UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): June 9, 1999
Commission Registrant; State of
File Incorporation; IRS Employer
Number Address; and Telephone Number Identification Number
------- ----------------------------- ---------------------
1-13739 UNISOURCE ENERGY CORPORATION 86-0786732
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
1-5924 TUCSON ELECTRIC POWER COMPANY 86-0062700
(An Arizona Corporation)
220 West Sixth Street
Tucson, AZ 85701
(520) 571-4000
Item 5. Other Events
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Settlement Agreement
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On June 9, 1999, Tucson Electric Power (TEP) entered into a
Settlement Agreement (Settlement) with certain customer groups
related to the implementation of retail electric competition. The
Settlement has been filed with the Arizona Corporation Commission
(ACC), and TEP has requested the ACC to schedule the Settlement for
review as soon as practicable. The Settlement will become
effective on the issuance of a final ACC order approving the
Settlement without modification.
The following are major provisions of the Settlement, which is
filed as an exhibit to this filing:
-- Consumer choice for energy supply will begin sixty (60) days
after the ACC approves the Settlement and will be phased in as
required by the retail electric competition rules previously
described in Management's Discussion and Analysis of Financial
Condition and Results of Operation in the Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999. By January 1,
2001, consumer choice will be available to all customers.
-- TEP rates will be frozen from July 1, 2000 through December 31,
2008, providing TEP with the opportunity to recover its stranded
costs, including regulatory assets. The ACC will authorize a
Competition Transition Charge (CTC) with two parts - a "Fixed" CTC
and a "Floating" CTC.
- The Fixed CTC will equal $0.93/kwh (average) and will include
recovery of regulatory assets. The Fixed CTC will terminate when
$450 million has been recovered, but will in no case extend beyond
December 31, 2008. When the Fixed CTC terminates, unbundled
service rates will be reduced by the same amount.
- The Floating CTC recovers stranded costs that are not recovered
through the Fixed CTC. The Floating CTC is determined by the
difference between the frozen rate and all other rate charges as
listed below. The Floating CTC will be calculated using a Market
Generation Credit (MGC) approach which adjusts the floating CTC as
the price of energy in the power markets fluctuates. Because TEP's
total retail rate is frozen, the Floating CTC recoups the revenue
shortfall: when market prices are strong, stranded costs are lower
and, thus, the Floating CTC is lower; and when market prices are
weak, stranded costs are greater and the Floating CTC is higher.
The Floating CTC will terminate on December 31, 2008.
-- TEP's rates will be unbundled into separate charges for: 1)
distribution; 2) transmission; 3) metering; 4) billing; 5)
ancillary services; 6) fixed must-run generation; 7) system
benefits; and 8) standard offer generation. The total of these
charges will not be more than a customer's current bundled rates.
All customers will be charged unbundled rates, including those
customers who are not initially eligible for competition. For
TEP's standard offer customers, the CTC will be included in the
cost of standard offer generation service.
-- In accordance with the Rate Settlement Agreement approved by the
ACC in 1998, TEP will decrease rates to retail customers by one
percent (1%) on July 1, 1999 and one percent (1%) on July 1, 2000.
These reductions will apply to all tariffed retail customers.
After these reductions, the Settlement provides that TEP's rates
will be frozen until December 31, 2008, except for:
- changes that result due to this Settlement;
- changes in TEP's transmission tariffs due to the implementation
of the Arizona Independent System Administrator (AISA);
- changes resulting from the June 2004 review as described below.
-- By June 1, 2004 TEP will recommend to the ACC any required
modifications to the CTCs and other service charges. A rate
change, to take effect no later than January 1, 2005, will only be
made if it results in a net reduction to overall charges.
-- On or before December 31, 2002, TEP will transfer its generation
and other competitive assets to a subsidiary of TEP, at market
value. At the time that TEP makes the transfer of such assets, it
will be required to provide generation for its standard offer
customers according to the ACC's electric competition rules.
-- On final approval of the Settlement by the ACC, TEP will move to
dismiss all pending litigation brought by TEP against the ACC.
When the final ACC order is approved, TEP will stop accounting
for its generation operations using Financial Accounting Standard
No. 71, "Accounting for the Effects of Certain Types of Regulation"
(FAS 71). The regulatory assets of the generation business,
together with certain above-market generation plant costs, totaling
$450 million, will be recovered through the distribution business.
No net gain or loss to TEP or UniSource Energy results. These
regulatory assets will amortize to expense over the period ending
in 2008, as provided for in the Settlement Agreement.
In addition, if the Settlement is approved we will immediately
recognize as income the following Investment Tax Credit (ITC)
amounts:
-- Deferred ITC: On our financial statements we have deferred the
benefit relating to ITC claimed on tax returns. This Deferred ITC
was then amortized to income over the tax lives of the related
property. The balance remaining when the Settlement is approved
will be recognized immediately. At March 31, 1999, the Deferred
ITC balance was $9.7 million.
-- ITC Carryforward: This ITC is generated but not yet claimed on a
tax return, and will be recognized immediately as income to the
extent that we expect to use the ITC on future tax returns. At
March 31, 1999, the total ITC Carryforward was $23 million. The
amounts expected to be used on future returns have not presently
been determined.
Certain other generation expenses, such as lease expense, will
amortize differently in the future, although total amounts of such
expenses will remain the same over the life of the leases.
Overall, earnings will increase in 1999, primarily as a result
of the recognition of the ITC described above, and earnings will be
reduced in the next few subsequent years, primarily as a result of
the changes in ceasing to apply FAS 71 to generation related
assets. However, TEP expects that such earnings reductions could
be offset and its earnings power retained provided:
- customer growth in TEP's service territory continues at its
current pace, about 2% to 3% annually;
- margins on wholesale sales grow as market prices increase over
time in the region; and
- a portion of free cash flow is used to reduce TEP's debt.
The table below illustrates the anticipated impact on TEP and
UniSource Energy's income statements in 1999-2001 from ceasing to
apply FAS 71 to our generation operations. The table shows only
expense item changes.
This analysis reflects TEP's Settlement filed with the ACC on
June 9, 1999, as originally filed, and assumes that the Settlement
is approved by year end 1999. The analysis involves estimates;
actual results in the future may differ materially from those
expressed below. TEP's analysis is expressed in good faith and is
believed by management to have reasonable basis, including without
limitation, examination of historical operating trends, data
contained in TEP's records and other data available from third
parties. There can be no assurance that the Settlement filed with
the ACC will be accepted as filed or that key assumptions and
related events will be realized.
For additional information regarding the accounting implications
from ceasing to account for the generation operations in accordance
with FAS 71, see Note 2, TEP's Regulatory Assets and Liabilities,
of Notes to Financial Statements contained in the Annual Report on
Form 10-K for 1998.
Summary of Anticipated Expense Item Changes
1999 2000 2001
---- ---- ----
- millions of dollars -
Operating Expenses -
increases/(decreases)
Fuel & Purchased Power (a) $ (4) $(14) $(14)
Impact of changes in generation
asset accounting methodologies (b) (10) (50) (46)
Stranded Asset Amortization (c) 4 17 21
Income Taxes (d) (1) (4) (6)
--------------------
Total Operating Expenses (11) (51) (45)
--------------------
Operating Income -
increase/(decrease) 11 51 45
Other Income -
Income Taxes: ITCs (e) 30 (4) (5)
Interest Expense - increase/(decrease)
Capital Lease "interest method"
interest expense (f) 23 92 91
Interest on Losses recorded at
present value (g) (9) (35) (37)
-------------------
Total Interest Expense 14 57 54
-------------------
After-tax impact $ 27 $(10) $(14)
===================
(a) This item may decrease to reflect the reclassification of
certain expenses presently classified as fuel expense to other line
items of expense. After we stop applying FAS 71 to our generation
operations, the lease costs for the coal handling facility lease
will be reflected as depreciation expense and interest expense in
the income statement, rather than operating lease expense. Also,
the fuel contract termination fee is presently capitalized and
amortized to fuel expense in accordance with ACC and FERC
directives. Post-FAS 71, the amortization of this fee may be
included with the amortization of other regulatory assets for
financial statement presentation purposes.
(b) This item reflects changes in accounting for leased and owned
generating assets after we stop applying FAS 71 to our generation
operations. These changes include:
- recognizing depreciation expense rather than lease expense for
capital lease assets;
- eliminating the amortization of the Springerville Unit 1
Allowance contra asset which is offset against the Stranded Assets;
and
- reducing amortization and depreciation expense due to the write-
down of generation plant assets.
(c) This is a new amortization expense item resulting from
reclassifying all generation-related regulatory assets to a
stranded cost regulatory asset totaling a net $414 million. The
$450 million of stranded costs includes $414 million presently on
the balance sheet and $36 million which has already been expensed
for financial statement purposes.
(d) This item reflects the expected 40% composite federal and
state tax benefit from all the other changes in expense noted in
the table.
(e) TEP expects to recognize all deferred ITC and all ITC
carryforward expected to be used within the ITC carryforward
period, when TEP stops applying FAS 71 to its generation
operations. The 1999 amount in the table represents TEP's best
estimate of the amount recognizable and may change materially
before the settlement is approved. For years after 1999, the
reduction in ITC reflects the elimination of amortization of ITC.
(f) Interest expense on the balance of the capital lease
liabilities will be recognized as a component of interest expense
on the income statement after TEP stops applying FAS 71 to its
generation operations.
(g) This item is imputed interest expense and relates to the
Springerville Unit 1 Allowance. The imputed interest expense is
eliminated since the Springerville Unit 1 Allowance is reclassified
to offset Stranded Assets.
Supreme Court Decision
----------------------
In a separate issue, on June 9 the Arizona Supreme Court removed
Commissioner Tony West from the ACC. Mr. West held a Commission-
issued securities license when elected November 3, 1998. Arizona
state law prohibits the election of a person to the ACC who is
subject to regulation by the Commission. The Court's decision
returns former Commissioner Renz Jennings to the Commission until
the Governor appoints a successor to serve until the general
election in 2000. The Court also stated that no rulings where Mr.
West cast the deciding vote would be disturbed.
Item 7. Financial Statements and Exhibits
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Exhibit 10 Settlement Agreement
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of
1934, each registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized. The
signature for each undersigned company shall be deemed to relate
only to matters having reference to such company or its subsidiary.
UniSource Energy Corporation
(Registrant)
Date: June 18, 1999 /s/ Karen G. Kissinger
---------------------------
Karen G. Kissinger
Principal Accounting Officer
Tucson Electric Power
(Registrant)
Date: June 18, 1999 /s/ Karen G. Kissinger
---------------------------
Karen G. Kissinger
Principal Accounting Officer