The following items were the subject of
a Form 12b-25 and are included herein:
Certain financial information in Note 3 --
Unregulated Energy Businesses, of Item 1.--
Financial Statements, for New Energy
Ventures, Inc., an affiliate which is not
consolidated and which is 50 percent owned
by the Registrant.
- ---------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1999
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Registrant;State of
Commission Incorporation; Address IRS Employer
File Number 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
Indicate by check mark whether each registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No _____
At May 7, 1999, 32,303,281 shares of UniSource Energy Corporation's
Common Stock, no par value (the only class of Common Stock) were
outstanding.
UniSource Energy Corporation is the sole holder of the 32,162,167
shares of the outstanding Common Stock of Tucson Electric Power Company.
- ---------------------------------------------------------------------------
<PAGE>
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
UniSource Energy Corporation
We have reviewed the accompanying condensed consolidated
balance sheets and the related condensed consolidated
statements of loss and of cash flows of UniSource Energy
Corporation and its subsidiaries (the Company) as of March 31, 1999
and for the three-month periods ended March 31, 1999 and 1998. This
financial information is the responsibility of the Company's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data
and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
information for it to be in conformity with generally accepted
accounting principles.
We previously audited in accordance with generally accepted
auditing standards, the consolidated balance sheet and
statement of capitalization as of December 31, 1998, and the
related consolidated statements of income, of changes in
stockholders' equity, and of cash flows for the year then ended
(not presented herein); and in our report dated February 4,
1999 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of
December 31, 1998, is fairly stated, in all material respects
in relation to the consolidated balance sheet from which it
has been derived.
PricewaterhouseCoopers LLP
Los Angeles, California
May 20, 1999
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The weather causes seasonal fluctuations in UniSource Energy's sales. As a
result, quarterly results are not indicative of annual operating results.
The quarterly financial statements that follow are unaudited but reflect
all normal recurring accruals and other adjustments which we believe are
necessary for a fair presentation of the results for the interim periods
presented. Also see Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations. This quarterly report should
be reviewed in conjunction with the Company's 1998 Form 10-K.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF LOSS
Three Months Ended
March 31,
1999 1998
(Unaudited)
-Thousands of Dollars-
Operating Revenues
Retail Customers $128,651 $138,087
Sales for Resale 31,859 22,854
--------- ---------
Total Operating Revenues 160,510 160,941
--------- ---------
Operating Expenses
Fuel and Purchased Power 54,919 48,400
Capital Lease Expense 25,461 25,778
Amortization of Springerville Unit 1 Allowance (8,729) (7,631)
Other Operations 23,623 26,298
Maintenance and Repairs 9,637 10,724
Depreciation and Amortization 23,081 22,563
Taxes Other Than Income Taxes 12,154 12,926
Income Taxes (2,559) (1,937)
--------- ---------
Total Operating Expenses 137,587 137,121
--------- ---------
Operating Income 22,923 23,820
--------- ---------
Other Income (Deductions)
Income Taxes (232) (631)
Interest Income 1,638 1,716
Unregulated Energy Businesses - Net (2,793) (4,036)
Other 658 810
--------- ---------
Total Other Income (Deductions) (729) (2,141)
--------- ---------
Interest Expense
Long-Term Debt 16,325 17,111
Interest Imputed on Losses Recorded at Present Value 8,748 8,545
Other 2,649 3,058
--------- ---------
Total Interest Expense 27,722 28,714
--------- ---------
Net Loss $ (5,528) $ (7,035)
========= =========
Average Shares of Common Stock Outstanding (000) 32,287 32,139
========= =========
Basic and Diluted Loss per Share $ (0.17) $ (0.22)
========= =========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1999 1998
(Unaudited)
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $147,388 $146,532
Cash Receipts from Sales for Resale 31,511 27,000
Fuel and Purchased Power Costs Paid (58,132) (42,978)
Wages Paid, Net of Amounts Capitalized (15,857) (21,925)
Payment of Other Operations and Maintenance Costs (25,501) (23,593)
Capital Lease Interest Paid (44,505) (41,319)
Taxes Paid, Net of Amounts Capitalized (11,110) (11,519)
Interest Paid, Net of Amounts Capitalized (24,004) (17,198)
Contract Termination Fee Paid - (10,000)
Income Taxes Paid (4,819) -
Emission Allowance Inventory Sales - 29
Interest Received 2,222 2,361
Other 1,294 1,907
--------- ---------
Net Cash Flows - Operating Activities (1,513) 9,297
--------- ---------
Cash Flows from Investing Activities
Capital Expenditures (16,729) (18,443)
Investments in and Loans to Unregulated
Energy Businesses (5,050) (6,000)
Distributions from Unregulated Energy Businesses 500 -
Other 85 193
--------- ---------
Net Cash Flows - Investing Activities (21,194) (24,250)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 255 1,105
Payments to Retire Long-Term Debt (1,225) -
Payments to Retire Capital Lease Obligations (16,552) (8,737)
Other 837 (1,876)
--------- ---------
Net Cash Flows - Financing Activities (16,685) (9,508)
--------- ---------
Net Decrease in Cash and Cash Equivalents (39,392) (24,461)
Cash and Cash Equivalents, Beginning of Year 145,167 146,256
--------- ---------
Cash and Cash Equivalents, End of Period $105,775 $121,795
========= =========
UNISOURCE ENERGY CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED CASH FLOW INFORMATION
Three Months Ended
March 31,
1999 1998
(Unaudited)
-Thousands of Dollars-
Net Loss $ (5,528) $ (7,035)
Adjustments to Reconcile Net Loss
to Net Operating Cash Flows
Depreciation and Amortization Expense 23,081 22,563
Deferred Income Taxes and Investment Tax Credit (8,459) (4,117)
Lease Payments Deferred (16,404) (12,616)
Amortization of Regulatory Assets & Liabilities,
Net of Interest Imputed on Losses Recorded at
Present Value 18 914
Deferred Contract Termination Fee 962 (9,038)
Unremitted (Earnings) Losses of Unconsolidated
Subsidiaries 1,385 6,591
Other 3,083 (123)
Changes in Assets and Liabilities which Provided
(Used) Cash Exclusive of Changes Shown Separately
Accounts Receivable 6,379 987
Materials and Fuel (3,146) 251
Accounts Payable (7,805) 508
Taxes Accrued 8,311 11,961
Other Current Assets and Liabilities (2,578) (1,928)
Other Deferred Assets and Liabilities (812) 379
--------- ---------
Net Cash Flows - Operating Activities $ (1,513) $ 9,297
========= =========
Non-Cash Financing Activities (these activities do not affect the statements
of cash flows):
The proceeds from the issuance of $200 million of Pollution Control Revenue
Bonds in March 1998 were held in trust and used in May 1998 to redeem $200
million of previously issued bonds.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited)
- Thousands of Dollars -
ASSETS
Utility Plant
Plant in Service $2,250,056 $2,263,871
Utility Plant Under Capital Leases 886,902 886,902
Construction Work in Progress 82,007 74,050
----------- -----------
Total Utility Plant 3,218,965 3,224,823
Less Accumulated Depreciation and Amortization (1,048,456) (1,051,994)
Less Accumulated Amortization of Capital Leases (90,624) (85,826)
Less Springerville Unit 1 Allowance (171,431) (171,413)
----------- -----------
Total Utility Plant - Net 1,908,454 1,915,590
----------- -----------
Investments and Other Property 116,070 110,318
----------- -----------
Current Assets
Cash and Cash Equivalents 105,775 145,167
Accounts Receivable 66,388 72,767
Materials and Fuel 40,025 37,040
Deferred Income Taxes - Current 9,594 14,820
Other 21,587 24,950
----------- -----------
Total Current Assets 243,369 294,744
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Revenues 148,244 152,111
Deferred Springerville Generation Costs 98,316 102,211
Deferred Lease Expense 9,523 9,877
Other Regulatory Assets 18,210 18,886
Deferred Debits - Other 30,468 30,443
----------- -----------
Total Deferred Debits 304,761 313,528
----------- -----------
Total Assets $2,572,654 $2,634,180
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(Unaudited)
- Thousands of Dollars -
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock $ 641,089 $ 640,640
Accumulated Deficit (399,522) (393,994)
----------- -----------
Common Stock Equity 241,567 246,646
Capital Lease Obligations 869,649 889,543
Long-Term Debt 1,183,198 1,184,423
----------- -----------
Total Capitalization 2,294,414 2,320,612
----------- -----------
Current Liabilities
Current Obligations Under Capital Leases 14,989 11,647
Current Maturities of Long-Term Debt 1,725 1,725
Accounts Payable 26,313 34,118
Interest Accrued 42,765 70,771
Taxes Accrued 35,478 27,167
Accrued Employee Expenses 17,388 15,207
Other 6,011 6,705
----------- -----------
Total Current Liabilities 144,669 167,340
----------- -----------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 49,992 62,028
Deferred Investment Tax Credits Regulatory Liability 9,736 10,436
Emission Allowance Gain Regulatory Liability 31,324 31,335
Other 42,519 42,429
----------- -----------
Total Deferred Credits and Other Liabilities 133,571 146,228
----------- -----------
Total Capitalization and Other Liabilities $2,572,654 $2,634,180
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. ACCOUNTING FOR THE EFFECTS OF REGULATION
Accounting Implications
The ACC regulates TEP's retail utility business. TEP generally
uses the same accounting policies and practices used by unregulated
companies for financial reporting under generally accepted accounting
principles. 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 charge its customers currently to recover
certain expenses but; instead, require that these expenses be recovered
from customers in the future. In this situation, FAS 71 requires that
TEP capitalize and report these expenses as regulatory assets on the
balance sheet until TEP is allowed to charge its customers. TEP then
amortizes these items to the income statement as those amounts are
recovered from customers. Similarly, certain items of revenue may be
deferred as regulatory liabilities, which are also eventually amortized
to the income statement.
We have recorded regulatory assets and liabilities in our balance
sheets in accordance with FAS 71. A regulated company must satisfy
certain conditions to apply the accounting policies and practices of
FAS 71. These conditions include:
- an independent regulator sets rates;
- the regulator sets the rates to cover specific costs of delivering
service; and
- the service territory lacks competitive pressures to reduce rates
below the rates set by the regulator.
We periodically assess whether we continue to meet these
conditions. If we were required to stop applying FAS 71 to all or a
portion of TEP's regulated utility operations, we would write off the
related balances of TEP's regulatory assets and liabilities as a charge
in our income statement. In that event, our earnings would be reduced
by the net amount of regulatory assets and liabilities, after
applicable deferred income taxes. Based on the balances of TEP's
regulatory assets and liabilities at March 31, 1999, if we ceased
applying FAS 71 to all of TEP's regulated operations, we would record
an extraordinary loss of approximately $140 million, net of the related
deferred income tax benefit of $93 million. Approximately 60% of TEP's
net regulatory assets on the balance sheet relate to electric
generation. While our cash flows may be affected by regulatory orders
and market conditions, our cash flows would not be affected if we
ceased to apply FAS 71.
If we stop applying FAS 71, we would need to evaluate the
likelihood that we could recover the cost of TEP's electric plant in
the marketplace. If undiscounted cash flows are less than the carrying
value of those plant assets that we continue to own, then we would need
to write off as an expense a portion of those plant assets to reflect
their current market value. Plant assets to be disposed of would be
written down to fair value if it is less than carrying value. We
cannot predict if we would write off any plant assets as a result of
these evaluations.
Recent Events That May Impact TEP's Application of FAS 71
In December 1996, the ACC adopted retail electric competition
rules (Rules) that provided a framework for the phase-in of retail
electric competition in Arizona beginning in January 1999. The Rules
were amended and adopted on an emergency basis in August 1998. The
Rules, as originally adopted, assumed a competition start date of
January 1, 1999. On January 5, 1999, the ACC delayed implementation of
the Rules.
On April 14, 1999, the ACC approved a modified order that provides
affected utilities with five options for stranded cost recovery. The
following recovery options are provided by the ACC's written order:
1. Net Revenues Lost Methodology -- Stranded costs would be
determined by comparing generation revenues under competition to
revenues under regulation. Using growth as a mitigating factor, the
amount of recovery would be reduced over a five-year period.
2. Divestiture/Auction Methodology -- Stranded costs would be
determined by auctioning non-essential generation assets. The amount of
stranded costs would be the difference between the assets' market value
and their book value. Recovery of stranded costs would occur over a
maximum 10-year period.
3. Financial Integrity Methodology -- The ACC would provide
sufficient revenues necessary to maintain financial integrity, such as
avoiding default under currently existing financial instruments for a
period of ten years, at which time there would be no remaining stranded
costs.
4. Settlement Methodology -- This option provides for some
combination of the three preceding methods, submitted as a settlement
option.
5. Alternative Methodology -- This option approved by the ACC would
allow affected utilities to file an alternative plan. Under this
option, utilities would be required to demonstrate how an alternative
plan would be in the best interests of all stakeholders.
TEP and other affected utilities have until June 14, 1999 to amend
their previously filed stranded cost recovery plans. TEP's original
stranded cost plan filed on August 21, 1998, specified divestiture of
generation assets as the preferred method for recovery given the then-
available options. TEP expects to file an amended plan in accordance
with the April 14 order.
Also on April 14, 1999, the ACC approved amendments to the
electric competition rules that require a phase-in to a competitive
market, ensuring all customers will have access to competitive
generation by January 1, 2001. Retail electric competition in Arizona
had been scheduled to begin on January 1, 1999, but the ACC delayed the
opening of the market by staying the previous Competition Rules pending
further review.
Under the amendments, consumer choice will be available to all
customers by January 1, 2001. TEP, as the regulated local distribution
company, will continue to provide delivery of electricity over existing
power lines to homes and businesses and will continue to provide
operation and maintenance of the lines.
Under these rules, competitive electric service will be available
in each affected utility's service territory after the affected
utility's stranded cost plan is approved by the ACC. In addition, the
proposed rules replace certain affiliated interest rules with a code
of conduct to be filed by each utility.
The amended rules will be submitted to the Secretary of State's
Office for publication in the Arizona Administrative Register. It is
anticipated that public comment sessions will be held in June, and the
Rules will be resubmitted to the ACC for their final approval in July
or August 1999.
TEP will stop accounting for its generation operations using FAS
71 when the ACC approves a cost recovery plan specific to TEP which
includes the amount of stranded costs (including regulatory assets, net
of regulatory liabilities) that TEP can recover and a cost recovery
method. The amount and method of recovery that the ACC approves for
TEP will determine whether write-offs or other adjustments will occur
at that time. Until the ACC approves the amount and recovery method,
we are unable to predict the amount of write-offs or other adjustments,
if any, which would be recorded at that time.
We cannot predict the outcome of the ACC's retail competition
rules. Additionally, federal legislators introduced several retail
competition initiatives in Congress which, if passed, could modify or
override the actions taken by the ACC. We will continue to monitor the
progress of the legislation and assess it's impact on retail electric
competition in Arizona.
NOTE 2. SEGMENT AND RELATED INFORMATION
In 1998, we adopted 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 the
regulated electric utility business of TEP. The other reportable
business segment is the unregulated energy businesses of Millennium:
- Advanced Energy Technologies, Inc. (Advanced Energy) which owns 50
percent of Global Solar Energy, L.L.C., a developer and manufacturer of
photovoltaic materials;
- MEH Corporation (MEH) which holds a 50 percent interest in New
Energy Ventures, Inc. (NEV), an energy buyer representative; and
- Nations Energy Corporation (Nations) which is an independent power
developer.
See Note 3 for more information on our unregulated energy
businesses. Intersegment revenues are not material.
We disclose selected financial data for our business segments in the
following table:
- ----------------------------------------------------------------------
Segments
----------------------
TEP: Millennium:
Regulated Unregulated UniSource
Electric Energy Reconciling Energy
Utility Businesses Adjustments Consolidated
- ----------------------------------------------------------------------
- Thousands of Dollars -
Income Statement
- ----------------
Three months ended
March 31, 1999:
Operating Revenues $160,636 $ 1,627 $ (1,753) $ 160,510
- ----------------------------------------------------------------------
Net Income (Loss):
Advanced Energy (374)
MEH (577)
Nations (1,942)
Other Entities 100
--------
Total Net
Income (Loss) (1,320) (2,793) (1,415) (5,528)
- ----------------------------------------------------------------------
Three months ended
March 31, 1998:
Operating Revenues 161,003 341 (403) 160,941
- ----------------------------------------------------------------------
Net Income (Loss):
Advanced Energy 170
MEH (4,050)
Nations (204)
Other Entities 48
--------
Total Net
Income (Loss) (1,607) (4,036) (1,392) (7,035)
- ----------------------------------------------------------------------
The reconciling adjustments include the following:
- Elimination of the revenues of Millennium's unregulated energy
businesses to show this activity in Unregulated Energy Businesses - Net
in the Other Income (Deductions) section of UniSource Energy's income
statements, and
- Elimination of intercompany activity and balances.
NOTE 3. UNREGULATED ENERGY BUSINESSES
Loans and Guarantees for NEV
Effective September 1, 1997, MEH (formerly Millennium)
acquired a 50% ownership in NEV and made a $0.8 million capital
contribution.
In December 1997, MEH committed to provide NEV with $20
million of funding. At March 31, 1999, NEV had received $19
million in debt funding under the commitment, resulting in a
remaining commitment amount available of $1 million at March 31,
1999. Additionally, in September 1998, NEV issued a $4.8 million
promissory note to MEH for a $3 million loan MEH extended to NEV
in September 1997 as well as a preferred operating return due MEH
under the terms of NEV's original operating agreement.
In December 1998, UniSource Energy committed $30 million in
credit to NEV. NEV has drawn $15 million on the credit
commitment at March 31, 1999. NEV also had accrued interest and
other accounts payable to MEH of $2.3 million at March 31, 1999
which also reduces the amount available under this credit
commitment. Under the terms of the commitment, NEV must provide
collateral prior to any amounts being drawn under this credit
commitment.
In addition to providing funding, UniSource Energy provides
credit to NEV in the form of guarantees and surety bonds to
support NEV's wholesale and retail electricity purchases and
sales activities. As of March 31, 1999, UniSource Energy had
extended guarantees and surety bonds aggregating $41.6
million, of which $21.7 million was outstanding. UniSource
Energy issued additional guarantees of $13.5 million subsequent
to March 31, 1999. In addition, UniSource Energy has guaranteed
repayment of a $10 million note that NEV obtained from an
unrelated party. This note is callable any time after May 28,
1999. UniSource Energy's guarantees and borrowings under the $30
million credit facility are secured by various NEV accounts
receivable and other assets.
NEV has incurred a total loss in excess of approximately $49
million for the period September 1997 through March 31, 1999.
In 1998 and 1997, MEH recorded $16 million and $7.8 million,
respectively, of NEV's losses. These losses, totaling $23.8
million, equal the total funds and unsecured commitments provided
by MEH and UniSource Energy to NEV. Our accounting policy limits
the amount of NEV's loss to be recorded by MEH to the total
amount invested and committed by MEH and UniSource Energy on an
unsecured basis. Should MEH or UniSource Energy provide
additional unsecured funding to NEV or should the value of
existing collateral decline, the unsecured amounts provided would
be immediately expensed up to the lesser of the amount of
unsecured funding provided or the amount of NEV's cumulative
losses in excess of the $23.8 million already recorded by MEH.
While we do not currently have plans to extend additional
unsecured amounts, there can be no assurance that additional
funding will not be necessary.
In the first quarter of 1999, ownership of New Energy Ventures
Southwest was transferred from MEH to NEV. MEH recorded $0.9
million of losses for NEV Southwest during the first three months
of 1999.
NEV Summarized Financial Information
Quarters Ended March 31,
Income Statement 1999 1998
-----------------
- Millions of Dollars-
Retail Customer Revenue $ 92 $ 1
Utility Distribution Company Payments (45) -
Cost of Goods Sold (47) (1)
---- ----
Gross Margin - -
Proprietary Purchases and Sales, Net 8 (2)
Other Operating Expenses (9) (5)
---- ----
Income (Loss) from Operations (1) (7)
Other Income (Expense) (2) -
Cumulative Effect of Change in
Accounting Principle 1 -
---- ----
Net Loss $(2) $(7)
==== ====
As of January 1, 1999, NEV adopted EITF 98-10 which provides
guidance on accounting for energy trading activities. As a result
of the adoption, NEV recorded a cumulative effect gain of
approximately $1 million during the first quarter of 1999.
Purchase of Generating Assets by Nations Energy
In March 1999, Nations Energy funded $3.3 million of equity in a
Curacao refinery project. The investment was made through a special
purpose company, Curacao Energy Company, Ltd., which will own a
controlling interest in the project. The project is a 167MW
cogeneration facility that will supply power, steam, water and
compressed air to Refineria di Korsou. Construction is planned to
begin later this year.
Nations Energy Holland Holding increased its minority equity
interest in a power project located in the Czech Republic with an $0.8
million payment in the first quarter of 1999. The $400 million, 340 MW
project is scheduled for completion in late 1999. Once completed, the
generating facility will sell power to a regional distribution company
and to an adjacent industrial complex.
NOTE 4. TAX ASSESSMENTS
Ruling on Arizona Sales Tax Assessments - Coal Sales
We received from the ADOR and are protesting, sales tax
assessments which allege that a former TEP subsidiary is liable for
sales tax on gross income from coal sales, transportation and coal-
handling services provided to TEP from November 1985 through May 1996.
Arizona law generally requires payment of an assessment prior to
pursuing the appellate process. We have previously paid, under
protest, a total of $23 million of the disputed sales tax assessments.
In September 1996, the Arizona Court of Appeals upheld the validity of
the assessment issued for the period November 1985 through March 1990.
However, in May 1998, the Arizona Supreme Court remanded the case back
to the Arizona Tax Court to be reheard. The case is set for trial in
the first week of June 1999. The payments previously made will be
refunded if we are successful in the appeal.
TEP has recorded an expense and a related liability for the sales
taxes and interest for the period November 1985 through May 1996 that
we believe are probable of incurrence. On May 31, 1996, the former
subsidiary was merged into TEP. Because TEP now acquires coal directly
from unaffiliated companies, we do not believe we are liable for sales
tax computed on a basis similar to the assessments described above
after May 31, 1996. For periods prior to May 31, 1996, we continue to
record an estimated interest expense on the disputed assessments.
Arizona Sales Tax Assessments - Leases
The ADOR has issued sales tax assessments to some of the lessors
of TEP's generation-related facilities and equipment. The assessments
allege 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. Under the
indemnification provisions in the lease agreements, if the ADOR
prevails, we would be required to reimburse the lessors for the sales
taxes that they pay. We filed an appeal of the assessments in the
Arizona Tax Court in February 1998. In July 1998, the Arizona Tax
Court upheld the assessment issued on the Irvington lease for the
period August 1988 through September 1990, and we have appealed the
decision. Oral argument on the appeal is scheduled to begin on May 25,
1999. Arizona law generally requires payment of an assessment prior to
pursuing the appellate process. Under protest, we paid a total of $2
million of the disputed assessments. These payments will be refunded
if we are successful in the appeals process.
We have recorded a liability for the probable amount of sales
taxes and interest due as of March 31, 1999. If the ADOR prevails, we
would need to record an additional expense and related liability. Even
though it is reasonably possible that the resolution of this issue
could result in approximately $23 million of additional sales tax
expense, we do not believe this outcome is likely. We do not expect
that the resolution of this assessment will have a material negative
impact on the financial statements. We believe that the ultimate
resolution of this issue could occur between two to four years from
now.
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 a financial restructuring, a change in TEP's ownership
occurred for tax purposes in December 1991. As a result, our use of
the NOL and ITC generated before 1992 may be limited under the tax
code. The IRS is challenging our calculation of this limitation. At
March 31, 1999, pre-1992 federal NOL and ITC carryforwards were
approximately $200 million and $23 million, respectively. In addition
to the pre-1992 NOL and ITC which are subject to the limitation, $203
million of federal NOL at March 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.
NOTE 5. SPRINGERVILLE COMMON FACILITIES LEASE
Under the terms of the Springerville Common Facilities lease
agreement, we must ensure that $70 million of secured notes underlying
this lease are refinanced by December 31, 1999 in order 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 a specified price or the fair market value of the facilities.
TEP has intends, and believes it has the ability, to refinance the
underlying debt on these leases in 1999.
NOTE 6. INCOME TAXES
The differences between the income tax expense (benefit) and the
amount obtained by multiplying income before income taxes by the U.S.
statutory federal income tax rate are as follows:
UniSource
Energy TEP
------------------ ------------------
Three Months Ended Three Months Ended
March 31, March 31,
1999 1998 1999 1998
- --------------------------------------------------------------------
-Thousands of Dollars -
Federal Income Tax
Benefit at Statutory Rate $ (3,040) $ (3,903) $ (949) $ (694)
State Income Tax Benefit,
Net of Federal Benefit (422) (601) (132) (107)
Depreciation Differences
(Flow Through Basis) 326 1,040 326 1,040
Investment Tax Credit
Amortization (700) (573) (700) (573)
Adjustment for Unregulated
Energy Businesses - (276) - -
Foreign Operations of
Unregulated Energy Businesses 613 238 - -
Other 65 (42) 65 (43)
- --------------------------------------------------------------------
Total Benefit for Federal
and State Income Taxes $ (3,158) $ (4,117) $ (1,390) $ (377)
====================================================================
Income taxes are included in the income statements as follows:
UniSource
Energy TEP
------------------- -----------------
Three Months Ended Three Months Ended
March 31, March 31,
1999 1998 1999 1998
- --------------------------------------------------------------------
-Thousands of Dollars -
Operating (Benefits) $ (2,559) $ (1,937) $ (2,559) $ (1,937)
Other Deductions 232 631 1,169 1,560
Unregulated Energy
Businesses - Net (831) (2,811) - -
- --------------------------------------------------------------------
Total Income Tax Benefit $ (3,158) $ (4,117) $ (1,390) $ (377)
====================================================================
As of December 31, 1997 both UniSource Energy and TEP had recorded
the amount of prior period NOL benefit that we expect to use on future
income tax returns. At the present time, we are not able to estimate
future 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 there may be additional
assessments and because federal and state NOL carryforwards have
varying expiration dates. We do not expect to recognize additional
amounts of NOL benefit until such items are resolved.
NOTE 7. 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 adopt FAS 133 in the first quarter of 2000.
We are still in the process of quantifying the effect, if any, that the
adoption of 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. We adopted this
guidance in the first quarter of 1999. TEP does engage in some forms
of energy trading but does not engage in the type of energy purchases
and sales defined in EITF 98-10 as energy trading; therefore the
adoption of this guidance had no effect on our financial statements.
NOTE 8. REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
With respect to the unaudited consolidated financial information
of UniSource Energy for the three-month periods ended March 31, 1999
and 1998, PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated May
20, 1999, appearing herein, states that they did not audit and they do
not express an opinion on that unaudited consolidated financial
information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of
the review procedures applied. PricewaterhouseCoopers LLP is not
subject to the liability provisions of section 11 of the Securities Act
of 1933 for their report on the unaudited consolidated financial
information because that report is not a "report" or a "part" of a
registration statement prepared or certified by PricewaterhouseCoopers
LLP within the meaning of sections 7 and 11 of the Act.
With respect to the unaudited consolidated financial information
of TEP for the three-month periods ended March 31, 1999 and 1998,
PricewaterhouseCoopers LLP reported that they have applied limited
procedures in accordance with professional standards for a review of
such information. However, their separate report dated May 17, 1999,
appearing herein, states that they did not audit and they do not
express an opinion on that unaudited consolidated financial
information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of
the review procedures applied. PricewaterhouseCoopers LLP is not
subject to the liability provisions of section 11 of the Securities Act
of 1933 for their report on the unaudited consolidated financial
information because that report is not a "report" or a "part" of a
registration statement prepared or certified by PricewaterhouseCoopers
LLP within the meaning of sections 7 and 11 of the Act.
NOTE 9. RECLASSIFICATIONS
Minor reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
insert financials and notes to statements
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. -- Exhibits and Reports on Form 8-K
- -------------------------------------------
(a) Exhibits.
-- See Exhibit Index.
(b) Reports on Form 8-K.
The Company and TEP filed the following current reports on Form 8-K
during the quarter ended March 31, 1999:
UniSource Energy Corporation and Tucson Electric Power Company
--------------------------------------------------------------
-- Form 8-K dated January 4, 1999 (filed January 8, 1999), reporting on
the delay of retail electric competition in Arizona.
-- Form 8-K dated February 5, 1999 (filed February 16, 1999), reporting
on Proposed Orders by ACC Hearing Officer and 1998 Earnings.
UniSource Energy Corporation
----------------------------
-- Form 8-K dated March 5, 1999 (filed March 15, 1999), reporting on
adoption of a shareholder rights plan.
<PAGE>
Signature
Pursuant to the requirements 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
(Registrant)
Date: May 24, 1999 Ira R. Adler
--------------------------------
Ira R. Adler
Executive Vice President and
Principal Financial Officer
<PAGE>
EXHIBIT INDEX
11 - Statement re computation of per share earnings - UniSource
Energy.
12 - Computation of Ratio of Earnings to Fixed Charges - TEP.
15 - Letter regarding unaudited interim financial information.
27a - Financial Data Schedule - UniSource Energy.
27b - Financial Data Schedule - TEP.
Exhibit 15
May 20, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated May 20, 1999 on our
review of interim financial information of UniSource
Energy Corporation (the Company) as of and for the period
ended March 31, 1999 and included in the Company's
quarterly report on Form 10-Q for the quarter then ended
is incorporated by reference in the Company's Registration
Statements on Form S-8 (Nos. 333-43765, 333-43767 and 333-
43769, 333-53309, 333-53333 and 333-53337), on Form S-3
(No. 333-31043), and on Form S-4 (No. 333-60809).
Yours very truly,
PricewaterhouseCoopers LLP
