FOR IMMEDIATE RELEASE Media Contact: Joseph Barrios, (520) 884-3725 Financial Analyst Contact: Jo Smith, (520) 884-3650 | August 6, 2008 Page 1 of 6 |
UNISOURCE ENERGY REPORTS SECOND QUARTER EARNINGS FOR 2008
Tucson, Ariz. – UniSource Energy Corp. (NYSE: UNS) today reported net income for the second quarter of 2008 of $5 million, or $0.13 per diluted share of common stock, compared with last year’s second quarter earnings of $12 million, or $0.32 per diluted share.
The year-over-year decline was due, in part, to the deferral of $15 million in revenue collected by Tucson Electric Power (TEP), UniSource Energy’s principal subsidiary. That revenue is part of an estimated $65 million TEP expects to collect this year through a component in its long-frozen retail rates that will be subject to review by the Arizona Corporation Commission (ACC). TEP will defer that revenue until the ACC determines its ultimate disposition as part of its resolution of TEP’s pending rate case.
TEP also faced higher fuel costs and a steep increase in its purchased power prices. Purchased power costs averaged nearly 10 cents per kilowatt-hour (kWh) during the second quarter of 2008, more than 50 percent higher than TEP incurred during the same period last year. TEP’s natural gas costs increased 16 percent on a per-kWh basis versus the same period last year, while its coal costs rose about 3 percent.
“We’ve been paying more for power than we’re able to pass along to customers through our current frozen rates,” said James S. Pignatelli, Chairman, President and CEO of TEP and UniSource Energy. “If not for the strong performance of our power plants and our relatively mild spring weather, we would have faced an even larger reduction in earnings.”
A maintenance outage at Springerville Generating Station (SGS) Unit 1 that previously had been scheduled for the second quarter of 2008 was instead completed a few months early, leaving the unit available during a period when market power prices were expected to be higher. Maintenance outages at other units were also limited, contributing to the overall availability of TEP’s generating fleet.
“We’re doing everything we can to manage our exposure to rising power prices,” Pignatelli said. “But we must access the market to meet our customers’ energy needs, and the prices we find there are beyond our control.”
In its pending rate case, TEP is seeking to recover such costs in the future through a Purchased Power and Fuel Adjustment Clause (PPFAC) incorporated in new, higher rates that would take effect no later than Jan. 1, 2009. TEP, the ACC Staff and most other parties to the company’s pending rate case have agreed to a proposed settlement that would provide a 6-percent base rate increase plus a PPFAC charge that, based on current prices for fuel and purchased power, could further increase average customers’ bills approximately 4% percent. This would be TEP’s first base rate increase since 1994. The new base rates would be frozen until 2013, while the PPFAC charge would adjust annually to reflect changes in fuel and purchased power costs.
The proposed settlement has been subject to a hearing before an administrative law judge, who will prepare a recommended opinion and order for the ACC’s review. In addition to issuing a final ruling on the proposed settlement, the ACC will decide when the new rates take effect and determine the final disposition of the deferred revenue. TEP expects the ACC to issue these rulings during the fourth quarter of 2008.
UniSource Energy Services (UES), which provides gas and electric service in northern and southern Arizona through subsidiaries UNS Gas and UNS Electric, reported earnings of $1 million in the second quarter of 2008 and earnings of less than $1 million in the second quarter of 2007.
Tucson Electric Power Co.
TEP reported net income for the second quarter of 2008 of $6 million, compared with net income of $12 million in the second quarter of 2007.
Factors affecting TEP's second quarter 2008 results include:
| | · | A $14 million decrease in utility gross margin (total operating revenues less fuel and purchased power expense) resulting from: |
| | o | A $15 million deferral of revenues recovered through continued collection of an amount equal to the fixed Competitive Transition Charge (CTC), which terminated in May 2008. This revenue may be subject to refund or other potential uses to be determined by the ACC; |
| | o | A $39 million increase in wholesale revenues due to increased short-term wholesale activity and higher market prices for wholesale power; |
| | o | A $39 million increase in purchased power costs resulting from rising market prices for wholesale power and an increase in short-term wholesale activity; |
| | o | A $1 million increase in fuel costs. Higher coal costs were partially offset by a $4 million unrealized gain related to gas hedges; and |
| | o | A $5 million increase in other revenues related to fees and reimbursements for fuel and operations and maintenance (O&M) costs related to SGS Units 3 and 4. |
Other factors impacting TEP’s second quarter 2008 net income include:
| | · | An $11 million increase in O&M expense resulting from O&M expenses for SGS Units 3 and 4 that TEP incurred and for which TEP receives reimbursement; a $4 million reduction in pre-tax gains on the sale of sulfur dioxide (SO2) emissions allowances which offset O&M expense; and an increase in generating plant O&M; |
| | · | A $13 million decrease in amortization of the Transition Recovery Asset (TRA). The TRA was fully amortized in May 2008; |
| | · | A $1 million increase in depreciation and amortization expense due to higher plant-in-service; and |
| | · | A $3 million decrease in interest expense due to lower capital lease obligation balances. |
UNS Gas
UNS Gas reported net income of less than $1 million in the second quarter of 2008, compared with a net loss of $1 million during the second quarter of 2007. The 2008 results reflect the impact of a base rate increase of approximately 4 percent, or $5 million annually, that took effect in December 2007.
UNS Electric
UNS Electric reported net income of $1 million for the second quarter of 2008, compared with earnings of $2 million in 2007. UNS Electric’s operations are seasonal in nature, with peak energy demand occurring in the summer months. Its second quarter results reflect mild weather compared with last year and the initial effects of a 2.5-percent base rate increase that took effect June 1, 2008. Results in the second quarter of 2007 include a pre-tax gain of $1 million related to the sale of land.
Millennium Energy Holdings, Inc. (Millennium)
Millennium recorded a $2 million pre-tax loss in the second quarter of 2008, due to an impairment of its investment in Valley Ventures. At June 30, 2008, Millennium had approximately $30 million of investments and $29 million in cash.
Net Income and Earnings Per Share Summary
