FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1995
OR
[X] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 1-5924
TUCSON ELECTRIC POWER COMPANY
(Exact name of registrant as specified in its charter)
ARIZONA 86-0062700
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
220 WEST SIXTH STREET, TUCSON, ARIZONA P.O. BOX 711
85701 85702
(Address of principal executive offices) (Zip Code)
(520) 571-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
At November 6, 1995, 160,723,702 shares of the registrant's Common Stock,
no par value (the only class of Common Stock), were outstanding.
TABLE OF CONTENTS
Page
Definitions
Independent Accountants' Report
PART I - FINANCIAL INFORMATION
Item 1. -- Financial Statements
Comparative Consolidated Statements of Income
Comparative Consolidated Statements of Cash Flows
Comparative Consolidated Balance Sheets
Notes to Consolidated Financial Statements
Note 1. Springerville Unit 2 Deferrals
Note 2. Commitments and Contingencies
Coal and Transportation Contracts
Tax Assessments
SDGE/FERC Proceedings
San Diego Gas & Electric v. Tucson Electric Power Company
Alamito Company, Docket No. ER79-97-009
Note 3. Investment in Partnership
Note 4. Income Taxes
Note 5. Long-Term Debt
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Proposed Holding Company
Nations Energy Corporation
Rate Matters
Competition
Wholesale
Retail
Accounting for the Effects of Regulation
Earnings
Dividends on Common Stock
Results of Operations
Results of Utility Operations
Sales and Revenues
Operating Expenses
Other Income
Liquidity and Capital Resources
Cash Flows
PART II - OTHER INFORMATION
Item 1. -- Legal Proceedings
SDGE/FERC Proceedings
San Diego Gas & Electric v. Tucson Electric Power Company
Alamito Company, Docket No. ER79-97-009
Item 6. -- Exhibits and Reports on Form 8-K
Signature Page
Exhibit Index
DEFINITIONS
The abbreviations and acronyms used in the 1995 Third Quarter Form 10-Q are
defined below:
ACC Arizona Corporation Commission.
Articles Company's Amended and Restated Articles of Incorporation.
Banks Various banks with which the Company has credit
relationships.
Board of Directors The Company's board of directors.
Century Century Power Corporation, an indirect subsidiary of
Catalyst and formerly known as Alamito Company.
Common Stock The Company's common stock, without par value.
Company Tucson Electric Power Company.
Creditors Certain of the Company's creditors and lease
participants and Century and the Springerville Unit 1
Leases participants.
Energy Act The Energy Policy Act of 1992.
FAS 71 Statement of Financial Accounting Standards #71:
Accounting for the Effects of Certain Types of
Regulation.
FAS 92 Statement of Financial Accounting Standards #92:
Regulated Enterprises - Accounting for Phase-In Plans.
FAS 101 Statement of Financial Accounting Standards #101:
Regulated Enterprises - Accounting for the
Discontinuation of Application of FAS 71.
FERC The Federal Energy Regulatory Commission.
Financial
Restructuring The comprehensive restructuring of the
Company's obligations to Creditors and the
reclassification of all shares of the Company's
previously outstanding preferred stock into Common Stock,
which closed on December 15, 1992.
First Mortgage Bonds The Company's first mortgage bonds issued under the
General First Mortgage.
General First
Mortgage The Indenture, dated as of April 1, 1941, of Tucson
Gas, Electric Light and Power Company to The Chase
National Bank of the City of New York, as trustee, as
supplemented and amended.
Holding Company Act The Public Utility Holding Company Act of 1935, as
amended.
Irvington Irvington Generating Station.
Irvington Lease The leveraged lease arrangement relating to Irvington
Unit 4.
kWh Kilowatt-hour(s).
LOC(s) Letter(s) of Credit.
MRA The master restructuring agreement between the
Company and the Banks which includes the Renewable Term
Loan, Revolving Credit and certain replacement
reimbursement agreement.
MSR Modesto, Santa Clara and Redding Public Power Agency.
MW Megawatt(s).
Nations Energy Nations Energy Corporation, a wholly-owned subsidiary of
the Company.
1994 Rate Order The ACC's January 11, 1994, Rate Order concerning an
increase in the Company's retail base rates and certain
regulatory write-offs.
Palo Verde The Palo Verde Nuclear Generating Station.
P&M Pittsburg & Midway Coal Mining Co.
PURPA The Public Utility Regulatory Policies Act of 1978,
as amended.
RTGs Regional Transmission Groups.
Renewable Term Loan The credit facility that replaced the Term Loan
pursuant to the MRA Sixth Amendment, dated as of
November 1, 1994, and completed March 7, 1995.
RUCO Residential Utility Consumers Office.
Revolving Credit The $50 million revolving credit facility entered
into between a syndicate of banks party to the Financial
Restructuring and the Company, as part of the Financial
Restructuring.
SCE Southern California Edison Company, a subsidiary of
SCECorp.
SDGE San Diego Gas & Electric.
SEC Securities and Exchange Commission.
Shareholders The Company's existing holders of Common Stock.
Springerville Springerville Generating Station.
DEFINITIONS
(concluded)
Springerville Unit 1
Leases The leveraged lease arrangements relating to
Springerville Unit 1, and one half interest in certain
facilities at Springerville used in common with
Springerville Unit 1 and Springerville Unit 2.
Springerville Common
Facilities Leases The leveraged lease arrangements relating to one-
half interest in certain facilities at Springerville used
in common with Springerville Unit 1 and Springerville
Unit 2.
SWRTA Southwest Regional Transmission Association.
Term Loan The $243.4 million original principal amount term
loan provided by a syndicate of certain Banks as part of
the Financial Restructuring.
Valencia Leases Valencia's leveraged lease arrangements relating to
the coal handling facilities serving Springerville.
WRTA Western Regional Transmission Association.
INDEPENDENT ACCOUNTANTS' REPORT
Tucson Electric Power Company:
We have reviewed the accompanying consolidated balance sheet of Tucson Electric
Power Company and subsidiaries (the Company) as of September 30, 1995 and the
related consolidated statements of income for the three-month and nine-month
periods ended September 30, 1995 and 1994, and cash flows for the nine-month
periods ended September 30, 1995 and 1994. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
As discussed in Note 1 (and Note 2 to the annual financial statements for the
year ended December 31, 1994 (not presented herein)), the timing of the
recovery of the costs associated with 37.5% of Springerville Unit 2 cannot
presently be determined because the Company has not yet received rate relief
for such costs.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of capitalization of
the Company as of December 31, 1994 and the related consolidated statements of
income (loss), cash flows, and changes in stockholders' equity (deficit) for
the year then ended (not presented herein); and in our report dated
January 31, 1995 (March 7, 1995 as to Note 6) (which includes an explanatory
paragraph relating to the timing of the recovery of the costs associated with
37.5% of Springerville Unit 2 which cannot presently be determined), we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1994 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Tucson, Arizona
October 31, 1995
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The September 30 consolidated financial statements are unaudited but
reflect all normal recurring accruals and other adjustments which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods covered. Due to seasonal fluctuations in sales, the
quarterly results are not indicative of annual operating results. Also see
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
COMPARATIVE CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30,
1995 1994
-Thousands of Dollars-
Operating Revenues
Retail Customers $192,929 $191,857
Amortization of MSR Option Gain Regulatory Liability 5,014 5,014
Other Utilities 19,844 23,615
--------- ---------
Total Operating Revenues 217,787 220,486
--------- ---------
Operating Expenses
Fuel and Purchased Power 47,103 62,149
Capital Lease Expense 24,180 23,121
Amortization of Springerville Unit 1 Allowance (7,108) (6,551)
Other Operations 24,574 27,731
Maintenance and Repairs 7,607 12,847
Depreciation and Amortization 23,041 22,686
Taxes Other Than Income Taxes 14,033 14,193
--------- ---------
Total Operating Expenses 133,430 156,176
--------- ---------
Operating Income 84,357 64,310
--------- ---------
Other Income
Interest Income 2,027 1,990
Gains on Sales of Securities 28 -
Other 1,060 1,513
--------- ---------
Total Other Income 3,115 3,503
--------- ---------
Interest Expense
Long-Term Debt - Net 17,039 17,546
Interest Imputed on Losses Recorded at Present Value 8,098 8,016
Other 1,894 1,839
Allowance for Borrowed Funds Used During Construction (288) (276)
--------- ---------
Total Interest Expense 26,743 27,125
--------- ---------
Net Income $ 60,729 $ 40,688
========= =========
Average Shares of Common Stock Outstanding (000) 160,678 160,724
========= =========
Net Income per Average Share $ 0.37 $ 0.25
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended
September 30,
1995 1994
-Thousands of Dollars-
Operating Revenues
Retail Customers $451,124 $450,809
Amortization of MSR Option Gain Regulatory Liability 15,040 15,040
Other Utilities 56,673 72,313
--------- ---------
Total Operating Revenues 522,837 538,162
--------- ---------
Operating Expenses
Fuel and Purchased Power 140,634 169,683
Capital Lease Expense 71,436 69,477
Amortization of Springerville Unit 1 Allowance (21,324) (19,653)
Other Operations 73,868 75,243
Maintenance and Repairs 28,675 33,300
Depreciation and Amortization 68,904 66,960
Taxes Other Than Income Taxes 42,569 42,632
--------- ---------
Total Operating Expenses 404,762 437,642
--------- ---------
Operating Income 118,075 100,520
--------- ---------
Other Income
Interest Income 6,806 4,434
Gains on Sales of Securities 2,986 -
Other 3,768 4,673
--------- ---------
Total Other Income 13,560 9,107
--------- ---------
Interest Expense
Long-Term Debt - Net 53,049 50,143
Interest Imputed on Losses Recorded at Present Value 24,666 24,378
Other 5,986 5,344
Allowance for Borrowed Funds Used During Construction (849) (778)
--------- ---------
Total Interest Expense 82,852 79,087
--------- ---------
Net Income $ 48,783 $ 30,540
========= =========
Average Shares of Common Stock Outstanding (000) 160,697 160,724
========= =========
Net Income per Average Share $ 0.30 $ 0.19
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1995 1994
-Thousands of Dollars-
Cash Flows from Continuing Operating Activities
Cash Receipts from Retail Customers $459,054 $461,492
Cash Receipts from Other Utilities 59,478 75,220
Fuel and Purchased Power Costs Paid (124,748) (138,497)
Wages Paid, Net of Amounts Capitalized (50,700) (39,654)
Payment of Other Operations and Maintenance Costs (54,925) (54,134)
Capital Lease Interest Paid (82,742) (81,302)
Interest Paid, Net of Amounts Capitalized (57,006) (49,010)
Taxes Paid, Net of Amounts Capitalized (79,329) (66,548)
Income Taxes Paid (1,760) -
Interest Received 6,708 4,128
--------- ---------
Net Cash Flows - Continuing Operating Activities 74,030 111,695
--------- ---------
Net Cash Flows - Discontinued Operations - 23,359
--------- ---------
Cash Flows from Investing Activities
Construction Expenditures (42,049) (48,932)
Purchase of Debt Securities (17,697) -
Investment in Partnership (11,529) -
Other 3,327 104
--------- ---------
Net Cash Flows - Investing Activities (67,948) (48,828)
--------- ---------
Cash Flows from Financing Activities
Payments to Retire Long-Term Debt (36,507) (1,853)
Payments on Renewable Term Loan (143,060) -
Payments to Retire Capital Lease Obligations (16,657) (17,215)
Other 273 988
--------- ---------
Net Cash Flows - Financing Activities (195,951) (18,080)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (189,869) 68,146
Cash and Cash Equivalents, Beginning of Year * 248,152 161,996
--------- ---------
Cash and Cash Equivalents, End of Period ** $ 58,283 $230,142
========= =========
* Beginning of year balance includes cash and cash equivalents from
discontinued operations of $14,852,000 for 1995 and $22,179,000 for 1994.
** End of period balance includes cash and cash equivalents from discontinued
operations of $20,526,000 for 1994.
See Notes to Consolidated Financial Statements.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
Nine Months Ended
September 30,
1995 1994
-Thousands of Dollars-
Net Income $ 48,783 $ 30,540
Adjustments to Reconcile Net Income
to Net Cash Flows
Depreciation and Amortization Expense 68,904 66,960
Taxes Accrued 4,644 16,520
Deferred Investment Tax Credits (3,539) (3,758)
Deferred Fuel and Purchased Power 5,287 5,601
Lease Payments Deferred 4,917 4,349
Deferred Springerville Unit 2 Costs (844) (864)
Amortization of Regulatory Adjustments (11,698) (10,314)
Other (2,250) (5)
Changes in Assets and Liabilities which
Provided (Used) Cash Exclusive of
Changes Shown Separately
Customer Accounts Receivable (12,090) (9,954)
Accounts Receivable - Other 2,628 3,400
Materials and Fuel (3,532) (2,342)
Unbilled Revenues (11,239) (9,927)
Other Current Assets and Liabilities (17,316) 18,208
Other Deferred Assets and Liabilities 1,375 3,281
--------- ---------
Net Cash Flows - Continuing Operating Activities $ 74,030 $111,695
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1995 1994
- Thousands of Dollars -
Utility Plant
Plant in Service $2,082,926 $2,053,123
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 50,358 40,870
----------- -----------
Total Utility Plant 3,026,348 2,987,057
Less Accumulated Depreciation and Amortization (844,008) (791,617)
Less Accumulated Amortization of Capital Leases (36,075) (25,595)
Less Allowance for Springerville Unit 1 (162,237) (162,423)
----------- -----------
Total Utility Plant - Net 1,984,028 2,007,422
----------- -----------
Investments
Investments and Other Property 47,976 4,307
Net Assets of Discontinued Operations - 8,685
----------- -----------
Total Investments 47,976 12,992
----------- -----------
Current Assets
Cash and Cash Equivalents 58,283 233,300
Accounts Receivable 87,047 66,332
Materials and Fuel 39,739 36,109
Deferred Income Taxes - Current 15,572 12,870
Other 8,114 8,376
----------- -----------
Total Current Assets 208,755 356,987
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 137,811 143,372
Deferred Common Facility Costs 63,937 65,843
Deferred Springerville Unit 2 Costs 45,273 54,983
Deferred Lease Expense 21,065 25,228
Deferred Fuel and Purchased Power Expense 586 5,872
Other Deferred Regulatory Assets 8,772 9,362
Deferred Debits - Other 16,469 17,532
----------- -----------
Total Deferred Debits 293,913 322,192
----------- -----------
Total Assets $2,534,672 $2,699,593
=========== ===========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
September 30, December 31,
1995 1994
- Thousands of Dollars -
Capitalization
Common Stock $ 645,314 $ 645,479
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (632,572) (681,355)
----------- -----------
Common Stock Equity (Deficit) 6,385 (42,233)
Capital Lease Obligations 896,102 922,735
Long-Term Debt 1,209,035 1,381,935
----------- -----------
Total Capitalization 2,111,522 2,262,437
----------- -----------
Current Liabilities
Short-Term Debt 12,039 -
Current Maturities of Long-Term Debt 10,500 17,167
Accounts Payable 29,457 39,777
Interest Accrued 40,113 59,480
Taxes Accrued 33,858 29,215
Accrued Employee Expenses 10,841 15,247
Current Obligations Under Capital Leases 32,780 12,803
Other 7,351 6,624
----------- -----------
Total Current Liabilities 176,939 180,313
----------- -----------
Deferred Credits and Other Liabilities
MSR Option Gain Regulatory Liability 29,702 41,214
Accumulated Deferred Investment Tax Credits
Regulatory Liability 20,829 24,368
Deferred Income Taxes - Noncurrent 161,005 164,341
Other 34,675 26,920
----------- -----------
Total Deferred Credits and Other Liabilities 246,211 256,843
----------- -----------
Total Capitalization and Other Liabilities $2,534,672 $2,699,593
=========== ===========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 1. SPRINGERVILLE UNIT 2 DEFERRALS
- ---------------------------------------
The Company is not presently recovering through retail rates the
depreciation, property taxes, operating and maintenance expenses other than
fuel, or interest costs associated with the 37.5% of Springerville Unit 2
capacity which is currently not deemed by the ACC to be used and useful for
the retail jurisdiction and therefore is not in rate base (hereinafter
referred to as "retail excess capacity deferrals"). These expenses are being
expensed as incurred. However, the 1994 Rate Order permits such costs to be
deferred for future recovery over the remaining useful life of Springerville
Unit 2. This phase-in plan does not qualify under FAS 92 and, therefore,
such retail excess capacity deferrals, while deferred for regulatory
purposes, cannot be deferred for financial reporting purposes. Such retail
excess capacity deferrals totaled $11 million during the nine months ended
September 30, 1995, bringing the total to $74 million at September 30, 1995.
Either inclusion in costs recoverable through retail rates or additional
wholesale sales at sufficient prices of an equivalent amount of capacity (or
a combination thereof) will be required to recover these retail excess
capacity deferrals.
In addition, the Company is not presently recovering through retail
rates 37.5% of the deferred Springerville Unit 2 rate synchronization costs
($27 million at September 30, 1995), which were non-fuel costs of
Springerville Unit 2 incurred from January 1, 1991 through October 14, 1991.
This amount, together with the balance of such costs that the Company is
presently recovering through rates ($18 million at September 30, 1995), are
reported in the Company's Consolidated Balance Sheet as Deferred
Springerville Unit 2 Costs.
The 1994 Rate Order provided that the rate synchronization and retail
excess capacity deferrals associated with the 37.5% of Springerville Unit 2
capacity not found to be used and useful for the retail jurisdiction will
continue to incur an interest charge of 7.19% until authorized to be included
in rate base or for a period of three years ending in 1997, whichever occurs
first.
NOTE 2. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Coal and Transportation Contracts
On October 14, 1991, amendments to the contract with the Springerville
coal supplier were entered into, and became effective, which, among other
things, reduced the price of coal shipments at Springerville. The amended
contract contains provisions which protected the claims of the Springerville
coal supplier under the original agreement in the event that the Company did
not perform its obligations under the terms of the amended agreement at any
time prior to August 23, 1995. On August 23, 1995, the Company satisfied all
of the conditions of the amended contract and, consequently, reversed a $3
million accrued liability. The reversal of the accrued liability is included
as a reduction to Fuel and Purchased Power expense in the Company's 1995
Consolidated Statements of Income.
Amendments to the Irvington coal supply agreement with P&M were
executed, effective November 5, 1991, which, among other things,
substantially reduced the minimum annual coal quantities. The amended
contract contains provisions which protected the claims of P&M under the
original agreement in the event that the Company did not perform its
obligations under the terms of the amended agreement at any time prior to
November 4, 1995. Additionally, the Company previously recorded an $8
million unpaid take-or-pay penalty. To satisfy such penalty, the amendments
provided for P&M to receive either the proceeds from any sale of, or, at
P&M's option, the title to an undeveloped parcel of land (which has a book
value to the Company of $2 million). At September 30, 1995 the Company
reversed $6 million of the $8 million accrued liability (the Company
satisfied all the terms of the amended contract on November 4, 1995). The
reversal of the accrued liability is included as a reduction to Fuel and
Purchased Power expense in the Company's 1995 Consolidated Statements of
Income.
Amendments to transportation agreements were also executed, effective
October 18, 1991, with the Springerville and Irvington rail transportation
suppliers which, among other things, reduced the price for coal shipments and
limited annual changes in the contract price. The Springerville amended rail
transportation agreement includes provisions which protected the supplier's
claims under their original contract in the event the Company did not perform
its obligations under the terms of the amended agreement at any time prior to
September 19, 1995. On September 19, 1995, the Company satisfied all of the
conditions of the amended contract and, consequently, reversed a $3 million
accrued liability. The reversal of the accrued liability is included as a
reduction to Fuel and Purchased Power expense in the Company's 1995
Consolidated Statements of Income.
The three reversals of accrued liabilities described above collectively
reduced Fuel and Purchased Power expense by $12 million in the third quarter
of 1995.
Tax Assessments
The Arizona Department of Revenue has issued transaction privilege tax
assessments to the Company for the period November 1985 through May 1993
alleging that Valencia is liable for sales tax on gross income received from
coal sales, transportation, and coal-handling services to the Company during
such period. The Company protested the assessments. On March 11, 1994, the
Arizona Tax Court issued a Minute Entry granting Summary Judgment to the
Arizona Department of Revenue and upholding the validity of the assessment
issued for the period November 1985 through March 1990. The Company appealed
this decision to the Court of Appeals. Generally, Arizona law requires
payment of the assessment due prior to the appellate process. To date the
Company has paid, under protest, a total of $23 million ($14.6 million in
1995, $2.8 million in 1994 and $5.6 million in 1993) of the disputed sales
tax assessments, subject to refund in the event the Company prevails.
Also, the Arizona Department of Revenue has issued transaction privilege
tax assessments to the lessors from whom the Company leases certain property.
The assessments allege sales tax liability on a component of rents paid by
the Company on the Springerville Unit 1 Leases, Springerville Common
Facilities Leases, Irvington Lease and Valencia Leases. Assessments cover
the period August 1, 1988 to September 30, 1993. Under the terms of the
lease agreements, if the Arizona Department of Revenue prevails the Company
must reimburse the lessors for taxes paid by them pursuant to indemnification
provisions.
In the opinion of management, the Company has recorded, through the
Consolidated Statements of Income (Loss) in current and prior years, a
liability for the amount of federal and state taxes and interest thereon for
which the Company feels incurrence is probable as of September 30, 1995. In
the event that all or most of the Arizona Department of Revenue's proposed
assessments are sustained, additional liabilities would result. Based on the
current status of the legal proceedings, the Company believes that the
ultimate resolution of such disputes will occur over a period of one to four
years. Although it is reasonably possible that the ultimate resolution of
such matters could result in a loss of up to approximately $26 million in
excess of amounts accrued, management and outside tax counsel believe that
the Company has meritorious defenses to mitigate or eliminate the assessed
amounts. Based on consultations with counsel, the Company believes that the
resolution of the tax matters described herein should not have a material
adverse effect on the Company's Consolidated Financial Statements.
SDGE/FERC Proceedings
San Diego Gas & Electric v. Tucson Electric Power Company
On February 11, 1993, SDGE filed a complaint and motion for summary
disposition against the Company and Century before the FERC (San Diego Gas &
Electric Company v. Tucson Electric Power Company and Century Power
Corporation, Docket No. EL93-19-001). The complaint alleged that the Company
and Century overbilled SDGE during Phases 3 through 5 of the Ten Year Power
Sale Agreement (Ten Year Agreement) and requested that the FERC order refunds
by the Company of an aggregate amount of approximately $14.5 million, plus
interest. On April 23, 1993, the Company filed an answer denying the
allegations of the complaint. On May 3, 1995, the FERC issued an order
dismissing SDGE's complaint. On July 19, 1995, the FERC partially granted
SDGE's request of rehearing of the May 3, 1995 Order and reinstituted
proceedings to determine what amounts SDGE and the Company may owe each other
for the period prior to November 1, 1984. SDGE appealed to the United States
Court of Appeals for the District of Columbia Circuit that portion of the
rehearing which FERC had denied. The Company and SDGE have agreed to resolve
this dispute by waiving all claims under the Ten Year Agreement and
dismissing all proceedings relating thereto. An Offer of Settlement has been
filed at FERC. To be effective the Offer of Settlement must be approved by
FERC.
Alamito Company, Docket No. ER79-97-009
On September 27, 1993, SDGE filed a motion for decision by the FERC in
Alamito Company, Docket No. ER79-97-009. This proceeding involved the proper
capital structure and rate of return for rates under which Century Power
Corporation (formerly Alamito Company) sold Company system power to SDGE
during Phase 5 of the Ten Year Agreement, from June 1, 1987 through May 31,
1989. An initial decision of an administrative law judge in January 1986,
found the Company's capital structure was inflated and its return on equity
excessive. SDGE claimed that the Company would owe Century on SDGE's behalf
up to approximately $12 million, plus interest. On October 8, 1993, the
Company filed an answer opposing SDGE's motion. It was the Company's
position that the FERC's order of July 19, 1991 approving a settlement
between SDGE and Century in Docket No. ER79-97-009, as well as the Company's
and Century's mutual release of all claims against each other as part of
their Financial Restructuring, bars SDGE's claim. On December 23, 1993, the
FERC issued an order confirming that the July 19, 1991 order disposed of this
case, and denied SDGE's September 27, 1993 motion. On January 21, 1994, SDGE
requested rehearing of the FERC's order. On May 3, 1995, the FERC issued an
order denying SDGE's request for rehearing. On June 30, 1995, SDGE filed a
petition for review of the FERC's orders with the United States Court of
Appeals for the District of Columbia Circuit. The Company has moved to
intervene in that proceeding.
SDGE has agreed that if FERC approves the Offer of Settlement in EL93-19-
001, SDGE will move to dismiss all appeals relating to the SDGE/FERC
Proceedings described herein. The Company believes the SDGE/FERC Proceedings
described herein should not have any effect on the Company's Consolidated
Financial Statements.
NOTE 3. INVESTMENT IN PARTNERSHIP
- ----------------------------------
In September 1995, Nations Energy Corporation (a wholly owned subsidiary
of the Company) and Trigen Energy Corporation formed a partnership and
purchased Coors Brewing Company's energy production (utility) assets.
Nations Energy has a 49% interest in the partnership. The partnership will
provide electricity and steam for the brewery operation in Golden, Colorado.
In addition, the partnership intends to upgrade Coors' power plant to improve
fuel efficiency and increase capacity. The investment of approximately $12
million by Nations Energy is included in the Company's Consolidated Balance
Sheet at September 30, 1995 under Investments and Other Property and in the
Company's Consolidated Statement of Cash Flows for the nine months ended
September 30, 1995 as Investment in Partnership.
NOTE 4. INCOME TAXES
- ---------------------
The income tax benefit included in results of continuing operations for
the quarter and nine months ended September 30, 1995 and 1994 was comprised
solely of the amortization of accumulated deferred investment tax credits.
The differences between income tax benefit and the amount obtained by
multiplying income before income taxes by the U.S. statutory federal income
tax rate for the quarter and nine months ended September 30, 1995 and 1994
are as follows:
Three Months Ended
September 30,
1995 1994
--------- ---------
-Thousands of Dollars-
Federal Income Tax Expense at Statutory Rate $(20,823) $(13,838)
Investment Tax Credit Amortization 1,235 1,151
Net Operating Loss Carryforwards 20,823 13,838
--------- ---------
Total Benefit for Federal and
State Income Taxes $ 1,235 $ 1,151
========= =========
Nine Months Ended
September 30,
1995 1994
--------- ---------
-Thousands of Dollars-
Federal Income Tax Expense at Statutory Rate $(15,835) $ (9,374)
Investment Tax Credit Amortization 3,539 3,758
Net Operating Loss Carryforwards 15,835 9,374
--------- ---------
Total Benefit for Federal and
State Income Taxes $ 3,539 $ 3,758
========= =========
The income tax benefit is included in the Consolidated Statements of
Income in the following accounts:
Three Months Ended
September 30,
1995 1994
-------- --------
-Thousands of Dollars-
Operating Expenses - Other Operations $ 23 $ 22
Other Income - Other 1,212 1,129
-------- --------
Total Income Tax Benefit $ 1,235 $ 1,151
======== ========
Nine Months Ended
September 30,
1995 1994
-------- --------
-Thousands of Dollars-
Operating Expenses - Other Operations $ 68 $ 68
Other Income - Other 3,471 3,690
-------- --------
Total Income Tax Benefit $ 3,539 $ 3,758
======== ========
NOTE 5. LONG-TERM DEBT
- -----------------------
In the third quarter of 1995, the Company made an $87 million payment on
its Renewable Term Loan thereby reducing its Long-Term Debt. Such amount may
be reborrowed pursuant to the terms of the Renewable Term Loan, as needed by
the Company.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following contains information regarding the results of the Company's
operations during the third quarter and first nine months of 1995 compared with
the third quarter and first nine months of 1994, the outlook for dividends on
Common Stock, and changes in liquidity and capital resources of the Company
during the third quarter and first nine months of 1995. Also management's
expectations of identifiable material trends are discussed.
OVERVIEW
The Company's financial prospects are subject to significant economic,
regulatory and other uncertainties, some of which are beyond the Company's
control. These uncertainties include the degree of utilization of capacity
through either retail electric service or wholesale sales and the extent to
which the Company, due to continued high financial and operating leverage, can
alter operations and reduce costs in response to unanticipated economic
downturns or industry changes. The Company's ability to recover the costs of
serving retail customers is dependent upon pricing of the Company's services,
which requires ACC approval, and the level of sales to such customers. The
Company anticipates continued growth in sales over the next five years
primarily as a result of anticipated population and economic growth in the
Tucson area. However, a number of factors such as changes in economic
conditions and the increasingly competitive electric markets could affect the
Company's levels of sales.
Increased revenues, including increases for the recovery of plant and
operating costs associated with the remaining 37.5% of Springerville Unit 2,
which is not currently included in rate base, may be required in order for the
Company to maintain its existing level of liquidity over the longer term as
obligations become due. The level of cash flow from wholesale sales is
affected generally by factors affecting the market for such sales, including
the availability of capacity and energy in the western United States. In
addition, the Company has a significant amount of variable rate debt and, as a
result, the Company's future cash flows are also affected by the level of
interest rates. See Liquidity and Capital Resources below.
If the Company is unable to make sales at prices adequate to recover its
costs or if for other reasons the Company fails to maintain or improve its cash
flows, the Company's ability to meet its obligations may be jeopardized.
During the 1997-2001 period, the Company has approximately $1.1 billion of
long-term debt maturing, including approximately $774 million in reimbursement
agreements relating to letters of credit which expire. The Company intends to
pay or refinance maturing bonds and bank loans and to replace or extend such
reimbursement agreements. There can be no assurance, however, that the Company
will be able to pay such debt or replace or extend such reimbursement
agreements.
In addition, the Company's capital structure is highly leveraged and its
ability to raise capital (through either public or private financings) is
limited. The Company's ability to obtain debt financing is limited by reason
of limited free cash flow available to meet additional interest expense and due
to the restrictive covenants contained in its obligations to creditors.
Further, if the Company is required to refinance its debt obligations in order
to repay them when due, such refinancing may be made on terms which may be
adverse to the Company. Such terms could include, among other things, higher
interest rates, greater sinking fund requirements and various other restrictive
covenants, such as dividend payment restrictions. Access to equity capital may
be limited because of the Company's likely limited future profitability and
its inability to pay dividends for the foreseeable future. See Dividends on
Common Stock below.
During the next twelve months, the Company does not expect any need to
obtain new debt financing to fund continuing operating activities and
construction expenditures. The Company instead expects to rely on internal
cash flows, existing cash balances, the Renewable Term Loan and, if necessary,
borrowings under the Revolving Credit. At September 30, 1995, the Company's
cash balance including cash equivalents was approximately $58 million. Cash
balances are invested in investment grade, money-market securities with an
emphasis on preserving the principal amount invested.
PROPOSED HOLDING COMPANY
The Company is seeking approvals to establish through a one-for-one share
exchange in early 1996 a new corporate structure in which the Company will be a
subsidiary of a new holding company, UniSource Energy Corporation (UniSource).
The Company seeks to establish a holding company structure because the Company
believes that it is in the best interests of its shareholders for the Company
to participate in various segments of the evolving and expanding electric
energy business. The Company believes that such participation would be
enhanced by the holding company structure, a commonly used structure in the
electric and other industries, to conduct different lines of business.
In May 1995, shareholders of the Company approved the proposed holding
company. In addition to shareholder approval, consummation of the holding
company plan is predicated upon receiving approval from the ACC and FERC. The
Company is currently in the process of obtaining such approvals. On September
27, 1995, the Company received a "no action" position from the staff of the
SEC under the Public Utility Holding Company Act of 1935, as amended.
In February 1995, the Company filed a Notice of Intent to Form a Holding
Company with the ACC. In June 1995, the ACC staff filed testimony in which the
ACC staff recommended that the ACC deny the Company's request on the basis that
retail customers would be exposed to certain risks resulting from
diversification. However, ACC staff recommended that, in the event that the ACC
approves formation of the holding company, the ACC impose various operating and
financial conditions on the Company and the holding company. In concurrently
filed testimony, RUCO did not oppose the formation of the holding company. The
Company filed rebuttal testimony on July 27, 1995, and a public hearing was
held on August 22, 1995. The Company expects a ruling from the ACC by the end
of December 1995. Also, on April 26, 1995, the Company filed an application
with FERC requesting approval to form a holding company. These applications
are pending.
If all required regulatory approvals are satisfactorily obtained, the
outstanding shares of the Company's common stock would be exchanged, on a
share-for-share basis, for shares of UniSource. As a result, the holders of
the Company's common stock will become the owners of UniSource common stock,
and UniSource will become the owner of the Company's common stock. If the
share exchange is effected, it will not be necessary to turn in the Company's
common stock certificates in exchange for UniSource common stock certificates.
The certificates for the Company's common stock will automatically represent
shares of UniSource common stock. New certificates bearing the name of
UniSource will be issued in the future as certificates for presently
outstanding shares of the Company's common stock are presented for transfer.
The Board has reserved the right to terminate the plan of exchange if it
determines in its sole discretion that the share exchange would be inadvisable
or not in the best interests of the Company or its shareholders. In making
such a determination, the Board may consider, among other things, the nature
of the conditions imposed upon the Company in order to obtain requisite
regulatory approvals.
NATIONS ENERGY CORPORATION
On September 14, 1995, Nations Energy and Trigen Energy Corporation
acquired a Colorado limited liability partnership which owns certain electric
and steam generating assets supplying electric and thermal energy to the Coors
Brewing Company (Coors). The partnership had been formed by Coors and Coors
Energy Company (Coors Energy) and following the acquisition was renamed Trigen-
Nations Energy Company, L.L.P. (Trigen-Nations). Trigen-Nations also acquired
certain gas pipeline assets from Coors Energy. The total purchase price for
the generating and pipeline assets acquired from Coors and Coors Energy was $22
million. In connection with the acquisition, Trigen-Nations entered into an
energy services agreement to provide Coors with electric power and steam for a
25-year term. Upon the completion of certain engineering and permitting
activities, as well as the satisfaction of certain other conditions, including
legal and regulatory matters, Trigen-Nations intends to improve the assets and
expand their electric generating capacity at a cost estimated to be
approximately $45 million.
RATE MATTERS
On June 13, 1995, the Company filed an application with the ACC,
requesting an overall 4.9% increase in retail rates (approximately $28.4
million in annual revenues). The Company's request is based on original cost
rate base of approximately $1.17 billion, a rate of return on original cost
rate base of 8.2%, and a rate of return on common equity of 11.5%.
The proposed rate structure is a continuation of the Company's effort to
insure that retail customer classes pay their appropriate allocated share of
the cost of providing service. The Company is proposing increases of 7.5% for
residential customers, 3.6% for commercial customers, and 5.0% for industrial
customers. The proposed increase would result in an increase of $5.37 in the
average monthly residential bill, from $70.92 (9.46 cents per kWh) to $76.29
(10.17 cents per kWh) for residential customers using an average 750 kilowatt-
hours per month.
The application requests recovery of the costs associated with the
remaining 37.5% (135 MW) of Springerville Unit 2 that the Company believes is
"used and useful" in accordance with ACC methodologies. Currently, the Company
is only allowed to recover 62.5% of the costs related to Springerville Unit 2.
In 1994, the Company's system peak demand was 139 MW over the demand upon which
current rates are based; therefore, the entire capacity of Springerville 2 was
utilized to meet retail requirements. Total proposed additions to rate base
due to the inclusion of the remaining 37.5% of Springerville Unit 2, including
related deferrals of previously incurred costs, amounted to approximately $191
million.
The Company's request contains elements of traditional cost of
service/rate of return ratemaking as well as several proposals designed to
increase the Company's competitiveness. Such proposals include, among others,
the flexibility to enter into special contracts with customers without
specific ACC approval at prices below previously approved tariffs' levels;
allocation of the savings resulting from improved operating efficiencies
between the Company and its customers; allocation of the benefits of the
110 MW added generating capacity related to the SCE power exchange solely to
the retail customers; and allocation of new long-term wholesale sales based on
marginal costs of a wholesale transaction rather than the Company's average
costs.
The Company further proposed that, if the ACC approves the Company's
request and proposals as filed, the Company would not file another rate case
until the year 2000, absent any emergencies.
The ACC has a self-imposed time schedule for receipt of orders in major
rate cases that would lead to an order being issued in the second quarter of
1996. On July 13, 1995, the ACC hearing officer issued a procedural order
which sets the hearing date for the rate case at March 21, 1996.
COMPETITION
WHOLESALE
Under current law, the Company is not in direct competition with any other
regulated electric utility for electric service in the Company's retail service
territory. Nevertheless, the Company competes for retail markets against gas
service suppliers and others who may provide energy services which would be
substitutes for, or bypass of, the Company's services.
The Company does compete with other utilities, marketers and independent
power producers in the sale of electric capacity and energy in the wholesale
market. The Company's rates for wholesale sales of capacity and energy,
generally, are not permitted to exceed rates determined on a cost of service
basis. With respect to wholesale sales, the Company's prices are substantially
below costs determined on a fully allocated cost of service basis, but, in all
instances, prices exceed the level necessary to recover fuel and other variable
costs. It is expected that competition to sell capacity will remain vigorous,
and that prices will remain depressed for several years, due to increased
competition and surplus capacity in the southwestern United States.
Competition for the sale of capacity and energy is influenced by many factors,
including the availability of capacity of the 3,810 MW Palo Verde nuclear
generating station and other generating stations in the southwestern United
States, the availability and prices of natural gas and oil, spot energy prices
and transmission access. In addition, the Energy Act has promoted increased
competition in the wholesale electric power markets.
The Energy Act addresses a wide range of energy issues, including several
matters affecting bulk power competition in the electric utility industry. It
creates exemptions from regulation under the Holding Company Act for persons or
corporations that own and/or operate in the United States certain generating
and interconnecting transmission facilities dedicated exclusively to wholesale
sales, thereby encouraging the participation of utility affiliates, independent
power producers and other non-utility participants in the development of power
generation. In order to facilitate competition in power generation, the Energy
Act also confers expanded authority upon FERC to issue orders requiring
electric utilities to transmit power and energy to or for wholesale purchasers
and sellers, and to require electric utilities to enlarge or construct
additional transmission capacity to provide these services. While the Energy
Act prohibits FERC from issuing any such order that would unreasonably impair
the continuing reliability of affected electric systems or that would be
conditioned upon or require transmission services directly to an ultimate
consumer, the Energy Act creates the potential for utilities and other power
producers to gain increased access to the transmission systems of other
entities to facilitate wholesale sales. FERC is encouraging all parties
interested in transmission access to form RTGs to facilitate access to and
development of transmission service and to assist in settling disputes
regarding such matters. RTGs will not relieve FERC of its responsibilities
related to transmission access; however, such organizations could provide for
more efficient handling of transmission service requests and planning for
regional transmission needs. The Company is currently involved in the
development of two RTGs in the West, SWRTA and WRTA. WRTA was approved by
FERC on May 16, 1995 and SWRTA was approved on October 31, 1995. The Company
is a member of SWRTA and is also considering membership in WRTA. As a
condition of its approval of WRTA and SWRTA as RTGs the FERC has required all
transmitting utility members of each RTG to offer comparable transmission
services at least to other members of such RTG through tariffs that set forth
the rates, terms and conditions of service.
In late March 1995, the FERC issued two Notices of Proposed Rulemaking
(NOPR). The first NOPR on open access non-discriminatory transmission services
by public utilities and transmitting utilities is intended to facilitate
competition among suppliers to the bulk power market. If adopted, public
utilities would be required to open access to their transmission systems within
certain guidelines, and at pre-established tariffs. The second and
supplemental NOPR would provide a basis for recovery by regulated public
utilities of legitimate and verifiable stranded costs associated with existing
wholesale requirements customers and retail customers who become unbundled
wholesale transmission customers of the utility. A final rule on both NOPRs
is expected to take effect in 1996.
RETAIL
On the retail level, customers, particularly industrial and large
commercial customers, may have the ability to own and operate facilities to
generate their own electric energy requirements and, if such facilities are
qualifying facilities, to require the displaced electric utility to purchase
the output of such facilities at "avoided costs" pursuant to PURPA. Such
facilities may be operated by the customers themselves or by other entities
engaged for such purpose.
The Company is active in marketing energy and customizing energy-related
services to meet customer needs. In part as a result of such efforts, the
Company has to date lost no customers to self-generation. The Company's two
mining customers, which provide approximately 11% of the Company's total annual
revenues from retail customers, each have considered self-generation. However,
following negotiations with the Company in 1993 and 1994, new contracts were
executed that included, among other things, rate reductions and term
extensions. These contracts expire after the year 2000, subject to various
provisions allowing the customers to terminate partially or entirely, under
certain circumstances upon at least one and up to two years prior notice.
To date, no such notice has been received. The ability to enter into or
extend contracts, to avoid early termination, and to retain customers will
be dependent on, among other things, market conditions and alternatives
available to customers from time to time.
The legislatures and/or the regulatory commissions in several states have
considered or are considering "retail wheeling" which, in general terms, means
the transmission by an electric utility of energy produced by another entity
over its transmission and distribution system to a retail customer in such
utility's service territory. A requirement to transmit directly to retail
customers could have the result of permitting retail customers to purchase
electric capacity and energy from, at the election of such customers, the
electric utility in whose service area they are located or from other electric
utilities or independent power producers.
In Arizona, the ACC Staff issued its first report on a retail electric
competition workshop held in October of 1994. This report is the first in a
series of reports that will be issued on various workshops that will be held
from time to time to identify and address policy issues related to competition.
While other states are considering competition proposals, the ACC effort is
designed to obtain information about competition. No specific proposals are
currently being considered. The report proposes that Staff develop a
comprehensive set of options to better inform the ACC about its choices. Staff
recommended that three options be considered: 1) encouraging retail
competition, 2) permitting limited retail competition, and 3) discouraging
retail competition by prohibiting retail wheeling and allowing distributed
energy services. The ACC has also established a working group on retail
electric competition. Membership in the working group includes ACC Staff,
Arizona utilities, and other interested parties, and the first meeting of the
group took place in January 1995. A report from the group was issued in
October 1995. This report concludes Phase I of the Commission's investigation
into retail electric competition. Phase II will focus on obtaining more
information from interested parties and on recommendations on policy. The
Company cannot predict what the working group will recommend and what, if any,
changes in electric regulation and competition will be implemented by the ACC.
The Company continues to assess the impact of the Energy Act and other
possible legislation on the Company's ability to remain competitive in the
electric utility industry. The Company is unable to predict the ultimate
impact the Energy Act or any other possible legislation will have on its
operations.
ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company prepares its financial statements in accordance with the
provisions of FAS 71. A regulated enterprise can prepare its financial
statements in accordance with FAS 71 only if (i) the enterprise's rates for
regulated services are established by or subject to approval by an independent
third-party regulator, (ii) the regulated rates are designed to recover the
enterprise's costs of providing the regulated services and (iii) in view of
demand for the regulated services and the level of competition, it is
reasonable to assume that rates set at levels that will recover the
enterprise's costs can be charged to and collected from customers. FAS 71
requires a cost-based, rate-regulated enterprise to reflect the impact of
regulatory decisions in its financial statements. In certain circumstances,
FAS 71 requires that certain costs and/or obligations (such as incurred costs
not currently recovered through rates, but expected to be so recovered in the
future) be reflected in a deferral account in the balance sheet and not be
reflected in the statement of income or loss until matching revenues are
recognized.
If at some future point, the Company determines that it no longer meets
the criteria for continued application of FAS 71, the Company would be
required to adopt the provisions of FAS 101. Adoption of FAS 101 would
require the Company to write off its regulatory assets and liabilities as of
the date of adoption of FAS 101 and would preclude the future deferral in the
balance sheet of costs not recovered through rates at the time such costs were
incurred, even if such costs were expected to be recovered in the future.
Based on the balances of the Company's regulatory assets and liabilities as of
September 30, 1995, the Company estimates that the adoption of FAS 101 would
have resulted in an extraordinary loss of $135 million, which includes a
reduction for the related deferred income taxes. The Company does not expect
that its cash flows would be affected by the adoption of FAS 101. However, as
a result of the increase in the Company's accumulated deficit which would
result from such loss, the Company's ability to pay dividends could be further
impaired.
EARNINGS
The Company recorded net income of $60.7 million in the third quarter of
1995 compared with net income of $40.7 million in the third quarter of 1994.
The net income per average share of Common Stock was $0.37 for the third
quarter of 1995 compared with a net income per average share of Common Stock
of $0.25 for the second quarter of 1994.
For the first nine months of 1995, the Company recorded net income of
$48.8 million, compared with net income of $30.5 million recorded for the
first nine months of 1994. The net income per average share of Common Stock
was $0.30 in the first nine months of 1995 compared with a net income per
average share of Common Stock of $0.19 for the first nine months of 1994.
The results in both the third quarter and first nine months of 1995 were
affected by a one-time $12.2 million reduction in expenses ($0.07 per average
share of Common Stock) resulting from the satisfaction of certain requirements
under fuel and transportation agreements restructured in 1991 including full
compliance with the terms of existing contracts.
DIVIDENDS ON COMMON STOCK
The Company does not expect to be able to pay cash dividends on its Common
Stock for the foreseeable future. The Company is currently precluded by
restrictive covenants in certain debt agreements from declaring or paying
dividends. Certain State statutes also limit the Company's ability to pay
dividends. No dividends on Common Stock have been declared or paid since 1989.
Under current applicable provisions of the Arizona General Corporation
Law, the Company is permitted to declare and pay dividends on its shares in
cash, property, or its own shares, only out of unreserved and unrestricted
earned surplus or out of the unreserved and unrestricted net earnings of the
current fiscal year and the immediately preceding fiscal year taken as a
single period, except that the Company may not declare or pay dividends when
the Company is insolvent (unable to pay its debts as they become due in the
ordinary course of business) or when the payment of the dividend would render
the Company insolvent, or when the declaration or payment of the dividend
would be contrary to any restriction contained in the Articles.
At September 30, 1995, the Company had no earned surplus (its accumulated
deficit on that date was $633 million), and the Company expects limited net
earnings for the 1994 and 1995 fiscal years taken together. The Company
expects to have no earned surplus for the foreseeable future and limited net
earnings and cash flow for several years.
Under applicable provisions of amendments to the Arizona General
Corporation Law, which will be effective in 1996, a company will be permitted
to make distributions to shareholders unless, after giving effect to such
distribution, either (i) the company would not be able to pay its debts as they
come due in the usual course of business, or (ii) the company's total assets
would be less than the sum of its total liabilities plus the amount necessary
to satisfy any liquidation preferences of shareholders with preferential
rights. As of September 30, 1995, the Company's common stock equity was
$6 million.
Although the Company expects to meet the requirements under the amended
corporation law for making distributions to shareholders within the next
several years, restrictive covenants in certain existing debt agreements may
continue to preclude the Company from declaring or paying dividends.
The General First Mortgage contains covenants, applicable so long as
certain series of First Mortgage Bonds (aggregating $194 million in principal
amount) are outstanding, which restrict the payment of dividends on Common
Stock if certain cash flow coverage and retained earnings tests are not met.
The retained earnings test will prevent the Company from paying dividends on
its Common Stock until such time as the Company has positive retained earnings
rather than an accumulated deficit. Such covenants will remain in effect until
the First Mortgage Bonds of such series have been paid or redeemed. The latest
maturity of such First Mortgage Bonds is in 2003. The MRA includes a similar
dividend restriction based on retained earnings.
RESULTS OF OPERATIONS
RESULTS OF UTILITY OPERATIONS
SALES AND REVENUES
Comparisons of kilowatt-hour sales and electric revenues are shown below:
Increase/(Decrease)
Three Months Ended September 30 1995 1994 Amount Percent
Electric kWh Sales (000):
Retail Customers 2,232,633 2,226,699 5,934 0.3 %
Other Utilities 633,391 693,364 (59,973) (8.6)
--------- --------- -------
Total 2,866,024 2,920,063 (54,039) (1.9)
========= ========= =======
Electric Revenues (000):
Retail Customers $ 192,929 $ 191,857 $ 1,072 0.6 %
Amortization of MSR Option
Gain Regulatory Liability 5,014 5,014 - -
Other Utilities 19,844 23,615 (3,771) (16.0)
--------- --------- -------
Total $ 217,787 $ 220,486 $(2,699) (1.2)
========= ========= =======
Increase/(Decrease)
Nine Months Ended September 30 1995 1994 Amount Percent
Electric kWh Sales (000):
Retail Customers 5,401,473 5,389,121 12,352 0.2 %
Other Utilities 1,651,537 2,157,203 (505,666) (23.4)
--------- --------- --------
Total 7,053,010 7,546,324 (493,314) (6.5)
========= ========= ========
Electric Revenues (000):
Retail Customers $451,124 $450,809 $ 315 0.1 %
Amortization of MSR Option
Gain Regulatory Liability 15,040 15,040 - -
Other Utilities 56,673 72,313 (15,640) (21.6)
-------- -------- --------
Total $522,837 $538,162 $(15,325) (2.8)
======== ======== ========
KWh sales to retail customers increased less than 1% in the third quarter
of 1995 compared with the third quarter of 1994 due to a 2.9% increase in the
average number of retail customers, partially offset by cooler temperatures in
the third quarter of 1995 than in the third quarter of 1994. Based on billed
cooling degree days, a commonly used measure in the electric industry that is
calculated by subtracting 75 from the average of the high and low daily
temperatures, the Tucson area registered an approximate 16% decrease in such
billed cooling degree days for the third quarter of 1995 compared with the
third quarter of 1994. In contrast, billed cooling degree days increased
approximately 9% for the third quarter of 1995 compared with the 10 year
average for the same period from 1985 to 1994. Specifically, billed cooling
degree days were 1,039, 1,232, and 950 for the third quarter of 1995, 1994,
and the 10 year average for the third quarter, respectively.
KWh sales to retail customers increased less than 1% in the first nine
months of 1995 compared with the same period in 1994. As in the third
quarter, milder weather dampened sales despite continued growth in the average
number of retail customers.
Revenues from sales to retail customers increased in the third quarter and
first nine months of 1995 compared with the same period of 1994 due to higher
kWh sales discussed above.
Lower kWh sales to other utilities in both the third quarter and first
nine months of 1995 compared with the same periods in 1994 resulted from lower
regional loads due to mild weather conditions and the increased availability of
lower cost hydroelectric power in the western United States. Lower revenues
from sales to other utilities resulted from lower sales and lower energy prices
in the third quarter and first nine months of 1995 than in the same periods of
1994.
OPERATING EXPENSES
Fuel and purchased power expense decreased in the third quarter and first
nine months of 1995 compared with the same periods in 1994 as a result of a one
time $12.2 million reduction in fuel expenses due to the satisfaction of
certain requirements under fuel and transportation agreements restructured in
1991, and lower generation requirements in the third quarter and first nine
months of 1995 than in the same periods of 1994.
Other operations decreased in the third quarter of 1995 compared with the
same period of 1994 as a result of lower accrual of employee expenses related
to compensation and pension benefits.
Maintenance and repairs expense was lower in both the third quarter and
first nine months of 1995 than in the same periods of 1994 due to overhaul work
at the San Juan and Springerville stations in 1994 and adjustments to materials
and supplies inventory made in 1994.
OTHER INCOME
Interest income increased as a result of higher interest rates during the
first nine months of 1995 than during the same period in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to generate sufficient cash flows during 1995 to fund
its continuing operating activities and construction expenditures. Furthermore,
the Company believes it has sufficient cash flow along with adequate cash and
temporary investments to meet expected cash obligations for the remainder of
1995. If cash flows were to fall short of expectations, the Company would rely
on existing cash balances, the Renewable Term Loan and, if necessary,
borrowings under the Revolving Credit.
In May 1995, the Company purchased approximately $18 million of
Springerville Unit 1 lease debt securities. The Company expects yearly cash
earnings of approximately $2.0 million as a result of the above-mentioned
purchase. This purchase is shown on the balance sheet under Investments and
Other Property and the interest earned is included in Interest Income on the
income statement. Also, as a result of the debt securities purchase, the
Renewable Term Loan commitment was decreased by $10 million to meet the
prepayment provisions of the MRA.
In September 1995, the Company paid $87 million on the Renewable Term Loan
to reduce the outstanding loan balance from $118 million to $31 million. The
Renewable Term Loan commitment remains at $164 million.
The Company's cash and cash equivalents balance at November 6, 1995 was
approximately $57 million. Cash balances are invested in investment grade
money-market securities with an emphasis on preserving the principal amounts
invested.
CASH FLOWS
The Company's cash and cash equivalents decreased $172 million or 75%,
from the September 30, 1994 ending balance of $230 million, to the
September 30, 1995 ending balance of $58 million. The reduction was primarily
due to debt repayments, purchase of debt securities, investments and payment
of taxes which may be refundable pending the outcome of tax appeals (see
Note 2 of Notes to Consolidated Financial Statements, Commitments and
Contingencies, Tax Assessments).
Net cash flows from continuing operating activities decreased in aggregate
$38 million in the first nine months of 1995 compared with the first nine
months of 1994 due primarily to a $14.6 million tax payment in the first
quarter of 1995 made by the Company relating to an appeal of a transaction
privilege tax assessment (see Note 2 of Notes to Consolidated Financial
Statements, Commitments and Contingencies, Tax Assessments); increased wages
paid due to the 1994 incentive plan and increased employee compensation and
pension benefits; higher interest payments on long-term debt; and lower cash
receipts from sales to other utilities. Cash receipts from sales to other
utilities decreased due to lower kWh sales and lower energy prices as a result
of lower regional loads and an abundance of hydroelectric power in the western
United States. Increased cash expenditures were partially offset during the
first nine months of 1995 due to greater interest income received and lower
fuel and purchased power expenses.
Net cash flows from investing activities decreased in the first nine
months of 1995 compared with the same period in 1994 as a result of the
purchase of debt securities described above, and the investment in the Coors
Energy project by the Trigen-Nations partnership described above under Nations
Energy Corporation.
Net cash flows from financing activities decreased $178 million in the
first nine months of 1995 compared with the same period in 1994 as a result of
$16 million of first mortgage bond maturities, a $19 million permanent
prepayment of the Term Loan and $143 million payment of the Renewable Term
Loan, an amount that can be reborrowed.
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
SDGE/FERC PROCEEDINGS
SAN DIEGO GAS & ELECTRIC V. TUCSON ELECTRIC POWER COMPANY
See Note 2 of Notes to Consolidated Financial Statements, San Diego Gas &
Electric v. Tucson Electric Power Company.
ALAMITO COMPANY, DOCKET NO. ER79-97-009
See Note 2 of Notes to Consolidated Financial Statements, Alamito Company,
Docket No. ER79-97-009.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
15 - Letter regarding unaudited interim financial information.
27a - Financial Data Schedule.
27b - Financial Data Schedule.
(b) Reports on Form 8-K.
- No reports on Form 8-K were filed during the third
quarter of 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUCSON ELECTRIC POWER COMPANY
(Registrant)
Date: November 9, 1995 Ira R. Adler
---------------
Ira R. Adler
Senior Vice President and Principal
Financial Officer
EXHIBIT INDEX
15 - Letter regarding unaudited interim financial information.
27a - Financial Data Schedule.
27b - Financial Data Schedule.