UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification Number
----------- ---------------------------------- ---------------------
1-13739 UNISOURCE ENERGY CORPORATION 86-0786732
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
1-5924 TUCSON ELECTRIC POWER COMPANY 86-0062700
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Registrant Title of Each Class on Which Registered
---------- ------------------- ---------------------
UniSource Energy Common Stock, no par New York Stock
Corporation value and Preferred Exchange
Share Purchase Rights Pacific Stock
Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of UniSource Energy Corporation voting Common
Stock held by non-affiliates of the registrant was $430,762,120.88 based on
the last reported sale price thereof on the consolidated tape on February 24,
2000.
At February 24, 2000, 32,357,718 shares of UniSource Energy Corporation
Common Stock, no par value (the only class of Common Stock), were
outstanding.
UniSource Energy Corporation is the sole holder of the 32,139,434 shares
of the outstanding Common Stock of Tucson Electric Power Company.
Documents incorporated by reference: Specified portions of UniSource
Energy Corporation's Proxy Statement relating to the 2000 Annual Meeting of
Shareholders are incorporated by reference into PART III.
- -----------------------------------------------------------------------------
<PAGE>
This combined Form 10-K 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....................................................vi
- PART I -
Item 1. - Business
The Company................................................... 1
Electric Utility Operations
Peak Demand................................................. 3
Customers................................................... 3
Sales for Resale............................................ 4
Generating and Other Resources
TEP Generating Resources.................................. 5
Power Exchange Agreement.................................. 7
Other Purchases and Interconnections...................... 7
Future Generating Resources............................... 7
Rates and Regulation
General................................................... 8
ACC Holding Company Order................................. 8
TEP's Settlement Agreement and Retail Electric
Competition Rules........................................ 9
State and Federal Legislation on Retail Competition.......10
Transmission Access.......................................10
Other Rate Matters........................................11
Fuel Supply
Coal......................................................12
Springerville Coal Handling Facilities....................13
Natural Gas...............................................13
Water Supply................................................13
Environmental Matters.......................................13
Millennium Energy Businesses..................................14
Employees.....................................................15
TEP's Utility Operating Statistics............................16
Item 2. - Properties...........................................17
Item 3. - Legal Proceedings
Tax Assessments...............................................18
Litigation Related to ACC Orders and Retail Competition.......18
Item 4. - Submission of Matters to a Vote of Security Holders..18
- PART II -
Item 5. - Market for Registrant's Common Equity and Related
Stockholder Matters..................................19
Item 6. - Selected Consolidated Financial Data
UniSource Energy..............................................20
TEP...........................................................21
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview....................................................22
Factors Affecting Results of Operations
Competition
Retail....................................................23
Wholesale.................................................24
Regulatory Matters..........................................24
Market Risks................................................25
Impact of the Year 2000 on Computer Systems and
Applications................................................27
Results of Operations.........................................27
Contribution by Business Segment............................27
Utility Sales and Revenues..................................28
Expenses....................................................29
Other Income (Deductions)...................................30
Reversal of Loss Provision................................30
Interest Income...........................................30
Income (Losses) from Millennium Energy Businesses.........30
Interest Expense............................................31
Extraordinary Income - Net of Tax...........................31
Results of Millennium Energy Businesses.....................32
Dividends on Common Stock
UniSource Energy............................................33
TEP.........................................................33
Millennium..................................................34
Income Tax Position...........................................34
Liquidity and Capital Resources
Cash Flows
Overview of UniSource Energy Cash Flows and Liquidity.....34
TEP Cash Flows and Liquidity..............................35
Investing and Financing Activities
TEP - Electric Utility
Capital Expenditures.................................36
Bond Issuance and Redemption.........................36
TEP Bank Credit Agreement............................36
Springerville Common Facilities Leases...............37
Tax-Exempt Local Furnishing Bonds....................37
Restrictive Covenants................................38
Millennium - Unregulated Energy Businesses
Sale of NewEnergy, Inc...............................39
Capital Requirements.................................39
UniSource Energy - Parent Company Financing Activities
Promissory Note to TEP...............................40
Investment Plus Plan.................................40
Restrictions on Proceeds of Equity Issuance..........40
Safe Harbor for Forward-Looking Statements..................40
Item 7A. - Quantitative and Qualitative Disclosures about
Market Risk.........................................41
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
Item 8. - Consolidated Financial Statements and
Supplementary Data...................................41
Independent Auditors' Report..................................42
Report of Independent Accountants.............................43
UniSource Energy Corporation
Consolidated Statements of Income...........................44
Consolidated Statements of Cash Flows.......................45
Consolidated Balance Sheets.................................46
Consolidated Statements of Capitalization...................47
Consolidated Statements of Changes in Stockholders' Equity..48
Tucson Electric Power Company
Consolidated Statements of Income...........................49
Consolidated Statements of Cash Flows.......................50
Consolidated Balance Sheets.................................51
Consolidated Statements of Capitalization...................52
Consolidated Statements of Changes in Stockholder's Equity..53
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant
Accounting Policies
Nature of Operations........................................54
Basis of Presentation.......................................54
Use of Accounting Estimates.................................55
Regulation..................................................55
TEP Utility Plant...........................................55
TEP Utility Plant Under Capital Leases......................55
Long-Term Debt..............................................56
Utility Operating Revenues..................................56
Fuel Costs..................................................56
Income Taxes................................................57
Emission Allowances.........................................57
New Accounting Standards....................................57
Reclassifications...........................................57
Note 2. Regulatory Matters
November 1999 ACC Approval of Settlement Agreement..........59
Accounting Implications.....................................60
Note 3. Segment and Related Information.......................62
Note 4. Millennium Energy Businesses..........................64
International Power Projects - Nations Energy Corporation...64
Energy Marketing - MEH Corporation..........................65
Photovoltaic Manufacturing - Advanced Energy
Technologies, Inc..........................................66
Note 5. TEP's Utility Plant and Jointly-Owned Facilities
Utility Plant...............................................66
Jointly-Owned Facilities....................................67
Note 6. Long-Term Debt and Capital Lease Obligations
TEP Long-Term Debt..........................................67
Bonds -- 1999.............................................67
Sale and Redemption of Bonds - 1998.......................67
TEP Other Long-Term Debt and Agreements
First and Second Mortgage...................................68
Bank Credit Agreement.......................................68
Capital Lease Obligations...................................68
Maturities and Sinking Fund Requirements....................69
<PAGE>
TABLE OF CONTENTS
(concluded)
Note 7. Fair Value of TEP's Financial Instruments.............69
Note 8 Dividend Limitations...................................70
Note 9. Commitments and Contingencies
TEP Commitments - Fuel Purchase.............................70
TEP Commitments - Environmental Regulation..................71
Contingencies
Income Tax Assessments....................................71
Resolution of Contingency - Arizona Sales Tax
Assessments..............................................72
Note 10. Income Taxes.........................................73
Note 11. Employee Benefits Plans..............................75
Pension and Other Postretirement Benefit Plans..............75
Defined Contribution Plans..................................77
Stock Option Plans..........................................77
Note 12. Warrants.............................................79
Note 13. Shareholder Rights Plan..............................79
Note 14. Supplemental Cash Flow Information...................80
Note 15. Earnings Per Share (EPS).............................82
Note 16. Quarterly Financial Data (Unaudited).................83
Item 9. - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................85
- PART III -
Item 10. - Directors and Executive Officers of the Registrants
Directors.....................................................85
Executive Officers............................................85
Item 11. - Executive Compensation..............................87
Item 12. - Security Ownership of Certain Beneficial Owners
and Management
General.......................................................87
Security Ownership of Certain Beneficial Owners...............87
Security Ownership of Management..............................87
Item 13. - Certain Relationships and Related Transactions......88
- PART IV -
Item 14. - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ..............................88
Signatures....................................................89
Exhibit Index.................................................93
<PAGE>
DEFINITIONS
The abbreviations and acronyms used in the 1999 Form 10-K 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.
APS........................ Arizona Public Service Company.
BTU........................ British Thermal Unit(s).
CAAA....................... Federal Clean Air Act Amendments.
Common Stock............... UniSource Energy's common stock, without par
value.
Company or UniSource Energy UniSource Energy Corporation.
Credit Agreement........... Credit Agreement between TEP and the
banks, dated as of December 30, 1997.
Emission Allowance(s)...... An EPA issued allowance which permits
emission of one ton of sulfur dioxide. Such
allowances can be sold.
EPA........................ The Environmental Protection Agency.
FAS 71..................... Statement of Financial Accounting Standards
No. 71: Accounting for 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 Collateral Trust Bonds Bonds issued under the First Collateral
Trust Indenture.
First Collateral Trust
Indenture................. The Indenture, dated as of August 1, 1998,
of Tucson Electric Power Company to Bank
of Montreal Trust Company of the City of
New York, as trustee.
First Mortgage Bonds....... First mortgage bonds issued under the General
First Mortgage.
Four Corners............... Four Corners Generating Station.
GAAP....................... Generally Accepted Accounting Principles.
General First Mortgage..... The Indenture, dated as of April 1, 1941,
of Tucson Gas, Electric Light and Power
Company to The Chase National Bank of the
City of New York, as trustee, as supplemented
and amended.
General Second Mortgage.... The Indenture, dated as of December 1,
1992, of Tucson Electric Power Company to
Bank of Montreal Trust Company of the City of
New York, as trustee, as supplemented.
Global Solar............... Global Solar Energy, L.L.C., a corporation
which is 50% owned by AET and 50% owned by
ITN.
Holding Company Act........ The Public Utility Holding Company Act of
1935, as amended.
IDBs....................... Industrial development revenue or pollution
control revenue bonds.
ION........................ ION International, Inc. a wholly-owned
subsidiary of Millennium.
IRS........................ Internal Revenue Service.
Irvington.................. Irvington Generating Station.
Irvington Lease........... The leveraged lease arrangement relating to
Irvington Unit 4.
ISO........................ Independent System Operator.
ITC........................ Investment tax credit.
ITN........................ ITN Energy Systems, Inc., an unaffiliated
company which owns 50% of Global Solar.
kW......................... Kilowatt(s).
kWh........................ Kilowatt-hour(s).
kV......................... Kilovolt(s).
kVA........................ Kilovoltampere(s).
LOC........................ Letter of Credit.
MEH........................ MEH Corporation, a wholly-owned subsidiary
of Millennium.
<PAGE>
DEFINITIONS
(continued)
Millennium................. Millennium Energy Holdings, Inc., a wholly-
owned subsidiary of UniSource Energy.
MSR........................ Modesto, Santa Clara and Redding Public Power
Agency.
MW......................... Megawatt(s).
MWh........................ Megawatt-hour(s).
Nations Energy............. Nations Energy Corporation, a wholly-owned
subsidiary of Millennium.
Navajo..................... Navajo Generating Station.
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.
NTUA....................... Navajo Tribal Utility Authority.
PNM........................ Public Service Company of New Mexico.
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........... $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.
San Carlos................. San Carlos Resources Inc., a wholly-owned
subsidiary of TEP.
San Juan San Juan Generating Station.
Second Mortgage Bonds...... TEP's second mortgage bonds issued under the
General Second Mortgage.
SES........................ Southwest Energy Solutions, Inc., a wholly-
owned subsidiary of Millennium.
Settlement Agreement....... TEP's Settlement Agreement approved by the
ACC in November 1999 provided for electric
retail competition and transition recovery
asset recovery.
Springerville.............. Springerville Generating Station.
Springerville Coal Handling
Facilities Leases.......... Leveraged lease arrangements relating to
the coal handling facilities serving
Springerville.
Springerville Common
Facilities............... Facilities at Springerville used in common
with Springerville Unit 1 and Springerville
Unit 2.
Springerville Common
Facilities Leases........ Leveraged lease arrangements relating to
an undivided one-half interest in certain
Springerville Common Facilities.
Springerville Unit 1....... Unit 1 of the Springerville Generating
Station.
Springerville Unit 1 Leases Leveraged lease arrangement relating
to Springerville Unit 1 and an undivided one-
half interest in certain Springerville Common
Facilities.
Springerville Unit 2....... Unit 2 of the Springerville Generating
Station.
SRP........................ Salt River Project Agricultural Improvement
and Power District.
TEP........................ Tucson Electric Power Company, the
principal subsidiary of UniSource Energy.
TEP Warrants............... Warrants for the purchase of TEP Common
Stock which were issued in 1992.
UniSource Energy........... UniSource Energy Corporation.
UniSource Energy Warrants.. Warrants for the purchase of UniSource
Energy Common Stock which were issued in
exchange for TEP Warrants, pursuant to an
exchange offer which expired October 23,
1998.
WSCC....................... Western Systems Coordinating Council.
<PAGE>
PART I
This Annual Report on Form 10-K contains forward-looking
statements as defined by the Private Securities Litigation Reform
Act of 1995. You should read forward-looking statements with the
cautionary statements and important factors included in this Form 10-
K. (See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Safe Harbor for Forward-Looking
Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions. Forward-looking statements
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," and
"projects." We express our expectations, beliefs and projections in
good faith and believe them to have a reasonable basis. However, we
cannot assure you that these expectations, beliefs or projections
will be achieved or realized.
ITEM 1. - BUSINESS
- --------------------------------------------------------------------
THE COMPANY
- -----------
Overview of Consolidated Business
- ---------------------------------
UniSource Energy Corporation (UniSource Energy) is a holding
company which owns all of the outstanding common stock of Tucson
Electric Power Company (TEP) and Millennium Energy Holdings, Inc.
(Millennium). UniSource Energy was incorporated in the State of
Arizona on March 8, 1995 and obtained regulatory approval to form a
holding company in November 1997. On January 1, 1998, TEP and
UniSource Energy completed a transaction by which all outstanding
shares of TEP common stock were exchanged, on a share-for-share
basis, for shares of UniSource Energy common stock. Following the
share exchange, TEP transferred the stock of its subsidiary
Millennium (formerly MEH Corporation) to UniSource Energy in
exchange for a $95 million promissory note. (See Note 1 of Notes to
Consolidated Financial Statements).
TEP was incorporated in the State of Arizona on December 16,
1963. TEP is the successor by merger as of February 20, 1964, to a
Colorado corporation which was incorporated on January 25, 1902.
We conduct our business in two primary business segments-the
Electric Utility Segment (TEP), and the Millennium Energy Businesses
Segment comprised of the unregulated subsidiaries owned by
Millennium.
Overview of Electric Utility
- ----------------------------
TEP is a vertically integrated utility which provides regulated
electric service to over 330,000 retail customers in its retail
service territory. This service territory consists of a 1,155
square mile area of Southeastern Arizona with a population of
approximately 840,000 in the greater Tucson metropolitan area in
Pima County, as well as parts of Cochise County. TEP holds a
franchise to provide electric service to customers in the City of
Tucson. This franchise expires in 2001. TEP is negotiating a
renewal of the franchise. However, expiration of the franchise
would not have a material effect on the ability of TEP to serve
customers in the City of Tucson. (See Customers, Franchise below).
TEP also engages in the wholesale marketing of electricity,
primarily in the Western U. S.
Beginning in 2000, the Arizona Corporation Commission's (ACC)
Retail Electric Competition Rules (Rules) require TEP to unbundle
its retail electric services into separate generation, transmission
and distribution services with open retail competition for
generation services. Pursuant to the Rules, TEP will serve as the
local distribution company providing electric distribution services
to all retail customers in its service territory and will be the
integrated electric service supplier to customers who cannot or do
not choose an alternate electric generation supplier. See Rates and
Regulation and Competition, Retail below for additional information
on the implementation of deregulation.
The ACC approved TEP's Settlement Agreement with certain
customer groups relating to recovery of transition recovery assets
and unbundling of tariffs in November 1999. This Settlement
Agreement provides the framework for transition to a fully
competitive generation market. In November 1999, TEP discontinued
the use of regulatory accounting in its financial statements for its
electric generation activities. In connection with this change, TEP
recognized $23 million in after-tax extraordinary net income in
1999. It also reclassified certain assets as transition recovery
assets and changed the method by which certain expenses are
recognized. See Note 2 of Notes to Consolidated Financial
Statements, Regulatory Matters and Management's Discussion and
Analysis of Financial Condition and Results of Operations for
additional information.
TEP owns all of the outstanding stock of San Carlos Resources
Inc. (San Carlos), which owns Springerville Unit 2.
We describe our electric utility business further in the
Electric Utility Operations and TEP Utility Operating Statistics
sections.
Overview of Millennium Energy Businesses
- ----------------------------------------
Millennium owns 100% of the common stock of five subsidiaries.
We established these subsidiaries to pursue various unregulated
energy-related investment opportunities:
(i) Advanced Energy Technologies, Inc. (AET) which holds a 50%
interest in Global Solar Energy, L.L.C. (Global Solar), a
manufacturer of thin-film photovoltaic cells. In November 1999,
Millennium and ITN Energy Systems, Inc. (ITN), the other 50% owner,
entered into an agreement in which Millennium's share of Global
Solar will increase to 67%. See Note 4 of Notes to Consolidated
Financial Statements, Millennium Energy Businesses.
(ii) ION International, Inc. (ION) which intends to provide
technology applications to commerce, health care and industry
organizations to help them more efficiently manage their energy
needs.
(iii) MEH Corporation (MEH) which held a 50% interest in NewEnergy,
Inc. Our interest in NewEnergy, a provider of various services
including the purchase and aggregation of electricity on behalf of
retail purchasers of electric energy, was sold in 1999. MEH now
holds secured notes from NewEnergy in the aggregate amount of $23
million.
(iv) Nations Energy Corporation (Nations Energy) which develops
independent power projects.
(v) Southwest Energy Solutions, Inc. (SES) which provides energy
support services to electric consumers.
We describe Millennium's unregulated energy businesses in more
detail in the Millennium Energy Businesses section.
Competition and Response to Regulatory Change
- ---------------------------------------------
The electric utility industry is undergoing significant
regulatory change designed to encourage competition in the sale of
electric generation services. We believe that TEP's Settlement
Agreement resolves a significant amount of uncertainty and provides
TEP with the opportunity to recover 100 percent of its transition
recovery assets. We continually evaluate our position to develop
strategies to remain competitive in this changing environment. In
November 1998, TEP realigned its utility business into two separate
business units: (1) generation and (2) transmission and
distribution, and in January 1999, we formed a third business unit
which provides administrative services to the utility business
units. By the terms of its Settlement Agreement, TEP is required to
transfer its generation and competitive electric service assets to a
separate TEP subsidiary by December 31, 2002. In addition, we may
pursue other strategies in the future which include one or more of
the following:
-- creation of separate affiliates for our transmission and
distribution businesses,
-- sale of generation assets,
-- acquisition of transmission assets, and
-- investments by unaffiliated parties in, or sales of portions of,
Millennium's unregulated energy businesses.
We cannot predict whether any transactions of the types
described above may actually occur, nor can we predict what their
effect on our financial condition or competitive position might be.
We discuss competition in our electric utility business in more
detail in Rates and Regulation and in Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of
Operations, Competition.
ELECTRIC UTILITY OPERATIONS
- ---------------------------
PEAK DEMAND
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Peak Demand - MW -
<S> <C> <C> <C> <C> <C>
Retail Customers-Net One Hour 1,754 1,786 1,659 1,619 1,617
Firm Sales to Other Utilities 178 179 177 177 223
----- ----- ----- ----- -----
Non-Coincident Peak Demand (A) 1,932 1,965 1,836 1,796 1,840
Total Generating Resources 1,904 1,896 1,992 1,952 1,952
Other Resources 235 235 235 133 133
----- ----- ----- ----- -----
Total TEP Resources (B) 2,139 2,131 2,227 2,085 2,085
Total Reserves (B) - (A) 207 166 391 289 245
Reserve Margin (% of Non-Coincident
Peak Demand) 11% 8% 21% 16% 13%
</TABLE>
- ---------------------------------------------------------------------------
The peak demand for TEP's retail service area occurs during the
summer months due to the cooling requirements of our retail
customers. TEP's local peak demand has grown at an average annual
rate of about 2.0% during the past five years. The peak demand for
firm sales to other utilities generally does not coincide with TEP's
retail peak demand.
The chart above shows the relationship over a five-year period
between TEP's peak demand and its energy resources. In addition to
TEP's generating resources, total resources include firm capacity
purchases and interruptible retail load. TEP's reserves are the
difference between energy resources and peak demand, and the reserve
margin is the ratio of reserves to peak demand. For planning
purposes, TEP monitors its reserve margin in accordance with
guidelines set by the WSCC equal to its largest single hazard plus
5% of its non-coincident peak demand. For 1999, this planning
reserve margin equaled 302 MW or 16% of non-coincident peak demand.
TEP's actual reserve margin in 1999 was 11%, compared with 8% in
1998. The higher actual reserve margin in 1999 resulted from a
reduction in the peak demand. TEP purchased additional firm energy
as needed to ensure it had adequate operating reserve margins
throughout the year in accordance with the operating requirements of
the Southwest Reserve Sharing Group.
TEP expects to meet near-term demand growth with existing
resources, purchases, and additional resources as discussed in
Future Generating Resources below. See TEP Generating Resources for
information regarding our need for new resources.
CUSTOMERS
The average number of TEP's retail customers increased by 2.8%
in 1999 to 329,779. TEP expects the number of its retail
distribution customers, and the amount of energy consumed by those
customers, each to grow at an average annual rate of approximately
2.0% through 2004. Retail peak demand in TEP's service territory is
expected to grow by about 2.5% annually over the same period. TEP
expects energy consumed by its residential, commercial, non-mining
industrial and mining customers to comprise approximately 36%, 18%,
28% and 15%, respectively, of total energy consumption during that
period.
TEP uses population and demographic studies prepared by
unrelated third parties to forecast the growth in the number of
customers, peak demand and retail sales. TEP also uses assumptions
about the weather, the economy and competitive conditions. The
forecasts do not take into account the source or price of energy.
Certain of TEP's retail customers are eligible to choose
alternative energy providers. See TEP's Settlement Agreement and
Retail Electric Competition Rules for a discussion of these
customers and the competition phase-in period. Even though some of
TEP's retail customers may choose other energy suppliers, the
forecasted growth rates in the number of customers referred to above
would continue to apply to TEP's distribution business.
Franchise
TEP holds a franchise to provide electric service to customers
in the City of Tucson. This franchise expires in 2001. Under the
franchise, TEP pays to the city 2% of revenues derived from service
provided within the city limits. This payment is passed through to
customers as a line item on the customer's bill. TEP is negotiating
a renewal of the franchise with the City of Tucson. Any such
renewal will have to be approved by vote of the population of Tucson
in a general or special election. If the franchise expires and TEP
is unable to negotiate a renewal, we do not believe it will have a
material adverse impact on the ability of TEP to provide electric
service within the City of Tucson.
Sales to Large Industrial Customers
TEP provides electric utility service to a diversified group of
commercial, industrial, and public sector customers. Major
industries served include copper mining, defense, health care,
education and governmental entities. Two of TEP's largest retail
customers are in the copper mining industry. In 1999, sales to
these customers totaled about 15% of TEP's total retail energy
sales, and their contract demands totaled almost 11% of the 1999
retail peak demand. Revenues from sales to mining customers
accounted for approximately 8% of TEP's retail revenues in 1999 and
in 1998. Sales to mining customers depend on a variety of factors
including changes in supply and demand factors in the world copper
market and the economics of self-generation. During 1998 and the
first half of 1999, market prices for copper were very low compared
to historical prices. During the second half of 1999 market prices
for copper increased but still remained low compared to historical
prices. As a result of low prices for copper, our mining customers
have curtailed operations to reduce costs of electricity. Should
copper prices return to or fall below the low price levels of 1999,
TEP may experience lower sales to, and lower revenues from, mining
customers. Both of these mining customers merged with other copper
companies in 1999. We cannot predict the effect these mergers may
have on our mining customers' operations.
TEP has contracts with its two principal mining customers to
provide them electric power at specified non-tariffed rates. These
contracts expire between 2003 and 2006. However, with advance
notice to TEP, the mines can cancel all or part of their contracts.
To date, TEP has not received any termination notices. Whether
these contracts are extended or terminated will depend, in part, on
market conditions and available alternatives.
SALES FOR RESALE
TEP's electric utility operations include the wholesale
marketing of electricity to other utilities and power marketers.
These transactions, termed sales for resale, are made on both a firm
basis and an interruptible basis. A firm basis means that
contractually, TEP must supply the power (except under limited
emergency circumstances), while an interruptible basis means that
TEP may stop supplying power under various circumstances. See Other
Purchases and Interconnections.
TEP's sales for resale consist primarily of three types of
sales, which are listed below, along with the percentage
contribution to total revenues from sales for resale in 1999:
-- sales of firm capacity under long-term contracts (26%);
-- forward contracts to sell energy for periods of up to one year
(36%); and
-- sales in the hourly and daily markets (35%).
KWh sales for resale increased by 16% in 1999 while revenues from
these sales grew by 20%. This increase in sales and revenues was
mainly due to increased trading activity in the forward markets and
higher market prices in the wholesale energy markets. See Item 7. -
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Market Risks, for a discussion of TEP's
wholesale marketing activities.
TEP currently has long-term contracts to sell firm capacity as
follows:
<TABLE>
<CAPTION>
Minimum
Contract
Company Demand MW Contract Term
- ------- --------- -------------
<S> <C> <C>
Salt River Project 100 June 1, 1991 - May 31, 2011
NTUA 40/50 (1) June 1, 1999 - December 31, 2009
- ---------------
(1) TEP will provide 40 MW of firm power in the summer months (May -
September)50 MW of firm power in the winter months (October - April).
</TABLE>
TEP cannot predict whether the contracts described above will be
replaced when terminated or extended in the future.
We expect strong competition to sell capacity and energy to
continue during the next few years due to:
-- surplus generating capacity in the Southwestern United States
during non-summer months;
-- restructuring of the electric utility industry in Arizona,
California and other western states;
-- an active spot market in the Western United States.
See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Competition, Wholesale.
GENERATING AND OTHER RESOURCES
------------------------------
TEP GENERATING RESOURCES
At December 31, 1999, TEP owned or leased 1,904 MW of net
generating capability as set forth in the following table:
<TABLE>
<CAPTION>
Net TEP's Share
Unit Fuel Owned/ Capability Operating
Generating Source No. Location Type Leased MW Agent % MW
- ----------------- ---- -------- ---- ------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Springerville Station 1 Springerville, AZ Coal Leased 380 TEP 100.0 380
Springerville Station 2 Springerville, AZ Coal Owned 380 TEP 100.0 380
San Juan Station 1 Farmington, NM Coal Owned 327 PNM 50.0 164
San Juan Station 2 Farmington, NM Coal Owned 316 PNM 50.0 158
Navajo Station 1 Page, AZ Coal Owned 750 SRP 7.5 56
Navajo Station 2 Page, AZ Coal Owned 750 SRP 7.5 56
Navajo Station 3 Page, AZ Coal Owned 750 SRP 7.5 56
Four Corners Station 4 Farmington, NM Coal Owned 784 APS 7.0 55
Four Corners Station 5 Farmington, NM Coal Owned 784 APS 7.0 55
Irvington Station 1 Tucson, AZ Gas/Oil Owned 81 TEP 100.0 81
Irvington Station 2 Tucson, AZ Gas/Oil Owned 81 TEP 100.0 81
Irvington Station 3 Tucson, AZ Gas/Oil Owned 104 TEP 100.0 104
Irvington Station 4 Tucson, AZ Coal/Gas Leased 156 TEP 100.0 156
Internal Combustion Tucson, AZ Gas/Oil Owned 122 TEP 100.0 122
Turbines -----
Total Company Capacity (1) 1,904
-----
- ---------------
(1) Excludes 235 MW of additional resources, which consists of
certain capacity purchases and interruptible retail load. At
December 31, 1999, total owned capacity was 1,368 MW and leased
capacity was 536 MW.
</TABLE>
TEP is the operator of the Springerville and Irvington
Generating Stations, which are wholly-owned or leased by TEP. TEP
has ownership interests in the San Juan, Navajo and Four Corners
Generating Stations, which are operated by others. As a result of
pollution control capital improvements, on May 1, 1999 the
generation capability increased by 11 MW to 327 MW at San Juan Unit
1 and by 4 MW to 316 MW at San Juan Unit 2. TEP's net generating
capability increased by 7.5 MW as a result of our 50% ownership
interest in these units. We provide additional information below on
those units operated by TEP, including details on the capital lease
obligations for Springerville Unit 1, Springerville Common
Facilities, and Irvington Unit 4.
Under terms of its Settlement Agreement, TEP will transfer its
generation and other competitive assets to a TEP subsidiary by
December 31, 2002.
During the fourth quarter 1999, TEP's Settlement Agreement with
the ACC resulted in the discontinuation of regulatory accounting for
its generation operations under FAS 71. We now account for our
generation operation as would an unregulated company. As a result,
certain financial statement line items related to capital lease
assets and obligations have changed.
Springerville Station
The Springerville Station, located in northeast Arizona,
consists of two coal-fired units. Springerville Unit 1 began
commercial operation in 1985 and is leased and operated by TEP.
Springerville Unit 2 started commercial operation in June 1990 and
is owned by San Carlos and operated by TEP. These units are rated
at 380 MW for continuous operation, but may be operated for up to
eight hours at a net capacity of 400 MW each.
The initial terms of the Springerville Unit 1 Leases, which
includes a 50% interest in the Springerville Common Facilities,
expire on January 1, 2015. At the end of the initial terms, TEP may
exercise fair market value purchase and renewal options. The annual
cash cost of lease payments for the Springerville Unit 1 Leases will
range from $33 million to $176 million, averaging approximately $81
million.
In December 1985, TEP sold and leased back a 50% interest in
the Springerville Common Facilities. The initial lease term for the
Springerville Common Facilities Leases expires in 2017 for one owner
participant and 2021 for the other two owner participants, subject
to optional fair market value renewal and purchase options. Annual
lease payments under these leases vary with changes in the interest
rate on the underlying debt. These lease payments totaled about $10
million in 1999 and $12 million per year in 1998 and 1997. The
secured notes underlying these leases were refinanced in December
1999 to avoid a special event of loss (see Investing and Financing
Activities). As a result of refinancing at a higher rate of interest,
we recorded an additional $26 million of capital lease obligations
and capital lease assets. Based on an assumed interest rate of 8.5%,
annual lease payments will range from $7 million to $20 million and
average approximately $12 million.
See Fuel Supply, Springerville Coal Handling Facilities, for
information regarding the Springerville Coal Handling Facilities
Leases.
IRVINGTON STATION
Irvington is a four-unit generating station located in Tucson,
AZ. Units 1, 2, and 3 are gas or oil burning units. In January
1988, TEP began coal-fired commercial operation of Irvington Unit 4.
The unit was initially sold and then leased back under the Irvington
Lease. Annual lease payments range from approximately $11 million to
$14 million and average about $13 million. The initial lease term
expires in 2011, but the lease has optional fair market value
renewal and purchase provisions.
Irvington Unit 4 (156 MW capability) has the flexibility to
operate on coal or gas. Coal has been the primary fuel and natural
gas the secondary fuel. In 1999 this unit began burning small
amounts of land fill gas.
The Irvington Station, along with the internal combustion
turbines located in Tucson, are designated as "must-run generation"
facilities. Must-run generating units are those which are required
to run in certain circumstances in order to maintain distribution
system reliability and meet load requirements.
POWER EXCHANGE AGREEMENT
As part of a 1992 litigation settlement, TEP and Southern
California Edison (SCE) agreed to a ten-year power exchange
agreement. The agreement began in May 1995 and requires SCE to
provide firm system capacity of 110 MW to TEP during summer months.
TEP pays an annual charge of approximately $1 million, increasing
annually after the year 2000, to a maximum of approximately $2
million annually for this agreement. TEP is entitled to schedule
firm energy deliveries from SCE during the summer (May 15 to
September 15) of up to 36,300 MWh per month, and is obligated to
return to SCE on an interruptible basis the same amount of energy
the following winter season (November 1 to February 28). The energy
provided under the exchange is expensed based on the estimated cost
of interruptible energy to be provided to SCE. Under this exchange
agreement, TEP received 119,525 MWh from SCE in 1999, and returned
93,462 MWh to SCE as of December 31, 1999.
OTHER PURCHASES AND INTERCONNECTIONS
TEP participates in a number of interchange agreements by which
it can purchase additional electric energy from other utilities.
The amount of energy purchased from other utilities and power
marketers varies substantially from time to time depending on demand
for energy, cost of purchased energy compared with TEP's cost of
generating energy, and the availability of such energy. TEP may also
sell its surplus electric energy through these agreements. See also
Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Market Risks.
TEP has transmission access and power transaction arrangements
with over 180 electric systems or suppliers, including the
California Power Exchange. TEP is a member of the following
organizations:
- --Southwest Reserve Sharing Group - A group of utilities serving
customers in portions of the southwestern United States. The group
provides emergency assistance and reserve sharing among members to
enhance system reliability in the Southwest region;
- --Western Systems Coordinating Council (WSCC) - A group of western
electric systems and suppliers working cooperatively to assure the
reliability of the region's interconnected generation and
transmission systems; and
- --Western Systems Power Pool - A voluntary power pooling
arrangement designed to achieve more efficient use of electric
generation and transmission facilities among its members.
See Rates and Regulation, Transmission Access for a discussion
of possible changes in transmission issues.
FUTURE GENERATING RESOURCES
In the past, TEP assessed its need for future generating
resources based on the premise of a continued regulatory requirement
to serve customers in TEP's retail service area. However, the
obligation to provide generation services to all customers has been
modified by the ACC's electric competition rules. Further, the need
for future resources will be affected by these rules and TEP's
ability to retain and attract customers. Under the Retail
Competition Rules as adopted, some of TEP's retail customers are
eligible to choose alternative energy providers. For those
customers who do not or cannot choose other energy providers, TEP
remains obligated to supply energy. However, TEP is not obligated
to supply this energy from TEP-owned generating assets. The energy
may be acquired from other sources through purchases in the
wholesale markets. See Rates and Regulation, TEP's Settlement
Agreement and Retail Electric Competition Rules below and Item 7. -
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Competition.
To improve local system reliability TEP believes additional
peaking resources are needed in Tucson by 2001. To address this
need, in the third quarter of 1999, TEP entered into an agreement to
purchase a 75 MW gas turbine. This peaking unit will be designated
as a must-run generation facility. We expect this unit will be in
operation by the third quarter of 2001.
RATES AND REGULATION
- --------------------
GENERAL
TEP is regulated by the FERC and by the ACC. The FERC
regulates the terms and prices of TEP's sales to other utilities and
resellers. The ACC has authority over certain rates charged to
retail customers, accounting classifications, and the issuance of
securities. The ACC also has authority to approve affiliate
transactions and the establishment of holding companies and
subsidiaries under its Affiliated Interest Rules.
The ACC consists of three commissioners, each serving a six-
year term. One of the three is elected at each general election.
Commissioners cannot serve consecutive terms and can be elected to
another term only after the passing of six years after the end of
their previous term as commissioners. The present commissioners
are:
-- Carl J. Kunasek (Republican), Chairman, began his term in 1995.
His term expires in 2001.
-- Jim Irvin (Republican) started his term in 1997. His term
expires in 2003.
-- William A. Mundell (Republican) started his term in 1999. Since
he was appointed by the governor his term expires in 2001. Mr.
Mundell may stand for election for the remaining four years of the
original six-year term at the expiration of his current term.
Historically, the ACC has determined TEP's rates for retail
sales of electric energy on a "cost of service" basis, which was
designed to provide, after recovery of allowable operating expenses,
an opportunity to earn a reasonable rate of return on "fair value
rate base". Fair value rate base was generally determined by
reference to the original cost and the reproduction cost (in each
case, net of depreciation) of utility plant in service to the extent
deemed used and useful, and to various adjustments for deferred
taxes and other items, plus a working capital component. Over time,
rate base was increased by additions to utility plant in service and
reduced by depreciation and retirements of utility plant.
With the introduction of retail electric competition in TEP's
service territory in 2000, the Rules and TEP's Settlement Agreement
require the unbundling of electric services, with separate rates for
generation, transmission, distribution, metering, meter reading,
billing and collection, and ancillary services. Generation services
at market prices may be provided by Energy Service Providers (ESPs)
licensed by the ACC. Transmission and distribution services will
remain subject to regulation on a cost of service basis. However,
certain conditions must be met before competitive electricity will
be sold in TEP's service territory, such as ACC approval of TEP's
direct access tariffs, certification of ESPs by the ACC and
execution of direct access service agreements by ESPs and TEP.
The FERC regulates TEP's rates for wholesale power sales and
transmission services. In general, these rates may not exceed rates
determined on a cost of service basis. In the fall of 1997, TEP was
granted a tariff to sell at market based rates. The FERC has
historically set rates in formal rate application proceedings. With
respect to new wholesale power sales, TEP's wholesale rates are
generally substantially below rates determined on a fully allocated
cost of service basis, but, in all instances, rates exceed the level
necessary to recover fuel and other variable costs.
ACC HOLDING COMPANY ORDER
In November 1997, the ACC allowed TEP to form a holding
company. The ACC order approving the holding company contained a
number of conditions which impact the activities of UniSource
Energy, TEP, and TEP's "sister companies" (i.e., other companies
owned by UniSource Energy or its affiliates). Some of these
conditions were waived or modified by the Settlement Agreement. Key
conditions, as modified include:
-- UniSource Energy and its subsidiaries will only conduct business
activities that are part of the electric energy business (as
defined in the order).
-- During its first five years of operations, UniSource Energy must
provide to TEP 30% of the proceeds of any public equity issuance by
UniSource Energy. TEP will use the proceeds to reduce debt or add
to its equity accounts.
-- 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).
TEP'S SETTLEMENT AGREEMENT AND RETAIL ELECTRIC COMPETITION RULES
In December 1996, the ACC adopted Rules that provided a
framework for the introduction of retail electric competition in
Arizona. The Rules, as well as other ACC orders, contain references
to the "Affected Utilities". These are the utilities, including
TEP, which are regulated by the ACC. These Rules, as amended and
modified, were approved by the ACC in September 1999.
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 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 ACC approval of TEP's direct access tariffs, certification
of ESPs by the ACC and execution of direct access service agreements
by ESPs and TEP.
The major provisions of the Settlement Agreement, as approved,
are:
- --Consumer choice for energy supply beginning in 2000 will be
phased in as required by the ACC's retail competition rules.
Initially, 377 megawatts of load, representing over 20 percent of
TEP's retail customers, will be eligible to choose competitive
energy suppliers. Customers initially eligible for choice include:
-- Large customers whose average usage/load is 1 megawatt (MW) or
above, such as mines, refineries, factories and resorts;
-- Smaller commercial customers that can aggregate with similar
sized entities to reach a total load of one MW also are eligible.
Examples include convenience stores, small fast-food restaurants and
large retail stores; and
-- A percentage of TEP's residential customers. Every three months,
an additional one and one-quarter percent of residential customers
will have the opportunity to choose.
By January 1, 2001, consumer choice will be available to all
customers. Under the ACC's electric competition rules, TEP will
be required to provide energy to any distribution customer who
does not choose another energy service provider.
- --In accordance with the Rate Settlement Agreement approved by the
ACC in 1998, TEP decreased rates to retail customers by 1.1% on July
1, 1998, 1% on July 1, 1999 and will decrease rates an additional 1%
on July 1, 2000. These reductions apply to all retail customers
except for certain customers that have negotiated non-standard
rates. The Settlement 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 which are designated for the recovery of its
transition recovery assets.
-- A Fixed CTC component will equal a fixed charge per kilowatt-hour
sold. It will terminate when $450 million has been recovered, or on
December 31, 2008, whichever occurs first. When the Fixed CTC
terminates, TEP's retail rates will decrease by the Fixed CTC
amount.
-- A Floating CTC component will equal the amount of the frozen
retail rate less the estimated market price of retail electric
service. The estimated market price of retail electric service will
include TEP's transmission and distribution charge and an energy
component based on the Palo Verde Futures Index for electric energy.
Because TEP's total retail rate will be frozen, the Floating CTC is
expected to allow TEP to recoup the balance of transition recovery
assets not otherwise recovered through the Fixed CTC. The Floating
CTC will terminate no later than December 31, 2008.
- -- By June 1, 2004, TEP will be required to file a general rate case
including an updated cost-of-service study. Any rate change
resulting from this rate case would be effective no sooner than June
1, 2005 and would not result in a net rate increase.
- -- By December 31, 2002, TEP will transfer its generation and other
competitive assets to a subsidiary of TEP. TEP, as a utility
distribution company (UDC), will acquire energy in the wholesale
market for its retail customer energy requirements through a
competitive bidding process. TEP's generation subsidiary will sell
energy into the wholesale market.
- -- TEP will dismiss all pending litigation brought by TEP against
the ACC once the ACC order approving the Settlement Agreement is no
longer subject to appeal.
Approval of the Settlement Agreement caused TEP to discontinue
regulatory accounting for its generation operations using FAS 71 in
November 1999. See Note 2 of Notes to Consolidated Financial
Statements, Regulatory Matters.
A consumer group has filed a lawsuit challenging the ACC's
order approving TEP's Settlement Agreement and also filed an appeal
of the competition rules. The consumer group contends that allowing
marketplace competition to determine rates violates the ACC's
constitutional duty to set rates. We cannot predict the outcome of
these actions.
See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Tax Exempt Local Furnishing
Bonds for a discussion of the possible effect of the transfer of
TEP's generating assets, referred to above, on TEP's capital
structure and refinancing requirements.
STATE AND FEDERAL LEGISLATION ON RETAIL COMPETITION
In May 1999 the Arizona State Legislature approved legislation
regulating retail electric competition for public service
corporations. The Governor vetoed the legislation. We expect the
Arizona Legislature will propose new retail electric competition
legislation in the 2000 legislative session.
Additionally, federal legislators introduced several retail
competition initiatives in Congress which, if passed, could modify
the actions taken by the ACC or the Arizona Legislature. Congress
has yet to enact any legislation at this time. We are unable to
predict when Congress will act or the ultimate impact of such
federal legislative initiatives.
TRANSMISSION ACCESS
In April 1996, the FERC issued two orders pertaining to
wholesale transmission access. FERC Order No. 888 requires all
public utilities that own, control, or operate interstate
transmission facilities to offer transmission service to others
under a single tariff. This tariff must incorporate certain minimum
terms and conditions of transmission service established by the FERC
and must also be used by public utilities for their own wholesale
market transactions. Transmission and generation services for new
wholesale service are to be unbundled and priced separately. FERC
Order No. 889 requires transmission service providers to establish
or participate in an Open Access Same-time Information System
(OASIS) that provides information on the availability of
transmission capacity to wholesale market participants. The order
also establishes standards of conduct to prevent employees of a
public utility engaged in marketing functions from obtaining
preferential access to OASIS-related information or from engaging in
discriminatory business practices. TEP is in compliance with the
requirements of FERC Orders 888 and 889.
In December 1999, the FERC issued FERC Order No. 2000. This
requires all public utilities that are transmission owners to file
by October 15, 2000 a proposal for a Regional Transmission
Organization (RTO), an organization or institution which is
envisioned by FERC to operate an electric transmission system on a
regional basis, enhance operational transmission efficiencies and
reliability and remove remaining discriminatory transmission
practices. FERC has not dictated a specific structure for an RTO
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 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, 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.
Over 50 parties participated in a Development Agreement to
investigate the feasibility of an ISO in this region. As a result
of this development effort, a non-profit corporation has been formed
to move this effort forward. Over 125 entities have paid membership
dues and become members of Desert STAR, Inc. Work is underway to
determine the operational and financial aspects of this
organization. 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 purpose of the AISA, which is
anticipated to be a temporary organization until the formation of an
ISO or RTO, is to:
-- calculate available transmission capacity for Arizona
transmission facilities that belong to the Affected Utilities or
other participants;
-- develop and operate an OASIS which covers all participants'
transmission systems;
-- implement and oversee the nondiscriminatory application of
protocols to ensure statewide consistency for transmission access;
and
-- provide dispute resolution processes and receive all requests for
reservation and scheduling of Arizona transmission facilities.
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. Currently, AISA participants are
attempting to reach a consensus on operating protocols that, once
finalized and filed with the ACC, will then be filed 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. See TEP's Settlement Agreement and Retail Electric
Competition Rules.
See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Tax Exempt Local Furnishing
Bonds for a discussion of the possible effect of the establishment
of a RTO, ISO and/or an AISA on TEP's capital structure and
refinancing requirements.
OTHER RATE MATTERS
See Electric Utility Operations, Customers and Item 7. -
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Competition, Retail for a discussion of TEP's
contracts and negotiations with certain of its mining customers.
FUEL SUPPLY
- -----------
TEP's principal fuel for electric generation is low-sulfur
coal. Fuel cost information for the years 1999 -1997 is provided
below:
<TABLE>
<CAPTION>
Cost Per Million BTU Consumed Percentage of Total BTU Consumed
----------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Coal (A) $1.66 1.65 $1.66 96% 97% 97%
Gas 2.94 2.67 2.74 4 3 3
---- ---- ----
All Fuels 1.73 1.69 1.68 100% 100% 100%
- --------------------
(A) The average cost per ton of coal for each of the last three
years (1999 - 1997) was $31.64, $31.33 and $31.33 respectively.
</TABLE>
COAL
Information concerning TEP's coal contracts is detailed below:
<TABLE>
<CAPTION>
Year Average
Contract Sulfur Coal Obtained
Station Coal Supplier Terminates Content From (A)
------- ------------- ---------- ------- -------------
<S> <C> <C> <C> <C>
Four Corners BHP Minerals International, Inc. 2005 0.8% Navajo Indian Tribe
San Juan San Juan Coal Company 2017 0.8% Federal and State Agencies
Navajo Peabody Western Coal Company 2011 0.6% Navajo and Hopi Indian Tribes
Springeville Peabody Coalsales Company 2010 0.7% Lee Ranch Coal Company
Irvington The Pittsburg & Midway Coal Mining 2015 0.4% Federal and State Agencies
Company
- --------------------
(A) Substantially all of the suppliers' leases extend at least as
long as coal is being mined in economic quantities.
</TABLE>
TEP-Operated Generating Facilities
TEP is the sole owner (or lessee) and operator of the
Springerville and Irvington Generating Stations. The coal supplies
for these plants are transported from northwestern New Mexico and
Colorado by railroad.
In June 1997, TEP terminated its existing coal supply contract
for the Springerville Generating Station for a $50 million fee and
entered into a new contract with the same supplier. The new coal
contract ends in 2010, with an option to extend the term for another
ten years. The Springerville rail contract expires in 2009. See
Notes 2 and 9 of Notes to Consolidated Financial Statements,
Deferred Springerville Generation Costs and Commitments and
Contingencies, TEP Commitments - Fuel Purchase. The coal supply and
rail contracts termination date for the Irvington station is the
earlier of 2015 or the remaining life of Unit 4.
The Springerville and Irvington contracts have various
adjustment clauses that will affect the future cost of coal
delivered. We expect coal reserves to be sufficient to supply the
estimated requirements of Springerville and Irvington for their
presently estimated remaining lives.
The Springerville and Irvington coal contracts combined require
TEP to take 2.1 million tons of coal per year through 2009 at an
estimated annual cost of $49 million for the next five years. The
Springerville and Irvington rail contracts combined require TEP to
transport 1.9 million tons of coal per year through 2015 at an
estimated cost of $13 million for the next five years. The coal
supply contracts require TEP to pay a take-or-pay charge if minimum
quantities of coal are not purchased. TEP's present fuel
requirements are in excess of the take-or-pay minimums. However,
TEP has purchased coal and natural gas in the spot market, and
switches fuel burn from one generating station to another in order
to reduce overall fuel costs, despite incurring take-or-pay minimum
charges. TEP incurred take-or-pay charges of $3.6 million in 1999,
$3.5 million in 1998 and none in 1997.
Generating Facilities Operated by Others
TEP also participates in jointly owned generating facilities
where coal supplies are under long-term contracts entered into by
the operating agents. Coal supplies are surface-mined in northern
Arizona and northwestern New Mexico. The coal supply for the San
Juan Station, a mine-mouth operation, is partially contracted
through the year 2017. The coal contract for Four Corners terminates
in 2005. The coal quantities under contract for the Navajo mine-
mouth coal fired generating station are expected to be sufficient
for the remaining life of the station. The contracts to purchase
coal, including rail transportation, for use at the jointly-owned
facilities require TEP to take 1.5 million tons of coal per year
through 2005 at an estimated annual cost of $45 million for the next
five years.
SPRINGERVILLE COAL HANDLING FACILITIES
TEP is the lessee of the coal-handling facilities at
Springerville under a capital lease. The Springerville Coal
Handling Facilities Leases have a remaining initial lease term
through 2015 with fair market value renewal and purchase options.
Annual rental payments range from approximately $10 million to $28
million but average $20 million.
Through October 31, 1999, TEP allocated portions of the costs
of its Springerville Coal Handling Facilities Leases to deferred
expense for future recovery through rates. See Note 2 of Notes to
Consolidated Financial Statements, Deferred Lease Expense, for a
description of the accounting for the Springerville Coal Handling
Facilities Leases. Approximately half of the expenses of the coal
handling facilities, including lease costs and other operating and
maintenance expenses, were charged to fuel expense in 1999, 1998 and
1997 and amounted to $12 million, $13 million, and $13 million,
respectively. Effective November 1, 1999, lease interest expense is
no longer charged to fuel expense.
NATURAL GAS
In June 1998, TEP entered into a one-year agreement to purchase
gas from Southwest Gas for power generation. This agreement was
renewed for an additional one-year term in 1999. During 1999, TEP
received natural gas sufficient to meet all of its needs. TEP also
burns small amounts of land fill gas at Irvington Unit 4.
WATER SUPPLY
------------
TEP believes there will be sufficient water to supply the
requirements of existing and planned electric generating stations in
which TEP has an interest for their estimated lives. A federal
contract for water at San Juan expires in 2005, and Public Service
Company of New Mexico is overseeing negotiations for an extension of
the contract.
ENVIRONMENTAL MATTERS
---------------------
TEP is subject to environmental regulation by federal, state
and local authorities. Air and water quality are under the most
stringent regulations. Resource extraction, waste disposal
operations and land use are also regulated. TEP spent $3 million in
1999 and $14 million in 1998 for construction costs to comply with
environmental requirements. TEP believes that all existing
generating facilities are or will be in compliance with all existing
or expected environmental regulations, except as described below.
Clean Air
Arizona and New Mexico have adopted emission regulations
restricting the emissions from both existing and future coal, oil
and gas-fired plants. These regulations are in some instances more
stringent than those adopted by the EPA. The principal generating
units of TEP are located relatively close to national parks,
monuments, wilderness areas and Indian reservations. Since these
areas have relatively high air quality, TEP could be subject to
control standards that relate to the "prevention of significant
deterioration" of visibility and tall stack limitation rules.
The 1990 Federal Clean Air Act Amendments (CAAA) require
reductions of sulfur dioxide (SO2) and nitrogen oxide (NOx)
emissions in two phases, more complex facility permits and other
requirements. TEP is subject only to Phase II of the SO2 and NOx
emission reductions which was effective January 1, 2000. All of
TEP's generating facilities (except existing internal combustion
turbines) are affected. TEP spent approximately $1 million in each
of 1999, 1998 and 1997 and expects to spend approximately $1 million
annually in 2000 and 2001 complying with these requirements.
In 1993, TEP's generating units affected by Phase II were
allocated SO2 Emission Allowances based on past operational history.
Beginning in the year 2000, Phase II generating units must hold
Emission Allowances equal to the level of emissions in the
compliance year or pay penalties and offset excess emissions in
future years. Due to increased energy output, TEP may have to
purchase additional Emission Allowances to comply with the Phase II
SO2 regulations. Based on current estimates, TEP believes that it
will purchase additional Emission Allowances and that such purchases
will not have a material effect on TEP.
In 1991, the EPA adopted a rule to reduce SO2 emissions at the
Navajo Station by 90% to improve visibility at Grand Canyon National
Park. TEP's share of the required capital expenditures remaining as
of December 31, 1999 is approximately $1 million.
Title V of the CAAA requires that all of TEP's generating
facilities obtain more complex air quality permits. All TEP
facilities (including those jointly owned and operated by others)
have applied for these permits and TEP does not anticipate any
material problems in obtaining the required permits. In 1999 TEP
received Title V permits for the Springerville and Irvington
generating stations. These permits are valid for five years. TEP
must pay an annual emission-based fee for each generating facility
subject to a Title V permit. These emission-based fees are included
in the CAAA compliance expenses discussed above.
The CAAA also require multi-year studies of visibility
impairment in specified areas and studies of hazardous air
pollutants. The results of these studies will impact the
development of future regulations of electric utility generating
units. Since these activities involve the gathering of information
not currently available, TEP cannot predict the outcome of these
studies.
TEP may incur additional costs to comply with recent and future
changes in federal and state environmental laws, regulations and
permit requirements at existing electric generating facilities.
Compliance with these changes may result in a reduction in operating
efficiency. Failure to comply with any EPA or state compliance
requirements may result in substantial penalties or fines.
MILLENNIUM ENERGY BUSINESSES
----------------------------
Millennium owns 100% of the common stock of five subsidiaries,
AET, ION, MEH, Nations Energy, and SES (described below).
Millennium's assets comprise approximately 4% of the
consolidated assets of UniSource Energy. Millennium recorded net
income of $10.9 million for the year ended December 31,1999 related
to these investments. These results are included in the Other
Income (Deductions) section on UniSource Energy's income statement.
We discuss these results in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations, Results
of Operations, Results of Millennium Energy Businesses.
AET and Global Solar
Advanced Energy Technologies, Inc. was established in May 1996.
This subsidiary of Millennium develops renewable energy and
distributed generation technologies. In 1996 AET acquired from ITN
a 50% ownership interest in Global Solar Energy, L.L.C., an Arizona
corporation which develops and manufactures flexible thin-film
photovoltaic cells. In November 1999, Millennium and ITN entered
into an agreement in which Millennium's share of Global Solar will
increase to 67%. Under the agreement, ITN agreed to transfer 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. Millennium and ITN
are in the process of finalizing the structure of the
transaction. As of December 31, 1999, Millennium had funded $2
million under this agreement.
Global Solar began limited commercial production of
photovoltaic cells in 1999. Target markets for its products include
military, space and home applications. We expect Global Solar's
manufacturing facility to produce approximately 1.5 MW or 255,000
square feet of the product in 2000.
ION
ION International, Inc., a wholly owned subsidiary of
Millennium, was established in January 2000. ION intends to provide
technology applications to commerce, health care and industry
organizations to help them more efficiently manage their energy
needs.
MEH and NewEnergy
MEH sold its 50% ownership interest in NewEnergy (formerly New
Energy Ventures, Inc.) to The AES Corporation on July 23, 1999.
NewEnergy is a provider of electricity, energy products, services
and technology based energy solutions to customers in deregulating
energy markets. MEH recorded an after-tax gain of $20.8 million on
the sale of NewEnergy in the third quarter of 1999. MEH received
$50 million in consideration for the sale, consisting of $27.2
million in AES common stock, and secured promissory notes issued by
NewEnergy totaling $22.8 million, payable over two years. MEH has
sold the AES common stock and still retains the promissory notes
which are secured by AES common stock.
Nations Energy
Nations Energy Corporation was established in 1995 to develop
and invest in independent power projects worldwide. Nations Energy
is involved in the following projects:
- --In 1996, Nations Energy acquired an interest in the development
of a 340 MW power project in the Czech Republic, consisting of the
upgrade and expansion of a cogeneration facility located in the city
of Kladno. In January 2000, Nations Energy sold its interest in
this project to another partner of the project resulting in a $3
million pre-tax gain.
- --In 1996, Nations Energy acquired an interest in the development
of a 167 MW power plant on the Island of Curacao, Venezuela.
Customers will be the ISLA refinery and the Island of Curacao. This
project is scheduled for completion in 2002.
- --In the second quarter 1998, Nations Energy agreed to develop a
110 MW cogeneration plant with Chalmette Refining, L.L.C., a
Louisiana refinery located near New Orleans. The on-site facility
will be 50% owned and managed by Nations Energy. This project is
scheduled for completion in late 2001.
- --In the third quarter 1998, Nations Energy purchased a 39%
interest in Corporation Panamena de Energia, S.A. (COPESA) for $7.6
million. COPESA is an independent power producer which owns and
operates a 43 MW power plant near Panama City.
Currently, we do not intend to make any material investments in
new projects through Nations Energy and we continue to review
options for the sale of Nations Energy's remaining assets.
SES
Southwest Energy Solutions, Inc., a wholly-owned subsidiary of
Millennium, was established in January 1997. SES provides energy
support services to retail electric consumers including lighting
equipment, service restoration, and design, engineering and
construction services.
EMPLOYEES
---------
As of December 31, 1999, TEP had 1,142 employees and the
subsidiaries of Millennium had 60 employees. The International
Brotherhood of Electrical Workers (IBEW) 1116 represents about 60%
of TEP's employees. A new collective bargaining agreement between
the IBEW and TEP was ratified in March 1999 and extends until
January 2003. The new agreement resulted in a wage increase of 3%
for 1999 and an additional 3% increase for 2000.
<PAGE>
TEP's UTILITY OPERATING STATISTICS
<TABLE>
<CAPTION>
For Years Ended December 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Generation and Purchased Power-kWh (000)
Remote Generation (Coal) 10,000,401 10,002,250 9,694,152 9,784,918 8,716,513
Local Generation (Oil, Gas & Coal) 1,115,277 720,515 806,819 723,232 500,958
Purchased Power 2,712,570 2,227,773 1,222,970 925,394 692,769
- ------------------------------------------------------------------------------------------------------
Total Generation and Purchased Power 13,828,248 12,950,538 11,723,941 11,433,544 9,910,240
Less Losses and Company Use 814,945 810,117 824,072 776,436 661,901
- ------------------------------------------------------------------------------------------------------
Total Energy Sold 13,013,303 12,140,421 10,899,869 10,657,108 9,248,339
======================================================================================================
Sales-kWh (000)
Residential 2,736,837 2,662,598 2,608,515 2,516,282 2,330,191
Commercial 1,383,756 1,355,319 1,316,360 1,306,826 1,280,752
Industrial 2,220,900 2,139,464 2,115,332 2,080,763 1,979,317
Mining 1,200,214 1,230,259 1,193,094 1,164,140 1,147,281
Public Authorities 247,361 242,845 237,113 228,800 204,746
- ------------------------------------------------------------------------------------------------------
Total - Retail Customers 7,789,068 7,630,485 7,470,414 7,296,811 6,942,287
Sales for Resale 5,224,235 4,509,936 3,429,455 3,360,297 2,306,052
- ------------------------------------------------------------------------------------------------------
Total Sales 13,013,303 12,140,421 10,899,869 10,657,108 9,248,339
======================================================================================================
Operating Revenues (000)
Residential $253,352 $248,821 $246,251 $237,569 $218,208
Commercial 148,039 146,269 146,377 143,623 138,294
Industrial 160,963 157,735 158,266 154,547 146,409
Mining 49,399 51,965 53,231 56,240 54,948
Public Authorities 18,148 17,950 17,531 16,949 14,952
Other 2,963 2,981 2,565 2,636 2,114
- ------------------------------------------------------------------------------------------------------
Total - Retail Customers 632,864 625,721 624,221 611,564 574,925
Amortization of MSR Option Gain
Regulatory Liability - - 8,105 20,053 20,053
Sales for Resale 171,219 143,269 97,567 84,256 75,591
- ------------------------------------------------------------------------------------------------------
Total Operating Revenues $804,083 $768,990 $729,893 $715,873 $670,569
======================================================================================================
Customers (End of Period)
Residential 303,653 295,469 287,857 282,060 273,976
Commercial 29,714 28,648 28,309 28,199 27,858
Industrial 705 684 664 626 620
Mining 4 4 4 4 4
Public Authorities 61 61 61 61 59
- ------------------------------------------------------------------------------------------------------
Total Retail Customers 334,137 324,866 316,895 310,950 302,517
======================================================================================================
Average Revenue per kWh Sold (cents)
Residential 9.3 9.3 9.4 9.4 9.4
Commercial 10.7 10.8 11.1 11.0 10.8
Industrial and Mining 6.1 6.2 6.4 6.5 6.4
Average Retail Revenue per kWh Sold 8.1 8.2 8.4 8.4 8.3
Average Revenue per Residential Customer $845 $855 $865 $854 $809
Average kWh Sales per Residential Customer 9,132 9,144 9,159 9,050 8,641
</TABLE>
<PAGE>
ITEM 2. - PROPERTIES
- --------------------------------------------------------------------
TEP's transmission facilities, located in Arizona and New
Mexico, transmit electricity from TEP's remote electric generating
stations at Four Corners, Navajo, San Juan and Springerville to the
Tucson area for use by TEP's retail customers (see Item 1, Business,
Generating and Other Resources for the location of TEP's plants).
The transmission system is directly interconnected with systems
operated by the following utilities:
<TABLE>
<CAPTION>
Utility Location
------- --------
<S> <C>
Arizona Public Service Co. Arizona
Arizona Electric Power Cooperative Arizona
El Paso Electric Co. New Mexico, Texas
Public Service Co. of New Mexico New Mexico
Salt River Project Arizona
</TABLE>
TEP has arrangements with approximately 180 companies,
including the five listed above, to interchange generation capacity
and transmission of energy.
As of December 31, 1999, TEP owned, or participated in, an
overhead electric transmission and distribution system consisting
of:
-- 511 circuit-miles of 500 kV lines;
-- 1,122 circuit-miles of 345 kV lines;
-- 363 circuit-miles of 138 kV lines;
-- 435 circuit-miles of 46 kV lines; and
-- 10,466 circuit-miles of lower voltage primary lines.
The underground transmission and distribution system was comprised
of 5,593 cable-miles. TEP owns approximately 77% of the poles on
which the lower voltage lines are located. Electric substation
capacity consisted of 179 substations with a total installed
transformer capacity of 5,433,105 kVA.
The electric generating stations (except as noted below), TEP's
general office building, operating headquarters and warehouse and
service center are located on land owned by TEP. The electric
distribution and transmission facilities owned by TEP are located:
-- on property owned by TEP;
-- under or over streets, alleys, highways and other public places,
the public domain and national forests and state lands under
franchises, easements or other rights which are generally subject
to termination;
-- under or over private property as a result of easements obtained
primarily from the record holder of title; and
-- over Indian reservations under grant of easement by the Secretary
of Interior or lease by Indian tribes.
It is possible that some of the easements, and the property over
which the easements were granted, may have title defects or may be
subject to mortgages or liens existing at the time the easements
were acquired.
Springerville is located on land parcels held by TEP under a
long-term surface ownership agreement with the State of Arizona.
Four Corners and Navajo are located on properties held under
easements from the United States and under leases from the Navajo
Indian Tribe. TEP, individually and in conjunction with PNM in
connection with San Juan, has acquired easements and leases for
transmission lines and a water diversion facility located on the
Navajo Indian Reservation. TEP has also acquired easements for
transmission facilities, related to San Juan and Navajo, across the
Zuni, Navajo and Tohono O'odham Indian Reservations.
TEP's rights under these various easements and leases may be
subject to defects such as:
-- possible conflicting grants or encumbrances due to the absence of
or inadequacies in the recording laws or record systems of the
Bureau of Indian Affairs and the Indian tribes;
-- possible inability of TEP to legally enforce its rights against
adverse claimants and the Indian tribes without Congressional
consent; and
-- failure or inability of the Indian tribes to protect TEP's
interests in the easements and leases from disruption by the U.S
Congress, Secretary of the Interior, or other adverse claimants.
However, these possible defects have not and are not expected to
materially interfere with TEP's interest in and operation of its
facilities.
TEP, under separate sale and leaseback arrangements, leases the
following generation facilities (which do not include land):
-- coal handling facilities at Springerville;
-- a 50% undivided interest in the Springerville Common Facilities;
-- Springerville Unit 1 and the remaining 50% undivided interest in
Springerville Common Facilities; and
-- Irvington Unit 4 and related common facilities.
See Note 6 of Notes to Consolidated Financial Statements, Long-Term
Debt and Capital Lease Obligations for additional information on
TEP's capital lease obligations.
Substantially all of the utility assets owned by TEP are
subject to the lien of the General First Mortgage and the General
Second Mortgage. Springerville Unit 2, which is owned by San
Carlos, is not subject to those liens.
ITEM 3. - LEGAL PROCEEDINGS
- --------------------------------------------------------------------
TAX ASSESSMENTS
---------------
See Contingencies in Note 9 of Notes to Consolidated Financial
Statements.
LITIGATION RELATED TO ACC ORDERS AND RETAIL COMPETITION
-------------------------------------------------------
See RATES AND REGULATION.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------
Not Applicable.
<PAGE>
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- --------------------------------------------------------------------
STOCKHOLDER MATTERS
- --------------------------------------------------------------------
The common stock of UniSource Energy is listed on the New York
and Pacific Stock Exchanges, and began trading under the symbol of
UNS on January 2, 1998. The closing price of the common stock on
February 24, 2000 was $13.3125, with 23,389 shareholders of record.
The table below lists the high and low sale prices of UniSource
Energy's common stock on the consolidated tape as reported by Dow
Jones. No dividends were paid on UniSource Energy common stock
during these periods.
<TABLE>
<CAPTION>
Market Price per
Quarter Share of Common Stock
------- ---------------------
1999 High Low
---- ---- ---
<S> <C> <C>
First $13.94 $10.38
Second 12.75 10.38
Third 12.44 11.56
Fourth 12.69 10.88
</TABLE>
<TABLE>
<CAPTION>
Market Price per
Quarter Share of Common Stock
------- ---------------------
1998 High Low
---- ---- ---
<S> <C> <C>
First $18.69 $16.56
Second 18.94 15.31
Third 16.06 12.25
Fourth 17.50 12.50
</TABLE>
On December 3, 1999 UniSource Energy declared a cash dividend
in the amount of $0.08 per share on its common stock. The dividend
is the first declared by UniSource Energy and is payable March 10,
2000 to shareholders of record at the close of business February 15,
2000.
TEP declared and paid cash dividends to its sole shareholder,
UniSource Energy, of $34 million and $30 million in the fourth
quarters of 1999 and 1998, respectively.
See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Dividends on Common Stock.
<PAGE>
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
UniSource Energy
(In thousands - except per share 1999 1998 1997 1996 1995
data and ratios) ---- ---- ---- ---- ----
Summary of Operations
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $803,812 $768,676 $729,893 $715,873 $670,569
Income Tax Benefit Recognition
Related to Prior Period NOLs -
Part of Income Taxes - - $43,443 $88,638 $23,282
Gain on Sale of New Energy $34,651 - - - -
Net Losses of Millennium
Energy Businesses $(11,276) $(11,884) $(8,182) $(2,218) $(1,327)
Income from Continuing Operations $56,510 $28,032 $83,572 $120,852 $54,905
Extraordinary Income - Net of Tax $22,597 - - - -
Net Income $79,107 $28,032 $83,572 $120,852 $54,905
Basic Earnings per Share
from Continuing Operations $1.75 $0.87 $2.60 $3.76 $1.71
Diluted Earnings per Share
from Continuing Operations $1.74 $0.87 $2.59 $3.75 $1.70
Shares of Common Stock Outstanding
Average 32,321 32,177 32,138 32,136 32,138
End of Year 32,349 32,258 32,139 32,139 32,138
Book Value per Share $10.02 $7.65 $6.75 $4.15 $0.39
Cash Dividends Declared per share $0.08 - - - -
- -----------------------------------------------------------------------------------------------
Financial Position
- -----------------------------------------------------------------------------------------------
Total Utility Plant - Net $1,729,856 $1,915,590 $1,935,513 $1,953,904 $1,978,126
Investments and Other Property 114,483 110,289 79,471 69,289 52,116
Total Assets 2,656,255 2,634,049 2,634,409 2,568,541 2,563,461
Long-Term Debt 1,135,820 1,184,423 1,215,120 1,223,025 1,207,460
Non-Current Capital
Lease Obligations 880,427 889,543 890,257 895,867 897,958
Common Stock Equity 324,248 246,646 216,878 133,288 12,488
------------------------------------------------------------
Total Capitalization $2,340,495 2,320,612 $2,322,255 $2,252,180 $2,117,906
- -----------------------------------------------------------------------------------------------
Selected Cash Flow Data
- -----------------------------------------------------------------------------------------------
Net Cash Flows from Operating
Activities $113,228 $160,933 $126,283 $152,932 $119,390
Capital Expenditures 92,808 81,147 72,475 68,272 59,097
- -----------------------------------------------------------------------------------------------
</TABLE>
- -- Net Losses from Millennium Energy Businesses are before income
taxes and do not include the 1999 Gain on Sale of NewEnergy.
- -- For years prior to 1998, UniSource Energy's operations and those
of TEP are the same.
See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<PAGE>
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
TEP
(In thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Summary of Operations
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $804,083 $768,990 $729,893 $715,873 $670,569
Income Tax Benefit Recognition
Related to Prior Period NOLs -
Part of Income Taxes - - $43,443 $88,638 $23,282
Net Losses of Millennium
Energy Businesses - - $(8,182) $(2,218) $(1,327)
Income from Continuing Operations $50,878 $41,676 $83,572 $120,852 $54,905
Extraordinary Income - Net of Tax $22,597 - - - -
Net Income $73,475 $41,676 $83,572 $120,852 $54,905
- -----------------------------------------------------------------------------------------------
Financial Position
- -----------------------------------------------------------------------------------------------
Total Utility Plant - Net $1,729,856 $1,915,590 $1,935,513 $1,953,904 $1,978,126
Investments and Other Property 67,838 62,978 79,471 69,289 52,116
Total Assets 2,600,508 2,628,588 2,634,409 2,568,541 2,563,461
Long-Term Debt 1,135,820 1,184,423 1,215,120 1,223,025 1,207,460
Non-Current Capital
Lease Obligations 880,111 889,543 890,257 895,867 897,958
Common Stock Equity 270,134 229,861 216,878 133,288 12,488
------------------------------------------------------------
Total Capitalization $2,286,065 $2,303,827 $2,322,255 $2,252,180 $2,117,906
- -----------------------------------------------------------------------------------------------
Selected Cash Flow Data
- -----------------------------------------------------------------------------------------------
Net Cash Flows from Operating
Activities $139,957 $180,487 $126,283 $152,932 $119,390
Capital Expenditures 90,940 81,011 72,475 68,272 59,097
- -----------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 1.45 1.35 1.39 1.25 1.21
- -----------------------------------------------------------------------------------------------
</TABLE>
- -- For years prior to 1998, UniSource Energy's operations and those
of TEP are the same.
- -- Disclosure of earnings per share information for TEP is not
presented as TEP has only debt securities outstanding.
See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<PAGE>
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- --------------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
Management's Discussion and Analysis explains 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 1999 compared with 1998 and 1998
compared with 1997,
-- changes in liquidity and capital resources during 1999, 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.
Income and losses from Millennium's energy-related businesses have
had a significant impact on earnings reported by UniSource Energy
for the years ended December 31, 1999, 1998 and 1997.
OVERVIEW
- --------
UniSource Energy recorded net income of $79.1 million in 1999,
compared with $28.0 million in 1998 and $83.6 million in 1997. The
primary factors contributing to the higher net income in 1999 were:
-- improved operating performance at TEP;
-- $22.6 million after-tax extraordinary income from changes in
accounting for TEP's generation operations;
-- $20.8 million net gain on the sale of NewEnergy, one of our
unregulated energy subsidiaries; and
-- $9.0 million in tax benefits attributable to the improved
likelihood of favorable resolution of tax matters.
The reduction in reported income tax benefits related to prior
period net operating losses from $43.4 million in 1997 to zero in
1998 contributed to the decline in earnings in 1998. See Results of
Operations, Other Income (Deductions) below. Common stock equity
was $324 million as of December 31, 1999, compared with $247 million
as of December 31, 1998.
In addition to the items described above, other factors
impacting results for 1999 were:
-- $5.8 million lower long-term debt interest expense as a result of
refinancings and prepayments;
-- $3.0 million write-off of investments at Nations Energy
subsidiaries in 1999;
-- increase in capital lease depreciation and interest expense
related to the change in accounting for our generation operations;
and
-- a 1.0% retail rate decrease effective July 1, 1999.
Our financial prospects are subject to significant competitive,
regulatory, economic and other uncertainties. The approval of TEP's
Settlement Agreement 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, 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 Millennium Energy Businesses; and Results of Operations
below.
Our financial prospects are also subject to uncertainties relating
to the start-up and developmental activities of the Millennium
Energy Businesses segment. At December 31, 1999, Millennium's
unregulated energy-related affiliates comprised approximately 4% 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 gain on the
transaction. In January 2000, we sold our interest in a power
project in which Nations Energy had invested, recording a gain on
the transaction. See Results of Millennium Energy Businesses.
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 declared its first dividend
to common shareholders in December 1999. TEP, now the principal
operating subsidiary of UniSource Energy, had not paid a common
dividend to public shareholders since 1989. See Dividends on Common
Stock and Investing and Financing Activities, Bond Issuance and
Redemption, 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. When retail competition for
electric generation supply begins in TEP's retail service territory
approximately 20% of TEP's retail customers will become 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 and also markets customized energy-related services.
Certain large retail customers will continue to be served by
TEP under contracts negotiated by TEP. During 1999, TEP entered
into a new contract with a major mining customer which extends the
term to 2006. The contract includes reduced pricing that will lower
TEP's annual revenues by approximately $4 - $5 million depending on
the price of copper during the next four years but will assure
continued revenues from this customer through the contract's term.
Retail Electric Competition Rules and TEP's Settlement
Agreement
In December 1996, the ACC adopted the Retail Electric
Competition Rules that provided a framework for the introduction of
retail electric competition in Arizona. The Rules, as well as other
ACC orders, contain references to the "Affected Utilities." These
are the utilities, including TEP, which are regulated by the ACC.
These Rules, as amended and modified, were approved by the ACC in
September 1999.
In November 1999, the ACC approved the Settlement Agreement
that was entered into between TEP and certain customer groups
relating to TEP's transition recovery assets and unbundled tariffs.
For TEP, 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 ACC approval of TEP's direct
access tariffs, certification of ESPs by the ACC and execution of
direct access service agreements by ESPs and TEP.
At that time, consumer choice for energy supply will be phased
in as required by the ACC's Rules. By January 1, 2001, consumer
choice will be available to all customers. See Item 1. - Business,
Rates and Regulation and Note 2 of Notes to Consolidated Financial
Statements, Regulatory Matters.
WHOLESALE
TEP competes with other utilities, power marketers and
independent power producers in the sale of electric capacity and
energy in the wholesale market. FERC generally does not permit
TEP's prices for wholesale sales of capacity and energy to exceed
rates determined on a cost of service basis. However, in the Fall
of 1997, FERC granted TEP a tariff to sell at market-based rates.
In the current market, wholesale prices are 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. Prices may
remain depressed for at least the next few years due to the surplus
of capacity during non-summer months in the southwestern United
States. Competition for the sale of capacity and energy is
influenced by the following factors:
-- availability of capacity in the southwestern United States;
-- 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.
See also Item 1. Business, Electric Utility Operations, Sales for
Resale.
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.
In 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board concluded that application of 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 provided sufficient
details regarding the deregulation of TEP's generation operations.
As a result, we changed certain accounts in our financial statements.
These included:
- --Increasing accumulated capital lease depreciation by $197 million
to reflect the depreciation that would have accumulated had we not
applied FAS 71;
- --Reclassifying $175 million of generation-related regulatory
assets to the Transition Recovery Asset, a distribution related
regulatory asset, because we believe we will recover these assets
through the Fixed CTC component of our standard rates in our
distribution business; and
- --Recording $23 million of extraordinary income for balances that
needed to be eliminated to reflect discontinuance of FAS 71 but that
could not be reclassified as part of the Transition Recovery Asset.
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
December 31, 1999, if we had stopped applying FAS 71 to TEP's
remaining regulated operations, we would have recorded an
extraordinary loss of approximately $275 million, after the related
income tax benefit of $183 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 2 of Notes to Consolidated Financial Statements, Regulatory
Matters.
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.
For additional information concerning risk factors, including
market risks, see Safe Harbor for Forward-Looking Statements below.
Interest Rate Risk
TEP is exposed to risk resulting from changes in interest rates
on certain of its long-term debt obligations. TEP manages its
exposure to interest rate risk by balancing the proportions of fixed
and variable rate debt on the balance sheet. During 1997 and 1998,
TEP refinanced over $475 million in variable rate debt with fixed
rate debt, and reduced the proportion of variable rate debt to long-
term debt from 68% at December 31, 1996 to 29% at December 31, 1999.
At December 31, 1999 and 1998, TEP's long-term debt included
$329 million of tax-exempt variable rate debt. The average interest
rates on TEP's variable rate debt were 3.33% and 3.51% for 1999 and
1998, respectively. A one percent increase (decrease) in average
interest rates would result in a decrease (increase) in pre-tax net
income of approximately $3.3 million. See Note 7 of Notes to
Consolidated Financial Statements, Fair Value of TEP's Financial
Instruments.
Marketable Securities Risk
TEP is exposed to fluctuations in the return on marketable
securities which are investments in debt securities. At December
31, 1999 and 1998, TEP had marketable debt securities with an
estimated fair value of $45 million and $22 million, which exceeded
the carrying value by zero and $4 million, respectively. These debt
securities represent TEP's investments in lease debt underlying
certain of its capital lease obligations. The fair value of
marketable debt securities increased in 1999 due to additional
investments in lease debt made by TEP. Changes in the fair value of
such debt securities do not present a material risk to TEP, as TEP
intends to hold these investments to maturity.
Foreign Currency Exchange Risk
We are exposed 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 for 1998 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.
Commodity Price Risk
TEP competes with other utilities, power marketers and
independent power producers in the sale of electric capacity and
energy in the wholesale market. The participants in this market
trade not only electricity and natural gas as commodities, but also
derivative commodity instruments such as futures, forwards, swaps,
options and other instruments. This market is largely unregulated
and most transactions are conducted on an "over-the-counter" basis,
there being no central clearing mechanism (except in the case of
specific instruments traded on the commodity exchanges). Power
marketers, whether or not affiliated with other entities, generally
do not own production facilities and obtain orders from FERC
permitting sales at market based rates.
TEP is exposed to commodity price risk primarily relating to
changes in the market price of electricity, as well as changes in
fuel costs incurred to generate electricity. TEP enters into
forward contracts to buy or sell energy at a specified price at a
future date. These contracts are considered to be derivative
commodity instruments. Generally, TEP commits to future sales based
on expected excess generating capability. However, rather than
producing additional power, TEP may enter into a forward purchase
contract to satisfy the forward sales contract if the market prices
are favorable. The forward sales contracts that are satisfied with
forward purchase contracts do not require any physical delivery of
energy by TEP. However, to take advantage of anticipated market
opportunities, TEP is at various times in a net open position. A
net open position means it has either committed to sell more
electricity than it has purchase contracts to cover or it has
committed to purchase more power than it needs for its selling
commitments. To limit exposure to price risk, TEP has trading
policies with limits as to total open positions. TEP continually
reviews its trading policies and limits to respond to the constantly
changing market conditions.
TEP uses the deferral method of accounting for energy sales and
purchases and recognizes gains and losses in the income statement
upon settlement of the contracts. TEP measures its market risk
related to its commodity exposure by using a sensitivity analysis.
The market prices used to determine fair value are estimated based
on various factors including broker quotes, exchange, over the
counter prices and time value. As of December 31, 1999, the
estimated potential unfavorable impact on pre-tax earnings of a
hypothetical 10% adverse shift in quoted market prices was $2
million. However, because TEP's derivative commodity instruments
are primarily hedges of forward long generation positions which
could generally be settled with TEP generation and are not used for
trading purposes, we do not believe that this commodity price risk
is material to our financial position.
TEP is exposed to credit risk in its energy trading activities
related to potential nonperformance by counterparties under the
terms of their contractual agreements. TEP manages the risk of
counterparty default by following an approved credit policy which
includes performing financial credit reviews of its counterparties
and the use of standardized agreements which allow for the netting
of current period exposures to and from a single counterparty. In
addition, TEP may require collateral to support trading positions
from certain counterparties. TEP does not anticipate any
nonperformance by any of its counterparties and did not experience
any material counterparty default during the years ended December
31, 1999 and 1998.
TEP also purchases coal and small amounts of natural gas in the
normal course of business for fuel for its generating plants.
Purchases of gas provide fuel for only 4% of total generation.
Changes in gas prices do not present a material risk to TEP. TEP
acquires its coal under long-term coal supply contracts. See Fuel
Supply for additional information on TEP's coal contracts and gas
purchases.
TEP is potentially exposed to changes in the price of copper
because the contract with one of its major retail mining customers
is tied to the price of copper. However, TEP's price risk exposure
related to copper prices is not material to TEP.
IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS AND APPLICATIONS
------------------------------------------------------------
Our Year 2000 (Y2K) efforts began in 1996 and involved the
inventory, assessment, remediation and testing of our operational
and business systems. TEP did not experience any significant Y2K
related problems with its operational and business systems. We
cannot predict whether we will experience any residual Y2K related
problems. However, if we were to experience any Y2K related
problems, we do not believe they would have a material effect on our
operations.
From 1996 through January 31, 2000, we have expensed $2.1
million addressing the Y2K issue. This amount does not include
major system replacement costs that, along with other functional
changes, addressed Y2K issues.
RESULTS OF OPERATIONS
- ---------------------
In 1999, UniSource Energy's consolidated net income was $79.1
million or $2.45 per average share of common stock compared with
$28.0 million or $0.87 per average share of common stock in 1998,
and $83.6 million or $2.60 per average share of common stock in
1997.
The increase in earnings in 1999 resulted primarily from
improved operating results of both our utility business and
Millennium's unregulated energy businesses, the sale of UniSource
Energy's interest in NewEnergy and extraordinary income due to the
change in the application of accounting standards from the
deregulation of our generating operations. While operating losses
from Millennium's unregulated energy businesses reduced our
consolidated net income in both 1998 and 1997, such operating losses
were lower in 1999 than in 1998. Earnings in 1997 included
significant non-cash income tax benefits related to prior period net
operating losses for income tax.
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.
<TABLE>
<CAPTION>
Amount in $ Millions
--------------------------------
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Electric Utility $73.5 $41.7 $88.9
Millennium Energy Businesses 10.9 (8.1) (5.3)
Parent Company and Inter-Company
Eliminations (5.3) (5.6) --
- ----------------------------------------------------------------------
Consolidated Net Income $79.1 $28.0 $83.6
- ----------------------------------------------------------------------
</TABLE>
TEP's electric utility business accounts for substantially all
of UniSource Energy's assets and revenues. The following discussion
is related to TEP's utility operations, unless otherwise noted. The
results of Millennium's unregulated energy businesses are discussed
in Results of Millennium Energy Businesses below. Parent company
results in 1999 and 1998 are due primarily to the after-tax interest
expense on a note payable from UniSource Energy to TEP. This note
was issued to TEP in exchange for the stock of Millennium in January
1998. See Interest Income, below. Prior to 1998, the unregulated
energy businesses now held by Millennium were held by and
consolidated with TEP.
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 $22.6 million of extraordinary income mentioned in Extraordinary
Income-Net of Tax, below and reclassification and changes in
presentation of certain financial statement line items.
Future earnings will be reduced 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
Retail sales of electricity are affected by customer growth,
weather and other consumption factors. In addition to these
factors, price changes contribute to changes in retail revenues.
Sales for resale are impacted by market prices in the wholesale
energy market, competing sources of energy and capacity in the
region.
1999 compared with 1998
In 1999, kWh sales to retail customers increased by 2.1%
compared with 1998. This sales increase resulted from an increase
in the average number of retail customers. The average number of
retail customers grew by 2.8% to 329,779 in 1999. Usage by mining
customers decreased in 1999 reflecting changes in the operations of
the mines due to continued weakness in worldwide demand for copper.
Revenues from sales to retail customers increased by 1.1% in 1999
compared with 1998. The increase in kWh sales noted above was
partially offset by the effect of a 1.0% across-the-board rate
reduction effective July 1, 1999.
KWh sales for resale increased by 16% in 1999 compared with
1998, while revenues from sales for resale increased by 20% for the
same period. KWH sales increased as a result of increased trading
activity in the forward, daily and hourly markets while revenues
were driven by higher market prices in the wholesale energy market.
Factors contributing to the higher market prices include higher
natural gas prices and the tightening of excess capacity in the
region.
1998 compared with 1997
Total operating revenues from retail sales and sales for resale
were 7% higher in 1998. KWh sales to retail customers grew by 2.1%
in 1998 compared with 1997. The average number of retail customers
increased by 2.2% in 1998. Revenues from sales to retail customers
increased by less than 1.0% in 1998 compared with 1997. The
increase in kWh sales noted above was partially offset by the effect
of a 1.1% across-the-board rate reduction retroactive to July 1,
1998. In addition, TEP recorded a $4.4 million reduction in
revenues resulting from a change in the method of estimating
unbilled revenues.
In 1998, kWh sales for resale increased by 32% while the
related revenues increased by 47% over 1997. KWH sales increased as
a result of increased trading activity in the forward, daily and
hourly markets while revenues increased due to higher market prices
in the wholesale energy market.
TEP's non-cash revenue from the Amortization of the MSR Option
Gain Regulatory Liability was zero in 1998 and $8.1 million in 1997.
This regulatory liability was fully amortized as of May 1997.
Expenses
1999 Compared with 1998
Fuel and Purchased Power expense increased by 12% in 1999
compared with 1998. Fuel expense at TEP's generating plants
increased primarily due to higher energy requirements to meet
increased kWh sales. Purchased Power Expense also increased because
of increased purchases in response to the large increase in
wholesale energy sales made by TEP in 1999. The average cost of
fuel per kWh generated was 1.75 cents and 1.70 cents for 1999 and
1998, respectively. In 1999 and 1998, fuel expense included $3.2
million and $3.8 million related to the amortization of the $50
million contract termination fee paid to TEP's major coal supplier.
As of November 1999 this regulatory asset was reclassified to the
Transition Recovery Asset. See Note 2 of Notes to Consolidated
Financial Statements, Deferred Springerville Generation Costs.
Capital Lease Expense decreased in 1999 from 1998 due to lease
expense not being recorded in this line item after October 1999.
Through October 1999, in accordance with FAS 71, we recorded lease
expense consistent with our rate-making treatment. For rate-making
purposes, our leases have been treated as operating leases with equal
annual expense amounts over the lease term. We stopped applying FAS
71 to our generation operations effective November 1, 1999 and we
began to account for our leases as an unregulated company would.
This caused our lease expense for the last two months of 1999 to be
$3.1 million (before tax) greater than it would have been if we
continued to apply FAS 71. Our lease expense recognized after
October 31, 1999 is presented in the following expense line items on
the income statement:
- --Depreciation and Amortization: reflects depreciation of the
capital lease asset on a straight-line basis over the remaining
lease term.
- --Interest on Capital Leases: reflects interest expense calculated
on a mortgage basis. See Note 2 of Notes to Consolidated Financial
Statements, Regulatory Matters.
Other Operations Expense was lower in 1999 compared with 1998
due to lower general and administrative expenses.
The Amortization of Springerville Unit 1 Allowance contra-asset
was discontinued in November 1999 due to the accounting effects of
ceasing to use FAS 71 for generation operations.
Depreciation and Amortization expense increased in 1999 over
1998 due to the accounting effects of ceasing to use FAS 71 for
generation operations. Absent this accounting change, Depreciation
and Amortization expense would have declined year to year.
Taxes Other Than Income Taxes decreased in 1999 versus 1998
primarily due to lower property taxes resulting from a lower average
assessment ratio on utility plant in 1999 than in 1998.
Amortization of Transition Recovery Asset is a new expense
category as of November 1999 and is the result of the change in
accounting for generation operations. This item reflects the
recovery of transition recovery assets which were previously
regulatory assets of the generation business. Based on TEP's
forecasted sales levels for the next three years, we expect the
amount of the Amortization of Transition Recovery Asset to be
approximately $15 million, $20 million and $25 million in 2000, 2001
and 2002, respectively.
Income Tax Expense for 1999 includes the benefit of a reversal
of income tax reserves related to NOL recognition. This reversal
reflects the improved likelihood of a favorable resolution of tax
items. The total amount of the adjustment was $9.0 million, with
approximately $7.2 million recorded in Income Tax Expense and $1.8
million recorded in Income Taxes under Other Income.
1998 Compared with 1997
Fuel and Purchased Power expense increased by 18% in 1998
relative to 1997 due primarily to the large increase in wholesale
energy sales. In 1998 and 1997, fuel expense included $3.8 million
and $1.9 million related to the amortization of the $50 million
contract termination fee paid to TEP's major coal supplier. The
average cost of fuel per kWh generated was 1.70 cents and 1.77 cents
for 1998 and 1997, respectively. See Note 2 of Notes to
Consolidated Financial Statements, Deferred Springerville
Generation Costs.
Depreciation and Amortization expense increased in 1998 over
1997 due to depreciation on additions to property in 1998.
Other Income (Deductions)
Income Tax reported within Other Income (Deductions) relates to
income tax expense or benefits which are related to nonutility
businesses and other income tax effects not directly related to
utility operations. The decrease in Income Tax benefits from 1998
to 1999 is due to the tax expense associated with the $34.7 million
gain on sale of NewEnergy in 1999 and the elimination of ITC
amortization after October 31, 1999. In 1998, Income Tax benefits
resulted primarily from losses at Millennium subsidiaries, including
NewEnergy.
UniSource Energy and TEP recognized $1.2 million of NOL benefit
in Other Income and $6.8 million in Income Tax Expense in 1999, zero
in 1998, and $43.4 million of NOL benefit in Other Income in 1997.
This reduced NOL benefit recognition and changes in tax expense
resulting from changes in income before taxes, caused the 1998
income tax benefits included in Other Income (Deductions) to
decrease by $34.0 million and $40.6 million for UniSource Energy and
TEP, respectively, from 1997 levels.
UniSource Energy and TEP recognize NOL benefits based on
changes in the estimated amount of prior period NOLs that are likely
to be used on future tax returns. In future periods when the NOLs
are used on tax returns to reduce income taxes paid, the income tax
expense shown on the income statements will not be reduced. At the
present time, we are not able to estimate additional amounts of NOL
benefit that we may recognize in the income statements of either
UniSource Energy or TEP. This is because there are still open tax
years for which additional assessments may be made and because
federal and state NOL carryforwards expire at various dates. We do
not expect to recognize additional amounts of NOL benefit until
these items are resolved or estimates of probable additional benefit
can be made.
Reversal of Loss Provision
TEP recorded a $10.2 million Reversal of Loss Provision in the
second quarter of 1997 when it dissolved certain subsidiaries which
were part of TEP's former investment operations.
Interest Income
Interest Income decreased in 1999 compared with 1998 due to
lower average cash balances during the year.
TEP's income statement for 1999 and 1998 includes $9.9 million
and $9.3 million, respectively, of interest income on the promissory
note TEP received from UniSource Energy in exchange for the transfer
of its stock in Millennium. See Note 1 of Notes to the Consolidated
Financial Statements, Nature of Operations and Summary of
Significant Accounting Policies, Basis of Presentation. On
UniSource Energy's income statement, this income is eliminated as an
inter-company transaction.
Income (Losses) from Millennium Energy Businesses
The Millennium Energy Businesses Segment contributed net income
of $10.9 million in 1999, compared with net losses of $8.1 million
in 1998 and $5.3 million in 1997. Results for 1999 include $20.8
million from the after-tax gain on sale of NewEnergy and the write-
off of certain of Nations Energy's projects. Excluding the
NewEnergy gain and the Nations Energy write-offs, the Millennium
Energy Businesses Segment would have realized a net loss of $6.1
million in 1999, an improvement in their operating results over 1998
losses of $8.1 million. See Results of Millennium Energy
Businesses, below for more information on the results of this
business segment.
Interest Expense
1999 Compared with 1998
Total Interest Expense increased in 1999 compared with 1998 as
a portion of Capital Lease Expense was reclassified from Operating
Expense to Interest Expense due to ceasing to apply FAS 71 to our
generation operations. This occurred in the fourth quarter of 1999
as accounting for capital leases changed from the 'levelized method'
to the 'interest method'.
Interest Expense on Long-Term Debt decreased in 1999 from 1998
as TEP redeemed $30 million of its 8.50% First Mortgage Bonds due in
2009 in December 1998. Also contributing to lower Long-Term Debt
interest expense were refinancings of higher rate debt in 1998 and
lower average interest rates on TEP's variable rate debt
obligations. The weighted average interest rate on TEP's tax-exempt
variable rate debt obligations was 3.3% in 1999 compared with 3.5%
in 1998, excluding letter of credit fees.
In November 1999, Interest Imputed on Losses Recorded at
Present Value was discontinued when we ceased to account for
generation operations according to FAS 71. The imputed interest
expense relates to the Springerville Unit 1 Allowance and is
eliminated going forward because the Springerville Unit 1 Allowance
has been offset against the cost basis of the Springerville Unit 1
Lease asset.
1998 Compared with 1997
Interest Expense increased in 1998 relative to 1997. Higher
letter of credit fees for a new TEP Credit Agreement, as well as
higher interest rates from the refinancing of certain variable rate
debt obligations with fixed rate debt obligations accounted for a
substantial part of the increase. TEP also incurred higher interest
expense in 1998 when new bonds were issued and interest expense was
accrued for periods up to 75 days before the redemption of old
bonds. This increased interest was partially offset by interest
income on the funds held prior to the redemption of the old bonds.
These refinancings benefit TEP by extending debt maturities and
reducing the risk of changes in variable interest rates by
refinancing on a fixed rate basis.
See Investing and Financing Activities, Bond Issuance and
Redemption, and Note 6 of Notes to the Consolidated Financial
Statements, Long-Term Debt and Capital Lease Obligations.
Extraordinary Income - Net of Tax
When TEP ceased applying FAS 71 for its generation operations
in November 1999, it recorded $22.6 million of extraordinary net
income consisting of the following after-tax items:
-- $31.4 million in income from recognizing all remaining usable
investment tax credit benefits;
-- $1.9 million of expense from a change in accounting related to
certain emission allowance transactions, and
-- $6.9 million expense true-up from recording generation-related
property-tax expense on an accrual basis rather than the regulatory
basis.
TEP recognized the $31.4 million in income from recognition of
its remaining usable ITC benefits in 1999. Prior to November 1,
1999, all ITC was recognized as income in Other Income and
Deductions as the ITC was amortized to income over the tax life of
the property generating the ITC for ACC ratemaking purposes. The
recognition of this one-time benefit will reduce future earnings by
the amount that would have amortized to income.
See Note 2 of Notes to Consolidated Financial Statements, Regulatory
Matters.
RESULTS OF MILLENNIUM ENERGY BUSINESSES
The table below provides a breakdown by subsidiary of the net
income and losses recorded by the Millennium Energy Businesses for
the three years ended December 31, 1999.
<TABLE>
<CAPTION>
Amounts in $ Millions
- ----------------------------------------------------------------------
Subsidiary 1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
AET $(1.0) $(0.3) $(0.6)
MEH 20.9 (9.2) (4.5)
Nations Energy (9.2) 1.4 0.2
Other 0.2 0.0 (0.4)
- ----------------------------------------------------------------------
Consolidated Millennium Net
Income $10.9 $(8.1) $(5.3)
- ----------------------------------------------------------------------
</TABLE>
AET and Global Solar
AET's net losses in the period 1997 through 1999 represent
ongoing developmental costs at Global Solar. In 1996, AET acquired
from ITN a 50% ownership interest in Global Solar. In November
1999, Millennium and ITN entered into an agreement in which
Millennium's share of Global Solar will increase to 67%. Small-scale
manufacturing of thin-film photovoltaic cells began in 1999 and
commercial production is expected in 2000.
MEH and NewEnergy
MEH recorded net income in 1999 as a result of the July 1999
sale of its equity investment in NewEnergy to The AES Corporation.
MEH received $50 million in consideration from the sale consisting
of $27.2 million in AES common stock and secured promissory notes
issued by NewEnergy totaling $22.8 million, payable over two years.
MEH recognized an after-tax gain of $20.8 million on the
transaction. The AES common stock was sold in 1999 at a small gain.
As part of the sale agreement, AES repaid a $10 million loan
NewEnergy obtained from an unrelated party that was guaranteed by
UniSource Energy. Previously, UniSource Energy provided guarantees
of up to $56 million of certain performance bonds and contractual
obligations relating to NewEnergy's purchases and sales of
electricity. On October 1, 1999, termination notices were sent on
all guarantees and the master surety agreement so that UniSource
Energy will not incur any additional liability under these
agreements. All obligations incurred prior to the terminations have
been extinguished, except for one in the amount of up to $1 million,
which is scheduled to expire in March 2000.
Net losses from MEH's equity investment in NewEnergy were the
primary contributors to net losses at Millennium in 1998 and 1997 of
$8.1 million and $5.3 million, respectively. NewEnergy's losses in
1998 resulted from:
-- narrow margins on energy sales;
-- gross margin that did not yet support administrative costs,
including start-up costs associated with expansion into additional
regions of the country; and
-- recognition of one-time losses from adverse sales commitments
resulting from contracts made prior to the start of operations.
NewEnergy's losses in 1997 resulted primarily from start-up
costs for business development in anticipation of the opening of the
California electricity market to competition in 1998. In addition
to amounts recorded as losses from unregulated businesses in 1997,
TEP recorded an additional $6.3 million (pre-tax) in consulting
expenses related to NewEnergy. These funds were paid to NewEnergy
during the first eight months of 1997, prior to the exercise of the
option to acquire a 50% interest in NewEnergy.
MEH originally acquired its 50% ownership in NewEnergy in
September 1997 with an $0.8 million capital contribution. In the
first quarter of 1999, MEH transferred its ownership in NewEnergy
Ventures Southwest (NEV SW) to NewEnergy. In 1999, 1998 and 1997,
MEH recorded pre-tax losses related to NewEnergy, including NEV SW,
of $1 million, $16 million and $8 million, respectively. These pre-
tax losses were approximately 1%, 42% and 13% in 1999, 1998 and
1997, respectively, of UniSource Energy's pre-tax income.
Because we have no continuing involvement with NewEnergy, other
than the collateralized promissory notes from NewEnergy, we do not
believe that the results of NewEnergy's operations will affect our
continuing operations. At December 31, 1999, the market value of
the collateral supporting the promissory notes exceeded the amount
of the promissory notes by 57%. The promissory notes represent less
than 1% of UniSource Energy's total assets at December 31, 1999.
Nations Energy
Nations Energy reported a net loss of $9.2 million in 1999 due
to development costs, expenses related to the exercise of an option
to invest in a power project in the Czech Republic and the write-off
of investments in certain projects. In early 2000, the power
project in the Czech Republic was sold for a $3 million pre-tax
gain. The net loss from 1999 compares with reported net income of
$1.4 million in 1998 resulting from a $5.8 million after-tax gain on
the sale of a 48% investment in the partnership which owned and
operated the Coors Brewing Company power plant in Golden, Colorado.
This gain was largely offset by expenses for new project development
in 1998. In 1997, Nations Energy reported a small profit, primarily
due to its share of partnership income from its investment in the
Coors Brewing Company power plant, which exceeded expenses recorded
for new project development.
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. The dividend
is payable 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 and 1998, TEP declared and paid dividends of
$34 million and $30 million, respectively, to UniSource Energy, its
sole shareholder. TEP declared the dividends from current year
earnings since TEP has an accumulated deficit, rather than positive
retained earnings.
TEP had not paid a dividend since 1989. TEP suspended its
dividend in 1989 due to financial difficulties which led to the
Financial Restructuring in 1992. After the Financial Restructuring,
TEP did not pay a dividend due, in part, to various restrictions in
its debt agreements. During 1998, TEP redeemed or exchanged the
series of First Mortgage Bonds that contained restrictions and
modified restrictions contained in other credit agreements. See
Investing and Financing Activities, below.
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 December 31, 1999, the required minimum net worth was $212
million. TEP's actual net worth at December 31, 1999 was $270
million. See Investing and Financing Activities, TEP Bank Credit
Agreement, below. As of December 31, 1999, 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 December 31, 1999, 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.
Millennium
In the third quarter of 1999, Millennium paid a $10 million
cash dividend to UniSource Energy. Millennium used some of the
proceeds of the sale of AES Corporation common stock received in
consideration for the sale of NewEnergy to pay this dividend. We
cannot predict, however, the amount or timing of future dividends
from Millennium.
INCOME TAX POSITION
- -------------------
At December 31, 1999, UniSource Energy and TEP had, for
federal income tax purposes:
-- $320 million of NOL carryforwards expiring in 2006 through 2009;
-- $20 million of unused ITC expiring in 2002 through 2005; and
-- $33 million of AMT credit which will carry forward to future
years.
Due to the issuance of common stock to various creditors of
TEP in 1992, a change in TEP ownership was deemed to have 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. See
Income Tax Assessments in Note 9 of Notes to Consolidated Financial
Statements. At December 31, 1999, pre-1992 federal NOL and ITC
carryforwards which are subject to the limitation were approximately
$153 million and $20 million, respectively. The $167 million of
post-1992 federal NOL at December 31, 1999, is not subject to the
limitation.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
Overview of UniSource Energy Cash Flows and Liquidity
Net cash flows from operating activities decreased in aggregate
by $48 million in 1999 compared with 1998. The decrease was
principally due to the transfer of cash to an escrow account related
to a tax settlement (see See Note 9 of Notes to Consolidated
Financial Statements, Commitments and Contingencies), higher income
tax payments and purchases of emission allowance credits.
Net cash used for investing activities totaled $93 million in
1999 compared with $109 million in 1998. Capital expenditures were
$12 million higher in 1999. Other significant investing activities
in 1999 included TEP's $27 million purchase of Springerville Unit 1
lease debt and $28 million in proceeds from Millennium's sale of AES
Corporation stock received as consideration from the sale of
NewEnergy. In 1998, Nations Energy received $21 million in cash
proceeds from the sale of its partnership interest in the Coors
Brewing Company power plant and $51 million was invested in or
loaned to other Millennium energy businesses. See Investing and
Financing Activities, below for a discussion of historical and
forecasted construction expenditures and investments in Millennium's
energy businesses.
Net cash used for financing activities totaled $20 million in
1999 compared with $53 million in 1998. In 1999, the major use of
cash for financing activities was $24 million to retire capital
lease obligations. In 1998 $17 million of capital lease obligations
were retired. Also, in 1998 TEP completed several bond issuance
transactions and used the proceeds to redeem First Mortgage Bonds .
In addition, in December 1998, TEP redeemed $30 million of its 8.50%
First Mortgage Bonds due in 2009. See Investing and Financing
Activities below.
As a result of activities described above, cash and cash
equivalents increased slightly from the 1998 year-end balance of
$145.1 million to the 1999 year-end balance of $145.2 million. Our
consolidated cash balance, including cash equivalents, at February
24, 2000, was approximately $112 million. We invest cash balances
in high-grade money market securities with an emphasis on preserving
the principal amounts invested.
During 2000, UniSource Energy will use cash to fund investments
in Millennium's energy businesses and to pay dividends to
shareholders. At year-end 1999 UniSource Energy had cash and short
term investments of approximately $53 million. 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 cash flows were to fall short of expectation, we
would reevaluate the investment requirements of Millennium's energy
businesses and/or seek additional financing for or investments in
those businesses by unrelated parties.
TEP Cash Flows and Liquidity
TEP's net cash flows from operating activities decreased in
aggregate by $40 million in 1999 compared with 1998. The decrease
was principally due to the transfer of cash to an escrow account
related to a tax settlement (see See Note 9 of Notes to Consolidated
Financial Statements, Commitments and Contingencies), higher income
tax payments and purchases of emission allowance credits.
Net cash used for investing activities totaled $115 million in
1999 compared with $125 million in 1998. Capital Expenditures were
$10 million higher in 1999. Other investing activities for 1999
included the $27 million purchase of Springerville Unit 1 lease
debt. In 1998, net cash outflows from investing activities included
the transfer of Millennium and its $45.4 million of cash from TEP to
UniSource Energy on January 1, 1998. The subsidiaries holding that
cash were subsidiaries of TEP at year-end 1997, and became
subsidiaries of UniSource Energy on January 1, 1998. See Investing
and Financing Activities, below for a discussion of historical and
forecasted construction expenditures.
Net cash used for financing activities totaled $54 million in
1999 compared with $84 million in 1998. In 1999, the major uses of
cash for financing activities were a $34 million cash dividend paid
by TEP to UniSource Energy in the fourth quarter of 1999 and $24
million to retire capital lease obligations. In 1998 TEP completed
several bond issuance transactions and used the proceeds to redeem
First Mortgage Bonds that prohibited the payment of dividends. In
1998, TEP paid a $30 million cash dividend to UniSource Energy and
$17 million of capital lease obligations were retired. In addition,
in December 1998, TEP redeemed $30 million of its 8.50% First
Mortgage Bonds due in 2009 to reduce interest expense in future
periods. See Investing and Financing Activities below.
As a result of activities described above, TEP's cash and cash
equivalents decreased by $30 million from the 1998 year-end balance
of $118 million to the 1999 year-end balance of $88 million. TEP's
consolidated cash balance, including cash equivalents, at February
24, 2000, was approximately $65 million.
After capital expenditures, scheduled debt maturities and
payments to retire capital lease obligations, TEP's net cash flows
available for other investing and financing activities were $23.7
million in 1999, $81.7 million in 1998, and $40.1 million in 1997.
During 2000, TEP expects to generate sufficient internal cash flows
to fund its operating activities, capital expenditures, required
debt maturities, and to pay dividends to UniSource Energy. However,
TEP's cash flows may vary due to changes in wholesale revenues,
changes in short-term interest rates, and other factors. If cash
flows were to fall short of expectations or if monthly cash
requirements temporarily exceeded available cash balances, TEP would
borrow from its Revolving Credit Facility.
INVESTING AND FINANCING ACTIVITIES
TEP-ELECTRIC UTILITY
--------------------
Capital Expenditures
TEP's capital expenditures for the years 1997 through 1999,
along with estimated amounts for the years 2000 through 2004, are
shown below:
($ in millions)
---------------------------------------
Actual Estimated
---------------------------------------
1997 $ 72 2000 $ 95
1998 81 2001 96
1999 91 2002 91
2003 86
2004 74
----------------------
TOTAL $442
----------------------
The estimated capital expenditures for the five years 2000-2004
break down in the following categories:
-- $292 million for transmission, distribution and other facilities
in the Tucson area;
-- $64 million in new production facilities. Beginning in 2000
production facilities are considered an unregulated component of our
electric utility operations; and
-- $86 million for existing other production facilities.
These estimated 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 be different from these
estimates 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.
Bond Issuance and Redemption
During 1999, TEP did not issue any new bonds or redeem any
existing bonds, other than required sinking fund payments of $1.7
million.
During 1998, TEP issued $386.9 million in new bonds and
redeemed $416.4 million of bonds. TEP achieved the following
objectives with this refinancing activity:
-- extended maturities;
-- replaced variable rate debt with fixed rate debt; and
-- eliminated restrictive covenants contained in existing First
Mortgage Bonds.
Bond redemptions during 1998 included all of TEP's First
Mortgage Bonds due in 1999, 2001, 2002, and 2003, as well as the
$31.9 million of 12.22% First Mortgage Bonds due 2000 not tendered
for exchange. By redeeming these bonds, covenants that prohibited
the payment of common stock dividends were eliminated. See
Dividends on Common Stock.
TEP Bank Credit Agreement
TEP has a $441 million Credit Agreement with a number of banks
which matures on December 30, 2002. The agreement consists of a
$100 million Revolving Credit Facility and a $341 million Letter of
Credit Facility. The Revolving Credit Facility is used to provide
liquidity for general corporate purposes. The Letter of Credit
Facility supports $329 million aggregate principal amount of tax-
exempt variable rate debt. The facilities are secured by $441
million in aggregate principal amount of Second Mortgage Bonds.
The Credit Agreement contains several financial covenants, including
interest coverage, leverage and net worth tests. As of December 31,
1999, TEP was in compliance with these financial covenants. See
Restrictive Covenants below.
If TEP borrows under the Revolving Credit Facility, the
borrowing costs would be at a variable interest rate consisting of a
spread over LIBOR or an alternate base rate. The spread is based
upon a pricing grid tied to the credit rating on TEP's senior
secured debt. Also, TEP pays a commitment fee on the unused portion
of the Revolving Credit Facility, and a fee on the Letter of Credit
Facility. These fees are also dependent on TEP's credit ratings.
At December 31, 1999, the commitment fee was 0.375% per year, and
the letter of credit fee (excluding letter of credit fronting fees
of 0.125%) was 1.375% per year. In late December 1999 and early
January 2000, TEP's bond ratings were upgraded by three credit
rating agencies. As a result, on January 3, 2000, the commitment
fee decreased to 0.250% per year, and the letter of credit fee
(excluding letter of credit fronting fees of 0.125%) decreased to
1.125% per year. TEP had no borrowings outstanding under the
Revolving Credit Facility at December 31, 1999 or January 3, 2000.
Springerville Common Facilities Leases
The secured notes underlying the Springerville Common
Facilities lease agreement were refunded in December 1999 and
replaced by new secured notes. The lease agreement was amended to
provide that the new secured notes underlying the lease must be
refunded or refinanced by June 30, 2003 to avoid a special event of
loss under the lease. If a special event of loss were to occur, TEP
would be required to repurchase the facilities for an amount equal
to the higher of the stipulated loss value of $125 million or the
fair market value of the facilities. Upon such purchase, the lease
would be terminated.
The principal amount of the notes at the refunding date was
approximately $70 million. Interest on the new lease notes is
currently paid at a variable rate of interest equal to LIBOR plus
2.50%. The secured notes underlying these leases were refinanced in
December 1999 to avoid a special event of loss. As a result of
refinancing at a higher rate, we recorded an additional $26 million
of capital lease obligations and capital lease assets.
Tax-Exempt Local Furnishing Bonds
TEP has financed a substantial portion of utility plant assets
with industrial development revenue bonds issued by the Industrial
Development Authorities of Pima County and Apache County. The
interest on these bonds is excluded from gross income of the bond
holder for federal tax purposes. This exclusion is allowed because
the facilities qualify as "facilities for the local furnishing of
electric energy" as defined by the Internal Revenue Code. These
bonds are sometimes referred to as "tax-exempt local furnishing
bonds." To qualify for this exclusion, the facilities must be part
of a system providing electric service to customers within not more
than two contiguous counties. TEP provides electric service to
retail customers in the City of Tucson and certain other portions of
Pima County, Arizona and to Fort Huachuca in contiguous Cochise
County, Arizona.
As of December 31, 1999, TEP had approximately $580 million of
tax-exempt local furnishing bonds outstanding. In addition,
approximately $98 million of debt related to the Irvington Unit 4
lease obligation was issued as tax-exempt local furnishing bonds.
TEP has financed the following facilities, in whole or in part, with
the proceeds of tax-exempt local furnishing bonds: Springerville
Unit 2, Irvington Unit 4, a dedicated 345-kV transmission line from
Springerville Unit 2 to TEP's retail service area (the "Express
Line"), and a portion of TEP's local transmission and distribution
system in the Tucson metropolitan area. Approximately $325 million
in principal amount of such bonds financed Springerville Unit 2 and
the Express Line.
Any of the following events might cause TEP to have to redeem
or defease some or all of these bonds:
-- formation of an RTO or ISO;
-- transfer of generating assets to a separate subsidiary;
-- asset divestiture;
-- changes in tax laws; or
-- changes in system operations.
As discussed elsewhere in this report, it is likely that an RTO or
ISO will be formed in Arizona. In addition, the Settlement
Agreement provides that TEP's generating facilities be transferred
to a subsidiary by December 31, 2002. However, at the date of this
report, no plans relating to the formation or operation of an RTO or
ISO, or to the transfer of generating facilities, have been
developed to a degree of certainty that would allow a determination
as to whether or not either of such actions would cause TEP's local
generation, transmission and distribution system to lose its
qualification as a local furnishing system. TEP believes that such
qualification should not be lost so long as (1) the RTO or ISO would
not change the operation of the Express Line or the transmission
facilities within TEP's local service area and (2) energy produced
by Springerville Unit 2 and by TEP's local generating units
continues to be consumed in TEP's local service area. However,
there is no assurance that such qualification can be maintained.
Any redemption or defeasance of tax-exempt local furnishing bonds
would likely require the issuance and sale of higher cost taxable
debt securities in the same or a greater principal amount.
Restrictive Covenants
General First Mortgage Covenants
--------------------------------
TEP's General First Mortgage creates a first mortgage lien on
and security interest in most of TEP's utility plant assets.
Springerville Unit 2, which is owned by San Carlos, is not subject
to this lien and security interest. Under the General First
Mortgage TEP may issue additional First Mortgage Bonds on the basis
of:
(1) up to 60% of net utility property additions; and
(2) the principal amount of retired First Mortgage Bonds.
In general, the amount of First Mortgage Bonds that TEP can issue is
also subject to a net earnings test. The test must show that TEP's
net earnings for 12 consecutive months within the preceding 15
months are at least two (2.0) times the annual interest requirements
on all outstanding First Mortgage Bonds (including the new bonds).
At December 31, 1999, TEP had the ability to issue
approximately $59 million of new First Mortgage Bonds on the basis
of property additions, as described above. TEP also had the ability
to issue about $476 million of new First Mortgage Bonds on the basis
of retired First Mortgage Bonds.
However, TEP's Credit Agreement allows no more than $411
million of First Mortgage Bonds to be outstanding. There were $277
million of First Mortgage Bonds outstanding at December 31, 1999.
Additionally, the Credit Agreement contains certain financial
covenants that limit the amount of new debt obligations TEP may
issue. See Credit Agreement Covenants below. Currently, TEP has no
plans to issue additional First Mortgage Bonds.
General Second Mortgage Covenants
---------------------------------
TEP's General Second Mortgage creates a second mortgage lien on
and security interest in most of TEP's utility plant assets. This
lien does not cover assets owned by San Carlos. Under the General
Second Mortgage TEP may issue additional Second Mortgage Bonds on
the basis of:
(1) up to 70% of net utility property additions; and
(2) the principal amount of retired First and Second Mortgage
Bonds.
In general, the amount of Second Mortgage Bonds that TEP can issue
is also subject to a net earnings test. The test must show that
TEP's net earnings for 12 consecutive months within the preceding 16
months are at least 1 3/4 times the annual interest requirements on
all outstanding First Mortgage Bonds and Second Mortgage Bonds
(including the new bonds).
If TEP issued Second Mortgage Bonds based on retired First
Mortgage Bonds, the amount of retired First Mortgage Bonds available
to issue new First Mortgage Bonds would be reduced by the same
amount.
At December 31, 1999, TEP had the ability to issue about $579
million of new Second Mortgage Bonds on the basis of net property
additions as described above. Also, TEP had the ability to issue
approximately $629 million of new Second Mortgage Bonds on the basis
of retired bonds. Using an interest rate of 7.5%, the net earnings
test would allow such new issuances of Second Mortgage Bonds. These
calculations assume that no additional First Mortgage Bonds would be
issued other than to refund First Mortgage Bonds outstanding at
December 31, 1999. However, issuance of these amounts would be
limited by financial covenants in TEP's bank Credit Agreement.
See Investing and Financing Activities, TEP Bank Credit
Agreement and Restrictive Covenants, Credit Agreement Covenants for
information regarding the Credit Agreement which is secured by $441
million in aggregate principal amount of Second Mortgage Bonds.
Credit Agreement Covenants
--------------------------
TEP's Credit Agreement contains a number of restrictive
covenants including restrictions on additional indebtedness, liens,
sale of assets or mergers and sale-leasebacks.
TEP must also maintain several financial covenants. The table
below includes a brief description of each covenant, the requirement
and TEP's actual results for the period ended December 31, 1999.
December 31, 1999
-----------------------------
Covenant Requirement Actual
- ------------------------------------------------------------------
Minimum Consolidated
Tangible Net Worth (equal
to the sum of $133 million
plus 40% of cumulative
Consolidated Net Income
since January 1, 1997) $212 million $270 million
Minimum Cash Coverage Ratio
(as defined in TEP's
Credit Agreement) 1.4 1.5
Maximum Leverage Ratio 6.8 6.3
See Dividends on Common Stock for a discussion of the
effects of such covenants on TEP's ability to declare or pay
dividends.
See Investing and Financing Activities, TEP Bank Credit
Agreement for more information regarding the Credit
Agreement.
MILLENNIUM--UNREGULATED ENERGY BUSINESSES
-----------------------------------------
Sale of NewEnergy, Inc.
On July 23, 1999, MEH sold its 50% ownership in
NewEnergy to the AES Corporation (AES).
MEH sold the AES Corporation common stock received in
consideration for the sale of NewEnergy in the third
quarter of 1999. Millennium used some of the proceeds from
the sale of AES stock to pay a $10 million cash dividend to
UniSource Energy. The remaining proceeds from the stock
sale as well as other proceeds of the NewEnergy sale were
subsequently available for reinvestment in other
affiliates.
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 1999,
Millennium made significant investments in and received
distributions from our unregulated energy businesses. These
included:
-- $5 million investment in AET and Global Solar; and
-- $28 million cash proceeds from the sale of NewEnergy
In January 2000, Nations Energy sold its interest in
the project located in the Czech Republic project for a $3
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 December 31, 1999, Millennium
had funded $2 million.
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.
UNISOURCE ENERGY-PARENT COMPANY FINANCING ACTIVITIES
----------------------------------------------------
Promissory Note to TEP
On January 1, 1998, TEP and UniSource Energy completed
a transaction by which all outstanding shares of TEP common
stock were exchanged, on a share-for-share basis, for shares
of UniSource Energy common stock. Following the share
exchange, TEP transferred the stock of Millennium to
UniSource Energy in exchange for a $95 million ten-year
promissory note from UniSource Energy. The promissory note
was issued in accordance with the ACC Order authorizing the
formation of the holding company. The interest rate on the
note issued to TEP is 9.78%. Interest is payable every two
years beginning January 1, 2000. UniSource Energy paid $19
million in interest prior to the due date.
Investment Plus Plan
UniSource Energy established a direct stock purchase
plan, called the Investment Plus Plan, in the third quarter
of 1998. On January 7, 2000, this plan was amended to
provide for automatic dividend reinvestment in addition to
direct stock purchases. The Investment Plus Plan provides a
method of investing directly in our common stock without
brokerage commissions or service charges.
Restrictions on Proceeds of Equity Issuance
Pursuant to the ACC Holding Company Order as modified
by the Settlement Agreement, 30% of the proceeds of any
public equity issuance undertaken by UniSource Energy in its
first five years of operations must be used to reduce TEP's
debt or add to TEP's equity account.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
- ------------------------------------------
UniSource Energy and TEP are including the following
cautionary statements to make applicable and take advantage
of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking
statements made by or for UniSource Energy or TEP in this
Annual Report on Form 10-K. Forward-looking statements
include statements concerning plans, objectives, goals,
strategies, future events or performance and underlying
assumptions and other statements which are 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 which 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. Market conditions and technological changes affecting
UniSource Energy's unregulated businesses.
ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES
- ------------------------------------------------------------
ABOUT MARKET RISK
- ------------------------------------------------------------
See Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations, Factors
Affecting Results of Operations, Market Risks.
ITEM 8. - CONSOLIDATED FINANCIAL STATEMENTS AND
- ------------------------------------------------------------
SUPPLEMENTARY DATA
- ------------------------------------------------------------
See Item 14, page 88, for a list of the Consolidated
Financial Statements which are included in the following
pages. See Note 16 of Notes to Consolidated Financial
Statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
UniSource Energy Corporation and its Stockholders
Tucson Electric Power Company
We have audited the accompanying consolidated statements of
income, changes in stockholders' equity, and cash flows of
UniSource Energy Corporation and its subsidiaries (the Company)
for the year ended December 31, 1997. We have also audited the
accompanying consolidated statements of income, changes in
stockholder's equity, and cash flows of Tucson Electric
Power Company and its subsidiaries (TEP) for the year ended
December 31, 1997. These financial statements are the
responsibility of the Company's and TEP's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the results of
operations and cash flows of the Company and TEP for the
year ended December 31, 1997 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Phoenix, Arizona
February 23, 1998 (March 11, 1999 as to information with
respect to 1997 in Note 3 and in Note 11)
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
UniSource Energy Corporation and to the
Board of Directors and Stockholder of
Tucson Electric Power Company
In our opinion, the accompanying consolidated balance sheets
and statements of capitalization and the related
consolidated statements of income, of cash flows, and of
changes in stockholders' equity present fairly, in all
material respects, the financial position of UniSource
Energy Corporation and its subsidiaries (the Company) and
Tucson Electric Power Company and its subsidiaries (TEP) at
December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in
the United States. These financial statements are the
responsibility of the Company's and TEP's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards
generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above. The consolidated financial
statements of the Company and TEP as of December 31, 1997
and for the year then ended were audited by other
independent accountants whose report dated February 23,
1998, except as to the information with respect to 1997 in
Notes 3 and 11 which is as of March 11, 1999, expressed an
unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Los Angeles, California
February 2, 2000
<PAGE>
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------
- Thousands of Dollars -
Operating Revenues
Retail Customers $ 632,593 $ 625,407 $ 624,221
Amortization of MSR Option Gain
Regulatory Liability - - 8,105
Sales for Resale 171,219 143,269 97,567
- ---------------------------------------------------------------------------
Total Operating Revenues 803,812 768,676 729,893
- ---------------------------------------------------------------------------
Operating Expenses
Fuel and Purchased Power 286,349 255,527 216,163
Capital Lease Expense 85,320 104,045 103,914
Amortization of Springerville
Unit 1 Allowance (29,098) (30,522) (28,037)
Other Operations 105,966 109,170 110,132
Maintenance and Repairs 36,949 36,143 36,657
Depreciation and Amortization 92,583 90,358 86,405
Amortization of Transition Recovery Asset 2,241 - -
Taxes Other Than Income Taxes 47,789 50,395 51,339
Income Taxes 18,268 18,372 19,297
- ---------------------------------------------------------------------------
Total Operating Expenses 646,367 633,488 595,870
- ---------------------------------------------------------------------------
Operating Income 157,445 135,188 134,023
- ---------------------------------------------------------------------------
Other Income (Deductions)
Income Taxes (12,924) 8,298 41,401
Reversal of Loss Provision - - 10,154
Interest Income 8,856 10,866 11,239
Gain on the Sale of NewEnergy 34,651 - -
Millennium Energy Businesses (11,276) (11,884) (8,182)
Other Income (Deductions) 2,988 3,164 1,812
- ----------------------------------------------------------------------------
Total Other Income (Deductions) 22,295 10,444 56,424
- ----------------------------------------------------------------------------
Interest Expense
Long-Term Debt 66,836 72,672 66,247
Interest on Capital Leases 16,241 - -
Interest Imputed on Losses Recorded at
Present Value 29,159 34,179 32,657
Other Interest Expense 10,994 10,749 7,971
- ----------------------------------------------------------------------------
Total Interest Expense 123,230 117,600 106,875
- ----------------------------------------------------------------------------
Income Before Extraordinary Item 56,510 28,032 83,572
Extraordinary Income - Net of Tax 22,597 - -
- ----------------------------------------------------------------------------
Net Income $ 79,107 $ 28,032 $ 83,572
============================================================================
Average Shares of
Common Stock Outstanding (000) 32,321 32,177 32,138
============================================================================
Basic Earnings Per Share
Income Before Extraordinary Item $1.75 $0.87 $2.60
Extraordinary Income - Net of Tax $0.70 - -
Net Income $2.45 $0.87 $2.60
===========================================================================
Diluted Earnings Per Share
Income Before Extraordinary Item $1.74 $0.87 $2.59
Extraordinary Income - Net of Tax $0.69 - -
Net Income $2.43 $0.87 $2.59
===========================================================================
See Notes to Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------
- Thousands of Dollars -
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $ 680,141 $ 670,793 $ 664,294
Cash Receipts from Sales for Resale 171,628 142,530 96,569
Fuel and Purchased Power Costs Paid (276,351) (241,824) (206,651)
Wages Paid, Net of Amounts Capitalized (68,711) (67,132) (60,398)
Payment of Other Operations and
Maintenance Costs (96,998) (88,538) (80,216)
Capital Lease Interest Paid (82,421) (81,823) (83,019)
Interest Paid, Net of Amounts Capitalized (74,881) (71,272) (66,625)
Taxes Paid, Net of Amounts Capitalized (97,843) (99,590) (99,126)
Tax Assessment and Interest Deposit Paid - (2,078) -
Contract Termination Fee Paid - (10,000) (40,000)
Emission Allowance Inventory Purchases (13,666) - (11,503)
Emission Allowance Inventory Sales 960 11,368 39
Interest Received 9,659 10,149 9,152
Income Taxes Paid (23,593) (5,113) (984)
Transfer of Tax Settlement to
Escrow Account (22,403) - -
Other 7,707 (6,537) 4,751
- ---------------------------------------------------------------------------
Net Cash Flows - Operating Activities 113,228 160,933 126,283
- ---------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital Expenditures (92,808) (81,147) (72,475)
Purchase of Springerville Lease Debt (26,768) - -
Investments in and Loans to Millennium
Energy Businesses (7,174) (50,682) (7,117)
Sale of Interest in Millennium Energy
Businesses 4,041 20,750 2,119
Sale of Securities 27,516 - -
Other Investments - Net 2,143 2,122 968
- ---------------------------------------------------------------------------
Net Cash Flows - Investing Activities (93,050) (108,957) (76,505)
- ---------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 1,977 99,511 16,928
Payments to Retire Long-Term Debt (1,725) (129,472) (500)
Payments on Renewable Term Loan - - (31,000)
Payments to Retire Capital Lease Obligations (23,602) (17,232) (13,229)
Payments for Credit Agreement and Debt
Issuance Costs - (7,719) (7,470)
Other 3,293 1,847 1,458
- ---------------------------------------------------------------------------
Net Cash Flows - Financing Activities (20,057) (53,065) (33,813)
- ---------------------------------------------------------------------------
Net Increase (Decrease) in
Cash and Cash Equivalents 121 (1,089) 15,965
Cash and Cash Equivalents, Beginning of Year 145,167 146,256 130,291
- ---------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 145,288 $ 145,167 $ 146,256
===========================================================================
See Note 14 for supplemental cash flow information.
See Notes to Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
- ---------------------------------------------------------------------------
- Thousands of Dollars -
ASSETS
Utility Plant
Plant in Service $2,301,645 $2,263,871
Utility Plant Under Capital Leases 741,446 886,902
Construction Work in Progress 96,565 74,050
- ---------------------------------------------------------------------------
Total Utility Plant 3,139,656 3,224,823
Less Accumulated Depreciation and Amortization (1,105,371) (1,051,994)
Less Accumulated Depreciation of Capital Lease
Assets (304,429) (85,826)
Less Springerville Unit 1 Allowance - (171,413)
- ---------------------------------------------------------------------------
Total Utility Plant - Net 1,729,856 1,915,590
- ---------------------------------------------------------------------------
Investments and Other Property 114,483 110,289
- ---------------------------------------------------------------------------
Current Assets
Cash and Cash Equivalents 145,288 145,167
Accounts Receivable 67,926 70,915
Materials and Fuel 42,119 37,040
Deferred Income Taxes - Current 17,148 14,683
Prepaid Pension Costs 15,818 7,673
Tax Settlement Deposit 13,471 -
Other 31,368 19,164
- ---------------------------------------------------------------------------
Total Current Assets 333,138 294,642
- ---------------------------------------------------------------------------
Deferred Debits - Regulatory Assets
Transition Recovery Asset 370,291 -
Income Taxes Recoverable Through Future Revenues 79,497 152,111
Deferred Springerville Generation Costs - 102,211
Deferred Lease Expense - 9,877
Other Regulatory Assets 8,639 18,886
Deferred Debits - Other 20,351 30,443
- ---------------------------------------------------------------------------
Total Deferred Debits 478,778 313,528
- ---------------------------------------------------------------------------
Total Assets $2,656,255 $2,634,049
===========================================================================
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity $ 324,248 $ 246,646
Capital Lease Obligations 880,427 889,543
Long-Term Debt 1,135,820 1,184,423
- ---------------------------------------------------------------------------
Total Capitalization 2,340,495 2,320,612
- ---------------------------------------------------------------------------
Current Liabilities
Current Obligations Under Capital Leases 36,335 11,647
Current Maturities of Long-Term Debt 48,603 1,725
Accounts Payable 32,390 32,354
Interest Accrued 66,311 70,771
Taxes Accrued 31,374 27,162
Accrued Employee Expenses 10,782 16,947
Other 8,934 6,741
- ---------------------------------------------------------------------------
Total Current Liabilities 234,729 167,347
- ---------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 42,526 61,892
Deferred Investment Tax Credits Regulatory
Liability - 10,436
Emission Allowance Gain Regulatory Liability - 31,335
Other 38,505 42,427
- ---------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 81,031 146,090
- ---------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
- ---------------------------------------------------------------------------
Total Capitalization and Other Liabilities $2,656,255 $2,634,049
===========================================================================
See Notes to Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1999 1998
- ---------------------------------------------------------------------------
COMMON STOCK EQUITY - Thousands of Dollars -
Common Stock--No Par Value $ 641,723 $ 640,640
1999 1998
---------- ----------
Shares Authorized 75,000,000 75,000,000
Shares Outstanding 32,349,091 32,257,963
Warrants Outstanding 1,492,411 2,984,822
Accumulated Deficit (317,475) (393,994)
- ---------------------------------------------------------------------------
Total Common Stock Equity 324,248 246,646
- ---------------------------------------------------------------------------
PREFERRED STOCK
No Par Value, 1,000,000 Shares Authorized,
None Outstanding - -
- ---------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 496,409 494,408
Springerville Coal Handling Facilities 163,216 166,288
Springerville Common Facilities 147,542 123,835
Irvington Unit 4 107,093 114,316
Other Leases 2,502 2,343
- ---------------------------------------------------------------------------
Total Capital Lease Obligations 916,762 901,190
Less Current Maturities (36,335) (11,647)
- ---------------------------------------------------------------------------
Total Long-Term Capital Lease Obligations 880,427 889,543
- ---------------------------------------------------------------------------
LONG-TERM DEBT
Interest
Issue Maturity Rate
- ---------------------------------------------------------------------------
First Mortgage Bonds
Corporate 2009 8.50% 27,900 27,900
2000 12.22% 46,878 46,878
Industrial Development
Revenue Bonds (IDBs) 2006 - 2008 6.10% to 7.50% 61,775 63,500
First Collateral Trust
Bonds 2008 7.50% 140,000 140,000
Second Mortgage Bonds
(IDBs)* 2018 - 2022 Variable** 328,600 328,600
Unsecured IDBs 2020 - 2033 5.85% to 7.13% 579,270 579,270
- ---------------------------------------------------------------------------
Total Stated Principal Amount 1,184,423 1,186,148
Less Current Maturities (48,603) (1,725)
- ---------------------------------------------------------------------------
Total Long-Term Debt 1,135,820 1,184,423
- ---------------------------------------------------------------------------
Total Capitalization $2,340,495 $2,320,612
===========================================================================
* These IDBs are backed by LOCs under TEP's Credit Agreement. TEP's
obligations under the Credit Agreement are collateralized with Second Mortgage
Bonds.
** Weighted average interest rates on variable rate tax-exempt debt (IDBs)
ranged from 2.25% to 5.55% during 1999 and 1998, and the average interest rate
on such debt was 3.33% in 1999 and 3.51% in 1998.
See Notes to Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Common Earnings
Stock (Deficit)
- -----------------------------------------------------------------------------
- Thousands of Dollars -
Balances at December 31, 1996 $638,886 $(505,598)
1997 Net Income - 83,572
6,630 Shares Issued under Stock Compensation Plans 108 -
5,687 Net Shares Purchased by Deferred
Compensation Trust Less Distributions (90) -
- -----------------------------------------------------------------------------
Balances at December 31, 1997 638,904 (422,026)
1998 Net Income - 28,032
116,696 Shares Issued Under Stock
Compensation Plans 1,709 -
1,833 Net Shares Distributed by Deferred
Compensation Trust Less Purchases 27 -
- -----------------------------------------------------------------------------
Balances at December 31, 1998 640,640 (393,994)
1999 Net Income - 79,107
Dividends Declared - (2,588)
107,567 Shares Issued Under Stock Compensation Plans 1,277 -
16,439 Net Shares Purchased by Deferred
Compensation Trust Less Distributions (194) -
- -----------------------------------------------------------------------------
Balances at December 31, 1999 $641,723 $(317,475)
=============================================================================
We describe limitations on our ability to pay dividends in Note 8.
See Notes to Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------
- Thousands of Dollars -
Operating Revenues
Retail Customers $ 632,864 $ 625,721 $ 624,221
Amortization of MSR Option Gain
Regulatory Liability - - 8,105
Sales for Resale 171,219 143,269 97,567
- ---------------------------------------------------------------------------
Total Operating Revenues 804,083 768,990 729,893
- ---------------------------------------------------------------------------
Operating Expenses
Fuel and Purchased Power 286,349 255,527 216,163
Capital Lease Expense 85,320 104,045 103,914
Amortization of Springerville
Unit 1 Allowance (29,098) (30,522) (28,037)
Other Operations 105,966 109,170 110,132
Maintenance and Repairs 36,949 36,143 36,657
Depreciation and Amortization 92,583 90,358 86,405
Amortization of Transition Recovery Asset 2,241 - -
Taxes Other Than Income Taxes 47,789 50,395 51,339
Income Taxes 18,268 18,372 19,297
- ---------------------------------------------------------------------------
Total Operating Expenses 646,367 633,488 595,870
- ---------------------------------------------------------------------------
Operating Income 157,716 135,502 134,023
- ---------------------------------------------------------------------------
Other Income (Deductions)
Income Taxes (4,082) 794 41,401
Reversal of Loss Provision - - 10,154
Interest Income 7,935 10,800 11,239
Interest Income - Note Receivable from
UniSource Energy 9,937 9,329 -
Other Income (Deductions) 2,602 2,851 (6,370)
- ---------------------------------------------------------------------------
Total Other Income (Deductions) 16,392 23,774 56,424
- ---------------------------------------------------------------------------
Interest Expense
Long-Term Debt 66,836 72,672 66,247
Interest on Capital Leases 16,241 - -
Interest Imputed on Losses Recorded at
Present Value 29,159 34,179 32,657
Other Interest Expense 10,994 10,749 7,971
- ---------------------------------------------------------------------------
Total Interest Expense 123,230 117,600 106,875
- ---------------------------------------------------------------------------
Income before Extraordinary Item 50,878 41,676 83,572
Extraordinary Income - Net of Tax 22,597 - -
- ---------------------------------------------------------------------------
Net Income $ 73,475 $ 41,676 $ 83,572
===========================================================================
See Notes to Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------
- Thousands of Dollars -
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $ 680,141 $ 670,793 $ 664,294
Cash Receipts from Sales for Resale 171,628 142,530 96,569
Fuel and Purchased Power Costs Paid (276,351) (241,824) (206,651)
Wages Paid, Net of Amounts Capitalized (61,697) (62,622) (60,398)
Payment of Other Operations and
Maintenance Costs (89,020) (81,065) (80,216)
Capital Lease Interest Paid (82,414) (81,823) (83,019)
Interest Paid, Net of Amounts Capitalized (74,862) (71,272) (66,625)
Taxes Paid, Net of Amounts Capitalized (97,416) (99,091) (99,126)
Tax Assessment and Interest Deposit Paid - (2,078) -
Contract Termination Fee Paid - (10,000) (40,000)
Emission Allowance Inventory Purchases (13,666) - (11,503)
Emission Allowance Inventory Sales 960 11,368 39
Interest Received 26,881 8,517 9,152
Income Taxes Paid (22,156) (3,883) (984)
Transfer of Tax Settlement to Escrow Account (22,403) - -
Other 332 937 4,751
- ---------------------------------------------------------------------------
Net Cash Flows - Operating Activities 139,957 180,487 126,283
- ---------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital Expenditures (90,940) (81,011) (72,475)
Purchase of Springerville Lease Debt (26,768) - -
Transfer of Millennium Cash to UniSource
Energy - (45,412) -
Investments in and Loans to Millennium
Energy Businesses - - (7,117)
Sale of Interest in Millennium Energy
Businesses - - 2,119
Other Investments - Net 2,288 1,475 968
- ---------------------------------------------------------------------------
Net Cash Flows - Investing Activities (115,420) (124,948) (76,505)
- ---------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 1,977 99,511 16,928
Payments to Retire Long-Term Debt (1,725) (129,472) (500)
Payments on Renewable Term Loan - - (31,000)
Dividend Paid to UniSource Energy (34,000) (30,000) -
Payments to Retire Capital Lease Obligations (23,563) (17,232) (13,229)
Payments for Credit Agreement and Debt
Issuance Costs - (7,719) (7,470)
Other 2,940 1,353 1,458
- ---------------------------------------------------------------------------
Net Cash Flows - Financing Activities (54,371) (83,559) (33,813)
- ---------------------------------------------------------------------------
Net Increase (Decrease) in
Cash and Cash Equivalents (29,834) (28,020) 15,965
Cash and Cash Equivalents, Beginning of Year 118,236 146,256 130,291
- ---------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 88,402 $ 118,236 $ 146,256
===========================================================================
See Note 14 for supplemental cash flow information.
See Notes to Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
- ---------------------------------------------------------------------------
- Thousands of Dollars -
ASSETS
Utility Plant
Plant in Service $2,301,645 $2,263,871
Utility Plant Under Capital Leases 741,446 886,902
Construction Work in Progress 96,565 74,050
- ---------------------------------------------------------------------------
Total Utility Plant 3,139,656 3,224,823
Less Accumulated Depreciation and Amortization (1,105,371) (1,051,994)
Less Accumulated Depreciation of Capital Lease
Assets (304,429) (85,826)
Less Springerville Unit 1 Allowance - (171,413)
- ---------------------------------------------------------------------------
Total Utility Plant - Net 1,729,856 1,915,590
- ---------------------------------------------------------------------------
Investments and Other Property 67,838 62,978
- ---------------------------------------------------------------------------
Note Receivable from UniSource Energy 70,132 79,462
- ---------------------------------------------------------------------------
Current Assets
Cash and Cash Equivalents 88,402 118,236
Accounts Receivable 70,739 72,239
Materials and Fuel 42,035 36,995
Deferred Income Taxes - Current 17,190 14,820
Prepaid Pension Costs 15,818 7,673
Tax Settlement Deposit 13,471 -
Other 6,249 7,067
- ---------------------------------------------------------------------------
Total Current Assets 253,904 257,030
- ---------------------------------------------------------------------------
Deferred Debits - Regulatory Assets
Transition Recovery Asset 370,291 -
Income Taxes Recoverable Through Future Revenues 79,497 152,111
Deferred Springerville Generation Costs - 102,211
Deferred Lease Expense - 9,877
Other Regulatory Assets 8,639 18,886
Deferred Debits - Other 20,351 30,443
- ---------------------------------------------------------------------------
Total Deferred Debits 478,778 313,528
- ---------------------------------------------------------------------------
Total Assets $2,600,508 $2,628,588
===========================================================================
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity $ 270,134 $ 229,861
Capital Lease Obligations 880,111 889,543
Long-Term Debt 1,135,820 1,184,423
- ----------------------------------------------------------------------------
Total Capitalization 2,286,065 2,303,827
- ----------------------------------------------------------------------------
Current Liabilities
Current Obligations Under Capital Leases 36,263 11,647
Current Maturities of Long-Term Debt 48,603 1,725
Accounts Payable 41,277 35,517
Interest Accrued 66,311 70,771
Taxes Accrued 27,738 27,088
Accrued Employee Expenses 10,591 16,635
Other 6,285 6,705
- ----------------------------------------------------------------------------
Total Current Liabilities 237,068 170,088
- ----------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 38,913 70,504
Deferred Investment Tax Credits Regulatory Liability - 10,436
Emission Allowance Gain Regulatory Liability - 31,335
Other 38,462 42,398
- ----------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 77,375 154,673
- ----------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
- ----------------------------------------------------------------------------
Total Capitalization and Other Liabilities $2,600,508 $2,628,588
================================================================+===========
See Notes to Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1999 1998
- ---------------------------------------------------------------------------
COMMON STOCK EQUITY - Thousands of Dollars -
Common Stock--No Par Value $ 647,366 $ 646,568
1999 1998
---------- ----------
Shares Authorized 75,000,000 75,000,000
Shares Outstanding**** 32,139,434 32,139,434
Warrants Outstanding*** 918,445 918,445
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (370,875) (410,350)
- ---------------------------------------------------------------------------
Total Common Stock Equity 270,134 229,861
- ---------------------------------------------------------------------------
PREFERRED STOCK
No Par Value, 1,000,000 Shares Authorized,
None Outstanding - -
- ---------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 496,409 494,408
Springerville Coal Handling Facilities 163,216 166,288
Springerville Common Facilities 147,542 123,835
Irvington Unit 4 107,093 114,316
Other Leases 2,114 2,343
- ---------------------------------------------------------------------------
Total Capital Lease Obligations 916,374 901,190
Less Current Maturities (36,263) (11,647)
- ---------------------------------------------------------------------------
Total Long-Term Capital Lease Obligations 880,111 889,543
- ---------------------------------------------------------------------------
LONG-TERM DEBT
Interest
Issue Maturity Rate
- ---------------------------------------------------------------------------
First Mortgage Bonds
Corporate 2009 8.50% 27,900 27,900
2000 12.22% 46,878 46,878
Industrial Development
Revenue Bonds (IDBs) 2006 - 2008 6.10% to 7.50% 61,775 63,500
First Collateral Trust
Bonds 2008 7.50% 140,000 140,000
Second Mortgage Bonds
IDBs* 2018 - 2022 Variable** 328,600 328,600
Unsecured IDBs 2020 - 2033 5.85% to 7.13% 579,270 579,270
- ---------------------------------------------------------------------------
Total Stated Principal Amount 1,184,423 1,186,148
Less Current Maturities (48,603) (1,725)
- ---------------------------------------------------------------------------
Total Long-Term Debt 1,135,820 1,184,423
- ---------------------------------------------------------------------------
Total Capitalization $2,286,065 $2,303,827
============================================================================
* These IDBs are backed by LOCs under TEP's Credit Agreement. TEP's
obligations under the Credit Agreement are collateralized with Second Mortgage
Bonds.
** Weighted average interest rates on variable rate tax-exempt debt (IDBs)
ranged from 2.25% to 5.55% during 1999 and 1998, and the average interest rate
on such debt was 3.33% in 1999 and 3.51% in 1998.
*** There are 4.6 million outstanding TEP warrants which entitle the holders
of five warrants to purchase one share of TEP common stock for $16.00. See
Note 12.
**** UniSource Energy is the sole holder of the outstanding common stock of
TEP.
See Notes to Consolidated Financial Statements.
<PAGE>
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Capital Accumulated
Common Stock Earnings
Stock Expense (Deficit)
- ---------------------------------------------------------------------------
- Thousands of Dollars -
Balances at December 31, 1996 $645,243 $(6,357) $(505,598)
1997 Net Income - - 83,572
6,630 Shares Issued under Stock
Compensation Plans 108 - -
5,687 Net Shares Purchased by Deferred
Compensation Trust Less Distributions (90) - -
- ---------------------------------------------------------------------------
Balances at December 31, 1997 645,261 (6,357) (422,026)
1998 Net Income - - 41,676
Dividend Paid to UniSource Energy - - (30,000)
22,733 Shares Held by Deferred
Compensation Trust Transferred to
UniSource Energy 373 - -
Other 934 - -
- ---------------------------------------------------------------------------
Balances at December 31, 1998 646,568 (6,357) (410,350)
1999 Net Income - - 73,475
Dividend Paid to UniSource Energy - - (34,000)
Other 798 - -
- ---------------------------------------------------------------------------
Balances at December 31, 1999 $647,366 $(6,357) $(370,875)
===========================================================================
We describe limitations on our ability to pay dividends in Note 8.
See Notes to Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------------------------
NATURE OF OPERATIONS
UniSource Energy Corporation (UniSource Energy) is an exempt holding
company under the Public Utility Holding Company Act. UniSource Energy has no
significant operations of its own, but holds the stock of Tucson Electric
Power Company (TEP) and Millennium Energy Holdings, Inc. (Millennium). TEP, a
regulated public utility incorporated in Arizona since 1963, is UniSource
Energy's largest operating subsidiary and represents substantially all of
UniSource Energy's assets. Millennium holds the energy-related businesses
described in Note 4.
TEP generates, transmits and distributes electricity. TEP serves retail
customers in a 1,155 square mile area in Southern Arizona. TEP also sells
electricity to other utilities and power marketing entities primarily located
in the Western United States. Approximately 60% of TEP's work force is
subject to a collective bargaining unit. The collective bargaining agreement
in place at December 31, 1999 terminates on January 6, 2003.
BASIS OF PRESENTATION
On January 1, 1998, TEP and UniSource Energy completed a transaction by
exchanging all the outstanding common stock of TEP on a share-for-share basis
for the common stock of UniSource Energy. Following the share exchange, in
January 1998 TEP transferred the stock of Millennium to UniSource Energy for a
$95 million ten-year promissory note from UniSource Energy. Approximately $25
million of this note represents a gain to TEP. TEP has not recorded this
gain. Instead, this gain will be reflected as an increase in TEP's common
stock equity when UniSource Energy pays the principal portion of the note. In
accordance with the ACC order authorizing the formation of the holding
company, the note bears interest at 9.78% payable every two years beginning
January 1, 2000. In 1999, UniSource Energy paid TEP $19 million for the
interest owed under this note.
UniSource Energy's consolidated financial statements include the
financial results of operations of UniSource Energy and its wholly owned
subsidiaries as if UniSource Energy's current holding company structure had
existed in all periods shown. For periods prior to January 1998, UniSource
Energy's operations and those of TEP are the same.
UniSource Energy and TEP use the following three methods to report
investments in their subsidiaries or other companies:
- Consolidation: When we own a majority of the voting stock of a subsidiary,
we combine the accounts of the subsidiary with our accounts. We eliminate
intercompany balances and transactions when we combine these accounts.
- The Equity Method: We use the equity method to report corporate joint
ventures, partnerships, and affiliated companies when we hold a 20% to 50%
voting interest or we have the ability to exercise significant influence over
the operating and financial policies of the investee company. Under the
equity method, we report:
-- Our interest in the equity of an entity as an investment on our balance
sheet; and
-- Our percentage share of the net income (loss) from the entity as "other
income" in our income statements.
- The Cost Method: We use the cost method when we hold less than a 20% voting
interest in an investment. Under the cost method, we report our investment at
cost on our balance sheet.
All non-utility operating transactions are included in the Other Income
(Deductions) section of the income statements.
USE OF ACCOUNTING ESTIMATES
Management makes estimates and assumptions when preparing financial
statements under Generally Accepted Accounting Principles (GAAP). These
estimates and assumptions affect:
- A portion of the reported amounts of assets and liabilities at the dates of
the financial statements;
- Our disclosures regarding contingent assets and liabilities at the dates of
the financial statements; and
- A portion of the reported revenues and expenses during the financial
statement reporting periods.
Because these estimates involve judgments, the actual amounts may differ from
the estimates.
REGULATION
The Arizona Corporation Commission (ACC) and the Federal Energy
Regulatory Commission (FERC) regulate portions of TEP's utility accounting
practices and electricity rates. 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. These effects are described in Note 2.
TEP UTILITY PLANT
We report TEP's utility plant on our balance sheets at its original cost.
Utility plant includes:
- Material and labor,
- Contractor costs,
- Construction overhead costs (where applicable), and
- An Allowance for Funds Used During Construction (AFUDC) or capitalized
interest.
AFUDC reflects the cost of financing construction projects with borrowed
funds and equity funds. The component of AFUDC attributable to borrowed funds
is included as a reduction of Other Interest Expense on the income statement.
The equity component is included in Other Income (Deductions). In 1999, 1998
and 1997, we imputed the cost of capital on construction expenditures at
7.04%, 6.30% and 5.55%, respectively, to reflect the cost of using borrowed
and equity funds to finance construction.
Upon discontinuance of FAS 71 to our generation operations effective
November 1, 1999, as described in Note 2, we complied with Statement of
Financial Accounting Standard No. 34, "Capitalization of Interest Cost". FAS
34 replaces the previous AFUDC calculation for generation-related construction
projects and provides guidance on calculating the costs during construction of
debt funds used to finance our construction projects.
Depreciation
We compute depreciation for owned utility plant on a straight-line basis
at rates based on the economic lives of the assets. These rates are
authorized by the ACC and averaged 3.68%, 3.53% and 3.44% in 1999, 1998 and
1997, respectively. The economic lives for generation plant are based on
remaining lives. The economic lives for transmission plant, distribution
plant, general plant and intangible plant are based on average lives. The
rates also reflect estimated removal costs, net of estimated salvage value.
Minor replacements and repairs are expensed as incurred. Retirements of
utility plant, together with removal costs less salvage, are charged to
accumulated depreciation.
TEP UTILITY PLANT UNDER CAPITAL LEASES
TEP financed the following generation assets with leases:
- Springerville Common Facilities,
- Springerville Unit 1,
- Springerville Coal Handling Facilities, and
- Irvington Unit 4.
Under GAAP, these leases qualify as capital leases. However, for ACC
rate-making purposes, these leases have been treated as operating leases with
recovery as if rent payments were made in equal amounts annually during the
lease term. We recorded lease expense (interest and depreciation) on a basis
which reflected the rate-making treatment for periods prior to November 1,
1999, the date our generation operations became deregulated. We deferred the
differences between GAAP capital lease accounting used by unregulated
companies and the ACC rate-making method used by us prior to November 1, 1999.
See Deferred Lease Expense and Income Statement Impact of Applying FAS 71 in
Note 2. We describe the lease terms in Capital Lease Obligations in Note 6.
The following table shows the amount of lease expense incurred for these
four leases and TEP's remaining generation-related leases.
Years Ended December 31,
1999 1998 1997
-----------------------------------------------------------------------
- Millions of Dollars -
Lease Expense:
Interest $ 94 $ 96 $ 95
Depreciation 22 18 17
-----------------------------------------------------------------------
Total Lease Expense $ 116 $ 114 $ 112
=======================================================================
Lease Expense Included In:
Operating Expenses - Fuel and
Purchased Power $ 10 $ 10 $ 10
Operating Expenses - Capital Lease
Expense 85 104 104
Operating Expenses - Depreciation and
Amortization 5 - -
Interest Expense on Capital Leases 16 - -
Balance Sheet - Deferred Lease Expense
(See Note 2) - - (2)
-----------------------------------------------------------------------
Total Lease Expense $ 116 $ 114 $ 112
=======================================================================
LONG-TERM DEBT
We defer all costs related to the issuance of long-term debt. These
costs include underwriters' commissions, discounts or premiums, and other
costs such as legal, accounting and regulatory fees and printing costs. We
amortize these costs over the life of the debt.
Prior to November 1, 1999, gains and losses on debt that we retired
before maturity were amortized over the remaining original life of the debt to
interest expense. Effective November 1, 1999, we recognize gains and losses
on reacquired debt associated with the generation portion of TEP's operations
as incurred. We reclassified any remaining generation-related unamortized
gains and losses on reacquired debt at November 1, 1999, which had been
included in Other Regulatory Assets in our balance sheets, to the Transition
Recovery Asset. See Note 2. We continue to defer and amortize the gains and
losses on reacquired debt associated with TEP's regulated operations to
interest income or expense over the remaining life of the original debt.
UTILITY OPERATING REVENUES
We record utility operating revenues when we deliver electricity to
customers. Operating revenues include unbilled revenues which are earned
(service has been provided) but not billed by the end of an accounting period.
FUEL COSTS
Fuel inventory, primarily coal, is recorded at weighted average cost.
TEP uses full absorption costing. Under full absorption costing, all costs
incurred in the production process are included in the cost of the inventory.
Examples of these costs are direct material, direct labor and overhead costs.
INCOME TAXES
We are required by GAAP to report some of our assets and liabilities
differently for our financial statements than we do for income tax purposes.
The tax effects of differences in these items are reported as deferred income
tax assets or liabilities in our balance sheets. We measure these assets and
liabilities using income tax rates that are currently in effect.
See Note 2 for discussion of the following income tax items:
- Income Taxes Recoverable Through Future Revenues
- Deferred Investment Tax Credits Regulatory Liability
The income tax benefits included in Other Income (Deductions) in the 1997
income statements primarily resulted from the recognition of a portion of the
net operating loss carryforwards. See Note 10.
We allocate income taxes to the subsidiaries based on their taxable
income and deductions used in the consolidated tax return.
EMISSION ALLOWANCES
Emission Allowances are issued by the EPA and each permits emission of
one ton of sulfur dioxide. These allowances can be sold. Prior to November
1, 1999, based on expected future regulatory treatment, TEP recorded Emission
Allowance purchases in a noncurrent inventory account included in Investments
and Other Property on the balance sheets. Emission allowance inventory was
recorded at weighted average cost. Gains on sales of Emission Allowances were
deferred as an Emission Allowance Gain Regulatory Liability in the balance
sheets. At November 1, 1999, the Emission Allowance inventory account and the
Emission Allowance Gain Regulatory Liability were written off and the result
was included in Extraordinary Income in the income statements in accordance
with the provisions of FAS 101. See Note 2.
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.
In November 1998, the Emerging Issues Task Force issued guidance on
accounting for energy trading activities (EITF 98-10). Energy trading
activities are intended to generate profits from changes in the market prices
for energy-related commodities such as electricity, natural gas and coal.
These activities include certain purchase power and transmission contracts.
This guidance would require us to measure the difference between cost and
market value for our energy contracts and include any resulting gains or
losses in earnings. TEP does purchase and sell electricity but does not engage
in the type of activities defined in EITF 98-10 as energy trading. Therefore
compliance with the guidance in EITF 98-10 had no effect on our financial
statements.
RECLASSIFICATIONS
We have made reclassifications to the prior year financial statements for
comparative purposes. These reclassifications had no effect on net income.
NOTE 2. 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.
The financial statement impact of applying FAS 71 changed between 1998
and 1999 due to a change in the way we are regulated. The following sections
of this note explain the chronology of events and the impact on our financial
statements.
REGULATORY ASSETS AND LIABILITIES AT DECEMBER 31, 1998
TEP applied FAS 71 to the generation, transmission and distribution
portions of its business during 1998. The regulatory assets and liabilities
at December 31, 1998 were:
--------------------------------------------------------------
- Millions of Dollars -
Regulatory Assets
Income Taxes Recoverable Through Future Revenues $ 152
Deferred Springerville Generation Costs 102
Deferred Lease Expense 10
Other Regulatory Assets 19
Springerville Unit 1 Allowance-contra-asset (171)
--------------------------------------------------------------
Total Regulatory Assets $ 112
==============================================================
Regulatory Liabilities
Deferred Investment Tax Credits Regulatory Liability $ 10
Emission Allowance Gain Regulatory Liability 31
--------------------------------------------------------------
Total Regulatory Liabilities $ 41
==============================================================
A description of these assets and liabilities follows:
Income Taxes Recoverable Through Future Revenues: Represents the portion of
the total deferred income tax liability attributable to our utility business
for which we have not charged our customers. This balance was amortized as
the temporary differences reversed. Effective November 1, 1999, the
generation-related portion of this balance became part of the Transition
Recovery Asset.
Deferred Springerville Generation Costs: Represents deferred costs related to
Springerville Generating Station operations, including:
- Springerville Common Facilities costs incurred between the in-service dates
of Springerville Unit 1 and Springerville Unit 2. We were amortizing these
costs over the initial term of the Common Facilities Leases (2017 and 2021);
- Fees incurred in 1997 to renegotiate the Springerville coal supply
contract. These fees were being amortized over the life of the new contract
(2010); and
- Non-fuel costs of Springerville Unit 2 incurred from January 1, 1991
through October 14, 1991 which were amortized over a three-year period from
1996 through 1999.
Deferred Lease Expense: Represents differences which arose as a result of the
ACC's regulatory treatment of TEP's capital leases. The ACC treated these
leases as operating leases for ratemaking purposes, resulting in deferral of
certain lease and interest costs.
Springerville Unit 1 Allowance: This allowance represents the portion of
Springerville Unit 1 non-fuel expenses that the ACC did not allow TEP to
recover through retail rates. The allowance, a contra-asset account,
increased by interest expense which was shown as Interest Imputed on Losses
Recorded at Present Value in the Interest Expense section in the income
statements and decreased by the Amortization of Springerville Unit 1
Allowance, which was a contra-expense included in Operating Expenses.
At November 1, 1999, the unamortized balance of the Springerville Unit 1
Allowance reduced the Springerville Unit 1 capital lease asset amount. This
offset reduces the amount of post-FAS 71 Springerville Unit 1 lease
depreciation expense that will be recognized in the income statements and
eliminates any further interest and amortization expense related to the
Springerville Unit 1 Allowance.
Deferred Investment Tax Credits Regulatory Liability: Represents the deferred
benefit relating to ITC claimed on tax returns. This amount was being
amortized over the tax lives of the related property.
Emission Allowance Gain Regulatory Liability: Represents the net deferred
gain on emission allowance sales. These gains would have been amortized as
the related emission allowances were used.
NOVEMBER 1999 ACC APPROVAL OF SETTLEMENT AGREEMENT
The Settlement Agreement
In November 1999, the ACC approved a Settlement Agreement between TEP and
certain customer groups relating to recovery of TEP's transition costs and
standard retail rates. The major provisions of the Settlement Agreement
include:
- Consumer choice: Consumer choice for energy supply was approved to begin in
January 2000 after the approval by the ACC of certain filings, and will be
phased in as required by the ACC's retail competition rules. Initially, over
20 percent of TEP's retail customers are eligible to choose competitive energy
suppliers. By January 1, 2001, consumer choice will be available to all
customers.
- Rate freeze: In accordance with the Rate Settlement 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 provides that,
after these reductions, TEP's retail rates will be frozen until December 31,
2008, except under certain circumstances. TEP expects to recover the costs of
transmission and distribution under regulated unbundled rates.
- Recovery of transition costs: TEP's frozen rates include Fixed and Floating
Competition Transition Charge (CTC) components which are designated for the
recovery of transition costs, including generation-related regulatory assets
and a portion of TEP's generation plant assets. Retail rates will decrease by
the Fixed CTC amount after TEP has recovered $450 million or on December 31,
2008, whichever occurs first. The Floating CTC will allow TEP to recover
stranded costs not collected through the Fixed CTC and will terminate no later
than December 31, 2008.
- By June 1, 2004, TEP will be required to file a general rate case including
an updated cost-of-service study. Any rate change resulting from this rate
case would be effective no sooner than June 1, 2005 and would not result in a
net rate increase.
In accordance with the Settlement Agreement, TEP will transfer its
generation and other competitive assets to a wholly-owned subsidiary by
December 31, 2002. TEP, as a utility distribution company, will acquire energy
in the wholesale market for its retail customer energy requirements through a
competitive bidding process. Under the ACC's electric competition rules, TEP
will be required to provide energy to any distribution customer who does not
choose another energy service provider. TEP's generation subsidiary will sell
energy into the wholesale market.
Accounting Implications
In 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board concluded that application of 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 provided sufficient details regarding the
deregulation of TEP's generation operations. As a result, we changed the
effects of rate regulation that we had reflected in our financial statements
as a result of applying FAS 71 to our generation operations. This included:
- Increasing accumulated capital lease depreciation by $197 million to
reflect the depreciation that would have accumulated had we not applied FAS
71;
- Reclassifying $175 million of generation-related regulatory assets to the
Transition Recovery Asset, a distribution-related regulatory asset, because we
believe we will recover these assets through the Fixed CTC component of our
standard rates in our distribution business; and
- Recording $23 million of extraordinary income for balances that needed to
be eliminated to reflect discontinuance of FAS 71 but that could not be
reclassified as part of the Transition Recovery Asset.
The Transition Recovery Asset and extraordinary income recorded as a result of
the discontinuation of application of FAS 71 are summarized below.
Transition Recovery Asset
As of November 1, 1999, we recorded a Transition Recovery Asset as
follows:
----------------------------------------------------------------------------
-Millions of Dollars-
Generation-Related Regulatory Assets
Capital Lease Deprecation Adjustment $ 197
Deferred Springerville Generation Costs 95
Income Taxes Recoverable Through Future Revenues 65
Other 15
----------------------------------------------------------------------------
Total Reclassified to Transition Recovery Asset on the Balance Sheet 372
Generation-Related Plant Assets 42
Excess Capacity Deferrals (Off Balance Sheet) 36
----------------------------------------------------------------------------
Total Transition Costs Being Recovered Through the Fixed CTC $ 450
============================================================================
The Generation-Related Plant Assets are included in Plant in Service on
the balance sheet. The Excess Capacity Deferrals are not reflected on our
balance sheet and relate to operating and capital costs associated with
Springerville Unit 2 capacity which were previously expensed when incurred.
Prior to discontinuation of application of FAS 71, these costs were amortized
as an off-balance sheet regulatory asset.
During the period from November 1, 1999 through December 31, 1999, we
recognized total amortization of $2.4 million related to the Total Transition
Costs Being Recovered Through the Fixed CTC. On the income statement, we
reflected amortization of $2.2 million related to the Transition Recovery
Asset recorded on the balance sheet. The remaining balance will be amortized
as costs are recovered through rates.
Extraordinary Income
As a result of the discontinuance of FAS 71 and the adoption of FAS 101
for generation operations, we recognized $23 million in extraordinary income,
net of tax, primarily as a result of recognition of deferred investment tax
credits. In accordance with previous actions of the ACC, TEP had deferred
recognition of the benefit of approximately $31 million in investment tax
credits. These benefits were recognized as part of the discontinuation of FAS
71 as we no longer had a regulatory deferral requirement. This gain was
partially offset by approximately $14 million in generation-related costs for
which TEP did not receive regulatory recovery as part of its Transition
Recovery Asset. These costs included approximately $11 million of generation-
related property taxes and approximately $3 million of net deferred losses
related to the sale of emission allowances. We recorded a net tax benefit of
$6 million related to the write-off of these costs.
REGULATORY ASSETS AT DECEMBER 31, 1999
These various accounting adjustments leave the balances of regulatory
assets at December 31, 1999 as noted in the table below. There are no
remaining regulatory liabilities recorded on the balance sheet at December 31,
1999. All of the remaining regulatory assets relate to TEP's distribution and
transmission business.
-----------------------------------------------------------------
- Millions of Dollars -
Regulatory Assets
Transition Recovery Asset $ 370
Income Taxes Recoverable Through Future Revenues 79
Other Regulatory Assets 9
-----------------------------------------------------------------
Total Regulatory Assets $ 458
=================================================================
INCOME STATEMENT IMPACT OF APPLYING FAS 71
The amortization of the regulatory assets and liabilities discussed in
the previous sections of this note have had the following effect on our income
statements:
Years Ended December 31,
1999 1998 1997
----------------------------------------------------------------------------
- Millions of Dollars -
Revenues
Amortization of MSR Option Gain Regulatory Liability $ - $ - $ 8
Operating Expenses
Fuel and Purchased Power 4 4 3
Amortization of Springerville Unit 1 Allowance (29) (31) (28)
Depreciation and Amortization 5 13 13
Amortization of Transition Recovery Asset 2 - -
Income Taxes: Income Taxes Recoverable Through Future
Revenues-Tax Depreciation Differences (Flow Through) 5 4 -
Other Income (Deductions)
Income Taxes: Investment Tax Credit Amortization 2 5 3
Interest Expense
Long-Term Debt 3 2 1
Interest Imputed on Losses Recorded at Present Value 29 34 33
----------------------------------------------------------------------------
If TEP had not applied FAS 71 in these years, the above amounts would
have been reflected in the income statements in prior periods, except for the
amortization and interest expense related to the MSR Option Gain Regulatory
Liability. These MSR amounts would not have been recorded. The above table
does not include capital lease expense. Capital lease expense would have been
recognized at different annual amounts if TEP had not applied FAS 71 although
the total would be the same over the life of the leases. Lease expense
included on our income statements amounted to $116 million in 1999 and $114
million in 1998 and 1997. If we had not applied FAS 71, the Springerville
Unit 1 Allowance would have been offset against the Springerville Unit 1
capital lease asset and the depreciation would have been calculated on a
straight-line method. Our lease expense would have been $124 million in 1999
and $125 million in 1998 and in 1997 if we had not applied FAS 71 in these
years. See Deferred Lease Expense above.
The reclassification of our generation-related regulatory assets to the
Transition Recovery Asset shortened the amortization period for these assets
to nine years.
FUTURE IMPLICATIONS OF CEASING TO APPLY FAS 71 TO OUR REGULATED BUSINESS
We continue to apply FAS 71 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 December 31, 1999, if we had stopped
applying FAS 71 to TEP's remaining regulated operations, we would have
recorded an extraordinary loss of approximately $275 million, net of the
related income tax benefit of $183 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 3. SEGMENT AND RELATED INFORMATION
- ----------------------------------------
In 1998, we began complying with Statement of Financial Accounting
Standards No.131 (FAS 131), Disclosures about Segments of an Enterprise and
Related Information, which requires that we report financial and descriptive
information about our operating segments. These segments are determined based
on the way we organize our operations and evaluate performance. UniSource
Energy's principal business segment is TEP, an electric utility business. The
other reportable business segment is the unregulated energy businesses of
Millennium:
- Advanced Energy Technologies, Inc. (AET) which currently owns 50 percent 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 4 regarding
this agreement;
- Nations Energy Corporation (Nations) which is an independent power
developer; and
- MEH Corporation (MEH) which held a 50 percent interest in NewEnergy, Inc.
(NewEnergy), an energy buyer representative. See Note 4 regarding the sale of
our interest in NewEnergy.
As discussed in Note 1, we record our percentage share of the earnings of
affiliated companies when we hold a 20% to 50% voting interest. Our portion
of the net income (loss) of the entities held by Millennium's Energy
Businesses is shown below in Net Income (Loss) from Equity Method Entities.
See Note 4 for more information on Millennium Energy Businesses.
Intersegment revenues are not material. The accounting policies of the
segments are described in Note 1. We disclose selected financial data for our
business segments in the following tables:
Segments
-------------------
UniSource
Reconciling Energy
1999 TEP Millennium Adjustments Consolidated
- ------------------------------------------------------------------------------
- Millions of Dollars -
Income Statement
- ----------------
Operating Revenues $ 804 $ 11 $ (11) $ 804
- ------------------------------------------------------------------------------
Net Income (Loss) from
Equity Method Entities* - (4) - (4)
- ------------------------------------------------------------------------------
Interest Income 18 2 (11) 9
- ------------------------------------------------------------------------------
Gain on the Sale of NewEnergy - 35 - 35
- ------------------------------------------------------------------------------
Interest Expense 123 - - 123
- ------------------------------------------------------------------------------
Depreciation and Amortization 93 - - 93
- ------------------------------------------------------------------------------
Income Tax (Benefit) Expense 22 12 (3) 31
-----------------------------------------------------------------------------
Extraordinary Income - Net of Tax 23 - - 23
-----------------------------------------------------------------------------
Net Income (Loss) 73 11 (5) 79
- ------------------------------------------------------------------------------
Cash Flow Statement
- -------------------
Capital Expenditures (91) (2) - (93)
- ------------------------------------------------------------------------------
Investments in and Loans to
Millennium Energy Businesses - (7) - (7)
- ------------------------------------------------------------------------------
Balance Sheet
- -------------
Total Assets 2,601 100 (45) 2,656
- ------------------------------------------------------------------------------
Millennium's Investment in
Equity Method Joint Ventures - 15 - 15
- ------------------------------------------------------------------------------
Segments
-------------------
UniSource
Reconciling Energy
1998 TEP Millennium Adjustments Consolidated
- ------------------------------------------------------------------------------
- Millions of Dollars -
Income Statement
- ----------------
Operating Revenues $ 769 $ 2 $ (2) $ 769
- ------------------------------------------------------------------------------
Net Income (Loss) from
Equity Method Entities*: - (14) - (14)
- ------------------------------------------------------------------------------
Interest Income 20 3 (12) 11
- ------------------------------------------------------------------------------
Interest Expense 118 - - 118
- ------------------------------------------------------------------------------
Depreciation and Amortization 90 - - 90
- ------------------------------------------------------------------------------
Income Tax (Benefit) Expense 17 (4) (3) 10
- ------------------------------------------------------------------------------
Net Income (Loss) 42 (8) (6) 28
- ------------------------------------------------------------------------------
Cash Flow Statement
- -------------------
Capital Expenditures (81) - - (81)
- ------------------------------------------------------------------------------
Investments in and Loans to
Millennium Energy Businesses - (51) - (51)
- ------------------------------------------------------------------------------
Balance Sheet
- -------------
Total Assets 2,629 74 (69) 2,634
- ------------------------------------------------------------------------------
Millennium's Investment in
Equity Method Joint Ventures - 24 - 24
- ------------------------------------------------------------------------------
Segments
-------------------
UniSource
Reconciling Energy
1997 TEP Millennium Adjustments Consolidated
- ------------------------------------------------------------------------------
- Millions of Dollars -
Income Statement
- ----------------
Operating Revenues $ 730 $ 1 $ (1) $ 730
- ------------------------------------------------------------------------------
Net Income (Loss) from
Equity Method Entities* - (4) - (4)
- ------------------------------------------------------------------------------
Interest Income 11 1 (1) 11
- ------------------------------------------------------------------------------
Interest Expense 107 - - 107
- ------------------------------------------------------------------------------
Depreciation and Amortization 86 - - 86
- ------------------------------------------------------------------------------
Income Tax (Benefit) Expense (19) (3) - (22)
- ------------------------------------------------------------------------------
Net Income (Loss) 89 (5) - 84
- ------------------------------------------------------------------------------
Cash Flow Statement
- -------------------
Capital Expenditures (72) - - (72)
- ------------------------------------------------------------------------------
Investments in and Loans to
Millennium Energy Businesses - (7) - (7)
- ------------------------------------------------------------------------------
* The Net Income (Loss) from Equity Method Entities is included in Millennium
Energy Businesses in UniSource Energy's income statements.
Prior to 1998, the unregulated businesses now held by Millennium were held by
and consolidated with TEP.
The reconciling adjustments in 1999, 1998 and 1997 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, and
- Elimination of intercompany activity and balances.
NOTE 4. MILLENNIUM ENERGY BUSINESSES
- -------------------------------------
On January 1, 1998, TEP transferred the stock of its subsidiary,
Millennium Energy Holdings, Inc. to UniSource Energy. See Basis of
Presentation in Note 1. Millennium now owns 100% of the stock of the entities
described below which were established to pursue various unregulated energy-
related investment opportunities. See Note 3.
INTERNATIONAL POWER PROJECTS - NATIONS ENERGY CORPORATION
Nations and its subsidiaries develop independent power projects in
domestic and foreign energy markets. Nations owns 100% of the stock of the
following entities:
- Nations Energy Holland Holding (Nations Holland) - In January 2000, Nations
sold Nations Holland, including its minority interest in a power project
located in the Czech Republic. Nations recorded a pre-tax gain of $3 million
on the sale. At December 31, 1999, Nations' investment in Nations Holland and
its subsidiaries was $15 million.
- Nations-Colorado Energy Corporation (Nations-Colorado) - In September 1998,
Nations-Colorado sold a 48% interest in Trigen-Nations Energy, which owns and
operates the 40 MW Coors Brewing Company power plant in Golden, Colorado. The
$6 million after-tax gain on the sale is included in Millennium Energy
Businesses in UniSource Energy's income statements. In June 1999, Nations
Energy sold its remaining 1% interest in Trigen-Nations Energy at book value.
- Nations International Ltd. (Nations International) - In December 1999,
Nations International recorded a $3 million decrease in the market-value of
its minority interest investment in Corporation Panamena de Energia, S.A.
(COPESA). COPESA is an independent power producer that owns and operates a 43
MW power plant near Panama City. The energy is sold under an agreement with
an unrelated party. At December 31, 1999, Nations International's investment
in COPESA was $5 million.
ENERGY MARKETING - MEH CORPORATION
On July 23, 1999, MEH sold its 50% ownership interest in NewEnergy to The
AES Corporation (AES) for approximately $50 million in consideration,
resulting in a pre-tax gain from the sale of approximately $35 million. The
consideration consisted of:
- Shares of AES common stock valued at $27 million as of July 23, 1999 which
were sold in the third quarter at a slight gain; and
- Two $11.4 million promissory notes, totaling $22.8 million, issued by
NewEnergy. The notes are collateralized by AES stock, bear interest at 9.5%,
and mature July 23, 2000 and July 23, 2001, respectively.
As part of the sale agreement, AES repaid a $10 million loan NewEnergy
obtained from an unrelated party that was guaranteed by UniSource Energy.
Previously, UniSource Energy provided guarantees of up to $56 million of
certain performance bonds and contractual obligations relating to NewEnergy's
purchases and sales of electricity. On October 1, 1999, termination notices
were sent on all guarantees and the master surety agreement so that UniSource
Energy will not incur any additional liability under these agreements. All
obligations incurred prior to the terminations have been extinguished, except
for one in the amount of up to $1 million, which is scheduled to expire in
March 2000 and is fully collateralized.
MEH originally acquired its 50% ownership in NewEnergy in September 1997
with an $0.8 million capital contribution. In the first quarter of 1999, MEH
transferred its ownership in New Energy Ventures Southwest (NEV SW) to
NewEnergy. In 1999, 1998 and 1997, MEH recorded pre-tax losses related to
NewEnergy, including NEV SW, of $1 million, $16 million and $8 million,
respectively. These pre-tax losses were approximately 1%, 42%, and 13% in
1999, 1998 and 1997, respectively, of UniSource Energy's pre-tax income.
Presented below is summarized NewEnergy financial information for the years
1998 and 1997, during which we recorded NewEnergy's financial results using
the equity method:
NewEnergy Summarized Financial Information
Years Ended December 31,
Income Statements 1998 1997
-----------------------------------------------------------------------
- Millions of Dollars -
Retail Customer Revenue $206 $ 2
Utility Distribution Company Payments (102) -
Cost of Goods Sold (119) (2)
-----------------------------------------------------------------------
Loss from Operations (15) -
Other (25) (14)
-----------------------------------------------------------------------
Net Loss $(40) $(14)
=======================================================================
December 31,
Balance Sheet 1998
--------------------------------------------------------------
- Millions of Dollars -
Current Assets $ 115
Noncurrent Assets 6
--------------------------------------------------------------
Total Assets $ 121
===============================================================
Current Liabilities $ 90
Noncurrent Liabilities 67
Minority Interest (of which $4 million is Mandatorily
Redeemable) 9
Shareholders' Deficit (45)
---------------------------------------------------------------
Total Liabilities and Deficit $ 121
===============================================================
Because we have no continuing involvement with NewEnergy, other than the
collateralized promissory notes from NewEnergy and a $1 million guarantee, we
do not believe that the results of NewEnergy's operations will affect our
continuing operations. At December 31, 1999, the market value of the
collateral supporting the promissory notes exceeded the amount of the
promissory notes by 57%. The promissory notes represent less than 1% of
UniSource Energy's total assets at December 31, 1999.
PHOTOVOLTAIC MANUFACTURING - ADVANCED ENERGY TECHNOLOGIES, INC.
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 (Agreement) in which Millennium's share of Global Solar will
increase to 67%. Under the Agreement, ITN agreed to transfer 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. Millennium and ITN
are in the process of finalizing the structure of the transaction. As of
December 31, 1999, Millennium had funded $2 million under this Agreement.
NOTE 5. TEP'S UTILITY PLANT AND JOINTLY-OWNED FACILITIES
- ---------------------------------------------------------
UTILITY PLANT
The following table shows TEP's Utility Plant in Service by major class:
December 31,
1999 1998
---------------------------------------------------------------------------
- Millions of Dollars -
Plant in Service:
Generation Plant $ 1,067 $ 1,069
Transmission Plant 491 477
Distribution Plant 599 586
General Plant 115 111
Intangible Plant 29 20
Electric Plant Held for Future Use 1 1
---------------------------------------------------------------------------
Total Plant in Service $ 2,302 $ 2,264
==========================================================================
Utility Plant Under Capital Leases $ 741 $ 887
==========================================================================
All Utility Plant Under Capital Leases is used in Generation. See TEP
Utility Plant and TEP Utility Plant Under Capital Leases in Note 1 and Capital
Lease Obligations in Note 6.
JOINTLY-OWNED FACILITIES
At December 31, 1999, TEP's interests in generating stations and
transmission systems that are jointly-owned with other utilities were as
follows:
Percent Plant Construction
Owned By In Work in Accumulated
TEP Service* Progress Depreciation
- ----------------------------------------------------------------------------
- Millions of Dollars -
San Juan Units 1 and 2 50.0 $ 284 $ 3 $ 208
Navajo Station Units 1,2 and 3 7.5 121 2 54
Four Corners Units 4 and 5 7.0 79 - 63
Transmission Facilities 7.5 to 95.0 221 2 131
- -----------------------------------------------------------------------------
Total $ 705 $ 7 $ 456
=============================================================================
* Included in Utility Plant shown above.
TEP has financed or provided funds for the above facilities and TEP's
share of their operating expenses is included in the income statements.
NOTE 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
- -----------------------------------------------------------
TEP LONG-TERM DEBT
LONG-TERM DEBT MATURES MORE THAN ONE YEAR FROM THE DATE OF THE FINANCIAL
STATEMENTS. WE SUMMARIZE OUR LONG-TERM DEBT IN THE STATEMENTS OF
CAPITALIZATION.
BONDS - 1999
In 1999 TEP made $2 million of sinking fund payments on First Mortgage
Bonds.
Sale and Redemption of Bonds - 1998
During 1998, TEP issued $387 million in new bonds and redeemed $416
million of previously outstanding bonds. TEP achieved the following objectives
with this refinancing activity:
- extended maturities
- replaced variable rate debt with fixed rate debt, and
- eliminated restrictive covenants contained in the original 12.22% Series
First Mortgage Bonds.
When TEP redeemed all of its First Mortgage Bonds due in 1999, 2001,
2002, and 2003, as well as $32 million of 12.22% First Mortgage Bonds due 2000
not tendered for exchange, it eliminated covenants that restricted the payment
of common stock dividends.
The proceeds from the issuance of certain bonds were held by a trustee
and subsequently used, by the trustee, to redeem previously outstanding bonds
in 1999, 1998 and 1997. See Note 14 for a description of the non-cash
financing activities related to the sale and redemption of bonds.
TEP OTHER LONG-TERM DEBT AND AGREEMENTS
FIRST AND SECOND MORTGAGE
TEP's General First Mortgage and General Second Mortgage are
collateralized by a lien on TEP's utility plant, with the exception of
Springerville Unit 2. San Carlos, a subsidiary of TEP, holds title to
Springerville Unit 2.
BANK CREDIT AGREEMENT
TEP has a $441 million Credit Agreement which provides a $100 million
Revolving Credit Facility and a $341 million Letter of Credit Facility. These
credit facilities mature on December 30, 2002 and are collateralized by $441
million of Second Mortgage Bonds. The Credit Agreement contains certain
financial covenants, including cash coverage, leverage and net worth tests.
As of December 31, 1999, TEP was in compliance with these covenants.
The Revolving Credit Facility can be used for general corporate purposes.
At December 31, 1999, TEP had no outstanding borrowings under this facility.
If we were to borrow under the Revolving Credit Facility, the variable
interest rate that we would pay would be dependent, in part, on the credit
rating on TEP's senior collateralized debt. We pay an annual commitment fee
on the unused portion of the Revolving Credit Facility. This fee is also
dependent on TEP's credit ratings. At December 31, 1999, the commitment fee
equaled 0.38% per year.
The $341 million Letter of Credit Facility secures the payment of
principal and interest on $329 million of tax-exempt variable rate bonds
(IDBs). The amount of commitment fee on the Letter of Credit Facility depends
on TEP's credit ratings. At December 31, 1999, the commitment fee equaled
1.50% per year.
In December 1999 and early January 2000, TEP's bond ratings were upgraded
by three rating agencies. As a result, on January 3, 2000, the commitment fee
decreased to 0.25% per year, and the letter of credit fee decreased to 1.25%
per year.
CAPITAL LEASE OBLIGATIONS
The terms of TEP's capital leases are as follows:
- The Irvington Lease has an initial term to January 2011 and provides for
renewal periods of two or more years through 2020.
- The Springerville Common Facilities Leases have an initial term to 2017 for
one lease and 2021 for the other two leases, subject to optional renewal
periods of two or more years through 2025.
- The Springerville Unit 1 Leases have an initial term to January 2015 and
provide for renewal periods of three or more years through 2030.
- The Springerville Coal Handling Facilities Leases have an initial term to
April 2015 and provide for one renewal period of six years, then additional
renewal periods of five or more years through 2035.
MATURITIES AND SINKING FUND REQUIREMENTS
TEP's long-term debt, including sinking funds, and lease obligations
mature on the following dates:
Expiring Scheduled
LOCs Long-Term
Supporting Debt Capital Lease
IDBs Retirements Obligations Total
--------------------------------------------------------------------------
Years Ending - Millions of Dollars -
December 31,
2000 $ 49 $ 130 $ 179
2001 2 104 106
2002 $ 329 2 92 423
2003 - 2 123 125
2004 - 2 124 126
- -----------------------------------------------------------------------------
Total 2000-2004 329 57 573 959
Thereafter - 799 1,378 2,177
Less: Imputed Interest - - (1,035) (1,035)
---------------------------------------------------------------------------
Total $ 329 $ 856 $ 916 $ 2,101
===========================================================================
In addition to the capital lease obligations above, we must ensure $70
million of notes underlying the Springerville Common Facilities leases are
refinanced by June 30, 2003 to avoid a special event of loss under the lease.
This special event of loss would require us to repurchase the Springerville
Common Facilities at the higher of the stipulated loss value of $125 million
or the fair market value of the facilities. Upon such purchase, the lease
would be terminated.
In December 1999, TEP refinanced $70 million of notes underlying the
Springerville Common Facility lease to avoid a special event of loss under the
lease. As a result of refinancing at a higher interest rate, we recorded an
additional $26 million of capital lease obligations and capital lease assets.
NOTE 7. FAIR VALUE OF TEP'S FINANCIAL INSTRUMENTS
- --------------------------------------------------
The carrying value and fair value of TEP's financial instruments are as
follows:
December 31,
1999 1998
- ----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------
- Millions of Dollars -
Assets:
Springerville Lease
Debt Securities (Included in
Investments and Other Property) $ 45 $ 45 $ 18 $ 22
Liabilities:
First Mortgage Bonds - Fixed Rate:
Corporate 75 77 75 79
Industrial Development Revenue
Bonds (IDBs) 62 61 64 64
First Collateral Trust Bonds 140 132 140 142
Second Mortgage Bonds -
IDBs (Variable Rate) 329 329 329 329
Unsecured IDBs - Fixed Rate 579 514 579 587
- ----------------------------------------------------------------------------
TEP intends to hold the investment in Springerville Lease Debt Securities
to maturity ($16 million matures through January 1, 2009 and $29 million
matures through January 1, 2013). These Springerville Lease Debt Securities
are stated at amortized cost, which means the purchase cost has been adjusted
for the amortization of the premium and discount to maturity. We base the
fair value of this investment on quoted market prices for the same or similar
debt. The $27 million purchase of additional Springerville Lease Debt
Securities in 1999 is reflected in the investing activity in our 1999 cash
flow statement.
TEP considers the principal amounts of variable rate debt outstanding to
be reasonable estimates of their fair value. We determined the fair value of
TEP's fixed rate obligations including the Corporate First Mortgage Bonds, the
First Mortgage Bonds-IDBs, First Collateral Trust Bonds and the Unsecured IDBs
by calculating the present value of the cash flows of each fixed rate
obligation. We used a rate consistent with market yields generally available
as of December 1999 for 1999 amounts and December 1998 for 1998 amounts for
bonds with similar characteristics with respect to: credit rating, time-to-
maturity, and the tax status of the bond coupon for Federal income tax
purposes. The use of different market assumptions and/or estimation
methodologies may yield different estimated fair value amounts.
NOTE 8. DIVIDEND LIMITATIONS
- -----------------------------
UNISOURCE ENERGY
In December 1999, UniSource Energy declared a dividend to the
shareholders of $0.08 per share of common stock. The dividend, totaling
approximately $3 million, will be paid on March 10, 2000 to shareholders of
record as of February 15, 2000.
Our ability to pay cash dividends on common stock outstanding depends, in
part, upon cash flows from our subsidiaries, TEP and Millennium.
TEP
In December 1999 and 1998, TEP paid a dividend of $34 million and $30
million, respectively, to UniSource Energy, the holder of all of TEP's common
stock. TEP met the following requirements before paying these dividends to
UniSource Energy:
- Bank Credit Agreement
TEP's bank Credit Agreement allows TEP to pay dividends as long as TEP
maintains compliance with the agreement and meets financial covenants.
- ACC Holding Company Order
The ACC Holding Company Order does not allow TEP to pay dividends to UniSource
Energy in excess of 75% of its annual earnings until TEP's equity ratio equals
37.5% of total capitalization, excluding capital lease obligations.
- Federal Power Act
This Act states that dividends shall not be paid out of funds properly
included in capital accounts. TEP's 1999 and 1998 dividends to UniSource
Energy were paid from current year earnings.
MILLENNIUM
In August 1999, Millennium paid a dividend of $10 million to UniSource
Energy. Millennium does not have any dividend restrictions.
NOTE 9. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
TEP COMMITMENTS - FUEL PURCHASE
TEP has the following commitments to purchase coal and rail:
- The Springerville coal contract expires in 2010, but includes an option to
extend the initial term for ten years. See Deferred Springerville Generation
Costs in Note 2. The Springerville rail contract expires in 2009.
- The Irvington coal and rail contracts expire in 2015 or at the end of the
useful life of the coal-fired unit, whichever is earlier.
- The contracts for jointly-owned facilities expire at various dates from
2005 to 2017. See Jointly-Owned Facilities in Note 5.
The Springerville and Irvington coal contracts combined require TEP to
take 2.1 million tons of coal per year through 2009 at an estimated annual
cost of $49 million for the next 5 years. The Springerville and Irvington
rail contracts combined require TEP to transport 1.9 million tons of coal per
year through 2015 at an estimated annual cost of $13 million for the next 5
years. The contracts to purchase coal, including rail transportation, for use
at the jointly-owned facilities require TEP to take 1.5 million tons of coal
per year through 2005 at an estimated annual cost of $45 million for the next
5 years. All of these contracts include a price adjustment clause that will
affect the future cost of coal. The total amount paid under these contracts
depends on the number of tons of coal purchased and transported. The
aggregate total that TEP incurred under all of these contracts was $152
million in 1999, $150 million in 1998, and $160 million in 1997.
Each of TEP's coal purchase contracts requires TEP to pay a take-or-pay
charge if certain minimum quantities of coal are not purchased. Our present
fuel requirements are in excess of the take-or-pay minimums. However,
sometimes TEP purchases coal from other suppliers or switches fuel burn from
one generating station to another to reduce overall fuel costs, resulting in
take-or-pay minimum charges. TEP incurred take-or-pay charges of $4 million
in 1999 and 1998, and none in 1997.
TEP COMMITMENTS - ENVIRONMENTAL REGULATION
The 1990 Federal Clean Air Act Amendments require reductions of sulfur
dioxide (SO2) and nitrogen oxide (NOx) emissions in two phases, more complex
facility permits and other requirements. TEP is subject only to Phase II of
the SO2 and NOx emission reductions which was effective January 1, 2000. All
of TEP's generating facilities (except existing internal combustion turbines)
are affected. TEP spent approximately $1 million in each of 1999, 1998 and
1997 and expects to spend approximately $1 million annually in 2000 and 2001
complying with these requirements.
In 1993, TEP's generating units affected by Phase II were allocated SO2
Emission Allowances based on past operational history. Beginning in the year
2000, Phase II generating units must hold Emission Allowances equal to the
level of emissions in the compliance year or pay penalties and offset excess
emissions in future years. Due to increased energy output, TEP may have to
purchase additional Emission Allowances to comply with the Phase II SO2
regulations. Based on current estimates of additional required Emission
Allowances and market prices, TEP believes that purchases of additional
Emission Allowances will not have a material effect on TEP.
TEP may incur additional costs to comply with recent and future changes
in federal and state environmental laws, regulations and permit requirements
at existing electric generating facilities. Compliance with these changes may
result in a reduction in operating efficiency.
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 December 31, 1999, pre-
1992 federal NOL and ITC carryforwards were approximately $153 million and $20
million, respectively. In addition to the pre-1992 NOL and ITC, which are
subject to the limitation, $167 million of federal NOL at December 31, 1999,
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.
Resolution of Contingency - Arizona Sales Tax Assessments
Since 1990 TEP has contested the following sales tax assessments:
- Coal Sales Assessments: The Arizona Department of Revenue (ADOR) issued
sales tax assessments which alleged that a former TEP subsidiary was liable
for sales tax on gross income from coal sales, transportation and coal-
handling services provided to TEP from November 1985 through May 1996. On May
31, 1996, the former subsidiary was merged into TEP. Because TEP now acquires
coal directly from unaffiliated companies, we are not liable for sales tax
computed on a basis similar to these assessments after May 31, 1996.
- Lease Assessments: The ADOR issued sales tax assessments to some of the
lessors of TEP's generation-related facilities and equipment. Under the
indemnification provisions in the lease agreements, we are required to pay any
sales tax assessments owed by the lessors. The assessments alleged sales tax
liability on a component of rents we paid on the Springerville Unit 1 Leases,
the Springerville Common Facilities Leases, the Irvington Lease and the
Springerville Coal Handling Facilities Lease from August 1, 1988 to June 30,
1997. Because the applicable sales tax rate went to zero on July 1, 1997, no
additional assessments are expected.
In August 1999, a settlement was reached with the ADOR to settle these
issues for $47.5 million. The settlement agreement became effective in
November 1999 when the lessors and their trustees agreed to the settlement.
TEP previously paid $25.1 million of the settlement amount in order to file an
appeal in the Arizona courts. Under the terms of the agreement, the remaining
$22.4 million was deposited into an escrow account and the funds are to be
released to the ADOR in 5 equal installments. During 1999, two of the
installments totaling $9 million were released to the ADOR. At December 31,
1999, the escrow balance, shown as the Tax Settlement Deposit on the balance
sheet, was $13.4 million. In January 2000, another installment of $4.5
million was released to the ADOR. The remaining installments are scheduled to
be paid on April 15 and July 15, 2000. This settlement does not result in
additional sales tax expense because we have previously recorded an expense
for the settlement amount.
NOTE 10. INCOME TAXES
- ----------------------
Deferred tax assets (liabilities) consist of the following:
UniSource Energy TEP
------------------ ---------------
December 31, December 31,
1999 1998 1999 1998
- ------------------------------------------------------------------------------
- Millions of Dollars -
Gross Deferred Income Tax Liabilities:
Electric Plant - Net $(397) $(559) $(397) $(559)
Income Taxes Recoverable Through
Future Revenues Regulatory Asset (32) (61) (32) (61)
Transition Recovery Asset (120) - (120) -
Other (52) (66) (28) (57)
- ------------------------------------------------------------------------------
Gross Deferred Income Tax Liability (601) (686) (577) (677)
- ------------------------------------------------------------------------------
Gross Deferred Income Tax Assets:
Capital Lease Obligations 355 360 355 360
Net Operating Loss Carryforwards 101 116 101 116
Springerville Unit 1
Disallowed Costs - 68 - 68
Investment Tax Credit Carryforwards 19 23 19 23
Alternative Minimum Tax (AMT) 52 17 38 15
Other 74 112 67 96
- ------------------------------------------------------------------------------
Gross Deferred Income Tax Asset 601 696 580 678
Deferred Tax Assets Valuation
Allowance (25) (57) (25) (57)
- ------------------------------------------------------------------------------
Net Deferred Income Tax Liability $ (25) $ (47) $ (22) $ (56)
==============================================================================
The net deferred income tax liability is included in the balance sheets
in the following accounts:
UniSource Energy TEP
------------------ ---------------
December 31, December 31,
1999 1998 1999 1998
- -----------------------------------------------------------------------------
- Millions of Dollars -
Deferred Income Taxes-Current $ 17 $ 15 $ 17 $ 15
Deferred Income Taxes-Noncurrent (42) (62) (39) (71)
- -----------------------------------------------------------------------------
Net Deferred Income Tax Liability $ (25) $ (47) $ (22) $ (56)
=============================================================================
We record a Deferred Tax Assets Valuation Allowance for the amount of
Deferred Tax Assets that we do not believe we can use to reduce income taxes
on a future tax return. The $32 million decrease in the Deferred Tax Assets
Valuation Allowance in 1999 consists of:
- $23 million of recognized ITC Carryforward - The income tax benefit
attributable to the recognition of the ITC Carryforward is included in
Extraordinary Income - see Note 2.; and
- $9 million reversal of a tax reserve: Income Taxes included in Operating
Expenses includes $7 million of tax benefit attributable to the improved
likelihood of favorable resolution of tax items. The remaining $2 million
benefit is included in Income Taxes in Other Income (Deductions).
In 1998 the Deferred Tax Assets Valuation Allowance decreased $11 million
due primarily to the use of capital loss and investment tax credit
carryforwards. In 1997, the Deferred Tax Assets Valuation Allowance decreased
$43 million due primarily to the use of NOL carryforwards and an increase in
the estimated amount of NOLs that we believe we will use to reduce future
taxable income.
Income tax expense (benefit) included in the income statements consists of
the following:
UniSource Energy TEP
---------------------- -----------------
Years Ended December 31,
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------
- Millions of Dollars -
Operating Expenses:
Deferred Tax Expense
Federal $ 20 $ 22 $ 15 $ 20 $ 22 $ 15
State 5 (4) 4 5 (4) 4
- ----------------------------------------------------------------------------
Total 25 18 19 25 18 19
Reduction in Valuation
Allowance - Benefit (7) - - (7) - -
- ----------------------------------------------------------------------------
Total Expense Included in
Operating Expenses 18 18 19 18 18 19
- ----------------------------------------------------------------------------
Other Income (Deductions):
Deferred Tax Expense -
Millennium Energy Businesses
Federal 10 (2) (2) - - -
State 2 (1) (1) - - -
- ----------------------------------------------------------------------------
Total Tax Expense (Benefit)
related to Millennium Energy
Businesses 12 (3) (3) - - -
Deferred Tax Expense - Other
Federal 4 (1) 7 7 2 4
State 1 1 1 1 2 1
- ----------------------------------------------------------------------------
Total Deferred Tax Expense 17 (3) 5 8 4 5
Reduction in Valuation
Allowance - Benefit (2) - (43) (2) - (43)
Investment Tax Credit
Amortization (2) (5) (3) (2) (5) (3)
- ----------------------------------------------------------------------------
Total Expense (Benefit) Included
in Other Income (Deductions) 13 (8) (41) 4 (1) (41)
- ----------------------------------------------------------------------------
Total Federal and State Income
Tax Expense (Benefit) Before
Extraordinary Item 31 10 (22) 22 17 (22)
- ----------------------------------------------------------------------------
Extraordinary Income:
Deferred Tax Benefit
Federal (5) - - (5) - -
State (1) - - (1) - -
Reduction in Valuation
Allowance - ITC Carryforward
Benefit (23) - - (23) - -
Benefit from recognition of
Deferred ITC (8) - - (8) - -
- ----------------------------------------------------------------------------
Total Benefit Included in
Extraordinary Income (37) - - (37) - -
- ----------------------------------------------------------------------------
Total Federal and State Income
Tax Expense (Benefit)
Including Extraordinary
Income $ (6) $ 10 $ (22) $ (15) $ 17 $ (22)
============================================================================
The differences between the income tax expense (benefit) and the amount
obtained by multiplying pre-tax income by the U.S. statutory federal income
tax rate of 35% are as follows:
UniSource Energy TEP
---------------------- ----------------
Years Ended December 31,
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------
- Millions of Dollars -
Federal Income Tax Expense
at Statutory Rate $ 31 $ 13 $ 22 $ 25 $ 21 $ 21
State Income Tax Expense,
Net of Federal Deduction 4 2 3 3 3 3
Depreciation Differences
(Flow Through Basis) 5 4 - 5 4 -
Investment Tax Credit
Amortization (2) (5) (3) (2) (5) (3)
Reduction in Valuation
Allowance - Benefit (9) - (43) (9) - (43)
Capital Loss Carryforwards - (4) - - (4) -
Foreign Operations of
Millennium Energy
Businesses 3 2 - - - -
Other (1) (2) (1) - (2) -
- ---------------------------------------------------------------------------
Total Federal and State Income
Tax Expense (Benefit) Before
Extraordinary Item $ 31 $ 10 $(22) $ 22 $ 17 $ (22)
===========================================================================
At December 31, 1999, UniSource Energy and TEP had, for federal income
tax purposes:
- $320 million of NOL carryforwards expiring in 2006 through 2009;
- $20 million of unused ITC expiring in 2002 through 2005;
- $33 million of AMT credit which will carry forward to future years.
See discussion of pre-1992 NOL and ITC in Income Tax Assessments in Note
9.
NOTE 11. EMPLOYEE BENEFITS PLANS
- ---------------------------------
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
TEP maintains noncontributory, defined benefit pension plans for all
regular employees. Benefits are based on years of service and the employee's
average compensation. TEP makes annual contributions to the plans sufficient
to meet the minimum funding requirements set forth by the Employee Retirement
Income Security Act of 1974, plus such additional tax deductible amounts as
may be advisable. TEP provides supplemental retirement benefits to employees
whose benefits are limited by IRS benefit or compensation limitations.
TEP also provides health care and life insurance benefits for retirees.
All regular employees may become eligible for these benefits if they reach
retirement age while working for TEP. The ACC allows TEP to recover through
rates postretirement costs only as benefit payments are made to or on behalf
of retirees. The postretirement benefits are currently funded entirely on a
pay-as-you-go basis. Under current accounting guidance, TEP cannot record a
regulatory asset for the excess of expense calculated per Statement of
Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, over actual benefit payments.
The actuarial present value of the benefit obligations are measured at
October 1 for our pension plans and December 31 for our other postretirement
benefit plan. The change in benefit obligation and plan assets and
reconciliation of the funded status are as follows:
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------
- Millions of Dollars -
Change in Benefit Obligation
Benefit Obligation at
Beginning of Year $ 105 $ 85 $ 34 $ 30
Actuarial (Gain) Loss (23) 13 (2) 2
Interest Cost 7 6 2 2
Service Cost 5 4 1 1
Benefits Paid (5) (3) (1) (1)
-----------------------------------------
Benefit Obligation at
End of Year 89 105 34 34
-----------------------------------------
Change in Plan Assets
Fair Value of Plan Assets
at Beginning of Year 87 88 - -
Actual Return on Plan Assets 22 (2) - -
Benefits Paid (5) (3) (1) (1)
Employer Contributions 8 4 1 1
-----------------------------------------
Fair Value of Plan Assets
at End of Year 112 87 - -
-----------------------------------------
Reconciliation of Funded Status
to Balance Sheet
Funded Status (Difference
between Benefit Obligation
and Fair Value of Plan Assets) 23 (18) (34) (34)
Unrecognized Net (Gain) Loss (21) 17 1 3
Unrecognized Prior Service Cost 12 13 - -
Unrecognized Transition (Asset)
Obligation - (1) 11 12
--------------------------------------------
Net Amount Recognized in
the Balance Sheets $ 14 $ 11 $ (22) $ (19)
============================================
Amounts Recognized in the
Balance Sheets Consist of:
Prepaid Pension Costs $ 16 $ 8 $ - $ -
Accrued Benefit Liability
Included in Other Liabilities (2) (7) (22) (19)
Intangible Asset Included in
Deferred Debits - Other - 10 - -
--------------------------------------------
Net Amount Recognized $ 14 $ 11 $ (22) $ (19)
============================================
Benefit Obligation and Fair Value of Plan Assets
for Plans with Benefit Obligations in Excess of
Plan Assets:
Benefit Obligation at
End of Year $ 5 $105 $ 34 $ 34
Fair Value of Plan
Assets at End of Year $ - $ 87 $ - $ -
- -----------------------------------------------------------------------------
We recorded a transition asset or obligation when we adopted accounting
standards requiring recognition of pension and other postretirement benefit
obligations and costs in the financial statements. The transition asset or
obligation equaled the difference between the fair value of plan assets and
the accumulated benefit obligation. The transition asset on the pension plans
is being amortized over 15 years. The transition obligation on the
postretirement benefit plan is being amortized over 20 years.
The components of net periodic benefit costs are as follows:
Pension Benefits
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------
- Millions of Dollars -
Components of Net Pension Cost
Service Cost of Benefits Earned During Period $ 5 $ 4 $ 3
Interest Cost on Projected Benefit Obligation 7 6 4
Expected Return on Plan Assets (9) (8) (6)
Amortization of Unrecognized Prior Service Cost 1 1 1
Recognized Actuarial (Gain) Loss 1 - -
- --------------------------------------------------------------------------
Net Periodic Pension Cost $ 5 $ 3 $ 2
==========================================================================
Actuarial Assumptions: 1999 1998 1997
- --------------------------------------------------------------------------
Discount Rate - Funding Status 7.8% 6.5% 7.3%
Average Compensation Increase 4.0 4.0 4.0
Expected Long-Term Rate of Return on Plan Assets 9.0 9.0 9.0
- --------------------------------------------------------------------------
Other Postretirement Benefits
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------
- Millions of Dollars -
Components of Net Postretirement Benefit Cost
Service Cost of Benefits Earned During Period $ 1 $ 1 $ 1
Interest Cost on Projected Benefit Obligation 2 2 2
Amortization of Unrecognized Transition
Obligation 1 1 1
Curtailment/Settlement (Gain) Loss - - 2
Special Termination Benefit Loss - - 1
- --------------------------------------------------------------------------
Net Periodic Postretirement Benefit Cost $ 4 $ 4 $ 7
==========================================================================
The accumulated postretirement benefit obligation was determined using a
7.75% and 6.50% discount rate for 1999 and 1998, respectively. Assumed health
care cost trend rates have a significant effect on the amounts reported for
health care plans. The health care cost trend rates were assumed to be 7.5%
for 2000, gradually declining to 4.5% in 2003 and thereafter. A one-
percentage-point change in assumed health care cost trend rates would have the
following effects on the December 31, 1999 amounts:
One-Percentage- One-Percentage-
Point Increase Point Decrease
-----------------------------------------------------------------------
- Millions of Dollars -
Effect on Total of Service and
Interest Cost Components $ 1 $ -
Effect on Postretirement Benefit
Obligation $ 5 $ (4)
-----------------------------------------------------------------------
DEFINED CONTRIBUTION PLANS
All regular employees may contribute up to 15 percent of their pre-tax
compensation, subject to certain limitations, in TEP's voluntary, defined
contribution 401(k) plans. TEP contributes cash to the account of each
participant based on each participant's contributions not exceeding 4.5% of
the participant's compensation. Participants direct the investment of
contributions to certain funds in their account. In 1999, 1998 and 1997, TEP
incurred approximately $2 million annually in expense related to these plans.
STOCK OPTION PLANS
On May 20, 1994, the Shareholders approved two stock option plans, the
1994 Outside Director Stock Option Plan (1994 Directors' Plan) and the 1994
Omnibus Stock and Incentive Plan (1994 Omnibus Plan).
The 1994 Directors' Plan provided for the annual grant of 1,200 non-
qualified stock options to each eligible director at an exercise price equal
to the market price of the common stock at the grant date, beginning January
3, 1995. These options vest over three years, become exercisable in one-third
increments on each anniversary date of the grant and expire on the tenth
anniversary. In December 1998, the Board of Directors approved an increase in
the annual grant of non-qualified stock options to 2,000 beginning January
1999.
The 1994 Omnibus Plan allows the Compensation Committee, a committee of
non-employee directors, to grant the following types of awards to each
eligible employee: stock options; stock appreciation rights; restricted stock;
performance units; performance shares; and dividend equivalents. The total
number of shares of UniSource Energy Common Stock that may be awarded under
the Omnibus Plan cannot exceed 1.6 million.
The Compensation Committee granted stock options to key employees during
1999, 1998, and 1997 and to most employees in 1999. These stock options were
granted at exercise prices equal to the market price of the common stock at
the grant date. These options vest over three years, become exercisable in
one-third increments on each anniversary date of the grant and expire on the
tenth anniversary.
A summary of the activity of the 1994 Directors' Plan and 1994 Omnibus
Plan is as follows:
1999 1998 1997
- -------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------
Options Outstanding,
Beginning of Year 888,459 $15.37 800,541 $15.17 688,123 $15.30
Granted 626,243 $12.31 222,446 $15.69 144,190 $14.59
Exercised - - (74,177) $14.79 (6,630) $16.25
Forfeited (124,669) $15.18 (60,351) $14.66 (25,142) $15.18
--------- -------- --------
Options Outstanding,
End of Year 1,390,033 $14.01 888,459 $15.37 800,541 $15.17
========= ======== ========
Options Exercisable,
End of Year 610,095 $15.35 549,254 $15.55 491,763 $15.84
Option Price Range of Options Outstanding at December 31, 1999: $12.28
to $18.13
Weighted Average Remaining Contractual Life at December 31, 1999: 7.73
- -------------------------------------------------------------------------
We apply Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting for our stock option plans. Accordingly,
we have not recognized any compensation cost for the plans during 1997 though
1999. We have also adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123). Had our compensation costs for the stock option plans
been determined based on the fair value at the grant date for awards in 1999,
1998 and 1997 consistent with the provisions of FAS 123, net income and net
income per average share would have been reduced to the pro forma amounts
indicated below:
Years Ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------
- Thousands of Dollars -
(except per share data)
Net Income - As Reported $79,107 $28,032 $83,572
Pro Forma $78,621 $27,724 $83,201
Basic Earnings Per Share - As Reported $2.45 $0.87 $2.60
Pro Forma $2.43 $0.86 $2.59
Diluted Earnings per Share - As Reported $2.43 $0.87 $2.59
Pro Forma $2.41 $0.86 $2.58
- -----------------------------------------------------------------------------
The fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
1999 1998 1997
--------------------------------------------------------------
Expected life (years) 5 4 3
Interest rate 5.65% 5.41% 6.16%
Volatility 22.91% 23.59% 23.15%
Dividend yield 0.69% None None
--------------------------------------------------------------
NOTE 12. WARRANTS
- ------------------
UniSource Energy
At December 31, 1999, 1.5 million of UniSource Energy Warrants which
expire on December 15, 2000 were outstanding. Each UniSource Energy Warrant
entitles the holder to purchase one share of UniSource Energy Common Stock for
$16.00.
TEP
At December 31, 1999, 4.6 million of TEP Warrants which expire on
December 15, 2002 were outstanding. The TEP Warrants entitle the holder of
five warrants to purchase one share of TEP common stock for $16.00. The TEP
common stock that would be issued upon the exercise of TEP Warrants cannot be
converted into UniSource Energy Common Stock. Currently, UniSource Energy
owns 100% of the common stock of TEP and TEP common stock is not publicly
traded.
NOTE 13. SHAREHOLDER RIGHTS PLAN
- ---------------------------------
In March 1999, UniSource Energy adopted a Shareholder Rights Plan. As of
April 1, 1999, each Common Stock shareholder receives one Right for each share
held. Each Right initially allows shareholders to purchase UniSource Energy's
Series X Preferred Stock at a specified purchase price. However, the Rights
are exercisable only if a person or group (the "acquirer") acquires or
commences a tender offer to acquire 15% or more of UniSource Energy Common
Stock. Each Right would entitle the holder (except the acquirer) to purchase a
number of shares of UniSource Energy Common or Preferred Stock (or, in the
case of a merger of UniSource Energy into another person or group, common
stock of the acquiring person) having a fair market value equal to twice the
specified purchase price. At any time until any person or group has acquired
15% or more of the Common Stock, UniSource Energy may redeem the Rights at a
redemption price of $0.001 per Right. The Rights trade automatically with the
Common Stock when it is bought and sold. The Rights expire on March 31, 2009.
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
We define Cash and Cash Equivalents as cash (unrestricted demand
deposits) and all highly liquid investments purchased with a maturity of three
months or less. A reconciliation of net income to net cash flows from
operating activities follows:
UniSource Energy
----------------------------------
Years Ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------
- Thousands of Dollars -
Net Income $ 79,107 $ 28,032 $ 83,572
Adjustments to Reconcile Net Income
to Net Cash Flows
Extraordinary Income - Net of Tax (22,597) - -
Depreciation and Amortization Expense 92,583 90,358 86,405
Deferred Income Taxes and Investment
Tax Credit 12,407 966 (23,089)
Lease Payments Deferred 28,318 32,624 33,679
Regulatory Amortization, Net of Interest
Imputed on Losses Recorded at
Present Value 2,302 3,657 (3,485)
Amortization of Deferred Debt-Related Costs
Included in Interest Expense 5,091 3,235 1,191
Reversal of Loss Provision - - (10,154)
Deferred Contract Termination Fee 3,205 (6,154) (38,077)
Unremitted Losses of
Unconsolidated Subsidiaries 3,370 5,678 5,625
Emission Allowances (12,926) 11,368 (11,463)
Gain on Sale of NewEnergy (34,651) - -
Other 4,175 103 (1,628)
Changes in Assets and Liabilities which
Provided (Used) Cash Exclusive of
Changes Shown Separately
Accounts Receivable 2,989 (222) (5,320)
Prepaid Pension Costs (1,742) (1,630) (3,021)
Tax Settlement Deposit (22,403) - -
Materials and Fuel (5,579) (2,223) (3,649)
Accounts Payable 36 (1,950) 6,103
Taxes Accrued (929) 2,770 390
Other Current Assets and Liabilities (10,882) 78 7,212
Other Deferred Assets and Liabilities (8,646) (5,757) 1,992
- -----------------------------------------------------------------------------
Net Cash Flows - Operating Activities $113,228 $160,933 $126,283
=============================================================================
TEP
----------------------------------
Years Ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------
- Thousands of Dollars -
Net Income $ 73,475 $ 41,676 $ 83,572
Adjustments to Reconcile Net Income
to Net Cash Flows
Extraordinary Income - Net of Tax (22,597) - -
Depreciation and Amortization Expense 92,583 90,358 86,405
Deferred Income Taxes and Investment
Tax Credit 277 6,910 (23,089)
Lease Payments Deferred 28,318 32,624 33,679
Regulatory Amortization, Net of Interest
Imputed on Losses Recorded at
Present Value 2,302 3,657 (3,485)
Amortization of Deferred Debt-Related Costs
Included in Interest Expense 5,091 3,235 1,191
Reversal of Loss Provision - - (10,154)
Deferred Contract Termination Fee 3,205 (6,154) (38,077)
Unremitted (Earnings) Losses of
Unconsolidated Subsidiaries (471) (1,017) 5,625
Emission Allowances (12,926) 11,368 (11,463)
Interest Accrued on Note Receivable from
UniSource Energy 9,329 (9,329) -
Other 9,035 3,243 (1,628)
Changes in Assets and Liabilities which
Provided (Used) Cash Exclusive of
Changes Shown Separately
Accounts Receivable 4,338 (604) (5,320)
Prepaid Pension Costs (1,742) (1,630) (3,021)
Tax Settlement Deposit (22,403) - -
Materials and Fuel (5,540) (2,218) (3,649)
Accounts Payable (2) 2,342 6,103
Taxes Accrued (4,491) 2,717 390
Other Current Assets and Liabilities (9,164) 9,068 7,212
Other Deferred Assets and Liabilities (8,660) (5,759) 1,992
- -----------------------------------------------------------------------------
Net Cash Flows - Operating Activities $139,957 $180,487 $126,283
=============================================================================
Non-cash investing and financing activities of UniSource Energy and TEP
that affected recognized assets and liabilities but did not result in cash
receipts or payments were as follows:
Years Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------
- Thousands of Dollars -
Capital Lease Asset* $26,019 $ - $ -
Capital Lease Obligations* 38,747 13,613 11,788
Proceeds from the Issuance of Long-Term Debt* - 290,699 379,270
Payments to Retire Long-Term Debt* - (286,878) (356,810)
Minimum Pension Liability* (10,036) 10,036 -
Notes Receivable received from the sale of
NewEnergy 22,800 - -
AES Stock received from the sale of NewEnergy 27,203 - -
NewEnergy Investment (15,351) - -
* These items were reflected on TEP's financial statements
The non-cash change in capital lease obligations represents interest
accrued for accounting purposes in excess of interest payments as well as a
$26 million increase in the capital lease obligation and asset resulting from
the Springerville Common Facilities Lease refinancing. See Note 6.
When issuing new bonds and redeeming outstanding bonds, a trustee may
hold the proceeds from our issuance of new long-term debt and use the proceeds
to redeem previously outstanding long-term debt. When this occurs, the
Proceeds from the Issuance of Long-Term Debt and the related Payments to
Retire Long-Term Debt are not reported in our cash flow statements because
these transactions did not affect our cash balances.
Non-cash consideration received upon the sale of NewEnergy in 1999
included two NewEnergy promissory notes, as well as AES common stock.
Concurrent with the receipt of these notes and stock, we removed the NewEnergy
investment from our balance sheet and recorded a gain on the sale. See Note
4.
NOTE 15. EARNINGS PER SHARE (EPS)
- ----------------------------------
Basic EPS is computed by dividing net income before the extraordinary
item by the weighted average number of common shares outstanding during the
period. Diluted EPS assumes that proceeds from the hypothetical exercise of
stock options and other stock-based awards are used to repurchase outstanding
shares of stock at the average fair market price during the reporting period.
The following table shows the amounts used in computing earnings per share and
the effects of potential dilutive common stock on the weighted average number
of shares.
Years Ended December 31,
1999 1998 1997
------------------------------------------------------------------------
- Thousands of Dollars -
Basic Earnings Per Share: (except per share data)
Numerator: Income Before Extraordinary
Item $ 56,510 $ 28,032 $ 83,572
Denominator:
Average Shares of Common Stock -
Outstanding 32,321 32,177 32,138
------------------------------------------------------------------------
Basic Earnings Per Share Before
Extraordinary Item $ 1.75 $ 0.87 $ 2.60
========================================================================
Diluted Earnings Per Share:
Numerator: Income Before
Extraordinary Item $ 56,510 $ 28,032 $ 83,572
Denominator:
Average Shares of Common Stock -
Outstanding 32,321 32,177 32,138
Effect of Dilutive Securities:
Warrants - 79 53
Options and Stock Issuable Under
Employee Benefit Plans 257 90 87
------------------------------------------------------------------------
Total Shares 32,578 32,346 32,278
------------------------------------------------------------------------
Diluted Earnings Per Share Before
Extraordinary Item $ 1.74 $ 0.87 $ 2.59
========================================================================
Options to purchase 1,115,000 shares of common stock at $12.28 to $18.13
per share were outstanding at the end of the year 1999 but were not included
in the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
4.6 million of the 6.1 million warrants outstanding are exercisable into
TEP common stock. See Note 12. However, the dilutive effect is the same as
it would be if the warrants were exercisable into UniSource Energy Common
Stock.
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
UniSource Energy
---------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------
- Thousands of Dollars -
(except per share data)
1999
Operating Revenues $160,510 $189,970 $264,691 $188,641
Operating Income 22,923 33,363 56,010 45,149
Income (Loss) Before Extraordinary
Item (5,528) 3,708 51,669 6,661
Extraordinary Income - Net of Tax - - - 22,597
Net Income (Loss) (5,528) 3,708 51,669 29,258
Basic Earnings Per Share:
- -------------------------
Income (Loss) Before
Extraordinary Item (0.17) 0.11 1.60 0.21
Extraordinary Income - Net of Tax - - - 0.70
Income (Loss) After Extraordinary
Item (0.17) 0.11 1.60 0.90
Diluted Earnings Per Share:
- ---------------------------
Income (Loss) Before
Extraordinary Item (0.17) 0.11 1.58 0.20
Extraordinary Income - Net of Tax - - - 0.69
Income (Loss) After Extraordinary
Item (0.17) 0.11 1.58 0.89
- ----------------------------------------------------------------------------
1998
Operating Revenues $160,941 $179,603 $253,229 $174,903
Operating Income 23,820 29,866 54,610 26,892
Net Income (Loss) (7,035) 1,058 33,673 336
Basic Earnings Per Share (0.22) 0.03 1.05 0.01
Diluted Earnings Per Share 0.22) 0.03 1.05 0.01
- ----------------------------------------------------------------------------
TEP
---------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------
1999
Operating Revenues $160,636 $189,983 $264,756 $188,708
Operating Income 23,049 33,376 56,075 45,216
Interest Income - Note Receivable
from UniSource Energy 2,525 2,554 2,506 2,352
Income (Loss) Before Extraordinary
Item (1,320) 8,355 31,933 11,910
Extraordinary Income - Net of Tax - - - 22,597
Net Income (Loss) (1,320) 8,355 31,933 34,507
- ----------------------------------------------------------------------------
1998
Operating Revenues $161,003 $179,686 $253,280 $175,021
Operating Income 23,882 29,949 54,661 27,010
Interest Income - Note Receivable
from UniSource Energy 2,300 2,326 2,352 2,351
Net Income (Loss) (1,607) 8,073 29,374 5,836
- ----------------------------------------------------------------------------
Due to seasonal fluctuations in TEP's sales and unusual items,
the quarterly results are not indicative of annual operating results. The
principal unusual items for UniSource Energy and TEP include:
TEP
- Third Quarter 1998: TEP changed its method of estimating unbilled
revenues to more accurately reflect revenues between months.
If we had continued using the previous method of calculating
unbilled revenues, revenues for the third quarter of 1998 would
have been $7 million greater.
- Fourth Quarter 1999:
<PAGE>
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- -------------------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------------
None.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
- -------------------------------------------------------------------
DIRECTORS
---------
Certain of the individuals serving as Directors of UniSource
Energy also serve as the Directors of TEP. Information concerning
Directors will be contained under Election of Directors in the
Company's Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120
days after December 31, 1999, which information is incorporated
herein by reference.
EXECUTIVE OFFICERS
------------------
Executive Officers of UniSource Energy who are elected
annually by the Company's Board of Directors, are as follows:
Executive
Officer
Name Age Title Since
- ---- --- ---- ---------
James S. Pignatelli 56 Chairman, President and Chief
Executive Officer (a) 1998
Ira R. Adler 49 Executive Vice President,
Chief Financial Officer
and Treasurer (b) 1998
Dennis R. Nelson 49 Vice President, General Counsel
and Corporate Secretary (c) 1998
Karen G. Kissinger 45 Vice President, Controller and-
Principal Accounting Officer (d) 1998
Michael J. DeConcini 36 Vice President - Strategic
Planning (e) 1999
Executive Officers of TEP who are elected annually by TEP's
Board of Directors, are:
Executive
Officer
Name Age Title Since
- ---- --- ----- ---------
James S. Pignatelli 56 Chairman, President and Chief
Executive Officer (a) 1994
Ira R. Adler 49 Executive Vice President and
Chief Financial Officer, Chief
Operating Officer, Generation (b) 1988
Dennis R. Nelson 49 Senior Vice President and General
Counsel, Chief Operating Officer,
Corporate Services (c) 1991
Thomas A. Delawder 53 Vice President - Energy
Resources (f) 1985
Steven J. Glaser 42 Vice President - Rates and
Regulatory Support, and Utility
Distribution Company Energy
Services (g) 1994
Thomas N. Hansen 49 Vice President - Technical
Services Advisor (h) 1992
Karen G. Kissinger 45 Vice President, Controller and
Chief Information Officer (d) 1991
Kevin P. Larson 43 Vice President and Treasurer (i) 1994
Vincent Nitido, Jr. 44 Vice President and Assistant
General Counsel (j) 1998
James Pyers 58 Vice President - Utility
Distribution Company
Operations (k) 1998
Catherine A. Nichols 41 Corporate Secretary (l) 1998
(a) James S. Pignatelli: Mr. Pignatelli joined TEP as Senior Vice
President in August 1994 and was elected Senior Vice President and
Chief Operating Officer in 1996. He was named Senior Vice
President and Chief Operating Officer of UniSource Energy in
January 1998, and Executive Vice President and Chief Operating
Officer of TEP in March 1998. On June 23, 1998, Mr. Pignatelli was
named Chairman, President and CEO of UniSource Energy and TEP.
Prior to joining TEP, he was President and Chief Executive Officer
from 1988 to 1993 of Mission Energy Company, a subsidiary of SCE
Corp.
(b) Ira R. Adler: Mr. Adler joined TEP in 1986 as Manager of
Financial Planning. In 1987 he was elected as Vice President and
Treasurer of TRI, one of TEP's investment subsidiaries, from which
position he resigned in October 1988, when he was elected Treasurer
of TEP. He was elected Vice President - Finance and Treasurer in
July 1989 and was elected Senior Vice President and Chief Financial
Officer in July 1990 and President of TRI and SRI in April 1992.
He was named Senior Vice President, Chief Financial Officer and
Treasurer of UniSource Energy in January 1998. Mr. Adler was named
Executive Vice President of TEP in March 1998 and Executive Vice
President of UniSource Energy in June 1998. In November 1998, Mr.
Adler also became Chief Operating Officer - Generation. Prior to
joining TEP, he was Vice President - Finance of US WEST Financial
Services, Inc.
(c) Dennis R. Nelson: Mr. Nelson joined TEP as a staff attorney
in 1976. He was manager of the Legal Department from 1985 to 1990.
He was elected Vice President, General Counsel and Corporate
Secretary in January 1991. He was named Vice President, General
Counsel and Corporate Secretary of UniSource Energy in January
1998. Mr. Nelson was named Senior Vice President and General
Counsel of TEP in November 1998. In December 1998 he was named
Chief Operating Officer, Corporate Services of TEP.
(d) Karen G. Kissinger: Ms. Kissinger joined TEP as Vice
President and Controller in January 1991. She was named Vice
President, Controller and Principal Accounting Officer of UniSource
Energy in January 1998. In November 1998, Ms. Kissinger was also
named Chief Information Officer of TEP. Prior to joining TEP, she
was a Manager with Deloitte & Touche from 1986 through 1989 and a
Senior Manager through 1990.
(e) Michael J. DeConcini: Mr. DeConcini joined TEP in 1988 and
served in various positions in finance, strategic planning and
wholesale marketing. He was Manager of TEP's Wholesale Marketing
Department in 1994, adding Product Development and Business
Development in 1997. In November 1998, he was elected Vice
Presidentof MEH, and elected Vice President - Strategic Planning of
UniSource Energy in February 1999.
(f) Thomas A. Delawder: Mr. Delawder joined TEP in 1974 and
thereafter served in various engineering and operations positions.
In April 1985 he was named Manager, Systems Operations and was
elected Vice President - Power Supply and System Control in November
1985. In February 1991, he became Vice President - Engineering
and Power Supply and in January 1992 he became Vice President -
System Operations. In 1994, he became Vice President - Energy
Resources.
(g) Steven J. Glaser: Mr. Glaser joined TEP in 1990 as a Senior
Attorney in charge of Regulatory Affairs. He was Manager of TEP's
Legal department from 1992 to 1994, and Manager of Contracts
and Wholesale Marketing from 1994 until elected Vice President -
Business Development. In 1995, he was named Vice President -
Wholesale/Retail Pricing and System Planning. He was named Vice
President - Energy Services in 1996 and Vice President - Rates and
Regulatory Support and Utility Distribution Company Energy Services
in November 1998.
(h) Thomas N. Hansen: Mr. Hansen joined TEP in December 1992 as Vice
President - Power Production. Prior to joining TEP, Mr. Hansen was
Century Power Corporation's Vice President - Operations from 1989
and Plant Manager at Springerville from 1987 through 1988. In 1994,
he was named Vice President - Technical Services Advisor.
(i) Kevin P. Larson: Mr. Larson joined TEP in 1985 and thereafter
held various positions in its finance department and at TEP's
investment subsidiaries. In January 1991, he was elected Assistant
Treasurer of TEP and named Manager of Financial Programs. He was
elected Treasurer of TEP in August 1994 and Vice President in March
1997.
(j) Vincent Nitido, Jr.: Mr. Nitido joined TEP as a staff
attorney in 1991. He was promoted to Manager of the Legal
Department in 1994, and elected Vice President and Assistant
General Counsel in 1998.
(k) James Pyers: Mr. Pyers joined TEP in 1974 as a Supervisor.
Thereafter, he held various supervisory positions and was promoted
to Manager of Customer in Service Operations in February 1998. Mr.
Pyers was elected Vice President - Utility Distribution Company
Operations in November 1998.
(l) Catherine A. Nichols: Ms. Nichols joined TEP as a staff attorney
in 1989. She was promoted to Manager of the Legal Department and
elected Corporate Secretary in 1998. She assumed the additional
role of Manager of the Human Resources Department in 1999.
ITEM 11. - EXECUTIVE COMPENSATION
- -------------------------------------------------------------------
Information concerning Executive Compensation will be
contained under Executive Compensation and Other Information in the
Company's Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120
days after December 31, 1999, which information is incorporated
herein by reference.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------------------------------------------------------------------
MANAGEMENT
- -------------------------------------------------------------------
GENERAL
-------
At February 24, 2000, UniSource Energy had outstanding
32,357,718 shares of Common Stock. As of February 24, 2000, the
number of shares of Common Stock beneficially owned by all
directors and officers of the Company as a group amounted to 1% of
the outstanding Common Stock.
At February 24, 2000, UniSource Energy owned all of the
outstanding shares of common stock of TEP.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
Information concerning the security ownership of certain
beneficial owners of UniSource Energy will be contained under
Security Ownership of Certain Beneficial Owners in the Company's
Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120
days after December 31, 1999, which information is incorporated
herein by reference.
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
Information concerning the security ownership of the Directors
and Executive Officers of UniSource Energy and TEP will be
contained under Security Ownership of Management in the Company's
Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120
days after December 31, 1999, which information is incorporated
herein by reference.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------------
None.
<PAGE>
PART IV
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- -------------------------------------------------------------------
FORM 8-K
- -------------------------------------------------------------------
Page
----
(a) 1. Consolidated Financial Statements as of
December 31, 1999 and 1998 and for Each
of the Three Years in the Period Ended
December 31, 1999.
UniSource Energy Corporation
----------------------------
Independent Auditors' Report 42
Report of Independent Accountants 43
Consolidated Statements of Income 44
Consolidated Statements of Cash Flows 45
Consolidated Balance Sheets 46
Consolidated Statements of Capitalization 47
Consolidated Statements of Changes in
Stockholders' Equity 48
Notes to Consolidated Financial Statements 54
Tucson Electric Power Company
-----------------------------
Independent Auditors' Report 42
Report of Independent Accountants 43
Consolidated Statements of Income 49
Consolidated Statements of Cash Flows 50
Consolidated Balance Sheets 51
Consolidated Statements of Capitalization 52
Consolidated Statements of Changes in
Stockholders' Equity 53
Notes to Consolidated Financial Statements 54
2. Supplemental Consolidated Schedules for the Years
Ended December 31, 1997 to 1999.
Schedules I to V, inclusive, are omitted because they are not
applicable or not required.
3. Exhibits.
Reference is made to the Exhibit Index commencing on page 93
(b) Reports on Form 8-K.
UniSource Energy Corporation and Tucson Electric Power Company
--------------------------------------------------------------
- Form 8-K dated November 22, 1999 (filed December 2, 1999),
reporting on approval of Settlement Agreement by the ACC.
UniSource Energy Corporation
----------------------------
- Form 8-K dated December 3, 1999 (filed December 6, 1999),
reporting on declaration of divided payable to shareholders
of UniSource Energy common stock.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
UNISOURCE ENERGY CORPORATION
Date: March 8, 2000 By /s/ Ira R. Adler
----------------------------
IRA R. ADLER
Executive Vice President
and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Date: March 8, 2000 /s/ James S. Pignatelli*
----------------------------
James S. Pignatelli
Chairman of the Board, President
and Principal Executive Officer
Date: March 8, 2000 /s/ Ira R. Adler
----------------------------
Ira R. Adler
Executive Vice President, Principal
Financial Officer and Director
Date: March 8, 2000 /s/ Karen G. Kissinger*
----------------------------
Karen G. Kissinger
Principal Accounting Officer
Date: March 8, 2000 /s/ Larry W. Bickle*
-----------------------------
Larry W. Bickle, Director
Date: March 8, 2000 /s/ Elizabeth T.Bilby*
-----------------------------
Elizabeth T. Bilby, Director
Date: March 8, 2000 /s/ Harold W.Burlingame*
-----------------------------
Harold W.Burlingame, Director
Date: March 8, 2000 /s/ Jose L. Canchola*
-----------------------------
Jose L. Canchola,Director
Date: March 8, 2000 /s/ John L. Carter*
-----------------------------
John L. Carter, Director
Date: March 8, 2000 /s/ Daniel W. Fessler*
-----------------------------
Daniel W. Fessler, Director
Date: March 8, 2000 /s/ John A. Jeter*
-----------------------------
John A. Jeter, Director
Date: March 8, 2000 /s/ R. B. O'Rielly*
-----------------------------
R. B. O'Rielly, Director
Date: March 8, 2000 /s/ Martha R. Seger*
-----------------------------
Martha R. Seger, Director
Date: March 8, 2000 /s/ H. Wilson Sundt*
-----------------------------
H. Wilson Sundt, Director
Date: March 8, 2000 By /s/ Ira R. Adler
-----------------------------
Ira R. Adler
as attorney-in-fact for each
of the persons indicated
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
TUCSON ELECTRIC POWER COMPANY
Date: March 8, 2000 By /s/ Ira R. Adler
-----------------------------
IRA R. ADLER
Executive Vice President and
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Date: March 8, 2000 /s/ James S. Pignatelli*
-----------------------------
James S. Pignatelli
Chairman of the Board, President
and Principal Executive Officer
Date: March 8, 2000 /s/ Ira R. Adler
----------------------------
Ira R. Adler
Executive Vice President, Principal
Financial Officer and Director
Date: March 8, 2000 /s/ Karen G. Kissinger*
-----------------------------
Karen G. Kissinger
Principal Accounting Officer
Date: March 8, 2000 /s/ Elizabeth T. Bilby*
-----------------------------
Elizabeth T. Bilby
Director
Date: March 8, 2000 /s/ Harold W. Burlingame*
-----------------------------
Harold W. Burlingame
Director
Date: March 8, 2000 /s/ John. L. Carter*
-----------------------------
John L. Carter
Director
Date: March 8, 2000 /s/ Daniel W. L. Fessler*
-----------------------------
Daniel W. L. Fessler
Director
Date: March 8, 2000 /s/ John A. Jeter*
-----------------------------
John A. Jeter
Director
Date: March 8, 2000 /s/ Martha R. Seger*
-----------------------------
Martha R. Seger
Director
Date: March 8, 2000 By /s/ Ira R. Adler
-----------------------------
Ira R. Adler
as attorney-in-fact for each
of the persons indicated
<PAGE>
EXHIBIT INDEX
-------------
*2(a) -- Agreement and Plan of Exchange, dated as of March 20, 1995,
between TEP, UniSource Energy and NCR Holding, Inc.
*3(a) -- Restated Articles of Incorporation of TEP, filed
with the ACC on August 11, 1994, as amended by Amendment
to Article Fourth of the Company's Restated Articles of
Incorporation, filed with the ACC on May 17, 1996. (Form
10-K for year ended December 31, 1996, File No. 1-
5924-Exhibit 3(a).)
*3(b) -- Bylaws of TEP, as amended May 20, 1994. (Form 10-Q for
the quarter ended June 30, 1994, File No. 1-5924--
Exhibit 3.)
*3(c) -- Amended and Restated Articles of Incorporation of
UniSource Energy. (Form 8-A/A, dated January 30, 1998,
File No. 1-13739-Exhibit 2(a).)
*3(d) -- Bylaws of UniSource Energy, as amended December 11,
1997. (Form 8-A, dated December 23, 1997, File No. 1-
13739-Exhibit 2(b).)
*4(a)(1) -- Indenture dated as of April 1, 1941, to The Chase
National Bank of the City of New York, as Trustee. (Form
S-7, File No. 2-59906--Exhibit 2(b)(1).)
*4(a)(2) -- First Supplemental Indenture, dated as of October
1, 1946. (Form S-7, File No. 2-59906--Exhibit 2(b)(2).)
*4(a)(3) -- Second Supplemental Indenture dated as of October
1, 1947. (Form S-7, File No. 2-59906--Exhibit 2(b)(3).)
*4(a)(4) -- Third Supplemental Indenture, dated as of April 1,
1949. (Form S-7, File No. 2-59906--Exhibit 2(b)(4).)
*4(a)(5) -- Fourth Supplemental Indenture, dated as of December
1, 1952. (Form S-7, File No. 2-59906--Exhibit 2(b)(5).)
*4(a)(6) -- Fifth Supplemental Indenture, dated as of January
1, 1955. (Form S-7, File No. 2-59906--Exhibit 2(b)(6).)
*4(a)(7) -- Sixth Supplemental Indenture, dated as of January
1, 1958. (Form S-7, File No. 2-59906--Exhibit 2(b)(7).)
*4(a)(8) -- Seventh Supplemental Indenture, dated as of
November 1, 1959. (Form S-7, File No. 2-59906--Exhibit
2(b)(8).)
*4(a)(9) -- Eighth Supplemental Indenture, dated as of November
1, 1961. (Form S-7, File No. 2-59906--Exhibit 2(b)(9).)
*4(a)(10)-- Ninth Supplemental Indenture, dated as of February
20, 1964. (Form S-7, File No. 2-59906--Exhibit 2(b)(10).)
*4(a)(11)-- Tenth Supplemental Indenture, dated as of February
1, 1965. (Form S-7, File No. 2-59906--Exhibit 2(b)(11).)
*4(a)(12)-- Eleventh Supplemental Indenture, dated as of
February 1, 1966. (Form S-7, File No. 2-59906--Exhibit
2(b)(12).)
*4(a)(13)-- Twelfth Supplemental Indenture, dated as of
November 1, 1969. (Form S-7, File No. 2-59906 Exhibit
2(b)(13).)
*4(a)(14)-- Thirteenth Supplemental Indenture, dated as of
January 20, 1970. (Form S-7, File No. 2-59906--Exhibit
2(b)(14).)
*4(a)(15)-- Fourteenth Supplemental Indenture, dated as of
September 1, 1971. (Form S-7, File No. 2-59906--Exhibit
2(b)(15).)
*4(a)(16)-- Fifteenth Supplemental Indenture, dated as of March
1, 1972. (Form S-7, File No. 2-59906--Exhibit 2(b)(16).)
*4(a)(17)-- Sixteenth Supplemental Indenture, dated as of May
1, 1973. (Form S-7, File No. 2-59906--Exhibit 2(b)(17).)
*4(a)(18)-- Seventeenth Supplemental Indenture, dated as of
November 1, 1975. (Form S-7, File No. 2-59906--Exhibit
2(b)(18).)
*4(a)(19)-- Eighteenth Supplemental Indenture, dated as of
November 1, 1975. (Form S-7, File No. 2-59906--Exhibit
2(b)(19).)
*4(a)(20)-- Nineteenth Supplemental Indenture, dated as of July
1, 1976. (Form S-7, File No. 2-59906--Exhibit 2(b)(20).)
*4(a)(21)-- Twentieth Supplemental Indenture, dated as of
October 1, 1977. (Form S-7, File No. 2-59906--Exhibit
2(b)(21).)
*4(a)(22)-- Twenty-first Supplemental Indenture, dated as of
November 1, 1977. (Form 10-K for year ended December 31,
1980, File No. 1-5924--Exhibit 4(v).)
*4(a)(23)-- Twenty-second Supplemental Indenture, dated as of
January 1, 1978. (Form 10-K for year ended December 31,
1980, File No. 1-5924--Exhibit 4(w).)
*4(a)(24)-- Twenty-third Supplemental Indenture, dated as of
July 1, 1980. (Form 10-K for year ended December 31,
1980, File No. 1-5924--Exhibit 4(x).)
*4(a)(25)-- Twenty-fourth Supplemental Indenture, dated as of
October 1, 1980. (Form 10-K for year ended December 31,
1980, File No. 1-5924--Exhibit 4(y).)
*4(a)(26)-- Twenty-fifth Supplemental Indenture, dated as of
April 1, 1981. (Form 10-Q for quarter ended March 31,
1981, File No. 1-5924--Exhibit 4(a).)
*4(a)(27)-- Twenty-sixth Supplemental Indenture, dated as of
April 1, 1981. (Form 10-Q for quarter ended March 31,
1981, File No. 1-5924--Exhibit 4(b).)
*4(a)(28)-- Twenty-seventh Supplemental Indenture, dated as of
October 1, 1981. (Form 10-Q for quarter ended September
30, 1982, File No. 1-5924--Exhibit 4(c).)
*4(a)(29)-- Twenty-eighth Supplemental Indenture, dated as of
June 1, 1990. (Form 10-Q for quarter ended June 30, 1990,
File No. 1-5924--Exhibit 4(a)(1).)
*4(a)(30)-- Twenty-ninth Supplemental Indenture, dated as of
December 1, 1992. (Form S-1, Registration No. 33-55732--
Exhibit 4(a)(30).)
*4(a)(31)-- Thirtieth Supplemental Indenture, dated as of
December 1, 1992. (Form S-1, Registration No. 33-55732--
Exhibit 4(a)(31).)
*4(a)(32)-- Thirty-first Supplemental Indenture, dated as of
May 1, 1996. (Form 10-K for the year ended December 31,
1996, File No. 1-5924-Exhibit 4(a)(32).)
*4(a)(33)-- Thirty-second Supplemental Indenture, dated as of
May 1, 1996. (Form 10-K for the year ended December 31,
1996, File No. 1-5924-Exhibit 4(a)(33).)
*4(a)(34)-- Thirty-third Supplemental Indenture, dated as of May
1, 1998. (Form 10-Q for the quarter ended June 30, 1998,
File No. 1-5924 - Exhibit 4(a).)
*4(a)(35)-- Thirty-fourth Supplemental Indenture dated as of
August 1, 1998. (Form 10-Q for the quarter ended June 30,
1998, File No. 1-5924 - Exhibit 4(b).)
*4(b)(1) -- Installment Sale Agreement, dated as of December 1,
1973, among the City of Farmington, New Mexico, Public
Service Company of New Mexico and TEP. (Form 8-K for the
month of January 1974, File No. 0-269--Exhibit 3.)
*4(b)(2) -- Ordinance No. 486, adopted December 17, 1973, of
the City of Farmington, New Mexico. (Form 8-K for the
month of January 1974, File No. 0-269--Exhibit 4.)
*4(b)(3) -- Amended and Restated Installment Sale Agreement
dated as of April 1, 1997, between the City of Farmington,
New Mexico and TEP relating to Pollution Control Revenue
Bonds, 1997 Series A (Tucson Electric Power Company San
Juan Project). (Form 10-Q for the quarter ended March 31,
1997, File No. 1-5924--Exhibit 4(a).)
*4(b)(4) -- City of Farmington, New Mexico Ordinance No. 97-
1055, adopted April 17, 1997, authorizing Pollution
Control Revenue Bonds, 1997 Series A (Tucson Electric
Power Company San Juan Project). (Form 10-Q for the
quarter ended March 31, 1997, File No. 1-5924--Exhibit
4(b).)
*4(c)(1) -- Loan Agreement, dated as of October 1, 1982,
between the Pima County Authority and TEP relating to
Floating Rate Monthly Demand Industrial Development
Revenue Bonds, 1982 Series A (Tucson Electric Power
Company Irvington Project). (Form 10-Q for quarter ended
September 30, 1982, File No. 1-5924--Exhibit 4(a).)
*4(c)(2) -- Indenture of Trust, dated as of October 1, 1982,
between the Pima County Authority and Morgan Guaranty
authorizing Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1982 Series A (Tucson Electric
Power Company Irvington Project). (Form 10-Q for quarter
ended September 30, 1982, File No. 1-5924--Exhibit 4(b).)
*4(c)(3) -- First Supplemental Loan Agreement, dated as of
March 31, 1992, between the Pima County Authority and TEP
relating to Industrial Development Revenue Bonds, 1982
Series A (Tucson Electric Power Company Irvington
Project). (Form S-4, Registration No. 33-52860--Exhibit
4(h)(3).)
*4(c)(4) -- First Supplemental Indenture of Trust, dated as of
March 31, 1992, between the Pima County Authority and
Morgan Guaranty relating to Industrial Development Revenue
Bonds, 1982 Series A (Tucson Electric Power Company
Irvington Project). (Form S-4, Registration No. 33-52860--
Exhibit 4(h)(4).)
*4(d)(1) -- Loan Agreement, dated as of December 1, 1982,
between the Pima County Authority and TEP relating to
Floating Rate Monthly Demand Industrial Development
Revenue Bonds, 1982 Series A (Tucson Electric Power
Company Projects). (Form 10-K for year ended December 31,
1982, File No. 1-5924--Exhibit 4(k)(1).)
*4(d)(2) -- Indenture of Trust, dated as of December 1, 1982,
between the Pima County Authority and Morgan Guaranty
authorizing Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1982 Series A (Tucson Electric
Power Company Projects). (Form 10-K for year ended
December 31, 1982, File No. 1-5924--Exhibit 4(k)(2).)
*4(d)(3) -- First Supplemental Loan Agreement, dated as of
March 31, 1992, between the Pima County Authority and TEP
relating to Industrial Development Revenue Bonds, 1982
Series A (Tucson Electric Power Company Projects). (Form S-
4, Registration No. 33-52860--Exhibit 4(i)(3).)
*4(d)(4) -- First Supplemental Indenture of Trust, dated as of
March 31, 1992, between the Pima County Authority and
Morgan Guaranty relating to Industrial Development Revenue
Bonds, 1982 Series A (Tucson Electric Power Company
Projects). (Form S-4, Registration No. 33-52860--Exhibit
4(i)(4).)
*4(e)(1) -- Loan Agreement, dated as of December 1, 1983,
between the Apache County Authority and TEP relating to
Floating Rate Monthly Demand Industrial Development
Revenue Bonds, 1983 Series A (Tucson Electric Power
Company Springerville Project). (Form 10-K for year ended
December 31, 1983, File No. 1-5924--Exhibit 4(l)(1).)
*4(e)(2) -- Indenture of Trust, dated as of December 1, 1983,
between the Apache County Authority and Morgan Guaranty
authorizing Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1983 Series A (Tucson Electric
Power Company Springerville Project). (Form 10-K for year
ended December 31, 1983, File No. 1-5924--Exhibit
4(l)(2).)
*4(e)(3) -- First Supplemental Loan Agreement, dated as of
December 1, 1985, between the Apache County Authority and
TEP relating to Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1983 Series A (Tucson Electric
Power Company Springerville Project). (Form 10-K for the
year ended December 31, 1987, File No. 1-5924--Exhibit
4(k)(3).)
*4(e)(4) -- First Supplemental Indenture, dated as of December
1, 1985, between the Apache County Authority and Morgan
Guaranty relating to Floating Rate Monthly Demand
Industrial Development Revenue Bonds, 1983 Series A
(Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No.
1-5924--Exhibit 4(k)(4).)
*4(e)(5) -- Second Supplemental Loan Agreement, dated as of
March 31, 1992, between the Apache County Authority and
TEP relating to Industrial Development Revenue Bonds, 1983
Series A (Tucson Electric Power Company Springerville
Project). (Form S-4, Registration No. 33-52860--Exhibit
4(k)(5).)
*4(e)(6) -- Second Supplemental Indenture of Trust, dated as of
March 31, 1992, between the Apache County Authority and
Morgan Guaranty relating to Industrial Development Revenue
Bonds, 1983 Series A (Tucson Electric Power Company
Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(k)(6).)
*4(f)(1) -- Loan Agreement, dated as of December 1, 1983,
between the Apache County Authority and TEP relating to
Variable Rate Demand Industrial Development Revenue Bonds,
1983 Series B (Tucson Electric Power Company Springerville
Project). (Form 10-K for year ended December 31, 1983,
File No. 1-5924--Exhibit 4(m)(1).)
*4(f)(2) -- Indenture of Trust, dated as of December 1, 1983,
between the Apache County Authority and Morgan Guaranty
authorizing Variable Rate Demand Industrial Development
Revenue Bonds, 1983 Series B (Tucson Electric Power
Company Springerville Project). (Form 10-K for year ended
December 31, 1983, File No. 1-5924--Exhibit 4(m)(2).)
*4(f)(3) -- First Supplemental Loan Agreement, dated as of
December 1, 1985, between the Apache County Authority and
TEP relating to Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1983 Series B (Tucson Electric
Power Company Springerville Project). (Form 10-K for the
year ended December 31, 1987, File No. 1-5924--Exhibit
4(l)(3).)
*4(f)(4) -- First Supplemental Indenture, dated as of December
1, 1985, between the Apache County Authority and Morgan
Guaranty relating to Floating Rate Monthly Demand
Industrial Development Revenue Bonds, 1983 Series B
(Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No.
1-5924--Exhibit 4(l)(4).)
*4(f)(5) -- Second Supplemental Loan Agreement, dated as of
March 31, 1992, between the Apache County Authority and
TEP relating to Industrial Development Revenue Bonds, 1983
Series B (Tucson Electric Power Company Springerville
Project). (Form S-4, Registration No. 33-52860--Exhibit
4(l)(5).)
*4(f)(6) -- Second Supplemental Indenture of Trust, dated as of
March 31, 1992, between the Apache County Authority and
Morgan Guaranty relating to Industrial Development Revenue
Bonds, 1983 Series B (Tucson Electric Power Company
Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(l)(6).)
*4(g)(1) -- Loan Agreement, dated as of December 1, 1983,
between the Apache County Authority and TEP relating to
Variable Rate Demand Industrial Development Revenue Bonds,
1983 Series C (Tucson Electric Power Company Springerville
Project). (Form 10-K for year ended December 31, 1983,
File No. 1-5924--Exhibit 4(n)(1).)
*4(g)(2) -- Indenture of Trust, dated as of December 1, 1983,
between the Apache County Authority and Morgan Guaranty
authorizing Variable Rate Demand Industrial Development
Revenue Bonds, 1983 Series C (Tucson Electric Power
Company Springerville Project). (Form 10-K for year ended
December 31, 1983, File No. 1-5924--Exhibit 4(n)(2).)
*4(g)(3) -- First Supplemental Loan Agreement, dated as of
December 1, 1985, between the Apache County Authority and
TEP relating to Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1983 Series C (Tucson Electric
Power Company Springerville Project). (Form 10-K for the
year ended December 31, 1987, File No. 1-5924--Exhibit
4(m)(3).)
*4(g)(4) -- First Supplemental Indenture, dated as of December
1, 1985, between the Apache County Authority and Morgan
Guaranty relating to Floating Rate Monthly Demand
Industrial Development Revenue Bonds, 1983 Series C
(Tucson Electric Power Company Springerville Project).
(Form 10-K for the year ended December 31, 1987, File No.
1-5924--Exhibit 4(m)(4).)
*4(g)(5) -- Second Supplemental Loan Agreement, dated as of
March 31, 1992, between the Apache County Authority and
TEP relating to Industrial Development Revenue Bonds, 1983
Series C (Tucson Electric Power Company Springerville
Project). (Form S-4, Registration No. 33-52860--Exhibit
4(m)(5).)
*4(g)(6) -- Second Supplemental Indenture of Trust, dated as of
March 31, 1992, between the Apache County Authority and
Morgan Guaranty relating to Industrial Development Revenue
Bonds, 1983 Series C (Tucson Electric Power Company
Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(m)(6).)
*4(h) -- Reimbursement Agreement, dated as of September 15,
1981, as amended, between TEP and Manufacturers Hanover
Trust Company. (Form 10-K for the year ended December 31,
1984, File No. 1-5924--Exhibit 4(o)(4).)
*4(i)(1) -- Loan Agreement, dated as of December 1, 1985,
between the Apache County Authority and TEP relating to
Variable Rate Demand Industrial Development Revenue Bonds,
1985 Series A (Tucson Electric Power Company Springerville
Project). (Form 10-K for the year ended December 31, 1985,
File No. 1-5924---Exhibit 4(r)(1).)
*4(i)(2) -- Indenture of Trust, dated as of December 1, 1985,
between the Apache County Authority and Morgan Guaranty
authorizing Variable Rate Demand Industrial Development
Revenue Bonds, 1985 Series A (Tucson Electric Power
Company Springerville Project). (Form 10-K for the year
ended December 31, 1985, File No. 1-5924--Exhibit
4(r)(2).)
*4(i)(3) -- First Supplemental Loan Agreement, dated as of
March 31, 1992, between the Apache County Authority and
TEP relating to Industrial Development Revenue Bonds, 1985
Series A (Tucson Electric Power Company Springerville
Project). (Form S-4, Registration No. 33-52860--Exhibit
4(o)(3).)
*4(i)(4) -- First Supplemental Indenture of Trust, dated as of
March 31, 1992, between the Apache County Authority and
Morgan Guaranty relating to Industrial Development Revenue
Bonds, 1985 Series A (Tucson Electric Power Company
Springerville Project). (Form S-4, Registration No. 33-
52860--Exhibit 4(o)(4).)
*4(j)(1) -- Warrant Agreement and Form of Warrant, dated as of
December 15, 1992. (Form S-1, Registration No. 33-55732--
Exhibit 4(q).)
* 4(j)(2)-- Form of Warrant Agreement relating to the UniSource
Energy Warrants, dated as of August 4, 1998. (Form S-4,
Registration Statement No. 333-60809--Exhibit 4(a)).
*4(k)(1) -- Indenture of Mortgage and Deed of Trust dated as of
December 1, 1992, to Bank of Montreal Trust Company,
Trustee. (Form S-1, Registration No. 33-55732--Exhibit
4(r)(1).)
*4(k)(2) -- Supplemental Indenture No. 1 creating a series of
bonds designated Second Mortgage Bonds, Collateral Series
A, dated as of December 1, 1992. (Form S-1, Registration
No. 33-55732--Exhibit 4(r)(2).)
*4(k)(3) -- Supplemental Indenture No. 2 creating a series of
bonds designated Second Mortgage Bonds, Collateral Series
B, dated as of December 1, 1997. (Form 10-K for year
ended December 31, 1997, File No. 1-5924 -- Exhibit
4(m)(3).)
*4(k)(4) -- Supplemental Indenture No. 3 creating a series of
bonds designated Second Mortgage Bonds, Collateral Series,
dated as of August 1, 1998. (Form 10-Q for the quarter
ended June 30, 1998, File No. 1-5924 -- Exhibit 4(c).)
*4(l)(1) -- Loan Agreement, dated as of April 1, 1997, between
Coconino County, Arizona Pollution Control Corporation and
TEP relating to Pollution Control Revenue Bonds, 1997
Series A (Tucson Electric Power Company Navajo Project).
(Form 10-Q for the quarter ended March 31, 1997, File No.
1-5924-Exhibit 4(c).)
*4(l)(2) -- Indenture of Trust, dated as of April 1, 1997,
between Coconino County, Arizona Pollution Control
Corporation and First Trust of New York, National
Association, authorizing Pollution Control Revenue Bonds,
1997 Series A (Tucson Electric Power Company Navajo
Project). (Form 10-Q for the quarter ended March 31,
1997, File No. 1-5924-Exhibit 4(d).)
*4(m)(1) -- Loan Agreement, dated as of April 1, 1997, between
Coconino County, Arizona Pollution Control Corporation and
TEP relating to Pollution Control Revenue Bonds, 1997
Series B (Tucson Electric Power Company Navajo Project).
(Form 10-Q for the quarter ended March 31, 1997, File No.
1-5924-Exhibit 4(e).)
*4(m)(2) -- Indenture of Trust, dated as of April 1, 1997,
between Coconino County, Arizona Pollution Control
Corporation and First Trust of New York, National
Association, authorizing Pollution Control Revenue Bonds,
1997 Series B (Tucson Electric Power Company Navajo
Project). (Form 10-Q for the quarter ended March 31, 1997,
File No. 1-5924-Exhibit 4(f).)
*4(n)(1) -- Loan Agreement, dated as of September 15, 1997,
between The Industrial Development Authority of the County
of Pima and TEP relating to Industrial Development Revenue
Bonds, 1997 Series A (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended September 30,
1997, File No. 1-5924-Exhibit 4(a).)
*4(n)(2) -- Indenture of Trust, dated as of September 15, 1997,
between The Industrial Development Authority of the County
of Pima and First Trust of New York, National Association,
authorizing Industrial Development Revenue Bonds, 1997
Series A (Tucson Electric Power Company Project). (Form
10-Q for the quarter ended September 30, 1997, File No. 1-
5924-Exhibit 4(b).)
*4(o)(1) -- Loan Agreement, dated as of September 15, 1997,
between The Industrial Development Authority of the County
of Pima and TEP relating to Industrial Development Revenue
Bonds, 1997 Series B (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended September 30,
1997, File No. 1-5924-Exhibit 4(c).)
*4(o)(2) -- Indenture of Trust, dated as of September 15, 1997,
between The Industrial Development Authority of the County
of Pima and First Trust of New York, National Association,
authorizing Industrial Development Revenue Bonds, 1997
Series B (Tucson Electric Power Company Project). (Form
10-Q for the quarter ended September 30, 1997, File No. 1-
5924-Exhibit 4(d).)
*4(p)(1) -- Loan Agreement, dated as of September 15, 1997,
between The Industrial Development Authority of the County
of Pima and TEP relating to Industrial Development Revenue
Bonds, 1997 Series C (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended September 30,
1997, File No. 1-5924-Exhibit 4(e).)
*4(p)(2) -- Indenture of Trust, dated as of September 15, 1997,
between The Industrial Development Authority of the County
of Pima and First Trust of New York, National Association,
authorizing Industrial Development Revenue Bonds, 1997
Series C (Tucson Electric Power Company Project). (Form
10-Q for the quarter ended September 30, 1997, File No. 1-
5924-Exhibit 4(f).)
*4(q)(1) -- Loan Agreement, dated as of March 1, 1998,
between The Industrial Development Authority of the County
of Apache and TEP relating to Pollution Control Revenue
Bonds, 1998 Series A (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended March 31,
1998, File No. 1-5924 - Exhibit 4(a).)
*4(q)(2) -- Indenture of Trust, dated as of March 1, 1998,
between The Industrial Development Authority of the County
of Apache and First Trust of New York, National
Association, authorizing Pollution Control Revenue Bonds,
1998 Series A (Tucson Electric Power Company Project).
(Form 10-Q for the quarter ended March 31, 1998, File No.
1-5924 - Exhibit 4(b).)
*4(r)(1) -- Loan Agreement, dated as of March 1, 1998,
between The Industrial Development Authority of the County
of Apache and TEP relating to Pollution Control Revenue
Bonds, 1998 Series B (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended March 31, 1998,
File No. 1-5924 - Exhibit 4(c).)
*4(r)(2) -- Indenture of Trust, dated as of March 1, 1998,
between The Industrial Development Authority of the County
of Apache and First Trust of New York, National
Association, authorizing Pollution Control Revenue Bonds,
1998 Series B (Tucson Electric Power Company Project).
(Form 10-Q for the quarter ended March 31, 1998, File No.
1-5924 - Exhibit 4(d).)
*4(s)(1) -- Loan Agreement, dated as of March 1, 1998,
between The Industrial Development Authority of the County
of Apache and TEP relating to Industrial Development
Revenue Bonds, 1998 Series C (Tucson Electric Power
Company Project). (Form 10-Q for the quarter ended March
31, 1998, File No. 1-5924 - Exhibit 4(e).)
*4(s)(2) -- Indenture of Trust, dated as of March 1, 1998,
between The Industrial Development Authority of the County
of Apache and First Trust of New York, National
Association, authorizing Industrial Development Revenue
Bonds, 1998 Series C (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended March 31, 1998,
File No. 1-5924 - Exhibit 4(f).)
*4(t)(1) -- Indenture of Trust, dated as of August 1, 1998,
between TEP and the Bank of Montreal Trust Company. (Form
10-Q for the quarter ended June 30, 1998, File No. 1-5924
- Exhibit 4(d).)
*4(u)(1) -- Rights Agreement dated as of March 5, 1999, between
UniSource Energy Corporation and The Bank of New York, as
Rights Agent. (Form 8-K dated March 5, 1999, File No. 1-
13739 - Exhibit 4.)
*10(a)(1)-- Lease Agreements, dated as of December 1, 1984,
between Valencia and United States Trust Company of New
York, as Trustee, and Thomas B. Zakrzewski, as Co-Trustee,
as amended and supplemented. (Form 10-K for the year ended
December 31, 1984, File No. 1-5924--Exhibit 10(d)(1).)
*10(a)(2)-- Guaranty and Agreements, dated as of December 1,
1984, between TEP and United States Trust Company of New
York, as Trustee, and Thomas B. Zakrzewski, as Co-Trustee.
(Form 10-K for the year ended December 31, 1984, File No.
1-5924--Exhibit 10(d)(2).)
*10(a)(3)-- General Indemnity Agreements, dated as of December
1, 1984, between Valencia and TEP, as Indemnitors; General
Foods Credit Corporation, Harvey Hubbell Financial, Inc.
and J. C. Penney Company, Inc. as Owner Participants;
United States Trust Company of New York, as Owner Trustee;
Teachers Insurance and Annuity Association of America as
Loan Participant; and Marine Midland Bank, N.A., as
Indenture Trustee. (Form 10-K for the year ended December
31, 1984, File No. 1-5924--Exhibit 10(d)(3).)
*10(a)(4)-- Tax Indemnity Agreements, dated as of December 1,
1984, between General Foods Credit Corporation, Harvey
Hubbell Financial, Inc. and J. C. Penney Company, Inc.,
each as Beneficiary under a separate Trust Agreement dated
December 1, 1984, with United States Trust of New York as
Owner Trustee, and Thomas B. Zakrzewski as Co-Trustee,
Lessor, and Valencia, Lessee, and TEP, Indemnitors. (Form
10-K for the year ended December 31, 1984, File No. 1-5924
--Exhibit 10(d)(4).)
*10(a)(5)-- Amendment No. 1, dated December 31, 1984, to the
Lease Agreements, dated December 1, 1984, between Valencia
and United States Trust Company of New York, as Owner
Trustee, and Thomas B. Zakrzewski as Co-Trustee. (Form 10-
K for the year ended December 31, 1986, File No. 1-5924--
Exhibit 10(e)(5).)
*10(a)(6)-- Amendment No. 2, dated April 1, 1985, to the Lease
Agreements, dated December 1, 1984, between Valencia and
United States Trust Company of New York, as Owner Trustee,
and Thomas B. Zakrzewski as Co-Trustee. (Form 10-K for the
year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(6).)
*10(a)(7)-- Amendment No. 3, dated August 1, 1985, to the Lease
Agreements, dated December 1, 1984, between Valencia and
United States Trust Company of New York, as Owner Trustee,
and Thomas Zakrzewski as Co-Trustee. (Form 10-K for the
year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(7).)
*10(a)(8)-- Amendment No. 4, dated June 1, 1986, to the Lease
Agreement, dated December 1, 1984, between Valencia and
United States Trust Company of New York as Owner Trustee,
and Thomas Zakrzewski as Co-Trustee, under a Trust
Agreement dated as of December 1, 1984, with General Foods
Credit Corporation as Owner Participant. (Form 10-K for
the year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(8).)
*10(a)(9)-- Amendment No. 4, dated June 1, 1986, to the Lease
Agreement, dated December 1, 1984, between Valencia and
United States Trust Company of New York as Owner Trustee,
and Thomas Zakrzewski as Co-Trustee, under a Trust
Agreement dated as of December 1, 1984, with J. C. Penney
Company, Inc. as Owner Participant. (Form 10-K for the
year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(9).)
*10(a)(10)-- Amendment No. 4, dated June 1, 1986, to the Lease
Agreement, dated December 1, 1984, between Valencia and
United States Trust Company of New York as Owner Trustee,
and Thomas Zakrzewski as Co-Trustee, under a Trust
Agreement dated as of December 1, 1984, with Harvey
Hubbell Financial Inc. as Owner Participant. (Form 10-K
for the year ended December 31, 1986, File No. 1-5924--
Exhibit 10(e)(10).)
*10(a)(11)-- Lease Amendment No. 5 and Supplement No. 2, to the
Lease Agreement, dated July 1, 1986, between Valencia,
United States Trust Company of New York as Owner Trustee,
and Thomas Zakrzewski as Co-Trustee and J. C. Penney as
Owner Participant. (Form 10-K for the year ended December
31, 1986, File No. 1-5924--Exhibit 10(e)(11).)
*10(a)(12)-- Lease Amendment No. 5, to the Lease Agreement,
dated June 1, 1987, between Valencia, United States Trust
Company of New York as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee and General Foods Credit
Corporation as Owner Participant. (Form 10-K for the year
ended December 31, 1988, File No. 1-5924--Exhibit
10(f)(12).)
*10(a)(13)-- Lease Amendment No. 5, to the Lease Agreement,
dated June 1, 1987, between Valencia, United States Trust
Company of New York as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee and Harvey Hubbell Financial Inc.
as Owner Participant. (Form 10-K for the year ended
December 31, 1988, File No. 1-5924--Exhibit 10(f)(13).)
*10(a)(14)-- Lease Amendment No. 6, to the Lease Agreement,
dated June 1, 1987, between Valencia, United States Trust
Company of New York as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee and J. C. Penney Company, Inc. as
Owner Participant. (Form 10-K for the year ended December
31, 1988, File No. 1-5924--Exhibit 10(f)(14).)
*10(a)(15)-- Lease Supplement No. 1, dated December 31, 1984, to
Lease Agreements, dated December 1, 1984, between
Valencia, as Lessee and United States Trust Company of New
York and Thomas B. Zakrzewski, as Owner Trustee and Co-
Trustee, respectively (document filed relates to General
Foods Credit Corporation; documents relating to Harvey
Hubbel Financial, Inc. and JC Penney Company, Inc. are not
filed but are substantially similar). (Form S-4,
Registration No. 33-52860--Exhibit 10(f)(15).)
*10(a)(16)-- Amendment No. 1, dated June 1, 1986, to the General
Indemnity Agreement, dated as of December 1, 1984, between
Valencia and TEP, as Indemnitors, General Foods Credit
Corporation, as Owner Participant, United States Trust
Company of New York, as Owner Trustee, Teachers Insurance
and Annuity Association of America, as Loan Participant,
and Marine Midland Bank, N.A., as Indenture Trustee. (Form
10-K for the year ended December 31, 1986, File No. 1-5924
--Exhibit 10(e)(12).)
*10(a)(17)-- Amendment No. 1, dated June 1, 1986, to the General
Indemnity Agreement, dated as of December 1, 1984, between
Valencia and TEP, as Indemnitors, J. C. Penney Company,
Inc., as Owner Participant, United States Trust Company of
New York, as Owner Trustee, Teachers Insurance and Annuity
Association of America, as Loan Participant, and Marine
Midland Bank, N.A., as Indenture Trustee. (Form 10-K for
the year ended December 31, 1986, File No. 1-5924--Exhibit
10(e)(13).)
*10(a)(18)-- Amendment No. 1, dated June 1, 1986, to the General
Indemnity Agreement, dated as of December 1, 1984, between
Valencia and TEP, as Indemnitors, Harvey Hubbell
Financial, Inc., as Owner Participant, United States Trust
Company of New York, as Owner Trustee, Teachers Insurance
and Annuity Association of America, as Loan Participant,
and Marine Midland Bank, N.A., as Indenture Trustee.
(Form 10-K for the year ended December 31, 1986, File No.
1-5924--Exhibit 10(e)(14).)
*10(a)(19)-- Amendment No. 2, dated as of July 1, 1986, to the
General Indemnity Agreement, dated as of December 1, 1984,
between Valencia and TEP, as Indemnitors, J. C. Penney
Company, Inc., as Owner Participant, United States Trust
Company of New York, as Owner Trustee, Teachers Insurance
and Annuity Association of America, as Loan Participant,
and Marine Midland Bank, N.A., as Indenture Trustee. (Form
S-4, Registration No. 33-52860--Exhibit 10(f)(19).)
*10(a)(20)-- Amendment No. 2, dated as of June 1, 1987, to the
General Indemnity Agreement, dated as of December 1, 1984,
between Valencia and TEP, as Indemnitors, General Foods
Credit Corporation, as Owner Participant, United States
Trust Company of New York, as Owner Trustee, Teachers
Insurance and Annuity Association of America, as Loan
Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form S-4, Registration No. 33-52860--Exhibit
10(f)(20).)
*10(a)(21)-- Amendment No. 2, dated as of June 1, 1987, to the
General Indemnity Agreement, dated as of December 1, 1984,
between Valencia and TEP, as Indemnitors, Harvey Hubbell
Financial, Inc., as Owner Participant, United States Trust
Company of New York, as Owner Trustee, Teachers Insurance
and Annuity Association of America, as Loan Participant,
and Marine Midland Bank, N.A., as Indenture Trustee. (Form
S-4, Registration No. 33-52860--Exhibit 10(f)(21).)
*10(a)(22)-- Amendment No. 3, dated as of June 1, 1987, to the
General Indemnity Agreement, dated as of December 1, 1984,
between Valencia and TEP, as Indemnitors, J. C. Penney
Company, Inc., as Owner Participant, United States Trust
Company of New York, as Owner Trustee, Teachers Insurance
and Annuity Association of America, as Loan Participant,
and Marine Midland Bank, N.A., as Indenture Trustee. (Form
S-4, Registration No. 33-52860--Exhibit 10(f)(22).)
*10(a)(23)-- Supplemental Tax Indemnity Agreement, dated July 1,
1986, between J. C. Penney Company, Inc., as Owner
Participant, and Valencia and TEP, as Indemnitors. (Form
10-K for the year ended December 31, 1986, File No. 1-5924
--Exhibit 10(e)(15).)
*10(a)(24)-- Supplemental General Indemnity Agreement, dated as
of July 1, 1986, among Valencia and TEP, as Indemnitors,
J. C. Penney Company, Inc., as Owner Participant, United
States Trust Company of New York, as Owner Trustee,
Teachers Insurance and Annuity Association of America, as
Loan Participant, and Marine Midland Bank, N.A., as
Indenture Trustee. (Form 10-K for the year ended December
31, 1986, File No. 1-5924--Exhibit 10(e)(16).)
*10(a)(25)-- Amendment No. 1, dated as of June 1, 1987, to the
Supplemental General Indemnity Agreement, dated as of July
1, 1986, among Valencia and TEP, as Indemnitors, J. C.
Penney Company, Inc., as Owner Participant, United States
Trust Company of New York, as Owner Trustee, Teachers
Insurance and Annuity Association of America, as Loan
Participant, and Marine Midland Bank, N.A., as Indenture
Trustee. (Form S-4, Registration No. 33-52860--Exhibit
10(f)(25).)
*10(a)(26)-- Valencia Agreement, dated as of June 30, 1992,
among TEP, as Guarantor, Valencia, as Lessee, Teachers
Insurance and Annuity Association of America, as Loan
Participant, Marine Midland Bank, N.A., as Indenture
Trustee, United States Trust Company of New York, as Owner
Trustee, and Thomas B. Zakrzewski, as Co-Trustee, and the
Owner Participants named therein relating to the
Restructuring of Valencia's lease of the coal-handling
facilities at the Springerville Generating Station. (Form
S-4, Registration No. 33-52860--Exhibit 10(f)(26).)
*10(a)(27)-- Amendment, dated as of December 15, 1992, to the
Lease Agreements, dated December 1, 1984, between
Valencia, as Lessee, and United States Trust Company of
New York, as Owner Trustee, and Thomas B. Zakrzewski, as
Co-Trustee. (Form S-1, Registration No. 33-55732--Exhibit
10(f)(27).)
*10(b)(1)-- Lease Agreements, dated as of December 1, 1985,
between TEP and San Carlos Resources Inc. (San Carlos) (a
wholly-owned subsidiary of the Registrant) jointly and
severally, as Lessee, and Wilmington Trust Company, as
Trustee, as amended and supplemented. (Form 10-K for the
year ended December 31, 1985, File No. 1-5924--Exhibit
10(f)(1).)
*10(b)(2)-- Tax Indemnity Agreements, dated as of December 1,
1985, between Philip Morris Credit Corporation, IBM Credit
Financing Corporation and Emerson Finance Co., each as
beneficiary under a separate trust agreement, dated as of
December 1, 1985, with Wilmington Trust Company, as Owner
Trustee, and William J. Wade, as Co-Trustee, and TEP and
San Carlos, as Lessee. (Form 10-K for the year ended
December 31, 1985, File No. 1-5924--Exhibit 10(f)(2).)
*10(b)(3)-- Participation Agreement, dated as of December 1,
1985, among TEP and San Carlos as Lessee, Philip Morris
Credit Corporation, IBM Credit Financing Corporation, and
Emerson Finance Co. as Owner Participants, Wilmington
Trust Company as Owner Trustee, The Sumitomo Bank,
Limited, New York Branch, as Loan Participant, and Bankers
Trust Company, as Indenture Trustee. (Form 10-K for the
year ended December 31, 1985, File No. 1-5924--Exhibit
10(f)(3).)
*10(b)(4)-- Restructuring Commitment Agreement, dated as of
June 30, 1992, among TEP and San Carlos, jointly and
severally, as Lessee, Philip Morris Credit Corporation,
IBM Credit Financing Corporation and Emerson Capital
Funding William J. Wade, as Owner Trustee and Co-Trustee,
respectively, The Sumitomo Bank, Limited, New York Branch,
as Loan Participant and United States Trust Company of New
York, as Indenture Trustee. (Form S-4, Registration No.
33-52860--Exhibit 10(g)(4).)
*10(b)(5)-- Lease Supplement No. 1, dated December 31, 1985, to
Lease Agreements, dated as of December 1, 1985, between
TEP and San Carlos, jointly and severally, as Lessee
Trustee and Co-Trustee, respectively (document filed
relates to Philip Morris Credit Corporation; documents
relating to IBM Credit Financing Corporation and Emerson
Financing Co. are not filed but are substantially
similar). (Form S-4, Registration No. 33-52860--Exhibit
10(g)(5).)
*10(b)(6)-- Amendment No. 1, dated as of December 15, 1992, to
Lease Agreements, dated as of December 1, 1985, between
TEP and San Carlos, jointly and severally, as Lessee, and
Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, as Lessor. (Form S-
1, Registration No. 33-55732--Exhibit 10(g)(6).)
*10(b)(7)-- Amendment No. 1, dated as of December 15, 1992, to
Tax Indemnity Agreements, dated as of December 1, 1985,
between Philip Morris Credit Corporation, IBM Credit
Financing Corporation and Emerson Capital Funding Corp.,
as Owner Participants and TEP and San Carlos, jointly and
severally, as Lessee. (Form S-1, Registration No. 33-
55732--Exhibit 10(g)(7).)
10(b)(8) -- Amendment No. 2, dated as of December 1, 1999, to
Lease Agreement, dated as of December 1, 1985, between TEP
and San Carlos, jointly and severally, as Lessee, and
Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, under a Trust
Agreement with Philip Morris Capital Corporation as Owner
Participant.
10(b)(9) -- Amendment No. 2, dated as of December 1, 1999, to
Lease Agreement, dated as of December 1, 1985, between TEP
and San Carlos, jointly and severally, as Lessee, and
Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, under a Trust
Agreement with IBM Credit Financing Corporation as Owner
Participant.
10(b)(10)-- Amendment No. 2, dated as of December 1, 1999, to
Lease Agreement, dated as of December 1, 1985, between TEP
and San Carlos, jointly and severally, as Lessee, and
Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, under a Trust
Agreement with Emerson Finance Co. as Owner Participant.
10(b)(11)-- Amendment No. 2, dated as of December 1, 1999, to Tax
Indemnity Agreement, dated as of December 1, 1985, between
TEP and San Carlos, jointly and severally, as Lessee, and
Philip Morris Capital Corporation as Owner Participant,
beneficiary under a Trust Agreement dated as of December
1, 1985, with Wilmington Trust Company and William J.
Wade, as Owner Trustee and Co-Trustee, respectively,
together as Lessor.
10(b)(12)-- Amendment No. 2, dated as of December 1, 1999, to Tax
Indemnity Agreement, dated as of December 1, 1985, between
TEP and San Carlos, jointly and severally, as Lessee, and
IBM Credit Financing Corporation as Owner Participant,
beneficiary under a Trust Agreement dated as of December
1, 1985, with Wilmington Trust Company and William J.
Wade, as Owner Trustee and Co-Trustee, respectively,
together as Lessor.
10(b)(13)-- Amendment No. 2, dated as of December 1, 1999, to Tax
Indemnity Agreement, dated as of December 1, 1985, between
TEP and San Carlos, jointly and severally, as Lessee, and
Emerson Finance Co. as Owner Participant, beneficiary
under a Trust Agreement dated as of December 1, 1985, with
Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, together as Lessor.
*10(c)(1)-- Amended and Restated Participation Agreement, dated
as of November 15, 1987, among TEP, as Lessee, Ford Motor
Credit Company, as Owner Participant, Financial Security
Assurance Inc., as Surety, Wilmington Trust Company and
William J. Wade in their respective individual capacities
as provided therein, but otherwise solely as Owner Trustee
and Co-Trustee under the Trust Agreement, and Morgan
Guaranty, in its individual capacity as provided therein,
but Secured Party. (Form 10-K for the year ended December
31, 1987, File No. 1-5924--Exhibit 10(j)(1).)
*10(c)(2)-- Lease Agreement, dated as of January 14, 1988,
between Wilmington Trust Company and William J. Wade, as
Owner Trust Agreement described therein, dated as of
November 15, 1987, between such parties and Ford Motor
Credit Company, as Lessor, and TEP, as Lessee. (Form 10-K
for the year ended December 31, 1987, File No. 1-5924--
Exhibit 10(j)(2).)
*10(c)(3)-- Tax Indemnity Agreement, dated as of January 14,
1988, between TEP, as Lessee, and Ford Motor Credit
Company, as Owner Participant, beneficiary under a Trust
Agreement, dated as of November 15, 1987, with Wilmington
Trust Company and William J. Wade, Owner Trustee and Co-
Trustee, respectively, together as Lessor. (Form 10-K for
the year ended December 31, 1987, File No. 1-5924--Exhibit
10(j)(3).)
*10(c)(4)-- Loan Agreement, dated as of January 14, 1988,
between the Pima County Authority and Wilmington Trust
Company and William J. Wade in their respective individual
capacities as expressly stated, but otherwise solely as
Owner Trustee and Co-Trustee, respectively, under and
pursuant to a Trust Agreement, dated as of November 15,
1987, with Ford Motor Credit Company as Trustor and Debtor
relating to Industrial Development Lease Obligation
Refunding Revenue Bonds, 1988 Series A (TEP's Irvington
Project). (Form 10-K for the year ended December 31, 1987,
File No. 1-5924--Exhibit 10(j)(4).)
*10(c)(5)-- Indenture of Trust, dated as of January 14, 1988,
between the Pima County Authority and Morgan Guaranty
authorizing Industrial Development Lease Obligation
Refunding Revenue Bonds, 1988 Series A (Tucson Electric
Power Company Irvington Project). (Form 10-K for the year
ended December 31, 1987, File No. 1-5924--Exhibit
10(j)(5).)
*10(c)(6)-- Lease Amendment No. 1, dated as of May 1, 1989,
between TEP, Wilmington Trust Company and William J. Wade
as Owner Trustee and Co-trustee, respectively under a
Trust Agreement dated as of November 15, 1987 with Ford
Motor Credit Company. (Form 10-K for the year ended
December 31, 1990, File No. 1-5924--Exhibit 10(i)(6).)
*10(c)(7)-- Lease Supplement, dated as of January 1, 1991,
between TEP, Wilmington Trust Company and William J. Wade
as Owner Trustee and Co-Trustee, respectively, under a
Trust Agreement dated as of November 15, 1987, with Ford.
(Form 10K for the year ended December 31, 1991, File No.
1-5924--Exhibit 10(i)(8).)
*10(c)(8)-- Lease Supplement, dated as of March 1, 1991,
between TEP, Wilmington Trust Company and William J. Wade
as Owner Trustee and Co-Trustee, respectively, under a
Trust Agreement dated as of November 15, 1987, with Ford.
(Form 10-K for the year ended December 31, 1991, File No.
1-5924--Exhibit 10(i)(9).)
*10(c)(9)-- Lease Supplement No. 4, dated as of December 1,
1991, between TEP, Wilmington Trust Company and William J.
Wade as Owner Trustee and Co-Trustee, respectively, under
a Trust Agreement dated as of November 15, 1987, with
Ford. (Form 10-K for the year ended December 31, 1991,
File No. 1-5924--Exhibit 10(i)(10).)
*10(c)(10)-- Supplemental Indenture No. 1, dated as of December
1, 1991, between the Pima County Authority and Morgan
Guaranty relating to Industrial Lease Development
Obligation Revenue Project). (Form 10-K for the year ended
December 31, 1991, File No. 1-5924--Exhibit 10(I)(11).)
*10(c)(11)-- Restructuring Commitment Agreement, dated as of
June 30, 1992, among TEP, as Lessee, Ford Motor Credit
Company, as Owner Participant, Wilmington Trust Company
and William J. Wade, as Owner Trustee and Co-Trustee,
respectively, and Morgan Guaranty, as Indenture Trustee
and Refunding Trustee, relating to the restructuring of
the Registrant's lease of Unit 4 at the Irvington
Generating Station. (Form S-4, Registration No. 33-52860--
Exhibit 10(i)(12).)
*10(c)(12)-- Amendment No. 1, dated as of December 15, 1992, to
Amended and Restated Participation Agreement, dated as of
November 15, 1987, among TEP, as Lessee, Ford Motor Credit
Company, as Owner Participant, Wilmington Trust Company
and William J. Wade, as Owner Trustee and Co-Trustee,
respectively, Financial Security Assurance Inc., as
Surety, and Morgan Guaranty, as Indenture Trustee. (Form
S-1, Registration No. 33-55732--Exhibit 10(h)(12).)
*10(c)(13)-- Amended and Restated Lease, dated as of December
15, 1992, between TEP, as Lessee and Wilmington Trust
Company and William J. Wade, as Owner Trustee and Co-
Trustee, respectively, as Lessor. (Form S-1, Registration
No. 33-55732--Exhibit 10(h)(13).)
*10(c)(14)-- Amended and Restated Tax Indemnity Agreement, dated
as of December 15, 1992, between TEP, as Lessee, and Ford
Motor Credit Company, as Owner Participant. (Form S-1,
Registration No. 33-55732--Exhibit 10(h)(14).)
*10(d) -- Power Sale Agreement for the years 1990 to 2011,
dated as of March 10, 1988, between TEP and Salt River
Project Agricultural Improvement and Power District. (Form
10-K for the year ended December 31, 1987, File No. 1-5924
--Exhibit 10(k).)
+*10(e)(1)-- Employment Agreements between TEP and currently in
effect with Ira R. Adler, Michael DeConcini, Thomas A.
Delawder, Steven J. Glaser, Thomas N. Hansen, Karen G.
Kissinger, Kevin P. Larson, Dennis R. Nelson, Catherine
A. Nichols, Vincent Nitido, James S. Pignatelli, James
Pyers and Romano Salvatori. (Form 10-K for the year ended
December 31, 1996, File No. 1-5924-Exhibit 10(g)(1).)
+*10(e)(2)-- Employment Agreement between TEP and Romano
Salvatori. (Form 10-K for the year ended December 31,
1996, File No. 1-5924-Exhibit 10(g)(2).)
*10(e)(3)-- Letter, dated February 25, 1992, from Dr. Martha R.
Seger to TEP and Capital Holding Corporation. (Form S-4,
Registration No. 33-52860--Exhibit 10(k)(4).)
+*10(e)(4)-- Amendment No. 1 to Employment Agreement among
Romano Salvatori, TEP and Nations Energy Corporation.
(Form 10-K for the year ended December 31, 1997, File Nos.
1-5924 and 1-13739-Exhibit 10(e)(4).)
+*10(e)(5)-- Amendment No. 1 to Amended and Restated Employment
Agreement between TEP and currently in effect with Ira R.
Adler, Michael DeConcini, Thomas A. Delawder, Steven J.
Glaser, Thomas N. Hansen, Karen G.Kissinger, Kevin P.
Larson, Dennis R. Nelson, Catherine A. Nichols, Vincent
Nitido, James S. Pignatelli, James Pyers and Romano
Salvatori. (Form 10-K for the year ended December 31,
1997, File Nos. 1-5924 and 1-13739-Exhibit 10(e)(5).).
*10(f) -- Power Sale Agreement, dated April 29, 1988, for the
dates of May 16, 1990 to December 31, 1995, between TEP
and Nevada Power Company. (Form 10-K for the year ended
December 31, 1988, File No 1-5924--Exhibit 10(m)(2).)
*10(g) -- Participation Agreement, dated as of June 30, 1992,
among TEP, as Lessee, various parties thereto, as Owner
Wilmington Trust Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively, and LaSalle National
Bank, as Indenture Trustee relating to TEP's lease of
Springerville Unit 1. (Form S-1, Registration No. 33-
55732--Exhibit 10(u).)
*10(h) -- Lease Agreement, dated as of December 15, 1992,
between TEP, as Lessee and Wilmington Trust Company and
William J. Wade, as Owner Trustee and Co-Trustee,
respectively, as Lessor. (Form S-1, Registration No. 33-
55732--Exhibit 10(v).)
*10(i) -- Tax Indemnity Agreements, dated as of December 15,
1992, between the various Owner Participants parties
thereto and TEP, as Lessee. (Form S-1, Registration No.
33-55732, Exhibit 10(w).)
*10(j) -- Restructuring Agreement, dated as of December 1,
1992, between TEP and Century Power Corporation. (Form S-
1, Registration No. 33-55732--Exhibit 10(x).)
*10(k) -- Voting Agreement, dated as of December 15, 1992,
between TEP and Chrysler Capital Corporation (documents
relating to CILCORP Lease Management, Inc., MWR Capital
Inc., US West Financial Services, Inc. and Philip Morris
Capital Corporation are not filed but are substantially
similar). (Form S-1, Registration No. 33-55732--Exhibit
10(y).)
*10(l)(1)-- Wholesale Power Supply Agreement between TEP and
Navajo Tribal Utility Authority dated January 5, 1993.
(Form 10-K for the year ended December 31, 1992, File No.
1-5924--Exhibit 10(t).)
*10(l)(2)-- Amended and Restated Wholesale Power Supply
Agreement between TEP and Navajo Tribal Utility Authority,
dated June 25, 1997. (Form 10-Q for the quarter ended
June 30, 1997, File No. 1-5924-Exhibit 10.)
*10(m) -- Credit Agreement dated as of December 30, 1997,
among TEP, Toronto Dominion (Texas), Inc., as
Administrative Agent, The Bank of New York, as Syndication
Agent, Societe Generale, as Documentation Agent, the
lenders party hereto, and the issuing banks party hereto.
(Form 10-K for year ended December 31, 1997, File No. 1-
5924-Exhibit 10(m).)
+*10(n) -- 1994 Omnibus Stock and Incentive Plan of UniSource
Energy. (Form S-8 dated January 6, 1998, File No. 333-
43767.)
+*10(o) -- 1994 Outside Director Stock Option Plan of
UniSource Energy. (Form S-8 dated January 6, 1998, File
No. 333-43765.)
+*10(p) -- Management and Directors Deferred Compensation Plan
of UniSource Energy. (Form S-8 dated January 6, 1998,
File No. 333-43769.)
+*10(q) -- TEP Supplemental Retirement Account for Classified
Employees. (Form S-8 dated May 21, 1998, File No. 333-
53309.)
+*10(r) -- TEP Triple Investment Plan for Salaried Employees.
(Form S-8 dated May 21, 1998, File No. 333-53333.)
+*10(s) -- UniSource Energy Management and Directors Deferred
Compensation Plan. (Form S-8 dated May 21, 1998, File No.
333-53337.)
11 -- Statement re computation of per share
earnings-UniSource Energy.
12 -- Computation of Ratio of Earnings to Fixed Charges--
TEP.
21 -- Subsidiaries of the Registrants.
23(a) -- Consents of experts (PricewaterhouseCoopers).
23(b) -- Consents of experts (Deloitte & Touche).
24(a) -- Power of Attorney-UniSource Energy.
24(b) -- Power of Attorney--TEP.
27(a) -- Financial Data Schedule-UniSource Energy.
27(b) -- Financial Data Schedule--TEP.
(*)Previously filed as indicated and incorporated herein by
reference.
(+)Management contracts or compensatory plans or arrangements
required to be filed as exhibits to this Form 10-K by item
601(b)(10)(iii) of Regulation S-K.
UNISOURCE ENERGY CORPORATION
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31,
1999 1998 1997
------ ------ ------
- Thousands of Dollars -
(except per share data)
Basic Earnings Per Share:
Numerator: Income Before
Extraordinary Item $56,510 $28,032 $83,572
Denominator:
Average Shares of Common Stock -
Outstanding 32,321 32,177 32,138
------ ------ -------
Basic Earnings Per Share Before
Extraordinary Item $ 1.75 $ 0.87 $ 2.60
====== ====== =======
Diluted Earnings Per Share:
Numerator: Income Before
Extraordinary Item $56,510 $28,032 $83,572
Denominator:
Average Shares of Common Stock -
Outstanding 32,321 32,177 32,138
Effect of Dilutive Securities:
Warrants - 79 53
Options and Stock Issuable under
Employee Benefit Plans 257 90 87
------ ------ -------
Total Shares 32,578 32,346 32,278
------ ------ -------
Diluted Earnings Per Share Before
Extraordinary Item $ 1.74 $ 0.87 $ 2.59
====== ====== =======
Options to purchase 1,115,000 shares of common stock at $12.28
to $18.13 per share were outstanding at the end of the year 1999
but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price
of the common shares.
4.6 million of the 6.1 million warrants outstanding are
exercisable into TEP common stock. See Note 12. However, the
dilutive effect is the same as it would be if the warrants were
exercisable into UniSource Energy Common Stock.
Exhibit 12
TUCSON ELECTRIC POWER COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
12 Months Ended
----------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest on Long-Term Debt (1) $66,836 $72,672 $66,247 $59,836 $69,174
Other Interest (2) $13,081 $13,207 $9,640 $11,721 $9,113
Interest on Capital Lease Obligations (3) $82,414 $81,823 $83,019 $84,383 $83,986
-----------------------------------------------------
TOTAL FIXED CHARGES $162,331 $167,702 $158,906 $155,940 $162,273
NET INCOME $73,475 $41,676 $83,572 $120,852 $54,905
LESS:
Extraordinary Income - Net of Tax $22,597 $0 $0 $0 $0
----------------------------------------------------
NET INCOME FROM CONTINUING OPERATIONS $50,878 $41,676 $83,572 $120,852 $54,905
ADD (DEDUCT):
Income Taxes - Operating Expense $18,268 $18,372 $19,297 $9,795 $8,920
Income Taxes - Other $4,082 ($794) ($41,401) ($91,950) ($29,356)
Total Fixed Charges $162,331 $167,702 $158,906 $155,940 $162,273
-----------------------------------------------------
TOTAL EARNINGS BEFORE TAXES
AND FIXED CHARGES $235,559 $226,956 $220,374 $194,637 $196,742
RATIO OF EARNINGS TO FIXED CHARGES 1.451 1.353 1.387 1.248 1.212
(1) Amounts have been restated for years ended 1996 and 1997 to conform to current year's
presentation.
(2) Excludes recognition of Allowance for Borrowed Funds Used during Construction.
(3) Capital Lease Interest Paid from Statement of Cash Flows.
</TABLE>
Exhibit 21
UniSource Energy Corporation Subsidiaries
State or Other Jurisdiction
Subsidiary of Incorporation or Organization
---------- --------------------------------
Tucson Electric Power Company (TEP) Arizona
Subsidiaries of TEP
-------------------
Escavada Company Arizona
Sabino Investing Inc. Delaware
San Carlos Resources Inc. Arizona
Santa Cruz Resources Inc. Delaware
Sierrita Resources Inc. Delaware
Tucson Resources Inc. Delaware
Tucsonel Inc. Arizona
Millennium Energy Holdings, Inc. Arizona
Subsidiaries of Millennium Energy Holdings, Inc.
---------------------------------------------------
Advanced Energy Technologies, Inc. Arizona
Biomasa Generacion, S. de R.L. de C.V. Honduras
COPESA Panama
Global Solar Energy, L.L.C. Arizona
Global Solar Energy International Holdings Cayman Islands
Global Solar Energy Technologies Mauritius
MEH Corporation Arizona
Nations BioGen Ltd. Cayman Islands
Nations Curacao Ltd. Cayman Islands
Nations Curacao Operating Ltd. Caymen Islands
Nations ECK, L.L.C. Delaware
Nations Energy - Chalmette, LLC Delaware
Nations Energy Corporation Arizona
Nations Energy Holland Holding B.V. Netherlands
Nations International Ltd. Cayman Islands
Nations Kladno B.V. Netherlands
Nations Kladno II B.V. Netherlands
Nations-Colorado Energy Corporation Delaware
Nations Panama Energy Corporation Panama
Productos de Concreto Internacionales,
S. de R.L. de C.V. Mexico
Sentinel Concrete Utility Poles, L.L.C. Arizona
Southwest Energy Solutions, Inc. Arizona
Suministradora de Materiales Organicos,
S.R.L. de C.V. Honduras
SWPP International Ltd. Cayman Islands
SWPP Investment Company Arizona
Exhibit 23(a)
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
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) of UniSource Energy Corporation of our
report dated February 2, 2000 relating to the financial
statements, which appears in this Form 10-K. We also consent
to the incorporation by reference in Amendment No. 2 to the
Registration Statement on Form S-4 (No. 333-65143) of Tucson
Electric Power Company of our report dated February 2, 2000
relating to the financial statements, which appears in this
Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 3, 2000
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective
Amendment No. 1 to Registration Statement No. 33-55732 of Tucson
Electric Power Company (TEP) on Form S-3, Registration Statements
No. 333-31043 and No. 333-93769 of UniSource Energy Corporation
(the Company) on Form S-3, Registration Statement No. 333-60809
of the Company on Form S-4, Amendment No. 2 to Registration
Statement No. 333-65143 of TEP on Form S-4, and Registration
Statements No. 333-43765, No. 333-43767, No. 333-43769, No. 333-
53309, No. 333-53333 and No. 333-53337 of the Company on Form S-8
of our report dated February 23, 1998 (March 11, 1999 as to
information with respect to 1997 in Note 3 and in Note 11),
appearing in this Annual Report on Form 10-K of the Company and
TEP for the year ended December 31, 1999.
DELOITTE & TOUCHE
Phoenix, Arizona
March 3, 2000
EXHIBIT 24(a)
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the
undersigned Principal Executive Officer, Principal
Financial Officer, Principal Accounting Officer,
officers and/or directors of UniSource Energy
Corporation, an Arizona corporation, which corporation
proposes to file with the Securities and Exchange
Commission an Annual Report on Form 10-K for the year
ended December 31, 1999, under the Securities Exchange Act
of 1934, as amended, does each for himself and not for
one another, hereby constitute and appoint Ira R. Adler,
Dennis R. Nelson and Karen G. Kissinger and each of them,
his true and lawful attorneys, in his name, place and
stead, to sign his name to said proposed Annual Report
on Form 10-K and any and all amendments thereto, and to
cause the same to be filed with the Securities and
Exchange Commission, it being intended to grant and
hereby granting to said attorneys, and each of them, full
power and authority to do and perform any act and thing
necessary and proper to be done in the premises as fully
and to all intents and purposes as the undersigned could do
if personally present; and each of the undersigned for
himself hereby ratifies and confirms all that said
attorneys, or any one of them, shall lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has
hereunto set their hand as of the ____ day of March, 2000.
/s/ James S. Pignatelli /s/ Larry W. Bickle
- ---------------------------- -----------------------------
James S. Pignatelli Larry W. Bickle, Director
Principal Executive Officer
and Chairman of the Board of
Directors
/s/ Ira R. Adler /s/ Elizabeth T.Bilby
- ---------------------------- -----------------------------
Ira R. Adler Elizabeth T. Bilby, Director
Principal Financial Officer
and Director
/s/ Karen G. Kissinger /s/ Harold W.Burlingame
- ---------------------------- -----------------------------
Karen G. Kissinger Harold W.Burlingame, Director
Principal Accounting Officer
/s/ Jose L. Canchola
-----------------------------
Jose L. Canchola,Director
/s/ John L. Carter
-----------------------------
John L. Carter, Director
/s/ Daniel W. Fessler
-----------------------------
Daniel W. Fessler, Director
/s/ John A. Jeter
-----------------------------
John A. Jeter, Director
/s/ R. B. O'Rielly
-----------------------------
R. B. O'Rielly, Director
/s/ Martha R. Seger
-----------------------------
Martha R. Seger, Director
/s/ H. Wilson Sundt
-----------------------------
H. Wilson Sundt, Director
EXHIBIT 24(b)
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the
undersigned Principal Executive Officer, Principal
Financial Officer, Principal Accounting Officer, officers
and/or directors of Tucson Electric Power Company, an
Arizona corporation, which corporation proposes to file
with the Securities and Exchange Commission an Annual
Report on Form 10-K for the year ended December 31, 1999,
under the Securities Exchange Act of 1934, as amended, does
each for himself and not for one another, hereby
constitute and appoint Ira R. Adler, Dennis R. Nelson and
Karen G. Kissinger and each of them, his true and lawful
attorneys, in his name, place and stead, to sign his name
to said proposed Annual Report on Form 10-K and any and
all amendments thereto, and to cause the same to be filed
with the Securities and Exchange Commission, it being
intended to grant and hereby granting to said attorneys,
and each of them, full power and authority to do and
perform any act and thing necessary and proper to be done in
the premises as fully and to all intents and purposes as
the undersigned could do if personally present; and each of
the undersigned for himself hereby ratifies and confirms
all that said attorneys, or any one of them, shall lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has
hereunto set their hand as of the ____ day of March, 2000.
/s/ James S. Pignatelli /s/ Elizabeth T.Bilby
- ---------------------------- -----------------------------
James S. Pignatelli Elizabeth T. Bilby, Director
Principal Executive Officer
and Chairman of the Board of
Directors
/s/ Ira R. Adler /s/ Harold W. Burlingame
- ---------------------------- -----------------------------
Ira R. Adler Harold W.Burlingame, Director
Principal Financial Officer
and Director
/s/ Karen G. Kissinger /s/ John L. Carter
- ---------------------------- -----------------------------
Karen G. Kissinger John L. Carter, Director
Principal Accounting Officer
/s/ Daniel W. Fessler
-----------------------------
Daniel W. Fessler, Director
/s/ John A. Jeter
-----------------------------
John A. Jeter, Director
/s/ Martha R. Seger
-----------------------------
Martha R. Seger, Director
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM UNISOURCE ENERGY FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,729,856
<OTHER-PROPERTY-AND-INVEST> 114,483
<TOTAL-CURRENT-ASSETS> 333,138
<TOTAL-DEFERRED-CHARGES> 478,778
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,656,255
<COMMON> 641,723
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (317,475)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 324,248
0
0
<LONG-TERM-DEBT-NET> 1,135,820
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 48,603
0
<CAPITAL-LEASE-OBLIGATIONS> 880,427
<LEASES-CURRENT> 36,335
<OTHER-ITEMS-CAPITAL-AND-LIAB> 230,822
<TOT-CAPITALIZATION-AND-LIAB> 2,656,255
<GROSS-OPERATING-REVENUE> 803,812
<INCOME-TAX-EXPENSE> 18,268
<OTHER-OPERATING-EXPENSES> 628,099
<TOTAL-OPERATING-EXPENSES> 646,367
<OPERATING-INCOME-LOSS> 157,445
<OTHER-INCOME-NET> 22,295
<INCOME-BEFORE-INTEREST-EXPEN> 179,740
<TOTAL-INTEREST-EXPENSE> 123,230
<NET-INCOME> 79,107
0
<EARNINGS-AVAILABLE-FOR-COMM> 79,107
<COMMON-STOCK-DIVIDENDS> 2,588
<TOTAL-INTEREST-ON-BONDS> 66,836
<CASH-FLOW-OPERATIONS> 113,228
<EPS-BASIC> 2.45
<EPS-DILUTED> 2.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM TUCSON ELECTRIC POWER FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,729,856
<OTHER-PROPERTY-AND-INVEST> 67,838
<TOTAL-CURRENT-ASSETS> 253,904
<TOTAL-DEFERRED-CHARGES> 478,778
<OTHER-ASSETS> 70,132
<TOTAL-ASSETS> 2,600,508
<COMMON> 641,009
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (370,875)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 270,134
0
0
<LONG-TERM-DEBT-NET> 1,135,820
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 48,603
0
<CAPITAL-LEASE-OBLIGATIONS> 880,111
<LEASES-CURRENT> 36,263
<OTHER-ITEMS-CAPITAL-AND-LIAB> 229,577
<TOT-CAPITALIZATION-AND-LIAB> 2,600,508
<GROSS-OPERATING-REVENUE> 804,083
<INCOME-TAX-EXPENSE> 18,268
<OTHER-OPERATING-EXPENSES> 628,099
<TOTAL-OPERATING-EXPENSES> 646,367
<OPERATING-INCOME-LOSS> 157,716
<OTHER-INCOME-NET> 16,392
<INCOME-BEFORE-INTEREST-EXPEN> 174,108
<TOTAL-INTEREST-EXPENSE> 123,230
<NET-INCOME> 73,475
0
<EARNINGS-AVAILABLE-FOR-COMM> 73,475
<COMMON-STOCK-DIVIDENDS> 34,000
<TOTAL-INTEREST-ON-BONDS> 66,836
<CASH-FLOW-OPERATIONS> 139,957
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
Exhibit 10(b)(8)
AMENDMENT NO. 2
to
LEASE AGREEMENT
This AMENDMENT NO. 2, dated as of December 1, 1999, to Lease
Agreement, dated as of December 1, 1985, between TUCSON ELECTRIC
POWER COMPANY, an Arizona corporation ("TEP"), and SAN CARLOS
RESOURCES INC., an Arizona corporation ("San Carlos"), jointly
and severally as Lessee (such term and all other capitalized
terms used herein without definition having the meanings provided
in Section 1 hereof), and WILMINGTON TRUST COMPANY, a Delaware
corporation, and WILLIAM J. WADE (not in their respective
individual capacities but solely as Owner Trustee and Cotrustee,
respectively, under the Trust Agreement between such parties and
Philip Morris Capital Corporation, as Owner Participant), as
Lessor (this "Lease Amendment"),
W I T N E S S E T H
WHEREAS, the Lessee and the Lessor have heretofore entered
into a Lease Agreement, dated as of December 1, 1985, as duly
recorded in the office of the County Recorder of Apache County,
Arizona on January 8, 1986, in Docket 499 at Pages 50-184, as
supplemented by a Lease Supplement dated December 31, 1985, as
duly recorded in the aforesaid office in Docket 499 at Pages 453-
470, as amended by Amendment No. 1 to Lease Agreement, dated as
of December 15, 1992, duly recorded in the aforesaid office in
Docket 700 at Pages 318-344, providing for the lease by the
Lessor to the Lessee of the Leased Assets (such Lease Agreement,
as so supplemented and amended and as further amended, modified
or supplemented from time to time in accordance with the
provisions thereof, being hereinafter referred to as the
"Lease"),
WHEREAS, the Lessee and the Lessor have agreed pursuant to a
Refunding Agreement, dated as of December 1, 1999 (as amended,
modified or supplemented from time to time in accordance with the
provisions thereof, the "Refunding Agreement"), with the Owner
Participant, the Loan Participants named therein, the Indenture
Trustee and certain other parties to participate in refinancing
the outstanding Secured Notes on the Refunding Date (as defined
in the Refunding Agreement),
WHEREAS, the Lessee and Lessor have agreed to amend the
Lease as contemplated herein so as to effectuate such
refinancing,
WHEREAS, Section 31(b) of the Lease provides, among other
things, that until the Lessee has received notice from the
Indenture Trustee that the Lien of the Indenture on the Trust
Indenture Estate has been released, no term of the Lease shall be
amended without the consent of the Indenture Trustee, and
WHEREAS, pursuant to Section 15.1 of the Indenture, the
Indenture Trustee has, at the direction and with the consent of
each holder of a Secured Note, consented, by executing and
delivering the Refunding Agreement, to the amendments to the
Lease set forth in this Lease Amendment,
NOW THEREFORE, in consideration of the premises and of such
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Definitions.
(a) General Definitions. Except as otherwise expressly
provided herein or unless the context otherwise requires,
capitalized terms used herein shall have the meanings set forth
in Section 1 of the Lease.
(b) Amended Definitions.
(i) The following definitions in Section 1 of the Lease
are hereby amended in their entirety to read as follows:
"Fair Market Rental Value" shall mean
the fair market rental value which would
be obtained in an arm's-length
transaction between an informed and
willing lessee and an informed and
willing lessor, in each case under no
compulsion to lease, for the Leased
Assets in place on the Site, on the
terms set forth, or referred to, in
Section 18 for a Renewal Period,
assuming, in the determination of such
fair market rental value, that (i) such
lessee has all rights of Lessee and such
lessor has all rights of Lessor under
the Operative Documents to use the
premises on which the Leased Assets are
situated for the then remaining term of
the Easement Assignment Agreements, and
(ii) the Leased Assets are in the
condition and repair required to be
maintained by the terms of this Lease
(unless such fair market rental value is
being determined for the purposes of
Section 16(d), in which case the
assumption described in this clause (ii)
shall not be made).
"Fair Market Sales Value" shall mean the
fair market sales value which would be
obtained in an arms's-length transaction
between an informed and willing buyer
and an informed and willing seller, in
each case under no compulsion,
respectively, to buy or sell, calculated
on the basis of the value for the use of
the Leased Assets in place on the Site,
assuming, in the determination of such
fair market sales value, that (i) such
buyer has all rights and obligations of
Lessor under the Operative Documents to
which it is a party, including the right
to use the premises on which the Leased
Assets are situated for the then
remaining term of the Easement
Assignment Agreements, (ii) upon the
expiration of the Easement Assignment
Agreements, the owner will be paid only
Net Scrap Value for the Leased Assets,
and (iii) the Leased Assets are in the
condition and repair required to be
maintained by the terms of this Lease
and the Facilities Agreement (unless
such fair market sales value is being
determined for the purposes of Section
16(d) in which case the assumption
described in this clause (iii) shall not
be made).
"Loan Participant" shall mean
collectively, the holders of the Secured
Notes and individually, any holder of a
Secured Note.
(ii) Clause (xix) of the definition of "Permitted
Encumbrance" in Annex 2 of the Lease is hereby amended in its
entirety to read as follows:
(xix) with respect to the Site (and, in
the case of clause (C), the Easements
and the Ancillary Rights), the Liens
created by (A) the Indenture, dated as
of April 1, 1941, of the Tucson Gas,
Electric Light and Power Company
(predecessor of TEP) to The Chase
Manhattan Bank of the City of New York
(predecessor of The Chase Manhattan Bank
(National Association)), trustee, (B)
the Indenture of Mortgage and Deed of
Trust, dated as of December 1, 1992, of
TEP to Bank of Montreal Trust Company,
trustee, so long as, in the case of this
clause (B), such indenture provides that
such Lien on TEP's leasehold interests
shall not result in the trustee having
any greater rights with respect to such
leasehold interests than TEP and (C) the
Deed of Trust, Assignment of Rents and
Leases and Security Agreement, dated as
of December 1, 1992, from San Carlos to
Transamerica Title Insurance Company,
trustee, for the use and benefits of
Barclays Bank PLC, New York Branch, as
collateral agent and beneficiary, so
long as, in the case of this clause (C),
such Deed of Trust at all times contains
the following language without
qualification "Notwithstanding any
provision of this Deed of Trust, the
Lien of this Deed of Trust shall not
result in the Trustee having any greater
rights than the Trustor in and to the
Trust Property".
(c) Additional Definition. Section 1 of the Lease is hereby
amended by adding the following definitions thereto:
"Administrative Agent" shall mean Union Bank of
California, N.A, in its capacity as Administrative Agent for the
Loan Participants.
"Alternate Base Rate" shall have the meaning specified
in the Indenture.
"Series 3 Notes" shall have the meaning specified in
the Indenture.
(d) Deleted Definitions. The definition of Series 1 Notes,
Series 2 Notes and Subparticipation Amount in Section 1 of the
Lease are hereby deleted in their entirety.
(e) Special Event of Loss. Clause (iii) of the definition of
"Special Event of Loss" in Section 1 of the Lease is hereby
amended in its entirety to read as follows:
(iii) (a) any of the Series 3 Notes are
outstanding after July 1, 2003 unless
subclause (b) of this clause (iii) shall
apply, or (b) upon any date occurring
prior to July 1, 2003 which shall have
been agreed to by the Lessee and the
Owner Participant; or
(f) Stipulated Interest Rate. Clause (b) of the definition
of "Stipulated Interest Rate" in Section 1 of the Lease is hereby
amended in its entirety to read as follows:
(b) in the case of any payment or the
portion of any payment to paid to the
Indenture Trustee or Loan Participant,
two percent over the Alternate Base
Rate.
Section 2. Insurance. Section 8(c) of the Lease is hereby
amended to delete each reference therein to the Loan Participant
and to substitute the words "Administrative Agent" in lieu
thereof.
Section 3. Sublease. Clause (ii)(B)(1) of the proviso to
Section 13(a) of the Lease is hereby amended to delete the words
"Series 1 Notes or Series 2 Notes" and to substitute the words
"Series 3 Notes" in lieu thereof.
Section 4. Counterpart Execution. This Lease Amendment may
be executed by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an
original, but all such counterparts shall together constitute but
one and the same instrument. The single executed original of
this Lease Amendment which provides that it is the "original
counterpart" and which contains the receipt therefor executed by
the Indenture Trustee on or immediately following the signature
page thereof shall evidence the monetary obligations of the
Lessee hereunder and thereunder. To the extent, if any, that
this Lease Amendment constitutes chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction), no security interest in this Lease
Amendment may be created by the transfer or possession of any
counterpart thereof other than the original counterpart and
containing the receipt therefor executed by the Indenture Trustee
on or immediately following the signature page thereof.
Section 5. Ratification of the Lease. This Lease Amendment
is an amendment to the Lease. As amended by this Lease
Amendment, the Lease is in all respects ratified, approved and
confirmed, and the Lease and this Lease Amendment shall together
constitute one and the same instrument.
Section 6. Governing Law. This Lease Amendment has been
delivered in, and shall in all respects be governed by and
construed in accordance with, the laws of the State of Arizona
applicable to agreements made and to be performed entirely within
such state, including matters of construction, validity and
performance.
Section 7. Liabilities of Owner Participant. Sections 23
and 31 of the Lease are hereby incorporated by reference mutatis
mutandis in this Lease Amendment.
IN WITNESS WHEREOF, the undersigned Lessee and Lessor have
each caused this Lease Amendment to be duly executed and
delivered and their corporate seals to be hereunto affixed and
attested by their respective officers thereunto duly authorized
as of the day and year first above written.
TUCSON ELECTRIC POWER COMPANY,
as Lessee
By: /s/ Kevin Larson
------------------------------
Name:
Title:
[seal]
Attest:
/s/ Linda Kennedy
- ------------------------
Assistant Secretary
SAN CARLOS RESOURCES INC.
as Lessee
By: /s/ Karen G. Kissinger
------------------------------
Name:
Title:
[seal]
Attest:
/s/ Vincent Nitido
- ------------------------
Assistant Secretary
WILMINGTON TRUST COMPANY,
not in its individual capacity
but solely as Owner Trustee
under the Trust Agreement, as
Lessor
By: /s/ C. Paglia
------------------------------
Name: Charlotte Paglia
Title: Financial Services Officer
[seal]
Attest:
/s/ D. Geran
- ------------------------
Assistant Secretary
/s/ William J. Wade
---------------------------------
WILLIAM J. WADE,
not in his individual capacity
but solely as Cotrustee under
the Trust Agreement, as Lessor
Witness:
Wendy R. Marthrope
- ------------------------
Receipt of this original counterpart of the foregoing
Amendment No. 2 to Lease Agreement is hereby acknowledged on this
____ day of December, 1999.
UNITED STATES TRUST COMPANY OF NEW YORK,
as Indenture Trustee
By:
-----------------------------------
Name:
Title:
ACKNOWLEDGEMENTS TO LEASE AMENDMENT
STATE OF ARIZONA )
) ss.:
COUNTY OF PIMA )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Kevin Larson, Vice President
and Treasurer of TUCSON ELECTRIC POWER COMPANY, an Arizona
corporation, on behalf of said corporation.
/s/ Janice Spencer
--------------------------
Notary Public
My Commission Expires:
August 8, 2003
- ------------------------
STATE OF ARIZONA )
) ss.:
COUNTY OF PIMA )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Karen G. Kissinger, Vice
President and Controller of SAN CARLOS RESOURCES INC., an
Arizona corporation, on behalf of said corporation.
/s/ Janice Spencer
-----------------------------
Notary Public
My Commission Expires:
August 8, 2003
- ------------------------
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Charlotte Paglia, Financial
Services Officer of WILMINGTON TRUST COMPANY, a Delaware
banking corporation, on behalf of said corporation.
/s/ Lisa M. Harrison
-----------------------------
Notary Public
My Commission Expires:
September 1, 2000
- ------------------------
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by WILLIAM J. WADE, an individual.
/s/ Lisa M. Harrison
-----------------------------
Notary Public
My Commission Expires:
September 1, 2000
- ------------------------
Exhibit 10(b)(9)
AMENDMENT NO. 2
to
LEASE AGREEMENT
This AMENDMENT NO. 2, dated as of December 1, 1999, to Lease
Agreement, dated as of December 1, 1985, between TUCSON ELECTRIC
POWER COMPANY, an Arizona corporation ("TEP"), and SAN CARLOS
RESOURCES INC., an Arizona corporation ("San Carlos"), jointly
and severally as Lessee (such term and all other capitalized
terms used herein without definition having the meanings provided
in Section 1 hereof), and WILMINGTON TRUST COMPANY, a Delaware
corporation, and WILLIAM J. WADE (not in their respective
individual capacities but solely as Owner Trustee and Cotrustee,
respectively, under the Trust Agreement between such parties and
IBM Credit Financing Corporation, as Owner Participant), as
Lessor (this "Lease Amendment"),
W I T N E S S E T H
WHEREAS, the Lessee and the Lessor have heretofore entered
into a Lease Agreement, dated as of December 1, 1985, as duly
recorded in the office of the County Recorder of Apache County,
Arizona on January 8, 1986, in Docket 499 at Pages 185-318, as
supplemented by a Lease Supplement dated December 31, 1985, as
duly recorded in the aforesaid office in Docket 499 at Pages 471-
488, as amended by Amendment No. 1 to Lease Agreement, dated as
of December 15, 1992, duly recorded in the aforesaid office in
Docket 700 at Pages 345-371, providing for the lease by the
Lessor to the Lessee of the Leased Assets (such Lease Agreement,
as so supplemented and amended and as further amended, modified
or supplemented from time to time in accordance with the
provisions thereof, being hereinafter referred to as the
"Lease"),
WHEREAS, the Lessee and the Lessor have agreed pursuant to a
Refunding Agreement, dated as of December 1, 1999 (as amended,
modified or supplemented from time to time in accordance with the
provisions thereof, the "Refunding Agreement"), with the Owner
Participant, the Loan Participants named therein, the Indenture
Trustee and certain other parties to participate in refinancing
the outstanding Secured Notes on the Refunding Date (as defined
in the Refunding Agreement),
WHEREAS, the Lessee and Lessor have agreed to amend the
Lease as contemplated herein so as to effectuate such
refinancing,
WHEREAS, Section 31(b) of the Lease provides, among other
things, that until the Lessee has received notice from the
Indenture Trustee that the Lien of the Indenture on the Trust
Indenture Estate has been released, no term of the Lease shall
be amended without the consent of the Indenture Trustee, and
WHEREAS, pursuant to Section 15.1 of the Indenture, the
Indenture Trustee has, at the direction and with the consent of
each holder of a Secured Note, consented, by executing and
delivering the Refunding Agreement, to the amendments to the
Lease set forth in this Lease Amendment,
NOW THEREFORE, in consideration of the premises and of such
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Definitions.
(a) General Definitions. Except as otherwise expressly
provided herein or unless the context otherwise requires,
capitalized terms used herein shall have the meanings set forth
in Section 1 of the Lease.
(b) Amended Definitions. The following definition in
Section 1 of the Lease is hereby amended in its entirety to read
as follows:
"Loan Participant" shall mean collectively, the holders
of the Secured Notes and individually, any holder of a Secured
Note.
(c) Additional Definition. Section 1 of the Lease is hereby
amended by adding the following definitions thereto:
"Administrative Agent" shall mean Union Bank of
California, N.A, in its capacity as Administrative Agent for the
Loan Participants.
"Alternate Base Rate" shall have the meaning specified
in the Indenture.
"Series 3 Notes" shall have the meaning specified in
the Indenture.
(d) Deleted Definitions. The definition of Series 1 Notes,
Series 2 Notes and Subparticipation Amount in Section 1 of the
Lease are hereby deleted in their entirety.
(e) Special Event of Loss. Clause (iii) of the definition
of "Special Event of Loss" in Section 1 of the Lease is hereby
amended in its entirety to read as follows:
(iii) (a) any of the Series 3 Notes are
outstanding after June 30, 2003 unless
subclause (b) of this clause (iii) shall
apply, or (b) upon any date occurring
prior to June 30, 2003 which shall have
been agreed to by the Lessee and the
Owner Participant; or
(f) Stipulated Interest Rate. Clause (b) of the definition
of "Stipulated Interest Rate" in Section 1 of the Lease is hereby
amended in its entirety to read as follows:
(b) in the case of any payment or the
portion of any payment to paid to the
Indenture Trustee or Loan Participant,
two percent over the Alternate Base
Rate.
Section 2. Insurance. Section 8(c) of the Lease is hereby
amended to delete each reference therein to the Loan Participant
and to substitute the words "Administrative Agent" in lieu
thereof.
Section 3. Sublease. Clause (ii)(B)(1) of the proviso to
Section 13(a) of the Lease is hereby amended to delete the words
"Series 1 Notes or Series 2 Notes" and to substitute the words
"Series 3 Notes" in lieu thereof.
Section 4. Counterpart Execution. This Lease Amendment may
be executed by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an
original, but all such counterparts shall together constitute but
one and the same instrument. The single executed original of
this Lease Amendment which provides that it is the "original
counterpart" and which contains the receipt therefor executed by
the Indenture Trustee on or immediately following the signature
page thereof shall evidence the monetary obligations of the
Lessee hereunder and thereunder. To the extent, if any, that
this Lease Amendment constitutes chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction), no security interest in this Lease
Amendment may be created by the transfer or possession of any
counterpart thereof other than the original counterpart and
containing the receipt therefor executed by the Indenture Trustee
on or immediately following the signature page thereof.
Section 5. Ratification of the Lease. This Lease Amendment
is an amendment to the Lease. As amended by this Lease
Amendment, the Lease is in all respects ratified, approved and
confirmed, and the Lease and this Lease Amendment shall together
constitute one and the same instrument.
Section 6. Governing Law. This Lease Amendment has been
delivered in, and shall in all respects be governed by and
construed in accordance with, the laws of the State of Arizona
applicable to agreements made and to be performed entirely within
such state, including matters of construction, validity and
performance.
Section 7. Liabilities of Owner Participant. Sections 23
and 31 of the Lease are hereby incorporated by reference mutatis
mutandis in this Lease Amendment.
IN WITNESS WHEREOF, the undersigned Lessee and Lessor have
each caused this Lease Amendment to be duly executed and
delivered and their corporate seals to be hereunto affixed and
attested by their respective officers thereunto duly authorized
as of the day and year first above written.
TUCSON ELECTRIC POWER COMPANY,
as Lessee
By: /s/ Kevin Larson
------------------------------
Name:
Title:
[seal]
Attest:
/s/ Linda Kennedy
- ------------------------
Assistant Secretary
SAN CARLOS RESOURCES INC.
as Lessee
By: /s/ Karen G. Kissinger
------------------------------
Name:
Title:
[seal]
Attest:
/s/ Vincent Nitido
- ------------------------
Assistant Secretary
WILMINGTON TRUST COMPANY,
not in its individual capacity
but solely as Owner Trustee
under the Trust Agreement, as
Lessor
By: /s/ C. Paglia
------------------------------
Name: Charlotte Paglia
Title: Financial Services Officer
[seal]
Attest:
/s/ D. Geran
- ------------------------
Assistant Secretary
/s/ William J. Wade
---------------------------------
WILLIAM J. WADE,
not in his individual capacity
but solely as Cotrustee under
the Trust Agreement, as Lessor
Witness:
/s/ Wendy R. Marthorpe
- ------------------------
Receipt of this original counterpart of the foregoing
Amendment No. 2 to Lease Agreement is hereby acknowledged on this
____ day of December, 1999.
UNITED STATES TRUST COMPANY OF NEW YORK,
as Indenture Trustee
By:
----------------------------------
Name:
Title:
ACKNOWLEDGEMENTS TO LEASE AMENDMENT
STATE OF ARIZONA )
) ss.:
COUNTY OF PIMA )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Kevin Larson, Vice President and
Treasurer of TUCSON ELECTRIC POWER COMPANY, an Arizona
corporation, on behalf of said corporation.
/s/ Janice Spencer
-----------------------------
Notary Public
My Commission Expires:
August 8, 2003
- ----------------------
STATE OF ARIZONA )
) ss.:
COUNTY OF PIMA )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Karen G. Kissinger, Vice
President and Controller of SAN CARLOS RESOURCES INC., an
Arizona corporation, on behalf of said corporation.
/s/ Janice Spencer
-----------------------------
Notary Public
My Commission Expires:
August 8, 2003
- ----------------------
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Charlotte Paglia, Financial
Services Officer of WILMINGTON TRUST COMPANY, a Delaware
banking corporation, on behalf of said corporation.
/s/ Sheri M. Robinson
-----------------------------
Notary Public
My Commission Expires:
October 9, 2000
- ----------------------
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by WILLIAM J. WADE, an individual.
/s/ Sheri M. Robinson
-----------------------------
Notary Public
My Commission Expires:
October 9, 2000
- ----------------------
Exhibit 10(b)(10)
AMENDMENT NO. 2
to
LEASE AGREEMENT
This AMENDMENT NO. 2, dated as of December 1, 1999,to Lease
Agreement, dated as of December 1, 1985, between TUCSON ELECTRIC
POWER COMPANY, an Arizona corporation ("TEP"), and SAN CARLOS
RESOURCES INC., an Arizona corporation ("San Carlos"), jointly
and severally as Lessee (such term and all other capitalized
terms used herein without definition having the meanings provided
in Section 1 hereof), and WILMINGTON TRUST COMPANY, a Delaware
corporation, and WILLIAM J. WADE (not in their respective
individual capacities but solely as Owner Trustee and Cotrustee,
respectively, under the Trust Agreement between such parties and
Emerson Finance Co., as Owner Participant), as Lessor (this
"Lease Amendment"),
W I T N E S S E T H
WHEREAS, the Lessee and the Lessor have heretofore entered
into a Lease Agreement, dated as of December 1, 1985, as duly
recorded in the office of the County Recorder of Apache County,
Arizona on January 8, 1986, in Docket 499 at Pages 319-452, as
supplemented by a Lease Supplement dated December 31, 1985, as
duly recorded in the aforesaid office in Docket 499 at Pages 489-
506, as amended by Amendment No. 1 to Lease Agreement, dated as
of December 15, 1992, duly recorded in the aforesaid office in
Docket 700 at Pages 372-398, providing for the lease by the
Lessor to the Lessee of the Leased Assets (such Lease Agreement,
as so supplemented and amended and as further amended, modified
or supplemented from time to time in accordance with the
provisions thereof, being hereinafter referred to as the
"Lease"),
WHEREAS,the Lessee and the Lessor have agreed pursuant to a
Refunding Agreement, dated as of December 1, 1999 (as amended,
modified or supplemented from time to time in accordance with the
provisions thereof, the "Refunding Agreement"), with the Owner
Participant, the Loan Participants named therein, the Indenture
Trustee and certain other parties to participate in refinancing
the outstanding Secured Notes on the Refunding Date (as defined
in the Refunding Agreement),
WHEREAS, the Lessee and Lessor have agreed to amend the
Lease as contemplated herein so as to effectuate such
refinancing,
WHEREAS, Section 31(b) of the Lease provides, among other
things, that until the Lessee has received notice from the
Indenture Trustee that the Lien of the Indenture on the Trust
Indenture Estate has been released, no term of the Lease shall
be amended without the consent of the Indenture Trustee, and
WHEREAS, pursuant to Section 15.1 of the Indenture, the
Indenture Trustee has, at the direction and with the consent of
each holder of a Secured Note, consented, by executing and
delivering the Refunding Agreement, to the amendments to the
Lease set forth in this Lease Amendment,
NOW THEREFORE, in consideration of the premises and of such
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Definitions.
(a) General Definitions. Except as otherwise expressly
provided herein or unless the context otherwise requires,
capitalized terms used herein shall have the meanings set forth
in Section 1 of the Lease.
(b) Amended Definitions. The following definition in
Section 1 of the Lease is hereby amended in its entirety to read
as follows:
"Loan Participant" shall mean collectively, the holders
of the Secured Notes and individually, any holder of a Secured
Note.
(c) Additional Definition. Section 1 of the Lease is
hereby amended by adding the following definitions thereto:
"Administrative Agent" shall mean Union Bank of
California, N.A, in its capacity as Administrative Agent for the
Loan Participants.
"Alternate Base Rate" shall have the meaning specified
in the Indenture.
"Series 3 Notes" shall have the meaning specified in
the Indenture.
(d) Deleted Definitions. The definition of Series 1 Notes,
Series 2 Notes and Subparticipation Amount in Section 1 of the
Lease are hereby deleted in their entirety.
(e) Special Event of Loss. Clause (iii) of the definition
of "Special Event of Loss" in Section 1 of the Lease is hereby
amended in its entirety to read as follows:
(iii) (a) any of the Series 3 Notes are
outstanding after July 1, 2003 unless
subclause (b) of this clause (iii) shall
apply, or (b) upon any date occurring
prior to July 1, 2003 which shall have
been agreed to by the Lessee and the
Owner Participant; or
(f) Stipulated Interest Rate. Clause (b) of the definition
of "Stipulated Interest Rate" in Section 1 of the Lease is hereby
amended in its entirety to read as follows:
(b) in the case of any payment or the
portion of any payment to paid to the
Indenture Trustee or Loan Participant,
two percent over the Alternate Base
Rate.
Section 2. Insurance. Section 8(c) of the Lease is hereby
amended to delete each reference therein to the Loan Participant
and to substitute the words "Administrative Agent" in lieu
thereof.
Section 3. Sublease. Clause (ii)(B)(1) of the proviso to
Section 13(a) of the Lease is hereby amended to delete the words
"Series 1 Notes or Series 2 Notes" and to substitute the words
"Series 3 Notes" in lieu thereof.
Section 4. Counterpart Execution. This Lease Amendment may
be executed by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an
original, but all such counterparts shall together constitute but
one and the same instrument. The single executed original of
this Lease Amendment which provides that it is the "original
counterpart" and which contains the receipt therefor executed by
the Indenture Trustee on or immediately following the signature
page thereof shall evidence the monetary obligations of the
Lessee hereunder and thereunder. To the extent, if any, that
this Lease Amendment constitutes chattel paper (as such term is
defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction), no security interest in this Lease
Amendment may be created by the transfer or possession of any
counterpart thereof other than the original counterpart and
containing the receipt therefor executed by the Indenture Trustee
on or immediately following the signature page thereof.
Section 5. Ratification of the Lease. This Lease Amendment
is an amendment to the Lease. As amended by this Lease
Amendment, the Lease is in all respects ratified, approved and
confirmed, and the Lease and this Lease Amendment shall together
constitute one and the same instrument.
Section 6. Governing Law. This Lease Amendment has been
delivered in, and shall in all respects be governed by and
construed in accordance with, the laws of the State of Arizona
applicable to agreements made and to be performed entirely within
such state, including matters of construction, validity and
performance.
Section 7. Liabilities of Owner Participant. Sections 23
and 31 of the Lease are hereby incorporated by reference mutatis
mutandis in this Lease Amendment.
IN WITNESS WHEREOF, the undersigned Lessee and Lessor have
each caused this Lease Amendment to be duly executed and
delivered and their corporate seals to be hereunto affixed and
attested by their respective officers thereunto duly authorized
as of the day and year first above written.
TUCSON ELECTRIC POWER COMPANY,
as Lessee
By: /s/ Kevin Larson
------------------------------
Name:
Title:
[seal]
Attest:
/s/ Linda Kennedy
- ------------------------
Assistant Secretary
SAN CARLOS RESOURCES INC.
as Lessee
By: /s/ Karen G. Kissinger
------------------------------
Name:
Title:
[seal]
Attest:
/s/ Vincent Nitido
- ------------------------
Assistant Secretary
WILMINGTON TRUST COMPANY,
not in its individual capacity
but solely as Owner Trustee
under the Trust Agreement, as
Lessor
By: /s/ C. Paglia
------------------------------
Name: Charlotte Paglia
Title: Financial Services Officer
[seal]
Attest:
/s/ D. Garen
- ------------------------
Assistant Secretary
/s/ William J. Wade
---------------------------------
WILLIAM J. WADE,
not in his individual capacity
but solely as Cotrustee under
the Trust Agreement, as Lessor
Witness:
/s/ Wendy R. Marthrope
- ------------------------
Receipt of this original counterpart of the foregoing
Amendment No. 2 to Lease Agreement is hereby acknowledged on this
____ day of December, 1999.
UNITED STATES TRUST COMPANY OF NEW YORK,
as Indenture Trustee
By:
-----------------------------------
Name:
Title:
ACKNOWLEDGEMENTS TO LEASE AMENDMENT
STATE OF ARIZONA )
) ss.:
COUNTY OF PIMA )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Kevin Larson, Vice President &
Treasurer, of TUCSON ELECTRIC POWER COMPANY, an Arizona
corporation, on behalf of said corporation.
/s/ Nancy Ann Juarez
-----------------------------
Notary Public
My Commission Expires:
May 14, 2000
- ----------------------
STATE OF ARIZONA )
) ss.:
COUNTY OF PIMA )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Karen G. Kissinger, Vice
President & Controller of SAN CARLOS RESOURCES INC., an
Arizona corporation, on behalf of said corporation.
/s/ Nancy Ann Juarez
-----------------------------
Notary Public
My Commission Expires:
May 14, 2000
- ----------------------
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by Charlotte Paglia, Financial
Services Officer, of WILMINGTON TRUST COMPANY, a Delaware
banking corporation, on behalf of said corporation.
/s/ Sheri M. Robinson
-----------------------------
Notary Public
My Commission Expires:
October 9, 2000
- ------------------------
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
The foregoing instrument was acknowledged before me this
10th day of December, 1999, by WILLIAM J. WADE, an individual.
/s/ Sheri M. Robinson
-----------------------------
Notary Public
My Commission Expires:
October 9, 2000
- ------------------------
Exhibit 10(b)(11)
AMENDMENT NO. 2
dated as of December 1, 1999
to
TAX INDEMNITY AGREEMENT
dated as of December 1, 1985
between
Philip Morris Capital Corporation
beneficiary under a Trust Agreement
dated as of December 1, 1985
with Wilmington Trust Company
and
William J. Wade,
as Owner Trustee and Cotrustee, respectively,
Lessor
and
TUCSON ELECTRIC POWER COMPANY,
and
SAN CARLOS RESOURCES INC.,
Lessee
---------------------------------------
Common Plant
Springerville Generating Station
AMENDMENT NO. 2
to
TAX INDEMNITY AGREEMENT
This AMENDMENT NO. 2 (this "Amendment"), dated as of
December 1, 1999 to TAX INDEMNITY AGREEMENT, dated as of December
1, 1985, between TUCSON ELECTRIC POWER COMPANY, an Arizona
corporation, and SAN CARLOS RESOURCES INC., an Arizona
corporation, as Lessee (the "Lessee"), and PHILIP MORRIS CAPITAL
CORPORATION, a Delaware corporation (the "Owner Participant"),
beneficiary under a Trust Agreement, dated as of December 1,
1985, with Wilmington Trust Company and William J. Wade, as Owner
Trustee and Cotrustee, respectively (the "Lessor").
W I T N E S S E T H
WHEREAS, the Owner Participant (or its predecessor in
interest) and the Lessee entered into a Tax Indemnity Agreement,
dated as of December 1, 1985, as amended by Amendment No. 1,
dated as of December 15, 1992, to Tax Indemnity Agreement dated
as of December 1, 1985 (such Tax Indemnity Agreement, as so
amended and as further amended, modified or supplemented from
time to time, being referred to herein as the "Tax Indemnity
Agreement");
WHEREAS, the Lessee, the Lessor, the Owner Participant and
certain other parties have agreed pursuant to a Refunding
Agreement, dated as of December 1, 1999 (as amended, modified or
supplemented from time to time, the "Refunding Agreement") to
participate in refinancing the outstanding Secured Notes on the
Refunding Date (as defined in the Refunding Agreement);
WHEREAS, the Owner Participant and the Lessee wish to amend
the Tax Indemnity Agreement as contemplated herein in order to
reflect agreements and amendments contemplated by the Refunding
Agreement;
NOW, THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions. General. Capitalized terms used
herein and not otherwise defined herein shall have the
respective meanings specified in the Tax Indemnity Agreement.
Section 2. Indemnified Losses. (a) Section 3.1 is hereby
amended by adding at the end of subsection (b) (i.e. prior to the
phrase "(any of the events)") the following:
"or (c) if, as a result of the Lessee paying any
Transaction Expenses (as defined in the Refunding Agreement,
dated as of December 1, 1999, among Lessee, Philip Morris
Capital Corporation, Lessor and certain other parties (such
Refunding Agreement, as amended, modified or supplemented
from time to time, being referred to herein as the
"Refunding Agreement") the Owner Participant shall be
required to include any amount in its gross income; or
(d) if Section 467 of the Code or the regulations
thereunder shall apply to any Rent paid on or after the
Refunding Date (as defined in the Refunding Agreement) with
the result that the Owner Participant is required to include
any amount in gross income (including any related deemed
interest) earlier than the time such payments would be
includable in gross income in accordance with the method of
accounting regularly utilized by the Owner Participant
(i.e., the accrual method)".
(b) Section 3.1 is hereby amended by replacing the phrase
"(any of the events described in these subsections (a)(2) or (b)
hereof being referred to hereinafter as a "Loss")" with the
following:
"(any of the events described in these subsections
(a)(2), (b), (c) or (d) being referred to hereinafter as a
"Loss")".
Section 3. Excluded Events. (a) Section 6(1)(e) is hereby
amended by adding after the phrase "Effective Date;" the
following:
"provided, further, that with regard to Losses
described in Section 3.1(c) and (d) hereof only, for
purposes of this Section 6(1)(e) change in tax law
shall mean only changes in the Code enacted after the
Refunding Date (as defined in the Refunding
Agreement);".
(b) Section 6(2) is hereby amended by adding at the end of
the proviso thereto and before the period the following:
"or Section 3.1(c) or (d)".
Section 4. Counterpart Execution. This Amendment may be
executed by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original,
but all such counterparts shall together constitute but one and
the same instrument.
Section 5. Ratification of the Tax Indemnity Agreement. As
amended by this Amendment, the Tax Indemnity Agreement is in all
respects ratified, approved and confirmed, and the Tax Indemnity
Agreement and this Amendment shall together constitute one and
the same instrument.
Section 6. Governing Law. This Amendment has been
delivered in, and shall in all respects be governed by, construed
in accordance with, the laws of the State of New York applicable
to agreements made and to be performed entirely within such
State, including such laws applicable to matters of construction,
validity and performance.
Section 7. No Duplication of Payment. Section 21 is hereby
amended by adding, after the phrase "Section 7 hereof" the
following:
"or the payment made pursuant to Section 2.01(d) of the
Refunding Agreement (with respect to the income attributable
to the payment pursuant to Section 2.01(c) of the Refunding
Agreement). For the avoidance of doubt, the parties confirm
that Section 4 hereof shall have no application to any
payments made pursuant to the Refunding Agreement or any tax
benefits arising therefrom".
IN WITNESS WHEREOF, the Owner Participant and the Lessee
have caused this Amendment to be duly executed by their
respective officers hereunto duly authorized as of the date set
forth above.
TUCSON ELECTRIC POWER COMPANY
By /s/ Vincent Nitido
------------------------------
Name:
Title:
SAN CARLOS RESOURCES INC.
By /s/ Dennis Nelson
------------------------------
Name:
Title:
PHILIP MORRIS CAPITAL CORPORATION
By /s/ James C. McCrea
------------------------------
Name:
Title:
Exhibit 10(b)(12)
AMENDMENT NO. 2
dated as of December 1, 1999
to
TAX INDEMNITY AGREEMENT
dated as of December 1, 1985
between
IBM Credit Financing Corporation
beneficiary under a Trust Agreement
dated as of December 1, 1985
with Wilmington Trust Company
and
William J. Wade,
as Owner Trustee and Cotrustee, respectively,
Lessor
and
TUCSON ELECTRIC POWER COMPANY,
and
SAN CARLOS RESOURCES INC.,
Lessee
---------------------------------------
Common Plant
Springerville Generating Station
AMENDMENT NO. 2
to
TAX INDEMNITY AGREEMENT
This AMENDMENT NO. 2 (this "Amendment"), dated as of
December 1, 1999 to TAX INDEMNITY AGREEMENT, dated as of
December 1, 1985, between TUCSON ELECTRIC POWER COMPANY, an
Arizona corporation, and SAN CARLOS RESOURCES INC., an Arizona
corporation, as Lessee (the "Lessee"), and IBM CREDIT FINANCING
CORPORATION, a Delaware corporation (the "Owner Participant"),
beneficiary under a Trust Agreement, dated as of December 1,
1985, with Wilmington Trust Company and William J. Wade, as
Owner Trustee and Cotrustee, respectively (the "Lessor").
W I T N E S S E T H
WHEREAS, the Owner Participant (or its predecessor in
interest) and the Lessee entered into a Tax Indemnity Agreement,
dated as of December 1, 1985, as amended by Amendment No. 1,
dated as of December 15, 1992, to Tax Indemnity Agreement dated
as of December 1, 1985 (such Tax Indemnity Agreement, as so
amended and as further amended, modified or supplemented from
time to time, being referred to herein as the "Tax Indemnity
Agreement");
WHEREAS, the Lessee, the Lessor, the Owner Participant and
certain other parties have agreed pursuant to a Refunding
Agreement, dated as of December 1, 1999 (as amended, modified or
supplemented from time to time, the "Refunding Agreement") to
participate in refinancing the outstanding Secured Notes on the
Refunding Date (as defined in the Refunding Agreement);
WHEREAS, the Owner Participant and the Lessee wish to amend
the Tax Indemnity Agreement as contemplated herein in order to
reflect agreements and amendments contemplated by the Refunding
Agreement;
NOW, THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions. General. Capitalized terms used
herein and not otherwise defined herein shall have the respective
meanings specified in the Tax Indemnity Agreement.
Section 2. Indemnified Losses. (a) Section 3.1 is hereby
amended by adding at the end of subsection (b) (i.e. prior to the
phrase "(any of the events)") the following:
"or (c) if, as a result of the Lessee paying any
Transaction Expenses (as defined in the Refunding Agreement,
dated as of December 1, 1999, among Lessee, IBM Credit
Financing Corporation, Lessor and certain other parties
(such Refunding Agreement, as amended, modified or
supplemented from time to time, being referred to herein as
the "Refunding Agreement") the Owner Participant shall be
required to include any amount in its gross income; or
(d) if Section 467 of the Code or the regulations
thereunder shall apply to any Rent paid on or after the
Refunding Date (as defined in the Refunding Agreement) with
the result that the Owner Participant is required to include
any amount in gross income (including any related deemed
interest) earlier than the time such payments would be
includable in gross income in accordance with the method of
accounting regularly utilized by the Owner Participant
(i.e., the accrual method)".
(b) Section 3.1 is hereby amended by replacing the phrase
"(any of the events described in these subsections (a)(2) or (b)
hereof being referred to hereinafter as a "Loss")" with the
following:
"(any of the events described in these subsections
(a)(2), (b), (c) or (d) being referred to hereinafter as a
"Loss")".
Section 3. Excluded Events. (a) Section 6(1)(e) is hereby
amended by adding after the phrase "Effective Date;" the
following:
"provided, further, that with regard to Losses
described in Section 3.1(c) and (d) hereof only, for
purposes of this Section 6(1)(e) change in tax law
shall mean only changes in the Code enacted after the
Refunding Date (as defined in the Refunding
Agreement);".
(b) Section 6(2) is hereby amended by adding at the end of
the proviso thereto and before the period the following:
"or Section 3.1(c) or (d)".
Section 4. Counterpart Execution. This Amendment may be
executed by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original,
but all such counterparts shall together constitute but one and
the same instrument.
Section 5. Ratification of the Tax Indemnity Agreement. As
amended by this Amendment, the Tax Indemnity Agreement is in all
respects ratified, approved and confirmed, and the Tax Indemnity
Agreement and this Amendment shall together constitute one and
the same instrument.
Section 6. Governing Law. This Amendment has been
delivered in, and shall in all respects be governed by, construed
in accordance with, the laws of the State of New York applicable
to agreements made and to be performed entirely within such
State, including such laws applicable to matters of construction,
validity and performance.
Section 7. No Duplication of Payment. Section 21 is hereby
amended by adding, after the phrase "Section 7 hereof" the
following:
"or the payment made pursuant to Section 2.01(d) of the
Refunding Agreement (with respect to the income attributable
to the payment pursuant to Section 2.01(c) of the Refunding
Agreement). For the avoidance of doubt, the parties confirm
that Section 4 hereof shall have no application to any
payments made pursuant to the Refunding Agreement or any tax
benefits arising therefrom".
IN WITNESS WHEREOF, the Owner Participant and the Lessee
have caused this Amendment to be duly executed by their
respective officers hereunto duly authorized as of the date set
forth above.
TUCSON ELECTRIC POWER COMPANY
By /s/ Vincent Nitido
------------------------------
Name:
Title:
SAN CARLOS RESOURCES INC.
By /s/ Dennis Nelson
------------------------------
Name:
Title:
IBM CREDIT FINANCING CORPORATION
By /s/ John V. Palerno, Jr.
------------------------------
Name:
Title:
Exhibit 10(b)(13)
AMENDMENT NO. 2
dated as of December 1, 1999
to
TAX INDEMNITY AGREEMENT
dated as of December 1, 1985
between
Emerson Finance Co.
beneficiary under a Trust Agreement
dated as of December 1, 1985
with Wilmington Trust Company
and
William J. Wade,
as Owner Trustee and Cotrustee, respectively,
Lessor
and
TUCSON ELECTRIC POWER COMPANY,
and
SAN CARLOS RESOURCES INC.,
Lessee
---------------------------------------
Common Plant
Springerville Generating Station
AMENDMENT NO. 2
to
TAX INDEMNITY AGREEMENT
This AMENDMENT NO. 2 (this "Amendment"), dated as of
December 1, 1999 to TAX INDEMNITY AGREEMENT, dated as of December
1, 1985, between TUCSON ELECTRIC POWER COMPANY, an Arizona
corporation, and SAN CARLOS RESOURCES INC., an Arizona
corporation, as Lessee (the "Lessee"), and EMERSON FINANCE CO., a
Delaware corporation (the "Owner Participant"), beneficiary under
a Trust Agreement, dated as of December 1, 1985, with Wilmington
Trust Company and William J. Wade, as Owner Trustee and
Cotrustee, respectively (the "Lessor").
W I T N E S S E T H
WHEREAS, the Owner Participant (or its predecessor in
interest) and the Lessee entered into a Tax Indemnity Agreement,
dated as of December 1, 1985, as amended by Amendment No. 1,
dated as of December 15, 1992, to Tax Indemnity Agreement dated
as of December 1, 1985 (such Tax Indemnity Agreement, as so
amended and as further amended, modified or supplemented from
time to time, being referred to herein as the "Tax Indemnity
Agreement");
WHEREAS, the Lessee, the Lessor, the Owner Participant and
certain other parties have agreed pursuant to a Refunding
Agreement, dated as of December 1, 1999 (as amended, modified or
supplemented from time to time, the "Refunding Agreement") to
participate in refinancing the outstanding Secured Notes on the
Refunding Date (as defined in the Refunding Agreement);
WHEREAS, the Owner Participant and the Lessee wish to amend
the Tax Indemnity Agreement as contemplated herein in order to
reflect agreements and amendments contemplated by the Refunding
Agreement;
NOW, THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions. General. Capitalized terms used
herein and not otherwise defined herein shall have the respective
meanings specified in the Tax Indemnity Agreement.
Section 2. Indemnified Losses. (a) Section 3.1 is hereby
amended by adding at the end of subsection (b) (i.e. prior to the
phrase "(any of the events)") the following:
"or (c) if, as a result of the Lessee paying any
Transaction Expenses (as defined in the Refunding Agreement,
dated as of December 1, 1999, among Lessee, Emerson Finance
Co., Lessor and certain other parties (such Refunding
Agreement, as amended, modified or supplemented from time to
time, being referred to herein as the "Refunding Agreement")
the Owner Participant shall be required to include any
amount in its gross income; or
(d) if Section 467 of the Code or the regulations
thereunder shall apply to any Rent paid on or after the
Refunding Date (as defined in the Refunding Agreement) with
the result that the Owner Participant is required to include
any amount in gross income (including any related deemed
interest) earlier than the time such payments would be
includable in gross income in accordance with the method of
accounting regularly utilized by the Owner Participant
(i.e., the accrual method)".
(b) Section 3.1 is hereby amended by replacing the phrase
"(any of the events described in these subsections (a)(2) or (b)
hereof being referred to hereinafter as a "Loss")" with the
following:
"(any of the events described in these subsections
(a)(2), (b), (c) or (d) being referred to hereinafter as a
"Loss")".
Section 3. Excluded Events. (a) Section 6(1)(e) is hereby
amended by adding after the phrase "Effective Date;" the
following:
"provided, further, that with regard to Losses
described in Section 3.1(c) and (d) hereof only, for
purposes of this Section 6(1)(e) change in tax law
shall mean only changes in the Code enacted after the
Refunding Date (as defined in the Refunding
Agreement);".
(b) Section 6(2) is hereby amended by adding at the end of
the proviso thereto and before the period the following:
"or Section 3.1(c) or (d)".
Section 4. Counterpart Execution. This Amendment may be
executed by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original,
but all such counterparts shall together constitute but one and
the same instrument.
Section 5. Ratification of the Tax Indemnity Agreement. As
amended by this Amendment, the Tax Indemnity Agreement is in all
respects ratified, approved and confirmed, and the Tax Indemnity
Agreement and this Amendment shall together constitute one and
the same instrument.
Section 6. Governing Law. This Amendment has been delivered
in, and shall in all respects be governed by, construed in
accordance with, the laws of the State of New York applicable to
agreements made and to be performed entirely within such State,
including such laws applicable to matters of construction,
validity and performance.
Section 7. No Duplication of Payment. Section 21 is hereby
amended by adding, after the phrase "Section 7 hereof" the
following:
"or the payment made pursuant to Section 2.01(d) of the
Refunding Agreement (with respect to the income attributable
to the payment pursuant to Section 2.01(c) of the Refunding
Agreement). For the avoidance of doubt, the parties confirm
that Section 4 hereof shall have no application to any
payments made pursuant to the Refunding Agreement or any tax
benefits arising therefrom".
IN WITNESS WHEREOF, the Owner Participant and the Lessee
have caused this Amendment to be duly executed by their
respective officers hereunto duly authorized as of the date set
forth above.
TUCSON ELECTRIC POWER COMPANY
By /s/ Vincent Nitido
------------------------------
Name:
Title:
SAN CARLOS RESOURCES INC.
By /s/ Dennis Nelson
------------------------------
Name:
Title:
EMERSON FINANCE CO.
By /s/ Frank J. Dellaquila
------------------------------
Name:
Title:
