9 million for
the first quarter of 1999, resulting principally from losses on foreign
currency transactions related to the Czech Republic project. Management is
considering the sale of Nation's remaining assets.
DIVIDENDS ON COMMON STOCK
- -------------------------
UniSource Energy
On December 3, 1999 UniSource Energy declared a cash dividend in the
amount of $0.08 per share on its common stock. This dividend was paid
March 10, 2000 to shareholders of record at the close of business February
15, 2000.
UniSource Energy's Board of Directors will review our dividend policy
on a continuing basis, taking into consideration a number of factors
including our results of operations and financial condition, general
economic and competitive conditions and the cash flow from our subsidiary
companies, TEP and Millennium.
TEP
In December 1999, TEP declared and paid a dividend of $34 million to
UniSource Energy, its sole shareholder.
TEP can pay dividends if it maintains compliance with the TEP Credit
Agreement and certain financial covenants, including a covenant that
requires TEP to maintain a minimum level of net worth. As of March 31,
2000, the required minimum net worth was $212 million. TEP's actual net
worth at March 31, 2000 was $270 million. See Investing and Financing
Activities, TEP Credit Agreement, below. As of March 31, 2000, TEP was 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, 2000, TEP's equity ratio on that basis was 19.2%.
In addition to these limitations, 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 are unclear, we
believe that there is a reasonable basis to pay dividends from current year
earnings. Therefore, TEP declared its December 1999 dividend from 1999
earnings since TEP had an accumulated deficit, rather than positive
retained earnings.
Millennium
In the third quarter of 1999, Millennium paid a $10 million cash
dividend to UniSource Energy. We cannot predict, however, the amount or
timing of future dividends from Millennium.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
----------
UniSource Energy
Consolidated cash and cash equivalents decreased from the March 31,
1999 ending balance of $105.8 million to $101.5 million at March 31, 2000.
For the twelve-month period ended March 31, 2000, consolidated net cash
outflows for investing and financing activities exceeded the cash generated
from operating activities.
Net cash flows from operating activities increased by $17.9 million in
the first quarter of 2000 compared with the same period in 1999. The net
increase resulted from the following principal factors:
* $9.6 million increase in cash receipts from wholesale sales;
* $5.6 million increase in cash receipts from retail customers; and
* $4.8 million reduction in income taxes paid.
Net cash used for investing activities totaled $36.3 million during
the first quarter of 2000 compared with $21.0 million during the same
period in 1999. Capital expenditures were $9.7 million higher in 2000.
Other significant investing activities in 2000 included: (i) the $27.6
million purchase of Springerville Unit 1 Lease debt by Millennium and (ii)
Nations Energy's $19.9 million in proceeds from the sale of its interest in
the Czech Republic power project.
Net cash used for financing activities totaled $23.7 million in the
first quarter of 2000 compared with $16.7 million during the same period in
1999. In 2000, the major use of cash for financing activities was $20.7
million of scheduled payments that retired capital lease obligations. In
1999, $16.5 million of capital lease obligations were retired. In the
first quarter of 2000, $2.6 million in common stock dividends were paid.
UniSource Energy's consolidated cash balance, including cash
equivalents, at May 4, 2000 was approximately $94 million. We invest cash
balances in high-grade money market securities with an emphasis on
preserving the principal amounts invested.
During the next 12 months, UniSource Energy expects to use cash to
fund investments in Millennium's unregulated energy businesses and to pay
dividends to shareholders. We expect our sources of cash to be dividends
from our subsidiaries, primarily TEP. Although no specific offerings are
currently contemplated, UniSource Energy may also issue debt and/or equity
securities from time to time. If available cash falls short of
expectations, we would reevaluate the investment requirements of
Millennium's unregulated energy businesses and/or seek additional financing
for, or investments in, those businesses by unrelated parties.
TEP
Cash and cash equivalents decreased from the March 31, 1999 ending
balance of $86.1 million to $61.1 million at March 31, 2000. For the
twelve-month period ended March 31, 2000, net cash outflows from investing
and financing activities exceeded net cash inflows for operating
activities.
Net cash flows from operating activities increased by $17.1 million in
the first quarter of 2000 compared with the same period in 1999,
principally due to cash receipts from wholesale sales and from sales to
retail customers. See Cash Flows, UniSource Energy, above for a
discussion of other factors affecting net cash flows from operating
activities.
Net cash used for investing activities totaled $23.6 million during
the first quarter of 2000 compared with $15.8 million during the same
period of 1999. Capital expenditures were $8.2 million higher in 2000.
Net cash used for financing activities totaled $21.3 million during
the first quarter of 2000 compared with $16.8 million during the same
period in 1999. Scheduled Payments to Retire Capital Lease Obligations,
the principal reason for the increase, were $4.2 million higher in 2000.
TEP's 12.22% Series First Mortgage Bonds will mature on June 1, 2000. The
payment of principal and interest upon maturity will total approximately
$50 million.
TEP's consolidated cash balance, including cash equivalents, at May 4,
2000 was approximately $49 million.
TEP expects to generate enough cash flow during the next 12 months to
fund continuing operating activities, capital expenditures, required debt
maturities, and to pay dividends to UniSource Energy. However, TEP's cash
flows may vary due to changes in wholesale market conditions, changes in
short-term interest rates and other factors. If cash flows were to fall
short of our expectations, or if monthly cash requirements temporarily
exceed available cash balances, TEP would borrow from the Revolving Credit
Facility.
INVESTING AND FINANCING ACTIVITIES
- ----------------------------------
UniSource Energy
----------------
Loans and Guarantees
As described below, UniSource Energy sold its interest in NewEnergy on
July 23, 1999. Pursuant to the sale, UniSource Energy provided guarantees
on certain of NewEnergy's transactions. All of these guarantees have been
terminated.
TEP
---
Capital Expenditures
TEP's capital expenditures for the quarter ended March 31, 2000 were
$23.7 million. TEP's capital budget for the year ending December 31, 2000
is approximately $95 million. These authorized expenditures include costs
for TEP to comply with current federal and state environmental regulations.
All of these estimates are subject to continuing review and adjustment.
Actual construction expenditures may differ from budgeted amounts due to
changes in business conditions, construction schedules, environmental
requirements and changes to our business arising from retail competition.
TEP plans to fund these expenditures through internally generated cash
flow.
TEP Credit Agreement
As of March 31, 2000 and as of May 4, 2000, TEP had no borrowings
outstanding under its $100 million Revolving Credit Facility.
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 1.40
in 2000 and gradually increasing to 1.55 in 2002, and (c) a maximum
Leverage Ratio ranging from 6.60 in 2000 and gradually decreasing to 6.20
in 2002. TEP is in compliance with each of these covenants.
Millennium -- Unregulated Energy Businesses
-------------------------------------------
Sale of NewEnergy, Inc.
On July 23, 1999, MEH sold its 50% ownership in NewEnergy to The AES
Corporation (AES) for approximately $50 million in consideration. As part
of the transaction, two promissory notes were issued by NewEnergy totaling
$22.8 million. The notes are secured by AES stock and bear interest at
9.5%. Principal of $11.4 million is due July 23, 2000 and July 23, 2001,
respectively.
Capital Requirements
The unregulated energy businesses owned by Millennium have
historically required significant amounts of capital. During 1999 and in
the first quarter of 2000, we have taken the opportunity to realize the
value from certain of these more capital intensive investments and focus on
emerging energy production and storage technologies.
In January 2000, Nations Energy sold its interest in the project
located in the Czech Republic for a $2.5 million pre-tax gain.
Plans for 2000 and beyond include lower anticipated funding
requirements for Nations Energy and increased support of AET and Global
Solar. In particular, Millennium has agreed to contribute to Global Solar
up to $14 million in additional equity. As of March 31, 2000, Millennium
had funded $3.7 million of the $14 million commitment.
Our ability to fund additional future capital requirements of our
unregulated business segment will depend to a great extent on the amount
and availability of dividends UniSource Energy receives from our primary
operating subsidiary, TEP.
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 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 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 and other statements that are not statements of
historical facts. Forward-looking statements may be identified by the use
of words such as "anticipates," "estimates," "expects," "intends," "plans,"
"predicts," "projects," and similar expressions. From time to time, we 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 of this report.
Forward-looking statements involve risks and uncertainties that could
cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. We express our expectations, beliefs
and projections in good faith and believe them to have a reasonable basis.
However, we make no assurances that management's expectations, beliefs or
projections will be achieved or accomplished. We have identified the
following important factors that could cause actual results to differ
materially from those discussed in our forward-looking statements. These
may be in addition to other factors and matters discussed in other parts of
this report:
1. Effects of restructuring initiatives in the electric industry and
other energy-related industries.
2. Effects of competition in retail and wholesale energy markets.
3. Changes in economic conditions, demographic patterns and weather
conditions in TEP's retail service area.
4. 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.
5. Changes in governmental policies and regulatory actions with respect
to allowed rates of return, financings, and rate structures.
6. Changes affecting the cost of competing energy alternatives, including
changes in available generating technologies and changes in the cost of
natural gas.
7. Changes in accounting principles or the application of such principles
to UniSource Energy or TEP.
8. Marketing conditions and technological changes affecting UniSource
Energy's unregulated businesses.
- -----------------------------------------------------------------------------
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -----------------------------------------------------------------------------
The information contained in this Item updates, and should be read in
conjunction with, information included in Part II, Item 7A in UniSource
Energy's and TEP's Annual Report on Form 10-K for the year ended December
31, 1999, in addition to the interim condensed consolidated financial
statements and accompanying notes presented in Items 1 and 2 of this Form
10-Q.
See Item 2- Management's Discussion and Analysis of Financial
Condition and Results of Operations, Factors Affecting Results of
Operations, Market Risks, Foreign Currency Exchange Risk.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
- -----------------------------------------------------------------------------
TAX ASSESSMENTS
See Note 4 of Notes to Condensed Consolidated Financial Statements,
Contingencies.
ACC ORDER on the SIERRITA CONTRACT
See Note 4 of Notes to Condensed Consolidated Financial Statements,
Contingencies.
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,
2000 1999
---- ----
Ratio of Earnings to Fixed Charges 1.47 1.45
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------------------------------------
(a) Exhibits.
-- See Exhibit Index.
(b) Reports on Form 8-K.
UniSource Energy and TEP filed the following current reports on Form
8-K during the quarter ended March 31, 2000:
* None.
<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: May 11, 2000 /s/ Ira R. Adler
----------------------------
Ira R. Adler
Executive Vice President and Principal
Financial Officer
TUCSON ELECTRIC POWER COMPANY
-----------------------------
(Registrant)
Date: May 11, 2000 /s/ Ira R. Adler
-----------------------------
Ira R. Adler
Executive Vice President and Principal
Financial Officer
<PAGE>
EXHIBIT INDEX
11 - Statement re computation of per share earnings - UniSource Energy.
12 - Computation of Ratio of Earnings to Fixed Charges - TEP.
15 - Letter regarding unaudited interim financial information.
27a - Financial Data Schedule - TEP.
27b - Financial Data Schedule - UniSource Energy.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TUCSON ELECTRIC POWER FINANCIAL STATEMENTS FOR THE PERIOD
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000100122
<NAME> TUCSON ELECTRIC POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,723,629
<OTHER-PROPERTY-AND-INVEST> 67,595
<TOTAL-CURRENT-ASSETS> 206,348
<TOTAL-DEFERRED-CHARGES> 474,229
<OTHER-ASSETS> 72,459
<TOTAL-ASSETS> 2,544,260
<COMMON> 641,261
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (370,961)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 270,300
0
0
<LONG-TERM-DEBT-NET> 1,134,595
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 48,603
0
<CAPITAL-LEASE-OBLIGATIONS> 866,664
<LEASES-CURRENT> 29,005
<OTHER-ITEMS-CAPITAL-AND-LIAB> 195,093
<TOT-CAPITALIZATION-AND-LIAB> 2,544,260
<GROSS-OPERATING-REVENUE> 176,623
<INCOME-TAX-EXPENSE> (1,062)
<OTHER-OPERATING-EXPENSES> 138,241
<TOTAL-OPERATING-EXPENSES> 137,179
<OPERATING-INCOME-LOSS> 39,444
<OTHER-INCOME-NET> 2,919
<INCOME-BEFORE-INTEREST-EXPEN> 42,363
<TOTAL-INTEREST-EXPENSE> 42,449
<NET-INCOME> (86)
0
<EARNINGS-AVAILABLE-FOR-COMM> (86)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 17,537
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM UNISOURCE ENERGY FINANCIAL STATEMENTS FOR THE PERIOD ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000941138
<NAME> UNISOURCE ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,723,629
<OTHER-PROPERTY-AND-INVEST> 128,025
<TOTAL-CURRENT-ASSETS> 272,791
<TOTAL-DEFERRED-CHARGES> 474,229
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,598,674
<COMMON> 641,975
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (317,237)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 324,738
0
0
<LONG-TERM-DEBT-NET> 1,134,595
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 48,603
0
<CAPITAL-LEASE-OBLIGATIONS> 866,986
<LEASES-CURRENT> 29,085
<OTHER-ITEMS-CAPITAL-AND-LIAB> 194,667
<TOT-CAPITALIZATION-AND-LIAB> 2,598,674
<GROSS-OPERATING-REVENUE> 176,547
<INCOME-TAX-EXPENSE> (1,062)
<OTHER-OPERATING-EXPENSES> 138,241
<TOTAL-OPERATING-EXPENSES> 137,179
<OPERATING-INCOME-LOSS> 39,368
<OTHER-INCOME-NET> 3,323
<INCOME-BEFORE-INTEREST-EXPEN> 42,691
<TOTAL-INTEREST-EXPENSE> 42,449
<NET-INCOME> 242
0
<EARNINGS-AVAILABLE-FOR-COMM> 242
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 16,256
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
UNISOURCE ENERGY CORPORATION
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Three Months Ended
March 31,
2000 1999
------ ------
- Thousands of Dollars -
(except per share data)
BASIC EARNINGS PER SHARE:
Net Income (Loss) $ 242 $(5,528)
Average Shares of Common Stock Outstanding 32,374 32,287
--------- --------
Basic Earnings (Loss) Per Share $ 0.01 $ (0.17)
========= ========
DILUTED EARNINGS PER SHARE:
Net Income (Loss) $ 242 $(5,528)
Average Shares of Common Stock Outstanding 32,374 32,286
Effect of Dilutive Securities:
Warrants - -
Options and Stock Issuable under Employee
Benefit Plans 383 -
--------- --------
Total Shares 32,757 32,286
--------- --------
Diluted Earnings (Loss) Per Share $ 0.01 $ (0.17)
========= ========
4.6 million of the 7.6 million warrants outstanding 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.
<TABLE>
Exhibit 12
TUCSON ELECTRIC POWER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<CAPTION>
12 Months Ended
---------------
Mar. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2000 1999 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on Long-Term Debt $67,385 $66,836 $72,672 $66,247 $59,836 $69,174
Other Interest (1) $12,647 $13,081 $13,207 $9,640 $11,721 $9,113
Interest on Capital Lease Obligations (2) $81,630 $82,414 $81,823 $83,019 $84,383 $83,986
----------------------------------------------------------------
TOTAL FIXED CHARGES $161,662 $162,331 $167,702 $158,906 $155,940 $162,273
NET INCOME $74,709 $73,475 $41,676 $83,572 $120,852 $54,905
LESS:
Extraordinary Income - Net of Tax $22,597 $22,597 $0 $0 $0 $0
----------------------------------------------------------------
NET INCOME FROM CONTINUING OPERATIONS $52,112 $50,878 $41,676 $83,572 $120,852 $54,905
ADD (DEDUCT):
Income Taxes - Operating Expense $19,765 $18,268 $18,372 $19,297 $9,795 $8,920
Income Taxes - Other $4,867 $4,082 ($794) ($41,401) ($91,950) ($29,356)
Total Fixed Charges $161,662 $162,331 $167,702 $158,906 $155,940 $162,273
----------------------------------------------------------------
TOTAL EARNINGS BEFORE TAXES
AND FIXED CHARGES $238,406 $235,559 $226,956 $220,374 $194,637 $196,742
RATIO OF EARNINGS TO FIXED CHARGES 1.474 1.451 1.353 1.387 1.248 1.212
(1) Excludes recognition of Allowance for Borrowed Funds Used during Construction.
(2) Capital Lease Interest Paid from Statement of Cash Flows.
</TABLE>
Exhibit 15
May 5, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 5, 2000 on
our review of interim financial information of UniSource
Energy Corporation (the Company) and Tucson Electric Power
Company (TEP) as of and for the period ended March 31,
2000 and included in the Company's and TEP's quarterly
report on Form 10-Q for the quarter then ended is
incorporated by reference in the Company's Registration
Statements on Form S-8 (Nos. 333-43765, 333-43767, 333-
43769, 333-53309, 333-53333 and 333-53337), on Form S-3
(Nos. 333-31043 and 333-93769), and on Form S-4 (No. 333-60809)
and in TEP's Amendment No. 3 to the Registration Statement
on Form S-4 (No. 333-65143).
Very truly yours,
PricewaterhouseCoopers LLP
