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, 19992002
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 StreetOne South Church Avenue, Suite 100
Tucson, AZ 85701
(520) 571-4000
1-5924 TUCSON ELECTRIC POWER COMPANY 86-0062700
(An Arizona Corporation)
220 West Sixth StreetOne South Church Avenue, Suite 100
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 Exchange
Corporation value and Preferred Pacific 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
----- -----
The aggregate market value of UniSource Energy Corporation voting Common
Stock held by non-affiliates of the registrant was $430,762,120.88$622,739,272 based on
the last reported sale price thereof on the consolidated tape on February 24,
2000.June 28, 2002.
At February 24, 2000, 32,357,718March 4, 2003, 33,583,182 shares of UniSource Energy Corporation
Common Stock, no par value (the only class of Common Stock), were outstanding.
At March 4, 2003, UniSource Energy Corporation is the sole holder of the
32,139,434 shares of the outstanding Common Stockcommon stock of Tucson Electric Power
Company.
Documents incorporated by reference: Specified portions of UniSource
Energy Corporation's Proxy Statement relating to the 20002003 Annual Meeting of
Shareholders are incorporated by reference into PART III.
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
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....................................................viDefinitions................................................................ v
- PART I -
Item 1. - Business
The Company................................................... 1Overview of Consolidated Business.........................................1
TEP Electric Utility Operations
Peak Demand................................................. 3
Customers................................................... 3
Sales for Resale............................................ 4Service Area and Customers..............................................2
Generating and Other Resources
TEP Generating Resources.................................. 5
Power Exchange Agreement.................................. 7
Other Purchases and Interconnections...................... 7
Future Generating Resources............................... 7Resources..........................................5
Fuel Supply.............................................................7
Water Supply............................................................9
Transmission Access.....................................................9
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.....................................................15Regulation...................................................10
TEP's Utility Operating Statistics............................16Statistics.....................................12
Environmental Matters..................................................13
Millennium Energy Businesses.............................................14
UniSource Energy Development Company.....................................15
Employees................................................................16
SEC Reports available on UniSource Energy's Website......................16
Item 2. - Properties...........................................17Properties.......................................................18
Item 3. - Legal Proceedings
Tax Assessments...............................................18
Litigation Related to ACC Orders and Retail Competition.......18Proceedings................................................19
Item 4. - Submission of Matters to a Vote of Security Holders..18Holders..............19
- PART II -
Item 5. - Market for Registrant's Common Equity and Related
Stockholder Matters..................................19Matters..............................................20
Item 6. - Selected Consolidated Financial Data
UniSource Energy..............................................20
TEP...........................................................21
TABLE OF CONTENTS
(continued)
Page
----Energy.........................................................21
TEP......................................................................22
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview....................................................22Operations....................................................23
UniSource Energy Consolidated..........................................23
Contribution by Business Segment.......................................24
Results of TEP.........................................................24
Results of Millennium Energy Businesses................................28
Results of UED.........................................................29
Income Tax Position......................................................29
Asset Purchase Agreements................................................29
Factors Affecting Results of Operations
Competition
Retail....................................................23
Wholesale.................................................24
Regulatory Matters..........................................24Competition............................................................30
Industry Restructuring.................................................31
Market Risks................................................25
Impact of the Year 2000 on Computer SystemsRisks...........................................................34
Outlook 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 IncomeStrategies.................................................37
Critical Accounting Policies...........................................37
TABLE OF CONTENTS
(continued)
Page
- 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 - Consolidated Cash Flows and Liquidity.....34
TEP Cash Flows and Liquidity..............................35
Investing and Financing ActivitiesFlows.............................42
UniSource Energy - Parent Company......................................43
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................................38Utility.................................................43
Operating Activities.................................................43
Investing Activities.................................................44
Financing Actitities.................................................45
Millennium - Unregulated Energy Businesses
Sale of NewEnergy, Inc...............................39
Capital Requirements.................................39
UniSourceBusinesses.............................47
UED - Unregulated Energy - Parent CompanyBusiness......................................49
Financing Activities
Promissory Note to TEP...............................40
Investment Plus Plan.................................40
RestrictionsRisks........................................................49
Contractual Obligations................................................50
Guarantees and Indemnities.............................................51
Dividends on Proceeds of Equity Issuance..........40Common Stock..............................................52
New Accounting Pronouncements............................................52
Safe Harbor for Forward-Looking Statements..................40Statements...............................53
Item 7A. -7A.- Quantitative and Qualitative Disclosures about Market Risk.........................................41
TABLE OF CONTENTS
(continued)
Page
----Risk.......54
Item 8. - Consolidated Financial Statements and Supplementary Data...................................41
Independent Auditors' Report..................................42Data.........54
Report of Independent Accountants.............................43Accountants........................................55
UniSource Energy Corporation
Consolidated Statements of Income...........................44Income......................................56
Consolidated Statements of Cash Flows.......................45Flows..................................57
Consolidated Balance Sheets.................................46Sheets............................................58
Consolidated Statements of Capitalization...................47Capitalization..............................59
Consolidated Statements of Changes in Stockholders' Equity..48Equity.............60
Tucson Electric Power Company
Consolidated Statements of Income...........................49Income......................................61
Consolidated Statements of Cash Flows.......................50Flows..................................62
Consolidated Balance Sheets.................................51Sheets............................................63
Consolidated Statements of Capitalization...................52Capitalization..............................64
Consolidated Statements of Changes in Stockholder's Equity..53Stockholders' Equity.............65
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...........................................57Policies......................................................66
Note 2. Regulatory Matters
November 1999 ACC Approval of Settlement Agreement..........59
Accounting Implications.....................................60Matters..............................................72
Note 3. SegmentAccounting for Derivative Instruments, Trading Activities
and Related Information.......................62Hedging Activities........................................75
Note 4. Millennium Energy Businesses..........................64
International Power Projects - Nations Energy Corporation...64
Energy Marketing - MEH Corporation..........................65
Photovoltaic Manufacturing - Advanced Energy
Technologies, Inc..........................................66Businesses....................................77
Note 5. Business Segments...............................................80
Note 6. TEP's Utility Plant and Jointly-Owned Facilities
Utility Plant...............................................66
Jointly-Owned Facilities....................................67Facilities................82
Note 6. Long-Term7. Debt and Capital Lease Obligations
TEP Long-Term Debt..........................................67
Bonds -- 1999.............................................67
SaleObligations..............................83
Note 8. Fair Value of TEP's Financial Instruments.......................85
Note 9. Stockholders' Equity............................................86
Note 10. Commitments and Redemption of Bonds - 1998.......................67
TEP Other Long-Term DebtContingencies...................................87
Note 11. Wholesale Accounts Receivable and Agreements
First and Second Mortgage...................................68
Bank Credit Agreement.......................................68
Capital Lease Obligations...................................68
Maturities and Sinking Fund Requirements....................69Allowances....................91
Note 12. Income Taxes....................................................92
Note 13. Employee Benefits Plans.........................................94
Note 14. UniSource Energy Earnings Per Share (EPS).......................98
Note 15. Asset Purchase Agreements.......................................99
Note 16. Supplemental Cash Flow Information.............................100
Note 17. Quarterly Financial Data (Unaudited)...........................103
TABLE OF CONTENTS
(concluded)
Note 7. Fair Value of TEP's Financial Instruments.............69
Note 8 Dividend Limitations...................................70
Note 9. CommitmentsPage
- -----------------------------------------------------------------------------
Schedule II - Valuation and Contingencies
TEP CommitmentsQualifying Accounts.........................106
- Fuel Purchase.............................70
TEP CommitmentsPART III - 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 -Disclosure.......................................107
Item 10. - Directors and Executive Officers of the Registrants
Directors.....................................................85
Executive Officers............................................85Registrants............107
Item 11. - Executive Compensation..............................87Compensation.........................................109
Item 12. - Security Ownership of Certain Beneficial Owners and
Management
General.......................................................87
Security Ownership of Certain Beneficial Owners...............87
Security Ownership of Management..............................87Management.....................................................109
Item 13. - Certain Relationships and Related Transactions......88Transactions.................110
- PART IV -
Item 14. - Controls and Procedures........................................111
Item 15. - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ..............................88
Signatures....................................................898-K...........................................................111
Signatures..............................................................113
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act.........117
Exhibit Index.................................................93Index...........................................................121
DEFINITIONS
The abbreviations and acronyms used in the 19992002 Form 10-K are defined below:
- --------------------------------------------------------------------------
ACC........................------------------------------------------------------------------------------
ACC.......................... Arizona Corporation Commission.
AET........................ Advanced Energy Technologies, Inc., a
wholly-owned subsidiary of Millennium.
Affected Utilities......... Electric utilities regulatedACC Holding Company Order.... The order approved by the ACC includingin November 1997
allowing TEP Arizona Public Service,
Citizens Utilities Company, and several
electric cooperatives.
APS........................to form a holding company.
AHMSA........................ Altos Hornos de Mexico, S.A. de C.V. AHMSA owns
50% of Sabinas.
ALJ.......................... Administrative Law Judge.
APS.......................... Arizona Public Service Company.
BTU........................Btu.......................... British Thermal Unit(s)thermal unit(s).
CAAA....................... Federal Clean Air Act Amendments.Capacity..................... The ability to produce power; the most power
a unit can produce or the maximum that can
be taken under a contract; measured in MWs.
CISO......................... California Independent System Operator.
Citizens..................... Citizens Communications Company.
Common Stock...............Stock................. UniSource Energy's common stock, without par
value.
Company or UniSource EnergyEnergy.. UniSource Energy Corporation.
Cooling Degree Days.......... An index used to measure the impact of weather
on energy usage calculated by subtracting 75
from the average of the high and low daily
temperatures.
CPX.......................... California Power Exchange.
Credit Agreement...........Agreement............. Credit Agreement between TEP and thea syndicate
of banks, dated as of December 30, 1997.November 14, 2002.
Emission Allowance(s).............. An EPA issuedEPA-issued allowance which permits
emission of one ton of sulfur dioxide.
SuchThese allowances can be bought and sold.
EPA........................Energy....................... The amount of power produced over a given
period of time; measured in MWh.
EPA.......................... The Environmental Protection Agency.
ESP.......................... Energy Service Provider.
Express Line................. 345-kV circuit connecting Springerville
Unit 2 to the Tucson 138 kV system.
FAS 71.....................71....................... Statement of Financial Accounting Standards
No. 71: Accounting for the Effects of
Certain Types of Regulation.
FAS 101....................133...................... Statement of Financial Accounting Standards
No. 101: Regulated Enterprises-Accounting133: Accounting for the DiscontinuationDerivative
Instruments and Hedging Activities.
FAS 143...................... Statement of FASB StatementFinancial Accounting Standards
No. 71.
FERC.......................143: Accounting for Asset Retirement
Obligations.
FERC......................... Federal Energy Regulatory Commission.
First Collateral Trust
BondsBonds...................... Bonds issued under the First CollateralIndenture of Trust, Indenture.
First Collateral Trust
Indenture................. The Indenture,
dated as of August 1, 1998, of Tucson Electric Power CompanyTEP to Bank
of Montreal Trust Company of the
CityBank of New York, assuccessor trustee.
First Mortgage Bonds.......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
CompanyTEP to TheJPMorgan
Chase National Bank, of the
City of New York, assuccessor 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.Four Corners................. Four Corners Generating Station.
GAAP......................... Generally Accepted Accounting Principles.
Global Solar...............Solar................. Global Solar Energy, L.L.C.Inc., a corporation
which is 50% ownedcompany that
develops and manufactures thin-film
photovoltaic cells. Millennium owns 87% of
Global Solar.
Heating Degree Days.......... An index used to measure the impact of weather
on energy usage calculated by AETsubtracting the
average of the high and 50% owned by
ITN.
Holding Company Act........ The Public Utility Holding Company Act of
1935, as amended.
IDBs.......................low daily temperatures
from 65.
IDBs......................... Industrial development revenue or pollution
control revenue bonds.
ION........................ ION International,IPS.......................... Infinite Power Solutions, Inc., a wholly-owned
subsidiarycompany that
develops thin-film batteries. Millennium owns
77.5% of Millennium.
IRS........................IPS.
IRS.......................... Internal Revenue Service.
Irvington..................
DEFINITIONS
(continued)
- ------------------------------------------------------------------------------
Irvington.................... Irvington Generating Station.
Irvington Lease...........Lease.............. The leveraged lease arrangement relating to
Irvington Unit 4.
ISO........................ISO.......................... Independent System Operator.
ITC........................ITN.......................... ITN Energy Systems, Inc. was formed to provide
research, development, and other services.
Millenium currently owns 49% but has agreed
to reduce its ownership to 9%.
ITC.......................... Investment tax credit.
ITN........................ ITN Energy Systems, Inc., an unaffiliated
company which owns 50% of Global Solar.
kW......................... Kilowatt(s).
kWh........................kWh.......................... Kilowatt-hour(s).
kV.........................kV........................... Kilovolt(s).
kVA........................ Kilovoltampere(s).
LOC........................LOC.......................... Letter of Credit.
MEH........................MEG.......................... Millennium Environmental Group, Inc., a wholly-
owned subsidiary of Millennium, which manages
and trades emission allowances, coal, and
related financial instruments.
MEH.......................... MEH Corporation, a wholly-owned subsidiary
of Millennium.
DEFINITIONS
(continued)
Millennium.................Millennium, which formerly held a 50%
interest in NewEnergy.
MicroSat..................... MicroSat Systems, Inc. is a company formed to
develop and commercialize small-scale
satellites. Millennium currently owns 49%
but has agreed to reduce its ownership to 35%.
Millennium................... Millennium Energy Holdings, Inc., a wholly-
ownedwholly-owned
subsidiary of UniSource Energy.
MSR........................ Modesto, Santa ClaraMimosa....................... Minerales de Monclova, S.A. de C.V., an owner of
coal and Redding Public Power
Agency.
MW.........................associated gas reserves and a supplier
of metallurgical coal to the steel industry
and thermal coal to the Mexican electricity
commission. Sabinas owns 19.5% of Mimosa.
MMBtus....................... Million British Thermal Units.
MW........................... Megawatt(s).
MWh........................MWh.......................... Megawatt-hour(s).
Nations Energy.............Energy............... Nations Energy Corporation, a wholly-owned
subsidiary of Millennium.
Navajo.....................Millennium, and holder of a
minority interest in an independent power
project in Panama.
Navajo....................... Navajo Generating Station.
NewEnergy..................NewEnergy.................... NewEnergy, Inc., formerly New Energy Ventures,
Inc., a company in which a 50% interest was
owned by MEH.
NOL........................NOL.......................... Net Operating Loss carryback or carryforward for
income tax purposes.
NTUA....................... Navajo Tribal Utility Authority.
PNM........................PG&E......................... Pacific Gas and Electric Company.
PNM.......................... Public Service Company of New Mexico.
Rate Settlement............ TEP's Rate Settlement agreement approvedPowertrusion................. POWERTRUSION, International, Inc., a company
owned 50.5% by the ACC in August 1998,Millennium, which provides
retail base price decreases over a two-year
period.manufactures
lightweight utility poles.
Revolving Credit........... $100Credit Facility.... $60 million revolving credit facility entered
into under the Credit Agreement between a
syndicate of banks and TEP.
RTO........................RTO.......................... Regional Transmission Organization.
Rules......................Rules........................ Retail Electric Competition Rules.
Sabinas...................... Carboelectrica Sabinas, S. de R.L. de C.V., a
Mexican limited liability company. Millennium
owns 50% of Sabinas.
San Carlos.................Carlos................... San Carlos Resources Inc., a wholly-owned
subsidiary of TEP.
San JuanJuan..................... San Juan Generating Station.
Second Mortgage Bonds......Bonds........ TEP's second mortgage bonds issued under the
General Second Mortgage.
SES........................Indenture of Mortgage and Deed of Trust, dated
as of December 1, 1992, of TEP to the Bank of
New York, successor trustee, as supplemented.
SCE.......................... Southern California Edison Company.
SES.......................... Southwest Energy Solutions, Inc., a wholly-
ownedwholly-owned
subsidiary of Millennium.
Settlement Agreement.......Agreement......... TEP's Settlement Agreement approved by the ACC
in November 1999 that provided for electric
retail competition and transition recovery
asset
recovery.
Springerville..............Springerville................ Springerville Generating Station.
DEFINITIONS
(concluded)
- ------------------------------------------------------------------------------
Springerville Coal Handling
Facilities Leases..........Leases............ Leveraged lease arrangements relating to the
coal handling facilities serving
Springerville.
Springerville Common
Facilities...............Facilities................. Facilities at Springerville used in common
with Springerville Unit 1 and Springerville
Unit 2.
Springerville Common
Facilities Leases........Leases.......... Leveraged lease arrangements relating to an
undivided one-half interest in certain
Springerville Common Facilities.
Springerville Unit 1.......1......... Unit 1 of the Springerville Generating Station.
Springerville Unit 1 LeasesLease... Leveraged lease arrangement relating to
Springerville Unit 1 and an undivided
one-
halfone-half interest in certain Springerville
Common Facilities.
Springerville Unit 2.......2......... Unit 2 of the Springerville Generating Station.
SRP........................SRP.......................... Salt River Project Agricultural Improvement
and Power District.
TEP........................TEP.......................... Tucson Electric Power Company, the principal
subsidiary of UniSource Energy.
TEP Warrants...............Warrants................. Warrants for the purchase of TEP Common
Stockcommon stock
which were issued in 1992.
Tri-State.................... Tri-State Generation and Transmission
Association.
TruePricing.................. TruePricing, Inc., a start-up company
established to market energy related
products.
UED.......................... UniSource Energy...........Energy Development Company, a wholly-
owned subsidiary of UniSource Energy, which
engages in developing generation resources
and other project development services and
related activities.
UniSource Energy............. UniSource Energy Corporation.
UniSource Energy Warrants..Warrants.... Warrants for the purchase of UniSource Energy
Common Stock whichthat were issued in exchange for
TEP Warrants, pursuant to an
exchange offerWarrants.
WestConnect.................. The proposed for-profit RTO in which expired October 23,
1998.
WSCC....................... Western Systems Coordinating Council.TEP is a
participant.
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 together with the cautionary statements and
important factors included in this Form 10-
K.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," "projects," and "projects."similar expressions. We
express our expectations, beliefs and projections in good faith and believe
them to have a reasonable basis. However, we cannot assure youmake no assurances that
thesemanagement's expectations, beliefs or projections will be achieved or
realized.accomplished.
ITEM 1. - BUSINESS
- --------------------------------------------------------------------
THE COMPANY
- -----------
Overview of Consolidated Business--------------------------------------------------------------------------------
OVERVIEW OF CONSOLIDATED BUSINESS
- ---------------------------------
UniSource Energy Corporation (UniSource Energy) is a holding company
whichthat owns all of the outstanding common stock of Tucson Electric Power Company
(TEP) and, Millennium Energy Holdings, Inc. (Millennium) and UniSource Energy
Development Company (UED). TEP, an electric utility, has provided electric
service to the community of Tucson, Arizona, for over 100 years. Millennium
invests in unregulated ventures, including a developer of thin-film
batteries, a developer of small-scale commercial satellites, and a developer
and manufacturer of thin-film photovoltaic cells. UED engages in developing
generating resources and other project development activities, including
facilitating the expansion of the Springerville Generating Station. We
conduct our business in these three primary business segments-TEP's Electric
Utility Segment, the Millennium Energy Businesses Segment, and the UniSource
Energy Development Segment. See Notes 4 and 5 of Notes to Consolidated
Financial Statements. See Millennium Energy Businesses and UniSource Energy
Development Company below.
In October 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens Communications Company (Citizens) for the purchase
by UniSource Energy of Citizens' Arizona electric utility and gas utility
businesses for a total of $230 million. The purchase price of each is
subject to adjustment based on the date on which the transaction is closed
and, in each case, on the amount of certain assets and liabilities of the
purchased business at the time of closing. The closing of these transactions
is subject to approval by the Arizona Corporation Commission (ACC), the
Federal Energy Regulatory Commission (FERC) and the SEC. If completed, these
transactions would add to our customer base approximately 77,500 retail
electric customers in Arizona, and approximately 122,000 retail gas customers
in Arizona. See Item 7.-Management's Discussion and Analysis of Financial
Condition and Results of Operations, Asset Purchase Agreements, for more
information regarding these transactions.
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
that was incorporated on January 25, 1902. 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 outstandingexchanged shares of stock resulting in TEP common stock were exchanged, onbecoming a
share-for-share
basis, for sharessubsidiary of UniSource Energy common stock.Energy. Following the share exchange, TEP
transferred the stock of its subsidiary Millennium (formerly MEH Corporation) to UniSource Energy in
exchange for a $95 million promissory note. (SeeEnergy. See
Note 1 of Notes to Consolidated Financial Statements).Statements-Nature of Operations and
Summary of Significant Accounting Policies.
The table below shows the contributions to our consolidated after-tax
earnings by our three business segments, as well as parent company expenses.
2002 2001 2000
--------------------------------------------------------------------
- Millions of Dollars -
Business Segment
TEP was incorporated$ 53.7 $ 75.3 $ 51.2
Millennium (15.5) (9.2) (4.1)
UED 0.8 0.8 -
UniSource Energy Standalone (1) (5.8) (5.6) (5.2)
--------------------------------------------------------------------
Consolidated Net Income $ 33.2 $ 61.3 $ 41.9
====================================================================
(1) Represents interest expense (net of tax) on the note payable
from UniSource Energy to TEP.
The electric utility industry has undergone significant regulatory
change in recent years. See Item 7. - Management's Discussion and Analysis
of Financial Condition and Results of Operations, Factors Affecting Results
of Operations, Outlook and Strategies, for a discussion of our plans and
strategies to remain competitive and flexible in this changing environment
and Rates and Regulation, below, for the Statestatus of Arizona on December 16,
1963.competition in Arizona.
References in this report to "we" and "our" are to UniSource Energy and
its subsidiaries, collectively. References in this report to the "utility
business" are to TEP.
TEP ELECTRIC UTILITY OPERATIONS
- -------------------------------
TEP is the successor by merger asprincipal operating subsidiary 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),UniSource Energy. In 2002,
TEP's electric utility operations contributed 99% of UniSource Energy's
operating revenues and the Millennium Energy Businesses
Segment comprised 94% of the unregulated subsidiaries owned by
Millennium.
Overview of Electric Utility
- ----------------------------its assets.
SERVICE AREA AND CUSTOMERS
TEP is a vertically integrated utility whichthat provides regulated electric
service to over 330,000355,000 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 840,000891,000 in the greater Tucson
metropolitan area in Pima County, as well as parts of Cochise County. TEP
holds a franchise to provide electric distribution service to customers in
the CityCities of Tucson and South Tucson. This franchise expiresThese franchises expire in 2001.2026 and
2017, respectively. TEP is negotiating a
renewal of the franchise. However, expiration of the franchise
would not have a material effect on the ability of TEPalso sells electricity to serve
customersother utilities and power
marketing entities in the City of Tucson. (See Customers, Franchise below).
TEP also engages inwestern U.S.
RETAIL CUSTOMERS
TEP's retail sales are influenced by several factors, including seasonal
weather patterns, competitive conditions and 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
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Peak Demand - MW -
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%
- ---------------------------------------------------------------------------overall economic climate.
The peak demand for TEP's retail service area occurs during the summer months
due to the cooling requirements of ourTEP's retail customers. TEP's localretail peak
demand has grown at an average annual rate of about 2.0%approximately 2.7% during the
past five years.
The peak demand for
firm sales to other utilities generally does not coincide withIn 2002, 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%2.4% while total
retail energy consumption decreased by approximately 3%. This decrease in
1999kWh energy sales was primarily attributable to 329,779. TEP expectsreduced sales to copper mining
customers. See Sales to Large Industrial Customers, below. The table below
shows the number of its retailtrend in the percentage distribution customers, and the amount of energy consumedsales 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% annuallymajor
customer class over the same period. TEP
expects energy consumed by its residential, commercial, non-mining
industrial and mining customers to comprise approximately 36%,last three years.
2002 2001 2000
---- ---- ----
Residential 40% 38% 37%
Commercial 20% 19% 18%,
Non-mining Industrial 28% and 15%, respectively, of total energy consumption during that
period.27% 28%
Mining 9% 13% 14%
Public Authority 3% 3% 3%
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 usesmakes assumptions about the weather, the economy and
competitive conditions. The
forecasts do not take into accountBased on these factors, TEP expects that its peak
demand, its number of retail customers and their energy consumption will
increase at 2 - 3% annually through 2006.
During that period, TEP expects total retail energy consumption by customer
class will be distributed similarly to the source or price of energy.
Certain2002 distribution.
Beginning January 1, 2001, all of TEP's retail customers arewere 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,providers, the forecasted growth rates in
the number of customers referred to above would continue to apply to TEP's
distribution business. FranchiseAs of March 4, 2003, no TEP holds a franchise to provide electric service toretail 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 approvedare
currently served by vote of the population of Tucson
in a general or special election. If the franchise expiresalternate energy providers. See Rates 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.Regulation,
State, below.
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, cement manufacturing, defense, health care, education,
military bases and other governmental entities. Local, regional, and
national economic factors can impact the financial condition and operations
of TEP's large industrial customers. Such economic conditions may directly
impact energy consumption by large industrial customers, and may indirectly
impact residential and small commercial sales and revenues if employment
levels and consumer spending is affected.
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-tariffednegotiated rates. These contracts expire between 2003in 2006 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.2008. Whether these
contracts are extended or terminated will depend, in part, on market
conditions and available alternatives. SALES FOR RESALETEP's sales to mining customers
depend on a variety of factors including changes in supply and demand in the
world copper market and the economics of self-generation. U.S. copper prices
were approximately 77 cents per pound in February 2003, and have ranged
between 63 cents and 91 cents per pound during the last five years. As the
result of low copper prices, TEP's mining customers have reduced operations
in recent years, and have correspondingly reduced energy consumption. See
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations, Results of TEP, Utility Sales and Revenues.
Energy sales to and revenues from TEP's mining customers may continue to
decline in the future. One of TEP's mining customers substantially curtailed
mining operations at one of its mines in December of 2002. This reduction in
operations will further decrease sales. TEP's revenue from this customer was
approximately $11 million in 2002. Any reduction of this retail revenue
would be mitigated, however, by an opportunity for TEP to sell this
generation capacity in the wholesale market or to reduce generation with
resulting fuel costs reductions. Depending on wholesale market price
assumptions, TEP's pre-tax net income in 2003 could be reduced by $1 million
to $3 million from the 2002 level if this customer ceases mining operations
at this location.
WHOLESALE BUSINESS
TEP's electric utility operations include the wholesale marketing of
electricity to other utilities and power marketers. These transactions, termedwholesale sales
for resale,transactions 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'sInterconnections, below.
TEP typically uses its own generation to serve the requirements of its
retail and long-term wholesale customers. Generally, TEP commits to future
sales for resale consist primarily of three types of
sales, which are listed below, along withbased on expected excess generating capability, forward prices and
generation costs, using a diversified portfolio approach to provide a balance
between long-term, mid-term and spot energy sales. When TEP expects to have
excess generating capacity (usually in the percentage
contribution to total revenues from sales for resale in 1999:
-- sales of firm capacity under long-term contracts (26%);
--first, second and fourth calendar
quarters), TEP may enter into forward contracts to sell energy for periodsa portion of up to one year
(36%);this
forecasted excess generating capacity. Then, during the course of each
month, TEP will analyze any remaining excess short-term generating capacity
and --make energy sales in the daily and hourly markets. TEP also enters into
limited forward sales and purchases to take advantage of favorable market
opportunities.
TEP also purchases power in the wholesale markets under certain
situations. It may enter into forward contracts: (a) to purchase energy
under long-term contracts to serve retail load and long-term wholesale
contracts, (b) to purchase capacity or energy during periods of planned
outages or for peak summer load conditions, and (c) to purchase energy to
resell to certain wholesale customers under load and resource management
agreements. Finally, TEP may purchase energy in the daily and hourly markets
(35%).
KWh sales for resale increasedto meet higher than anticipated demands, to cover unplanned generation
outages, or when it is more economical than generating.
As a participant in the western U.S. wholesale power markets, TEP is
directly and indirectly affected by 16%changes affecting these markets and
market participants. In 2000 and 2001, a significant portion of TEP's
revenues and earnings resulted from its wholesale marketing activities, which
benefited from strong demand and high wholesale prices in 1999 while revenues fromthe western U.S.
These market conditions were the result of a number of factors, including
power supply shortages, high natural gas prices, transmission, and
environmental constraints. During this period, these sales grewmarkets experienced
unprecedented price volatility, as well as payment defaults and bankruptcies
by 20%. This increaseseveral of its largest participants. Regulatory agencies became concerned
with the outcomes of deregulation of the electric power industry and
intervened in the operation of these markets by, among other things, imposing
price caps and initiating investigations into potential market manipulation.
Since mid-2001, conditions in the western energy markets have changed
significantly as a result of various regulatory actions, moderate weather, a
decrease in natural gas prices, the addition of new generation in the region,
the slowdown of the regional economy, and the energy crisis in California.
In addition, the presence of fewer creditworthy counterparties, as well as
legal, political and regulatory uncertainties have reduced market liquidity
and trading volume. Several companies that were large market participants
have either curtailed their activities or exited the business completely.
These factors placed downward pressure on wholesale electricity prices, and
resulted in significantly lower wholesale electricity sales and revenues was
mainlyat
TEP in 2002.
In the first quarter of 2003, both the natural gas and western U.S.
wholesale electricity markets have experienced some price spikes and
volatility due to increased trading activitysevere winter weather in certain regions, as well as high
gas storage withdrawals due to lagging production. TEP cannot predict,
however, whether average wholesale electricity prices will remain higher than
in 2002 and what the forward marketsimpact will be on TEP's sales and higher market pricesrevenues in 2003.
TEP expects to continue to be a participant in the wholesale energy
markets, primarily by making sales and purchases in the short-term and
forward markets. TEP expects the market price and demand for capacity and
energy to continue to be influenced by the following factors, among others,
during the next few years:
- continued population growth and economic conditions in the western U.S.;
- availability of capacity throughout the western U.S.;
- the extent of electric utility industry restructuring in Arizona,
California and other western states;
- the effect of FERC regulation of wholesale energy markets;
- the availability and price of natural gas;
- precipitation, which affects hydropower availability;
- transmission constraints; and
- environmental restrictions and the cost of compliance.
See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Factors Affecting Results of Operations,
Competition, Western Energy Markets and Market Risks, for aadditional
discussion of TEP's wholesale marketing activities.
TEP currently has long-term contracts to sell firm capacity as
follows:
Minimum
Contract
Company Demand MW Contract Term
- ------- --------- -------------
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).
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, 1999,2002, TEP owned or leased 1,9042,002 MW of net generating
capability as set forth in the following table:
Net TEP's Share
Unit Fuel Owned/ Capability Operating -----------
Generating Source No. Location Type Leased MW Agent % MW
- ----------------- ---- -------- ---- ------ ---------- --------- ----------------------------------------------------------------------------------------------------------------
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
Turbines Tucson, AZ Gas/Oil Owned 122 TEP 100.0 122
Internal Combustion
Turbines -----Tucson, AZ Gas Owned 95 TEP 100.0 95
Solar Electric Generation Springerville/
Tucson, AZ Solar Owned 3 TEP 100.0 3
- ----------------------------------------------------------------------------------------------------
Total CompanyTEP Capacity (1) 1,904
-----
- ---------------2,002
====================================================================================================
(1) Excludes 235380 MW of additional resources, which consistsconsist of certain capacity purchases
and interruptible retail load. At December 31, 1999,2002, total owned capacity was 1,3681,466 MW
and leased capacity was 536 MW.
TEP is the operator of theThe 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 TEP's wholly-owned
subsidiary, San Carlos Resources Inc. (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 time at a net capacity of 400 MW each. The
initial termsSpringerville Station was originally designed for four generating units. UED
is currently evaluating opportunities to expand the Springerville Station by
assigning the rights to construct Springerville Units 3 and 4 to unrelated
third parties. TEP will be the operator of the new units. See UniSource
Energy Development Company, below.
The Springerville Unit 1 Leases, whichStation also includes a 50% interest inthe Springerville Coal Handling
Facilities and the Springerville Common Facilities,
expire on January 1, 2015. At the end of the initial terms,Facilities. In 1984, TEP may
exercise fair market value purchasesold and
renewal options. The annual
cash cost of lease payments forleased back the Springerville Unit 1 Leases will
range from $33 million to $176 million, averaging approximately $81
million.Coal Handling Facilities. In December 1985, TEP sold
and leased back a 50% interest in the Springerville Common Facilities. The
initial lease term forother 50% interest is included in the Springerville Common Facilities Leases expiresUnit 1 leases.
TEP obtains approximately 600 MW, or 30%, of its generating capacity
from jointly-owned facilities at the San Juan, Four Corners, and Navajo
Generating Stations in 2017 for one owner
participantNew Mexico 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 STATIONnorthern Arizona.
Irvington is a four-unit generating station located in Tucson, AZ.Arizona.
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 unit4 operates
primarily on coal in combination with natural gas or landfill gas, but it is
also able to operate solely on natural gas. Units 1, 2, and 3 are wholly-
owned by TEP, and Unit 4 was initially sold and then leased back in 1988 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.lease. The Irvington Station, along with the internal combustion turbines
located in Tucson, are designated as "must-run generation" facilities. Must-runMust-
run generating units are those which are required to run in certain
circumstances in order to maintain distribution system reliability and meet local load
requirements.
POWER EXCHANGE AGREEMENT
As partTo improve local system reliability in Tucson and to serve increasing
load requirements, TEP added 95 MW of new peaking resources in June 2001,
consisting of a 1992 litigation settlement,75 MW gas turbine it purchased and a 20 MW gas turbine leased
from UED. In September 2002, TEP and Southern
California Edison (SCE) agreedpurchased the 20 MW gas turbine from UED.
See Note 7 of Notes to a ten-year power exchange
agreement. The agreement began in May 1995Consolidated Financial Statements, 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, Liquidity and Capital Resources, Contractual Obligations, for
more information regarding the Springerville and Irvington leases.
POWER EXCHANGE AGREEMENT
TEP and Southern California Edison Company (SCE) have a ten-year power
exchange agreement which requires SCE to provide firm system capacity of 110
MW to TEP during the summer months. TEP is then obligated to return to SCE
in the winter months the same amount of energy that TEP received during the
preceding summer. For example, in the summer of 2002, TEP received
approximately 133,000 MWh from SCE and returned the same amount during the
winter months from November 2002 to February 2003. This agreement expires in
February 2005.
OTHER PURCHASES AND INTERCONNECTIONS
TEP purchases additional electric energy from other utilities and power
marketers. The amount of energy purchased varies substantially from time to
time depending on the demand for energy, the cost of purchased energy
compared with TEP's cost of generation, and the availability of such energy.
TEP may also sell electric energy at wholesale. See also Wholesale Business,
above and Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Factors Affecting 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 also 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 andvarious regional reserve sharing, among membersreliability
and power sharing organizations. These relationships allow TEP to enhancecall upon
other utilities during emergencies such as plant outages and system
disturbances, and also reduce the amount of reserves TEP is required to
carry.
PEAK DEMAND AND RESOURCES
Peak Demand 2002 2001 2000 1999 1998
-------------------------------------
- MW -
Retail Customers-Net One Hour 1,899 1,840 1,862 1,754 1,786
Firm Sales to Other Utilities 228 151 143 178 179
---------------------------------------------------------------------------
Coincident Peak Demand (A) 2,127 1,991 2,005 1,932 1,965
Total Generating Resources 2,002 1,999 1,904 1,904 1,896
Other Resources (1) 308 217 248 235 235
---------------------------------------------------------------------------
Total TEP Resources (B) 2,310 2,216 2,152 2,139 2,131
Total Margin (B) - (A) 183 225 147 207 166
Reserve Margin (% of Coincident
Peak Demand) 9% 11% 7% 11% 8%
(1) Other Resources includes firm power purchases and interruptible retail
and wholesale loads.
---------------------------------------------------------------------------
TEP's retail sales are influenced by several factors, including seasonal
weather patterns, competitive conditions and the overall economic climate.
The peak demand for TEP's retail service area occurs during the summer months
due to the cooling requirements of its retail customers. TEP's retail peak
demand has grown at an average annual rate of approximately 2.7% during the
past five years.
The chart above shows the relationship over a five-year period between
TEP's peak demand and its energy resources. TEP's margin is the difference
between total energy resources and coincident peak demand, and the reserve
margin is the ratio of margin to coincident peak demand. TEP maintains a
minimum reserve margin in excess of 7% to comply with reliability criteria
set forth by the Western Electricity Coordinating Council (WECC), (formerly
the Western Systems Coordinating Council). TEP's actual reserve margin in
2002 was 9%. In 2002, TEP purchased 50 MW of firm capacity and energy in the
Southwest region;forward energy markets during the summer peak period to ensure an adequate
reserve margin.
TEP's forecasted retail peak demand for 2003 is approximately 1,950 MW,
compared with actual peak demand of 1,899 MW in 2002. Except for certain
peak hours during the summer peak period, TEP believes it has sufficient
resources to meet this expected demand in 2003 with its existing resources.
TEP plans to make forward purchases to ensure adequate supply during its
summer peak period. Beginning in early 2003, any future resource needs are
expected to be procured through a competitive bidding process being
established by the ACC.
See Future Generating Resources--TEP, and Item 7. - --Western Systems Coordinating Council (WSCC) - A groupManagement's
Discussion and Analysis of western
electric systemsFinancial Condition and suppliers working cooperatively to assureResults of Operations,
Factors Affecting Results of Operations, Recent Developments in 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.Arizona
Regulatory Environment, below.
FUTURE GENERATING RESOURCES -- TEP
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 ACC's electric competition rules, as
currently in effect, modified 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 thesecustomers. These rules and TEP's ability to retain and attract
customers. Undercustomers will affect the Retail
Competition Rules as adopted, some of TEP's retail customers are
eligible to choose alternative energy providers.need for future resources. 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 purchasesby purchasing 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, Factors Affecting
Results of Operations, Competition.
To improve local system reliability TEP believes additionalwill continue to add peaking resources arein the Tucson area as needed
based upon our forecasts of retail and firm wholesale load, as well as the
statewide transmission infrastructure. TEP currently forecasts that new
peaking resources of 75 MW may be needed in Tucsonboth 2008 and 2010. To
facilitate the proposed expansion of the Springerville Generating Station,
TEP is also planning to enter into a power purchase contract for up to 100 MW
of capacity from the proposed addition of Unit 3 at Springerville under
development by 2001. To address this
need,UED. This contract would be for up to five years, beginning
with commercial operation of Unit 3, expected in 2006. TEP anticipates that
any power purchased by it under such a contract will be sold in the third quarterwholesale
markets. TEP could not use Springerville Unit 3 power to serve its retail
load without complying with the competitive bidding procedures being
established by the ACC. See UniSource Energy Development Company, below and
Item 7. - Management's Discussion and Analysis of 1999,Financial Condition and
Results of Operations, Factors Affecting Results of Operations, Industry
Restructuring.
FUEL SUPPLY
TEP's principal fuel for electric generation is low-sulfur coal. Fuel
information is provided below:
Average Cost Per MMBTU Consumed Percentage of Total BTU Consumed
2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------
Coal (A) $1.59 $1.63 $1.61 94% 90% 91%
Gas 4.28 5.99 5.70 6 10 9
- ---------------------------------------------------------------------------------
All Fuels $1.76 $2.08 $1.95 100% 100% 100%
(A) The average cost per ton of coal for 2002, 2001, and 2000 was $30.86
$30.96, and $30.69, respectively.
TEP'S COAL SUPPLY
Year Average
Contract Sulfur
Station Coal Supplier Terminates Content Coal Obtained From (A)
------- ------------- ---------- ------- ------------------------------
Springerville Peabody Coalsales Company 2010 0.9% Lee Ranch Coal Company
Four Corners BHP Billiton 2004 (B) 0.8% Navajo Indian Tribe
San Juan San Juan Coal Company 2017 0.8% Federal and State Agencies
Navajo Peabody Coalsales Company 2011 0.6% Navajo and Hopi Indian Tribes
Irvington Various approved suppliers - - Various locations
(A) Substantially all of the suppliers' mining leases extend at least as long as coal
is being mined in economic quantities.
(B) Contract is under negotiation to be extended through 2016.
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.
The coal supply contract for the Springerville Generating Station ends
in June 2010, with an option to extend the term for another ten years. The
Springerville contract has an adjustment clause that will affect the future
cost of coal delivered. We expect coal reserves to be sufficient to supply
the estimated requirements of Springerville for its presently estimated
remaining life. The Springerville coal contract requires TEP to take 1.9
million tons of coal per year through June 2010 at an estimated annual cost
of $45 million for the next five years and requires 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. The Springerville
rail contract expires in 2009. This contract requires TEP to transport 1.9
million tons of coal per year through 2009 at an estimated annual cost of $13
million for the next five years.
In July 2002, TEP terminated the long-term coal supply contract for the
Irvington station. TEP incurred a pre-tax charge of $11.3 million related to
the cost of terminating this contract. The termination fee relieves TEP of
up to $3.5 million in annual pre-tax take-or-pay payments. TEP is currently
purchasing coal for Irvington under short-term contracts to take advantage of
favorable price opportunities. At this time, there is no concern for future
coal availability for the life of this station. While the Irvington coal
supply contract was terminated, the rail contract for the Irvington station
is in effect until the earlier of 2015 or the remaining life of Unit 4. The
rail contract requires TEP to transport at least 75,000 tons of coal per year
through 2015 at an estimated annual cost of $1.5 million or to make a minimum
payment of $0.5 million for the next five years if coal deliveries are not
chosen. See Note 10 of Notes to Consolidated Financial Statements -
Commitments and Contingencies, TEP Commitments, Fuel Purchase and
Transportation Commitments.
Generating Facilities Operated by Others
----------------------------------------
TEP also participates in jointly-owned generating facilities at Four
Corners, Navajo and San Juan, where coal supplies are under long-term
contracts administered by the operating agents. The coal contract for Four
Corners terminates in 2004 unless extended pursuant to its terms. The Four
Corners contract is under negotiation and is expected to be extended through
July 1, 2016. The coal quantities under contract for the Navajo and San Juan
mine-mouth coal-fired generating stations are expected to be sufficient for
the remaining lives of the stations.
The contracts to purchase coal for use at the jointly-owned facilities
require TEP to purchase minimum amounts of coal at an estimated average
annual cost of $16 million for the next five years.
NATURAL GAS
TEP purchases natural gas from Southwest Gas Corporation (SWG) for its
natural gas-fired facilities. TEP is a retail customer of SWG under a
special procurement agreement. In 2001, TEP entered into ana new five-year
agreement that provides for all of TEP's natural gas commodity and
transportation needs for use in power generation. SWG purchases gas at TEP's
direction at spot or forward market prices. The first two and one-half years
of the contract, through October 31, 2003, as extended, require that TEP take
a minimum of 10 million MMBtus annually at transportation rates established
in the contract. Minimum gas transportation costs for 2003 are expected to
purchase a 75be $6 million. SWG is affected by recent FERC actions relating to its gas
allocations from the Permian and San Juan basins. A FERC order on this issue
is expected in the summer of 2003. At that time, TEP and SWG will
renegotiate the terms of the special procurement agreement. TEP does not
anticipate any material difference in operational or economic terms in the
new agreement, which is estimated to begin November 1, 2003. Actual gas
commodity costs will depend on the volumes purchased and the market prices.
During 2002, TEP received natural gas sufficient to meet all of its needs.
During 2002, natural gas supplied approximately 6% of TEP's generation.
TEP's gas usage was significantly higher in 2000 and 2001 because of: (1)
higher wholesale energy prices in the western U.S. in the second half of 2000
and the first half of 2001, which made it profitable for TEP to sell gas-
generated energy into the wholesale markets, and (2) the addition of the two
new gas turbines in 2001, providing 95 MW in new generating capacity. TEP
also burns small amounts of landfill gas turbine. This peaking unitat Irvington Unit 4.
WATER SUPPLY
TEP believes there will be designatedsufficient water to supply the requirements
of TEP's existing and planned electric generating stations in Arizona.
However, drought conditions in the Four Corners region, combined with water
usage in upper New Mexico, have resulted in decreasing water levels in the
lake that indirectly supplies water to the San Juan and Four Corners
generating stations located in New Mexico. The U.S. Bureau of Reclamation
projects that, based on historical factors and seasonal usage, there should
be adequate capacity in the lake for all water users. The projected water
levels are not expected to affect the operations of the generating stations
in 2003.
TRANSMISSION ACCESS
TEP has transmission access and power transaction arrangements with over
120 electric systems or suppliers. In January 2001, TEP and Citizens entered
into a project development agreement for the joint construction of a 62-mile
transmission line from Tucson to Nogales, Arizona. In January 2002, the ACC
approved the location and construction of the proposed 345 kV line, almost
half of which runs through a national forest. A drought-caused closure of
the forest in June 2002 has delayed the progress on the environmental impact
study required for Federal project approval. A U.S. Department of Energy
(DOE) and Forest Service decision is expected to occur by the end of 2003.
Construction could begin as early as mid-2004 with an expected in-service
date eight months after the start of construction. Construction costs are
expected to be approximately $75 million. In 2000, TEP applied to the DOE
for a must-run generation facility. We expect this unitPresidential Permit to allow extension of the line across the
international border with Mexico to connect with Mexico's utility system,
providing further reliability and market opportunities in the region.
In 1997, TEP and other transmission owners and users located in the
southwestern U.S. began to investigate the feasibility of forming an
Independent System Operator (ISO) for the region. In December 1999, the FERC
issued FERC Order 2000, which established timelines for all transmission
owning entities to join a Regional Transmission Organization (RTO) and
defined the minimum characteristics and functions of an RTO. TEP and three
other southwestern utilities filed agreements and operating protocols with
the FERC in October 2001 to form a new, for-profit RTO to be known as
WestConnect RTO, LLC (WestConnect).
WestConnect will be responsible for security, reservations, scheduling,
transmission expansion and planning, and congestion management for the
regional transmission system. It will also focus on ensuring reliability,
nondiscriminatory open-access, and independent governance. Regional
transmission owners would have the option, but not be required, to transfer
ownership of transmission assets to the RTO. At present, TEP intends to turn
over only operating control of its transmission assets to the RTO.
Additionally, the RTO may build new transmission lines in operationthe region, which
would be owned by the third quarterRTO.
In October, 2002, the FERC issued a provisional order approving, in
part, the WestConnect RTO proposal. The FERC also required WestConnect,
along with the other two RTOs in the western region (the California
Independent System Operator (CISO) and RTO West), to participate in a
steering group to encourage the development of 2001.a seamless wholesale electric
energy market. WestConnect's operation is dependent on the resolution of
these issues and is also subject to approval by state regulatory agencies in
the region. WestConnect is not expected to become operational prior to 2005.
On July 31, 2002, the FERC issued a Notice of Proposed Rulemaking (NOPR)
proposing standard market design rules that would significantly alter the
markets for wholesale electricity and transmission and ancillary services in
the U.S. The new rules would establish a generation adequacy requirement for
"load-serving entities" and a standard platform for the sale of electricity
and transmission services. Under the new rules, Independent Transmission
Providers would administer spot markets for wholesale power, ancillary
services and transmission congestion rights, and electric utilities,
including TEP, would be required to transfer control over transmission
facilities to the applicable Independent Transmission Provider. The FERC
expects to release for comments a white paper on the standard market design
in April 2003, followed in July 2003 by final rules. Once the final rules
are issued, a phased compliance schedule will begin. TEP is currently in the
process of determining the impact the proposed rules would have on its
operations.
RATES AND REGULATION
- --------------------
GENERAL
TEP is regulated by theThe FERC and by the ACC.ACC regulate portions of TEP's utility accounting
practices and electricity rates. The FERC regulates the terms and prices of
TEP's sales to other utilities and resellers. In 1997, TEP was granted a
FERC tariff to sell power at market based rates. 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 affiliatesecurities, and
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.with affiliated parties.
STATE
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".base." Fair value rate base
was generally determined by reference to the original cost and the
reproductionreconstruction cost (in each
case, net(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.
WithIn September 1999, the ACC approved the Retail Electric Competition
Rules (Rules) that provided a framework for the introduction of retail
electric competition in TEP's
service territoryArizona. In November 1999, the ACC approved the
Settlement Agreement between TEP and certain customer groups related to the
implementation of retail electric competition in 2000, theArizona.
The Rules and TEP's Settlement Agreement requirerequired the unbundling of
electric services, with separate rates or prices 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 and must-run generation facilities will remain subject
to regulation on a cost of service basis. However,
certainTEP has met all conditions
must be met before competitive electricity will
be sold in TEP's service territory, such asrequired by the ACC to facilitate electric retail competition, including ACC
approval of TEP's direct access tariffs,tariffs. However, ESPs and their related
service providers must meet certain conditions before they can competitively
sell electricity in TEP's service territory. Examples of these conditions
include ACC certification of ESPs by the ACC and executioncompletion of direct access service
agreements by ESPs andwith 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
exceptprovided for certain customers that have negotiated non-standard
rates. The Settlement approved in November 1999 provides that,retail rate
reductions from 1998 through 2000, after these reductions,which TEP's retail rates will beare 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 decreaseis required
to file 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-servicecost 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 hasMatters, for more information on TEP's Settlement Agreement.
In October 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens for the purchase by UniSource Energy of Citizens'
Arizona electric utility and gas utility businesses for a total of $230
million. The purchase price of each is subject to adjustment based on the
date on which the transaction is closed and, in each case, on the amount of
certain assets and liabilities of the purchased business at the time of
closing. The closing of these transactions is subject to approval by the
ACC, the FERC and the SEC. Citizens had two cases pending before the ACC
requesting rate relief for both the Arizona electric and Arizona gas assets
prior to entering into the Asset Purchase Agreements with UniSource Energy.
The requested electric rate increase is to recover purchased power costs
and the gas rate increase is a base rate increase. In December 2002,
UniSource Energy and Citizens filed a lawsuit challengingJoint Application with the ACC's
order approving TEP's Settlement AgreementACC
requesting smaller increases in both pending cases. Under the proposal,
UniSource Energy asked that the 45% electric increase requested by
Citizens be reduced to 22%, and also filed an appealthat the 29% increase in gas rates be reduced
to 23%. UniSource Energy believes that the smaller proposed rate increases
are sufficient in light of the competition rules. The consumer group contends that allowing
marketplace competition to determine rates violatesnegotiated purchase price. We are currently
in settlement discussions with the ACC's
constitutional duty to set rates. We cannot predict the outcome of
these actions.ACC Staff and intervenors regarding this
Joint Application. See Item 7. - Management's Discussion and Analysis of
Financial Condition and Results of Operations, Tax Exempt Local Furnishing
Bonds for a discussion ofAsset Purchase Agreements.
FEDERAL
During 2000 and 2001, the possible effect of the transfer of
TEP's generating assets, referredFERC ordered hearings and issued several
orders 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
legislationmitigate volatile energy prices in the 2000 legislative session.
Additionally, federal legislators introduced several retail
competition initiativeswestern U.S. and to address
the energy emergency 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,California. During 2000, the FERC issued two orders pertainingestablished
certain soft caps on prices for power sold 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 bythe CISO. In June 2001, 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 approachprice mitigation plan applicable 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
marketcertain wholesale power
that may exist on the part of transmission owners.
TEP, along with other transmission owners and users locatedsales in the southwestern United States, is continuing to investigate the
feasibilitywestern U.S. This plan, which had a price cap of forming an Independent System Operator (ISO)$91.87 per
MWh, was in effect until October 31, 2002. The FERC adopted a price cap for
the region. An ISO, which could potentially satisfy the requirementsperiod thereafter 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.$250 per MWh.
See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Tax Exempt Local Furnishing
BondsFactors Affecting Results of
Operations, Western Energy Markets, for a discussion of the possible effect of the establishment
of a RTO, ISO and/or an AISAvarious FERC
proceedings, including refund hearings on power sold to California in
2000 and 2001, which may impact 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:results.
Cost Per Million BTU Consumed Percentage of Total BTU Consumed
----------------------------- --------------------------------TEP's UTILITY OPERATING STATISTICS
For Years Ended December 31,
2002 2001 2000 1999 1998
1997 1999 1998 1997
---- ---- ---- ---- ---- ----- -------------------------------------------------------------------------------------------------------
Coal (A) $1.66 1.65 $1.66 96% 97% 97%Generation and Purchased Power-kWh (000)
Remote Generation (Coal) 10,067,069 10,362,211 10,278,393 10,000,401 10,002,250
Local Tucson Generation (Oil, Gas 2.94 2.67 2.74& Coal) 1,402,504 1,820,783 1,667,308 1,115,277 720,515
Purchased Power 1,842,739 3,656,978 3,174,244 2,712,570 2,227,773
- -------------------------------------------------------------------------------------------------------
Total Generation and Purchased Power 13,312,312 15,839,972 15,119,945 13,828,248 12,950,538
Less Losses and Company Use 769,101 846,287 724,677 814,945 810,117
- -------------------------------------------------------------------------------------------------------
Total Energy Sold 12,543,211 14,993,685 14,395,268 13,013,303 12,140,421
=======================================================================================================
Sales-kWh (000)
Residential 3,188,726 3,122,332 3,027,963 2,736,837 2,662,598
Commercial 1,609,367 1,573,213 1,496,558 1,383,756 1,355,319
Industrial 2,261,463 2,270,446 2,262,212 2,220,900 2,139,464
Mining 695,221 1,040,762 1,140,811 1,200,214 1,230,259
Public Authorities 257,641 254,130 258,470 247,361 242,845
- -------------------------------------------------------------------------------------------------------
Total - Electric Retail Sales 8,012,418 8,260,883 8,186,014 7,789,068 7,630,485
Electric Wholesale Sales 4,530,793 6,732,802 6,209,254 5,224,235 4,509,936
- -------------------------------------------------------------------------------------------------------
Total Electric Sales 12,543,211 14,993,685 14,395,268 13,013,303 12,140,421
=======================================================================================================
Operating Revenues (000)
Residential $290,091 $283,673 $276,720 $253,352 $248,821
Commercial 168,159 164,345 157,744 148,039 146,269
Industrial 160,862 161,584 162,790 160,963 157,735
Mining 28,168 41,994 48,484 49,399 51,965
Public Authorities 18,769 18,521 18,908 18,147 17,950
- -------------------------------------------------------------------------------------------------------
Total - Electric Retail Sales 666,049 670,117 664,646 629,900 622,740
Electric Wholesale Sales 177,908 733,559 359,814 171,219 143,269
Net Unrealized Gain (Loss) on Forward
Electric Sales and Purchases 533 (1,315) - - -
Other Revenues 6,603 6,308 3,908 2,964 2,981
- -------------------------------------------------------------------------------------------------------
Total Operating Revenues $851,093 $1,408,669 $1,028,368 $804,083 $768,990
=======================================================================================================
Customers (End of Period)
Residential 326,847 318,976 311,673 303,653 295,469
Commercial 31,767 31,194 30,467 29,714 28,648
Industrial 695 705 711 705 684
Mining 2 2 2 4 3 3
---- ---- ----
All Fuels 1.73 1.69 1.68 100% 100% 100%4
Public Authorities 61 61 61 61 61
- --------------------
(A) The average cost-------------------------------------------------------------------------------------------------------
Total Retail Customers 359,372 350,938 342,914 334,137 324,866
=======================================================================================================
Average Retail Revenue per ton of coal for each of the last three
years (1999 - 1997) was $31.64, $31.33kWh Sold (cents)
Residential 9.1 9.1 9.1 9.3 9.3
Commercial 10.5 10.5 10.5 10.7 10.8
Industrial and $31.33 respectively.Mining 6.4 6.1 6.2 6.1 6.2
Average Retail Revenue per kWh Sold 8.3 8.1 8.1 8.1 8.2
Average Revenue per Residential Customer $886 $899 $899 $845 $855
Average kWh Sales per Residential Customer 9,737 9,897 9,834 9,132 9,144
COAL
Information concerning TEP's coal contracts is detailed below:
Year Average
Contract Sulfur Coal Obtained
Station Coal Supplier Terminates Content From (A)
------- ------------- ---------- ------- -------------
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.
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 of air and water quality,
resource extraction, waste disposal and land use 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 orin
compliance with all existing regulations and 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 wasbecame effective
January 1, 2000. All of TEP's generating facilities (except existing142 MW of its
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. Each allowance gives
the owner the right to emit one ton of SO2. Beginning in the year 2000, generating
units subject to 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. DueTEP had sufficient Emission Allowances to comply with the
Phase II SO2 regulations for compliance year 2002. However, 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.for
future compliance years.
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 forobtained 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.below. The CAAA also requirerequires 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 regulationsregulation of
electric utility generating units. Since these activities involve the
gathering of information not currently available, TEP cannot predict the
outcome of these studies.
Arizona and New Mexico have adopted regulations restricting the
emissions from existing and future coal, oil and gas-fired plants. These
regulations are in some instances more stringent than those adopted by the
Environmental Protection Agency (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.
TEP spent approximately $2.5 million in 2002, $2 million in 2001 and $1
million in 2000, and expects to spend approximately $2 million in 2003 and
2004 complying with these requirements. 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.
The EPA has issued a determination that coal and oil fired electric
utility steam generating units must control their mercury emissions. Final
regulations are expected to be issued in 2004.
On April 29, 2002, the Arizona Department of Environmental Quality
(ADEQ) issued a final permit granting the expansion of the Springerville
Generating Station to allow for two new 400 MW coal fired generating units.
TEP worked with the EPA and the ADEQ to determine mutually acceptable levels
of emissions for all four units to accomplish significant emission reductions
from current levels. If constructed, Springerville Unit 3 will be equipped
with modern emissions control technology and the emissions controls on Units
1 and 2 will be upgraded. SO2 emissions from all four units will be up to
55 percent less than those currently produced from the two existing units,
while NOx emissions will be up to 39 percent less. Upgrades to Units
1 and 2 will be paid for by the Unit 3 project. The Grand Canyon Trust
(GCT), an environmental activist group, has filed a petition with the EPA
to revoke the permit, based on the allegations in the litigation set forth
below.
On November 13, 2001, the GCT filed a complaint in U.S. District Court
against TEP for alleged violations of the Clean Air Act at the Springerville
Generating Station. The complaint alleged that more stringent emission
standards should apply to Units 1 and 2 and that new permits and the
installation of additional facilities meeting Best Available Control
Technology standards are required for the continued operation of Units 1 and
2 in accordance with applicable law. TEP believes the claims by the GCT are
without merit and will vigorously contest them.
On September 10, 2002, the U.S. District Court granted TEP's motion for
summary judgment on one of the primary issues in the case: whether TEP
commenced construction within 18 months and/or by March 19, 1979, after the
original 1977 air permit covering Units 1 and 2 was issued. The Court found
that TEP had commenced consturction of the Springerville Generating Station
in the time periods required by the original permits. There were two
remaining allegations: (1) TEP discontinued construction for a period of 18
months or longer and did not complete construction in a reasonable period of
time and (2) TEP did not commence construction, for purposes of New Source
Performance Standard applicability, by September 18, 1978. On March 4, 2002,
the U.S. District Court determined that the GCT had not commenced the case
on a timely basis and dismissed the case.
On November 1, 2002 the ACC granted TEP siting approval to construct
Unit 3 (and Unit 4, if Unit 4 is built) at Springerville subject to certain
conditions. Both the GCT and the Land and Water Fund of the Rockies have
opposed this approval and have filed for reconsideration which was denied
by the ACC. The GCT and the Land and Water Fund of the Rockies have
judicially appealed this decision.
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 comprisecomprised approximately 4%6% of the consolidated
assets of UniSource Energy.Energy at December 31, 2002. Millennium recorded net
incomehad an after-tax
loss of $10.9$15.5 million in 2002 and $9.2 million in 2001, which included a $6
million after-tax gain on the sale of a power project. In 2000, Millennium
reported losses of $4.1 million. Through its affiliates, Millennium holds
investments in the energy-related businesses which are described below.
Energy Technology Investments
-----------------------------
Millennium participates in various companies designed to develop
renewable energy, thin-film technologies and other emerging energy
technologies, including:
- Global Solar Energy, Inc. (Global Solar), a developer of flexible thin-
film photovoltaic cells, started limited production of photovoltaic
cells in 1999. Global Solar's target markets for its products include
commercial, space and military applications. Millennium currently owns
87% of Global Solar.
- Infinite Power Solutions, Inc. (IPS), a developer of thin-film
batteries. At December 31, 2002, Millennium owns approximately 77.5% of
IPS, however this ownership share is anticipated to be reduced in 2003
as a result of planned additional external investment by Dow Corning
Enterprises, Inc. Millennium anticipates that its ultimate ownership
in IPS will be between 59% and 72%.
- MicroSat Systems, Inc. (MicroSat) is a developer of small scale
satellites. MicroSat funds much of the development activities through
Federal Government contracts. Millennium currently owns 49% of
MicroSat, but pursuant to a restructuring agreement signed earlier in
the year, ended December 31,1999 relatedhas agreed to reduce its ownership to 35%. Millennium expects
this change to occur in 2003.
As technology developers, these investments. These results are includedentities face many challenges, such as
developing technologies that can be manufactured on an economic scale,
technological obsolescence, competitors and possible reductions in government
spending to advance technological research and development activities. While
in the Other
Income (Deductions) section on UniSource Energy's income statement.
We discuss these resultsshort-term we believe Millennium will incur losses from the funding of
the development efforts, we believe that the investments will be profitable
in the long-term. Millennium expects to fund between $7 million and $15
million to its various technology investments in 2003. In 2002, Millennium
provided $18.5 million in debt and equity funding to the Energy Technology
Investments. See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Results of Operations, Results of Millennium Energy Businesses.
AETBusinesses
for more information regarding these entities, including research and
Global Solar
Advanceddevelopment activities.
Sabinas
-------
In 2002, Millennium invested $20 million in a company created to develop
up to 800 megawatts (MW) of coal-fired generation in the Sabinas region of
Coahuila, Mexico. Millennium received a 50% share of Carboelectrica Sabinas,
S. de R.L. de C.V., a Mexican limited liability company (Sabinas). The other
50% of Sabinas is owned by Altos Hornos de Mexico, S.A. de C.V. (AHMSA) and
certain of its affiliates. Sabinas also owns approximately 19.5% of
Minerales de Monclova, S.A. de C.V., (Mimosa). Mimosa is an owner of coal
and associated gas reserves, a supplier of metallurgical coal to the steel
industry, and a supplier of thermal coal to the Mexican electricity commission.
Since 1999, both AHMSA and Mimosa are parties to a suspension of payments
procedure, under applicable Mexican law, which is the equivalent of a U.S.
Chapter 11 proceeding. Under certain circumstances, Millennium has the right
to sell its interest (a put option) in Sabinas to an AHMSA affiliate for $20
million plus an accrued service fee. These circumstances include failure of
Sabinas to reach financial closing on the generation project within three
years. Millennium's put option is secured by collateral with a value currently
in excess of $20 million. UniSource Energy's Chairman, President and Chief
Executive Officer is a member of the board of directors of AHMSA.
Nations Energy
Technologies, Inc. was established in May 1996.
This--------------
Nations Energy Corporation (Nations Energy), a wholly-owned 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 2000,2001, Nations Energy sold its 26% equity
interest in thisa power project to another partner of the project resultinglocated in a $3
million pre-tax gain.
- --In 1996,Curacao, Netherland Antilles. Nations
Energy acquired anhas one remaining investment, a 40% equity 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 whichthat owns and operates a 43 MW power plant near Panama City.
Currently, we doCity,
Panama. Nations Energy intends to sell its interest in this project, which
has a book value of less than $1 million at December 31, 2002. Millennium
does not currently intend to make any materialadditional investments in new projects through Nations
Energy. See Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operation - Results of Millennium Energy and we continue to review
options forBusinesses,
Nations Energy.
Other Millennium Investments
----------------------------
Millennium also has the sale of Nations Energy's remaining assets.
SESfollowing investments which are consolidated:
- Southwest Energy Solutions, Inc. (SES), a wholly-owned Millennium
subsidiary, provides electrical contracting services in Arizona to
commercial, industrial and governmental customers in both high voltage
and inside wiring capacities and meter reading services to TEP.
- Millennium Environmental Group, Inc. (MEG), a wholly-owned Millennium
subsidiary, established in September 2001, manages and trades emission
allowances, coal and other environmental related products including
derivative instruments.
- POWERTRUSION International, Inc. (Powertrusion) is a manufacturer of
lightweight utility poles, which is 50.5% owned by Millennium.
We describe Millennium's unregulated energy businesses and other
investments in more detail in Note 4 of Notes to Consolidated Financial
Statements - Millennium Energy Businesses, and in Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Millennium wasEnergy Businesses and in Liqiudity and Capital
Resources, Millennium - Unregulated Businesses.
UNISOURCE ENERGY DEVELOPMENT COMPANY
- ------------------------------------
UED, established in February 2001, is facilitating the expansion of the
Springerville Generating Station. The Springerville Generating Station was
originally designed for four units. If constructed, each of Units 3 and 4
would consist of a 400 MW coal-fired, base-load generating unit at the same
site as Springerville Units 1 and 2. If Unit 3 (and subsequently Unit 4) is
built, this would allow TEP to spread the fixed costs of the existing common
facilities over the additional generating unit (or units).
UED currently expects to act as project manager for the development of
Springerville Unit 3 (and Unit 4, if Unit 4 is built) and anticipates that
financing and ownership will occur through third parties. The entire output
of Unit 3 is expected to be taken by regional power companies, including
Tri-State Generation and Transmission Association (Tri-State), Salt River
Project Agricultural Improvement and Power District (SRP), and TEP. It is
currently expected that SRP will purchase 100 MW, and Tri-State will take
300 MW. TEP would purchase from Tri-State up to 100 MW of capacity for no
more than five years from commercial operation. SRP also has an option to
own Unit 4 at a later date. If SRP exercises the option to own Unit 4,
TEP would be required to purchase SRP's 100 MW of output from Unit 3,
beginning with the commercial operation of Unit 4.
Tri-State and UED signed a Development Cost Agreement in January 1997. SES provides energy
support services2003
to retaileach share 50% of the development costs of Unit 3 effective from November
6, 2002 until financial closing. As of December 31, 2002, UED had
approximately $22 million of capitalized project development costs on its
balance sheet.
On October 29, 2002, the ACC issued an order that affirms the
Certificate of Environmental Compatibility (CEC) granted to TEP authorizing
the construction of Unit 3, subject to compliance with certain conditions,
and approved the CEC for Unit 4 subject to certain conditions occurring. The
ACC approved construction of a third and fourth unit at the Springerville
Generating Station in 1977 and 1987, respectively, but with respect to Unit
4, the ACC provided that TEP, as plant operator, demonstrate that the fourth
unit was needed to provide an adequate, economical and reliable supply of
electric consumers including lighting
equipment, service restoration,power to its customers. That demonstration was made as part of the
proceedings that resulted in the issuance of the ACC Order.
Environmental activist groups have expressed concerns regarding the
construction of any new units. Such concerns have been expressed during the
permitting and design,ACC proceedings and may extend to other forums and to issues
apart from the proposed construction. See Environmental Matters above.
UED expects to finalize the power purchase agreements, the engineering,
procurement and construction services.contract, and other required project agreements
during the first half of 2003. UED expects a third party to obtain
construction financing in 2003 and then begin construction. UED expects
commercial operation of Unit 3 to occur in 2006. We can make no assurances,
however, about the ultimate timing, or whether UED will proceed with this
project. See Note 10 of Notes to Consolidated Financial Statements - UED
Commitments.
EMPLOYEES
- ---------
As of December 31, 1999,2002, TEP had 1,1421,134 employees and the wholly-owned
subsidiaries of Millennium had 60118 employees. The International Brotherhood
of Electrical Workers (IBEW) Local 1116 represents about 60%approximately 58% of TEP's
employees. A new three-year collective bargaining agreement between the IBEW
and TEP was ratified in March 1999December 2002 and extends until
Januarythrough 2005. Wages for
bargaining unit employees will increase 3.5% in 2003. Wage increases for
2004 and 2005 will be determined annually during July and August of each
preceding year.
SEC REPORTS AVAILABLE ON UNISOURCE ENERGY'S WEBSITE
- ---------------------------------------------------
UniSource Energy and TEP make available their annual reports on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after they
electronically file them with, or furnish them to, the SEC. These reports
are available free of charge through UniSource Energy's website address:
http://www.unisourceenergy.com. A link from UniSource Energy's website to
these SEC reports is accessible as follows: At the UniSource Energy main
page, select Investor Relations from the menu shown at the top of the page;
next select SEC filings from the menu shown on the Investor Relations page.
Information contained at UniSource Energy's website is not part of any
report filed with the SEC by UniSource Energy or TEP.
The new agreement resulted in a wage increaseSEC also maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. The SEC website address is http://www.sec.gov.
Interested parties may also read and copy any materials UniSource Energy and
TEP file with the SEC at the SEC's Public Reference Room at 450 Fifth Street,
NW, Washington, DC 20549. Information on the operation of 3%
for 1999 and an additional 3% increase for 2000.
TEP's UTILITY OPERATING STATISTICS
For Years Ended December 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
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
the Public
Reference Room is available by calling the SEC at 1-800-SEC-0030.
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 1,1. - Business - Generating and Other
Resources for the location of TEP's plants)Resources). The transmission system is directly interconnected at various
points in Arizona and New Mexico with systems
operated by the following utilities:
Utility Location
------- --------
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
a number of regional utilities. TEP
has arrangements with approximately 180120 companies
including the five listed above, to interchange generation
capacity and transmission of energy.
As of December 31, 1999,2002, 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- 371 circuit-miles of 138 kV lines;
-- 435- 434 circuit-miles of 46 kV lines; and
-- 10,466- 12,095 circuit-miles of lower voltage primary lines.
The underground transmission andelectric distribution system wasis comprised of 5,593 cable-miles.7,353 cable-
miles. TEP owns approximately 77% of the poles on which the lower voltage
lines are located. Electric substation capacity consisted of 179192 substations
with a total installed transformer capacity of 5,433,105 kVA.5,602,522 kilovoltamperes.
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.Nation. TEP,
individually and in conjunction with PNMPublic Service Company of New Mexico
(PNM) in connection with San Juan, has acquired easements and leases for
transmission lines and a water diversion facility located on land owned by
the Navajo Indian Reservation.Nation. TEP has also acquired easements for transmission
facilities, related to San Juan, Four Corners, 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.SU.S. Congress,
Secretary of the Interior, or other adverse claimants.
However, theseThese 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 67 of Notes to Consolidated Financial Statements, Long-Term
Debtand Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Liquidity and Capital LeaseResources, Contractual 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.
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.
Market Price per
Quarter Share of Common Stock
------- ---------------------
1999 High Low
---- ---- ---
First $13.94 $10.38
Second 12.75 10.38
Third 12.44 11.56
Fourth 12.69 10.88
Market Price per
Quarter Share of Common Stock
------- ---------------------
1998 High Low
---- ---- ---
First $18.69 $16.56
Second 18.94 15.31
Third 16.06 12.25
Fourth 17.50 12.50
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 - Factors Affecting Results of Operations
for litigation related to ACC orders and retail competition.
We discuss other legal proceedings in Note 10 of Notes to Consolidated
Financial Statements.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
Not applicable.
PART II
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- --------------------------------------------------------------------------------
Stock Trading
-------------
UniSource Energy's Common Stock is traded under the ticker symbol UNS.
It is listed on the New York Stock Exchange and the Pacific Exchange. As of
March 4, 2003, the closing price was $16.58, with 15,181 shareholders of
record.
Dividends
---------
UniSource Energy pays dividends on its Common Stock after its Board of
Directors declares them. There is no limitation on UniSource Energy paying
dividends on its Common Stock.
ITEM 6.TEP pays dividends on its common stock after its Board of Directors
declares them. UniSource Energy is the primary shareholder of TEP's common
stock. TEP has certain restrictions on paying dividends, as listed below:
- SELECTED CONSOLIDATED FINANCIAL DATATEP 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, and so long as
the dividends and certain investments in affiliates would not exceed 65%
of TEP's net income.
- --------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
UniSource Energy
(In thousands - except per share 1999 1998 1997 1996 1995
data and ratios) ---- ---- ---- ---- ----
Summary of Operations
- ----------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------
- -- Net Losses from Millennium Energy Businesses are before income
taxes andUnder ACC restrictions, TEP can pay dividends so long as the dividends
do not includeexceed 75% of TEP's earnings until its equity ratio equals 37.5%
of total capital (excluding capital lease obligations).
- Under the 1999 Gain on SaleFederal Power Act, TEP cannot pay dividends out of NewEnergy.
- -- For years prior to 1998, UniSource Energy's operations and those
of TEPfunds
that are properly included in the same.capital account.
See Item 7,7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations.Operations - Dividends on Common Stock.
Common Stock Dividends and Price Ranges
----------------------------------------------------------------------------------
2002 2001
Quarter: Market Price per Dividends Market Price per Dividends
Share of Common Declared Share of Common Declared
Stock (1) Stock (1)
High Low High Low
---- --- ---- ---
First $20.60 $16.74 $0.125 $21.00 $15.13 $0.10
Second 20.75 17.91 0.125 25.98 20.16 0.10
Third 18.89 14.05 0.125 24.05 13.80 0.10
Fourth 17.90 13.69 0.125 19.30 13.80 0.10
----------------------------------------------------------------------------------
Total $0.500 $0.40
==================================================================================
(1) UniSource Energy's Common Stock price on the consolidated tape as reported by
Dow Jones.
On February 7, 2003, UniSource Energy declared a cash dividend of $0.15
per share on its Common Stock. The dividend is payable March 7, 2003 to
shareholders of record at the close of business February 21, 2003.
TEP declared and paid cash dividends of $35 million in 2002, $50 million
in 2001, and $30 million in 2000.
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TEP
(In thousands)UniSource Energy 2002 2001 2000 1999 1998
1997 1996 1995
---- ---- ---- ---- ----------------------------------------------------------
- In Thousands -
Summary of Operations (except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $804,083 $768,990 $729,893 $715,873 $670,569
Income Tax Benefit Recognition
Related to Prior Period NOLs -
Part$856,222 $1,417,012 $1,033,669 $814,828 $770,597
Gain on Sale of Income TaxesNewEnergy - - $43,443 $88,638 $23,282
Net Losses- $34,651 -
Loss Before Income Taxes of Millennium
Energy Businesses (1) $(30,702) $(14,455) $(12,059) $(11,276) $(11,884)
Income Before Extraordinary Item and
Accounting Change $33,275 $60,875 $41,891 $56,510 $28,032
Net Income $33,275 $61,345 $41,891 $79,107 $28,032
Basic Earnings per Share:
Before Extraordinary Item &
Accounting Change $0.99 $1.83 $1.29 $1.75 $0.87
Net Income $0.99 $1.84 $1.29 $2.45 $0.87
Diluted Earnings per Share:
Before Extraordinary Item &
Accounting Change $0.97 $1.79 $1.27 $1.74 $0.87
Net Income $0.97 $1.80 $1.27 $2.43 $0.87
Shares of Common Stock Outstanding
Average 33,665 33,398 32,445 32,321 32,177
End of Year 33,579 33,502 33,219 32,349 32,258
Year-end Book Value per Share $13.05 $12.68 $11.20 $10.02 $7.65
Cash Dividends Declared per Share $0.50 $0.40 $0.24 $0.08 -
- $(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 $1,668,350 $1,677,671 $1,706,290 $1,729,856 $1,915,590
$1,935,513 $1,953,904 $1,978,126Investments in Lease Debt and Equity $191,867 $84,459 $71,639 $44,550 $17,813
Other Investments and Other Property 67,838 62,978 79,471 69,289 52,116$123,238 $98,288 $50,172 $69,933 $92,476
Total Assets 2,600,508 2,628,588 2,634,409 2,568,541 2,563,461$2,690,734 $2,746,717 $2,671,384 $2,656,255 $2,634,049
Long-Term Debt 1,135,820 1,184,423 1,215,120 1,223,025 1,207,460(2) $1,128,963 $802,804 $1,132,395 $1,135,820 $1,184,423
Non-Current Capital Lease Obligations 880,111801,611 853,793 857,829 880,427 889,543 890,257 895,867 897,958
Common Stock Equity 270,134 229,861 216,878 133,288 12,488
------------------------------------------------------------438,229 424,722 372,169 324,248 246,646
- --------------------------------------------------------------------------------------------------
Total Capitalization $2,286,065 $2,303,827 $2,322,255 $2,252,180 $2,117,906$2,368,803 $2,081,319 $2,362,393 $2,340,495 $2,320,612
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Selected Cash Flow Data
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows fromFrom Operating
Activities $139,957 $180,487 $126,283 $152,932 $119,390$172,963 $215,379 $215,034 $113,228 $160,933
Capital Expenditures 90,940 81,011 72,475 68,272 59,097$(112,706) $(121,622) $(105,996) $(92,808) $(81,147)
Other Investing Cash Flows (158,184) 4,775 (7,554) (242) (27,810)
- -----------------------------------------------------------------------------------------------
Ratio--------------------------------------------------------------------------------------------------
Net Cash Flows From Investing
Activities $(270,890) $(116,847) $(113,550) $(93,050) $(108,957)
- --------------------------------------------------------------------------------------------------
Net Cash Flows From Financing
Activities $(39,299) $(33,382) $(83,768) $(20,057) $(53,065)
- --------------------------------------------------------------------------------------------------
(1) Loss Before Income Taxes of EarningsMillennium Energy Businesses for 1999 excludes the Gain on
Sale of NewEnergy.
(2) TEP's tax-exempt variable rate bonds in the amount of $329 million are backed by LOCs
under TEP's Credit Agreement. TEP's obligations under the Credit Agreement are
collateralized with Second Mortgage Bonds. In November 2002, TEP entered into two new
LOCs for $341 million to Fixed Charges 1.45 1.35 1.39 1.25 1.21replace the LOCs provided under its then existing credit
agreement that would have expired on December 30, 2002. These new LOCs expire in 2006.
Accordingly, these IDBs were classified as short-term debt at December 31, 2001 and
classified as long-term debt at December 31, 2002.
See Item 7. - -----------------------------------------------------------------------------------------------
- -- 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.
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
TEP 2002 2001 2000 1999 1998
-----------------------------------------------------
- Thousands of Dollars -
Summary of Operations
- --------------------------------------------------------------------------------------------------
Operating Revenues $851,093 $1,408,669 $1,028,368 $804,083 $768,990
Income Before Extraordinary Item
and Accounting Change $53,737 $74,814 $51,169 $50,878 $41,676
Net Income $53,737 $75,284 $51,169 $73,475 $41,676
- --------------------------------------------------------------------------------------------------
Financial Position
- --------------------------------------------------------------------------------------------------
Total Utility Plant - Net $1,668,350 $1,677,671 $1,706,290 $1,729,856 $1,915,590
Investments in Lease Debt and Equity $191,867 $84,459 $69,474 $44,550 $17,813
Other Investments and Other Property $21,358 $21,416 $22,860 $23,288 $45,165
Total Assets $2,613,590 $2,645,335 $2,600,935 $2,600,508 $2,628,588
Long-Term Debt (1) $1,128,410 $801,924 $1,132,395 $1,135,820 $1,184,423
Non-Current Capital Lease Obligations 801,508 853,447 857,519 880,111 889,543
Common Stock Equity 337,463 322,471 295,660 270,134 229,861
- --------------------------------------------------------------------------------------------------
Total Capitalization $2,267,381 $1,977,842 $2,285,574 $2,286,065 $2,303,827
- --------------------------------------------------------------------------------------------------
Selected Cash Flow Data
- --------------------------------------------------------------------------------------------------
Net Cash Flows From Operating
Activities $203,517 $261,169 $234,190 $139,957 $180,487
Capital Expenditures $(103,307) $(103,913) $(98,063) $(90,940) $(81,011)
Other Investing Cash Flows (145,271) (11,981) (23,273) (24,480) (43,937)
- --------------------------------------------------------------------------------------------------
Net Cash Flows From Investing
Activities $(248,578) $(115,894) $(121,336) $(115,420) $(124,948)
- --------------------------------------------------------------------------------------------------
Net Cash Flows From Financing
Activities $(58,841) $(74,307) $(112,544) $(54,371) $(83,559)
- --------------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 1.58 1.82 1.47 1.45 1.35
- --------------------------------------------------------------------------------------------------
(1) TEP's tax-exempt variable rate bonds in the amount of $329 million are backed by LOCs
under TEP's Credit Agreement. TEP's obligations under the Credit Agreement are
collateralized with Second Mortgage Bonds. In November 2002, TEP entered into two new
LOCs for $341 million to replace the LOCs provided under its then existing credit
agreement that would have expired on December 30, 2002. These new LOCs expire in 2006.
Accordingly, these IDBs were classified as short-term debt at December 31, 2001 and
classified as long-term debt at December 31, 2002.
Note: Disclosure of earnings per share information for TEP is not presented as the common
stock of TEP is not publicly traded.
See Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - --------------------------------------------------------------------
CONDITION AND
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis explains the results of operations,
the general financial condition, and the results of operationsoutlook for UniSource Energy and its
twothree primary business segments-the electric utility business of TEP and the
unregulated energy businesses of Millennium and UED-and includes the
following:
--- operating results during 19992002 compared with 19982001, and 19982001 compared with
1997,
-- changes in2000,
- factors which affect our results and outlook,
- our outlook and strategy, and
- our liquidity, andcapital needs, capital resources during 1999, and -- expectations of identifiable material trends which may affect our
business in the future.contractual
obligations.
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 2002, 2001, and 2000. UED`s
unregulated business segment, which was established in February 2001, may
have a significant impact on consolidated net income and cash flows in the
years ended December 31, 1999, 1998future. In addition, in 2002, UniSource Energy entered into asset purchase
agreements for the purchase of retail electric and 1997.
OVERVIEWgas utility assets in
various locations in Arizona, which if completed, will have a significant
impact on our financial condition and results of operations.
RESULTS OF OPERATIONS
- -----------------------------
UNISOURCE ENERGY CONSOLIDATED
UniSource Energy recorded net income of $79.1$33 million in 1999,2002, compared
with $28.0$61 million in 19982001, and $83.6$42 million in 1997.2000. UniSource Energy's total
revenues decreased by 40% to $856 million in 2002, resulting from
significantly decreased wholesale marketing activities at TEP. The primaryfollowing
factors contributingcontributed to the higherchange in net income in 1999 were:
-- improved operating performance at TEP;
-- $22.62002 compared with 2001:
- TEP's wholesale revenues decreased by $556 million, or 76%, due to
significantly lower prices in the western U.S. energy markets and
decreased sales activity, partially offset by a reduction of $527
million, or 66%, in fuel and purchased power expenses.
- Mild weather and lower demand from TEP's mining customers contributed
to lower retail energy sales and revenues in 2002. Despite these
factors, retail revenues fell only one percent due to continued strong
growth in number of retail customers and increased usage by residential
and commercial customers.
- TEP recorded a one-time $7 million after-tax extraordinary income from changescoal contract termination
fee expense in accounting for TEP's generation operations;
-- $20.8the third quarter of 2002, which will relieve TEP of
annual $2 million netafter-tax take-or-pay payments in future years.
- Millennium's after-tax losses were $6 million higher in 2002 than 2001
because 2001 results included a $6 million after-tax gain on the sale of
NewEnergy, onea power project.
- TEP recognized $5 million in tax benefits from the favorable
settlement of IRS audits and the recognition of tax credits in 2002, and
Millennium recognized $2.5 million in tax benefits from the recognition
of foreign tax losses and favorable settlement of IRS audits.
The following factors contributed to the change in net income in 2001
compared with 2000:
- TEP's average number of retail customers grew by 2.5% to 347,099 in
2001 and retail revenues grew by 0.8% to $670 million.
- TEP's wholesale revenues more than doubled due to sales of available
generating capacity, increased trading activities and significantly
higher prices in the western U.S. energy markets in the first half of
2001.
- Interest expense at TEP decreased by 5% due to lower debt balances and
lower rates on variable rate debt.
- Nations Energy sold an independent power project in 2001 for a $6
million after-tax gain.
- TEP recorded a one-time $8 million after-tax expense related to the
amendment of a coal supply contract in the third quarter of 2000.
CONTRIBUTION BY BUSINESS SEGMENT
The table below shows the contributions to our consolidated after-tax
earnings by our three business segments, as well as parent company expenses.
2002 2001 2000
--------------------------------------------------------------------
- Millions of Dollars -
Business Segment
TEP $ 53.7 $ 75.3 $ 51.2
Millennium (15.5) (9.2) (4.1)
UED 0.8 0.8 -
UniSource Energy Standalone (1) (5.8) (5.6) (5.2)
--------------------------------------------------------------------
Consolidated Net Income $ 33.2 $ 61.3 $ 41.9
====================================================================
(1) Represents interest expense (net of tax) on the note payable
from UniSource Energy to TEP.
RESULTS OF TEP
The financial condition and results of operations of TEP are currently
the principal factors affecting the financial condition and results of
operations of UniSource Energy on an annual basis. The following discussion
relates to TEP's utility operations, unless otherwise noted. The results of
our unregulated energy subsidiaries; and
-- $9.0 millionbusinesses are discussed 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)Millennium
Energy Businesses and Results of UED, below.
Common stock equity
was $324 million asUTILITY SALES AND REVENUES
Customer growth, weather and other consumption factors affect retail
sales of December 31, 1999,electricity. Price changes also contribute to changes in retail
revenues. Electric wholesale revenues are affected by market prices in the
wholesale energy market, availability of TEP generating resources, and the
level of wholesale forward contract activity.
TEP experienced a significant decrease in wholesale energy sales and
revenues during 2002 compared with $247 million
as of December 31, 1998.
In addition to2001. Market demand in the items described above, other factors
impacting results for 1999 were:
-- $5.8 million lower long-term debt interest expensewestern region
declined primarily 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,mild temperatures, and market prices fell
as a result of increased capacity in the region and declining natural gas
prices, as well as reduced demand. In comparison, during the first five
months of 2001 and the last half of 2000, TEP experienced significant growth
in wholesale energy sales and revenues, primarily due to significantly higher
regional market prices, which increased to unprecedented levels, and
opportunities to sell its excess generating capacity to California and other
western wholesale market participants. However, in June 2001 wholesale
market prices began a steady decline and by 2002, reached levels that were
more consistent with historical prices. By 2002, electric wholesale revenues
comprised only 21% of total revenues, compared with 52% in 2001 and 35% in
2000. TEP's electric wholesale sales consist primarily of four types of
sales:
(1) Sales under long-term contracts for periods of more than one year.
TEP currently has long-term contracts with three entities to sell
firm capacity and energy: SRP, the Navajo Tribal Utility Authority
and the Tohono O'odham Utility Authority. TEP also has a multi-year
interruptible contract with Phelps Dodge Energy Services, which
requires a fixed contract demand of 60 MW at all times except during
TEP's peak customer energy demand period, from July through September
of each year. Under the contract, TEP can interrupt delivery of power
if the utility experiences significant loss of any electric generating
resources.
(2) Forward contracts to sell energy for periods through the end of the
next calendar year. Under forward contracts, TEP commits to sell a
specified amount of capacity or energy at a specified price over a
given period of time, typically for one-month, three-month or one-year
periods.
(3) Short-term economy energy sales in the daily or hourly markets at
fluctuating spot market prices and other non-firm energy sales.
(4) Sales of transmission service.
The table below provides trend information on retail sales by major
customer class and on the four types of electric wholesale sales made by TEP
in the last three years.
Sales Operating Revenue
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------
- Millions of kWh - - Millions of Dollars -
Electric Retail Sales:
Residential 3,189 3,122 3,028 $ 290 $ 284 $ 276
Commercial 1,609 1,573 1,497 168 164 158
Industrial 2,261 2,271 2,262 161 162 163
Mining 695 1,041 1,141 28 42 48
Public Authorities 258 254 258 19 18 19
- -----------------------------------------------------------------------------------------------
Total Electric Retail Sales 8,012 8,261 8,186 666 670 664
- -----------------------------------------------------------------------------------------------
Electric Wholesale Sales Delivered:
Forward Contracts 983 3,546 2,612 32 480 129
Long-term Contracts 981 1,219 1,234 51 52 52
Short-term Sales and Other 2,567 1,968 2,363 91 198 174
Transmission - - - 4 4 5
- -----------------------------------------------------------------------------------------------
Total Electric Wholesale Sales 4,531 6,733 6,209 178 734 360
- -----------------------------------------------------------------------------------------------
Total 12,543 14,994 14,395 $ 844 $1,404 $1,024
===============================================================================================
2002 Compared with 2001
-----------------------
TEP's average number of retail customers increased by 2.4% to 355,486,
while kWh sales to retail customers decreased by 3.0% in 2002 compared with
2001. This decrease in kWh energy sales was primarily due to a 33% reduction
in sales to copper mining customers. Sales to residential, commercial and
non-mining industrial customers as a group actually increased by 1.3% in
2002, despite milder temperatures in 2002. Cooling Degree Days decreased 3%
for the year, and also decreased slightly when compared with the 10-year
average. Heating Degree Days decreased 16% for 2002 and 4% compared with the
10-year average. Revenue from sales to retail energy. See Competition, Retail
below.
Other uncertaintiescustomers decreased only
slightly in 2002 compared with 2001, reflecting the increased kWh sales to
non-mining customers.
Electric wholesale sales decreased by 33% in 2002 compared with 2001
while revenues decreased by 76%. The decrease in revenue resulted from
decreased sales activity and the sharp decline in market prices from those in
2001. The average market price for around-the-clock energy decreased $67 per
MWh, compared with 2001. Sales and revenues from forward contracts
experienced the largest declines, reflecting lower demand and lower market
prices in the forward energy markets. Short-term sales were higher, however,
due to sales of excess energy in the daily and hourly markets. Despite the
higher short-term sales volumes, revenues from short-term sales were
significantly lower in 2002 due to the lower average market prices. Factors
contributing to the lower market prices include more generation online in the
extentwestern U.S., lower natural gas prices, increased hydropower supply, and
weaker demand.
2001 Compared with 2000
-----------------------
TEP's kWh sales to which,retail customers increased by 1% in 2001 compared
with 2000, despite a 2.5% increase in the average number of retail customers
to 347,099. Sales to mining customers decreased by 9%, offset by increased
sales to residential and commercial customers. The decrease in mining
consumption is due to cutbacks in production by both of TEP's large mining
customers in response to industry changes or unanticipated economic downturns,lower copper prices. Milder summer temperatures
also reduced demand by retail customers. Cooling Degree Days decreased by 4%
in 2001, from 1,552 to 1,484 days. Revenue from sales to retail customers
increased by 1% in 2001 compared with 2000, reflecting the slight increase in
consumption.
Kilowatt-hour electric wholesale sales increased by 8% in 2001 compared
with 2000, while revenues increased by 104%. The largest increase in sales
and revenues was in forward contracts, which represents increased purchase
and resale transactions. Revenues also increased as a result of the
settlement of sales contracts that were established when market prices were
higher earlier in the year. Short-term economy sales in the daily and hourly
markets at higher market prices made it economical for TEP can alter
operationsto run its gas
generation units to produce energy to sell to other regional utilities and
reduce costs, which may be limitedmarketers during the first six months of 2001. Although kWh sales in the
short-term economy markets were lower in 2001 than 2000, revenues from these
sales were higher, due to high
financialhigher average market prices in 2001. Factors
contributing to the higher market prices include increased demand due to
population and economic growth in the region, higher natural gas prices,
dysfunction in the California marketplace, increased maintenance outages due
to higher than normal operating leverage. Future results will depend,levels, lower availability of hydropower
resources, transmission constraints, and environmental constraints.
OPERATING EXPENSES
2002 Compared with 2001
-----------------------
Fuel and Purchased Power expenses decreased by $527 million, or 66%, in
part, on our ability2002 compared with 2001. Fuel expense at TEP's generating plants decreased
by $49 million, or 19%, in 2002 primarily attributable 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)lower wholesale
demand, which resulted in decreased natural gas usage for generation, and
(2) transmissionlower gas purchase prices. Contributing to higher gas purchase prices in
2001 was approximately $9 million in costs associated with two gas swap
agreements entered into in May 2001 to hedge the risk of price fluctuation.
Fuel expense in 2002 included $2.3 million related to an arbitration ruling
that increased the price of coal purchased between 1997 and distribution,May 2002 for the
Navajo Generating Facility. The average cost of fuel per kWh generated was
1.83 cents in 2002 and 2.12 cents in January
1999, formed a third business unit which provides administrative
services2001. See Market Risks - Commodity
Price Risk.
Purchased Power expense decreased by $478 million, or 88%, due
principally to the utility business units. We are improving cost
measurementdecreased volume of wholesale forward contract activity and
management techniques at TEP. We have also extended
contracts, where appropriate, for largesignificantly lower 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.prices. In the third quarter of 1999,2001, TEP
incurred approximately $12 million in additional costs from several forward
purchase contracts that were entered into in May 2001 to assure service
reliability in the summer months. TEP paid an average price of $186 per MWh
for those forward contracts in 2001. TEP entered into similar contracts in
2002 at an average price of $37 per MWh. Forward purchase contract activity
decreased corresponding with the reduction in forward sales activity
discussed above.
TEP recorded an $11 million (pre-tax) charge in the third quarter of
2002 as a result of terminating the Irvington long-term coal supply
agreement. This expense will be mitigated by TEP not being required to make
take-or-pay payments of up to $3.5 million annually. In July 2002, TEP
reversed the $2.4 million accrued portion of the 2002 take-or-pay penalty.
Despite the large decreases in Fuel and Purchased Power expenses, TEP's
gross margin (Operating Revenue less Fuel and Purchased Power expense)
decreased by $30 million or 5% in 2002 compared with 2001. This decline was
primarily due to decreased sales volumes and lower prices in the wholesale
energy markets.
Other Operations and Maintenance expense increased by $5 million, or 3%,
in 2002 compared with 2001, due primarily to a $2 million increase in pension
and post-retirement medical benefit costs and maintenance at the Four Corners
and Springerville generating stations.
Depreciation and Amortization expense increased by $7 million, or 6%, in
2002 compared with 2001. Depreciation expense increased due to depreciation
of solar generating facilities and a $125 million increase in the depreciable
asset base, which represents: (i) new line extensions to support new
business, (ii) the addition of a 75 MW gas turbine placed in-service in June
2001, and (iii) routine improvements to TEP's system. These increases were
partially offset by reduced depreciation resulting from a change in the
second quarter of 2002 to increase the estimated useful lives of gas-fired
generating units and internal combustion turbines located in Tucson. See
Note 6 of Notes to Consolidated Financial Statements. See Critical
Accounting Policies, below, for expected changes to depreciation expense
resulting from adopting Statement of Financial Accounting Standards No. 143
(FAS 143), Accounting for Asset Retirement Obligations.
Amortization of Transition Recovery Asset increased by $3 million, or
14%, in 2002 compared with 2001. The Transition Recovery Asset (TRA) and its
related amortization result from the Settlement Agreement reached with the
ACC in 1999. The Amortization of Transition Recovery Asset totaled $25
million in 2002, up from $22 million in 2001. Amortization amounts are
scheduled to increase annually until the entire TRA has been amortized, no
later than December 31, 2008. The monthly amount of amortization recorded is
a function of the remaining TRA balance and total retail kWh consumption by
TEP distribution customers.
2001 Compared with 2000
-----------------------
Fuel and Purchased Power expenses increased by $354 million, or 79%, in
2001 compared with 2000. Fuel expense at TEP's generating plants increased
by $19 million, or 8%, primarily because of higher natural gas prices and
increased usage of gas generation to meet increased kWh sales in the first
five months of 2001. This increase was partially offset by decreased usage
of gas generation in the last half of the year, as wholesale market prices
fell, making it less economical for TEP to run its gas generation units to
produce energy to sell to other regional utilities and marketers. Gas
expense also includes the new gas-fired peaking units, which went in-service
in June 2001, and the $9 million additional cost associated with gas swap
agreements we sold our ownershipentered into in May 2001. The average cost of fuel per kWh
generated was 2.12 cents in 2001 and 2.01 cents in 2000. See Market Risks,
Commodity Price Risk.
Purchased Power expense increased by $335 million, or 161%, because of
higher wholesale energy prices and increased purchases in the forward and
spot energy markets to resell to wholesale customers. Purchased Power
expense remained high, even after wholesale market prices began to fall in
June 2001, due to the settlement of wholesale energy purchase contracts,
which were established when forward power prices were higher. Also, in May
2001, TEP entered into several forward purchase contracts to assure service
reliability in the summer months and to mitigate the risk of the potential
loss of 110 MW under an exchange agreement with SCE. The additional cost to
assure service reliability was approximately $12 million.
TEP recorded a $13 million pre-tax ($8 million after-tax) one-time
charge in the third quarter of 2000 as a result of a coal supply contract
amendment related to the San Juan Generating Station. See Note 10 of Notes
to Consolidated Financial Statements.
Despite the large increases in Fuel and Purchased Power expenses, TEP's
gross margin (Operating Revenue less Fuel and Purchased Power expense)
improved by $27 million or 5% in 2001 compared with 2000. This improvement
was primarily due to increased sales volumes and higher prices in the
wholesale energy markets.
Other Operations and Maintenance expense decreased by $4 million, or 3%
in 2001 compared with 2000. TEP established a reserve in 2000 for wholesale
energy sales to California, $7 million of which was recorded as an expense.
In contrast, in 2001, TEP recorded an additional reserve of $7 million in the
first quarter of 2001, of which $5 million was charged to expense, but
reversed $8 million in December. See Note 11 of Notes to Consolidated
Financial Statements. Various other production expenses increased by $4
million and maintenance expense increased by $2 million in 2001 compared with
2000. The higher Maintenance expense is the result of scheduled maintenance
at the Irvington, Springerville Unit 2 and San Juan generating plants.
The Amortization of Transition Recovery Asset totaled $22 million in
2001, up from $17 million in 2000.
INTEREST INCOME
TEP's income statement for both 2002 and 2001 includes interest income
of $9 million on its promissory note from UniSource Energy. See Note 1 of
Notes to Consolidated Financial Statements - Nature of Operations and Summary
of Significant Accounting Policies-Basis of Presentation. On UniSource
Energy's consolidated income statement, this income is eliminated as an
intercompany transaction.
Other Interest Income was $8 million higher in 2002 compared with 2001
due to TEP's additional $132 million investment in Springerville lease debt
in 2002.
Other Interest Income was higher in 2001 compared with 2000 due to
higher average cash balances and increased interest income on investments in
Springerville Unit 1 Lease Debt.
INTEREST EXPENSE
Interest Expense was $5 million, or 3% lower in 2002 than in 2001 due to
lower average interest rates on variable rate tax-exempt debt and lower debt
balances. In 2001, Interest Expense was $8 million or 5% lower than in 2000
for the same reasons. See TEP Credit Agreement, below, for the impact of
TEP's new Credit Agreement on future interest expense.
INCOME TAXES
Income taxes decreased $21 million in 2002 compared with 2001 due
primarily to lower pre-tax income, a $4 million tax benefit from the
reduction of the valuation allowance and the favorable settlement of an IRS
audit in the third quarter of 2002, and $2 million in tax credits recognized
in 2002.
Income taxes increased $29 million in 2001 compared with 2000 as a
result of higher pre-tax income and the recognition of $6 million in tax
benefits in the second quarter of 2000 from the resolution of various IRS
audits.
See Note 10 of Notes to Consolidated Financial Statements - Commitments
and Contingencies.
RESULTS OF MILLENNIUM ENERGY BUSINESSES
The table below provides a breakdown of the net income and losses
recorded by the Millennium Energy Businesses for the last three years. These
results exclude sales and related costs to TEP.
2002 2001 2000
- -------------------------------------------------------------------------------------------------
- Millions of Dollars -
Energy Technology Investments
Global Solar and IPS
Research & Development Contract Revenues from Third Parties $ 1.1 $ 1.7 $ 3.6
Research & Development Contract Expenses and Losses (3.4) (4.6) (4.9)
Research & Development - Internal Development Expenses (3.8) (4.0) (2.8)
Depreciation & Amortization Expense (2.9) (2.1) (1.0)
Administrative & Other Costs (13.2) (8.3) (4.5)
Income Tax Benefits 8.9 6.7 3.6
- -------------------------------------------------------------------------------------------------
Total Global Solar and IPS Net Loss (13.3) (10.6) (6.0)
MicroSat and ITN Energy Systems Inc. Net Loss (0.6) (3.3) -
- -------------------------------------------------------------------------------------------------
Total Energy Technology Investments Net Loss (13.9) (13.9) (6.0)
Nations Energy Net Income 0.4 4.5 0.7
Other Millennium Investments Net (Loss) Income (2.0) 0.2 1.2
- -------------------------------------------------------------------------------------------------
Total Millennium Loss, after-tax $(15.5) $ (9.2) $ (4.1)
=================================================================================================
Energy Technology Investments
-----------------------------
Global Solar is primarily engaged in the development of thin-film
flexible photovoltaic material. These products are designed to be
lightweight and durable. Thin-film photovoltaic cells can be used for
military, commercial and space applications. IPS' business focus is the
development of thin-film solid state rechargeable batteries. Thin-film
batteries are intended to be used in various products including medical
devices, "smart cards" and semi-conductors. Global Solar's research and
development costs, the costs of refining Global Solar's manufacturing
processes to increase efficiency, and administrative costs all contributed to
Global Solar and IPS' after-tax losses of $13.3 million, $10.6 million and
$6.0 million in 2002, 2001 and 2000, respectively. In 2002 and 2001,
Millennium recorded after-tax losses relating to MicroSat and ITN Energy
Systems Inc. (ITN) of $0.6 million and $3.3 million, respectively. These
losses are related to the development of small-scale satellites and other
research and development activities.
Nations Energy
--------------
Nations Energy had minimal activity in 2002 as it is attempting to sell
its remaining investment, an interest in affiliate NewEnergy and recorded a project in Panama with a book
value of less than $1 million.
In 2001, Nations Energy sold its investment in a power project in
Curacao, resulting in an after-tax gain onof $6 million. Nations Energy
received a promissory note as part of the transaction.sale. See Market Risks, Credit
Risk, below.
In January 2000, weNations Energy sold oura minority interest in a power project in
whichthe Czech Republic for a pre-tax gain of $3 million. During 2000, Nations
Energy had invested, recordingrecorded decreases of $3 million in the market value of its Panama
investment. This was offset by a gaintax benefit of $3 million recorded in 2000
related to market value adjustments on the transaction. SeePanama investment.
Other Millennium Investments
----------------------------
Results from Other Millennium Investments in 2002 include an after-tax
loss of $2.2 million from Powertrusion. Powertrusion's efforts have been
focused on development and sale of lightweight utility pole products. MEG,
SES and TruePricing, Inc. (TruePricing), each recorded after-tax losses of
less than $1 million. These losses were offset by earned interest and a tax
benefit from final resolution of IRS audits.
In 2000, Millennium Energy Businesses.
Our consolidated capital structure remains highly leveraged.
Since April 1997, however, we have made significant progressrecorded net income of $1 million from interest
income on a note receivable received as part of the sale of NewEnergy to AES
Corporation in our
financial strategy to reduce refinancing risk by extending
maturities1999.
RESULTS OF UED
UED, established in February 2001, recorded a net profit of long-term debt and letters of credit and by reducing
exposure to variable interest rates by refinancing over $475$0.8 million
in variable rate debt with fixed interest rate securities. Withboth 2002 and 2001. This income represents rental income, less expenses,
under the operating lease of a more stabilized regulatory outlook and with ongoing improvements in
our capital structure,20 MW gas turbine to TEP through September
2002, when TEP purchased the turbine from UED. This rental income was
eliminated from UniSource Energy's consolidated after-tax earnings as an
intercompany transaction.
INCOME TAX POSITION
- -------------------
At December 31, 2002, UniSource Energy declared its first dividendand TEP had, for consolidated
federal income tax filing purposes:
- $21 million of NOL carryforwards expiring in 2006 through 2009;
- $6 million of unused ITC expiring in 2003 through 2022; and
- $91 million of Alternative Minimum Tax credit that will carry forward
to future years.
We have recorded deferred tax assets and valuation allowances related to
these amounts. See Note 12 of Notes to Consolidated Financial Statements-
Income Taxes.
Due to the issuance of common shareholdersstock to various creditors of TEP in 1992,
a change in TEP ownership was deemed to have occurred for tax purposes in
December 1999. TEP, now1991. As a result, TEP's use of the principal
operating subsidiary ofNOL and ITC generated before
1992 is limited under the tax code. At December 31, 2002, pre-1992 federal
NOL and ITC carryforwards which are subject to the limitation were
approximately $21 million and $4 million, respectively. See Critical
Accounting Policies Deferred Tax Valuation, below.
ASSET PURCHASE AGREEMENTS
- -------------------------
On October 29, 2002, UniSource Energy hadentered into two Asset Purchase
Agreements with Citizens Communications Company (Citizens) for the purchase
by UniSource Energy of Citizens' Arizona electric utility and gas utility
businesses for a total of $230 million in cash. The purchase price of each
is subject to adjustment based on the date on which the transaction is closed
and, in each case, on the amount of certain assets and liabilities of the
purchased business at the time of closing. If the transaction closes before
July 28, 2003, the purchase price is reduced by $10 million. If the
transaction closes after October 29, 2003, the purchase price is increased by
$5 million. In addition, the purchase price in each transaction may also be
adjusted if there is a casualty loss, governmental taking, or discovery of
substantial additional environmental liabilities, in each case subject to
materiality thresholds, prior to the closing. UniSource Energy will assume
certain liabilities associated with the purchased assets, but will 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, borrowingsassume
Citizens' obligations under the Revolving Credit Facility. While someindustrial development revenue bonds issued
to finance certain of Millennium's
unregulated energy businesses havethe purchased assets for which Citizens will remain
the economic obligor. The asset purchases are expected to close in the
second half of 2003 after the conditions to the consummation of the
transactions, including federal and state regulatory approvals, are satisfied
or waived.
The closing of the transactions is subject to approval by the ACC, the
FERC and the SEC under the Public Utility Holding Company Act of 1935, as
amended. The closing is also subject to the filing of the requisite
notification with the Federal Trade Commission and the Department of Justice
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other
customary closing conditions.
The Asset Purchase Agreements are subject to termination if the closing
has not occurred within 15 months of the date of the Asset Purchase
Agreements (subject to extension in limited circumstances), if a governmental
authority seeks to prohibit the transactions, if required significant amountsregulatory
approvals are not obtained with satisfactory terms and conditions, or if
either party is in material breach and such breach is not cured. If one
Asset Purchase Agreement is terminated, the other will also be automatically
terminated. If the Asset Purchase Agreements are terminated by Citizens due
to UniSource Energy's breach, UniSource Energy must pay to Citizens a $25
million termination fee as liquidated damages. If the Asset Purchase
Agreements are terminated by UniSource Energy due to Citizen's breach,
Citizens must pay to UniSource Energy a $10 million termination fee as
liquidated damages. The termination fees are also payable in certain other
limited circumstances.
Citizens had two cases pending before the ACC requesting rate relief for
both the Arizona electric and Arizona gas assets prior to entering into the
Asset Purchase Agreements with UniSource Energy. The requested electric rate
increase is to recover purchased power costs and the gas rate increase is a
base rate increase. In December 2002, UniSource Energy and Citizens filed a
Joint Application with the ACC requesting smaller increases in both pending
cases. Under the proposal, UniSource Energy asked that the 45% electric rate
increase requested by Citizens be reduced to 22%, and that the 29% increase
in gas rates be reduced to 23%. UniSource Energy believes that the smaller
proposed rate increases are sufficient in light of capitalthe discounted purchase
price. We are currently in settlement discussions with the ACC Staff and
credit, managementintervenors regarding the Joint Application. The ACC Administrative Law
Judge (ALJ) set a hearing date of May 1, 2003 for this matter. We currently
expectsanticipate the ACC to make limited
investments in these businesses.review this case and issue a decision by June 2003.
We expect that the purchase price will be financed by funds from
UniSource Energy and its affiliates and debt secured by the purchased assets.
TEP is limited by its Credit Agreement, however, as to use existing cash
balances to fulfill these needs,the amount of
affiliate investments or if necessary, weloans it may seek
investments by unaffiliated parties to meet the ongoing capital
requirements of some of these businesses.make. See Liquidity and Capital
Resources, Investing and Financing Activities, TEP Credit Agreement, below. UniSource
Energy may also consider financing a portion of the purchase with new equity,
depending on market conditions and other considerations. UniSource Energy
expects to form a new subsidiary to hold the purchased assets. This new
subsidiary will maintain a separate rate structure from TEP. If UniSource
Energy is unable to obtain financing and therefore fails to consummate the
purchase of these assets, this would constitute a breach under the contracts
and termination damages of $25 million would be payable.
FACTORS AFFECTING RESULTS OF OPERATIONS
- ---------------------------------------
COMPETITION
-----------
RETAIL
The electric utility industry is undergoinghas undergone significant regulatory
change in the last few years designed to encourage competition in the sale of
electricity and related services. WhenHowever, the recent experience in
California with deregulation has caused many states, including Arizona, to
step back and reexamine the viability of retail competition for
electric generation supply begins in TEP's retail service territory
approximately 20%deregulation.
As of January 1, 2001, all of TEP's retail customers will becomewere eligible to
choose an alternate energy supplier. However, no competitors are
currently providing electricAlthough there is one ESP certified to
provide service to customers in ourTEP's retail service area, norcurrently none of TEP's retail
customers have opted to receive service from this ESP. TEP has met all
conditions required by the ACC to facilitate electric retail competition,
including obtaining ACC approval of TEP's direct access tariffs. ESPs must
meet certain conditions before electricity can be sold competitively in
TEP's service territory. Examples of these include ACC certification of
ESPs, and execution of and compliance with direct access service agreements
with TEP.
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. TEPalso 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 priceOther forms 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 electricenergy technologies, such as fuel cells, may
provide 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,services in the Rules became effectivefuture, but to date, are not
financially viable alternatives. Self-generation by TEP's large industrial
customers could also provide competition for TEP's services in January 2000, 60 days after
the effective date offuture,
but has not had a significant impact to date.
In 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.
WHOLESALEwholesale market, TEP competes with other utilities, power
marketers and independent power producers in the sale of electric capacity
and energy.
INDUSTRY RESTRUCTURING
RETAIL
TEP's Settlement Agreement and Retail Electric Competition Rules
----------------------------------------------------------------
In September 1999, the ACC approved Rules that provided a framework for
the introduction of retail electric competition in Arizona. In November
1999, the ACC approved the Settlement Agreement between TEP and certain
customer groups relating to the implementation of retail electric
competition, including TEP's recovery of its transition recovery assets and
the unbundling of tariffs. See Note 2 of Notes to Consolidated Financial
Statements for more information on TEP's Settlement Agreement.
The Settlement Agreement originally required TEP to transfer its
generation and other competitive assets to a wholly-owned subsidiary by
December 31, 2002. The Settlement Agreement also required that by December
31, 2002, TEP as the Utility Distribution Company (UDC) would acquire at
least 50% of its requirements through a competitive bidding process, while
the remainder may be purchased under contracts with TEP's generation
subsidiary or other energy suppliers. These requirements were amended by the
September 2002 ACC order described below.
Recent Developments in the Arizona Regulatory Environment
---------------------------------------------------------
In February 2002, the ACC consolidated several retail competition
proceedings to reexamine circumstances that had changed since the ACC
approved the Rules in 1999. The outstanding issues were divided into two
groups-"Track A" and "Track B" issues. Track A related primarily to the
divestiture of generation assets while Track B related primarily to the
competitive energy bidding process.
On September 10, 2002, the ACC issued the Track A Order, which
eliminated the requirement that TEP transfer its generating assets to a
subsidiary. At the same time, the ACC ordered the parties, including TEP, to
develop a competitive bidding process, and reduced the amount of power to be
acquired in the competitive bidding process to only that portion not supplied
by TEP's existing resources.
On February 27, 2003, the ACC issued the Track B Order, which defines
the process by which TEP will be required to obtain its capacity and energy
requirements beyond what is supplied by TEP's existing resources. For the
period 2003 through 2006, TEP estimates the amount it will be required to
bid for is 50,000 MWh of energy in the wholesale market. FERC generally2003, or approximately 0.5% of its retail
load, gradually increasing to 104,000 MWh by in 2006.
TEP is also required to bid out its Reliability Must Run (RMR)
generation requirements, amounting to 758 MW of capacity and 183,000 MWh of
energy in 2003, and increasing to 898 MW and 276,000 MWh in 2006. TEP's RMR
generation requirements are currently met by its existng local generation
units. TEP does not permitanticipate that any near-term RMR requirements will be
met through this competitive bidding process because of the locational and
operational restrictions of TEP's RMR requirements as well as TEP's belief
that its existing RMR generation solutions are economically sound.
The Track B Order further requires TEP to bid out "Economy Energy", or
short-term energy purchases, that it estimates it will make in the 2003 to
2006 period (210,000 to 181,000 MWh). TEP will then evaluate if purchases
through this process will provide a better economic result than purchases
made as needed in the short-term markets.
TEP is not required to purchase any power through this process that it
deems to be uneconomical, unreasonable or unreliable. The Track B bidding
process will involve the ACC Staff and an independent monitor. The Track B
Order also confirms that it is not intended to change the current rate-base
status of TEP's existing assets.
TEP expects to issue requests for proposals in March 2003 and complete
the selection process by June 1, 2003.
As part of its reexamination of the Rules, the ACC had planned to
address the requirement for Arizona electric utilities to participate in the
Arizona Independent Scheduling Administrator (AISA) organization. The Rules
originally required the formation and implementation of the AISA; however,
the ACC opened a docket in July 2001 to revisit this obligation. This issue
is pending and will be addressed separately from the issues identified above.
The status of the Rules and the ability of ESPs to continue to sell
competitive services may also be subject to change due to recent court
proceedings. Several parties, including certain rural electric cooperatives
(Cooperatives), filed lawsuits in Maricopa County Superior Court challenging
the Rules. In November 2000, the Court found the Rules to be
unconstitutional and unlawful due to failure to establish a fair value rate
base for ESPs and because certain Rules were not submitted to the Arizona
Attorney General for certification. The decision was appealed to the Court
of Appeals and implementation of the judgment was stayed and the Rules remain
in effect pending the outcome of the appeals.
TEP cannot predict the effect of the recent court decision or the
outcome of these appeals to which it is a party or the effect of the
judgment, if affirmed upon appeal, on the introduction of retail electric
competition in Arizona.
State and Federal Legislation
-----------------------------
In the current session, the state legislature will address a power plant
valuation proposal that will clarify the valuation methodology of centrally
assessed generation facilities and may affect TEP's property tax expense.
The Congress will debate the President's Clear Sky Initiative which
proposes a new regulatory regime for controlling power plant emissions. The
Congress will also consider legislation that proposes to expand the
regulatory authority of EPA in the area of carbon dioxide. Proposed Federal
energy legislation has considered the implementation of a national renewable
portfolio standard of 10% of retail energy sold by certain utilities.
WESTERN ENERGY MARKETS
As a participant in the western U.S. wholesale power markets, TEP is
directly and indirectly affected by changes affecting these markets and
market participants. In 2000 and 2001, a significant portion of TEP's
revenues and earnings resulted from its wholesale marketing activities, which
benefited from strong demand and high wholesale prices in the western U.S.
These market conditions were the result of a number of factors, including
power supply shortages, high natural gas prices, transmission, and
environmental constraints. During this period, these markets experienced
unprecedented price volatility, as well as payment defaults and bankruptcies
by several of its largest participants. Regulatory agencies became concerned
with the outcomes of deregulation of the electric power industry and
intervened in the operation of these markets.
In the last 18 months, conditions in the western energy markets have
changed significantly as a result of various regulatory actions, moderate
weather, a decrease in natural gas prices, the addition of new generation in
the region, and the slowdown of the regional economy. In addition, the
presence of fewer creditworthy counterparties, as well as legal, political
and regulatory uncertainties have reduced market liquidity and trading
volume. Several companies that were large market participants have either
curtailed their activities or exited the business completely. These factors
placed downward pressure on wholesale electricity prices, and resulted in
significantly lower wholesale electricity sales and revenues at TEP in 2002.
Market Prices
-------------
The chart below shows the quarterly and annual average market prices in
2002, 2001, and 2000 for around-the-clock energy based on the Dow Jones Palo
Verde Index:
Average Market Price for Around-the-Clock Energy 2002 2001 2000
--------------------------------------------------------------------------
MWh
Quarter ended March 31, $24 $178 $ 27
Quarter ended June 30, 24 135 65
Quarter ended September 30, 28 40 124
Quarter ended December 31, 31 23 129
Year ended December 31, 26 94 86
--------------------------------------------------------------------------
Beginning in June 2001, average market prices declined sharply,
returning to historical price levels throughout 2002. In the first quarter
of 2003, however, both the natural gas and western U.S. wholesale electricity
markets have experienced some price spikes and volatility due to severe
winter weather in certain regions, as well as high gas storage withdrawals
due to lagging production. As of March 2003, the average forward around-the-
clock market price for the balance of the year 2003 was approximately $51 per
MWh, based on forward broker market quotes. TEP cannot predict, however,
whether average wholesale electricity prices will remain higher than in 2002
and what the impact will be on TEP's sales ofand revenues in 2003.
TEP expects the market price and demand for capacity and energy to
exceed
rates determined on a cost of service basis. However, in the Fall
of 1997, FERC granted TEP a tariffcontinue 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 isbe influenced by the following factors:
--factors, among others, during the
next few years:
- continued population growth in the western U.S.;
- economic conditions in the western U.S.;
- availability of capacity inthroughout the southwestern United States;
-- restructuringwestern U.S.;
- the extent of the electric utility industry restructuring in Arizona,
California and other western states;
--- the effect of FERC regulation of wholesale energy markets;
- the availability and price of natural gas;
- precipitation, which affects hydropower availability;
- transmission constraints; and
- environmental restrictions and the cost of compliance.
Payment Defaults and Allowances for Doubtful Accounts
-----------------------------------------------------
In early 2001, California's two largest utilities, SCE and Pacific Gas &
Electric Company (PG&E), defaulted on payment obligations owed to various
energy sellers, including the California Power Exchange (CPX) and the CISO.
The CPX and the CISO defaulted on their payment obligations to market
participants, including TEP. While SCE subsequently satisfied its
obligations to the CPX, TEP has not received a corresponding payment from the
CPX. The total amount owed to TEP by the CPX and CISO is $16 million. In
late 2001, Enron Corp. (Enron) filed for bankruptcy protection. At that
time, TEP had an outstanding receivable from Enron of $0.8 million. TEP has
established an allowance for doubtful accounts of $8 million related to these
payment defaults.
See Critical Accounting Policies - Payment Defaults and Allowances for
Doubtful Accounts, below, and Note 11 of Notes to Consolidated Financial
Statements.
California Refund Proceedings
-----------------------------
On June 25, 2001, a FERC ALJ convened a settlement conference to address
potential refunds owed by sellers of energy into the California market.
California claims that it was overcharged up to $9 billion for wholesale
power purchases since May 2000, and is seeking refunds from numerous power
generators, including TEP. The settlement conference, which included
representatives from over 100 parties and participants in the western power
market, including the State of California and power generators, was
unsuccessful. On July 25, 2001, the FERC ordered hearings to determine
refunds/offsets applicable to wholesale sales into the CISO's spot markets
for the period from October 2, 2000 to June 20, 2001. The order established
a methodology to calculate the amount of refunds and specified that the price-
mitigation formula contained in its June 19, 2001 order be applied to the
period from October 2, 2000 to June 20, 2001.
In August 2002, the FERC staff proposed revised calculations to
determine amounts due from the CPX and the CISO, based on concern that
natural gas prices were manipulated. If TEP were to apply these proposed
adjustments to amounts due to TEP, TEP could receive as little as $4 million,
plus interest, of the amounts due from the CPX and the CISO. The FERC has
not yet confirmed or rejected the calculation proposed by its staff. Under
earlier calculations proposed by the FERC staff, TEP could receive up to $11
million plus interest. The ALJ has issued a proposed finding under which TEP
would receive approximately $8.4 million, plus interest. This represents
amounts owed to TEP net of TEP's estimated refund liability. FERC is
accepting additional information and is expected to issue a ruling on the
recommended order later in 2003.
TEP is not able to predict the length and outcome of the FERC hearings
and the outcome of any subsequent lawsuits and appeals that might be filed.
As a participant in the June 2001 refund proceedings, TEP will be subject to
any final refund orders. TEP does not expect its refund liability, if any,
to have a significant impact on the financial statements. See Critical
Accounting Policies - Payment Defaults and Allowances for Doubtful Accounts,
below.
Market Manipulation Investigations
----------------------------------
In May 2002, the FERC initiated an investigation into potential
manipulation of the California electric and natural gas markets. The FERC
requested specific data and information with respect to certain trading
strategies in which companies may have engaged. This request was made to
all sellers of wholesale electricity and/or ancillary services, including
TEP, to the CISO and/or the CPX during 2000 and 2001. In May 2002, TEP
responded to the FERC, certifying that TEP did not engage in any of the
trading activities listed in the data request during 2000 and 2001. TEP also
certified that it had not in the past, nor does it now, model or forecast
California's energy markets and did not purchase energy from, or sell energy
to, any company as part of any of the types of potentially market manipulative
transactions as identified by the FERC during 2000 and 2001.
MARKET RISKS
We are exposed to various forms of market risk. Changes in interest
rates, returns on marketable securities, and changes in commodity prices may
affect our future financial results.
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 variable rate debt obligations. At December 31, 2002 and
2001, TEP's debt included $329 million of tax-exempt variable rate debt. The
average interest rate on TEP's variable rate debt (excluding letter of credit
fees) was 1.41% in 2002 and 2.68% in 2001. TEP also has approximately $70
million in outstanding principal amount of variable rate lease debt related
to its Springerville Common Facilities Leases. Interest on this lease debt
is payable at LIBOR plus 2.50%. The average interest rate on this lease debt
was 5.14% in 2002 and 8.63% in 2001. A one percent increase (decrease) in
average interest rates would result in a decrease (increase) in TEP's pre-tax
net income of approximately $4 million.
Marketable Securities Risk
--------------------------
TEP is exposed to fluctuations in the return on its marketable
securities, comprised of investments in debt securities. At December 31,
2002 and 2001, TEP had marketable debt securities with an estimated fair
value of $196 million and $74 million. At December 31, 2002 and 2001, the
fair value exceeded the carrying value by $4 million and $3 million,
respectively. These debt securities represent TEP's investments in lease
debt underlying certain of TEP's capital lease obligations. 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.
Risk Management Committee
-------------------------
We have a Risk Management Committee responsible for the oversight of
commodity price risk and credit risk related to the wholesale energy
marketing activities of TEP and the emissions allowance and coal trading
activities of MEG. Our Risk Management Committee consists of officers from
the finance, accounting, legal, wholesale marketing, and the generation
operations departments of UniSource Energy. To limit TEP and MEG's exposure
to commodity price risk, the Risk Management Committee sets trading policies
and limits, which are reviewed frequently to respond to constantly changing
market conditions. To limit TEP and MEG's exposure to credit risk in these
activities, the Risk Management Committee reviews counterparty credit
exposure, as well as credit policies and limits, on a monthly basis.
Commodity Price Risk
--------------------
We are exposed to commodity price risk primarily relating to changes in
the market price of electricity, natural gas, coal and emissions allowances.
To manage its exposure to energy price risk, TEP enters into forward
contracts to buy or sell energy at a specified price for a future delivery
period. Generally, TEP commits to future sales based on expected excess
generating capability, forward prices and generation costs, using a
diversified market approach to provide a balance between long-term, mid-term
and spot energy sales. TEP enters into forward purchases during its summer
peaking period to ensure it can meet its load and reserve requirements and
account for other contract and resource contingencies. TEP also enters into
limited forward purchases and sales to optimize its resource portfolio and
take advantage of locational differences in price. These positions are
managed on both a volumetric and dollar basis and are closely monitored using
risk management policies and procedures overseen by the Risk Management
Committee. For example, risk management policies provide that TEP should not
take a short position in the third quarter and must have owned generation
backing all forward sales positions at the time the sale is made. TEP's risk
management policies also restrict entering into forward positions with
maturities extending beyond the end of the next calendar year.
The majority of TEP's forward contracts are considered to be "normal
purchases and sales" of electric energy and are not considered to be
derivatives under Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (FAS 133).
TEP records revenues on its "normal sales" and expenses on its "normal
purchases" in the period in which the energy is delivered. From time to
time, however, TEP enters into forward contracts that meet the definition
of a derivative under FAS 133. When TEP has derivative forward contracts, it
marks them to market on a daily basis using actively quoted prices obtained
from brokers for power traded over-the-counter at Palo Verde and at other
southwestern U.S. trading hubs. TEP believes that these broker quotations
used to calculate the mark-to-market values represent accurate measures of
the fair values of TEP's positions, because of the short-term nature of TEP's
positions, as limited by risk management policies, and the liquidity in the
short-term market. When TEP has derivative forward contracts, it uses a
sensitivity analysis to measure the impact of an unfavorable change in market
prices on the fair value of its derivative forward contracts. As of December
31, 2002, TEP had no forward contracts that are considered derivatives. TEP
had no unrealized gain or loss on its December 31, 2002 balance sheet. TEP
had a cumulative unrealized loss of $0.5 million on its December 31, 2001
balance sheet, which was reversed during 2002 as the contracts settled. This
demonstrates the limited derivative forward contract activity conducted by
TEP and the limited impact on TEP's operating results and financial
condition.
During the fourth quarter of 2001, MEG began managing and trading
emission allowances, coal and related instruments. We manage the market risk
of this line of business by setting notional limits by product, as well as
limits to the potential change in fair market value under a 33% change in
price or volatility. We closely monitor MEG's trading activities, including
swap agreements, options and forward contracts, using risk management
policies and procedures overseen by the Risk Management Committee. MEG marks
its trading positions to market on a daily basis using actively quoted prices
obtained from brokers and options pricing models for positions that extend
through 2005. As of December 31, 2002, the fair value of MEG's trading
positions combined with emissions allowances it holds in escrow was $0.2
million. At December 31, 2001, the fair value of MEG's trading positions was
($0.1) million. During 2002, MEG had a $0.2 million unrealized gain and a
$0.1 million realized loss on its income statement.
Unrealized Gain (Loss) of MEG's Trading Activities
- Millions of Dollars -
----------------------------------------------------------
Source of Fair Value Maturity Maturity Maturity over Total Unrealized
At December 31, 2002 0 - 6 mos. 6 - 12 mos. 1 yr. Gain (Loss)
- --------------------------------------------------------------------------------------
Prices actively quoted $(0.8) $(0.2) $3.6 $ 2.6
Prices provided by other
external sources - - - -
Prices based on models and
other valuation methods (1.7) (0.7) - (2.4)
- --------------------------------------------------------------------------------------
Total $(2.5) $(0.9) $3.6 $ 0.2
======================================================================================
TEP also purchases coal and natural gas in the normal course of business
to fuel its generating plants. The majority of its coal supplies are
purchased under long-term contracts, which result in very predictable prices.
TEP's usage of natural gas oilto fuel generating plants has historically comprised
less than 5% of its generation output and coal;
--2% of its total fuel costs. This
historical natural gas usage has been to meet the summer peak demands of its
firm electric wholesale and retail customers and transmission import
requirements. Natural gas usage to meet these demands is expected to
increase at approximately 1% - 2% of total generation output per year. Due
to its limited and historically seasonal usage of natural gas for firm
electric wholesale and retail customers, TEP typically purchases its gas
needs in the spot and short-term markets. In 2002, natural gas fueled 6% of
our total generation output and resulted in $32 million of fuel expense,
compared with 9% gas usage and $76 million in expense in 2001. The higher
usage and costs during 2001 are primarily the result of strong wholesale
power markets and higher natural gas prices in the first half of 2001.
TEP obtains its gas supply as a retail customer of the local gas
supplier, Southwest Gas Corporation (SWG). TEP periodically negotiates its
contract with its gas supplier to establish terms relating to pricing and
scheduling of gas delivery. TEP entered into fixed price gas purchase
agreements in May and June 2002 to hedge its risk of fluctuations in the
market price of gas for June through October 2002. The agreements covered
approximately 30% of TEP's anticipated gas purchases for that period. SWG is
affected by recent FERC actions relating to its gas allocations from the San
Juan and Permian basins. A FERC order is expected on this issue in the
summer of 2003, and at that time, TEP will renegotiate its gas supply and
transportation agreement with SWG. In the interim, TEP and SWG have agreed
on an extension of the current contract terms through October 31, 2003. TEP
does not anticipate any material difference in operational or economic terms
in the new agreement, which is estimated to begin November 1, 2003.
Credit Risk
-----------
UniSource Energy is exposed to credit risk in its energy-related
marketing and trading activities related to potential nonperformance by
counterparties. We manage the risk of counterparty default by performing
financial credit reviews, setting limits monitoring exposures, requiring
collateral when needed, and using a standardized agreement which allows for
the netting of current period exposures to and from a single counterparty.
Despite such mitigation efforts, there is a potential for defaults by
counterparties to occur from time to time. In the fourth quarter of 2000 and
the first quarter of 2001, TEP was affected by payment defaults by SCE and
PG&E for amounts owed to the CPX and CISO. In the fourth quarter of 2001,
Enron defaulted on amounts owed to TEP for energy prices;
-- precipitation;sales.
We calculate counterparty credit exposure by adding any outstanding
receivable (net of amounts payable if a netting agreement exists) to the mark-
to-market value of any forward contracts. As of December 31, 2002, TEP's
total credit exposure related to its wholesale marketing activities
(excluding defaulted amounts owed by the CPX, the CISO and --Enron), was less
than $7 million and MEG's total credit exposure related to its trading
activities was $7 million. TEP and MEG's credit exposure is diversified
across approximately 26 counterparties. Approximately $1 million of exposure
is to non-investment grade companies.
UniSource Energy is also exposed to credit risk related to the sale of
assets owned by Nations Energy. In September 2001, Nations Energy sold its
26% equity interest in a power project located in Curacao, Netherland
Antilles to a subsidiary of Mirant Corporation (Mirant). Nations Energy
received $5 million in cash proceeds and recorded an $11 million note
receivable from the sale at its net present value of $8 million, with the
discount amortized to interest income over the five-year life of the note.
The note is guaranteed by Mirant Americas, Inc., a subsidiary of Mirant.
Payments on the note receivable are expected as follows: $2 million in July
2004, $4 million in July 2005, and $5 million in July 2006.
In October 2002, the major rating agencies downgraded the ratings of
Mirant and certain of its subsidiaries citing Mirant's significantly lower
operating cash flow relative to its debt burden coupled with the likelihood
that future operating cash flow levels may weaken further. Their ratings are
now below investment grade. As of December 31, 2002, Nations Energy's
receivable from Mirant is approximately $9 million. We cannot predict what
effect the downgrade of Mirant will have on its ability to make its required
payments to Nations Energy when due, beginning in July 2004. Nations Energy
has not recorded an allowance for doubtful accounts and we will continue to
evaluate whether any further ratings events or actions by Mirant will impact
the collectibility of the receivable.
OUTLOOK AND STRATEGIES
Our financial prospects and outlook for the next few years will be
affected by many competitive, regulatory and economic factors. Our plans and
strategies include the following:
- Complete the Arizona electric utility and gas utility asset
acquisition from Citizens described above.
- Facilitate the construction of Springerville Unit 3, which will allow
TEP to spread the fixed costs of its Springerville Units 1 and 2 Common
Facilities over an additional unit.
- Enhance the value of TEP's transmission access.
See also Item 1. Business, Electric Utilitysystem while continuing to
provide reliable access to generation for TEP's retail customers and
market access for all generating assets. This will include focusing on
completing the Tucson - Nogales transmission line, which could
eventually be connected to Mexico's utility system, and completing a new
one mile 500-kV line to enhance TEP's distributin system's link to the
regional high voltage transmission system.
- Improve production of Global Solar's thin-film photovoltaic cells and
seek strategic partners.
- Reduce TEP's debt as appropriate, using some of our excess cash flows.
Although no specific retirements are planned at this time, TEP expects
to use $30 million to $50 million annually for debt reductions.
- Efficiently manage TEP's generating resources and look for ways to
reduce or control our operating expenses in order to improve
profitability.
To accomplish our goals, we estimate that during 2003, TEP will spend
$121 million on capital expenditures, Millennium will provide between $7
million and $15 million of funding to its Energy Technology Investments, and
we will provide between $4 million and $50 million in funding to UED. Our
funding to UED will depend upon the timing of the financial close of the
Springerville expansion project and UED's ultimate ownership percentage. In
addition, we plan to pay $230 million for the acquisition of the Arizona
electric utility and gas utility assets from Citizens.
While we believe that our plans and strategies will continue to have a
positive impact on our financial prospects and position, we recognize that we
continue to be highly leveraged, and as a result, our access to the capital
markets may be limited or more expensive than for less leveraged companies.
CRITICAL ACCOUNTING POLICIES
In preparing financial statements under Generally Accepted Accounting
Principles (GAAP), management exercises judgment in the selection and
application of accounting principles, including making estimates and
assumptions. UniSource Energy and TEP consider Critical Accounting Policies
to be those that could result in materially different financial statement
results if our assumptions regarding application of accounting principles
were different. UniSource Energy and TEP describe our Critical Accounting
Policies below. Other significant accounting policies and recently issued
accounting standards are discussed in Note 1 of Notes to Consolidated
Financial Statements - Nature of Operations Sales for
Resale.
REGULATORY MATTERS
------------------and Summary of Significant
Accounting Policies.
ACCOUNTING FOR RATE REGULATION
TEP generally uses the same accounting policies and practices used by
unregulated companies for financial reporting under GAAP. However, sometimes
these principles, such as FASStatement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (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.statement as rates to customers are reduced.
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,November 1999, upon approval by the Emerging Issues Task ForceACC of the Financial
Accounting Standards Board concluded that applicationTEP's Settlement Agreement
relating to recovery 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 theTEP's transition plan provides for their recovery through the
regulated transmissioncosts and distribution portion of the business.
Effective November 1, 1999,standard retail rates, 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 continueTEP continues to apply FAS 71 in accounting for the distribution and
transmission portions of TEP's business, ourits regulated operations. WeTEP
periodically assessassesses whether weit can continue to apply FAS 71. If weTEP stopped
applying FAS 71 to TEP'sits remaining regulated operations, weTEP would write off
the related balances of TEP's regulatory assets as a charge in ourthe income
statement. Based on the balances of TEP's regulatory assets at December 31,
1999,2002, if weTEP had stopped applying FAS 71 to TEP's remaining regulated
operations, weTEP would have recorded an extraordinary loss, after-tax, of
approximately $275 million, after the related
income tax benefit of $183$233 million. While regulatory orders and
market conditions may affect our cash flows, ourTEP's cash flows would not be affected if weTEP
stopped applying FAS 71.71 unless a regulatory order limited its ability to
recover the cost of regulatory assets.
See Note 2 of Notes to Consolidated Financial Statements - Regulatory
Matters.
MARKET RISKS
------------
WeACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
FAS 143 requires entities to record the fair value of a liability for a
legal obligation to retire an asset in the period in which the liability is
incurred. A legal obligation is a liability that a party is required to
settle as a result of an existing or enacted law, statute, ordinance or
contract. When the liability is initially recorded, the entity should
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is adjusted to its present value by
recognizing accretion expense as an operating expense in the income statement
each period, and the capitalized cost is depreciated over the useful life of
the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss if
the actual costs differ from the recorded amount.
Prior to adopting FAS 143, costs for final removal of all owned
generation facilities were accrued as an additional component of depreciation
expense. Under FAS 143, only the costs to remove an asset with legally
binding retirement obligations will be accrued over time through accretion of
the asset retirement obligation and depreciation of the capitalized asset
retirement cost.
TEP will adopt FAS 143 on January 1, 2003, as required. TEP has
identified legal obligations to retire generation plant assets specified in
land leases for its jointly-owned Navajo and Four Corners generating
stations. The land on which the Navajo and Four Corners generating stations
reside is leased from the Navajo Nation. The provisions of the leases
require the lessees to remove the facilities upon request of the Navajo
Nation at the expiration of the leases. TEP also has certain environmental
obligations at the San Juan generating station. TEP has estimated that its
share of the cost to remove the Navajo and Four Corners facilities and settle
the San Juan environmental obligations is approximately $38 million at the
date of retirement. No other legally binding retirement obligations for
generation plant assets were identified. Millennium and UED have no asset
retirement obligations.
TEP has various Transmission and Distribution lines that operate under
various land leases and rights of way that contain end dates and restorative
clauses. TEP operates its Transmission and Distribution lines as if they
will be operated in perpetuity and would continue to be used or sold without
land remediation. As a result, TEP will not recognize the costs of final
removal of the Transmission and Distribution lines in the financial
statements.
Upon adoption of FAS 143 on January 1, 2003, TEP expects to record an
asset retirement obligation of $38 million at its net present value of $1.1
million, increase depreciable assets by $0.1 million for asset retirement
costs, reverse $112.8 million of costs accrued for final removal from
accumulated depreciation, reverse previously recorded deferred tax assets by
$44.2 million and recognize the cumulative effect of accounting change as
gain of $111.7 million ($67.5 million net of tax). TEP expects that adopting
FAS 143 will result in a reduction to depreciation expense charged throughout
the year as well. For 2003, this amount is approximately $6 million.
Amounts recorded under FAS 143 are potentially exposedsubject to various formsassumptions and
determinations, such as determining whether a legal obligation exists to
remove assets, estimating the fair value of market risk.
Changes inthe costs of removal, estimating
when final removal will occur, and the credit-adjusted risk-free interest
rates returnsto be utilized on marketable securities, changesdiscounting future liabilities. Changes that may
arise over time with regard to these assumptions will change amounts recorded
in foreign currency exchange rates, and changesthe future as expense for asset retirement obligations.
If TEP in commodity prices
may affect our future financial results.fact retires any asset at the end of its useful life, without
a legal obligation to do so, it will record retirement costs at that time as
incurred or accrued. TEP currently uses
derivative commodity instruments such as forward contracts to buy or
sell energy, but does not use derivative commodity or derivative
financial instrumentsbelieve that the adoption of FAS 143 will
result in any change in retail rates since all matters relating to the rate-
making treatment of TEP's generating assets have been determined pursuant to
the Settlement Agreement.
PAYMENT DEFAULTS AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
We record an allowance for either trading or speculative purposes.doubtful accounts when we determine that an
account receivable will not be collected. As a result of payment defaults
made by market participants in California, TEP's collection shortfall from
the CPX and CISO was approximately $9 million for sales made in 2000 and $7
million for sales made in 2001. TEP continues to evaluate to what extent, if any, it may use
derivative financial and commodity instrumentsrecorded an allowance for doubtful
accounts for the full amount of these uncollected amounts in the normal coursefourth
quarter of 2000 and the first quarter of 2001, totaling $16 million. In the
fourth quarter of 2001, TEP decreased the reserve by $8 million, or 50%, of
the outstanding receivable because events during 2001 caused us to believe
that it is probable that at least 50% of the amount due to TEP will be
repaid. These include: (1) the stabilization of western power markets, (2)
rate increases achieved by PG&E and SCE, (3) settlements made by California
utilities with various power providers, (4) the CPUC approval of SCE's
financing plan to pay its future business.
For additional information concerning risk factors, including
market risks, see Safe Harbor for Forward-Looking Statements below.
Interest Rate Riskcreditors by the end of the first quarter of 2002,
and (5) data in filings of FERC refund hearings. The amount that TEP
ultimately collects would have an impact on earnings if the amount is more
or less than the $8 million TEP has reserved. If TEP collects all of the $16
million, pre-tax income will increase by $8 million. If TEP does not collect
any of the $16 million, pre-tax income will decrease by $8 million. TEP also
believes that it is due interest on the amounts TEP is exposedowed. In addition,
TEP has cash collateral of approximately $1 million on deposit in an escrow
account with the CPX, which is currently unavailable to risk resulting from changes in interest rates
on certain of its long-term debt obligations. TEP manages its
exposuredue 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.CPX's
bankruptcy stay.
At December 31, 19992002 and 1998, TEP's long-term debt included
$329 million of tax-exempt variable rate debt. The average interest
ratesDecember 31, 2001, the reserve for electric
wholesale accounts receivable 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 ofbalance sheet was approximately $3.3$8
million.
See Note 711 of Notes to Consolidated Financial Statements, Fair ValueStatements.
CAPITALIZATION OF UED PROJECT DEVELOPMENT COSTS
UED capitalizes project development costs when it is probable that the
project will be completed and it expects to recover the costs 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.project.
At December 31, 19992002, capitalized project development costs on UED's balance
sheet were approximately $22.4 million. If the Springerville expansion
project does not proceed, the capitalized project development costs will be
immediately expensed.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLAN ASSUMPTIONS
TEP records plan assets, obligations, and 1998,expenses as appropriate,
related to its pension and other postretirement benefit plans based on
actuarial valuations. Inherent in these valuations are key assumptions
including discounts rates, expected returns on plan assets, compensation
increases and health care cost trend rates. These actuarial assumptions are
reviewed annually and modified as appropriate. The effect of modifications
is generally recorded or amortized over future periods. TEP had marketable debt securities with an
estimated fair valuebelieves that
the assumptions utilized in recording obligations under the plans are
reasonable based on prior experience, market conditions and from the advice
of $45plan actuaries.
TEP discounted its future pension and other postretirement plan
obligations using a rate of 6.75% at December 31, 2002, compared to 7.25% at
December 31, 2001. TEP determines the appropriate discount annually based on
the current rates earned on long-term bonds that receive one of the two
highest ratings given by a recognized rating agency. The pension liability
and future pension expense both increase as the discount rate is reduced.
For TEP's pension plans, a 25 basis point decrease in the discount rate would
increase the accumulated benefit obligation by approximately $3.7 million and
$22the related plan expense for 2003 by approximately $0.6 million. A similar
increase in the discount rate would decrease the accumulated benefit
obligation by approximately $3.5 million which exceededand the carrying valuerelated plan expense for 2003
by zeroapproximately $0.6 million. For TEP's plan for other postretirement
benefits, a 25 basis point decrease in the discount rate would increase the
accumulated benefit obligation by approximately $1.5 million and the related
plan expense for 2003 by approximately $0.1 million. A similar increase in
the discount rate would decrease the accumulated benefit obligation by
approximately $1.5 million and the related plan expense for 2003 by
approximately $0.1 milllion.
At December 31, 2002, TEP assumed that its plans' assets would generate
a long-term rate of return of 8.75%. This rate is lower than the assumed
rate of 9.0% used at December 31, 2001. In establishing its assumption as to
the expected return on plan assets, TEP reviews the plans' asset allocation
and develops return assumptions for each asset class based on advice from the
plans' actuaries that includes both historical performance analysis and
forward looking views of the financial markets. Pension expense increases as
the expected rate of return on plan assets decreases. A 25 basis point
decrease in the expected return on plan assets would increase pension expense
for 2003 by approximately $0.3 million. A similar increase in the expected
return on plan assets would decrease pension expense for 2003 by approximately
$0.3 million.
In recognition of significant increases in health care costs, TEP
increased the initial health care cost trend rate used in valuing its
postretirement benefit obligation to 12.0% at December 31, 2002. The rate
assumed at December 31, 2001 was 8.5%. Assumed health care cost trend rates
have a significant effect on the amounts reported for health care plans. A
one percentage-point increase in assumed health care cost trend rates would
increase the postretirement benefit obligation by approximately $5 million
and the related plan expense by approximately $1 million. A similar decrease
in assumed health care cost trend rates would decrease the postretirement
benefit obligation by approximately $4 million respectively. These debt
securities represent TEP's investmentsand the related plan expense
by approximately $1 million.
As discussed in lease debt underlying
certainNote 13, TEP recorded a minimum pension liability of
its capital lease obligations. The fair value$6.7 million at December 31, 2002 primarily because of marketable debt securities increased in 1999 due to additional
investments in lease debt made by TEP. Changescurrent stock market
conditions and a reduction in the fair valueassumed discount rate.
Based on the above assumptions, TEP will record pension expense 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$8.5
million and other Millennium
businessespostretirement benefit expense of $6.6 million in 2003.
TEP will make required pension plan contributions of $2.8 million in 2003.
TEP's other postretirement benefit plan is not material duefunded. TEP expects to the small amountmake
benefit payments to retirees under this plan of such
investments.
Commodity Price Riskapproximately $2 million in
2003.
See Note 13 of Notes to Consolidated Financial Statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND HEDGING
ACTIVITIES
On January 1, 2001, TEP competes withadopted FAS 133. A derivative financial
instrument or other utilities, power marketers and
independent power producers incontract derives its value from another investment or
designated benchmark. When TEP adopted FAS 133, some of 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 that it used to buy orand sell energy at a specified price at a
future date. These contracts arewholesale power were considered to be
derivative
commodity instruments. Generally, TEP commits to future salesderivatives based on expected excess generating capability. However, ratherthe accounting guidance at that time. Other contracts
qualified for hedge accounting.
Because of the complexity of derivatives, the FASB established a
Derivatives Implementation Group (DIG). During 2001, the DIG issued new
guidance, which changed the contracts that qualified as derivatives under FAS
133. To date, the DIG has issued more than producing additional power,100 interpretations to provide
guidance in applying FAS 133. As the DIG or the FASB continues to issue
interpretations, TEP may enter intochange the conclusions that it has reached and, as a
result, the accounting treatment and financial statement impact could change
in the future.
Under FAS 133, TEP records unrealized gains and losses on its derivative
forward purchase
contractcontracts and adjusts the related assets and liabilities on a monthly
basis to satisfy the forward sales contract ifreflect the market prices are favorable. The forward sales contracts that are satisfiedat the end of the month. Similarly, in
accordance 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 needsthe accounting guidance for its selling
commitments. To limit exposure to price risk, TEP hasenergy-related 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 recognizesactivities, MEG records unrealized gains and losses inon its trading activities
and adjusts the income statement
upon settlementrelated assets and liabilities on a monthly basis to reflect
the market prices at the end of the contracts. TEP measures its market risk
related to its commodity exposure by using a sensitivity analysis.month. The market prices used to
determine fair value for these derivative instruments and trading activities
are estimated based on various factors including broker quotes, exchange
prices, over the counter prices and time value. AsTEP reports its unrealized
gain/loss on derivative forward sales net of December 31, 1999, the
estimated potential unfavorable impactits unrealized gain/loss on
pre-tax earningsderivative forward purchases as a component 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 inOperating Revenues. MEG
reports its energyunrealized gain/loss on 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 reviewsnet of its counterpartiesrealized
gain/loss on trading activities as a component of Operating Revenues. The
net pre-tax gain on TEP forward contracts and the use of standardized agreements which allowMEG trading activities 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 yearsyear ended December 31, 19992002, were approximately $0.5 million and 1998.
TEP also purchases coal and small amounts$0.1
million, respectively. At December 31, 2002, the fair value of natural gasMEG's trading
assets totaled $10.5 million, which is reported 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.
Amount in $ Millions
--------------------------------
1999 1998 1997
--------------------------------
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
- ----------------------------------------------------------------------
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 pricesOther Current Assets, and
the tighteningfair value of excess capacityMEG's trading liabilities totaled $10.3 million, which is
reported 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,Other Current Liabilities. 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 thehad no open 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 expensecontracts 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.December 31, 2002 that are considered derivatives.
See Note 23 of Notes to Consolidated Financial Statements, Deferred Springerville Generation Costs.
Capital Lease Expense decreased in 1999 from 1998 dueStatements.
UNBILLED REVENUE
TEP's electric retail sales revenues include an estimate of MWhs
delivered but unbilled at the end of each period. The unbilled revenue is
estimated by comparing the actual MWhs generated 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
71MWhs billed to our
generation operations effective November 1, 1999 and we
beganretail customers. The excess of MWhs generated over MWhs billed is then
allocated to accountthe retail customer classes based on estimated usage by each
customer class. TEP then records revenue for our leases as an unregulated company would.
This caused our lease expenseeach customer class based on
the various bill rates for each customer class. Due to the last two monthsseasonal
fluctuations of 1999 to be
$3.1 million (before tax)TEP's actual load, the unbilled revenue amount is 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 1999summer months 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
accountingwinter months.
DEFERRED TAX VALUATION
We record deferred tax liabilities 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
ofamounts that will increase 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
areWe record deferred tax assets for amounts that
could be used on tax returns to reduce income taxes paid,on future tax returns. We record a
valuation allowance, or reserve, for the incomedeferred 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
benefitasset amount that we
may recognize innot be able to use on future tax returns. We estimate the income statementsvaluation
allowance based on our interpretation of either
UniSource Energythe tax rules, prior tax audits, tax
planning strategies, scheduled reversal of deferred tax liabilities, and
projected future taxable income.
The valuation allowance of $16 million at December 31, 2002, which
reduces the Deferred Tax Asset balance, relates to net operating loss and
investment tax credit carryforward amounts. In the future, if TEP determines
that TEP would be able to use all 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 reclassifiedthese amounts on tax
returns, then TEP would reduce the reserve and recognize a tax benefit up to
$16 million. Factors that could cause TEP to recognize the tax benefit
include new or additional guidance through tax regulations, tax rulings, case
law and/or the use of such benefits on future tax returns.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
UNISOURCE ENERGY CONSOLIDATED CASH FLOWS
2002 2001 2000
---------------------------------------------------------------------
- Millions of Dollars -
Cash provided by (used in):
Operating Activities $ 173 $ 215 $ 215
Investing Activities (271) (117) (113)
Financing Activities (39) (33) (84)
---------------------------------------------------------------------
Net Increase (Decrease) in Cash $(137) $ 65 $ 18
=====================================================================
UniSource Energy's primary source of liquidity is its cash flow from
Operating
Expense to Interest Expense due to ceasing to apply FAS 71 tooperations, which is derived primarily from retail and wholesale energy sales
at TEP, net of the related payments for fuel and purchased power. In 2001
and 2000, our generation operations. This occurredcash flows benefited from higher margins on wholesale energy
sales in the fourth quarter of 1999
as accounting forwestern U.S. power markets. This enabled us to increase our
cash levels from $163 million at year-end 2000 to $228 million at year-end
2001. We used our available cash to finance capital leases changed from the 'levelized method'expenditures, primarily
at TEP, to the 'interest method'.
Interest Expense on Long-Term Debt decreasedmake investments in 1999 from 1998
as TEP redeemed $30 million of its 8.50% First Mortgage Bonds due in
2009 in December 1998. Also contributingour energy technology affiliates, to lower Long-Term Debt
interest expense were refinancings of higher rate debt in 1998pay
dividends to shareholders, 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 Recordedto reduce leverage 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 extendingrepaying high
coupon debt maturities and reducing the risk of changesinvesting 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 -lease debt.
Net of Tax
When TEP ceased applying FAS 71 for its generation operationscash flows from operating activities in November 1999, it recorded $22.6 million of extraordinary net
income consisting of the following after-tax items:
-- $31.4 million in income2002 decreased 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.
Amounts in $ Millions
- ----------------------------------------------------------------------
Subsidiary 1999 1998 1997
- ----------------------------------------------------------------------
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)
- ----------------------------------------------------------------------
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 19992001,
primarily as a result of the July 1999
salefollowing factors:
- $42 million decrease in cash receipts from sales to wholesale and
retail customers, net of its equityfuel and purchased power costs;
- $11 million cash payment to terminate an Irvington coal supply
agreement in September 2002;
- $15 million cash payment to amend a San Juan coal supply agreement in
December 2002; offset by
- $11 million decrease in capital lease interest paid as a result of
lower lease obligation balances and lower interest rates on variable
rate lease debt; and
- $10 million decrease in income taxes paid due to lower pre-tax income
and income tax benefits in 2002.
In 2001, net cash flows from operating activities increased slightly
compared with 2000 due to higher cash receipts from sales to retail and
wholesale customers, net of fuel and purchased power costs and lower capital
lease interest payments, offset by higher income tax payments and higher
wages and other operations and maintenance costs.
Net cash used for investing activities was higher in 2002 than in 2001
primarily due to investment in NewEnergy to The AES Corporation.
MEH received $50$135 million of Springerville lease debt. TEP
spent $113 million for construction expenditures and Millennium contributed
$24 million in considerationinvestments and loans to Millennium Energy Businesses in 2002.
Other significant investing activities in 2001 included: (1) TEP spent $104
million for construction expenditures; (2) we received $5 million in proceeds
from the sale consisting
of $27.2Nations Energy's interest in the Curacao project, along with
the return of $16 million in AES common stockdeposits; (3) UED purchased a 20 MW gas turbine
for $15 million; (4) we received the final promissory note payment of $11
million from NewEnergy; 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(5) TEP sold real estate for $7 million.
Net cash used for financing activities was soldhigher 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 associated2002 compared 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,2001 primarily due to its shareincreased common stock dividends and expenses
associated with the refinance 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
- -------------------------TEP's bank credit facility. In 2002,
UniSource Energy On December 3, 1999 UniSource Energy declared a cash dividendpaid approximately $17 million in the amount of $0.08 per share ondividends to 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 economicTEP retired $20 million in capital lease obligations and
competitive conditions and the cash flow from
our subsidiary companies,made $2 million in bond payments. In addition, in November 2002, TEP and Millennium.
TEP
In December 1999 and 1998, TEP declared and paid dividends of
$34$5
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 complianceupfront fees associated with the refinance of its bank facility.
See 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- Electric Utility, Financing Activities, TEP Bank Credit Agreement,
below. As of December 31, 1999, TEP wasIn contrast, in compliance
with the terms of the Credit Agreement.
The ACC Holding Company Order states that TEP may not pay2001 UniSource Energy paid $13 million in 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 Energyshareholders 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 $24paid $26 million to retire capital lease
obligations. In 1998 $17obligations and made $2 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.payments.
As a result of the activities described above, our consolidated cash and
cash equivalents increased slightlydecreased to $91 million at December 31, 2002 from the 1998 year-end balance of
$145.1$228
million at December 31, 2001. TEP's cash and cash equivalents decreased to
the 1999 year-end balance of $145.2 million. Our$56 million at December 31, 2002 compared with $160 million at December 31,
2001. At March 4, 2003, our consolidated cash balance, including cash
equivalents, at February
24, 2000, was approximately $112$30 million, including TEP's cash balance of
approximately $10 million. We invest cash balances in high-grade money market
securities with an emphasis on preserving the principal amounts invested.
During 2000, UniSource EnergyIn the event that we experience lower cash from operations in 2003, we
will useadjust our discretionary uses of cash accordingly. We believe, however,
that we will continue to have sufficient cash flow to cover our capital
needs, as well as required debt payments and dividends to shareholders.
Furthermore, we believe that even with lower wholesale energy prices and
lower demand from mining customers, we will have sufficient excess cash flow
to continue to make annual discretionary debt reductions or lease debt
investments at TEP in the range of $30 - $50 million.
UNISOURCE ENERGY - PARENT COMPANY
Our primary cash needs are to fund investments in Millennium'sthe unregulated energy
businesses, and to pay dividends to shareholders. At year-end 1999 UniSource Energy had cashshareholders, and short
term investmentsinterest payments on our
promissory note to TEP. In addition, as part of approximately $53 million. We expect our
ACC Holding Company Order, we must invest 30% of any proceeds of equity
issuances in TEP until TEP's equity reaches 37.5% of total capital (excluding
capital leases).
Our primary sources of cash to beare dividends from our subsidiaries, primarily
TEP. Although no specific offerings are currently contemplated,In 2002, TEP paid
dividends to UniSource Energy of $35 million, compared with $50 million in
2001 and $30 million in 2000.
In 2003, UniSource Energy will need funds to finance the purchase of the
Citizens Arizona electric and gas utility assets. To finance this purchase,
we plan to issue debt secured by the purchased assets and may also issue debt and/orconsider
financing a portion of the purchase with new equity, securities from
time to time.depending on market
conditions and other factors.
If cash flows were to fall short of expectation,expectations, we wouldwill reevaluate the
investment requirements of Millennium'sthe unregulated energy businesses and/or seek
additional financing for, or investments in, those businesses by unrelated
parties.
TEP Cash Flows- ELECTRIC UTILITY
TEP's capital requirements consist primarily of capital expenditures 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 transferoptional and mandatory redemptions of cash to an escrow account
related to a tax settlement (see See Note 9 of Notes to Consolidated
Financial Statements, Commitmentslong-term debt 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 1998As shown in the chart below, during the last three years, 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 millionhad sufficient 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.
Afteravailable after capital expenditures, scheduled debt
maturitiespayments and
payments to retire capital lease obligations TEP's net cash flows
availableto provide for other investing and
financing activities were $23.7
million in 1999, $81.7 million in 1998, and $40.1 million in 1997.activities:
2002 2001 2000
----------------------------------------------------------------------
- Millions of Dollars -
Cash from Operations $ 204 $ 261 $ 234
Capital Expenditures (103) (104) (98)
Debt Maturities (2) (2) (48)
Retirement of Capital Lease Obligations (20) (26) (39)
----------------------------------------------------------------------
Net Cash Flows Available after Required
Payments $ 79 $ 129 $ 49
======================================================================
During 2000,2003, TEP expects to generate sufficient internal cash flows to
fund its operating activities, capitalconstruction 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. At December 31, 2002, TEP had $60 million
available under its Revolving Credit Facility. In January 2003, TEP borrowed
$25 million under its Revolving Credit Facility and repaid it within 20 days.
If cash flows were to fall short of expectations or if monthly cash requirements
temporarily exceededexceed available cash balances, TEP wouldwill borrow from its
Revolving Credit Facility.
INVESTING AND FINANCING ACTIVITIES
TEP-ELECTRIC UTILITYOperating Activities
--------------------
In 2002, net cash flows from operating activities at TEP exceeded $200
million for the third year in a row, but were lower than 2001 primarily due
to decreased sales to wholesale customers. TEP made cash payments of $27
million in 2002 related to coal contract amendment and termination fees.
Partially offsetting these cash decreases were lower income tax payments due
to lower pre-tax income and certain tax benefits received, and lower capital
lease interest paid due to lower lease obligation balances and lower
variable interest rates.
Wholesale energy market conditions were not as favorable in 2002 as they
were in the previous two years, with market prices and margins significantly
lower. Another factor that affects TEP's cash flows from operations is reduced
energy demand by its large mining customers. As reported elsewhere in this
document, TEP's two major mining customers have reduced operations during the
last few years due to lower copper prices. This trend is likely to continue
in 2003. TEP expects that these load reductions will be offset, however, by
lower purchased power costs to cover summer peaking needs and by sales of
excess capacity, when profitable, in the first, second, and fourth quarters.
TEP does not, therefore, expect these reductions to have a significant impact
on cash flows.
Investing Activities
--------------------
Net cash used for investing activities was higher in 2002 compared with
2001, primarily due to TEP's investment in Springerville lease debt. In
2002, TEP paid $135 million to purchase Springerville Lease debt, spent $103
million on construction expenditures, and $15 million to purchase the 20 MW
gas turbine from UED. In 2001, construction expenditures were $104 million
and TEP received $7 million in proceeds from the sale of real estate.
Investments in Springerville Lease Debt and Equity
--------------------------------------------------
TEP made the following investments in Springerville Lease debt in 2002:
Principal Average
Date Amount Debt Purchased Coupon Rate
- ------------------------------------------------------------------------------------
January 2002 $ 96 million Springerville Coal Handling Lease Debt 14.3%
May 2002 3 million Springerville Unit 1 Lease Debt 10.7%
September 2002 33 million Springerville Unit 1 Lease Debt 10.6%
TEP purchased $2 million of Springerville Unit 1 Lease debt in 2001 from
Millennium. Millennium previously purchased these notes in the open market
in the first quarter of 2000. As of December 31, 2002, TEP's total
investment in Springerville lease debt was $192 million, at yields ranging
from 8.9% to 12.7%.
In December 2001, TEP purchased a 13% equity ownership interest in the
Springerville Coal Handling Facilities Leases for $13 million. In March
2002, TEP terminated the leases related to its equity interest and cancelled
the associated debt that we held. As a result of the lease termination, TEP
recorded a $21 million reduction to the capital lease obligation, a $27
million reduction of its investment in lease debt, and a $6 million increase
in the capital lease asset, which represents the residual value of TEP's
interest in the leased asset and is carried at cost.
See Note 7 of Notes to Consolidated Financial Statements.
Capital Expenditures
--------------------
TEP's capitalforecasted construction expenditures for the next five years 1997 through 1999,
along with estimated amounts for the years 2000 throughare:
$121 million in 2003, $126 million in 2004, are
shown below:
($$163 million in millions)
---------------------------------------
Actual Estimated
---------------------------------------
1997 $ 72 2000 $ 95
1998 81 2001 96
1999 91 2002 91
2003 86
2004 74
----------------------
TOTAL $442
----------------------
The2005, $107
million in 2006, and $110 million in 2007. These estimated capital
expenditures for the five years 2000-20042003-2007 break down in the following categories:
-- $292- $347 million for transmission, distribution and other facilities in
the Tucson area;
-- $64- $154 million for production facilities;
- $32 million in renewable energy projects, including expansion of its
solar generation portfolio;
- $15 million in a new production facilities. Beginningfacility for a 75 MW combustion
turbine;
- $4 million in 2000
production facilities are considered an unregulated component of our
electric utility operations;environmental projects; and
-- $86- $75 million for existing other production facilities.the proposed 345 kV transmission line to Nogales,
Arizona.
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.
Forecasted construction expenditures for 2003 include approximately $10
million for completing a new one mile 500-kV transmission line to enhance
TEP's distribution system link to the regional high voltage transmission
system.
In January 2001, TEP and Citizens entered into a project development
agreement for the joint construction of a 62-mile transmission line from
Tucson to Nogales, Arizona. In January 2002, the ACC approved the location
and construction of the proposed 345 kV line. Pending federal studies and
approvals for the portion of the line that will pass through a national
forest, construction could begin as early as mid-2004, with an expected in-
service date eight months following start of construction. Construction costs
are expected to be approximately $75 million. TEP has also applied to the
U.S. Department of Energy for a Presidential Permit that would allow building
an extension of the line across the international border with Mexico to
interconnect with Mexico's utility system, providing further reliability and
market opportunities in the region.
The estimated expenditures listed above do not include any amounts for
the potential expansion of the Springerville Generating Station.
Springerville generation expenditures are expected to be made by another
UniSource Energy subsidiary. See UED - Unregulated Energy Business, below.
In addition to TEP's forecasted construction expenditures, TEP's other
capital requirements include its required debt maturities and capital lease
obligations. See Note 7 of Notes to Consolidated Financial Statements.
Financing Activities
--------------------
Net cash used for financing activities was significantly less in 2002
compared with 2001 primarily because TEP's dividends to its common
shareholders and payments on capital leases obligations were lower. In
2002, TEP paid $35 million in dividends to UniSource Energy and its other
common shareholders, retired $20 million in capital lease obligations and
paid $2 million in bond sinking fund payments and other redemptions. In
addition, we paid approximately $5 million in bank financing fees associated
with our new bank facilities. In contrast, in 2001, TEP paid $50 million in
dividends to UniSource Energy and its other common shareholders, retired $26
million in capital lease obligations and paid $2 million in bond sinking fund
payments and other redemptions.
Bond Issuance and Redemption
----------------------------
During 1999,2002, TEP did not issue any new bonds or redeem any
existing bonds, other thanpurchased and retired $0.4 million of its 8.50% First
Mortgage Bonds due in 2009 and made required sinking fund payments of $1.7$2
million. During 1998,2001, TEP issued $386.9 million in new bondspurchased and redeemed $416.4retired $0.2 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'sits 8.50%
First Mortgage Bonds due in 1999, 2001, 2002,2009 and 2003, as well as the
$31.9 millionmade required sinking fund payments 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.$2 million.
TEP Bank Credit Agreement
-------------------------
In November 2002, TEP hasentered into a $441new $401 million Credit Agreement
with a number of banks
which matures onto replace the credit facilities provided under its then existing $441
million credit agreement that would have expired December 30, 2002. The new
agreement consists of a $100$60 million Revolving Credit Facility and atwo letter
of credit (LOC) facilities (Tranche A and Tranche B) totaling $341 million Letter of
Credit Facility.million.
The Revolving Credit Facility is used to provide liquidity for general
corporate purposes. The Letter of Credit
Facility supportsLOC Facilities support $329 million aggregate
principal amount of tax-
exempttax-exempt variable rate debt.debt obligations. The Revolving
Credit Facility is a 364-day facility that expires on November 13, 2003. The
Tranche A letters of credit, totaling $135 million, expire in January 2006,
and the Tranche B letters of credit, totaling $206 million, expire in
November 2006.
The new facilities are secured by $441$401 million in aggregate principal
amount of Second Mortgage Bonds.Bonds issued under TEP's General Second Mortgage
Indenture. The new Credit Agreement contains a number of restrictive
covenants that are similar to TEP's previous credit agreement, including
restrictions on additional indebtedness, liens, sale of assets, mergers and
sale-leasebacks. The new Credit Agreement, like the previous agreement, also
contains several financial covenants including
interest coverage, leverageincluding: (a) a minimum Consolidated
Tangible Net Worth, (b) a minimum Cash Coverage Ratio, and (c) a maximum
Leverage Ratio. Under the terms of the new Credit Agreement, TEP may pay
dividends so long as it maintains compliance with the Credit Agreement;
however, dividends and certain investments in affiliates may not exceed 65%
of TEP's net worth tests.income so long as the Tranche B LOCs are outstanding. The new
Credit Agreement also provides that under certain circumstances, certain
regulatory actions could result in a required reduction of the commitments.
As of December 31, 1999,2002, TEP was in compliance with these financial covenants.
See
Restrictive Covenants below.The $329 million in aggregate principal amount of tax-exempt variable
rate debt that is supported by the LOC Facilities were classified as Current
Maturities of Long-Term Debt on TEP's Balance Sheet at December 31, 2001
because the previous letter of credit facility matured on December 30, 2002.
When the new LOCs were issued on November 25, 2002, TEP classified the bonds
as Long-Term Debt because the maturities of the new LOCs are in January 2006
and November 2006.
Due to prevailing market conditions at the time of refinancing,
particularly in the energy sector, the amount of interest and fees that TEP
will pay on its new Credit Facilities is significantly higher than that of
its previous credit agreement. TEP's annual interest expense, including LOC
fees, related to its Credit Agreement will increase from approximately $6
million to approximately $19 million.
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 theTEP's
credit rating on TEP's senior
secured debt.ratings. Also, TEP pays a commitment fee on the unused portion of the
Revolving Credit Facility, and a fee on the Letter of Credit
Facility. TheseLOC Facilities. The chart below
shows the per annum rates and fees are also dependentin effect on TEP's Credit Facilities as of
December 31, 2002, based on its credit ratings.ratings, as well as the possible range
of rates and fees if TEP's credit ratings were to change:
Current Rate/ Range of
Fee Rate / Fees
-------------------------------------------------------------------------
Revolving Credit Facility
- Commitment Fee 0.35% 0.25% to 0.40%
- Borrowing Rate (spread over LIBOR) 4.00% 3.50% to 4.25%
Tranche A LOCs (including LOC Fronting Fee) 4.25% 3.75% to 4.50%
Tranche B LOCs (including LOC Fronting Fee) 5.75% 5.75%
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.2002, there were no outstanding borrowings under this
facility. 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.2003, TEP had no borrowings outstandingborrowed $25 million under theits Revolving
Credit Facility at December 31, 1999 or January 3, 2000.
Springerville Common Facilities Leases
The secured notes underlyingand repaid it within 20 days. If TEP encounters temporary
cash needs during 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 highercourse 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.year, it will borrow from its Revolving
Credit Facility.
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
holderbondholder 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")Express Line), and a portion of
TEP's local transmission and distribution system in the Tucson metropolitan
area. As of December 31, 2002, TEP had approximately $584 million of tax-
exempt local furnishing bonds outstanding. Approximately $325$331 million in
principal amount of such bonds financed Springerville Unit 2 and the Express
Line. AnyIn addition, approximately $65 million of remaining lease debt related
to the followingIrvington Unit 4 lease obligation was issued as tax-exempt local
furnishing bonds.
Various 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 likelyTEP believes 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
qualificationsystem 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, (2) the RTO or ISO allows pricing of transmission service such that the
benefits of tax-exempt financing continue to accrue to retail customers, and
(2)(3) 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
--------------------------------Indentures
-------------------
TEP's General First Mortgage creates a first mortgage lienindenture and second mortgage indenture create
liens on and security interestinterests in most of TEP's utility plant assets.
Springerville Unit 2, which is owned by San Carlos, is not subject to this lienthese
liens and security interest. Under the General First
Mortgageinterests. TEP's mortgage indentures allow TEP mayto issue
additional First Mortgage Bondsmortgage bonds on the basis of: (1) up to 60%a percentage of net utility
property additions; andadditions and/or (2) the principal amount of retired First Mortgage Bonds.
In general, themortgage bonds.
The amount of First Mortgage Bondsbonds that TEP canmay issue is also subject to a net earnings test. The test
must show thatunder each mortgage indenture.
TEP's net earnings for 12 consecutive months withinCredit Agreement contains limits on the preceding 15
months are at least two (2.0) times the annual interest requirements
on all outstandingamount of First and Second
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'sthat may be outstanding. The Credit Agreement allows no more
than $411$222 million of First Mortgage Bonds to be outstanding, and no more than
$623 million in First and Second Mortgage bonds, combined to be outstanding.
There were $277At December 31, 2002, TEP had $222 million of First Mortgage Bonds outstanding at December 31, 1999.
Additionally, the Credit Agreement contains certain financial
covenants that limit the amountand a
total 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$623 million 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,Bonds outstanding.
Although the amount of Second Mortgage Bonds thatfirst and second mortgage indentures would allow TEP canto 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 Bondsadditional bonds based on property additions and/or retired First
Mortgage Bonds,bond credits, the
amount of retired First Mortgage Bonds available
to issue new First Mortgage Bonds would be reducedlimits imposed by the same
amount.
At December 31, 1999,Credit Agreement are more restrictive and are currently
the governing limitations.
TEP hadalso has the ability to issue about $579
millionrelease property from the liens of new Second Mortgage Bondsthe
mortgage indentures on the basis of net property additions as described above. Also,and/or retired
bond credits. The Credit Agreement also limits the amount of property that
can be released from the second mortgage indenture to $25 million.
Springerville Common Facilities Leases
--------------------------------------
In 1985, TEP hadsold and leased back its undivided one-half ownership
interest in the abilitycommon facilities at the Springerville Generating Station.
Under the terms of the Springerville Common Facilities Leases, TEP must
periodically refinance or refund the secured notes underlying the leases
prior to issue
approximately $629the named date in order to avoid a special event of loss. If the
lease debt is not refinanced prior to the special event of loss date
(currently June 30, 2003), the leases would be terminated and TEP would be
required to repurchase the facilities.
In January 2003, TEP filed an application with the ACC for authorization
to amend the Springerville Common Facilities Leases and refinance the $70
million of associated lease debt. The interest rate on new Second Mortgage Bondslease debt will
be a function of market conditions at the time of refinancing, the lender's
view of TEP's creditworthiness, and the lender's evaluation of the collateral
for the secured notes. As a result of the current market conditions and a
smaller financing market overall, we expect that the interest rate on the basis
of retired bonds. Using annew
debt will likely be higher than the current variable interest rate of 7.5%LIBOR
plus 2.50%, resulting in higher rents payable by TEP.
MILLENNIUM -- UNREGULATED ENERGY BUSINESSES
Below we discuss our significant investments, commitments and investment
proceeds from 2002, 2001 and 2000.
Investments in Energy Technologies
----------------------------------
Millennium provided the net earnings
test would allow such new issuancesfollowing funding to its Energy Technology
Investments:
2002 2001 2000
---------------------------------------------------------------------
- Millions of Second Mortgage Bonds. These
calculations assume that no additional First Mortgage Bonds wouldDollars -
Cash Funding Provided To:
Global Solar $ 13 $ 15 $ 18
IPS 4 6 -
ITN 1 5 -
MicroSat - 10 -
---------------------------------------------------------------------
Total Cash Funding Provided to Energy
Technology Investments $ 18 $ 36 $ 18
=====================================================================
Millennium expects to fund between $7 million and $15 million to its
various Energy Technology Investments in 2003. By March 5, 2003,
approximately $4 million of Millennium's remaining commitment had been
funded. A significant portion of the funding under these agreements has been
and will be issuedused for research and development purposes, establishment of the
production line, and other than to refund First Mortgage Bonds outstanding atadministrative costs. As these funds are expended
for research and development and for administrative costs, Millennium
recognizes expense.
As of December 31, 1999. However, issuance2002, including accumulated deferred tax benefits
relating to these investments, Millennium had approximately $50 million
remaining investment in the Energy Technology Investments. As discussed
above, we may commit to provide additional funding to these investments.
During 2003, we will analyze the prospects for each of these amountsinvestments and
determine if additional internal funding is needed. In addition, external
sources of funding are being sought for these investments. If management
determines that any of these entities are not viable, Millennium 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 (equalrecord
expense up 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
effectsentire remaining investment balance of such covenants on TEP's abilityentity.
Nations Energy
--------------
In 2002, Millennium did not and currently does not intend 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% ownershipmake any
material investments in NewEnergynew projects through Nations Energy. Millennium
continues to the AES Corporation (AES).
MEH sold the AES Corporation common stock received in
considerationreview options for the sale of NewEnergyNations Energy's remaining
investment, a power project in the third
quarterPanama with a book value of 1999. Millennium used someless than $1
million.
In 2001, Nations Energy recorded an after-tax gain of the proceeds$6 million 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 andits interest 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 andCuracao project. Nations Energy received
distributions from our unregulated energy businesses. These
included:
-- $5
million investment in AET and Global Solar; and
-- $28 million cash proceeds fromand recorded a net present valued $8 million note
receivable in connection with this transaction. In addition, $15 million in
related construction deposits were returned to Nations Energy. At December
31, 2002, including accretion, the salenote receivable balance is $9 million. We
describe this note more fully in Note 4 of NewEnergyNotes to Consolidated Financial
Statements - Millennium Energy Businesses - Nations Energy Contingency.
In January 2000, Nations Energy sold its interest in thea project located in the
Czech Republic project forresulting in a $3 million pre-tax gain.
PlansOther Investments and Commitments
---------------------------------
Millennium provided funding to the following investments:
Millennium invested $20 million in Sabinas. Sabinas also owns 19.5% of
Mimosa. In December 2002, Millennium received a return of capital of $0.5
million, bringing Millennium's investment at December 31, 2002 to
approximately $19.5 million. In the first quarter of 2003, Millennium
received an additional return of capital of $0.5 million. Millennium owns
50% of Sabinas; the other half is owned by AHMSA. UniSource Energy's
Chairman, President and Chief Executive Officer is a member of the board of
directors of AHMSA.
In 2002, Millennium provided a loan of approximately $5 million to MEG.
In 2001, Millennium contributed $5 million in equity and a $4 million loan to
MEG. These funds were used to provide working capital to facilitate MEG's
activities in the emission allowance and coal markets.
Millennium contributed $2 million in 2002 and $3 million in 2001 in
equity funding to Powertrusion. Millennium owns a controlling 50.5% interest
in Powertrusion.
Millennium provided funding to TruePricing of $2 million in 2002 and
$1.1 million in 2001. TruePricing is a start-up company established to
market energy related products. In February 2003, Millennium committed to
fund up to an additional $1.2 million in equity to TruePricing of which $0.4
million was funded on March 5, 2003.
Millennium contributed $1 million in 2002, $4.2 million in 2001 and $1.4
million in 2000 to Haddington Energy Partners II LP, a limited partnership
that funds energy related investments. This investment brings Millennium's
funding to approximately $6.6 million. The funding is part of a $15 million
commitment made during 2000. The remaining funds are expected to be invested
within two to three years. A member of the UniSource Energy Board of
Directors has a minor investment in the project. An affiliate of such board
member serves as the general partner.
Millennium has a $6 million capital commitment to a venture capital fund
that focuses on information technology, microelectronics, and biotechnology
investments in Arizona, Southern California, New Mexico, Colorado and Utah.
Approximately $1 million has been funded from inception through December 31,
2002. Millennium does not currently expect to provide additional funding to
this commitment in 2003. Another member of the UniSource Energy Board of
Directors is a general partner of the company that manages the fund.
UED -- UNREGULATED ENERGY BUSINESS
UED is responsible as project developer for 2000facilitating the
Springerville Generating Station expansion project construction. If
constructed, each of Units 3 and beyond include lower anticipated4 would consist of a 400 MW coal-fired, base-
load generating unit at the same site as Springerville Units 1 and 2. This
would allow TEP to spread the fixed costs of the existing common facilities
over the additional generating unit (or units). Upon completion of Unit 3,
TEP expects to receive annual benefits of approximately $10 million to $15
million in the form of cost savings, rental payments and other fees. TEP
will also benefit from upgraded emissions controls for Units 1 and 2 that
will be paid for by the Unit 3 project.
To date, we have funded approximately $22 million for development of the
project. In January 2003, UED and Tri-State signed a Development Cost
Agreement to each share 50% of the remaining development costs of Unit 3
effective from November 6, 2002 until financial close. UED expects to
provide an additional $4 million in funding requirements for Nationsdevelopment prior to a third
party obtaining the construction financing. UED expects the third party to
obtain construction financing in the second quarter of 2003. Our funding to
UED for equity will depend upon the level of ownership by the third party.
We can make no assurances, however, about the ultimate timing, or whether UED
will proceed with this project.
FINANCING RISKS
UniSource Energy and increased
supportTEP are exposed to risks related to the ability to
obtain financing at reasonable costs for various projects, agreements to
which they are a party, and their debt obligations. During 2002, the market
for bank financings was less liquid and more volatile than in recent years
due to a number of AETdefaults and Global Solar. In particular, Millenniumdeteriorating financial condition of many
corporate borrowers, particularly in the energy industry. As a result, when
TEP refinanced its bank Credit Agreement in November 2002, it was required to
pay significantly higher interest and fees on its new credit facilities than
it paid on its previous credit facilities. See TEP Bank Credit Agreement,
above. During 2003, UniSource Energy, TEP and UED will be subject to
financing risks and capital market conditions related to the following:
- UniSource Energy has agreedentered into Asset Purchase Agreements to
contributepurchase the Citizens Arizona electric utility and gas utility assets
for $230 million. UniSource Energy expects that a portion of the
purchase price will be financed with debt secured by the purchased
assets. UniSource Energy may also consider financing a portion of the
purchase price with new equity, depending on market conditions and other
considerations. If UniSource Energy were unable to Global Solar upobtain financing,
and therefore were unable to $14 million
in additional equity.consummate the purchase of these assets,
this would constitute a breach under the contracts and termination
damages would be payable.
- UED is currently evaluating opportunities to expand the Springerville
Station by assigning the rights to construct Springerville Units 3 and 4
to unrelated third parties. As of December 31, 1999, Millennium2002, UED had
funded $2 million.
Our abilityapproximately $22 million of capitalized project development costs on
its balance sheet. If a third party does not obtain financing for this
project and as a result, this project does not proceed, the capitalized
project development costs would immediately be expensed.
- TEP must refinance or extend the $70 million of lease debt related to fund additional future capital
requirementsthe
Springerville Common Facilities Leases before June 30, 2003. Due to the
ongoing difficult captial market conditions in the energy sector, TEP
will likely be required to pay a higher rate of our unregulated business segment will depend
to a great extentinterest on the amountnew debt
than its existing rate of LIBOR plus 2.5%.
- TEP intends to refinance or extend its 364 day Revolving Credit Facility,
which expires on November 13, 2003.
CONTRACTUAL OBLIGATIONS
The following charts display TEP's contractual obligations by maturity
and availabilityby type 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, TEPobligation, and provide additional detail on TEP's capital
lease obligations.
TEP's Contractual Obligations
- Millions of Dollars -
- ---------------------------------------------------------------------------------------------------------
IDBs Total
Supported Long- Capital Unconditional Contractual
Payments Due in Years by Expiring Term Lease Operating Purchase Cash
Ending December 31, LOCs (1) Debt Obligations (2) Leases Obligations (3) Obligations
- ---------------------------------------------------------------------------------------------------------
2003 $ - $ 2 $ 121 $ 2 $ 81 $ 206
2004 - 2 124 1 78 205
2005 - 2 125 1 75 203
2006 329 21 127 1 72 550
2007 - 1 128 1 72 202
- ---------------------------------------------------------------------------------------------------------
Total 2003 - 2007 329 28 625 6 378 1,366
Thereafter - 773 965 3 278 2,019
Less: Imputed Interest - - (746) - - (746)
- ---------------------------------------------------------------------------------------------------------
Total $ 329 $801 $ 844 $ 9 $ 656 $2,639
=========================================================================================================
(1) TEP's tax-exempt variable rate bonds (IDBs) in the amount of $329 million are backed by LOCs
under TEP's Credit Agreement. TEP's obligations under the Credit Agreement are collateralized
with Second Mortgage Bonds. These IDBs were classified as short-term debt at December 31,
2001, because the existing LOCs were scheduled to expire on December 30, 2002. New LOC
facilities were obtained in November 2002 and the IDBs were classified as long-term debt
December 31, 2002.
(2) See TEP's Capital Lease Contractual Obligations table below.
(3) These obligations represent future guaranteed payments under TEP's natural gas, coal and rail
transportation contracts.
TEP's Capital Lease Obligations
- Millions of Dollars -
- --------------------------------------------------------------------------------------------------------------
Springerville Springerville Irvington Springerville Rail Car Total Capital
Payments Due in Years Unit 1 Coal Unit 4 Common Lease Lease
Ending December 31, Handling Obligations
- --------------------------------------------------------------------------------------------------------------
2003 $ 84 $ 19 $ 13 $ 5 $ - $ 121
2004 86 18 13 6 1 124
2005 86 19 12 7 1 125
2006 85 24 11 7 - 127
2007 85 24 13 6 - 128
- --------------------------------------------------------------------------------------------------------------
Total 2003 - 2007 426 104 62 31 2 625
Thereafter 606 148 39 172 - 965
Less: Imputed Interest (529) (120) (20) (77) - (746)
- --------------------------------------------------------------------------------------------------------------
Total $ 503 $ 132 $ 81 $ 126 $ 2 $ 844
==============================================================================================================
Contractual obligations of Millennium, UED, and UniSource Energy
completedstand-alone are not significant. UniSource Energy has contingent
obligations under various surety bonds that total approximately $0.5
million.
As discussed above, TEP has the full amount available under its $60
million Revolving Credit Facility. If TEP draws any amount under this
facility, such borrowing would become a transaction by which all outstanding sharescontractual obligation of TEP commonat that
time. We have no other commercial commitments to report.
We have reviewed our contractual obligations and provide the following
additional information:
- TEP does not have any provisions in any of its debt or lease
agreements that would cause an event of default or cause amounts to
become due and payable in the event of a credit rating downgrade.
- None of our contracts or financing structures contains provisions or
acceleration clauses due to changes in our stock were exchanged,price.
- TEP's Credit Agreement contains pricing tied to a grid based on the
ratings of TEP's Credit Facilities. A change in TEP's credit rating can
cause an increase or decrease in the amount of interest and fees TEP
pays for these facilities.
- TEP's Credit Agreement contains certain financial and other
restrictive covenants, including interest coverage, leverage and net
worth tests. Failure to comply with these covenants would entitle the
lenders to accelerate the maturity of all amounts outstanding. At
December 31, 2002, TEP was in compliance with these covenants. See TEP
Bank Credit Agreement, above.
- TEP conducts its wholesale trading activities under the Western
Systems Power Pool Agreement (WSPP) which contains provisions whereby
TEP may be required to post margin collateral due to a change in credit
rating or changes in contract values. As of December 31, 2002, TEP has
not been required to post such collateral.
- MEG conducts its emissions and coal trading activities using certain
contracts which contain provisions whereby MEG may be required to post
margin collateral due to a change in contract values. As of December
31, 2002, MEG had posted $2 million in cash collateral to its trading
counterparties.
- MEG has a $5 million bank line of credit for the purpose of issuing
LOCs to counterparties to support its emission allowance and coal
marketing and trading activities. As of December 31, 2002, MEG had $2
million in outstanding LOCs. This facility expires in August 2004.
GUARANTEES AND INDEMNITIES
In the normal course of business, UniSource Energy and certain
subsidiaries, including TEP, enter into various agreements providing
financial or performance assurance to third parties on behalf of certain
subsidiaries. These agreements are entered into primarily to support or
enhance the creditworthiness otherwise attributed to a subsidiary on a share-for-sharestand-
alone basis, thereby facilitating the extension of sufficient credit to
accomplish the subsidiaries' intended commercial purposes. The most
significant of these guarantees supports up to approximately $3.5 million in
commodity-related payments for shares
ofMEG at December 31, 2002. To the extent
liabilities exist under the contracts subject to these guarantees, such
liabilities are included in the consolidated balance sheets.
In addition, UniSource Energy and its subsidiaries have indemnified the
purchasers of interests in certain investments from additional taxes due for
years prior to the sale. The terms of the indemnifications provide for no
limitation on potential future payments; however, we believe that we have
abided by all tax laws and paid all tax obligations. We have not made any
payments under the terms of these indemnifications to date.
We believe that the likelihood UniSource Energy or TEP would be required
to perform or otherwise incur any significant losses associated with any of
these guarantees is remote.
DIVIDENDS ON COMMON STOCK
UniSource Energy
----------------
On February 7, 2003, UniSource Energy declared a cash dividend of $0.15
per share on its Common Stock. The dividend, totaling approximately $5
million, is payable March 7, 2003 to shareholders of record at the close of
business February 21, 2003. During 2002 and 2001, UniSource Energy paid
equal quarterly dividends to its shareholders of $0.125 and $0.10 per share,
totaling $17 million and $13 million, respectively.
UniSource Energy's Board of Directors will review our dividend level 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 flows from our subsidiary companies, TEP,
Millennium and UED.
TEP
---
TEP declared and paid dividends of $35 million in 2002, $50 million in
2001, and $30 million in 2000. UniSource Energy is the primary holder of
TEP's common stock.
FollowingTEP can pay dividends if it maintains compliance with the share
exchange, TEP transferredCredit
Agreement and certain financial covenants, including a covenant that requires
TEP to maintain a minimum level of net worth. As of December 31, 2002, the
stockrequired minimum net worth was $286 million. TEP's actual net worth at
December 31, 2002 was $337 million. See TEP - Electric Utility, Financing
Activities, TEP Bank Credit Agreement, above. As of MillenniumDecember 31, 2002, TEP
was in compliance with the terms of the Credit Agreement. Under the terms of
the Credit Agreement, dividends and certain investments in affiliates may not
exceed 65% of TEP's net income for the immediately preceding fiscal year, so
long as the Tranche B LOCs are outstanding.
The ACC Holding Company Order states that TEP may not pay dividends to
UniSource Energy in exchange for a $95 million ten-year
promissory note from UniSource Energy. The promissory noteexcess of 75% of its earnings until TEP's equity ratio
equals 37.5% of total capital (excluding capital lease obligations). As of
December 31, 2002, TEP's equity ratio on that basis was issued23%.
In addition to these limitations, the Federal Power Act states that
dividends shall not be paid out of funds properly included in accordance with the ACC Order authorizingcapital
account. Although the formationterms of the holding company. The interest rate on the
note issuedFederal Power Act are unclear, we believe
that there is a reasonable basis to pay dividends from current year earnings.
Therefore, TEP is 9.78%. Interest is payable every two
years beginning January 1, 2000. UniSource Energy paid $19
million in interest priordeclared its December 2002, 2001, and 2000 dividends from
2002, 2001, and 2000 earnings, respectively.
Millennium and UED
------------------
Millennium did not pay any dividends 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 years2002, 2001
or 2000. We cannot predict the amount or timing of operations must be usedfuture dividends from
Millennium. UED has not paid any dividends to reduce TEP's
debt or addUniSource Energy.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
See Note 1 of Notes to TEP's equity account.Consolidated Financial Statements.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
- ------------------------------------------
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. UniSource
Energy and TEP are including the following cautionary statements to make
applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements
made by or for UniSource Energy or TEP in this 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 whichthat are not statements of historical facts. Forward-lookingForward-
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-
lookingforward-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-
lookingforward-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. Supply and demand conditions in wholesale energy markets, including
volatility in market prices and illiquidity in markets, which are
affected by a variety of factors. These factors include the
availability of generating capacity in the western U.S., including
hydroelectric resources, weather, natural gas prices, the extent of
utility restructuring in various states, transmission constraints,
environmental restrictions and cost of compliance, FERC regulation of
wholesale energy markets, and economic conditions in the western U.S.
5. The creditworthiness of the entities with whom UniSource Energy,
TEP, Millennium and their affiliates transact business.
6. Changes affecting TEP's cost of providing electrical service
including changes in fuel costs, generating unit operating
performance, scheduled and unscheduled plant outages, interest rates,
tax laws, environmental laws, and the general rate of inflation.
5.7. Changes in governmental policies and regulatory actions with respect
to allowed rates of return, financings,financing and rate structures.
6.8. Changes affecting the cost of competing energy alternatives,
including changes in available generating technologies and changes in
the cost of natural gas.
7.9. Changes in accounting principles or the application of such
principles to UniSource Energy or TEP.
8.10. Market conditions and technological changes affecting UniSource
Energy's unregulated businesses.
11. Regulatory conditions to the approval of the acquisition of
Citizens' Arizona electric and gas utility assets.
12. The level of rate relief granted with respect to Citizens' Arizona
electric utility and gas utility assets.
13. Unanticipated changes in future liabilities relating to employee
benefit plans due to changes in market values of its retirement plan
assets and health care costs.
14. The outcome of any ongoing litigation.
15. Ability to obtain financing through debt and/or equity issuance,
which can be affected by various factors, including interest rate
fluctuations and capital market conditions.
16. Whether the proposed Springerville Generating Station expansion
proceeds; the role of Tri-State, SRP, and other third parties in such
expansion; and the terms of the ownership, operating and power
purchase arrangements ultimately utilized.
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 14,15, page 88,111, for a list of the Consolidated Financial
Statements whichthat are included in the following pages. See Note 16 of Notes to
Consolidated Financial Statements.
INDEPENDENT AUDITORS' REPORT
UniSource Energy Corporation and its Stockholders
Tucson Electric Power Company
We have auditedAPPROVAL OF NON-AUDIT SERVICES
On February 6, 2002, the accompanying consolidated statementsAudit Committee of income, changes in stockholders' equity, and cash flowsthe Board of Directors of
UniSource Energy Corporationpre-approved ongoing non-audit related services, for fees
not to exceed $600,000, to be performed by our independent auditor,
PricewaterhouseCoopers LLP (PwC), consisting of accounting and its subsidiaries (the Company)
fortax research
in connection with the year ended December 31, 1997. We have also auditedfinancings of Springerville Units 3 and 4.
On August 1, 2002, 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
responsibilityAudit Committee of the Company'sBoard of Directors of
UniSource Energy pre-approved certain non-audit related services, for fees
not to exceed $30,000, to be performed by PwC, including rate case training
for certain of our employees.
On October 17, 2002, the Audit Committee of the Board of Directors of
UniSource Energy pre-approved non-audit related services, for fees not to
exceed $100,000, to be performed by PwC, consisting of performance of certain
tests of financial, statistical and TEP's management. Our
responsibility israte-making data relating 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 planthe Arizona
gas and electric assets of Citizens.
On December 5, 2002, the Audit Committee of the Board of Directors of
UniSource Energy pre-approved PwC to perform audit related services of 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 amountsgas and disclosures in the
financial statements. An audit also includes assessing the
accounting principles usedelectric asset balances 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 flowstherefore for
Citizens Utilities, Inc., located in Arizona, for fees not to exceed
$250,000. This replaces the Audit Committee's previous authorization of
October 17, 2002 for non-audit related services, for fees not to exceed
$100,000. The audits cover periods prior to 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)proposed acquisition date of
such assets by UniSource Energy.
Report of Independent Accountants
To the Board of Directors and Stockholders of
UniSource Energy Corporation and to the
Board of Directors and StockholderStockholders of
Tucson Electric Power Company
In our opinion, the accompanying consolidated balance sheets
andfinancial statements of capitalization andlisted in the related
consolidated statements of income, of cash flows, and of
changes in stockholders' equityindex
appearing under Item 15(a)(1) 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, 19992002 and 1998,2001, and the results of their operations and their
cash flows for each of the three years thenin the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United
States.States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's and TEP's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based
on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
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 our opinion.
As discussed in Note 3 to the
opinion expressed above. The consolidated financial statements, of the Company
and TEP changed their method of accounting for derivative instruments 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.January 1, 2001.
PricewaterhouseCoopers LLP
Los Angeles, California
February 2, 20006, 2003
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1999 1998 19972002 2001 2000
- ---------------------------------------------------------------------------
- Thousands-----------------------------------------------------------------------------
-Thousands of Dollars -Dollars-
Operating Revenues
Electric Retail CustomersSales $ 632,593666,049 $ 625,407670,117 $ 624,221
Amortization of MSR Option664,646
Electric Wholesale Sales 177,908 733,559 359,814
Net Gain Regulatory Liability(Loss) on TEP Forward
Contracts and MEG Trading Activities 644 (1,347) -
Other Revenues 11,621 14,683 9,209
- 8,105
Sales for Resale 171,219 143,269 97,567
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 803,812 768,676 729,893856,222 1,417,012 1,033,669
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel and209,712 258,761 239,939
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)64,504 542,587 207,596
Coal Contract Termination and
Amendment Fees 11,250 - 13,231
Other Operations 105,966 109,170 110,132and Maintenance and Repairs 36,949 36,143 36,657188,910 179,036 181,392
Depreciation and Amortization 92,583 90,358 86,405127,923 120,346 114,038
Amortization of Transition Recovery
Asset 2,241 - -24,554 21,609 17,008
Taxes Other Than Income Taxes 47,789 50,395 51,339
Income Taxes 18,268 18,372 19,29745,508 46,213 50,137
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 646,367 633,488 595,870672,361 1,168,552 823,341
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Income 157,445 135,188 134,023183,861 248,460 210,328
- --------------------------------------------------------------------------------------------------------------------------------------------------------
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)20,654 14,600 13,532
Other Income (Deductions) 2,988 3,164 1,812189 3,868 (468)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) 22,295 10,444 56,42420,843 18,468 13,064
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Long-Term Debt 66,836 72,672 66,24765,620 68,678 75,076
Interest on Capital Leases 16,241 - -87,801 90,559 92,869
Interest Imputed on Losses Recorded at
Present Value 29,159 34,179 32,6571,166 820 198
Other Interest Expense, 10,994 10,749 7,971Net of Amounts
Capitalized (36) (1,478) (1,797)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 123,230 117,600 106,875154,551 158,579 166,346
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 56,510 28,032 83,572
Extraordinary Income Taxes and
Cumulative Effect of Accounting Change 50,153 108,349 57,046
Income Taxes 16,878 47,474 15,155
- -----------------------------------------------------------------------------
Income Before Cumulative Effect of
Accounting Change 33,275 60,875 41,891
Cumulative Effect of Accounting Change
- Net of Tax 22,597- 470 -
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 79,10733,275 $ 28,03261,345 $ 83,572
============================================================================41,891
=============================================================================
Average Shares of Common Stock
Outstanding (000) 32,321 32,177 32,138
============================================================================33,665 33,398 32,445
=============================================================================
Basic Earnings Perper Share
Income Before Extraordinary Item $1.75 $0.87 $2.60
Extraordinary IncomeCumulative Effect of
Accounting Change $0.99 $1.83 $1.29
Cumulative Effect of Accounting Change
- Net of Tax $0.70 - $0.01 -
Net Income $2.45 $0.87 $2.60
===========================================================================$0.99 $1.84 $1.29
=============================================================================
Diluted Earnings Perper Share
Income Before Extraordinary Item $1.74 $0.87 $2.59
Extraordinary IncomeCumulative Effect of
Accounting Change $0.97 $1.79 $1.27
Cumulative Effect of Accounting Change
- Net of Tax $0.69 - $0.01 -
Net Income $2.43 $0.87 $2.59
===========================================================================$0.97 $1.80 $1.27
=============================================================================
Dividends Paid per Share $0.50 $0.40 $0.32
=============================================================================
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 19972002 2001 2000
- ---------------------------------------------------------------------------
- Thousands-------------------------------------------------------------------------------
-Thousands of Dollars -Dollars-
Cash Flows from Operating Activities
Cash Receipts from Electric Retail CustomersSales $731,404 $ 680,141731,379 $ 670,793 $ 664,294716,955
Cash Receipts from Electric Wholesale Sales for Resale 171,628 142,530 96,569248,305 760,258 301,281
MEG Cash Receipts from Trading Activity 57,889 49 -
Interest Received 13,820 14,747 14,835
Income Tax Refunds Received 921 59 11,833
Performance Deposits 6,147 (8,629) -
Fuel andCosts Paid (201,124) (262,283) (213,999)
Purchased Power Costs Paid (276,351) (241,824) (206,651)(135,320) (544,472) (196,137)
Wages Paid, Net of Amounts Capitalized (68,711) (67,132) (60,398)(75,479) (71,043) (61,862)
Payment of Other Operations and
Maintenance Costs (96,998) (88,538) (80,216)(126,623) (127,382) (96,722)
MEG Cash Payments for Trading Activity (63,766) - -
Capital Lease Interest Paid (82,421) (81,823) (83,019)(68,975) (79,745) (90,418)
Taxes Paid, Net of Amounts Capitalized (106,550) (105,484) (101,263)
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(62,241) (64,814) (71,439)
Income Taxes Paid (23,593) (5,113) (984)
Transfer of Tax Settlement to
Escrow Account (22,403)(29,238) (38,951) (3,503)
Coal Contract Termination and Amendment
Fees Paid (26,649) - -
Other 7,707 (6,537) 4,75110,442 11,690 5,473
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows - Operating Activities 113,228 160,933 126,283172,963 215,379 215,034
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital Expenditures (92,808) (81,147) (72,475)(112,706) (121,622) (105,996)
Purchase of Springerville Lease Debt
(26,768) - -and Equity (134,989) (13,000) (27,633)
Investments in and Loans to Equity Investees (23,592) (18,474) (18,552)
Proceeds from the Sale of Millennium Energy
Businesses (7,174) (50,682) (7,117)- 16,631 31,350
Return of Nations Energy's Construction
Deposits - 15,574 -
Proceeds from the Sale of Interest in Millennium Energy
Businesses 4,041 20,750 2,119
Sale of Securities 27,516Real Estate - 6,580 -
Other Investments397 (2,536) 7,281
- Net 2,143 2,122 968
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows - Investing Activities (93,050) (108,957) (76,505)(270,890) (116,847) (113,550)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from IssuanceRepayment of Long-Term Debt 1,977 99,511 16,928
Payments to Retire Long-Term Debt (1,725) (129,472) (500)(2,138) (1,871) (50,116)
Proceeds from Borrowings under the Revolving
Credit Facility - - 25,000
Payments on Renewable Term LoanBorrowings under the Revolving
Credit Facility - - (31,000)(25,000)
Payment of Debt Issue Costs (5,410) - -
Payments to Retireon Capital Lease Obligations (23,602) (17,232) (13,229)
Payments for Credit Agreement and Debt
Issuance Costs(19,842) (26,015) (39,019)
Proceeds from the Exercise of Warrants - (7,719) (7,470)- 12,671
Common Stock Dividends Paid (16,806) (13,376) (10,349)
Other 3,293 1,847 1,4584,897 7,880 3,045
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Flows - Financing Activities (20,057) (53,065) (33,813)(39,299) (33,382) (83,768)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 121 (1,089) 15,965(137,226) 65,150 17,716
Cash and Cash Equivalents, Beginning of Year 145,167 146,256 130,291228,154 163,004 145,288
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 145,28890,928 $ 145,167228,154 $ 146,256
===========================================================================163,004
===============================================================================
See Note 1417 for supplemental cash flow information.
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
1999 19982002 2001
- ---------------------------------------------------------------------------
- Thousands-----------------------------------------------------------------------------
-Thousands of Dollars -Dollars-
ASSETS
Utility Plant
Plant in Service $2,301,645 $2,263,871$ 2,598,884 $ 2,498,046
Utility Plant Underunder Capital Leases 747,556 741,446 886,902
Construction Work in Progress 96,565 74,05059,926 70,992
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Utility Plant 3,139,656 3,224,8233,406,366 3,310,484
Less Accumulated Depreciation and Amortization (1,105,371) (1,051,994)(1,346,101) (1,270,089)
Less Accumulated Depreciation of Capital
Lease Assets (304,429) (85,826)
Less Springerville Unit 1 Allowance(391,915) (362,724)
- (171,413)
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Utility Plant - Net 1,729,856 1,915,5901,668,350 1,677,671
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Investments and Other Property
114,483 110,289Investments in Lease Debt and Equity 191,867 84,459
Other 123,238 98,288
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Investments and Other Property 315,105 182,747
- -----------------------------------------------------------------------------
Current Assets
Cash and Cash Equivalents 145,288 145,16790,928 228,154
Trade Accounts Receivable 67,926 70,915- Net 76,635 119,646
Materials and Fuel 42,119 37,040Inventory 46,657 45,052
Current Regulatory Assets 11,778 11,392
Deferred Income Taxes - Current 17,148 14,683
Prepaid Pension Costs 15,818 7,673
Tax Settlement Deposit 13,47115,917 11,165
Interest Receivable - Current 12,178 3,630
Other 31,368 19,16430,912 27,261
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 333,138 294,642285,005 446,300
- ---------------------------------------------------------------------------
Deferred Debits ------------------------------------------------------------------------------
Regulatory and Other Assets
Transition Recovery Asset 370,291 -307,120 331,674
Income Taxes Recoverable Through Future Revenues 79,497 152,111
Deferred Springerville Generation Costs - 102,211
Deferred Lease Expense - 9,87757,044 64,239
Other Regulatory Assets 8,639 18,886
Deferred Debits10,504 9,072
Other Assets 47,606 35,014
- -----------------------------------------------------------------------------
Total Regulatory and Other 20,351 30,443Assets 422,274 439,999
- ---------------------------------------------------------------------------
Total Deferred Debits 478,778 313,528
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Assets $2,656,255 $2,634,049
===========================================================================$ 2,690,734 $ 2,746,717
=============================================================================
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity $ 324,248438,229 $ 246,646424,722
Capital Lease Obligations 880,427 889,543801,611 853,793
Long-Term Debt 1,135,820 1,184,4231,128,963 802,804
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Capitalization 2,340,495 2,320,6122,368,803 2,081,319
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current Obligations Underunder Capital Leases 36,335 11,64742,960 20,158
Current Maturities of Long-Term Debt 48,603 1,7251,840 330,424
Accounts Payable 32,390 32,35448,934 84,011
Interest Accrued 66,311 70,77160,238 53,300
Taxes Accrued 31,374 27,16233,850 42,572
Accrued Employee Expenses 10,782 16,94713,644 14,240
Other 8,934 6,74117,914 16,105
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 234,729 167,347219,380 560,810
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 42,526 61,892
Deferred Investment Tax Credits Regulatory
Liability34,552 37,568
Other 67,999 67,020
- 10,436
Emission Allowance Gain Regulatory Liability - 31,335
Other 38,505 42,427
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 81,031 146,090102,551 104,588
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)10)
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Total Capitalization and Other Liabilities $2,656,255 $2,634,049
===========================================================================$ 2,690,734 $ 2,746,717
=============================================================================
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1999 19982002 2001
- -------------------------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY - Thousands-Thousands of Dollars -Dollars-
Common Stock--No Par Value $ 641,723661,185 $ 640,640
1999 1998660,123
2002 2001
---------- ----------
Shares Authorized 75,000,000 75,000,000
Shares Outstanding 32,349,091 32,257,963
Warrants Outstanding 1,492,411 2,984,82233,578,959 33,502,007
Accumulated Deficit (317,475) (393,994)(218,932) (235,401)
Accumulated Other Comprehensive Income (Loss) (4,024) -
- ----------------------------------------------------------------------------
Total Common Stock Equity 438,229 424,722
- ----------------------------------------------------------------------------
PREFERRED STOCK
No Par Value, 1,000,000 Shares Authorized,
None Outstanding - -
- ----------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 503,237 492,838
Springerville Coal Handling Facilities 132,333 156,427
Springerville Common Facilities 126,277 131,744
Irvington Unit 4 81,268 90,831
Other Leases 1,456 2,111
- ----------------------------------------------------------------------------
Total Capital Lease Obligations 844,571 873,951
Less Current Maturities (42,960) (20,158)
- ----------------------------------------------------------------------------
Total Long-Term Capital Lease Obligations 801,611 853,793
- ----------------------------------------------------------------------------
LONG-TERM DEBT
Interest
Issue Maturity Rate
- ----------------------------------------------------------------------------
First Mortgage Bonds
Corporate 2009 8.50% 27,365 27,754
Industrial Development
Revenue Bonds (IDBs) 2006 - 2008 6.10% to 7.50% 56,600 58,325
First Collateral Trust
Bonds 2008 7.50% 138,300 138,300
Second Mortgage IDBs* 2018 - 2022 Variable** 328,600 328,600
Unsecured IDBs 2020 - 2033 5.85% to 7.13% 579,270 579,270
Other Long-Term Debt 668 979
- ----------------------------------------------------------------------------
Total Stated Principal Amount 1,130,803 1,133,228
Less Current Maturities* (1,840) (330,424)
- ----------------------------------------------------------------------------
Total Long-Term Debt 1,128,963 802,804
- ----------------------------------------------------------------------------
Total Capitalization $2,368,803 $2,081,319
============================================================================
* Second Mortgage IDBs are backed by LOCs under TEP's Credit Agreement. TEP's
obligations under the Credit Agreement are collateralized with Second
Mortgage Bonds. In November 2002, TEP entered into two new LOCs (Tranche A
and Tranche B) for $341 million to replace the LOCs provided under its then
existing credit agreement that would have expired on December 30, 2002.
These new LOCs expire in 2006. Accordingly, these IDBs were classified as
short-term debt at December 31, 2001 and classified as long-term debt at
December 31, 2002.
** Weighted average interest rates on variable rate tax-exempt debt (IDBs)
ranged from 1.23% to 3.92% during 2002 and 2001, and the average interest
rate on such debt was 1.41% in 2002 and 2.67% in 2001. The annual LOC fee
on TEP's previous LOC Facility was 1.25% in 2002 (until it was replaced in
November 2002) and in 2001. At December 31, 2002, the annual LOC fee for
Tranche A (including fronting fees) was 4.25% of the Tranche A commitment
and for Tranche B (including fronting fees) was 5.75% of the Tranche B
commitment.
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Common Accumulated Other Total
Shares Common Earnings Comprehensive Stockholders'
Outstanding* Stock (Deficit) Income (Loss) Equity
- -------------------------------------------------------------------------------
-In Thousands-
Balances at
December 31, 1999 32,349 $641,723 $(317,475) $ - $324,248
2000 Net Income - - 41,891 - 41,891
Dividends Declared - - (7,786) - (7,786)
Shares Issued under
Stock Compensation
Plans 75 1,123 - - 1,123
Shares Purchased by
Deferred Compensation
Trust Less
Distributions (5) (75) - - (75)
Shares Issued for
Warrants and Stock
Options 800 12,768 - - 12,768
- -------------------------------------------------------------------------------
Balances at
December 31, 2000 33,219 655,539 (283,370) - 372,169
Comprehensive Income
(Loss):
2001 Net Income - - 61,345 - 61,345
Cumulative Effect of
Accounting Change
(net of $9,179,000
income tax benefit) - - - (13,827) (13,827)
Reversal of
Unrealized Loss
on Cash Flow
Hedges included
in Cumulative
Effect of
Accounting Change
(net of $9,179,000
income tax expense) - - - 13,827 13,827
Unrealized Loss on Cash
Flow Hedges (net of
$5,537,000 income tax
benefit) - - - (8,340) (8,340)
Reversal of
Unrealized Loss on
Cash Flow Hedges
(net of $5,537,000
income tax expense) - - - 8,340 8,340
Total Comprehensive -------
Income 61,345
-------
Dividends Declared - - (13,376) - (13,376)
Shares Issued under
Stock Compensation
Plans 113 2,210 - - 2,210
Shares Purchased by
Deferred Compensation
Trust Less
Distributions (7) (215) - - (215)
Shares Issued for
Stock Options 177 2,589 - - 2,589
- -------------------------------------------------------------------------------
Balances at
December 31, 2001 33,502 660,123 (235,401) - 424,722
Comprehensive Income:
2002 Net Income - - 33,275 - 33,275
Minimum Pension
Liability (net of
$2,639,000 income
tax benefit) - - - (4,024) (4,024)
Total Comprehensive -------
Income 29,251
-------
Dividends Declared - - (16,806) - (16,806)
Shares Issued under
Stock Compensation
Plans 9 80 - - 80
Shares Distributed
by Deferred
Compensation Trust 3 48 - - 48
Shares Issued for
Stock Options 65 934 - - 934
- -------------------------------------------------------------------------------
Balances at
December 31, 2002 33,579 $661,185 $(218,932) $ (4,024) $438,229
===============================================================================
* UniSource Energy has 75 million authorized shares of common stock.
We describe limitations on our ability to pay dividends in Note 9.
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2002 2001 2000
- -------------------------------------------------------------------------------
-Thousands of Dollars-
Operating Revenues
Electric Retail Sales $ 666,049 $ 670,117 $ 664,646
Electric Wholesale Sales 177,908 733,559 359,814
Net Unrealized Gain (Loss) on Forward
Electric Sales and Purchases 533 (1,315) -
Other Revenues 6,603 6,308 3,908
- -------------------------------------------------------------------------------
Total Operating Revenues 851,093 1,408,669 1,028,368
- -------------------------------------------------------------------------------
Operating Expenses
Fuel 209,712 258,761 239,939
Purchased Power 64,504 542,587 207,596
Coal Contract Termination and
Amendment Fees 11,250 - 13,231
Other Operations and Maintenance 163,616 158,118 162,322
Depreciation and Amortization 124,054 117,063 113,507
Amortization of Transition Recovery Asset 24,554 21,609 17,008
Taxes Other Than Income Taxes 44,228 45,047 49,445
- -------------------------------------------------------------------------------
Total Operating Expenses 641,918 1,143,185 803,048
- -------------------------------------------------------------------------------
Operating Income 209,175 265,484 225,320
- -------------------------------------------------------------------------------
Other Income
Interest Income 20,094 11,910 8,550
Interest Income - Note Receivable from
UniSource Energy 9,329 9,330 9,329
Other Income 4,338 2,499 820
- -------------------------------------------------------------------------------
Total Other Income 33,761 23,739 18,699
- -------------------------------------------------------------------------------
Interest Expense
Long-Term Debt 65,620 68,678 75,076
Interest on Capital Leases 87,783 90,506 92,815
Interest Imputed on Losses Recorded at
Present Value 1,166 820 198
Other Interest Expense, Net of Amounts
Capitalized (720) (1,505) (1,805)
- -------------------------------------------------------------------------------
Total Interest Expense 153,849 158,499 166,284
- -------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative
Effect of Accounting Change 89,087 130,724 77,735
Income Taxes 35,350 55,910 26,566
- -------------------------------------------------------------------------------
Income Before Cumulative Effect of
Accounting Change 53,737 74,814 51,169
Cumulative Effect of Accounting Change
- Net of Tax - 470 -
- -------------------------------------------------------------------------------
Net Income $ 53,737 $ 75,284 $ 51,169
===============================================================================
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2002 2001 2000
- ------------------------------------------------------------------------------
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Electric Retail Sales $ 731,404 $ 731,379 $ 716,955
Cash Receipts from Electric Wholesale Sales 248,305 760,258 301,281
Interest Received 13,288 11,894 7,764
Interest Received from UniSource Energy - 9,330 9,329
Income Tax Refunds Received 921 - 11,831
Fuel Costs Paid (201,124) (262,283) (213,999)
Purchased Power Costs Paid (135,320) (544,472) (196,137)
Wages Paid, Net of Amounts Capitalized (60,871) (61,839) (54,469)
Payment of Other Operations and
Maintenance Costs (105,844) (98,628) (82,750)
Capital Lease Interest Paid (68,911) (79,663) (90,365)
Taxes Paid, Net of Amounts Capitalized (101,866) (101,729) (100,400)
Interest Paid, Net of Amounts Capitalized (62,209) (64,830) (71,439)
Income Taxes Paid (29,109) (38,950) (3,503)
Coal Contract Termination and Amendment
Fees Paid (26,649) - -
Other 1,502 702 92
- ------------------------------------------------------------------------------
Net Cash Flows - Operating Activities 203,517 261,169 234,190
- ------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital Expenditures (103,307) (103,913) (98,063)
Purchase of Springerville Lease Debt
and Equity (134,989) (15,167) (25,070)
Purchase of North Loop Gas Turbine from UED (14,853) - -
Proceeds from the Sale of Real Estate - 6,580 -
Investment in Equity Method Entity - - (2,000)
Other 4,571 (3,394) 3,797
- ------------------------------------------------------------------------------
Net Cash Flows - Investing Activities (248,578) (115,894) (121,336)
- ------------------------------------------------------------------------------
Cash Flows from Financing Activities
Repayments of Long-Term Debt (2,114) (1,871) (50,116)
Proceeds from Borrowings under the Revolving
Credit Facility - - 25,000
Payments on Borrowings under the Revolving
Credit Facility - - (25,000)
Payment of Debt Issue Costs (5,410) - -
Dividends Paid to UniSource Energy (35,000) (50,000) (30,000)
Payments on Capital Lease Obligations (19,544) (25,875) (38,855)
Other 3,227 3,439 6,427
- ------------------------------------------------------------------------------
Net Cash Flows - Financing Activities (58,841) (74,307) (112,544)
- ------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents (103,902) 70,968 310
Cash and Cash Equivalents, Beginning of Year 159,680 88,712 88,402
- ------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 55,778 $ 159,680 $ 88,712
==============================================================================
See Note 17 for supplemental cash flow information.
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
- -------------------------------------------------------------------------------
-Thousands of Dollars-
ASSETS
Utility Plant
Plant in Service $ 2,598,884 $ 2,498,046
Utility Plant under Capital Leases 747,556 741,446
Construction Work in Progress 59,926 70,992
- -------------------------------------------------------------------------------
Total Utility Plant 3,406,366 3,310,484
Less Accumulated Depreciation and Amortization (1,346,101) (1,270,089)
Less Accumulated Depreciation of Capital
Lease Assets (391,915) (362,724)
- -------------------------------------------------------------------------------
Total Utility Plant - Net 1,668,350 1,677,671
- -------------------------------------------------------------------------------
Investments and Other Property
Investments in Lease Debt and Equity 191,867 84,459
Other 21,358 21,416
- -------------------------------------------------------------------------------
Total Investments and Other Property 213,225 105,875
- -------------------------------------------------------------------------------
Note Receivable from UniSource Energy 79,462 70,132
- -------------------------------------------------------------------------------
Current Assets
Cash and Cash Equivalents 55,778 159,680
Trade Accounts Receivable - Net 67,724 113,224
Intercompany Accounts Receivable 14,851 11,263
Materials and Fuel Inventory 44,500 43,682
Current Regulatory Assets 11,778 11,392
Deferred Income Taxes - Current 15,917 4,603
Interest Receivable - Current 12,178 3,630
Other 8,407 4,184
- -------------------------------------------------------------------------------
Total Current Assets 231,133 351,658
- -------------------------------------------------------------------------------
Regulatory and Other Assets
Transition Recovery Asset 307,120 331,674
Income Taxes Recoverable Through Future Revenues 57,044 64,239
Other Regulatory Assets 10,504 9,072
Other Assets 46,752 35,014
- -------------------------------------------------------------------------------
Total Regulatory and Other Assets 421,420 439,999
- -------------------------------------------------------------------------------
Total Assets $ 2,613,590 $ 2,645,335
===============================================================================
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity $ 337,463 $ 322,471
Capital Lease Obligations 801,508 853,447
Long-Term Debt 1,128,410 801,924
- -------------------------------------------------------------------------------
Total Capitalization 2,267,381 1,977,842
- -------------------------------------------------------------------------------
Current Liabilities
Current Obligations under Capital Leases 42,872 19,971
Current Maturities of Long-Term Debt 1,725 330,325
Accounts Payable 41,704 79,133
Intercompany Accounts Payable 12,478 10,060
Interest Accrued 60,238 53,300
Taxes Accrued 35,772 39,826
Accrued Employee Expenses 13,370 13,741
Other 7,543 6,531
- -------------------------------------------------------------------------------
Total Current Liabilities 215,702 552,887
- -------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred Income Taxes - Noncurrent 67,490 50,824
Other 63,017 63,782
- -------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 130,507 114,606
- -------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
- -------------------------------------------------------------------------------
Total Capitalization and Other Liabilities $ 2,613,590 $ 2,645,335
===============================================================================
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
2002 2001
- ---------------------------------------------------------------------------
COMMON STOCK EQUITY -Thousands of Dollars-
Common Stock--No Par Value $ 653,529 $ 653,250
2002 2001
---------- ----------
Shares Authorized 75,000,000 75,000,000
Shares Outstanding* 32,139,555 32,139,554
Warrants Outstanding** - 918,325
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (305,685) (324,422)
Accumulated Other Comprehensive Income (Loss) (4,024) -
- ---------------------------------------------------------------------------
Total Common Stock Equity 324,248 246,646337,463 322,471
- ---------------------------------------------------------------------------
PREFERRED STOCK
No Par Value, 1,000,000 Shares Authorized,
None Outstanding - -
- ---------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 496,409 494,408503,237 492,838
Springerville Coal Handling Facilities 163,216 166,288132,333 156,427
Springerville Common Facilities 147,542 123,835126,277 131,744
Irvington Unit 4 107,093 114,31681,268 90,831
Other Leases 2,502 2,3431,265 1,578
- ---------------------------------------------------------------------------
Total Capital Lease Obligations 916,762 901,190844,380 873,418
Less Current Maturities (36,335) (11,647)(42,872) (19,971)
- ---------------------------------------------------------------------------
Total Long-Term Capital Lease Obligations 880,427 889,543801,508 853,447
- ---------------------------------------------------------------------------
LONG-TERM DEBT
Interest
Issue Maturity Rate
- ---------------------------------------------------------------------------
First Mortgage Bonds
Corporate 2009 8.50% 27,900 27,900
2000 12.22% 46,878 46,87827,365 27,754
Industrial Development
Revenue Bonds (IDBs) 2006 - 2008 6.10% to 7.50% 61,775 63,50056,600 58,325
First Collateral Trust
Bonds 2008 7.50% 140,000 140,000138,300 138,300
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 1,186,1481,130,135 1,132,249
Less Current Maturities (48,603)Maturities*** (1,725) (330,325)
- ---------------------------------------------------------------------------
Total Long-Term Debt 1,135,820 1,184,4231,128,410 801,924
- ---------------------------------------------------------------------------
Total Capitalization $2,340,495 $2,320,612$2,267,381 $1,977,842
===========================================================================
* TheseUniSource Energy is the holder of all but 121 shares of TEP's outstanding
common stock.
** There were 4.6 million warrants that entitled the holder of five warrants
to purchase one share of TEP common stock for $16.00. They were
exercisable until December 15, 2002, when they expired.
*** Second Mortgage IDBs are backed by LOCs under TEP's Credit Agreement.
TEP's obligations under the Credit Agreement are collateralized with Second
Mortgage Bonds. In November 2002, TEP entered into two new LOCs (Tranche A
and Tranche B) for $341 million to replace the LOCs provided under its then
existing credit agreement that would have expired on December 30, 2002.
These new LOCs expire in 2006. Accordingly, these IDBs were classified as
short-term debt at December 31, 2001 and classified as long-term debt at
December 31, 2002.
**** Weighted average interest rates on variable rate tax-exempt debt (IDBs)
ranged from 2.25%1.23% to 5.55%3.92% during 19992002 and 1998,2001, and the average interest
rate on such debt was 3.33%1.41% in 19992002 and 3.51%2.67% in 1998.
See Notes to Consolidated Financial Statements.
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Common Earnings
Stock (Deficit)
- -----------------------------------------------------------------------------
- Thousands of Dollars -
Balances at2001. The annual LOC fee
on TEP's previous LOC Facility was 1.25% in 2002 (until it was replaced in
November 2002) and in 2001. 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.
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
Sales2002, the annual LOC fee 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.
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.
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.
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 debtTranche A (including fronting fees) 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 holder4.25% of the outstanding common stockTranche A commitment
and for Tranche B (including fronting fees) was 5.75% of TEP.the Tranche B
commitment.
See Notes to Consolidated Financial Statements.
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'SSTOCKHOLDERS' EQUITY
Accumulated
Capital Accumulated Other Total
Common Stock Earnings Comprehensive Stockholders'
Stock Expense (Deficit) Income (Loss) Equity
- ---------------------------------------------------------------------------
- Thousands-------------------------------------------------------------------------------
-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 - -
- ---------------------------------------------------------------------------Dollars-
Balances at
December 31, 1999 $647,366 $(6,357) $(370,875) ===========================================================================$ - $270,134
2000 Net Income - - 51,169 - 51,169
Dividend Paid - - (30,000) - (30,000)
Capital Contribution
from UniSource Energy 4,140 - - - 4,140
Other 217 - - - 217
- -------------------------------------------------------------------------------
Balances at
December 31, 2000 651,723 (6,357) (349,706) - 295,660
Comprehensive Income
(Loss):
2001 Net Income - - 75,284 - 75,284
Cumulative Effect of
Accounting Change
(net of $9,179,000
income tax benefit) - - - (13,827) (13,827)
Reversal of
Unrealized Loss on
Cash Flow Hedges
included in
Cumulative Effect
of Accounting
Change (net of
$9,179,000 income
tax expense) - - - 13,827 13,827
Unrealized Loss on
Cash Flow Hedges (net
of $5,537,000 income
tax benefit) - - - (8,340) (8,340)
Reversal of
Unrealized Loss on
Cash Flow Hedges
(net of $5,537,000
income tax expense) - - - 8,340 8,340
Total Comprehensive ---------
Income 75,284
---------
Dividend Paid - - (50,000) - (50,000)
Capital Contribution
from UniSource Energy 1,411 - - - 1,411
Other 116 - - - 116
- -------------------------------------------------------------------------------
Balances at
December 31, 2001 653,250 (6,357) (324,422) - 322,471
Comprehensive Income:
2002 Net Income - - 53,737 - 53,737
Minimum Pension
Liability (net of
$2,639,000 income
tax benefit) - - - (4,024) (4,024)
Total Comprehensive ---------
Income 49,713
---------
Dividend Paid - - (35,000) - (35,000)
Capital Contribution
from UniSource Energy 241 - - - 241
Other 38 - - - 38
- -------------------------------------------------------------------------------
Balances at
December 31, 2002 $653,529 $(6,357) $(305,685) $ (4,024) $337,463
===============================================================================
We describe limitations on our ability to pay dividends in Note 8.9.
See Notes to Consolidated Financial Statements.
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.Act of 1935. 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) and UniSource Energy Development Company (UED). 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 4.4 and UED's services are described in Note 5.
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.western U. S. Approximately 60%58% of TEP's work force is subject to a
collective bargaining unit. The collective bargaining agreement in place at
December 31, 1999 terminates2001 terminated on January 6, 2003. New collective bargaining
agreements were ratified by union members in December 2002. The agreements
took effect on January 7, 2003, and extend through the end of 2005.
References to "we" and "our" are to UniSource Energy and its
subsidiaries, collectively. References to the "utility business" are to TEP.
BASIS OF PRESENTATION
On January 1, 1998, TEP and UniSource Energy completed a transaction by
exchangingexchanged 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-yearten-
year promissory note from UniSource Energy.note. 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.note in 2008. In accordance with the
ACCArizona Corporation Commission (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,For the interest payment due January 1, 2002,
UniSource Energy paid TEP $19$9 million for the
interest owed under this note.
UniSource Energy's consolidated financial statements include the
financial resultsin each of operations of2001 and 2000. UniSource
Energy and its wholly owned
subsidiaries as if UniSource Energy's current holding company structure had
existed in all periods shown. For periods priorexpects to make the next payment, of approximately $18 million, by the
January 1998, UniSource
Energy's operations and those of TEP are the same.1, 2004 due date.
UniSource Energy, TEP and TEPMillennium use the following three methods to report
investments in their subsidiaries or other companies:
- Consolidation: When we ownUniSource Energy, TEP or Millennium owns a majority
of the voting stock of a subsidiary we combineand has control over the subsidiary,
the accounts of the subsidiary are combined with our accounts. We eliminatethe accounts of the
parent and intercompany balances and transactions when we combine these accounts.are eliminated.
- The Equity Method: We use theThe equity method is used to report corporate joint
ventures, partnerships, and affiliated companies when we holdUniSource Energy,
TEP or Millennium holds a 20% to 50% voting interest or we havehas the ability
to exercise significant influence over the operating and financial
policies of the investee company. Under the equity method, weUniSource
Energy, TEP and Millennium report:
-- Our- Their interest in the equity of an entity as an investment on ourtheir
balance sheet; and
-- Our- Their percentage share of the net income (loss) from the entity as
"other
income"Other Income in ourtheir income statements. For investments where
UniSource Energy, TEP or Millennium is committed to providing all of
the financing, they recognize 100% of the losses (see Note 4).
- The Cost Method: WeWhen UniSource Energy, TEP or Millennium does not own
enough shares to exercise significant influence over an investee company,
they use the cost method when we holdto report these investments. Typically the cost
method is used for investments of less than a 20% of the voting interest in
an investment.investee company. Under the cost method we report our investment at
cost on our balance sheet.
All non-utility operating transactions are includedUniSource Energy, TEP and
Millennium report:
- Their interest in the equity of an entity as an investment on their
balance sheet; and
- Income based on dividend distributions from the investee company as
Other Income (Deductions) sectionin their income statements; and
- Loss when impairment of the value of the investment becomes evident as
Other Income in their income statements.
USE OF ACCOUNTING ESTIMATES
Management makes estimates and assumptions when preparing financial
statements under Generally Accepted Accounting Principlesaccounting principles generally accepted in the United
States of America (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)ACC and the Federal Energy Regulatory Commission (FERC) regulate
portions of TEP's utility accounting practices and electricityelectric rates. The ACC
has authority over certain rates charged to retail customers, the issuance of
securities, and transactions with affiliated parties. The FERC regulates
TEP's rates for wholesale power sales and transmission services. TEP
generally uses the same accounting policies and practices used by unregulated
companies for financial reporting under GAAP. However, sometimes these
principles, such as FASthe Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards No. 71, Accounting for the
Effects of Certain Types of Regulation (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'sTEP reports its utility plant on ourits balance sheets at its original
cost. Utility plant includes:
- Material and labor costs,
- Contractor costs,
- Construction overhead costs (where applicable), and
- An Allowance for Funds Used During Construction (AFUDC) or capitalized
interest.interest during construction.
AFUDC reflects the cost of financing construction for transmission and
distribution projects with borrowed funds and equity funds. In 2002, 2001
and 2000, TEP imputed the cost of capital on construction expenditures at an
average of 8.40%, 8.46% and 7.64%, respectively, to reflect the cost of using
borrowed and equity funds to finance construction. The component of AFUDC
attributable to borrowed funds is included as a reduction of Other Interest
Expense on the income statement.statement and totaled $1 million in each of 2002, 2001
and 2000. The equity component is included in Other Income (Deductions). In 1999, 1998
and 1997, we imputed the costtotaled $1
million in each of capital2002, 2001 and 2000.
The capitalized interest during construction 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 forTEP's generation-related
construction projects is included as a reduction of Other Interest Expense on
the income statement and provides guidance on calculating the coststotaled $1 million in each of 2002 and 2001 and less
than $0.5 million in 2000. The average capitalized interest during
construction of
debt funds usedrate applied to finance ourgeneration-related construction projects.expenditures was
4.26%, 4.93% and 5.58% in 2002, 2001 and 2000, respectively.
Depreciation
We compute------------
TEP computes depreciation for owned utility plant on a straight-line
basis at rates based on the economic lives of the assets. See Note 6. These
depreciation rates are authorizedapproved by the ACC for all plant except deregulated
generation assets. The average depreciation rates for TEP's utility plant
were 4.01%, 3.88%, and averaged 3.68%, 3.53%3.85% in 2002, 2001 and 3.44% in 1999, 1998 and
1997,2000, respectively. The
economicdepreciable lives for generation plant are based on remaining lives. Changes
made to the depreciable lives of TEP's generation plant are discussed in Note
6. The economicdepreciable 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. The costs
of planned major maintenance activities are recorded as the costs are
actually incurred and are not accrued in advance of the planned maintenance.
Planned major maintenance activities include the scheduled overhauls at TEP's
generation plants. Minor replacements and repairs are expensed as incurred.
Retirements of utility plant, together with removal costs less salvage, are
charged to accumulated depreciation. TEP's amortization of capitalized
computer software costs was $6 million in 2002, $6 million in 2001 and $5
million in 2000.
Computer Software Costs
-----------------------
TEP UTILITY PLANT UNDER CAPITAL LEASEScapitalizes all costs incurred to purchase computer software and
amortizes those costs over the estimated economic life of the product.
Capitalized computer software costs would be immediately charged to expense
if TEP determines that the software in no longer useful.
TEP Utility Plant under Capital Leases
--------------------------------------
TEP financed the following generation assets with capital leases:
- Springerville Common Facilities,
- Springerville Unit 1,
- Springerville Coal Handling Facilities, and
- Irvington Unit 4.
Under GAAP, these leases qualify asThe following table shows the amount of lease expense incurred for TEP's
generation-related 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.7.
Years Ended December 31,
1999 1998 1997
-----------------------------------------------------------------------
- Millions2002 2001 2000
---------------------------------------------------------------
-Millions of Dollars -Dollars-
Lease Expense:
Interest Expense on Capital
Leases $ 9488 $ 9690 $ 9593
Depreciation 22 18 17
-----------------------------------------------------------------------
Total Lease Expense $ 116 $ 114 $ 112
=======================================================================
Lease Expense- Included In:in:
Operating Expenses - Fuel and
Purchased Power $ 10 $ 10 $ 10
Operating Expenses - Capital Lease
Expense 85 104 1044 4 4
Operating Expenses -
Depreciation and Amortization 5 - -
Interest Expense on Capital Leases 16 - -
Balance Sheet - Deferred Lease Expense
(See Note 2) - - (2)
-----------------------------------------------------------------------25 25 25
---------------------------------------------------------------
Total Lease Expense $ 116 $ 114 $ 112
=======================================================================
LONG-TERM$117 $119 $122
===============================================================
MILLENNIUM AND UED PROPERTIES AND EQUIPMENT
Millennium and UED's properties and equipment are included, net of
accumulated depreciation, in UniSource Energy's balance sheets in the
Investments and Other Property-Other line item. Properties and equipment are
stated at original cost and are depreciated using the straight-line method
over the estimated useful lives of the assets. Maintenance, repairs and
minor renewals are charged to expense as incurred, while major renewals and
betterments are capitalized. Millennium capitalizes all costs incurred to
purchase computer software and amortizes those costs over the estimated
economic life of the product. Millennium's unamortized computer software
costs were $2 million as of December 31, 2002 and December 31, 2001.
Millennium's amortization of capitalized computer software costs was less
than $0.5 million in each of 2002, 2001 and 2000. Capitalized computer
software costs would be immediately charged to expense if Millennium
determines that the software is no longer useful.
Interest is capitalized in connection with the construction of major
equipment at Global Solar Energy, Inc. (Global Solar). The capitalized
interest is recorded as part of the asset to which it relates and is
depreciated over the asset's estimated useful life.
UED capitalizes project development costs because UED believes it is
probable that the project will be completed and UED expects to recover the
costs of the project. These costs include dedicated employee salaries,
professional services and other third party costs. Capitalized project costs
would be immediately charged to expense if UED determines that the project is
impaired.
DEBT
We deferTEP defers 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
amortizeTEP
amortizes 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 overusing the remaining original life ofstraight-line
method, which approximates the debt toeffective interest expense. Effective November 1, 1999, we recognizemethod.
TEP recognizes gains and losses on reacquired debt associated with the
generation portion of TEP's operations as incurred. We reclassified any remaining generation-related unamortized
gainsTEP defers 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 amortizeamortizes
the gains and losses on reacquired debt associated with TEP's regulated
operations to interest income or interest expense over the remaining life of
the original debt.
ELECTRIC UTILITY OPERATING REVENUES
We recordTEP records electric utility operating revenues when we deliverTEP delivers
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.
TEP records an expense and reduces accounts receivable by an Allowance
for Doubtful Accounts for revenue amounts that TEP estimates will become
uncollectible. The Allowance for Doubtful Accounts was $9 million at
December 31, 2002 and 2001. See Note 11 for further discussion of TEP's
wholesale accounts receivable and allowances.
REVENUE FROM LONG-TERM RESEARCH AND DEVELOPMENT CONTRACTS
UniSource Energy's income statements have included Global Solar's long-
term contract revenue in Other Operating Revenues since Global Solar was
consolidated on June 1, 2000. Global Solar recognized long-term contract
revenue of $1.1 million in 2002, $1.7 million in 2001 and $3.6 million in
2000. Global Solar recognized total annual research and development expense
of $7.2 million in 2002, $8.6 million in 2001, and $7.7 million in 2000.
These expenses include both costs associated with revenue producing contracts
and internal development costs. Global Solar derives much of its revenue
from funding received under research and development contracts with various
U.S. governmental agencies. Revenues on these contracts are recognized as
follows:
- Cost Reimbursement Contracts - Revenue is recognized as costs are
incurred;
- Cost Plus Fixed Fee Contracts - Revenues are recognized using the
percentage of completion method of accounting by relating contract costs
incurred to date to total contract costs; and
- Fixed Fee Contracts - Revenues are recognized when applicable milestones
are met.
Contract costs include direct material, direct labor and overhead costs.
FUEL COSTS
Fuel inventory, primarily coal, is recorded at weighted average cost.
TEP uses full absorption costing. Under full absorption costing, all
handling and procurement 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.
TEP has long-term contracts for the purchase and transportation of coal with
expiration dates from 2004 through 2017. The contracts require TEP to pay a
take-or-pay fee if certain minimum quantities of coal are not purchased or
transported. TEP expenses such fees as they are incurred. See Fuel Purchase
and Transportation Commitments in Note 10, below. Fuel costs include coal
mine reclamation expenses as they are charged to TEP on an ongoing basis.
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 tax 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(ITC) are accounted for as a reduction of income tax
benefits included in Other Income (Deductions)expense in the 1997
income statements primarily resulted fromyear in which the recognition of a portion of the
net operating loss carryforwards. See Note 10.credit arises.
We allocate income taxes to the subsidiaries based on their taxable
income and deductions used in the consolidated tax return.
EMISSION ALLOWANCES
Emission Allowances arewere issued to qualifying utilities by the
EPAEnvironmental Protection Agency (EPA) based on past operational history, and
each allowance permits emission of one ton of sulfur dioxide.dioxide (SO(2)) in its
vintage year or a subsequent year. These allowances canhave no book value for
accounting purposes but may be sold. Priorsold if TEP does not need them for operations.
TEP also may purchase additional allowances if needed. See Note 10. In
2002, TEP sold 4,000 allowances that were in excess of those required for
compliance to November
1, 1999,Millennium Environmental Group, Inc. (MEG) at their fair market
value of $0.5 million. This intercompany sale was eliminated in
consolidation. MEG subsequently sold these allowances to a third party.
STOCK-BASED COMPENSATION
At December 31, 2002, UniSource Energy has two stock-based compensation
plans, which are described in Note 13. We account for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations. No stock-
based on expected future regulatory treatment, TEP recorded Emission
Allowance purchasesemployee compensation cost is reflected in a noncurrent inventory account included in Investments
and Other Propertynet income for stock
options, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the balance sheets. Emission allowance inventory was
recorded at weighted average cost. Gainsdate of grant. The
following table illustrates the effect on sales of Emission Allowances were
deferred as an Emission Allowance Gain Regulatory Liability inUniSource Energy's net income and
earnings per share and TEP's net income if we had applied 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 thefair value
recognition 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),123, 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 instrumentsStock-Based Compensation (FAS 123), 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 atstock-based
employee compensation:
UniSource Energy:
- -----------------
Years Ended December 31,
2002 2001 2000
-----------------------------------------------------------------
-Thousands of Dollars-
(except per share data)
Net Income - As Reported $ 33,275 $ 61,345 $ 41,891
Deduct: Total stock-based employee
compensation expense determined
under fair value and
changes inbased method for
all awards, net of related tax
effects (1,271) (1,021) (794)
-----------------------------------------------------------------
Pro Forma Net Income $ 32,004 $ 60,324 $ 41,097
=================================================================
Earnings per Share:
Basic - As Reported $ 0.99 $ 1.84 $ 1.29
Basic - Pro Forma $ 0.95 $ 1.81 $ 1.27
Diluted - As Reported $ 0.97 $ 1.80 $ 1.27
Diluted - Pro Forma $ 0.93 $ 1.77 $ 1.25
-----------------------------------------------------------------
TEP:
- ----
Years Ended December 31,
2002 2001 2000
-----------------------------------------------------------------
-Thousands of Dollars-
(except per share data)
Net Income - As Reported $ 53,737 $ 75,284 $ 51,169
Deduct: Total stock-based employee
compensation expense determined
under fair value (i.e., gainsbased method for
all awards, net of related tax
effects (1,271) (1,021) (794)
-----------------------------------------------------------------
Pro Forma Net Income $ 52,466 $ 74,263 $ 50,375
=================================================================
NEW ACCOUNTING STANDARDS
The FASB recently issued the following Statements of Financial
Accounting Standards (FAS) and losses) are recognizedFASB Interpretations (FIN):
- FAS 143, Accounting for Asset Retirement Obligations, issued by the FASB
in earningsJune 2001, requires entities to record the fair value of a liability
for a legal obligation to retire an asset in the period of change. Ifin which the
liability is incurred. A legal obligation is a derivative qualifiesliability that a party is
required to settle as a hedge,result of an existing or enacted law, statue,
ordinance or contract. When the liability is initially recorded, the
entity should capitalize a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is adjusted to its
present value by recognizing accretion expense as an operating expense in
the income statement each period, and the capitalized cost is depreciated
over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount
or incurs a gain or loss if the actual costs differ from the recorded
amount.
Prior to adopting FAS 143, costs for final removal of all owned
generation facilities were accrued as an additional component of
depreciation expense. Under FAS 143, only the costs to remove an asset
with legally binding retirement obligations will be accrued over time
through accretion of the asset retirement obligation and depreciation of
the capitalized asset retirement cost.
TEP will adopt FAS 143 on January 1, 2003, as required. TEP has
identified legal obligations to retire generation plant assets specified
in land leases for its jointly-owned Navajo and Four Corners generating
stations. The land on which the Navajo and Four Corners generating
stations reside is leased from the Navajo Nation. The provisions of the
leases require the lessees to remove the facilities upon request of the
Navajo Nation at the expiration of the leases. TEP also has certain
environmental obligations at the San Juan generating station. TEP has
estimated that its share of the cost to remove the Navajo and Four
Corners facilities and settle the San Juan environmental obligations is
approximately $38 million at the date of retirement. No other legal
obligations to retire generation plant assets were identified.
Millennium and UED have no asset retirement obligations.
TEP has various Transmission and Distribution lines that operate under
various land leases and rights of way that contain end dates and
restorative clauses. TEP operates its Transmission and Distribution
lines as if they will be operated in perpetuity and would continue to
be used or sold without land remediation. As a result, TEP will not
recognize the costs of final removal of the Transmission and
Distribution lines in the financial statements.
Upon adoption of FAS 143 on January 1, 2003, TEP expects to record an
asset retirement obligation of $38 million at its net present value of
$1.1 million, increase depreciable assets by $0.1 million for asset
retirement costs, reverse $112.8 million of costs previously accrued for
final removal from accumulated depreciation, reverse previously recorded
deferred tax assets by $44.2 million and recognize the cumulative effect
of accounting for changeschange as a gain of $111.7 million ($67.5 million net of
tax). TEP expects that adopting FAS 143 will result in a reduction to
depreciation expense charged throughout the year as well. For 2003, this
amount is approximately $6 million.
Amounts recorded under FAS 143 are subject to various assumptions and
determinations, such as determining whether a legal obligation exists to
remove assets, estimating the fair value of the costs of removal,
estimating when final removal will dependoccur, and the credit-adjusted
risk-free interest rates to be utilized on discounting future liabilities.
Changes that may arise over time with regard to these assumptions and
determinations will change amounts recorded in the specific exposure being hedged.future as expense for
asset retirement obligations.
If TEP in fact retires any asset at the end of its useful life, without
a legal obligation to do so, it will record retirement costs at that time
as incurred or accrued. TEP does not believe that the adoption of FAS
143 will result in any change in retail rates since all matters relating
to the rate-making treatment of TEP's generating assets have been
determined pursuant to the Settlement Agreement.
- FAS 146, Accounting for Costs Associated with Exit or Disposal
Activities, issued in July 2002, requires entities to record a liability
for costs related to exit or disposal activities when the costs are
incurred. Previous accounting guidance required the liability to be
recorded at the date of commitment to an exit or disposal plan. We are
required to comply with FAS 133 effective146 beginning January 1, 2001. We are
still2003, which will
affect any restructuring activities after that date. Although unknown at
this time, the timing of expense recognition in our financial statements
for future restructuring activities could differ significantly.
- FAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FAS 123, issued in December 2002, provides
alternative methods of transition for a voluntary change to the processfair value
based method of quantifyingaccounting for stock-based employee compensation. In
addition, FAS 148 requires prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect if any, that complianceof the method used on reported results.
Although we are required to comply with interim disclosure requirements of
FAS 133 will148 beginning January 1, 2003, we have on our financial statements.
In November 1998,elected to continue to apply the
Emerging Issues Task Force issued guidance on
accounting for energy trading activities (EITF 98-10). Energy trading
activities are intendedrecognition and measurement provisions of APB 25. Therefore, we do not
expect the adoption of FAS 148 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 nohave a significant effect on our
financial statements. The annual disclosure requirements of FAS 148 are
included in Stock-Based Compensation in Note 1, above.
- FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, issued November
2002, requires disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. FIN 45 also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified
beginning January 1, 2003. The disclosure requirements of FIN 45 are
immediately effective. See Guarantees and Indemnities in Note 10, below.
- FIN 46, Consolidation of Variable Interest Entities, issued January
2003, expands upon existing guidance that addresses when a company should
include in its financial statements the assets and liabilities of another
entity. The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means
other than through voting rights ("variable interest entities") and to
determine when and which business enterprise should consolidate the
variable interest entity (the "primary beneficiary"). FIN 46 requires
that both the primary beneficiary and all other enterprises with a
significant variable interest make additional disclosures. The
transitional disclosure requirements of FIN 46 are effective immediately.
The effective date of the consolidation requirements of FIN 46 depends on
the date the variable interest entity was created. FIN 46 is effective
for all variable interest entities created after January 31, 2003. For
variable interest entities created before February 1, 2003, the provisions
of FIN 46 are to be applied to a variable interest entity for interim
reporting periods beginning after June 30, 2003. We are currently in the
process of evaluating the impact of FIN 46 on UniSource Energy and TEP's
financial statements.
RECLASSIFICATIONS
WeUniSource Energy and TEP have made minor reclassifications to the prior
year financial statements for comparative purposes. See Note 17. 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.statement as rates to customers are reduced.
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 coverrecover 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 impactApproval of applyingthe Settlement Agreement caused TEP to discontinue
regulatory accounting under FAS 71 changed between 1998
and 1999 duefor its generation operations in November
1999. TEP continues 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,report its 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.under FAS 71.
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:as approved, were:
- Consumer choice: Consumer choice for energy supply was approved to beginbegan in January 2000
after the approvaland 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 bewas 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 applyapplied to all
retail customers except for certain customers that have negotiated non-standardnon-
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.rates both during
and after the rate freeze.
- 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 equals the amount of the
frozen retail rate less the price of retail electric service. The price of
retail electric service includes TEP's transmission and distribution charge
and a market energy component based on a market index for electric energy.
Because TEP's total retail rate will be frozen, the Floating CTC is
expected to allow TEP to recover
stranded costsrecoup the balance of transition recovery assets
not collectedotherwise recovered through the Fixed CTC. The Floating CTC and will terminateend
no later than December 31, 2008.
- ByGeneral rate case: TEP is required to file 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 millionTransition Recovery Asset
-------------------------
The Transition Recovery Asset consists of generation-related regulatory
assets toand a portion of TEP's generation plant asset costs. The total
Transition Costs Being Recovered through the Fixed CTC, which includes 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 ratesas well as generation-related plant in our distribution business;service and
- Recording $23 million of extraordinary income for balances that needed to
be eliminated to reflect discontinuance of FAS 71 but that couldexcess capacity deferral costs which are not be
reclassified as part ofincluded in 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(see table below), were amortized as follows:
----------------------------------------------------------------------------Years Ended December 31,
2002 2001 2000
-----------------------------------------------------------------------
-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
----------------------------------------------------------------------------
TotalAmortization of Transition Costs Being
Recovered Through the Fixed CTC
$ 450
============================================================================
TheTransition Costs Being Recovered Through
Fixed CTC, beginning of year $386 $419 $448
Amortization of Transition Recovery Asset
recorded on the income statement (25) (21) (17)
Generation-Related Plant Assets areAsset Amortization (3) (3) (3)
Excess Capacity Deferral Amortization(off
balance sheet) (9) (9) (9)
-----------------------------------------------------------------------
Transition Costs Being Recovered Through
the Fixed CTC, end of year $349 $386 $419
=======================================================================
The portion of the Transition Recovery Asset that is recorded on the
balance sheet was amortized as follows:
Years Ended December 31,
2002 2001 2000
-----------------------------------------------------------------------
-Millions of Dollars-
Amortization of Transition Recovery Asset
Recorded on the Balance Sheet
Transition Recovery Asset recorded on the
balance sheet, beginning of year $332 $353 $370
Amortization of Transition Recovery Asset
recorded on the income statement (25) (21) (17)
-----------------------------------------------------------------------
Remaining Transition Recovery Asset on
the balance sheet, end of year $307 $332 $353
=======================================================================
The remaining Transition Recovery Costs Being Recovered Through the
Fixed CTC differs from the Transitions Recovery Asset recorded on the balance
sheet as follows:
December 31,
2002 2001
---------------------------------------------------------------
-Millions of Dollars-
Remaining Transition Recovery Costs to
be Recovered Through the Fixed CTC,
end of year $349 $386
Unamortized balance of generation-related
costs included in Plant in Service on
the balance sheet. Thesheet (33) (36)
Excess Capacity Deferrals are not reflected on our
balance sheet and relaterelating 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 theasset (9) (18)
---------------------------------------------------------------
Remaining Transition Recovery Asset recorded on
the balance sheet.sheet, end of year $307 $332
===============================================================
The remaining Transition Recovery Asset 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,rates until 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 $11has recovered $450 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.transition costs or until December 31, 2008, whichever occurs first.
OTHER REGULATORY ASSETS AT DECEMBER 31, 1999
These various accounting adjustments leave2002 AND 2001
In addition to the balances ofTransition Recovery Asset related to generation
assets, the following regulatory assets atare being recovered through TEP's
transmission and distribution business:
December 31,
1999 as noted in the table below.2002 2001
-------------------------------------------------------------
-Millions of Dollars-
Other Regulatory Assets Related to
Transmission and Distribution
Income Taxes Recoverable Through
Future Revenues $ 57 $ 64
Current Regulatory Assets 12 11
Other Regulatory Assets 11 9
-------------------------------------------------------------
Total Regulatory Assets $ 80 $ 84
=============================================================
There are no remaining regulatory liabilities recorded on the balance
sheetsheets at December 31, 1999. All of the remaining regulatory assets relate to TEP's distribution2002 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
=================================================================2001.
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 ourUniSource Energy and
TEP's income statements:
Years Ended December 31,
1999 1998 1997
----------------------------------------------------------------------------
- Millions2002 2001 2000
--------------------------------------------------------------
-Millions of Dollars -
Revenues
Amortization of MSR Option Gain Regulatory Liability $ - $ - $ 8Dollars-
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$ 25 $ 21 $ 17
Interest Expense
Long-Term Debt 31 1 2
1
Interest Imputed on Losses Recorded at Present Value 29 34 33
----------------------------------------------------------------------------Income Taxes 7 5 5
--------------------------------------------------------------
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.periods. The
reclassification of ourTEP's 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 OURTEP'S REGULATED BUSINESS
We continueTEP continues to apply FAS 71 forto the distribution and transmission
portions of TEP'sits business, ourits regulated operations. We periodically assessoperations, and assesses whether weit
can continue to apply FAS 71.71 to these operations. If weTEP stopped applying
FAS 71 to TEP'sits remaining regulated operations, weit would write off the related
balances of TEP'sits regulatory assets as a charge in ouran expense on its income statement.
Based on the balances of TEP's regulatory assets at December 31, 1999,2002, if weTEP
had stopped applying FAS 71 to TEP'sits remaining regulated operations, weit would
have recorded an extraordinary loss, after-tax, of approximately $275 million, net of the
related income tax benefit of $183$233
million. While regulatory orders and market conditions may affect ourTEP's cash
flows, ourits cash flows would not be affected if weit stopped applying FAS 71.71
unless a regulatory order limited its ability to recover the cost of that
regulatory asset.
RECENT DEVELOPMENTS IN THE ARIZONA REGULATORY ENVIRONMENT
In February 2002, the ACC consolidated several pending matters related
to retail electric competition in order to make a comprehensive reexamination
of the Rules. On September 10, 2002, the ACC issued an order that eliminated
the requirement that TEP transfer its generating assets to a subsidiary. At
the same time, the ACC ordered the parties, including TEP, to develop a
competitive bidding process and reduced the amount of power to be acquired in
the competitive bidding process to only that portion not supplied by TEP's
existing resources.
On February 27, 2003, the ACC issued an order that defines the process,
for the period 2003 through 2006, by which TEP will be required to obtain its
capacity and energy requirements beyond what is supplied by TEP's existing
resources, which represents approximately 0.5% of its retail load in the
first year and increases over the period. This order further requires TEP to
bid out short-term energy purchases that it estimates it will make in the
2003 to 2006 period; however, it does not require TEP to purchase any power
that it deems to be uneconomical, unreasonable or unreliable. TEP expects to
issue requests for proposals in March 2003 and complete the selection process
by June 1, 2003.
As part of its reexamination of the Rules, the ACC had planned to
address the requirement for Arizona electric utilities to participate in the
Arizona Independent Scheduling Administrator (AISA) organization. The Rules
originally required the formation and implementation of the AISA; however,
the ACC opened a docket in July 2001 to revisit this obligation. This issue
is pending and will be addressed separately from the issues identified above.
NOTE 3. SEGMENTACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND
RELATED INFORMATIONHEDGING ACTIVITIES
- ----------------------------------------
In 1998, we began complying with---------------------------------------------------------------------------
On January 1, 2001, TEP recorded a $0.5 million after-tax gain in its
income statement for the cumulative effect of adopting Statement of Financial
Accounting Standards No.131No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 131)133). TEP enters into forward contracts to purchase
or sell a specified amount of capacity or energy at a specified price over a
given period of time, typically for one month, three months, or one year,
within established limits to take advantage of favorable market
opportunities. Some of these forward contracts are considered to be
derivatives, which TEP marks to market under FAS 133 by recording unrealized
gains and losses and adjusting the related assets and liabilities on a
monthly basis to reflect the market prices at the end of the month. However,
the majority of TEP's forward contracts are considered normal purchases and
sales under FAS 133 and, therefore, are not required to be marked to market.
TEP manages the risk of counterparty default by performing financial credit
reviews, setting limits monitoring exposures, requiring collateral when
needed, and using a standardized agreement which allows for the netting of
current period exposures to and from a single counterparty.
MEG, a wholly-owned subsidiary of Millennium, began operations in
November 2001 and enters into swap agreements, options and forward contracts
relating to emission allowances and coal. MEG also marks its trading
contracts to market under FAS 133 by recording unrealized gains and losses
and adjusting the related assets and liabilities on a monthly basis to
reflect the market prices at the end of the month.
The market prices used to determine fair value for TEP's and MEG's
derivative instruments are estimated based on various factors including
broker quotes, exchange prices, over the counter prices and time value.
In June 2002, new guidance was issued that requires all realized and
unrealized gains and losses on energy-related trading contracts to be shown
net in the income statement whether or not physically settled. This guidance
is effective for financial statements issued after July 15, 2002, and
requires financial statements for all comparative periods to be reclassified
to conform to the new presentation. MEG adopted this guidance on July 1,
2002 for its trading activity and reclassified its net realized gains and
losses from Other Revenue into a single line in Operating Revenue. The
impact of MEG adopting this guidance was immaterial to the financial
statements. This guidance does not apply to TEP because TEP's forward
contracts are not "energy-related trading contracts" as defined by the
guidance.
TEP's activity in derivative forward contracts and MEG's trading
activity are now reported as follows:
- TEP's unrealized gain/loss on forward sales and purchase contracts is a
component of Operating Revenues;
- TEP's realized gain/loss on forward sales contracts is a component of
Electric Wholesale Revenues;
- TEP's realized gain/loss on forward purchase contracts is a component of
Purchased Power; and
- MEG's unrealized and realized gain/loss on trading activities are
components of Operating Revenues.
During the year ended December 31, 2002, MEG physically settled the
purchase of 394,000 Emission Allowances and the sale of 416,000 Emission
Allowances under its trading contracts.
The net pre-tax gains (losses) were as follows:
Years Ended
December 31,
2002 2001
-------------------------------------------------------------
-Millions of Dollars-
TEP's derivative forward contracts $ 0.5 $ (0.5)
MEG's trading activities 0.1 (0.1)
-------------------------------------------------------------
UniSource Energy $ 0.6 $ (0.6)
=============================================================
At December 31, 2002, TEP had no open forward contracts that are
considered derivatives. At December 31, 2002, the fair value of MEG's
trading assets totaled $10.5 million, which is reported in Other Current
Assets, and the fair value of MEG's trading liabilities totaled $10.3
million, which is reported in Other Current Liabilities. At December 31,
2001, the fair value of MEG's trading assets was $8.7 million, which is
reported in Other Current Assets, and the fair value of TEP's derivative
liabilities and MEG's trading liabilities totaled $9.3 million, which is
reported in Other Current Liabilities.
TEP treated certain forward sale and purchase contracts as cash flow
hedges when it adopted FAS 133 and recorded an unrealized gain/loss related
to these hedges in Other Comprehensive Income. However, during 2001, new
guidance was issued by the FASB which provided that certain forward power
purchase or sale agreements, including capacity contracts, could be excluded
from the requirements of FAS 133. TEP implemented this new guidance in 2001
and determined that the items designated as cash flow hedges upon adoption
could be excluded from the FAS 133 requirements. Therefore, as these
contracts settled in 2001, TEP reversed the unrealized gain/loss included in
Other Comprehensive Income and recorded the realized gain/loss in the income
statement. As of December 31, 2002 and December 31, 2001, TEP had no cash
flow hedges and, therefore, its balance in Accumulated Other Comprehensive
Income was zero.
NOTE 4. MILLENNIUM ENERGY BUSINESSES
- -------------------------------------
See Note 5 for selected financial data of Millennium.
At December 31, 2002, Millennium recognized 100% of the losses of the
following: Global Solar Energy, Inc. (Global Solar), Disclosures about SegmentsMicroSat Systems, Inc.
(MicroSat), ITN Energy Systems, Inc. (ITN), POWERTRUSION International, Inc.
(Powertrusion), and TruePricing, Inc. (TruePricing). At December 31, 2001,
Millennium recognized 100% of the losses of the following: Global Solar,
Infinite Power Solutions, Inc. (IPS), MicroSat and ITN. At December 31,
2000, Millennium recognized 100% of the losses from Global Solar and IPS.
Millennium recognizes 100% of an Enterpriseinvestment's losses when it, as sole
provider of funds, bears all of the financial risk. In addition, when one of
these investments becomes profitable, Millennium will recognize 100% of net
income to the extent Millennium's recognized losses are greater than
Millennium's ownership percentage of such losses.
ENERGY TECHNOLOGY INVESTMENTS
We refer to Global Solar, IPS, MicroSat and Related Information,ITN collectively as
Millennium's Energy Technology Investments. In addition to the above,
Millennium recognized substantially all of IPS's losses in 2002. In December
2002, IPS received a cash equity contribution from Dow Corning Enterprises,
Inc. (Dow Corning). This investment permits Millennium to recognize only its
ratable share of losses from the investment going forward.
Millennium's total investment (capital contributions and loans) in its
Energy Technology Investments totaled $18.5 million during 2002.
- Global Solar is primarily a developer and manufacturer of flexible thin-
film photovoltaic cells. Global Solar began limited production of
photovoltaic cells in 1999. Target markets for its products include
military, space and commercial applications. In 2002, Millennium increased
its ownership of Global Solar from 67% to 87%. In addition, Millennium
converted $27.4 million of debt and accumulated interest due from Global
Solar to an equity contribution. Millennium accounts for the Global Solar
investment under the consolidation method. At December 31, 2002, there
remained $4.7 million of unfunded commitments from Millennium to Global
Solar, of which requires$3 million was drawn through March 5, 2003.
- IPS, established in 2000, is a developer of thin-film batteries. In
2002, Millennium increased its ownership in IPS from 67% to 77.5%. In
2002, Millennium converted $9.8 million of debt and accumulated interest
due from IPS to an equity contribution. In addition, Millennium provided
$1 million of equipment to IPS in exchange for equity. In December 2002,
Dow Corning provided a corresponding $1 million cash equity contribution.
IPS received an additional $1 million equity contribution from Dow Corning
on March 4, 2003. Millennium had committed an additional $1.5 million in
future funding to IPS. Millennium contributed $1 million of its future
funding commitment in January 2003. Millennium accounts for the IPS
investment under the consolidation method. Depending on warrant exercise
and additional funding from Dow Corning, Millennium anticipates its
ownership of IPS will be between 59% and 72%.
- MicroSat is a space systems company formed in 2001 to develop and
commercialize small-scale satellites. Millennium currently owns 49%, but
has agreed to reduce its ownership to 35%. Millennium accounts for the
MicroSat investment under the equity method. Millennium currently has no
further funding commitments to MicroSat.
- ITN was formed in 2001 to provide research and development and other
services to affiliates, government agencies and other third parties. In
2002, Millennium provided $1 million in equity funding. Currently
Millennium owns 49%, but has agreed to reduce its ownership to 9%. Because
Millennium is the primary funder of ITN's operations, it will continue to
account for ITN under the equity method. At December 31, 2002, Millennium
had $0.8 million in open funding commitments to ITN, primarily relating to
the establishment of a new solid oxide fuel cell subsidiary called Ascent
Power Systems.
Global Solar and IPS have each agreed to provide ITN $1 million in
research and development contracting through 2004. Global Solar, MicroSat
and ITN have certain government contracts that require them to contribute to
the research and development effort under cost share arrangements. Global
Solar, MicroSat and ITN's share of costs are expensed as incurred or
capitalized in accordance with the terms of the contracts. Global Solar,
MicroSat and ITN had the following approximate remaining cost share
commitments at:
December 31,
2002 2001 2000
---------------------------------------------------
-Millions of Dollars-
Global Solar $ 2.6 $ - $ 1.0
MicroSat 6.2 7.7 -
ITN 0.9 2.2 -
---------------------------------------------------
Total $ 9.7 $ 9.9 $ 1.0
===================================================
Millennium is currently finalizing its ownership and future debt
commitments for each of the Energy Technology Investments in order to help
ensure that these investments conform to Millennium's business plans.
Therefore, Millennium's ownership share is subject to change in 2003.
Millennium expects to fund between $7 million and $15 million to its various
Energy Technology Investments in 2003. Millennium may commit to provide
additional funding to these investments. A significant portion of the
funding under these agreements will be used for research and development
purposes and administrative costs. As funds are expended for these purposes,
Millennium recognizes expense.
OTHER MILLENNIUM INVESTMENTS AND COMMITMENTS
Millennium has a $15 million capital commitment to Haddington Energy
Partners II LP, a limited partnership that funds energy related investments.
As of December 31, 2002, Millennium had funded $6.6 million of this
commitment and owns approximately 31% of this entity. The remaining $8.4
million is expected to be funded within the next two to three years. A
member of the UniSource Energy Board of Directors has an investment in the
limited partnership and is a managing director of the general partner of the
limited partnership. Millennium accounts for this investment under the
equity method.
Millennium has a $6 million capital commitment to a venture capital fund
that focuses on information technology, microelectronics and biotechnology
investments. During 2002, this venture capital fund merged with another fund
that focuses on similar investments in Arizona, Southern California, New
Mexico, Colorado and Utah. As a result, Millennium owns 14.8% of the merged
venture. Millennium uses the cost method to account for this investment.
Before the merger, Millennium accounted for this investment under the equity
method. Another member of the UniSource Energy Board of Directors is a
general partner of the company that manages the fund. At December 31, 2002,
Millennium had funded approximately $1 million of the $6 million commitment.
Millennium does not currently expect to provide funding to this investment in
2003.
On July 15, 2002, Millennium invested $20 million in a company created
to develop up to 800 megawatts (MW) of coal-fired generation in the Sabinas
region of Coahuila, Mexico. Millennium received a 50% share of
Carboelectrica Sabinas, S. de R.L. de C.V., a Mexican limited liability
company (Sabinas). The other 50% of Sabinas is owned by Altos Hornos de
Mexico, S.A. de C.V. (AHMSA) and certain of its affiliates. Sabinas also
owns 19.5% of Minerales de Monclova, S.A. de C.V., (Mimosa) an owner of coal
and associated gas reserves and a supplier of metallurgical coal to the steel
industry and thermal coal to the Mexican electricity commission. Since 1999,
both AHMSA and Mimosa are parties to a suspension of payments procedure,
under applicable Mexican law, which is the equivalent of a U.S. Chapter 11
proceeding. Under certain circumstances, Millennium has the right to sell (a
put option) its interest in Sabinas to an AHMSA affiliate for $20 million
plus an accrued service fee. These circumstances include failure of Sabinas
to reach financial closing on the generation project within three years.
Millennium's put option is secured by collateral with a value currently in
excess of $20 million. UniSource Energy's Chairman, President and Chief
Executive Officer is a member of the board of directors of AHMSA. In
December 2002, Millennium received a return of capital of $0.5 million,
bringing Millennium's investment to approximately $19.5 million at December
31, 2002. In addition, in the first quarter of 2003, Millennium received a
second $0.5 million also representing a return of capital. Millennium
accounts for the Sabinas investment under the equity method, however, Sabinas
accounts for the Mimosa investment under the cost method.
Millennium owns a controlling 50.5% interest in Powertrusion, a
manufacturer of lightweight utility poles. During the third quarter of 2002,
Millennium provided an additional $2 million of funding to maintain its
controlling interest. Millennium accounts for the Powertrusion investment
under the consolidation method. In addition, during the third quarter of 2002
Millennium began recognizing 100% of Powertrusion's losses, as it became the
sole funder of Powertrusion's operations.
On April 1, 2002, Millennium invested an additional $2 million in
TruePricing, a start-up company established to market energy related
products, bringing Millennium's total investment to $3.1 million at December
31, 2002. Following this additional investment, Millennium began recognizing
100% of TruePricing's losses. Millennium accounts for the TruePricing
investment under the equity method. In February 2003, Millennium committed
to fund up to an additional $1.2 million in equity contributions to
TruePricing, of which $0.4 million was funded on March 5, 2003.
Nations Energy is a wholly-owned subsidiary of Millennium, accounted for
under the consolidation method. Through its subsidiaries, Nations Energy has
a 40% equity interest in a 43 MW power plant near Panama City, Panama. No
impairment was recorded in 2002, however, Nations Energy recorded decreases
in the market value of its Panama investment of $0.5 million in 2001 and $3
million in 2000. In 2000, Nations Energy recognized a $3 million deferred
tax benefit related to the decreased value. Nations Energy intends to sell
its interest in this project, which has a book value of less than $1 million
at December 31, 2002.
NATIONS ENERGY CONTINGENCY
In September 2001, Nations Energy sold its 26% equity interest in a
power project located in Curacao, Netherland Antilles to a subsidiary of
Mirant Corporation (Mirant). Nations Energy received $5 million in cash
proceeds and an $11 million note receivable from the sale. The note was
recorded at its net present value of $8 million, with the discount being
amortized to interest income over the five-year life of the note. Millennium
utilizes an 8% discount rate, established on the date this note was
initiated. The note is included in Investments and Other Property - Other on
UniSource Energy's consolidated balance sheet. The note is guaranteed by
Mirant Americas, Inc., a subsidiary of Mirant. Payments on the note
receivable are expected as follows: $2 million in July 2004, $4 million in
July 2005, and $5 million in July 2006.
In late 2002, the major rating agencies downgraded the ratings of Mirant
and certain of its subsidiaries citing Mirant's significantly lower operating
cash flow relative to its debt burden coupled with the likelihood that future
operating cash flow levels may weaken further. Their ratings are now below
investment grade. As of December 31, 2002, Nations Energy's receivable from
Mirant is approximately $9 million. We cannot predict what effect the
downgrade of Mirant will have on its ability to make its required payments to
Nations Energy when due, beginning in July 2004. Nations Energy has not
recorded an allowance for doubtful accounts and we report financial and descriptive
information about our operating segments. These segments are determined basedwill continue to evaluate
whether any further ratings events or actions by or to Mirant will impact the
collectibility of the receivable.
NOTE 5. BUSINESS SEGMENTS
- --------------------------
Based on the way we organize our operations and evaluate performance. UniSource
Energy's principalperformance, we
have three reportable business segment issegments:
(1) TEP, an electric utility business. The
other reportable business, segment is theUniSource Energy's largest
subsidiary.
(2) Millennium holds interests in unregulated energy businesses (see
Note 4).
(3) UED, established in 2001, is responsible for developing the expansion
project at the Springerville Generating Station. Prior to September
2002, UED owned a 20 MW gas turbine, which it leased to TEP. In
September 2002, UED sold the turbine to TEP for its net book value of
Millennium:
- Advanced$15 million.
Significant reconciling adjustments consist of the elimination of
intercompany activity and balances. Millennium recorded revenue from
transactions with TEP of $14 million, $13 million and $3 million in 2002,
2001 and 2000, respectively. TEP's related expense is reported in Other
Operations and Maintenance expense on its income statement. Millennium's
revenue and TEP's related expense are eliminated in UniSource Energy
Technologies, Inc. (AET) which currently owns 50 percentconsolidation. Other significant reconciling adjustments include the
elimination of Global Solarthe intercompany note between UniSource Energy L.L.C., a developer and manufacturerTEP, as
well as the related interest income and expense; and the elimination of photovoltaic
materials. In November 1999, Millennium entered into an agreement whereby
Millennium's share of Global Solar will increaseUED's
rental income and TEP's rental expense from UED's turbine lease 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 theTEP prior
to UED's sale of our interestthe turbine to TEP in NewEnergy.September 2002.
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.interest, except for
investments where we provide all of the financing, in which case we recognize
100% of the losses. See Note 4. Our portion of the net income (loss) of the
entities held by Millennium's Energy
Businessesin which TEP and Millennium own a 20-50% interest or have the
ability to exercise significant influence is shown below in Net Income (Loss)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
19992002 TEP Millennium UED Adjustments Consolidated
- ------------------------------------------------------------------------------
- Millions-----------------------------------------------------------------------------
-Millions of Dollars -Dollars-
Income Statement
- ----------------
Operating Revenues
- External $ 804851 $ 115 $ (11)- $ 804
- ------------------------------------------------------------------------------$ 856
- -----------------------------------------------------------------------------
Operating Revenues
- Intersegment - 14 3 (17) -
- -----------------------------------------------------------------------------
Depreciation and
Amortization 124 4 - - 128
- -----------------------------------------------------------------------------
Amortization of Transition
Recovery Asset 25 - - - 25
- -----------------------------------------------------------------------------
Interest Income 29 1 - (9) 21
- -----------------------------------------------------------------------------
Net Income (Loss)Loss from
Equity Method Entities*Entities (1) (3) - - (4)
- (4)
- ------------------------------------------------------------------------------
Interest Income 18 2 (11) 9
- ------------------------------------------------------------------------------
Gain on the Sale of NewEnergy - 35 - 35
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
Interest Expense 123154 1 - - 123155
- ------------------------------------------------------------------------------
Depreciation and Amortization 93 - - 93
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
Income Tax (Benefit)
Expense 22 12 (3) 31
-----------------------------------------------------------------------------
Extraordinary Income35 (15) 1 (4) 17
- Net of Tax 23 - - 23 -----------------------------------------------------------------------------
Net Income (Loss) 73 11 (5) 7954 (16) 1 (6) 33
- -----------------------------------------------------------------------------------------------------------------------------------------------------------
Cash Flow Statement
- -------------------
Capital Expenditures (91) (2)(103) (10) - (93)
- ------------------------------------------------------------------------------(113)
- -----------------------------------------------------------------------------
Purchase of North Loop Gas
Turbine from UED (15) - 15 - -
- -----------------------------------------------------------------------------
Investments in and Loans
to Millennium Energy BusinessesEquity Method Entities - (7)(24) - (7)
- ------------------------------------------------------------------------------(24)
- -----------------------------------------------------------------------------
Balance Sheet
- -------------
Total Assets 2,614 151 38 (112) 2,691
- -----------------------------------------------------------------------------
Investment in Equity
Method Entities 6 35 - - 41
- -----------------------------------------------------------------------------
2001
- -----------------------------------------------------------------------------
Income Statement
- ----------------
Operating Revenues
- External $1,409 $ 8 $ - $ - $1,417
- -----------------------------------------------------------------------------
Operating Revenues
- Intersegment - 13 2 (15) -
- -----------------------------------------------------------------------------
Depreciation and
Amortization 117 3 - - 120
- -----------------------------------------------------------------------------
Amortization of Transition
Recovery Asset 22 - - - 22
- -----------------------------------------------------------------------------
Interest Income 21 3 - (9) 15
- -----------------------------------------------------------------------------
Net Loss from
Equity Method Entities (1) (10) - - (11)
- -----------------------------------------------------------------------------
Interest Expense 159 - - - 159
- -----------------------------------------------------------------------------
Income Tax (Benefit)
Expense 56 (5) - (4) 47
- -----------------------------------------------------------------------------
Net Income (Loss) 75 (9) 1 (6) 61
- -----------------------------------------------------------------------------
Cash Flow Statement
- -------------------
Capital Expenditures (104) (17) (1) - (122)
- -----------------------------------------------------------------------------
Investments in and Loans
to Equity Method Entities - (18) - - (18)
- -----------------------------------------------------------------------------
Balance Sheet
- -------------
Total Assets 2,645 176 27 (101) 2,747
- -----------------------------------------------------------------------------
Investment in Equity
Method Entities 7 14 - - 21
- -----------------------------------------------------------------------------
2000
- -----------------------------------------------------------------------------
Income Statement
- ----------------
Operating Revenues
- External $1,028 $ 6 $ - $ - $1,034
- -----------------------------------------------------------------------------
Operating Revenues
- Intersegment - 3 - (3) -
- -----------------------------------------------------------------------------
Depreciation and
Amortization 114 - - - 114
- -----------------------------------------------------------------------------
Amortization of Transition
Recovery Asset 17 - - - 17
- -----------------------------------------------------------------------------
Interest Income 18 4 - (8) 14
- -----------------------------------------------------------------------------
Net Loss from
Equity Method Entities (2) (2) - - (4)
- -----------------------------------------------------------------------------
Interest Expense 166 - - - 166
- -----------------------------------------------------------------------------
Income Tax (Benefit)
Expense 27 (8) - (4) 15
- -----------------------------------------------------------------------------
Net Income (Loss) 51 (4) - (5) 42
- -----------------------------------------------------------------------------
Cash Flow Statement
- -------------------
Capital Expenditures (98) (8) - - (106)
- -----------------------------------------------------------------------------
Investments in and Loans
to Equity Method Entities (2) (17) - - (19)
- -----------------------------------------------------------------------------
Balance Sheet
- -------------
Total Assets 2,601 100 (45) 2,656167 - ------------------------------------------------------------------------------
Millennium's(97) 2,671
- -----------------------------------------------------------------------------
Investment in Equity
Method Joint VenturesEntities 9 6 - - 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 5.6. 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
---------------------------------------------------------------------------
- Millions2002 2001
-------------------------------------------------------------------
-Millions of Dollars -Dollars-
Plant in Service:
Generation Plant $ 1,0671,166 $ 1,0691,133
Transmission Plant 491 477515 508
Distribution Plant 599 586741 692
General Plant 115 111130 120
Intangible Plant 29 2046 44
Electric Plant Held for Future Use 1 1
----------------------------------------------------------------------------------------------------------------------------------------------
Total Plant in Service $ 2,3022,599 $ 2,264
==========================================================================2,498
===================================================================
Utility Plant Underunder Capital Leases $ 747 $ 741
$ 887
=============================================================================================================================================
Intangible Plant primarily represents computer software costs. TEP's
unamortized computer software costs were $28 million and $30 million as of
December 31, 2002 and 2001, respectively.
All Utility Plant Underunder Capital Leases is used in Generation.TEP's generation
operations.
The depreciable lives currently used by TEP are as follows:
Major Class of Utility Plant in Service: Depreciable Lives:
----------------------------------------------------------------
Generation Plant 23-60 years
Transmission Plant 10-50 years
Distribution Plant 24-60 years
General Plant 5-45 years
Intangible Plant 3-10 years
In the second quarter of 2002, TEP increased its estimates of useful
lives from 40 years to 60 years for its Irvington Generating Station gas-
fired generating units and from 25 years to 40 years for its internal
combustion turbines. These changes in estimates decreased depreciation
expense by approximately $3 million for the year ended December 31, 2002.
TEP continues to evaluate the depreciable lives of its other generating
stations.
See TEP Utility Plant and TEP Utility Plant Under Capital Leases in Note 1 and TEP Capital Lease Obligations in
Note 6.7.
JOINTLY-OWNED FACILITIES
At December 31, 1999,2002, TEP's interests in generating stations and
transmission systems that are jointly-owned with other utilities were as
follows:
Percent Plant Construction
Owned By Inby in Work in Accumulated
TEP Service* Progress Depreciation
- ----------------------------------------------------------------------------
- Millions-----------------------------------------------------------------------------
-Millions of Dollars -Dollars-
San Juan Units 1 and 2 50.050.0% $ 284289 $ 39 $ 208228
Navajo Station Units 1,2 and 3 7.5 121125 2 5472
Four Corners Units 4 and 5 7.0 79 - 632 73
Transmission Facilities 7.5 to 95.0 221 2 131225 - 152
- -----------------------------------------------------------------------------
Total $ 705718 $ 713 $ 456525
=============================================================================
* Included*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 includedreflected in the income statements. See
Note 10 for commitments related to TEP's jointly-owned facilities.
NOTE 6. LONG-TERM7. 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 1999Long-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.
TEP made the required sinking fund payments of $2 million on its First
Mortgage IDBs in each of 2002 and 2001. TEP redeemed $0.4 million of its
8.5% First Mortgage Bonds in 2002 and $0.2 million in 2001. TEP did not
issue any new bonds in 2002 or 2001.
During 2000, TEP repaid as scheduled $47 million of its 12.22% Series
First Mortgage Bonds. Also during 2000, TEP redeemed $2 million of its 7.5%
First Collateral Trust Bonds at a discount and made required sinking fund
payments on First Mortgage Bonds.
Sale and RedemptionBonds of Bonds - 1998
During 1998,$2 million.
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 MORTGAGEFirst and Second Mortgage
-------------------------
TEP's General First Mortgagefirst and General Second Mortgagesecond mortgage indentures are collateralized by a $956
million lien on TEP's utility plant, with the exception of Springerville Unit
2. San Carlos Resources Inc., a wholly-owned subsidiary of TEP, holds title
to Springerville Unit 2. BANK CREDIT AGREEMENTUtility Plant under Capital Leases is not subject
to such liens or available to TEP hascreditors, other than the lessors.
Bank Credit Agreement
---------------------
In November 2002, TEP entered into a new $401 million Credit Agreement
to replace the credit facilities provided under its then existing $441
million Credit Agreement whichthat would have expired December 30, 2002. The new
agreement provides a $100$60 million Revolving Credit Facility and a $341 milliontwo Letter of
Credit Facility. These
credit facilities mature on December 30, 2002(Tranche A 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.Tranche B; collectively, LOC) totaling $341
million. The Revolving Credit Facility, can be used to provide liquidity 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 ratepurposes, is a 364-day facility that we would pay would be dependent, in part,expires 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.November
13, 2003. The $341 million Letter of Credit FacilityLOC secures the payment of principal and interest on $329
million of tax-exempt variable rate bonds (IDBs). Tranche A provides $135
million and expires in January 2006; Tranche B provides $206 million and
expires in November 2006. The amountnew facilities are collateralized by $401
million of Second Mortgage Bonds.
The new Credit Agreement contains a number of restrictive covenants that
are similar to TEP's previous credit agreement, including restrictions on
additional indebtedness, liens, sale of assets or mergers and sale-
leasebacks. The new Credit Agreement, like the prior agreement, also
contains several financial covenants including net worth, cash coverage and
leverage tests. As of December 31, 2002, TEP was in compliance with these
financial covenants.
At December 31, 2002 and 2001, TEP had no outstanding borrowings under
these facilities. When TEP borrows under the Revolving Credit Facility, the
borrowing costs are 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 TEP's credit ratings. Also, TEP pays an annual commitment fee on the
Letterunused portion of the Revolving Credit Facility dependsand a fee on the LOC
facilities. The chart below shows the per annum rates and fees in effect on
TEP's credit ratings. AtCredit Facilities as of December 31, 1999,2002, based on its credit ratings,
as well as the commitment fee equaled
1.50% per year.
In December 1999possible range of rates and early January 2000,fees if TEP's bondcredit ratings were
upgradedto change:
Current Rate/ Range of
Fee Rates/Fees
-------------- ------------
Revolving Credit Facility
-Commitment Fee 0.35% 0.25% to 0.40%
-Borrowing Rate (spread over LIBOR) 4.00% 3.50% to 4.25%
Tranche A LOCs (including LOC
Fronting Fee) 4.25% 3.75% to 4.50%
Tranche B LOCs (including LOC
Fronting Fee) 5.75% 5.75%
The $329 million in aggregate principal amount of tax-exempt variable
rate debt that is supported by three rating agencies. As a result, on January 3, 2000, the commitment fee
decreased to 0.25% per year, andLOCs was classified as short-term debt at
December 31, 2001 because the previous letter of credit fee decreased to 1.25%
per year.facility matured on
December 30, 2002. When the new LOCs were issued in November 2002, TEP
classified the bonds as long-term debt because the new LOCs mature in 2006.
TEP 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 June
2017 for one lease and 2021July 2020 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.
Springerville Lease Debt and Equity
-----------------------------------
TEP purchased a 13% ownership interest in the Springerville Coal
Handling Facilities Leases for $13 million in December 2001 and all $96
million of the debt related to these capital leases in January 2002. In
March 2002, TEP terminated the lease related to its equity interest and
cancelled the associated debt. As a result of the lease termination, TEP
recorded a $21 million reduction to the capital lease obligation, a $27
million reduction of its investment, and a $6 million increase in the capital
lease asset, which represents the residual value of TEP's interest in the
leased asset and is carried at cost. At December 31, 2002 and December 31,
2001, TEP held $84 million and $13 million, respectively, of Springerville
Coal Handling Facilities lease debt and equity.
In addition, TEP purchased $36 million of Springerville Unit 1 lease
debt in 2002. At December 31, 2002 and December 31, 2001, TEP held $108
million and $71 million, respectively, of Springerville Unit 1 lease debt.
TEP recognizes interest income on these investments. TEP's purchases of
lease debt and equity are reflected in investing activities on TEP's cash
flow statements.
TEP MATURITIES AND SINKING FUND REQUIREMENTS
TEP's long-term debt, including sinking funds, and lease obligations
mature on the following dates:
Expiring Scheduled
LOCsIDBs Long-Term SupportingCapital
Supported by Debt Capital Lease
IDBsLOCs Retirements Obligations Total
--------------------------------------------------------------------------
Years Ending------------------------------------------------------------------------
-Millions of Dollars-
2003 $ - Millions of Dollars -
December 31,
2000 $ 492 $ 130121 $ 179
2001 2 104 106
2002 $ 329 2 92 423
2003 - 2 123 125
2004 - 2 124 126
2005 - -----------------------------------------------------------------------------2 125 127
2006 329 21 127 477
2007 - 1 128 129
------------------------------------------------------------------------
Total 2000-20042003 - 2007 329 57 573 95928 625 982
Thereafter - 799 1,378 2,177773 965 1,738
Less: Imputed Interest - - (1,035) (1,035)
---------------------------------------------------------------------------(746) (746)
------------------------------------------------------------------------
Total $ 329 $ 856801 $ 916 $ 2,101
===========================================================================844 $1,974
========================================================================
In addition to the capital lease obligations above, weTEP must ensure $70
million of notes underlying the Springerville Common Facilities leasesLeases are
refinanced by June 30, 2003 to avoid a special event of loss under the lease.
This special event of loss would require usTEP to repurchase the property leased
under the Springerville Common Facilities Leases 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.
InMEG LINE OF CREDIT
MEG has a $5 million bank line of credit for the purpose of issuing
letters of credit to counterparties to support its emission allowance and
coal trading activities. as of December 1999, TEP refinanced $7031, 2002, MEG had $2 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.in
outstanding LOCS. this facility expires in August 2004.
NOTE 7.8. FAIR VALUE OF TEP'S FINANCIAL INSTRUMENTS
- -----------------------------------------------------------------------------------------------------
The carrying valuevalues and fair valuevalues of TEP's financial instruments are
as follows:
December 31,
1999 19982002 2001
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------
- Millions-----------------------------------------------------------------------------
-Millions of Dollars -Dollars-
Assets:
Springerville Lease Debt
Securities (Included in
Investments and Other Property) $ 45192 $ 45196 $ 1871 $ 2274
Springerville Lease Ownership
Interest (Included in
Investments and Other Property) - - 13 13
Liabilities:
First Mortgage Bonds - Fixed Rate:
Corporate 75 77 75 7927 28 28 28
Industrial Development Revenue
Bonds (IDBs) 62 61 64 6457 57 58 59
First Collateral Trust Bonds 138 140 132 140 142138 138
Second Mortgage Bonds - IDBs
(Variable Rate) 329 329 329 329
Unsecured IDBs - Fixed Rate 579 514569 579 587534
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
See Note 7 for a description of TEP's 2002 investment in Springerville
Lease Debt. TEP intends to hold the $192 million investment in Springerville
Lease Debt Securities to maturity ($1653 million matures through January 1,
2009, $84 million matures through July 1, 2011, and $29$55 million matures
through January 1, 2013). These Springerville Lease Debt Securities
areThis investment is stated at amortized cost, which
means the purchase cost has been adjusted for the amortization of the premium
and discount to maturity. We baseTEP bases 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. WeTEP determined the fair value
of TEP'sits 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. WeTEP used a rate consistent with market yields generally
available as of December 19992002 for 19992002 amounts and December 19982001 for 19982001
amounts for bonds with similar characteristics with respect to:to credit rating,
time-to-
maturity,time-to-maturity, and the tax status of the bond coupon for Federalfederal income
tax purposes. The use of different market assumptions and/or estimation
methodologies may yield different estimated fair value amounts.
The carrying amounts of our current assets and liabilities approximate
fair value.
NOTE 8.9. STOCKHOLDERS' EQUITY
- -----------------------------
DIVIDEND LIMITATIONS
- -----------------------------
UNISOURCE ENERGYUniSource Energy
----------------
In December 1999,February 2003, UniSource Energy declared a quarterly dividend to the
shareholders of $0.15 per share of UniSource Energy Common Stock. The
dividend, totaling approximately $5 million, will be paid on March 7, 2003 to
common shareholders of record as of February 21, 2003. In 2002, UniSource
Energy paid quarterly dividends to the shareholders of $0.125 per share, for
a total of $0.50 per share, or $17 million, for the year. During 2001,
UniSource Energy paid quarterly dividends to the shareholders of $0.10 per
share, for a total of $0.40 per share, or $13 million, for the year. During
2000, UniSource Energy paid quarterly dividends to the shareholders of $0.08
per share, for a total of common stock. The dividend, totaling
approximately $3$0.32 per share, or $10 million, will be paid on March 10, 2000 to shareholders of
record as of February 15, 2000.for the year.
Our ability to pay cash dividends on common stock outstanding depends,
in part, upon cash flows from our subsidiaries,subsidiaries: TEP, Millennium and Millennium.UED.
TEP
In December 1999 and 1998,---
TEP paid a dividenddividends of $34$35 million in 2002, $50 million in 2001, and $30
million respectively, toin 2000. UniSource Energy is the primary holder of all of TEP's common
stock. TEP met the following requirements before paying these dividends to
UniSource Energy:dividends:
- Bank Credit Agreement
During 2000 through 2002, TEP's bank Credit Agreement allowsallowed TEP to pay
dividends as long as TEP maintainsmaintained compliance with the agreement and meetsmet its
financial covenants. TEP's new Credit Agreement as of November 2002 applies
those same restrictions as well as restricting TEP's dividends to 65% of
TEP's consolidated net income for the immediately preceding fiscal year, as
long as the Tranche B LOCs are outstanding.
- 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 19992002, 2001 and 19982000 dividends to UniSource
Energy were paid
from current year earnings.
MILLENNIUM
In August 1999, Millennium and UED
------------------
Millennium did not pay any dividends to UniSource Energy in 2002, 2001
or 2000. UED has not paid a dividend of $10 millionany dividends to UniSource Energy. Millennium does notand
UED have anyno 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.WARRANTS
UniSource Energy
----------------
At December 31, 1999, pre-
1992 federal NOL2002 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:2001, 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.no outstanding
warrants. 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 of2000, 791,966 UniSource Energy Warrants, whichthat were
scheduled to 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.exercised resulting in a $13
million increase in common stock equity. The remaining 700,445 warrants
expired unexercised.
TEP
---
At December 31, 1999, 4.6 million of2002, TEP Warrants which expire onhad no outstanding warrants. On December 15,
2002, were outstanding. The4.6 million 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 intoexpired unexercised. UniSource Energy Common Stock. Currently, UniSource Energy
owns 100%is the
primary holder of the common stock of TEP and TEP common stock is not
publicly traded.
NOTE 13.UNISOURCE ENERGY 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.
UNISOURCE ENERGY POTENTIAL COMMON STOCK ISSUE
On February 21, 2003, we filed a "shelf" registration statement on Form
S-3 to issue up to 4 million shares of UniSource Energy Common Stock.
NOTE 10. COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
TEP COMMITMENTS
Fuel Purchase and Transportation Commitments
--------------------------------------------
TEP has several long-term contracts for the purchase and transportation
of coal with expiration dates from 2004 through 2017. The total amount paid
under these contracts depends on the number of tons of coal purchased and
transported. All of these contracts (i) include a price adjustment clause
that will affect the future cost of coal and (ii) require TEP to pay a take-
or-pay charge if certain minimum quantities of coal are not purchased and/or
transported. TEP's present fuel requirements are in excess of the take-or-
pay minimums. However, sometimes TEP has purchased coal from other suppliers,
resulting in take-or-pay minimum charges, but a lower overall cost of fuel.
TEP made payments under these contracts of $161 million in 2002, $173 million
in 2001, and $157 million in 2000.
TEP entered into a Gas Procurement Agreement with Southwest Gas
Corporation effective June 1, 2001 with a primary term of five years. The
contract provides for a minimum volume obligation during the first two years
of 10 million MMBtus annually. TEP made payments under this contract of $33
million in 2002 and $28 million in 2001.
At December 31, 2002, TEP estimates its future minimum payments under
these contracts to be:
Total Contractual
Obligations
--------------------------------------
-Millions of Dollars-
2003 $ 81
2004 78
2005 75
2006 72
2007 72
--------------------------------------
Total 2003 - 2007 378
Thereafter 278
--------------------------------------
Total $ 656
======================================
Irvington Coal Contract Termination
-----------------------------------
In the third quarter of 2002, TEP terminated a coal supply agreement for
the Irvington Generating Station. As a result, TEP recorded a pre-tax charge
of $11.3 million and made an $11.3 million payment in the third quarter of
2002. The additional expense was mitigated by TEP not being required to make
a take-or-pay penalty payment of approximately $3.5 million for the year 2002
and subsequent years.
San Juan Coal Contract Amendment
--------------------------------
In September 2000, to reduce fuel costs over the next 17 years, TEP
terminated the San Juan Generating Station's coal supply contract and entered
into a new coal supply contract, replacing two surface mining operations with
one underground operation. To terminate the contract, TEP was required to
make a $15 million payment in January 2003. In September 2000, as a result
of this scheduled payment, TEP recorded a pre-tax $13 million Coal Contract
Amendment Fee expense and a non-current liability which equaled the present
value of the $15 million payment. TEP recognized interest expense, included
in the Interest Imputed on Losses Recorded at Present Value line item on the
income statements, and increased its liability until the payment was made in
December 2002. On a net present value basis, TEP expects the fuel savings to
significantly exceed the $15 million payment over the original term of the
contract.
Operating Leases
----------------
TEP and Millennium have entered into operating leases, primarily for
office facilities and computer equipment, with varying terms, provisions, and
expiration dates. UniSource Energy's consolidated operating lease expense
was $3 million for each of 2002, 2001 and 2000. TEP's operating lease
expense was $2 million for each of 2002, 2001 and 2000. UniSource Energy and
TEP's estimated future minimum payments under non-cancelable operating leases
at December 31, 2002 are as follows:
UniSource
Energy
Consolidated TEP
-------------------------------------------
-Millions of Dollars-
2003 $ 3 $ 2
2004 2 1
2005 1 1
2006 1 1
2007 1 1
-------------------------------------------
Total 2003 - 2007 8 6
Thereafter 3 3
-------------------------------------------
Total $ 11 $ 9
===========================================
Environmental Regulation
------------------------
The 1990 Federal Clean Air Act Amendments require reductions of 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 $2.5 million in 2002, approximately $2
million in 2001 and approximately $1 million in 2000 and expects to spend
approximately $2 million annually in 2003 and 2004 to comply 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 were required to hold Emission
Allowances equal to the level of emissions in the compliance year or pay
penalties and offset excess emissions in future years. TEP had sufficient
Emission Allowances to comply with the Phase II SO2 regulations for
compliance year 2002. However, due to increased energy output, TEP may have
to purchase additional Emission Allowances for future compliance years.
Based on current estimates of additional required Emission Allowances and
market prices, TEP believes that purchases of Emission Allowances will not
have a material effect on TEP.
The EPA has issued a determination that coal and oil-fired electric
utility steam generating units must control their mercury emissions. Final
regulations are expected to be issued in 2004. 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.
MILLENNIUM COMMITMENTS AND CONTINGENCY
See Note 4 for a description of Millennium's commitments and
contingency.
UED COMMITMENTS
UED and Salt River Project Agricultural Improvement and Power District
(SRP) entered into a Joint Development Agreement in October 2001 to develop
two 400 MW coal-fired units at TEP's existing Springerville Station. As a
result of recent developments, UED and SRP are modifying the Joint
Development Agreement to provide for the purchase by SRP of a specified
amount of power from Unit 3 and an option for SRP to own Unit 4. UED and SRP
each committed project development funding for professional services and
other third party costs. As of December 31, 2002, SRP met its funding
commitment for the project. Tri-State Generation and Transmission
Association, Inc. (Tri-State) has agreed to purchase the remaining power from
Unit 3. Tri-State and UED signed a Development Cost Agreement in January
2003 to each share 50% of the remaining development costs of Unit 3 effective
from November 6, 2002 until financial closing. At December 31, 2002,
capitalized project development costs on UED's balance sheet were
approximately $22.4 million. Management believes it is probable that UED
will proceed with this project. If the project does not proceed, the
capitalized project development costs will be immediately expensed.
TEP CONTINGENCIES
Springerville Generating Station Complaint
------------------------------------------
Environmental activist groups have expressed concerns regarding the
construction of any new units at the Springerville Station. In January 2003,
environmental activist groups appealed an ACC Order affirming the ACC's
approval of the expansion at Springerville Station to the Superior Court of
the State of Arizona. Additionally, in November 2001, the Grand Canyon Trust
(GCT), an environmental activist group filed a complaint in U.S. District Court
against TEP for alleged violations of the Clean Air Act at the Springerville
Generating Station. The complaint alleged that more stringent emission
standards should apply to Units 1 and 2 and that new permits and the
installation of additional facilities meeting Best Available Control Technology
standards are required for the continued operation of Units 1 and 2 in
accordance with applicable law. TEP believes the claims by the GCT are without
merit and will vigorously contest them.
In 2002, the U.S. District Court granted TEP's motion for
summary judgment on one of the primary issues in the case: whether TEP
commenced construction within 18 months and/or by March 19, 1979, after the
original 1977 air permit covering Units 1 and 2 was issued. The Court found
that TEP had commenced construction of the Springerville Generating Station in
the time periods required by the original permits. There were two remaining
allegations: that (a) TEP discontinued construction for a period
of 18 months or longer and did not complete construction in a reasonable
period of time, and (b) TEP did not commence construction, for purposes of
New Source Performance Standard applicability, by September 18, 1978.
On March 4, 2003, the U.S. District Court determined that the GCT had not
commenced the case on a timely basis and dismissed the case.
Litigation Related to San Juan Coal Company
-------------------------------------------
On July 30, 2002, Dugan Production Corp. (Dugan) filed a lawsuit against
the San Juan Coal Company, the coal supplier to the San Juan Generating
Station (San Juan). TEP owns 50% of San Juan Units 1 and 2, which equates to
19.8% of San Juan in total. The San Juan Coal Company, through leases with
the federal government and the State of New Mexico, owns coal interests with
respect to an underground mine. Dugan, through leases with the federal
government, the State of New Mexico and certain private parties, claims to
own certain oil and gas interests in portions of the land used for the
underground mine. Dugan alleges that San Juan Coal Company's underground
coal mining operations have or will interfere with Dugan's gas production and
will result in the dissipation of natural gas that it otherwise would be
entitled to recover. Dugan seeks a declaration by the court that the rights
under its leases are senior and superior to the rights of the San Juan Coal
Company and seeks to enjoin the underground mining of coal from a portion of
the land used for the underground mine as described above. Dugan also seeks
monetary damages.
The San Juan Coal Company has informed Public Service Company of New
Mexico (PNM) that it intends to strongly dispute the litigation. TEP cannot
predict the ultimate outcome of this litigation, or whether it will adversely
affect the amount of coal available or cost of coal to San Juan. TEP does not
expect resolution of this litigation to be material to TEP as a 19.8% owner
of San Juan.
Litigation Related to San Juan Generating Station
-------------------------------------------------
On May 16, 2002, the Grand Canyon Trust and the Sierra Club filed a
citizen lawsuit under the Clean Air Act in federal district court in New
Mexico against PNM as operator of San Juan. The lawsuit, which alleges two
violations of the Clean Air Act and related regulations and permits, seeks
penalties as well as injunctive and declaratory relief and is presently
scheduled for trial in June 2003. Based on its investigation to date, PNM
has stated that it firmly believes that the allegations are without merit,
and vigorously disputes the allegations. Only one of those allegations
relates to a unit in which TEP owns an interest. While we are unable to
predict the ultimate outcome of the lawsuit, we do not believe the outcome
will be material to TEP.
Environmental Reclamation
-------------------------
TEP pays on-going reclamation costs at each of its remote generating
stations, and it is reasonably possible that we may have to pay a portion of
final reclamation costs as the coal companies from which the remote
generating stations purchase coal undertake final reclamation of their mines.
As amounts become known and probable, we will record a liability for final
reclamation.
GUARANTEES AND INDEMNITIES
In the normal course of business, UniSource Energy and certain
subsidiaries, including TEP, enter into various agreements providing
financial or performance assurance to third parties on behalf of certain
subsidiaries. These agreements are entered into primarily to support or
enhance the creditworthiness otherwise attributed to a subsidiary on a stand-
alone basis, thereby facilitating the extension of sufficient credit to
accomplish the subsidiaries' intended commercial purposes. The most
significant of these guarantees supports up to approximately $3.5 million in
commodity-related payments for MEG at December 31, 2002. To the extent
liabilities exist under the contracts subject to these guarantees, such
liabilities are included in the consolidated balance sheets.
In addition, UniSource Energy and its subsidiaries have indemnified the
purchasers of interests in certain investments from additional taxes due for
years prior to the sale. The terms of the indemnifications provide for no
limitation on potential future payments; however, we believe that we have
abided by all tax laws and paid all tax obligations. We have not made any
payments under the terms of these indemnifications to date.
We believe that the likelihood UniSource Energy or TEP would be required
to perform or otherwise incur any significant losses associated with any of
these guarantees is remote.
RESOLUTION OF TEP CONTINGENCIES
Income Tax Assessments
----------------------
In 2002, the IRS audit for 1997-2000 was settled, and after reviewing
the impact of the audit findings as well as the effect of tax positions
established in relation to future tax years, TEP reversed $1 million of the
deferred tax valuation allowance. See Note 12.
In 2000, the IRS issued an income tax assessment for the 1994, 1995 and
1996 tax years. After reviewing the impact of these items on TEP's accrued
tax liabilities, TEP reversed $1 million of the deferred tax valuation
allowance in 2000. See Note 12. The audit for such period was settled in
2001, and after reviewing the impact of the final assessment on TEP's accrued
tax liabilities and the potential for assessments related to later tax years,
no further adjustments to the deferred tax valuation allowance were deemed
necessary in 2001.
In February 1998, the IRS issued an income tax assessment for the 1992
and 1993 tax years. The IRS challenged TEP's treatment of various items
relating to a 1992 financial restructuring, including the amount of net
operating loss (NOL) and investment tax credit (ITC) generated before
December 1991 that may be used to reduce taxes in future periods. In 2000,
TEP settled the 1992 and 1993 audits. After reviewing the impact of these
items on its accrued tax liabilities, TEP reversed $7 million of the deferred
tax valuation allowance in 2000. See Note 12.
ACC Order on the Sierrita Contract
----------------------------------
In September 2000, TEP reversed a $3 million reserve, resulting in $3
million of revenue, related to a dispute between TEP and Cyprus Sierrita
Corporation (now known as Phelps Dodge Sierrita, Inc.) (Sierrita) over the
proper method of calculating energy costs that TEP charged to Sierrita under
an ACC-approved contract. Sierrita dismissed its appeals to the Court of
Appeals after TEP and Sierrita entered into an amendment to their contract,
which was subsequently approved by the ACC.
NOTE 11. Wholesale Accounts Receivable and Allowances
- ------------------------------------------------------
At December 31, 2002 and December 31, 2001, TEP's Accounts Receivable on
the balance sheet is net of an $8.4 million allowance for uncollectible
receivables related to 2000 and 2001 sales to the California Power Exchange
(CPX), the California Independent System Operator (CISO) and Enron Corp. and
certain of its affiliates (Enron). The receivable from the CPX and the CISO
is $16 million and the receivable from Enron is $0.8 million. This allowance
reflects a 50% reserve on amounts unpaid from the CPX, the CISO and Enron.
The reserve for the receivable from Enron was recorded in 2001.
TEP's collection shortfall from the CPX and CISO was approximately $9
million for sales made in 2000 and $7 million for sales made in 2001. We
recorded an allowance for doubtful accounts for the full amount of these
uncollected amounts in the fourth quarter of 2000 and the first quarter of
2001, totaling $16 million. In the fourth quarter of 2001, we decreased the
reserve by $8 million, or 50%, of the outstanding receivable because the
following events which occurred in late 2001 caused us to believe that it is
probable that TEP will collect at least 50% of this aggregate outstanding net
receivable: (a) the stabilization of the power markets, (b) rate increases
achieved by Pacific Gas and Electric Company (PG&E) and Southern California
Edison Company (SCE), (c) settlements made by California utilities with
various power providers, and (d) data in filings of FERC refund hearings.
SCE publicly disclosed that on March 1, 2002, it obtained financing and made
payments so that it has no material undisputed obligations that are past due
or in default. These payments included a payment to the CPX; however, TEP
has not received a corresponding payment from the CPX.
There are several other outstanding legal issues, complaints and
lawsuits concerning the California energy crisis related to the FERC,
wholesale power suppliers, SCE, PG&E, the CPX and the CISO, and concerning
Enron. In August 2002, the FERC staff proposed revised calculations to
determine amounts due from the CPX and the CISO, based on concern that
natural gas prices were manipulated. If we were to apply these proposed
adjustments to amounts due to TEP, TEP could receive as little as $4 million,
plus interest, of the amounts due from the CPX and the CISO. The FERC has
not yet confirmed or rejected the calculation proposed by its staff. Under
earlier calculations proposed by the FERC staff, TEP could receive up to $11
million plus interest. A FERC administrative law judge has issued a proposed
finding under which TEP would receive approximately $8.4 million, plus
interest. This represents amounts owed to TEP, net of TEP's estimated refund
liability. The FERC is accepting additional information and is expected to
issue a ruling on the recommended order later in 2003. We cannot predict the
outcome of these issues or lawsuits. We believe, however, that TEP is
adequately reserved for its transactions with the CPX, the CISO and Enron.
TEP's Accounts Receivable from Electric Wholesale Revenues, net of
allowances, totaled $31 million at December 31, 2002 and $70 million at
December 31, 2001. These amounts are included in Accounts Receivable on the
balance sheet. Excluding the receivables from the CPX, the CISO and Enron,
as described above, substantially all of the December 31, 2002 wholesale
receivable balance has been collected as of the date of this filing.
NOTE 12. INCOME TAXES
- ----------------------
Deferred tax assets (liabilities) consist of the following:
UniSource Energy TEP
------------------ -----------------
December 31, December 31,
2002 2001 2002 2001
- -----------------------------------------------------------------------------
-Millions of Dollars-
Gross Deferred Income Tax Liabilities
Electric Plant - Net $(397) $(398) $(397) $(398)
Income Taxes Recoverable Through
Future Revenues Regulatory Asset (23) (25) (23) (25)
Transition Recovery Asset (122) (131) (122) (131)
Other (26) (59) (24) (26)
- -----------------------------------------------------------------------------
Gross Deferred Income Tax
Liability (568) (613) (566) (580)
- -----------------------------------------------------------------------------
Gross Deferred Income Tax Assets
Capital Lease Obligations 334 346 334 346
Net Operating Loss Carryforwards 7 46 1 34
Investment Tax Credit Carryforwards 6 9 6 9
Alternative Minimum Tax 91 91 88 78
Accrued Pension Liabilities 16 14 16 14
Emission Allowance Inventory 15 15 15 15
Coal Contract Termination Fees 18 19 18 19
Springerville Coal Handling Facility 9 - 9 -
Other 69 64 44 36
- -----------------------------------------------------------------------------
Gross Deferred Income Tax Asset 565 604 531 551
Deferred Tax Assets Valuation
Allowance (16) (17) (16) (17)
- -----------------------------------------------------------------------------
Net Deferred Income Tax
Liability $ (19) $ (26) $ (51) $ (46)
=============================================================================
The net deferred income tax liability is included in the balance sheets
in the following accounts:
UniSource Energy TEP
------------------ ----------------
December 31, December 31,
2002 2001 2002 2001
- -----------------------------------------------------------------------------
-Millions of Dollars-
Deferred Income Taxes - Current
Assets $ 16 $ 11 $ 16 $ 5
Deferred Income Taxes - Noncurrent
Liabilities (35) (37) (67) (51)
- -----------------------------------------------------------------------------
Net Deferred Income Tax Liability $ (19) $ (26) $ (51) $ (46)
=============================================================================
We record deferred tax liabilities for amounts that will increase income
taxes on future tax returns. We record deferred tax assets for amounts that
could be used to reduce income taxes on future tax returns. We record a
Deferred Tax Assets Valuation Allowance for the amount of Deferred Tax Assets
that we may not be able to use on future tax returns. We estimate the
valuation allowance based on our interpretation of the tax rules, prior tax
audits, tax planning strategies, scheduled reversal of deferred tax
liabilities, and projected future taxable income. The valuation allowance of
$16 million at December 31, 2002, which reduces the Deferred Tax Asset
balance, relates to NOL and ITC carryforward amounts. In the future if TEP
determines that TEP should be able to use all or a portion of these amounts
on tax returns, then TEP would reduce the valuation allowance and recognize a
tax benefit up to $16 million. Factors that could cause TEP to recognize the
tax benefit include new or additional guidance through tax regulations, tax
rulings, case law and/or the use of such benefits on future tax returns.
In 2002, the Deferred Tax Assets Valuation Allowance decreased $1
million due primarily to the settlement of audits. In 2001, there was no
change in the Deferred Tax Assets Valuation Allowance. In 2000, the Deferred
Tax Assets Valuation Allowance decreased $8 million due primarily to the
improved likelihood of utilization of tax items.
TEP had a net intercompany tax receivable (payable) from affiliates of
zero at December 31, 2002 and ($5.0) million at December 31, 2001. These
amounts are included in TEP's intercompany accounts on its balance sheet.
In 2002, UniSource Energy recognized a tax benefit of $1.5 million as a
result of final agreement with the IRS on audit issues and a tax benefit of
$1.0 million from recognition of losses generated by the sale of a Nations
Energy foreign entity. These amounts are included in current and deferred
tax expense (benefit) in the following table.
Income tax expense (benefit) included in the income statements consists
of the following:
UniSource Energy TEP
-------------------- --------------------
Years Ended December 31,
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------
-Millions of Dollars-
Current Tax Expense
Federal $ 19 $ 24 $ 14 $ 22 $ 25 $ 16
State 7 11 4 8 11 6
- -----------------------------------------------------------------------------
Total 26 35 18 30 36 22
Deferred Tax Expense (Benefit)
Federal (1) 16 6 9 22 13
State (7) (4) (1) (3) (2) -
- -----------------------------------------------------------------------------
Total (8) 12 5 6 20 13
- -----------------------------------------------------------------------------
Reduction in Valuation
Allowance - Benefit (1) - (8) (1) - (8)
- -----------------------------------------------------------------------------
Total Federal and State Income
Tax Expense $ 17 $ 47 $ 15 $ 35 $ 56 $ 27
- -----------------------------------------------------------------------------
The differences between the income tax expense 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,
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------
-Millions of Dollars-
Federal Income Tax Expense at
Statutory Rate $ 18 $ 38 $ 20 $ 32 $ 46 $ 27
State Income Tax Expense, Net
of Federal Deduction 2 5 3 4 6 4
Depreciation Differences (Flow
Through Basis) 4 5 5 4 5 5
Federal/State Credits (4) - - (4) - -
Reduction in Valuation
Allowance - Benefit (1) - (8) (1) - (8)
Foreign Operations of Millennium
Energy Businesses - (1) (3) - - -
Other (2) - (2) - (1) (1)
- -----------------------------------------------------------------------------
Total Federal and State Income
Tax Expense $ 17 $ 47 $ 15 $ 35 $ 56 $ 27
=============================================================================
The Total Federal and State Income Tax Expense in the tables above is
included on UniSource Energy and TEP's income statements. In addition, TEP
recorded a $2.6 million income tax benefit related to its minimum pension
liability at December 31, 2002 (see Note 13). This income tax benefit is
included in UniSource Energy and TEP's other comprehensive income at December
31, 2002.
At December 31, 2002, UniSource Energy and TEP had, for consolidated
federal income tax filing purposes:
- $21 million of NOL carryforwards expiring in 2006 through 2009;
- $6 million of unused ITC expiring in 2003 through 2022; and
- $91 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's ownership was deemed to have occurred for tax purposes in
December 1991. As a result, TEP's use of the NOL and ITC generated before
1992 is limited under the tax code. At December 31, 2002, pre-1992 federal
NOL and ITC carryforwards which are subject to the limitation were
approximately $21 million and $4 million, respectively. We had $2 million of
ITC not subject to the limitation. Because of the appropriate valuation
allowance amounts recorded, we do not expect these annual limitations to have
a material adverse impact on the financial statements.
NOTE 13. 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. Additionally, TEP provides supplemental retirement
benefits to certain 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
postretirement costs through rates 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.
TEP amended its other postretirement benefit plan as of January 1, 2003,
capping its annual cost for Post-Medicare coverage for both current
classified retirees under age 65 and all classified employees retiring after
December 31, 2002. As of June 1, 2001, TEP amended this plan to eliminate
post-65 medical benefits for salaried employees retiring after January 1,
2002 and cap Medicare supplement payments for salaried retirees under age 65.
These amendments required TEP to recalculate benefits related to
participants' past service. TEP is amortizing the change in the benefit cost
from these plan amendments on a straight-line basis over 10 years.
The actuarial present values of the pension benefit obligations and
other postretirement benefit plan were measured at December 1. The change in
benefit obligation and plan assets and reconciliation of the funded status
are as follows:
Other Postretirement
Pension Benefits Benefits
---------------- -------------------
Years Ended December 31,
2002 2001 2002 2001
- -----------------------------------------------------------------------------
-Millions of Dollars-
Change in Benefit Obligation
Benefit Obligation at
Beginning of Year $ 117 $ 102 $ 59 $ 64
Actuarial (Gain) Loss 10 9 8 1
Interest Cost 8 8 4 4
Service Cost 4 4 2 2
Benefits Paid (6) (6) (2) (2)
Plan Amendments - - (12) (10)
-----------------------------------------
Benefit Obligation at
End of Year 133 117 59 59
-----------------------------------------
Change in Plan Assets
Fair Value of Plan Assets
at Beginning of Year 120 137 - -
Actual Return on Plan Assets (14) (13) - -
Benefits Paid (6) (6) (2) (2)
Employer Contributions 6 2 2 2
-----------------------------------------
Fair Value of Plan Assets
at End of Year 106 120 - -
-----------------------------------------
Reconciliation of Funded Status
to Balance Sheet
Funded Status (Difference
between Benefit Obligation
and Fair Value of Plan Assets) (27) 3 (59) (59)
Unrecognized Net (Gain) Loss 34 (1) 32 26
Unrecognized Prior Service Cost 14 16 (12) -
-----------------------------------------
Net Amount Recognized in
the Balance Sheets $ 21 $ 18 $ (39) $ (33)
=========================================
Amounts Recognized in the
Balance Sheets Consist of:
Prepaid Pension Costs Included
in Other Assets $ 13 $ 21 $ - $ -
Accrued Benefit Liability
Included in Other Liabilities (10) (3) (39) (33)
Intangible Asset Included in
Other Assets 11 - - -
Accumulated Other Comprehensive
Income 7 - - -
-----------------------------------------
Net Amount Recognized $ 21 $ 18 $ (39) $ (33)
=========================================
Benefit Obligation and Fair Value
of Plan Assets for Plans with
Benefit Obligations in Excess of
Plan Assets:
Benefit Obligation at
End of Year $ 133 $ 61 $ 59 $ 59
Fair Value of Plan Assets at
End of Year $ 106 $ 51 $ - $ -
- -----------------------------------------------------------------------------
At December 31, 2002, the pension benefit obligation exceeded the fair
value of Plan Assets for all three defined benefit plans maintained by TEP.
At December 31, 2001, the benefit obligation exceeded the fair value of Plan
Assets for only two of the three plans.
TEP recorded a minimum pension liability of $6.7 million on one of its
defined benefit plans at December 31, 2002. The adjustment is reflected in
other comprehensive income and other long-term liabilities, as appropriate,
and is prescribed when the accumulated benefit obligation in the plan exceeds
the fair value of the underlying pension plan assets and accrued pension
liabilities. The adjustment is primarily attributable to current stock market
conditions and a reduction in the assumed discount rate.
The components of net periodic benefit costs are as follows:
Other Postretirement
Pension Benefits Benefits
-------------------- --------------------
Years Ended December 31,
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------
-Millions of Dollars-
Components of Net Periodic Cost
Service Cost $ 5 $ 4 $ 4 $ 2 $ 2 $ 1
Interest Cost 8 7 7 4 4 3
Expected Return on Plan Assets (11) (12) (11) - - -
Prior Service Cost Amortization 2 2 2 - - -
Recognized Actuarial (Gain) Loss - (2) (1) 2 2 1
Amortization of Transition Asset - - - - - 1
- -----------------------------------------------------------------------------
Net Periodic Benefits Cost
(Benefit) $ 4 $ (1) $ 1 $ 8 $ 8 $ 6
=============================================================================
Other Postretirement
Pension Benefits Benefits
-------------------- --------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------
Actuarial Assumptions as of
December 1,
Discount Rate 6.75% 7.25% 6.75% 7.25%
Rate of Compensation Increase 4.00% 4.00% - -
Expected Return on Plan Assets 8.75% 9.00% - -
Initial Health Care Cost Trend
Rate - - 12.00% 8.50%
- -----------------------------------------------------------------------------
The initial health care cost trend rate as of December 1, 2002 was
assumed to decrease gradually to 5.00% in 2011 and beyond.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects on the
December 31, 2002 amounts:
One-Percentage- One-Percentage-
Point Increase Point Decrease
------------------------------------------------------------------------
-Millions of Dollars-
Effect on Total of Service and
Interest Cost Components $ 1 $ (1)
Effect on Postretirement Benefit
Obligation $ 5 $ (4)
------------------------------------------------------------------------
DEFINED CONTRIBUTION PLANS
All regular employees may contribute a percentage 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. TEP incurred approximately
$3 million in expense related to these plans in each of 2002, 2001 and 2000.
STOCK-BASED COMPENSATION PLANS
On May 20, 1994, the Shareholders approved two stock-based compensation
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.
In May 2002, the Directors' Plan was amended to provide each eligible
director an annual award of non-qualified stock options to be determined as
of the first business day of the calendar year. The number of options
granted will be calculated by dividing $10,000 by the option's Black-Scholes
value on the date of grant. Additionally, each eligible director received an
initial award in May 2002 for a number of restricted shares of Common Stock
equal to $10,000 divided by the fair market value of a share of Common Stock
as of that date. Similar awards will be granted annually on the first
business day of each calendar year during the term of the plan. Each
participant may elect to receive stock units in lieu of restricted shares.
The restricted shares or stock units become 100% vested on the third
anniversary of the grant date. Compensation expense equal to the fair market
value on the date of award is recognized over the vesting period. In May
2002, 516 shares or units were awarded to each of nine directors. The total
number of shares of UniSource Energy Common Stock that may be awarded under
the Directors' Plan cannot exceed 324,000 shares.
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; stock units; 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 4.1 million. There
were no stock unit awards granted in 2002 or 2001. Stock unit awards of
10,000 units were granted in 2000. Compensation expense equal to the fair
market value on the date of the award is recognized over a three or four year
vesting period for all stock unit awards. During 2002, 2001 and 2000, TEP
recognized compensation expense for stock unit awards of $0.5 million, $0.9
million and $0.9 million, respectively.
Stock Options
-------------
The Compensation Committee granted stock options to key employees during
2002, 2001, and 2000. 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 of the
grant.
A summary of the stock option activity of the 1994 Directors' Plan and
1994 Omnibus Plan is as follows:
2002 2001 2000
- -----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------
Options Outstanding,
Beginning of Year 2,075,234 $15.05 1,918,077 $14.36 1,390,033 $14.01
Granted 590,000 $18.14 410,000 $17.96 601,000 $15.14
Exercised (64,851) $14.42 (177,602) $14.56 (7,749) $12.88
Forfeited (23,564) $15.46 (75,241) $14.60 (65,207) $14.10
---------- ---------- ----------
Options Outstanding,
End of Year 2,576,819 $15.77 2,075,234 $15.05 1,918,077 $14.36
========== ========== ==========
Options Exercisable,
End of Year 1,442,179 $14.47 1,081,162 $14.38 856,656 $14.67
Exercise Price Range of Options Outstanding at December 31, 2002: $11.00
to $18.84
Weighted Average Remaining Contractual Life at December 31, 2002: 6.94
- -----------------------------------------------------------------------------
As discussed in Note 1, we apply APB 25 in accounting for our stock
option plans. Accordingly, we have not recognized any compensation cost for
these options. We have also adopted the disclosure-only provisions of FAS
123. As required by FAS 148, the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of FAS 123
to stock-based employee compensation is presented in Note 1.
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:
2002 2001 2000
-------------------------------
Expected life (years) 5 5 5
Interest rate 1.45% 4.70% 6.10%
Volatility 23.74% 23.93% 23.04%
Dividend yield 2.83% 2.08% 2.14%
Stock options awarded after January 1, 2002 accrue dividend equivalents
that are paid in cash on the earlier of the date of exercise of the
underlying option or the date the option expires. Compensation expense is
recognized as dividends are declared. In 2002, TEP recognized compensation
expense of $0.3 million for dividend equivalents on stock option grants.
NOTE 14. UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
- ---------------------------------------------------
Basic EPS is computed by dividing net income 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 EPS and the effects of potential dilutive
common stock on the weighted average number of shares:
Years Ended December 31,
2002 2001 2000
-----------------------------------------------------------------------
-In Thousands-
Basic EPS: (except per share data)
Numerator:
Income Before Cumulative Effect of
Accounting Change $33,275 $60,875 $41,891
Cumulative Effect of Accounting Change - 470 -
-----------------------------------------------------------------------
Net Income $33,275 $61,345 $41,891
=======================================================================
Denominator:
Average Shares of Common Stock
Outstanding 33,665 33,399 32,445
=======================================================================
Basic EPS:
Before Cumulative Effect of Accounting
Change $0.99 $1.83 $1.29
Cumulative Effect of Accounting Change - 0.01 -
-----------------------------------------------------------------------
Net Income $0.99 $1.84 $1.29
=======================================================================
Diluted EPS:
Numerator:
Income Before Cumulative Effect of
Accounting Change $33,275 $60,875 $41,891
Cumulative Effect of Accounting
Change - 470 -
-----------------------------------------------------------------------
Net Income $33,275 $61,345 $41,891
=======================================================================
Denominator:
Average Shares of Common Stock
Outstanding 33,665 33,399 32,445
Effect of Dilutive Securities:
Warrants 81 143 -
Options and Stock Issuable under
Employee Benefit Plans 476 625 434
-----------------------------------------------------------------------
Total Shares 34,222 34,167 32,879
=======================================================================
Diluted EPS:
Before Cumulative Effect of Accounting
Change $0.97 $1.79 $1.27
Cumulative Effect of Accounting Change - 0.01 -
-----------------------------------------------------------------------
Net Income $0.97 $1.80 $1.27
=======================================================================
Options to purchase an average of 525,000 shares of common stock at
$16.56 to $18.84 per share were outstanding during the year 2002 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 stock.
At December 31, 2002, UniSource Energy had no outstanding warrants.
There were 4.6 million warrants that were exercisable into TEP common stock
until December 15, 2002, when they expired. See Note 9. The dilutive effect
of these warrants was the same as it would have been if the warrants were
exercisable into UniSource Energy Common Stock.
NOTE 15. ASSET PURCHASE AGREEMENTS
- -----------------------------------
On October 29, 2002, UniSource Energy entered into two Asset Purchase
Agreements with Citizens Communications Company (Citizens) for the purchase
by UniSource Energy of Citizens' Arizona electric utility and gas utility
businesses for a total of $230 million in cash. The purchase price of each
is subject to adjustment based on the date on which the transaction is closed
and, in each case, on the amount of certain assets and liabilities of the
purchased business at the time of closing. If the transaction closes before
July 28, 2003, the purchase price is reduced by $10 million. If the
transaction closes after October 29, 2003, the purchase price is increased by
$5 million. In addition, the purchase price in each transaction may also be
adjusted if there is a casualty loss, governmental taking, or discovery of
substantial additional environmental liabilities, in each case subject to
materiality thresholds, prior to the closing. UniSource Energy will assume
certain liabilities associated with the purchased assets, but will not assume
Citizens' obligations under the industrial development revenue bonds issued
to finance certain of the purchased assets for which Citizens will remain the
economic obligor. The asset purchases are expected to close in the second
half of 2003 after the conditions to the consummation of the transactions,
including federal and state regulatory approvals, are satisfied or waived.
The closing of the transactions is subject to approval by the ACC, the
FERC and the SEC under the Public Utility Holding Company Act of 1935, as
amended. The closing is also subject to the filing of the requisite
notification with the Federal Trade Commission and the Department of Justice
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other
customary closing conditions.
The Asset Purchase Agreements are subject to termination if the closing
has not occurred within 15 months of the date of the Asset Purchase
Agreements (subject to extension in limited circumstances), if a governmental
authority seeks to prohibit the transactions, if required regulatory
approvals are not obtained with satisfactory terms and conditions, or if
either party is in material breach and such breach is not cured. If one
Asset Purchase Agreement is terminated, the other will also be automatically
terminated. If the Asset Purchase Agreements are terminated by Citizens due
to UniSource Energy's breach, UniSource Energy must pay to Citizens a $25
million termination fee as liquidated damages. If the Asset Purchase
Agreements are terminated by UniSource Energy due to Citizen's breach,
Citizens must pay to UniSource Energy a $10 million termination fee as
liquidated damages. The termination fees are also payable in certain other
limited circumstances.
Citizens had two cases pending before the ACC requesting rate relief for
both the Arizona electric and Arizona gas assets prior to entering into the
Asset Purchase Agreements with UniSource Energy. In December 2002, UniSource
Energy and Citizens filed a Joint Application with the ACC requesting smaller
increases in both pending cases. Under the proposal, UniSource Energy asked
that the 45% electric rate increase requested by Citizens be reduced to 22%,
and that the 29% increase in gas rates be reduced to 23%. UniSource Energy
believes that the smaller proposed rate increases are sufficient in light of
the discounted purchase price. We are currently in settlement discussions
with the ACC Staff and intervenors regarding the Joint Application. The ACC
Administrative Law Judge set a hearing date of May 1, 2003 for this matter.
We currently anticipate the ACC to review this case and issue a decision by
June 2003.
We expect that the purchase price will be financed by funds from
UniSource Energy and its affiliates and debt secured by the purchased assets.
TEP is limited by its Credit Agreement, however, as to the amount of
affiliate investments it may make. UniSource Energy may also consider
financing a portion of the purchase with new equity, depending on market
conditions and other considerations. UniSource Energy expects to form a new
subsidiary to hold the purchased assets. This new subsidiary will maintain a
separate rate structure from TEP. If UniSource Energy is unable to obtain
financing and therefore fails to consummate the purchase of these assets,
this would constitute a breach under the contracts and termination damages of
$25 million would be payable.
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
WeUniSource Energy and TEP define Cash and Cash Equivalents as cash
(unrestricted demand deposits) and all highly liquid investments purchased
with aan original 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 19972002 2001 2000
- -----------------------------------------------------------------------------
- Thousands-Thousands of Dollars -Dollars-
Net Income $ 79,10733,275 $ 28,03261,345 $ 83,57241,891
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 Taxes127,923 120,346 114,038
Depreciation Recorded to Fuel and Investment
Tax Credit 12,407 966 (23,089)
Lease Payments Deferred 28,318 32,624 33,679
RegulatoryOther
O&M Expense 5,701 6,001 5,307
Coal Contract Amendment Fee (14,248) - 13,231
Amortization of Transition Recovery Asset 24,554 21,609 17,008
Net of Interest
ImputedUnrealized (Gain) Loss on Losses Recorded at
Present Value 2,302 3,657 (3,485)TEP Forward
Contracts and MEG Trading Activities (721) 564 -
Amortization of Deferred Debt-Related
Costs Includedincluded in Interest Expense 5,091 3,235 1,191
Reversal of Loss2,058 1,996 3,167
Provision - - (10,154)for Bad Debts 1,688 (529) 9,607
Deferred Contract Termination Fee 3,205 (6,154) (38,077)
UnremittedIncome Taxes 2,066 8,317 13,905
Losses of
Unconsolidated Subsidiaries 3,370 5,678 5,625
Emission Allowances (12,926) 11,368 (11,463)from Equity Method Entities 3,560 2,516 4,206
Gain on Sale of NewEnergy (34,651)Nations Energy's Curacao
Project - (10,737) -
Gain on Sale of Real Estate - (1,572) -
Other 4,175 103 (1,628)(11,114) (7,391) 4,878
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) - -40,465 (3,577) (57,423)
Materials and Fuel (5,579) (2,223) (3,649)Inventory (2,118) (653) (6,744)
Accounts Payable 36 (1,950) 6,103(35,193) 17,626 37,655
Interest Accrued 18,542 10,191 2,543
Taxes Accrued (929) 2,770 390(9,096) (907) 4,908
Other Current Assets and(12,199) (14,094) (7,647)
Other Current Liabilities (10,882) 78 7,2122,517 (4,328) 5,891
Other Deferred Assets and(14,120) (3,486) 4,958
Other Deferred Liabilities (8,646) (5,757) 1,9929,423 12,142 3,655
- -----------------------------------------------------------------------------
Net Cash Flows - Operating Activities $113,228 $160,933 $126,283$172,963 $215,379 $215,034
=============================================================================
TEP
----------------------------------
Years Ended December 31,
1999 1998 19972002 2001 2000
- -----------------------------------------------------------------------------
- Thousands-Thousands of Dollars -Dollars-
Net Income $ 73,47553,737 $ 41,67675,284 $ 83,57251,169
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 Taxes124,054 117,063 113,507
Depreciation Recorded to Fuel and Investment
Tax Credit 277 6,910 (23,089)
Lease Payments Deferred 28,318 32,624 33,679
RegulatoryOther
O&M Expense 5,701 6,001 5,307
Coal Contract Amendment Fee (14,248) - 13,231
Amortization of Transition Recovery Asset 24,554 21,609 17,008
Net of Interest
ImputedUnrealized (Gain) Loss on Losses Recorded at
Present Value 2,302 3,657 (3,485)Forward
Electric Sales and Purchases (533) 532 -
Amortization of Deferred Debt-Related
Costs Includedincluded in Interest Expense 5,091 3,235 1,191
Reversal of Loss2,058 1,996 3,167
Provision - - (10,154)for Bad Debts 1,688 (529) 9,607
Deferred Contract Termination Fee 3,205 (6,154) (38,077)
Unremitted (Earnings)Income Taxes 15,186 18,205 27,633
Losses of
Unconsolidated Subsidiaries (471) (1,017) 5,625
Emission Allowances (12,926) 11,368 (11,463)from Equity Method Entities 530 1,812 2,414
Interest Accrued on Note Receivable
from UniSource Energy 9,329 (9,329) - -
Gain on Sale of Real Estate - (1,572) -
Other 9,035 3,243 (1,628)2,830 2,437 157
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) - -35,192 (3,984) (56,255)
Materials and Fuel (5,540) (2,218) (3,649)Inventory (1,331) 165 (6,276)
Accounts Payable (2) 2,342 6,103(35,011) 15,238 36,981
Interest Accrued 18,542 10,191 2,543
Taxes Accrued (4,491) 2,717 390(4,428) (2,470) 7,218
Other Current Assets and(12,771) (1,229) (336)
Other Current Liabilities (9,164) 9,068 7,2122,683 (3,358) 973
Other Deferred Assets and(13,265) (5,194) 2,498
Other Deferred Liabilities (8,660) (5,759) 1,9927,678 8,972 3,644
- -----------------------------------------------------------------------------
Net Cash Flows - Operating Activities $139,957 $180,487 $126,283$203,517 $261,169 234,190
=============================================================================
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 19972002 2001 2000
- ------------------------------------------------------------------------------
- Thousands-----------------------------------------------------------------------------
-Thousands of Dollars -Dollars-
Capital Lease Asset* $26,019Obligations $11,604 $20,743 $ - $ -
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 -1,031
Notes Receivable received fromReceived From the saleSale of
NewEnergy 22,800Nations Energy's Curacao Project* - -
AES Stock received from the sale of NewEnergy 27,203 - -
NewEnergy Investment (15,351) -8,300 -
* These items wereThis item is a non-cash investing activity of Millennium, and
therefore, is not reflected on TEP's financial statementsstatements.
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 obligation2002, 2001,
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
4.2000.
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 16.17. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
UniSource Energy
-------------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------
- Thousands-----------------------------------------------------------------------------
-Thousands of Dollars -Dollars-
(except per share data)
19992002
Operating Revenues $160,510 $189,970 $264,691 $188,641$171,195 $227,203 $258,546 $199,278
Operating Income 22,923 33,363 56,010 45,14924,686 51,971 65,211 41,993
Net Income (Loss) (6,314) 11,888 22,819 4,882
Basic EPS (0.19) 0.35 0.68 0.14
Diluted EPS (0.19) 0.35 0.67 0.14
- -----------------------------------------------------------------------------
2001
Operating Revenues $283,665 $397,466 $420,389 $315,492
Operating Income 70,822 63,036 55,276 59,326
Income Before Extraordinary
Item (5,528) 3,708 51,669 6,661
Extraordinary IncomeCumulative Effect of
Accounting Change 18,795 13,254 15,548 13,278
Cumulative Effect of Accounting
Change - Net of Tax 470 - - -
22,597
Net Income (Loss) (5,528) 3,708 51,669 29,25819,265 13,254 15,548 13,278
Basic Earnings Per Share:EPS:
- -------------------------------------------------
Income (Loss) Before Extraordinary Item (0.17) 0.11 1.60 0.21
Extraordinary IncomeCumulative Effect of
Accounting Change 0.57 0.40 0.46 0.40
Cumulative Effect of Accounting
Change - Net of Tax 0.01 - - -
0.70Net Income (Loss) After Extraordinary
Item (0.17) 0.11 1.60 0.900.58 0.40 0.46 0.40
Diluted Earnings Per Share:EPS:
- -----------------------------------------------------
Income (Loss) Before Extraordinary Item (0.17) 0.11 1.58 0.20
Extraordinary IncomeCumulative Effect of
Accounting Change 0.56 0.39 0.45 0.39
Cumulative Effect of Accounting
Change - Net of Tax 0.01 - - -
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 0.010.57 0.39 0.45 0.39
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
TEP
-------------------------------------------------------------------------------
First Second Third Fourth
- ----------------------------------------------------------------------------
1999-----------------------------------------------------------------------------
-Thousands of Dollars-
2002
Operating Revenues $160,636 $189,983 $264,756 $188,708$169,577 $226,362 $257,022 $198,132
Operating Income 23,049 33,376 56,075 45,21629,170 58,163 71,833 50,009
Interest Income - Note Receivable
from UniSource Energy 2,525 2,554 2,5062,301 2,325 2,352 Income (Loss) Before Extraordinary
Item (1,320) 8,355 31,933 11,910
Extraordinary Income - Net of Tax - - - 22,5972,351
Net Income (Loss) (1,320) 8,355 31,933 34,507(1,930) 17,467 26,562 11,638
- ----------------------------------------------------------------------------
1998-----------------------------------------------------------------------------
2001
Operating Revenues $161,003 $179,686 $253,280 $175,021$281,800 $394,878 $418,210 $313,781
Operating Income 23,882 29,949 54,661 27,01074,875 66,875 60,077 63,657
Interest Income - Note Receivable
from UniSource Energy 2,300 2,3262,327 2,351 2,352
2,351Income Before Cumulative Effect of
Accounting Change 23,041 18,904 14,440 18,429
Cumulative Effect of Accounting
Change - Net of Tax 470 - - -
Net Income (Loss) (1,607) 8,073 29,374 5,83623,511 18,904 14,440 18,429
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
EPS is computed independently for each of the quarters presented.
Therefore, the sum of the quarterly EPS do not necessarily equal the total
for the year.
Due to seasonal fluctuations in TEP'sTEP'S sales and unusual items, the quarterlyeach
quarter's results areis not indicative of annual operating results. Thethe
principal unusual items for TEP and UniSource Energy and TEP include:
TEP
- Third Quarter 1998:2002: TEP changedrecorded a one-time $11.3 million pre-tax
expense related to the termination of the Irvington coal contract. See
Note 10. TEP also recognized a $2 million tax benefit due to the
resolution of various tax items. See Note 12.
- First Quarter 2001: TEP recorded a $0.5 million unrealized gain for the
cumulative effects of adopting FAS 133 for its methodforward wholesale trading
activity. See Note 3.
In addition to the unusual TEP items mentioned above, UniSource Energy
results include:
- Third Quarter 2002: Millennium recognized a $2.8 million tax benefit due
to the resolution of estimating unbilled
revenues to more accurately reflect revenues between months.
If we had continued usingvarious tax items. See Note 12.
- Third Quarter 2001: Nations Energy recorded a pre-tax gain of $11
million from the previous methodsale of calculating
unbilled revenues, revenues forits 26% equity interest in a power project located
in Curacao, Netherland Antilles. See Note 4.
In the third quarter of 1998 would
have been2002, TEP began reporting purchase and sale
transactions under a Resource Management agreement with one of its
counterparties on a net basis, because TEP's purchases and sales to this
counterparty exactly offset each other and are made only for scheduling
purposes. TEP reclassified purchased power related to its purchases from the
counterparty as a reduction of Electric Wholesale Revenues related to its
sales to the counterparty.
In the second quarter of 2001, TEP began reporting Unrealized Gain
(Loss) on Forward Purchases net of Unrealized Gain (Loss) on Forward Sales as
a component of Operating Revenues. In the first quarter of 2001, TEP
presented Unrealized Gain (Loss) on Forward Purchases as a component of
Operating Expenses. Also, in the fourth quarter of 2001, UniSource Energy
and TEP consolidated Income Taxes into a single line item below Income Before
Income Taxes, Extraordinary Item and Cumulative Effect of Accounting Change.
Previously, Income Taxes were included in Operating Expenses and Other Income
(Deductions).
UniSource Energy
----------------------------------------
First Second Third Fourth
- -----------------------------------------------------------------------------
-Thousands of Dollars-
2002
Operating Revenues - Historical $180,267 $236,375 $258,546 $199,278
Reclassification (9,072) (9,172) - -
Operating Revenues - Restated 171,195 227,203 258,546 199,278
- -----------------------------------------------------------------------------
2001
Operating Revenues - Historical $241,206 $406,615 $429,662 $324,766
Reclassification 42,459 (9,149) (9,273) (9,274)
Operating Revenues - Restated 283,665 397,466 420,389 315,492
Operating Income - Historical $ 57,250 $ 52,587 $ 47,846 $ 59,326
Reclassification 13,572 10,449 7,430 -
Operating Income - Restated 70,822 63,036 55,276 59,326
- -----------------------------------------------------------------------------
TEP
----------------------------------------
First Second Third Fourth
- -----------------------------------------------------------------------------
-Thousands of Dollars-
2002
Operating Revenues - Historical $178,649 $235,534 $257,022 $198,132
Reclassification (9,072) (9,172) - -
Operating Revenues - Restated 169,577 226,362 257,022 198,132
- -----------------------------------------------------------------------------
2001
Operating Revenues - Historical $239,341 $404,027 $427,483 $323,055
Reclassification 42,459 (9,149) (9,273) (9,274)
Operating Revenues - Restated 281,800 394,878 418,210 313,781
Operating Income - Historical $ 59,680 $ 54,889 $ 50,721 $ 63,657
Reclassification 15,195 11,986 9,356 -
Operating Income - Restated 74,875 66,875 60,077 63,657
- -----------------------------------------------------------------------------
Schedule II - Valuation and Qualifying Accounts
Additions-
Beginning Charged to Ending
Description Balance Income(1) Deductions(2) Balance
- -------------------------------------------------------------------------------
Year Ended December 31, -Millions of Dollars-
Allowance for Doubtful Accounts
2002 $ 9.2 $ 1.7 $ 1.9 $ 9.0
2001 9.7 1.3 1.8 9.2
2000 6.9 10.2 7.4 9.7
- -------------------------------------------------------------------------------
(1) TEP recorded $7 million greater.
- Fourth Quarter 1999:of expense in the first quarter of 2001 and $9
million in the fourth quarter of 2000 to reserve for uncollectible amounts
related to sales to the state of California in 2000 and the first quarter
of 2001. TEP reversed $8 million of the $16 million reserve in the fourth
quarter of 2001 (see Note 11 of Notes to Consolidated Financial
Statements).
(2) Deductions principally reflect amounts charged off as uncollectible, less
amounts recovered.
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'sUniSource Energy's Proxy Statement
relating to the 20002003 Annual Meeting of Shareholders, which will be filed with
the SEC not later than 120 days after December 31, 1999,2002, which information is
incorporated herein by reference.
EXECUTIVE OFFICERS ------------------- UNISOURCE ENERGY
-------------------------------------
Executive Officers of UniSource Energy who are elected annually by
the Company'sUniSource Energy's Board of Directors, are as follows:
Executive
Officer
Name Age Title Since
- ---- --- ---- ---------
Executive
Officer
Name Age Position(s) Held Since
------------------------------------------------------------------------------------------------
James S. Pignatelli 59 Chairman, President and Chief Executive Officer 1998
Michael J. DeConcini 38 Senior Vice President, Investments and Planning 1999
Dennis R. Nelson 52 Senior Vice President, Utility Services 1998
Karen G. Kissinger 48 Vice President, Controller and Chief Compliance Officer 1998
Kevin P. Larson 46 Vice President, Chief Financial Officer and Treasurer 2000
Steven W. Lynn 56 Vice President, Communications and Government Relations 2003
Vincent Nitido, Jr. 47 Vice President, General Counsel and Chief Administrative
Officer 2000
Catherine A. Nichols 44 Corporate Secretary 2003
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
Pignatelli 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:Michael J. Mr. AdlerDeConcini joined TEP in 1986 as1988 and served in various
DeConcini positions in finance, strategic planning and wholesale
marketing. He was Manager of Financial Planning.TEP's Wholesale Marketing
Department in 1994, adding Product Development and Business
Development in 1997. In 1987November 1998, 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 - Financeof MEH, and Treasurer in
July 1989 and was elected Senior Vice President, and Chief Financial
OfficerStrategic
Planning of UniSource Energy in July 1990 and President of TRI and SRI in April 1992.February 1999. He was named
Senior Vice President, Chief Financial OfficerInvestments and TreasurerPlanning of UniSource
Energy in January 1998.October 2000. Mr. AdlerDeConcini was named
Executiveelected Senior Vice
President of the Energy Resources business unit 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)effective January 1, 2003.
Dennis R. Nelson: Mr. Nelson joined TEP as a staff attorney in 1976. He was
Nelson 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)In October 2000, he was named Senior Vice President,
Governmental Affairs of UniSource Energy and Senior Vice
President and Chief Operating Officer of the Energy Resources
business unit of TEP. Mr. Nelson was elected Senior Vice
President of Utility Services, effective January 1, 2003.
Karen G. Kissinger: Ms. Kissinger joined TEP as Vice President and Controller
Kissinger 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, sheShe 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 Planningnamed Chief Compliance
Officer of UniSource Energy in February 1999.
(f) Thomas A. Delawder: Mr. Delawder joinedand 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 ineffective 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)1,
2003.
Kevin P. Larson: Mr. Larson joined TEP in 1985 and thereafter held various
Larson 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)In October 2000, he was elected Vice President
and Chief Financial Officer of both UniSource Energy and TEP
and remains Treasurer of both organizations.
Steven W. Mr. Lynn joined TEP in 2000 as Manager of Corporate Relations
Lynn for UniSource Energy and was named Manager of Corporate
Relations of both TEP and UniSource Energy during 2000. In
January 2003, he was elected Vice President of Communications
and Government Relations at UniSource Energy and TEP. Prior
to joining TEP, Mr. Lynn was an owner-partner from 1984 - 2000
of Nordensson Lynn & Associates, Inc.
Vincent Nitido, Jr.: Mr. Nitido joined TEP as a staff attorney in 1991. He
Nitido, Jr. 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,In October 2000, 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)General
Counsel of both UniSource Energy and TEP and Corporate
Secretary of UniSource Energy. Mr. Nitido was also named
Chief Administrative Officer of UniSource Energy and TEP,
effective January 1, 2003.
Catherine A. Nichols: Ms. Nichols joined TEP as a staff attorney in 1989.
Nichols She was promoted to Manager of the Legal Department and
elected Corporate Secretary of TEP in 1998. She assumed the
additional role of Manager of the Human Resources Department
in 1999. Ms. Nichols was elected Corporate Secretary of
UniSource Energy, effective January 1, 2003, and remains
Corporate Secretary of TEP.
EXECUTIVE OFFICERS - TUCSON ELECTRIC POWER COMPANY
--------------------------------------------------
Executive Officers of TEP who are elected annually by TEP's Board of
Directors, are:
Executive
Officer
Name Age Position(s) Held Since
------------------------------------------------------------------------------------------------
James S. Pignatelli 59 Chairman, President and Chief Executive Officer 1994
Michael J. DeConcini 38 Senior Vice President, Energy Resources Business Unit 2003
Steven J. Glaser 45 Senior Vice President and Chief Operating Officer,
Transmission and Distribution Business Unit 1994
Thomas A. Delawder 56 Vice President, Energy Resources Business Unit 1985
Thomas N. Hansen 52 Vice President / Technical Advisor 1992
Karen G. Kissinger 48 Vice President, Controller and Chief Compliance Officer 1991
Kevin P. Larson 46 Vice President, Chief Financial Officer and Treasurer 1994
Steven Lynn W. 56 Vice President, Communications and Government Relations 2003
Vincent Nitido, Jr. 47 Vice President, General Counsel and Chief Administrative
Officer 1998
James Pyers 61 Vice President, Utility Distribution Business Unit,
Operations 1998
Catherine A. Nichols 44 Corporate Secretary 1998
James S.
Pignatelli See description shown under UniSource Energy Corporation above.
Michael J.
DeConcini See description shown under UniSource Energy Corporation above.
Steven J. Mr. Glaser joined TEP in 1990 as a Senior Attorney in
Glaser 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. In October 2000, he was
named Senior Vice President and Chief Operating Officer of the
Transmission and Distribution business unit.
Thomas A. Mr. Delawder joined TEP in 1974 and thereafter served in
Delawder 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 of the
Energy Resources business unit.
Thomas N. Mr. Hansen joined TEP in December 1992 as Vice President,
Hansen 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
Advisor.
Karen G.
Kissinger See description shown under UniSource Energy Corporation above.
Kevin P.
Larson See description shown under UniSource Energy Corporation above.
Steven W.
Lynn See description shown under UniSource Energy Corporation above.
Vincent
Nitido, Jr. See description shown under UniSource Energy Corporation above.
James Mr. Pyers joined TEP in 1974 as a Supervisor. Thereafter, he
Pyers held various supervisory positions and was promoted to Manager
of Customer Service Operations in February 1998. Mr. Pyers
was elected Vice President, Utility Distribution business
unit, Operations in November 1998.
Catherine A.
Nichols See description shown under UniSource Energy Corporation above.
ITEM 11. - EXECUTIVE COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------------------------------------
Information concerning Executive Compensation will be contained under
Executive Compensation and Other Information in the
Company'sUniSource Energy's Proxy
Statement relating to the 20002003 Annual Meeting of Shareholders, which will be
filed with the SEC not later than 120 days after December 31, 1999,2002, which
information is incorporated herein by reference.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - -------------------------------------------------------------------
MANAGEMENT
- ---------------------------------------------------------------------------------------------------------------------------------------------------
GENERAL
-------
At February 24, 2000,March 4, 2003, UniSource Energy had outstanding 32,357,71833,583,182 shares of
Common Stock. As of February 24, 2000,March 4, 2003, the number of shares of Common Stock
beneficially owned by all directors and officers of the CompanyUniSource Energy as a
group amounted to 1%approximately 3% of the outstanding Common Stock.
At February 24, 2000,March 4, 2003, UniSource Energy owned allgreater than 99.9% 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'sUniSource Energy's Proxy Statement relating to
the 20002003 Annual Meeting of Shareholders, which will be filed with the SEC not
later than 120 days after December 31, 1999,2002, 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'sUniSource Energy's Proxy Statement
relating to the 20002003 Annual Meeting of Shareholders, which will be filed with
the SEC not later than 120 days after December 31, 1999,2002, which information is
incorporated herein by reference.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information concerning securities authorized for issuance under equity
compensation plans will be contained under Securities Authorized for Issuance
under Equity Compensation Plans in UniSource Energy's Proxy Statement
relating to the 2003 Annual Meeting of Shareholders, which will be filed with
the SEC not later than 120 days after December 31, 2002, which information is
incorporated herein by reference.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------------
None.
--------------------------------------------------------------------------------
Information concerning certain relationships and related transactions of
UniSource Energy and TEP will be contained under Transactions with Management
and Others and Compensation Committee Interlocks and Insider Participation in
UniSource Energy's Proxy Statement relating to the 2003 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120 days after
December 31, 2002, which information is incorporated herein by reference.
PART IV
ITEM 14. - CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
UniSource Energy and TEP have disclosure controls and procedures to
ensure that material information contained in their filings with the SEC is
recorded, processed, summarized and reported on an accurate and timely basis.
The principal executive officer and principal financial officer of UniSource
Energy and TEP have evaluated these disclosure controls and procedures as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended, within 90 days prior to the filing of this report. Based
on such evaluation, the principal executive officer and principal financial
officer of UniSource Energy and TEP have concluded that such disclosure
controls and procedures are effective at ensuring that material information
is recorded, processed, summarized and reported accurately and within the
time periods specified by the SEC's rules and forms. Since such evaluation
there have not been any significant changes in UniSource Energy and TEP's
internal controls, or in other factors that could significantly affect these
controls.
ITEM 15. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON - -------------------------------------------------------------------
FORM 8-K
- ---------------------------------------------------------------------------------------------------------------------------------------------------
Page
----
(a) 1. Consolidated Financial Statements as of
December 31, 19992002 and 19982001 and for Each
of the Three Years in the Period Ended
December 31, 1999.2002.
UniSource Energy Corporation
----------------------------
Independent Auditors' Report 42
Report of Independent Accountants 4355
Consolidated Statements of Income 4456
Consolidated Statements of Cash Flows 4557
Consolidated Balance Sheets 4658
Consolidated Statements of Capitalization 4759
Consolidated Statements of Changes in Stockholders'
Equity 4860
Notes to Consolidated Financial Statements 5466
Tucson Electric Power Company
-----------------------------
Independent Auditors' Report 42
Report of Independent Accountants 4355
Consolidated Statements of Income 4961
Consolidated Statements of Cash Flows 5062
Consolidated Balance Sheets 5163
Consolidated Statements of Capitalization 5264
Consolidated Statements of Changes in Stockholders'
Equity 5365
Notes to Consolidated Financial Statements 5466
2. Supplemental ConsolidatedFinancial Statement 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.Schedule II
Valuation and Qualifying Accounts 106
3. Exhibits.
Reference is made to the Exhibit Index commencing on page 93121.
(b) Reports on Form 8-K.
UniSource Energy Corporation and Tucson Electric Power Company
--------------------------------------------------------------
- Form 8-K, dated August 9, 2002 (filed August 9, 2002) regarding
Officer Sworn Statements pursuant to Order 4-460 and Section 21
(a)(1) of the Securities Exchange Act of 1934.
- Form 8-K, dated November 22, 199925, 2002 (filed December 2, 1999),
reporting on approval of Settlement Agreement byNovember 27, 2002)
regarding the ACC.new TEP bank credit agreement.
UniSource Energy Corporation
----------------------------
- Form 8-K, dated December 3, 1999October 31, 2002 (filed December 6, 1999),
reporting on declaration of divided payable to shareholders
ofOctober 31, 2002) regarding
UniSource Energy common stock.Purchase of Citizens Communications Company
Electric Utility Business and Gas Utility Business in Arizona.
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 By10, 2003 By: /s/ Ira R. Adler
----------------------------
IRA R. ADLER
ExecutiveKevin P. Larson
----------------------------------------
Kevin P. Larson
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, 200010, 2003 /s/ James S. Pignatelli*
---------------------------------------------------------------------
James S. Pignatelli
Chairman of the Board, President and
Principal Executive Officer
Date: March 8, 200010, 2003 /s/ Ira R. Adler
----------------------------
Ira R. Adler
Executive Vice President,Kevin P. Larson
-----------------------------------------
Kevin P. Larson
Principal Financial Officer
and Director
Date: March 8, 200010, 2003 /s/ Karen G. Kissinger*
---------------------------------------------------------------------
Karen G. Kissinger
Principal Accounting Officer
Date: March 8, 200010, 2003 /s/ Lawrence J. Aldrich*
-----------------------------------------
Lawrence J. Aldrich
Director
Date: March 10, 2003 /s/ Larry W. Bickle*
----------------------------------------------------------------------
Larry W. Bickle
Director
Date: March 8, 200010, 2003 /s/ Elizabeth T.Bilby*
-----------------------------T. Bilby*
-----------------------------------------
Elizabeth T. Bilby
Director
Date: March 8, 200010, 2003 /s/ Harold W.Burlingame*
-----------------------------W. Burlingame*
-----------------------------------------
Harold W.Burlingame,W. Burlingame
Director
Date: March 8, 2000 /s/ Jose L. Canchola*
-----------------------------
Jose L. Canchola,Director
Date: March 8, 200010, 2003 /s/ John L. Carter*
----------------------------------------------------------------------
John L. Carter
Director
Date: March 8, 200010, 2003 /s/ Daniel W. L. Fessler*
----------------------------------------------------------------------
Daniel W. L. Fessler
Director
Date: March 8, 200010, 2003 /s/ John A. Jeter*
-----------------------------
John A. Jeter,Kenneth Handy*
-----------------------------------------
Kenneth Handy
Director
Date: March 8, 200010, 2003 /s/ R. B. O'Rielly*
-----------------------------
R. B. O'Rielly,Warren Y. Jobe*
-----------------------------------------
Warren Y. Jobe
Director
Date: March 8, 2000 /s/ Martha R. Seger*
-----------------------------
Martha R. Seger, Director
Date: March 8, 200010, 2003 /s/ H. Wilson Sundt*
----------------------------------------------------------------------
H. Wilson Sundt
Director
Date: March 8, 2000 By10, 2003 By: /s/ Ira R. Adler
-----------------------------
Ira R. AdlerKevin P. Larson
-----------------------------------------
Kevin P. Larson
as attorney-in-fact for each
of the persons indicated
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 By10, 2003 By: /s/ Ira R. Adler
-----------------------------
IRA R. ADLER
ExecutiveKevin P. Larson
-----------------------------------------
Kevin P. Larson
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, 200010, 2003 /s/ James S. Pignatelli*
----------------------------------------------------------------------
James S. Pignatelli
Chairman of the Board, President and
Principal Executive Officer
Date: March 8, 200010, 2003 /s/ Ira R. Adler
----------------------------
Ira R. Adler
Executive Vice President,Kevin P. Larson
-----------------------------------------
Kevin P. Larson
Principal Financial Officer
and Director
Date: March 8, 200010, 2003 /s/ Karen G. Kissinger*
----------------------------------------------------------------------
Karen G. Kissinger
Principal Accounting Officer
Date: March 8, 200010, 2003 /s/ Lawrence J. Aldrich*
-----------------------------------------
Lawrence J. Aldrich
Director
Date: March 10, 2003 /s/ Elizabeth T. Bilby*
----------------------------------------------------------------------
Elizabeth T. Bilby
Director
Date: March 8, 200010, 2003 /s/ Harold W. Burlingame*
----------------------------------------------------------------------
Harold W. Burlingame
Director
Date: March 8, 200010, 2003 /s/ John.John L. Carter*
----------------------------------------------------------------------
John L. Carter
Director
Date: March 8, 200010, 2003 /s/ Daniel W. L. Fessler*
----------------------------------------------------------------------
Daniel W. L. Fessler
Director
Date: March 8, 200010, 2003 /s/ John A. Jeter*
-----------------------------
John A. JeterKenneth Handy*
-----------------------------------------
Kenneth Handy
Director
Date: March 8, 200010, 2003 /s/ Martha R. Seger*
-----------------------------
Martha R. SegerWarren Y. Jobe*
-----------------------------------------
Warren Y. Jobe
Director
Date: March 8, 2000 By10, 2003 By: /s/ Ira R. Adler
-----------------------------
Ira R. AdlerKevin P. Larson
-----------------------------------------
Kevin P. Larson
as attorney-in-fact for each
of the persons indicated
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act
I, James S. Pignatelli, certify that:
1. I have reviewed this annual report on Form 10-K of UniSource Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/ James S. Pignatelli
-------------- ----------------------------------------------
James S. Pignatelli
Chairman, President, and
Chief Executive Officer
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act
I, Kevin P. Larson, certify that:
1. I have reviewed this annual report on Form 10-K of UniSource Energy
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/ Kevin P. Larson
-------------- ----------------------------------------------
Kevin P. Larson
Vice President, Chief Financial Officer
and Treasurer
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act
I, James S. Pignatelli, certify that:
1. I have reviewed this annual report on Form 10-K of Tucson Electric
Power Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/ James S. Pignatelli
-------------- ----------------------------------------------
James S. Pignatelli
Chairman, President, and
Chief Executive Officer
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act
I, Kevin P. Larson, certify that:
1. I have reviewed this annual report on Form 10-K of Tucson Electric
Power Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/ Kevin P. Larson
-------------- ----------------------------------------------
Kevin P. Larson
Vice President, Chief Financial Officer
and Treasurer
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-Exhibit1-5924 -- 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--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-Exhibit1-13739
-- 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-Exhibit1-13739 --
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--Exhibit2-59906 -- Exhibit 2(b)(1).)
*4(a)(2) -- First Supplemental Indenture, dated as of October 1, 1946.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(2).)
*4(a)(3) -- Second Supplemental Indenture dated as of October 1, 1947.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(3).)
*4(a)(4) -- Third Supplemental Indenture, dated as of April 1, 1949.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(4).)
*4(a)(5) -- Fourth Supplemental Indenture, dated as of December 1, 1952.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(5).)
*4(a)(6) -- Fifth Supplemental Indenture, dated as of January 1, 1955.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(6).)
*4(a)(7) -- Sixth Supplemental Indenture, dated as of January 1, 1958.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(7).)
*4(a)(8) -- Seventh Supplemental Indenture, dated as of November 1, 1959.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(8).)
*4(a)(9) -- Eighth Supplemental Indenture, dated as of November 1, 1961.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(9).)
*4(a)(10)-- Ninth Supplemental Indenture, dated as of February 20, 1964.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(10).)
*4(a)(11)-- Tenth Supplemental Indenture, dated as of February 1, 1965.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(11).)
*4(a)(12)-- Eleventh Supplemental Indenture, dated as of February 1, 1966.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- 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--Exhibit2-59906 -- Exhibit 2(b)(14).)
*4(a)(15)-- Fourteenth Supplemental Indenture, dated as of September 1,
1971. (Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(15).)
*4(a)(16)-- Fifteenth Supplemental Indenture, dated as of March 1, 1972.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(16).)
*4(a)(17)-- Sixteenth Supplemental Indenture, dated as of May 1, 1973.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(17).)
*4(a)(18)-- Seventeenth Supplemental Indenture, dated as of November 1,
1975. (Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(18).)
*4(a)(19)-- Eighteenth Supplemental Indenture, dated as of November 1,
1975. (Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(19).)
*4(a)(20)-- Nineteenth Supplemental Indenture, dated as of July 1, 1976.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- Exhibit 2(b)(20).)
*4(a)(21)-- Twentieth Supplemental Indenture, dated as of October 1, 1977.
(Form S-7, File No. 2-59906--Exhibit2-59906 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924
-- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- Exhibit 4(a)(1).)
*4(a)(30)-- Twenty-ninth Supplemental Indenture, dated as of December 1,
1992. (Form S-1, Registration No. 33-55732--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--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-Exhibit1-5924 -- 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-Exhibit1-5924 -- 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--Exhibit0-269 -- 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--Exhibit0-269 -- 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--Exhibit1-5924
-- Exhibit 4(a).)
*4(b)(4) -- City of Farmington, New Mexico Ordinance No. 97-
1055,97-1055, 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--Exhibit1-5924 -- 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 the quarter ended September 30, 1982, File No. 1-5924--Exhibit1-5924
-- 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 the quarter ended September 30, 1982, File No.
1-5924--Exhibit1-5924 -- 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--Exhibit33-52860 -- 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,S-
4, Registration No. 33-52860--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 the
year ended December 31, 1982, File No. 1-5924--Exhibit1-5924 -- 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 the year ended December 31, 1982, File No. 1-5924--Exhibit1-5924
-- 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,S-4, Registration No.
33-52860--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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 the year ended December 31, 1983,
File No. 1-5924--Exhibit1-5924 -- 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 the year ended
December 31, 1983, File No. 1-5924--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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 the year ended December 31, 1983, File No.
1-5924--Exhibit1-5924 -- 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 the year ended December 31, 1983,
File No. 1-5924--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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--Exhibit1-5924
-- 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 the year ended December 31, 1983,
File No. 1-5924--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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--Exhibit1-5924 -- 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---Exhibit1-5924
-- 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--Exhibit1-5924 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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--Exhibit33-55732 -- Exhibit 4(r)(1).)
*4(k)*4(j)(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--Exhibit33-55732
-- Exhibit 4(r)(2).)
*4(k)*4(j)(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(j)(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)*4(j)(5) -- Supplemental Indenture No. 4 creating a series of bonds
designated Second Mortgage Bonds, Collateral Series C, dated
as of November 1, 2002. (Form 8-K dated November 27, 2002,
File Nos. 1-05924 and 1-13739 -- Exhibit 99.2.)
*4(k)(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-Exhibit1-5924 -- Exhibit
4(c).)
*4(l)*4(k)(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-Exhibit1-5924 -- Exhibit
4(d).)
*4(m)*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 B (Tucson
Electric Power Company Navajo Project). (Form 10-Q for the
quarter ended March 31, 1997, File No. 1-5924-Exhibit1-5924 -- Exhibit 4(e).)
*4(m)*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 B (Tucson
Electric Power Company Navajo Project). (Form 10-Q for the
quarter ended March 31, 1997, File No. 1-5924-Exhibit1-5924 -- Exhibit
4(f).)
*4(n)*4(m)(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-Exhibit1-5924 -- Exhibit
4(a).)
*4(n)*4(m)(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-Exhibit1-5924 -- Exhibit 4(b).)
*4(o)*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
B (Tucson Electric Power Company Project). (Form 10-Q for the
quarter ended September 30, 1997, File No. 1-5924-Exhibit1-5924 -- Exhibit
4(c).)
*4(o)*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 B (Tucson
Electric Power Company Project). (Form 10-Q for the quarter
ended September 30, 1997, File No. 1-
5924-Exhibit1-5924 -- Exhibit 4(d).)
*4(p)*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
C (Tucson Electric Power Company Project). (Form 10-Q for the
quarter ended September 30, 1997, File No. 1-5924-Exhibit1-5924 -- Exhibit
4(e).)
*4(p)*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 C (Tucson
Electric Power Company Project). (Form 10-Q for the quarter
ended September 30, 1997, File No. 1-
5924-Exhibit1-5924 -- Exhibit 4(f).)
*4(q)*4(p)(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)*4(p)(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)*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 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)*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 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)*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 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)*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
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)*4(s)(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)*4(t)(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 -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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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-- 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-
K10-K for the year
ended December 31, 1986, File No. 1-5924--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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--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--Exhibit1-5924 -- 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--Exhibit1-5924
-- 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--Exhibit1-5924
-- 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--Exhibit1-5924
-- 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,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--Exhibit33-52860 -- 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-- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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-- 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--Exhibit1-5924
-- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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--Exhibit33-55732 -- 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(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--Exhibit1-5924 -- 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--Exhibit1-5924
-- 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--Exhibit1-5924 -- 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--Exhibit33-52860 -- 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--Exhibit33-52860 -- 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,S-1, Registration No. 33-55732--Exhibit33-55732
-- 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--Exhibit33-55732 -- Exhibit
10(g)(7).)
10(b)*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. (Form 10-K for the
year ended December 31, 1999, File No. 1-5924 -- Exhibit
10(b)(8).)
*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. (Form 10-K for
the year ended December 31, 1999, File No. 1-5924 -- Exhibit
10(b)(9).)
*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. (Form 10-K for the
year ended December 31, 1999, File No. 1-5924 -- Exhibit
10(b)(10).)
*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. (Form 10-K
for the year ended December 31, 1999, File No. 1-5924
-- Exhibit 10(b)(11).)
*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. (Form 10-K
for the year ended December 31, 1999, File No. 1-5924
-- Exhibit 10(b)(12).)
*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. (Form 10-K for the year
ended December 31, 1999, File No. 1-5924 -- Exhibit
10(b)(13).)
*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--Exhibit1-5924
-- 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--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,Co-Trustee, respectively, together
as Lessor. (Form 10-K for the year ended December 31, 1987,
File No. 1-5924--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924
-- 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 10K10-K for the year
ended December 31, 1991, File No. 1-5924--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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--Exhibit1-5924 -- 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).Project.
(Form 10-K for the year ended December 31, 1991, File No.
1-5924--Exhibit 10(I)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--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--Exhibit33-55732
-- 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,Co-Trustee,
respectively, as Lessor. (Form S-1, Registration No.
33-55732--Exhibit33-55732 -- 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--Exhibit33-55732 -- 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-- 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--Exhibit33-55732 -- Exhibit 10(u).)
*10(h)*10(f) -- 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--Exhibit33-55732 -- Exhibit 10(v).)
*10(i)*10(g) -- 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)*10(h) -- Restructuring Agreement, dated as of December 1, 1992, between
TEP and Century Power Corporation. (Form S-
1,S-1, Registration
No. 33-55732--Exhibit33-55732 -- Exhibit 10(x).)
*10(k)*10(i) -- 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--Exhibit33-55732 -- Exhibit 10(y).)
*10(l)*10(j)(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--Exhibit1-5924 -- Exhibit
10(t).)
*10(l)*10(j)(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-Exhibit1-5924 -- 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)10(k) -- 1994 Omnibus Stock and Incentive Plan of UniSource Energy.
(Form S-8 dated January 6, 1998, File No. 333-
43767.333-43767.)
+*10(o) -- 1994 Outside Director Stock Option Plan of
UniSource Energy. (Form S-8 dated January 6, 1998, File
No. 333-43765.)
+*10(p)10(l) -- Management and Directors Deferred Compensation Plan of
UniSource Energy. (Form S-8 dated January 6, 1998, File No.
333-43769.)
+*10(q)10(m) -- TEP Supplemental Retirement Account for Classified Employees.
(Form S-8 dated May 21, 1998, File No. 333-
53309.333-53309.)
+*10(r)10(n) -- TEP Triple Investment Plan for Salaried Employees. (Form S-8
dated May 21, 1998, File No. 333-53333.)
+*10(s)10(o) -- UniSource Energy Management and Directors Deferred
Compensation Plan. (Form S-8 dated May 21, 1998, File No.
333-53337.)
11+10(p) -- Officer Change in Control Agreement between TEP and currently
in effect with Thomas A. Delawder, Michael DeConcini, Steven
J. Glaser, Thomas N. Hansen, Neil Holstad, Karen G. Kissinger,
Kevin P. Larson, Steven W. Lynn, Dennis R. Nelson, Vincent
Nitido, Jr., James S. Pignatelli, and James Pyers dated as of
December 4, 1998.
*10(q)(1) -- Sworn Statement re computationby UniSource Energy Principal Executive
Officer Regarding Facts and Circumstances Relating to Exchange
Act Filings pursuant to SEC Order No. 4-460. (Form 8-K dated
August 9, 2002, File No. 1-13739 -- Exhibit 99.1.)
*10(q)(2) -- Sworn Statement by UniSource Energy Principal Financial
Officer Regarding Facts and Circumstances Relating to Exchange
Act Filings pursuant to SEC Order No. 4-460. (Form 8-K dated
August 9, 2002, File No. 1-13739 -- Exhibit 99.2.)
+*10(r) -- Amended and Restated UniSource Energy 1994 Outside Director
Stock Option Plan of per share
earnings-UniSourceUniSource Energy. (Form S-8 dated
September 9, 2002, File No. 333-99317.)
*10(s)(1) -- Asset Purchase Agreement dated as of October 29, 2002, by and
between UniSource Energy and Citizens Communications Company
relating to the Purchase of Citizens' Electric Utility
Business in the State of Arizona. (Form 8-K dated October 31,
2002, File No. 1-13739 -- Exhibit 99-1.)
*10(s)(2) -- Asset Purchase Agreement dated as of October 29, 2002, by and
between UniSource Energy and Citizens Communications Company
relating to the Purchase of Citizens' Gas Utility Business in
the State of Arizona. (Form 8-K dated October 31, 2002, File
No. 1-13739 -- Exhibit 99-2.)
*10(t) -- Credit Agreement dated as of November 14, 2002, among TEP,
Toronto Dominion (Texas), Inc., as Administrative Agent, The
Bank of New York and Union Bank of California as
Co-Syndication Agents, Credit Suisse First Boston as
Documentation Agent, TD Securities (USA) Inc. and Credit
Suisse First Boston as Co-Lead Arrangers and Joint
Bookrunners, the lenders party hereto, and the issuing banks
party hereto. (Form 8-K dated November 27, 2002, File Nos.
1-5924 and 1-13739 -- Exhibit 99-1.)
12 -- Computation of Ratio of Earnings to Fixed Charges--Charges -- TEP.
21 -- Subsidiaries of the Registrants.
23(a)23 -- Consents of experts (PricewaterhouseCoopers).
23(b) -- Consents of experts (Deloitte & Touche).experts.
24(a) -- Power of Attorney-UniSourceAttorney -- UniSource Energy.
24(b) -- Power of Attorney--TEP.
27(a)Attorney -- Financial Data Schedule-UniSource Energy.
27(b)TEP.
99 -- Financial Data Schedule--TEP.Statements of Corporate Officers pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(*)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.