Attached files
file | filename |
---|---|
EX-31.D - EXHIBIT 31(D) - TUCSON ELECTRIC POWER CO | c00007exv31wd.htm |
EX-15 - EXHIBIT 15 - TUCSON ELECTRIC POWER CO | c00007exv15.htm |
EX-32 - EXHIBIT 32 - TUCSON ELECTRIC POWER CO | c00007exv32.htm |
EX-12.B - EXHIBIT 12(B) - TUCSON ELECTRIC POWER CO | c00007exv12wb.htm |
EX-31.C - EXHIBIT 31(C) - TUCSON ELECTRIC POWER CO | c00007exv31wc.htm |
EX-31.A - EXHIBIT 31(A) - TUCSON ELECTRIC POWER CO | c00007exv31wa.htm |
EX-31.B - EXHIBIT 31(B) - TUCSON ELECTRIC POWER CO | c00007exv31wb.htm |
EX-12.A - EXHIBIT 12(A) - TUCSON ELECTRIC POWER CO | c00007exv12wa.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission | Registrant; State of Incorporation; | IRS Employer | ||
File Number | Address; and Telephone Number | Identification Number | ||
1-13739 |
UNISOURCE ENERGY CORPORATION | 86-0786732 | ||
(An Arizona Corporation) | ||||
One South Church Avenue, Suite 100 | ||||
Tucson, AZ 85701 | ||||
(520) 571-4000 | ||||
1-5924 |
TUCSON ELECTRIC POWER COMPANY | 86-0062700 | ||
(An Arizona Corporation) | ||||
One South Church Avenue, Suite 100 | ||||
Tucson, AZ 85701 | ||||
(520) 571-4000 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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.
UniSource Energy Corporation | Yes þ | No o | ||||||
Tucson Electric Power Company (1) | Yes o | No þ |
(1) | Tucson Electric Power Company is not required to file reports under the Exchange Act. However, Tucson Electric Power Company has filed all Exchange Act reports for the preceding 12 months. |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
UniSource Energy Corporation | Yes o | No o | ||||||
Tucson Electric Power Company | Yes o | No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated
filer. See definition of accelerated filer, large accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
UniSource Energy Corporation | Large Accelerated Filer þ | Accelerated Filer o | Non-accelerated filer o | Smaller Reporting Company o | ||||
Tucson Electric Power Company | Large Accelerated Filer o | Accelerated Filer o | Non-accelerated filer þ | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
UniSource Energy Corporation | Yes o | No þ | ||||||
Tucson Electric Power Company | Yes o | No þ |
At April
30, 2010, 36,076,165 shares of UniSource Energy Corporation Common Stock, no par value
(the only class of Common Stock), were outstanding. At April 30, 2010, 32,139,434 shares of Tucson
Electric Power Companys common stock, no par value, were outstanding, all of which were held by
UniSource Energy Corporation.
This combined Form 10-Q is separately filed by UniSource Energy Corporation and Tucson Electric
Power Company. Information contained in this document relating to Tucson Electric Power Company is
filed by UniSource Energy Corporation and separately by Tucson Electric Power Company on its own
behalf. Tucson Electric Power Company makes no representation as to information relating to
UniSource Energy Corporation or its subsidiaries, except as it may relate to Tucson Electric Power
Company.
Table of Contents
Table of Contents
iv | ||||
PART I |
||||
1 | ||||
3 | ||||
3 | ||||
4 | ||||
5 | ||||
7 | ||||
8 | ||||
9 | ||||
10 | ||||
12 | ||||
13 | ||||
13 | ||||
13 | ||||
16 | ||||
17 | ||||
18 | ||||
19 | ||||
22 | ||||
23 | ||||
24 | ||||
24 | ||||
28 | ||||
28 | ||||
29 | ||||
29 | ||||
29 | ||||
30 | ||||
32 | ||||
35 | ||||
36 | ||||
36 | ||||
36 | ||||
36 | ||||
37 | ||||
38 | ||||
38 | ||||
42 | ||||
42 | ||||
46 | ||||
49 | ||||
53 | ||||
53 | ||||
54 | ||||
56 | ||||
57 | ||||
57 | ||||
59 | ||||
60 | ||||
ii
Table of Contents
62 | ||||||||
62 | ||||||||
62 | ||||||||
63 | ||||||||
63 | ||||||||
63 | ||||||||
64 | ||||||||
66 | ||||||||
67 | ||||||||
67 | ||||||||
67 | ||||||||
68 | ||||||||
68 | ||||||||
68 | ||||||||
69 | ||||||||
70 | ||||||||
Exhibit 12(a) | ||||||||
Exhibit 12(b) | ||||||||
Exhibit 15 | ||||||||
Exhibit 31(a) | ||||||||
Exhibit 31(b) | ||||||||
Exhibit 31(c) | ||||||||
Exhibit 31(d) | ||||||||
Exhibit 32 |
iii
Table of Contents
DEFINITIONS
The abbreviations and acronyms used in the 2010 first quarter report on Form 10-Q are defined
below:
1999 Settlement
Agreement
|
TEPs 1999 Settlement Agreement approved by the ACC in November 1999 that provided for electric retail competition and transition asset recovery. | |
2008 TEP Rate Order
|
A rate order issued by the ACC resulting in a new retail rate structure for TEP, effective December 1, 2008. | |
ACC
|
Arizona Corporation Commission. | |
AMT
|
Alternative Minimum Tax. | |
APS
|
Arizona Public Service Company. | |
BMGS
|
Black Mountain Generating Station owned by UED. | |
Btu
|
British thermal unit(s). | |
Capacity
|
The ability to produce power; the most power a unit can produce or the maximum that can be taken under a contract, measured in MWs. | |
Common Stock
|
UniSource Energys common stock, without par value. | |
Company
|
UniSource Energy Corporation. | |
DSM
|
Demand side management. | |
Emission Allowance(s)
|
An allowance issued by the Environmental Protection Agency which permits emission of one ton of sulfur dioxide or one ton of nitrogen oxide. These allowances can be bought and sold. | |
Energy
|
The amount of power produced over a given period of time measured in MWh. | |
EPA
|
Environmental Protection Agency. | |
FERC
|
Federal Energy Regulatory Commission. | |
Four Corners
|
Four Corners Generating Station. | |
GBtu
|
Billion British Thermal Units. | |
Heating Degree Days
|
An index used to measure the impact of weather on energy usage calculated by subtracting the average of the high and low daily temperatures from 65. | |
IRS
|
Internal Revenue Service. | |
kWh
|
Kilowatt-hour(s). | |
LIBOR
|
London Interbank Offered Rate. | |
Luna
|
Luna Energy Facility. | |
Millennium
|
Millennium Energy Holdings, Inc., a wholly-owned subsidiary of UniSource Energy. | |
MMBtu
|
Million British Thermal Units. | |
MW
|
Megawatt(s). | |
MWh
|
Megawatt-hour(s). | |
Navajo
|
Navajo Generating Station. | |
O&M
|
Operations and Maintenance Expense. | |
PGA
|
Purchased Gas Adjuster, a retail rate mechanism designed to recover the cost of gas purchased for retail gas customers. | |
PPFAC
|
Purchased Power and Fuel Adjustment Clause. | |
REST
|
Renewable Energy Standard and Tariff. | |
Salt River Project
|
A public power utility serving more than 900,000 customers in Phoenix, Arizona. | |
San Juan
|
San Juan Generating Station. | |
Springerville
|
Springerville Generating Station. | |
Springerville Common
Facilities
|
Facilities at Springerville used in common with Springerville Unit 1 and Springerville Unit 2. | |
Springerville Common
Facilities Leases
|
Leveraged lease arrangements relating to an undivided one-half interest in certain Springerville Common Facilities. | |
Springerville Unit 1
|
Unit 1 of the Springerville Generating Station. | |
Springerville Unit 1 Leases
|
Leveraged lease arrangement relating to Springerville Unit 1 and an undivided one-half interest in certain Springerville Common Facilities. |
iv
Table of Contents
Springerville Unit 2
|
Unit 2 of the Springerville Generating Station. | |
Springerville Unit 3
|
Unit 3 of the Springerville Generating Station. | |
Springerville Unit 4
|
Unit 4 of the Springerville Generating Station. | |
SRP
|
Salt River Project Agricultural Improvement and Power District. | |
Sundt
|
H. Wilson Sundt Generating Station. | |
Sundt Unit 4
|
Unit 4 of the H. Wilson Sundt Generating Station. | |
TEP
|
Tucson Electric Power Company, the principal subsidiary of UniSource Energy. | |
TEP Credit Agreement
|
Amended and Restated Credit Agreement between TEP and a syndicate of banks, dated as of August 11, 2006. | |
TEP Revolving Credit Facility
|
Revolving credit facility under the TEP Credit Agreement. | |
TEP Term Loan
|
$30 million term loan agreement dated as of March 1, 2010. | |
Therm
|
A unit of heating value equivalent to 100,000 British thermal units (Btu). | |
TOU
|
Time of use. | |
TRA
|
Transition Recovery Asset, a $450 million regulatory asset established in TEPs 1999 Settlement Agreement that was fully recovered in 2008. | |
Tri-State
|
Tri-State Generation and Transmission Association. | |
UED
|
UniSource Energy Development Company, a wholly-owned subsidiary of UniSource Energy, which engages in developing generation resources and other project development services and related activities. | |
UED Credit Agreement
|
Credit agreement between UED and a syndicate of banks, dated as of March 26, 2009, guaranteed by UniSource Energy. | |
UES
|
UniSource Energy Services, Inc., an intermediate holding company established to own the operating companies (UNS Gas and UNS Electric). | |
UniSource Credit Agreement
|
Amended and Restated Credit Agreement between UniSource Energy and a syndicate of banks, dated as of August 11, 2006. | |
UniSource Energy
|
UniSource Energy Corporation. | |
UNS Electric
|
UNS Electric, Inc., a wholly-owned subsidiary of UES. | |
UNS Gas
|
UNS Gas, Inc., a wholly-owned subsidiary of UES. | |
UNS Gas/UNS Electric
Revolver
|
Revolving credit facility under the Amended and Restated Credit Agreement among UNS Gas and UNS Electric as borrowers, UES as guarantor, and a syndicate of banks, dated as of August 11, 2006. |
v
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
UniSource Energy Corporation:
UniSource Energy Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of UniSource Energy
Corporation and its subsidiaries (the Company) as of March 31, 2010, and the related condensed
consolidated statements of income for the three-month periods ended March 31, 2010 and 2009, the
condensed consolidated statement of changes in stockholders equity and comprehensive income for
the three-month period ended March 31, 2010 and the condensed consolidated statements of cash flows
for the three-month periods ended March 31, 2010 and 2009. These interim financial statements are
the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), 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 the
accompanying condensed consolidated interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet as of December 31, 2009, and the related
consolidated statements of income, of cash flows, of capitalization, and of changes in
stockholders equity and comprehensive income for the year then ended (not presented herein), and
in our report dated February 25, 2010, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2009, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
|
||
Phoenix, Arizona |
||
May 3, 2010 |
1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of
Tucson Electric Power Company:
Tucson Electric Power Company:
We have reviewed the accompanying condensed consolidated balance sheet of Tucson Electric Power
Company and its subsidiaries (the Company) as of March 31, 2010, and the related condensed
consolidated statements of income (loss) for the three-month periods ended March 31, 2010 and 2009,
the condensed consolidated statement of changes in stockholders equity and comprehensive income
for the three-month period ended March 31, 2010, and the condensed consolidated statements of cash
flows for the three-month periods ended March 31, 2010 and 2009. These interim financial
statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), 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 the
accompanying condensed consolidated interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We previously audited in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet as of December 31, 2009, and the related
consolidated statements of income, of cash flows, of capitalization, and of changes in
stockholders equity and comprehensive income for the year then ended (not present herein), and in
our report dated February 25, 2010, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2009, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
|
||
Phoenix, Arizona |
||
May 3, 2010 |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
(Except Per Share Amounts) | ||||||||
Operating Revenues |
||||||||
Electric Retail Sales |
$ | 204,746 | $ | 201,352 | ||||
Electric Wholesale Sales |
36,145 | 35,295 | ||||||
California Power Exchange (CPX) Provision for Wholesale Refunds |
(2,970 | ) | | |||||
Gas Revenue |
55,781 | 58,303 | ||||||
Other Revenues |
24,200 | 16,907 | ||||||
Total Operating Revenues |
317,902 | 311,857 | ||||||
Operating Expenses |
||||||||
Fuel |
60,448 | 54,817 | ||||||
Purchased Energy |
81,886 | 76,695 | ||||||
Transmission |
2,430 | 2,259 | ||||||
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment |
(12,631 | ) | 6,702 | |||||
Total Fuel and Purchased Energy |
132,133 | 140,473 | ||||||
Other Operations and Maintenance |
82,908 | 84,954 | ||||||
Depreciation |
31,099 | 33,602 | ||||||
Amortization |
6,572 | 7,073 | ||||||
Taxes Other Than Income Taxes |
12,273 | 12,455 | ||||||
Total Operating Expenses |
264,985 | 278,557 | ||||||
Operating Income |
52,917 | 33,300 | ||||||
Other Income (Deductions) |
||||||||
Interest Income |
1,927 | 2,098 | ||||||
Other Income |
6,059 | 1,458 | ||||||
Other Expense |
(844 | ) | (1,484 | ) | ||||
Total Other Income (Deductions) |
7,142 | 2,072 | ||||||
Interest Expense |
||||||||
Long-Term Debt |
15,240 | 14,644 | ||||||
Capital Leases |
12,083 | 12,809 | ||||||
Other Interest Expense, Net of Interest Capitalized |
329 | (256 | ) | |||||
Total Interest Expense |
27,652 | 27,197 | ||||||
Income Before Income Taxes |
32,407 | 8,175 | ||||||
Income Tax Expense |
12,435 | 3,256 | ||||||
Net Income |
$ | 19,972 | $ | 4,919 | ||||
Weighted-Average Shares of Common Stock Outstanding (000) |
36,052 | 35,665 | ||||||
Basic Earnings per Share |
$ | 0.55 | $ | 0.14 | ||||
Diluted Earnings per Share |
$ | 0.52 | $ | 0.14 | ||||
Dividends Declared per Share |
$ | 0.39 | $ | 0.29 | ||||
See Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
Cash Flows from Operating Activities |
||||||||
Cash Receipts from Electric Retail Sales |
$ | 233,734 | $ | 241,524 | ||||
Cash Receipts from Electric Wholesale Sales |
44,459 | 55,200 | ||||||
Cash Receipts from Gas Sales |
66,511 | 71,103 | ||||||
Cash Receipts from Operating Springerville Units 3 & 4 |
24,906 | 17,940 | ||||||
Interest Received |
5,090 | 4,522 | ||||||
Income Tax Refunds Received |
| 14,962 | ||||||
Performance Deposits Receipt |
2,700 | 8,470 | ||||||
Other Cash Receipts |
4,250 | 3,313 | ||||||
Purchased Energy Costs Paid |
(93,529 | ) | (94,013 | ) | ||||
Fuel Costs Paid |
(58,818 | ) | (59,021 | ) | ||||
Payment of Other Operations and Maintenance Costs |
(49,947 | ) | (53,583 | ) | ||||
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized |
(28,046 | ) | (27,148 | ) | ||||
Wages Paid, Net of Amounts Capitalized |
(36,941 | ) | (32,497 | ) | ||||
Interest Paid, Net of Amounts Capitalized |
(20,369 | ) | (20,768 | ) | ||||
Capital Lease Interest Paid |
(23,943 | ) | (22,821 | ) | ||||
Performance Deposit Payments |
(6,500 | ) | (14,100 | ) | ||||
Income Taxes Paid |
(234 | ) | | |||||
Excess Tax Benefit from Stock Options Exercised |
(151 | ) | (4 | ) | ||||
Other Cash Payments |
(1,422 | ) | (1,858 | ) | ||||
Net Cash Flows Operating Activities |
61,750 | 91,221 | ||||||
Cash Flows from Investing Activities |
||||||||
Capital Expenditures |
(60,383 | ) | (82,061 | ) | ||||
Purchase of Sundt Unit 4 Lease Asset |
(51,389 | ) | | |||||
Purchase of Springerville Lease Debt |
| (31,375 | ) | |||||
Return of Investment in Springerville Lease Debt |
21,667 | 906 | ||||||
Return of Investment from Millennium Energy Businesses |
423 | 5,000 | ||||||
Insurance Proceeds for Replacement Assets |
| 4,279 | ||||||
Other Cash Receipts |
30 | | ||||||
Other Cash Payments |
(215 | ) | (319 | ) | ||||
Net Cash Flows Investing Activities |
(89,867 | ) | (103,570 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Proceeds from Borrowings Under Revolving Credit Facilities |
125,000 | 34,000 | ||||||
Proceeds from Issuance of Short-Term Debt |
| 30,000 | ||||||
Proceeds from Stock Options Exercised |
2,621 | 8 | ||||||
Excess Tax Benefit from Stock Options Exercised |
151 | 4 | ||||||
Other Cash Receipts |
2,796 | 699 | ||||||
Proceeds from Issuance of Long-Term Debt |
39,570 | | ||||||
Repayments of Borrowings Under Revolving Credit Facilities |
(91,000 | ) | (39,000 | ) | ||||
Payments of Capital Lease Obligations |
(39,541 | ) | (14,471 | ) | ||||
Common Stock Dividends Paid |
(14,021 | ) | (10,330 | ) | ||||
Repayment of Long-Term Debt |
(2,445 | ) | (1,500 | ) | ||||
Payment of Debt Issue/Retirement Costs |
(1,631 | ) | (814 | ) | ||||
Other Cash Payments |
(340 | ) | (390 | ) | ||||
Net Cash Flows Financing Activities |
21,160 | (1,794 | ) | |||||
Net Decrease in Cash and Cash Equivalents |
(6,957 | ) | (14,143 | ) | ||||
Cash and Cash Equivalents, Beginning of Year |
76,922 | 55,172 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 69,965 | $ | 41,029 | ||||
See Note 16 for supplemental cash flow information.
See Notes to Condensed Consolidated Financial Statements.
4
Table of Contents
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
ASSETS |
||||||||
Utility Plant |
||||||||
Plant in Service |
$ | 4,176,496 | $ | 4,147,268 | ||||
Utility Plant under Capital Leases |
772,016 | 720,628 | ||||||
Construction Work in Progress |
175,535 | 144,551 | ||||||
Total Utility Plant |
5,124,047 | 5,012,447 | ||||||
Less Accumulated Depreciation and Amortization |
(1,695,090 | ) | (1,652,296 | ) | ||||
Less Accumulated Amortization of Capital Lease Assets |
(579,150 | ) | (574,437 | ) | ||||
Total Utility Plant Net |
2,849,807 | 2,785,714 | ||||||
Investments and Other Property |
||||||||
Investments in Lease Debt and Equity |
104,665 | 132,168 | ||||||
Other |
62,378 | 60,239 | ||||||
Total Investments and Other Property |
167,043 | 192,407 | ||||||
Current Assets |
||||||||
Cash and Cash Equivalents |
69,965 | 76,922 | ||||||
Accounts Receivable Retail and Other |
54,100 | 64,230 | ||||||
Accounts Receivable Wholesale |
15,443 | 18,288 | ||||||
Unbilled Accounts Receivable |
42,011 | 53,361 | ||||||
Allowance for Doubtful Accounts |
(5,944 | ) | (5,977 | ) | ||||
Materials and Fuel Inventory |
117,333 | 116,791 | ||||||
Prepayments |
6,236 | 6,759 | ||||||
Derivative Instruments |
6,153 | 2,653 | ||||||
Regulatory Assets Derivative Instruments |
33,196 | 17,841 | ||||||
Regulatory Assets Other |
24,724 | 23,931 | ||||||
Deferred Income Taxes Current |
51,106 | 52,355 | ||||||
Income Taxes Receivable |
| 620 | ||||||
Investments in Lease Debt and Equity |
5,513 | | ||||||
Collateral Posted |
5,550 | 1,750 | ||||||
Other |
17,240 | 16,781 | ||||||
Total Current Assets |
442,626 | 446,305 | ||||||
Regulatory and Other Assets |
||||||||
Income Taxes Recoverable Through Future Revenues |
18,072 | 18,144 | ||||||
Regulatory Assets Pension and Other Postretirement Benefits |
83,208 | 84,149 | ||||||
Regulatory Assets Derivative Instruments |
8,762 | 9,503 | ||||||
Regulatory Assets Other |
35,779 | 35,529 | ||||||
Derivative Instruments |
9,539 | 4,498 | ||||||
Other Assets |
24,226 | 24,993 | ||||||
Total Regulatory and Other Assets |
179,586 | 176,816 | ||||||
Total Assets |
$ | 3,639,062 | $ | 3,601,242 | ||||
See Notes to Condensed Consolidated Financial Statements.
(Continued)
5
Table of Contents
UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
CAPITALIZATION AND OTHER LIABILITIES |
||||||||
Capitalization |
||||||||
Common Stock Equity |
$ | 757,939 | $ | 750,865 | ||||
Capital Lease Obligations |
431,834 | 488,349 | ||||||
Long-Term Debt |
1,357,630 | 1,307,795 | ||||||
Total Capitalization |
2,547,403 | 2,547,009 | ||||||
Current Liabilities |
||||||||
Current Obligations Under Capital Leases |
65,292 | 40,441 | ||||||
Borrowing Under Revolving Credit Facility |
55,000 | 35,000 | ||||||
Current Maturities of Long-Term Debt |
13,000 | 12,195 | ||||||
Accounts Payable |
55,940 | 54,152 | ||||||
Accounts Payable Purchased Power |
43,996 | 44,838 | ||||||
Interest Accrued |
16,819 | 41,396 | ||||||
Income Taxes Payable |
2,657 | | ||||||
Accrued Taxes Other Than Income Taxes |
46,961 | 36,698 | ||||||
Accrued Employee Expenses |
21,456 | 27,545 | ||||||
Customer Deposits |
26,875 | 25,978 | ||||||
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
14,341 | 24,258 | ||||||
Regulatory Liabilities Other |
20,744 | 17,971 | ||||||
Derivative Instruments |
39,072 | 21,186 | ||||||
Other |
4,319 | 4,038 | ||||||
Total Current Liabilities |
426,472 | 385,696 | ||||||
Deferred Credits and Other Liabilities |
||||||||
Deferred Income Taxes Noncurrent |
233,681 | 227,199 | ||||||
Regulatory Liabilities Net Cost of Removal for Interim Retirements |
179,348 | 195,177 | ||||||
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
11,018 | 16,714 | ||||||
Derivative Instruments |
25,930 | 19,489 | ||||||
Pension and Other Postretirement Benefits |
125,582 | 123,476 | ||||||
Customer Advances for Construction |
33,241 | 31,803 | ||||||
Other |
56,387 | 54,679 | ||||||
Total Deferred Credits and Other Liabilities |
665,187 | 668,537 | ||||||
Commitments and Contingencies (Note 6) |
||||||||
Total Capitalization and Other Liabilities |
$ | 3,639,062 | $ | 3,601,242 | ||||
See Notes to Condensed Consolidated Financial Statements.
(Concluded)
6
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UNISOURCE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Accumulated | ||||||||||||||||||||
Common | Other | Total | ||||||||||||||||||
Shares | Common | Accumulated | Comprehensive | Stockholders | ||||||||||||||||
Outstanding* | Stock | Earnings | Loss | Equity | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
-Thousands of Dollars- | ||||||||||||||||||||
Balances at December 31, 2009 |
35,851 | $ | 696,206 | $ | 60,461 | $ | (5,802 | ) | $ | 750,865 | ||||||||||
Comprehensive Income: |
||||||||||||||||||||
2010 Year-to-Date Net Income |
19,972 | 19,972 | ||||||||||||||||||
Unrealized Loss on Cash Flow Hedges
(net of $1,516 income taxes) |
(2,312 | ) | (2,312 | ) | ||||||||||||||||
Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $478 income taxes) |
729 | 729 | ||||||||||||||||||
Employee Benefit Obligations |
||||||||||||||||||||
Amortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $34 income taxes) |
52 | 52 | ||||||||||||||||||
Total Comprehensive Income |
18,441 | |||||||||||||||||||
Dividends |
(14,121 | ) | (14,121 | ) | ||||||||||||||||
Shares Issued under Stock Compensation Plans -
(net of shares redeemed for taxes) |
144 | 1,985 | 1,985 | |||||||||||||||||
Tax Benefit Realized from Share-Based Compensation Plans |
151 | 151 | ||||||||||||||||||
Other Share-Based Compensation |
618 | 618 | ||||||||||||||||||
Balances at March 31, 2010 |
35,995 | $ | 698,960 | $ | 66,312 | $ | (7,333 | ) | $ | 757,939 | ||||||||||
* | UniSource Energy has 75 million authorized shares of Common Stock. |
See Notes to Condensed Consolidated Financial Statements.
7
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TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
Operating Revenues |
||||||||
Electric Retail Sales |
$ | 167,419 | $ | 157,764 | ||||
Electric Wholesale Sales |
40,043 | 37,758 | ||||||
California Power Exchange (CPX) Provision for Wholesale Refunds |
(2,970 | ) | | |||||
Other Revenues |
25,667 | 17,752 | ||||||
Total Operating Revenues |
230,159 | 213,274 | ||||||
Operating Expenses |
||||||||
Fuel |
58,351 | 51,440 | ||||||
Purchased Power |
23,735 | 23,042 | ||||||
Transmission |
796 | 548 | ||||||
Increase (Decrease) to Reflect PPFAC Recovery Treatment |
(3,118 | ) | (368 | ) | ||||
Total Fuel and Purchased Energy |
79,764 | 74,662 | ||||||
Other Operations and Maintenance |
72,023 | 74,734 | ||||||
Depreciation |
24,077 | 26,757 | ||||||
Amortization |
7,786 | 8,293 | ||||||
Taxes Other Than Income Taxes |
10,006 | 10,256 | ||||||
Total Operating Expenses |
193,656 | 194,702 | ||||||
Operating Income |
36,503 | 18,572 | ||||||
Other Income (Deductions) |
||||||||
Interest Income |
1,690 | 2,070 | ||||||
Other Income |
1,199 | 1,331 | ||||||
Other Expense |
(761 | ) | (1,128 | ) | ||||
Total Other Income (Deductions) |
2,128 | 2,273 | ||||||
Interest Expense |
||||||||
Long-Term Debt |
9,878 | 9,191 | ||||||
Capital Leases |
12,081 | 12,805 | ||||||
Other Interest Expense, Net of Interest Capitalized |
(25 | ) | (285 | ) | ||||
Total Interest Expense |
21,934 | 21,711 | ||||||
Income (Loss) Before Income Taxes |
16,697 | (866 | ) | |||||
Income Tax Expense (Benefit) |
6,348 | (313 | ) | |||||
Net Income (Loss) |
$ | 10,349 | $ | (553 | ) | |||
See Notes to Condensed Consolidated Financial Statements.
8
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TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
Cash Flows from Operating Activities |
||||||||
Cash Receipts from Electric Retail Sales |
$ | 190,753 | $ | 190,337 | ||||
Cash Receipts from Electric Wholesale Sales |
49,531 | 58,850 | ||||||
Cash Receipts from Operating Springerville Units 3 & 4 |
24,906 | 17,940 | ||||||
Interest Received |
5,086 | 4,500 | ||||||
Income Tax Refunds Received |
| 14,962 | ||||||
Reimbursement of Affiliate Charges |
4,202 | 5,976 | ||||||
Other Cash Receipts |
2,094 | 2,106 | ||||||
Performance Deposit Payments |
(1,540 | ) | (9,100 | ) | ||||
Fuel Costs Paid |
(57,288 | ) | (54,728 | ) | ||||
Purchased Power Costs Paid |
(29,214 | ) | (33,437 | ) | ||||
Payment of Other Operations and Maintenance Costs |
(47,017 | ) | (51,155 | ) | ||||
Capital Lease Interest Paid |
(23,941 | ) | (22,818 | ) | ||||
Wages Paid, Net of Amounts Capitalized |
(30,903 | ) | (26,867 | ) | ||||
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized |
(19,524 | ) | (17,427 | ) | ||||
Interest Paid, Net of Amounts Capitalized |
(10,399 | ) | (10,495 | ) | ||||
Income Taxes Paid |
(234 | ) | | |||||
Other Cash Payments |
(767 | ) | (1,252 | ) | ||||
Net Cash Flows Operating Activities |
55,745 | 67,392 | ||||||
Cash Flows from Investing Activities |
||||||||
Capital Expenditures |
(52,470 | ) | (69,459 | ) | ||||
Purchase of Sundt Unit 4 Lease Asset |
(51,389 | ) | | |||||
Purchase of Springerville Lease Debt |
| (31,375 | ) | |||||
Return of Investment in Springerville Lease Debt |
21,667 | 906 | ||||||
Insurance Proceeds for Replacement Assets |
| 4,279 | ||||||
Other Cash Receipts |
30 | | ||||||
Other Cash Payments |
(1 | ) | (3 | ) | ||||
Net Cash Flows Investing Activities |
(82,163 | ) | (95,652 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Proceeds from Borrowings Under Revolving Credit Facility |
95,000 | 20,000 | ||||||
Repayments of Borrowings Under Revolving Credit Facility |
(75,000 | ) | (30,000 | ) | ||||
Equity Investment from UniSource Energy |
15,000 | 30,000 | ||||||
Proceeds from Issuance of Long-Term Debt |
30,000 | | ||||||
Payments of Capital Lease Obligations |
(39,523 | ) | (14,447 | ) | ||||
Other Cash Receipts |
61 | 465 | ||||||
Payment of Debt Issue/Retirement Costs |
(989 | ) | (9 | ) | ||||
Other Cash Payments |
(54 | ) | (139 | ) | ||||
Net Cash Flows Financing Activities |
24,495 | 5,870 | ||||||
Net Decrease in Cash and Cash Equivalents |
(1,923 | ) | (22,390 | ) | ||||
Cash and Cash Equivalents, Beginning of Year |
22,418 | 33,275 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 20,495 | $ | 10,885 | ||||
See Note 16 for supplemental cash flow information.
See Notes to Condensed Consolidated Financial Statements.
9
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TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
ASSETS |
||||||||
Utility Plant |
||||||||
Plant in Service |
$ | 3,610,744 | $ | 3,584,308 | ||||
Utility Plant under Capital Leases |
771,311 | 719,922 | ||||||
Construction Work in Progress |
137,731 | 113,390 | ||||||
Total Utility Plant |
4,519,786 | 4,417,620 | ||||||
Less Accumulated Depreciation and Amortization |
(1,619,807 | ) | (1,582,442 | ) | ||||
Less Accumulated Amortization of Capital Lease Assets |
(578,543 | ) | (573,853 | ) | ||||
Total Utility Plant Net |
2,321,436 | 2,261,325 | ||||||
Investments and Other Property |
||||||||
Investments in Lease Debt and Equity |
104,665 | 132,168 | ||||||
Other |
33,658 | 31,813 | ||||||
Total Investments and Other Property |
138,323 | 163,981 | ||||||
Current Assets |
||||||||
Cash and Cash Equivalents |
20,495 | 22,418 | ||||||
Accounts Receivable Retail and Other |
40,388 | 46,894 | ||||||
Accounts Receivable Wholesale |
14,569 | 17,904 | ||||||
Unbilled Accounts Receivable |
26,723 | 32,368 | ||||||
Allowance for Doubtful Accounts |
(3,878 | ) | (3,806 | ) | ||||
Accounts Receivable Due from Affiliates |
7,149 | 5,218 | ||||||
Materials and Fuel Inventory |
106,628 | 104,861 | ||||||
Prepayments |
5,159 | 5,678 | ||||||
Derivative Instruments |
4,991 | 5,043 | ||||||
Regulatory Assets Derivative Instruments |
8,994 | 3,696 | ||||||
Regulatory Assets Other |
24,184 | 23,330 | ||||||
Deferred Income Taxes Current |
49,881 | 50,789 | ||||||
Investments in Lease Debt and Equity |
5,513 | | ||||||
Other |
14,745 | 16,394 | ||||||
Total Current Assets |
325,541 | 330,787 | ||||||
Regulatory and Other Assets |
||||||||
Regulatory Assets Pension and Other Postretirement Benefits |
79,313 | 80,169 | ||||||
Regulatory Assets Derivative Instruments |
4,125 | 4,631 | ||||||
Regulatory Assets Other |
34,503 | 34,203 | ||||||
Income Taxes Recoverable Through Future Revenues |
18,072 | 18,144 | ||||||
Derivative Instruments |
1,382 | 1,075 | ||||||
Other Assets |
19,519 | 19,984 | ||||||
Total Regulatory and Other Assets |
156,914 | 158,206 | ||||||
Total Assets |
$ | 2,942,214 | $ | 2,914,299 | ||||
See Notes to Condensed Consolidated Financial Statements.
(Continued)
10
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TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
-Thousands of Dollars- | ||||||||
CAPITALIZATION AND OTHER LIABILITIES |
||||||||
Capitalization |
||||||||
Common Stock Equity |
$ | 666,963 | $ | 643,144 | ||||
Capital Lease Obligations |
431,814 | 488,311 | ||||||
Long-Term Debt |
933,615 | 903,615 | ||||||
Total Capitalization |
2,032,392 | 2,035,070 | ||||||
Current Liabilities |
||||||||
Current Obligations Under Capital Leases |
65,183 | 40,332 | ||||||
Borrowing Under Revolving Credit Facility |
55,000 | 35,000 | ||||||
Accounts Payable |
50,351 | 48,631 | ||||||
Accounts Payable Purchased Power |
27,489 | 22,697 | ||||||
Accounts Payable Due to Affiliates |
2,926 | 3,694 | ||||||
Income Taxes Payable |
1,844 | | ||||||
Interest Accrued |
14,343 | 33,970 | ||||||
Accrued Taxes Other Than Income Taxes |
36,569 | 28,404 | ||||||
Accrued Employee Expenses |
18,692 | 24,409 | ||||||
Customer Deposits |
18,815 | 18,125 | ||||||
Derivative Instruments |
13,735 | 9,434 | ||||||
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
8,785 | 9,200 | ||||||
Regulatory Liabilities Other |
19,799 | 17,439 | ||||||
Other |
2,620 | 1,445 | ||||||
Total Current Liabilities |
336,151 | 292,780 | ||||||
Deferred Credits and Other Liabilities |
||||||||
Deferred Income Taxes Noncurrent |
221,098 | 217,316 | ||||||
Regulatory Liabilities Net Cost of Removal for Interim Retirements |
146,390 | 162,764 | ||||||
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
11,018 | 16,714 | ||||||
Derivative Instruments |
13,136 | 11,195 | ||||||
Pension and Other Postretirement Benefits |
118,996 | 116,991 | ||||||
Customer Advances for Construction |
7,776 | 7,891 | ||||||
Other |
55,257 | 53,578 | ||||||
Total Deferred Credits and Other Liabilities |
573,671 | 586,449 | ||||||
Commitments and Contingencies (Note 6) |
||||||||
Total Capitalization and Other Liabilities |
$ | 2,942,214 | $ | 2,914,299 | ||||
See Notes to Condensed Consolidated Financial Statements.
(Concluded)
11
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TUCSON ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
Accumulated | ||||||||||||||||||||
Capital | Other | Total | ||||||||||||||||||
Common | Stock | Accumulated | Comprehensive | Stockholders | ||||||||||||||||
Stock | Expense | Deficit | Loss | Equity | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
-Thousands of Dollars- | ||||||||||||||||||||
Balances at December 31, 2009 |
$ | 843,971 | $ | (6,357 | ) | $ | (188,668 | ) | $ | (5,802 | ) | $ | 643,144 | |||||||
Comprehensive Income: |
||||||||||||||||||||
2010 Year-to-Date Net Income |
10,349 | 10,349 | ||||||||||||||||||
Unrealized Loss on Cash Flow Hedges
(net of $1,516 income taxes) |
(2,311 | ) | (2,311 | ) | ||||||||||||||||
Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $478 income taxes) |
729 | 729 | ||||||||||||||||||
Employee Benefit Obligations |
||||||||||||||||||||
Amortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $34 income taxes) |
52 | 52 | ||||||||||||||||||
Total Comprehensive Income |
8,819 | |||||||||||||||||||
Capital Contribution from UniSource Energy |
15,000 | 15,000 | ||||||||||||||||||
Balances at March 31, 2010 |
$ | 858,971 | $ | (6,357 | ) | $ | (178,319 | ) | $ | (7,332 | ) | $ | 666,963 | |||||||
See Notes to Condensed Consolidated Financial Statements.
12
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Unaudited
NOTE 1. NATURE OF OPERATIONS AND BASIS OF ACCOUNTING PRESENTATION
UniSource Energy Corporation (UniSource Energy) is a holding company that has no significant
operations of its own. Operations are conducted by UniSource Energys subsidiaries, each of which
is a separate legal entity with its own assets and liabilities. UniSource Energy owns the common
stock of Tucson Electric Power Company (TEP), UniSource Energy Services, Inc. (UES), Millennium
Energy Holdings, Inc. (Millennium) and UniSource Energy Development Company (UED).
TEP, a regulated public utility, is UniSource Energys largest operating subsidiary and represented
approximately 81% of UniSource Energys assets as of March 31, 2010. TEP generates, transmits and
distributes electricity to approximately 402,000 retail electric customers in a 1,155 square mile
area in Southern Arizona. TEP also sells electricity to other utilities and power marketing
entities primarily located in the Western U.S. In addition, TEP operates Springerville Unit 3 on
behalf of Tri-State Generation and Transmission Association, Inc. (Tri-State) and, beginning in
December 2009, Springerville Unit 4 on behalf of Salt River Project Agriculture Improvement and
Power District (SRP).
UES holds the common stock of UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (UNS Electric). UNS
Gas is a gas distribution company with 146,000 retail customers in Mohave, Yavapai, Coconino, and
Navajo counties in Northern Arizona, as well as Santa Cruz county in Southeast Arizona. UNS
Electric is an electric transmission and distribution company with approximately 91,000 retail
customers in Mohave and Santa Cruz counties.
Millennium invests in unregulated businesses. In March 2010, Millennium sold its interest in
Nations Energy Corporation. See Note 13.
References to we and our are to UniSource Energy and its subsidiaries, collectively.
The accompanying quarterly financial statements of UniSource Energy and TEP are unaudited but
reflect all normal recurring accruals and other adjustments which we believe are necessary for a
fair presentation of the results for the interim periods presented. These financial statements are
presented in accordance with the Securities and Exchange Commissions (SEC) interim reporting
requirements which do not include all the disclosures required by accounting principles generally
accepted in the United States of America (GAAP) for audited annual financial statements. The
year-end condensed balance sheet data was derived from audited financial statements, but does not
include disclosures required by GAAP for audited annual financial statements. This quarterly
report should be reviewed in conjunction with UniSource Energy and TEPs 2009 Annual Report on Form
10-K.
Weather, among other factors, causes seasonal fluctuations in TEP, UNS Gas and UNS Electrics
sales; therefore, quarterly results are not indicative of annual operating results.
To be comparable with the 2010 presentation, UniSource Energy and TEP each had immaterial
reclassifications from Other Long-Term Liabilities to Other Current Liabilities in the first
quarter 2009 balance sheets.
NOTE 2. REGULATORY MATTERS
ACCOUNTING FOR RATE REGULATION
The Arizona Corporation Commission (ACC) and the Federal Energy Regulatory Commission (FERC)
regulate portions of TEP, UNS Gas, and UNS Electric (the three utilities) utility accounting
practices and rates. The ACC has authority over certain rates charged to retail customers, the
issuance of securities, and transactions with affiliated parties. The FERC regulates rates for
wholesale power sales and interstate transmission services.
TEP PURCHASED POWER AND FUEL ADJUSTMENT CLAUSE (PPFAC)
The PPFAC allows recovery of fuel, transmission, and purchased power costs, including demand
charges and the prudent costs of contracts for hedging fuel and purchased power costs. In March
2010, the ACC approved a 0.09 cent PPFAC effective April 2010, compared to a 0.18 cent PPFAC that
expired March 2010. This includes a forward component credit of (0.08) cents and a true-up
component of 0.17 cents. TEP offsets the forward and true-up components of the PPFAC with Fixed
Competition Transition Charge (CTC) revenue to be refunded, resulting in a PPFAC charge of zero to
customers until the CTC is fully credited. TEP had no PPFAC in the first quarter of 2009.
13
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
The following table shows the balance of Regulatory Liabilities (Over-) Under-Recovered
Purchased Energy Costs:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
-Millions of Dollars- | ||||||||
Fixed CTC Revenue to be Refunded Within the Next 12
Months; Included in Current Liabilities |
$ | (9 | ) | $ | (9 | ) | ||
Under-Recovered Purchased Energy Costs Regulatory
Basis as Billed to Customers |
$ | 30 | $ | 29 | ||||
Estimated Purchased Energy Costs Recovered through
Accrued Unbilled Revenues |
(7 | ) | (9 | ) | ||||
Fixed CTC Revenue to be Refunded |
(34 | ) | (37 | ) | ||||
Total Included in Deferred Credits and Other Liabilities |
$ | (11 | ) | $ | (17 | ) | ||
The $3 million amortization of the Fixed CTC Revenue to be Refunded appears in the accompanying
income statements as an addition to retail revenues in 2010. The $3 million 2010 increase in
Under-Recovered Purchased Energy Costs appears in the income statement as a credit to fuel and
purchased power costs in the line item Increase (Decrease) to Reflect PPFAC Recovery Treatment.
UNS GAS RATES AND REGULATION
2008 General Rate Case Filing
In November 2008, UNS Gas filed the general rate case (on a cost of service basis) with the ACC
requesting a total rate increase of 6% to cover a revenue deficiency of $10 million. In April
2010, the ACC approved a rate increase of 2% ($3 million), including an 8% return on original cost
rate base and a 5.75% return on fair value rate base, effective April 1, 2010. The rate increase
is intended to cover the costs of providing service.
Purchased Gas Adjuster (PGA) Mechanism
UNS Gas retail rates include a PGA mechanism intended to address the volatility of natural gas
prices and allow UNS Gas to recover its actual commodity costs, including transportation, through a
price adjuster. All purchased gas commodity costs, including transportation, increase the PGA
bank, a balancing account. UNS Gas recovers these costs or returns amounts over-collected from/to
ratepayers through a PGA mechanism. In October 2009, the ACC approved an 8 cent per therm PGA
surcredit, effective November 2009 through October 2010 or until the balance reaches zero.
The
following table shows the balance of (Over-) Recovered Purchased Gas Costs:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
-Millions of Dollars- | ||||||||
(Over-) Recovered Purchased Gas Costs
Regulatory Basis as Billed to Customers |
$ | | $ | (2 | ) | |||
Estimated Purchased Gas Costs Recovered
through Accrued Unbilled Revenues |
(5 | ) | (8 | ) | ||||
(Over-) Recovered Purchased Gas Costs (PGA)
Included as a Current Regulatory Liability |
$ | (5 | ) | $ | (10 | ) | ||
14
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
UNS ELECTRIC RATES AND REGULATION
2009 General Rate Case Filing
In April 2009, UNS Electric filed a general rate case with the ACC (on a cost of service basis)
requesting a rate increase of 7.4% to cover a revenue deficiency of $14 million. Hearings before
an ACC administrative law judge concluded in February 2010. UNS Electric expects the ACC to rule
on its rate case in the second half of 2010.
UNS Electric Purchased Power and Fuel Adjustment Clause (PPFAC)
The PPFAC allows recovery of fuel and purchased power costs, including demand charges and the
prudent costs of contracts for hedging fuel and purchased power costs. In April 2010, UNS Electric
filed an annual PPFAC recommendation with the ACC to have a (0.28) cent PPFAC surcredit to be
effective June 2010. This includes a forward component credit of (0.42) cents and a true-up
component of 0.14 cents.
The following table shows the balance of (Over-) Under-Recovered Purchased Power Costs:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
-Millions of Dollars- | ||||||||
(Over-) Under-Recovered Purchased Power
Costs Regulatory Basis as Billed to
Customers |
$ | 3 | $ | (1 | ) | |||
Estimated Purchased Power Costs Recovered
through Accrued Unbilled Revenues |
(3 | ) | (4 | ) | ||||
(Over-) Recovered Purchased Power Costs
(PPFAC) Included as a Current Regulatory
Liability |
$ | | $ | (5 | ) | |||
REST/DSM
The ACC allows TEP and UNS Electric to include a REST tariff on customer bills to recover qualified
expenditures related to renewable energy projects. TEP and UNS Electric are required to file a
five-year implementation plan with the ACC, and annually seek approval for the upcoming years REST
funding amount. For 2010, the ACC approved a $32 million tariff for TEP, and an $8 million tariff
for UNS Electric.
In April 2010, the ACC approved TEPs use of REST and PPFAC
funds to add approximately 30 MW of solar generating capacity,
through long-term power purchase contracts.
In April 2010, the ACC approved UNS Electrics use of REST
and PPFAC funds to add more than 7 MW of wind generating
capacity and 0.5 MW of solar generating capacity, through a long-term power purchase contract.
15
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
NOTE 3. BUSINESS SEGMENTS
Based on the way we organize our operations and evaluate performance, we have three reportable
segments:
(1) | TEP, a vertically integrated electric utility business, UniSource Energys largest subsidiary; | ||
(2) | UNS Gas, a regulated gas distribution utility business; and | ||
(3) | UNS Electric, a regulated electric distribution utility business. |
The UniSource Energy and UES holding companies, Millennium, and UED are included in Other.
Reconciling adjustments consist of the elimination of intersegment revenues which were due to the
following transactions and are eliminated in consolidation:
Reportable Segments | ||||||||||||||||
UNS | UNS | |||||||||||||||
Intersegment Revenue | TEP | Gas | Electric | Other | ||||||||||||
-Millions of Dollars- | ||||||||||||||||
Three Months Ended March 31, 2010: |
||||||||||||||||
Wholesale Sales TEP to UNS Electric |
$ | 6 | $ | | $ | | $ | | ||||||||
Wholesale Sales UNS Electric to TEP |
| | 1 | | ||||||||||||
Wholesale Sales UED to UNS Electric |
| | | 3 | ||||||||||||
Gas Revenue UNS Gas to UNS Electric & UED |
| 1 | | | ||||||||||||
Other Revenue TEP to Affiliates(1) |
2 | | | | ||||||||||||
Other Revenue Millennium to TEP, UNS Electric, & UNS
Gas(2) |
| | | 4 | ||||||||||||
Other Revenue TEP to UNS Electric(3) |
1 | | | | ||||||||||||
Total Intersegment Revenue |
$ | 9 | $ | 1 | $ | 1 | $ | 7 | ||||||||
Three Months Ended March 31, 2009: |
||||||||||||||||
Wholesale Sales TEP to UNS Electric |
$ | 2 | $ | | $ | | $ | | ||||||||
Wholesale Sales UNS Electric to TEP |
| | 1 | | ||||||||||||
Wholesale Sales UED to UNS Electric |
| | | 3 | ||||||||||||
Gas Revenue UNS Gas to UNS Electric & UED |
| 1 | | | ||||||||||||
Other Revenue TEP to Affiliates(1) |
2 | | | | ||||||||||||
Other
Revenue Millennium to TEP, UNS Electric, & UNS
Gas(2) |
| | | 4 | ||||||||||||
Other Revenue TEP to UNS Electric & UNS Gas(3) |
1 | | | | ||||||||||||
Total Intersegment Revenue |
$ | 5 | $ | 1 | $ | 1 | $ | 7 | ||||||||
(1) | TEP provides corporate services (finance, accounting, tax, information technology services, etc.) to UniSource Energy and its subsidiaries. | |
(2) | Millennium provides supplemental workforce and meter reading services to TEP, UNS Electric and UNS Gas. | |
(3) | TEP provides control area services to UNS Electric. |
Other significant reconciling adjustments include the elimination of investments in subsidiaries
held by UniSource Energy, and reclassifications of deferred tax assets and liabilities.
16
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
We disclose selected financial data for our reportable segments in the following table:
Reportable Segments | UniSource | |||||||||||||||||||||||
UNS | UNS | Reconciling | Energy | |||||||||||||||||||||
Income Statement | TEP | Gas | Electric | Other | Adjustments | Consolidated | ||||||||||||||||||
-Millions of Dollars- | ||||||||||||||||||||||||
Three Months Ended March 31, 2010: |
||||||||||||||||||||||||
Operating Revenues External |
$ | 221 | $ | 56 | $ | 40 | $ | | $ | 1 | $ | 318 | ||||||||||||
Operating Revenues Intersegment |
9 | 1 | 1 | 7 | (18 | ) | | |||||||||||||||||
Income Before Income Taxes |
17 | 10 | 5 | | | 32 | ||||||||||||||||||
Net Income |
10 | 6 | 3 | 1 | | 20 | ||||||||||||||||||
Three Months Ended March 31, 2009: |
||||||||||||||||||||||||
Operating Revenues External |
$ | 208 | $ | 59 | $ | 45 | $ | | $ | | $ | 312 | ||||||||||||
Operating Revenues Intersegment |
5 | 1 | 1 | 7 | (14 | ) | | |||||||||||||||||
Income (Loss) Before Income Taxes |
(1 | ) | 8 | 1 | | | 8 | |||||||||||||||||
Net Income (Loss) |
(1 | ) | 5 | 1 | | | 5 |
NOTE 4. DEBT, CREDIT FACILITIES AND CAPITAL LEASE OBLIGATIONS
UNISOURCE ENERGY CREDIT AGREEMENT
UniSource Energy had the following balances outstanding under the UniSource Energy Credit
Agreement:
Current | Long- | Current | Long- | |||||||||||||||||||||
Liabilities | Term Debt | Total | Liabilities | Term Debt | Total | |||||||||||||||||||
-Millions of Dollars- | ||||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
Revolver |
$ | | $ | 45 | $ | 45 | $ | | $ | 31 | $ | 31 | ||||||||||||
Term Loan |
6 | 2 | 8 | 6 | 3 | 9 |
On April 30, 2010, UniSource Energy had $34 million in borrowings outstanding under its revolving
credit facility.
TEP SUNDT UNIT 4 CAPITAL LEASE PURCHASE
In January 2010, TEP entered into a commitment to purchase 100% of the equity interest in Sundt
Unit 4 from the owner participants for $52 million, resulting in an increase in capital lease
assets and capital lease obligation. In March 2010, TEP paid the owner participants $52 million
reducing the capital lease obligation. In April 2010, TEP paid the final outstanding Sundt Unit 4
lease obligation of $5 million to terminate the lease and reclassified the capital lease asset and
the related leasehold improvements to plant in service.
TEP DEBT
At March 31, 2010, TEP had $55 million in borrowings outstanding and $1 million in letters of
credit issued under its revolving credit agreement. The letters of credit were issued to provide
credit enhancements for energy purchase contracts and hedging activities. As of December 31, 2009,
TEP had $35 million in borrowings outstanding and $1 million in letters of credit issued under its
revolving credit facility. On April 30, 2010, TEP had $65 million in borrowings outstanding and $1
million in letters of credit issued under its revolving credit facility. The revolving loan
balances are included in Current Liabilities in the UniSource Energy and TEP balance sheets.
17
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
TEP Term Loan Borrowings
In March 2010, TEP entered into an 18-month, $30 million term loan facility. The loan is secured by
$30 million of TEP mortgage bonds. TEP has the option of paying interest on the loan facility at
LIBOR or Alternate Base Rate plus a margin based on a pricing grid tied to TEPs credit ratings.
The current margins are 2% for LIBOR loans and 1% for Alternate Base Rate loans. The loan proceeds
were used for general corporate purposes, including the funding of a portion of the purchase price
of Sundt Unit 4.
The loan agreement contains a number of covenants which restrict TEP and its subsidiaries,
including restrictions on additional indebtedness, liens, sale of assets, dividends and
sale-leaseback agreements. The loan agreement also requires TEP to meet a minimum cash coverage
ratio and a maximum leverage ratio. If TEP complies with the terms of the loan agreement, TEP may
pay dividends to UniSource Energy.
2008 Pima B Bonds Interest Conversion
In January 2010, TEP converted the interest on the $130 million of 2008 Pima B Bonds from a
variable rate to a fixed rate. The Pima B Bonds were reoffered on January 12, 2010, with a term
rate of 5.75% through maturity of September 2029. Interest is payable semi-annually beginning June
1, 2010. The bonds are callable at par beginning January 2015. Accordingly, the associated letter
of credit was terminated on January 12, 2010, and the TEP mortgage bonds which collateralized the
letter of credit were canceled.
UNS GAS/UNS ELECTRIC REVOLVING CREDIT AGREEMENT
The borrowings under the UNS Gas/UNS Electric Revolver were as follows:
UNS | UNS | UNS | UNS | |||||||||||||
Gas | Electric | Gas | Electric | |||||||||||||
-Millions of Dollars- | ||||||||||||||||
March 31, 2010 | December 31, 2009 | |||||||||||||||
Balance on the Revolver |
$ | | $ | | $ | | $ | | ||||||||
Outstanding Letters of Credit |
| 16 | | 11 |
UED BORROWINGS
In February 2010, UED amended its senior secured term loan facility to extend the termination date
by two years to March 2012, and to increase borrowings by $9 million bringing the outstanding
balance to $35 million. UED capitalized less than $1 million in costs related to the transaction.
As of March 31, 2010, UED owed $35 million under the UED Credit Agreement.
OTHER
As of March 31, 2010, UniSource Energy and its subsidiaries were in compliance with the terms of
their respective loan and credit agreements.
NOTE 5. INCOME TAXES
For the quarters ended March 31, 2010 and March 31, 2009, the effective tax rate differed from the
federal rate, primarily due to state income taxes and the impact of the domestic production
activities deduction.
During the quarter ended March 31, 2010, UniSource Energy recorded a $12 million capital loss for
tax purposes from Millenniums sale of Nations Energy Corporation. Corporate capital losses can
reduce taxable income if there are offsetting capital gains during 2010, the 3-year carryback
period, or the 5-year carryforward period. If they remain unused after the 5-year carryforward
period they expire. UniSource Energy has a $5 million deferred tax asset as a result of the
capital loss. $3 million of this relates to losses incurred by a foreign joint venture of Nations
Energy and was included in UniSource Energys deferred tax assets as of December 31, 2009.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion, or the entire deferred tax asset, will not be realized. A
$2 million valuation allowance was recorded
since management believes that only $3 million of the deferred tax asset may be realized. Since
UniSource Energys deferred tax assets, net of valuation allowance, were $3 million for the periods
ended December 31, 2009, and March 31, 2010, recording the valuation allowance had no impact on the
effective income tax rate.
18
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
NOTE 6. COMMITMENTS AND CONTINGENCIES
TEP COMMITMENTS
Firm Purchase Commitments
In 2010, TEP entered into new long-term, forward purchase power commitments in addition to those
reported in our 2009 Annual Report on Form 10-K. These contracts will settle in June 2011 through
September 2011 with prices per MWh that are indexed to natural gas prices. TEPs estimated minimum
payment obligation for these purchases is $4 million based on projected market prices as of March
31, 2010.
Renewable Energy Purchase Power Agreements
TEP entered into three 20 year long-term purchase power agreements with developing renewable energy
generation facilities, with ACC approval. The facilities are expected to begin commercial
operation during 2011 or 2012. TEP is required to purchase the full output of each facility.
Expected capacities range from 1.4 MW to 25 MW. TEP is only obligated to pay for actual energy
delivered. There are no minimum payment obligations under these contracts. TEP is authorized to
recover a portion of the cost of renewable energy through the PPFAC with the balance of cost
recovery through the REST surcharge. Additionally, TEP signed long-term renewable energy contracts
for approximately 140 MW. TEP expects ACC approval authorizing cost recovery of the new renewable
energy contracts later in 2010. These facilities are also expected to begin commercial operation
during 2011 or 2012.
UNS ELECTRIC COMMITMENTS
In 2010, UNS Electric entered into forward power purchase agreements through December 2012. UNS
Electric estimates its minimum payments for these forward purchases to be $5 million in 2011 and $2
million in 2012. Certain of these purchased power contracts are at a fixed price per MWh and
others are indexed to natural gas prices. For indexed contracts, commitments are based on
projected market prices as of March 31, 2010.
UNS
Electric entered into one 20 year long-term purchase power
agreement with a developing renewable energy
generation facility, with ACC approval. The facility is expected to begin commercial operation in
2011. UNS Electric is required to purchase the full output of the facility with an expected
minimum capacity of 7 MW. UNS Electric is only obligated to pay for actual energy delivered.
There is no minimum payment obligation under this contract. UNS Electric is authorized to recover
a portion of the cost of renewable energy through the PPFAC with the balance of cost recovery
through the REST surcharge.
UNS GAS COMMITMENTS
In 2010, UNS Gas entered into forward gas purchase agreements through January 2013. UNS Gas
estimates its minimum payments for these forward purchases to be $1 million in 2011 and 2012, and
less than $1 million in 2013.
UNISOURCE ENERGY COMMITMENTS
In 2009, UniSource Energy purchased land to construct a new headquarters building in downtown
Tucson. In April 2010, UniSource Energy signed a design-build contract stipulating payment of $14
million for Phase I of the construction project.
19
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
TEP CONTINGENCIES
El Paso Electric Transmission
In 2006, El Paso filed a complaint with the FERC claiming that TEP must request service under El
Pasos Open Access Transmission Tariff (OATT) in order to transmit power from Luna to TEPs system.
TEP filed a counter complaint stating that TEP has existing rights under a 1982 Tucson-El Paso
Transmission Agreement and, therefore, is not required to pay for transmission service under El
Pasos OATT. On November 13, 2008, the FERC issued an order supporting TEPs position. In
December 2008, pending resolution, El Paso refunded to TEP $10 million paid for transmission
service from Luna during the period 2006 to 2008 and interest of $1 million. On January 14, 2009,
FERC granted El Pasos request for a rehearing of this matter. TEP is no longer accruing for
transmission service under El Pasos OATT; but due to the pending rehearing, TEP did not recognize
the refund as a reduction in transmission expense.
In December 2008, TEP filed a complaint in the United States Federal District Court against El Paso
seeking a $2 million reimbursement from El Paso for transmission charges paid by TEP to Public
Service Company of New Mexico (PNM) for transmission service in an attempt to mitigate TEPs
damages before FERC issued its decision in November 2008. On September 10, 2009, the District
Court denied El Pasos motion to dismiss TEPs complaint and stayed the proceeding pending a final
resolution of the FERC proceedings and any appeal. TEP cannot predict the timing or outcome of
this lawsuit.
Claims Related to Navajo Generating Station
In June 1999, the Navajo Nation filed suit against Salt River Project, several Peabody Coal Company
entities (including Peabody Western Coal Company, the coal supplier to Navajo Generating Station),
Southern California Edison Company, and other defendants in the U.S. District Court for the
District of Columbia (D.C. Lawsuit). Although TEP is not a named defendant in the D.C. Lawsuit,
TEP is a participant in the Navajo Generation Station. The D.C. Lawsuit alleges, among other
things, that the defendants obtained a favorable coal royalty rate on the lease agreements under
which Peabody mines coal by improperly influencing the outcome of a federal administrative process
pursuant to which the royalty rate was to be adjusted. The suit seeks $600 million in damages,
treble damages, and punitive damages of not less than $1 billion, and the ejection of defendants
from all possessory interests and Navajo Tribal lands arising out of the primary coal lease. In
July 2001, the District Court dismissed all claims against Salt River Project. In March 2008, the
District Court lifted a stay that had been in place since October 2004 and referred pending
discovery related motions to a magistrate judge. In February 2010, the District Court extended the
February 2010 discovery deadline and set other procedural deadlines at various dates between March
2010 and February 2011.
In 2004, Peabody Western Coal Company (Peabody) filed a complaint in the Circuit Court for the City
of St. Louis, Missouri against the participants at Navajo, including TEP (7.5% owner), for
reimbursement of royalties and other costs arising out of the D.C. Lawsuit. In July 2008, the
parties entered into a joint stipulation of dismissal of these claims which was approved by the
Circuit Court. TEP cannot predict whether the lawsuit will be refiled based upon the final outcome
of the D.C. Lawsuit.
Claims Related to San Juan Generating Station
San Juan Coal Company, the coal supplier to San Juan, through leases with the federal government
and the State of New Mexico, owns coal interests with respect to an underground mine. Certain gas
producers have oil and gas leases with the federal government, the State of New Mexico and private
parties in the area of the underground mine. These gas producers allege that San Juan Coal
Companys underground coal mining operations have or will interfere with their gas production and
will reduce the amount of natural gas that they would otherwise be entitled to recover. San Juan
Coal Company has compensated certain gas producers for any remaining gas production from a well
when it was determined that mining activity was close enough to warrant shutting down the well.
These settlements, however, do not resolve all potential claims by gas producers in the underground
mine area. As a 20% owner of San Juan Generating Station, TEP is
liable for its share of any resulting liabilities. TEP cannot estimate the impact of any future claims by these gas producers on the cost
of coal at San Juan.
20
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
Environmental Reclamation at Remote Generating Stations
TEP currently pays on-going reclamation costs related to the coal mines which supply the remote
generating stations, and it is probable that TEP will have to pay a portion of final reclamation
costs upon mine closure. When a reasonable estimate of final reclamation costs is available, the
liability is recognized as a cost of coal over the remaining term of the corresponding coal supply
agreement. At March 31, 2010, and at December 31, 2009, TEP recorded liabilities of $10 million
based on TEPs estimated $17 million obligation at the expiration dates of the coal supply agreements
in 2011 through 2017.
TEPs PPFAC allows TEP to pass-through most fuel costs, including final reclamation costs, to
customers. Therefore, TEP classifies these costs as a regulatory asset. TEP will increase the
regulatory asset and the reclamation liability over the remaining life of the coal supply
agreements on an accrual basis, and will recover the regulatory asset through the PPFAC as final
mine reclamation costs are paid to the coal suppliers.
Amounts recorded for final reclamation are subject to various assumptions, such as estimating the
costs of reclamation, when final reclamation will occur, and the credit-adjusted risk-free interest
rate to be used to discount future liabilities. As these assumptions change, TEP will
prospectively adjust the expense amounts for final reclamation over the remaining coal supply
agreement term. TEP does not believe that recognition of its final reclamation obligations will be
material to TEP in any single year because recognition occurs over the remaining terms of its coal
supply agreements.
California Energy Market Issues
In March 2010, TEP and the California Attorney General, California Public Utilities Commission and
various private entities (collectively California Parties) reached a settlement in principal of all
remaining claims against TEP related to TEPs transactions in the Western energy markets including
the California Power Exchange and the California Independent System Operator during the
California energy crisis of 2000 and 2001. In April 2010, TEP and the California Parties entered
into a written settlement agreement (Settlement Agreement) which was filed with FERC on April 15,
2010. The Settlement Agreement remains subject to FERC approval. As a result of the settlement
with the California Parties, TEP recognized an additional liability of $4 million in March 2010,
bringing TEPs gross liability related to these claims to $6 million at March 31, 2010. In
association with the California Parties settlement, in March 2010, TEP recorded a receivable from
SRP for approximately $1 million related to a long-term power sale agreement between TEP and SRP.
The net $3 million is shown on TEPs income statement as contra revenue. In addition, in March
2010 UNS Electric reached a related settlement with Arizona Public Service Company (APS) and
recorded a receivable and Other Income of $3 million in March 2010. The settlements described above
offset and had no impact on UniSource Energys consolidated results in the first quarter 2010.
Tucson to Nogales Transmission Line
TEP and UNS Electric are parties to a project development agreement for the joint construction of
an approximately 60-mile transmission line from Tucson to Nogales, Arizona. UNS Electrics
participation in this project was initiated in response to an order by the ACC to improve
reliability to UNS Electrics retail customers in Nogales, Arizona.
In 2002, the ACC approved the location and construction of the proposed 345-kV line along a route
identified as the Western Corridor route subject to a number of conditions, including obtaining all
required permits from state and federal agencies. The U.S. Forest Service subsequently identified
a preference for a route identified as the Central Corridor route in the final Environmental Impact
Statement for the project. TEP is considering options for the project including potential new
routes. If a decision is made to pursue an alternative route, approvals will be needed from the
ACC, the Department of Energy, U.S. Forest Service, Bureau of Land Management, and the
International Boundary and Water Commission. As of March 31, 2010, TEP had capitalized $11 million
related to the project, including $2 million of land and land rights. If TEP does not receive the
required approvals or abandons the project, TEP believes cost recovery is probable for prudent and
reasonably incurred costs related to the project as a consequence of the ACCs requirement for a
second transmission line serving the Nogales, Arizona area.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
Sierra Club San Juan Matter
In December 2009, TEP received a Notice of Intent to Sue (RCRA Notice) under the Resource
Conservation and Recovery Act (RCRA) from the Sierra Club. The RCRA Notice was also sent to all San
Juan Generating Station (SJGS) owners, to San Juan Coal Company (SJCC), which operates the San Juan
mine that supplies coal to SJGS, and to SJCC parent BHP. Additionally, TEP was informed that in
December 2009 SJCC and BHP received a separate Notice of Intent to Sue under the Surface Mine
Control and Reclamation Act (SMCRA) from the Sierra Club. On April 8, 2010, the Sierra Club filed a
citizens suit under RCRA and SMCRA in the U.S. District Court for the District of New Mexico
against SJGS operator Public Service Company of New Mexico (PNM), PNM parent PNM Resources, Inc.
(PNMR), SJCC and BHP. The Sierra Club alleges in the suit that certain activities at SJGS and the
San Juan mine associated with the treatment, storage and disposal of coal and coal combustion
by-products (CCBs) are causing imminent and substantial harm to the environment, including ground
and surface water in the region, and that placement of CCBs at the mine constitute open dumping
in violation of RCRA. The RCRA claims are asserted against PNM, PNMR, SJCC and BHP. The suit also
includes claims under SMCRA which are directed only against SJCC and BHP. The suit seeks the
following relief: an injunction requiring the parties to undertake certain mitigation
measures with respect to the placement of CCBs at the mine or to cease placement of CCBs at the
mine; the imposition of civil penalties; and, attorneys fees and costs. None of the defendants
have been formally served with the complaint. PNM, as SJGS operator, plans an aggressive defense of
the RCRA claims in the suit. As a 20% owner of SJGS, TEP is liable for its share of any resulting
liabilities. TEP cannot predict the outcome of this matter at this time.
GUARANTEES
In the normal course of business, UniSource Energy and certain subsidiaries enter into various
agreements providing financial or performance assurance to third parties on behalf of certain
subsidiaries. We enter into these agreements primarily to support or enhance the creditworthiness
of a subsidiary on a stand-alone basis. The most significant of these guarantees are:
| UES guarantee of $100 million senior unsecured notes issued by UNS Gas and $100 million senior unsecured notes issued by UNS Electric; |
| UES guarantee of the $60 million UNS Gas/UNS Electric Revolver; |
| UniSource Energys guarantee of approximately $2 million in building lease payments for UNS Gas; and |
| UniSource Energys guarantee of the $35 million UED term loan. |
To the extent liabilities exist under these contracts, the liabilities are included in our
consolidated balance sheets.
We believe that the likelihood UniSource Energy or UES would be required to perform or otherwise
incur any significant losses associated with any of these guarantees is remote.
In March 2010, TEP purchased 100% of the equity interest in Sundt Unit 4. We have indemnified the
seller of Sundt Unit 4 from any sales, use, transfer or similar taxes or fees due relating to the
purchase. The terms of the indemnification do not include a limit on potential future payments;
however, we believe that the parties to the agreement have abided by all tax laws and we do not
have any additional tax obligations. We have not made any payments under the terms of this
indemnification to date.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE
The fair value of a financial instrument is the market price that would be received to sell an
asset or transfer a liability at the measurement date. We use the following methods and
assumptions for estimating the fair value of our financial instruments:
| The carrying amounts of our current assets and liabilities, including Current Maturities of Long-Term Debt, term loans, and amounts outstanding under our credit agreements, approximate their fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the table below. |
| Investments in Lease Debt and Equity: TEP calculated the present value of remaining cash flows at the balance sheet date using current market rates for instruments with similar characteristics with respect to credit rating and time-to-maturity. We also incorporated the impact of counterparty credit risk using market credit default swap data. |
22
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
| Fixed Rate Long-Term Debt: UniSource Energy and TEP used quoted market prices, where available, or calculated the present value of remaining cash flows at the balance sheet date using current market rates for bonds with similar characteristics with respect to credit rating and time-to-maturity. We also incorporate the impact of our own credit risk using a credit default swap rate when determining the fair value of fixed rate long-term debt. |
| Variable Rate Long-Term Debt: TEP considers the principal amounts of variable rate debt outstanding to be reasonable estimates of their fair value. The fair value of variable rate long-term debt has also been adjusted for credit risk using a credit default swap rate. |
The use of different estimation methods and/or market assumptions may yield different estimated
fair value amounts. The amounts recorded in the balance sheet (carrying value) and the estimated
fair values of our financial instruments included the following:
March 31, | December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
-Millions of Dollars- | ||||||||||||||||
Assets: |
||||||||||||||||
TEP Investment in Lease Debt and Equity |
$ | 110 | $ | 119 | $ | 132 | $ | 140 | ||||||||
Millennium Note Receivable |
15 | 15 | 15 | 15 | ||||||||||||
Liabilities: |
||||||||||||||||
Fixed Rate Long-Term Debt |
||||||||||||||||
TEP |
575 | 432 | 445 | 336 | ||||||||||||
UniSource Energy |
925 | 802 | 795 | 693 | ||||||||||||
Variable Rate Long-Term Debt |
||||||||||||||||
UniSource Energy and TEP |
329 | 329 | 459 | 452 |
NOTE 8. EMPLOYEE BENEFIT PLANS
PENSION BENEFIT PLANS
The three utilities maintain noncontributory, defined benefit pension plans for substantially all
regular employees and certain affiliate employees. Benefits are based on years of service and the
employees average compensation. The three utilities fund the plans by contributing at least the
minimum amount required under Internal Revenue Service regulations.
We recognize the underfunded status of our defined benefit pension plans as a liability on our
consolidated balance sheets. The underfunded status is measured as the difference between the fair
value of the plans assets and the projected benefit obligation for pension plans. We recognize a
regulatory asset to the extent these future costs are probable of recovery in rates.
Additionally, we provide supplemental retirement benefits to certain employees whose benefits are
limited by Internal Revenue Service benefit or compensation limitations. Changes in supplemental
retirement benefit obligations are recognized as a component of accumulated other comprehensive
income (AOCI).
OTHER POSTRETIREMENT BENEFIT PLANS
TEP provides limited health care and life insurance benefits for retirees. All regular employees
may become eligible for these benefits if they reach retirement age while working for TEP or an
affiliate. UNS Gas and UNS Electric provide postretirement medical benefits for current retirees.
UNS Gas and UNS Electric active employees do not participate in the postretirement medical plan.
23
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
COMPONENTS OF NET PERIODIC BENEFIT COST
The components of UniSource Energys net periodic benefit cost are as follows:
Other Postretirement | ||||||||||||||||
Pension Benefits | Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
-Millions of Dollars- | ||||||||||||||||
Components of Net Periodic Benefit Cost |
||||||||||||||||
Service Cost |
$ | 2 | $ | 2 | $ | | $ | | ||||||||
Interest Cost |
4 | 4 | 1 | 1 | ||||||||||||
Expected Return on Plan Assets |
(3 | ) | (3 | ) | | | ||||||||||
Amortization of Net Loss |
1 | 2 | | | ||||||||||||
Net Periodic Benefit Cost |
$ | 4 | $ | 5 | $ | 1 | $ | 1 | ||||||||
The table above includes pension benefit costs of $0.5 million and other postretirement benefit
costs of less than $0.1 million for UNS Gas and UNS Electric.
NOTE 9. SHARE-BASED COMPENSATION PLANS
PERFORMANCE SHARES
In February 2010, the Compensation Committee of the UniSource Energy Board of Directors granted
93,720 performance share awards (targeted shares) to Officers. 50% of the performance share awards
had a grant date fair value, based on a Monte Carlo simulation, of $31.26 and will be paid out in
shares of UniSource Energy Common Stock based on targeted, cumulative UniSource Energy Total
Shareholder Return during the performance period of January 1, 2010 through December 31, 2012,
compared to the Total Shareholder Return over the same period of an industry or peer group. The
remaining 50% had a grant date fair value of $30.52 and will be paid out in shares of UniSource
Energy Common Stock based on cumulative net income for the 3-year period ended December 31, 2012.
The performance shares vest based on goal attainment upon completion of the performance period; any
unearned awards are forfeited. Performance shares are eligible for dividend equivalents during the
performance period.
SHARE-BASED COMPENSATION EXPENSE
UniSource Energy and TEP recorded share-based compensation expense net of amounts capitalized of
less than $1 million for each of the three months ended March 31, 2010 and 2009.
At March 31, 2010, the total unrecognized compensation cost related to non-vested share-based
compensation was $4 million, which will be recorded as compensation expense over the remaining
vesting periods through December 2012. The total number of shares awarded but not yet issued,
including target performance based shares, under the share-based compensation plans at March 31,
2010, was 2 million.
NOTE 10. FAIR VALUE MEASUREMENTS
The following tables set forth, by level within the fair value hierarchy, UniSource Energy and
TEPs financial assets and liabilities that were accounted for at fair value on a recurring basis
as of March 31, 2010, and December 31, 2009. Financial assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value
measurement. There were no transfers between Levels 1, 2 or 3 for either reporting period.
24
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
UniSource Energy | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Assets |
||||||||||||||||
Cash Equivalents (1) |
$ | 52 | $ | | $ | | $ | 52 | ||||||||
Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2) |
| 14 | | 14 | ||||||||||||
Equity Investments (3) |
| | 6 | 6 | ||||||||||||
Collateral Posted (4) |
| 6 | | 6 | ||||||||||||
Energy Contracts (5) |
| | 16 | 16 | ||||||||||||
Total Assets |
52 | 20 | 22 | 94 | ||||||||||||
Liabilities |
||||||||||||||||
Energy Contracts (5) |
| (26 | ) | (32 | ) | (58 | ) | |||||||||
Interest Rate Swaps (6) |
| (7 | ) | | (7 | ) | ||||||||||
Total Liabilities |
| (33 | ) | (32 | ) | (65 | ) | |||||||||
Net Total Assets and (Liabilities) |
$ | 52 | $ | (13 | ) | $ | (10 | ) | $ | 29 | ||||||
UniSource Energy | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
December 31, 2009 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Assets |
||||||||||||||||
Cash Equivalents (1) |
$ | 51 | $ | | $ | | $ | 51 | ||||||||
Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2) |
| 14 | | 14 | ||||||||||||
Equity Investments (3) |
| | 6 | 6 | ||||||||||||
Collateral Posted (4) |
| 2 | | 2 | ||||||||||||
Energy Contracts (5) |
| 1 | 6 | 7 | ||||||||||||
Total Assets |
51 | 17 | 12 | 80 | ||||||||||||
Liabilities |
||||||||||||||||
Energy Contracts (5) |
| (16 | ) | (19 | ) | (35 | ) | |||||||||
Interest Rate Swaps (6) |
| (6 | ) | | (6 | ) | ||||||||||
Total Liabilities |
| (22 | ) | (19 | ) | (41 | ) | |||||||||
Net Total Assets and (Liabilities) |
$ | 51 | $ | (5 | ) | $ | (7 | ) | $ | 39 | ||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
TEP | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Assets |
||||||||||||||||
Cash Equivalents (1) |
$ | 18 | $ | | $ | | $ | 18 | ||||||||
Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2) |
| 14 | | 14 | ||||||||||||
Collateral Posted (4) |
| 2 | | 2 | ||||||||||||
Energy Contracts (5) |
| | 6 | 6 | ||||||||||||
Total Assets |
18 | 16 | 6 | 40 | ||||||||||||
Liabilities |
||||||||||||||||
Energy Contracts (5) |
| (12 | ) | (8 | ) | (20 | ) | |||||||||
Interest Rate Swaps (6) |
| (7 | ) | | (7 | ) | ||||||||||
Total Liabilities |
| (19 | ) | (8 | ) | (27 | ) | |||||||||
Net Total Assets and (Liabilities) |
$ | 18 | $ | (3 | ) | $ | (2 | ) | $ | 13 | ||||||
TEP | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
December 31, 2009 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Assets |
||||||||||||||||
Cash Equivalents (1) |
$ | 8 | $ | | $ | | $ | 8 | ||||||||
Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2) |
| 14 | | 14 | ||||||||||||
Energy Contracts (5) |
| 1 | 5 | 6 | ||||||||||||
Total Assets |
8 | 15 | 5 | 28 | ||||||||||||
Liabilities |
||||||||||||||||
Energy Contracts (5) |
| (5 | ) | (9 | ) | (14 | ) | |||||||||
Interest Rate Swaps (6) |
| (6 | ) | | (6 | ) | ||||||||||
Total Liabilities |
| (11 | ) | (9 | ) | (20 | ) | |||||||||
Net Total Assets and (Liabilities) |
$ | 8 | $ | 4 | $ | (4 | ) | $ | 8 | |||||||
(1) | Cash Equivalents are based on observable market prices and are comprised of the fair value of commercial paper, money market funds and certificates of deposit. | |
(2) | Level 2 Investments comprise amounts held in mutual and money market funds related to deferred compensation and Supplemental Executive Retirement Plan (SERP) benefits. The valuation is based on quoted prices, traded in active markets. These investments are included in Investments and Other Property Other in the UniSource Energy and TEP balance sheets. | |
(3) | Equity Investments are, in the absence of readily ascertainable market values, based on the lower of the investment partners valuations or managements valuation and comprise Millenniums equity investments in unregulated businesses. These investments are included in Investments and Other Property Other in the UniSource Energy balance sheet. | |
(4) | Collateral provided for energy contracts with counterparties to reduce credit risk exposure. |
26
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
(5) | Energy contracts include gas swap agreements (Level 2), forward power purchase and sales
contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to
take advantage of favorable market conditions and reduce exposure to energy price risk. The
valuation techniques are described below. See Note 17 for additional information. |
|
(6) | Interest Rate Swaps are valued based on the six-month LIBOR index or the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap index (Level 2). |
Energy Contracts
The three utilities primarily apply the market approach for recurring fair value measurements and
endeavor to utilize the best available information. Where observable inputs are available for
substantially the full term of the asset or liability, such as gas swap derivatives valued using
New York Mercantile Exchange (NYMEX) pricing, adjusted for basin differences, the instrument is
categorized in Level 2.
Derivatives valued using an aggregate pricing service or published prices that represent a
consensus reporting of multiple brokers are categorized in Level 3. For both power and gas prices,
TEP and UNS Electric obtain quotes from brokers, major market participants, exchanges or industry
publications as well as its own price experience from active transactions in the market. TEP and
UNS Electric primarily use one set of quotations each for power and for gas, and then use the other
sources as validation of those prices. The broker providing quotes for power prices states that
the market information provided is indicative only, but believes it to be reflective of market
conditions as of the time and date indicated. In addition, energy derivatives include contracts
where published prices are not readily available. These include contracts for delivery periods
during non-standard time blocks, contracts for delivery during only a few months of a given year
when prices are quoted only for the annual average, or contracts for delivery at illiquid delivery
points. In these cases, TEP and UNS Electric apply certain management assumptions to value such
contracts. These assumptions include applying percentage multipliers to value non-standard time
blocks, applying historical price curve relationships to calendar year quotes, and including
adjustments for transmission and line losses to value contracts at illiquid delivery points. We
also consider the impact of counterparty credit risk using current and historical default and
recovery rates as well as our own credit risk using credit default swap data. TEP and UNS Electric
review these assumptions on a quarterly basis.
The fair value of TEPs purchase power call option is estimated using an internal pricing model
which includes assumptions about market risks such as liquidity, volatility, and contract
valuation. This model also considers credit and non-performance risk. UniSource Energy and
TEPs assessment of the significance of a particular input to the fair value measurements requires
judgment, and may affect the valuation of fair value assets and liabilities and their placement
within the fair value hierarchy levels.
The following tables set forth a reconciliation of changes in the fair value of derivatives
classified as Level 3 in the fair value hierarchy:
Three Months Ended | ||||||||||||||||
March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
UniSource Energy | TEP | |||||||||||||||
Mark-to- | Mark-to- | |||||||||||||||
Market | Market | |||||||||||||||
Contracts | Investments | Total | Contracts | |||||||||||||
Balance, as of December 31, 2009 |
$ | (13 | ) | $ | 6 | $ | (7 | ) | $ | (4 | ) | |||||
Gains and (Losses) (Realized/Unrealized) Recorded to: |
||||||||||||||||
Net Regulatory Assets-Derivative Instruments |
(2 | ) | | (2 | ) | 3 | ||||||||||
Other Comprehensive Income |
(1 | ) | | (1 | ) | (1 | ) | |||||||||
Balance, as of March 31, 2010 |
$ | (16 | ) | $ | 6 | $ | (10 | ) | $ | (2 | ) | |||||
Gains and losses on mark-to-market contracts include the reclassification of realized gains
and losses on the settlement of derivative contracts. All of the Level 3 unrealized gains and
losses are attributable to the change in fair value of Level 3 assets and liabilities held at the
reporting date.
27
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
NOTE 11. UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
We compute basic EPS by dividing Net Income by the weighted-average number of common shares
outstanding during the period. Except when the effect would be anti-dilutive, the diluted EPS
calculation includes the impact of shares that could be issued upon exercise of outstanding stock
options, contingently issuable shares under equity-based awards or common shares that would result
from the conversion of convertible notes. The numerator in calculating diluted earnings per share
is Net Income adjusted for the interest on convertible notes (net of tax) that would not be paid if
the notes were converted to common shares.
The following table shows the effects of potential dilutive Common Stock on the weighted-average
number of shares:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
-Thousands of Dollars- | ||||||||
Numerator: |
||||||||
Net Income |
$ | 19,972 | $ | 4,919 | ||||
Income from Assumed Conversion of Convertible Senior Notes |
1,097 | | ||||||
Adjusted Numerator |
$ | 21,069 | $ | 4,919 | ||||
-Thousands of Shares- | ||||||||
Denominator: |
||||||||
Weighted-Average Shares of Common Stock Outstanding: |
||||||||
Common Shares Issued |
35,850 | 35,557 | ||||||
Fully Vested Deferred Stock Units |
107 | 108 | ||||||
Participating Securities |
95 | | ||||||
Total Weighted-Average Shares of Common Stock Outstanding and
Participating Securities Basic |
36,052 | 35,665 | ||||||
Effect of Dilutive Securities: |
||||||||
Convertible Senior Notes |
4,140 | | ||||||
Options and Stock Issuable Under Employee Benefit Plans
and the Directors Plans |
481 | 540 | ||||||
Total Shares Diluted |
40,673 | 36,205 | ||||||
Stock options to purchase 234,000 and 395,000 shares of Common Stock were outstanding during the
three months ended March 31, 2010 and 2009, respectively, but were not included in the computation
of diluted EPS because the stock options exercise prices were greater than the average market
price of the Common Stock. Additionally, for the three months ended March 31, 2009, 4 million
potentially dilutive shares from the conversion of convertible senior notes, and after-tax interest
expense of $1 million were not included in the computation of diluted EPS because to do so would be
anti-dilutive.
NOTE 12. STOCKHOLDERS EQUITY
In February 2010, UniSource Energy declared a first quarter dividend to shareholders of $0.39 per
share of UniSource Energy Common Stock. The dividend, totaling approximately $14 million, was paid
in March 2010. In February 2009, UniSource Energy declared a first quarter dividend to
shareholders of $0.29 per share of UniSource Energy Common Stock. The dividend, totaling
approximately $10 million, was paid in March 2009.
In March 2010, UniSource Energy contributed $15 million of capital to TEP.
28
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
Dividends
Millennium paid dividends which represented return of capital distributions to UniSource Energy of
$2 million in March 2010, and $4 million in January 2010. UED paid dividends to UniSource Energy
of $9 million in February 2010, $4 million of which represented a return of capital distribution.
UNS Gas paid dividends of $10 million to UniSource Energy in April 2010.
NOTE 13. SALE OF MILLENNIUMS INVESTMENT IN NATIONS ENERGY CORPORATION
In March 2010, Millennium sold its wholly-owned subsidiary Nations Energy Corporation. Millennium
received cash of less than $1 million, and recorded less than $1 million of pre-tax gain included
in Other Income on UniSource Energys income statement.
NOTE 14. TRANSMISSION ASSETS DEPRECIATION
During the fourth quarter of 2009, TEP performed an analysis of the service life and net salvage
parameters of its transmission assets. As a result, new depreciation rates were implemented
effective January 1, 2010. The new rates effectively extend the expected remaining service lives
of TEPs transmission assets, resulting in a reduction of related depreciation expense of $3 million for the first quarter of 2010 compared to the first quarter of 2009. We expect the annual
reduction of depreciation expense to be approximately $14 million in 2010.
NOTE 15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The following recently issued accounting standards are not yet reflected in UniSource Energy and
TEP financial statements:
| The FASB issued authoritative guidance for multiple deliverable revenue arrangements that provides another alternative for determining the selling price of deliverables and eliminates the residual method of allocating consideration. In addition, this pronouncement requires expanded qualitative and quantitative disclosures and is effective for revenue arrangements entered into after January 1, 2011. We are evaluating the impact of this pronouncement. |
| The FASB issued amendments that require some new disclosures and clarify some existing disclosure requirements about fair value measurements. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, are effective for interim and annual reporting periods beginning January 1, 2011. We are evaluating the impact of these new disclosures on our financial statements. |
29
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
A reconciliation of Net Income to Net Cash Flows Operating Activities follows:
UniSource Energy | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
-Thousands of Dollars- | ||||||||
Net Income |
$ | 19,972 | $ | 4,919 | ||||
Adjustments to Reconcile Net Income
To Net Cash Flows from Operating Activities |
||||||||
Depreciation Expense |
31,099 | 33,602 | ||||||
Amortization Expense |
6,572 | 7,073 | ||||||
Depreciation and Amortization Recorded to Fuel and Other O&M Expense |
1,261 | 816 | ||||||
Amortization of Deferred Debt-Related Costs Included in Interest Expense |
922 | 950 | ||||||
Provision for Bad Debts |
814 | 820 | ||||||
Deferred Income Taxes |
8,804 | 5,686 | ||||||
Pension and Postretirement Expense |
4,876 | 6,045 | ||||||
Pension and Postretirement Funding |
(1,739 | ) | (909 | ) | ||||
Share-Based Compensation Expense |
784 | 820 | ||||||
Excess Tax Benefit from Stock Options Exercised |
(151 | ) | (4 | ) | ||||
CTC Revenue Refunded |
(2,993 | ) | | |||||
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment |
(12,631 | ) | 6,702 | |||||
Changes in Assets and Liabilities which Provided (Used)
Cash Exclusive of Changes Shown Separately |
||||||||
Accounts Receivable |
23,478 | 40,962 | ||||||
Collateral Posted |
(3,800 | ) | (5,630 | ) | ||||
Materials and Fuel Inventory |
(542 | ) | (1,470 | ) | ||||
Accounts Payable |
(4,874 | ) | (21,412 | ) | ||||
Interest Accrued |
(16,700 | ) | (17,275 | ) | ||||
Income Taxes Payable |
3,277 | 12,550 | ||||||
Accrued Taxes Other Than Income Taxes |
10,263 | 9,811 | ||||||
Regulatory Liabilities Other |
1,418 | 6,384 | ||||||
Accrued Employee Expenses |
(6,984 | ) | (3,018 | ) | ||||
Other |
(1,376 | ) | 3,799 | |||||
Net Cash Flows Operating Activities |
$ | 61,750 | $ | 91,221 | ||||
30
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
TEP | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
-Thousands of Dollars- | ||||||||
Net Income (Loss) |
$ | 10,349 | $ | (553 | ) | |||
Adjustments to Reconcile Net Income (Loss)
To Net Cash Flows from Operating Activities |
||||||||
Depreciation Expense |
24,077 | 26,757 | ||||||
Amortization Expense |
7,786 | 8,293 | ||||||
Depreciation and Amortization Recorded to Fuel and Other
O&M Expense |
896 | 441 | ||||||
Amortization of Deferred Debt-Related Costs Included in
Interest Expense |
508 | 692 | ||||||
Provision for Bad Debts |
501 | 408 | ||||||
California Power Exchange Provision for Wholesale Revenue
Refunds |
2,970 | | ||||||
Deferred Income Taxes |
5,762 | (2,223 | ) | |||||
Pension and Postretirement Expense |
4,327 | 5,469 | ||||||
Pension and Postretirement Funding |
(1,463 | ) | (866 | ) | ||||
Share-Based Compensation Expense |
607 | 627 | ||||||
CTC Revenue Refunded |
(2,993 | ) | | |||||
Increase (Decrease) to Reflect PPFAC Recovery Treatment |
(3,118 | ) | (368 | ) | ||||
Changes in Assets and Liabilities which Provided (Used)
Cash Exclusive of Changes Shown Separately |
||||||||
Accounts Receivable |
16,137 | 30,443 | ||||||
Materials and Fuel Inventory |
(1,767 | ) | (922 | ) | ||||
Accounts Payable |
(1,267 | ) | (12,920 | ) | ||||
Interest Accrued |
(11,750 | ) | (12,066 | ) | ||||
Income Taxes Payable |
1,844 | 587 | ||||||
Accrued Taxes Other Than Income Taxes |
8,165 | 8,499 | ||||||
Regulatory Liabilities Other |
1,005 | 5,736 | ||||||
Accrued Employee Expenses |
(5,717 | ) | (1,637 | ) | ||||
Other |
(1,114 | ) | 10,995 | |||||
Net Cash Flows Operating Activities |
$ | 55,745 | $ | 67,392 | ||||
31
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NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
NOTE 17. ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND HEDGING ACTIVITIES
RISKS AND OVERVIEW
The three utilities are exposed to energy price risk associated with their gas and purchased power
requirements, volumetric risk associated with their seasonal load and operational risk associated
with their power plants, transmission and transportation systems. The energy price risk is
mitigated through the PPFAC and PGA mechanisms which provide an adjustment to the three utilities
retail rates to recover the actual costs of purchased power, gas, transmission and transportation.
The three utilities further reduce their energy price risk through a variety of derivative and
non-derivative instruments. The objectives for entering into such contracts include: creating
price stability for the three utilities; ensuring the three utilities can meet their load and
reserve requirements; and reducing the three utilities exposure to price volatility that may
result from delayed recovery under the PPFAC or PGA. While current procurement methodologies allow
the three utilities to recover electric and gas procurement costs from customers, future regulatory
structures could change, potentially impacting the recoverability of electric and gas procurement
costs. See Note 2 for further information regarding regulatory matters.
We consider the effect of counterparty credit risk in determining the fair value of derivative
instruments that are in a net asset position, after incorporating collateral posted by
counterparties, and allocating the credit risk adjustment to individual contracts. We also
consider the impact of our own credit risk, after considering collateral posted, on instruments
that are in a net liability position and allocating the credit risk adjustment to all individual
contracts.
Although TEPs gains and losses on trading activities are recorded on a net basis in the income
statement, we report the related cash receipts and cash payments separately in the statement of
cash flows. We present cash collateral and derivative assets and liabilities, associated with the
same counterparty, separately in our financial statements and we bifurcate all derivatives into
their current and long-term portions on the balance sheet.
CASH FLOW HEDGES
TEP hedges the cash flow risk associated with unfavorable changes in the variable interest rates
related to LIBOR on the Springerville Common Facilities Lease. In addition, TEP hedges the cash
flow risk associated with a six-year power supply agreement using a six-year power purchase swap
agreement. TEP accounts for cash flow hedges as follows:
| The effective portion of the changes in the fair value of TEPs interest rate swaps and TEPs six-year power purchase swap agreement are recorded in AOCI and the ineffective portion, if any, is recognized in earnings. |
| When TEP determines a contract is no longer effective in offsetting the changes in cash flow of a hedged item, TEP recognizes the changes in fair value in earnings. The gains and losses at that time remain in AOCI and are reclassified into earnings as the underlying hedged transaction occurs. |
We formally assess, both at the hedges inception and on an ongoing basis, whether the derivatives
have been and are expected to remain highly effective in offsetting changes in the cash flows of
hedged items. We discontinue hedge accounting when: (1) the derivative is no longer effective in
offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative expires or
is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction
will occur; or (4) we determine that designating the derivative as a hedging instrument is no
longer appropriate.
MARK-TO-MARKET
| TEP |
TEP non-trading hedges, such as forward power purchase contracts indexed to gas, short-term
forward power sales contracts, or call and put options (gas collars), that were not designated
as cash flow hedges or did not qualify for the normal scope exception, are considered
mark-to-market transactions. TEP hedges a portion of
its monthly natural gas exposure for plant fuel, gas-indexed purchased power and spot market
purchases with fixed price contracts for a maximum of three years. Unrealized gains and losses
are recorded as either a regulatory asset or regulatory liability only to the extent they
qualify for recovery under the PPFAC mechanism.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
TEP enters into certain energy-related derivatives for trading purposes which are forward power
purchase and sale contracts entered into purely to profit from market price changes. As
unrealized gains and losses resulting from changes in the market prices of trading derivatives
are not recoverable in the PPFAC, unrealized gains and losses are recorded in the income
statement in Electric Wholesale Sales. The net trading activities represent a very small
portion (less than 1%) of TEPs revenue from wholesale sales.
| UNS Electric |
UNS Electric enters into derivatives, such as fixed price forward power purchases, natural
gas-indexed forward power purchase contracts and financial gas swaps, to hedge a portion of its
purchased power exposure. In April 2009, UNS Electric also began using call and put options,
creating price stability and reducing exposure to price volatility that may result in delayed
recovery under the PPFAC. These contracts are considered mark-to-market transactions. As UNS
Electrics PPFAC mechanism permits recovery of the prudent costs of hedging transactions,
unrealized gains and losses resulting from changes in the market prices of such contracts are
recorded as either regulatory assets or regulatory liabilities.
| UNS Gas |
UNS Gas enters into derivatives, such as forward gas purchases and financial gas swaps to ensure
supply, create price stability and reduce exposure to natural gas price volatility that may
result in delayed recovery under the PGA. Unrealized gains and losses are recorded as either a
regulatory asset or regulatory liability, as the UNS Gas PGA mechanism permits the recovery of
the prudent cost of hedging contracts.
NORMAL PURCHASE AND NORMAL SALE
TEP and UNS Electric enter into forward energy purchase and sales contracts, including call
options, to support the current load forecast. When these contracts are entered into with
counterparties that have generating capacity or load serving requirements, these contracts are not
required to be marked to market and are accounted for on an accrual basis. UNS Gas enters into
forward gas purchases, based on forecasted needs, with counterparties that can supply its physical
requirements. These contracts meet the normal purchase scope exception and are not required to be
marked to market. On an ongoing basis, we evaluate our counterparties for non-performance risk to
ensure such risk does not impact our ability to obtain the normal scope exception.
FINANCIAL IMPACT OF DERIVATIVES
Cash Flow Hedges
At March 31, 2010 and December 31, 2009, UniSource Energy and TEP had liabilities related to their
cash flow hedges of $9 million and $7 million, respectively. UniSource Energy and TEP had net
unrealized losses on derivative activities reported in AOCI of $2 million for the three months
ended March 31, 2010 and less than $1 million in net unrealized gains for the three months ended
March 31, 2009.
Regulatory Treatment of Commodity Derivatives
UniSource Energy and TEP report unrealized gains and losses on energy contracts that are
recoverable through the PPFAC or PGA on the balance sheet as a regulatory asset or a regulatory
liability rather than as a component of AOCI or in the income statement. For the three months
ended March 31, 2010, UniSource Energy and TEP recorded net increases to regulatory assets of $13
million and $3 million, respectively and $26 million and $14 million, respectively for the three
months ended March 31, 2009. At March 31, 2010, UniSource Energy and TEP had liabilities of $56
million and $13 million, respectively, and assets of $15 million and $2 million, respectively,
related to their energy derivatives that will be recovered through the PPFAC or PGA. At December
31, 2009, UniSource Energy and TEP had liabilities of $34 million and $9 million, respectively, and
assets of $7 million and $2 million, respectively, related to their energy derivatives that will be
recovered through the PPFAC or PGA.
33
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited
Realized gains and losses on settled gas swaps are fully recovered through the PPFAC or PGA. For
the three months ended March 31, 2010 and 2009, UniSource Energy realized losses of $4 million and
$8 million, respectively. TEP realized losses of less than $1 million in each of the same
reporting periods.
At March 31, 2010, TEP had contracts that will settle through the third quarter of 2015; UNS
Electric had contracts that will settle through the fourth quarter of 2013; and UNS Gas had
contracts that will settle through the first quarter of 2013.
Other Commodity Derivatives
UniSource Energy and TEP record realized and unrealized gains and losses on other energy contracts
on a net basis in Wholesale Sales. For each three month period ended March 31, 2010 and 2009, net
realized and unrealized gains and losses were less than $0.5 million. At March 31, 2010 and
December 31, 2009, TEP had assets of $3 million and $4 million, respectively, and liabilities of $3
million and $4 million, respectively, related to other energy contracts. TEPs other energy
contracts are with an affiliated counterparty; therefore, related assets and liabilities are
eliminated in the UniSource Energy financial statements.
The settlement of forward power purchase and sales contracts that did not result in physical
delivery were as follows:
UniSource Energy and TEP | ||||||||
Three Months | ||||||||
Ended March 31, | ||||||||
2010 | 2009 | |||||||
-Millions of Dollars- | ||||||||
Recorded in Wholesale Sales: |
||||||||
Forward Power Sales |
$ | 1 | $ | 4 | ||||
Forward Power Purchases |
(1 | ) | (3 | ) | ||||
Total Sales and Purchases Not Resulting in Physical Delivery |
$ | | $ | 1 | ||||
DERIVATIVE VOLUMES
At March 31, 2010, UniSource Energy and TEP had gas swaps totaling 14,322 GBtu and 6,738 GBtu,
respectively, and power contracts totaling 5,139 GWh and 1,365 GWh, respectively, which were
accounted for as derivatives. At December 31, 2009, UniSource Energy and TEP had gas swaps
totaling 13,321 GBtu and 5,658 GBtu, respectively, and power contracts totaling 3,859 GWh and 1,247
GWh, respectively, which were accounted for as derivatives.
CREDIT RISK ADJUSTMENT
When the fair value of our derivative contracts is reflected as an asset, the counterparty owes us
and this creates credit risk. We minimize our credit risk by: (1) entering into transactions with
high-quality counterparties, (2) limiting our exposure to each counterparty, (3) monitoring the
financial condition of the counterparties and (4) requiring collateral in accordance with the
counterparty master agreements. Using a combination of market credit default swap data and
historical recovery rates for bonds, we consider the impact of counterparty creditworthiness in
determining the fair value of our derivatives as well as its possible effect on continued
qualification for cash flow hedge accounting. At March 31, 2010, and at December 31, 2009, the
impact of counterparty credit risk on the fair value of derivative asset contracts was less than
$0.5 million.
We also consider the impact of our own credit risk on instruments that are in a net liability
position, after deducting collateral posted, using market credit default swap data and allocating
the credit risk adjustment to all individual contracts in a net liability position. At March 31,
2010, and at December 31, 2009, the impact of our own credit risk was less than $0.5 million.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded) Unaudited
CONCENTRATION OF CREDIT RISK
The use of contractual arrangements to manage the risks associated with changes in energy commodity
prices creates credit risk exposure resulting from the possibility of nonperformance by
counterparties pursuant to the terms of their contractual obligations. The three utilities
enter into contracts for the physical delivery of energy and gas which contain remedies in the
event of non-performance by the supply counterparties. In addition, volatile energy prices can
create significant credit exposure from energy market receivables and mark-to-market valuations.
The three utilities have contractual agreements for their energy procurement and hedging activities
that contain certain provisions that require each company to post collateral under certain
circumstances. These circumstances include: exposures in excess of unsecured credit limits
provided to TEP, UNS Gas or UNS Electric; credit rating downgrades; or a failure to meet certain
financial ratios. In the event that such credit events were to occur, the three utilities would
have to provide certain credit enhancements in the form of cash or letters of credit to fully
collateralize their exposure to these counterparties.
The following table shows the sum of the fair value of all derivative instruments under contracts
with credit-risk related contingent features that are in a net liability position at March 31,
2010. It also shows cash collateral and letters of credit posted, and additional collateral to be
posted if credit-risk related contingent features were triggered.
UniSource | ||||||||||||||||
TEP | UNS Gas | UNS Electric | Energy | |||||||||||||
March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Net Liability Position |
$ | 33 | $ | 23 | $ | 26 | $ | 82 | ||||||||
Cash Collateral Posted |
2 | 3 | 1 | 6 | ||||||||||||
Letters of Credit |
1 | | 16 | 17 | ||||||||||||
Additional Collateral to Post if Contingent Features Triggered |
31 | 20 | 14 | 65 |
As of March 31, 2010, TEP had $15 million of credit exposure to other counterparties
creditworthiness related to its wholesale marketing and gas hedging activities, of which four
counterparties individually composed greater than 10% of the total credit exposure. At March 31,
2010, UNS Gas and UNS Electric had immaterial exposure to other counterparties.
NOTE 18. REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The UniSource Energy and TEP condensed consolidated financial statements as of March 31, 2010 and
for the three months ended March 31, 2010 and 2009, have been reviewed by PricewaterhouseCoopers
LLP, an independent registered public accounting firm. Their reports (dated May 3, 2010) are
included on pages 1 and 2. The reports of PricewaterhouseCoopers LLP state that they did not audit
and they do not express an opinion on that unaudited financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in light of the
limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 (the Act) for their reports on the
unaudited financial information because neither of those reports is a report or a part of the
registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of
Sections 7 and 11 of the Act.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis explains the results of operations, the general financial
condition, and the outlook for UniSource Energy and its three primary business segments and
includes the following:
| outlook and strategies; | |
| operating results during the first quarter ended March 31, 2010 compared with the same period in 2009; | |
| factors which affect our results and outlook; | |
| liquidity, capital needs, capital resources, and contractual obligations; | |
| dividends; and | |
| critical accounting estimates. |
Managements Discussion and Analysis should be read in conjunction with UniSource Energy and TEPs
2009 Annual Report on Form 10-K and with the Comparative Condensed Consolidated Financial
Statements, beginning on page 3, which present the results of operations for the three months ended
March 31, 2010 and 2009. Managements Discussion and Analysis explains the differences between
periods for specific line items of the Comparative Condensed Consolidated Financial Statements.
References in this report to we and our are to UniSource Energy and its subsidiaries,
collectively.
UNISOURCE ENERGY CONSOLIDATED
OVERVIEW OF CONSOLIDATED BUSINESS
UniSource Energy is a holding company that has no significant operations of its own. Operations
are conducted by UniSource Energys subsidiaries, each of which is a separate legal entity with its
own assets and liabilities. UniSource Energy owns all of the outstanding common stock of Tucson
Electric Power Company (TEP), UniSource Energy Services, Inc. (UES), UniSource Energy Development
Company (UED) and Millennium Energy Holdings, Inc. (Millennium). We conduct our business in three
primary business segments TEP, UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (UNS Electric).
TEP, an electric utility, provides electric service to the community of Tucson, Arizona. UES,
through its two operating subsidiaries, UNS Gas and UNS Electric, provides gas and electric service
to 30 communities in Northern and Southern Arizona.
UED developed and owns the Black Mountain Generating Station (BMGS), a natural gas-fired combustion
turbine in Northern Arizona that, through a power sales agreement, provides energy to UNS Electric.
Millennium has existing investments in unregulated businesses that represent 1% of UniSource
Energys total assets as of March 31, 2010; no new investments are planned in Millennium.
UniSource Energy was incorporated in the State of Arizona in 1995 and obtained regulatory approval
to form a holding company in 1997. In 1998, TEP and UniSource Energy exchanged shares of stock
resulting in TEP becoming a subsidiary of UniSource Energy.
OUTLOOK AND STRATEGIES
Our financial prospects and outlook for the next few years will be affected by many factors
including: TEPs 2008 Rate Order that freezes base rates through 2012, the recent national and
regional economic downturn, the financial market disruptions and volatility, potential regulations
impacting greenhouse gas emissions and other regulatory factors. Our plans and strategies include
the following:
| Develop strategic responses to potential new legislation on carbon emissions, including the evaluation of TEPs existing mix of generation resources, and define steps to achieve environmental objectives that provide an appropriate return on investment and are consistent with earnings growth; | |
| Obtain ACC approval of a rate increase for UNS Electric to provide adequate revenues to cover the rising cost of providing reliable and safe service to their customers; |
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| Expand TEP and UNS Electrics transmission system to meet increasing loads and provide access to renewable energy resources; | |
| Expand TEP and UNS Electrics portfolio of renewable energy sources and programs to meet Arizonas renewable energy standards; | |
| Create future ownership opportunities for renewable energy projects; and | |
| Ensure UniSource Energy continues to have adequate liquidity by maintaining sufficient lines of credit and regularly reviewing and adjusting UniSource Energys short-term investment strategies in response to market conditions. |
RESULTS OF OPERATIONS
Executive Overview
Seasonality of Utility Operations
The net income and results of operations of UniSource Energys utility businesses are seasonal in
nature. TEP and UNS Electric are summer-peaking utilities and historically have recorded a
majority of their net income during the second and third quarters, when hot weather drives
increases in energy consumption. Energy demand from UNS Gas customers typically peaks during the
winter, and that company records the majority of its net income during the first and fourth
quarters.
First Quarter of 2010 Compared with the First Quarter of 2009
UniSource Energy reported net income of $20 million in the first quarter of 2010 compared with $5
million in the first quarter of 2009. The increase in UniSource Energys net income in the first
three months of 2010 is due primarily to: a $4 million increase in pre-tax operating benefits
received by TEP primarily related to Springerville Unit 4; a $4 million increase in TEPs wholesale
transmission revenues as TEP provided temporary transmission capacity to the owner of Springerville
Unit 4; a $3 million decrease in depreciation resulting from lower depreciation rates on TEPs
transmission assets compared with 2009; a $9 million decrease in TEPs base O&M expense due to
fewer planned maintenance outages compared to the first quarter of 2009; and a $1 million increase
in net income at Millennium related to the sale of an investment.
O&M
The table below summarizes the items included in UniSource Energys O&M expense.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
TEP Base O&M |
$ | 54 | $ | 63 | ||||
UNS Gas Base O&M |
6 | 6 | ||||||
UNS Electric Base O&M |
5 | 5 | ||||||
Consolidating Adjustments and Other (1) |
(2 | ) | (1 | ) | ||||
UniSource Energy Base O&M |
63 | 73 | ||||||
Reimbursed Expenses Related to Springerville Units 3 and 4 |
13 | 9 | ||||||
Expenses related to customer-funded renewable energy programs(2) |
7 | 3 | ||||||
Total UniSource Energy O&M |
$ | 83 | $ | 85 | ||||
(1) | Includes Millennium, UED and parent company O&M, and inter-company eliminations | |
(2) | Represents expenses related to customer-funded renewable energy programs; the offsetting funds collected from customers are recorded in other revenue. |
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CONTRIBUTION BY BUSINESS SEGMENT
The table below shows the contributions to our consolidated after-tax earnings by our three
business segments, as well as Other Net Income (Loss).
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
-Millions of Dollars- | ||||||||
TEP |
$ | 10 | $ | (1 | ) | |||
UNS Gas |
6 | 5 | ||||||
UNS Electric |
3 | 1 | ||||||
Other (1) |
1 | | ||||||
Consolidated Net Income |
$ | 20 | $ | 5 | ||||
(1) | Includes: UniSource Energy parent company expenses; UniSource Energy parent company interest expense (net of tax) on the UniSource Convertible Senior Notes and on the UniSource Credit Agreement; income and losses from Millennium investments and UED. |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary source of liquidity for UniSource Energy, the parent company, is dividends from its
subsidiaries, primarily TEP. Also, under UniSource Energys tax sharing agreement, subsidiaries
make income tax payments to UniSource Energy, which makes payments on behalf of the consolidated
group. The table below provides a summary of the liquidity position of UniSource Energy on a
stand-alone basis and for each of its segments.
Borrowings | Amount Available | |||||||||||
Balances as of | Cash and Cash | under Revolving | under Revolving | |||||||||
April 30, 2010 | Equivalents | Credit Facility(1) | Credit Facility | |||||||||
-Millions of Dollars- | ||||||||||||
UniSource Energy stand-alone |
$ | 4 | $ | 34 | $ | 36 | ||||||
TEP |
14 | 66 | 84 | |||||||||
UNS Gas |
21 | | 45 | (2) | ||||||||
UNS Electric |
10 | 16 | 29 | (2) | ||||||||
Other |
3 | (3) | N/A | N/A | ||||||||
Total |
$ | 52 | ||||||||||
(1) | Includes LOCs issued under Revolving Credit Facilities. | |
(2) | Either UNS Gas or UNS Electric may borrow up to a maximum of $45 million, but the total combined amount borrowed cannot exceed $60 million. | |
(3) | Includes cash and cash equivalents at UED and Millennium. |
Short-term Investments
UniSource Energy has a short-term investment policy which governs the investment of excess cash
balances by UniSource Energy and its subsidiaries. We review this policy periodically in response
to market conditions to adjust, if necessary, the maturities and concentrations by investment type
and issuer in the investment portfolio. As of March 31, 2010, UniSource Energys short-term
investments consisted of highly-rated and liquid money market funds, certificates of deposit and
commercial paper. These short-term investments are classified as Cash and Cash Equivalents on the
Balance Sheet.
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Access to Revolving Credit Facilities
UniSource Energy, TEP, UNS Gas and UNS Electric are each party to a revolving credit agreement with
a group of lenders, which is available to be used for working capital purposes. Each of these
agreements is a committed facility and expires in August 2011. The TEP Credit Agreement and UNS
Gas/UNS Electric Revolver may be used for revolving borrowings, as well as to issue letters of
credit. TEP, UNS Gas and UNS Electric each issue letters of credit from time to time to provide
credit enhancement to counterparties for their power or gas procurement and hedging activities.
The UniSource Credit Agreement may be used only for revolver borrowings.
UniSource Energy and its subsidiaries believe that they have sufficient liquidity under their
revolving credit facilities to meet their short-term working capital needs and to provide credit
enhancement as may be required under their respective energy procurement and hedging agreements.
See Item 3. Quantitative and Qualitative Disclosures about Market Risk, Credit Risk, below.
Liquidity Outlook
Neither UniSource Energy nor any of its subsidiaries have any long-term debt maturities until 2011
when $50 million of unsecured notes mature at UNS Gas and a $30 million secured term loan matures
at TEP. The UniSource Energy and TEP Credit Agreements and the UNS Gas/UNS Electric Revolver also
expire in 2011. UniSource Energy is required to make principal payments on an amortizing term loan,
totaling $6 million per year. See UniSource Energy Credit Agreement, below.
Executive Overview UniSource Energy Consolidated Cash Flows
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Cash provided by (used in): |
||||||||
Operating Activities |
$ | 62 | $ | 91 | ||||
Investing Activities |
(90 | ) | (104 | ) | ||||
Financing Activities |
21 | (2 | ) |
Operating Activities
In the first three months of 2010, net cash flows from operating activities were $29 million lower
than the same period last year due primarily to: a $22 million
decrease in cash flows from electric
and gas retail sales, net of fuel and purchased power costs, resulting in part from customer
refunds of over-collected fuel and purchased power costs; a $7 million increase in proceeds from
the operating of Springerville Units 3 and 4; a $4 million decrease in operations and maintenance
costs; and $15 million of income tax refunds received in 2009.
Investing Activities
Net cash flows used for investing activities decreased by $14 million in the first three months of
2010. Investing activities in 2010 included: $21 million of lease debt principal received; a $22
million decline in capital expenditures; and the purchase of Sundt Unit 4 for $52 million.
Investing activities in 2009 included: a $31 million investment in Springerville lease debt; the
sale of an interest in a Millennium investment that resulted in $5 million of proceeds; and
insurance proceeds of $4 million.
Capital Expenditures
Actual Year-to-Date | Estimate | |||||||
March 31, 2010 | Full Year 2010 | |||||||
-Millions of Dollars- | ||||||||
TEP |
$ | 104 | $ | 258 | ||||
UNS Gas |
2 | 14 | ||||||
UNS Electric |
5 | 26 | ||||||
UniSource Energy Stand-Alone |
1 | 16 | ||||||
UniSource Energy Consolidated |
$ | 112 | $ | 314 | ||||
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Financing Activities
Net cash flows from financing activities were $23 million higher in the first three months of 2010
compared with the same period last year due primarily to: a $39 million increase in net borrowings
under revolving credit facilities; $40 million of proceeds from the issuance of long-term debt;
partially offset by a $25 million increase in payments on TEPs capital lease obligations; a $30
million decrease in proceeds from short-term debt; and a $4 million increase in dividends paid to
UniSource Energy shareholders. See TEP, Liquidity and Capital Resources, Financing Activities, TEP
Term Loan, and Other Non-Reportable Business Segments, Results of Operations, UED below for more
information.
UniSource Energy Credit Agreement
The UniSource Credit Agreement, which expires in August 2011, consists of a $30 million amortizing
term loan facility and a $70 million revolving credit facility. Principal payments of $1.5 million
on the outstanding term loan are due quarterly, with the balance due at maturity. At March 31,
2010, there was $8 million outstanding under the term loan facility and $45 million outstanding
under the UniSource Energy revolving credit facility at a weighted average interest rate of 1.49%.
We have the option of paying interest on the term loan and on borrowings under the revolving credit
facility at adjusted LIBOR plus 1.25% or the sum of the greater of the federal funds rate plus 0.5%
or the agent banks reference rate and 0.25%.
The UniSource Credit Agreement restricts additional indebtedness, liens, mergers, sales of assets,
and certain investments and acquisitions. We must also meet: (1) a minimum cash flow to debt
service coverage ratio for UniSource Energy on a standalone basis and (2) a maximum leverage ratio
on a consolidated basis. We may pay dividends if, after giving effect to the dividend payment, we
have more than $15 million of unrestricted cash and unused revolving credit.
As of March 31, 2010, we were in compliance with the terms of the UniSource Credit Agreement.
If an event of default occurs, the UniSource Credit Agreement may become immediately due and
payable. An event of default includes failure to make required payments under the UniSource Credit
Agreement, failure of UniSource Energy or certain subsidiaries to make payments or default on debt
greater than $20 million, or certain bankruptcy events at UniSource Energy or certain subsidiaries.
Interest Rate Risk
UniSource Energy is subject to interest rate risk resulting from changes in interest rates on its
borrowings under the revolving credit facility. The interest paid on revolving credit borrowings
is variable. Given the recent volatility in LIBOR and other benchmark interest rates, UniSource
Energy may be required to pay higher rates of interest on borrowings under its revolving credit
facility. See Item 3. Quantitative and Qualitative Disclosures about Market Risk, Credit Risk,
below.
Convertible Senior Notes
UniSource Energy has outstanding $150 million of 4.50% Convertible Senior Notes due 2035. Each
$1,000 of Convertible Senior Notes is convertible into 27.60 shares of our Common Stock at any
time, representing a conversion price of approximately $36.23 per share of our Common Stock,
subject to adjustments. The closing price of UniSource Energys Common Stock was $33.32 on April
30, 2010.
Guarantees
In the normal course of business, UniSource Energy and certain subsidiaries enter into various
agreements providing financial or performance assurance to third parties on behalf of certain
subsidiaries. We enter into these agreements primarily to support or enhance the creditworthiness
of a subsidiary on a stand-alone basis. The most significant of these guarantees at March 31, 2010
were:
| UES guarantee of $100 million senior unsecured notes issued by UNS Gas and $100 million senior unsecured notes issued by UNS Electric; | |
| UES guarantee of the $60 million UNS Gas/UNS Electric Revolver; |
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| UniSource Energys guarantee of approximately $2 million in building lease payments for UNS Gas; and | |
| UniSource Energys guarantee of the $35 million UED term loan. |
To the extent liabilities exist under the contracts subject to these guarantees, such liabilities
are included in the consolidated balance sheets.
We believe that the likelihood that UniSource Energy or UES would be required to perform or
otherwise incur any significant losses associated with any of these guarantees is remote.
In March 2010, TEP purchased 100% of the equity interest in Sundt Unit 4. We have indemnified the
seller of Sundt Unit 4 from any sales, use, transfer or similar taxes or fees due relating to the
purchase. The terms of the indemnification do not include a limit on potential future payments;
however, we believe that the parties to the agreement have abided by all tax laws and we do not
have any additional tax obligations. We have not made any payments under the terms of this
indemnification to date.
Contractual Obligations
There have been no significant changes in our contractual obligations or other commercial
commitments from those reported in our 2009 Annual Report on Form 10-K, other than the following
entered into in 2010:
2015 | ||||||||||||||||||||||||||||
Payment Due in Years | and | |||||||||||||||||||||||||||
Ending December 31, | 2010 | 2011 | 2012 | 2013 | 2014 | after | Total | |||||||||||||||||||||
-Millions of Dollars- | ||||||||||||||||||||||||||||
Long-Term Debt(1) |
$ | | $ | 30 | $ | 35 | $ | | $ | | $ | | $ | 65 | ||||||||||||||
Purchase Obligations: |
||||||||||||||||||||||||||||
Fuel |
| 1 | 1 | | | | 2 | |||||||||||||||||||||
Purchased Power |
| 9 | 2 | | | | 11 | |||||||||||||||||||||
Building Commitments |
14 | | | | | | 14 | |||||||||||||||||||||
Total Additional Contractual Cash
Obligations |
$ | 14 | $ | 40 | $ | 38 | $ | | $ | | $ | | $ | 92 | ||||||||||||||
(1) | In February 2010, UED amended the UED Credit Agreement to extend the termination date by two years to March 2012 and to increase borrowings by $9 million bringing the outstanding balance to $35 million. In March 2010, TEP entered into an 18-month, $30 million term loan facility. |
Dividends on Common Stock
The following table shows the dividends declared to UniSource Energy shareholders for 2010:
Dividend Amount Per Share | ||||||||
Declaration Date | Record Date | Payment Date | of Common Stock | |||||
February 12, 2010 |
February 23, 2010 | March 8, 2010 | $ | 0.39 |
Income Tax Position
At March 31, 2010, UniSource Energy had federal AMT credit carryforwards of $41 million, including
$25 million for TEP, which do not expire. UniSource Energy has a capital loss carryforward of $12
million which expires in December 31, 2015. A $2 million valuation allowance has been recorded
against the deferred tax asset generated by the capital loss carryforward. See Financial
Statements Note 5. Income Taxes, for more information.
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TUCSON ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
Executive Summary
The financial condition and results of operations of TEP are currently the principal factors
affecting the financial condition and results of operations of UniSource Energy on an annual basis.
The following discussion relates to TEPs utility operations, unless otherwise noted.
TEP recorded net income of $10 million in the first quarter of 2010 compared with a net loss of $1
million in the same period in 2009. The improvement is due primarily to: fewer scheduled
generating plant maintenance outages resulting in lower O&M; an increase in wholesale transmission
revenues; lower depreciation rates on TEPs transmission assets; and benefits related to
Springerville Unit 4, which began commercial operations in December 2009.
First Quarter of 2010 Compared with First Quarter of 2009
The following factors contributed to the increase in TEPs net income:
| A $1 million increase in total retail margin revenues due to an increase in residential and mining kWh sales compared with the first quarter of 2009, which was partially offset by lower commercial and industrial sales resulting from weak economic conditions; | ||
| a $4 million increase in wholesale transmission revenues as TEP temporarily provided transmission capacity for Springerville Unit 4 during the first quarter of 2010; | ||
| a $9 million decrease in base O&M expense, which excludes costs directly offset by customer surcharges for renewable energy and demand side management programs and third party reimbursements, resulting primarily from fewer planned maintenance outages compared with the first three months of 2009. See Other Operating Expenses, O&M, below; | ||
| a $3 million decrease in depreciation expense due to lower depreciation rates on TEPs transmission assets and lower depreciation related to Sundt Unit 4 compared with 2009. TEP completed an updated depreciation study in the fourth quarter of 2009 and adopted new depreciation rates for transmission assets in January 2010. This was partially offset by higher depreciation related to additions to plant in service; | ||
| a $1 million decrease in capital lease amortization expense due to the purchase in March 2010 of the previously leased Sundt Unit 4, a lengthened amortization period for leasehold improvements at Sundt Unit 4, and lower balances on capital lease obligations; and | ||
| a $4 million increase in the pre-tax benefit recognized by TEP related to Springerville Units 3 and 4 for operating fees and contributions toward common facility costs. The increase is primarily due to the start of commercial operation of Springerville Unit 4 in December 2009; partially offset by | ||
| a $3 million provision for wholesale refunds resulting from the settlement of disputes related to wholesale sales to the California Power Exchange in 2000 and 2001. |
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Retail Sales and Revenues
Increase (Decrease) | ||||||||||||||||
Three Months Ended March 31, | 2010 | 2009 | Amount | Percent* | ||||||||||||
Energy Sales, kWh (in millions) |
||||||||||||||||
Electric Retail Sales: |
||||||||||||||||
Residential |
755 | 727 | 28 | 3.8 | % | |||||||||||
Commercial |
394 | 404 | (10 | ) | (2.3 | %) | ||||||||||
Industrial |
474 | 489 | (15 | ) | (3.2 | %) | ||||||||||
Mining |
261 | 259 | 2 | 0.9 | % | |||||||||||
Public Authorities |
45 | 50 | (5 | ) | (10.7 | )% | ||||||||||
Total Electric Retail Sales |
1,929 | 1,929 | 0 | 0 | % | |||||||||||
Retail Margin Revenues (in millions): |
||||||||||||||||
Residential |
$ | 47 | $ | 45 | $ | 2 | 4.4 | % | ||||||||
Commercial |
31 | 30 | 1 | 1.0 | % | |||||||||||
Industrial |
21 | 23 | (2 | ) | (7.1 | %) | ||||||||||
Mining |
7 | 7 | | 2.8 | % | |||||||||||
Public Authorities |
2 | 2 | | (4.3 | %) | |||||||||||
Total Retail Margin Revenues |
$ | 108 | $ | 107 | 1 | 0.7 | % | |||||||||
PPFAC Revenues |
51 | 48 | 3 | 7.4 | % | |||||||||||
REST & DSM Revenues |
8 | 2 | 6 | NM | ||||||||||||
Total Retail Revenues |
$ | 167 | $ | 157 | $ | 10 | 6.3 | % | ||||||||
Avg. Retail Margin Rate (cents / kWh): |
||||||||||||||||
Residential |
6.27 | 6.23 | 0.04 | 0.6 | % | |||||||||||
Commercial |
7.75 | 7.50 | 0.25 | 3.4 | % | |||||||||||
Industrial |
4.43 | 4.62 | (0.18 | ) | (4.0 | %) | ||||||||||
Mining |
2.80 | 2.86 | (0.06 | ) | (2.2 | %) | ||||||||||
Public Authorities |
4.93 | 4.60 | 0.33 | 7.1 | % | |||||||||||
Avg. Retail Margin Rate |
5.62 | 5.59 | 0.03 | 0.5 | % | |||||||||||
Avg. PPFAC Rate |
2.64 | 2.46 | 0.18 | 7.4 | % | |||||||||||
Avg. REST & DSM Rate |
0.41 | 0.12 | 0.29 | NM | ||||||||||||
Total Avg. Retail Rate |
8.68 | 8.18 | 0.50 | 6.1 | % | |||||||||||
2010 | 2009 | |||||||||||||||
Weather Data: |
||||||||||||||||
Heating Degree Days |
||||||||||||||||
Three Months Ended March 31 |
881 | 646 | 235 | 36.4 | % | |||||||||||
10-Year Average |
805 | 805 | | |
* | Percent change calculated on un-rounded data; may not correspond to data shown in table |
Residential
Residential kWh sales were 3.8% higher in the first quarter of 2010, resulting in a $2 million or
4.4% increase in residential margin revenues. In the first quarter of 2009, TEPs service
territory experienced very mild winter weather. As a result, we estimate that the mild weather
negatively impacted residential sales in 2009 by approximately 1%. Therefore, of the 3.8% increase
in first quarter 2010 kWh, we estimate 1% can be attributed to the mild weather that occurred in
the first quarter of 2009.
Commercial
Commercial kWh sales were 2.3% lower in the first quarter of 2010 due primarily to weakened
economic conditions. The decrease in sales volumes did not materially impact commercial margin
revenues. We do not believe that weather impacts commercial kWh sales during the first and fourth
quarters.
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Industrial
Industrial kWh sales were 3.2% lower in the first quarter of 2010, resulting in a decrease in
margin revenues of $2 million. Lower sales volumes during the first quarter of 2010 were due
primarily to weakened economic conditions.
Mining
Higher copper prices led to increased mining activity and a 0.9% increase in sales volumes in the
first quarter of 2010 compared with the same period last year. Margin revenues increased by less
than $1 million compared with the first quarter of 2009.
Wholesale Sales and Revenues
Increase (Decrease) | ||||||||||||||||
Three Months Ended March 31, | 2010 | 2009 | Amount | Percent* | ||||||||||||
Energy Sales, kWh (in millions) |
||||||||||||||||
Electric Wholesale Sales Delivered: |
||||||||||||||||
Long-term Contracts |
288 | 275 | 13 | 4.7 | % | |||||||||||
Other Sales |
450 | 555 | (105 | ) | (18.9 | %) | ||||||||||
Total Electric Wholesale Sales |
738 | 830 | (92 | ) | (11.1 | %) | ||||||||||
Electric Wholesale Revenues: |
||||||||||||||||
Long-term Contracts |
$ | 15 | $ | 14 | $ | 1 | 5.6 | % | ||||||||
Other Sales |
17 | 20 | (3 | ) | (6.6 | %) | ||||||||||
Provision for Wholesale Refunds |
(3 | ) | | (3 | ) | NM | ||||||||||
Transmission |
8 | 4 | 4 | NM | ||||||||||||
Total Wholesale Revenues |
$ | 37 | $ | 38 | $ | (1 | ) | (2.6 | %) | |||||||
* | Percent change calculated on un-rounded data; may not correspond to data shown in table |
Long-Term Wholesale and Transmission Revenues
Revenues from long-term wholesale contracts increased by $1 million in the first quarter of 2010
compared with the first quarter of 2009, due to a 4.7% increase in kWh sales. TEPs long-term
wholesale sales consist of three contracts with Salt River Project (SRP), Navajo Tribal Utility
Authority and the Tohono Oodham Utility Authority. The margin on TEPs long-term wholesale sales
was $8 million in the first quarters of 2010 and 2009.
Wholesale transmission revenues in the first quarter of 2010 increased by $4 million as TEP
temporarily provided transmission capacity to SRP for Springerville Unit 4. TEP does not expect
transmission revenue to remain at this level for the remainder of 2010.
In April 2010, TEP settled all remaining claims arising out of certain of its transactions with the
California Power Exchange (CPX) and the California Independent System Operator (CISO) during the
California energy crisis of 2000 and 2001. As a result of this settlement, TEP recorded a $3
million loss in the first quarter of 2010. See Note 6. Commitments and Contingencies.
Short-Term Wholesale and Trading Revenues
All of the revenues from short-term wholesale sales and 10% of the profits from wholesale trading
activity are credited to fuel and purchased power costs eligible for recovery in the PPFAC.
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Other Revenues
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Revenues related to Springerville Units 3 and 4 |
$ | 21 | $ | 13 | ||||
Other Revenue |
5 | 5 | ||||||
Total Other Revenue |
$ | 26 | $ | 18 | ||||
Fuel and Purchased Power Expense
Generation and | ||||||||||||||||
TEP | Purchased Power | Expense | ||||||||||||||
Three Months Ended March 31, | 2010 | 2009 | 2010 | 2009 | ||||||||||||
-Millions of kWh- | -Millions of Dollars- | |||||||||||||||
Coal-Fired Generation |
2,095 | 2,112 | $ | 48 | $ | 43 | ||||||||||
Gas-Fired Generation |
183 | 169 | 9 | 7 | ||||||||||||
Renewable Generation |
7 | 2 | | | ||||||||||||
Total Generation (1) |
2,285 | 2,283 | 57 | 50 | ||||||||||||
Total Purchased Power |
536 | 651 | 24 | 23 | ||||||||||||
Transmission |
| | 1 | 1 | ||||||||||||
Increase
(Decrease) to Reflect PPFAC Recovery Treatment |
| | (3 | ) | | |||||||||||
Total Resources |
2,821 | 2,934 | $ | 79 | $ | 74 | ||||||||||
Less Line Losses and Company Use |
(154 | ) | (175 | ) | ||||||||||||
Total Energy Sold |
2,667 | 2,759 | ||||||||||||||
(1) | Generation expense in the first quarters of 2010 and 2009 exclude $1 million related to Springerville Units 3 and 4; these expenses were reimbursed by Tri-State and SRP and recorded in Other Revenue. |
Generating Output
Total generating output in the first quarter of 2010 was similar to the same period last year,
following the trend of TEPs retail sales volumes, which were also relatively flat over the same
time period. Fuel expense for coal-fired generation in the first quarter of 2010 increased by $5
million due primarily to the switching of fuel at Sundt Unit 4 from natural gas to coal. Fuel
expense for gas-fired generation increased by $2 million due to an increase in generating output at
Luna and an increase in the market price for natural gas.
Purchased Power
Purchased power volumes decreased by 18% during the first quarter of 2010 due to a decline in
short-term wholesale sales activity.
The table below summarizes TEPs cost per kWh generated or purchased.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-cents per kWh- | ||||||||
Coal |
2.29 | 2.04 | ||||||
Gas |
4.92 | 4.14 | ||||||
Purchased Power |
4.48 | 3.53 | ||||||
All Sources |
2.81 | 2.52 |
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Market Prices
As a participant in the Western U.S. wholesale power markets, TEP is directly and indirectly
affected by changes in market conditions. The average market price for around-the-clock energy
based on the Dow Jones Palo Verde Index was 34% higher in the first quarter of 2010 compared with
the same period last year. The average price for natural gas based on the Permian Index was 47%
higher than the first quarter of 2009. We cannot predict whether
changes in various factors that influence demand and supply will cause prices to change for the
remainder of 2010.
Average Market Price for Around-the-Clock Energy | $/MWh | |||
Quarter ended March 31, 2010 |
$ | 40 | ||
Quarter ended March 31, 2009 |
30 |
Average Market Price for Natural Gas | $/MMBtu | |||
Quarter ended March 31, 2010 |
$ | 5.26 | ||
Quarter ended March 31, 2009 |
3.57 |
Other Operating Expenses
O&M
The table below summarizes the items included in TEPs O&M expense.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Base O&M |
$ | 54 | $ | 63 | ||||
Reimbursed Expenses Related to Springerville Units 3 and 4 |
13 | 9 | ||||||
Expenses related to Customer-Funded Renewable Energy and
DSM programs(1) |
5 | 3 | ||||||
Total O&M |
$ | 72 | $ | 75 | ||||
(1) | Represents expenses related to TEPs customer-funded renewable energy programs; the offsetting funds collected from customers are recorded in retail revenue. |
FACTORS AFFECTING RESULTS OF OPERATIONS
Springerville Units 3 and 4
TEP operates Springerville Units 3 and 4 on behalf of Tri-State and SRP, and receives annual
benefits in the form of rental payments and other fees and cost savings. TEP recorded pre-tax
benefits of $6 million and $2 million, in the first quarters of 2010 and 2009, respectively. The
increase is primarily due to the start of commercial operation of Springerville Unit 4 in December
2009.
Depreciation
In the fourth quarter of 2009, TEP completed an updated depreciation study which indicated that its
transmission assets depreciable lives should be extended. As a result, TEP adopted new
transmission depreciation rates effective January 2010 which will have the effect of reducing
transmission-related depreciation expense by approximately $14 million in 2010.
For the first quarter of 2010, total depreciation expense, which includes higher depreciation
expense for new plant, was $24 million compared with $27 million in the same period last year.
Sundt Unit 4
Until March 2010, Sundt Unit 4 was leased by TEP with a lease term expiration of January 2011. In
March 2010, TEP purchased 100% of the equity interest in Sundt Unit 4 from the equity owner for
approximately $52 million. In April 2010, TEP redeemed the outstanding Sundt Unit 4 lease debt of
$5 million, terminated the lease agreement and caused title of Sundt Unit 4 to be transferred to
TEP.
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Refinancing Activity
The TEP Credit Agreement, which consists of a $150 million revolving credit facility and a $341
million letter of credit facility, matures in August 2011. Interest rates and fees under the TEP
Credit Agreement are based on a pricing grid tied to TEPs credit ratings. Letter of credit fees
are 0.45% per annum and amounts drawn under a letter of credit would bear interest at LIBOR plus
0.45% per annum. Based on our current estimates, we believe that the interest costs associated
with TEPs credit agreement after it is refinanced will increase over current levels. At March 31,
2010, there were $55 million of borrowings at an interest rate of 0.69% and $1 million in letters
of credit outstanding under the Revolving Credit Facility. We are continuously monitoring
conditions in the capital markets in order to achieve favorable terms and conditions. See
Liquidity and Capital Resources, Financing Activities,TEP Credit Agreement, below for more
information.
Pension and Postretirement Benefit Expense
In the first quarters of 2010 and 2009, TEP charged $3 million and $4 million, respectively, of
pension and postretirement benefit expenses to O&M expense. In 2010, TEP expects to charge $15
million of pension and postretirement benefit expense to O&M expense, compared with $17 million in
2009. The decrease in 2010 is due primarily to the increase in the market value of the pension
asset values. See Financial Statements Note 8. Employee Benefit Plans, for more information.
El Paso Electric Dispute
TEP was a party to a proceeding at FERC that involved the interpretation of the 1982 Power Exchange
and Transmission Agreement (1982 Agreement) between TEP and El Paso. The dispute related to TEPs
ability to use existing rights for the transmission of power from Luna into TEPs system. On
November 13, 2008, the FERC issued a decision that supported TEPs position. As a result of the
ruling, El Paso refunded to TEP pre-tax amounts of $10 million in disputed transmission charges and
$1 million of accrued interest. TEP is no longer accruing transmission charges under this
agreement. In January 2009, FERC granted El Pasos request for a rehearing in this matter. As a
result of the pending appeal process, TEPs net income in 2008 or 2009 does not reflect the refund
made by El Paso. TEP does not expect to recognize any income related to this refund until the
appeals process is fully resolved.
In December 2008, TEP filed a complaint in the U.S. Federal District Court against El Paso seeking
a $2 million reimbursement for transmission charges paid by TEP to PNM for transmission service in
an attempt to mitigate TEPs damages before FERC issued its decision in November 2008. On February
23, 2009, El Paso filed a motion to dismiss TEPs complaint, or in the alternative, requested a
stay in the proceeding pending further resolution by FERC. In April 2009, TEP filed a response
requesting that the court deny El Pasos motion, followed by an El Paso reply in May 2009. On
September 10, 2009, the District Court denied El Pasos motion to dismiss and stayed the proceeding
pending a final resolution of the FERC proceeding and any appeal. TEP cannot predict the timing or
outcome of this lawsuit.
Renewable Energy Standard and Tariff
In the first quarters of 2010 and 2009, TEP collected $7 million in Renewable Energy Standard and
Tariff (REST) surcharges, of which $8 million and $2 million, respectively, were expensed for REST
projects and renewable purchased power, respectively. Any surcharge collections above or below the
amount of renewable expenditures will be deferred and reflected in TEPs financial statements as a
regulatory liability or asset. In 2010, TEP expects to collect $32 million from customers through
the REST. REST implementation plans and the associated surcharge must be submitted annually to the
ACC for review and approval.
In March 2010, the ACC approved TEPs 2010 REST implementation plan and found the proposed
purchased power agreements and TEP-owned solar projects to be appropriate components. The plan
includes two agreements to purchase 30 MW of energy from two new Arizona-based solar systems which
are expected to be completed in early 2012. The above market costs associated with these contracts
are recoverable through the REST surcharge. These agreements give TEP the option to purchase the
facilities in the future.
The approved plan also includes the expansion of TEPs Springerville photovoltaic installation by
1.8 MW and the construction of a new 1.6 MW solar project within the Tucson city limits. The
estimated cost of these TEP-owned projects is approximately $14 million.
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A request is pending before the ACC that would allow TEP to use REST funds to offset operating
costs, depreciation, property taxes and provide TEP with a return on its investment in the two
TEP-owned solar projects until these costs could be recovered as part of TEPs next rate case. We
expect the ACC to consider this proposal in May 2010.
Electric Energy Efficiency Standards
In December 2009, the ACC established a process to adopt new Electric Energy Efficiency Standards
(EE Standards) designed to require TEP, UNS Electric and other affected utilities to implement cost
effective DSM programs. The proposed EE Standards target total kWh savings in 2011 of 1.25%. The
EE requirement increases thereafter up to the targeted cumulative annual reduction in retail kWh
sales of 22% by 2020. The EE requirement can be met by: savings from Direct Load Control programs;
previously implemented DSM programs; and from a portion of energy efficient building codes. If the
DSM programs are cost effective, the proposed EE Standards provide for the recovery of costs
incurred to implement DSM programs. TEPs DSM programs and rates charged to customers for such
programs are subject to ACC approval. If the ACC approves EE Standards, they must be certified by
the Arizona Attorney General before taking effect.
Rosemont Copper Mine
In 2007, Augusta Resources Corporation (Augusta) filed a plan of operations with the United States
Forest Service (USFS) for the proposed Rosemont Copper Mine near Tucson, Arizona. Augusta is
waiting for an environmental impact statement from the USFS before it can begin construction and
operation of the mine. If the Rosemont Copper Mine begins full production, it would become TEPs
largest retail customer, with an estimated load of up to 110 MW. TEP cannot predict if or when the
mine will commence operations.
Fair Value Measurements
The following table sets forth, by level within the fair value hierarchy, TEPs financial assets
and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010.
Financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
TEP | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Assets |
||||||||||||||||
Cash Equivalents (1) |
$ | 18 | $ | | $ | | $ | 18 | ||||||||
Rabbi Trust Investments to support
the Deferred Compensation and
SERP Plans (2) |
| 14 | | 14 | ||||||||||||
Collateral Posted (5) |
| 2 | | 2 | ||||||||||||
Energy Contracts (3) |
| | 6 | 6 | ||||||||||||
Total Assets |
18 | 16 | 6 | 40 | ||||||||||||
Liabilities |
||||||||||||||||
Energy Contracts (3) |
| (12 | ) | (8 | ) | (20 | ) | |||||||||
Interest Rate Swaps (4) |
| (7 | ) | | (7 | ) | ||||||||||
Total Liabilities |
| (19 | ) | (8 | ) | (27 | ) | |||||||||
Net Total Assets and (Liabilities) |
$ | 18 | $ | (3 | ) | $ | (2 | ) | $ | 13 | ||||||
(1) | Cash Equivalents are based on observable market prices and are comprised of the fair value of
money market funds and certificates of deposit. |
|
(2) | Level 2 investments consist of amounts held in mutual and money market funds related to deferred compensation and Supplemental Executive Retirement Plan (SERP) benefits. The valuation is based on quoted prices, traded in active markets. These investments are included in Investments and Other Property Other in the UniSource Energy and TEP balance sheets. |
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(3) | Energy contracts include gas swap agreements (Level 2), forward power purchase and sales contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to take advantage of favorable market conditions and reduce exposure to energy price risk. The valuation techniques are described below. | |
(4) | The Interest Rate Swaps are valued based on the six month LIBOR index or the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index. | |
(5) | Collateral provided for energy contracts with counterparties to reduce credit risk exposure. |
For the first quarter of 2010, TEP recorded unrealized losses of $3 million in net regulatory
assets. This amount represents $7 million in losses related to the change in fair value of Level 2
gas swaps due to lower forward gas prices and increased swap volumes, partially offset by $4
million in gains related to the change in the fair value of Level 3 forward power contracts
primarily due to the change in value of purchase power call option.
TEP primarily applies the market approach for recurring fair value measurements and endeavors to
utilize the best available information. Where observable inputs are available for substantially
the full term of the asset or liability, such as gas swap derivatives valued using New York
Mercantile Exchange (NYMEX) pricing, adjusted for basin differentials, the instrument is
categorized in Level 2.
Derivatives valued using an aggregate pricing service or published prices that represent a
consensus reporting of multiple brokers are categorized in Level 3. For both power and gas prices,
TEP obtains quotes from brokers, major market participants, exchanges or industry publications as
well as its own price experience from active transactions in the market. TEP primarily uses one
set of quotations each for power and for gas, and then uses the other sources as validation of
those prices. The broker providing quotes for power prices states that the market information
provided is indicative only, but believes it to be reflective of market conditions as of the time
and date indicated. In addition, energy derivatives include contracts where published prices are
not readily available. These include contracts for delivery periods during non-standard time
blocks, contracts for delivery during only a few months of a given year when prices are quoted only
for the annual average, or contracts for delivery at illiquid delivery points. In these cases, TEP
applies certain management assumptions to value such contracts. These assumptions include applying
percentage multipliers to value non-standard time blocks, applying historical price curve
relationships to calendar year quotes, and including adjustments for transmission and line losses
to value contracts at illiquid delivery points. We also consider the impact of counterparty credit
risk using current and historical default and recovery rates as well as our own credit risk using
credit default swap data. TEP reviews these assumptions on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
TEP Cash Flows
The table below shows the cash available to TEP after capital expenditures, scheduled debt payments
and payments on capital lease obligations:
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Net Cash Flows Operating Activities (GAAP) |
$ | 56 | $ | 67 | ||||
Amounts from Statements of Cash Flows: |
||||||||
Less: Capital Expenditures (1) |
(104 | ) | (69 | ) | ||||
Net Cash Flows after Capital Expenditures
(non-GAAP)* |
(48 | ) | (2 | ) | ||||
Amounts from Statements of Cash Flows: |
||||||||
Less: Retirement of Capital Lease Obligations |
(40 | ) | (14 | ) | ||||
Plus: Proceeds from Investment in Lease Debt |
22 | 1 | ||||||
Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)* |
$ | (66 | ) | $ | (15 | ) | ||
(1) | Includes $52 million payment for purchase of Sundt Unit 4 lease equity. |
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Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Net Cash Flows Operating Activities (GAAP) |
$ | 56 | $ | 67 | ||||
Net Cash Flows Investing Activities (GAAP) |
(82 | ) | (96 | ) | ||||
Net Cash Flows Financing Activities (GAAP) |
24 | 6 | ||||||
Net Cash Flows after Capital Expenditures (non-GAAP)* |
(48 | ) | (2 | ) | ||||
Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)* |
(66 | ) | (15 | ) |
* | Net Cash Flows after Capital Expenditures and Net Cash Flows Available after Required Payments, both non-GAAP measures of liquidity, should not be considered as alternatives to Net Cash Flows - Operating Activities, which is determined in accordance with GAAP as a measure of liquidity. TEP believes that Net Cash Flows after Capital Expenditures and Net Cash Flows Available after Required Payments provide useful information to investors as measures of liquidity and its ability to fund its capital requirements, make required payments on debt and capital lease obligations, and pay dividends to UniSource Energy. |
Liquidity Outlook
During 2010, TEP expects to generate sufficient internal cash flows to fund all of its construction
expenditures and operating activities. Cash flows may vary during the year, with cash flow from
operations typically the lowest in the first quarter and highest in the third quarter due to TEPs
summer peaking load. As a result of the varied seasonal cash flow, TEP will use, as needed, its
revolving credit facility to fund its business activities.
Operating Activities
In the first three months of 2010, net cash flows from operating activities decreased by $11
million compared with 2009. Net cash flows were impacted by:
| a $7 million decrease in cash flows from wholesale electric sales less fuel and purchased power cost; | ||
| a $15 million decrease in income tax refunds; | ||
| a $2 million increase in taxes other than income taxes; partially offset by | ||
| a $7 million increase in cash receipts related to the operation of Springerville Units 3 and 4; and | ||
| an $8 million decrease in cash deposits made with power and gas trading counterparties. |
Investing Activities
Net cash used for investing activities was $13 million lower in the first three months of 2010
compared with 2009. Investing activities in the first three
months of 2010 included: the purchase of Sundt Unit 4 for $52 million, which was partially offset by a decline in other capital
expenditures of $17 million; and a $21 million increase in proceeds received from the return of
investments in lease debt. Investing activities in the first three months of 2009 included: the use of $31 million for an investment in Springerville Unit 1 lease debt; and the receipt of $4
million of insurance proceeds.
Financing Activities
Net cash proceeds from financing activities were $19 million higher in the first three months of
2010 compared with 2009 due to: $30 million of proceeds received under a loan agreement to help
fund the purchase of Sundt Unit 4; and a $30 million increase in net proceeds under TEPs revolving
credit facility; partially offset by a $25 million increase in TEPs payments on capital lease
obligations; and a $15 million decrease in capital contributions from UniSource Energy.
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Table of Contents
TEP Term Loan
In March 2010, TEP entered into a $30 million term loan agreement (TEP Term Loan). The interest on
the TEP Term Loan is based on LIBOR or an alternate base rate plus a margin based on a pricing grid
tied to TEPs credit ratings. The current margins are 2.00% for LIBOR and 1.00% for the alternate
base rate. The proceeds were used to help fund a portion of the purchase of Sundt Unit 4 and for
other general corporate purposes. The TEP Term Loan expires on September 1, 2011 and is secured by
$30 million of mortgage bonds issued under TEPs 1992 Mortgage.
The TEP Term Loan contains a number
of covenants, which are substantially the same as the covenants
in the TEP Credit Agreement, which restrict TEP and its subsidiaries, including restrictions
on additional indebtedness, liens, sale of assets, dividends and sale-leaseback agreements. The
TEP Term Loan also requires TEP to meet a minimum cash coverage ratio and a maximum leverage ratio.
If TEP complies with the terms of the TEP Term Loan, TEP may pay dividends to UniSource Energy. As
of March 31, 2010, TEP was in compliance with the terms of the TEP Term Loan.
TEP Credit Agreement
The TEP Credit Agreement consists of a $150 million revolving credit facility and a $341 million
letter of credit facility which supports $329 million of tax-exempt variable rate bonds. The TEP
Credit Agreement matures in 2011 and is secured by $491 million of Mortgage Bonds. At March 31,
2010, there were $55 million of outstanding borrowings and $1 million in letters of credit
outstanding under the TEP Revolving Credit Facility.
As of March 31, 2010, TEP was in compliance with the terms of the TEP Credit Agreement.
Capital Contribution from UniSource Energy
In March 2010, UniSource Energy contributed $15 million of capital to TEP to help fund the purchase
of Sundt Unit 4. In March 2009, UniSource Energy contributed $30 million of capital to TEP. TEP
used the proceeds to purchase Springerville Unit 1 lease debt. See Investments in Springerville
Lease Debt and Equity, below.
Interest Rate Risk
TEP is exposed to interest rate risk resulting from changes in interest rates on certain of its
variable rate debt obligations, as well as borrowings under its revolving credit facility. As a
result, TEP may be required to pay significantly higher rates of interest on outstanding variable
rate debt and borrowings under its revolving credit facility. At March 31, 2010 and December 31,
2009, TEP had $329 million and $459 million, respectively, in tax-exempt variable rate debt
outstanding. In January 2010, TEP completed a transaction that converted the interest rate on the
$130 million of 2008 Pima B Bonds to a fixed rate of 5.75%. The interest rates on TEPs tax-exempt
variable rate debt are reset weekly by its remarketing agents. The maximum interest payable under
the indenture for the bonds is 20%. During 2009, the average rates paid ranged from 0.25% to
0.79%. At March 31, 2010, the average rate on the debt was 0.23%.
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Capital Lease Obligations
At March 31, 2010, TEP had $497 million of total capital lease obligations on its balance sheet.
The table below provides a summary of the outstanding lease amounts in each of the obligations.
Capital Lease Obligation | ||||||||||||
Balance | Renewal/Purchase | |||||||||||
Leased Asset | at March 31, 2010 | Expiration | Option | |||||||||
-Millions of Dollars- | ||||||||||||
Springerville Unit 1 |
$ | 297 | 2015 | Fair market value purchase option | ||||||||
Springerville Coal Handling Facilities |
87 | 2015 | Fixed price purchase option of $120 million | |||||||||
Springerville Common Facilities |
108 | 2017 and 2021 | Fixed price purchase option of $106 million | |||||||||
Sundt Unit 4 |
5 | (1) | Fair market value purchase option | |||||||||
Total Capital Lease Obligations |
$ | 497 | ||||||||||
(1) | In March 2010, TEP purchased 100% of the equity interest in Sundt Unit 4. See TEP, Factors Affecting Results of Operations, Sundt Unit 4, above, for more information. |
Except for TEPs 14% equity ownership in the Springerville Unit 1 Leases and its 13% equity
ownership in the Springerville Coal Handling Facilities, TEP will not own these assets at the
expiration of the leases. TEP may renew the leases or purchase the leased assets at such time.
The renewal and purchase option for Springerville Unit 1 is for fair market value as determined at
that time, while the purchase price option is fixed for the Springerville Coal Handling Facilities
and Common Facilities. See Financial Statements Note 4. Debt, Credit Facilities and Capital Lease
Obligations for more information about the fixed purchase price amounts.
Income Tax Position
See UniSource Energy Consolidated, Liquidity and Capital Resources, Income Tax Position, above.
Contractual Obligations
There have been no significant changes in TEPs contractual obligations or other commercial
commitments from those reported in our 2009 Annual Report on Form 10-K, other than the following
purchase obligations entered into in 2010 and the TEP Term Loan:
2015 | ||||||||||||||||||||||||||||
Payment Due in Years | and | |||||||||||||||||||||||||||
Ending December 31, | 2010 | 2011 | 2012 | 2013 | 2014 | after | Total | |||||||||||||||||||||
-Millions of Dollars- | ||||||||||||||||||||||||||||
Long-Term Debt |
$ | | $ | 30 | $ | | $ | | $ | | $ | | $ | 30 | ||||||||||||||
Purchase Obligations: |
||||||||||||||||||||||||||||
Purchased Power |
| 4 | | | | | 4 | |||||||||||||||||||||
Total Additional Contractual Cash
Obligations |
$ | | $ | 34 | $ | | $ | | $ | | $ | | $ | 34 | ||||||||||||||
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Dividends on Common Stock
TEP can pay dividends if it maintains compliance with the TEP Credit Agreement and TEP Term Loan
and certain financial covenants. As of March 31, 2010, TEP was in compliance with the terms of the
TEP Credit Agreement, the TEP Term Loan and applicable financial covenants.
The Federal Power Act states that dividends shall not be paid out of funds properly included in
capital accounts. TEP has an accumulated deficit rather than retained earnings. Although the
terms of the Federal Power Act are unclear, we believe that there is a reasonable basis for TEP to
pay dividends from current year earnings.
UNS GAS
RESULTS OF OPERATIONS
UNS Gas reported net income of $6 million in the first quarter of 2010 and net income of $5 million
in the same period of 2009. The table below shows UNS Gas therm sales and revenues for the first
quarters of 2010 and 2009.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Gas Revenues |
$ | 56 | $ | 59 | ||||
Other Revenues |
1 | 1 | ||||||
Total Operating Revenues |
57 | 60 | ||||||
Purchased Gas Expense |
37 | 41 | ||||||
Other Operations and Maintenance Expense |
6 | 6 | ||||||
Depreciation and Amortization |
2 | 2 | ||||||
Taxes Other Than Income Taxes |
1 | 1 | ||||||
Total Other Operating Expenses |
46 | 50 | ||||||
Operating Income |
11 | 10 | ||||||
Total Interest Expense |
2 | 2 | ||||||
Income Tax Expense |
3 | 3 | ||||||
Net Income |
$ | 6 | $ | 5 | ||||
The improvement in UNS Gas net income in the first quarter of 2010 is primarily due to colder
winter weather that led to a 12.0% increase in retail therm sales compared with the same period
last year.
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The table below shows UNS Gas therm sales and revenues for the first quarters of 2010 and 2009.
Increase (Decrease) | ||||||||||||||||
Three Months Ended March 31, | 2010 | 2009 | Amount | Percent* | ||||||||||||
Energy Sales, Therms (in millions) |
||||||||||||||||
Gas Retail Sales: |
||||||||||||||||
Residential |
33 | 30 | 3 | 13.0 | % | |||||||||||
Commercial |
12 | 10 | 2 | 10.3 | % | |||||||||||
Industrial |
1 | 1 | | 5.0 | % | |||||||||||
Public Authorities |
3 | 3 | | 9.4 | % | |||||||||||
Total Gas Retail Sales |
49 | 44 | 5 | 12.0 | % | |||||||||||
Negotiated Sales Program (NSP) |
7 | 8 | (1 | ) | (14.7 | %) | ||||||||||
Total Gas Sales |
56 | 52 | 4 | 7.6 | % | |||||||||||
Gas Revenues (in millions): |
||||||||||||||||
Retail Margin Revenues: |
||||||||||||||||
Residential |
$ | 14 | $ | 13 | $ | 1 | 9.3 | % | ||||||||
Commercial |
3 | 3 | | 8.8 | % | |||||||||||
Industrial |
| | | 4.6 | % | |||||||||||
Public Authorities |
1 | 1 | | 8.1 | % | |||||||||||
Total Retail Margin Revenues |
$ | 18 | $ | 17 | $ | 1 | 9.1 | % | ||||||||
Transport |
1 | 1 | | (0.1 | %) | |||||||||||
Negotiated Sales Program (NSP) |
4 | 4 | | (2.7 | %) | |||||||||||
Total Non-Fuel Base Revenues |
$ | 23 | $ | 22 | $ | 1 | 6.5 | % | ||||||||
Retail Fuel Revenues |
$ | 33 | $ | 37 | (4 | ) | (11.4 | %) | ||||||||
Other Revenue |
1 | 1 | | (2.2 | %) | |||||||||||
Total Operating Revenues |
$ | 57 | $ | 60 | ($3 | ) | (4.8 | %) | ||||||||
Increase (Decrease) | ||||||||||||||||
Weather Data: | 2010 | 2009 | Amount | Percent | ||||||||||||
Heating Degree Days |
||||||||||||||||
Three Months Ended March 31 |
10,356 | 9,254 | 1,102 | 11.9 | % | |||||||||||
10-Year Average |
9,885 | 9,901 | (16 | ) | (0.2 | %) |
* | Percent change calculated on un-rounded data; may not correspond to data shown in table |
The increase in gas sales volumes resulted in a $1 million, or 9.1%, increase in retail margin
revenues.
Through a Negotiated Sales Program (NSP) approved by the ACC, customers who receive gas
transmission services from UNS Gas may also elect to purchase gas from UNS Gas. Approximately one
half of the margin earned on these NSP sales is retained by UNS Gas, while the remainder benefits
retail customers through a credit to the PGA mechanism which reduces the gas commodity price.
FACTORS AFFECTING RESULTS OF OPERATIONS
Rates
2010 UNS Gas Rate Order
In November 2008, UNS Gas filed a general rate case with the ACC on a cost of service basis
requesting a $10 million, or a 6% base rate increase. On March 31, 2010 the ACC issued an order
authorizing a 2%, or $3 million base rate increase effective April 2010.
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Test year 12 months ended June 30, 2008 | Requested by UNS Gas | 2010 ACC Order | ||
Original cost rate base |
$182 million | $180 million | ||
Revenue deficiency |
$10 million | $3 million | ||
Total rate increase (over test year revenues) |
6% | 2% | ||
Cost of equity |
11.0% | 9.5% | ||
Actual capital structure |
50% equity / 50% debt | 50% equity / 50% debt | ||
Weighted average cost of capital |
8.75% | 8.0% | ||
Rate of return on fair value rate base |
6.80% | 5.75% |
Energy Cost Adjustment Mechanism
UNS Gas retail rates include a PGA mechanism intended to address the volatility of natural gas
prices and allow UNS Gas to recover its actual commodity costs, including transportation, through a
price adjustor. The difference between UNS Gas actual monthly gas and transportation costs and
the rolling 12-month average cost of gas and transportation is deferred and recovered from or
returned to customers through the PGA mechanism.
The PGA mechanism has two components, the PGA factor and the PGA surcharge or credit. The PGA
factor is a mechanism that calculates the twelve-month rolling weighted average gas cost and
automatically adjusts monthly, subject to limitations on how much the price per therm may change in
a twelve month period. The annual cap on the maximum increase in the PGA factor is $0.15 per therm
in a twelve month period.
At any time UNS Gas PGA bank balance is under-recovered, UNS Gas may request a PGA surcharge with
the goal of collecting the amount deferred from customers over a period deemed appropriate by the
ACC. When the PGA bank balance reaches an over-collected balance of $10 million on a billed to
customers basis, UNS Gas is required to make a filing so that the ACC can determine how the
over-collected balance should be returned to customers. In October 2009, the ACC approved a PGA
surcredit of $0.08 per therm, effective November 2009 through October 2010 or until the balance
reaches zero. On March 31, 2010, the PGA bank balance was over-collected by $5 million.
Fair Value Measurements
The following table sets forth, by level within the fair value hierarchy, UNS Gas financial assets
and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2010.
Financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement.
UNS Gas | ||||||||||||||||
March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | Total | |||||||||||||
Cash Equivalents(1) |
$ | 24 | $ | | $ | | $ | 24 | ||||||||
Cash Collateral(2) |
| 3 | | 3 | ||||||||||||
Energy Contracts(3) |
| (10 | ) | | (10 | ) | ||||||||||
Total |
$ | 24 | $ | (7 | ) | $ | | $ | 17 | |||||||
(1) | Cash Equivalents are based on observable market prices and are comprised of the fair value of money market funds, commercial paper and certificates of deposit. | |
(2) | Collateral provided to energy contract counterparties to reduce credit risk exposure. | |
(3) | Energy contracts include gas swap agreements (Level 2) entered into to take advantage of favorable market conditions and reduce exposure to energy price risk. They are valued using New York Mercantile Exchange (NYMEX) pricing, adjusted for basin difference. The amounts include current and non-current liabilities and are net of current and non-current assets. |
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Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Outlook
UNS Gas capital requirements consist primarily of capital expenditures. In the first three months
of 2010, capital expenditures were $2 million. UNS Gas expects internal cash flows to fund its
future operating activities and a large portion of its construction expenditures. If natural gas
prices rise and UNS Gas is not allowed to recover its projected gas costs or PGA bank balance on a
timely basis, UNS Gas may require additional funding to meet operating and capital requirements.
Sources of funding future capital expenditures could include draws on the revolving credit
facility, additional credit lines, the issuance of long-term debt, or capital contributions from
UniSource Energy.
Operating Cash Flow and Capital Expenditures
The table below provides summary cash flow information for UNS Gas.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Cash provided by (used in): |
||||||||
Operating Activities |
$ | 4 | $ | 11 | ||||
Investing Activities |
(2 | ) | (4 | ) | ||||
Financing Activities |
| | ||||||
Net Increase (Decrease) in Cash |
2 | 7 | ||||||
Beginning Cash |
31 | 7 | ||||||
Ending Cash |
$ | 33 | $ | 14 | ||||
Operating cash flows decreased in the first three months of 2010 due primarily to the return of
over-collected gas costs to customers.
UNS Gas/UNS Electric Revolver
The UNS Gas/UNS Electric Revolver is a $60 million unsecured revolving credit facility which
matures in August 2011. Either borrower may borrow up to a maximum of $45 million so long as the
combined amount borrowed does not exceed $60 million.
The UNS Gas/UNS Electric Revolver contains restrictions on additional indebtedness, liens, mergers
and sales of assets; it also contains a maximum leverage ratio and a minimum cash flow to interest
coverage ratio for each borrower. UNS Gas expects to draw upon the UNS Gas/UNS Electric Revolver
from time to time for seasonal working capital purposes, to fund a portion of its capital
expenditures or to issue letters of credit to provide credit enhancement for its energy procurement
and hedging activities. As of March 31, 2010, UNS Gas and UNS Electric were each in compliance
with the terms of the UNS Gas/UNS Electric Revolver. As of April 30, 2010, UNS Gas had no
outstanding borrowings and no outstanding letters of credit under the UNS Gas/UNS Electric
Revolver.
Interest Rate Risk
UNS Gas is subject to interest rate risk resulting from changes in interest rates on its borrowings
under its revolving credit facility. The interest paid on revolving credit borrowings is variable.
As a result of recent volatility in interest rates, UNS Gas may be required to pay higher rates of
interest on borrowings under its revolving credit facility. See Item 3. Quantitative and
Qualitative Disclosures about Market Risk, Credit Risk, below.
Senior Unsecured Notes
UNS Gas has $100 million of senior unsecured notes outstanding consisting of $50 million at 6.23%
due in 2011 and $50 million at 6.23% due in 2015, each of which are guaranteed by UES. The note
purchase agreement for UNS Gas restricts transactions with affiliates, mergers, liens, restricted
payments and incurrence of indebtedness, and also contains a minimum net worth test. As of March
31, 2010, UNS Gas was in compliance with the terms of its note purchase agreement.
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Table of Contents
Contractual Obligations
There have been no significant changes in UNS Gas contractual obligations or other commercial
commitments from those reported in our 2009 Annual Report on Form 10-K, other than the following
purchase obligations entered into in 2010:
2015 | ||||||||||||||||||||||||||||
Payment Due in Years | and | |||||||||||||||||||||||||||
Ending December 31, | 2010 | 2011 | 2012 | 2013 | 2014 | after | Total | |||||||||||||||||||||
-Millions of Dollars- | ||||||||||||||||||||||||||||
Purchase Obligations: |
||||||||||||||||||||||||||||
Fuel |
$ | | $ | 1 | $ | 1 | $ | | $ | | $ | | $ | 2 |
Dividends on Common Stock
In April 2010, UNS Gas paid a dividend of $10 million to UniSource Energy. The note purchase
agreement for UNS Gas contains restrictions on dividends. UNS Gas may pay dividends so long as (a)
no default or event of default exists and (b) it could incur additional debt under the debt
incurrence test. As of March 31, 2010, UNS Gas was in compliance with the terms in its note
purchase agreement. See Senior Unsecured Notes, above.
UNS ELECTRIC
RESULTS OF OPERATIONS
UNS Electric reported net income of $3 million in the first quarter of 2010 compared with net
income of $1 million in the first quarter of 2009.
Similar to TEP, UNS Electrics operations are generally seasonal in nature, with peak energy demand
occurring in the summer months.
The table below provides summary financial information for UNS Electric.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Retail Electric Revenues |
$ | 38 | $ | 44 | ||||
Wholesale Electric Revenues |
3 | 1 | ||||||
Total Operating Revenues |
41 | 45 | ||||||
Purchased Energy Expense |
26 | 21 | ||||||
Fuel Expense |
2 | 4 | ||||||
Transmission Expense |
3 | 2 | ||||||
Increase (Decrease) to reflect PPFAC Recovery |
(4 | ) | 6 | |||||
Other Operations and Maintenance Expense |
6 | 5 | ||||||
Depreciation and Amortization |
4 | 3 | ||||||
Taxes Other Than Income Taxes |
1 | 1 | ||||||
Total Other Operating Expenses |
38 | 42 | ||||||
Operating Income |
3 | 3 | ||||||
Other Income |
3 | | ||||||
Total Interest Expense |
2 | 2 | ||||||
Income Tax Expense |
1 | | ||||||
Net Income |
$ | 3 | $ | 1 | ||||
The increase in net income in the first three months of 2010 is due primarily to $3 million of
pre-tax income related to a settlement with APS for refunds related to transactions with the
California Power Exchange.
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The table below shows UNS Electrics kWh sales and revenues for the first quarters of 2010 and
2009.
Increase (Decrease) | ||||||||||||||||
Three Months Ended March 31, | 2010 | 2009 | Amount | Percent* | ||||||||||||
Energy Sales, kWh (in millions) |
||||||||||||||||
Electric Retail Sales: |
||||||||||||||||
Residential |
175 | 166 | 9 | 5.3 | % | |||||||||||
Commercial |
131 | 134 | (3 | ) | (1.8 | %) | ||||||||||
Industrial |
52 | 38 | 14 | 35.1 | % | |||||||||||
Mining |
47 | 34 | 13 | 38.1 | % | |||||||||||
Public Authorities |
1 | 1 | | (7.5 | %) | |||||||||||
Total Electric Retail Sales |
406 | 373 | 33 | 8.8 | % | |||||||||||
Electric Wholesale Sales |
69 | 38 | 32 | 84.7 | % | |||||||||||
Total Electric Sales |
475 | 411 | 65 | 16.0 | % | |||||||||||
Electric Retail Revenues (in millions): |
||||||||||||||||
Retail Margin Revenues: |
||||||||||||||||
Residential |
$ | 4 | $ | 4 | $ | | 4.7 | % | ||||||||
Commercial |
5 | 5 | | (0.4 | %) | |||||||||||
Industrial |
2 | 1 | 1 | 16.8 | % | |||||||||||
Mining |
1 | 1 | | 27.3 | % | |||||||||||
Public Authorities |
| | | 3.6 | % | |||||||||||
Total Retail Margin Revenues |
$ | 12 | $ | 11 | $ | 1 | 5.9 | % | ||||||||
Retail Fuel Revenues |
23 | $ | 31 | (8 | ) | (25.2 | %) | |||||||||
DSM and REST Revenues |
2 | 1 | 1 | NM | ||||||||||||
Total Retail Revenues |
37 | 43 | (6 | ) | (14.4 | %) | ||||||||||
Electric Wholesale Revenues |
3 | 1 | 2 | NM | ||||||||||||
Total Electric Revenues |
$ | 40 | $ | 44 | $ | (4 | ) | (6.8 | %) | |||||||
Weather Heating Degree Days | 2010 | 2009 | ||||||||||||||
Three Months Ended March 31 |
3,570 | 3,121 | 449 | 14.4 | % | |||||||||||
10-Year Average |
3,389 | 3,364 | 25 | 0.7 | % |
* | Percent change calculated on un-rounded data; may not correspond to data shown in table |
In the first quarter of 2010, residential kWh sales were 5.3% higher than the same period last year
due primarily to cold winter weather. Mining sales also increased due to the impact of a mining
customer operating at a higher level of production than last year. Industrial kWh sales also
improved due to the impact of a new customer. Total retail kWh sales in the first quarter of 2010
increased by 8.8% compared with the same period last year, which led to a $1 million or 5.9%
increase in retail margin revenues. UNS Electrics retail customer count did not change materially
compared with March 31, 2009.
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FACTORS AFFECTING RESULTS OF OPERATIONS
Rates
2009 General Rate Case Filing
On April 30, 2009, UNS Electric filed a rate case application with the ACC, which is summarized
below.
Requested by | ||||||
Test year December 31, 2008 | UNS Electric | |||||
Original cost rate base
|
$176 million | |||||
Revenue deficiency
|
$13.5 million | |||||
Total rate increase (over test year revenues)
|
7.4% | |||||
Cost of debt
|
7.05% | |||||
Cost of equity
|
11.40% | |||||
Actual capital structure
|
46% equity / 54% debt | |||||
Weighted average cost of capital
|
9.04% | |||||
Fair Value Rate Base
|
$265 million | |||||
Rate of Return on Fair Value Rate Base
|
6.88% |
UNS Electrics filing also included a proposal to acquire, and put into its rate base, BMGS, the
gas-fired facility in UNS Electrics service territory that is owned and operated by UED. The
proposed acquisition and inclusion of BMGS in rate base would not impact the amount of the total
rate increase requested by UNS Electric. The ACC staff testimony recommended a base revenue
increase of approximately $8 million. A hearing before an ACC administrative law judge concluded
in February 2010. UNS Electric expects that the ACC will issue a final order in mid 2010.
Purchased Power and Fuel Adjustment Clause
UNS Electrics PPFAC mechanism has a forward component and a true-up component. The forward
component of the PPFAC rate is based on forecasted fuel and purchased power costs. The cap on the
PPFAC forward component, over the 6.9 cents per kWh in base rates, is 1.73 cents per kWh. The
true-up component reconciles actual fuel and purchased power costs with the amounts collected in
the prior year and any amounts under/over-collected will be collected/credited from/to customers.
Fair Value Measurements
The following table sets forth, by level within the fair value hierarchy, UNS Electrics financial
assets and liabilities that were accounted for at fair value on a recurring basis as of March 31,
2010. Financial assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
UNS Electric | ||||||||||||||||
March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | Total | |||||||||||||
Cash Equivalents(1) |
$ | 3 | $ | | $ | | $ | 3 | ||||||||
Cash Collateral(2) |
| 1 | | 1 | ||||||||||||
Energy Contracts(3) |
| (5 | ) | (14 | ) | (19 | ) | |||||||||
Total |
$ | 3 | $ | (4 | ) | (14 | ) | $ | (15 | ) | ||||||
(1) | Cash Equivalents are based on observable market prices and are comprised of the fair value of money market funds. | |
(2) | Collateral provided to energy contract counterparties to reduce credit risk exposure. | |
(3) | Energy contracts include gas swap agreements (Level 2), forward power purchase and sales contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to take advantage of favorable market conditions and reduce exposure to energy price risk. The amounts include current and non-current liabilities and are net of current and non-current assets. The valuation techniques are described below. |
59
Table of Contents
UNS Electric recorded in the first quarter of 2010, unrealized losses of $7 million in net
regulatory assets, of which $6 million relates to the change in the fair value of forward power
contracts classified as Level 3 in the fair value hierarchy. The remaining $1 million relates to
the change in the fair value of gas swap agreements, classified as Level 2 in the fair value
hierarchy. These changes in fair value were primarily due to lower forward power prices and
increased derivative volumes on forward power contracts and due to lower forward gas prices on gas
swap agreements.
UNS Electric primarily applies the market approach for recurring fair value measurements and
endeavors to utilize the best available information. Where observable inputs are available for
substantially the full term of the asset or liability, such as gas swap derivatives valued using
New York Mercantile Exchange (NYMEX) pricing, adjusted for basin differences, the instrument is
categorized in Level 2.
Derivatives valued using an aggregate pricing service or published prices that represent a
consensus reporting of multiple brokers are categorized in Level 3. For both power and gas prices,
UNS Electric obtains quotes from brokers, major market participants, exchanges, or industry
publications as well as its own price experience from active transactions in the market. UNS
Electric primarily uses one set of quotations each for power and for gas, and then uses the other
sources as validation of those prices. The broker providing quotes for power prices states that
the market information provided is indicative only, but believes it to be reflective of market
conditions as of the time and date indicated. In addition, energy derivatives include contracts
where published prices are not readily available. These include contracts for delivery periods
during non-standard time blocks, contracts for delivery during only a few months of a given year
when prices are quoted only for the annual average, or contracts for delivery at illiquid delivery
points. In these cases, UNS Electric applies certain management assumptions to value such
contracts. These assumptions include applying percentage multipliers to value non-standard time
blocks, applying historical price curve relationships to calendar year quotes, and including
adjustments for transmission and line losses to value contracts at illiquid delivery points. We
also consider the impact of counterparty credit risk using current and historical default and
recovery rates as well as our own credit risk using credit default swap data. UNS Electric reviews
these assumptions on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Outlook
In the first three months of 2010, UNS Electrics capital expenditures were $5 million. UNS
Electric expects internal cash flows to fund a portion of its construction expenditures.
Additional sources of funding future capital expenditures could include draws on the UNS Gas/UNS
Electric Revolver, additional credit lines, the issuance of long-term debt, or capital
contributions from UniSource Energy.
UNS Electrics operating cash flows are not sufficient to cover its costs and fund all of its
capital expenditures. UNS Electric may need to rely more heavily on external funding sources for
capital expenditures until it receives a decision in the rate case UNS Electric filed in April
2009. See UniSource Energy Consolidated, Outlook and Strategies, and UniSource Energy
Consolidated, Liquidity and Capital Resources, Liquidity, Access to Revolving Credit Facilities,
above for more information regarding the potential impact of current financial market conditions.
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Table of Contents
Operating Cash Flow and Capital Expenditures
The table below provides summary cash flow information for UNS Electric.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Cash provided by (used in): |
||||||||
Operating Activities |
$ | 1 | $ | 14 | ||||
Investing Activities |
(5 | ) | (8 | ) | ||||
Financing Activities |
2 | (8 | ) | |||||
Net Increase (Decrease) in Cash |
(2 | ) | (2 | ) | ||||
Beginning Cash |
10 | 9 | ||||||
Ending Cash |
$ | 8 | $ | 7 | ||||
Operating cash flows decreased in the first three months of 2010 due to: lower refunds of cash
collateral deposits made with power and gas trading counterparties; and an increase in purchased
energy costs.
UNS Gas/UNS Electric Revolver
See UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver above for a description
of UNS Electrics unsecured revolving credit agreement.
The UNS Gas/UNS Electric Revolver contains restrictions on additional indebtedness, liens, mergers
and sales of assets; it also contains a maximum leverage ratio and a minimum cash flow to interest
coverage ratio for each borrower. UNS Electric expects to draw upon the UNS Gas/UNS Electric
Revolver from time to time for seasonal working capital purposes, to fund a portion of its capital
expenditures or to issue letters of credit to provide credit enhancement for its energy procurement
and hedging activities. At April 30, 2010, UNS Electric had $16 million outstanding under the UNS
Gas/UNS Electric Revolver.
Senior Unsecured Notes
UNS Electric has $100 million of senior unsecured notes outstanding, consisting of $50 million due
in 2015 and $50 million due in 2023. The notes are guaranteed by UES. The note purchase agreement
for UNS Electric contains certain restrictive covenants, including restrictions on transactions
with affiliates, mergers, liens to secure indebtedness, restricted payments, and incurrence of
indebtedness. As of March 31, 2010, UNS Electric was in compliance with the terms of its note
purchase agreement.
Contractual Obligations
There have been no significant changes in UNS Electrics contractual obligations or other
commercial commitments from those reported in our 2009 Annual Report on Form 10-K other than the
following purchase obligations entered into in 2010:
2015 | ||||||||||||||||||||||||||||
Payment Due in Years | and | |||||||||||||||||||||||||||
Ending December 31, | 2010 | 2011 | 2012 | 2013 | 2014 | after | Total | |||||||||||||||||||||
-Millions of Dollars- | ||||||||||||||||||||||||||||
Purchase Obligations: |
||||||||||||||||||||||||||||
Purchased Power |
$ | | $ | 5 | $ | 2 | $ | | $ | | $ | | $ | 7 |
Dividends on Common Stock
The note purchase agreement for UNS Electric contains restrictions on dividends. UNS Electric may
pay dividends so long as (a) no default or event of default exists and (b) it could incur
additional debt under the debt incurrence test. As of March 31, 2010, UNS Electric was in
compliance with the terms of its note purchase agreement. See Senior Unsecured Notes, above. As
of March 31, 2010 UNS Electric has not paid dividends to UniSource Energy. UNS Electrics ability
to pay dividends will depend on the outcome of the rate case filed in April 2009, the need for
capital expenditures and various other factors.
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OTHER NON-REPORTABLE BUSINESS SEGMENTS
RESULTS OF OPERATIONS
The table below summarizes the income (loss) for the other non-reportable segments.
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
UED |
$ | 1 | $ | 1 | ||||
Millennium |
1 | | ||||||
UniSource Energy Parent Company |
(1 | ) | (1 | ) | ||||
Total Other |
$ | 1 | $ | | ||||
UniSource Energy Parent Company
UniSource Energy parent company expenses include interest expense (net of tax) related to the
UniSource Energy Convertible Senior Notes and the UniSource Credit Agreement. In 2009, UniSource
Energy had capital expenditures of $8 million at the parent level related to the purchase of land
and site development to construct a new headquarters building. In the first three months of 2010,
UniSource Energys parent-level capital expenditures were $1 million.
UED
In March 2009, UED entered into a 364-day $30 million term loan facility that is guaranteed by
UniSource Energy and is secured by substantially all of the assets of UED, which primarily consist
of BMGS and a mortgage on UEDs leasehold interest in the real property on which BMGS is located.
UED distributed the loan proceeds to UniSource Energy, which in turn made a capital contribution to
TEP. UED has the option of paying interest at LIBOR plus 3% or an alternate base rate plus 2%.
In February 2010, UED made an additional borrowing under the facility, resulting in $35 million of
outstanding debt, and extended the maturity of the debt for two years to March 2012. The loan
proceeds were used to pay a $9 million dividend to UniSource Energy.
The $30 million dividend paid in 2009 represented a return of capital distribution, as did $4
million of the $9 million of dividends paid in the first quarter of 2010.
In the first three months of 2010 and 2009, UED recorded after-tax income of $1 million related to
the operation of BMGS.
FACTORS AFFECTING RESULTS OF OPERATIONS
Millennium Investments
Millennium is in the process of exiting its remaining investments. In March 2010, Millennium sold
its interest in Nations Energy for an after-tax gain of less than $1 million. At March 31, 2010,
Millenniums investment balance was $10 million and its cash balance was $3 million. In the first
quarter of 2010, Millennium paid dividends of $6 million to UniSource Energy compared with $3
million in the first quarter of 2009.
The following table sets forth, by level within the fair value hierarchy, Millenniums financial
assets and liabilities that were accounted for at fair value on a recurring basis as of March 31,
2010. Financial assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
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March 31, 2010 | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | Total | |||||||||||||
Cash Equivalents (1) |
$ | 2 | $ | | $ | | $ | 2 | ||||||||
Equity Investments (2) |
| | 6 | 6 | ||||||||||||
Total |
$ | 2 | $ | | $ | 6 | $ | 8 | ||||||||
(1) | Cash Equivalents are based on observable market prices and are comprised of the fair value of money market funds. | |
(2) | Equity Investments are, in the absence of readily ascertainable market values, based on the lower of the investment partners valuations or managements valuation and comprise Millenniums equity investment in unregulated businesses. These investments are included in Investments and Other Property Other in the UniSource Energy balance sheet. |
CRITICAL ACCOUNTING ESTIMATES
There have been no significant changes in our accounting policies from those disclosed in our Form
10-K for the year ended December 31, 2009.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
The following recently issued accounting standards are not yet reflected in UniSource Energy and
TEP financial statements:
| The FASB issued authoritative guidance for multiple deliverable revenue arrangements that provides another alternative for determining the selling price of deliverables and eliminates the residual method of allocating consideration. In addition, this pronouncement requires expanded qualitative and quantitative disclosures and is effective for revenue arrangements entered into after January 1, 2011. We are evaluating the impact of this pronouncement. |
| The FASB issued amendments that require some new disclosures and clarify some existing disclosure requirements about fair value measurements. The amendments are effective for interim and annual reporting periods beginning January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning January 1, 2011. We are evaluating the impact of these new disclosures on our financial statements. See Financial Statements Note 10 for our current fair value disclosures. |
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. UniSource Energy and TEP are including the following
cautionary statements to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by or for
UniSource Energy or TEP in this Quarterly Report on Form 10-Q. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not statements of historical facts.
Forward-looking statements may be identified by the use of words such as anticipates,
estimates, expects, intends, plans, predicts, projects, and similar expressions. From
time to time, we may publish or otherwise make available forward-looking statements of this nature.
All such forward-looking statements, whether written or oral, and whether made by or on behalf of
UniSource Energy or TEP, are expressly qualified by these cautionary statements and any other
cautionary statements which may accompany the forward-looking statements. In addition, UniSource
Energy and TEP disclaim any obligation to update any forward-looking statements to reflect events
or circumstances after the date of this report.
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Forward-looking statements involve risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed in the forward-looking statements. We express
our expectations, beliefs and projections in good faith and believe them to have a reasonable
basis. However, we make no assurances that managements expectations, beliefs or projections will
be achieved or accomplished. We have identified the following important factors that could cause
actual results to differ materially from those discussed in our forward-looking statements. These
may be in addition to other factors and matters discussed in Item 1A. Risk Factors, Item 2.
Managements Discussion and Analysis, and other parts of this report: state and federal regulatory
and legislative decisions and actions, including environmental legislation and renewable energy
requirements; regional economic and market conditions which could affect customer growth and energy
usage; weather variations affecting energy usage; the cost of debt and equity capital and access to
capital markets; the performance of the stock market and changing interest rate environment, which
affect the value of the companys pension and other postretirement benefit plan assets and the
related contribution requirements and expense; unexpected increases in O&M expense; resolution of
pending litigation matters; changes in accounting standards; changes in critical accounting
estimates; the ongoing restructuring of the electric industry; changes to long-term contracts; the
cost of fuel and power supplies; and performance of TEPs generating plants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in this Item identifies material changes from information included in
Part II, Item 7A in UniSource Energy and TEPs Annual Report on Form 10-K for the year ended
December 31, 2009, in addition to the interim condensed consolidated financial statements and
accompanying notes presented in Item 1 and Managements Discussion and Analysis presented in Item 2
of this Form 10-Q.
Interest Rate Risk
In January 2010, TEP reduced its exposure to variable interest rate risk by converting the interest
rate on its $130 million principal amount of 2008 Pima B Bonds from a variable rate to a fixed rate
of 5.75% through maturity in 2029.
Commodity Price Risk
TEP
TEP is exposed to commodity price risk primarily relating to changes in the market price of
electricity, natural gas, coal and emission allowances. This risk is mitigated through a PPFAC
mechanism which fully recovers the actual retail fuel and purchased power costs incurred on a
timely basis from TEPs retail customers. The commodity price risk from changes in the price of
coal, electricity and emission allowances have not changed materially from the commodity price
risks reported in our 2009 Annual Report on Form 10-K.
Natural Gas
In addition to energy from its coal-fired facilities, TEP typically uses purchased power,
supplemented by generation from its gas-fired units to meet the summer peak demands of its retail
customers and to meet local reliability needs. Some of these purchased power contracts are price
indexed to natural gas prices. Short-term and spot power purchase prices are also closely
correlated to natural gas prices. Due to its increasing seasonal gas and purchased power usage,
TEP hedges a portion of its total natural gas exposure from plant fuel, gas-indexed purchase power
and spot market purchases with fixed price contracts for a maximum of three years. TEP purchases
its remaining gas fuel needs and purchased power in the spot and short-term markets.
Purchases and Sales of Energy
To manage its exposure to energy price risk, TEP enters into forward contracts to buy or sell
energy at a specified price and future delivery period. Generally, TEP commits to future sales
based on expected excess generating capability, forward prices and generation costs, using a
diversified market approach to provide a balance between long-term and spot energy sales. TEP
generally enters into forward purchases during its summer peaking periods to ensure it can meet its
load and reserve requirements and account for other contracts and resource contingencies. TEP also
enters into limited forward purchases and sales to optimize its resource portfolio and take
advantage of locational differences in price. These positions are managed on both a volumetric and
dollar basis and are closely monitored using risk management policies and procedures overseen by
the Risk Management Committee.
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To adjust the value of its commodity derivatives to fair value in Regulatory Assets or Regulatory
Liabilities, TEP recorded the following net unrealized gains (losses):
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Unrealized Gains (Losses) |
$ | (3 | ) | $ | (14 | ) |
As required by fair value accounting rules, for the three months ended March 31, 2010, TEP
considered the impact of non-performance risk in the measurement of fair value of its derivative
assets and derivative liabilities net of collateral posted. The adjustment required for TEP was
less than $0.5 million at March 31, 2010.
Sensitivity Analysis of Derivatives
The chart below displays the valuation methodologies and maturities of TEPs power and gas
derivative contracts.
Unrealized Gain (Loss) of TEPs | ||||||||||||||||
Hedging and Trading Activities | ||||||||||||||||
-Millions of Dollars- | ||||||||||||||||
Total | ||||||||||||||||
Maturity 0 6 | Maturity 6 12 | Maturity | Unrealized | |||||||||||||
Source of Fair Value at March 31, 2010 | months | months | over 1 yr. | Gain (Loss) | ||||||||||||
Prices actively quoted |
$ | (10 | ) | $ | | $ | (3 | ) | $ | (13 | ) | |||||
Prices based on models and other
valuation methods |
2 | | (2 | ) | | |||||||||||
Total |
$ | (8 | ) | $ | | $ | (5 | ) | $ | (13 | ) | |||||
TEP uses sensitivity analysis to measure the impact of favorable and unfavorable changes in market
prices on the fair value of its derivative forward contracts. Unrealized gains and losses are
recorded as either a regulatory asset or regulatory liability. As contracts settle, the unrealized
gains and losses are reversed and realized gains or losses are recorded to the PPFAC. The chart
below summarizes the change in unrealized gains or losses if market prices increase or decrease by
10%.
-Millions of Dollars- | ||||||||
Change in Market Price as of March 31, 2010 | 10% Increase | 10% Decrease | ||||||
Non-Cash Flow Hedges |
||||||||
Forward gas contracts |
$ | 3 | $ | (3 | ) | |||
Forward power sales and purchase contracts |
(1 | ) | 1 | |||||
Cash Flow Hedges |
||||||||
Forward power purchase contracts |
1 | (1 | ) |
UNS Gas
UNS Gas is subject to commodity price risk, primarily from the changes in the price of natural gas
purchased for its customers. This risk is mitigated through the PGA mechanism which provides an
adjustment to UNS Gas retail rates to recover the actual costs of gas and transportation.
To adjust the value of its commodity derivatives to fair value in Regulatory Assets or Regulatory
Liabilities, UNS Gas recorded the following net unrealized gains (losses):
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Unrealized Gains (Losses) |
$ | (3 | ) | $ | (1 | ) |
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For UNS Gas forward gas purchase contracts, a 10% decrease in market prices would result in an
increase in unrealized net losses reported as net regulatory assets of $3 million, while a 10%
increase in market prices would result in a decrease in unrealized net losses reported as net
regulatory assets of $3 million.
UNS Electric
UNS Electric is exposed to commodity price risk from changes in the price for electricity and
natural gas. This risk is mitigated through a PPFAC mechanism which fully recovers the costs
incurred on a timely basis.
To adjust the value of its commodity derivatives to fair value in Regulatory Assets or Regulatory
Liabilities, UNS Electric recorded the following net unrealized gains (losses):
Three Months Ended March 31, | 2010 | 2009 | ||||||
-Millions of Dollars- | ||||||||
Unrealized Gains (Losses) |
$ | (7 | ) | $ | (11 | ) |
For UNS Electrics forward power sales and purchase contracts, a 10% decrease in market prices
would result in an increase in unrealized net losses reported as net regulatory assets of $9
million, while a 10% increase in market prices would result in a decrease in unrealized net losses
reported as net regulatory assets of $9 million.
For UNS Electrics forward gas purchase contracts, a 10% decrease in market prices would result in
an increase in unrealized net losses reported as net regulatory assets of $1 million, while a 10%
increase in market prices would result in a decrease in unrealized net losses reported as
regulatory assets of $1 million.
Credit Risk
UniSource Energy is exposed to credit risk in its energy-related marketing, trading and hedging
activities related to potential non-performance by counterparties.
As of March 31, 2010, TEPs total credit exposure related to its wholesale marketing and gas
hedging activities was approximately $15 million, including $4 million of inter-company exposure to
UNS Electric. TEPs total exposure to non-investment grade or non-rated counterparties was $8
million.
At March 31, 2010, TEP had $3 million in credit enhancements, consisting of $2 million in cash and
$1 million in letters of credit, posted with counterparties, and did not hold any collateral from
its counterparties.
At March 31, 2010, UNS Gas had no mark-to-market counterparty credit exposure under its supply and
hedging contracts. As of March 31, 2010, UNS Gas had posted $3 million in cash as credit
enhancements with its counterparties, and did not hold any collateral from counterparties.
At March 31, 2010, UNS Electric had no counterparty credit exposure under its supply and hedging
contracts. As of March 31, 2010, UNS Electric had posted $16 million in letters of credit and $1
million in cash collateral as credit enhancements with its counterparties and had not collected any
collateral margin from its counterparties.
ITEM 4. CONTROLS AND PROCEDURES
UniSource Energy and TEPs Chief Executive Officer and Chief Financial Officer supervised and
participated in UniSource Energy and TEPs evaluation of their disclosure controls and procedures
as such term is defined under Rule 13a 15(e) or Rule 15d 15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report.
Disclosure controls and procedures are controls and procedures designed to ensure that information
required to be disclosed in UniSource Energy and TEPs periodic reports filed or submitted under
the Exchange Act, is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. These disclosure controls and
procedures are also designed to ensure that information required to be disclosed by UniSource
Energy and TEP in the reports that they file or submit under the Exchange Act is accumulated and
communicated to management, including the principal executive and principal financial officers, or
person performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. Based upon the evaluation performed, UniSource Energy and TEPs Chief Executive Officer
and Chief Financial Officer concluded that UniSource Energy and TEPs disclosure controls and
procedures are effective.
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While UniSource Energy and TEP continually strive to improve their disclosure controls and
procedures to enhance the quality of their financial reporting, there has been no change in
UniSource Energy or TEPs internal
control over financial reporting during the first quarter of 2010 that has materially affected, or
is reasonably likely to materially affect, UniSource Energy or TEPs internal control over
financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Right of Way Matters
TEP was a
defendant in a class action filed on February 11, 2009, in the United States
District Court in Albuquerque, New Mexico by members of the Navajo Nation. The plaintiffs alleged,
among other things, that the rights of way for defendants transmission lines on Navajo lands were
improperly granted and that the compensation paid for such rights of way was inadequate. The
plaintiffs were requesting, among other things, that the transmission lines on these lands be
removed. In June 2009, TEP and the other defendants filed motions to dismiss the lawsuit on
procedural grounds. On March 31, 2010, the Court granted several of the defendants motions to
dismiss, and, as a result, dismissed the entirety of the plaintiffs case against all defendants.
The Court entered a final judgment dismissing the case on April 16, 2010.
There are no other pending material legal proceedings to which the Company is a party, other than
routine litigation incidental to the business of the Company. We discuss other legal proceedings
in Note 6 of Notes to Consolidated Financial Statements, Commitments and Contingencies and in
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 1A. RISK FACTORS
The business and financial results of UniSource Energy and TEP are subject to numerous risks and
uncertainties. The risks and uncertainties have not changed materially from those reported in our
2009 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities None.
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ITEM 5. OTHER INFORMATION
Ratio of Earnings to Fixed Charges
The following table reflects the ratio of earnings to fixed charges for UniSource Energy and TEP:
3 Months Ended | 12 Months Ended | |||||||
March 31, 2010 | March 31, 2010 | |||||||
UniSource Energy |
2.085 | 2.713 | ||||||
TEP |
1.699 | 2.814 |
For purposes of this computation, earnings are defined as pre-tax earnings from continuing
operations before minority interest, or income/loss from equity method investments, plus interest
expense and amortization of debt discount and expense related to indebtedness. Fixed charges are
interest expense, including amortization of debt discount and expense on indebtedness.
Environmental Matters
In April 2009, APS received a request from the EPA under section 114 of the Clean Air Act seeking
information about Four Corners. Four Corners, which is operated by APS, is comprised of five
coal-fired generating units. TEP
has a 7% ownership interest in two units, totaling 110 MW. APS is in the process of responding to
the EPAs request. TEP cannot predict the timing or outcome of this matter.
ITEM 6. EXHIBITS
See Exhibit Index.
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SIGNATURES
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 subsidiaries.
UNISOURCE ENERGY CORPORATION | ||||
(Registrant) |
||||
Date: May 3, 2010 | /s/ Kevin P. Larson | |||
Kevin P. Larson | ||||
Senior Vice President and Principal Financial Officer |
||||
TUCSON ELECTRIC POWER COMPANY | ||||
(Registrant) |
||||
Date: May 3, 2010 | /s/ Kevin P. Larson | |||
Kevin P. Larson | ||||
Senior Vice President and Principal Financial Officer | ||||
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EXHIBIT INDEX
**4 | (a) | | Loan Agreement, dated as of March 1, 2010, between Tucson Electric Power Company and JP Morgan Chase bank; as
Lender and Administrative agent. (Form 8-K dated March 5, 2010, File No. 4-13739 Exhibit 4(a)) |
|||
**4 | (b) | | Supplemental Indenture No. 10 creating a series of bonds designated as First Mortgage Bonds, Collateral Series
H, dated as of March 1, 2010. (Form 8-K dated March 5, 2010, File No. 4-13739 Exhibit 4(b)) |
|||
**10 | (a) | | Change in Control Agreement, date as of March 4, 2010, between Tucson Electric Power Company and Michael J.
DeConcini (including a schedule of other officers who are covered substantially by identical agreements).
(Form 8-K dated March 5, 2010, File No. 4-13739 Exhibit 10(a)) |
|||
12 | (a) | | Computation of Ratio of Earnings to Fixed Charges UniSource Energy. |
|||
12 | (b) | | Computation of Ratio of Earnings to Fixed Charges TEP. |
|||
15 | | Letter regarding unaudited interim financial information. |
||||
31 | (a) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act UniSource Energy, by Paul J. Bonavia. |
|||
31 | (b) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act UniSource Energy, by Kevin P. Larson. |
|||
31 | (c) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act TEP, by Paul J. Bonavia. |
|||
31 | (d) | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act TEP, by Kevin P. Larson. |
|||
*32 | | Statements of Corporate Officers (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). |
* | Pursuant to Item 601(b)(32)(ii) of Regulation S-K, this certificate is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. | |
** | Previously filed as indicated and incorporated by reference. |
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