SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 1-5924
1
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, P.O. BOX 711
ARIZONA 85702
85701 Zip Code)
Address of Principal Executive
Offices)
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 15d) of the Securities Exchange Act of
1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports), and 2) has been subject to such
filing requirements for the past 90 days.
Yes X No
At May 9, 1996, 160,652,959 shares of the registrant's Common Stock, no par
value the only class of Common Stock), were outstanding.
2
TABLE OF CONTENTS
Page
Definitions..............................................................ii
Independent Accountants' Report...........................................1
PART I - FINANCIAL INFORMATION
Item 1. -- Financial Statements
Comparative Consolidated Statements of Income Loss)..................2
Comparative Consolidated Statements of Cash Flows....................3
Comparative Consolidated Balance Sheets..............................4
Notes to Consolidated Financial Statements
Note 1. Rate Matters................................................5
Note 2. Tax Assessments.............................................5
Note 3. Income Taxes................................................6
Note 4. Long-Term Debt..............................................6
Note 5. Reclassification............................................6
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview.............................................................7
Rate Matters.........................................................7
Competition
Wholesale........................................................8
Retail...........................................................9
Accounting for the Effects of Regulation............................10
Dividends on Common Stock...........................................11
Earnings............................................................11
Results of Operations
Results of Utility Operations
Sales and Revenues..............................................12
i
Operating Expenses..............................................12
Other Income....................................................13
Interest Expense................................................13
Income Taxes....................................................13
Liquidity and Capital Resources..........................................14
Cash Flows......................................................14
Financing Developments..........................................14
PART II - OTHER INFORMATION
Item 1. -- Legal Proceedings
Tax Assessments..................................................16
Item 6. -- Exhibits and Reports on Form 8-K............................16
Signature Page...........................................................17
Exhibit Index............................................................18
DEFINITIONS
The abbreviations and acronyms used in the 1996 First Quarter Form 10-Q are
defined below:
ACC............... Arizona Corporation Commission.
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.
ii
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.
FAS 121........... Statement of Financial Accounting Standards #121:
Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of.
FERC.............. Federal Energy Regulatory Commission.
First Mortgage Bonds 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-hours).
MRA............... Master restructuring agreement between the Company and the
Banks which includes the Renewable Term Loan, Revolving
Credit and certain replacement reimbursement agreement.
iii
MSR............... Modesto, Santa Clara and Redding Public Power Agency.
Nations Energy.... Nations Energy Corporation, a wholly-owned subsidiary of
the Company.
1994 Rate Order... ACC Rate Order concerning an increase in the Company's
retail base rates and certain regulatory write-offs,
issued January 11, 1994.
1996 Rate Order..................... ACC Rate Order concerning an
increase in the Company's retail base rates and the
recovery of Springerville Unit 2 costs, issued March 29,
1996.
NOL............... Net Operating Loss carryforward for tax purposes.
NOPR.............. Notice of Proposed Rulemaking.
PURPA............. Public Utility Regulatory Policies Act of 1978, as
amended.
RTGs.............. Regional Transmission Groups.
Renewable Term Loan Credit facility that replaced the Term Loan pursuant to
the MRA Sixth Amendment, dated as of November 1, 1994,
and effective March 7, 1995.
Revolving Credit.. $50 million revolving credit facility entered into between
a syndicate of banks and the Company.
Shareholders...... Holders of Common Stock.
Springerville..... Springerville Generating Station.
Springerville Common Facilities
Leases.......... Leveraged lease arrangements relating to one-half interest
in certain facilities at Springerville used in common
with Springerville Unit 1 and Springerville Unit 2.
Springerville Unit 1 Leases 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.
SWRTA............. Southwest Regional Transmission Association.
iv
DEFINITIONS
concluded)
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
220 West Sixth Street
Tucson, Arizona 85701
We have reviewed the accompanying condensed consolidated balance sheet of Tucson
Electric Power Company and subsidiaries the "Company") as of March 31, 1996 and
the related condensed consolidated statements of income loss) and of cash flows
for the three-month periods ended March 31, 1996 and 1995. These financial
statements are their 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 condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
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, 1995 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 29, 1996
which includes an explanatory paragraph relating to the timing of the recovery
of 37.5% of Springerville Unit 2; see Note 1 to the March 31, 1996 condensed
1
consolidated financial statements for the current status of this matter), 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, 1995 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which is has been derived.
DELOITTE & TOUCHE LLP
Tucson, Arizona
May 3, 1996
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The March 31 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 (LOSS)
Three Months Ended
March 31,
1996 1995
-Thousands of Dollars-
Operating Revenues
Retail Customers $125,210 $118,187
Amortization of MSR Option Gain Regulatory Liability 5,013 5,013
Sales for Resale 17,805 19,545
--------- ---------
Total Operating Revenues 148,028 142,745
--------- ---------
Operating Expenses
Fuel and Purchased Power 50,849 45,716
Capital Lease Expense 23,325 23,443
Amortization of Springerville Unit 1 Allowance (7,273) (7,108)
Other Operations 23,954 24,842
Maintenance and Repairs 8,792 10,683
Depreciation and Amortization 23,487 22,886
Taxes Other Than Income Taxes 13,858 15,557
Income Taxes (7,536) (22)
--------- ---------
Total Operating Expenses 129,456 135,997
--------- ---------
Operating Income 18,572 6,748
--------- ---------
Other Income (Deductions)
Income Taxes 5,693 1,130
Interest Income 1,473 2,721
Gains on Sales of Securities - 2,958
Other (562) (32)
--------- ---------
Total Other Income (Deductions) 6,604 6,777
--------- ---------
Interest Expense
Long-Term Debt - Net 14,644 18,378
Interest Imputed on Losses Recorded at Present Value 8,363 8,345
Other 2,118 2,039
Allowance for Borrowed Funds Used During Construction (368) (277)
--------- ---------
Total Interest Expense 24,757 28,485
--------- ---------
Net Income (Loss) $ 419 $(14,960)
========= =========
Average Shares of Common Stock Outstanding (000) 160,668 160,724
========= =========
Net Income (Loss) per Average Share $ 0.00 $ (0.09)
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1996 1995
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $140,519 $137,231
Cash Receipts from Sales for Resale 17,037 25,476
Fuel and Purchased Power Costs Paid (39,985) (38,185)
Wages Paid, Net of Amounts Capitalized (24,824) (23,962)
Payment of Other Operations and Maintenance Costs (19,922) (19,105)
Capital Lease Interest Paid (37,838) (37,912)
Interest Paid, Net of Amounts Capitalized (13,739) (17,119)
Taxes Paid, Net of Amounts Capitalized (12,013) (26,293)
Emission Allowance Inventory Sale 4,120 -
Interest Received 1,890 2,919
--------- ---------
Net Cash Flows - Operating Activities 15,245 3,050
--------- ---------
Cash Flows from Investing Activities
Construction Expenditures (17,835) (14,577)
Other 311 2,768
--------- ---------
Net Cash Flows - Investing Activities (17,524) (11,809)
--------- ---------
Cash Flows from Financing Activities
Payments to Retire Long-Term Debt (10,000) (35,492)
Payments on Renewable Term Loan - (55,660)
Payments to Retire Capital Lease Obligations (4,150) (4,911)
Other 288 227
--------- ---------
Net Cash Flows - Financing Activities (13,862) (95,836)
--------- ---------
Net Decrease in Cash and Cash Equivalents (16,141) (104,595)
Cash and Cash Equivalents, Beginning of Year 85,094 248,152
--------- ---------
Cash and Cash Equivalents, End of Period $ 68,953 $143,557
========= =========
See Notes to Consolidated Financial Statements.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
Three Months Ended
March 31,
1996 1995
-Thousands of Dollars-
Net Income (Loss) $ 419 $(14,960)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Flows
Depreciation and Amortization Expense 23,487 22,886
Deferred Income Taxes and
Investment Tax Credits - Net (13,229) (1,152)
Deferred Fuel and Purchased Power - 1,757
Lease Payments Deferred (9,138) (9,006)
Regulatory Amortizations, Net of Interest Imputed
on Losses Recorded at Present Value (3,923) (3,776)
Other (305) (1,335)
Changes in Assets and Liabilities which
Provided (Used) Cash Exclusive of
Changes Shown Separately
Accounts Receivable 6,929 16,615
Materials and Fuel 1,290 (10,126)
Accounts Payable (1,178) 6,778
Taxes Accrued 14,173 2,583
Other Current Assets and Liabilities (7,934) (8,818)
Other Deferred Assets and Liabilities 4,654 1,604
--------- ---------
Net Cash Flows - Operating Activities $ 15,245 $ 3,050
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1996 1995
- Thousands of Dollars -
Utility Plant
Plant in Service $2,105,690 $2,095,679
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 58,857 50,898
----------- -----------
Total Utility Plant 3,057,611 3,039,641
Less Accumulated Depreciation and Amortization (878,646) (859,227)
Less Accumulated Amortization of Capital Leases (43,661) (40,113)
Less Springerville Unit 1 Allowance (162,478) (162,175)
----------- -----------
Total Utility Plant - Net 1,972,826 1,978,126
----------- -----------
Investments and Other Property 51,730 52,116
----------- -----------
Current Assets
Cash and Cash Equivalents 68,953 85,094
Accounts Receivable 54,788 61,717
Materials and Fuel 40,878 42,168
Deferred Income Taxes - Current 16,154 18,250
Other 9,334 7,565
----------- -----------
Total Current Assets 190,107 214,794
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 135,957 135,957
Deferred Common Facility Costs 62,667 63,303
Deferred Springerville Unit 2 Costs 38,807 42,039
Deferred Lease Expense 18,679 19,808
Other Deferred Regulatory Assets 8,380 8,576
Deferred Debits - Other 15,320 16,211
----------- -----------
Total Deferred Debits 279,810 285,894
----------- -----------
Total Assets $2,494,473 $2,530,930
=========== ===========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
March 31, December 31,
1996 1995
- Thousands of Dollars -
Capitalization
Common Stock $ 645,281 $ 645,295
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (626,031) (626,450)
----------- -----------
Common Stock Equity 12,893 12,488
Capital Lease Obligations 900,979 897,958
Long-Term Debt 1,207,460 1,207,460
----------- -----------
Total Capitalization 2,121,332 2,117,906
----------- -----------
Current Liabilities
Short-Term Debt 12,039 12,039
Current Obligations Under Capital Leases 32,011 33,389
Current Maturities of Long-Term Debt 2,075 12,075
Accounts Payable 24,000 25,178
Interest Accrued 40,610 57,389
Taxes Accrued 29,869 15,696
Accrued Employee Expenses 5,032 13,680
Other 7,710 7,989
----------- -----------
Total Current Liabilities 153,346 177,435
----------- -----------
Deferred Credits and Other Liabilities
MSR Option Gain Regulatory Liability 21,384 25,610
Accumulated Deferred Investment Tax Credits
Regulatory Liability 18,376 19,603
Other Regulatory Liabilities 13,947 10,343
Deferred Income Taxes - Noncurrent 131,882 145,982
Other 34,206 34,051
----------- -----------
Total Deferred Credits and Other Liabilities 219,795 235,589
----------- -----------
Total Capitalization and Other Liabilities $2,494,473 $2,530,930
=========== ===========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 1. RATE MATTERS
- ---------------------
On March 29, 1996, the ACC authorized a 1.1%, or $6.4 million, increase
in base rates effective March 31, 1996. Pursuant to the 1996 Rate Order, the
Company agreed to not seek an increase in base rates before January 1, 2000,
subject to conditions specified in such order.
The 1996 Rate Order recognizes all of Springerville Unit 2 as used and
useful for regulatory purposes, so that the Company will be able to recover
operating and capital costs associated with the portion of such generating
unit not previously included in rate base. Prior to the 1996 Rate Order, the
Company was not 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 not deemed by the
ACC to be used and useful for the retail jurisdiction and therefore not
included in rate base (hereinafter referred to as "retail excess capacity
deferrals"). The 1994 Rate Order permitted such costs to be deferred for
future recovery over the remaining useful life of Springerville Unit 2.
However, this phase-in plan did not qualify under FAS 92 and, therefore, such
retail excess capacity deferrals, while deferred for regulatory purposes,
were not deferred for financial reporting purposes and were expensed as
incurred. Such retail excess capacity deferrals totaled $3 million during
the three months ended March 31, 1996, bringing the total to $81 million at
March 30, 1996. Beginning March 31, 1996, the total retail excess capacity
deferrals will be amortized for regulatory purposes over 20 years.
In addition, prior to the 1996 Rate Order, the Company was not
recovering through retail rates 37.5% of the deferred Springerville Unit 2
rate synchronization costs ($28 million at March 30, 1996), which were non-
fuel costs of Springerville Unit 2 incurred from January 1, 1991 through
October 14, 1991. Beginning March 31, 1996, these costs will be amortized
over a three-year period on the Consolidated Statements of Income (Loss), in
accordance with the 1996 Rate Order. This amount, together with the balance
of such costs that the Company has been recovering through rates, pursuant to
the 1994 Rate Order, ($11 million at March 31, 1996), are reported in the
Company's Consolidated Balance Sheet as Deferred Springerville Unit 2 Costs.
The amortization of such costs is included in Depreciation and Amortization
on the Company's Consolidated Statements of Income (Loss).
NOTE 2. TAX ASSESSMENTS
- ------------------------
The Arizona Department of Revenue has issued transaction privilege tax
assessments to the Company alleging that Valencia is liable for sales tax on
gross income received from coal sales, transportation and coal-handling
services to the Company for the period November 1985 through May 1993. 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. In prior years, the Company has paid,
under protest, a total of $23 million 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 March 31, 1996. 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 additional sales tax expense of up to
approximately $27 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.
NOTE 3. INCOME TAXES
- ---------------------
The benefit for income taxes included in the Comparative Consolidated
Statements of Income (Loss) consists of the following:
Three Months Ended
March 31,
1996 1995
---------- ----------
- Thousands of Dollars -
Operating Expenses:
Deferred Tax Benefit
Federal $ 5,979
State 1,543
---------- ----------
Total 7,522
Investment Tax Credit Amortization 14 $ 22
---------- ----------
Total Benefit Included in Operating Expenses 7,536 22
---------- ----------
Other Income (Deductions):
Deferred Tax Expense
Federal (292) -
State (77) -
---------- ----------
Total (369) -
Reduction in Valuation Allowance 4,849 -
Investment Tax Credit Amortization 1,213 1,130
---------- ----------
Total Benefit Included in
Other Income (Deductions) 5,693 1,130
---------- ----------
Total Benefit for Federal and State
Income Taxes $ 13,229 $ 1,152
========== ==========
The differences between income tax benefit and the amount obtained by
multiplying income (loss) before income taxes by the U.S. statutory federal
income tax rate are as follows:
Three Months Ended
March 31,
1996 1995
---------- ----------
- Thousands of Dollars -
Federal Income Tax Benefit at
Statutory Rate $ 4,484 $ 5,639
State Income Tax Benefit, Net of
Federal Deduction 690 -
Investment Tax Credit Amortization 1,227 1,152
Reduction in Valuation Allowance 4,849 -
Loss for Which No Tax Benefit
is Recognized - (5,639)
Use of Capital Loss Carryforwards 1,663 -
Other 316 -
---------- ----------
Total Benefit for Federal and
State Income Taxes $ 13,229 $ 1,152
========== ==========
NOTE 4. LONG-TERM DEBT
- -----------------------
On May 1, 1996, the Coconino County, Arizona Pollution Control
Corporation, on behalf of the Company, issued $16.7 million of variable rate
Pollution Control Revenue Bonds. The Pollution Control Corporation also
issued $14.7 million of variable rate Pollution Control Refunding Revenue
Bonds on behalf of the Company to provide funds to refund previously issued
8.25% Pollution Control Revenue Bonds. Both issues have a scheduled maturity
in 2031 and are secured by separate Letters of Credit that expire in 1999.
NOTE 5. RECLASSIFICATION
- -------------------------
Minor reclassifications have been made to the prior year financial
statements presented to conform to the current year's presentation.
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 first quarter of 1996 compared with the first quarter of
1995, the outlook for dividends on Common Stock, and changes in liquidity and
capital resources of the Company during the first quarter of 1996. Also
management's expectations of identifiable material trends are discussed.
OVERVIEW
Earnings for the Company improved by approximately $15.4 million in the
first quarter of 1996 relative to the same time period in 1995. This
improvement, from a net loss of $15.0 million to net income of $0.4 million,
reflects the recognition of non-cash tax benefits of $9.6 million associated
with federal net operating loss carryforwards generated in the first quarter of
1996 and the expected future utilization of federal net operating loss
carryforwards. See ~Results~of~Utility~Operations,~Income~Taxes~below. This
improvement also reflects the Company's continuing efforts to reduce operating
costs and capital costs, and growth in the Company's retail service area. The
Company also ended the first quarter of 1996 with common stock equity of $12.9
million, compared to a balance of $12.5 million as of December 31, 1995 and a
$57.2 million deficit balance recorded as of March 31, 1995.
Despite such improvements, the Company's financial prospects continue to be
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 generation 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
7
success will depend, among other things, on the Company's ability to contain the
costs of serving retail customers and the level of sales to such customers.
Although 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, a number of factors such as changes in economic conditions and the
increasingly competitive electric markets could affect the Company's levels of
sales.
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, approximately $1.0 billion of the Company's long-term debt
will be maturing, including approximately $805 million in reimbursement
agreements relating to letters of credit which will expire. The Company intends
to pay or refinance maturing bonds and bank loans and to replace or extend such
letters of credit. There can be no assurance, however, that the Company will be
able to pay such debt or replace or extend such letters of credit. 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.
The Company's capital structure is highly leveraged and the Company's
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 existing obligations to creditors. To
the extent the Company refinances 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
and various restrictive covenants, such as dividend payment restrictions.
Access to equity capital may be limited because of the Company's likely limited
8
future profitability and its present inability to pay dividends. See
~Dividends~on~Common~Stock~~below.
During the next twelve months, the Company expects to be able to fund
continuing operating activities and construction expenditures with internal cash
flows, existing cash balances, and, if necessary, drawdowns under the Renewable
Term Loan and/or borrowings under the Revolving Credit. Cash balances are
invested in investment grade, money-market securities with an emphasis on
preserving the principal amount invested.
RATE MATTERS
On March 27, 1996 the ACC took formal action to resolve the Company's rate
application which was filed on June 13, 1995. In that application the Company
requested an overall increase in retail rates of 4.9% approximately $28.4
million in annual revenues). In its order dated March 29, 1996, the ACC
approved with certain modifications a rate settlement agreement which was filed
with the ACC on March 8, 1996, and approved a one-time rate increase for the
Company of 1.1 percent approximately $6.4 million annually). The rate increase
was implemented by the Company on March 31, 1996 for electrical usage on or
after such date.
The 1996 Rate Order recognizes all of Springerville Unit 2 as used and
useful for ratemaking purposes so that the Company will be able to recover the
operating and capital costs associated with that portion of the generating unit
not previously included in rates. See ~Note~1~of
the~Notes~to~Consolidated~Financial~Statements~, ~Rate~Matters.~The 1996 Rate
Order and approved settlement agreement also establish a rate moratorium period
for the Company. The Company has committed not to file for a change in base
rates prior to January 1, 2000, except for conditions or circumstances which
9
constitute an emergency, for the sharing of benefits with customers of cost
containment efforts where appropriate, or in the event the Company is acquired
or merged with another company. Among other things, the 1996 Rate Order and
approved settlement agreement also contain provisions relating to the
implementation of time-of-use rates for residential customers, increased pricing
flexibility for commercial and industrial customers, the consideration of
incentive regulation and a review of jurisdictional cost allocation procedures
for wholesale sales.
The rates approved in the 1996 Rate Order are based on a rate of return of
6.59 percent on a fair value rate base of approximately $1.36 billion, or 7.72
percent on an original cost rate base of approximately $1.16 billion. The
capital structure adopted by the ACC for rate making purposes includes 62.5
percent debt and 37.5 percent equity. Consistent with previous ACC rate orders,
the Company's leasehold interest in utility plant was reflected in rates through
an allowance for rental expense, and was therefore not included in rate base.
COMPETITION
WHOLESALE
The Company competes 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. In the
current market, wholesale 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 at least the next several years, due to increased competition and
10
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 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 Policy Act of 1992 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.
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
11
forth the rates, terms and conditions of service.
On March 29, 1995, the FERC issued a Notice of Proposed Rulemaking NOPR) on
Open Access Non-Discriminatory Transmission Services by Public Utilities and
Transmitting Utilities the Open Access NOPR) and a supplemental NOPR on Recovery
of Stranded Costs the Stranded Costs NOPR). On December 13, 1995, FERC issued a
third and supplemental NOPR on Real-Time Information Networks and Standards of
Conduct. On April 24, 1996, the FERC issued two orders pertaining to these
rulemaking proceedings. Order Number 888 addresses both open access and
stranded cost issues. Order Number 889 addresses the issue of establishing
real-time electronic information systems for transmission capacity, and provides
standards of conduct for owners of transmission capacity. On this same date the
FERC also issued a NOPR which proposes to establish a new system for utilities
to use in reserving capacity on their own and others' transmission lines.
Pursuant to Order Number 888, all public utilities that own, control, or
operate interstate transmission facilities will be required to offer
transmission service to others under a single tariff that incorporates certain
minimum terms and conditions of transmission service established by the FERC.
This tariff 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. According to the Order, the
use of a single tariff, when combined with other aspects of the order, is
intended to promote wholesale competition through the provision of non-
discriminatory open access transmission service by public utilities. Public
utilities will be required to file open access tariffs containing the terms and
conditions outlined in the Order within 60 days after publication of the final
rules in the Federal Register. With regard to the pricing of transmission
services, the order does not prescribe rates for network, point-to-point, or
ancillary services. Instead, public utilities may charge current rates or apply
for new transmission rates that comply with a transmission pricing policy
statement issued by the FERC in 1994. In establishing new rates for
12
transmission service, the order allows transmission providers to propose the
recovery of opportunity costs and expansion costs. Additionally, the order
permits public utilities to reserve existing transmission capacity needed for
native load growth and network transmission customer load growth that is
reasonably forecasted to occur within the utility's current planning horizon.
As proposed in the new NOPR pertaining to transmission capacity reservation,
each public utility would be required to replace the single pro forma tariff
established in Order Number 888 with a capacity reservation tariff by December
31, 1997. Comments on this new NOPR are due by August 1, 1996.
Order Number 888 also provides 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. The order allows public
utilities to seek recovery of wholesale stranded costs from departing customers.
Such recovery would be achieved through a rate filing that is premised on the
direct assignment of stranded costs to the departing customer. The order
further states that the FERC would consider allowing the recovery of stranded
costs associated with retail wheeling only if a state regulatory commission
lacks the authority to consider that issue.
Order Number 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 that are designed
to prevent employees of a public utility engaged in marketing functions from
obtaining preferential access to OASIS-related information or from engaging in
unduly discriminatory business practices. As such, public utilities will be
required to completely separate their wholesale power marketing and transmission
operation functions. The rules contained in this order will become effective 60
days after publication in the Federal Register. However, compliance with these
rules will not be required until November 1, 1996.
13
The requirements of Order Number 888 and Order Number 889 are still under
review by the Company. Therefore, the Company is unable to predict at this time
the ultimate impact of such orders on the Company's future results of
operations.
RETAIL
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.
Electric energy for meeting retail customers' needs primarily competes with
natural gas, an alternative fuel source for certain retail energy uses. Such
uses may include heating, cooling and a limited number of other energy
applications. In most applications, electric energy is a cost effective source
of energy compared with natural gas. Also, customers, particularly industrial
and large commercial customers, may 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 actively markets energy and customized energy-related services
to meet customer needs. The Company has to date lost no customers to self-
generation in part because of such efforts and in part because such self-
generation alternatives have proven to be uneconomic in comparison with Company-
provided electric service. For example, the Company's two mining customers,
which provide approximately 10% of the Company's total annual revenues from
14
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,
the Company's ability to contain its costs, 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. While retail wheeling would expose
the Company's service territory to increased competition, it would also open
additional markets into which the Company may sell its electric power.
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
15
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. In February 1996, Phase II started and is focusing
on obtaining more information from interested parties and recommendations on
policy. Responses to a series of questions posed by the ACC on issues related
to retail competition and market structure are due to be filed with the ACC by
June 28, 1996. 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. This statement requires a cost-based rate-regulated
utility to reflect the effect of regulatory decisions in its financial
statements. In certain circumstances, FAS 71 requires that certain costs and/or
obligations 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. Therefore, the Company's Consolidated Balance Sheets at March 31,
1996, and at December 31, 1995, contain certain line items for example, Deferred
Debits - Regulatory Assets and MSR Option Gain Regulatory Liability, Accumulated
Deferred Investment Tax Credits Regulatory Liability, and Other
16
Regulatory Liabilities) solely as a result of the application of FAS 71. In
addition, a number of line items in the Company's Consolidated Statements of
Income Loss) for the quarters ended March 31, 1996 and 1995 also reflect the
application of FAS 71.
If at some point in the future the Company determines that all or a portion
of the Company's regulated operations no longer meet the criteria for continued
application of FAS 71, the Company would be required to adopt the provisions of
FAS 101 for that portion of the operations for which FAS 71 no longer applied.
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 March 31, 1996, the Company estimates that future adoption of
FAS 101 for all of the Company's regulated operations would result in an
extraordinary loss of $142 million, which includes a reduction for the related
deferred income taxes of $68 million. The Company's cash flows would not be
affected by the adoption of FAS 101.
At the present time, the Company recovers the costs of its plant assets
through its regulated revenues. If in the future the Company discontinues
accounting according to the provisions of FAS 71, the Company would also need to
consider whether the markets in which the Company is then selling power will
allow the Company to recover the costs of its plant assets. If at that time
market prices are not expected to allow the Company to recover the costs of its
plant assets, additional write-downs may be required in accordance with the
provisions of FAS 121. The Company is presently unable to predict the amounts,
if any, of any potential future write-downs attributable to the provisions of
FAS 121 under such circumstances.
DIVIDENDS ON COMMON STOCK
17
The Company is precluded by restrictive covenants in certain debt
agreements from declaring or paying dividends. No dividend on common stock has
been declared or paid since 1989.
Under the applicable provisions of amendments to the Arizona General
Corporation Law, in effect starting in 1996, a company is 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. Under such
provisions, the Company is currently able to declare and pay a dividend.
The Company's ability to pay a dividend is restricted by certain covenants
of the General First Mortgage applicable so long as certain series of First
Mortgage Bonds aggregating $184 million in principal amount) are outstanding.
These covenants restrict the payment of dividends on Common Stock if certain
cash flow coverage and retained earnings tests are not met. The cash flow
coverage and retained earnings test will prevent the Company from paying
dividends on its Common Stock until such time as the Company's cash flow
coverage ratio, as defined therein, is greater or equal to a ratio of 2 to 1,
and the Company has positive retained earnings rather than an accumulated
deficit. As of March 31, 1996, the Company had a cash flow coverage ratio in
excess of 2 to 1 and the Company's accumulated deficit was $626 million. 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 contains a similar dividend restriction based on the amount of
retained earnings. Such restriction will no longer apply if i) the Renewable
Term Loan and the Revolving Credit have been paid in full and the commitments
18
relating thereto have been terminated and ii) the Company's senior long-term
debt is rated investment grade. Currently, the Company's total outstanding
amounts under the Renewable Term Loan are $31 million and to date no amounts
have been borrowed under the Revolving Credit. Commitments relating to such
facilities permit the Company to borrow $133 million under the Renewable Term
Loan and $50 million under the Revolving Credit. Also, the Company's senior
debt is currently rated below investment grade.
In order for the Company to pay a dividend when such covenants would
otherwise restrict such payment, the Company would have to i) obtain a waiver or
an amendment to the MRA's retained earnings covenant and ii) redeem all
outstanding First Mortgage Bonds of the series that contain dividend
restrictions or amend the General First Mortgage. Such amendment would require
approval by holders of 75% of all First Mortgage Bonds.
In addition to such restrictive covenants, the Company may also be
restricted under the Federal Power Act from paying dividends from funds properly
included in capital account. The provisions of the Federal Power Act leaves the
scope of any such restriction and its potential applicability to the Company
unclear.
EARNINGS
The Company recorded net income of $0.4 million in the first quarter of
1996 compared with a net loss of $15.0 million in the first quarter of 1995.
The net income per average share of Common Stock was essentially zero for the
first quarter of 1996 compared with a net loss per average share of Common Stock
of $0.09 for the first quarter of 1995.
RESULTS OF OPERATIONS
19
RESULTS OF UTILITY OPERATIONS
SALES AND REVENUES
Comparisons of kilowatt-hour sales and electric revenues are shown below:
Increase/Decrease)
Three Months Ended March 31 1996 1995 Amount Percent
Electric kWh Sales 000):
Retail Customers 1,581,425 1,493,302 88,123 5.9 %
Sales for Resale 719,064 577,343 141,721 24.5
Total 2,300,489 2,070,645 229,844 11.1
Electric Revenues 000):
Retail Customers $125,210 $118,187$ 7,023 5.9 %
Amortization of MSR Option
Gain Regulatory Liability 5,013 5,013 - -
Sales for Resale 17,805 19,545 (1,740 ) 8.9)
Total $148,028 $142,745$ 5,283 3.7
KWh sales to retail customers increased by 5.9% in the first quarter of
1996 compared with the first quarter of 1995 due to a 3.0% increase in the
20
average number of retail customers and an 8.5% increase in sales to industrial
customers.
Revenues from sales to retail customers increased in the first quarter of
1996 compared with the same period of 1995 due to higher kWh sales discussed
above.
Higher sales for resale in the first quarter of 1996 relative to the same
period in 1995 resulted primarily from the availability of generating capacity
which was out of service in early 1995 due to planned maintenance activities.
Despite the increase in sales, wholesale revenues declined due to a reduction in
the average price per kWh sold. This reduction in the average unit price
realized was due primarily to the expiration of a firm power sale agreement with
Nevada Power Company in December 1995.
OPERATING EXPENSES
Fuel and Purchased Power expense increased in the first quarter of 1996
compared with the same period in 1995 primarily as a result of increased kWh
sales. However, fuel expense increased disproportionately to the increase in
revenues due to take-or-pay payments made in the first quarter of 1996.
Although the Company's present fuel requirements are generally in excess of the
stated take-or-pay minimum amounts, from time to time the Company has purchased
spot market alternative fuels or switched fuel burn from one generating station
to another in order to achieve lower overall fuel costs, while incurring take-
or-pay minimum charges. As a result, the Company incurred take-or-pay minimum
charges of approximately $1 million during the first quarter of 1996. The
Company incurred no take-or-pay charges in 1995.
Maintenance and Repairs expense was lower in the first quarter of 1996 than
in the same period of 1995 due primarily to overhaul work performed at the San
Juan and Springerville stations in early 1995.
21
Taxes Other Than Income Taxes decreased in the first quarter of 1996
compared with the same period in 1995 due to lower accruals for estimated
property taxes.
Income Taxes benefits) increased in the first quarter of 1996 from the
first quarter of 1995. See ~Income~Taxes~below
and~Note~3~of~Notes~to~Financial~Statements,~Income~Taxes~.
OTHER INCOME
Income Taxes benefits) included in Other Income also increased in the first
quarter of 1996 from the first quarter of 1995. See ~Income~Taxes~below
and~Note~3~of~Notes~to~Financial~Statements,~Income~Taxes~.
Interest Income decreased as a result of lower short-term investment
balances and lower interest rates during the first three months of 1996 relative
to the same period in 1995. This decrease in short-term interest income was
partially offset by the receipt of interest income on approximately $18 million
of Springerville Unit 1 lease debt securities which were purchased by the
Company in May 1995.
Gains on Sales of Securities decreased in the first quarter of 1996
relative to the same period in 1995 due to gains realized in the first quarter
of 1995 on sales of certain equity securities by the investment subsidiaries.
No such sales occurred in the first quarter of 1996.
Other income decreased in the first quarter of 1996 compared with the same
period in 1995 due primarily to expenses recorded for ancillary
22
services provided in the first quarter of 1996.
INTEREST EXPENSE
Interest expense on long-term debt decreased in the first quarter of 1996
relative to the first quarter of 1995 due to the retirement of approximately
$189 million of debt obligations in calendar year 1995 and in the first quarter
of 1996.
The Allowance for Borrowed Funds Used During Construction interest
deduction) increased in the first quarter of 1996 compared to the same period in
1995 due to a higher balance of construction work-in-progress.
INCOME TAXES
Net income tax benefits increased $12.1 million in the first quarter of
1996 from the first quarter of 1995 due primarily to i) a $5 million benefit for
federal net tax operating loss carryforwards NOL) generated in the first quarter
of 1996 and ii) recognition of a $4.6 million benefit for the expected future
utilization of prior period federal NOLs.
The $5 million benefit relates to the net operating loss generated in the
first quarter for tax purposes. Each quarter, the Company will record, as a
component of income taxes, an expense or benefit relating to the quarter's tax
operating income or loss. These quarterly amounts are combined to produce the
result for the year. Due to seasonal operating results, the results for a
quarter are not indicative of the income tax expense or benefit to be recognized
in subsequent quarters.
The recognition of the $4.6 million benefit of prior period NOLs results
from a revision in the estimated amount of NOLs generated in prior periods that
the Company believes are likely to reduce taxable income on a future tax
23
return. Because the Company's results from operations have been steadily
improving, the three year historical average net book income of the Company has
increased, and, as a result, the Company now believes it is more likely than not
that it will realize an additional $13 million of federal NOLs. Accordingly,
the Company recognized a $4.6 million income tax benefit related to the expected
utilization of this $13 million of federal NOLs. As of March 31, 1996, the
Company had recognized a total of $32.6 million of income tax benefits relating
to federal NOLs. The $32.6 million consists of $23 million of benefits related
to prior period NOLs recognized in 1995, $4.6 million of benefits related to
prior period NOLs recognized in the first quarter of 1996, and $5 million of
benefits related to NOLs generated in the first quarter of 1996.
Benefits attributable to state NOLs are included in Income Taxes in the
Consolidated Statement of Income and are considerably less. The state income
tax rate is less than the federal income tax rate and the state NOL carryforward
period is five years as opposed to fifteen years for federal.
The Company recognizes benefits related to prior period NOLs based on
changes in the estimated amount of NOLs that in the Company's judgment, are more
likely than not to be realized in the future. A significant factor, among
others, considered in estimating such amount is the three year historical
average net book income. If the Company's operating results continue to
improve, the three year historical average net book income will increase and,
correspondingly, the estimated amount of NOLs that are more likely than not to
be realized in the future will likely increase. If the Company's operating
results continue to improve, recognition of prior period federal and state NOL
benefits totaling approximately $140 million will likely occur during the next
three to five years. The amount, if any, of NOL benefits recognized in future
periods may vary significantly from the potential benefits described herein. In
addition, in future periods when such NOLs are utilized on a tax return, income
tax expense shown on the Company's Consolidated Statements of Income Loss) will
not be reduced to reflect such utilization.
24
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to generate sufficient cash flows during 1996 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
1996. However, the Company's projected cash flows are subject to variation due
to changes in wholesale revenues and changes in short-term interest rates. An
increase in short-term interest rates of 100 basis points 1%) would result in an
approximate $10 million increase in annual interest expense. If cash flows were
to fall short of expectations, the Company would rely on existing cash balances,
borrowings under the Renewable Term Loan and, if necessary, borrowings under the
Revolving Credit.
At May 9, 1996, the Company had a loan balance of $31 million outstanding
under the Renewable Term Loan, and to date, no amount has been borrowed under
the Revolving Credit. The Renewable Term Loan commitment and the Revolving
Credit commitment were $164 million and $50 million, respectively.
The Company's cash and cash equivalents balance at May 9, 1996 was
approximately $46 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 $75 million or 52%, from
the March 31, 1995 ending balance of $144 million to the March 31, 1996 ending
balance of $69 million. The reduction was primarily due to debt repayments, the
purchase of debt securities, and investments in energy-related ventures.
25
Net cash flows from continuing operating activities increased in aggregate
by $12 million in the first three months of 1996 compared with the same period
in 1995. This increase was due primarily to a $14.6 million tax payment made
in the first quarter of 1995 relating to an appeal of a transaction privilege
tax assessment see ~Note~2~~of
~Notes~to~Consolidated~Financial~Statements,~Tax~Assessments),~a reduction in
interest paid on debt obligations in the first quarter of 1996 relative to the
same period in 1995, and the receipt of cash in the first quarter of 1996
related to the sale of emission allowances. These contributions to cash flow
were partially offset by a decrease in revenues and cash receipts derived from
wholesale sales of electricity, the receipt of lower interest income, and a 3.6%
increase in wages paid net of amounts capitalized) during the first three months
of 1996 compared with the same period in 1995.
Net cash flows from investing activities decreased in aggregate by $6
million in the first three months of 1996 compared with the same period in 1995.
This decrease in net cash flow was due to increased construction expenditures in
the first quarter of 1996, as well as to the receipt of proceeds from sales of
investment subsidiary securities in the first quarter of 1995.
Net cash outflows from financing activities were $82 million lower in the
first three months of 1996 compared with the same period in 1995 as a result of
lower debt principal repayments.
FINANCING DEVELOPMENTS
On February 1, 1996, the Company retired upon maturity the $10 million
balance of 4.875% first mortgage bonds then outstanding.
On May 1, 1996, the Pollution Control Corporation of Coconino County,
Arizona issued $16.7 million aggregate principal amount of its Series A
pollution control revenue bonds for the benefit of the Company. The proceeds
26
from this issuance have been loaned to the Company to reimburse the Company for
expenditures related to the Company's interest in pollution abatement facilities
at the Navajo Generating Station.
On May 1, 1996, the Pollution Control Corporation of Coconino County,
Arizona also issued $14.7 million aggregate principal of its Series B pollution
control refunding revenue bonds for the benefit of the Company. The proceeds
from this issuance have been loaned to the Company and will be used on June 14,
1996, to redeem all of the Company's 1975 Series A pollution control revenue
bonds 8.25% due in 2005) currently outstanding.
Interest rates on the newly issued bonds will initially be reset weekly by
the remarketing agent. The initial rates of interest on the bonds, expressed on
an annual basis, were 4.25% for the 1996 Series A bonds and 4.15% for the 1996
Series B bonds. Pursuant to the terms of the offering, the Company has the
right, subject to certain conditions, to change the variable interest rate term
or to convert the interest rate from a variable rate to a fixed rate. Both
issues have a stated maturity date of May 1, 2031, and are backed by separate
irrevocable letters of credit which terminate in 1999 .
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
TAX ASSESSMENTS
See ~Note~2~of~Notes~to~Consolidated~Financial~Statements,~Tax~Assessments.
~
~
~
27
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
4a - Loan Agreement, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation and the Registrant relating to
Pollution Control Revenue Bonds, 1996 Series A Tucson Electric Power
Company Project).
4b - Indenture of Trust, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation
and First Trust of New York, National Association authorizing
Pollution Control Revenue Bonds, 1996 Series A Tucson Electric Power
Company Project).
4c - Letter of Credit and Reimbursement Agreement, dated as of
May 1, 1996, between the Registrant, Various Banks, and Canadian
Imperial Bank of Commerce, New York Agency.
4d - Loan Agreement, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation and the Registrant relating to
Pollution Control Refunding Revenue Bonds, 1996 Series B Tucson
Electric Power Company Project).
4e - Indenture of Trust, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation and First Trust of New York,
National Association authorizing Pollution Control Refunding Revenue
Bonds, 1996 Series B Tucson Electric Power Company Project).
4f - Letter of Credit and Reimbursement Agreement, dated as of
May 1, 1996, between the Registrant and Societe Generale,
Los Angeles Branch.
15 - Letter regarding unaudited interim financial information.
27 - Financial Data Schedule.
b) Reports on Form 8-K.
- Dated January 26, 1996, reporting on the ACC's rejection of a
28
settlement agreement pertaining to the Company's rate application and
holding company application.
- Dated February 9, 1996, reporting on the recommendation of the ACC's
Chief Hearing Officer in the proceedings regarding the Company's
Notice of Intent to form a Holding Company.
- Dated March 6, 1996, reporting on the approval by the Company's
Board of Directors of a one-for-five reverse stock split and a
reduction in the number of authorized shares of common stock.
- Dated April 4, 1996, reporting on the 1996 Rate Order issued by the
ACC.
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: May 13, 1996 Ira R. Adler
Ira R. Adler
Senior Vice President and Principal
Financial Officer
EXHIBIT INDEX
29
4a - Loan Agreement, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation and the Registrant relating to
Pollution Control Revenue Bonds, 1996 Series A Tucson Electric Power
Company Project).
4b - Indenture of Trust, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation
and First Trust of New York, National Association authorizing
Pollution Control Revenue Bonds, 1996 Series A Tucson Electric Power
Company Project).
4c - Letter of Credit and Reimbursement Agreement, dated as of
May 1, 1996, between the Registrant, Various Banks, and Canadian
Imperial Bank of Commerce, New York Agency.
4d - Loan Agreement, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation and the Registrant relating to
Pollution Control Refunding Revenue Bonds, 1996 Series B Tucson
Electric Power Company Project).
4e - Indenture of Trust, dated as of May 1, 1996, between Coconino County,
Arizona Pollution Control Corporation and First Trust of New York,
National Association authorizing Pollution Control Refunding Revenue
Bonds, 1996 Series B Tucson Electric Power Company Project).
4f - Letter of Credit and Reimbursement Agreement, dated as of
May 1, 1996, between the Registrant and Societe Generale,
Los Angeles Branch.
15 - Letter regarding unaudited interim financial information.
27 - Financial Data Schedule.
30