SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1996
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 August 7, 1996, 32,132,996 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. Consolidated Subsidiaries...................................6
Note 4. Voluntary Severance Plan....................................6
Note 5. Common Stock Reverse Split..................................6
Note 6. Income Taxes................................................7
Note 7. Reclassification............................................7
Item 2. -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview.............................................................8
Competition
Wholesale........................................................9
Retail...........................................................9
Accounting for the Effects of Regulation............................10
Investments in Energy-Related Ventures..............................11
Dividends on Common Stock...........................................11
Earnings............................................................12
Results of Operations
i
Results of Utility Operations
Sales and Revenues..............................................13
Operating Expenses..............................................14
Other Income....................................................14
Interest Expense................................................14
Income Taxes....................................................14
Liquidity and Capital Resources..........................................15
Cash Flows......................................................15
PART II - OTHER INFORMATION
Item 1. -- Legal Proceedings
Tax Assessments..................................................17
Item 4. -- Submission of Matters to a Vote of Security Holders...........17
Item 6. -- Exhibits and Reports on Form 8-K............................17
Signature Page...........................................................18
Exhibit Index............................................................19
DEFINITIONS
The abbreviations and acronyms used in the 1996 Second 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.
ii
Common Stock...... The Company's common stock, without par value.
Company........... Tucson Electric Power Company.
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.
Global Solar...... Global Solar Energy, LLC, a corporation in which a 50%
interest is owned by TEP Solar.
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.
MSR............... Modesto, Santa Clara and Redding Public Power Agency.
Nations Energy.... Nations Energy Corporation, a wholly-owned subsidiary of
iii
the Company.
NEV............... New Energy Ventures, Inc.
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.
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 Coal Handling
Facilities Leases Leveraged lease arrangements relating to the coal
handling facilities serving Springerville.
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.
SWPP.............. SWPP Investment Company, a wholly-owned subsidiary of the
Company.
iv
SWRTA............. Southwest Regional Transmission Association.
TEP Solar......... TEP Solar Energy Corporation, a wholly-owned subsidiary of
the Company.
Valencia.......... Valencia Energy Company, previously a wholly-owned
subsidiary of the Company, merged into the Company on May
31, 1996.
v
INDEPENDENT ACCOUNTANTS' REVIEW 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 June 30, 1996 and the
related condensed consolidated statements of income loss) for the three-month
and six-month periods ended June 30, 1996 and 1995, and cash flows for the six-
month periods ended June 30, 1996 and 1995. 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 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 June 30, 1996 condensed
consolidated financial statements for the current status of this matter), we
8
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 it has been derived.
DELOITTE & TOUCHE LLP
Tucson, Arizona
July 26, 1996
5
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The June 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
June 30,
1996 1995
-Thousands of Dollars-
Operating Revenues
Retail Customers $162,040 $140,008
Amortization of MSR Option Gain Regulatory Liability 5,013 5,013
Sales for Resale 17,480 17,284
--------- ---------
Total Operating Revenues 184,533 162,305
--------- ---------
Operating Expenses
Fuel and Purchased Power 49,917 42,965
Capital Lease Expense 26,444 26,295
Amortization of Springerville Unit 1 Allowance (7,272) (7,108)
Other Operations 24,360 24,591
Maintenance and Repairs 9,009 11,382
Depreciation and Amortization 24,797 23,214
Taxes Other Than Income Taxes 14,799 14,019
Voluntary Severance Plan Expense 13,998 -
Income Taxes 1,484 (23)
--------- ---------
Total Operating Expenses 157,536 135,335
--------- ---------
Operating Income 26,997 26,970
--------- ---------
Other Income
Income Taxes 6,504 1,129
Interest Income 1,429 2,058
Other 631 481
--------- ---------
Total Other Income 8,564 3,668
--------- ---------
Interest Expense
Long-Term Debt - Net 15,113 17,632
Interest Imputed on Losses Recorded at Present Value 8,223 8,223
Other 2,267 2,053
Allowance for Borrowed Funds Used During Construction (331) (284)
--------- ---------
Total Interest Expense 25,272 27,624
--------- ---------
Net Income $ 10,289 $ 3,014
========= =========
Average Shares of Common Stock Outstanding (000) 32,133 32,138
========= =========
Net Income per Average Share $ 0.32 $ 0.09
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Six Months Ended
June 30,
1996 1995
-Thousands of Dollars-
Operating Revenues
Retail Customers $287,250 $258,195
Amortization of MSR Option Gain Regulatory Liability 10,026 10,026
Sales for Resale 35,285 36,829
--------- ---------
Total Operating Revenues 332,561 305,050
--------- ---------
Operating Expenses
Fuel and Purchased Power 95,451 83,767
Capital Lease Expense 52,249 52,221
Amortization of Springerville Unit 1 Allowance (14,545) (14,216)
Other Operations 48,448 49,528
Maintenance and Repairs 18,832 23,074
Depreciation and Amortization 48,550 46,338
Taxes Other Than Income Taxes 30,061 30,665
Voluntary Severance Plan Expense 13,998 -
Income Taxes (4,388) (45)
--------- ---------
Total Operating Expenses 288,656 271,332
--------- ---------
Operating Income 43,905 33,718
--------- ---------
Other Income
Income Taxes 13,861 2,259
Interest Income 2,902 4,779
Gains on Sales of Securities - 2,958
Other 69 449
--------- ---------
Total Other Income 16,832 10,445
--------- ---------
Interest Expense
Long-Term Debt - Net 29,757 36,010
Interest Imputed on Losses Recorded at Present Value 16,586 16,568
Other 4,385 4,092
Allowance for Borrowed Funds Used During Construction (699) (561)
--------- ---------
Total Interest Expense 50,029 56,109
--------- ---------
Net Income (Loss) $ 10,708 $(11,946)
========= =========
Average Shares of Common Stock Outstanding (000) 32,134 32,141
========= =========
Net Income (Loss) per Average Share $ 0.33 $ (0.37)
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1996 1995
-Thousands of Dollars-
Cash Flows from Operating Activities
Cash Receipts from Retail Customers $288,828 $271,708
Cash Receipts from Sales for Resale 35,319 42,806
Fuel and Purchased Power Costs Paid (84,282) (85,398)
Wages Paid, Net of Amounts Capitalized (37,364) (36,316)
Payment of Other Operations and Maintenance Costs (36,099) (40,323)
Capital Lease Interest Paid (41,233) (41,463)
Interest Paid, Net of Amounts Capitalized (35,450) (40,283)
Taxes Paid, Net of Amounts Capitalized (53,361) (66,651)
Emission Allowance Inventory Sale 4,120 -
Interest Received 2,920 4,886
Income Taxes Paid (58) -
Other (2,297) -
--------- ---------
Net Cash Flows - Operating Activities 41,043 8,966
--------- ---------
Cash Flows from Investing Activities
Construction Expenditures (36,690) (27,950)
Purchase of Debt Securities - (17,697)
Investments in Joint Ventures (4,600) -
Other 233 3,226
--------- ---------
Net Cash Flows - Investing Activities (41,057) (42,421)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long-Term Debt 31,400 -
Payments to Retire Long-Term Debt (25,200) (35,492)
Payments on Renewable Term Loan - (55,660)
Payments to Retire Capital Lease Obligations (4,787) (5,500)
Other (234) 620
--------- ---------
Net Cash Flows - Financing Activities 1,179 (96,032)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 1,165 (129,487)
Cash and Cash Equivalents, Beginning of Year 85,094 248,152
--------- ---------
Cash and Cash Equivalents, End of Period $ 86,259 $118,665
========= =========
See Notes to Consolidated Financial Statements.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
Six Months Ended
June 30,
1996 1995
-Thousands of Dollars-
Net Income (Loss) $ 10,708 $(11,946)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Flows
Depreciation and Amortization Expense 48,550 46,338
Deferred Income Taxes and
Investment Tax Credits - Net (18,286) (2,304)
Deferred Fuel and Purchased Power - 3,529
Lease Payments Deferred 16,600 16,298
Regulatory Amortizations, Net of Interest Imputed
on Losses Recorded at Present Value (7,985) (7,675)
Other (3,084) (629)
Changes in Assets and Liabilities which
Provided (Used) Cash Exclusive of
Changes Shown Separately
Accounts Receivable (18,096) 1,253
Materials and Fuel 428 (10,047)
Accounts Payable 878 (3,080)
Taxes Accrued 2,025 (11,997)
Other Current Assets and Liabilities 1,209 (11,852)
Other Deferred Assets and Liabilities 8,096 1,078
--------- ---------
Net Cash Flows - Operating Activities $ 41,043 $ 8,966
========= =========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1996 1995
- Thousands of Dollars -
Utility Plant
Plant in Service $2,117,178 $2,095,679
Utility Plant Under Capital Leases 893,064 893,064
Construction Work in Progress 59,463 50,898
----------- -----------
Total Utility Plant 3,069,705 3,039,641
Less Accumulated Depreciation and Amortization (891,299) (859,227)
Less Accumulated Amortization of Capital Leases (48,094) (40,113)
Less Springerville Unit 1 Allowance (162,781) (162,175)
----------- -----------
Total Utility Plant - Net 1,967,531 1,978,126
----------- -----------
Investments and Other Property 60,893 52,116
----------- -----------
Current Assets
Cash and Cash Equivalents 86,259 85,094
Accounts Receivable 79,813 61,717
Materials and Fuel 41,740 42,168
Deferred Income Taxes - Current 18,074 18,250
Other 8,128 7,565
----------- -----------
Total Current Assets 234,014 214,794
----------- -----------
Deferred Debits - Regulatory Assets
Income Taxes Recoverable Through Future Rates 135,957 135,957
Deferred Common Facility Costs 62,032 63,303
Deferred Springerville Unit 2 Costs 32,941 42,039
Deferred Lease Expense 17,637 19,808
Other Deferred Regulatory Assets 8,394 8,576
Deferred Debits - Other 15,075 16,211
----------- -----------
Total Deferred Debits 272,036 285,894
----------- -----------
Total Assets $2,534,474 $2,530,930
=========== ===========
See Notes to Consolidated Financial Statements.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND OTHER LIABILITIES
June 30, December 31,
1996 1995
- Thousands of Dollars -
Capitalization
Common Stock $ 645,211 $ 645,295
Capital Stock Expense (6,357) (6,357)
Accumulated Deficit (615,742) (626,450)
----------- -----------
Common Stock Equity 23,112 12,488
Capital Lease Obligations 900,703 897,958
Long-Term Debt 1,224,131 1,207,460
----------- -----------
Total Capitalization 2,147,946 2,117,906
----------- -----------
Current Liabilities
Short-Term Debt 12,039 12,039
Current Obligations Under Capital Leases 32,506 33,389
Current Maturities of Long-Term Debt 1,575 12,075
Accounts Payable 26,056 25,178
Interest Accrued 56,575 57,389
Taxes Accrued 17,721 15,696
Accrued Employee Expenses 16,905 14,297
Other 7,628 7,372
----------- -----------
Total Current Liabilities 171,005 177,435
----------- -----------
Deferred Credits and Other Liabilities
MSR Option Gain Regulatory Liability 17,019 25,610
Accumulated Deferred Investment Tax Credits
Regulatory Liability 17,149 19,603
Other Regulatory Liabilities 13,954 10,343
Deferred Income Taxes - Noncurrent 129,974 145,982
Other 37,427 34,051
----------- -----------
Total Deferred Credits and Other Liabilities 215,523 235,589
----------- -----------
Total Capitalization and Other Liabilities $2,534,474 $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 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 are 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 are amortized over a
three-year period on the Consolidated Statements of Income (Loss), in
accordance with the 1996 Rate Order. These costs ($26 million at June 30,
1996), together with the balance of such costs that the Company has been
recovering through rates, pursuant to the 1994 Rate Order, ($7 million at
June 30, 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.
The New Mexico Taxation and Revenue Department has issued a gross
receipts tax assessment to a seller from whom Valencia purchased coal,
alleging sales tax liability on payments made to the seller for coal Valencia
purchased for resale and which Valencia resold. The assessment covers the
period June 1993 to April 1996. The seller is in the process of protesting
the assessment. The terms of the coal supply agreement provide that the
buyer shall bear and pay all gross receipts taxes levied or assessed on or in
connection with the coal it purchases and shall reimburse the seller for any
such taxes which the seller may be required to pay.
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 Springerville Coal Handling Facilities
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 June 30, 1996. In the
event that all or most of the assessments by the Arizona Department of
Revenue and the New Mexico Taxation and Revenue Department 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 $40 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. CONSOLIDATED SUBSIDIARIES
- ----------------------------------
On May 31, 1996, Valencia Energy Company, a wholly-owned subsidiary of
the Company, was merged into the Company. Effective with the merger, the
Company assumed all of the assets and liabilities of Valencia; the
responsibilities for the coal procurement, coal transportation and coal
handling services at Springerville Generating Station; and the
responsibilities as the lessee of the Springerville Coal Handling Facilities
Leases. Certain amounts previously included in Fuel and Purchased Power have
been reclassified to Capital Lease Expense, Other Operations, Maintenance and
Repairs, Depreciation and Amortization and Taxes Other Than Income Taxes on
the Company's Consolidated Statements of Income (Loss) to conform to the
current year's presentation.
In May 1996, TEP Solar Energy Corporation, a wholly-owned subsidiary of
the Company, and ITN Energy Systems formed Global Solar Energy, LLC for the
purpose of development and manufacturing of photovoltaic materials. TEP
Solar has a 50% interest in Global Solar. The investment in Global Solar is
included in the Company's Consolidated Balance Sheet at June 30, 1996 under
Investments and Other Property and in the Company's Consolidated Statement of
Cash Flows for the six months ended June 30, 1996 as Investments in Joint
Ventures.
NOTE 4. VOLUNTARY SEVERANCE PLAN
- ---------------------------------
In May 1996, the Company implemented a Voluntary Severance Plan (VSP).
Approximately 200 employees, or 15 percent of the Company's total workforce,
accepted the VSP. The VSP resulted in an expense for termination benefits of
approximately $14 million reflected as Voluntary Severance Plan Expense on
the Company's Consolidated Statement of Income (Loss). Approximately $10
million of the termination benefits were paid in July 1996 with the remaining
benefits to be paid over the next three years. In addition, the reduction in
the workforce resulted in partial settlements and curtailments of the
Company's two pension plans in July 1996 the effect of which has not yet been
determined.
NOTE 5. COMMON STOCK REVERSE SPLIT
- -----------------------------------
In May 1996, shareholders approved a one-for-five reverse split of the
Company's common stock. All references in the financial statements to
average number of shares and per share amounts of the Company's common stock
have been retroactively restated to reflect the reverse split. In addition,
shareholders also approved the reduction in the number of authorized shares
of common stock from 200 million to 75 million.
NOTE 6. INCOME TAXES
- ---------------------
The benefit for income taxes included in the Comparative Consolidated
Statements of Income (Loss) consists of the following:
Three Months Ended
June 30,
1996 1995
---------- ----------
- Thousands of Dollars -
Operating Expenses:
Deferred Tax Benefit (Expense)
Federal $ (1,192)
State (307)
---------- ----------
Total (1,499)
Investment Tax Credit Amortization 15 $ 23
---------- ----------
Total Benefit (Expense) Included in
Operating Expenses (1,484) 23
---------- ----------
Other Income:
Deferred Tax Benefit (Expense)
Federal (646) -
State (225) -
---------- ----------
Total (871) -
Reduction in Valuation Allowance 6,164 -
Investment Tax Credit Amortization 1,211 1,129
---------- ----------
Total Benefit Included in
Other Income 6,504 1,129
---------- ----------
Total Benefit for Federal and State
Income Taxes $ 5,020 $ 1,152
========== ==========
Six Months Ended
June 30,
1996 1995
---------- ----------
- Thousands of Dollars -
Operating Expenses:
Deferred Tax Benefit (Expense)
Federal $ 3,465
State 893
---------- ----------
Total 4,358
Investment Tax Credit Amortization 30 $ 45
---------- ----------
Total Benefit (Expense) Included in
Operating Expenses 4,388 45
---------- ----------
Other Income:
Deferred Tax Benefit (Expense)
Federal 383 -
State 41 -
---------- ----------
Total 424 -
Reduction in Valuation Allowance 11,013 -
Investment Tax Credit Amortization 2,424 2,259
---------- ----------
Total Benefit Included in
Other Income 13,861 2,259
---------- ----------
Total Benefit for Federal and State
Income Taxes $ 18,249 $ 2,304
========== ==========
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
June 30,
1996 1995
---------- ----------
- Thousands of Dollars -
Federal Income Tax Benefit (Expense) at
Statutory Rate $ (1,844) $ (652)
State Income Tax Benefit (Expense), Net of
Federal Deduction (284) -
Investment Tax Credit Amortization 1,226 1,152
Reduction in Valuation Allowance 6,164 -
Loss for Which No Tax Benefit
is Recognized - -
Net Operating Loss Carryforwards - 652
Use of Capital Loss Carryforwards - -
Other (242) -
---------- ----------
Total Benefit for Federal and
State Income Taxes $ 5,020 $ 1,152
========== ==========
Six Months Ended
June 30,
1996 1995
---------- ----------
- Thousands of Dollars -
Federal Income Tax Benefit (Expense) at
Statutory Rate $ 2,640 $ 4,988
State Income Tax Benefit (Expense), Net of
Federal Deduction 406 -
Investment Tax Credit Amortization 2,454 2,304
Reduction in Valuation Allowance 11,013 -
Loss for Which No Tax Benefit
is Recognized - (4,988)
Net Operating Loss Carryforwards - -
Use of Capital Loss Carryforwards 1,663 -
Other 73 -
---------- ----------
Total Benefit for Federal and
State Income Taxes $ 18,249 $ 2,304
========== ==========
NOTE 7. RECLASSIFICATION
- -------------------------
Minor reclassifications, other than those described in Note 3, have been
made to the prior year financial statements 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 second quarter and first six months of 1996 compared with
the second quarter and first six months of 1995, the outlook for dividends on
Common Stock, and changes in liquidity and capital resources of the Company
during the second quarter and first six months of 1996. Also management's
expectations of identifiable material trends are discussed.
OVERVIEW
Earnings for the Company for the second quarter increased by $7.3 million,
or 241% relative to the same time period in 1995. This improvement in net
income, from $3.0 million in the second quarter of 1995 to $10.3 million in the
9
second quarter of 1996, was achieved despite the recording of a one-time $14.0
million pre-tax charge related to the Company's Voluntary Severance Plan in the
second quarter of 1996. Earnings for the first half of 1996 were also higher,
having improved from a net loss of $11.9 million in the first half of 1995 to
net income of $10.7 million in the first half of 1996. In addition to higher
sales due to warmer weather in the second quarter of 1996, the earnings
improvement was attributable to growth in the number of customers in the
Company's retail service area, increased revenues from a 1.1% retail rate
increase implemented in March 1996 and reductions in both operating and capital
costs. Due to the increase in income, the Company also recognized non-cash tax
benefits associated with the expected future utilization of federal and state
net operating loss carryforwards generated in prior periods. Such recognized
benefits totaled $6.2 million for the second quarter of 1996 and $11.0 million
for the first six months of 1996.
See~~Results~of~Utility~Operations,~Income~Taxes~ below.
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
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 the economic and regulatory
environment and the increasingly competitive electric markets could affect the
Company's levels of sales.
10
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 period 1999-2003, approximately $250 million of the Company's long-term debt
obligations will mature. Letters of credit supporting $805 million of the
Company's long-term variable rate debt obligations are also scheduled to expire
during the period 1997-2002. In the event that expiring letters of credit are
not replaced or extended, the corresponding variable rate debt obligations would
be subject to mandatory redemption. In addition, the Company's borrowings under
the Renewable Term Loan, which totaled $31 million as of August 7, 1996, are
scheduled to be repaid during the period 1997-1999. While the Company intends
to pay or refinance maturing bonds and bank loans, and to replace or extend
expiring letters of credit, there can be no assurance that the Company will be
able to pay such debt or replace or extend such letters of credit. The
Company's future cash flows will also be affected by the level of interest rates
due to the significant amount of variable rate debt outstanding. 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 present
inability to pay dividends. See ~Dividends~on~Common~Stock~~below.
During the next twelve months, the Company expects to be able to fund
11
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.
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
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 by encouraging the participation of utility affiliates,
independent power producers and other non-utility participants in the
development of power generation. The Energy Act also confers expanded authority
12
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 a member
of SWRTA, an RTG which was approved by FERC on October 31, 1995. As a condition
of its approval of each RTG, including SWRTA, 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.
On April 24, 1996, the FERC issued two orders pertaining to transmission
access and the recovery of stranded costs. Among other things, Order Number 888
requires all public utilities that own, control, or operate interstate
transmission facilities 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. A Phase I open access tariff containing the terms and conditions
outlined in the Order was filed by the Company on July 9, 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
13
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.
FERC 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 became effective on July
9, 1996. However, compliance with these rules is not required until November
1, 1996.
Given the intense level of competition already present in the wholesale
market for electricity, the Company does not believe that Order Number 888 or
Order Number 889 will have a material effect on the Company's future results of
operations. However, these orders could assume greater significance if the
Company's retail service territory were to be opened to competing suppliers of
electricity.
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 does compete against gas service suppliers
14
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. For example, the Company's two
mining customers, which provide approximately 10% 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, 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
15
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 issued a request for comments on electric industry
restructuring in February 1996. Comments were submitted by the Company and a
variety of other interested parties in June 1996. Based on the comments
received, the ACC Staff has developed two options for introducing retail
electric competition in Arizona. These options, which contemplate a four-year
phase-in of retail competition beginning in either 1997 or 2000, will be the
subject of an ACC Staff workshop in August 1996. The purpose of the workshop
is to provide the ACC Staff with additional information that could be used in
drafting a proposed rule on retail electric competition. Any such rule would be
subject to further public comment and approval by the ACC prior to becoming
effective.
The Arizona legislature is also investigating the potential merits of
retail electric competition. Legislation was recently passed which calls for
the establishment of a joint legislative study committee on electric industry
competition. This committee is charged with studying and making recommendations
on a wide variety of issues related to electric industry competition. The
committee is to complete a report to the legislature no later than December 31,
1997. Such report is to contain a proposal for electric utility competition for
implementation by December 31, 1999. An advisory committee on electric industry
16
competition was also created, consisting of members representing electric
consumers, electric utilities, various State offices and agencies, and other
interested parties. The Company has a representative on such advisory committee
and intends to actively participate as a committee member.
The Company continues to assess the impact of FERC Order Nos. 888 and 889,
the Energy Act and other possible legislation on the Company. The Company is
unable to predict the ultimate impact of wholesale and retail competition on the
Company's future results of 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 June 30,
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 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 June 30, 1996 and 1995, and the six months ended June 30,
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.
17
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 June 30, 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 $141 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.
INVESTMENTS IN ENERGY- RELATED VENTURES
As described in
~Note~3~of~Notes~to~Consolidated~Financial~Statements,~Consolidated~Subsidiaries
,~a wholly-owned subsidiary of the Company, TEP Solar Energy Corporation,
recently acquired a 50% interest in Global Solar Energy, LLC, an Arizona
corporation established for the purpose of developing and manufacturing flexible
18
thin-film photovoltaic cells. Global Solar plans to locate a manufacturing
facility in the Tucson area and begin commercial production by mid-1997.
In addition to the Company's investment in Global Solar, the Company
continues to evaluate and pursue other energy related investment opportunities.
Nations Energy, a wholly-owned subsidiary established for the purpose of
investing in independent power projects, intends to invest in certain power
projects in addition to its investment in the Coors project
see~~Nations~Energy~Corporation~ on page K-23 of the Company's Annual Report on
Form 10-K). Additionally, the Company continues to provide funding, pursuant to
a consulting services contract, to New Energy Ventures Inc. NEV), a California
corporation. NEV is a buyer's agent providing load aggregation and advisory
services to energy consumers in the State of California. Although the Company
does not presently have an ownership interest in NEV, the Company does have a
currently exercisable option to purchase for a nominal amount a 50% interest in
NEV through February 1998. A wholly-owned subsidiary of the Company, SWPP
Investment Company SWPP), was also recently formed for the purpose of holding an
ownership interest in a business engaged in the manufacture and sale of concrete
power poles. Although SWPP has not yet acquired such ownership interest, the
Company currently has a contract with a Mexican corporation for the distribution
and sale of concrete power poles in the United States.
In comparison to the Company's large investment in regulated utility
assets, the Company's current investments in Nations, Global Solar, and SWPP are
not material in terms of recorded assets or net income. However, depending on
the nature of future investment opportunities, and the ability of the Company to
make additional investments as determined by the ACC and in certain credit
agreements, the Company expects to make additional investments in Nations and in
other energy related ventures. Over time, such additional investments may have
a material impact on the Company's future cash flow and profitability. Pursuant
to an ACC order issued in February 1996, the Company is permitted to invest in
19
subsidiaries that engage in energy related projects in an annual amount equal to
the lesser of $25 million or the maximum amount allowed by the MRA. To the
extent that the Company obtains retroactive approval or waiver of projects from
the ACC, the Company would be authorized to expend additional funds. This
investment authority is subject to the conditions that i) the total amount
permitted to be invested in such projects shall not exceed $50 million annually,
ii) 60% of net profits from such projects be applied to repay the Company's
debt, and iii) total investment in such projects does not exceed 15% of the
Company's capitalization. Under the MRA, the Company's capital investments are
restricted to assets which are related to the utility business, and are limited
in size by a ceiling on total capital expenditures and investments. The Company
is currently attempting to obtain an amendment to the MRA which would provide
the Company with greater flexibility to make energy related investments.
DIVIDENDS ON COMMON STOCK
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, however, by certain
covenants of the General First Mortgage applicable so long as certain series of
20
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 test would 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 retained earnings
test would permit dividend payments if the Company has positive retained
earnings rather than an accumulated deficit. As of June 30, 1996, the Company
had a cash flow coverage ratio in excess of 2 to 1 and the Company's accumulated
deficit was $616 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
relating thereto have been terminated and ii) the Company's senior long-term
debt is rated investment grade. At August 7, 1996, the Company's total
outstanding amount under the Renewable Term Loan was $31 million, and to date no
amounts have been borrowed under the Revolving Credit. Commitments relating to
such facilities permit the Company to borrow an additional $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 General First Mortgage
amendment would require approval by holders of 75% of all First Mortgage Bonds.
21
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 leave
unclear the scope of any such restriction and its potential applicability to the
Company.
EARNINGS
The Company recorded net income of $10.3 million in the second quarter of
1996 compared with net income of $3.0 million in the second quarter of 1995.
The net income per average share of Common Stock was $0.32 for the second
quarter of 1996 compared with a net income per average share of Common Stock of
$0.09 for the second quarter of 1995.
For the first six months of 1996, the Company recorded net income of $10.7
million, compared with a net loss of $11.9 million recorded for the first six
months of 1995. The net income per average share of Common Stock was $0.33 for
the first six months of 1996, compared with a net loss per average share of
Common Stock of $0.37 for the first six months of 1995.
RESULTS OF OPERATIONS
RESULTS OF UTILITY OPERATIONS
SALES AND REVENUES
Comparisons of kilowatt-hour sales and electric revenues are shown below:
Increase/Decrease)
22
Three Months Ended June 30 1996 1995 Amount Percent
Electric kWh Sales 000):
Retail Customers 1,896,118 1,675,538 220,580 13.2%
Sales for Resale 675,287 440,803 234,484 53.2
Total 2,571,405 2,116,341 455,064 21.5
Electric Revenues 000):
Retail Customers $162,040 $140,008$ 22,032 15.7%
Amortization of MSR Option Gain Regulatory
Liability 5,013 5,013 - -
Sales for Resale 17,480 17,284 196 1.1
Total $184,533 $162,305$ 22,228 13.7
Increase/Decrease)
Six Months Ended June 30 1996 1995 Amount Percent
Electric kWh Sales 000):
Retail Customers 3,477,543 3,168,840 308,703 9.7%
23
Sales for Resale 1,394,351 1,018,146 376,205 37.0
Total 4,871,894 4,186,986 684,908 16.4
Electric Revenues 000):
Retail Customers $287,250 $258,195$ 29,055 11.3%
Amortization of MSR Option Gain Regulatory
Liability 10,026 10,026 - -
Sales for Resale 35,285 36,829 (1,544) (4.2)
Total $332,561 $305,050$ 27,511 9.0
KWh sales to retail customers increased by 13.2% in the second quarter of
1996 compared with the second quarter of 1995 due to warmer than normal
temperatures, a 3.1% increase in the average number of retail customers, and a
10.1% increase in sales to industrial customers. KWh sales to retail customers
increased by 9.7% in the first six months of 1996 compared with the same period
in 1995. Sales were higher due to warmer weather conditions in the second
quarter, growth in the average number of retail customers, and a 9.4% increase
in sales to industrial customers. Based on 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
increase of approximately 85% in such cooling degree days for the second quarter
of 1996 compared with the same period in 1995, and an increase of approximately
28% in such cooling degree days compared with the ten year average for the same
period from 1986 to 1995. Such cooling degree days were 544, 294, and 425 for
the second quarter of 1996, 1995, and the ten year average for the second
24
quarter, respectively.
Revenues from sales to retail customers increased in the second quarter and
first six months of 1996 compared with the same periods in 1995 due to higher
kWh sales discussed above and a 1.1% retail rate increase implemented by the
Company on March 31, 1996.
See~~Note~1~of~Notes~to~Consolidated~Financial~Statements,~Rate~Matters~.
Sales for resale increased by 53.2% in the second quarter of 1996 relative
to the same period in 1995 because of higher regional loads due to warmer
weather conditions and increased electricity demand throughout the Western
United States. Sales for resale increased by 37.0% in the first six months of
1996 compared with the same period in 1995 due to higher second quarter sales
and the availability of generating capacity which was out of service in early
1995 for planned maintenance activities.
Revenues from sales for resale were 1.1% higher in the second quarter and
4.2% lower in the first six months of 1996 relative to the same periods in 1995.
Such revenues did not increase proportionately with the increase in kWh sales
during these periods due to the expiration of a firm power sale agreement with
Nevada Power Company in December 1995 and an increase in lower priced economy
energy sales as a percentage of total sales for resale.
OPERATING EXPENSES
Total Fuel and Purchased Power expense increased in the second quarter and
first six months of 1996 compared with the same periods in 1995 primarily as a
result of increased kWh sales. However, Fuel and Purchased Power expense per
kWh sold decreased by 4.4% in the second quarter of 1996 and by 2.0% in the
first six months of 1996 compared with the same periods in 1995 due primarily to
increased purchases of economy energy at lower average prices.
25
Maintenance and Repairs expense was lower in the second quarter of 1996
compared with the same period in 1995 due primarily to the costs of overhaul
work performed at the Springerville station in the second quarter of 1995.
Maintenance and Repairs expense was lower for the first six months of 1996
compared with the same period in 1995 due to the costs of overhaul work
performed at the San Juan station in the first quarter of 1995 and at the
Springerville Station in the first and second quarters of 1995.
Voluntary Severance Plan Expense of $14.0 million was recorded in the
second quarter of 1996 due to the recognition of termination benefits resulting
from the implementation of a voluntary employee severance plan.
See~~Note~4~of~Notes~to~Consolidated~Financial~Statements,~Voluntary~Severance~P
lan~.
Income Taxes expense included in Operating Expenses increased in the second
quarter of 1996 to $1.5 million, compared with a $23,000 benefit recorded in the
second quarter of 1995. For the first six months of 1996, income tax benefits
increased to $4.4 million relative to a $45,000 benefit recorded for the same
period in 1995. See ~Income~Taxes~below
and~Note~6~of~Notes~to~Consolidated~Financial~Statements,~Income~Taxes~.
OTHER INCOME
Income Tax benefits included in Other Income increased in the second
quarter of 1996 to $6.5 million, compared with a $1.1 million benefit recorded
in the second quarter of 1995. For the first six months of 1996, Income Tax
benefits included in Other Income increased to $13.9 million, compared with a
benefit of $2.3 million recorded for the same period in 1995. See
~Income~Taxes~below
and~Note~6~of~Notes~to~Consolidated~Financial~Statements,~Income~Taxes~.
26
Interest Income decreased during the second quarter and first six months of
1996 relative to the same periods in 1995 as a result of lower short-term
investment balances and lower interest rates. 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 six months 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 six months of 1996.
INTEREST EXPENSE
Interest expense on long-term debt decreased in the second quarter and
first six months of 1996 relative to the same periods in 1995 due to a reduction
in the aggregate amount of debt outstanding and due to lower interest rates on
the Company's variable rate debt obligations.
INCOME TAXES
Net income tax benefits increased $3.9 million in the second quarter of
1996 compared with the second quarter of 1995 due primarily to the recognition
of $6.2 million of income tax benefits related to the expected future
utilization of federal and state NOLs generated in prior periods. The Company
believes it is probable that such NOLs will be used in the future to reduce
income taxes payable. The $6.2 million benefit is partially offset by income
tax expense related to the operating results for the second quarter of 1996.
Net income tax benefits increased $15.9 million for the six months ended
27
June 30, 1996 compared with the same period in 1995 due primarily to the
recognition of $11 million of income tax benefits related to the expected future
utilization of NOLs and the recognition of $3.1 million of income tax benefits
related to the operating results for the six months ended June 30, 1996.
The recognition of the $6.2 million benefit in the second quarter of 1996
and the $11 million benefit for the six months ended June 30, 1996 results from
a revision in the estimated amount of NOLs that the Company believes are likely
to reduce taxable income on a future tax return. Because the Company's results
from operations have been steadily improving and the three year historical
average net book income of the Company has increased, the Company now believes
it is more likely than not that it will realize additional federal and state
NOLs. Accordingly, the Company recognized income tax benefits related to the
expected future utilization of these NOLs. As of June 30, 1996, the Company had
recognized a total of $34 million of income tax benefits relating to federal and
state NOLs. The $34 million consists of $23 million recognized in 1995 and $11
million recognized during the six months ended June 30, 1996.
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
28
tax expense shown on the Company's Consolidated Statements of Income Loss) will
not be reduced to reflect such utilization.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to generate sufficient cash flows during 1996 to fund
its continuing operating activities and construction expenditures. However, the
Company's projected cash flows are subject to variation due to changes in
wholesale revenues, changes in short-term interest rates, and other factors.
For example, an increase in short-term interest rates of 100 basis points 1%)
would result in an approximate $10 million increase in annual interest payments.
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 August 7, 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 August 7, 1996 was
approximately $32 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 $32.4 million or 27%,
from the June 30, 1995 ending balance of $118.7 million to the June 30, 1996
ending balance of $86.3 million. This reduction was due primarily to debt
repayments, including an $87 million principal payment on the Renewable Term
29
Loan made in September 1995.
Net cash flows from continuing operating activities increased in aggregate
by $32 million in the first six months of 1996 compared with the same period in
1995. This increase was due primarily to higher cash receipts from retail
customers during the first half of 1996 compared with the same period in 1995,
and a $14.6 million tax payment made in the first quarter of 1995 related to an
appeal of a transaction privilege tax assessment see ~Note~2~~of
~Notes~to~Consolidated~Financial~Statements,~Tax~Assessments).~Also contributing
to the increase in net cash flows in the first half of 1996 was a decrease in
operations and maintenance costs and interest paid on debt obligations 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 cash receipts from wholesale customers
and the receipt of lower interest income compared with the first six months of
1995, as well as the payment of $4.5 million to establish a low income customer
assistance fund in the second quarter of 1996.
Net cash outflows from investing activities decreased in aggregate by $1.4
million in the first six months of 1996 compared with the same period in 1995.
Despite an increase in construction expenditures and investments in joint
ventures, net cash outflows from investing activities decreased relative to the
first half of 1995 due to the May 1995 purchase of approximately $18 million of
Springerville Unit 1 lease debt securities.
Net cash flows from financing activities increased in aggregate by $97
million in the first six months of 1996 compared with the same period in 1995 as
a result of lower debt principal repayments and the receipt of loan proceeds
related to the May 1996 issuance of pollution control revenue bonds by the
Pollution Control Corporation of Coconino County, Arizona.
30
PART II - OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
TAX ASSESSMENTS
See ~Note~2~of~Notes~to~Consolidated~Financial~Statements,~Tax~Assessments.
~
~
~
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company conducted its Annual Meeting of Shareholders on May 14, 1996.
At that meeting, in addition to electing members of the Board of Directors, the
shareholders of the Company approved the Company's proposal for a
recapitalization involving a one-for-five reverse split of the Common Stock and
a reduction in the number of authorized shares of Common Stock from 200 million
to 75 million.
The total votes were as follows:
Against Broker
i) Election of For or Withheld Abstain Non-Votes
Directors
Elizabeth 132,354,430 1,372,533 -- --
Alexander
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Charles E. 132,639,107 1,219,527 -- --
Bayless
Jose L. 132,779,484 1,234,088 -- --
Canchola
John Jeter 132,867,276 1,163,832 -- --
R. B. O'Rielly 132,384,676 1,259,246 -- --
Martha R. 132,619,756 1,288,478 -- --
Seger
Donald G. 132,765,414 1,169,472 -- --
Shropshire
H. Wilson 132,666,873 1,298,721 -- --
Sundt
J. Burgess 130,579,705 1,190,318 -- --
Winter
ii) 124,161,826 11,379,890 1,758,630 --
Recapitalization
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits.
3 - Amendment to Article Fourth of the Company's Restated Articles of
Incorporation
15 - Letter regarding unaudited interim financial information.
27a - Financial Data Schedule.
27b - Financial Data Schedule.
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b) Reports on Form 8-K.
- Dated May 22, 1996, reporting on the approval by the Company's
shareholders of a one-for-five reverse stock split and a reduction in
the number of authorized shares of common stock.
- Dated July 5, 1996, reporting on employee acceptance of the
Company's Voluntary Severance Plan.
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: August 9, 1996 Ira R. Adler
Ira R. Adler
Senior Vice President and Principal
Financial Officer
EXHIBIT INDEX
33
3 - Amendment to Article Fourth of the Company's Restated Articles of
Incorporation
15 - Letter regarding unaudited interim financial information.
27a - Financial Data Schedule.
27b - Financial Data Schedule.
34