UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Commission
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Registrant; State of Incorporation;
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IRS Employer |
File Number
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Address; and Telephone Number
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Identification Number |
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1-13739
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UNISOURCE ENERGY CORPORATION
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86-0786732 |
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(An Arizona Corporation) |
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One South Church Avenue, Suite 100 |
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Tucson, AZ 85701 |
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(520) 571-4000 |
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1-5924
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TUCSON ELECTRIC POWER COMPANY
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86-0062700 |
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(An Arizona Corporation) |
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One South Church Avenue, Suite 100 |
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Tucson, AZ 85701 |
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(520) 571-4000 |
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Securities registered pursuant to Section 12(b) of the Exchange Act:
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Name of Each Exchange |
Registrant
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Title of Each Class
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on Which Registered |
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UniSource Energy
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Common Stock, no par value
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New York Stock Exchange |
Corporation |
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Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of
the Securities Act of 1933.
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UniSource Energy Corporation
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Yes þ
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No o |
Tucson Electric Power Company
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Yes o
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No þ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act).
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UniSource Energy Corporation
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Yes o
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No þ |
Tucson Electric Power Company
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Yes þ
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No o |
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.
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UniSource Energy Corporation
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Yes þ
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No o |
Tucson Electric Power Company (1)
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Yes o
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No þ |
(1) As indicated above, 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).
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UniSource Energy Corporation
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Yes o
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No o |
Tucson Electric Power Company
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Yes o
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No o |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of each registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of accelerated filer,
large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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UniSource Energy Corporation
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-accelerated filer o
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Smaller Reporting Company o |
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Tucson Electric Power Company
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Large Accelerated Filer o
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Accelerated Filer o
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Non-accelerated filer þ
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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).
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UniSource Energy Corporation
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Yes o
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No þ |
Tucson Electric Power Company
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Yes o
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No þ |
The aggregate market value of UniSource Energy Corporation voting Common Stock held by
non-affiliates of the registrant was $933,280,480 based on the last reported sale price thereof on
the consolidated tape on June 30, 2009.
At February 23, 2010, 35,941,414 shares of UniSource Energy Corporation Common Stock, no par value
(the only class of Common Stock), were outstanding.
At February 23, 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.
Tucson Electric Power Company meets the conditions set forth in General Instructions (I)(1)(a) and
(b) on Form 10-K and is therefore filing this report with the reduced disclosure format.
Documents incorporated by reference: Specified portions of UniSource Energy Corporations Proxy
Statement relating to the 2010 Annual Meeting of Shareholders are incorporated by reference into
Part III.
Table of Contents
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v |
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PART I
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1 |
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1 |
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2 |
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2 |
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4 |
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7 |
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8 |
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9 |
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11 |
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12 |
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14 |
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14 |
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15 |
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15 |
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19 |
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20 |
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20 |
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26 |
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27 |
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27 |
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28 |
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28 |
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28 |
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29 |
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PART II
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29 |
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31 |
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31 |
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32 |
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33 |
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33 |
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33 |
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35 |
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36 |
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36 |
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41 |
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41 |
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ii
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49 |
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53 |
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60 |
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60 |
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61 |
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62 |
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65 |
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65 |
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66 |
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68 |
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70 |
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70 |
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71 |
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71 |
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76 |
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76 |
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77 |
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83 |
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83 |
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84 |
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86 |
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87 |
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88 |
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90 |
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91 |
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92 |
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93 |
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94 |
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96 |
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97 |
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98 |
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108 |
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119 |
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122 |
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129 |
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131 |
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138 |
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139 |
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141 |
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144 |
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153 |
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157 |
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161 |
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162 |
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163 |
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163 |
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164 |
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166 |
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169 |
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177 |
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177 |
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177 |
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iii
DEFINITIONS
The abbreviations and acronyms used in the 2009 Form 10-K are defined below:
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1992 Mortgage |
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TEPs Indenture of Mortgage and Deed of Trust, dated as of December 1, 1992,
to the Bank of New York Mellon, successor trustee, as supplemented. |
1999 Settlement Agreement |
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TEPs Settlement Agreement approved by the ACC in November 1999 that
provided for electric retail competition and transition asset recovery. |
2008 TEP Rate Order |
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A rate order issued by the ACC resulting in a new retail rate structure for TEP,
effective December 1, 2008. |
ACC |
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Arizona Corporation Commission. |
ALJ |
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Administrative Law Judge. |
AMT |
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Alternative Minimum Tax. |
APS |
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Arizona Public Service Company. |
BART |
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Best Available Retrofit Technology. |
BMGS |
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Black Mountain Generating Station. |
Btu |
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British thermal unit(s). |
CCB |
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Coal combustion byproducts. |
Capacity |
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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. |
Citizens |
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Citizens Communications Company. |
Collateral Trust Bonds |
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Bonds issued under the Indenture of Trust, dated as of August 1, 1998, of TEP
to The Bank of New York, successor
trustee. |
Common Stock |
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UniSource Energys common stock, without par value. |
Company or UniSource Energy |
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UniSource Energy Corporation. |
Cooling Degree Days |
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An index used to measure the impact of weather on energy usage
calculated by subtracting 75 from the average of the high and low
daily temperatures. |
DSM |
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Demand side management. |
Emission Allowance(s) |
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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 |
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The amount of power produced over a given period of time; measured
in MWh. |
EPA |
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The Environmental Protection Agency. |
EL Paso |
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El Paso Electric Company. |
EPNG |
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El Paso Natural Gas Company. |
ESP |
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Energy Service Provider. |
Express Line |
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A dedicated 345-kV transmission line from Springerville Unit 2 to TEPs retail
service area. |
FERC |
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Federal Energy Regulatory
Commission. |
Fixed CTC |
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Competition Transition Charge of approximately $0.009 per kWh that was
included in TEPs retail rate for the purpose of recovering TEPs TRA.
Approximately $58 million will be credited to customers through the
PPFAC. |
Four Corners |
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Four Corners Generating Station. |
GHG |
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Greenhouse gases. |
Haddington |
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Haddington Energy Partners II, LP, a limited partnership that funds
energy-related investments. |
Heating Degree Days |
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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. |
IDBs |
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Industrial development revenue or pollution control revenue bonds. |
IRS |
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Internal Revenue Service. |
kWh |
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Kilowatt-hour(s). |
kV |
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Kilovolt(s). |
LIBOR |
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London Interbank Offered Rate. |
v
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Luna |
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Luna Energy Facility. |
Mark-to-Market Adjustments |
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Forward energy sales and purchase contracts that are considered to be
derivatives are adjusted monthly by recording unrealized gains and losses
to reflect the market prices at the end of each month. |
Millennium |
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Millennium Energy Holdings, Inc., a wholly-owned subsidiary of
UniSource Energy. |
MMBtu |
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Million British Thermal Units. |
Mortgage Bonds |
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Bonds issued under the 1992 Mortgage. |
MW |
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Megawatt(s). |
MWh |
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Megawatt-hour(s). |
Navajo |
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Navajo Generating Station. |
NERC |
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North American Electric Reliability Corporation. |
NOx |
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Nitrogen oxide. |
PGA |
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Purchased Gas Adjuster, a retail rate mechanism designed to recover
the cost of gas purchased for retail gas customers. |
Pima Authority |
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The Industrial Development Authority of the County of Pima. |
PNM |
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Public Service Company of New Mexico. |
PNMR |
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PNM Resources. |
PPA |
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Purchased Power Agreement. |
PPFAC |
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Purchased Power and Fuel Adjustment Clause. |
PWMT |
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Pinnacle West Marketing and Trading. |
REST |
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Renewable Energy Standard and Tariff rules approved by the ACC in October
2006. |
Repurchased Bonds |
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$221 million of fixed-rate tax-exempt bonds that TEP purchased from
bondholders on May 11, 2005. |
Rules |
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Retail Electric Competition Rules. |
Sabinas |
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Carboelectrica Sabinas, S. de R.L. de C.V., a Mexican limited liability
company. Prior to June 2009, Millennium owned 50% of Sabinas. |
San Carlos |
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San Carlos Resources Inc., a wholly-owned subsidiary of TEP. |
San Juan |
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San Juan Generating Station. |
SO2 |
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Sulfur dioxide. |
Springerville |
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Springerville Generating Station. |
Springerville Coal Handling Facilities Leases |
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Leveraged lease arrangements relating to the coal handling facilities
serving Springerville. |
Springerville Common Facilities |
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Facilities at Springerville used in common with Springerville Unit 1 and
Springerville Unit 2. |
Springerville Common Facilities Leases |
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Leveraged lease arrangements relating to an undivided one-half
interest in certain Springerville Common Facilities. |
Springerville Unit 1 |
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Unit 1 of the Springerville Generating Station. |
Springerville Unit 1 Leases |
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Leveraged lease arrangement relating to Springerville Unit 1 and an
undivided one-half interest in certain Springerville Common Facilities. |
Springerville Unit 2 |
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Unit 2 of the Springerville Generating Station. |
Springerville Unit 3 |
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Unit 3 of the Springerville Generating Station. |
Springerville Unit 4 |
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Unit 4 of the Springerville Generating Station. |
SRP |
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Salt River Project Agricultural Improvement and Power District. |
Sundt |
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H. Wilson Sundt Generating Station (formerly known as the Irvington
Generating Station). |
Sundt Lease |
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The leveraged lease arrangement relating to Sundt Unit 4. |
Sundt Unit 4 |
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Unit 4 of the H. Wilson Sundt Generating Station. |
SWG |
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Southwest Gas Corporation. |
TEP |
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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 Letter of Credit Facility |
|
Letter of credit facility between TEP and a syndicate of Banks, dated as of April
30, 2008. |
TEP Revolving Credit Facility |
|
Revolving credit facility under the TEP Credit Agreement. |
vi
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Therm |
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A unit of heating value equivalent to 100,000 British thermal units (Btu). |
TRA |
|
Transition Recovery Asset, a $450 million regulatory asset established in TEPs 1999
Settlement Agreement that was fully recovered in May 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. |
UES |
|
UniSource Energy Services, Inc., an intermediate holding company
established to own the operating companies (UNS Gas and UNS
Electric) which acquired the Citizens Arizona gas and electric
utility assets in 2003. |
UniSource Energy 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 |
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UNS Electric, Inc., a wholly-owned subsidiary of UES, which acquired
the Citizens Arizona electric utility assets in 2003. |
UNS Gas |
|
UNS Gas, Inc., a wholly-owned subsidiary of UES, which acquired the
Citizens Arizona gas utility assets in 2003. |
UNS Gas/UNS Electric Revolver |
|
Revolving credit facility under the Amended and Restated Credit
Agreement among UNS Gas and UNS Electric as borrowers, and UES as
guarantor, and a syndicate of banks, dated as of August 11, 2006. |
Valencia |
|
Valencia power plant owned by UNS Electric. |
WAPA |
|
Western Area Power Administration. |
vii
PART I
This combined Form 10-K is being filed separately by UniSource Energy Corporation and Tucson
Electric Power Company (collectively, the Registrants). Information contained herein relating to
any individual registrant is filed by such registrant on its own behalf. TEP does not make any
representation as to information relating to any other subsidiary of UniSource Energy.
This Annual Report on Form 10-K contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. You should read forward-looking statements together with
the cautionary statements and important factors included in this Form 10-K. (See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations, Safe Harbor
for Forward-Looking Statements). Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance and underlying assumptions.
Forward-looking statements 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. 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.
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.
ITEM 1. BUSINESS
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 the outstanding common stock of 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 and UNS Electric.
TEP, an electric utility, provides electric service to the community of Tucson, Arizona. UES,
through its two operating subsidiaries, UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (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 December 31, 2009; 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.
K-1
BUSINESS SEGMENT CONTRIBUTIONS
The table below shows the contributions to our consolidated after-tax earnings by our three
business segments.
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|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
TEP |
|
$ |
89 |
|
|
$ |
4 |
|
|
$ |
53 |
|
UNS Gas |
|
|
7 |
|
|
|
9 |
|
|
|
4 |
|
UNS Electric |
|
|
6 |
|
|
|
4 |
|
|
|
5 |
|
Other (1) |
|
|
2 |
|
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated Net Income |
|
$ |
104 |
|
|
$ |
14 |
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes: UniSource Energy parent company expenses; income and losses from
Millennium investments and UED and interest expense (net of tax) on the UniSource Energy
Convertible Senior Notes and on the UniSource Energy Credit Agreement. |
References in this report to we and our are to UniSource Energy and its subsidiaries,
collectively.
Rates and Regulation of Business Segments
The Arizona Corporation Commission (ACC) regulates portions of TEP, UNS Gas and UNS Electrics
utility accounting practices and electricity rates. The ACC has authority over rates charged to
retail customers, the issuance of securities, and transactions with affiliated parties. Our
regulated utilities rates for retail electric and natural gas service are determined on a cost of
service basis. Rates are designed to provide, after recovery of allowable operating expenses, an
opportunity for us to earn a reasonable return on rate base. Rate base is generally determined by
reference to the original cost and reconstruction (net of depreciation) of utility plant in service
to the extent deemed used and useful, and to various adjustments for deferred taxes and other items
plus a working capital component. Over time, additions to utility plant in service increase rate
base and depreciation and retirement of utility plant reduce the rate base.
The Federal Energy Regulatory Commission (FERC) regulates the terms and prices of transmission
services and wholesale electricity sales, wholesale transport and purchases of natural gas and
portions of our accounting practices. TEP and UNS Electric have FERC tariffs to sell power at
market based rates.
TEP
TEP was incorporated in the State of Arizona in 1963. TEP is the principal operating subsidiary of
UniSource Energy. In 2009, TEPs electric utility operations contributed 79% of UniSource Energys
operating revenues and comprised 81% of its assets.
SERVICE AREA AND CUSTOMERS
TEP is a vertically integrated utility that provides regulated electric service to approximately
402,000 retail customers in Southeastern Arizona. TEPs service territory consists of a 1,155
square mile area and includes a population of approximately 1 million in the greater Tucson
metropolitan area in Pima County, as well as parts of Cochise County. TEP holds franchises to
provide electric distribution service to customers in the Cities of Tucson and South Tucson. These
franchises expire in 2026 and 2017, respectively. TEP also sells electricity to other utilities
and power marketing entities in the Western U.S.
Retail Customers
TEP provides electric utility service to a diverse group of residential, commercial, industrial,
and public sector customers. Major industries served include copper mining, cement manufacturing,
defense, health care, education, military bases and other governmental entities. TEPs retail
sales are influenced by several factors, including seasonal weather patterns and overall economic
climate.
K-2
The table below shows the percentage distribution of TEPs energy sales by major customer
class over the last three years. The retail energy consumption by customer class through 2012 is
expected to be similar to the historical distribution.
|
|
|
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|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Residential |
|
|
42 |
% |
|
|
41 |
% |
|
|
42 |
% |
Commercial |
|
|
21 |
% |
|
|
21 |
% |
|
|
21 |
% |
Non-mining Industrial |
|
|
23 |
% |
|
|
24 |
% |
|
|
24 |
% |
Mining |
|
|
11 |
% |
|
|
11 |
% |
|
|
10 |
% |
Public Authority |
|
|
3 |
% |
|
|
3 |
% |
|
|
3 |
% |
Two of TEPs largest retail customers are in the copper mining industry. TEPs kWh sales to mining
customers depend on a variety of factors including changes in supply and demand in the world copper
market and the economics of self-generation.
Local, regional, and national economic factors can impact the level of customer growth and the
financial condition and operations of TEPs large commercial and industrial customers and as a
result directly impact energy consumption. Economic conditions can also impact sales to
residential and small commercial customers if employment and consumer spending levels change.
As a result of weak economic conditions during 2008 and 2009, retail customer growth and energy
usage by retail customers at TEP were below the average levels experienced in prior years. In 2008
and 2009, TEPs average number of retail customers increased by less than 1% per year. This
compares with average annual increases of 2% from 2003 to 2007.
TEPs total retail kWh sales decreased by 1.4% in 2008 compared with 2007. This was the first
year-over-year decrease in TEPs retail kWh sales since 2002. In 2009, TEPs kWh sales once again
declined by 1.4% over the prior years levels. This compares with average annual increases in
retail kWh sales of 4% from 2003 to 2007. We cannot predict if the customer growth rate or sales
volumes will return to historic levels. However, we expect TEPs customer base to grow at a rate
of less than 1% in 2010 and approximately 1% in 2011.
Energy Service Providers
In 2001, all of TEPs retail customers became eligible to choose an alternative energy service
provider (ESP); however, none of TEPs retail customers are currently being serviced by an
alternative ESP. See Rates and Regulation, below for more information regarding the status of
retail competition in Arizona.
Wholesale Business
TEPs electric utility operations include the wholesale marketing of electricity to other utilities
and power marketers. Wholesale sales transactions are made on both a firm and interruptible basis.
A firm contract requires TEP to supply power on demand (except under limited emergency
circumstances), while an interruptible contract allows TEP to stop supplying power under defined
conditions. See Purchases and Interconnections, below.
Generally, TEP commits to future sales based on expected excess generating capability, forward
prices and generation costs, using a diversified portfolio approach to provide a balance between
long-term, mid-term and spot energy sales. When TEP expects to have excess generating capacity and
energy (usually in the first, second and fourth calendar quarters), its wholesale sales consist
primarily of two types of sales:
Long-term sales
Long-term wholesale sales contracts are for periods of more than one year. TEP typically uses its
own generation to serve the requirements of its long-term wholesale customers. TEP currently has
long-term contracts with three entities to sell firm capacity and energy:
|
|
Salt River Project Agricultural Improvement and Power District (SRP), 100 MW, expires in
May 2016. Under the current terms of the contract, TEP receives an annual demand charge of
approximately $22 million, while the cost of the energy sold is based on TEPs average
generation cost. Beginning in June 2011, SRP will purchase 876 MWhs annually, TEP will not
receive a demand charge and the price of energy will be based on a slight discount to the Dow
Jones Palo Verde Electricity Price Indexes (Palo Verde Index). |
|
|
|
Navajo Tribal Utility Authority (NTUA) expires in December 2015. TEP serves the portion of
NTUAs load that is not served from NTUAs allocation of federal hydroelectric power. Over
the last three years, sales to NTUA
averaged 225 MWh. Beginning in 2010, the price of 50% of the kWh sales from June to September
will be based on the Palo Verde Index. |
|
|
|
Tohono Oodham Utility Authority, 2 MW, expires in 2014. |
K-3
Short-term sales
Under forward contracts, TEP commits to sell a specified amount of capacity or energy at a
specified price over a given period of time, typically for one-month, three-month or one-year
periods. Under short-term sales, TEP sells energy in the daily or hourly markets at fluctuating
spot market prices and makes other non-firm energy sales. Beginning January 1, 2009, all revenues
from short-term wholesale sales offset fuel and purchased power costs that are passed through to
TEP retail customers. TEP uses short-term wholesale sales as part of its hedging strategy to
reduce customer exposure to fluctuating power prices. See Rates and Regulation, below.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, Tucson Electric Power Company, Factors Affecting Results of Operations, for additional
discussion of TEPs wholesale marketing activities.
GENERATING AND OTHER RESOURCES
At December 31, 2009, TEP owned or leased 2,229 MW of net generating capability, as set forth in
the following table:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
Unit |
|
|
|
|
|
|
Date |
|
|
Fuel |
|
|
Capability |
|
|
Operating |
|
|
TEPs Share |
|
Generating Source |
|
No. |
|
|
Location |
|
|
In Service |
|
|
Type |
|
|
MW |
|
|
Agent |
|
|
% |
|
|
MW |
|
Springerville Station(1) |
|
|
1 |
|
|
Springerville, AZ |
|
|
1985 |
|
|
Coal |
|
|
387 |
|
|
TEP |
|
|
100.0 |
|
|
|
387 |
|
Springerville Station |
|
|
2 |
|
|
Springerville, AZ |
|
|
1990 |
|
|
Coal |
|
|
390 |
|
|
TEP |
|
|
100.0 |
|
|
|
390 |
|
San Juan Station |
|
|
1 |
|
|
Farmington, NM |
|
|
1976 |
|
|
Coal |
|
|
340 |
|
|
PNM |
|
|
50.0 |
|
|
|
170 |
|
San Juan Station |
|
|
2 |
|
|
Farmington, NM |
|
|
1973 |
|
|
Coal |
|
|
340 |
|
|
PNM |
|
|
50.0 |
|
|
|
170 |
|
Navajo Station |
|
|
1 |
|
|
Page, AZ |
|
|
1974 |
|
|
Coal |
|
|
750 |
|
|
SRP |
|
|
7.5 |
|
|
|
56 |
|
Navajo Station |
|
|
2 |
|
|
Page, AZ |
|
|
1975 |
|
|
Coal |
|
|
750 |
|
|
SRP |
|
|
7.5 |
|
|
|
56 |
|
Navajo Station |
|
|
3 |
|
|
Page, AZ |
|
|
1976 |
|
|
Coal |
|
|
750 |
|
|
SRP |
|
|
7.5 |
|
|
|
56 |
|
Four Corners Station |
|
|
4 |
|
|
Farmington, NM |
|
|
1969 |
|
|
Coal |
|
|
784 |
|
|
APS |
|
|
7.0 |
|
|
|
55 |
|
Four Corners Station |
|
|
5 |
|
|
Farmington, NM |
|
|
1970 |
|
|
Coal |
|
|
784 |
|
|
APS |
|
|
7.0 |
|
|
|
55 |
|
Luna Energy Facility |
|
|
1 |
|
|
Deming, NM |
|
|
2006 |
|
|
Gas |
|
|
570 |
|
|
PNM |
|
|
33.3 |
|
|
|
190 |
|
Sundt Station |
|
|
1 |
|
|
Tucson, AZ |
|
|
1958 |
|
|
Gas/Oil |
|
|
81 |
|
|
TEP |
|
|
100.0 |
|
|
|
81 |
|
Sundt Station |
|
|
2 |
|
|
Tucson, AZ |
|
|
1960 |
|
|
Gas/Oil |
|
|
81 |
|
|
TEP |
|
|
100.0 |
|
|
|
81 |
|
Sundt Station |
|
|
3 |
|
|
Tucson, AZ |
|
|
1962 |
|
|
Gas/Oil |
|
|
104 |
|
|
TEP |
|
|
100.0 |
|
|
|
104 |
|
Sundt Station(1) |
|
|
4 |
|
|
Tucson, AZ |
|
|
1967 |
|
|
Coal/Gas |
|
|
156 |
|
|
TEP |
|
|
100.0 |
|
|
|
156 |
|
DeMoss Petrie |
|
|
|
|
|
Tucson, AZ |
|
|
1972 |
|
|
Gas/Oil |
|
|
122 |
|
|
TEP |
|
|
100.0 |
|
|
|
122 |
|
North Loop |
|
|
|
|
|
Tucson, AZ |
|
|
2001 |
|
|
Gas |
|
|
95 |
|
|
TEP |
|
|
100.0 |
|
|
|
95 |
|
Springerville Solar Station |
|
|
|
|
|
Springerville/Tucson, AZ |
|
|
2002-2005 |
|
|
Solar |
|
|
5 |
|
|
TEP |
|
|
100.0 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TEP Capacity (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Leased assets, as of December 31, 2009. |
|
(2) |
|
Excludes 781MW of additional resources, which consist of certain capacity
purchases and interruptible retail load. At December 31, 2009, total owned capacity was 1,686 MW
and leased capacity was 543 MW. |
Springerville Generating Station
Springerville Unit 1 is leased by TEP. The Springerville Generating Station also includes the
Springerville Coal Handling Facilities and the Springerville Common Facilities.
The terms of the Springerville Unit 1 Leases, which include a 50% interest in the Springerville
Common Facilities, expire in 2015, but have optional fair market value renewal and purchase
provisions. In 1985, TEP sold and leased back a 50% interest in the Springerville Common
Facilities. The Springerville Common Facilities Leases, which expire in 2017 and 2021, have a
fixed price purchase provision. The fixed prices to acquire the leased interests in the
Springerville Common Facilities are $38 million in 2017 and $68 million in 2021. In 1984, TEP sold
and leased back the Springerville Coal Handling Facilities. The terms of the Springerville Coal
Handling Facilities Leases expire in 2015, but have a fixed price purchase provision of $120
million.
K-4
Since entering into the Springerville leases, TEP has purchased a 14% equity ownership interest in
the Springerville Unit 1 Leases and a 13% equity ownership interest in the Springerville Coal
Handling Facilities Leases.
Sundt Generating Station
The Sundt Generating Station and the internal combustion turbines located in Tucson are designated
as must-run generation facilities. Must-run generation units are required to run in certain
circumstances to maintain distribution system reliability and to meet local load requirements.
Sundt Unit 4 is leased by TEP and the term of the lease expires in 2011. In January 2010, TEP
entered into an agreement to purchase 100% of the equity interest in Sundt Unit 4 from the equity
owner for approximately $52 million. The purchase price is subject to increase by 0.75% of the
purchase price per month in the event that the purchase occurs after March 31, 2010. TEP expects
the purchase to occur prior to March 31, 2010. Following the completion of the transaction, TEP
expects to redeem the outstanding Sundt Unit 4 lease obligation of $5 million, terminate the lease and
cause the title of Sundt Unit 4 to be transferred to TEP.
See Note 6 of Notes to Consolidated Financial Statements, Debt, Credit Facilities, and Capital
Lease Obligations, and Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations, Tucson Electric Power Company, Liquidity and Capital Resources, Contractual
Obligations, for more information regarding the Springerville and Sundt leases.
Renewable Energy Resources
Owned Resources
The Springerville Solar Generating Station includes 34,980 photovoltaic (PV) modules located near
TEPs coal-fired Springerville Generating Station in eastern Arizona. TEP began building the
system in 2000 and continued to expand it for several years until its capacity reached 4.6
megawatts in 2004. A proposal to expand its capacity to 6.4 MW in 2010 is pending before the ACC.
TEP also has proposed a 1.6 MW PV installation in Tucson, Arizona. If approved by the ACC, the
project is expected to be completed in the second half of 2010.
Purchased Power Agreements
In September 2009, TEP filed two 20 year purchased power agreements with the ACC in order to meet
the requirements of the ACCs Renewable Energy Standard and Tariff (REST). The first agreement
would provide TEP with 25 MW of energy from a single axis tracking PV installation. The second
agreement would provide TEP with 5 MW of energy from a parabolic trough concentrating solar
facility. Each agreement contains an option that would allow TEP to purchase all or part of the
project at a future period. TEP cannot predict when or if the ACC will approve the agreements.
See Renewable Energy Standard and Tariff, below for more information.
Purchases and Interconnections
TEP purchases power from other utilities and power marketers. TEP may enter into contracts: (a) to
purchase energy under long-term contracts to serve retail load and long-term wholesale contracts,
(b) to purchase capacity or energy during periods of planned outages or for peak summer load
conditions, and (c) to purchase energy for resale to certain wholesale customers under load and
resource management agreements.
TEP typically uses generation from its gas-fired units supplemented by purchased power to meet the
summer peak demands of its retail customers. Some of these purchased power contracts are price
indexed 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 and gas-indexed purchased power
with fixed price contracts for a maximum of three years. TEP also purchases energy in the daily
and hourly markets to meet higher than anticipated demands, to cover unplanned generation outages,
or when it is more economical than generating its own energy.
K-5
TEP is a member of various regional reserve sharing, reliability and power sharing organizations.
These relationships allow TEP to call upon other utilities during emergencies, such as plant
outages and system disturbances, and reduce the amount of reserves TEP is required to carry.
As a result of the Energy Policy Act of 2005, owners and operators of bulk power transmission
systems, including TEP, are subject to mandatory reliability standards that are developed and
enforced by the North American Electric Reliability Corporation (NERC) subject to the oversight of
the Federal Energy Regulatory Commission (FERC). TEP is reviewing its operating policies and
procedures to ensure continued compliance with these standards.
Springerville Units 3 and 4
Springerville Units 3 and 4 are each 400 MW coal-fired generating facilities located at the same
site as Springerville Units 1 and 2 that are operated, but not owned by TEP. Tri-State is leasing
100% of Unit 3 from a financial owner. Unit 4 began commercial operation in December 2009 and is
owned by SRP. For operating Units 3 and 4, TEP receives rental payments and other fees, including
the allocation of a portion of the fixed costs of the existing common facilities to Units 3 and 4.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations. Tucson Electric Power Company, Factors Affecting Results of Operations, Springerville
Units 3 and 4.
Peak Demand and Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peak Demand |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
-MW- |
|
|
|
|
|
|
|
|
|
Retail Customers |
|
|
2,354 |
|
|
|
2,376 |
|
|
|
2,386 |
|
|
|
2,365 |
|
|
|
2,225 |
|
Firm Sales to Other Utilities |
|
|
385 |
|
|
|
394 |
|
|
|
369 |
|
|
|
331 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coincident Peak Demand (A) |
|
|
2,739 |
|
|
|
2,770 |
|
|
|
2,755 |
|
|
|
2,696 |
|
|
|
2,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Generating Resources |
|
|
2,229 |
|
|
|
2,204 |
|
|
|
2,204 |
|
|
|
2,194 |
|
|
|
2,004 |
|
Other Resources (1) |
|
|
781 |
|
|
|
966 |
|
|
|
785 |
|
|
|
719 |
|
|
|
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TEP Resources (B) |
|
|
3,010 |
|
|
|
3,170 |
|
|
|
2,989 |
|
|
|
2,913 |
|
|
|
2,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Margin (B) (A) |
|
|
271 |
|
|
|
400 |
|
|
|
234 |
|
|
|
217 |
|
|
|
225 |
|
Reserve Margin (% of Coincident Peak Demand) |
|
|
10 |
% |
|
|
14 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
9 |
% |
|
|
|
(1) |
|
Other Resources include firm power purchases and interruptible retail and wholesale
loads. Additional firm power purchases were made in 2009 to displace more expensive owned gas
generation. |
Peak demand occurs during the summer months due to the cooling requirements of TEPs retail
customers. Retail peak demand varies from year-to-year due to weather, economic conditions and
other factors. TEPs retail demand peaked in 2007 and subsequently declined in 2008 and 2009 due
primarily to weak economic conditions.
The chart above shows the relationship over a five-year period between TEPs peak demand and its
energy resources. TEPs total margin is the difference between total energy resources and
coincident peak demand, and the reserve margin is the ratio of margin to coincident peak demand.
TEPs reserve margin in 2009 was in compliance with reliability criteria set forth by the Western
Electricity Coordinating Council, a regional council of NERC.
Forecasted retail peak demand for 2010 is approximately 2,284 MW, compared with actual peak demand
of 2,354 MW in 2009. In 2009, cooling degree days were 13% above the ten year average. TEPs 2010
estimated retail peak demand is based on normal weather patterns and total retail kWh sales similar
to 2009 levels. TEP believes it will have sufficient resources to meet expected demand in 2010
with its existing generation capacity and power purchase agreements.
Future Generating Resources
TEP will continue to add peaking resources to serve the Tucson area as needed based upon our
forecasts of retail and firm wholesale load, as well as statewide transmission infrastructure. TEP
projects that additional import capacity and/or additional local generation resources of 75 to 150
MW may be required in 2015.
K-6
FUEL SUPPLY
Fuel Summary
Fuel cost and usage information is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Cost per MMBtu |
|
|
Percentage of Total Btu |
|
|
|
Consumed |
|
|
Consumed |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Coal |
|
$ |
2.11 |
|
|
$ |
2.08 |
|
|
$ |
1.81 |
|
|
|
90 |
% |
|
|
93 |
% |
|
|
92 |
% |
Gas |
|
$ |
4.51 |
|
|
$ |
8.02 |
|
|
$ |
8.30 |
|
|
|
10 |
% |
|
|
7 |
% |
|
|
8 |
% |
All Fuels |
|
$ |
2.34 |
|
|
$ |
2.52 |
|
|
$ |
2.30 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Coal
TEPs principal fuel for electric generation is low-sulfur, bituminous or sub-bituminous coal from
mines in Arizona, New Mexico and Colorado. More than 90% of TEPs coal supply is purchased under
long-term contracts, which results in more predictable prices. The average cost per ton of coal,
including transportation, for 2009, 2008, and 2007 was $39.81, $39.67, and $34.71, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Contract |
|
|
Sulfur |
|
|
|
Station |
|
Coal Supplier |
|
Expiration |
|
|
Content |
|
|
Coal Obtained From (A) |
Springerville |
|
Peabody Coalsales Company |
|
|
2020 |
|
|
|
0.9 |
% |
|
Lee Ranch Coal Company |
Four Corners |
|
BHP Billiton |
|
|
2016 |
|
|
|
0.8 |
% |
|
Navajo Indian Tribe |
San Juan |
|
San Juan Coal Company |
|
|
2017 |
|
|
|
0.8 |
% |
|
Federal and State Agencies |
Navajo |
|
Peabody Coalsales Company |
|
|
2011 |
|
|
|
0.4 |
% |
|
Navajo and Hopi Indian Tribes |
Sundt |
|
Rio Tinto Energy America |
|
|
|
|
|
|
|
|
|
Colowyo Mine / McKinley Mine |
|
|
/ Chevron Mining Company |
|
|
|
|
|
|
0.4 |
% |
|
|
|
|
|
(A) |
|
Substantially all of the suppliers mining leases extend at least as long as coal is being
mined in economic quantities.
|
TEP Operated Generating Facilities
TEP is the operator, and the sole owner (or lessee), of the Springerville Units 1 and 2 and Sundt
Unit 4 Generating Stations. The coal supplies for the Springerville Units 1 and 2 are transported
approximately 200 miles by railroad from Northwestern New Mexico. TEP expects coal reserves to be
sufficient to supply the estimated requirements for Springerville Units 1 and 2 for their presently
estimated remaining lives.
The coal supplies for Sundt are transported approximately 1,300 miles by railroad from Colorado and
approximately 500 miles from New Mexico. In the past, Sundt Unit 4 has been fueled by coal;
however, the generating station can also be operated with natural gas or landfill gas. Both fuels
are combined with methane, a renewable energy resource, piped from a nearby landfill. From January
through October 2009, TEP used natural gas to fuel Sundt Unit 4. TEP hedged the price of natural
gas such that it became more economic to use natural gas instead of coal to fuel the plant. TEP
had agreements for the purchase and transportation of coal to Sundt through 2009 and has adequate
coal inventory through 2010. TEP will continue to analyze natural gas prices to determine the fuel
it will use to run Sundt Unit 4.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, UniSource Energy Consolidated, Contractual Obligations and Note 4 of Notes to
Consolidated Financial Statements Commitments and Contingencies, TEP Commitments, Firm Purchase
and Transportation Commitments.
K-7
Generating Facilities Operated by Others
TEP also participates in jointly-owned generating facilities at Four Corners, Navajo and San Juan.
Four Corners and San Juan, operated by PNM, are mine mouth generating stations located adjacent to
the coal reserves. Navajo, operated by SRP, obtains its coal supply from a nearby coal mine and a
dedicated rail delivery system. The coal supplies are under long-term contracts administered by
the operating agents. TEP expects coal reserves available to these three jointly-owned generating
facilities to be sufficient for the remaining presently estimated lives of the stations.
Natural Gas Supply
TEP typically uses generation from its facilities fueled by natural gas and purchased power, in
addition to energy from its coal-fired facilities, to meet the summer peak demands of its retail
customers and 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 purchased power and spot
market purchases with fixed price contracts for a maximum of three years.
TEP purchases gas from Southwest Gas Corporation (SWG) under a retail tariff for North Loop, a 95
MW internal combustion turbine located in Tucson, Arizona, and receives distribution service under
a transportation agreement for DeMoss Petrie, a 122 MW internal combustion turbine located in
Tucson, Arizona. TEP completed a bypass of SWG and connected the Sundt plant directly to El Paso
Natural Gas Company (ENPG) in the first quarter of 2008. TEP purchases capacity from EPNG for
transportation from the San Juan and Permian Basins to its Sundt plant under a contract that
expires in April 2013, with right-of-first refusal for continuation thereafter. TEP buys gas from
third party suppliers for Sundt and DeMoss Petrie.
TEP purchases gas transportation for Luna from EPNG from the Permian Basin to the plant site under
an agreement that expires in January 2012, with right-of-first refusal for continuation thereafter.
TEP purchases gas for its share of Luna from various suppliers in the Permian Basin region.
WATER SUPPLY
The Four Corners region of New Mexico, where the San Juan and Four Corners Generating Stations (San
Juan and Four Corners) are located, experiences drought conditions periodically that could affect
the water supply for these plants. The operating agents for San Juan and Four Corners have
negotiated supplemental water contracts with BHP Billiton and the Jicarilla Apache Nation to assist
the generating plants in meeting their water requirements in the event of a shortage.
Drought conditions within the Southwestern United States, combined with increased water usage in
Arizona, Nevada and Southern California, have periodically caused water levels to recede at Lake
Powell, which supplies operating water for the Navajo Generating Station (Navajo). TEP has a 7.5%
ownership interest in Navajo Units 1, 2 and 3 (168 MW capacity). A project was completed in
December 2009, which lowered the water intake structures to ensure adequate water supply at Navajo
in the event drought conditions adversely affect the water level at Lake Powell.
TRANSMISSION ACCESS
TEP has transmission access and power transaction arrangements with over 120 electric systems or
suppliers. TEP is taking steps to increase the capacity and reliability of its transmission and
distribution system. TEP also has various ongoing projects that are designed to increase access to
the regional wholesale energy market and improve the reliability and efficiency of its existing
transmission and distribution systems.
In 2008, TEP completed construction of a new 500 kV transmission line from the Palo Verde regional
market hub to the Pinal West substation along with a new 345 kV TEP substation at Pinal West
connecting to TEPs 345kV transmission line between Phoenix and Tucson. These projects provide TEP
with additional access to energy resources.
K-8
TEP is participating in the continuation of the 500 kV transmission line from the Pinal West
substation to the Pinal Central substation. TEP is also in the process of obtaining permits to
construct a 40 mile 500-kV transmission line from the Pinal Central substation to the Tortolita
substation northwest of Tucson to further enhance its ability to access the regions energy
resources. TEP expects the transmission lines to be in-service in 2014. As a result of these high
voltage transmission additions, TEP anticipates that its ability to import energy into its service
territory should increase by at least 250 MW.
Tucson to Nogales Transmission Line
TEP and UNS Electric are parties to a project development agreement initiated in 2000 for the joint
construction of a 62-mile transmission line from Tucson to Nogales, Arizona. The project was
initiated in response to an order by the ACC to improve reliability to UNS Electrics retail
customers in Nogales, Arizona. Since receiving ACC approval of the location and construction of
the proposed 345-kV transmission line along a specified route, TEP has been working to obtain all
other required permits from state and federal agencies. The Department of Energy completed a Final
Environmental Impact Statement (FEIS) for the project accepting any of the routes identified in the
FEIS. The U.S. Forest Service, however, prefers a route that was not approved by the ACC.
Based on the alternative proposals and passage of time since the ACC approved the location of the
line, in 2006 the Line Siting Committee of the ACC was directed to gather facts related to options
for improving service reliability in Nogales, Arizona. TEP continues to evaluate alternatives for
improving service reliability in Nogales, Arizona. In 2007 and 2008, TEP met with major property
owners and impacted governmental agencies along the proposed transmission line routes to discuss
alternatives. If all regulatory approvals are received and the project moves forward, the future
costs to construct the transmission line from Tucson to Nogales, Arizona are expected to be
approximately $120 million. As of December 31, 2009, 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 that 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.
TEP met with the Federal Electricity Commission of Mexico (CFE) and other transmission developers
in 2009 to develop a schedule for performing transmission studies to interconnect the proposed
Tucson to Nogales transmission line to a new CFE proposed 400-kV transmission line in Mexico. The
studies are scheduled to be completed in 2010.
RATES AND REGULATION
2008 TEP Rate Order
On November 25, 2008, the ACC issued an order that resolved a rate case filed by TEP in July 2007.
The ACC order included an average base retail rate increase of approximately 6% effective December
1, 2008 and a Purchased Power and Fuel Adjustment Clause (PPFAC) that began January 1, 2009.
Prior to the 2008 TEP Rate Order, TEPs rates had remained unchanged since 2000.
The 2008 TEP Rate Order requires TEP to credit $58 million of previously collected Fixed CTC
true-up revenues to customers through the PPFAC. TEP expects the PPFAC charge to be zero until the
Fixed CTC true-up revenues are fully credited over an estimated period of 36 to 48 months, which
began on April 1, 2009.
For a more detailed description of the terms of the 2008 TEP Rate Order, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations, Tucson
Electric Power Company, Factors Affecting Results of Operations, 2008 TEP Rate Order, below.
Renewable Energy Standard and Tariff
The ACCs REST requires TEP and other affected utilities to generate or purchase at least 15% of
their total annual retail energy requirements from renewable energy technologies by 2025, with
smaller amounts required in earlier years. The REST rules provide for recovery of above market
costs a utility incurs in providing the renewable energy. TEP met the 2009 REST rules target of
generating or purchasing renewable energy for at least 2.0% of TEPs total retail energy
requirements; TEP expects to meet the REST rules 2010 target of 2.5%.
K-9
For more information see Renewable Energy Resources, above, and Item 7. Managements Discussion and
Analysis, Tucson Electric Power, Factors Affecting Results of Operations, Renewable Energy Standard
and Tariff.
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
demand-side management (DSM) programs, to the extent that they are cost effective. If the ACC
approves EE Standards, they must be certified by the Arizona Attorney General before taking effect.
TEPs DSM programs and customer surcharge to recover the costs incurred to implement these proposed
programs are subject to ACC approval. See Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, TEP, Factors Affecting Results of Operations,
Electric Energy Efficiency Standards, for more information.
Retail Electric Competition Rules
In 1999, the ACC approved the Retail Electric Competition Rules (Rules) that provided a framework
for the introduction of retail electric competition in Arizona. Certain portions of the ACC rules
that enabled ESPs to compete in the retail market were invalidated by an Arizona Court of Appeals
decision in 2005. In 2008, the ACC opened an administrative proceeding to address the Rules.
Unless and until the ACC clarifies the competition rules and ESPs offer to provide energy in TEPs
service area, it is not possible for TEPs retail customers to use alternative ESPs. We cannot
predict what changes, if any, the ACC will make to the Rules. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, Tucson Electric Power
Company, Factors Affecting Results of Operations, Competition, for more information.
Line Extension Policy
In 2008, the ACC approved a policy requiring TEP to charge customers for the total cost of line
extensions, eliminating TEPs prior practice of providing a portion of line extensions free of
charge to its customers. The policy became effective June 1, 2009. Prior to this ruling by the
ACC, a portion of the cost of line extensions was capitalized by TEP and eligible for inclusion in
rate base.
K-10
TEPS UTILITY OPERATING STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Generation and Purchased Power kWh (000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remote Generation (Coal) |
|
|
9,576,873 |
|
|
|
10,438,864 |
|
|
|
11,001,318 |
|
|
|
10,854,710 |
|
|
|
10,059,315 |
|
Local Tucson Generation (Oil, Gas & Coal) |
|
|
711,420 |
|
|
|
1,039,362 |
|
|
|
1,088,778 |
|
|
|
966,476 |
|
|
|
1,165,001 |
|
Purchased Power |
|
|
3,085,805 |
|
|
|
2,947,749 |
|
|
|
2,046,864 |
|
|
|
1,680,495 |
|
|
|
1,638,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Generation and Purchased Power |
|
|
13,374,098 |
|
|
|
14,425,975 |
|
|
|
14,136,960 |
|
|
|
13,501,681 |
|
|
|
12,863,053 |
|
Less Losses and Company Use |
|
|
948,463 |
|
|
|
954,643 |
|
|
|
944,024 |
|
|
|
885,120 |
|
|
|
806,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Sold |
|
|
12,425,635 |
|
|
|
13,471,332 |
|
|
|
13,192,936 |
|
|
|
12,616,561 |
|
|
|
12,056,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales kWh (000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
3,905,696 |
|
|
|
3,852,707 |
|
|
|
4,004,797 |
|
|
|
3,778,269 |
|
|
|
3,633,226 |
|
Commercial |
|
|
1,988,356 |
|
|
|
2,034,453 |
|
|
|
2,057,982 |
|
|
|
1,959,141 |
|
|
|
1,855,432 |
|
Industrial |
|
|
2,160,946 |
|
|
|
2,263,706 |
|
|
|
2,341,025 |
|
|
|
2,278,244 |
|
|
|
2,302,327 |
|
Mining |
|
|
1,064,830 |
|
|
|
1,095,962 |
|
|
|
983,173 |
|
|
|
924,898 |
|
|
|
842,881 |
|
Public Authorities |
|
|
250,915 |
|
|
|
255,817 |
|
|
|
247,430 |
|
|
|
260,767 |
|
|
|
241,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Retail Sales |
|
|
9,370,743 |
|
|
|
9,502,645 |
|
|
|
9,634,407 |
|
|
|
9,201,419 |
|
|
|
8,874,985 |
|
Electric Wholesale Sales |
|
|
3,054,892 |
|
|
|
3,968,688 |
|
|
|
3,558,529 |
|
|
|
3,415,142 |
|
|
|
3,181,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Sales |
|
|
12,425,635 |
|
|
|
13,471,332 |
|
|
|
13,192,936 |
|
|
|
12,616,561 |
|
|
|
12,056,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues (000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
377,761 |
|
|
$ |
351,079 |
|
|
$ |
362,967 |
|
|
$ |
343,459 |
|
|
$ |
330,614 |
|
Commercial |
|
|
219,694 |
|
|
|
211,639 |
|
|
|
213,364 |
|
|
|
203,284 |
|
|
|
192,966 |
|
Industrial |
|
|
163,720 |
|
|
|
164,849 |
|
|
|
168,279 |
|
|
|
165,068 |
|
|
|
165,988 |
|
Mining |
|
|
61,033 |
|
|
|
55,619 |
|
|
|
48,707 |
|
|
|
43,724 |
|
|
|
39,749 |
|
Public Authorities |
|
|
19,865 |
|
|
|
19,146 |
|
|
|
18,332 |
|
|
|
18,935 |
|
|
|
17,559 |
|
REST and DSM |
|
|
25,443 |
|
|
|
2,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
EFPS |
|
|
|
|
|
|
415 |
|
|
|
4,822 |
|
|
|
2,684 |
|
|
|
2,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Retail Sales |
|
|
867,516 |
|
|
|
805,528 |
|
|
|
816,471 |
|
|
|
777,154 |
|
|
|
749,500 |
|
CTC To Be Refunded |
|
|
|
|
|
|
(58,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Revenue-Long Term |
|
|
48,249 |
|
|
|
57,493 |
|
|
|
55,788 |
|
|
|
51,442 |
|
|
|
54,901 |
|
Wholesale Revenue-Short Term |
|
|
83,456 |
|
|
|
185,189 |
|
|
|
125,369 |
|
|
|
112,309 |
|
|
|
117,557 |
|
California Power Exchange Provision for
Wholesale Refunds |
|
|
(4,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transmission |
|
|
18,974 |
|
|
|
17,173 |
|
|
|
14,842 |
|
|
|
13,391 |
|
|
|
7,250 |
|
Other Revenues |
|
|
82,688 |
|
|
|
71,962 |
|
|
|
58,033 |
|
|
|
34,698 |
|
|
|
8,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues |
|
$ |
1,096,711 |
|
|
$ |
1,079,253 |
|
|
$ |
1,070,503 |
|
|
$ |
988,994 |
|
|
$ |
937,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers (End of Period) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
365,157 |
|
|
|
363,861 |
|
|
|
361,945 |
|
|
|
357,646 |
|
|
|
350,628 |
|
Commercial |
|
|
35,759 |
|
|
|
35,432 |
|
|
|
34,759 |
|
|
|
34,104 |
|
|
|
33,534 |
|
Industrial |
|
|
629 |
|
|
|
633 |
|
|
|
641 |
|
|
|
664 |
|
|
|
673 |
|
Mining |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Public Authorities |
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Customers |
|
|
401,608 |
|
|
|
399,989 |
|
|
|
397,408 |
|
|
|
392,477 |
|
|
|
384,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Retail Revenue per kWh Sold (cents) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
9.7 |
|
|
|
9.1 |
|
|
|
9.1 |
|
|
|
9.1 |
|
|
|
9.1 |
|
Commercial |
|
|
11.0 |
|
|
|
10.4 |
|
|
|
10.4 |
|
|
|
10.4 |
|
|
|
10.4 |
|
Industrial and Mining |
|
|
7.0 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.5 |
|
Average Retail Revenue per kWh Sold |
|
|
9.3 |
|
|
|
8.5 |
|
|
|
8.5 |
|
|
|
8.4 |
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Revenue per Residential Customer |
|
$ |
1,034 |
|
|
$ |
965 |
|
|
$ |
1,003 |
|
|
$ |
971 |
|
|
$ |
954 |
|
Average kWh Sales per Residential Customer |
|
|
10,708 |
|
|
|
10,621 |
|
|
|
11,129 |
|
|
|
10,681 |
|
|
|
10,484 |
|
K-11
ENVIRONMENTAL MATTERS
Air and water quality, resource extraction, waste disposal and land use are regulated by federal,
state and local authorities. TEP believes that its facilities are in substantial compliance with
existing regulations.
Clean Air Act Requirements
TEP generating facilities are subject to EPA limits on the amount of sulfur dioxide
(SO2), nitrogen oxide (NOx) and other emissions into the atmosphere. TEP capitalized
$24 million in 2009, $73 million in 2008 and $7 million in 2007 in construction costs to comply
with environmental requirements, including TEPs share of new pollution control equipment installed
at San Juan described below. TEP expects to capitalize environmental compliance costs of $8
million in 2010 and $5 million in 2011. In addition, TEP recorded operating expenses of $13
million in 2009, $14 million in 2008 and $10 million in 2007 related to environmental compliance.
TEP expects environmental expenses to be $11 million in 2010. TEP may incur additional costs to
comply with future changes in federal and state environmental laws, regulations and permit
requirements at existing electric generating facilities. Compliance with these changes may reduce
operating efficiency.
As a result of a 2005 settlement agreement between PNM, environmental activist groups, and the New
Mexico Environment Department (PNM Consent Decree), the co-owners of San Juan installed new
pollution control equipment at the generating station to reduce mercury, particulate matter, NOx,
and SO2 emissions. TEP owns 50% of San Juan Units 1 and 2. The PNM Consent Decree
includes stipulated penalties for non-compliance with specified emissions limits at San Juan. In
2008 and 2007, TEPs share of stipulated penalties at San Juan
was $1 million and $2 million,
respectively. TEPs share of stipulated penalties at San Juan during 2009 was less than $1
million. TEP cannot deduct these penalties for income tax purposes. With the installation of new
pollution control equipment designed to remedy emission violations, we do not expect to incur
similar penalties in the future.
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
has responded to the EPAs request. TEP cannot predict the timing or outcome of this matter.
In 1993, the EPA allocated TEPs generating units SO2 Emission Allowances based on past
operational history. Beginning in 2000, TEPs generating units were required to hold Emission
Allowances equal to the level of emissions in the compliance year or pay penalties and offset
excess emissions in future years. To date, TEP has held sufficient Emission Allowances to comply
with the SO2 regulations.
Hazardous Air Pollutant Requirements
The Clean Air Act requires the EPA to develop an emission limit for hazardous air pollutants that
represents the maximum achievable control technology. In October 2009, EPA entered into a consent
order to develop a final rule by November 2011.
Depending on the stringency of the EPA rule, emission controls for mercury may be required at some
or all coal fired units by 2014 or later. Whether controls are required at a particular unit, the
level of control required, and the cost to achieve that level of control will not be known until
the rule has been promulgated.
As stipulated in the PNM Consent Decree described above, the co-owners of San Juan installed new
pollution control equipment at the generating station to reduce mercury emissions. The
installation of mercury emissions controls for San Juan Units 1 and 2 were completed in 2009.
These controls are expected to be adequate to achieve compliance with the federal standard.
Arizona adopted mercury emission rules in 2007 requiring a 90% reduction in emission from coal
fired units. Due to potential inconsistency between the Arizona rule and the pending EPA rule, in
January, 2009, TEP and ADEQ reached an agreement that (1) defers the 90% reduction requirement to
2016, (2) improves regulatory certainty regarding mercury compliance obligations under existing
Arizona rules, and (3) achieves mercury reductions substantially similar to those that would be
required by the existing Arizona rules. This agreement relates to the Springerville and Sundt
generating stations.
In order to comply with the Arizona rule, TEP expects mercury emission control equipment may be
required at Springerville by 2016. The associated capital cost for this equipment is estimated to
be $6 million at Springerville
Units 1 and 2. If the emission control equipment is installed, TEP expects the annual operating
expenses to be approximately $3 million, once all installations are completed.
K-12
Climate Change
In 2007, the Supreme Court ruled in Commonwealth of Massachusetts, et al v. EPA, that carbon
dioxide (CO2) and other greenhouse gases (GHG) are air pollutants under the Clean Air
Act. In December 2009, EPA issued a final Endangerment Finding, stating that greenhouse gases
endanger public health and welfare. This finding allows EPA to promulgate regulations limiting
emissions of greenhouse gases. EPA is in the process of developing regulation limiting greenhouse
gases, which once finalized, may impact future generation or modifications of existing plants.
Several pieces of legislation have been introduced at the federal level. In June 2009, the House
of Representatives passed the American Clean Energy and Security legislation which included a cap
and trade program for GHG. The Senate is considering similar cap and trade legislation with the
September 2009 introduction of the Clean Energy Jobs and American Power bill. While debate
continues at the national level over the direction of domestic climate policy, several states have
developed state-specific policies or regional initiatives to reduce greenhouse gas emissions. In
2007, the governors of several western states, including the then-governor of Arizona, signed the
Western Regional Climate Action Initiative (the Western Climate Initiative) that directed their
respective states to develop a regional target for reducing greenhouse gases. The states in the
Western Climate Initiative announced a target of reducing greenhouse gas emissions by 15% below
2005 levels by 2020. In 2008, the Western Climate Initiative participants submitted their design
recommendation for the Western Climate Initiative cap-and-trade program for greenhouse gas
emissions, with an implementation date set for 2012. In February 2010, the Governor of Arizona
issued an executive order which, among other things, stated that Arizona will not implement the GHG
cap-and-trade proposal advanced by the Western Climate Initiative. The executive order expires
December 31, 2012.
Based on the competing proposals to regulate greenhouse gas emissions by federal, state, and local
regulatory and legislative bodies and uncertainty in the regulatory and legislative processes, the
scope of such requirements and initiatives and their effect on our operations cannot be determined
at this time.
Regional Haze
The EPAs regional haze rules require emission controls known as Best Available Retrofit Technology
(BART) for certain industrial facilities emitting air pollutants that reduce visibility. The
operators of the San Juan, Four Corners, and Navajo generating stations submitted BART analyses in
2007 and early 2008. PNM, operator of San Juan, believes the controls being installed at San Juan
as a result of the PNM Consent Decree constitute BART and did not recommend installation of any
additional pollution control equipment. APS and SRP, the operators of the Four Corners and Navajo
generating stations, respectively recommended installing certain additional pollution control
equipment in their respective BART analyses. TEPs share of the cost for the APS recommended
pollution control upgrades at Four Corners is estimated to be $6 million. SRP has initiated the
pollution control upgrades at Navajo on a voluntary basis. TEPs $3 million share of these costs
is included in the cost estimates section on Clean Air Act Requirements above.
In August 2009, EPA issued an Advanced Notice of Proposed Rulemaking requesting comment on the cost
effectiveness and expected visibility improvements of different levels of air pollution controls at
Four Corners and Navajo including Selective Catalytic Reduction (SCR). If SCR is determined by the
EPA to be BART, the capital cost impact to TEP is estimated to be $42 million for Four Corners, and
$50 million for Navajo. The exact level and cost of pollution control required will not be known
until final determinations are made by the regulatory agencies. Under the current proposal,
controls would need to be in place no earlier than five years following the final determination.
The Four Corners and Navajo Plant participants obligations to comply with the EPAs BART
determinations, coupled with the financial impact of future climate change legislation, other
environmental regulations and other business considerations, could jeopardize the economic
viability of these plants or the ability of individual participants to meet their obligations and
continue their participation in these plants.
K-13
Coal Combustion Byproducts
The EPA is expected to issue proposed regulations governing the handling and disposal of coal
combustion byproducts (CCBs), such as fly ash. The EPA is evaluating options that include
regulation of CCBs under solid waste standards, hazardous waste standards, or a combination of
both. A proposed rule is expected during the first quarter of 2010. The financial impact to TEP,
if any, cannot be determined at this time.
Ozone National Ambient Air Quality Standard
In January 2010, EPA issued a proposed rule to reduce the National Ambient Air Quality Standard for
Ozone. Based on the proposed standard, certain counties in which TEP conducts operations could be
in violation of the standard. The financial impact to TEP, if any, cannot be determined at this
time.
UNS GAS
SERVICE TERRITORY AND CUSTOMERS
UNS Gas is a gas distribution company serving approximately 146,000 retail customers in Mohave,
Yavapai, Coconino, and Navajo counties in Northern Arizona, as well as Santa Cruz County in
Southeast Arizona. These counties comprise approximately 50% of the territory in the state of
Arizona, with a population of approximately 700,000. From 2003 to 2007, customer growth in UNS
Gas service territory averaged 3% per year, compared with zero growth in 2008 and less than 1% growth in 2009 in the number of retail
customers. As a result of weak economic conditions and mild weather, the
average energy use by retail customers during 2008 and 2009 was below the average levels
experienced by UNS Gas in prior periods.
UNS Gas customer base is primarily residential. Revenues derived from residential customers were
approximately 61% of total revenues in 2009, while sales to other retail customer classes accounted
for approximately 28% of total revenues. Approximately 11% of total revenues in 2009 were derived
from gas transportation services and a Negotiated Sales Program (NSP). UNS Gas supplies natural
gas transportation service to the 600 MW Griffith Power Plant located near Kingman, Arizona, under
a 20-year contract which expires in 2021. UNS Gas also supplies natural gas to some of its large
transportation customers through an NSP approved by the ACC. One half of the margin earned on
these NSP sales is retained by UNS Gas, while the other half benefits retail customers through a
credit to the purchased gas adjustor (PGA) mechanism which reduces the gas commodity price.
In 2008, UNS Gas and UNS Electric entered into a 20-year gas transportation agreement and a 20-year
natural gas sales agreement, whereby UNS Gas will purchase natural gas for UNS Electric and
transport it to BMGS.
GAS SUPPLY AND TRANSMISSION
UNS Gas directly manages its gas supply and transportation contracts. The market price for gas
varies based upon the period during which the commodity is purchased. UNS Gas hedges its gas
supply prices by entering into fixed price forward contracts and financial swaps at various times
during the year to provide more stable prices to its customers. These purchases and hedges are
made up to three years in advance with the goal of hedging at least 45% of the expected monthly gas
consumption with fixed prices prior to entering into the month.
UNS Gas buys most of the gas it distributes from the San Juan Basin in the Four Corners region.
The gas is delivered on the El Paso Natural Gas Company (EPNG) and Transwestern Pipeline Company
(Transwestern) interstate pipeline systems under firm transportation agreements with combined
capacity sufficient to meet UNS Gas customers demands.
With EPNG, the average daily capacity right of UNS Gas is approximately 655,000 therms per day,
with an average of 1,095,000 therms per day in the winter season (November through March) to serve
its Northern and Southern Arizona service territories. UNS Gas has capacity rights of 250,000
therms per day on the San Juan Lateral and Mainline of the Transwestern pipeline. The Transwestern
pipeline principally delivers gas to the portion of UNS Gas distribution system serving customers
in Flagstaff and Kingman, Arizona, and also delivers gas to UNS Gas facilities serving the
Griffith Power Plant in Mohave County.
K-14
UNS Gas signed a separate transportation agreement with Transwestern for transportation capacity
rights on the Phoenix Lateral Extension Line. The 15-year agreement began in March 2009, when
construction of that pipeline was completed. UNS Gas average daily capacity right will be 126,100
therms per day, with an average of 221,900 therms per day in the winter season (November through
March).
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, UNS Gas, Liquidity and Capital Resources, Contractual Obligations, UNS Gas Supply
Contracts, for more information.
RATES AND REGULATION
The ACC regulates UNS Gas with respect to retail gas rates, the issuance of securities, and
transactions with affiliated parties. UNS Gas retail gas rates include a monthly customer charge,
a base rate charge for delivery services and the cost of gas (expressed in cents per therm), and a
PGA.
Purchased Gas Adjustor
The PGA mechanism is 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 or returned to customers through
the PGA mechanism. See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations, UNS Gas, Factors Affecting Results of Operations, Rates and Regulation,
Energy Cost Adjustment Mechanism, for more information.
2008 General Rate Case
In November 2008, UNS Gas filed a general rate case with the ACC on a cost of service basis. Below
is a table that summarizes UNS Gas request:
|
|
|
Test year 12 months ended June 30, 2008 |
|
Requested by UNS Gas |
Original cost rate base |
|
$182 million |
Revenue deficiency |
|
$9.5 million |
Total rate increase (over test year revenues) |
|
6% |
Cost of long-term debt |
|
6.5% |
Cost of equity |
|
11.0% |
Actual capital structure |
|
50% equity / 50% debt |
Weighted average cost of capital |
|
8.75% |
Rate of return on fair value rate base |
|
6.80% |
On June 8, 2009, the ACC staff and other intervenors filed testimony in this proceeding. The ACC
staff recommended a rate increase of $3.4 million based on an original cost rate base of $178
million and a 10% ROE. Hearings before an administrative law judge concluded in August 2009. UNS
Gas expects the ACC to issue a final order in the first half of 2010. UNS Gas cannot predict the
outcome of this general rate case proceeding. See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations, UNS Gas, Rates, 2008 General Rate Case Filing,
for more information.
ENVIRONMENTAL MATTERS
UNS Gas is subject to environmental regulation of air and water quality, resource extraction, waste
disposal and land use by federal, state and local authorities. UNS Gas believes that its
facilities are in substantial compliance with all existing regulations. See Item. 1 Business,
TEP, Environmental Matters, for more information.
UNS ELECTRIC
SERVICE TERRITORY AND CUSTOMERS
UNS Electric is an electric transmission and distribution company serving approximately 90,000
retail customers in Mohave and Santa Cruz counties. These counties have a combined population of
approximately 240,000. As a result of weak economic conditions, retail customer growth and average
energy use by retail customers is below the average levels experienced by UNS Electric in prior
periods. From 2003 to 2007, customer growth in UNS
Electrics service territory averaged 3% per year, compared with no change in the average number of retail
customers during 2008 and less than 1% growth 2009. UNS Electrics customer base is primarily residential, with some
small commercial and both light and heavy industrial customers. Peak demand for 2009 was 559 MW.
K-15
POWER SUPPLY AND TRANSMISSION
Power Supply
In 2008, UNS Electric and UED entered into a Power Purchase and Sales Agreement (PPA) under which
UED sells all the output of the 90 MW gas-fired Black Mountain Generating Station (BMGS) to UNS
Electric over a five-year term. The PPA is a tolling arrangement in which UNS Electric operates
BMGS and assumes all risk of operation and maintenance costs, including fuel. Under the terms of
the PPA, UNS Electric pays UED a capacity charge. The costs associated with the PPA are
recoverable through UNS Electrics PPFAC.
UNS Gas and UED have a 20-year gas transportation agreement and a 20-year natural gas sales
agreement, whereby UNS Gas will purchase and transport natural gas for UED to BMGS.
UNS Electric owns and operates the Valencia Power Plant (Valencia), located in Nogales, Arizona.
Valencia consists of four gas and diesel-fueled combustion turbine units and provides approximately
68 MW of peaking resources. The facility is directly interconnected with the distribution system
serving the city of Nogales and the surrounding areas.
In addition to the PPA with UED and the output from Valencia, UNS Electric relies on a portfolio of
long, intermediate and short-term purchases to meet customer load requirements.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, UNS Electric, Liquidity and Capital Resources, Contractual Obligations and Other
Non-Reportable Business Segments, UED, below for more information.
Transmission
UNS Electric imports the power it purchases from UED into its Mohave County and Santa Cruz County
service territories over Western Area Power Administrations (WAPA) transmission lines. UNS
Electric has a network transmission service agreement for its primary transmission capacity with
WAPA for the Parker-Davis system that expires in May 2017. UNS Electric also has a long-term
electric point to point transmission capacity agreement with WAPA for the Southwest Intertie system
that expires in 2011.
UNS Electric currently plans to upgrade its existing 115 kV transmission line to 138 kV by the end
of 2012 to improve the reliability of service in Santa Cruz County.
This upgrade is included in UNS Electrics current capital expenditures forecast. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations, UNS
Electric, Liquidity and Capital Resources for more information.
RATES AND REGULATION
UNS Electric is regulated by the ACC with respect to retail electric rates, quality of service, the
issuance of securities, and transactions with affiliated parties, and by the FERC with respect to
wholesale power contracts and interstate transmission service. In 2007, UNS Electric was granted a
FERC tariff to sell power at market based rates. UNS Electrics retail electric rates include a
PPFAC, which allows for UNS Electric to recover the actual costs of its fuel and power purchases.
K-16
2009 General Rate Case Filing
In April 2009, UNS Electric filed a rate case application with the ACC, which is summarized below.
|
|
|
Test year December 31, 2008 |
|
|
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% |
The 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 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.
On November 6, 2009, the ACC staff and other intervenors filed testimony in this proceeding. The
ACC staff recommended a rate increase of $7.5 million based on an original cost rate base of $168
million and a 10% return on equity. A hearing before an ACC administrative law judge concluded in
February 2010. See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations, UNS Electric, Factors Affecting Results of Operations, Rates, for more
information.
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
demand-side management (DSM) programs, to the extent that they are cost effective. If the ACC
approves EE Standards, they must be certified by the Arizona Attorney General before taking affect.
TEPs DSM programs and customer surcharge to recover the costs incurred to implement these
proposed programs are subject to ACC approval.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, UNS Electric, Factors Affecting Results of Operations, Electric Energy Efficiency
Standards, for more information.
Line Extension Policy
As part of the May 2008 ACC order, UNS Electric is required to charge customers for the total cost
of line extensions beginning in March 2010. Prior to this ruling by the ACC, a portion of the cost
of line extensions was capitalized by UNS Electric and eligible for inclusion in rate base.
ENVIRONMENTAL MATTERS
UNS Electric is subject to environmental regulation of air and water quality, resource extraction,
waste disposal and land use by federal, state and local authorities. UNS Electric believes that
its facilities are in substantial compliance with all existing regulations and will be in
compliance with expected environmental regulations. See Item. 1 Business, TEP, Environmental
Matters, for more information.
Renewable Energy Standard and Tariff
The REST rules require UNS Electric to generate or purchase at least 15% of its total annual retail
energy requirements from renewable energy technologies by 2025, with smaller amounts required in
earlier years. UNS Electric began implementing its ACC approved REST plan on June 1, 2008. UNS
Electric met the REST rules 2009 target of generating or purchasing renewable energy for at least
2% of UNS Electrics total retail energy requirements; UNS Electric expects to meet the 2010
requirement of 2.5%. See Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations, UNS Electric, Factors Affecting Results of Operations, Renewable Energy
Standard and Tariff, for more information.
K-17
Renewable Energy Resources
In February 2010, UNS Electric requested the ACC approve a power purchase agreement that would
provide UNS Electric with 11 MW of energy from wind turbine installation near Kingman, Arizona over
a 20 year period. The above market cost of power under the agreement would be funded through UNS
Electrics REST surcharge. UNS Electric cannot predict when or if the ACC will approve the
agreement. See Renewable Energy Standard and Tariff, above for more information.
OTHER
UED
UED completed construction of the 90 MW BMGS in May 2008. See UNS Electric, Power Supply and
Transmission, above for more information regarding BMGS.
Millennium Investments
Through affiliates, Millennium holds investments in unregulated energy and emerging technology
companies. At December 31, 2009, Millennium had an investment balance of $10 million, a $7 million
cash balance and a $15 million note, which in total represented less than 1% of UniSource Energys total
consolidated assets. UniSource Energy has ceased making loans or equity contributions to Millennium
and has less than $1 million of remaining funding commitments. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, Other Non-Reportable
Business Segments, Millennium Investments, for more information.
Sabinas
In June 2009, Millennium finalized a sale of its 50% interest in Sabinas. Millennium received an
upfront $5 million cash payment in January 2009. Other key terms of the transaction included a
three year, 6% interest-bearing, collateralized $15 million note. In June 2009, Millennium
recorded a $6 million pre-tax gain on the sale.
EMPLOYEES (As of December 31, 2009)
TEP had 1,358 employees, of which approximately 54% are represented by the International
Brotherhood of Electrical Workers (IBEW) Local No. 1116. A collective bargaining agreement between
the IBEW and TEP expires in January 2013.
UNS Gas had 197 employees, of which 117 employees were represented by IBEW Local No. 1116 and 6
employees were represented by IBEW Local No. 387. The agreements with the IBEW Local No. 1116 and
No. 387 expire in June 2012 and February 2011, respectively.
UNS Electric had 167 employees, of which 29 employees were represented by the IBEW Local No. 387
and 107 employees were represented by the IBEW Local No. 769. The existing agreement with the IBEW
Local No. 387 and No. 769 expire in February 2011 and August 2010, respectively.
Southwest Energy Solutions, a wholly-owned subsidiary of Millennium, had 254 employees, of which
approximately 95% are represented by unions. Of the employees represented by unions, 226 are
represented by IBEW Local No. 1116 and 15 by IBEW Local No. 570; these agreements expire on
February 2, 2012, and May 31, 2012, respectively.
K-18
EXECUTIVE OFFICERS OF THE REGISTRANTS
Executive Officers UniSource Energy
Executive Officers of UniSource Energy, who are elected annually by UniSource Energys Board of
Directors, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officer |
Name |
|
Age |
|
Position(s) Held |
|
Since |
Paul J. Bonavia
|
|
|
58 |
|
|
Chairman, President and Chief Executive Officer
|
|
|
2009 |
|
Michael J. DeConcini
|
|
|
45 |
|
|
Senior Vice President and Chief Operating Officer, Transmission and Distribution
|
|
|
1999 |
|
Raymond S. Heyman
|
|
|
54 |
|
|
Senior Vice President and General Counsel
|
|
|
2005 |
|
Kevin P. Larson
|
|
|
53 |
|
|
Senior Vice President, Chief Financial Officer and Treasurer
|
|
|
2000 |
|
Philip Dion III
|
|
|
41 |
|
|
Vice President, Legal and Environmental Services
|
|
|
2008 |
|
Kentton C. Grant
|
|
|
51 |
|
|
Vice President, Finance and Rates
|
|
|
2007 |
|
Arie Hoekstra
|
|
|
62 |
|
|
Vice President, Generation
|
|
|
2007 |
|
David G. Hutchens
|
|
|
43 |
|
|
Vice President, Energy Efficiency and Resource Planning
|
|
|
2007 |
|
Karen G. Kissinger
|
|
|
55 |
|
|
Vice President, Controller and Chief Compliance Officer
|
|
|
1998 |
|
Steven W. Lynn
|
|
|
63 |
|
|
Vice President, Communications and Government Relations
|
|
|
2003 |
|
Thomas A. McKenna
|
|
|
61 |
|
|
Vice President, Engineering
|
|
|
2007 |
|
Catherine E. Ries
|
|
|
50 |
|
|
Vice President, Human Resources
|
|
|
2007 |
|
Herlinda H. Kennedy
|
|
|
48 |
|
|
Corporate Secretary
|
|
|
2006 |
|
|
|
|
Paul J. Bonavia
|
|
Mr. Bonavia became Chairman, President and Chief
Executive Officer of UniSource Energy and TEP in
January 2009. Prior to joining UniSource Energy and
TEP, Mr. Bonavia served as President of the Utilities
Group of Xcel Energy. Mr. Bonavia previously served
as President of Xcel Energys Commercial Enterprises
business unit and President of the companys Energy
Markets unit. |
|
|
|
Michael J. DeConcini
|
|
Mr. DeConcini joined TEP in 1988 and was elected
Senior Vice President and Chief Operating Officer of
the Energy Resources business unit of TEP, effective
January 1, 2003. In August 2006, he was named Senior
Vice President and Chief Operating Officer,
Transmission and Distribution. In May 2009, he was
named Senior Vice President and Chief Operating
Officer. |
|
|
|
Raymond S. Heyman
|
|
Mr. Heyman was elected to the position of Senior Vice
President and General Counsel of TEP and UniSource
Energy in September 2005. Prior to joining UniSource
Energy and TEP, Mr. Heyman was a member of the
Phoenix, Arizona law firm Roshka, Heyman & DeWulf,
PLC. |
|
|
|
Kevin P. Larson
|
|
Mr. Larson joined TEP in 1985 and thereafter held
various positions in its finance department and at
TEPs investment subsidiaries. He was elected
Treasurer of TEP in August 1994 and Vice President in
March 1997. In October 2000, he was elected Vice
President and Chief Financial Officer of both
UniSource Energy and TEP and serves as Treasurer of
both organizations. He was named Senior Vice
President in September 2005. |
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Philip Dion III
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Mr. Dion was named Vice President of Legal and
Environmental Services at UniSource Energy and TEP in
February 2008. Prior to joining TEP, Mr. Dion was
chief of staff and chief legal advisor to
Commissioner Marc Spitzer of the Federal Energy
Regulatory Commission. Mr. Dion previously worked in
various roles at the ACC, including as an
administrative law judge and as an advisor to Mr.
Spitzer, prior to his appointment to FERC. |
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Kentton C. Grant
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Mr. Grant joined TEP in 1995. In January 2007, Mr.
Grant was elected Vice President of Finance and Rates
at UniSource Energy and TEP. |
K-19
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Arie Hoekstra
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Mr. Hoekstra joined TEP in 1979. In January 2007,
Mr. Hoekstra was elected Vice President of Generation
at UniSource Energy and TEP. |
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David G. Hutchens
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Mr. Hutchens joined TEP in 1995. In May 2009, Mr.
Hutchens was named Vice President of Energy
Efficiency and Resource Planning. In January 2007,
Mr. Hutchens was elected Vice President of Wholesale
Marketing at UniSource Energy and TEP, and Vice
President of UNS Gas. |
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Karen G. Kissinger
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Ms. Kissinger joined TEP as Vice President and
Controller in January 1991. She was named Vice
President, Controller and Principal Accounting
Officer of UniSource Energy in January 1998. She has
served as Chief Compliance Officer of UniSource
Energy and TEP since 2003. |
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Steven W. Lynn
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Mr. Lynn joined TEP in 2000. In January 2003, he was
elected Vice President of Communications and
Government Relations at UniSource Energy and TEP. |
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Thomas A. McKenna
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Mr. McKenna joined Nations Energy Corporation (a
wholly-owned subsidiary of Millennium) in 1998. In
May 2009, Mr. McKenna was named Vice President of UNS
Gas. This is in addition to his position as Vice
President of Engineering at UniSource Energy and TEP,
and Vice President of UNS Electric, to which he was
elected in January 2007. |
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Catherine E. Ries
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Ms. Ries joined UniSource Energy and TEP in June 2007
as Vice President of Human Resources. Prior to
joining UniSource Energy and TEP, Ms. Ries worked for
Clopay Building Products, a division of Griffon
Corporation, from 2000 to 2007 and held the position
of Vice President of Human Resources prior to joining
UniSource Energy and TEP. |
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Herlinda H. Kennedy
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Ms. Kennedy joined TEP in 1980. Ms. Kennedy was
named assistant Corporate Secretary of TEP and
UniSource Energy in 1999 and was elected Corporate
Secretary of UniSource Energy and TEP in September
2006. |
Executive Officers TEP
The executive officers of TEP are the same as UniSource Energy. See Executive Officers
UniSource Energy,
above, for a listing and description of TEPs executive officers.
SEC REPORTS AVAILABLE ON UNISOURCE ENERGYS WEBSITE
UniSource Energy and TEP make available their annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after they electronically file them with, or furnish them to, the Securities and
Exchange Commission (SEC). These reports are available free of charge through UniSource Energys
website address: http://www.uns.com. A link from UniSource Energys website to these SEC reports
is accessible as follows: At the UniSource Energy main page, select Investors from the menu shown
at the top of the page; next select SEC filings from the menu shown on the Investor Relations page.
UniSource Energys code of ethics, and any amendments made to the code of ethics, is also
available on UniSource Energys website.
Information contained at UniSource Energys website is not part of any report filed with the SEC by
UniSource Energy or TEP.
ITEM 1A. RISK FACTORS
The business and financial results of UniSource Energy and TEP are subject to a number of risks and
uncertainties, including those set forth below and in other documents we file with the SEC. These
risks and uncertainties fall primarily into five major categories: revenues, regulatory, financial,
environmental and operational.
REVENUES
National and local economic conditions can have a significant impact on the results of operations,
net income and cash flows at TEP, UNS Gas and UNS Electric.
Economic conditions have contributed significantly to a reduction in TEPs retail customer growth
and lower energy usage by the companys residential, commercial and industrial customers. From
2003 to 2007, customer growth in TEPs service territory averaged approximately 2% per year. In
2008 and 2009, as economic conditions
worsened, TEPs average retail customer base grew by less than 1%. In 2009, total retail kWh sales
were 1.4% below 2008 levels. TEP estimates that a 1% decrease in annual retail sales could reduce
pre-tax net income and pre-tax cash flows by approximately $6 million.
K-20
Similar impacts were felt at UNS Gas and UNS Electric. The retail customer bases at both companies
did not grow during 2008 or 2009 compared with average annual growth rates of 3 to 4% from 2003 to
2007. We estimate that a 1% decrease in annual retail sales at UNS Gas and UNS Electric could
reduce pre-tax net income and pre-tax cash flows by less than $1 million.
TEPs base rates are frozen through December 31, 2012, which could limit our ability to cope with
the impact of risks and uncertainties and negatively affect TEPs results of operations, net income
and cash flows.
Under the terms of the 2008 TEP rate order, TEP is prohibited from submitting a base rate
application before June 30, 2012 and new rates cannot go into effect prior to December 31, 2012.
If the cost of serving TEPs customers rises more quickly than the revenues collected from
customers, TEPs results of operations, net income and cash flows could be negatively impacted.
New technological developments and increasing use of more energy efficient products may have a
significant impact on retail sales, which could negatively impact UniSource Energys results of
operations, net income and cash flows.
Heightened awareness of energy costs and general public support for energy efficiency has increased
demand for products intended to reduce consumers use of electricity. TEP and UNS Electric also
are promoting Demand Side Management programs designed to help customers reduce their energy use,
and these efforts may increase significantly under new energy efficiency rules given preliminary
approval in 2009 by the ACC. Unless the ACC makes specific provision for the recovery of
usage-based revenues lost to these energy efficiency programs, the reduced retail sales that would
result from the success of these efforts would negatively impact the results of operations, net
income and cash flows of TEP and UNS Electric.
The revenues, results of operations and cash flows of TEP, UNS Gas and UNS Electric are seasonal,
and are subject to weather conditions and customer usage patterns, beyond the companies control.
TEP typically earns the majority of its operating revenue and net income in the third quarter
because retail customers increase their air conditioning usage during Tucsons hot summer weather.
Conversely, TEPs first quarter net income is typically limited by relatively mild winter weather
in its retail service territory. UNS Electrics earnings follow a similar pattern, while UNS Gas
sales peak in the winter during home heating season. Cool summers or warm winters may affect
customer usage at all three companies, adversely affecting operating revenues, cash flows and net
income by reducing sales.
REGULATORY
TEP, UNS Gas and UNS Electric are subject to regulation by the ACC, which sets the companies
retail rates and oversees many aspects of their business in ways that could negatively affect the
companies results of operations, net income and cash flows.
The ACC is a constitutionally created body composed of five elected commissioners. Commissioners
are elected state-wide for staggered four-year terms and are limited to serving a total of two
terms. As a result, the composition of the commission, and therefore its policies, are subject to
change every two years.
The ACC is charged with setting retail electric and gas rates that provide utility companies with
an opportunity to recover their costs of service and earn a reasonable rate of return. The
decisions these elected officials make on such matters impact the net income and cash flows of TEP,
UNS Gas and UNS Electric.
Changes in federal energy regulation may negatively affect TEP, UNS Gas and UNS Electrics results
of operations, net income and cash flows.
TEP, UNS Gas and UNS Electric are subject to comprehensive and changing governmental regulation at
the federal level that continues to change the structure of the electric and gas utility industries
and the ways in which
these industries are regulated. UniSource Energys electric utility subsidiaries are subject to
regulation by the FERC. The FERC has jurisdiction over rates for electric transmission in
interstate commerce and rates for wholesale sales of electric power, including terms and prices of
transmission services and sales of electricity at wholesale prices.
K-21
FINANCIAL
Financial market disruptions and volatility may increase our financing costs, limit our access to
the credit markets and increase our pension funding obligations, which may adversely affect our
liquidity and our ability to carry out our financial strategy.
We rely on access to the bank markets and capital markets as a significant source of liquidity and
for capital requirements not satisfied by the cash flow from our operations. Market disruptions
such as those recently experienced in the United States and abroad may increase our cost of
borrowing or adversely affect our ability to access sources of liquidity needed to finance our
operations and satisfy our obligations as they become due. These disruptions may include turmoil in
the financial services industry, including substantial uncertainty surrounding particular lending
institutions and counterparties we do business with, unprecedented volatility in the markets where
our outstanding securities trade, and general economic downturns in our utility service
territories. If we are unable to access credit at competitive rates, or if our borrowing costs
dramatically increase, our ability to finance our operations, meet our short-term obligations and
execute our financial strategy could be adversely affected.
Changing market conditions could negatively affect the market value of assets held in our pension
and other postretirement pension plans and may increase the amount and accelerate the timing of
required future funding contributions.
Financial market disruptions and volatility may increase our financing costs and adversely affect
our ability to refinance debt obligations and credit agreements totaling $671 million that expire
or come due in 2011 at UniSource Energy, TEP, UNS Gas and UNS Electric.
UniSource Energy, TEP, UNS Gas and UNS Electric are each party to a revolving credit agreement with
a group of lenders. We rely on these agreements for working capital requirements not provided by
cash flow from our operations. We cannot be assured that there will be sufficient lender interest
and capacity to refinance these facilities prior to their expiration dates. The following credit
agreements and debt obligations mature in August 2011:
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Description |
|
Amount |
UniSource Energy Credit Agreement
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$70 million revolving credit facility |
TEP Credit Agreement
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$491 million, consisting of a $341
million letter of credit facility and a
$150 million revolving credit facility |
UNS Gas/UNS Electric Revolver
|
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$60 million revolving credit facility |
UNS Gas Senior Unsecured Notes
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$50 million |
UniSource Energy, TEP, UNS Gas and UNS Electric could have difficulty obtaining funding under their
respective revolving credit facilities when required if lenders in the bank group file for
bankruptcy or refuse to fund when requested. If sufficient liquidity is not available to meet
short-term working capital needs, if we are unable pay off or refinance our debt obligations or if
borrowing costs dramatically increase, UniSource Energy, TEP, UNS Gas and UNS Electrics results of
operations, net income and cash flows could be negatively impacted.
Regulatory rules and other restrictions limit the ability of TEP, UNS Gas and UNS Electric to make
distributions to UniSource Energy.
As a holding company, UniSource Energy is dependent on the earnings and distributions of funds from
its subsidiaries to service its debt and pay dividends to shareholders.
K-22
Restrictions include:
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TEP, UNS Gas and UNS Electric are restricted from lending or transferring funds or
issuing securities without ACC approval; |
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The Federal Power Act restricts electric utilities ability to pay dividends out of
funds that are properly included in their capital account. TEP has an accumulated deficit
rather than positive retained earnings. Although the terms of the Federal Power Act are
unclear, we believe there is a reasonable basis for TEP to pay dividends from current year
earnings. However, the FERC could attempt to stop TEP from paying further dividends or
could seek to impose additional restrictions on the payment of dividends; and |
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TEP, UNS Gas and UNS Electric must be in compliance with their respective debt
agreements to make dividend payments to UniSource Energy. |
Economic conditions could adversely impact our ability to comply with financial covenants in the
UniSource Energy and TEP Credit Agreements.
The UniSource Energy and TEP credit and reimbursement agreements include a minimum cash flow to
interest coverage ratio and a maximum leverage ratio. The leverage ratios are calculated as the
ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. The
ability to comply with these covenants could be adversely impacted by lower customer growth rates
or sales during an economic downturn. In the event that we seek to renegotiate these provisions to
provide additional flexibility, we may need to pay fees or increased interest rates on borrowings
as a condition to any amendments or waivers.
UniSource Energys net income and cash flows can be adversely affected by rising interest rates.
As of February 23, 2010, TEP had $329 million of tax-exempt variable rate debt obligations. The interest rates on these
debt obligations are set weekly with a maximum interest rate of 20%. The average weekly interest
rate ranged from 0.25% to 0.79% in 2009. A 1% increase in the average interest rates on this debt,
over a twelve month period, would result in an increase in interest expense by approximately $3
million.
UniSource Energy, TEP, UNS Gas and UNS Electric also are subject to risk resulting from changes in
the interest rate on their borrowings under revolving credit facilities. Revolving credit
borrowings may be made on a spread over LIBOR or an Alternate Base Rate. Each of these agreements
is a committed facility and expires in August 2011.
If capital market conditions result in rising interest rates, the resulting increase in the cost of
variable rate borrowings would negatively impact UniSource Energy, TEP, UNS Gas and UNS Electric
results of operations, net income and cash flows.
TEP, UNS Gas and UNS Electric may be required to post margin under their power and fuel supply
agreements which could negatively impact their liquidity.
TEP, UNS Gas and UNS Electric secure power and fuel supply resources to serve their respective
retail customers. The agreements under which TEP, UNS Gas and UNS Electric contract for such
resources include requirements to post credit enhancement in the form of cash or letters of credit
under certain circumstances, including changes in market prices which affect contract values, or a
change in creditworthiness of the respective companies.
In order to post such credit enhancement, TEP, UNS Gas and UNS Electric would have to use available
cash, draw under their revolving credit agreements, or issue letters of credit under their
revolving credit agreements.
The maximum amount TEP may use under its revolving credit facility is $150 million. As of February
23, 2010, TEP had $99 million available to borrow under its revolving credit facility. The
maximum amount UNS Gas or UNS Electric may use under their revolving credit facility is $45
million, so long as the combined amount does not exceed $60 million. As of February 23, 2010, UNS
Gas and UNS Electric had $45 million and $33 million, respectively, to borrow under their revolving
credit facility. From time to time, TEP, UNS Gas and UNS Electric use their respective revolving
credit facilities to post collateral. If additional collateral is required, it may negatively
impact TEP, UNS Gas and/or UNS Electrics ability to fund their capital requirements. As of
December 31, 2009, TEP, UNS Gas and UNS Electric had posted $1 million, $2 million, and $11
million, respectively, with counterparties.
K-23
UniSource Energy and its subsidiaries have substantial debt which could adversely affect their
business and results of operations.
UniSource Energy has no operations of its own and derives all of its revenues and cash flow from
its subsidiaries. At December 31, 2009, the ratio of total debt (including capital lease
obligations net of investments in lease debt) to total capitalization for UniSource Energy and its
subsidiaries was 70%. This substantial debt level:
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requires UniSource Energy and its subsidiaries to dedicate a substantial portion of
their cash flow to pay principal and interest on their debt, which could reduce the funds
available for working capital, capital expenditures, acquisitions and other general
corporate purposes; and |
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could limit UniSource Energy and its subsidiaries ability to borrow additional amounts
for working capital, capital expenditures, acquisitions, dividends, debt service
requirements, execution of its business strategy or other purposes. |
The cost of renewing leases or purchasing TEPs leased assets, or the cost of procuring alternate
sources of generation or purchased power, could adversely affect TEPs results of operations, net
income and cash flows.
TEP, under separate sale and leaseback arrangements, leases the following generation facilities:
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Leased Asset |
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Expiration |
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Renewal/Purchase Option |
Springerville Unit 1
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2015 |
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Fair market value purchase option |
Springerville Coal Handling Facilities
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2015 |
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Fixed price purchase option of $120 million |
Springerville Common Facilities
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2017 & 2021 |
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Fixed price purchase option of $106 million |
Sundt Unit 4
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2011 |
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Agreement to purchase equity entered into
January 2010 |
TEP may renew the leases or purchase the assets when the leases expire at various times between
2011 and 2021. The renewal and purchase options for Springerville Unit 1 are generally for fair
market value as determined at that time, whereas fixed purchase price options exist for the coal
handling and common facilities leases. Upon expiration of the coal handling and common facilities
leases (whether at the end of the initial term or any renewal term), TEP has the obligation under
agreements with the Springerville Units 3 and 4 owners to purchase such facilities, and each of the
owners of Springerville Units 3 and 4 has the obligation to purchase or continue renting from TEP
at 14% and 17% interest, respectively, in these facilities.
ENVIRONMENTAL
UniSource Energys utility subsidiaries are subject to numerous environmental laws and regulations
that may increase their cost of operations or expose them to environmentally-related litigation and
liabilities.
UniSource Energys utility subsidiaries are subject to numerous federal, state and local
environmental laws and regulations affecting present and future operations, including rules
regarding air emissions, water quality, wastewater discharges, solid waste and hazardous waste.
Many of these regulations arise from TEPs reliance on coal as its primary fuel for energy
generation.
These laws and regulations can contribute to higher capital, operating and other costs,
particularly with regard to enforcement efforts focused on existing power plants and compliance
plans with regard to new and existing power plants. These laws and regulations generally require us
to obtain and comply with a wide variety of environmental licenses, permits, authorizations and
other approvals. Both public officials and private individuals may seek to enforce applicable
environmental laws and regulations. Failure to comply with applicable laws and regulations might
result in the imposition of fines and penalties by regulatory authorities. We cannot provide
assurance that existing environmental laws and regulations will not be revised or that new
environmental laws and regulations will not be adopted or become applicable to us. Increased
compliance costs or additional operating restrictions from revised or additional regulation could
have an adverse effect on our results of operations, particularly if those costs are not fully
recoverable from our ratepayers.
TEP also is contractually obligated to pay a portion of the environmental reclamation costs
incurred at generating stations in which it has a minority interest and may be obliged to pay
similar costs at the mines that supply these generating stations. While TEP has recorded the
portion of its costs that can be determined at this time, the total costs for final reclamation at
these sites are unknown and could be substantial.
K-24
New federal regulations to limit greenhouse gas emissions could increase TEPs cost of operations
and result in a change in the composition of TEPs coal-dominated generating fleet.
Based on the finding by the EPA in December 2009 stating that greenhouse gases endanger public
health and welfare, the agency is in the process of developing regulations limiting greenhouse gas
emissions. In addition, there are proposals and ongoing studies at the state, federal and
international levels to address global climate change that could also result in the regulation of
carbon dioxide (CO2) and other greenhouse gases. Any future regulatory actions taken to
address global climate change represent a business risk to our operations. In 2009, 69% of TEPs
total energy resources came from its coal-fueled generating facilities. Reductions in
CO2 emissions to the levels specified by some proposals could be materially adverse to
our financial position or results of operations if associated costs of control or limitation cannot
be recovered from customers. Any future legislation or regulation addressing climate change could
produce a number of other results including additional costs to fund energy efficiency activities,
costly modifications to, or reexamination of the economic viability of, our existing coal plants or
changes in the overall fuel mix of our generating fleet. The impact of legislation or regulation to
address global climate change would depend on the specific legislation or regulation enacted and
cannot be determined at this time.
UniSource Energy could be subject to physical risks associated with climate change.
Climate change may cause physical risks, including an increase in sea level, intensified storms,
water scarcity and changes in weather conditions, such as changes in precipitation, average
temperatures and extreme weather conditions. A significant portion of the nations oil and gas
infrastructure is located in areas susceptible to storm damage that could be aggravated by wetland
and barrier island erosion, which could give rise to fuel supply interruptions and price spikes.
These and other physical changes could result in changes in customer demand, increased costs
associated with repairing and maintaining generation facilities and transmission and distribution
systems resulting in increased maintenance and capital costs (and potential increased financing
needs), limits on the companys ability to meet peak customer demand, increased regulatory
oversight, and lower customer satisfaction. Also, to the extent that climate change adversely
impacts the economic health of a region, it may adversely impact customer demand and revenues.
Such physical risks could have an adverse effect on our financial condition, results of operations
and liquidity.
OPERATIONAL
The operation of electric generating stations involves risks that could result in unplanned outages
or reduced generating capability that could adversely affect TEPs results of operations, net
income and cash flows.
The operation of electric generating stations involves certain risks, including equipment breakdown
or failure, interruption of fuel supply and lower than expected levels of efficiency or operational
performance. Unplanned outages, including extensions of planned outages due to equipment failure
or other complications occur from time to time and are an inherent risk of our business. If TEPs
generating stations operate below expectations, TEP could be adversely affected.
The operation of electric transmission and distribution systems involves a risk of significant
unplanned outages that could adversely affect TEP and UNS Electrics businesses, results of
operations, net income and cash flows.
The operation of electric transmission and distribution systems involves certain risks, including
equipment failure and damage caused by storms, fires or other hazards. Unplanned outages occur
from time to time and are an inherent risk of our business. If TEP or UNS Electrics transmission
and distribution systems experience a significant failure, TEP or UNS Electric could be adversely
affected
K-25
TEP could be subject to penalties as a result of mandatory reliability standards.
As a result of the Energy Policy Act of 2005, owners and operators of bulk power transmission
systems, including TEP, are subject to mandatory reliability standards that are developed and
enforced by NERC, subject to the oversight of FERC. If we fail to comply with the mandatory
reliability standards we could be subject to sanctions, including substantial monetary penalties.
UNS Electric may not be able to secure sufficient energy resources to serve its retail customers.
UNS Electric owns 68 MW of peaking generation resources and is purchasing the output of the 90 MW
BMGS from UED through a PPA that extends through May 2013. UNS Electric also relies on short and
intermediate term purchased power contracts to meet its retail energy demand. In 2009, UNS
Electrics peak retail demand was 559 MW. UNS Electric procures its projected retail peak demand
requirements prior to the start of the summer season. In addition to its owned resources and PPA
with UED, UNS Electric has acquired other contract capacity to satisfy 90% and 60% of its projected
summer peak demand for 2010 and 2011, respectively. However, UNS Electric cannot predict whether
it will be able to obtain sufficient resources to meet its retail energy demand for 2010 and
beyond. UNS Electrics cash flows and net income could be negatively impacted if UNS Electric is
unable to secure adequate energy resources to sell to its retail customers.
TEP or UNS Electric may not be able to secure adequate right-of-way to construct transmission lines
and may be required to find alternate ways to provide adequate sources of energy and maintain
reliability in TEP and UNS Electrics service areas.
TEP and UNS Electric rely on federal, state and local governmental agencies to secure right-of-way
and siting permits to construct transmission lines. If adequate right-of-way and siting permits to
build new transmission lines cannot be secured:
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TEP and UNS Electric may need to rely on more costly alternatives to provide energy to
their customers; |
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TEP and UNS Electric may not be able to maintain reliability in their service areas; or |
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TEP and UNS Electrics ability to provide electric service to new customers may be
negatively impacted. |
TEP may be required to build an estimated $120 million transmission line from Tucson to Nogales or
UNS Electric or TEP may be required to find alternate ways to improve reliability in UNS Electrics
Santa Cruz service area.
In 2001, TEP entered into an agreement to build an approximately 60-mile transmission line from
Tucson to Nogales, Arizona, in response to an order from the ACC to improve reliability to UNS
Electrics retail customers in Nogales. Required regulatory approvals have delayed the
construction of the transmission line, and in 2005, the ACC initiated proceedings to review the
status of service in Nogales and need for the 345-kV line. After a hearing on the issue in
February 2006, the ACC directed the ALJ to amend the recommendation to direct the Arizona Power
Plant and Transmission Line Siting Committee to gather facts related to options for improving
service reliability in Santa Cruz County. If all regulatory approvals are received and the project
moves forward, the future costs to construct the transmission line from Tucson to Nogales are
expected to be $120 million. If TEP is required to build the transmission line, it may negatively
impact TEPs ability to internally fund substantially all of its capital requirements.
If TEP does not receive required approvals or if the project is abandoned, TEP may be required to
expense a portion of the $11 million it has incurred through December 31, 2009, in land
acquisition, engineering and environmental expenses. In such an event, TEP or UNS Electric may be
required to make additional expenditures to improve reliability. In the event TEP or UNS Electric
are unable to recover such expenditures, their results of operations and net income could be
adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
K-26
ITEM 2. PROPERTIES
TEP PROPERTIES
TEPs transmission facilities, located in Arizona and New Mexico, transmit electricity from TEPs
remote electric generating stations at Four Corners, Navajo, San Juan, Springerville and Luna to
the Tucson area for use by TEPs retail customers (see Item 1. Business Generating and Other
Resources). The transmission system is interconnected at various points in Arizona and New Mexico
with a number of regional utilities. TEP has arrangements with approximately 120 companies to
interchange generation capacity and transmission of energy.
As of December 31, 2009, TEP owned or participated in an overhead electric transmission and
distribution system consisting of:
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512 circuit-miles of 500-kV lines; |
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1,087 circuit-miles of 345-kV lines; |
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369 circuit-miles of 138-kV lines; |
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477 circuit-miles of 46-kV lines; and |
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2,622 circuit-miles of lower voltage primary lines. |
The underground electric distribution system is comprised of 4,341 cable-miles. TEP owns
approximately 76% of the poles on which the lower voltage lines are located. Electric substation
capacity consisted of 102 substations with a total installed transformer capacity of 13,170,650
kilovolt amperes.
Substantially all of the utility assets owned by TEP are subject to the lien of the 1992 Mortgage.
Springerville Unit 2, which is owned by San Carlos Resources Inc., a wholly-owned subsidiary of TEP
(San Carlos), is not subject to the lien.
The electric generating stations (except as noted below), operating headquarters, warehouse and
service center are located on land owned by TEP. The electric distribution and transmission
facilities owned by TEP are located:
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on property owned by TEP; |
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under or over streets, alleys, highways and other public places, the public domain and
national forests and state lands under franchises, easements or other rights which are
generally subject to termination; |
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under or over private property as a result of easements obtained primarily from the
record holder of title; or |
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over American Indian reservations under grant of easement by the Secretary of Interior
or lease by American Indian tribes. |
It is possible that some of the easements, and the property over which the easements were granted,
may have title defects or may be subject to mortgages or liens existing at the time the easements
were acquired.
Springerville is located on land parcels held by TEP under a long-term surface ownership agreement
with the State of Arizona.
Four Corners and Navajo are located on properties held under easements from the United States and
under leases from the Navajo Nation, respectively. TEP, individually and in conjunction with PNM
in connection with San Juan, has acquired easements and leases for transmission lines and a water
diversion facility located on land owned by the Navajo Nation. TEP has also acquired easements for
transmission facilities, related to San Juan, Four Corners, and Navajo, across the Zuni, Navajo and
Tohono Oodham Indian Reservations. TEP, in conjunction with PNM and Phelps Dodge, holds an
undivided ownership interest in the property on which Luna is located.
TEPs rights under these various easements and leases may be subject to defects such as:
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possible conflicting grants or encumbrances due to the absence of or inadequacies in the
recording laws or record systems of the Bureau of Indian Affairs and the American Indian
tribes; |
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possible inability of TEP to legally enforce its rights against adverse claimants and
the American Indian tribes without Congressional consent; or |
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failure or inability of the American Indian tribes to protect TEPs interests in the
easements and leases from disruption by the U.S. Congress, Secretary of the Interior, or
other adverse claimants. |
K-27
These possible defects have not interfered and are not expected to materially interfere with TEPs
interest in and operation of its facilities.
TEP, under separate sale and leaseback arrangements, leases the following generation facilities
(which do not include land):
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coal handling facilities at Springerville; |
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a 50% undivided interest in the Springerville Common Facilities; |
|
|
|
Springerville Unit 1 and the remaining 50% undivided interest in the Springerville
Common Facilities; and |
|
|
|
Sundt Unit 4 and related common facilities. |
See Note 6 of Notes to Consolidated Financial Statements, Debt, Credit Facilities, and Capital
Lease Obligations and Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations, Tucson Electric Power Company, Liquidity and Capital Resources, Contractual
Obligations, for additional information on TEPs capital lease obligations.
UES PROPERTIES
UNS Gas
As of December 31, 2009, UNS Gas transmission and distribution system consisted of approximately
58 miles of steel transmission mains, 4,173 miles of steel and plastic distribution mains, and
135,920 customer service lines.
UNS Electric
As of December 31, 2009, UNS Electrics transmission and distribution system consisted of
approximately 56 circuit-miles of 115-kV transmission lines, 264 circuit-miles of 69-kV
transmission lines, and 3,581 circuit-miles of underground and overhead distribution lines. UNS
Electric also owns 39 substations having a total installed capacity of 1,768,050 kilovolt amperes
and the 65 MW Valencia plant.
The gas and electric distribution and transmission facilities owned by UNS Gas and UNS Electric are
located:
|
|
|
on property owned by UNS Gas or UNS Electric; |
|
|
|
under or over streets, alleys, highways and other public places, the public domain and
national forests and state lands under franchises, easements or other rights which are
generally subject to termination; or |
|
|
|
under or over private property as a result of easements obtained primarily from the
record holder of title. |
It is possible that some of the easements, and the property over which the easements were granted,
may have title defects or may be subject to mortgages or liens existing at the time the easements
were acquired.
UED PROPERTIES
As of December 31, 2009, UED owned a 90 MW gas-fired generation facility in Kingman, Arizona, known
as BMGS, that was completed in May 2008. BMGS is located on property that is owned by UNS Electric
and currently leased to UED. BMGS is subject to a lien to secure UEDs obligations under its term
loan facility.
ITEM 3. LEGAL PROCEEDINGS
Right of Way Matters
TEP is a defendant in a putative 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 allege,
among other things, that the rights of ways for defendants transmission lines on Navajo lands were
improperly granted and that the compensation paid for such rights of way was inadequate. The
plaintiffs are 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 and in September 2009, the plaintiffs filed responses. TEP cannot predict the
outcome of this lawsuit.
K-28
Sierra Club San Juan Allegations
In December 2009, the Sierra Club sent TEP, the other owners of the San Juan Generating Station
(SJGS), and San Juan Coal Company (SJCC), a Notice of Intent to Sue (RCRA Notice) under the
Resource Conservation and Recovery Act (RCRA). The RCRA Notice alleges 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 and that
placement of CCBs at the mine constitute open dumping in violation of RCRA. Additionally, TEP has
been informed that the Sierra Club sent SJCC a separate Notice of Intent to Sue (SMCRA Notice)
under the Surface Mine Control and Reclamation Act (SMCRA) in December 2009. The SMCRA Notice
similarly alleges damage to the environment due to activities at the San Juan mine, including the
placement of CCBs from SJGS in the surface pits at the mine. Both Notices state Sierra Clubs
intent to file citizens suits to pursue these claims upon expiration of the RCRA and SMRCA
statutory notice periods. If suits are filed, potential remedies include the imposition of civil
penalties and injunctive relief. TEP and Public Service Company of New Mexico, the SJGS operator,
plan an aggressive defense of the RCRA claims. TEP cannot predict the outcome of these matters at
this time.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, Tucson Electric Power Company, Factors Affecting Operations, for litigation related to
ACC orders and retail competition.
In addition, see legal proceedings described in Note 4 of Notes to Consolidated Financial
Statements,
Commitments and Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF COMMON EQUITY
Stock Trading
UniSource Energys Common Stock is traded under the ticker symbol UNS and is listed on the New York
Stock Exchange. On February 23, 2010, the closing price was $31.37, with 9,375 shareholders of
record.
Dividends
UniSource Energys Board of Directors currently expects to continue to pay regular quarterly cash
dividends on our Common Stock subject, however, to the Boards evaluation of our financial
condition, earnings, cash flows and dividend policy.
UniSource Energy is the sole shareholder of TEPs common stock and relies on dividends from its
subsidiaries, primarily TEP, to declare and pay dividends. The TEP Board of Directors typically
declares a dividend at the end of each year.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, UniSource Energy Consolidated, Liquidity and Capital Resources, Dividends on Common
Stock.
K-29
Common Stock Dividends and Price Ranges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Market Price per |
|
|
|
|
|
|
Market Price per |
|
|
|
|
|
|
Share of Common |
|
|
|
|
|
|
Share of Common |
|
|
|
|
|
|
Stock (1) |
|
|
Dividends |
|
|
Stock (1) |
|
|
Dividends |
|
Quarter: |
|
High |
|
|
Low |
|
|
Declared |
|
|
High |
|
|
Low |
|
|
Declared |
|
|
|
First |
|
$ |
29.97 |
|
|
$ |
22.76 |
|
|
$ |
0.29 |
|
|
$ |
32.18 |
|
|
$ |
21.35 |
|
|
$ |
0.24 |
|
Second |
|
|
28.76 |
|
|
|
24.78 |
|
|
|
0.29 |
|
|
|
34.49 |
|
|
|
22.33 |
|
|
|
0.24 |
|
Third |
|
|
31.11 |
|
|
|
25.96 |
|
|
|
0.29 |
|
|
|
33.42 |
|
|
|
28.10 |
|
|
|
0.24 |
|
Fourth |
|
|
33.11 |
|
|
|
28.04 |
|
|
|
0.29 |
|
|
|
29.67 |
|
|
|
20.91 |
|
|
|
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
UniSource Energys Common Stock price as reported by the New York Stock
Exchange. |
On February 12, 2010, UniSource Energy declared a cash dividend of $0.39 per share on its Common
Stock. The dividend will be paid March 8, 2010 to shareholders of record at the close of business
February 23, 2010.
TEPs common stock is wholly-owned by UniSource Energy and is not listed for trading on any stock
exchange. TEP declared and paid cash dividends to UniSource Energy of $60 million in 2009, $3
million in 2008, and $53 million in 2007.
Convertible Senior Notes
In 2005, UniSource Energy issued $150 million of 4.50% Convertible Senior Notes due 2035. Each
$1,000 of Convertible Senior Notes is convertible into 27.427 shares of our Common Stock at any
time, representing a conversion price of approximately $36.46 per share of our Common Stock,
subject to adjustment in certain circumstances. See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations, UniSource Energy Consolidated, Liquidity and
Capital Resources, Executive Overview, UniSource Energy Consolidated Cash Flows, Financing
Activities.
Issuer Purchases of Common Equity
UniSource Energy did not purchase any of its Common Stock during 2009, 2008 or 2007.
K-30
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
UniSource Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
- In Thousands - |
|
|
|
(except per share data) |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
$ |
1,394,424 |
|
|
$ |
1,397,511 |
|
|
$ |
1,381,373 |
|
|
$ |
1,308,141 |
|
|
$ |
1,224,056 |
|
Income Before Discontinued Operations
and Accounting Change |
|
$ |
104,258 |
|
|
$ |
14,021 |
|
|
$ |
58,373 |
|
|
$ |
69,243 |
|
|
$ |
52,253 |
|
Net Income (1) |
|
$ |
104,258 |
|
|
$ |
14,021 |
|
|
$ |
58,373 |
|
|
$ |
67,447 |
|
|
$ |
46,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Discontinued Operations &
Accounting Change |
|
$ |
2.91 |
|
|
$ |
0.39 |
|
|
$ |
1.64 |
|
|
$ |
1.96 |
|
|
$ |
1.51 |
|
Net Income |
|
$ |
2.91 |
|
|
$ |
0.39 |
|
|
$ |
1.64 |
|
|
$ |
1.91 |
|
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Discontinued Operations &
Accounting Change |
|
$ |
2.69 |
|
|
$ |
0.39 |
|
|
$ |
1.57 |
|
|
$ |
1.85 |
|
|
$ |
1.44 |
|
Net Income |
|
$ |
2.69 |
|
|
$ |
0.39 |
|
|
$ |
1.57 |
|
|
$ |
1.80 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Common Stock Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
35,858 |
|
|
|
35,632 |
|
|
|
35,486 |
|
|
|
35,264 |
|
|
|
34,798 |
|
End of Year |
|
|
35,851 |
|
|
|
35,458 |
|
|
|
35,315 |
|
|
|
35,190 |
|
|
|
34,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end Book Value per Share |
|
$ |
20.94 |
|
|
$ |
19.16 |
|
|
$ |
19.54 |
|
|
$ |
18.59 |
|
|
$ |
17.69 |
|
Cash Dividends Declared per Share |
|
$ |
1.16 |
|
|
$ |
0.96 |
|
|
$ |
0.90 |
|
|
$ |
0.84 |
|
|
$ |
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Utility Plant Net |
|
$ |
2,785,714 |
|
|
$ |
2,617,693 |
|
|
$ |
2,407,295 |
|
|
$ |
2,259,620 |
|
|
$ |
2,171,461 |
|
Investments in Lease Debt and Equity |
|
|
132,168 |
|
|
|
126,672 |
|
|
|
152,544 |
|
|
|
181,222 |
|
|
|
156,301 |
|
Other Investments and Other Property |
|
|
60,239 |
|
|
|
64,096 |
|
|
|
70,677 |
|
|
|
66,194 |
|
|
|
58,468 |
|
Total Assets |
|
$ |
3,601,242 |
|
|
$ |
3,509,567 |
|
|
$ |
3,185,716 |
|
|
$ |
3,187,409 |
|
|
$ |
3,180,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
$ |
1,307,795 |
|
|
$ |
1,313,615 |
|
|
$ |
993,870 |
|
|
$ |
1,171,170 |
|
|
$ |
1,212,420 |
|
Non-Current Capital Lease Obligations |
|
|
488,349 |
|
|
|
513,517 |
|
|
|
530,973 |
|
|
|
588,771 |
|
|
|
665,737 |
|
Common Stock Equity |
|
|
750,865 |
|
|
|
679,274 |
|
|
|
690,075 |
|
|
|
654,149 |
|
|
|
616,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization |
|
$ |
2,547,009 |
|
|
$ |
2,506,406 |
|
|
$ |
2,214,918 |
|
|
$ |
2,414,090 |
|
|
$ |
2,494,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Cash Flow Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows From Operating Activities |
|
$ |
347,310 |
|
|
$ |
277,011 |
|
|
$ |
322,766 |
|
|
$ |
282,659 |
|
|
$ |
273,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
$ |
(287,104 |
) |
|
$ |
(357,324 |
) |
|
$ |
(245,366 |
) |
|
$ |
(238,261 |
) |
|
$ |
(203,362 |
) |
Other Investing Cash Flows (2) |
|
|
(9,540 |
) |
|
|
(95,493 |
) |
|
|
27,961 |
|
|
|
(7,820 |
) |
|
|
32,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows From Investing Activities |
|
$ |
(296,644 |
) |
|
$ |
(452,817 |
) |
|
$ |
(217,405 |
) |
|
$ |
(246,081 |
) |
|
$ |
(170,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows From Financing Activities |
|
$ |
(28,916 |
) |
|
$ |
140,605 |
|
|
$ |
(119,229 |
) |
|
$ |
(77,016 |
) |
|
$ |
(112,664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed
Charges (3) |
|
|
2.47 |
|
|
|
1.24 |
|
|
|
1.68 |
|
|
|
1.73 |
|
|
|
1.55 |
|
K-31
|
|
|
(1) |
|
Net Income includes an after-tax loss for discontinued operations of $2 million in
2006, and $5 million in 2005. Net income includes an after-tax loss of $0.6 million for the
Cumulative Effect of Accounting Change from the implementation of asset retirement accounting in 2005. |
|
((2) |
|
Other Investing Cash Flows in 2008 includes the $133 million deposit to
Trustee for Repayment of Collateral Trust Bond. |
|
(3) |
|
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. |
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
TEP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
-Thousands of Dollars- |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
$ |
1,096,711 |
|
|
$ |
1,079,253 |
|
|
$ |
1,070,503 |
|
|
$ |
988,994 |
|
|
$ |
937,470 |
|
Income Before Accounting Change |
|
|
89,248 |
|
|
|
4,363 |
|
|
|
53,456 |
|
|
|
66,745 |
|
|
|
48,893 |
|
Net Income (1) |
|
$ |
89,248 |
|
|
$ |
4,363 |
|
|
$ |
53,456 |
|
|
$ |
66,745 |
|
|
$ |
48,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Utility Plant Net |
|
$ |
2,261,325 |
|
|
$ |
2,120,619 |
|
|
$ |
1,957,506 |
|
|
$ |
1,887,387 |
|
|
$ |
1,866,622 |
|
Investments in Lease Debt and Equity |
|
|
132,168 |
|
|
|
126,672 |
|
|
|
152,544 |
|
|
|
181,222 |
|
|
|
156,301 |
|
Other Investments and Other Property |
|
|
31,813 |
|
|
|
31,291 |
|
|
|
35,460 |
|
|
|
30,161 |
|
|
|
27,013 |
|
Total Assets |
|
$ |
2,914,299 |
|
|
$ |
2,841,771 |
|
|
$ |
2,573,036 |
|
|
$ |
2,623,063 |
|
|
$ |
2,617,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
$ |
903,615 |
|
|
$ |
903,615 |
|
|
$ |
682,870 |
|
|
$ |
821,170 |
|
|
$ |
821,170 |
|
Non-Current Capital Lease Obligations |
|
|
488,311 |
|
|
|
513,370 |
|
|
|
530,714 |
|
|
|
588,424 |
|
|
|
665,299 |
|
Common Stock Equity |
|
|
643,144 |
|
|
|
583,606 |
|
|
|
577,349 |
|
|
|
554,714 |
|
|
|
558,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization |
|
$ |
2,035,070 |
|
|
$ |
2,000,591 |
|
|
$ |
1,790,933 |
|
|
$ |
1,964,308 |
|
|
$ |
2,045,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Cash Flow Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows From Operating Activities |
|
$ |
268,064 |
|
|
$ |
268,706 |
|
|
$ |
264,112 |
|
|
$ |
227,228 |
|
|
$ |
243,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
$ |
(235,485 |
) |
|
$ |
(294,940 |
) |
|
$ |
(162,539 |
) |
|
$ |
(156,180 |
) |
|
$ |
(149,906 |
) |
Other Investing Cash Flows(2) |
|
|
(14,116 |
) |
|
|
(95,814 |
) |
|
|
25,414 |
|
|
|
(25,786 |
) |
|
|
21,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows From Investing Activities |
|
$ |
(249,601 |
) |
|
$ |
(390,754 |
) |
|
$ |
(137,125 |
) |
|
$ |
(181,966 |
) |
|
$ |
(128,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows From Financing Activities |
|
$ |
(29,320 |
) |
|
$ |
128,713 |
|
|
$ |
(120,088 |
) |
|
$ |
(78,984 |
) |
|
$ |
(173,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges (3) |
|
|
2.58 |
|
|
|
1.13 |
|
|
|
1.75 |
|
|
|
1.84 |
|
|
|
1.60 |
|
|
|
|
(1) |
|
Net Income includes an after-tax loss of $0.6 million for the Cumulative Effect of
Accounting Change from the implementation of asset retirement accounting in 2005. |
|
(2) |
|
Other Investing Cash Flows in 2008 includes the $133 million deposit to
Trustee for Repayment of Collateral Trust Bonds. |
|
(3) |
|
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. |
|
Note: |
|
Disclosure of earnings per share information for TEP is not presented as the common stock of
TEP is not publicly traded. |
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
K-32
ITEM 7. 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 2009 compared with 2008, and 2008 compared with 2007, |
|
|
|
factors which affect our results and outlook, |
|
|
|
liquidity, capital needs, capital resources, and contractual obligations, |
|
|
|
critical accounting policies. |
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 outstanding common stock of TEP, UniSource
Energy Services, Inc. (UES), UniSource Energy Development Company (UED) and Millennium Energy
Holdings, Inc. (Millennium).
TEP, an electric utility, provides electric service to the community of Tucson, Arizona. UES,
through its two operating subsidiaries, UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (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 gas turbine project in
Northern Arizona that provides energy to UNS Electric through a five-year power sale agreement.
Millennium has existing investments in unregulated businesses; however no new investments are
planned at Millennium. We conduct our business in three primary business segments TEP, UNS Gas
and UNS Electric.
At December 31, 2009, the investment in Millennium represented 1% of UniSource Energys total
assets.
UNISOURCE ENERGY CONSOLIDATED
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 rate increases for UNS Gas and UNS Electric to provide adequate
revenues to cover the rising cost of providing reliable and safe service to their customers; |
|
|
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. |
K-33
Economic Conditions
Sales and Revenues
As a result of general economic conditions, retail customer growth and energy usage by residential
and commercial customers at UniSource Energys utility subsidiaries is below the average levels
experienced in prior periods. From 2003 to 2007, the growth in number of customers in UniSource
Energys utility service territories averaged 2% per year for TEP, and 3% per year for UNS Gas and
UNS Electric. During 2008 and 2009, UniSource Energys results were impacted by slower retail
customer growth and lower energy consumption.
TEP and UES experienced retail customer growth of less than 1% during 2009. TEPs total retail kWh sales decreased by 1.4% in 2008 compared with 2007.
This was the first year-over-year decrease in TEPs retail kWh sales since 2002. In 2009, TEPs
kWh sales declined by 1.4% over the prior years levels. This compares with average annual
increases in retail kWh sales of 4% from 2003 to 2007. We did not experience a significant
increase in uncollectible accounts at TEP, UNS Gas or UNS Electric in 2008 or 2009.
UniSource Energys future results of operations may continue to be impacted by weak economic
conditions. We cannot predict if the customer growth rate or sales volumes will return to historic
levels. We expect TEPs customer base to grow at a rate of less than 1% in 2010 and approximately
1% in 2011. UES customer base is expected to grow at a rate of less than 1% in 2010 and 2011.
Financial Markets
To date, UniSource Energy and its subsidiaries have not been materially impacted by volatility and
disruptions in the financial markets. Our banking relationships remain stable. UniSource Energy
and its subsidiaries have access to $280 million of revolving credit facilities, of which $202
million was unused as of February 23, 2010, which we believe is sufficient to meet current
operating, capital and financing needs. UniSource Energy, TEP, UNS Gas and UNS Electric have not
experienced, nor do they expect to experience, any difficulties obtaining funding under their
respective revolving credit facilities. None of these credit facilities have any bankrupt
financial institutions as lenders, and no lenders in the bank groups have refused to fund when
requested.
UniSource Energy and its subsidiaries are also subject to interest rate risk on variable rate
revolving credit facility borrowings and outstanding long-term variable rate debt. See Liquidity
and Capital Resources, Interest Rate Risk; Tucson Electric Power, Liquidity and Capital Resources,
Interest Rate Risk; UNS Gas, Liquidity and Capital Resources, Interest Rate Risk; and UNS Electric,
Liquidity and Capital Resources, Interest Rate Risk below.
Neither UniSource Energy nor any of its subsidiaries have any scheduled long-term debt maturities
until 2011 when $50 million of unsecured notes mature at UNS Gas. 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.
As of February 23, 2010, TEP, UNS Electric and UNS Gas did not have any material power or gas
trading exposure to financially distressed counterparties. We cannot predict whether in the future
our financial condition or results of operations will be impacted by current economic conditions or
liquidity concerns in the financial markets. See Liquidity and Capital Resources, below.
Pension and Post-Retirement Benefits
TEP, UNS Gas and UNS Electric 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. TEP, UNS Gas and UNS Electric fund the plans
by contributing at least the minimum amount required under Internal Revenue Service regulations.
Additionally, we provide supplemental retirement benefits to certain employees whose benefits are
limited by Internal Revenue Service benefit or compensation limitations.
K-34
The pension assets are invested in a diversified portfolio of domestic and international equity
securities, fixed income securities, real estate and alternative investments. As of December 31,
2009, the total value of the pension assets was approximately $184 million, compared with $135
million as of December 31, 2008. Our accumulated benefit obligation at December 31, 2009 and at
December 31, 2008 was $210 million and $198 million, respectively. Due to the increase in the
plan total asset value during 2009, projected funding levels are expected to be $22 million in 2010,
compared with the $23 million contribution that was funded in 2009.
Environmental Matters
UniSource Energys utility subsidiaries are subject to numerous federal, state and local
environmental laws and regulations affecting present and future operations, including regulations
regarding air emissions, water quality, wastewater discharges, solid waste and hazardous waste.
These laws and regulations can result in increased capital, operating and other costs, particularly
with regard to enforcement efforts focused on existing power plants and compliance plans with
regard to new and existing power plants. There are proposals and ongoing studies at the state,
federal and international levels to address global climate change that could result in the
regulation of CO2 and other greenhouse gases. Such legislation or regulation could
produce a number of results including additional costs to fund energy efficiency activities, costly
modifications to, or reexamination of the economic viability of, our existing coal plants or
changes in the overall fuel mix of our generating fleet. The impact of legislation or regulation to
address global climate change would depend on the specific legislation or regulation enacted and
cannot be determined at this time. For further discussion of the possible impact of environmental
matters on our business, see Item 1. Business -Environmental Matters and Item 1A. Risk Factors.
RESULTS OF OPERATIONS
Executive Overview
UniSource Energy recorded Net Income of $104 million in 2009, $14 million in 2008 and $58 million
in 2007.
2009 Compared with 2008
The increase in UniSource Energys net income in 2009 is due primarily to three factors: 1) a $40
million increase in TEPs retail revenues (excluding revenues collected from customers for
renewable energy and energy efficiency programs) resulting from a 6% base rate increase and hot
summer weather during the third quarter of 2009; 2) a $30 million decrease in total fuel and
purchased energy expense (net of short-term wholesale revenues); and 3) $50 million of regulatory
expenses, revenue deferrals and accounting adjustments in 2008 that did not recur in 2009. Other
factors include a $6 million pre-tax gain recorded in 2009 resulting from Millenniums sale of an
investment. See Tucson Electric Power Company, Results of Operations, below.
2008 Compared with 2007
UniSource Energy recorded net income of $14 million in 2008 compared with net income of $58 million
in 2007. The decrease in UniSource Energys net income in 2008 was due primarily to higher costs
at TEP and the impacts resulting from the 2008 TEP Rate Order. TEP incurred higher coal-related
fuel expense; higher purchased power costs due partially to plant outages in the first and third
quarters of 2008; and higher operations and maintenance (O&M) expense primarily due to generating
plant maintenance.
K-35
Results in 2008 were also impacted by: a $54 million decrease in TRA amortization; the 2008 TEP
Rate Order that included a credit to retail customers that decreased revenue by $58 million; and
adjustments that reduced pre-tax expenses by $32 million related to the reapplication of regulatory
accounting to TEPs generating assets, resulting from the 2008 TEP Rate Order. See Tucson
Electric Power Company, Results of Operations, below.
O&M
The table below summarizes the items included in UniSource Energys O&M expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
TEP Base O&M |
|
$ |
231 |
|
|
$ |
219 |
|
|
$ |
192 |
|
UNS Gas Base O&M |
|
|
25 |
|
|
|
25 |
|
|
|
27 |
|
UNS Electric Base O&M |
|
|
21 |
|
|
|
21 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
Base Utility O&M |
|
|
277 |
|
|
|
265 |
|
|
|
242 |
|
Consolidating Adjustments and Other (1) |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
UniSource Energy Base O&M |
|
|
270 |
|
|
|
258 |
|
|
|
231 |
|
Reimbursed Expenses Related to Springerville Units 3 and 4 |
|
|
41 |
|
|
|
35 |
|
|
|
24 |
|
Gain on the Sale of SO2 Emissions Allowances |
|
|
|
|
|
|
(1 |
) |
|
|
(15 |
) |
Expenses related to customer-funded renewable energy programs(2) |
|
|
23 |
|
|
|
5 |
|
|
|
2 |
|
Reinstatement of Regulatory Accounting |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total UniSource Energy O&M |
|
$ |
334 |
|
|
$ |
296 |
|
|
$ |
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
CONTRIBUTION BY BUSINESS SEGMENT
The table below shows the contributions to our consolidated after-tax earnings by our three
business segments and Other net income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
TEP |
|
$ |
89 |
|
|
$ |
4 |
|
|
$ |
53 |
|
UNS Gas |
|
|
7 |
|
|
|
9 |
|
|
|
4 |
|
UNS Electric |
|
|
6 |
|
|
|
4 |
|
|
|
5 |
|
Other (1) |
|
|
2 |
|
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated Net Income |
|
$ |
104 |
|
|
$ |
14 |
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes: UniSource Energy parent company expenses; UniSource Energy parent
company interest expense (net of tax) on the UniSource Energy Convertible Senior Notes and on the
UniSource Energy Credit Agreement; and 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 each of its segments.
K-36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
Amount Available |
|
Balances As of |
|
Cash and Cash |
|
|
under Revolving |
|
|
under Revolving |
|
February 23, 2010 |
|
Equivalents |
|
|
Credit Facility(3) |
|
|
Credit Facility |
|
|
|
-Millions of Dollars- |
|
UniSource Energy stand-alone |
|
$ |
2 |
|
|
$ |
15 |
|
|
$ |
55 |
|
TEP |
|
|
26 |
|
|
|
51 |
|
|
|
99 |
|
UNS Gas |
|
|
41 |
|
|
|
|
|
|
|
45 |
(1) |
UNS Electric |
|
|
6 |
|
|
|
12 |
|
|
|
33 |
(1) |
Other |
|
|
8 |
(2) |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Currently, 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. |
|
(2) |
|
Includes cash and cash equivalents at Millennium and UED. |
|
(3) |
|
Includes LOCs issued under Revolving Credit Facilities |
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 December 31, 2009, UniSource Energys short-term
investments include 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.
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 and UNS Gas/UNS Electric
Credit Agreements 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 Energy 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 7A. 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. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities |
|
$ |
347 |
|
|
$ |
277 |
|
|
$ |
323 |
|
Investing Activities |
|
|
(297 |
) |
|
|
(453 |
) |
|
|
(217 |
) |
Financing Activities |
|
|
(29 |
) |
|
|
141 |
|
|
|
(119 |
) |
UniSource Energys consolidated cash flows are provided primarily from retail and wholesale energy
sales at TEP, UNS Gas and UNS Electric, net of the related payments for fuel and purchased power.
Generally, cash from operations is 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, UniSource Energy, TEP, UNS Gas and UNS Electric use, as
needed, their revolving credit facilities to fund their business activities.
K-37
Cash used for investing activities is primarily a result of capital expenditures at TEP, UNS Gas
and UNS Electric.
Cash used for investing and financing activities can fluctuate year-to-year depending on: capital
expenditures, repayments and borrowings under revolving credit facilities; debt issuances or
retirements; capital lease payments by TEP; and dividends paid by UniSource Energy to its
shareholders.
Operating Activities
In 2009, net cash flows from operating activities were $70 million higher than 2008 primarily due
to: lower costs of fuel and purchased energy; increased retail revenues due to base rate increases
at TEP and UNS Electric and hot summer weather; lower interest paid on capital leases and long-term
debt; partially offset by lower wholesale sales, higher O&M and higher wages paid.
Investing Activities
Net cash used for investing activities was $156 million lower in 2009 compared with 2008 due to: a
$133 million deposit made by TEP last year with the trustee for bonds that matured on August 1,
2008; and a $70 million decrease in capital expenditures in 2009; partially offset by a $31 million
investment made by TEP in 2009 to purchase Springerville lease debt; and a $12 million decrease in
proceeds from investment in lease debt.
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Estimated |
Business Segment |
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
-Millions of Dollars- |
|
|
|
|
|
TEP |
|
$ |
235 |
|
|
$ |
258 |
|
|
$ |
217 |
|
|
$ |
203 |
|
|
$ |
225 |
|
|
$ |
209 |
|
UNS Gas |
|
|
14 |
|
|
|
14 |
|
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
18 |
|
UNS Electric |
|
|
28 |
|
|
|
26 |
|
|
|
25 |
|
|
|
31 |
|
|
|
13 |
|
|
|
16 |
|
UniSource Energy Stand-Alone |
|
|
10 |
|
|
|
16 |
|
|
|
27 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy Consolidated |
|
$ |
287 |
|
|
$ |
314 |
|
|
$ |
285 |
|
|
$ |
251 |
|
|
$ |
254 |
|
|
$ |
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in TEPs capital expenditures forecast for 2010 is $52 million for the proposed
purchase of Sundt Unit 4. |
|
|
|
Items excluded from TEPs capital expenditures forecast are: the estimated cost to
construct proposed Tucson to Nogales, Arizona transmission line of $120 million; estimated
costs of $300 million between 2011-2014 to construct 75 to 150 MW of local generation that
may be required in 2015. |
|
|
|
The estimated capital expenditures for UniSource Energy Stand-Alone are for the purchase
of land and construction of a new corporate headquarters. |
For more information see TEP, Liquidity and Capital Resources, Investing Activities, Capital
Expenditures, below, and Item 1. Business, TEP, Transmission Access, Tucson to Nogales Transmission
Line, above.
Financing Activities
Net cash proceeds from financing activities were $170 million lower in 2009 compared with 2008. In
2008, The Industrial Development Authority of Pima County issued, for the benefit of TEP,
approximately $221 million of tax-exempt industrial development revenue bonds and UNS Electric
issued $100 million of long-term debt used in part to refinance a $60 million debt maturity.
Factors affecting proceeds from financing activities in 2009 included: $30 million of proceeds from
the issuance of short-term debt at UED; a $70 million decrease in payments of long-term debt
compared with 2008; a $50 million decline in payments on capital lease obligations compared with
2008; and a $7 million increase in dividends paid compared with 2008.
K-38
Capital Contributions
In March 2009, UED used loan proceeds to distribute $30 million to UniSource Energy. UniSource
Energy used the proceeds to contribute $30 million of capital to TEP. TEP used the proceeds to
purchase lease debt related to Springerville Unit 1. In February 2010, UED distributed $9 million
to UniSource Energy. See Other Non-Reportable Business Segments, UED and Tucson Electric Power
Company, Liquidity and Capital Resources, below for more information.
In 2008, UniSource Energy contributed $59 million in capital to UED by canceling an intercompany
promissory note in the amount of $59 million. Borrowings under the promissory note were used to
finance the development of BMGS.
UniSource Energy Credit Agreement
The UniSource Credit Agreement consists of a $30 million amortizing term loan facility and a $70
million revolving credit facility and matures in August 2011. Principal payments of $1.5 million
on the outstanding term loan are due quarterly, with the balance due at maturity. At December 31,
2009, there was $9 million outstanding under the term loan facility and $31 million outstanding
under the UniSource Energy revolving credit facility at a weighted average interest rate of 1.48%.
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, dividends, 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 stand alone 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.
In September 2008 and February 2009, as a result of higher than expected fuel and purchased power
costs, UniSource Energy amended its credit agreements to provide more flexibility to meet the
required leverage ratio. Although fuel and purchase power expenses have decreased in recent
months, current economic conditions could result in lower customer growth rates and lower sales and
could impact our ability to comply with these covenants.
As of December 31, 2009, 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 7A. Quantitative and Qualitative Disclosures about Market Risk, Credit Risk,
below.
Convertible Senior Notes
UniSource Energy has $150 million of 4.50% Convertible Senior Notes due 2035. Each $1,000 of
Convertible Senior Notes is convertible into 27.427 shares of UniSource Energy Common Stock at any
time, representing a conversion price of approximately $36.46 per share of our Common Stock,
subject to adjustments. The closing price of UniSource Energys Common Stock was $31.37 on
February 23, 2010.
Beginning on March 5, 2010, UniSource Energy will have the option to redeem the notes, in whole or
in part, for cash, at a price equal to 100% of the principal amount plus accrued and unpaid
interest. Holders of the notes will have the right to require UniSource Energy to repurchase the
notes, in whole or in part, for cash on March 1, 2015, 2020, 2025 and 2030, or if certain specified
fundamental changes involving UniSource Energy occur. The repurchase price will be 100% of the
principal amount of the notes plus accrued and unpaid interest.
K-39
Guarantees and Indemnities
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 December 31,
2009 were:
|
|
UES guarantee of senior unsecured notes issued by UNS Gas ($100 million) and UNS Electric
($100 million); |
|
|
|
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 $26 million of outstanding loans under the UED Credit
Agreement. In February 2010, UED increased its borrowings under this agreement to $35
million. As a result, UniSource Energy increased its guarantee to $35 million. |
To the extent liabilities exist under these contracts, such liabilities are included in the
consolidated balance sheets.
In January 2010, TEP entered into an agreement to purchase 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
The following chart displays UniSource Energys consolidated contractual obligations by maturity
and by type of obligation as of December 31, 2009.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energys Contractual Obligations - Millions of Dollars - |
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
Payment Due in Years |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
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|
|
|
|
|
Ending December 31, |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
after |
|
|
Other |
|
|
Total |
|
Long Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal(1) |
|
$ |
32 |
|
|
$ |
578 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
745 |
|
|
$ |
|
|
|
$ |
1,355 |
|
Interest(2) |
|
|
59 |
|
|
|
58 |
|
|
|
51 |
|
|
|
51 |
|
|
|
51 |
|
|
|
659 |
|
|
|
|
|
|
|
929 |
|
Capital Lease Obligations(3) |
|
|
93 |
|
|
|
107 |
|
|
|
118 |
|
|
|
123 |
|
|
|
195 |
|
|
|
103 |
|
|
|
|
|
|
|
739 |
|
Operating Leases |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
5 |
|
Purchase Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(4) |
|
|
108 |
|
|
|
65 |
|
|
|
47 |
|
|
|
42 |
|
|
|
40 |
|
|
|
165 |
|
|
|
|
|
|
|
467 |
|
Purchased Power |
|
|
111 |
|
|
|
35 |
|
|
|
18 |
|
|
|
49 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
217 |
|
Transmission |
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
17 |
|
Other Long-Term Liabilities(5): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension & Other Post Retirement
Obligations(6) |
|
|
28 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
|
|
30 |
|
|
|
|
|
|
|
80 |
|
Acquisition of Springerville Coal
Handling and Common Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
226 |
|
Building Commitments |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Unrecognized Tax Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations |
|
$ |
439 |
|
|
$ |
854 |
|
|
$ |
243 |
|
|
$ |
273 |
|
|
$ |
296 |
|
|
$ |
1,933 |
|
|
$ |
19 |
|
|
$ |
4,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-40
|
|
|
(1) |
|
TEPs variable rate IDBs are secured by letters of credit issued pursuant to TEPs
Credit Agreement and 2008 Letter of Credit Facility which expire in 2011. Although the variable
rate IDBs mature between 2018 and 2029, the above maturity reflects a redemption or repurchase of
such bonds in 2011 as though the letters of credit terminate without replacement upon expiration of
the TEP Credit Agreement and 2008 Letter of Credit Facility. In January 2010, TEPs 2008 Letter of
Credit Facility was terminated on conversion of the 2008 Pima B Bonds to a fixed rate.
Effective with the termination of the 2008 Letter of Credit Facility, $130 million of variable rate
IDBs mature in 2029. In February 2010, UED amended its $26 million term loan facility (included in
2010 maturity above) to extend the termination date by two years to March 2012 and had net
additional borrowings of $9 million bringing the outstanding balance to $35 million. |
|
(2) |
|
Excludes interest on revolving credit facilities. |
|
(3) |
|
Effective with commercial operation of Springerville Unit 3 in July 2006 and Unit 4
in December 2009, Tri-State and SRP are reimbursing TEP for various operating costs related to the
common facilities on an ongoing basis, including 14% each of the Springerville Common Lease
payments and 17% each of the Springerville Coal Handling Facilities Lease payments. TEP remains
the obligor under these capital leases, and Capital Lease Obligations do not reflect any reduction
associated with this reimbursement. In January 2010, TEP entered into an agreement to purchase
100% of the equity interest in Sundt Unit 4 from the owner participant for approximately $52
million. The purchase price is subject to increase by 0.75% of the purchase price per month in the
event that the purchase occurs after March 31, 2010. |
|
(4) |
|
Excludes TEPs liability for final environmental reclamation at the coal mines
which supply the San Juan and Four Corners generating stations as the timing of payment has not
been determined. See Note 4. |
|
(5) |
|
Excludes asset retirement obligations expected to occur through 2066. |
|
(6) |
|
These obligations represent TEP and UES expected contributions to pension plans in
2010 and TEPs expected postretirement benefit costs to cover medical and life insurance claims as
determined by the plans actuaries. TEP and UES do not know and have not included pension
contributions beyond 2010 due to the significant impact that returns on plan assets and changes in
discount rates might have on such amounts. TEP previously funded the postretirement benefit plan
on a pay-as-you-go basis. In 2009, TEP established a VEBA Trust to partially fund expected future
benefits for union employees. Benefit payments are not expected to be made from the Trust for
several years. The 2010 obligation includes expected VEBA contributions. VEBA contributions for
periods beyond 2010 cannot be determined at this time. |
We have reviewed our contractual obligations and provide the following additional information:
|
|
|
We do not have any provisions in any of our debt or lease agreements that would cause an
event of default or cause amounts to become due and payable in the event of a credit rating
downgrade. |
|
|
|
None of our contracts or financing arrangements contains acceleration clauses or other
consequences triggered by changes in our stock price. |
Dividends on Common Stock
On February 12, 2010, UniSource Energy declared a first quarter cash dividend of $0.39 per share on
its Common Stock. The first quarter dividend, totaling approximately $14 million, will be paid
March 8, 2010 to shareholders of record at the close of business February 23, 2010. During 2009,
UniSource Energy paid quarterly dividends to its shareholders of 0.29 per share; for all of 2009,
total dividends paid were $41 million. In 2008, UniSource Energy paid quarterly dividends to its
shareholders of $0.24 per share; for all of 2008, total dividends paid were $34 million.
Income Tax Position
At December 31, 2009, UniSource Energy and TEP had federal AMT credit carryforwards of $43 million
and $28 million, respectively, which do not expire. During 2009, UniSource Energy and TEP used all
of their capital loss and state net operating loss carryforwards.
TUCSON ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
Executive Summary
TEP recorded net income of $89 million in 2009 compared with $4 million in 2008. The improvement
in net income during 2009 is due primarily to: TEPs new retail rate structure; hot summer weather;
lower fuel and purchased power costs; no provision for rate refunds recorded in 2009; and the
elimination of TRA amortization expense that was incurred in 2008. In addition, 2008 results
include a reduction in pre-tax expenses related to the reinstatement of regulatory accounting to
TEPs generating assets resulting from the 2008 TEP Rate Order.
K-41
Beginning on January 1, 2009, TEP implemented a PPFAC. The PPFAC allows recovery of actual fuel
and purchased power costs from TEPs retail customers. The fuel and purchased power costs are
off-set by the following, which are credited to the PPFAC: 100% of short-term wholesale revenues,
10% of the profit on trading activity and 50% of the revenues from the sale of SO2
emission allowances. As a result of the PPFAC, relative to prior periods, TEPs net income is not
as sensitive to changes in fuel and purchased power costs or revenues from short-term wholesale
sales.
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.
2009 Compared with 2008
The following factors contributed to the change in TEPs net income:
|
|
|
a $62 million increase in retail revenues due primarily to: the 6% base rate increase that
took effect in December 2008; a new rate structure that charges higher rates for higher
levels of energy usage; a $23 million increase in revenues collected from customers for
renewable energy and energy efficiency programs; and hot summer weather during the third
quarter of 2009; |
|
|
|
a provision for rate refunds of $58 million recorded in 2008; |
|
|
|
a $9 million decrease in long-term wholesale revenues due primarily to lower kWh sales to
Salt River Project (SRP) and Navajo Tribal Utility Authority (NTUA); |
|
|
|
a $30 million decrease in total fuel and purchased energy expense, net of short-term
wholesale revenues, due to lower generating output; a decline in the market price of
wholesale power and natural gas; and a $24 million gain recorded to fuel expense in 2008
related to the reinstatement of regulatory accounting; |
|
|
|
a $33 million increase in O&M. Excluding a $15 million increase in expenses directly
offset by customer surcharges for renewable energy and energy efficiency programs and a $6
million increase third party reimbursements, the increase in O&M was $12 million, which
resulted primarily from higher pension-related expenses and plant maintenance expenses. |
|
|
|
a $27 million increase in depreciation and amortization expense due to: additions to plant
in service; new depreciation rates for generation assets; and amortization of regulatory
assets resulting from the 2008 TEP Rate Order; |
|
|
|
a $24 million decrease in the amortization of TEPs TRA. In May 2008, the TRA was fully
amortized; |
|
|
|
a $6 million increase in taxes other than income taxes due primarily to a $7 million gain
recorded in 2008 resulting from the reinstatement of regulatory accounting; |
|
|
|
a $10 million increase in total other income due to interest income related to an income
tax refund, income related to an adjustment in the accounting for an investment in lease
equity and income related to an increase in the value of a company owned life insurance
policy; and |
|
|
|
an $11 million decrease in total interest expense resulting primarily from lower interest
rates on variable rate debt and lower interest expense related to capital lease obligations; |
In 2009 and 2008, the pre-tax benefit recognized by TEP related to Springerville Units 3 and 4 for
operating fees and contributions toward common facility costs was $12 million in each period.
In June 2009, TEP adjusted its accounting for a 2006 investment in 14.14% of Springerville
Unit 1 lease equity. As a result, TEP recorded a net increase to the income statement of $0.6
million, before tax. The adjustment recorded in June 2009 for the period from July 2006 through
June 2009 included additional depreciation expense of $4 million; a reduction of interest expense
on capital leases of $2 million; and $3 million of equity in earnings which is included in Other
Income on the income statement.
K-42
2008 Compared with 2007
The following factors contributed to the decrease in TEPs net income:
|
|
|
A $9 million increase in total operating revenues due to: |
|
|
|
a $64 million increase in wholesale revenues due to increased short-term wholesale
activity and related purchased power volumes, lower retail demand resulting in an increase
in the availability of energy to sell into the wholesale market and an increase in the
market price of wholesale power. Wholesale sales volumes increased 13% and the average
price per MWh of wholesale power sold increased by 16%; and |
|
|
|
a $12 million increase in other revenues due primarily to fees and reimbursements
received for fuel and O&M costs related to Springerville Units 3 and 4; partially offset
by: |
|
|
|
a $58 million provision for revenues to be credited equivalent to the Fixed CTC
revenue that was collected from customers after the TRA was fully amortized in early May
2008; and |
|
|
|
|
a $9 million decrease in retail revenues due to mild summer weather and a weakening local economy. |
|
|
|
A $92 million increase in fuel and purchased power due to: |
|
|
|
a $98 million increase in purchased power expense. Purchased power volumes increased
by 44% as a result of higher wholesale sales activity and replacement power purchases
during the first and third quarters. The average price paid per MWh increased by 18% due
to higher market prices for wholesale energy; and |
|
|
|
a $6 million decrease in fuel expense. Higher mining costs at San Juan, increased
coal costs at Sundt Unit 4 and a 17% increase in the average cost per kWh of gas-fired
generation due to higher natural gas prices, were offset by a $25 million gain recorded to
fuel expense related to the reinstatement of regulatory accounting. |
Other factors impacting the comparability of results for 2008 include:
|
|
|
a $55 million increase in O&M expense due to: an $11 million increase in O&M related to
Springerville Units 3 and 4, which is reimbursed to TEP by the owners of those units and
recorded in other revenues; an increase in generation plant maintenance of $18 million; a $13
million decrease in pre-tax gains from the sale of excess SO2 Emission Allowances
which is recorded as an offset to O&M; increased transmission expense; and general cost
pressures resulting from inflation and other economic factors; |
|
|
|
a $6 million increase in depreciation and amortization expense due to additions to plant
in service; |
|
|
|
a $54 million decrease in the amortization of TEPs TRA. In May 2008, the TRA was fully
amortized; |
|
|
|
a $9 million decrease in taxes other than income taxes due primarily to a $7 million gain
resulting from the reinstatement of regulatory accounting; |
|
|
|
a $7 million decrease in other income due in part to lower interest income on investment
in lease debt. The interest income declines over time as the lease debt is amortized; and |
|
|
|
a $15 million decrease in total interest expense resulting primarily from lower balances
on capital lease obligations. |
In 2008 and 2007, the pre-tax benefit recognized by TEP related to Springerville Units 3 and 4 for
operating fees and contributions toward common facility costs was $12 million in each period.
K-43
Utility Sales and Revenues
Customer growth, weather and other consumption factors affect retail sales of electricity.
Electric wholesale revenues are affected by market prices in the wholesale energy market, the
availability of TEP generating resources, and the level of wholesale forward contract activity.
The table below provides trend information on retail sales by major customer class and electric
wholesale sales made by TEP in the last three years as well as weather data for TEPs service
territory.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09-08 |
|
|
|
|
Energy Sales, kWh (in millions) |
|
2009 |
|
|
2008 |
|
|
% Change* |
|
|
2007 |
|
Electric Retail Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
3,906 |
|
|
|
3,852 |
|
|
|
1.4 |
% |
|
|
4,005 |
|
Commercial |
|
|
1,988 |
|
|
|
2,034 |
|
|
|
(2.3 |
%) |
|
|
2,058 |
|
Industrial |
|
|
2,161 |
|
|
|
2,264 |
|
|
|
(4.5 |
%) |
|
|
2,341 |
|
Mining |
|
|
1,065 |
|
|
|
1,096 |
|
|
|
(2.8 |
%) |
|
|
983 |
|
Public Authorities |
|
|
251 |
|
|
|
256 |
|
|
|
(1.9 |
%) |
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Retail Sales |
|
|
9,371 |
|
|
|
9,502 |
|
|
|
(1.4 |
%) |
|
|
9,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Wholesale Sales Delivered: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Contracts |
|
|
833 |
|
|
|
1,096 |
|
|
|
(24.0 |
%) |
|
|
1,101 |
|
Short-term and Trading |
|
|
2,222 |
|
|
|
2,873 |
|
|
|
(22.8 |
%) |
|
|
2,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Wholesale Sales |
|
|
3,055 |
|
|
|
3,969 |
|
|
|
(23.0 |
%) |
|
|
3,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Sales |
|
|
12,426 |
|
|
|
13,471 |
|
|
|
(7.8 |
%) |
|
|
13,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Retail Revenues (in millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
378 |
|
|
$ |
351 |
|
|
|
7.6 |
% |
|
$ |
363 |
|
Commercial |
|
|
220 |
|
|
|
212 |
|
|
|
3.8 |
% |
|
|
214 |
|
Industrial |
|
|
164 |
|
|
|
165 |
|
|
|
(0.7 |
%) |
|
|
168 |
|
Mining |
|
|
61 |
|
|
|
55 |
|
|
|
9.7 |
% |
|
|
49 |
|
Public Authorities |
|
|
20 |
|
|
|
19 |
|
|
|
3.8 |
% |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues excluding REST & DSM |
|
$ |
843 |
|
|
|
802 |
|
|
|
5.0 |
% |
|
|
812 |
|
REST and DSM Revenues |
|
|
25 |
|
|
|
3 |
|
|
NM |
|
|
|
5 |
|
Provision for Rate Refunds |
|
|
|
|
|
|
(58 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Revenues |
|
$ |
868 |
|
|
$ |
747 |
|
|
|
16.2 |
% |
|
$ |
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Wholesale Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Contracts |
|
|
48 |
|
|
|
58 |
|
|
|
(17.2 |
%) |
|
|
56 |
|
Provision for Wholesale Refunds |
|
|
(4 |
) |
|
|
|
|
|
NM |
|
|
|
|
|
Other Sales |
|
|
81 |
|
|
|
185 |
|
|
|
(55.1 |
%) |
|
|
125 |
|
Transmission |
|
|
19 |
|
|
|
17 |
|
|
|
10.5 |
% |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wholesale Revenues |
|
|
146 |
|
|
|
260 |
|
|
|
(43.9 |
%) |
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail and Wholesale Revenues |
|
$ |
1,012 |
|
|
$ |
1,007 |
|
|
|
0.6 |
% |
|
$ |
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09-08 |
|
|
|
|
Weather Data: |
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2007 |
|
Cooling Degree Days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
1,599 |
|
|
|
1,336 |
|
|
|
19.7 |
% |
|
|
1,517 |
|
10-Year Average |
|
|
1,419 |
|
|
|
1,431 |
|
|
NM |
|
|
|
1,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heating Degree Days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
1,287 |
|
|
|
1,367 |
|
|
|
(5.9 |
%) |
|
|
1,506 |
|
10-Year Average |
|
|
1,481 |
|
|
|
1,444 |
|
|
NM |
|
|
|
1,497 |
|
|
|
|
* |
|
Percent change calculated on un-rounded data; may not correspond to data shown in table |
K-44
2009 Compared with 2008
Residential and Commercial
Residential kWh sales increased by 1.4% in 2009 due primarily to hotter than normal weather during
the third quarter. Residential revenues increased $27 million or 7.6% during 2009, benefitting
from hot summer weather, as well as a base rate increase that became effective in December 2008.
Commercial kWh sales during 2009 were 2.3% below 2008. The decrease in commercial kWh sales was
driven primarily by weak economic conditions. Revenues from commercial kWh sales increased by $8
million, or 3.8%, as a result of the base rate increase that became effective in December 2008.
Industrial, Mining and Public Authorities
Sales volumes to industrial, mining and public authority customers decreased by a combined 3.8% in
2009 due primarily to the weak economy. Associated revenues were $5 million higher than the same
period last year as a result of the base rate increase that became effective in December 2008.
Retail Margin Revenues
The table below provides a summary of the margin revenues (retail revenues excluding base fuel,
PPFAC and REST and DSM charges) on TEPs retail sales for 2009. Comparable data is not available
for 2008 since TEPs new rate structure went into effect in December 2008.
2009 Year-End
|
|
|
|
|
|
|
|
|
|
|
-millions- |
|
|
-cents / kWh- |
|
Retail Margin Revenues (non-GAAP)* |
|
|
|
|
|
|
|
|
Residential |
|
$ |
253 |
|
|
|
6.48 |
|
Commercial |
|
|
160 |
|
|
|
8.04 |
|
Industrial |
|
|
99 |
|
|
|
4.59 |
|
Mining |
|
|
31 |
|
|
|
2.93 |
|
Public Authorities |
|
|
13 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
Retail Margin Revenues (Non-GAAP)* |
|
$ |
556 |
|
|
|
5.94 |
|
Base Fuel & PPFAC Revenues |
|
|
287 |
|
|
|
3.05 |
|
REST & DSM Revenues |
|
|
25 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
Net Electric Retail Sales (GAAP) |
|
$ |
868 |
|
|
|
9.26 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative
to Net Electric Retail Sales, which is determined in accordance with GAAP. TEP believes that
Retail Margin Revenues, which is Net Electric Retail Sales less base fuel and PPFAC revenues, and
revenues for DSM and REST programs, provides useful information to investors as a measure of TEPs
ability to pay for operating expenses with retail revenues, after giving effect to related fuel and
purchased power expenses. |
Long-Term Wholesale Revenues
Revenues from long-term wholesale contracts decreased by $10 million in 2009 compared with last
year primarily due to lower sales volumes to NTUA. In 2009, NTUA received a greater allotment of
federal hydro power as hydro conditions in the Colorado River basin have been above normal. In
addition, low gas prices made it more economic for one of their major customers to self-generate
than to purchase power from NTUA. These factors led NTUA to purchase 17% less energy under its
agreement with TEP compared with 2008. The gross margin (long-term wholesale revenues less the
cost of energy, which is based on TEPs average fuel and purchased power costs) on TEPs long-term
wholesale sales for 2009 was $24 million. Prior to the implementation of the PPFAC in January
2009, TEP did not allocate fuel and purchased power costs to long-term wholesale sales.
K-45
2008 Compared with 2007
Residential and Commercial
Residential kWh sales were 4% lower in 2008, resulting in a $12 million or 3% decline in
residential revenues. Mild weather accounted for $7 million of the decrease, while other factors
such as slower customer growth, economic conditions and customer usage patterns accounted for the
remaining decrease.
Commercial kWh sales were 1% lower in 2008, resulting in a $2 million or 1% decline in commercial
revenues. Mild weather accounted for most of the decrease, while weak economic conditions and
slower customer growth also contributed to the decline.
Industrial, Mining and Public Authorities
Industrial kWh sales were 3% lower in 2008, resulting in a $3 million or 2% decline in industrial
revenues. The decrease is due primarily to regional and national economic conditions. kWh sales
and revenues to mining customers increased 11% and 12%, respectively, in 2008 compared with 2007.
The increase is due to higher mining production as well as an increase in the rate charged to one
of TEPs mining customers.
CTC Revenue to be Refunded
TEP deferred $58 million of retail revenues in 2008 that is being credited to customers according
to the 2008 TEP Rate Order. See Factors Affecting Results of Operations, 2008 TEP Rate Order,
below for more information.
Long-Term Wholesale Revenues
Revenues from long-term wholesale contracts increased by $2 million in 2008 compared with 2007.
The average price per MWh sold under long-term contracts averaged $53 per MWh in 2008 compared with
$51 per MWh in 2007. See Factors Affecting Results of Operations, Long-Term Wholesale Contracts,
below for more information.
Short-Term Wholesale and Trading Revenues
Short-term wholesale sales volumes increased 23%, and revenues from short-term wholesale and
trading activity increased by $60 million or 48% compared with 2007. In 2008, 405,000 MWh of
wholesale sales and purchases were due to a single transaction involving a purchase and resale
between TEP and two wholesale counterparties. The wholesale revenues and purchased power expenses
associated with this transaction were $34 million and $31 million, respectively. Lower retail
demand also contributed to higher sales volumes and a 34% increase in the average market price of
wholesale power contributed to higher revenue compared with 2007. All revenues from short-term
wholesale sales and 10% of the profit on trading activity is credited to costs included in TEPs
PPFAC.
Other Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Reimbursements related to Springerville Units 3 and 4(1) |
|
$ |
59 |
|
|
$ |
53 |
|
|
$ |
42 |
|
Other |
|
|
24 |
|
|
|
19 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Revenue |
|
$ |
83 |
|
|
$ |
72 |
|
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents reimbursements from Tri-State and SRP, the owners of
Springerville Units 3 and 4, respectively, for expenses incurred by TEP related to
the operation of these plants. |
In addition to reimbursements related to Springerville Units 3 and 4, TEPs other revenues include:
inter-company revenues from UNS Gas and UNS Electric for corporate services provided by TEP;
miscellaneous service-related revenues such as power pole attachments; damage claims; and customer
late fees.
K-46
Operating Expenses
2009 Compared with 2008
Generation and Purchased Power Summary
TEPs fuel and purchased power expense, and energy resources for 2009, 2008 and 2007 are detailed
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generation/Purchases |
|
|
Expense |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of kWh- |
|
|
-Millions of Dollars- |
|
Coal-Fired Generation |
|
|
9,272 |
|
|
|
10,573 |
|
|
|
10,970 |
|
|
$ |
202 |
|
|
$ |
235 |
|
|
$ |
213 |
|
Gas-Fired Generation |
|
|
986 |
|
|
|
871 |
|
|
|
1,088 |
|
|
|
75 |
|
|
|
74 |
|
|
|
79 |
|
Renewable Generation |
|
|
30 |
|
|
|
34 |
|
|
|
32 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,288 |
|
|
|
11,478 |
|
|
|
12,090 |
|
|
|
278 |
|
|
|
309 |
|
|
|
292 |
|
Regulatory Accounting Reinstatement (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Generation (2) |
|
|
10,288 |
|
|
|
11,478 |
|
|
|
12,090 |
|
|
|
278 |
|
|
|
285 |
|
|
|
292 |
|
Purchased Power |
|
|
3,086 |
|
|
|
2,948 |
|
|
|
2,047 |
|
|
|
142 |
|
|
|
238 |
|
|
|
140 |
|
Transmission |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
11 |
|
|
|
9 |
|
Increase (Decrease) to Reflect PPFAC Recovery
Treatment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Resources |
|
|
13,374 |
|
|
|
14,426 |
|
|
|
14,137 |
|
|
$ |
402 |
|
|
$ |
534 |
|
|
$ |
441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Line Losses and Company Use |
|
|
948 |
|
|
|
955 |
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Sold |
|
|
12,426 |
|
|
|
13,471 |
|
|
|
13,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 2. Regulatory Matters, for more information. |
|
(2) |
|
Fuel expense excludes $5 million in 2009, 2008 and 2007, related to Springerville
Unit 3; the fuel costs incurred on behalf of Unit 3 are recorded in Fuel Expense and the
reimbursement by Tri-State is recorded in Other Revenue. |
PPFAC
TEPs PPFAC became effective in January 2009 and allows TEP to pass through its actual fuel,
purchased power and transmission costs net of short-term wholesale revenues and other offsets to
its retail customers. For comparative purposes, those PPFAC related costs decreased by $30.5
million in 2009 compared with 2008. The decrease was due primarily to lower wholesale market prices
for energy and natural gas. See 2008 TEP Rate Order, Purchased Power and Fuel Adjustment Clause,
below for more information.
Energy Resources
In 2009, coal-fired generation decreased by 12% due to: fuel switching at Sundt Unit 4 from coal to
natural gas; a 1% decrease in retail kWh sales; and lower coal plant availability. Coal-related
fuel expense, excluding a $24 million gain recorded in 2008 related to the adoption of regulatory
accounting, decreased by $33 million during 2009. The lower generating output, as well as $9
million of expenses recorded in the third quarter of 2008 related to a settlement of mining-related
costs, led to the decrease in coal-related fuel expense in 2009.
Fuel switching at Sundt Unit 4 led to a 13% increase in gas-fired generating output in 2009
compared with 2008; however, gas-related fuel expense increased by just $1 million due to a
decrease in the average price for natural gas. Under TEPs new rate structure, hedging activities
are reflected in the PPFAC.
Purchased power volumes increased by 5% in 2009 compared with 2008, as it was more economic for TEP
to purchase power in the wholesale energy market rather than run certain of its less efficient
gas-fired units. The average price paid by TEP for purchased power during 2009 was approximately
$46 per MWh, compared with an average cost of $76 per MWh for generating output from TEPs
gas-fired generating resources.
K-47
The table below summarizes TEPs cost per kWh generated or purchased.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-cents per |
|
|
|
kWh generated- |
|
Coal |
|
|
2.18 |
|
|
|
2.22 |
|
|
|
1.93 |
|
Gas |
|
|
7.60 |
|
|
|
8.49 |
|
|
|
7.26 |
|
Purchased Power |
|
|
4.57 |
|
|
|
8.07 |
|
|
|
6.84 |
|
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 annual market price for around-the-clock
energy based on the Dow Jones Palo Verde Index and the average annual price for natural gas based
on the Permian Index were higher in 2009 compared with 2008. We cannot predict whether changes in
various factors that influence demand and supply will cause prices to change during 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg. Market Price for Around-the-Clock Energy $/MWh |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Year ended December 31 |
|
$ |
30 |
|
|
$ |
63 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg. Market Price for Natural Gas $/MMBtu |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Year ended December 31 |
|
$ |
3.34 |
|
|
$ |
7.41 |
|
|
$ |
6.11 |
|
TRA Amortization
TEP did not record any TRA amortization during 2009, as the TRA balance was amortized to zero in
May 2008. TRA amortization was $24 million in 2008. Amortization of the TRA was the result of the
1999 Settlement Agreement with the ACC, which changed the accounting method for TEPs generation
operations. This item reflected the recovery, through 2008, of transition recovery assets which
were previously regulatory assets related to the generation business.
O&M
The table below summarizes the items included in TEPs O&M expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Base O&M |
|
$ |
231 |
|
|
$ |
220 |
|
|
$ |
192 |
|
Reimbursed Expenses Related to Springerville Units 3 and 4 |
|
|
41 |
|
|
|
35 |
|
|
|
24 |
|
Gain on the Sale of SO2 Emissions Allowances |
|
|
|
|
|
|
(1 |
) |
|
|
(15 |
) |
Expenses related to customer-funded renewable energy
programs(1) |
|
|
18 |
|
|
|
3 |
|
|
|
2 |
|
Reinstatement of Regulatory Accounting |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total O&M |
|
$ |
290 |
|
|
$ |
257 |
|
|
$ |
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents expenses related TEPs customer-funded renewable energy
programs; the offsetting funds collected from customers are recorded in other
revenue. |
Income Tax Expense
In 2009, TEPs effective tax rate was 38% compared with 71% in 2008. In 2008, it was determined
that the environmental penalties at San Juan would not be deductible for income tax purposes. As a
result, an additional $3 million of tax expense was recognized in 2008 for penalties incurred in
the current and prior years. Other items included in GAAP expense which will not be deductible for
tax were offset by the recognition of income tax credits. See Note 9. Income Taxes, for more
information.
K-48
Operating Expenses
2008 Compared with 2007
Coal
Coal-fired generating output decreased by 4% compared with 2007, due to lower coal plant
availability resulting from planned and unplanned outages. Coal-related fuel expense, excluding
the gain related to the reinstatement of regulatory accounting, increased by $22 million due
primarily to higher mining-related costs at San Juan and Navajo, and increased coal costs at Sundt
Unit 4.
Gas
Gas-fired generating output decreased by 20% due primarily to slower customer growth and mild
weather. Gas-related fuel expense was $5 million, or 6%, lower than 2007 due in part to a decrease
in realized losses on gas hedging activity. The average cost per kWh generated by TEPs gas-fired
fleet for 2008 increased 17% compared with 2007.
Purchased Power
Power purchase volumes increased 42% in 2008 compared with 2007, leading to a $98 million increase
in purchased power expense. The higher purchased power volume and expense is due partially to
higher short-term wholesale sales activity and replacement power purchases related to lower coal
plant availability. In 2008, 405,000 MWh of wholesale sales and purchases were due to a single
transaction involving a purchase and resale between TEP and two wholesale counterparties. The
wholesale revenues and purchased power expenses associated with this transaction were $34 million
and $31 million, respectively.
FACTORS AFFECTING RESULTS OF OPERATIONS
2008 TEP Rate Order
Base Rate Increase
TEP received a base rate increase, effective December 1, 2008, of approximately 6% over its
previous average retail rate of 8.4 cents per kWh. TEPs new base rates are expected to increase
retail revenue by approximately $50 million annually. The average base rate is 8.8 cents per kWh
and includes approximately 2.9 cents per kWh for fuel and purchased power costs.
Purchased Power and Fuel Adjustment Clause
The PPFAC became effective starting January 1, 2009. The PPFAC allows recovery of fuel and
purchased power costs, including demand charges, transmission costs and the prudent costs of
contracts for hedging fuel and purchased power costs. The PPFAC consists of a forward component
and a true-up component.
|
|
|
The forward component was established as of April 1, 2009 and will be updated on April
1 of each year. The forward component is based on the forecasted fuel and purchased power
costs for the 12-month period from April 1 to March 31, less the base cost of fuel and
purchased power of 2.9 cents per kWh, which is embedded in base rates. The ACC approved a
forward component of 0.18 cents per kWh, effective April 1, 2009. |
|
|
|
The true-up component will reconcile any over/under collected amounts from the
preceding 12 month period and will be credited to or recovered from customers in the
subsequent year. |
As part of the reconciliation of fuel and purchased power costs and PPFAC revenues, TEP credits the
following against the recoverable costs: 100% of short-term wholesale revenues; 10% of the profit
on trading activity; and 50% of the revenues from the sales of SO2 emission allowances.
On a cash basis, Fixed CTC revenue to be refunded ($58 million collected from May 2008 to November
30, 2008) will be credited to customers as an offset to the PPFAC. This credit will off-set the
forward and true-up
components of the PPFAC, resulting in a PPFAC charge of zero until the Fixed CTC revenue to be
refunded is fully credited, which is expected to occur over 36 to 48 months beginning April 1,
2009.
K-49
Base Rate Increase Moratorium
TEPs base rates are frozen through December 31, 2012. TEP is prohibited from submitting a base
rate application before June 30, 2012. The test year to be used in TEPs next base rate
application must be no earlier than December 31, 2011.
Notwithstanding the rate increase moratorium, base rates and adjustor mechanisms may be changed in
emergency conditions which are beyond TEPs control if the ACC concludes such changes are required
to protect the public interest. The moratorium does not preclude TEP from seeking rate relief in
the event of the imposition of a federal carbon tax or related federal carbon regulations.
Springerville Units 3 and 4
TEP operates Springerville Unit 3 on behalf of Tri-State and receives annual benefits in the form
of rental payments and other fees and cost savings. TEP recorded pre-tax benefits of $12 million
in 2009 and 2008.
Springerville Unit 4 was completed in December 2009. TEP operates Springerville Unit 4 on behalf
of SRP and expects to receive annual pre-tax benefits beginning in 2010 of approximately $8 million
in the form of rental payments and other fees and cost savings.
Depreciation
In January 2010, 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 depreciation
expense by approximately $14 million in 2010.
Sundt Unit 4
Sundt Unit 4 is leased by TEP and the term of the lease expires in January 2011. In January 2010,
TEP entered into an agreement to purchase 100% of the equity interest in Sundt Unit 4 from the
equity owner for approximately $52 million. The purchase price is subject to increase by 0.75% of
the purchase price per month in the event that the purchase occurs after March 31, 2010. TEP
expects to finalize the purchase prior to March 31, 2010. Following the completion of the
transaction, TEP expects to redeem the outstanding Sundt Unit 4 lease debt of $5 million, terminate
the lease agreement and cause title of Sundt Unit 4 to be transferred to TEP.
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 December
31, 2009, there were $35 million of borrowings at an interest rate of 0.68% 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, TEP Credit Agreement, below for more information.
Pension and Postretirement Benefit Expense
In 2009 and 2008, TEP charged $17 million and $10 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. The expected decrease in 2010 compared
with 2009 is due primarily to the increase in the market value of the pension asset values. See
Note 10. Employee Benefit Plans, for more information.
K-50
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.
Emission Allowances
TEP has SO2 Emission Allowances in excess of what is required to operate its generating
units. The excess results primarily from a higher removal rate of SO2 emissions at
Springerville Units 1 and 2 following recent upgrades to environmental plant components and related
changes to plant operations. From time to time, TEP will sell a portion of its excess
SO2 Emission Allowances.
The table below summarizes sales made since 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Gain |
|
Delivery |
|
Allowances Sold |
|
|
(millions) |
|
2007 |
|
|
22,000 |
|
|
$ |
15 |
|
2008 |
|
|
4,000 |
|
|
|
1 |
|
2009 |
|
|
|
|
|
|
|
|
Existing regulations call for a reduction to the EPA SO2 Emissions Allowances allocation
beginning in 2010. As a result, starting in 2010 and for the remaining life of the program, TEPs
annual SO2 Emissions Allowance allocation will be approximately 28,000 allowances. The
exact number of excess allowances for future years cannot be determined until the SO2
allowance consumption for each year is verified by EPA. TEP expects to have approximately 13,000
excess SO2 Emission Allowances annually beginning in 2010 and for the remaining life of
the program. The decline in sales of SO2 allowances from 2007 to 2009 is a result of a
decrease in the market price for the allowances.
As part of the 2008 TEP Rate Order, TEP will credit 50% of the revenue from the sales of its
SO2 Emissions Allowances to the PPFAC. As of January 1, 2010, the average market price
of SO2 Emissions Allowances was $59. On December 31, 2008 and 2007, the market price of
SO2 Emissions Allowances was $205 and $534, respectively.
Competition
TEPs customers have the ability to install renewable energy technologies and conventional
generation units that could reduce their reliance on TEPs services in the future. Self-generation
by TEPs customers has not had a significant impact to date. In the wholesale market, TEP competes
with other utilities, power marketers and independent power producers in the sale of electric
capacity and energy.
Renewable Energy Standard and Tariff
TEP began implementing its ACC approved REST plan on June 1, 2008. In 2009 and 2008 TEP collected
$29 and $9 million in REST surcharges, of which $25 million and $3 million, respectively, were
expensed for REST projects, 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. For more information, see Item 1. Business, TEP, Renewable, Energy Standard
and Tariff, above.
K-51
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 DSM
programs, only to the extent that they are cost effective. The proposed EE Standards target cost
effective total kWh savings in 2011 of 1.25% and ramping up each year to reach a targeted
cumulative annual reduction in retail kWh sales of 22% by 2020. Savings from Direct Load Control
programs, previously implemented DSM programs and from a portion of energy efficient building codes
may be counted towards meeting the target. The proposed EE Standards provide for recovery of costs
incurred to implement cost effective 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 affect.
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 annual
load of up to 110 MW. TEP cannot predict if or when the mine will commence operations.
Fair Value Measurements
As described in Note 12 to the Notes to Consolidated Financial Statements, TEP adopted fair value
accounting, on January 1, 2008 which, among other things, establishes a three-tier value hierarchy,
based on the valuation techniques used to determine the fair value of derivative assets and
liabilities.
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 December 31, 2009.
As required by fair value accounting, 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 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 (3) |
|
|
|
|
|
|
1 |
|
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
8 |
|
|
|
15 |
|
|
|
5 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Contracts (3) |
|
|
|
|
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(14 |
) |
Interest Rate Swaps (4) |
|
|
|
|
|
|
(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
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) |
|
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) |
|
Interest Rate Swaps are valued based on the six month LIBOR index or the Securities Industry
and Financial Markets Association (SIFMA) Municipal Swap Index. |
K-52
TEP recorded in 2009, net unrealized losses of $2 million in net Regulatory Assets and $1 million
as other comprehensive income due to the change in the fair value of commodity derivative contracts
classified as Level 3 in the fair value hierarchy.
Valuation Techniques
TEP values its energy derivative contracts by obtaining market quotes for periods and delivery
points where an active market exists. For both power and gas prices, TEP obtains quotes from
brokers, major market participants, exchanges or industry publications. TEP primarily uses 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.
TEPs Level 3 derivatives include certain energy 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. 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. TEPs model also considers credit and non-performance risk. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Net Cash Flows Operating Activities (GAAP) |
|
$ |
268 |
|
|
$ |
269 |
|
|
$ |
264 |
|
Amounts from Statements of Cash Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Capital Expenditures |
|
|
(235 |
) |
|
|
(295 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows after Capital Expenditures (non-GAAP)* |
|
|
33 |
|
|
|
(26 |
) |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
Amounts from Statements of Cash Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Retirement of Capital Lease Obligations |
|
|
(24 |
) |
|
|
(74 |
) |
|
|
(71 |
) |
Plus: Proceeds from Investment in Lease Debt |
|
|
13 |
|
|
|
25 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)* |
|
$ |
22 |
|
|
$ |
(75 |
) |
|
$ |
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net Cash Flows Operating Activities (GAAP) |
|
$ |
268 |
|
|
$ |
269 |
|
|
$ |
264 |
|
Net Cash Flows Investing Activities (GAAP) |
|
|
(250 |
) |
|
|
(391 |
) |
|
|
(137 |
) |
Net Cash Flows Financing Activities (GAAP) |
|
|
(29 |
) |
|
|
129 |
|
|
|
(120 |
) |
Net Cash Flows after Capital Expenditures (non-GAAP)* |
|
|
33 |
|
|
|
(26 |
) |
|
|
101 |
|
Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)* |
|
|
22 |
|
|
|
(75 |
) |
|
|
58 |
|
|
|
|
* |
|
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. We
believe 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 our ability to fund
our capital requirements, make required payments on debt and capital lease obligations, and pay
dividends to UniSource Energy. |
K-53
Liquidity Outlook
During 2010, TEP expects to generate sufficient internal cash flows to fund the majority of its
capital 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 2009, net cash flows from operating activities decreased by $1 million compared with 2008. Net
cash flows were impacted by:
|
|
|
a $65 million increase in cash receipts from retail and wholesale electric sales, less
fuel and purchased power costs, due to: an increase in retail electric cash receipts
resulting from the rate increase that became effective in December 2008 and cash
collections from retail customers that are used to offset expenses related to renewable
energy and energy efficiency programs; and lower market prices for natural gas and
purchased power; |
|
|
|
an $11 million decrease in total interest paid resulting from lower rates on variable
rate debt and lower capital lease interest paid; offset by |
|
|
|
a $39 million increase in O&M costs related to: costs associated with renewable energy
and energy efficiency programs that are offset by funds collected from retail customers; an
increase in pension-related costs; extensive planned generating plant outage and
maintenance costs; general cost pressures resulting from inflation; and O&M related to
Springerville Units 3 and 4 that is reimbursed by the plant owners; |
|
|
|
a $27 million increase in total taxes paid (net of refunds received) due primarily to
higher taxable income; and |
|
|
|
a $12 million increase in wages paid. |
Investing Activities
Net cash used for investing activities was $141 million lower in 2009 compared with 2008 primarily
due to: a $133 million deposit made last year by TEP to the trustee for bonds that matured in
August 2008; and a $59 million decrease in capital expenditures; partially offset by a $31 million
investment in Springerville Unit 1 lease debt; and a $12 million decrease in proceeds from
investments in lease debt and equity. See Financing Activities, Investments in Springerville Lease
Debt and Equity, below for more information.
Capital Expenditures
TEPs forecasted capital expenditures are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
|
|
|
|
-Millions of Dollars- |
|
|
|
|
|
Transmission and Distribution |
|
$ |
107 |
|
|
$ |
117 |
|
|
$ |
91 |
|
|
$ |
99 |
|
|
$ |
73 |
|
Generation Facilities |
|
|
108 |
|
|
|
65 |
|
|
|
65 |
|
|
|
72 |
|
|
|
64 |
|
Environmental |
|
|
8 |
|
|
|
5 |
|
|
|
11 |
|
|
|
24 |
|
|
|
44 |
|
General and Other |
|
|
35 |
|
|
|
30 |
|
|
|
36 |
|
|
|
30 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
258 |
|
|
$ |
217 |
|
|
$ |
203 |
|
|
$ |
225 |
|
|
$ |
209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-54
|
|
|
Included in TEPs capital expenditures forecast for 2010 is $52 million for the
proposed purchased of Sundt Unit 4. See Sundt Unit 4, above, for more information. |
|
|
|
|
Items excluded from TEPs capital expenditures forecast are: the estimated cost to
construct proposed Tucson to Nogales, Arizona transmission line of $120 million; estimated
costs of $300 million between 2011-2014 to construct 75 to 150 MW of local generation that
may be required in 2015. |
See Item 1. Business, Tucson Electric Utility Operations, Transmission Access, Tucson to Nogales
Transmission Line for more information.
All of these estimates are subject to continuing review and adjustment. Actual capital
expenditures may be different from these estimates due to changes in business conditions,
construction schedules, environmental requirements, and changes to TEPs business arising from
retail competition. TEP plans to fund its capital expenditures through internally generated cash
flow.
Investments in Springerville Lease Debt
At December 31, 2009, TEP had $95 million of investments in lease debt on its balance sheet. In
March 2009, TEP made a $31 million purchase of Springerville Unit 1 lease debt. The table below
provides a summary of the investment balances in lease debt.
|
|
|
|
|
|
|
|
|
|
|
Lease Debt Investment Balance |
|
Leased Asset |
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
- In Millions - |
|
Investments in Lease Debt: |
|
|
|
|
|
|
|
|
Springerville Unit 1 |
|
$ |
88 |
|
|
$ |
59 |
|
Springerville Coal Handling Facilities |
|
|
7 |
|
|
|
20 |
|
|
|
|
|
|
|
|
Total Investment in Lease Debt |
|
$ |
95 |
|
|
$ |
79 |
|
|
|
|
|
|
|
|
Unless TEP makes new investments in lease debt, the investment in lease debt balance declines over
time due to the amortization of lease debt that occurs as a result of the normal payments TEP makes
on its capital lease obligations. The Springerville Unit 1 and Springerville Coal Handling
Facilities leases expire in 2015.
See Note 6 of Notes to Consolidated Financial Statements Debt, Credit Facilities and Capital
Lease Obligations
Financing Activities
Net cash proceeds from financing activities were $158 million lower in 2009 compared with 2008 due
to: proceeds of $221 million received in 2008 related to long-term debt issuances; and a $58
million increase in dividends paid to UniSource Energy in 2009; partially offset by a $25 million
increase in net proceeds from revolving credit facility borrowings; a $30 million capital
contribution from UniSource Energy; a decrease in payments for capital lease obligations of $50
million; and a $10 million decrease in repayments of long-term debt.
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 December 31,
2009, there were $35 million of borrowings at an interest rate of 0.68% and $1 million in letters
of credit outstanding under the Revolving Credit Facility.
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. TEP has the option of paying interest on
borrowings under the revolving credit facility at LIBOR plus 0.45% or the greater of the federal
funds rate plus 0.5% or the agent banks reference rate.
The TEP Credit Agreement restricts additional indebtedness, liens, sale of assets and
sale-leaseback agreements. The TEP Credit Agreement also requires TEP to meet a minimum cash
coverage ratio and a maximum leverage ratio. If TEP complies with the terms of the TEP Credit
Agreement, it may pay dividends to UniSource Energy.
K-55
In September 2008, as a result of higher than expected fuel and purchased power costs, TEP amended
its credit agreements to provide more flexibility to meet the required leverage ratio. The
leverage ratio is calculated as a ratio of total indebtedness to earnings before interest, taxes,
depreciation and amortization. Although fuel and purchase power expenses have decreased in recent
months, current economic conditions could result in lower customer growth rates and lower sales.
If TEPs financial results are impacted by the economic downturn, our ability to comply with
financial covenants could be jeopardized and we may seek waivers or amendments of the covenants.
As of December 31, 2009, TEP was in compliance with the terms of the TEP Credit Agreement.
If an event of default occurs, the TEP Credit Agreement may become immediately due and payable. An
event of default includes failure to make required payments under the TEP Credit Agreement; change
in control, as defined; failure of TEP or certain subsidiaries to make payments or default on debt
greater than $20 million; or certain bankruptcy events at TEP or certain subsidiaries.
TEP Letter of Credit Facility
In 2008, TEP entered into a three-year $132 million letter of credit and reimbursement agreement
(2008 TEP Letter of Credit Facility). The 2008 TEP Letter of Credit Facility supported $130
million aggregate principal amount of variable rate tax-exempt IDBs that were issued on behalf of
TEP in June 2008.
The 2008 TEP Letter of Credit Facility was terminated in January 2010 upon the conversion of the
interest rate mode on the tax-exempt IDBs from variable to fixed rate, and the mortgage bonds
securing the facility were cancelled. See Bond Issuances, below.
Capital Contribution from UniSource Energy
In March 2009, UniSource Energy contributed $30 million of capital to TEP. TEP used the proceeds
to purchase Springerville Unit 1 lease debt. There were no capital contributions from UniSource
Energy to TEP in 2008.
Bond Issuances
In October 2009, the Pima Authority issued approximately $80 million of its 2009 Series A
tax-exempt pollution control bonds (2009 Pima A San Juan Bonds) for TEPs benefit. At the same
time, the Coconino County, Arizona Pollution Control Corporation issued approximately $15 million
of its 2009 Series A tax-exempt pollution control bonds (2009 Coconino A Bonds) for TEPs benefit.
The 2009 Pima A San Juan bonds are unsecured, bear interest at a rate of 4.95%, mature on October
1, 2020, and are not callable prior to maturity. The 2009 Coconino A Bonds are unsecured, bear
interest at 5.125%, mature on October 1, 2032, and are callable at par beginning October 1, 2019.
Semi-annual interest payments on both series of bonds are payable beginning April 1, 2010. TEP
capitalized approximately $1 million in costs related to the issuance of these bonds and will
amortize the costs for each through the respective maturity dates.
The proceeds from the issuance of the 2009 Pima A San Juan Bonds and the 2009 Coconino A Bonds were
deposited with a trustee and were used in November 2009 to redeem approximately $80 million of
6.95% 1997 Series A City of Farmington, New Mexico Pollution Control Bonds and approximately $15
million of 7.0% 1997 Series B Coconino County Pollution Control Bonds, respectively. The average
annual interest savings is expected to be approximately $2 million.
In March 2008, the Pima Authority issued approximately $91 million of its 2008 Series A tax-exempt
IDBs (2008 Pima A Bonds) for TEPs benefit. The proceeds were used to redeem a corresponding
principal amount of bonds previously issued by the Pima Authority for TEPs benefit which TEP
repurchased in 2005. TEP did not cancel the Repurchased Bonds, which remained outstanding under
their respective indentures but were not reflected as debt on the balance sheet. As holder of the
Repurchased Bonds being redeemed, TEP received the payment of the redemption price. TEP used $75
million of the redemption price proceeds to repay loans outstanding under its revolving credit
facility and $10 million to redeem a portion of TEPs Collateral Trust Bonds that matured on August
1, 2008. The 2008 Pima A Bonds are unsecured, bear interest at the rate of 6.375%, mature on
September 1, 2029 and are callable at par in March 2013.
K-56
In June 2008, the Pima Authority issued $130 million of its 2008 Series B tax-exempt IDBs (2008
Pima B Bonds) for TEPs benefit. The proceeds were used to redeem a corresponding principal amount
of bonds previously issued by the Pima Authority for TEPs benefit which TEP repurchased in 2005.
TEP did not cancel the Repurchased Bonds, which remained outstanding under their respective
indentures but were not reflected as debt on the balance sheet. As holder of the Repurchased
Bonds being redeemed, TEP received the payment of the redemption price. TEP used $128 million of
the redemption price proceeds to redeem the remaining 7.5% Collateral Trust Bonds that matured on
August 1, 2008. The 2008 Pima B Bonds were supported by a letter of credit (LOC) issued under the
2008 TEP Letter of Credit Facility. See TEP Letter of Credit Facility, above.
In January 2010, TEP converted the interest mode on the 2008 Pima B Bonds to a fixed rate. The
2008 Pima B bonds were reoffered in January 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. Although the fixed interest rate is higher than the variable
interest rate that was in effect at the time of the conversion, the fixed rate conversion reduced
TEPs future interest rate risk and allowed TEP to terminate the LOC and cancel the mortgage bonds.
See Interest Rate Risk and Tax Exempt Local Furnishing Bonds, below for additional information.
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 December 31, 2009 and December
31, 2008, TEP had $459 million in tax-exempt variable rate debt outstanding. The interest rates on
TEPs tax-exempt variable rate debt are reset weekly by its remarketing agents. The maximum
interest payable under the indentures for the bonds was 10% on the $130 million of 2008 Pima B
Bonds and is 20% on the other $329 million in IDBs. During 2008, the average rates paid ranged
from 0.55% to 8.09%. During 2009, the average rates paid have ranged from 0.25% to 0.79%. At
February 23, 2010, the average rate on the debt was 0.24%.
In August 2009, TEP reduced its exposure to variable interest rate risk by entering into an
interest rate swap that had the effect of converting $50 million of its variable rate IDBs to a
fixed interest rate from September 2009 to September 2014. See Item 7A. Quantitative and
Qualitative Disclosures about Market Risk, Interest Rate Risk, below.
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%. See Bond Issuances, above.
Interest Rate Swaps Springerville Common Facilities Lease Debt
In 2006 and May 2009, TEP entered into interest rate swaps to hedge the floating interest rate risk
associated with the Springerville Common Facilities Lease Debt. Interest on the lease debt is
payable at six-month LIBOR plus a spread. The applicable spread was 1.625% as of December 31,
2009 and 1.5% as of December 31, 2008. The swaps have the effect of fixing the interest rates on
$65 million of the lease debt outstanding at December 31, 2009 at rates ranging from 3.18% to
5.77%.
Mortgage Indenture
TEPs Mortgage creates a lien on and security interest in most of TEPs utility plant assets.
Springerville Unit 2, which is owned by San Carlos, is not subject to this lien and security
interest. The Mortgage allows TEP to issue additional mortgage bonds on the basis of (1) a
percentage of net utility property additions and/or (2) the principal amount of retired mortgage
bonds. The amount of bonds that TEP may issue is also subject to a net earnings test under the
Mortgage.
TEPs Credit Agreement, which totals $491 million and is secured by Mortgage Bonds, limits the
amount of mortgage bonds that may be outstanding to no more than $840 million. At December 31,
2009, TEP had a total of $623 million in outstanding Mortgage Bonds, consisting of $491 million in
bonds securing the TEP Credit Agreement, and $132 million in bonds securing the 2008 TEP Letter of
Credit Facility. The $132 million in bonds securing the TEP 2008 Letter of Credit Facility were
cancelled in January 2010 when the LOC was terminated. Although the Mortgage would allow TEP to
issue additional bonds, the limit imposed by the TEP Credit Agreement is more restrictive and is
currently the governing limitation. See Bond Issuances, above.
K-57
Tax-Exempt Local Furnishing Bonds
TEP has financed a substantial portion of utility plant assets with industrial development revenue
bonds issued by the Industrial Development Authorities of Pima County and Apache County. The
interest on these bonds is excluded from gross income of the bondholder for federal tax purposes.
This exclusion is allowed because the facilities qualify as facilities for the local furnishing of
electric energy as defined by the Internal Revenue Code. These bonds are sometimes referred to as
tax-exempt local furnishing bonds. To qualify for this exclusion, the facilities must be part of
a system providing electric service to customers within not more than two contiguous counties. TEP
provides electric service to retail customers in the City of Tucson and certain other portions of
Pima County, Arizona and to Fort Huachuca in contiguous Cochise County, Arizona.
TEP has financed the following facilities, in whole or in part, with the proceeds of tax-exempt
local furnishing bonds: Springerville Unit 2, Sundt Unit 4, a dedicated 345-kV transmission line
from Springerville Unit 2 to TEPs retail service area (the Express Line), and a portion of TEPs
local transmission and distribution system in the Tucson metropolitan area. During 2008, the Pima
Authority issued $221 million of tax-exempt local furnishing bonds for TEPs benefit. See Bond
Issuances, above.
As of December 31, 2009, TEP had approximately $580 million of tax-exempt local furnishing bonds
outstanding. Approximately $331 million in principal amount of such bonds financed Springerville
Unit 2 and the Express Line. In addition, approximately $11 million of remaining lease debt
related to the Sundt Unit 4 lease obligation was issued as tax-exempt local furnishing bonds.
In December 2008, the Arizona Department of Commerce allocated $200 million of tax-exempt financing
volume cap to TEP for purposes of financing local furnishing transmission and distribution projects
in Pima County, Arizona. Any new IDBs issued under this allocation would be issued in one or more
series by the Pima Authority for the benefit of TEP. TEP has until December 2011 to use this
volume cap allocation. Upon receipt of this allocation in December 2008, TEP paid a $2 million
security deposit to the Arizona Department of Commerce. This security deposit is refundable on a
pro rata basis after each new series of IDBs is issued.
Capital Lease Obligations
At December 31, 2009, TEP had $529 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.
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|
|
Capital Lease Obligation |
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Renewal/Purchase |
Leased Asset |
|
at December 31, 2009 |
|
|
|
Expiration |
|
|
Option |
|
|
- In Millions - |
|
|
|
|
|
|
|
Springerville Unit 1 |
|
$ |
321 |
|
|
|
2015 |
|
|
Fair market value purchase option |
|
|
|
|
|
|
|
|
|
|
|
Springerville Coal Handling Facilities |
|
|
85 |
|
|
|
2015 |
|
|
Fixed price purchase option of $120 million |
|
|
|
|
|
|
|
|
|
|
|
Springerville Common Facilities |
|
|
110 |
|
|
|
2017 & 2021 |
|
|
Fixed price purchase
option of $106 million |
|
|
|
|
|
|
|
|
|
|
|
Sundt Unit 4 |
|
|
13 |
|
|
|
2011 |
|
|
Agreement to purchase equity entered into January 2010 |
|
|
|
|
|
|
|
|
|
|
Total Capital Lease Obligations |
|
$ |
529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2010, TEP entered into an agreement to purchase 100% of the equity interest in
Sundt Unit 4. See Sundt Unit 4, above, for more information.
Except for Sundt Unit 4, 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. 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.
K-58
TEPs capital lease obligation balances decline over time due to the normal capital lease payments
made by TEP. See Note 6. Debt, Credit Facilities and Capital Lease Obligations for more
information about the fixed purchase price amounts.
The following chart displays TEPs contractual obligations as of December 31, 2009 by maturity and
by type of obligation.
TEPs Contractual Obligations
- Millions of Dollars -
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due in Years |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
Ending December 31, |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
and after |
|
|
Other |
|
|
Total |
|
Long Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
494 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
445 |
|
|
$ |
|
|
|
$ |
939 |
|
Interest |
|
|
39 |
|
|
|
38 |
|
|
|
34 |
|
|
|
34 |
|
|
|
34 |
|
|
|
484 |
|
|
|
|
|
|
|
663 |
|
Capital Lease Obligations |
|
|
93 |
|
|
|
107 |
|
|
|
118 |
|
|
|
123 |
|
|
|
195 |
|
|
|
103 |
|
|
|
|
|
|
|
739 |
|
Operating Leases |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Purchase Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel (including Transportation) |
|
|
89 |
|
|
|
51 |
|
|
|
42 |
|
|
|
39 |
|
|
|
37 |
|
|
|
142 |
|
|
|
|
|
|
|
400 |
|
Purchased Power |
|
|
44 |
|
|
|
12 |
|
|
|
4 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
66 |
|
Transmission |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
12 |
|
Other Long-Term Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension & Other Post
Retirement Obligations |
|
|
26 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
|
|
30 |
|
|
|
|
|
|
|
78 |
|
Acquisition of Springerville
Coal Handling and Common
Facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
226 |
|
Unrecognized Tax Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations |
|
$ |
294 |
|
|
$ |
709 |
|
|
$ |
205 |
|
|
$ |
206 |
|
|
$ |
276 |
|
|
$ |
1,434 |
|
|
$ |
19 |
|
|
$ |
3,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See UniSource Energy Consolidated, Liquidity and Capital Resources, Contractual Obligations,
above, for a description of these obligations.
We have reviewed our contractual obligations and provide the following additional information:
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|
|
TEPs Credit Agreement contains pricing based on TEPs credit ratings. A change in
TEPs credit ratings can cause an increase or decrease in the amount of interest TEP pays
on its borrowings, and the amount of fees it pays for its letters of credit and unused
commitments. A downgrade in TEPs credit ratings would not cause a restriction in TEPs
ability to borrow under its revolving credit facility. |
|
|
|
|
TEPs Credit Agreement contains certain financial and other restrictive covenants,
including interest coverage and leverage tests. Failure to comply with these covenants
would entitle the lenders to accelerate the maturity of all amounts outstanding. At
December 31, 2009, TEP was in compliance with these covenants. See TEP Credit Agreement
above. |
|
|
|
|
TEP conducts its wholesale marketing and risk management activities under certain master
agreements whereby TEP may be required to post credit enhancements in the form of cash or a
letter of credit due to exposures exceeding unsecured credit limits provided to TEP,
changes in contract values, a change in TEPs credit ratings or if there has been a
material change in TEPs creditworthiness. As of December 31, 2009, TEP had posted a $1
million letter of credit as collateral with counterparties for credit enhancement. |
K-59
Dividends on Common Stock
TEP declared and paid dividends to UniSource Energy of $60 million in 2009, $3 million in 2008, and
$53 million in 2007.
TEP can pay dividends if it maintains compliance with the TEP Credit Agreement and certain
financial covenants. As of December 31, 2009, TEP was in compliance with the terms of the TEP
Credit Agreement.
The Federal Power Act states that dividends shall not be paid out of funds properly included in
capital accounts. 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 $7 million in 2009, $9 million in 2008, and $4 million in 2007. We
expect operations at UNS Gas to vary with the seasons, with peak energy usage occurring in the
winter months.
The table below provides summary financial information for UNS Gas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Gas Revenues |
|
$ |
149 |
|
|
$ |
172 |
|
|
$ |
149 |
|
Other Revenues |
|
|
4 |
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues |
|
|
153 |
|
|
|
174 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
Total Purchased Gas and PGA Expense |
|
|
99 |
|
|
|
117 |
|
|
|
101 |
|
Other Operations and Maintenance Expense |
|
|
25 |
|
|
|
25 |
|
|
|
27 |
|
Depreciation and Amortization |
|
|
7 |
|
|
|
7 |
|
|
|
8 |
|
Taxes other than Income Taxes |
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Expenses |
|
|
134 |
|
|
|
152 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
18 |
|
|
|
22 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
6 |
|
|
|
7 |
|
|
|
7 |
|
Total Other Income |
|
|
|
|
|
|
|
|
|
|
2 |
|
Income Tax Expense (Benefit) |
|
|
5 |
|
|
|
6 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
7 |
|
|
$ |
9 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
The table below shows UNS Gas therm sales and revenues for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Sales (Millions of Therms) |
|
|
Gas Revenues (Millions of Dollars) |
|
|
|
|
|
|
|
|
|
|
|
09-08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09-08 |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
%Chng |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
% Chng |
|
|
2007 |
|
Retail Therm Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
70 |
|
|
|
72 |
|
|
|
(3.4 |
%) |
|
|
71 |
|
|
$ |
91 |
|
|
$ |
97 |
|
|
|
(6.5 |
%) |
|
$ |
90 |
|
Commercial |
|
|
30 |
|
|
|
31 |
|
|
|
(4.4 |
%) |
|
|
31 |
|
|
|
32 |
|
|
|
36 |
|
|
|
(9.1 |
%) |
|
|
34 |
|
Industrial |
|
|
2 |
|
|
|
2 |
|
|
|
15.4 |
% |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
7.6 |
% |
|
|
2 |
|
Public Authorities |
|
|
6 |
|
|
|
7 |
|
|
|
(7.7 |
%) |
|
|
8 |
|
|
|
7 |
|
|
|
8 |
|
|
|
(11.4 |
%) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Therm
Sales |
|
|
108 |
|
|
|
112 |
|
|
|
(3.6 |
%) |
|
|
112 |
|
|
|
132 |
|
|
|
143 |
|
|
|
(7.3 |
%) |
|
|
133 |
|
Transport |
|
|
36 |
|
|
|
40 |
|
|
|
(7.0 |
%) |
|
|
25 |
|
|
|
4 |
|
|
|
4 |
|
|
|
(2.7 |
%) |
|
|
3 |
|
Negotiated Sales
Program (NSP) |
|
|
30 |
|
|
|
32 |
|
|
|
(7.7 |
%) |
|
|
19 |
|
|
|
13 |
|
|
|
25 |
|
|
|
(48.7 |
%) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Therm Sales |
|
|
174 |
|
|
|
184 |
|
|
|
(5.1 |
%) |
|
|
156 |
|
|
$ |
149 |
|
|
$ |
172 |
|
|
|
(13.1 |
%) |
|
$ |
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail therm sales in 2009 decreased by 3.6% compared with 2008 due to mild weather and weak
economic conditions. Heating degree days were down 3% compared with 2008 and use per customer also
decreased. Economic conditions have resulted in lower customer growth rates than experienced in
prior years. As of
December 31, 2009, UNS Gas had approximately 145,000 retail customers, which represents an increase
of less than 1% compared with year end 2008. The lower gas sales volumes resulted in an $11
million, or 7.3%, decrease in retail revenues.
K-60
Through a Negotiated Sales Program (NSP) approved by the ACC, UNS Gas supplies natural gas to some
of its large transportation customers. 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
Purchased Gas Adjustor (PGA) mechanism which reduces the gas commodity price. See Factors
Affecting Results of Operations, Rates and Regulation, Energy Cost Adjustment Mechanism, below.
FACTORS AFFECTING RESULTS OF OPERATIONS
Rates
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. In 2007, the ACC increased the annual cap on the maximum increase in the
PGA factor from $0.10 per therm to $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. On December 31, 2009, the PGA bank balance
was over-collected by $10 million. In October 2009, the ACC approved a $0.08 cent per therm PGA
surcredit, effective November 2009 through October 2010 or until the balance reaches zero.
2008 General Rate Case Filing
Due to increases in capital and operating costs related to providing safe and reliable service to
customers of UNS Gas, UNS Gas believes the rates approved by the ACC in 2007 are inadequate for UNS
Gas to recover its costs and earn a reasonable return on its investments.
In November 2008, UNS Gas filed a general rate case with the ACC on a cost of service basis. Below
is a table that summarizes UNS Gas request:
|
|
|
Test year 12 months ended June 30, 2008 |
|
Requested by UNS Gas |
Original cost rate base |
|
$182 million |
Revenue deficiency |
|
$9.5 million |
Total rate increase (over test year revenues) |
|
6% |
Cost of long-term debt |
|
6.5% |
Cost of equity |
|
11.0% |
Actual capital structure |
|
50% equity / 50% debt |
Weighted average cost of capital |
|
8.75% |
Rate of return on fair value rate base |
|
6.80% |
In June 2009, ACC staff recommended a rate increase of $3.4 million based on an original cost rate
base of $178 million and a 10% return on equity. Hearings before the ALJ concluded in August 2009.
UNS Gas expects the ACC to issue a final order in the first half of 2010. UNS Gas cannot predict
the outcome of this general rate case proceeding.
K-61
Fair Value Measurements
UNS Gas adopted fair value measurements, on January 1, 2008. See Tucson Electric Power, Factors
Affecting Results of Operations, above, for more information about 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 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.
UNS Gas
December 31, 2009
- 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) |
|
$ |
25 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
25 |
|
Cash Collateral(2) |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Energy Contracts(3) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25 |
|
|
$ |
(5 |
) |
|
$ |
|
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
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. The amounts include current
and non-current assets and are net of current and non-current liabilities. |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Outlook
UNS Gas capital requirements consist primarily of capital expenditures. In 2009, capital
expenditures were $13 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. The rate
increase approved by the ACC in November 2007 covers some, but not all, of UNS Gas higher costs
and capital investments.
K-62
Operating Cash Flow and Capital Expenditures
The table below provides summary cash flow information for UNS Gas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities |
|
|
37 |
|
|
$ |
3 |
|
|
$ |
28 |
|
Investing Activities |
|
|
(13 |
) |
|
|
(16 |
) |
|
|
(22 |
) |
Financing Activities |
|
|
|
|
|
|
1 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash |
|
|
24 |
|
|
|
(12 |
) |
|
|
|
|
Beginning Cash |
|
|
7 |
|
|
|
19 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Ending Cash |
|
|
31 |
|
|
|
7 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows increased in 2009 due to a net over-recovery of PGA gas costs and cash inflows
related to the return of cash collateral deposited in prior periods with gas supply and hedging
counterparties.
Forecasted capital expenditures for UNS Gas are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
- Millions of Dollars - |
|
UNS Gas |
|
$ |
14 |
|
|
$ |
16 |
|
|
$ |
16 |
|
|
$ |
16 |
|
|
$ |
18 |
|
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.
UNS Gas is only liable for UNS Gas borrowings, and similarly, UNS Electric is only liable for UNS
Electrics borrowings under the UNS Gas/UNS Electric Revolver. UES guarantees the obligations of
both UNS Gas and UNS Electric.
UNS Gas and UNS Electric have the option of paying interest on borrowings at LIBOR plus 1.0% or the
greater of the federal funds rate plus 0.5% or the agent banks reference rate. Letter of credit
fees are 1.0% per annum.
The UNS Gas/UNS Electric Revolver contains restrictions on additional indebtedness, liens,
dividends, mergers and sales of assets; it also contains a maximum leverage ratio and a minimum
cash flow to interest coverage ratio for each borrower. As of December 31, 2009, UNS Gas and UNS
Electric were each in compliance with the terms of the UNS Gas/UNS Electric Revolver.
If an event of default occurs, the UNS Gas/UNS Electric Revolver may become immediately due and
payable. An event of default includes failure to make required payments under the UNS Gas/UNS
Electric Revolver, certain change in control transactions, certain bankruptcy events of UNS Gas or
UNS Electric, or failure of UES, UNS Gas or UNS Electric to make payments or default on debt
greater than $4 million.
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 natural gas procurement and hedging activities. As of
February 23, 2010, UNS Gas had 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 7A. Quantitative and
Qualitative Disclosures about Market Risk, Credit Risk, below.
K-63
Senior Unsecured Notes
UNS Gas has $100 million of 6.23% senior unsecured notes outstanding of which $50 million matures
in 2011 and $50 million matures in 2015. These notes 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 December 31,
2009, UNS Gas was in compliance with the terms of its note purchase agreement.
UNS Gas must meet a leverage test and an interest coverage test to issue additional debt or to pay
dividends. However, UNS Gas may, without meeting these tests, refinance existing debt and incur up
to $7 million in short-term debt.
Contractual Obligations
UNS Gas Supply Contracts
UNS Gas directly manages its gas supply and transportation contracts. The market price for gas
varies based upon the period during which the commodity is purchased. UNS Gas has firm
transportation agreements with capacity sufficient to meet its current load requirements. These
contracts expire in various years between 2011 and 2023. These costs are passed through to UNS
Gas customers via the PGA.
UNS Gas hedges its gas supply prices by entering into fixed price forward contracts and financial
swaps at various times during the year to provide more stable prices to its customers. These
purchases and hedges are made up to three years in advance with the goal of hedging at least 45% of
the expected monthly gas consumption with fixed prices prior to entering into the month. UNS Gas
hedged approximately 45% of its expected monthly consumption for the 2009/2010 winter season
(November through March). Additionally, UNS Gas has approximately 40% of its expected gas
consumption hedged for April through October 2010, and 35% hedged for the period November 2010
through March 2011.
The following table displays UNS Gas contractual obligations as of December 31, 2009 by maturity
and by type of obligation.
UNS Gas Contractual Obligations
-Millions of Dollars-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
Payment Due in Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
Ending December 31, |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
after |
|
|
Total |
|
Long Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
50 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
50 |
|
|
$ |
100 |
|
Interest |
|
|
6 |
|
|
|
6 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
|
|
25 |
|
Purchase Obligations Fuel |
|
|
19 |
|
|
|
14 |
|
|
|
5 |
|
|
|
3 |
|
|
|
3 |
|
|
|
23 |
|
|
|
67 |
|
Pension & Other Post
Retirement Obligations |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations |
|
$ |
26 |
|
|
$ |
70 |
|
|
$ |
8 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
77 |
|
|
$ |
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS Gas conducts certain of its gas procurement and risk management activities under certain
agreements whereby UNS Gas may be required to post margin due to changes in contract values, a
change in UNS Gas creditworthiness or exposures exceeding credit limits provided to UNS Gas. As
of December 31, 2009, UNS Gas had posted $2 million in such credit enhancements.
Dividends on Common Stock
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 December 31, 2009, UNS Gas was in compliance with the terms of its note purchase agreement.
See Senior Unsecured Notes, above.
K-64
UNS ELECTRIC
RESULTS OF OPERATIONS
UNS Electric reported net income of $6 million in 2009, $4 million in 2008 and $5 million in 2007.
Similar to TEPs operations, we expect UNS Electrics operations to be seasonal in nature, with
peak energy demand occurring in the summer months.
The table below provides summary financial information for UNS Electric.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Retail Electric Revenues |
|
$ |
180 |
|
|
$ |
183 |
|
|
$ |
165 |
|
Wholesale Electric Revenues |
|
|
5 |
|
|
|
10 |
|
|
|
|
|
Other Revenues |
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues |
|
|
187 |
|
|
|
195 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
Purchased Energy and Fuel Expense |
|
|
128 |
|
|
|
143 |
|
|
|
118 |
|
Other Operations and Maintenance Expense |
|
|
25 |
|
|
|
22 |
|
|
|
23 |
|
Depreciation and Amortization |
|
|
14 |
|
|
|
14 |
|
|
|
13 |
|
Taxes other than Income Taxes |
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Expenses |
|
|
171 |
|
|
|
183 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
16 |
|
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Total Interest Expense |
|
|
7 |
|
|
|
7 |
|
|
|
6 |
|
Income Tax Expense |
|
|
4 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6 |
|
|
$ |
4 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
The table below shows UNS Electrics kWh sales and revenues for 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Sales - Millions of kWh |
|
|
Electric Revenues - Millions of Dollars |
|
|
|
|
|
|
|
|
|
|
|
09-08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
09-08 |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
%Chng |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
%Chng |
|
|
2007 |
|
Electric Retail
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
814 |
|
|
|
822 |
|
|
|
(1.1 |
%) |
|
|
854 |
|
|
$ |
82 |
|
|
$ |
92 |
|
|
|
(10.6 |
%) |
|
$ |
86 |
|
Commercial |
|
|
608 |
|
|
|
620 |
|
|
|
(1.9 |
%) |
|
|
627 |
|
|
|
63 |
|
|
|
70 |
|
|
|
(9.9 |
%) |
|
|
64 |
|
Industrial |
|
|
197 |
|
|
|
189 |
|
|
|
4.2 |
% |
|
|
199 |
|
|
|
17 |
|
|
|
17 |
|
|
|
(2.2 |
%) |
|
|
15 |
|
Mining |
|
|
163 |
|
|
|
30 |
|
|
NM |
|
|
|
|
|
|
|
12 |
|
|
|
3 |
|
|
NM |
|
|
|
|
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
(0.8 |
%) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric
Retail Sales |
|
|
1,784 |
|
|
|
1,663 |
|
|
|
7.3 |
% |
|
|
1,682 |
|
|
$ |
174 |
|
|
$ |
182 |
|
|
|
(4.4 |
%) |
|
$ |
165 |
|
REST & DSM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
1 |
|
|
NM |
|
|
|
|
|
Wholesale Electric
Sales |
|
|
154 |
|
|
|
153 |
|
|
|
(0.5 |
%) |
|
|
|
|
|
|
5 |
|
|
|
10 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric Sales |
|
|
1,938 |
|
|
|
1,816 |
|
|
|
6.7 |
% |
|
|
1,682 |
|
|
$ |
185 |
|
|
$ |
193 |
|
|
|
(4.0 |
%) |
|
$ |
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, retail kWh sales increased by 7.3% compared to 2008. The increase is due primarily to
increased usage by a new copper mining customer in UNS Electrics service area. Excluding mining
sales, UNS Electrics retail kWh sales decreased by 0.8% compared with last year as a result of
weak economic conditions.
UNS Electrics retail customer base did not increase during 2009. As of December 31, 2009, UNS
Electric had approximately 90,000 retail customers, which is comparable with the prior year.
Wholesale revenues decreased by $5 million in 2009 due to lower market prices for wholesale power.
Wholesale sales are made primarily from contract and resource capacity agreements that became
effective June 1, 2008, subsequent to the expiration of UNS Electrics full requirements contract
with Pinnacle West Marketing and Trading (PWMT). All revenues from wholesales sales are credited
against costs recovered through UNS Electrics PPFAC.
K-65
FACTORS AFFECTING RESULTS OF OPERATIONS
Competition
As required by the ACC order approving UniSource Energys acquisition of the Citizens Arizona gas
and electric assets, in 2003 UNS Electric filed with the ACC a plan to open its service territories
to retail competition by December 31, 2003. The plan is subject to review and approval by the ACC,
which has not yet considered the plan. As a result of the court decisions concerning the ACCs
Rules, we are unable to predict when and how the ACC will address this plan. See Item 1.
Business, TEP, Rates and Regulation, Retail Electric Competition Rules, for more information.
Rates
2008 UNS Electric Rate Order
In May 2008, the ACC issued an order authorizing a 2.5%, or $4 million base rate increase effective
June 1, 2008. UNS Electric had requested a 5.5%, or $8.5 million base rate increase.
Purchased Power and Fuel Adjustment Clause
As part of the 2008 ACC order, a new PPFAC mechanism took effect on June 1, 2008. The 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 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. The ACC approved a cap on the
PPFAC forward component of 1.73 cents per kWh, resulting in total fuel and purchased power recovery
of approximately 8.7 cents per kWh, an increase of approximately 1.7 cents per kWh in UNS
Electrics average retail rate. On April 1, 2009, UNS Electric filed a request with the ACC for a
PPFAC rate that credits 1.06 cents per kWh. This results in a total fuel and purchased power
recovery of approximately 6.06 cents per kWh that became effective on June 1, 2009.
2009 General Rate Case Filing
On April 30, 2009, UNS Electric filed a rate case application with the ACC seeking a base rate
increase of 7.4% or $13.5 million. 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.
Electric Energy Efficiency Standards
In December 2009, the ACC established a process to adopt new Electric Energy Efficiency Standards
(EE Standards) designed to require UNS Electric, TEP and other affected utilities to implement DSM
programs, only to the extent that they are cost effective. The proposed EE Standards target cost
effective total kWh savings in 2011 of 1.25% and ramping up each year to reach a targeted
cumulative annual reduction in retail kWh sales of 22% by 2020. Savings from Direct Load Control
programs, previously implemented DSM programs and from a portion of energy efficient building codes
may be counted towards meeting the target. The proposed EE Standards provide for recovery of costs
incurred to implement cost effective DSM programs. UNS Electrics 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 affect.
Purchased Power Agreement
In May 2008, UNS Electric and UED entered into a Power Purchase and Sales Agreement (PPA) under
which UED sells all the output of the 90 MW gas-fired Black Mountain Generating Station (BMGS) to
UNS Electric over a five-year term. The PPA is a tolling arrangement in which UNS Electric takes
operational control of BMGS and assumes all risk of operation and maintenance costs, including
fuel. Under the terms of the PPA, UNS Electric pays UED a capacity charge. The costs associated
with the PPA are recoverable through UNS Electrics PPFAC.
K-66
Renewable Energy Standard and Tariff
UNS Electric began implementing its ACC approved REST plan on June 1, 2008. In 2009 and 2008, UNS
Electric collected $5 million and $3 million in REST surcharges, of which $6 million and $1 million
were expensed for REST projects, respectively. Any surcharge collections above or below the amount
of renewable expenditures will be deferred and reflected in UNS Electrics financial statements as
a regulatory liability or asset. In 2010, UNS Electric expects to collect $8 million from
customers through the REST surcharge. REST implementation plans and the associated surcharge must be
submitted annually to the ACC for review and approval. For more information, see Item 1. Business,
UNS Electric, Renewable, Energy Standard and Tariff, above.
Fair Value Measurements
UNS Electric adopted fair value measurements on January 1, 2008. See Tucson Electric Power,
Factors Affecting Results of Operations, above, for more information about 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 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.
UNS Electric
December 31, 2009
- 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) |
|
$ |
9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9 |
|
Energy Contracts(2) |
|
|
|
|
|
|
(3 |
) |
|
|
(9 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9 |
|
|
$ |
(3 |
) |
|
$ |
(9 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
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 assets and are net of current and non-current liabilities.
The level 3 valuation techniques are described below. |
UNS Electric recorded in 2009, net unrealized gains of $7 million in net Regulatory Assets due to
the change in the fair value of forward power purchase contracts classified as Level 3 in the fair
value hierarchy. These changes in fair value were primarily due to older fixed price contracts
settling during the year and entering into new fixed price forward power contracts at lower prices.
UNS Electrics Level 3 derivatives include certain energy 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.
K-67
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Outlook
In 2009, UNS Electrics capital expenditures were $28 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. In April
2007, UniSource Energy contributed $10 million of capital to UNS Electric.
UNS Electric implemented an average base rate increase of approximately 2.5% in June 2008, however
the increase does not provide sufficient cash flow to cover UNS Electrics higher 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 filed in April 2009.
See UniSource Energy Consolidated, Outlook and Strategies, Economic Conditions 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.
In August 2008, UNS Electric issued $100 million of unsecured debt. A portion of the proceeds was
used to redeem $60 million of notes that matured on August 11, 2008. The remaining proceeds were
used to repay outstanding borrowings by UNS Electric under the UNS Gas/UNS Electric Revolver and
for general corporate purposes. See Senior Unsecured Notes, below.
Operating Cash Flow and Capital Expenditures
The table below provides summary cash flow information for UNS Electric.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities |
|
$ |
37 |
|
|
$ |
14 |
|
|
$ |
22 |
|
Investing Activities |
|
|
(28 |
) |
|
|
(30 |
) |
|
|
(36 |
) |
Financing Activities |
|
|
(8 |
) |
|
|
22 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash |
|
|
1 |
|
|
|
6 |
|
|
|
(2 |
) |
Beginning Cash |
|
|
9 |
|
|
|
3 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Ending Cash |
|
|
10 |
|
|
|
9 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows increased in 2009 because of the higher mining kWh sales, an increase in base
rates, and the PPFAC charge that went into effect on June 1, 2008.
Forecasted capital expenditures for UNS Electric are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
- Millions of Dollars - |
|
UNS Electric |
|
$ |
26 |
|
|
$ |
25 |
|
|
$ |
31 |
|
|
$ |
13 |
|
|
$ |
16 |
|
UNS Gas/UNS Electric Revolver
See UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver above for description
of UNS Electrics unsecured revolving credit agreement.
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
February 23, 2010, UNS Electric had $12 million outstanding under the UNS Gas/UNS Electric
Revolver.
K-68
Senior Unsecured Notes
UNS Electric has $100 million of senior unsecured notes outstanding, consisting of $50 million of
6.50% notes due in 2015 and $50 million of 7.10% notes due August 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 December 31, 2009, UNS Electric was in
compliance with the terms of its note purchase agreement.
UNS Electric must meet a leverage test and an interest coverage test to issue additional debt or to
pay dividends. However, UNS Electric may, without meeting these tests, refinance existing debt and
incur up to $5 million in short-term debt.
Contractual Obligations
UNS Electric Power Supply and Transmission Contracts
UNS Electric enters into various power supply agreements for periods of one to five years. Certain
of these contracts are at a fixed price per MW and others are indexed to natural gas prices.
UNS Electrics power purchase contracts and risk management activities are subject to master
agreements whereby UNS Electric may be required to post margin due to changes in contract values or
if there has been a material change in UNS Electrics creditworthiness, or exposures exceeding
credit limits provided to UNS Electric. As of December 31, 2009, UNS Electric had posted $11
million of such credit enhancements in the form of letters of credit.
UNS Electric imports the power it purchases over the Western Area Power Administrations (WAPA)
transmission lines. UNS Electrics transmission capacity agreements with WAPA provide for annual
rate adjustments and expire in 2017 and 2011.
The following table displays UNS Electrics contractual obligations as of December 31, 2009 by
maturity and by type of obligation.
UNS Electrics Contractual Obligations
-Millions of Dollars-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
Payment Due in Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
Ending December 31, |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
after |
|
|
Total |
|
Long Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
100 |
|
|
$ |
100 |
|
Interest |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
34 |
|
|
|
69 |
|
Purchase Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Power |
|
|
67 |
|
|
|
23 |
|
|
|
14 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
Transmission |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Pension & Other Post
Retirement Obligations |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations |
|
$ |
77 |
|
|
$ |
32 |
|
|
$ |
22 |
|
|
$ |
54 |
|
|
$ |
7 |
|
|
$ |
134 |
|
|
$ |
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-69
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 December 31, 2009, UNS Electric was in compliance with the terms of its note purchase agreement.
See Senior Unsecured Notes, above. As of December
31, 2009, 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.
OTHER NON-REPORTABLE BUSINESS SEGMENTS
RESULTS OF OPERATIONS
The table below summarizes the income (loss) for the Other non-reportable segments in the last
three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
- Millions of Dollars - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy Parent Company |
|
$ |
(6 |
) |
|
$ |
(5 |
) |
|
$ |
(5 |
) |
Millennium |
|
|
3 |
|
|
|
|
|
|
|
1 |
|
UED |
|
|
5 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Net Loss |
|
$ |
2 |
|
|
$ |
(2 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
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 related to the purchase of land and site development
to construct a new headquarters building.
UED
UED completed the construction of the 90 MW BMGS in Kingman, Arizona in May 2008. UED sells the
output of BMGS to UNS Electric through a PPA. See UNS Electric, Factors Affecting Results of
Operation, Purchased Power Agreement, above.
In December 2008, UniSource Energy contributed $59 million of equity to UED by canceling an
intercompany promissory note in the amount of $59 million. Borrowings under the promissory note
were used to finance the development of BMGS.
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 used the loan proceeds to pay a $30 million dividend 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%. As of December 31, 2009, UED owed $26 million under this term loan
facility. 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.
In 2009 and 2008, UED recorded after-tax income of $5 million and $3 million, respectively, related
to the operation of BMGS.
In 2008, UED made distributions to UniSource Energy of less than $1 million. The $30 million
dividend paid in 2009 represented a return of capital distribution, as did $4 million of the $9
million dividends paid in February 2010.
K-70
FACTORS AFFECTING RESULTS OF OPERATIONS
Millennium Investments
Millennium is in the process of exiting its remaining investments which may yield gains or losses.
At December 31, 2009, Millenniums key assets included: a $15 million note receivable related to
the sale of Sabinas; a $10 million investment balance in various energy technology projects; and $7
million in cash.
In June 2009, Millennium finalized a sale of its 50% interest in Sabinas to Mimosa. The terms
called for an upfront $5 million payment to Millennium which was received in January 2009. Other
key terms of the transaction include a three year, 6% interest-bearing, collateralized $15 million
note from Mimosa. In June 2009, Millennium recorded a $6 million pre-tax gain on the sale.
Millennium made $3 million in dividend payments to UniSource Energy in 2009, $25 million in 2008
and $15 million in 2007. In January 2010, Millennium made a $4 million dividend payment to
UniSource Energy. All of these dividends represented return of capital distributions.
Millenniums remaining commitment for all of its investments combined is less than $1 million,
which is expected to be funded over the next one to two years.
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 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.
December 31, 2009
- 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 |
|
Investments |
|
$ |
4 |
|
|
$ |
|
|
|
$ |
6 |
|
|
$ |
10 |
|
Level 1 Investments represent the fair value of money market funds based on observable market
prices. Level 3 Investments represent Millenniums equity investment in unregulated businesses
that, in the absence of readily ascertainable market values, is based on the investment partners
valuations.
CRITICAL ACCOUNTING POLICIES
In preparing financial statements under Generally Accepted Accounting Principles (GAAP), management
exercises judgment in the selection and application of accounting principles, including making
estimates and assumptions. UniSource Energy and TEP consider Critical Accounting Policies to be
those that could result in materially different financial statement results if our assumptions
regarding application of accounting principles were different. UniSource Energy and TEP describe
their Critical Accounting Policies below. Other significant accounting policies and recently
issued accounting standards are discussed in Note 1 of Notes to Consolidated Financial Statements
Nature of Operations and Summary of Significant Accounting Estimates.
Accounting for Rate Regulation
TEP, UNS Gas and UNS Electric generally use the same accounting policies and practices used by
unregulated companies for financial reporting under GAAP. However, sometimes these principles
require special accounting treatment for regulated companies to show the effect of regulation. For
example, in setting retail rates for TEP, UNS Gas and UNS Electric, the ACC may not allow TEP, UNS
Gas or UNS Electric to currently charge their customers to recover certain expenses, but instead
may require that these expenses be charged to customers in the future. In this situation,
regulatory accounting requires that TEP, UNS Gas and UNS Electric defer these items and show them
as regulatory assets on the balance sheet until TEP, UNS Gas and UNS Electric are allowed to charge
their customers. TEP, UNS Gas and UNS Electric then amortize these items as expense to the income
statement as these charges are recovered from customers. Similarly, certain revenue items may be
deferred as regulatory liabilities, which are also eventually amortized to the income statement as
rates to customers are reduced.
K-71
TEP
Upon approval by the ACC of a settlement agreement in November 1999, TEP discontinued application
of regulatory accounting for its generation operations. Beginning in December 2008, as a result of
the 2008 TEP rate order, TEP reapplied regulatory accounting to its generation related operations.
Throughout this period, TEP continued to apply regulatory accounting to its transmission and
distribution operations.
TEPs generation, transmission and distribution regulatory liabilities, net of regulatory assets,
totaled $42 million at December 31, 2009. If TEP stopped applying regulatory accounting to its
remaining regulated operations, it would write off the related balances of its regulatory assets as
an expense and its regulatory liabilities as income on its income statement. TEP regularly
assesses whether it can continue to apply regulatory accounting to its cost-based rate regulated
operations. Expectations of future recovery are generally based on orders issued by regulatory
commissions or historical experience. There are no current or expected proposals or changes in the
regulatory environment that impact the probability of future recovery of these assets.
UNS Gas and UNS Electric
UNS Gass regulatory liabilities, net of regulatory assets, totaled $19 million at December 31,
2009. UNS Electrics regulatory liabilities, net of regulatory assets, totaled $4 million at
December 31, 2009. UNS Gas and UNS Electric regularly assess whether they can continue to apply
regulatory accounting to their cost-based rate regulated operations. If UNS Gas and UNS Electric
stopped applying regulatory accounting to their regulated operations, they would write off the
related balances of regulatory assets as an expense and regulatory liabilities as income on their
income statements. There are no current or expected proposals or changes in the regulatory
environment that impact the probability of future recovery of these assets.
Accounting for Asset Retirement Obligations
TEP
TEP is required to record the fair value of a liability for a legal obligation to retire an asset
in the period in which the liability is incurred. A legal obligation can also be associated with
the retirement of a long-lived asset whose timing and/or method of settlement are conditional on a
future event. TEP incurs legal obligations as a result of environmental and other governmental
regulations, contractual agreements and other factors. To estimate the liability, management must
use significant judgment and assumptions in: determining whether a legal obligation exists to
remove assets; estimating the probability of a future event for a conditional obligation;
estimating the fair value of the cost of removal; estimating when final removal will occur; and
estimating the credit-adjusted risk-free interest rates to be used to discount the future
liabilities. Changes that may arise over time with regard to these assumptions and determinations
will change amounts recorded in the future as expense for asset retirement obligations.
The initial liability is recorded by increasing the carrying amount of the related long-lived
asset. Over time, the liability is adjusted to its present value by recognizing accretion expense
as an operating expense in the income statement each period, and the capitalized cost of the
long-lived asset is depreciated over the useful life of the related asset. Upon settlement of the
liability, TEP will pay the recorded liability or incur a gain or loss if the actual costs differ
from the recorded amount. If TEP retires any asset at the end of its useful life, without a legal
obligation to do so, TEP will record retirement costs at that time as incurred or accrued.
TEP has identified legal obligations to retire generation plant assets specified in land leases for
its jointly-owned Navajo and Four Corners Generating Stations. The land on which these stations
reside is leased from the Navajo Nation. The provisions of the leases require the lessees to
remove the facilities upon request of the Navajo Nation at the expiration of the leases. TEP also
has certain environmental obligations at the San Juan Generating Station. TEP has estimated that
its share of the cost to remove the Navajo and Four Corners facilities and settle the San Juan
environmental obligations will be approximately $40 million at the date of retirement. No other
legal obligations to retire generation plant assets were identified.
In 2004, TEP, Phelps Dodge Energy Services, LLC and PNM Resources, Inc. each purchased from Duke
Energy North America, LLC a one-third interest in a limited liability company which owns the
natural gas-fired Luna Energy Facility (Luna) in Southern New Mexico. Luna is a 570-MW combined
cycle plant and was placed into commercial operation in April 2006. See Item 1. Business, TEP,
Generating and Other Resources, Future Generating Resources. The new owners assumed asset
retirement obligations to remove certain piping and evaporation
ponds and to restore the ground to its original condition. TEP has estimated its share of the
obligations will be approximately $2 million at the date of retirement.
K-72
As of December 31, 2009, TEP had a liability of $5 million associated with its final asset
retirement obligations.
TEP has various transmission and distribution lines that operate under leases and rights-of-way
that contain end dates and restrictive clauses. TEP operates its transmission and distribution
lines as if they will be operated in perpetuity and would continue to be used or sold without land
remediation. As such there are no legal obligations that require application of the accounting
requirements for asset retirement obligations. Nevertheless, included in the revenue requirement
underlying the Companys electric service rates is a component of depreciation expense intended to
enable TEP to accrue for such future costs of retiring assets for which no legal obligations
exists. The accumulated balance of such accruals, less actual removal costs incurred, net of
salvage proceeds realized, is reported as a regulatory liability. As of December 31, 2009, such
liability is reported as $163 million.
UNS Gas and UNS Electric
UNS Gas and UNS Electric have various transmission and distribution lines that operate under land
leases and rights-of-way that contain end dates and restorative clauses. UNS Gas and UNS Electric
operate their transmission and distribution lines as if they will be operated in perpetuity and
would continue to be used or sold without land remediation. As a result, UNS Gas and UNS Electric
are not recognizing the cost of final removal of the transmission and distribution lines in the
financial statements.
For the net cost of removal for interim retirements from transmission, distribution and general
plant, UNS Gas accrued $20 million as of December 31, 2009. UNS Electric accrued $12 million as
of December 31, 2009. The amounts are recorded as regulatory liabilities.
Pension and Other Postretirement Benefit Plan Assumptions
We record plan assets, obligations, and expenses related to pension and other postretirement
benefit plans based on actuarial valuations, which include key assumptions on discount rates,
expected returns on plan assets, compensation increases and health care cost trend rates. These
actuarial assumptions are reviewed annually and modified as appropriate. The effect of
modifications is generally recorded or amortized over future periods. We believe that the
assumptions used in recording obligations under the plans are reasonable based on prior experience,
market conditions and the advice of plan actuaries.
TEP
TEP is required to recognize the underfunded status of its defined benefit pension and other
postretirement plans as a liability. The underfunded status is measured as the difference between
the fair value of the plans assets and the projected benefit obligation for pension plans or
accumulated postretirement benefit obligation for other postretirement benefit plans. We expect
volatility in the liability recognized in the balance sheet in future years as the funded status of
our plans can change significantly due to discount rate changes and investment and actuarial
experience. TEP recorded the underfunded amount at December 31, 2009 of $58 million for its
pension obligations and $69 million for its other post-retirement obligations as a liability and a
regulatory asset to reflect expected recovery of pension and other post-retirement costs through
rates.
TEP is required to measure the funded status of its pension plans as of the date of its year-end
balance sheet, beginning with the year ended December 31, 2008. On January 1, 2008, TEP recorded a
reduction to retained earnings of less than $1 million to move the measurement date from December 1
to December 31 for all of its pension and other postretirement plans.
TEP discounted its future pension plan obligations at 6.3% at December 31, 2009 and its other
postretirement plan obligations at a rate of 6%. TEP determines the discount rate annually based
on the rates currently available on high-quality, non-callable, long-term bonds. TEP looks to
bonds that receive one of the two highest ratings given by a recognized rating agency whose future
cash flows match the timing and amount of expected future benefit payments. For TEPs pension
plans, a 25-basis point change in the discount rate would increase or decrease the projected
benefit obligation (PBO) by approximately $7 million and the 2010 plan expense by $1 million. For
TEPs other postretirement benefit plan, a 25-basis point change in the discount rate would
increase or decrease the accumulated postretirement benefit obligation (APBO) by approximately $2
million. A 25-basis point change in the discount rate would impact plan expense by less than $1
million.
K-73
TEP calculates the market-related value of plan assets using the fair value of plan assets on the
measurement date. TEP assumed that its plans assets would generate a long-term rate of return of
7.5% at December 31, 2009. In establishing its assumption as to the expected return on plan
assets, TEP reviews the plans asset allocation and develops return assumptions for each asset
class based on advice from an investment consultant and the plans actuary that includes both
historical performance analysis and forward looking views of the financial markets. Pension
expense decreases as the expected rate of return on plan assets increases. A 25-basis point change
in the expected return on plan assets would impact pension expense in 2010 by less than $1 million.
TEP used a current year health care cost trend rate of 7.9% in valuing its postretirement benefit
obligation at December 31, 2009. This rate reflects both market
conditions and the plans experience. Assumed health care cost trend rates have a significant
effect on the amounts reported for health care plans. A one-percentage point change in assumed
health care cost trend rates would change the postretirement benefit obligation by approximately $5 million and the related plan expense in 2010 by less than $1 million.
TEP will record pension expense of approximately $12 million and other postretirement benefit
expense of $5 million ratably through 2010, of which approximately $2 million will be capitalized.
TEP expects to make pension plan contributions of $20 million in 2010. In 2009, TEP established a
Voluntary Employee Beneficiary Association (VEBA) to fund its other postretirement benefit plan.
TEP expects to make benefit payments to retirees under the postretirement benefit plan of
approximately $5 million in 2010 and contributions to the VEBA trust of $1 million in 2010.
UNS Gas and UNS Electric
UNS Gas and UNS Electric discounted their future pension plan obligations using a rate of 6.3% at
December 31, 2009. For UNS Gas and UNS Electrics pension plan, a 25-basis point change in the
discount rate would impact the benefit obligation and 2010 pension expense by less than $1 million.
UNS Gas and UNS Electric will record pension expense of $2 million in 2010, of which less than $1
million will be capitalized. UNS Gas and UNS Electric expects to make combined pension plan
contributions of $2 million in 2010.
UNS Gas and UNS Electric discounted their other postretirement plan obligations using a rate of 6%
at December 31, 2009. UNS Gas and UNS Electric will record postretirement medical benefit expense
and make benefit payments to retirees under the postretirement benefit plan of less than $1 million
in 2010.
Accounting for Derivative Instruments, Trading Activities and Hedging Activities
Commodity Derivative Contracts
TEP, UNS Electric and UNS Gas enter into forward contracts to purchase or sell a specified amount
of capacity or energy at a specified price over a given period of time, typically for one month,
three months, or one year, within established limits to take advantage of favorable market
opportunities. In general, TEP enters into forward purchase contracts when market conditions
provide the opportunity to purchase energy for its load at prices that are below the marginal cost
of its supply resources or to supplement its own resources (e.g., during plant outages and summer
peaking periods). TEP enters into forward sales contracts when it forecasts that it has excess
supply and the market price of energy exceeds its marginal cost. TEP and UNS Gas also enter into
forward gas commodity price swap agreements to lock in fixed prices on a portion of forecasted
summer gas purchases.
As a result of the 2008 TEP Rate Order, which permits recovery in the PPFAC of hedging
transactions, unrealized gains and losses on commodity derivative contracts entered into for retail
customer load are recorded as either a regulatory asset or regulatory liability. UNS Electric and
UNS Gas are also permitted to record unrealized gains and losses on commodity derivative contracts
as either a regulatory asset or regulatory liability. There are no current or expected proposals
or changes in the regulatory environment that impact the probability of future recovery of these
assets through the PPFAC or PGA mechanisms.
K-74
Interest Rate Swaps
TEP hedges the cash flow risk associated with unfavorable changes in the variable interest rates
related to LIBOR on the Springerville Common Facilities Lease. TEP entered into swaps that had the
effect of converting approximately $30 million and $35 million of variable rate lease debt payments
for the Springerville Common Facilities Lease to a fixed rate from May 2009 through July 1, 2014,
and June 2006 through January 2, 2020, respectively. In August 2009, TEP entered into a swap that
had the effect of converting $50 million of variable rate industrial development bonds to a fixed
rate from September 2009 through September 2014. At December 31, 2009, the fair value of these
interest rate swaps is a liability of $6 million.
Commodity Cash Flow Hedge
TEP hedges the cash flow risk associated with a six-year power wholesale supply agreement using a
six-year power purchase swap agreement. Unrealized gains and losses are recorded in Accumulated
Other Comprehensive Income (AOCI). At December 31, 2009, the fair value of this contract is a
liability of $1 million.
The market prices used to determine fair values for TEP, UNS Electric and UNS Gas derivative
instruments at December 31, 2009, are estimated based on various factors including broker quotes,
exchange prices, over the counter prices and time value.
TEP, UNS Gas and UNS Electric manage the risk of counterparty default by performing financial
credit reviews, setting limits, monitoring exposures, requiring collateral when needed, and using a
standardized agreement, which allows for the netting of current period exposures to and from a
single counterparty.
See Item 7A. Quantitative and Qualitative Disclosures about Market Risk, Commodity Price Risk.
Unbilled Revenue TEP, UNS Gas and UNS Electric
TEPs, UNS Gass and UNS Electrics retail revenues include an estimate of MWhs/therms delivered
but unbilled at the end of each period. Unbilled revenues are dependent upon a number of factors
that require managements judgment including estimates of retail sales and customer usage patterns.
The unbilled revenue is estimated by comparing the estimated MWhs/therms delivered to the
MWhs/therms billed to TEP, UNS Gas and UNS Electric retail customers. The excess of estimated
MWhs/therms delivered over MWhs/therms billed is then allocated to the retail customer classes
based on estimated usage by each customer class. TEP, UNS Gas and UNS Electric then record revenue
for each customer class based on the various bill rates for each customer class. Due to the
seasonal fluctuations of TEPs actual load, the unbilled revenue amount increases during the spring
and summer months and decreases during the fall and winter months. The unbilled revenue amount for
UNS Gas sales increases during the fall and winter months and decreases during the spring and
summer months, whereas, the unbilled revenue amount for UNS Electric sales increases during the
spring and summer months and decreases during the fall and winter months.
Plant Asset Depreciable Lives TEP, UNS Gas and UNS Electric
We calculate depreciation expense based on our estimate of the useful lives of our plant assets.
The estimated useful lives, and resulting depreciation rates presently used to calculate
depreciation expense for electric generation and distribution assets for TEP, UNS Gas and UNS
Electric have been approved by the ACC in prior rate decisions. Depreciation rates for such assets
cannot be changed without ACC approval. Depreciation rates for electric transmission assets fall
under the jurisdiction of the FERC.
In January 2010, TEP obtained 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 depreciation
expense by approximately $14 million annually.
Deferred Tax Valuation
Due to the differences between GAAP and income tax laws, many transactions are treated differently
for income tax purposes than they are in the financial statements. This difference is accounted
for by recording deferred income tax assets and liabilities on our balance sheets. These assets
and liabilities are recorded using the income tax rates in effect on the balance sheet date.
K-75
Federal and state income tax credits are treated as a reduction to income tax expense in the year
the credit arises.
Prior to 1990, we flowed through to ratepayers certain accelerated tax benefits related to utility
plant as the benefits were recognized on the income tax return. Income Taxes Recoverable Through
Future Rates on the balance sheet reflects the future revenues due us from ratepayers as these tax
benefits reverse. See Note 2.
Consolidated income tax liabilities are allocated to subsidiaries based on their taxable income and
deductions as reported in the consolidated tax return.
UniSource Energy and TEP record net interest expense associated with uncertain tax positions as
Interest Expense in the income statements. No income tax penalties have been accrued.
At December 31, 2009, TEP had no valuation allowance. See Note 9 of Notes to Consolidated
Financial Statements.
As of December 31, 2009, UniSource Energys deferred income tax assets include $8 million related
to unregulated investment losses of Millennium. These losses have not been reflected on UniSource
Energys consolidated income tax returns. If UniSource Energy were unable to recognize such losses
through its consolidated income tax return in the foreseeable future, UniSource Energy would be
required to write off these deferred tax assets.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The following recently issued accounting standards are not yet reflected in the UniSource Energy
and TEP financial statements:
|
|
|
The FASB issued authoritative guidance for transfers of financial assets that clarify
and change the criteria for a transfer to be accounted for as a sale, change the amount of
a recognized gain/loss on a sale when beneficial interests are received by the transferor,
and requires extensive disclosures. This standard is effective for interim and annual
periods beginning January 1, 2010. To date, we have not participated in any transfers to
which this guidance is applicable. |
|
|
|
|
The FASB issued authoritative guidance for variable interest entities requiring an
analysis to determine whether the enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity. This standard did not have a
material impact on our financial statements on adoption on January 1, 2010. |
|
|
|
|
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 Quantitative and Qualitative 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 and revised
disclosures on our financial statements. |
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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.
K-76
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 7.
Managements Financial Discussion and Analysis, and other parts of this report: state and federal
regulatory and legislative decisions and actions; 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks
We are exposed to various forms of market risk. Changes in interest rates, returns on marketable
securities, and changes in commodity prices may affect our future financial results.
For additional information concerning risk factors, including market risks, see Safe Harbor for
Forward-Looking Statements, above.
Risk Management Committee
We have a Risk Management Committee responsible for the oversight of commodity price risk and
credit risk related to the wholesale energy marketing activities of TEP and the fuel and power
procurement activities at TEP, UNS Gas and UNS Electric. Our Risk Management Committee, which
meets on a quarterly basis and as needed, consists of officers from the finance, accounting, legal,
wholesale marketing, transmission and distribution operations, and generation operations
departments of UniSource Energy. To limit TEP, UNS Gas and UNS Electrics exposure to commodity
price risk, the Risk Management Committee sets trading and hedging policies and limits, which are
reviewed frequently to respond to constantly changing market conditions. To limit TEP, UNS Gas and
UNS Electrics exposure to credit risk, the Risk Management Committee reviews counterparty credit
exposure as well as credit policies and limits.
Interest Rate Risk
TEP is exposed to interest rate risk resulting from changes in interest rates on certain of its
variable rate debt obligations. At December 31, 2009 and December 31, 2008, TEP had $459 million
in tax-exempt variable rate debt outstanding. The interest rates on TEPs tax-exempt variable
rate debt are reset weekly by its remarketing agents. The maximum interest rate payable under the
indentures for these bonds is 10% on the 2008 Pima B Bonds and 20% on the other $329 million in
IDBs. The average interest rate on TEPs variable rate debt (excluding letter of credit fees) was
0.41% in 2009 and 2.11% in 2008. The average weekly interest rate ranged from 0.25% to 0.79% in
2009 and 0.55% to 8.09% during 2008. The peak average interest rate of 8.09% occurred in September
2008 when the short-term debt markets began to experience significant disruptions following the
bankruptcy filing of Lehman Brothers Holdings, Inc. and the deterioration of creditworthiness of
other large financial institutions. Although short-term markets were less volatile in 2009, TEP
may still be subject to volatility in its tax-exempt variable rate debt. A 100 basis point
increase in average interest rates on this debt, over a twelve month period, would result in a
decrease in TEPs pre-tax net income of approximately $5 million.
K-77
To reduce its exposure to variable interest rate risk, in August 2009, TEP entered into an interest
rate swap that had the effect of converting $50 million of variable rate industrial revenue bonds
to a fixed rate of 2.4% from September 2009 through September 2014. To further reduce its variable
interest rate exposure, in January 2010, TEP converted 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.
At December 31, 2009 and 2008, TEPs debt also included variable rate lease debt totaling $65
million related to its Springerville Common Facilities Leases. The notes underlying the leases
mature in June 2017 and January 2020. Interest is payable at six-month LIBOR plus an applicable
spread. The applicable spread was 1.625% at December 31, 2009 and 1.5% at December 31, 2008.
In June 2006 and May 2009, TEP entered into interest rate swaps to hedge the floating interest rate
risk associated with the Springerville Common Facilities lease debt. The swaps have the effect of
fixing the interest rates on the amortizing principal balances as follows:
|
|
|
|
|
|
|
|
|
Outstanding at Dec. 31, 2009 |
|
Fixed Rate |
|
|
LIBOR Spread |
|
$35 million |
|
|
5.77 |
% |
|
|
1.625 |
% |
$23 million |
|
|
3.18 |
% |
|
|
1.625 |
% |
$7 million |
|
|
3.32 |
% |
|
|
1.625 |
% |
To adjust the value of TEPs interest rate swaps, classified as a cash flow hedge, to fair value in
Other Comprehensive Income, TEP recorded the following net unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
- In Millions- |
|
Unrealized Gains (Losses) |
|
$ |
1 |
|
|
$ |
(5 |
) |
|
$ |
(1 |
) |
UniSource Energy, TEP, UNS Gas and UNS Electric are also subject to interest rate risk
resulting from changes in interest rates on their borrowings under revolving credit facilities.
Revolving credit borrowings may be made on the basis of a spread over LIBOR or an Alternate Base
Rate. With the recent disruptions in the financial markets, the spread between LIBOR and other
similar maturity short-term rates, such as U.S. Treasury securities, has been significantly higher
than historical relationships. As a result, UniSource Energy, TEP, UNS Gas and UNS Electric may
experience significant volatility in the rates paid on LIBOR borrowings under their revolving
credit facilities.
Marketable Securities Risk
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 December 31, 2009, UniSource Energys short-term
investments consisted of highly-rated and liquid money market funds, commercial paper, and
certificates of deposit. These short-term investments are classified as Cash and Cash Equivalents
on the Balance Sheet.
At December 31, 2009 and 2008, TEP had marketable securities comprised of investments in lease debt
and equity with an estimated fair value of $132 million and $127 million, respectively. At
December 31, 2009 and 2008, the fair value exceeded the carrying value by $8 million and $17
million, respectively. These securities represent TEPs investments in lease debt and equity
underlying certain of TEPs capital lease obligations. Changes in the fair value of such debt
securities do not present a material risk to TEP, as TEP intends to hold these investments to
maturity.
K-78
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. Beginning January 1, 2009, 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 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 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 from/credited to customers. If the actual price of power
is higher than the forecasted PPFAC rate, TEP is exposed to the price difference until the
subsequent 12-month period when the true-up component is adjusted to allow the recovery of this
difference. In 2009, the ACC approved a PPFAC rate of 0.18 cents per kWh, resulting in total fuel
and purchased power recovery of approximately 3.08 cents per kWh.
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, mid-term and spot energy sales.
TEP generally enters into forward purchases during its summer peaking period 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. For example, the risk management policies provide that TEP should
not take a short physical position in the third quarter and must have owned generation backing up
all physical forward sales positions at the time the sale is made. TEPs risk management policies
also restrict entering into forward positions with maturities extending beyond the end of the next
calendar year except for approved hedging purposes.
TEPs risk management policies also allow for financial purchases and sales of energy subject to
specified risk parameters established and monitored by the Risk Management Committee. These
include financial trades in a futures account on an exchange, with the intent of optimizing market
opportunities.
The majority of TEPs forward contracts are considered to be normal purchases and sales of
electric energy and are therefore not accounted for as derivatives. TEP records revenues on its
normal sales and expenses on its normal purchases in the period in which the energy is
delivered. From time to time, however, TEP enters into forward contracts that meet the definition
of a derivative. When TEP has derivative forward contracts, it marks them to market using actively
quoted prices obtained from brokers for power traded over-the-counter at Palo Verde and at other
Southwestern U.S. trading hubs. TEP believes that these broker quotations used to calculate the
mark-to-market values represent accurate measures of the fair values of TEPs positions because of
the short-term nature of TEPs positions, as limited by risk management policies, and the liquidity
in the short-term market.
Natural Gas
TEP is also subject to commodity price risk from changes in the price of 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.
As required by fair value accounting rules, for the year ended December 31, 2009, 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 December 31, 2009.
K-79
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
- In Millions- |
|
Unrealized Gains (Losses) |
|
$ |
11 |
|
|
$ |
(19 |
) |
|
$ |
|
|
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 06 |
|
|
Maturity 612 |
|
|
Maturity |
|
|
Unrealized |
|
Source of Fair Value At Dec. 31, 2009 |
|
months |
|
|
months |
|
|
over 1 yr. |
|
|
Gain (Loss) |
|
Prices actively quoted |
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
(1 |
) |
|
$ |
(5 |
) |
Prices based on models and other
valuation methods |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
(5 |
) |
|
$ |
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity Analysis of Derivatives
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. Beginning in December 2008, as a
result of the 2008 TEP Rate Order, which permits the recovery of prudent costs associated with
hedging contracts through the PPFAC, 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 December 31, 2009 |
|
10% Increase |
|
|
10% Decrease |
|
Non-Cash Flow Hedges |
|
|
|
|
|
|
|
|
Forward power sales and purchase contracts |
|
$ |
|
|
|
$ |
|
|
Gas swap agreements |
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Cash Flow Hedges |
|
|
|
|
|
|
|
|
Forward power sales and purchase contracts |
|
$ |
1 |
|
|
$ |
(1 |
) |
Gas swap agreements |
|
|
|
|
|
|
|
|
Coal
TEP is subject to commodity price risk from changes in the price of coal used to fuel its
coal-fired generating plants.
In 2003, TEP amended and extended the long-term coal supply contract for Springerville Units 1 and
2 through 2020 and expects coal reserves to be sufficient to supply the estimated requirements for
Units 1 and 2 for their presently estimated remaining lives. During the extension period from 2011
through 2020, the coal price will be determined by the cost of Powder River Basin coal delivered to
Springerville Unit 3 subject to a floor and ceiling. Based on current coal market conditions, this
range would be from $24 to $30 per ton. TEP estimates its future minimum annual payments under
this contract to be $45 million in 2010, the initial contract expiration date, and $14 million from
2011 through 2020. TEPs coal transportation contract at Springerville runs through June of 2011.
TEP estimates minimum annual payments under this contract to be $13 million in 2010 and $7 million
in 2011.
TEP does not have a long-term coal supply contract from Sundt Unit 4, however it has adequate coal
inventory through 2010. Coal burned at Sundt Unit 4 represents less than 10% of TEPs total coal
consumption. The long-term rail contract for Sundt Unit 4 is in effect until the earliest of 2015,
the remaining life of Sundt Unit 4 or the life of the coal mine. This rail contract requires TEP
to transport at least 75,000 tons of coal per year through 2015 at an estimated annual cost of $2
million or to make a minimum payment of $1 million.
K-80
TEP also participates in jointly-owned generating facilities at Four Corners, Navajo and San Juan,
where coal supplies are under long-term contracts administered by the operating agents. TEP expects
coal reserves available to these three jointly-owned generating facilities to be sufficient for the
remaining lives of the stations.
The contracts to purchase coal for use at the jointly-owned facilities require TEP to purchase
minimum amounts of coal at an estimated average annual cost of $23 million for the next five years.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, UniSource Energy Consolidated, Contractual Obligations and Note 4 of Notes to
Consolidated Financial Statements Commitments and Contingencies, TEP Commitments, Purchase and
Transportation Commitments.
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. UNS Gas
further reduces this risk by purchasing forward fixed price contracts or entering into financial
gas swaps for a portion of its projected gas needs under its Price Stabilization Plan. UNS Gas
purchases at least 45% of its estimated gas needs in this manner.
As required by fair value accounting rules, for the year ended December 31, 2009, UNS Gas
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 UNS Gas
was less than $0.5 million at December 31, 2009.
For UNS Gas forward gas purchase contracts, a 10% decrease in market prices would result in an
increase in unrealized net losses reported as a regulatory asset of $3 million, while a 10%
increase in market prices would result in a decrease in unrealized net losses reported as a
regulatory asset 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. As part of the May 2008 ACC order, a new PPFAC mechanism took effect
on June 1, 2008. The 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 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 from/credited to customers. If the
actual price of power is higher than the forecasted PPFAC rate, UNS Electric is exposed to the
price difference until the subsequent 12-month period when the true-up component is adjusted to
allow the recovery of this difference. The ACC approved a PPFAC rate of 1.73 cents per kWh,
resulting in total fuel and purchased power recovery of approximately 8.7 cents per kWh, an
increase of approximately 1.7 cents per kWh in UNS Electrics average retail rate.
UNS Electric enters into various power supply agreements for periods of one to five years. Certain
of these contracts are at a fixed price per MW and others are indexed to natural gas prices. UNS
Electric estimates its future minimum payments under these contracts to be $67 million in 2010, $23
million in 2011, $14 million in 2012, and $47 million in 2013, based on natural gas prices at the
date of the contracts.
Because a portion of the costs under these contracts will vary from period to period based on the
market price of gas, the PPFAC, as currently structured, may not provide recovery of the costs
incurred under these new contracts on a timely basis.
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 a regulatory asset of $11 million,
while a 10% increase in market prices would result in a decrease in unrealized net losses reported
as a regulatory asset of $11 million.
UNS Electric hedges a portion of its natural gas exposure from gas-indexed purchase power
agreements with fixed price contracts. In addition, UNS Electric hedges a portion of its
anticipated natural gas exposure from plant fuel. UNS Electric currently has approximately 53% of
this aggregate summer exposure hedged for the summer of 2010. UNS Electric will obtain its
remaining gas and purchased power needs through a combination of additional forward purchases and
purchases in the short-term and spot markets.
K-81
As required by fair value accounting rules, for the year ended December 31, 2009, UNS Electric
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 UNS
Electric was less than $0.5 million at December 31, 2009.
For UNS Electrics forward gas purchase contracts, a 10% decrease in market prices would result in
an increase in unrealized net losses reported as a regulatory asset of $1 million, while a 10%
increase in market prices would result in a decrease in unrealized net losses reported as a
regulatory asset of $1 million.
Credit Risk
UniSource Energy is exposed to credit risk in its energy-related marketing and trading activities
related to potential nonperformance by counterparties. We manage the risk of counterparty default
by performing financial credit reviews, setting limits, monitoring exposures, requiring collateral
when needed, and using standard agreements which allow for the netting of current period exposures
to and from a single counterparty. We calculate counterparty credit exposure by adding any
outstanding receivable (net of amounts payable if a netting agreement exists) to the mark-to-market
value of any forward contracts. A positive number means that we are exposed to the
creditworthiness of our counterparties. If exposure exceeds credit limits or contractual
collateral thresholds, we may request that a counterparty provide credit enhancement in the form of
cash collateral or a letter of credit. Conversely, a negative exposure means that a counterparty
is exposed to the creditworthiness of TEP, UNS Gas or UNS Electric. If such exposure exceeds
credit limits or collateral thresholds, we may be required to post collateral in the form of cash
or letters of credit.
During the last three years, financial institution counterparties have become active participants
in the wholesale energy markets. TEP, UNS Electric and UNS Gas have each entered into short-term
and long-term transactions with several financial institution counterparties with terms of one
month through five years. Due to the recent turmoil in the financial and credit markets, we have
been closely monitoring our transactions with financial institutions. As of December 31, 2009, the
combined credit exposure to TEP, UNS Electric and UNS Gas from financial institution counterparties
was less than $1 million.
As of December 31, 2009, TEPs total credit exposure related to its wholesale marketing and gas
hedging activities was approximately $20 million, including $7 million of inter-company exposure to
UNS Electric. TEP had 2 non-investment grade counterparties with exposure of greater than 10% of
its total credit exposure, totaling approximately $6 million. TEPs total exposure to
non-investment grade counterparties was $7 million.
TEP maintains a margin account with a broker to support certain risk management and trading
activities. At December 31, 2009, TEP had less than $1 million in that margin account. At
December 31, 2009, TEP had $1 million in credit enhancements posted with counterparties, and did
not hold any collateral from its counterparties.
UNS Gas is subject to credit risk from non-performance by its supply and hedging counterparties to
the extent that these contracts have a mark-to-market value in favor of UNS Gas. As of December
31, 2009, UNS Gas had purchased under fixed price contracts approximately 35% of its expected
consumption for the 2010/2011 winter season. At December 31, 2009, UNS Gas had no mark-to-market
credit exposure under its supply and hedging contracts. As of December 31, 2009, UNS Gas had
posted $2 million in cash collateral and no letters of credit as credit enhancements with its
counterparties, and did not hold any collateral from counterparties.
UNS Electric enters into energy purchase agreements as well as gas hedging contracts to hedge the
risk in its gas-indexed power purchase agreements. To the extent that such contracts have a
positive mark-to-market value, UNS Electric is exposed to credit risk under those contracts. At
December 31, 2009, UNS Electric had no credit exposure under such contracts. As of December 31,
2009, UNS Electric had posted $11 million in letters of credit and no cash collateral as credit
enhancements with its counterparties and had not collected any collateral margin from its
counterparties.
K-82
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UniSource Energy Managements Report on Internal Controls Over Financial Reporting
UniSource Energy Corporations management is responsible for establishing and maintaining adequate
internal control over financial reporting. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of the UniSource Energy Corporations internal control over
financial reporting as of December 31, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control Integrated Framework.
Based on managements assessment using those criteria, management has concluded that, as of
December 31, 2009, UniSource Energy Corporations internal control over financial reporting was
effective.
Tucson Electric Power Company Managements Report on Internal Controls Over Financial Reporting
Tucson Electric Power Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of Tucson Electric Power Companys internal control over
financial reporting as of December 31, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control Integrated Framework.
Based on managements assessment using those criteria, management has concluded that, as of
December 31, 2009, Tucson Electric Power Companys internal control over financial reporting was
effective.
This annual report does not include an attestation report of Tucson Electric Power Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by Tucson Electric Power Companys registered
public accounting firm pursuant to temporary rules of the SEC that permit Tucson Electric Power
Company to provide only managements report in this annual report.
K-83
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
UniSource Energy Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of UniSource Energy
Corporation and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of
their operations and their cash flows for each of the three years in the period ended December 31,
2009 in conformity with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Controls Over Financial Reporting. Our responsibility
is to express opinions on these financial statements, on the financial statement schedule, and on
the Companys internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
As described in Note 9 to the consolidated financial statements, the Company changed the manner in
which it accounts for uncertain tax positions as of January 1, 2007.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
|
|
|
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
|
|
|
Phoenix, Arizona |
|
|
February 25, 2010 |
|
|
K-84
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Tucson Electric Power Company:
In our opinion, the accompanying consolidated financial statements listed in the index appearing
under Item 15(a)(1), present fairly, in all material respects, the financial position of Tucson
Electric Power Company and its subsidiaries at December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2009
in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 9 to the consolidated financial statements, the Company changed the manner in
which it accounts for uncertain tax positions as of January 1, 2007.
|
|
|
/s/ PricewaterhouseCoopers LLP
|
|
|
PricewaterhouseCoopers LLP |
|
|
Phoenix, Arizona |
|
|
February 25, 2010 |
|
|
K-85
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
- Thousands of Dollars - |
|
|
|
(Except Per Share Amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Electric Retail Sales |
|
$ |
1,047,619 |
|
|
$ |
988,612 |
|
|
$ |
983,993 |
|
Provision for Rate Refunds CTC Revenue |
|
|
|
|
|
|
(58,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Electric Retail Sales |
|
|
1,047,619 |
|
|
|
930,520 |
|
|
|
983,993 |
|
Electric Wholesale Sales |
|
|
128,627 |
|
|
|
236,300 |
|
|
|
196,233 |
|
California Power Exchange (CPX) Provision for Wholesale Refunds |
|
|
(4,172 |
) |
|
|
|
|
|
|
|
|
Gas Revenue |
|
|
144,609 |
|
|
|
163,977 |
|
|
|
148,598 |
|
Other Revenues |
|
|
77,741 |
|
|
|
66,714 |
|
|
|
52,549 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues |
|
|
1,394,424 |
|
|
|
1,397,511 |
|
|
|
1,381,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
298,655 |
|
|
|
299,987 |
|
|
|
297,037 |
|
Purchased Energy |
|
|
294,584 |
|
|
|
442,210 |
|
|
|
347,377 |
|
Transmission |
|
|
10,181 |
|
|
|
19,214 |
|
|
|
15,648 |
|
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment |
|
|
(17,091 |
) |
|
|
(10,975 |
) |
|
|
5,259 |
|
|
|
|
|
|
|
|
|
|
|
Total Fuel and Purchased Energy |
|
|
586,329 |
|
|
|
750,436 |
|
|
|
665,321 |
|
Other Operations and Maintenance |
|
|
333,887 |
|
|
|
295,658 |
|
|
|
242,264 |
|
Depreciation and Amortization |
|
|
176,018 |
|
|
|
147,690 |
|
|
|
140,638 |
|
Amortization of Transition Recovery Asset |
|
|
|
|
|
|
23,945 |
|
|
|
77,681 |
|
Taxes Other Than Income Taxes |
|
|
45,857 |
|
|
|
39,339 |
|
|
|
47,836 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
1,142,091 |
|
|
|
1,257,068 |
|
|
|
1,173,740 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
252,333 |
|
|
|
140,443 |
|
|
|
207,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Deductions) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
|
12,072 |
|
|
|
11,011 |
|
|
|
18,828 |
|
Other Income |
|
|
18,063 |
|
|
|
7,838 |
|
|
|
7,622 |
|
Other Expense |
|
|
(5,292 |
) |
|
|
(9,286 |
) |
|
|
(4,380 |
) |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Deductions) |
|
|
24,843 |
|
|
|
9,563 |
|
|
|
22,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
58,134 |
|
|
|
70,227 |
|
|
|
73,095 |
|
Capital Leases |
|
|
49,270 |
|
|
|
52,511 |
|
|
|
59,227 |
|
Other Interest Expense |
|
|
3,468 |
|
|
|
1,837 |
|
|
|
5,480 |
|
Interest Capitalized |
|
|
(2,302 |
) |
|
|
(5,565 |
) |
|
|
(5,551 |
) |
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
108,570 |
|
|
|
119,010 |
|
|
|
132,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
168,606 |
|
|
|
30,996 |
|
|
|
97,452 |
|
Income Tax Expense |
|
|
64,348 |
|
|
|
16,975 |
|
|
|
39,079 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
104,258 |
|
|
$ |
14,021 |
|
|
$ |
58,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares of Common Stock Outstanding (000) |
|
|
35,858 |
|
|
|
35,632 |
|
|
|
35,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share |
|
$ |
2.91 |
|
|
$ |
0.39 |
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share |
|
$ |
2.69 |
|
|
$ |
0.39 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared per Share |
|
$ |
1.16 |
|
|
$ |
0.96 |
|
|
$ |
0.90 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
K-86
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
- Thousands of Dollars - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Receipts from Electric Retail Sales |
|
$ |
1,145,051 |
|
|
$ |
1,079,964 |
|
|
$ |
1,061,994 |
|
Cash Receipts from Electric Wholesale Sales |
|
|
175,679 |
|
|
|
353,618 |
|
|
|
301,616 |
|
Cash Receipts from Gas Sales |
|
|
163,441 |
|
|
|
182,271 |
|
|
|
165,678 |
|
Cash Receipts from Operating Springerville Unit 3 |
|
|
49,386 |
|
|
|
53,495 |
|
|
|
38,887 |
|
Cash Receipts from Operating Springerville Unit 4 |
|
|
19,565 |
|
|
|
4,162 |
|
|
|
|
|
Interest Received |
|
|
13,470 |
|
|
|
17,246 |
|
|
|
19,197 |
|
Performance Deposits Received |
|
|
34,630 |
|
|
|
34,404 |
|
|
|
12,549 |
|
Income Tax Refunds Received |
|
|
20,242 |
|
|
|
22,355 |
|
|
|
1,016 |
|
Other Cash Receipts |
|
|
15,441 |
|
|
|
15,137 |
|
|
|
14,603 |
|
Sale of Excess Emission Allowances |
|
|
24 |
|
|
|
1,494 |
|
|
|
14,861 |
|
Refund of Disputed Transmission Costs |
|
|
|
|
|
|
10,665 |
|
|
|
|
|
Purchased Energy Costs Paid |
|
|
(334,481 |
) |
|
|
(577,588 |
) |
|
|
(450,197 |
) |
Fuel Costs Paid |
|
|
(300,810 |
) |
|
|
(292,646 |
) |
|
|
(283,439 |
) |
Payment of Other Operations and Maintenance Costs |
|
|
(236,184 |
) |
|
|
(196,860 |
) |
|
|
(158,057 |
) |
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized |
|
|
(161,574 |
) |
|
|
(154,548 |
) |
|
|
(151,074 |
) |
Wages Paid, Net of Amounts Capitalized |
|
|
(122,245 |
) |
|
|
(108,504 |
) |
|
|
(106,097 |
) |
Interest Paid, Net of Amounts Capitalized |
|
|
(54,641 |
) |
|
|
(58,774 |
) |
|
|
(68,446 |
) |
Performance Deposits Paid |
|
|
(22,260 |
) |
|
|
(48,520 |
) |
|
|
(7,900 |
) |
Capital Lease Interest Paid |
|
|
(38,598 |
) |
|
|
(43,828 |
) |
|
|
(54,315 |
) |
Income Taxes Paid |
|
|
(9,050 |
) |
|
|
(9,900 |
) |
|
|
(20,923 |
) |
Excess Tax Benefit from Stock Options Exercised |
|
|
(3,256 |
) |
|
|
(633 |
) |
|
|
(541 |
) |
Other Cash Payments |
|
|
(6,520 |
) |
|
|
(5,999 |
) |
|
|
(6,646 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Operating Activities |
|
|
347,310 |
|
|
|
277,011 |
|
|
|
322,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(287,104 |
) |
|
|
(357,324 |
) |
|
|
(245,366 |
) |
Payments for Investment in Springerville Lease Debt |
|
|
(31,375 |
) |
|
|
|
|
|
|
|
|
Prepayment Deposit on UED Short-Term Debt |
|
|
(3,625 |
) |
|
|
|
|
|
|
|
|
Deposit Collateral Trust Bond Trustee |
|
|
|
|
|
|
(133,111 |
) |
|
|
|
|
Proceeds from Investment in Springerville Lease Debt |
|
|
12,736 |
|
|
|
24,918 |
|
|
|
27,732 |
|
Other Proceeds from Investing Activities |
|
|
331 |
|
|
|
5,137 |
|
|
|
4,475 |
|
Return of Investment from Millennium Energy Businesses |
|
|
8,333 |
|
|
|
839 |
|
|
|
12 |
|
Insurance Proceeds for Replacement Assets |
|
|
4,928 |
|
|
|
8,035 |
|
|
|
|
|
Investment in and Loans to Equity Investees |
|
|
(207 |
) |
|
|
(600 |
) |
|
|
(845 |
) |
Other Payments for Investing Activities |
|
|
(661 |
) |
|
|
(711 |
) |
|
|
(3,413 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Investing Activities |
|
|
(296,644 |
) |
|
|
(452,817 |
) |
|
|
(217,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Borrowings Under Revolving Credit Facilities |
|
|
203,000 |
|
|
|
242,000 |
|
|
|
205,000 |
|
Proceeds from Issuance of Short-Term Debt |
|
|
30,000 |
|
|
|
|
|
|
|
|
|
Proceeds from Stock Options Exercised |
|
|
3,441 |
|
|
|
1,969 |
|
|
|
1,980 |
|
Excess Tax Benefit from Stock Options Exercised |
|
|
3,256 |
|
|
|
633 |
|
|
|
541 |
|
Other Cash Receipts |
|
|
5,681 |
|
|
|
6,028 |
|
|
|
8,210 |
|
Proceeds from Issuance of Long-Term Debt |
|
|
|
|
|
|
320,745 |
|
|
|
|
|
Repayments of Borrowings Under Revolving Credit Facilities |
|
|
(198,000 |
) |
|
|
(237,000 |
) |
|
|
(218,000 |
) |
Payments of Capital Lease Obligations |
|
|
(24,192 |
) |
|
|
(74,316 |
) |
|
|
(71,549 |
) |
Common Stock Dividends Paid |
|
|
(41,429 |
) |
|
|
(34,043 |
) |
|
|
(31,784 |
) |
Repayment of Long-Term Debt |
|
|
(6,000 |
) |
|
|
(76,000 |
) |
|
|
(6,000 |
) |
Payment of Debt Issue/Retirement Costs |
|
|
(2,268 |
) |
|
|
(3,739 |
) |
|
|
(465 |
) |
Other Cash Payments |
|
|
(2,405 |
) |
|
|
(5,672 |
) |
|
|
(7,162 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Financing Activities |
|
|
(28,916 |
) |
|
|
140,605 |
|
|
|
(119,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase(Decrease) in Cash and Cash Equivalents |
|
|
21,750 |
|
|
|
(35,201 |
) |
|
|
(13,868 |
) |
Cash and Cash Equivalents, Beginning of Year |
|
|
55,172 |
|
|
|
90,373 |
|
|
|
104,241 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year |
|
$ |
76,922 |
|
|
$ |
55,172 |
|
|
$ |
90,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activity |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of UED Short-Term Debt |
|
$ |
(3,625 |
) |
|
$ |
|
|
|
$ |
|
|
Repayment of Collateral Trust Bonds |
|
$ |
|
|
|
$ |
(128,300 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See Note 17 for supplemental cash flow information.
See Notes to Consolidated Financial Statements.
K-87
UNISOURCE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
- Thousands of Dollars - |
|
ASSETS |
|
|
|
|
|
|
|
|
Utility Plant |
|
|
|
|
|
|
|
|
Plant in Service |
|
$ |
4,147,268 |
|
|
$ |
3,870,493 |
|
Utility Plant Under Capital Leases |
|
|
720,628 |
|
|
|
702,337 |
|
Construction Work in Progress |
|
|
144,551 |
|
|
|
171,996 |
|
|
|
|
|
|
|
|
Total Utility Plant |
|
|
5,012,447 |
|
|
|
4,744,826 |
|
Less Accumulated Depreciation and Amortization |
|
|
(1,652,296 |
) |
|
|
(1,580,308 |
) |
Less Accumulated Amortization of Capital Lease Assets |
|
|
(574,437 |
) |
|
|
(546,825 |
) |
|
|
|
|
|
|
|
Total Utility Plant Net |
|
|
2,785,714 |
|
|
|
2,617,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and Other Property |
|
|
|
|
|
|
|
|
Investments in Lease Debt and Equity |
|
|
132,168 |
|
|
|
126,672 |
|
Other |
|
|
60,239 |
|
|
|
64,096 |
|
|
|
|
|
|
|
|
Total Investments and Other Property |
|
|
192,407 |
|
|
|
190,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
76,922 |
|
|
|
55,172 |
|
Accounts Receivable Retail and Other |
|
|
64,230 |
|
|
|
74,288 |
|
Accounts Receivable Wholesale Sales |
|
|
18,288 |
|
|
|
44,725 |
|
Unbilled Accounts Receivable |
|
|
53,361 |
|
|
|
60,146 |
|
Allowance for Doubtful Accounts |
|
|
(5,977 |
) |
|
|
(19,684 |
) |
Materials and Fuel Inventory |
|
|
116,791 |
|
|
|
92,170 |
|
Prepayments |
|
|
6,759 |
|
|
|
7,893 |
|
Derivative Instruments |
|
|
2,653 |
|
|
|
3,437 |
|
Regulatory Assets Derivative Instruments |
|
|
17,841 |
|
|
|
38,276 |
|
Regulatory Assets Other |
|
|
23,931 |
|
|
|
23,299 |
|
Deferred Income Taxes Current |
|
|
52,355 |
|
|
|
61,398 |
|
Income Tax Receivable |
|
|
620 |
|
|
|
12,720 |
|
Interest Receivable on Capital Lease Debt Investment |
|
|
5,081 |
|
|
|
4,491 |
|
Collateral Posted |
|
|
1,750 |
|
|
|
14,120 |
|
Other |
|
|
11,700 |
|
|
|
9,635 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
446,305 |
|
|
|
482,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory and Other Assets |
|
|
|
|
|
|
|
|
Income Taxes Recoverable Through Future Revenues |
|
|
18,144 |
|
|
|
19,814 |
|
Regulatory Assets Pension and Other Postretirement Benefits |
|
|
84,149 |
|
|
|
112,035 |
|
Regulatory Assets Derivative Instruments |
|
|
9,503 |
|
|
|
18,324 |
|
Regulatory Assets Other |
|
|
35,529 |
|
|
|
39,395 |
|
Derivative Instruments |
|
|
4,498 |
|
|
|
3,113 |
|
Other Assets |
|
|
24,993 |
|
|
|
26,339 |
|
|
|
|
|
|
|
|
Total Regulatory and Other Assets |
|
|
176,816 |
|
|
|
219,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,601,242 |
|
|
$ |
3,509,567 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
(Consolidated Balance Sheets Continued)
K-88
UNISOURCE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
- Thousands of Dollars - |
|
CAPITALIZATION AND OTHER LIABILITIES |
|
|
|
|
|
|
|
|
Capitalization |
|
|
|
|
|
|
|
|
Common Stock Equity |
|
$ |
750,865 |
|
|
$ |
679,274 |
|
Capital Lease Obligations |
|
|
488,349 |
|
|
|
513,517 |
|
Long-Term Debt |
|
|
1,307,795 |
|
|
|
1,313,615 |
|
|
|
|
|
|
|
|
Total Capitalization |
|
|
2,547,009 |
|
|
|
2,506,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Current Obligations Under Capital Leases |
|
|
40,441 |
|
|
|
18,334 |
|
Short-Term Borrowings |
|
|
35,000 |
|
|
|
10,000 |
|
Current Maturities of Long-Term Debt |
|
|
12,195 |
|
|
|
6,000 |
|
Accounts Payable |
|
|
54,152 |
|
|
|
62,514 |
|
Accounts Payable Purchased Power |
|
|
44,838 |
|
|
|
49,146 |
|
Interest Accrued |
|
|
41,396 |
|
|
|
43,440 |
|
Accrued Taxes Other than Income Taxes |
|
|
36,698 |
|
|
|
36,746 |
|
Accrued Employee Expenses |
|
|
27,545 |
|
|
|
26,859 |
|
Customer Deposits |
|
|
25,978 |
|
|
|
22,656 |
|
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
|
|
24,258 |
|
|
|
25,665 |
|
Regulatory Liabilities Other |
|
|
17,971 |
|
|
|
8,161 |
|
Derivative Instruments |
|
|
21,186 |
|
|
|
41,076 |
|
Other |
|
|
3,960 |
|
|
|
1,460 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
385,618 |
|
|
|
352,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities |
|
|
|
|
|
|
|
|
Deferred Income Taxes Noncurrent |
|
|
227,199 |
|
|
|
178,089 |
|
Regulatory Liabilities Net Cost of Removal for Interim Retirements |
|
|
195,177 |
|
|
|
151,796 |
|
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
|
|
16,714 |
|
|
|
44,469 |
|
Derivative Instruments |
|
|
19,489 |
|
|
|
29,849 |
|
Pension and Other Postretirement Benefits |
|
|
123,476 |
|
|
|
157,769 |
|
Customer Advances for Construction |
|
|
31,803 |
|
|
|
31,062 |
|
Other |
|
|
54,757 |
|
|
|
58,070 |
|
|
|
|
|
|
|
|
Total Deferred Credits and Other Liabilities |
|
|
668,615 |
|
|
|
651,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization and Other Liabilities |
|
$ |
3,601,242 |
|
|
$ |
3,509,567 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
(Consolidated Balance Sheets Concluded)
K-89
UNISOURCE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CAPITALIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
- Thousands of Dollars - |
|
COMMON STOCK EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock-No Par Value |
|
|
|
|
|
|
|
|
|
$ |
696,206 |
|
|
$ |
687,360 |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
Shares Authorized |
|
|
75,000,000 |
|
|
|
75,000,000 |
|
|
|
|
|
|
|
|
|
Shares Outstanding |
|
|
35,851,185 |
|
|
|
35,457,780 |
|
|
|
|
|
|
|
|
|
Accumulated Earnings (Deficit) |
|
|
|
|
|
|
|
|
|
|
60,461 |
|
|
|
(1,231 |
) |
Accumulated Other Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
(5,802 |
) |
|
|
(6,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stock Equity |
|
|
|
|
|
|
|
|
|
|
750,865 |
|
|
|
679,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Par Value, 1,000,000 Shares Authorized, None Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Springerville Unit 1 |
|
|
|
|
|
|
|
|
|
|
320,843 |
|
|
|
306,553 |
|
Springerville Coal Handling Facilities |
|
|
|
|
|
|
|
|
|
|
85,224 |
|
|
|
90,812 |
|
Springerville Common Facilities |
|
|
|
|
|
|
|
|
|
|
109,499 |
|
|
|
108,516 |
|
Sundt Unit 4 |
|
|
|
|
|
|
|
|
|
|
13,077 |
|
|
|
25,400 |
|
Other |
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
528,790 |
|
|
|
531,851 |
|
Less Current Maturities |
|
|
|
|
|
|
|
|
|
|
(40,441 |
) |
|
|
(18,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
488,349 |
|
|
|
513,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
Maturity |
|
|
Interest Rate |
|
|
|
|
|
|
|
|
|
UniSource Energy: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Senior Notes |
|
|
2035 |
|
|
|
4.50% |
|
|
|
150,000 |
|
|
|
150,000 |
|
Credit Agreement |
|
|
2011 |
|
|
Variable |
|
|
40,000 |
|
|
|
58,000 |
|
Tucson Electric Power Company: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate IDBs |
|
|
2011 |
|
|
Variable |
|
|
458,600 |
|
|
|
458,600 |
|
Unsecured IDBs |
|
|
2020 2033 |
|
|
4.95% to 7.13% |
|
|
445,015 |
|
|
|
445,015 |
|
UNS Gas and UNS Electric: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Unsecured Notes |
|
|
2011 2023 |
|
|
6.23% to 7.1% |
|
|
200,000 |
|
|
|
200,000 |
|
Credit Agreement |
|
|
2011 |
|
|
Variable |
|
|
|
|
|
|
8,000 |
|
UED: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Term Loan |
|
|
2010 |
|
|
Variable |
|
|
26,375 |
|
|
|
|
|
Total Stated Principal Amount |
|
|
|
|
|
|
|
|
|
|
1,319,990 |
|
|
|
1,319,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Current Maturities |
|
|
|
|
|
|
|
|
|
|
(12,195 |
) |
|
|
(6,000 |
) |
Total Long-Term Debt |
|
|
|
|
|
|
|
|
|
|
1,307,795 |
|
|
|
1,313,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization |
|
|
|
|
|
|
|
|
|
$ |
2,547,009 |
|
|
$ |
2,506,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
K-90
UNISOURCE ENERGY CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Shares |
|
|
Common |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Outstanding* |
|
|
Stock |
|
|
Earnings (Deficit) |
|
|
Loss |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
|
35,190 |
|
|
$ |
697,426 |
|
|
$ |
(27,913 |
) |
|
$ |
(15,364 |
) |
|
$ |
654,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implementation of FIN 48 |
|
|
|
|
|
|
|
|
|
|
696 |
|
|
|
|
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Net Income |
|
|
|
|
|
|
|
|
|
|
58,373 |
|
|
|
|
|
|
|
58,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in Pension and Other Post-Retirement Benefit
Liabilities (net of $3,929 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,993 |
|
|
|
5,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Cash Flow Hedges
(net of $2,500 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,813 |
) |
|
|
(3,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $996 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,519 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
|
(31,784 |
) |
|
|
|
|
|
|
(31,784 |
) |
Shares Issued under Stock Compensation Plans |
|
|
125 |
|
|
|
1,980 |
|
|
|
|
|
|
|
|
|
|
|
1980 |
|
Tax Benefit Realized from Stock-Based Compensation Plans |
|
|
|
|
|
|
540 |
|
|
|
|
|
|
|
|
|
|
|
540 |
|
Other |
|
|
|
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
2,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
|
35,315 |
|
|
|
702,368 |
|
|
|
(628 |
) |
|
|
(11,665 |
) |
|
|
690,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Change in Pension Plan Measurement Date |
|
|
|
|
|
|
|
|
|
|
(603 |
) |
|
|
|
|
|
|
(603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Net Income |
|
|
|
|
|
|
|
|
|
|
14,021 |
|
|
|
|
|
|
|
14,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Interest Rate Swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net of $2,181 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,326 |
) |
|
|
(3,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Gain on Cash Flow Hedges
to Regulatory Asset (net of $1,370 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,089 |
) |
|
|
(2,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Loss on
Cash Flow Hedges to Net Income
(net of $1,569 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,393 |
|
|
|
2,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Benefit Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service credit
included in net periodic benefit cost
(net of $158 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in SERP Liability
(net of $108 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165 |
) |
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Pension and Other Postretirement Benefit
to Regulatory Asset (net of $5,401 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,239 |
|
|
|
8,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
(20,017 |
) |
|
|
(14,021 |
) |
|
|
|
|
|
|
(34,038 |
) |
Shares Issued under Stock Compensation Plans |
|
|
143 |
|
|
|
1,969 |
|
|
|
|
|
|
|
|
|
|
|
1,969 |
|
Tax Benefit
Realized from Stock-Based Compensation Plans |
|
|
|
|
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
633 |
|
Other |
|
|
|
|
|
|
2,407 |
|
|
|
|
|
|
|
|
|
|
|
2,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
|
35,458 |
|
|
|
687,360 |
|
|
|
(1,231 |
) |
|
|
(6,855 |
) |
|
|
679,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Net Income |
|
|
|
|
|
|
|
|
|
|
104,258 |
|
|
|
|
|
|
|
104,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Cash Flow Hedges
(net of $33 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $690 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,053 |
|
|
|
1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Benefit Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $33 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
|
(42,566 |
) |
|
|
|
|
|
|
(42,566 |
) |
Shares Issued under Deferred Compensation Plans |
|
|
10 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
279 |
|
Shares
Issued under Stock Compensation Plans (net of shares redeemed for taxes) |
|
|
383 |
|
|
|
2,541 |
|
|
|
|
|
|
|
|
|
|
|
2,541 |
|
Tax Benefit Realized from Stock-Based Compensation Plans |
|
|
|
|
|
|
3,256 |
|
|
|
|
|
|
|
|
|
|
|
3,256 |
|
Other Stock-Based Compensation |
|
|
|
|
|
|
2,770 |
|
|
|
|
|
|
|
|
|
|
|
2,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
|
35,851 |
|
|
$ |
696,206 |
|
|
$ |
60,461 |
|
|
$ |
(5,802 |
) |
|
$ |
750,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
UniSource Energy has 75 million authorized shares of Common Stock.
|
|
We describe limitations
on our ability to pay dividends in Note 8. |
|
See Notes to Consolidated Financial Statements. |
K-91
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
- Thousands of Dollars - |
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Electric Retail Sales |
|
$ |
867,516 |
|
|
$ |
805,528 |
|
|
$ |
816,471 |
|
Provision for Rate Refunds CTC Revenue |
|
|
|
|
|
|
(58,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Electric Retail Sales |
|
|
867,516 |
|
|
|
747,436 |
|
|
|
816,471 |
|
Electric Wholesale Sales |
|
|
150,679 |
|
|
|
259,855 |
|
|
|
195,999 |
|
California Power Exchange (CPX) Provision for Wholesale Refunds |
|
|
(4,172 |
) |
|
|
|
|
|
|
|
|
Other Revenues |
|
|
82,688 |
|
|
|
71,962 |
|
|
|
58,033 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues |
|
|
1,096,711 |
|
|
|
1,079,253 |
|
|
|
1,070,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
281,710 |
|
|
|
289,985 |
|
|
|
296,511 |
|
Purchased Power |
|
|
142,252 |
|
|
|
238,024 |
|
|
|
140,498 |
|
Transmission |
|
|
3,066 |
|
|
|
10,515 |
|
|
|
9,014 |
|
Increase (Decrease) to Reflect PPFAC Recovery Treatment |
|
|
(20,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel and Purchased Energy |
|
|
406,304 |
|
|
|
538,524 |
|
|
|
446,023 |
|
Other Operations and Maintenance |
|
|
289,765 |
|
|
|
256,584 |
|
|
|
202,837 |
|
Depreciation and Amortization |
|
|
152,901 |
|
|
|
126,040 |
|
|
|
119,811 |
|
Amortization of Transition Recovery Asset |
|
|
|
|
|
|
23,945 |
|
|
|
77,681 |
|
Taxes Other Than Income Taxes |
|
|
37,618 |
|
|
|
31,650 |
|
|
|
40,366 |
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
886,588 |
|
|
|
976,743 |
|
|
|
886,718 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
210,123 |
|
|
|
102,510 |
|
|
|
183,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Deductions) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
|
11,471 |
|
|
|
9,900 |
|
|
|
16,073 |
|
Other Income |
|
|
10,991 |
|
|
|
5,708 |
|
|
|
3,665 |
|
Other Expense |
|
|
(2,904 |
) |
|
|
(6,249 |
) |
|
|
(3,296 |
) |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Deductions) |
|
|
19,558 |
|
|
|
9,359 |
|
|
|
16,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
36,226 |
|
|
|
47,456 |
|
|
|
50,230 |
|
Interest on Capital Leases |
|
|
49,258 |
|
|
|
52,491 |
|
|
|
59,205 |
|
Other Interest Expense |
|
|
1,571 |
|
|
|
1,367 |
|
|
|
4,538 |
|
Interest Capitalized |
|
|
(1,752 |
) |
|
|
(4,675 |
) |
|
|
(2,744 |
) |
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
85,303 |
|
|
|
96,639 |
|
|
|
111,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
144,378 |
|
|
|
15,230 |
|
|
|
88,998 |
|
Income Tax Expense |
|
|
55,130 |
|
|
|
10,867 |
|
|
|
35,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
89,248 |
|
|
$ |
4,363 |
|
|
$ |
53,456 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
K-92
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
- Thousands of Dollars - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Receipts from Electric Retail Sales |
|
$ |
944,873 |
|
|
$ |
883,423 |
|
|
$ |
883,885 |
|
Cash Receipts from Electric Wholesale Sales |
|
|
199,918 |
|
|
|
377,579 |
|
|
|
301,616 |
|
Cash Receipts from Operating Springerville Unit 3 |
|
|
49,386 |
|
|
|
53,495 |
|
|
|
38,887 |
|
Cash Receipts from Operating Springerville Unit 4 |
|
|
19,565 |
|
|
|
4,162 |
|
|
|
|
|
Interest Received |
|
|
12,768 |
|
|
|
15,849 |
|
|
|
16,284 |
|
Income Tax Refunds Received |
|
|
14,462 |
|
|
|
20,902 |
|
|
|
|
|
Reimbursement of Affiliate Charges |
|
|
19,998 |
|
|
|
16,534 |
|
|
|
|
|
Refund of Disputed Transmission Costs |
|
|
|
|
|
|
10,665 |
|
|
|
|
|
Performance Deposits Received |
|
|
14,000 |
|
|
|
10,150 |
|
|
|
|
|
Sale of Excess Emission Allowances |
|
|
24 |
|
|
|
1,494 |
|
|
|
16,975 |
|
Other Cash Receipts |
|
|
10,101 |
|
|
|
7,774 |
|
|
|
7,931 |
|
Fuel Costs Paid |
|
|
(282,653 |
) |
|
|
(284,830 |
) |
|
|
(283,440 |
) |
Purchased Power Costs Paid |
|
|
(185,129 |
) |
|
|
(364,356 |
) |
|
|
(245,439 |
) |
Payment of Other Operations and Maintenance Costs |
|
|
(223,760 |
) |
|
|
(185,206 |
) |
|
|
(144,753 |
) |
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized |
|
|
(124,053 |
) |
|
|
(117,611 |
) |
|
|
(116,641 |
) |
Wages Paid, Net of Amounts Capitalized |
|
|
(97,289 |
) |
|
|
(84,857 |
) |
|
|
(82,661 |
) |
Capital Lease Interest Paid |
|
|
(38,586 |
) |
|
|
(43,807 |
) |
|
|
(54,293 |
) |
Interest Paid, Net of Amounts Capitalized |
|
|
(33,128 |
) |
|
|
(38,467 |
) |
|
|
(47,050 |
) |
Income Taxes Paid |
|
|
(14,606 |
) |
|
|
|
|
|
|
(23,609 |
) |
Performance Deposits Paid |
|
|
(14,000 |
) |
|
|
(10,150 |
) |
|
|
|
|
Other Cash Payments |
|
|
(3,827 |
) |
|
|
(4,037 |
) |
|
|
(3,580 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Operating Activities |
|
|
268,064 |
|
|
|
268,706 |
|
|
|
264,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(235,485 |
) |
|
|
(294,940 |
) |
|
|
(162,539 |
) |
Payments for Investments in Lease Debt and Equity |
|
|
(31,375 |
) |
|
|
|
|
|
|
|
|
Deposit Collateral Trust Bond Trustee |
|
|
|
|
|
|
(133,111 |
) |
|
|
|
|
Proceeds from Investments in Springerville Lease Debt |
|
|
12,736 |
|
|
|
24,918 |
|
|
|
27,732 |
|
Insurance Proceeds for Replacement Assets |
|
|
4,928 |
|
|
|
8,035 |
|
|
|
|
|
Other Cash Receipts |
|
|
6 |
|
|
|
5,055 |
|
|
|
650 |
|
Other Cash Payments |
|
|
(411 |
) |
|
|
(711 |
) |
|
|
(2,968 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Investing Activities |
|
|
(249,601 |
) |
|
|
(390,754 |
) |
|
|
(137,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Issuance of Long-Term Debt |
|
|
|
|
|
|
220,745 |
|
|
|
|
|
Proceeds from Borrowings Under Revolving Credit Facility |
|
|
171,000 |
|
|
|
170,000 |
|
|
|
160,000 |
|
Repayments of Borrowings Under Revolving Credit Facility |
|
|
(146,000 |
) |
|
|
(170,000 |
) |
|
|
(180,000 |
) |
Payments of Capital Lease Obligations |
|
|
(24,091 |
) |
|
|
(74,228 |
) |
|
|
(71,464 |
) |
Repayments of Long-Term Debt |
|
|
|
|
|
|
(10,000 |
) |
|
|
|
|
Dividends Paid to UniSource Energy |
|
|
(60,000 |
) |
|
|
(2,500 |
) |
|
|
(53,000 |
) |
Equity Investment from UniSource Energy |
|
|
30,000 |
|
|
|
|
|
|
|
18,000 |
|
Other Cash Receipts |
|
|
2,447 |
|
|
|
1,237 |
|
|
|
7,795 |
|
Payment of Debt Issue/Retirement Costs |
|
|
(1,329 |
) |
|
|
(3,120 |
) |
|
|
(451 |
) |
Other Cash Payments |
|
|
(1,347 |
) |
|
|
(3,421 |
) |
|
|
(968 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Financing Activities |
|
|
(29,320 |
) |
|
|
128,713 |
|
|
|
(120,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(10,857 |
) |
|
|
6,665 |
|
|
|
6,899 |
|
Cash and Cash Equivalents, Beginning of Year |
|
|
33,275 |
|
|
|
26,610 |
|
|
|
19,711 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year |
|
$ |
22,418 |
|
|
$ |
33,275 |
|
|
$ |
26,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activity Repayment of Collateral Trust Bonds |
|
$ |
|
|
|
$ |
(128,300 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See Note 17 for supplemental cash flow information.
See Notes to Consolidated Financial Statements.
K-93
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
- Thousands of Dollars - |
|
ASSETS |
|
|
|
|
|
|
|
|
Utility Plant |
|
|
|
|
|
|
|
|
Plant in Service |
|
$ |
3,584,308 |
|
|
$ |
3,351,474 |
|
Utility Plant Under Capital Leases |
|
|
719,922 |
|
|
|
701,631 |
|
Construction Work in Progress |
|
|
113,390 |
|
|
|
145,457 |
|
|
|
|
|
|
|
|
Total Utility Plant |
|
|
4,417,620 |
|
|
|
4,198,562 |
|
Less Accumulated Depreciation and Amortization |
|
|
(1,582,442 |
) |
|
|
(1,531,611 |
) |
Less Accumulated Amortization of Capital Lease Assets |
|
|
(573,853 |
) |
|
|
(546,332 |
) |
|
|
|
|
|
|
|
Total Utility Plant Net |
|
|
2,261,325 |
|
|
|
2,120,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and Other Property |
|
|
|
|
|
|
|
|
Investments in Lease Debt and Equity |
|
|
132,168 |
|
|
|
126,672 |
|
Other |
|
|
31,813 |
|
|
|
31,291 |
|
|
|
|
|
|
|
|
Total Investments and Other Property |
|
|
163,981 |
|
|
|
157,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
22,418 |
|
|
|
33,275 |
|
Accounts Receivable Retail and Other |
|
|
46,894 |
|
|
|
53,091 |
|
Accounts Receivable Wholesale |
|
|
17,904 |
|
|
|
44,610 |
|
Unbilled Accounts Receivable |
|
|
32,368 |
|
|
|
33,554 |
|
Allowance for Doubtful Accounts |
|
|
(3,806 |
) |
|
|
(17,135 |
) |
Accounts Receivable Due from Affiliates |
|
|
5,218 |
|
|
|
16,614 |
|
Materials and Fuel Inventory |
|
|
104,861 |
|
|
|
81,067 |
|
Prepayments |
|
|
5,678 |
|
|
|
5,535 |
|
Derivative Instruments |
|
|
5,043 |
|
|
|
5,129 |
|
Regulatory Assets Derivative Instruments |
|
|
3,696 |
|
|
|
14,242 |
|
Regulatory Assets Other |
|
|
23,330 |
|
|
|
22,834 |
|
Deferred Income Taxes Current |
|
|
50,789 |
|
|
|
59,615 |
|
Interest Receivable on Capital Lease Debt Investment |
|
|
5,081 |
|
|
|
4,491 |
|
Other |
|
|
11,313 |
|
|
|
10,554 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
330,787 |
|
|
|
367,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory and Other Assets |
|
|
|
|
|
|
|
|
Regulatory Assets Pension and Other Postretirement Benefits |
|
|
80,169 |
|
|
|
106,596 |
|
Regulatory Assets Derivatives |
|
|
4,631 |
|
|
|
5,400 |
|
Regulatory Assets Other |
|
|
34,203 |
|
|
|
38,180 |
|
Income Taxes Recoverable Through Future Revenues |
|
|
18,144 |
|
|
|
19,814 |
|
Derivative Instruments |
|
|
1,075 |
|
|
|
4,982 |
|
Other Assets |
|
|
19,984 |
|
|
|
20,741 |
|
|
|
|
|
|
|
|
Total Regulatory and Other Assets |
|
|
158,206 |
|
|
|
195,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,914,299 |
|
|
$ |
2,841,771 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
(Consolidated Balance Sheets Continued)
K-94
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
- Thousands of Dollars - |
|
CAPITALIZATION AND OTHER LIABILITIES |
|
|
|
|
|
|
|
|
Capitalization |
|
|
|
|
|
|
|
|
Common Stock Equity |
|
$ |
643,144 |
|
|
$ |
583,606 |
|
Capital Lease Obligations |
|
|
488,311 |
|
|
|
513,370 |
|
Long-Term Debt |
|
|
903,615 |
|
|
|
903,615 |
|
|
|
|
|
|
|
|
Total Capitalization |
|
|
2,035,070 |
|
|
|
2,000,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Current Obligations Under Capital Leases |
|
|
40,332 |
|
|
|
18,231 |
|
Borrowings Under Revolving Credit Facility |
|
|
35,000 |
|
|
|
10,000 |
|
Accounts Payable |
|
|
48,631 |
|
|
|
56,001 |
|
Accounts Payable Purchased Power |
|
|
22,697 |
|
|
|
28,510 |
|
Accounts Payable Due from Affiliates |
|
|
3,694 |
|
|
|
3,610 |
|
Income Taxes Payable |
|
|
|
|
|
|
2,057 |
|
Interest Accrued |
|
|
33,970 |
|
|
|
35,828 |
|
Accrued Taxes Other than Income Taxes |
|
|
28,404 |
|
|
|
27,679 |
|
Accrued Employee Expenses |
|
|
24,409 |
|
|
|
23,990 |
|
Customer Deposits |
|
|
18,125 |
|
|
|
15,902 |
|
Derivative Instruments |
|
|
9,434 |
|
|
|
18,737 |
|
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
|
|
9,200 |
|
|
|
14,310 |
|
Regulatory Liability Other |
|
|
17,439 |
|
|
|
7,083 |
|
Other |
|
|
1,363 |
|
|
|
1,204 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
292,698 |
|
|
|
263,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities |
|
|
|
|
|
|
|
|
Deferred Income Taxes Noncurrent |
|
|
217,316 |
|
|
|
180,098 |
|
Regulatory Liabilities Net Cost of Removal for Interim Retirements |
|
|
162,764 |
|
|
|
122,037 |
|
Regulatory Liabilities Over-Recovered Purchased Energy Costs |
|
|
16,714 |
|
|
|
44,469 |
|
Derivative Instruments |
|
|
11,195 |
|
|
|
18,794 |
|
Pension and Other Postretirement Benefits |
|
|
116,991 |
|
|
|
149,955 |
|
Other |
|
|
61,551 |
|
|
|
62,685 |
|
|
|
|
|
|
|
|
Total Deferred Credits and Other Liabilities |
|
|
586,531 |
|
|
|
578,038 |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 4) |
|
|
|
|
|
|
|
|
|
Total Capitalization and Other Liabilities |
|
$ |
2,914,299 |
|
|
$ |
2,841,771 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
(Consolidated Balance Sheets Concluded)
K-95
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
- Thousands of Dollars - |
|
COMMON STOCK EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common StockNo Par Value |
|
|
|
|
|
|
|
|
|
$ |
843,971 |
|
|
$ |
813,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
Shares Authorized |
|
|
75,000,000 |
|
|
|
75,000,000 |
|
|
|
|
|
|
|
|
|
Shares Outstanding |
|
|
32,139,434 |
|
|
|
32,139,434 |
|
|
|
|
|
|
|
|
|
Capital Stock Expense |
|
|
|
|
|
|
|
|
|
|
(6,357 |
) |
|
|
(6,357 |
) |
Accumulated Deficit |
|
|
|
|
|
|
|
|
|
|
(188,668 |
) |
|
|
(217,153 |
) |
Accumulated Other Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
(5,802 |
) |
|
|
(6,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stock Equity |
|
|
|
|
|
|
|
|
|
|
643,144 |
|
|
|
583,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Par Value, 1,000,000 Shares Authorized, None Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL LEASE OBLIGATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Springerville Unit 1 |
|
|
|
|
|
|
|
|
|
|
320,843 |
|
|
|
306,553 |
|
Springerville Coal Handling Facilities |
|
|
|
|
|
|
|
|
|
|
85,224 |
|
|
|
90,812 |
|
Springerville Common Facilities |
|
|
|
|
|
|
|
|
|
|
109,499 |
|
|
|
108,516 |
|
Sundt Unit 4 |
|
|
|
|
|
|
|
|
|
|
13,077 |
|
|
|
25,400 |
|
Other Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
528,643 |
|
|
|
531,601 |
|
Less Current Maturities |
|
|
|
|
|
|
|
|
|
|
(40,332 |
) |
|
|
(18,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
488,311 |
|
|
|
513,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
Maturity |
|
|
Interest Rate |
|
|
|
|
|
|
|
|
|
Variable Rate IDBs |
|
|
2011 |
|
|
Variable |
|
|
|
458,600 |
|
|
|
458,600 |
|
Unsecured IDBs |
|
|
2020 2033 |
|
|
4.95% to 7.125% |
|
|
|
445,015 |
|
|
|
445,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt |
|
|
|
|
|
|
|
|
|
|
903,615 |
|
|
|
903,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization |
|
|
|
|
|
|
|
|
|
$ |
2,035,070 |
|
|
$ |
2,000,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
K-96
TUCSON ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common |
|
|
Stock |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Stock |
|
|
Expense |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
|
|
- Thousands of Dollars - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
$ |
795,971 |
|
|
$ |
(6,357 |
) |
|
$ |
(219,640 |
) |
|
$ |
(15,260 |
) |
|
$ |
554,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implementation of FIN 48 |
|
|
|
|
|
|
|
|
|
|
696 |
|
|
|
|
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Net Income |
|
|
|
|
|
|
|
|
|
|
53,456 |
|
|
|
|
|
|
|
53,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in Pension and Other Post-Retirement Benefit
Liabilities (net of $3,820 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,826 |
|
|
|
5,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Cash Flow Hedges
(net of $2,532 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,862 |
) |
|
|
(3,862 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
to Regulatory Asset (net of $996 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,519 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Contribution from UniSource Energy |
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
Dividends Paid |
|
|
|
|
|
|
|
|
|
|
(53,000 |
) |
|
|
|
|
|
|
(53,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
|
813,971 |
|
|
|
(6,357 |
) |
|
|
(218,488 |
) |
|
|
(11,777 |
) |
|
|
577,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Change in Pension Plan Measurement Date |
|
|
|
|
|
|
|
|
|
|
(528 |
) |
|
|
|
|
|
|
(528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Net Income |
|
|
|
|
|
|
|
|
|
|
4,363 |
|
|
|
|
|
|
|
4,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Interest Rate Swap
(net of $2,181 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,326 |
) |
|
|
(3,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Gain on Cash Flow Hedges
to Regulatory Asset (net of $1,337 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,039 |
) |
|
|
(2,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Loss on
Cash Flow Hedges to Net Income
(net of $1,569 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,393 |
|
|
|
2,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Benefit Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service credit
included in net periodic benefit cost
(net of $157 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in SERP Liability
(net of $108 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165 |
) |
|
|
(165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Pension and Other Postretirement Benefit
to Regulatory Asset (net of $5,441 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,299 |
|
|
|
8,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Paid |
|
|
|
|
|
|
|
|
|
|
(2,500 |
) |
|
|
|
|
|
|
(2,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
|
813,971 |
|
|
|
(6,357 |
) |
|
|
(217,153 |
) |
|
|
(6,855 |
) |
|
|
583,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Net Income |
|
|
|
|
|
|
|
|
|
|
89,248 |
|
|
|
|
|
|
|
89,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Cash Flow Hedges
(net of $33 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $690 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,053 |
|
|
|
1,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Benefit Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $33 income taxes) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Contribution from UniSource Energy |
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
|
(60,763 |
) |
|
|
|
|
|
|
(60,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
$ |
843,971 |
|
|
$ |
(6,357 |
) |
|
$ |
(188,668 |
) |
|
$ |
(5,802 |
) |
|
$ |
643,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We describe limitations on our ability to pay dividends in Note 8.
See Notes to Consolidated Financial Statements.
K-97
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DRAFT
Audit Committee
2/19/10
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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 100% 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 December 31, 2009. 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 South Central Arizona. UNS
Electric is an electric transmission and distribution company with approximately 90,000 retail
customers in Mohave and Santa Cruz counties.
Millennium invests in unregulated businesses. In June 2009, Millennium sold its 50% equity
interest in Carboelectrica Sabinas, S. de R.L. de C.V. See Note 15.
Our business is comprised of three reporting segments TEP, UNS Gas and UNS Electric.
References to we and our are to UniSource Energy and its subsidiaries, collectively.
BASIS OF PRESENTATION
We account for our investments in subsidiaries using the consolidation method when we hold a
majority of a subsidiarys voting stock and we can exercise control over the subsidiary. The
accounts of the subsidiary and parent are combined, and intercompany balances and transactions are
eliminated. Intercompany profits on transactions between regulated entities are not eliminated.
We use the equity method to report corporate joint ventures, partnerships, and affiliated company
investments when we can demonstrate the ability to exercise significant influence over the
operating and financial policies of an investee company. Equity method investments are recorded at
cost and appear on a single line item on the balance sheet and net income (loss) from the entity is
reflected in Other Income on the income statements. Quarterly, we review the equity investments
and where there is an other-than-temporary impairment, we recognize the loss in earnings.
K-98
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
USE OF ACCOUNTING ESTIMATES
We make estimates and assumptions to prepare financial statements under accounting principles
generally accepted in the U.S. (GAAP). These estimates and assumptions affect:
|
|
|
A portion of the reported amounts of assets and liabilities at the dates of the
financial statements; |
|
|
|
|
Our disclosures about contingent assets and liabilities at the dates of the financial
statements; and |
|
|
|
|
A portion of revenues and expenses reported during the periods presented. |
Because these estimates involve judgments, the actual amounts may differ from the estimates.
ACCOUNTING FOR RATE REGULATION
TEP, UNS Gas and UNS Electric generally use the same accounting policies and practices used by
unregulated companies. However, sometimes regulatory accounting requires rate-regulated companies
to apply special accounting treatment to show the effect of rate-regulation. For example, the ACC
can determine that TEP, UNS Gas or UNS Electric are allowed to recover certain expenses, but at a
designated time in the future. In this situation, TEP, UNS Gas and UNS Electric defer these items
and show them as regulatory assets on the balance sheet until they are allowed to charge their
customers. TEP, UNS Gas and UNS Electric then amortize these items as expenses as they recover
these charges from customers. Similarly, certain revenue items may be deferred as regulatory
liabilities, which are also eventually amortized to the income statement as rates to customers are
reduced. We evaluate our regulatory assets each period and believe recovery is probable.
Beginning in December 2008, as a result of the 2008 TEP Rate Order, TEP reapplied regulatory
accounting to its generation operations. See Note 2.
The conditions a rate-regulated company must satisfy to apply regulatory accounting policies and
practices include:
|
|
|
An independent regulator sets rates; |
|
|
|
|
The regulator sets the rates to recover the specific enterprises costs of providing
service; and |
|
|
|
|
The service territory lacks competitive pressures to reduce rates below the rates set by
the regulator. |
CASH AND CASH EQUIVALENTS
We define Cash and Cash Equivalents as cash (unrestricted demand deposits) and all highly liquid
investments purchased with an original maturity of three months or less.
K-99
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
UTILITY PLANT
TEP, UNS Gas and UNS Electric report utility plant at cost. Costs included in utility plant are
materials and labor, contractor services, construction overhead (where applicable), and an
Allowance for Funds Used During Construction (AFUDC).
Costs to replace major units of property are included in utility plant. The cost of planned major
maintenance activities, including scheduled overhauls at TEPs generation plants, is recorded as
the costs are actually incurred. Replacement of capital equipment included in plant maintenance
activities is capitalized to utility plant. TEP, UNS Gas and UNS Electric charge the cost of
repairs and minor replacements to Other Operations and Maintenance expense.
When a unit of regulated property is retired, the original cost plus removal costs less any salvage
value is credited or charged to accumulated depreciation. Prior to December 2008, before TEP
reapplied regulatory accounting to its generation operations, interim retirements of unregulated
generation plant, together with the cost of removal less salvage, were charged to accumulated
depreciation.
AFUDC and Capitalized Interest
AFUDC, which reflects the cost of debt or equity funds used to finance construction, is capitalized
as part of the cost of regulated utility plant. AFUDC applies to all regulated operations that
follow regulatory accounting. AFUDC amounts capitalized are included in rate base for establishing
utility rates. For operations that do not apply regulatory accounting, interest related only to
debt is capitalized as a cost of construction. The interest capitalized that relates to debt
reduces Other Interest Expense on the income statement. The cost capitalized that relates to
equity funds is recorded as Other Income. Beginning in December 2008, when TEP reapplied
regulatory accounting to its generation operations, TEP began capitalizing costs that relate to
equity funds. See Note 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Average AFUDC rate on regulated
construction expenditures |
|
|
6.4 |
% |
|
|
7.5 |
% |
|
|
10.05 |
% |
AFUDC Debt (in millions) |
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
2 |
|
AFUDC Equity (in millions) |
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
1 |
|
Average capitalized interest rate on
generation-related construction
expenditures (before December 2008) |
|
|
N/A |
|
|
|
5.02 |
% |
|
|
5.73 |
% |
Capitalized interest (in millions) |
|
|
N/A |
|
|
$ |
2 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS Gas |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Average AFUDC rate on regulated construction
expenditures |
|
|
7.05 |
% |
|
|
8.37 |
% |
|
|
8.12 |
% |
AFUDC Debt (in millions) |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
AFUDC Equity (in millions) |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS Electric |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Average AFUDC rate on regulated
construction expenditures |
|
|
7.62 |
% |
|
|
8.84 |
% |
|
|
13.51 |
% |
AFUDC Debt (in millions) |
|
$ |
0.4 |
|
|
$ |
0.2 |
|
|
$ |
0.7 |
|
AFUDC Equity (in millions) |
|
$ |
0.5 |
|
|
$ |
0.3 |
|
|
$ |
0.4 |
|
K-100
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Depreciation
TEP, UNS Gas, UNS Electric and UED compute depreciation for owned utility plant on a group method
straight-line basis at rates based on the economic lives of the assets. See Note 5. The ACC
approves depreciation rates for all utility plant, except that of UED and the transmission assets
of TEP which are subject to FERC jurisdiction. Depreciation rates are based on average useful lives
and reflect estimated removal costs, net of estimated salvage value for interim retirements. Prior
to December 2008, before TEP reapplied regulatory accounting to its generation operations, the
depreciable lives for TEPs generation assets were based on remaining useful lives. We have
summarized the average annual depreciation rates for all utility plants below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
TEP |
|
|
UNS Gas |
|
|
UNS Electric |
|
|
UED |
|
2009 |
|
|
3.64 |
% |
|
|
2.76 |
% |
|
|
4.33 |
% |
|
|
2.57 |
% |
2008 |
|
|
3.33 |
% |
|
|
2.77 |
% |
|
|
4.47 |
% |
|
|
2.57 |
% |
2007 |
|
|
3.35 |
% |
|
|
3.28 |
% |
|
|
4.60 |
% |
|
|
N/A |
|
Computer Software Costs
TEP, UNS Gas and UNS Electric capitalize costs incurred to purchase and develop computer software
for internal use and amortize those costs over the estimated economic life of the product. If the
software is no longer useful, we immediately charge capitalized computer software costs to expense.
TEP amortized capitalized computer software costs of $8 million in 2009, $7 million in 2008, and
$9 million in 2007.
TEP Utility Plant under Capital Leases
TEP financed the following generation assets with capital leases: Springerville Common Facilities,
Springerville Unit 1, Springerville Coal Handling Facilities, and Sundt Unit 4. The following
table shows the amount of lease expense incurred for TEPs generation-related capital leases. The
lease terms are described in TEP Capital Lease Obligations in Note 6.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
-Millions of Dollars- |
Lease Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense –
Included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Capital
Leases
|
|
$ |
49 |
|
|
$ |
52 |
|
|
$ |
59 |
|
Operating Expenses –
Fuel
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Amortization of Capital
Lease Assets – Included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses –
Fuel
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
Operating Expenses –
Depreciation and Amortization
|
|
|
26 |
|
|
|
21 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease Expense
|
|
$ |
82 |
|
|
$ |
82 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS IN LEASE DEBT AND EQUITY
TEP has investments in lease debt in two of TEPs capital leases: Springerville Unit 1 and
Springerville Coal Handling Facilities. TEPs investments in lease debt are considered to be
held-to-maturity investments because TEP has the ability and intent to hold until maturity. TEP
records these investments at amortized cost and recognizes interest income. See Note 6. These
investments do not reduce the capital lease obligations reflected on the balance sheet because
there is no legal right of offset. TEP makes lease payments to a trustee who then distributes the
payments to debt and equity holders.
TEP accounts for its 14% equity interest in the Springerville Unit 1 lease trust using the equity
method.
K-101
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
JOINTLY-OWNED FACILITIES
TEP has investments in several plants and transmission facilities jointly owned with other
utilities. These projects are accounted for on a proportionate consolidation basis. See Note 5.
ASSET RETIREMENT OBLIGATIONS
TEP records a liability for the estimated present value of a conditional asset retirement
obligation as follows:
|
|
|
When it is able to reasonably estimate the fair value of any future obligation to retire
as a result of an existing or enacted law, statute, ordinance or contract; or |
|
|
|
|
If it can reasonably estimate the fair value. |
When the liability is initially recorded at net present value, TEP capitalizes the cost by
increasing the carrying amount of the related long-lived asset. Over time, TEP adjusts the
liability to its present value by recognizing accretion expense each period in other operations and
maintenance expense, and the capitalized cost is depreciated in depreciation and amortization
expense over the useful life of the related asset. Upon retirement of the asset, TEP either
settles the obligation for its recorded amount or incurs a gain or loss if the actual costs differ
from the recorded amount.
Beginning in December 2008, when TEP reapplied regulatory accounting to its generation operations,
TEP began recording cost of removal for its generation assets that is recoverable through rates
charged to customers. See Note 2. TEP, UNS Gas and UNS Electric record cost of removal for their
transmission and distribution assets through depreciation rates and recover those amounts in rates
charged to their customers. There are no legal obligations associated with these assets. TEP, UNS
Gas and UNS Electric have recorded their obligation for estimated costs of removal as regulatory
liabilities.
EVALUATION OF ASSETS FOR IMPAIRMENT
TEP, UNS Gas and UNS Electric evaluate their Utility Plant and other long-lived assets for
impairment whenever events or circumstances indicate that the value of the assets may be impaired.
If the fair value of the asset, determined based on the undiscounted expected future cash flows, is
less than the carrying value of the asset, an impairment charge would be recorded.
Millennium evaluates its investments for impairment at the end of each quarter. If the decline in
fair value is judged to be other-than-temporary, an impairment loss would be recorded.
DEFERRED FINANCING COSTS
We defer costs related to the issuance of debt. We amortize on a straight-line basis over the life
of the debt as this approximates the effective interest method. These costs include underwriters
commissions, discounts or premiums, and other costs such as legal, accounting and regulatory fees
and printing costs.
TEP, UNS Gas and UNS Electric defer and amortize the gains and losses on reacquired debt associated
with their regulated operations to interest expense over the remaining life of the original debt.
Prior to December 2008, when TEP reapplied regulatory accounting to its generation operations, TEP
recognized gains and losses on reacquired debt, including unamortized debt issuance costs,
associated with its generation operations, as incurred.
UTILITY OPERATING REVENUES
TEP, UNS Gas and UNS Electric record utility operating revenues when services are provided or
commodities are delivered to customers. Operating revenues include unbilled revenues which are
earned (service has been
provided) but not billed by the end of an accounting period.
K-102
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Amounts delivered are determined through systematic monthly readings of customer meters. At the
end of the month, the usage since the last meter reading is estimated and the corresponding
unbilled revenue is calculated. Unbilled revenue is estimated based on daily generation or
purchased volumes, estimated customer usage by class, estimated line losses and estimated average
customer rates. Accrued unbilled revenues are reversed the following month when actual billings
occur. The accuracy of the unbilled
revenue estimate is affected by factors that include fluctuations in energy demands, weather, line
losses, and changes in the composition of customer classes.
Effective in January 2009, as a result of the 2008 TEP Rate Order, TEP has a rate-adjustment
mechanism that provides for the recovery of fuel and purchased energy cost. UNS Gas and UNS
Electric also have rate-adjustment mechanisms in place that allow for a revenue surcharge or
surcredit (that adjusts the customers base rate for delivered purchased power or gas) to collect
or return under- or over- recovery of costs. These rate-adjustment mechanisms are revised
periodically and may increase or decrease the level of costs recovered through base rates for any
difference between the total amount collected under the clauses and the recoverable costs incurred.
See Note 2.
TEPs wholesale revenue and purchased power costs from settled energy contracts that are not
physically delivered are reported on a net basis in Electric Wholesale Sales. The corresponding
cash receipts and payments are recorded in the statement of cash flows as Cash Receipts from
Electric Wholesale Sales and Purchased Energy Costs Paid, respectively.
We record an Allowance for Doubtful Accounts to reduce accounts receivable for revenue amounts that
are estimated to be uncollectible. TEP, UNS Gas and UNS Electric establish an allowance for
doubtful accounts based on historical collection experience and any specific customer collection
issues that are identified. TEPs Allowance for Doubtful Accounts was $4 million at December 31,
2009, and $17 million at December 31, 2008. See Note 4. UNS Gas and UNS Electrics combined
Allowance for Doubtful Accounts was $2 million at December 31, 2009 and $3 million at December 31,
2008.
TEP recognizes revenue from operating Springerville Unit 3 and Unit 4 as contract services and
materials are provided. Expenses are recorded in the respective line item of the income statement
based on the nature of service or materials provided.
INVENTORY
TEP records fuel inventory, primarily coal, at weighted average cost. TEP uses full absorption
costing, under which all handling and procurement costs are included in the cost of the inventory.
Examples of these costs include direct material, direct labor, overhead costs and transportation
costs. See Note 4 regarding fuel purchase contracts.
Materials and supplies inventories are recorded at cost. Materials and supplies consist of
transmission and distribution line construction and repair materials and generating station and
transmission and distribution substation repair materials.
FUEL AND PURCHASED ENERGY COSTS
TEP and UNS Electric Purchased Power and Fuel Adjustment Clause (PPFAC)
As a result of the 2008 TEP Rate Order, TEP began deferring differences between purchased energy
costs and the recovery of such costs in rates effective January 1, 2009. UNS Electric also defers
differences between purchased energy costs and the recovery of such costs in rates. Where
applicable, fuel cost over-recoveries (the excess of fuel costs recovered in base rates over fuel
costs incurred) are deferred as current regulatory liabilities and under-recoveries (the excess of
fuel costs incurred over fuel costs recovered in base rates) are deferred as current regulatory
assets. The 2008 TEP Rate Order required TEP to credit, with interest, $58 million of Fixed CTC
true-up revenues charged to customers from May 2008 to November 2008, through the PPFAC. See
Note 2.
K-103
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
UNS Gas Purchased Gas Adjustor (PGA)
UNS Gas defers differences between gas purchase costs and the recovery of such costs in base rates
under a Purchased Gas Adjustor (PGA) mechanism. The PGA mechanism addresses the volatility of
natural gas prices and allows UNS Gas to recover its commodity costs through a price adjustor. The
PGA factor, computed monthly, is a calculation of 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 difference between the actual cost of UNS Gas gas supplies
and transportation contracts and that cost which is currently allowed by the ACC is deferred and recovered or
repaid through the PGA mechanism. When under-or over-recovery trigger points are met, UNS Gas may
request a PGA surcharge or surcredit with the goal of collecting or returning the amount deferred
from or to customers, with interest, over a twelve-month period. See Note 2.
INCOME TAXES
Due to the differences between GAAP and income tax laws, many transactions are treated differently
for income tax purposes than they are in the financial statements. This difference is accounted
for by recording deferred income tax assets and liabilities on our balance sheets. These assets
and liabilities are recorded using current income tax rates, which are expected to be in effect
when the deferred tax assets and liabilities are realized or settled.
Tax benefits are recognized in the financial statements when it is more likely than not that a tax
position will be sustained upon examination by the tax authorities based on the technical merits of
the position. The tax benefit recorded is the largest amount that is more than 50% likely to be
realized upon ultimate settlement with the tax authority. In calculating the benefit to be
recognized we assume the tax authorities have full knowledge of the position and all relevant
facts. Interest Expense includes interest accrued by UniSource and TEP on tax positions taken on
tax returns which have not been reflected in the financial statements.
Prior to 1990, we flowed through to ratepayers certain accelerated tax benefits related to utility
plant as the benefits were recognized on the income tax return. Income Taxes Recoverable Through
Future Rates on the balance sheet reflects the future revenues due us from ratepayers as these tax
benefits reverse. See Notes 2 and 9.
Federal and state income tax credits are treated as a reduction to income tax expense in the year
the credit arises.
Consolidated income tax liabilities are allocated to subsidiaries based on their taxable income as
reported in the consolidated tax return.
TAXES OTHER THAN INCOME TAXES
TEP, UNS Gas and UNS Electric act as conduits or collection agents for sales tax, utility taxes,
franchise fees and regulatory assessments. We record liabilities payable to governmental agencies
as customers are billed for these taxes and assessments. These amounts are not reflected in the
income statement.
EMISSION ALLOWANCES
The Environmental Protection Agency (EPA) issues emission allowances to qualifying utilities based
on past operational history. Each allowance permits emission of one ton of sulfur dioxide
(SO2) in its vintage year or a subsequent year. TEP receives an allotment of these
SO2 emission allowances annually; UNS Electric and UED do not receive SO2
emission allowances since neither has coal-fired generation. When issued from the EPA, these
SO2 emission allowances have no book value for accounting purposes but may be sold if
TEP does not need them for operations. TEP may also purchase additional SO2 emission
allowances if needed. Purchased SO2 emission allowances are recorded at cost.
Beginning in January 2009, as a result of the 2008 TEP Rate Order, TEP will credit 50% of the gains
from the sales of SO2 emission allowances to the PPFAC. The remaining 50% of gains from
sales of excess SO2 emission allowances will be reflected as a reduction of
Other Operations and Maintenance expense on TEPs income statement when title passes and in the
operating activities section of the statement of cash flows. 100% of gains from sales of excess
SO2 emission allowances were reflected as a reduction of Other Operations and
Maintenance expense in 2007 and 2008. No allowances were sold in 2009.
K-104
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
RENEWABLE ENERGY STANDARDS TARIFF (REST) AND RENEWABLE ENERGY CREDITS (RECs)
Arizona adopted a mandatory renewables portfolio standard that requires TEP and UNS Electric to
engage in renewable energy activities, allowing cost recovery under REST. Arizona uses RECs as a
form of measurement of compliance to the REST requirements encouraging construction and consumption
of renewable energy. RECs are created each time one KWh of renewable energy is generated or when
qualifying renewable equipment is manufactured. An escalating percentage of retail electric sales
determine the annual REC requirement. RECs may be used to satisfy compliance requirements anytime
after creation with no expiration date. We have the option of generating our own RECs, or
purchasing RECs which are usually bundled with renewable power purchases. RECs may be sold if we
do not need them for operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Risks and Overview
TEP, UNS Gas and UNS Electric 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 TEP, UNS Gas
and UNS Electrics retail rates to recover the actual costs of purchased power, gas, transmission
and transportation. TEP, UNS Gas and UNS Electric 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 TEP, UNS Gas and UNS Electric; to ensure TEP, UNS
Gas and UNS Electric can meet their load and reserve requirements; and reducing TEP, UNS Gas and
UNS Electrics exposure to price volatility that may result from delayed recovery under the PPFAC
or PGA. 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 allocate 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 allocate the credit risk adjustment to all individual contracts.
Although TEPs gains and losses on trading activities, if any, 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.
K-105
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
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. 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
unrealized 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 |
|
|
|
TEPs 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 did not qualify for
cash flow hedge accounting treatment 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. Beginning in December 2008, as a result of the 2008 TEP
Rate Order, which permits recovery in the PPFAC of hedging transactions, 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. |
|
|
|
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. The net
trading activities represent a very small portion (less than 1%) of TEPs revenue from wholesale
sales in 2007 and 2008. In 2009, TEP had no trading activity. 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. |
|
|
|
UNS Electric |
|
|
|
UNS Electric hedges a portion of its purchased power exposure to fixed price and natural
gas-indexed contracts with forward power purchases or financial gas swaps. 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. |
|
|
|
UNS Gas |
|
|
|
UNS Gas enters into derivatives such as forward gas purchases and gas swaps, creating price
stability and reducing exposure to natural gas price volatility that may result in delayed
recovery under the PGA. Beginning in December 2008, 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. |
K-106
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Normal Purchase and Normal Sale
UNS Gas, UNS Electric and TEP enter into forward energy purchase and sales contracts, including
call options, to support the current load forecast and contracts entered into with a counterparty
with load serving requirements or generating capacity. These contracts are not required to be
marked-to-market and are accounted for on an accrual basis. On an ongoing basis we evaluate our
counterparties for non-performance risk to ensure it does not impact our ability to obtain the
normal scope exception.
2007 and 2008 Accounting Summary
Prior to December 2008, we recorded unrealized gains and losses on derivative instruments as
follows:
|
|
|
TEPs interest rate swaps, TEPs forward contracts to sell excess capacity, and TEP and
UNS Gas forward gas swaps were recorded in AOCI; |
|
|
|
|
TEPs non-trading hedges such as forward power purchase contracts indexed to gas, and
TEPs forward purchase and sale trading contracts were recorded in the income statement;
and |
|
|
|
|
All other commodity contracts were reflected on the balance sheet as either regulatory
assets or regulatory liabilities. |
SHARE-BASED COMPENSATION
UniSource Energy has a stock-based long-term incentive plan. UniSource Energy measures the cost of
employee services received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with some limited exceptions). Compensation costs are recognized over the
period during which an employee is required to provide service in exchange for the award which
typically is the vesting period. Compensation cost is not recognized for anticipated forfeitures
of equity instruments prior to vesting. Our share-based compensation plans are described more
fully in Note 11.
RECLASSIFICATIONS AND OTHER ADJUSTMENTS
Springerville Unit 1
In 2006, we recorded an investment in 14.14% of Springerville Unit 1 lease equity transaction as a
lease restructuring. We subsequently determined that the transaction was best characterized as a
purchase of an interest in a trust accounted for using equity method accounting. As a result, at
June 30, 2009, UniSource Energy and TEP recorded a net increase to Net Income of less than $0.5 million,
after tax. The net adjustment recorded in June 2009 included additional depreciation expense of $4
million; a reduction of interest expense on capital leases of $2 million; and $3 million of equity
in earnings which is included in Other Income on the income statement. In addition, UniSource
Energy and TEP recorded a $19 million increase to capital lease assets, a $4 million increase to
accumulated amortization, a $3 million increase to capital lease obligations, and an $11 million
decrease to investment in lease debt.
Renewable Energy and Demand Side Management (DSM) Revenues
UniSource Energy and TEP reclassified renewable revenue of $5 million and $3 million in 2008, and
$7 million and $5 million in 2007, respectively, from Other Revenue to Electric Retail Sales in the
Statements of Income. These reclassifications had no effect on Net Income.
K-107
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Dividend Equivalents
In September 2009, UniSource Energy and TEP recorded dividends of $0.9 million and $0.8 million,
respectively, for dividend equivalents that should have been recorded between 2005 and 2008.
Other
In June 2009, TEP recorded approximately $1 million ($0.6 million after-tax) of additional
depreciation for plant improvements that should have been recorded prior to 2009. TEP also
recorded an after-tax gain of $1.5 million related to proceeds from a company owned life insurance
policy that should have been recorded prior to 2009.
TEP 2008 Rate Order
In the TEP 2008 Rate Order, the Arizona Corporation Commission (ACC) granted TEP a Purchased Power
and Fuel Adjustment Clause (PPFAC) which allows recovery of actual fuel and purchased power costs,
including demand charges, transmission costs, and prudent settlement costs of contracts for hedging
fuel and purchased power costs. UNS Electric has a similar PPFAC mechanism. UNS Gas has a
Purchased Gas Adjuster (PGA) mechanism which allows UNS Gas to recover its actual commodity costs,
including transportation. See Note 2.
To provide more information regarding the components of the PPFAC/PGA and to be comparable with the
2009 presentation, UniSource Energy and TEP made the following reclassifications to the statements
of income for the years ended December 31, 2008 and December 31, 2007.
|
|
|
UniSource Energy and TEP reclassified Transmission expenses of $19 million and $11
million in 2008, and $16 million and $9 million in 2007, respectively, from Other
Operations and Maintenance to Transmission, a component of Total Fuel and Purchased Energy; |
|
|
|
|
UniSource Energy and TEP reclassified capital lease expenses of $5 million in 2007 and
2008 from Interest on Capital Leases to Fuel; and |
|
|
|
|
UniSource Energy reclassified $11 million in 2008 and $5 million in 2007 of
over-recovered PPFAC and PGA expenses from Purchased Energy, Transmission, and Fuel to
Increase (Decrease) to reflect PPFAC/PGA Recovery Treatment, a component of Total Fuel and
Purchased Energy. |
These reclassifications had no effect on Net Income.
NOTE 2. REGULATORY MATTERS
1999 Settlement Agreement
We believe that the 1999 Settlement Agreement contemplated that TEPs retail rates for generation
service would have been market-based beginning January 1, 2009. As part of the 2008 TEP Rate
Order, TEP and all the parties to the 2008 Proposed Settlement Agreement relinquished all claims
related to the 1999 Settlement Agreement and the ACC order adopting the 1999 Settlement Agreement.
1999 Transition Recovery Asset
TEPs Transition Recovery Asset consisted of generation-related regulatory assets and a portion of
TEPs generation plant asset costs. Transition costs that were recovered through the Fixed CTC
included: (1) the Transition Recovery Regulatory Asset; (2) a small portion of generation-related
plant assets included in Plant in Service on the balance sheet; and (3) excess capacity deferrals
related to operating and capital costs associated with Springerville Unit 2 which were amortized as
an off-balance sheet regulatory asset through 2003. In May 2008, TEP fully amortized the remaining
Transition Recovery Asset balance, as costs were fully recovered through rates. TEP amortized $24
million and $78 million of the asset to the
income statement in 2008 and 2007, respectively. TEP also amortized $2 million and $8 million of
generation-related plant assets in 2008 and 2007, respectively.
K-108
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
In May 2007, the ACC ordered that TEPs current Fixed CTC revenue remain at its then-current level
until the effective date of a final order in the TEP 2008 proposed settlement agreement proceeding.
As of December 1, 2008, when new rates went into effect, TEP had collected $58 million of true-up
revenues and recorded a $58 million reserve for Fixed CTC revenue to be refunded against its
Electric Retail Sales in 2008. The 2008 TEP Rate Order requires TEP to return the Fixed CTC
true-up revenues to customers by reducing the PPFAC balance.
TEP 2008 Rate Order
The 2008 TEP Rate Order, issued by the ACC and effective December 1, 2008, provides for a cost of
service rate methodology for TEPs generation assets; an average base rate increase of 6% over
TEPs previous retail rates; a fuel rate included in base rates of 2.9 cents per kilowatt-hour
(kWh); a PPFAC effective January 1, 2009; a base rate increase moratorium through January 1, 2013;
and a waiver of any claims under the 1999 Settlement Agreement.
As a result of the 2008 TEP Rate Order, TEP reapplied regulatory accounting to its generation
operations. In addition, in December 2008, TEP began deferring its mark-to-market adjustments for
derivative instruments that are expected to be recovered through the PPFAC as either regulatory
assets or regulatory liabilities.
Purchased Power and Fuel Adjustment Clause (PPFAC)
The TEP PPFAC became effective January 1, 2009. 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. The PPFAC consists of a forward component and a true-up component.
|
|
|
The forward component of 0.18 cents per kWh became effective on April 1, 2009, and will
be updated each year. The forward component is based on the forecasted fuel and purchased
power costs for the twelve-month period from April 1 to March 31 the following year, less
the average base cost of fuel and purchased power of approximately 2.9 cents per kWh, which
is embedded in base rates. |
|
|
|
|
The true-up component will reconcile any over/under collected amounts from the preceding
12 month period and will be credited to or recovered from customers in the subsequent year. |
TEP credited Fixed CTC revenue to be refunded ($58 million collected from May 2008 to November 30,
2008) to customers as an offset to the PPFAC rate. This credit will offset the forward and true-up
components of the PPFAC, resulting in a PPFAC charge of zero until the Fixed CTC revenue to be
refunded is fully credited, which is expected to occur over the next 36 to 48 months beginning
April 1, 2009.
K-109
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
The following table shows the balance of Regulatory Liabilities (Over-) Under-Recovered Purchased
Energy Costs:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Fixed CTC Revenue to be Refunded within the next 12
months; Included in Current Liabilities |
|
$ |
(9 |
) |
|
$ |
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under-Recovered Purchased Energy Costs Regulatory
Basis as Billed to Customers |
|
$ |
29 |
|
|
$ |
|
|
Estimated Purchased Energy Costs Recovered through
Accrued Unbilled Revenues |
|
|
(9 |
) |
|
|
|
|
Fixed CTC Revenue to be Refunded |
|
|
(37 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
Total Included in Deferred Credits and Other Liabilities |
|
$ |
(17 |
) |
|
$ |
(44 |
) |
|
|
|
|
|
|
|
The $12 million amortization of the Fixed CTC Revenue to be Refunded appears in the accompanying
income statements as an addition to retail revenues in 2009. The $21 million 2009 change 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.
For the purposes of reconciling fuel and purchased power to PPFAC revenues, including the credited
forward component, TEP will credit the allocable retail portion of the following against the PPFAC
eligible costs: 100% of short-term wholesale revenues; 10% of the annual profit on trading
activity; and 50% of the revenues from the sales of SO2 emission allowances. TEP had no
trading activities or sales of SO2 emission allowances in 2009.
Ratemaking Methodology for Generation Assets
Rates for generation service are based on a cost-of-service methodology. All generation assets
acquired by TEP between the end of the rate case test year (December 31, 2006) and the end of the
base rate increase moratorium period (December 31, 2012) shall be included in TEPs rate base at
their respective original depreciated cost, subject to subsequent review and approval by the ACC in
future rate cases. Luna is included in TEPs original cost rate base at its net book value of $48
million as of December 31, 2006.
Springerville Unit 1 non-fuel costs are being recovered through base rates at $25.67 per kilowatt
(kW) per month, which approximates the levelized cost of Springerville Unit 1 through the remainder
of the lease term.
Depreciation and Net Negative Salvage
On December 1, 2008, TEP implemented new depreciation rates that include a component for net
negative salvage value for all generation assets except Luna and new depreciation rates for
distribution and general plant assets that will extend the depreciable lives of these assets. The
estimated net impact on the income statement is to increase depreciation expense $9 million per
year.
K-110
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Impact of Reapplying Regulatory Accounting to TEPs Generation Operations
In December 2008, as a result of the 2008 TEP Rate Order, TEP reapplied regulatory accounting to
its generation operations and TEP recorded the following adjustments:
|
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|
|
|
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|
|
|
|
|
|
|
|
Income |
|
|
|
|
|
|
Statement |
|
|
Balance Sheet |
|
|
|
|
|
|
Regulatory Asset |
|
|
|
|
|
|
|
|
|
|
Non |
|
|
|
|
|
|
(Gain)/Loss |
|
|
Current |
|
|
Current |
|
|
AOCI |
|
Recorded in Fuel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Juan Coal Contract Amendment |
|
$ |
(9 |
) |
|
$ |
1 |
|
|
$ |
8 |
|
|
$ |
|
|
Retiree Health Care and Final
Mine Reclamation Costs |
|
|
(15 |
) |
|
|
|
|
|
|
15 |
|
|
|
|
|
Unrealized Gains (Losses) on
Derivative Contracts (PPFAC) |
|
|
(8 |
) |
|
|
14 |
|
|
|
5 |
|
|
|
(11 |
) |
Deregulation Costs Recorded in O&M |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
Property Taxes |
|
|
(7 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement
Benefits |
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax Impact of Reapplying
Regulatory Accounting |
|
$ |
(40 |
) |
|
$ |
23 |
|
|
$ |
42 |
|
|
$ |
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Juan Coal Contract Amendment costs of $9 million, incurred by TEP in 2000, will be
amortized over 9 years beginning in December 2008. |
|
|
|
|
Final Mine Reclamation and Retiree Health Care Costs represent costs associated with
TEPs jointly-owned facilities at San Juan, Four Corners and Navajo. TEP is required to
recognize the present value of its liability associated with final reclamation and retiree
health care obligations. As TEP is permitted to fully recover these costs through the
PPFAC when the costs are invoiced by the miners, TEP recorded a regulatory asset. |
|
|
|
|
Unrealized gains (losses) on derivative instruments (PPFAC) are contracts for which the
settled amounts will be recovered through the PPFAC. As TEP expects to recover the final
settled amounts through the PPFAC, TEP reclassified amounts previously recorded in the
income statement and in AOCI to a regulatory asset. |
|
|
|
|
Deregulation Costs represent deferred expenses that TEP incurred to comply with various
ACC deregulation orders. |
|
|
|
|
Property taxes related to generation assets which will be recovered in rates as cash is
paid rather than as costs are accrued. |
|
|
|
|
Pension and Other Postretirement Benefits represent the underfunded status of TEPs
defined benefit and other postretirement benefit plans prior to December 2008. As TEP
expects to recover these costs in rates, TEP reclassified amounts previously recorded in
AOCI to a regulatory asset. |
K-111
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit
Committee
2/19/10
Income Statement Impact of Applying Regulatory Accounting
Regulatory accounting had the following impacts on TEPs reported net income, in addition to the
impact of reapplying regulatory accounting to its generation operations for 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of the Fixed CTC Revenue to be Refunded |
|
$ |
(12 |
) |
|
$ |
|
|
|
$ |
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation (related to Net Cost of Removal for Interim
Retirements) |
|
|
41 |
|
|
|
10 |
|
|
|
7 |
|
Deferral of Under-Recovered Purchased Energy Costs |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
Deferral of Unrealized losses on Derivative Instruments |
|
|
10 |
|
|
|
|
|
|
|
|
|
Amortization of 1999 Transition Recovery Asset |
|
|
|
|
|
|
24 |
|
|
|
78 |
|
Other |
|
|
3 |
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt (Amortization of Loss on Reacquired Debt Costs) |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Income Taxes |
|
|
|
|
|
|
4 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Net Increase to Income Statement |
|
$ |
21 |
|
|
$ |
39 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
If TEP had not applied regulatory accounting in these years, the above amounts would have been
reflected in the income statements in prior or future periods.
Renewable Energy Standard Tariff (REST)
Through December 31, 2009, and December 31, 2008, TEP collected $29 million and $9 million in
customer surcharges, of which $18 million and $3 million were expensed for REST projects,
respectively. At December 31, 2009 and December 31, 2008, $17 million and $6 million were recorded as a
current regulatory liability to be used in future periods, respectively.
The approved REST adjustor mechanism allows TEP to file an application with the ACC to apply any
shortage or surplus in the prior years program expenses to the subsequent years REST surcharge.
K-112
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
The following table summarizes TEPs regulatory assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Current Regulatory Assets |
|
|
|
|
|
|
|
|
Property Tax Deferrals (1) |
|
$ |
16 |
|
|
$ |
16 |
|
Derivative Instruments (2) |
|
|
4 |
|
|
|
14 |
|
Deregulation Costs (3) |
|
|
4 |
|
|
|
4 |
|
Other Current Regulatory Assets (4) |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total Current Regulatory Assets |
|
|
27 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits (7) |
|
|
80 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Assets Other |
|
|
|
|
|
|
|
|
Derivative Instruments (2) |
|
|
5 |
|
|
|
5 |
|
Deregulation Costs (3) |
|
|
7 |
|
|
|
10 |
|
San Juan Coal Contract Amendment (5) |
|
|
7 |
|
|
|
8 |
|
Final Mine Reclamation Costs (8) |
|
|
9 |
|
|
|
8 |
|
Retiree Health Care Costs (8) |
|
|
6 |
|
|
|
6 |
|
Unamortized Loss on Reacquired Debt (9) |
|
|
4 |
|
|
|
5 |
|
Other Regulatory Assets (4) |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total Regulatory Assets Other |
|
|
39 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes Recoverable through Future Revenues (6) |
|
|
18 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Regulatory Liabilities |
|
|
|
|
|
|
|
|
Over-Recovered Purchased Energy Costs |
|
|
(9 |
) |
|
|
(14 |
) |
Renewable Energy Standards Tariff (REST) (10) |
|
|
(17 |
) |
|
|
(6 |
) |
Other Current Regulatory Liabilities (4) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Total Current Regulatory Liabilities |
|
|
(26 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Regulatory Liabilities |
|
|
|
|
|
|
|
|
Net Cost of Removal for Interim Retirements (11) |
|
|
(163 |
) |
|
|
(123 |
) |
Over-Recovered Purchased Energy Costs |
|
|
(17 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
Total Other Regulatory Liabilities |
|
|
(180 |
) |
|
|
(167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Regulatory Assets (Liabilities) |
|
$ |
(42 |
) |
|
$ |
19 |
|
|
|
|
|
|
|
|
Regulatory assets are either being collected in rates or are expected to be collected through rates
in a future period, as described below:
|
1. |
|
Property Tax is recorded based on historical ratemaking treatment allowing recovery as
costs are paid out, rather than as costs are accrued. TEP records a regulatory property
tax asset related to its generation assets. While these assets do not earn a return, the
costs are fully recovered in rates over an approximate six month period. |
|
|
2. |
|
Derivative Instruments represent the unrealized gains or losses on contracts entered
into to hedge the variability of purchased energy costs and short-term wholesale sales that
are expected to be recovered through the PPFAC. As a result of the 2008 TEP Rate Order and
the approval of the PPFAC, TEP deferred the gains and losses on certain contracts that meet
the recovery criteria under the PPFAC requirements. |
|
|
3. |
|
Deregulation costs represent deferred expenses that TEP incurred to comply with various
ACC deregulation orders, the recovery of which has been authorized by the ACC in the 2008
TEP Rate
Order. These assets are included in rate base and consequently earn a return. TEP will
recover these costs through rates over a four-year period, beginning in December 2008. |
K-113
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
4. |
|
TEP does not earn a return on these assets. |
|
|
5. |
|
San Juan Coal Contract Amendment costs of $15 million were incurred by TEP in 2000. In
the 2008 TEP Rate Order, the ACC approved the recovery of $9 million of these costs over a
nine-year period beginning in December 2008. The current portion is recorded in Other
Assets. These assets do not earn a return. |
|
|
6. |
|
Income Taxes Recoverable Through Future Revenues, while not included in rate base, are
amortized over the life of the assets. TEP does not earn a return on these assets. |
|
|
7. |
|
Pension Assets. TEP records a regulatory pension and postretirement benefit asset
related to its employees. Based on past regulatory actions, TEP expects to
recover these costs in rates. TEP does not earn a return on these assets. |
|
|
8. |
|
Final Reclamation and Retiree Health Care Costs represent costs associated with TEPs
jointly-owned facilities at San Juan, Four Corners and Navajo. TEP is required to
recognize the present value of its liability associated with final reclamation and retiree
health care obligations. As TEP is permitted to fully recover these costs through the
PPFAC when the costs are invoiced by the miners, TEP recorded a regulatory asset. TEP
expects to recover these costs over the life of the mines, which is estimated to be between
17 and 34 years. TEP does not earn a return on these assets. |
|
|
9. |
|
Unamortized Loss on Reacquired Debt Costs is amortized for rate recovery over the
remaining life of the related debt instruments over a period of 21 years. TEP does not
earn a return on these costs. |
Regulatory liabilities represent items that TEP expects to pay to customers through billing
reductions in future periods or use for the purpose for which they were collected from customers,
as described below:
|
10. |
|
Renewable Energy Standards Tariff (REST) represents the REST surcharge collected in
excess of qualified renewable expenditures. |
|
|
11. |
|
Net Cost of Removal for Interim Retirements represents an estimate of the cost of
future asset retirement obligations net of salvage value. These are amounts collected
through revenue for the net cost of removal of interim retirements for transmission,
distribution, general and intangible plant which are not yet expended. TEP collects
through revenue the net cost of removal of interim retirements for generation plant, which
it has not yet expended. |
Future Implications of Discontinuing Application of Regulatory Accounting
TEP continues to apply regulatory accounting to its regulated operations. TEP regularly assesses
whether it can continue to apply regulatory accounting to these operations. If TEP stopped
applying regulatory accounting to its regulated operations, regulatory pension assets would be reflected in AOCI, and it would write-off the remaining related balances
of its regulatory assets as an expense and its regulatory liabilities as income on its income
statement. Based on the regulatory assets balances, net of regulatory liabilities, at December 31,
2009, if TEP had stopped applying regulatory accounting to its regulated operations, it would have
recorded an extraordinary after-tax gain of $74 million and an after-tax loss in AOCI of $48
million. While future regulatory orders and market conditions may affect cash flows, TEPs cash
flows would not be affected if TEP stopped applying regulatory accounting.
UNS GAS RATES AND REGULATION
2008 General Rate Case Filing
In November 2008, UNS Gas filed a 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. The case uses
a June 30, 2008 test year. UNS Gas expects the ACC to rule on its rate case in the first half of
2010.
K-114
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Purchase Gas Adjustor (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 adjustor. 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 rate. The PGA rate includes the following two components:
|
(1) |
|
The PGA factor, computed monthly, is a calculation of 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. Effective December 2007, the ACC
increased the annual cap on the maximum increase in the PGA factor from $0.10 per therm to
$0.15 per therm in a twelve-month period. |
|
|
(2) |
|
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 basis, UNS Gas is required to request a PGA surcredit with the
goal of returning the over-collected balance to customers over a period deemed appropriate
by the ACC. |
The PGA surcharge was $0.05 cents per therm from January 2007 through April 2007. The PGA surcredit was $0.04 cents per
therm from October 2007 through April 2008. From May 2008 through October 2009, there was no
surcharge or surcredit in effect. In October 2009, the ACC approved a $0.08 cent per therm PGA
surcredit, effective November 2009 through October 2010 or until the balance reaches zero.
Based on current projections of gas prices, UNS Gas believes that the current PGA rates will allow
it to timely recover its gas costs. However, changes in the market price for gas, sales volumes
and surcharges could significantly change the PGA bank balance in the future.
The following table shows the balance of over-recovered purchased gas costs:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Under (Over) Recovered Purchased Gas
Costs Regulatory Basis as Billed to
Customers |
|
$ |
(2 |
) |
|
$ |
5 |
|
Estimated Purchased Gas Costs
Recovered through Accrued Unbilled
Revenues |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
Over-Recovered Purchased Gas Costs
(PGA) Included as a Current Regulatory
Liability |
|
$ |
(10 |
) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
K-115
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Other Regulatory Assets and Liabilities
In addition to the Over-Recovered Purchased Gas Costs, UNS Gas has the following Regulatory Assets
and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Current Assets |
|
|
|
|
|
|
|
|
Derivative Instruments |
|
$ |
5 |
|
|
$ |
7 |
|
Pension Obligations |
|
|
2 |
|
|
|
3 |
|
Other Regulatory Assets |
|
|
|
|
|
|
|
|
Derivative Instruments |
|
|
3 |
|
|
|
6 |
|
Other Regulatory Assets |
|
|
1 |
|
|
|
1 |
|
Other Regulatory Liabilities |
|
|
|
|
|
|
|
|
Net Cost of Removal for Interim Retirements |
|
|
(20 |
) |
|
|
(19 |
) |
Regulatory assets are either being collected in rates or are expected to be collected through rates
in a future period, as described below:
|
|
|
Derivative instruments represent the unrealized gains or losses on contracts entered
into to hedge the variability of purchased energy costs that are expected to be recovered
through the PGA. UNS Gas does not earn a return on these costs. |
|
|
|
|
Pension assets represent the unfunded status of UNS Gas share of the UES pension and
other postretirement benefit plans that it expects, based on past regulatory actions, to
recover through rates. UNS Gas does not earn a return on these costs. |
|
|
|
|
Other Regulatory Assets consist of its 2007 rate case costs which are recoverable over 3
years. In addition, UNS Gas deferred its 2008 rate case costs and its low income
assistance program costs. UNS Gas requested recovery of these costs in its 2008 rate case
filing. UNS Gas does not earn a return on these costs. |
Regulatory liabilities represent items that UNS Gas expects to pay to customers through billing
reductions in future periods or use for the purpose for which they were collected from customers,
as described below:
|
|
|
Net Cost of Removal for Interim Retirements represents an estimate of the cost of future
asset retirement obligations. These are amounts collected through revenue for the net cost
of removal of interim retirements for which removal costs have not yet been expended. In
December 2007, to comply with ACC requirements, UNS Gas reclassified $12 million of Net
Cost of Removal for Interim Retirements from Accumulated Depreciation to a regulatory
liability. |
Income Statement Impact of Applying Regulatory Accounting
If UNS Gas had not applied regulatory accounting, net income would have been $6 million higher in
2009, and $9 million higher in 2007 as UNS Gas would have been able to recognize over-recovered purchased energy costs and unrealized gains on its
commodity derivative instruments as a reduction to its expenses in the income statement rather than record a regulatory liability. Net income would have been $4 million lower in 2008 as UNS Gas would have recognized under-recovered purchased
energy costs and unrealized losses on its commodity derivative instruments as an expense to its income statement rather than a reduction to its regulatory
liability.
Future Implications of Discontinuing Application of Regulatory Accounting
UNS Gas regularly assesses whether it can continue to apply regulatory accounting. If UNS Gas
stopped applying regulatory accounting to its regulated operations,
regulatory pension assets would be reflected in AOCI and UNS Gas would write-off the
remaining related balance of its regulatory assets as an expense and write-off its regulatory liabilities as
income on its income statement. Based on the regulatory asset and liability balances, if UNS Gas
had stopped applying
regulatory accounting to its regulated operations, it would have recorded an extraordinary
after-tax gain of $13 million and an after-tax loss in AOCI of $1 million at December 31, 2009.
Discontinuing application of regulatory accounting would not affect UNS Gas cash flows.
K-116
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
UNS ELECTRIC RATES AND REGULATION
2008 UNS Electric Rate Order
In the May 2008 rate order, the ACC approved a rate increase of 2.5% ($4 million) effective June
2008. As a result of the May 2008 rate order limiting recovery of deferred rate case costs, UNS
Electric expensed $0.3 million of the $0.6 million deferred costs in May 2008.
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 total rate increase of 7.4% to cover a revenue deficiency of $13.5 million. The case
uses a December 31, 2008 test year. 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.
Purchased Power and Fuel Adjustment Clause (PPFAC)
UNS Electrics retail rates include a PPFAC, which allows for a separate surcharge or surcredit to
the base rate for delivered purchased power to collect under-recovered or return over-recovered
costs. Allowable PPFAC costs include fuel, purchased power (less proceeds from most wholesale
sales) and transmission costs. The PPFAC approved in UNS Electrics last rate case in May 2008,
allows recovery of fuel and purchased power costs incurred to provide service to retail customers,
including demand charges and the prudent costs of contracts for hedging fuel and purchased power
costs.
The PPFAC mechanism has a forward component and a true-up component. The forward component of the
PPFAC rate is based on the difference between forecasted fuel and purchased power costs and the
base cost of fuel and purchased power included in base rates. The true-up component reconciles the
previous years actual fuel and purchased power costs with the amounts collected through base and
PPFAC rates and credits or recovers that amount to or from customers in the subsequent PPFAC year.
The PPFAC rate will be updated on June 1 of each year, beginning June 1, 2009.
On June 1, 2009, a PPFAC credit of approximately 1.06 cents per kWh took effect. The PPFAC rate
from June 1, 2008 to May 31, 2009, was a charge of approximately 1.5 cents per kWh. Base rates of
approximately 7.1 cents per kWh have been in effect since June 1, 2008. The retail rates prior to
June 2008, included a charge for fuel and purchased power of approximately 7 cents per kWh (base
rate recovery of 5.2 cents per kWh and a transmission surcharge of 1.8 cents per kWh).
The following table shows the balance of over-recovered purchased power costs:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
(Over-)Recovered Purchased Power
Costs Regulatory Basis as Billed to
Customers |
|
$ |
(1 |
) |
|
$ |
|
|
Estimated Purchased Power Costs
Recovered through Accrued Unbilled
Revenues |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
(Over-)Recovered Purchased Power
Costs (PPFAC) Included as a Current
Regulatory Liability |
|
$ |
(5 |
) |
|
$ |
(7 |
) |
|
|
|
|
|
|
|
K-117
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Purchased Power Agreement
In June 2008, UED and UNS Electric entered into a 5-year Power Purchase Agreement (PPA) under which
UED sells all the output of BMGS to UNS Electric. The PPA is a tolling arrangement in which UNS
Electric takes operational control of BMGS and assumes all risk of operation and maintenance costs,
including fuel. UNS Electric accounts for the PPA as an operating lease. The costs associated
with the PPA are recoverable through UNS Electrics PPFAC.
Regulatory Assets and Liabilities
UNS Electrics regulatory assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Current Regulatory Assets |
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
9 |
|
|
$ |
17 |
|
Other Regulatory Assets |
|
|
|
|
|
|
|
|
Derivative Instruments |
|
|
2 |
|
|
|
7 |
|
Pension Assets |
|
|
2 |
|
|
|
3 |
|
Other |
|
|
1 |
|
|
|
|
|
Current Regulatory Liabilities |
|
|
|
|
|
|
|
|
REST |
|
|
(1 |
) |
|
|
(1 |
) |
Over-Recovered Purchased Power Costs |
|
|
(5 |
) |
|
|
(6 |
) |
Other Regulatory Liabilities |
|
|
|
|
|
|
|
|
Net Cost of Removal for Interim Retirements |
|
|
(12 |
) |
|
|
(11 |
) |
Regulatory assets are either being collected in rates or are expected to be collected through rates
in a future period, as described below:
|
|
|
Derivative instruments represent the unrealized gains or losses on contracts entered
into to hedge the variability of purchased energy costs that are expected to be recovered
through the PPFAC. UNS Electric does not earn a return on these costs. |
|
|
|
|
Pension assets represent the unfunded status of UNS Electrics share of the UES pension
and other postretirement benefit plans that it expects, based on past regulatory actions,
to recover through rates. UNS Electric does not earn a return on these costs. |
|
|
|
|
Rate case costs included in Other Regulatory Assets are included in rate base and
consequently earn a return. The recovery period is 3 years. |
Regulatory liabilities represent items that UNS Electric expects to pay to customers through
billing reductions in future periods or use for the purpose for which they were collected from
customers, as described below:
|
|
|
Renewable Energy Standards Tariff (REST) represents the REST surcharge collected in
excess of qualified renewable expenditures. The ACC approved a REST surcharge for UNS
Electric, effective June 1, 2008, to allow UNS Electric to recover the cost of qualified
renewable expenditures, such as payments to customers who have renewable energy resources
or the incremental cost of renewable power generated or purchased by UNS Electric. Any
surcharge collected in excess of qualified renewable expenditures will be reflected in the
financial statements as a current regulatory liability. Conversely, qualified renewable
expenditures in excess of the REST surcharge will be reflected as a current regulatory
asset. The REST plan includes an adjustor mechanism which allows UNS Electric to file an
application with the ACC to apply any shortage or surplus in the prior years program
expenses to the subsequent years REST surcharge. |
K-118
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
|
UNS Electric defers differences between purchased energy costs and the recovery of such
costs in revenues. Future billings are adjusted for such deferrals through use of a PPFAC
approved by the ACC. The PPFAC allows for a revenue surcharge or surcredit (that adjusts
the customers rate for delivered purchased power) to collect or return under- or
over-recovery of costs. |
|
|
|
Net Cost of Removal for Interim Retirements represents an estimate of the cost of future
asset retirement obligations. These are amounts collected through revenue for the net cost
of removal of interim retirements for which removal costs have not yet been expended. In
June 2008, to comply with ACC expectations, UNS Electric reclassified $7 million of Net
Cost of Removal for Interim Retirements from Accumulated Depreciation to a regulatory
liability. |
Income Statement Impact of Applying Regulatory Accounting
If UNS Electric had not applied regulatory accounting, net income would have been $7 million higher
in 2009 and $1 million higher in 2007, as UNS Electric would have been able to recognize over-recovered purchased power costs and unrealized gains on its commodity derivative instruments as a credit to the income statement
rather than record an increase to regulatory liabilities. If UNS Electric had not applied regulatory accounting, net income would have been $15 million lower in 2008 as UNS Electric would have recognized under-recovered
purchased energy and unrealized losses on its commodity derivative instruments as an expense to its
income statement, rather than as regulatory assets or a reduction to its regulatory liabilities.
Future Implications of Discontinuing Application of Regulatory Accounting
UNS Electric regularly assesses whether it can continue to apply regulatory accounting to its
operations. If UNS Electric stopped applying regulatory accounting to its regulated
operations, regulatory pension assets would be reflected in AOCI and
it would write-off the remaining related balances of its regulatory assets as an expense and
would write-off its regulatory liabilities as income on its income statement. Based on the
regulatory asset and liability balances, if UNS Electric had stopped applying regulatory accounting
to its regulated operations, it would have recorded an extraordinary
after-tax gain of $3 million
and an after-tax loss in AOCI of $1 million at December 31, 2009. Discontinuing application of
regulatory accounting would not affect UNS Electrics cash flows.
NOTE 3. SEGMENT AND RELATED INFORMATION
We have three reportable segments that are determined based on the way we organize our operations
and evaluate performance:
|
(1) |
|
TEP, a vertically integrated electric utility business, is our largest subsidiary. |
|
|
(2) |
|
UNS Gas is a regulated gas distribution utility business. |
|
|
(3) |
|
UNS Electric is a regulated electric distribution utility business. |
The UniSource Energy and UES holding companies, Millennium, and UED are included in All Other.
K-119
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit
Committee
2/19/10
Reconciling adjustments consist of the elimination of intersegment revenue which were due to the
following transactions and they are eliminated in consolidation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
|
UNS |
|
|
UNS |
|
|
|
|
|
|
TEP |
|
|
Gas |
|
|
Electric |
|
|
Other |
|
|
|
-Millions of Dollars- |
|
Intersegment Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
Sales TEP to UNSE |
|
$ |
23 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Wholesale
Sales UNSE to TEP |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
Wholesale Sales UED to UNSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Gas Revenue UNSG to UNSE & UED |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Other Revenue TEP to Affiliates(1) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Revenue Millennium to TEP & UNSE(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Other Revenue TEP to UNSE(3) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intersegment Revenue |
|
$ |
34 |
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
Sales TEP to UNSE |
|
$ |
24 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Wholesale
Sales UNSE to TEP |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
Wholesale Sales UED to UNSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Gas Revenue UNSG to UNSE & UED |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Other Revenue TEP to Affiliates(1) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Revenue Millennium to TEP & UNSE(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
Other Revenue TEP to UNSE(3) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intersegment Revenue |
|
$ |
34 |
|
|
$ |
8 |
|
|
$ |
9 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Revenue TEP to Affiliates(1) |
|
$ |
7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other
Revenue Millennium to TEP & UNSE(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intersegment Revenue |
|
$ |
7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
TEP provides corporate services (finance, accounting, tax, information technology
services, etc.) to UniSource Energy and its subsidiaries. See Note 14. |
|
(2) |
|
A Millennium subsidiary provides a supplemental workforce and meter reading services to TEP and
UNS Electric. |
|
(3) |
|
TEP provides control area services to UNS Electric. See Note 14. |
Other significant reconciling adjustments include intercompany interest between UniSource Energy
and UED, the elimination of investments in subsidiaries held by UniSource Energy and
reclassifications of deferred tax assets and liabilities.
K-120
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
We disclose selected financial data for our reportable segments in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
UNS |
|
|
All |
|
|
Reconciling |
|
|
UniSource |
|
2009 |
|
TEP |
|
|
Gas |
|
|
Electric |
|
|
Other |
|
|
Adjustments |
|
|
Energy |
|
|
|
-Millions of Dollars- |
|
Income
Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues External |
|
$ |
1,063 |
|
|
$ |
148 |
|
|
$ |
183 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,394 |
|
Operating Revenues Intersegment |
|
|
34 |
|
|
|
5 |
|
|
|
4 |
|
|
|
28 |
|
|
|
(71 |
) |
|
|
|
|
Depreciation and Amortization |
|
|
153 |
|
|
|
7 |
|
|
|
14 |
|
|
|
2 |
|
|
|
|
|
|
|
176 |
|
Interest Income |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
12 |
|
Interest Expense |
|
|
85 |
|
|
|
6 |
|
|
|
7 |
|
|
|
11 |
|
|
|
|
|
|
|
109 |
|
Income Tax Expense (Benefit) |
|
|
55 |
|
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
64 |
|
Net Income (Loss) |
|
|
89 |
|
|
|
7 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(235 |
) |
|
|
(14 |
) |
|
|
(28 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
2,914 |
|
|
|
307 |
|
|
|
273 |
|
|
|
1,107 |
|
|
|
(1,000 |
) |
|
|
3,601 |
|
Investments in Equity Method Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
UNS |
|
|
All |
|
|
Reconciling |
|
|
UniSource |
|
2008 |
|
TEP |
|
|
Gas |
|
|
Electric |
|
|
Other |
|
|
Adjustments |
|
|
Energy |
|
|
|
-Millions of Dollars- |
|
Income
Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues External |
|
$ |
1,045 |
|
|
$ |
166 |
|
|
$ |
186 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,397 |
|
Operating Revenues Intersegment |
|
|
34 |
|
|
|
8 |
|
|
|
9 |
|
|
|
23 |
|
|
|
(74 |
) |
|
|
|
|
Depreciation and Amortization |
|
|
126 |
|
|
|
7 |
|
|
|
14 |
|
|
|
1 |
|
|
|
|
|
|
|
148 |
|
Amortization of Transition Recovery Asset |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Interest Income |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
11 |
|
Net Loss from Equity Method Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
Interest Expense |
|
|
96 |
|
|
|
7 |
|
|
|
7 |
|
|
|
11 |
|
|
|
(2 |
) |
|
|
119 |
|
Income Tax Expense (Benefit) |
|
|
11 |
|
|
|
6 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
17 |
|
Net Income (Loss) |
|
|
4 |
|
|
|
9 |
|
|
|
4 |
|
|
|
16 |
|
|
|
(19 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(295 |
) |
|
|
(16 |
) |
|
|
(30 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
(357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
2,842 |
|
|
|
294 |
|
|
|
285 |
|
|
|
1,061 |
|
|
|
(972 |
) |
|
|
3,510 |
|
Investments in Equity Method Entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-121
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
UNS |
|
|
All |
|
|
Reconciling |
|
|
UniSource |
|
2007 |
|
TEP |
|
|
Gas |
|
|
Electric |
|
|
Other |
|
|
Adjustments |
|
|
Energy |
|
|
|
-Millions of Dollars- |
|
Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues External |
|
$ |
1,064 |
|
|
$ |
151 |
|
|
$ |
169 |
|
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
1,381 |
|
Operating Revenues Intersegment |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
(22 |
) |
|
|
|
|
Depreciation and Amortization |
|
|
120 |
|
|
|
8 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
141 |
|
Amortization of Transition Recovery Asset |
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78 |
|
Interest Income |
|
|
16 |
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
19 |
|
Interest Expense |
|
|
111 |
|
|
|
7 |
|
|
|
6 |
|
|
|
8 |
|
|
|
|
|
|
|
132 |
|
Income Tax Expense (Benefit) |
|
|
36 |
|
|
|
3 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
39 |
|
Net Income (Loss) |
|
|
53 |
|
|
|
4 |
|
|
|
5 |
|
|
|
(4 |
) |
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
(162 |
) |
|
|
(23 |
) |
|
|
(38 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
2,573 |
|
|
|
276 |
|
|
|
231 |
|
|
|
1,077 |
|
|
|
(971 |
) |
|
|
3,186 |
|
Investments in Equity Method Entities |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
31 |
|
NOTE 4. COMMITMENTS AND CONTINGENCIES
TEP COMMITMENTS
Firm Purchase Commitments
At December 31, 2009, TEP had various firm non-cancelable purchase commitments and operating leases
as described in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Commitments |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
|
|
-Millions of Dollars- |
|
Fuel (including Transportation) |
|
$ |
89 |
|
|
$ |
51 |
|
|
$ |
42 |
|
|
$ |
39 |
|
|
$ |
37 |
|
|
$ |
142 |
|
|
$ |
400 |
|
Purchased Power |
|
|
44 |
|
|
|
12 |
|
|
|
4 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
66 |
|
Transmission |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Firm Purchase Commitments |
|
|
135 |
|
|
|
65 |
|
|
|
48 |
|
|
|
43 |
|
|
|
41 |
|
|
|
146 |
|
|
|
478 |
|
Operating Lease Payments |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrecognized Firm Commitments |
|
$ |
136 |
|
|
$ |
65 |
|
|
$ |
48 |
|
|
$ |
43 |
|
|
$ |
41 |
|
|
$ |
146 |
|
|
$ |
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel and Purchased Power Contracts
TEP has long-term contracts for the purchase and delivery of coal and natural gas with various
expiration dates from 2010 through 2020. Amounts paid under these contracts depend on actual
quantities purchased and delivered. Some of these contracts include a price adjustment clause that
will affect the future cost. The table above also includes approximately $1 million under
take-or-pay arrangements if certain minimum quantities are not transported in 2010. TEP expects to
spend more to meet its fuel requirements than the minimum purchase obligations outlined above.
TEP has entered into agreements with utilities and other energy suppliers for purchased power to
meet system load and energy requirements, replace generation from company-owned units under
maintenance and during outages, and meet operating reserve obligations. In general, these
contracts provide for capacity payments and energy payments based on actual power taken under the
contracts. These
contracts expire in various years between 2010 and 2015. Certain of these contracts are at a fixed
price per MW and others are indexed to natural gas prices. The commitment amounts included in the
table are based on projected market prices as of December 31, 2009.
K-122
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Starting January 1, 2009, fuel, purchased power and transmission costs are recoverable from
customers through a PPFAC.
TEP has,
subject to ACC approval, entered into three long-term purchase power agreements with developing renewable energy
generation facilities that extend for periods of 15 to 20 years. The facilities are expected to
begin commercial operation between 2010 and 2012. TEP is required to purchase the full output of
each facility. Expected capacities range from 2 MW to 25 MW. TEP is only obligated to pay for
actual energy delivered. There are no minimum payment obligations under these contracts.
Operating Leases
TEPs aggregate operating lease expense, which is primarily for office facilities and computer
equipment, with varying terms, provisions, and expiration dates, totaled $1 million in 2009, $1
million in 2008 and $2 million in 2007.
Environmental Regulation
Clean Air Act Requirements
TEP generating facilities are subject to EPA limits on the amount of sulfur dioxide
(SO2), nitrogen oxide (NOx) and other emissions released into the atmosphere.
TEP capitalized $24 million in 2009, $73 million in 2008 and $7 million in 2007 in construction
costs to comply with environmental requirements, including TEPs share of new pollution control
equipment installed at San Juan described below. TEP expects to capitalize environmental
compliance costs of $8 million in 2010 and $5 million in 2011. In addition, TEP recorded operating
expenses of $13 million in 2009, $14 million in 2008 and $10 million in 2007 related to
environmental compliance. TEP expects environmental expenses to be $11 million in 2010.
As a result of a 2005 settlement agreement between PNM, environmental activist groups, and the New
Mexico Environment Department (PNM Consent Decree), the co-owners of San Juan installed new
pollution control equipment at the generating station to reduce mercury, particulate matter, NOx,
and SO2 emissions. TEP owns 50% of San Juan Units 1 and 2. The PNM Consent Decree
includes stipulated penalties for non-compliance with specified emissions limits at San Juan. In
2008 and 2007, TEPs share of stipulated penalties at San Juan was $1 million and $2 million,
respectively. TEP can not deduct these penalties for income tax purposes. TEP did not incur any
stipulated penalties at San Juan in 2009. The installation of new pollution control equipment
designed to remedy all emission violations was completed in 2008 for San Juan Unit 1 and in 2009 at
San Juan Unit 2.
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 100 MW. APS
has responded to the EPAs request. TEP cannot predict the timing or outcome of this matter.
In 1993, the EPA allocated TEPs generating units SO2 Emission Allowances based on past operational
history. Beginning in 2000, TEPs generating units were required to hold SO2 Emission Allowances
equal to the level of emissions in the compliance year or pay penalties and offset excess emissions
in future years. To date, TEP has had sufficient SO2 Emission Allowances to comply with the SO2
regulations.
TEP may incur additional costs to comply with future changes in federal and state environmental
laws, regulations and permit requirements at existing electric generating facilities. Compliance
with these changes may reduce operating efficiency.
K-123
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
UNS GAS and UNS ELECTRIC COMMITMENTS
At December 31, 2009, UNS Gas had firm non-cancelable purchase commitments for fuel, including
transportation, as described in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Commitments |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
|
|
-Millions of Dollars- |
|
Total Unrecognized Firm Commitments Fuel |
|
$ |
19 |
|
|
$ |
14 |
|
|
$ |
5 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
23 |
|
|
$ |
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS Gas purchases gas from various suppliers at market prices. However, UNS Gas risk of loss due
to increased costs (as a result of changes in the market price of fuel) is mitigated through the
use of the PGA, which provides for pass-through of most fuel costs to customers. UNS Gas forward
gas purchase agreements expire through 2012. Certain of these contracts are at a fixed price per
mmbtu and others are indexed to natural gas prices. UNS Gas has firm transportation agreements with
capacity sufficient to meet its load requirements. These contracts expire in various years between
2011 and 2024.
At December 31, 2009, UNS Electric had various firm non-cancelable purchase commitments as
described in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Commitments |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
|
|
-Millions of Dollars- |
|
Purchased Power |
|
$ |
67 |
|
|
$ |
23 |
|
|
$ |
14 |
|
|
$ |
47 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
151 |
|
Transmission |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrecognized Firm Commitments |
|
$ |
69 |
|
|
$ |
25 |
|
|
$ |
15 |
|
|
$ |
47 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS Electric enters into agreements with various energy suppliers for purchased power at market
prices to meet its energy requirements. In general, these contracts provide for capacity payments
and energy payments based on actual power taken under the contracts. These contracts expire in
various years through 2013. Certain of these contracts are at a fixed price per MW and others are
indexed to natural gas prices. The commitment amounts included in the table above are based on
market prices as of December 31, 2009.
UNS Electric imports the power it purchases over the Western Area Power Administrations (WAPA)
transmission lines. UNS Electrics transmission capacity agreements with WAPA provide for annual
rate adjustments and expire in 2011 and 2017. However, the effects of both purchased power and
transmission cost adjustments are mitigated through a purchased power rate-adjustment mechanism.
UNS
Electric has subject to ACC approval, entered into one long-term purchase power agreement with a renewable energy
generation facility that extends for 20 years. 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.
In addition, UNS Gas and UNS Electrics combined operating lease expense, which is primarily for
office facilities and computer equipment, with varying terms, provisions, and expiration dates was
$1 million in each of the years 2009, 2008 and 2007. UNS Gas and UNS Electrics estimated future
minimum payments under non-cancelable operating leases are approximately $1 million per year from
2010 to 2011 and $2 million thereafter.
K-124
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
MILLENNIUM COMMITMENTS
Millennium has a remaining obligation to fund investments for capital and operations of less than
$1 million over the next 3 years.
UNISOURCE ENERGY COMMITMENTS
UniSource Energy purchased land and plans to construct a new headquarters building on the site.
The construction contract has not yet been executed; however, firm commitments related to the
design phase have been made requiring expenditures of $3 million over the next 18 months.
TEP CONTINGENCIES
El Paso Electric Transmission
In 2006, El Paso filed a complaint to 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, El Paso refunded to TEP $10 million paid for transmission service from Luna during
the pendency of this dispute 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, however, due to the rehearing, TEP deferred recognition of 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 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 these lawsuits.
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). The D.C. Lawsuit alleges, among other things, that the
defendants obtained a favorable coal royalty rate of 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 U.S.
District Court dismissed all claims against Salt River Project. In March 2008, the U.S. District
Court lifted a stay that had been in place since October 2004 and referred pending discovery
related motions to a Magistrate judge. In June 2009, the District Court ordered the parties to
complete fact discovery by February 2010. In February 2010, the District Court issued an Amended
Scheduling Order which extends the February 2010 discovery deadline and sets other procedural
deadlines at various dates between March 2010 and February 2011.
K-125
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
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 Coal Company
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. TEP cannot estimate the impact of any future claims by these gas producers on the cost
of coal at San Juan.
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 December 31, 2009 and 2008, TEP recorded liabilities of $10 million and $9 million,
respectively, based on our $17 million obligation at the expiration dates of the coal supply
agreements in 2011 through 2017.
TEPs PPFAC, as approved in the 2008 TEP Rate Order, allows TEP to pass-through most fuel costs,
including final reclamation costs, to customers. Therefore, in 2008, when TEP reapplied regulatory
accounting to its generation operations, TEP reclassified these costs from fuel expense to a
regulatory asset. TEP will increase the regulatory asset and the 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.
TEP Wholesale Accounts Receivable and Allowances
TEPs Accounts Receivable from Electric Wholesale Sales included $16 million of receivables at
December 31, 2008 related to sales to the California Power Exchange (CPX) and the California
Independent System Operator (CISO) in 2001 and 2000. TEP had recognized a related reserve of $14
million. There are currently pending several proceedings and lawsuits concerning the California
energy crisis related to the FERC, wholesale power suppliers, Southern California Edison Company,
Pacific Gas and Electric Company, the CPX and the CISO, where the parties are seeking refunds of $4
million. TEPs cost to litigate these matters is expected to increase substantially as the
proceedings enter the trial phase in 2010. In light of this, TEP re-engaged in settlement
discussions with the plaintiffs in the fourth quarter of 2009. In December 2009, based on those
settlement discussions, TEP wrote off the remaining receivable balance of $2 million and accrued an
additional liability of $2 million. TEP believes it is adequately reserved but we cannot predict
the final outcome of the settlement discussions or lawsuits at this time.
K-126
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
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 December 31, 2009, 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.
Sierra Club San Juan Allegations
In December 2009, the Sierra Club sent TEP, the other owners of the San Juan Generating Station
(SJGS), and San Juan Coal Company (SJCC), a Notice of Intent to Sue (RCRA Notice) under the
Resource Conservation and Recovery Act (RCRA). The RCRA Notice alleges 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 and that
placement of CCBs at the mine constitute open dumping in violation of RCRA. Additionally, TEP
has been informed that the Sierra Club sent SJCC a separate Notice of Intent to Sue (SMCRA Notice)
under the Surface Mine Control and Reclamation Act (SMCRA) in December 2009. The SMCRA Notice
similarly alleges damage to the environment due to activities at the San Juan mine, including the
placement of CCBs from SJGS in the surface pits at the mine. Both Notices state Sierra Clubs
intent to file citizens suits to pursue these claims upon expiration of the RCRA and SMRCA
statutory notice periods. If suits are filed, potential remedies include the imposition of civil
penalties and injunctive relief. TEP and Public Service Company of New Mexico, the SJGS operator,
plan an aggressive defense of the RCRA claims. TEP cannot predict the outcome of these matters at
this time.
GUARANTEES AND INDEMNITIES
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 senior unsecured notes issued by UNS Gas ($100 million) and by UNS
Electric ($100 million), |
|
|
|
|
UES guarantee of the $60 million UNS Gas/UNS Electric Revolver, and |
|
|
|
|
UniSource Energys guarantee of approximately $2 million in building lease payments for
UNS Gas, and |
|
|
|
|
UniSource Energys guarantee of the $26 million of outstanding loans under the UED
Credit Agreement. In February 2010, UED increased its borrowings under this agreement to
$35 million. As a result, UniSource Energy increased its guarantee to $35 million. |
K-127
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
To the extent liabilities exist under these contracts, the liabilities are included in our
consolidated balance sheets.
In January 2010, TEP entered into an agreement to purchase 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.
K-128
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
NOTE 5. UTILITY PLANT AND JOINTLY-OWNED FACILITIES
UTILITY PLANT
The following table shows Utility Plant in Service by company and major class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
- Millions of Dollars - |
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
|
|
|
|
UniSource |
|
|
|
TEP |
|
|
UNS Gas |
|
|
Electric |
|
|
UED |
|
|
Energy |
|
Plant in Service: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Generation Plant |
|
$ |
1,527 |
|
|
$ |
|
|
|
$ |
17 |
|
|
$ |
61 |
|
|
$ |
1,605 |
|
Electric Transmission Plant |
|
|
682 |
|
|
|
|
|
|
|
30 |
|
|
|
4 |
|
|
|
716 |
|
Electric Distribution Plant |
|
|
1,110 |
|
|
|
|
|
|
|
185 |
|
|
|
|
|
|
|
1,295 |
|
Gas Distribution Plant |
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
216 |
|
Gas Transmission Plant |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
18 |
|
General Plant |
|
|
178 |
|
|
|
15 |
|
|
|
11 |
|
|
|
|
|
|
|
204 |
|
Computer Software |
|
|
82 |
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
87 |
|
Electric Plant Held for Future Use |
|
|
5 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Plant in Service |
|
$ |
3,584 |
|
|
$ |
250 |
|
|
$ |
248 |
|
|
$ |
65 |
|
|
$ |
4,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Plant under Capital Leases |
|
$ |
720 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
- Millions of Dollars - |
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
|
|
|
|
UniSource |
|
|
|
TEP |
|
|
UNS Gas |
|
|
Electric |
|
|
UED |
|
|
Energy |
|
Plant in Service: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Generation Plant |
|
$ |
1,398 |
|
|
$ |
|
|
|
$ |
17 |
|
|
$ |
58 |
|
|
$ |
1,473 |
|
Electric Transmission Plant |
|
|
660 |
|
|
|
|
|
|
|
29 |
|
|
|
4 |
|
|
|
693 |
|
Electric Distribution Plant |
|
|
1,044 |
|
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
1,207 |
|
Gas Distribution Plant |
|
|
|
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
201 |
|
Gas Transmission Plant |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
18 |
|
General Plant |
|
|
173 |
|
|
|
14 |
|
|
|
9 |
|
|
|
|
|
|
|
196 |
|
Computer Software |
|
|
71 |
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
76 |
|
Electric Plant Held for Future Use |
|
|
5 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Plant in Service |
|
$ |
3,351 |
|
|
$ |
234 |
|
|
$ |
223 |
|
|
$ |
62 |
|
|
$ |
3,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Plant under Capital Leases |
|
$ |
701 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
702 |
|
TEPS UTILITY OPERATING STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Generation and Purchased Power kWh (000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remote Generation (Coal) |
|
|
9,576,873 |
|
|
|
10,438,864 |
|
|
|
11,001,318 |
|
|
|
10,854,710 |
|
|
|
10,059,315 |
|
Local Tucson Generation (Oil, Gas & Coal) |
|
|
711,420 |
|
|
|
1,039,362 |
|
|
|
1,088,778 |
|
|
|
966,476 |
|
|
|
1,165,001 |
|
Purchased Power |
|
|
3,085,805 |
|
|
|
2,947,749 |
|
|
|
2,046,864 |
|
|
|
1,680,495 |
|
|
|
1,638,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Generation and Purchased Power |
|
|
13,374,098 |
|
|
|
14,425,975 |
|
|
|
14,136,960 |
|
|
|
13,501,681 |
|
|
|
12,863,053 |
|
Less Losses and Company Use |
|
|
948,463 |
|
|
|
954,643 |
|
|
|
944,024 |
|
|
|
885,120 |
|
|
|
806,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Energy Sold |
|
|
12,425,635 |
|
|
|
13,471,332 |
|
|
|
13,192,936 |
|
|
|
12,616,561 |
|
|
|
12,056,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEPs unamortized computer software costs were $31 million as of December 31, 2009
and $29 million as of December 31, 2008. UNS Gas and UNS Electric had unamortized
computer software costs of $1 million as of December 31, 2009 and as of December 31, 2008.
All TEP Utility Plant under Capital Leases is used in TEPs generation operations and amortized
over the primary lease term as described in Notes 1 and 6. The amortization expense on capital
lease assets was $26 million in 2009, and $25 million in each of 2008 and 2007.
K-129
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
The following table reconciles the gross investment in utility plant to net investment in utility
plant, segregated between regulated and non-regulated utility plant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Regulated |
|
|
Non- Regulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
UNS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas |
|
|
Electric |
|
|
|
|
|
|
UniSource |
|
|
|
|
|
|
|
TEP |
|
|
Total |
|
|
Total |
|
|
Total |
|
|
UED |
|
|
Energy |
|
|
|
T&D |
|
|
Gen |
|
|
Plant |
|
|
Plant |
|
|
Plant |
|
|
Plant |
|
|
Total Plant |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Plant in Service |
|
$ |
2,057 |
|
|
$ |
1,527 |
|
|
$ |
3,584 |
|
|
$ |
250 |
|
|
$ |
248 |
|
|
$ |
65 |
|
|
$ |
4,147 |
|
Less Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
Amortization |
|
|
913 |
|
|
|
669 |
|
|
|
1,582 |
|
|
|
15 |
|
|
|
52 |
|
|
|
3 |
|
|
|
1,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Plant in Service |
|
$ |
1,144 |
|
|
$ |
858 |
|
|
$ |
2,002 |
|
|
$ |
235 |
|
|
$ |
196 |
|
|
$ |
62 |
|
|
$ |
2,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Regulated |
|
|
Non- Regulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
UNS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas |
|
|
Electric |
|
|
|
|
|
UniSource |
|
|
|
|
|
|
|
TEP |
|
|
Total |
|
|
Total |
|
|
Total |
|
|
UED |
|
|
Energy |
|
|
|
T&D |
|
|
Gen |
|
|
Plant |
|
|
Plant |
|
|
Plant |
|
|
Plant |
|
|
Total Plant |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Plant in Service |
|
$ |
1,953 |
|
|
$ |
1,398 |
|
|
$ |
3,351 |
|
|
$ |
234 |
|
|
$ |
223 |
|
|
$ |
62 |
|
|
$ |
3,870 |
|
Less Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
Amortization |
|
|
865 |
|
|
|
667 |
|
|
|
1,532 |
|
|
|
9 |
|
|
|
39 |
|
|
|
1 |
|
|
|
1,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Plant in Service |
|
$ |
1,088 |
|
|
$ |
731 |
|
|
$ |
1,819 |
|
|
$ |
225 |
|
|
$ |
184 |
|
|
$ |
61 |
|
|
$ |
2,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The category T&D includes all transmission and distribution Plant in Service. The category Gen
includes the generation assets. Rates for utility operations appearing in this table are set by
the ACC on a cost-of-service basis, and are accounted for under the provisions of regulatory
accounting for all periods except those assets owned by UED.
The depreciable lives as of December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS Gas, |
|
|
|
|
|
|
|
UNS Electric |
|
Major Class of Utility Plant in Service |
|
TEP |
|
|
& UED |
|
|
|
|
|
|
|
|
|
|
Electric Generation Plant |
|
7-59 years |
|
38-49 years |
Electric Transmission Plant |
|
10-50 years |
|
20-50 years |
Electric Distribution Plant |
|
28-60 years |
|
23-50 years |
Gas Distribution Plant |
|
|
n/a |
|
|
30-65 years |
Gas Transmission Plant |
|
|
n/a |
|
|
30-55 years |
General Plant |
|
5-31 years |
|
5-40 years |
Intangible Plant |
|
3-15 years |
|
5-32 years |
See TEP Utility Plant in Note 1 and TEP Capital Lease Obligations in Note 6.
K-130
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
JOINTLY-OWNED FACILITIES
At December 31, 2009, TEPs interests in jointly-owned generating stations and transmission systems
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant |
|
|
Construction |
|
|
|
|
|
|
Ownership |
|
|
in |
|
|
Work in |
|
|
Accumulated |
|
|
|
Percentage |
|
|
Service |
|
|
Progress |
|
|
Depreciation |
|
|
|
-Millions of Dollars- |
|
San Juan Units 1 and 2 |
|
|
50.0 |
% |
|
$ |
416 |
|
|
$ |
5 |
|
|
$ |
209 |
|
Navajo Station Units 1, 2 and 3 |
|
|
7.5 |
|
|
|
138 |
|
|
|
3 |
|
|
|
86 |
|
Four Corners Units 4 and 5 |
|
|
7.0 |
|
|
|
89 |
|
|
|
5 |
|
|
|
67 |
|
Transmission Facilities |
|
|
7.5 to 95.0 |
|
|
|
243 |
|
|
|
|
|
|
|
177 |
|
Luna Energy Facility |
|
|
33.3 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
936 |
|
|
$ |
13 |
|
|
$ |
539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP has financed or provided funds for the above facilities and TEPs share of their operating
expenses is reflected in the income statements. See Note 4 for commitments related to TEPs
jointly-owned facilities.
NOTE 6. DEBT, CREDIT FACILITIES, AND CAPITAL LEASE OBLIGATIONS
Long-term debt matures more than one year from the date of the financial statements. We summarize
UniSource Energy and TEPs long-term debt in the statements of capitalization.
UNISOURCE ENERGY DEBT
Convertible Senior Notes
UniSource Energy has $150 million of 4.50% Convertible Senior Notes (Convertible Senior Notes) due
2035. The Convertible Senior Notes are unsecured and are not guaranteed by TEP or any other
UniSource Energy subsidiary. Each $1,000 of Convertible Senior Notes is convertible into 27.427
shares of UniSource Energy Common Stock at any time, representing a conversion price of
approximately $36.46 per share of our Common Stock, subject to adjustment in certain circumstances.
Beginning on March 5, 2010, UniSource Energy will have the option to redeem the Convertible Senior
Notes, in whole or in part, for cash at a price equal to 100% of the principal amount plus accrued
interest. Holders of the Convertible Senior Notes may require UniSource Energy to repurchase the
Convertible Senior Notes, in whole or in part, for cash on March 1, 2015, 2020, 2025 and 2030, or
if certain change of control transactions occur, or if our common stock is no longer listed on a
national securities exchange. The repurchase price will be 100% of the principal amount of the
Convertible Senior Notes plus accrued interest.
K-131
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
TEP DEBT
2009 Sale and Redemption of Bonds
In October 2009, the Pima Authority issued approximately $80 million of its 2009 Series A
tax-exempt pollution control bonds (2009 Pima A San Juan Bonds) for TEPs benefit. At the same
time, the Coconino County, Arizona Pollution Control Corporation (Coconino PCC) issued
approximately $15 million of its 2009 Series A tax-exempt pollution control bonds (2009 Coconino A
Bonds) for TEPs benefit. The 2009 Pima A San Juan Bonds are unsecured, bear interest at a rate of
4.95%, mature on October 1, 2020, and are not callable prior to maturity. The 2009 Coconino A
Bonds are unsecured, bear interest at 5.125%, mature on October 1, 2032, and are callable in whole
or in part for cash at par beginning October 1, 2019. Semi-annual interest payments on both series
of bonds are payable beginning April 1, 2010. TEP capitalized approximately $1 million in costs
related to the issuance of these bonds and will amortize the costs for each through the respective
maturity dates.
The proceeds from the issuance of the 2009 Pima A San Juan Bonds and the 2009 Coconino A Bonds were
deposited with a trustee and were used on November 2, 2009, to redeem approximately $80 million of
6.95% 1997 Series A City of Farmington, New Mexico Pollution Control Bonds and approximately $15
million of 7.0% 1997 Series B Coconino County, Arizona Pollution Control Bonds.
Collateral Trust Bonds
In 1998, TEP issued a total of $140 million, 7.5% Collateral Trust Bonds, due August, 2008. TEP
retired these bonds in 2008. See 2008 Pima A and 2008 Pima B Bonds below.
2008 Pima A Bonds
In March 2008, The Industrial Development Authority of Pima County (Pima Authority) issued, for the
benefit of TEP, approximately $91 million of its 2008 Series A tax-exempt, unsecured, 6.375% bonds
(2008 Pima A Bonds) due September 1, 2029. The proceeds were used to redeem a corresponding
principal amount of bonds previously issued by the Pima Authority for TEPs benefit, which TEP
repurchased in 2005. In 2005, TEP did not cancel the repurchased bonds, which remained outstanding
under their respective indentures but were not reflected as debt on the balance sheet. As holder
of the repurchased bonds, TEP received the payment of the redemption price.
TEP used the redemption proceeds to repay $75 million in revolving loans outstanding under its
revolving credit facility. The remaining proceeds were used in May 2008 to redeem $10 million of
the $138 million 7.5% Collateral Trust Bonds due August 2008. TEP capitalized $1 million of costs
related to the issuance of the 2008 Pima A Bonds and will amortize these costs through August 2029,
the term of the bonds.
Interest on the 2008 Pima A Bonds is payable semi-annually, commencing on September 1, 2008.
Beginning in March 2013, TEP will have the option to redeem the 2008 Pima A Bonds, in whole or in
part, for cash, at a price equal to 100% of the principal amount, plus accrued interest.
2008 Pima B Bonds
In June 2008, the Pima Authority issued for TEPs benefit, $130 million of its 2008 Series B
tax-exempt variable rate IDBs (2008 Pima B Bonds) due September 1, 2029. The 2008 Pima B Bonds
were supported by a letter of credit (LOC) issued under the TEP 2008 Letter of Credit Facility.
The LOC was secured by $132 million of 1992 Mortgage Bonds. The proceeds were used to redeem a
corresponding principal amount of bonds previously issued by the Pima Authority for TEPs benefit
which TEP repurchased in 2005. TEP did not cancel the repurchased bonds, which remained
outstanding under their respective indentures but were not reflected as debt on the balance sheet.
As holder of the repurchased bonds being redeemed, TEP received the payment of the redemption
price.
K-132
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
TEP deposited the redemption proceeds with the trustee for its 7.5% Collateral Trust Bonds. In
August 2008, the deposit was applied to the payment of $128 million of principal plus $5 million of
accrued interest on such bonds at maturity. TEP was required to deposit these funds with the
trustee pursuant to amendments dated May 30, 2008 to the TEP Credit Agreement and the 2008 TEP
Letter of Credit Facility. These amendments allowed TEP to exclude the $128 million of Collateral
Trust Bonds to be retired in August 2008 from Total Indebtedness for the calculation of its
leverage ratio covenant at June 30, 2008.
While in the variable rate mode, the 2008 Pima B Bonds accrued interest at a rate which reset
weekly. The average weekly interest rate on the 2008 Pima B Bonds ranged from 0.50% to 8.25%, with
an average rate of 2.03% for 2008, and from 0.15% to 0.75%, with an average rate of 0.34% for 2009.
The peak weekly rate of 8.25% occurred in mid-September 2008, when the short-term debt markets
began to experience significant disruptions related to the creditworthiness of several large
financial institutions. The rate on this debt was 0.30% and 0.75%,
respectively, as of December 31,
2009 and 2008. TEP paid a remarketing fee of 10 basis points (bps) to the remarketing agent of the
bonds, an LOC fee of 65 bps to the lenders, and an LOC issuing fee of 12.5 bps to the issuing bank.
In January 2010, TEP converted the interest on the 2008 Pima B to a fixed rate. The Pima B Bonds
were reoffered in January 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 LOC was terminated on January 12, 2010 and the mortgage
bonds were canceled.
TEP capitalized $1 million of costs related to the issuance of the 2008 Pima B Bonds and will
amortize these costs through August 2029. TEP capitalized approximately $2 million of costs
related to the reoffering in January 2010 and will amortize these costs through August 2029.
Variable Rate Industrial Development Bonds (IDBs)
Weighted average interest rates on this variable rate tax-exempt IDBs debt ranged from 0.25% to
0.79% during 2009, and from 0.55% to 8.09% during 2008, and the average interest rate on such debt
was 0.41% in 2009, and 2.11% in 2008. In August 2009, TEP entered into an interest rate swap that
had the effect of converting $50 million of variable rate industrial development bonds to a fixed
rate of 2.4% from September 2009 through September 2014.
1992 Mortgage
TEPs 1992 Mortgage creates liens on and security interests in most of TEPs utility plant assets,
with the exception of Springerville Unit 2. San Carlos Resources Inc., a wholly-owned subsidiary
of TEP, holds title to Springerville Unit 2. Utility Plant under Capital Leases is not subject to
such liens or available to TEP creditors, other than the lessors. The net book value of TEPs
utility plant subject to the lien of the indenture was approximately $2 billion at December 31,
2009.
TEP CAPITAL LEASE OBLIGATIONS
In January 2010, TEP entered into an agreement to purchase 100% of the equity interest in Sundt
Unit 4 from the owner participant for $52 million. The purchase price is subject to increase by
0.75% of the purchase price per month in the event that the purchase occurs after March 31, 2010.
TEP expects to finalize the purchase prior to March 31, 2010. Following the completion of the
transaction, TEP expects to repay the remaining Sundt Unit 4 lease obligation of $5 million.
K-133
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
The terms of TEPs other capital leases are as follows:
|
|
|
The Springerville Common Facilities Leases have an initial term to December 2017 for
one lease and January 2021 for the other two leases, subject to optional renewal periods
of two or more years through 2025. |
|
|
|
|
The Springerville Unit 1 Leases have an initial term to January 2015 and provide for
renewal periods of three or more years through 2030. |
|
|
|
|
The Springerville Coal Handling Facilities Leases have an initial term to April 2015
and provide for one renewal period of six years, then additional renewal periods of five
or more years through 2035. |
Effective with commercial operation of Springerville Unit 3 in July 2006 and Springerville Unit 4
in December 2009, Tri-State and SRP are reimbursing TEP for various operating costs related to the
common facilities on an ongoing basis, including 14% each of the Springerville Common Lease
payments and 17% each of the Springerville Coal Handling Facilities Lease payments. TEP remains
the obligor under these capital leases, and Capital Lease Obligations do not reflect any reduction
associated with this reimbursement. Lease expenses reimbursed by Tri-State were $7 million in each
of 2009, 2008 and 2007.
TEP has agreed with the owners of Springerville Units 3 and 4 that, upon expiration of the
Springerville Coal Handling Facilities and Common Leases, TEP will acquire the leased interest in
the facilities at fixed prices of $120 million in 2015, $38 million in 2017, and $68 million in
2021. Upon such acquisitions by TEP, each of the owners of Unit 3 and Unit 4 have the obligation
to purchase or continue renting from TEP a 17% and 14% interest, respectively, in such facilities.
On or before the Springerville Unit 1 Lease expiration date, TEP will determine if it will either:
a) purchase the assets at the fair market value; b) extend the lease term; or c) not continue with
an interest in Springerville Unit 1.
In January 2010, through scheduled lease payments, TEP reduced its capital lease obligation by $40
million.
Investments in Springerville Lease Debt and Equity
In March 2009, TEP purchased $31 million of Springerville Unit 1 lease debt which included a
premium that will be amortized over the remaining term of the lease debt. TEPs investment in
Springerville Unit 1 lease debt totaled $88 million at December 31, 2009 and $59 million at
December 31, 2008. TEP also held an undivided equity ownership interest in the Springerville Unit
1 lease totaling $37 million at December 31, 2009 and $48 million at December 31, 2008. TEP held
an investment in Springerville Coal Handling Facilities lease debt totaling $7 million at December
31, 2009 and $20 million at December 31, 2008.
Interest Rate Swaps Springerville Common Facilities Lease Debt
In June 2006 and in May 2009, TEP entered into interest rate swaps to hedge the floating interest
rate risk associated with the Springerville Common Facilities Lease debt. Interest on the lease
debt is payable at six-month LIBOR plus a spread. The applicable spread was 1.625% as of December
31, 2009 and 1.5% as of December 31, 2008. The swaps have the effect of fixing the interest rates
on the amortizing principal balances as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR |
|
Outstanding at December 31, 2009 |
|
Fixed Ratio |
|
|
Spread |
|
$35 million |
|
|
5.77 |
% |
|
|
1.625 |
% |
$23 million |
|
|
3.18 |
% |
|
|
1.625 |
% |
$7 million |
|
|
3.32 |
% |
|
|
1.625 |
% |
K-134
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
These interest rate swaps have been recorded by TEP as a cash flow hedge for financial reporting
purposes. See Note 18.
UNS ELECTRIC LONG-TERM DEBT
UNS Electric has $100 million of senior unsecured debt; $50 million at 6.5%, due 2015 and $50
million at 7.1%, due 2023 (UNS Electric 2008 Long-Term Debt). The UNS Electric Long-Term Debt is
guaranteed by UES. The notes may be prepaid with a make-whole call premium reflecting a discount
rate equal to an equivalent maturity U.S. Treasury security yield plus 50 basis points.
The UNS Electric Long-Term Debt contains certain restrictive covenants, including restrictions on
transactions with affiliates, mergers, liens to secure indebtedness, restricted payments and
incurrence of indebtedness. As of December 31, 2009, UNS Electric was in compliance with the
covenants.
UNS Electric must meet a leverage test and an interest coverage test to issue additional debt or to
pay dividends. However, UNS Electric may, without meeting these tests, refinance existing debt and
incur up to $5 million in short-term debt.
UNS GAS LONG-TERM DEBT
UNS Gas has $100 million of senior unsecured notes outstanding, consisting of $50 million at 6.23%,
due August 2011, and $50 million at 6.23%, due August 2015. The notes may be prepaid with a
make-whole call premium reflecting a discount rate equal to an equivalent maturity U.S. Treasury
security yield plus 50 basis points. UES guarantees the notes.
UNS Gas must meet a leverage test and an interest coverage test to issue additional debt or to pay
dividends. UNS Gas may refinance existing debt and incur up to $7 million in short-term debt.
The UNS
Gas Long-Term Debt contains certain restrictive covenants, including restrictions on
transactions with affiliates, mergers, liens to secure indebtedness, restricted payments and
incurrence of indebtedness. As of December 31, 2009, UNS Gas was in compliance with the terms of
its note purchase agreement.
UNISOURCE ENERGY CREDIT AGREEMENT
The UniSource Energy Credit Agreement consists of a $30 million amortizing term loan facility and a
$70 million revolving credit facility and matures in August 2011. UniSource Energys obligations
under the UniSource Credit Agreement are secured by a pledge of the capital stock of Millennium,
UES and UED.
At December 31, 2009 the following balances were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Long- |
|
|
|
|
|
|
Current |
|
|
Long- |
|
|
|
|
|
|
Liabilities |
|
|
Term Debt |
|
|
Total |
|
|
Liabilities |
|
|
Term Debt |
|
|
Total |
|
|
|
- Millions of Dollars- |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
Revolver |
|
$ |
|
|
|
$ |
31 |
|
|
$ |
31 |
|
|
$ |
|
|
|
$ |
43 |
|
|
$ |
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan |
|
$ |
6 |
|
|
$ |
3 |
|
|
$ |
9 |
|
|
$ |
6 |
|
|
$ |
9 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Interest Rate on
the Revolver and
Term Loan |
|
|
|
|
|
|
|
|
|
|
1.48 |
% |
|
|
|
|
|
|
|
|
|
|
2.48 |
% |
K-135
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
We have included the revolver borrowings in Long-Term Debt as UniSource Energy has the ability and
the intent to have outstanding borrowings for the next twelve months. As of February 25, 2010,
outstanding borrowings under the UniSource Energy Credit Agreement were $15 million.
Principal payments of $1.5 million on the outstanding term loan are due quarterly, with the balance
due at maturity. 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 Energy 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
interest coverage ratio for UniSource Energy on a standalone basis and (2) a maximum leverage ratio
on a consolidated basis. In September 2008, as a result of higher than expected fuel and purchased
power costs, UniSource Energy amended the UniSource Energy Credit Agreement to provide more
flexibility to meet the leverage ratio test for the next four calendar quarters, ending June 30,
2009. In February 2009, the leverage ratio in the UniSource Credit Agreement was further amended
through August 2011. The leverage ratio is calculated as the ratio of consolidated total
indebtedness to consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA). As of December 31, 2009, UniSource Energy was in compliance with the terms of its credit
agreement.
UniSource Energy may pay dividends if, after giving effect to the dividend payment, it has more
than $15 million of unrestricted cash and unused revolving credit.
TEP CREDIT AGREEMENT
The TEP Credit Agreement consists of a $150 million revolving credit facility, and a $341 million
LOC facility which supports $329 million of tax-exempt Variable Rate IDBs. The TEP Credit
Agreement matures in August 2011 and is secured by $491 million of mortgage bonds issued under the
1992 Mortgage, which creates a lien on and security interest in most of TEPs utility plant assets.
The $150 million revolving credit facility may be used for revolver borrowings as well as to issue
letters of credit. TEP issues letters of credit to provide credit enhancements to counterparties
for power and gas procurement and hedging activities.
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. TEP has the option of paying interest on
borrowings under the revolving credit facility at LIBOR plus 0.45% or the greater of the federal
funds rate plus 0.5% or the agent banks reference rate.
The TEP Credit Agreement restricts additional indebtedness, liens, sale of assets and
sale-leaseback agreements. The TEP Credit Agreement also requires TEP to meet a minimum cash
coverage ratio and a maximum leverage ratio. If TEP complies with the terms of the TEP Credit
Agreement, TEP may pay dividends to UniSource Energy.
In September 2008, as a result of higher than expected fuel and purchased power costs, TEP amended
the TEP Credit Agreement, to provide more flexibility to meet the leverage ratio test for the next
four calendar quarters, ending June 30, 2009. The leverage ratio is calculated as the ratio of
consolidated total indebtedness to EBITDA. As of December 31, 2009, TEP was in compliance with all
the terms of its credit agreement.
As of December 31, 2009, TEP had $35 million in borrowings and $1 million outstanding in letters of
credit under its revolving credit facility. As of December 31, 2008, TEP had $10 million in loans
outstanding under its revolving credit facility and $1 million outstanding in letters of credit.
The revolving loan balances are included in Current Liabilities in the UniSource Energy and TEP
balance sheets. The outstanding letters of credit are off-balance
sheet obligations of TEP. As of February 25, 2009, TEP had
$50 million in borrowings and $1 million outstanding in letters of
credit under its revolving credit facility.
K-136
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
TEP Letter of Credit Facility
In April 2008, TEP entered into a three-year $132 million letter of credit and reimbursement
agreement (2008 TEP Letter of Credit Facility). The 2008 TEP Letter of Credit Facility supported
$130 million aggregate principal amount of variable rate tax-exempt IDBs that were issued on behalf
of TEP in June 2008. (See 2008 Pima B Bonds above).
Interest rates and fees under the 2008 TEP Letter of Credit Facility were based on a pricing grid
tied to TEPs credit ratings. Based on TEPs current credit ratings, the letter of credit fees
were 0.65% per annum during the first two years and 0.775% in the third year.
The TEP Letter of Credit Facility contained substantially the same restrictive covenants as the TEP
Credit Agreement described above. As of December 31, 2009, TEP was in compliance with all the
terms of the TEP Letter of Credit Facility. The TEP Letter of Credit Facility was terminated in
January 2010 at the time of the fixed rate conversion of the 2008 Pima B Bonds (See 2008 Pima B
Bonds above).
UNS GAS/UNS ELECTRIC CREDIT AGREEMENT
The UNS Gas/UNS Electric Revolver is a $60 million revolving credit facility which matures in
August 2011. Either UNS Gas or UNS Electric may borrow up to a maximum of $45 million, so long as
the combined amount borrowed does not exceed $60 million. UNS Gas is only liable for UNS Gas
borrowings, and similarly, UNS Electric is only liable for UNS Electrics borrowings under the UNS
Gas/UNS Electric Revolver. UES guarantees the obligations of both UNS Gas and UNS Electric. The
UNS Gas/UNS Electric Revolver may be used to issue letters of credit, as well as for revolver
borrowings. UNS Gas and UNS Electric issue letters of credit, which are off-balance sheet
obligations, to support power and gas purchases and hedges.
UNS Gas and UNS Electric each have the option of paying interest at LIBOR plus 1.0% or the greater
of the federal funds rate plus 0.5% or the agent banks reference rate.
The UNS Gas/UNS Electric Revolver contains restrictions on additional indebtedness, liens,
dividends, mergers and sales of assets. The UNS Gas/UNS Electric Revolver also contains a maximum
leverage ratio and a minimum cash flow to interest coverage ratio for each borrower. As of
December 31, 2009, UNS Gas and UNS Electric were each in compliance with the terms of the UNS
Gas/UNS Electric Revolver.
The borrowings under the UNS Gas/UNS Electric Revolver were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS |
|
|
UNS |
|
|
UNS |
|
|
UNS |
|
|
|
Gas |
|
|
Electric |
|
|
Gas |
|
|
Electric |
|
|
|
-Millions of Dollars- |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
Balance on the Revolver |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Letters of Credit |
|
$ |
|
|
|
$ |
11 |
|
|
$ |
10 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, UNS Electrics borrowings under the UNS Gas/UNS Electric Revolver were
excluded from Current Liabilities and presented as Long-Term Debt, as UNS Electric has the ability
and the intent to keep the borrowings outstanding under the UNS Gas/UNS Electric Revolver for the
next twelve months.
K-137
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
UED BORROWINGS
In March 2009, UED entered into a 364-day, $30 million senior secured term loan facility. The loan
is guaranteed by UniSource Energy and is secured by a lien of substantially all the assets of UED,
including the BMGS and an assignment of UEDs PPA with UNS Electric. UED has the option of paying
interest on the loan facility at LIBOR plus 3% or an alternative base rate plus 2%. The
alternative base rate is the greater of federal funds plus 0.5%, the agent banks reference rate or
one-month LIBOR plus 1%. The terms of the facility require UED to make quarterly excess cash flow
payments. UED paid $1 million in debt issuance costs which are being amortized to interest expense
over one year, the term of the loan. UED used the proceeds of the loan to pay a dividend of $30
million to UniSource Energy. As of
December 31, 2009, UED owed $26 million under the senior secured term loan facility. In February
2010, UED amended its term loan facility to extend the termination date by two years to March 2012
and had net additional borrowings of $9 million bringing the outstanding balance to $35 million. UED
capitalized less than $1 million in costs related to the transaction.
DEBT MATURITIES
Long-term debt, including term loan payments, revolving credit facilities classified as long-term,
and capital lease obligations mature on the following dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate IDBs |
|
|
TEP |
|
|
TEP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource |
|
|
|
|
|
|
Supported |
|
|
Scheduled |
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
|
|
|
|
by Letters |
|
|
Debt |
|
|
Lease |
|
|
TEP |
|
|
UNS |
|
|
UNS |
|
|
(includes |
|
|
|
|
|
|
of Credit |
|
|
Retirements |
|
|
Obligations |
|
|
Total |
|
|
Gas |
|
|
Electric |
|
|
UED) |
|
|
Total |
|
|
|
- Millions of Dollars - |
|
2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
93 |
|
|
$ |
93 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
32 |
|
|
$ |
125 |
|
2011 |
|
|
459 |
|
|
|
|
|
|
|
107 |
|
|
|
566 |
|
|
|
50 |
|
|
|
|
|
|
|
34 |
|
|
|
650 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
118 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2010 2014 |
|
|
459 |
|
|
|
|
|
|
|
635 |
|
|
|
1,094 |
|
|
|
50 |
|
|
|
|
|
|
|
66 |
|
|
|
1,210 |
|
Thereafter |
|
|
|
|
|
|
445 |
|
|
|
103 |
|
|
|
548 |
|
|
|
50 |
|
|
|
100 |
|
|
|
150 |
|
|
|
848 |
|
Less: Imputed
Interest |
|
|
|
|
|
|
|
|
|
|
(209 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
459 |
|
|
$ |
445 |
|
|
$ |
529 |
|
|
$ |
1,433 |
|
|
$ |
100 |
|
|
$ |
100 |
|
|
$ |
216 |
|
|
$ |
1,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEPs Variable Rate IDBs are backed by a $341 million LOC issued pursuant to TEPs Credit Agreement
which expires in August 2011 and TEPs $132 million Letter of Credit Facility which was terminated
in January 2010. Although the Variable Rate IDBs mature between 2018 and 2029, the above table
reflects a redemption or repurchase of such bonds in 2011 as though the LOCs terminate without
replacement upon expiration of the TEP Credit Agreement.
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, UEDs term loan, 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. |
K-138
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
Investments in Lease Debt and Equity: TEP calculated the present value of remaining cash
flows at the balance sheet date using current market rates 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. |
|
|
|
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 amount recorded in the balance sheet (carrying value) and the estimated
fair values of our financial instruments included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
|
-Millions of Dollars- |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP Investment in Lease Debt and Equity |
|
$ |
132 |
|
|
$ |
140 |
|
|
$ |
127 |
|
|
$ |
144 |
|
Millennium Note Receivable |
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate Long-Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
445 |
|
|
|
336 |
|
|
|
445 |
|
|
|
322 |
|
UniSource Energy |
|
|
795 |
|
|
|
693 |
|
|
|
795 |
|
|
|
661 |
|
Variable Rate Long-Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
459 |
|
|
|
452 |
|
|
|
459 |
|
|
|
441 |
|
UniSource Energy |
|
|
459 |
|
|
|
452 |
|
|
|
459 |
|
|
|
441 |
|
See Note 6 for a description of TEPs investment in Springerville Lease Debt and Equity. TEP
intends to hold the $95 million investment in Springerville Lease Debt Securities to maturity
(Springerville Coal Handling Facilities lease debt totaling $7 million matures through July 1,
2011, and Springerville Unit 1 lease debt totaling $88 million matures through January 1, 2013).
This investment is stated at amortized cost, which means the purchase cost has been adjusted for
the amortization of the premium and discount to maturity.
NOTE 8. STOCKHOLDERS EQUITY
DIVIDEND LIMITATIONS
UniSource Energy
Our ability to pay cash dividends on Common Stock outstanding depends, in part, upon cash flows
from our subsidiaries: TEP, UES, Millennium and UED, as well as compliance with various debt
covenant requirements. As of December 31, 2009, we complied with the terms of all such debt
covenant requirements. Because UNS and all of its subsidiaries are in compliance with their debt covenants at December 31, 2009, there are no amounts of net income which are restricted.
K-139
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
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, will be
paid on March 8, 2010 to common shareholders of record as of February 23, 2010. In 2009, UniSource
Energy paid quarterly dividends to the shareholders of $0.29 per share, for a total of $1.16 per
share, or $41 million for the year. In 2008, UniSource Energy paid quarterly dividends to the
shareholders of $0.24 per share, for a total of $0.96 per share, or $34 million, for the year.
During 2007, UniSource Energy paid quarterly dividends to the shareholders of $0.225 per share, for
a total of $0.90 per share, or $32 million, for the year.
In 2008, UniSource Energys dividend to the shareholders of $34 million exceeded its retained
earnings. As a result, we recorded dividends of $14 million against retained earnings and
dividends of $20 million against common stock. UniSource Energy has no additional paid-in capital. Such dividends do not
represent a return of capital dividend for income tax purposes.
TEP
TEP paid dividends to UniSource Energy of $60 million in 2009, $3 million in 2008, and $53 million
in 2007. In 2009, TEP recorded $0.8 million of dividend equivalents related to restricted stock
units as dividends. UniSource Energy is the holder of TEPs common stock. TEP met the requirements
discussed below before paying these dividends.
UniSource Energy contributed capital to TEP of $30 million in 2009 and $18 million in 2007.
Bank Credit Agreement
TEPs Credit Agreement as of August 2006 allows TEP to pay dividends as long as TEP complies with
the agreement and certain financial covenants including quarterly limits on the ratio of total
indebtedness to total earnings before interest expense/income, income taxes and non-cash items.
TEP is in compliance with these covenants.
Federal Power Act
This Act states that dividends shall not be paid out of funds properly included in capital
accounts. TEPs 2009, 2008 and 2007 dividends were paid from current year earnings.
UNS Gas and UNS Electric
The terms of the senior unsecured note agreements entered into by both UNS Gas and UNS Electric
contain dividend restrictions. See Note 6. UES did not pay any dividends to UniSource Energy in
2009, 2008 or 2007.
UES made capital contributions to UNS Electric of less than $0.5 million in 2008.
UniSource Energy made no capital contributions to UNS Electric in 2009 and 2008. UniSource Energy
made capital contributions to UNS Electric of $10 million in 2007.
Millennium and UED
Millennium paid dividends of $4 million to UniSource Energy in January 2010, $3 million in 2009,
$25 million in 2008 and $15 million in 2007, all of which represented return of capital
distributions.
UED paid dividends to UniSource Energy of $9 million in February 2010, $4 million of which
represented return of capital distributions; $30 million in 2009 which represented return of
capital distributions; and $0.5 million in 2008. Millennium and UED have no dividend restrictions.
K-140
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
In December 2008, UniSource Energy contributed $59 million in capital to UED by canceling an
intercompany promissory note in the amount of $59 million. Borrowings under the promissory note
were used to finance the development of BMGS.
NOTE 9. INCOME TAXES
A reconciliation of the federal statutory income tax rate to each companys effective income tax
rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy |
|
|
TEP |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Income Tax Expense at Statutory Rate |
|
$ |
59 |
|
|
$ |
11 |
|
|
$ |
34 |
|
|
$ |
51 |
|
|
$ |
5 |
|
|
$ |
31 |
|
State Income Tax Expense, Net of Federal Benefit |
|
|
7 |
|
|
|
1 |
|
|
|
5 |
|
|
|
6 |
|
|
|
1 |
|
|
|
4 |
|
Depreciation Differences (Flow Through Basis) |
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
San Juan Generating Station Environmental Penalties |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Federal/State Tax Credits |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
Other |
|
|
(2 |
) |
|
|
3 |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal and State Income Tax Expense |
|
$ |
64 |
|
|
$ |
17 |
|
|
$ |
39 |
|
|
$ |
55 |
|
|
$ |
11 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate |
|
|
38 |
% |
|
|
55 |
% |
|
|
40 |
% |
|
|
38 |
% |
|
|
71 |
% |
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, it was determined that the environmental penalties at San Juan Generating Station would
not be deductible for income tax purposes. As a result, an additional $3 million of tax expense
was recognized in 2008 for penalties incurred in the current and prior years. Other items included
in GAAP expense which will not be deductible for tax were offset by the recognition of income tax
credits.
Income tax expense included in the income statements consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy |
|
|
TEP |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Tax Expense (Benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
5 |
|
|
$ |
(17 |
) |
|
$ |
14 |
|
|
$ |
7 |
|
|
$ |
(12 |
) |
|
$ |
22 |
|
State |
|
|
|
|
|
|
(2 |
) |
|
|
3 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5 |
|
|
|
(19 |
) |
|
|
17 |
|
|
|
8 |
|
|
|
(13 |
) |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Expense (Benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
48 |
|
|
|
34 |
|
|
|
20 |
|
|
|
38 |
|
|
|
23 |
|
|
|
9 |
|
State |
|
|
11 |
|
|
|
2 |
|
|
|
2 |
|
|
|
9 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
59 |
|
|
|
36 |
|
|
|
22 |
|
|
|
47 |
|
|
|
24 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal and State Income Tax Expense |
|
$ |
64 |
|
|
$ |
17 |
|
|
$ |
39 |
|
|
$ |
55 |
|
|
$ |
11 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We record deferred income tax assets and liabilities for amounts that will result in tax deductions
or taxable income on future tax returns. We consider it more likely than not that all the deferred
tax assets will result in lower income taxes in the future. Consequently, we have not recorded a
valuation allowance to reduce our deferred tax assets.
K-141
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
The significant components of deferred income tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy |
|
|
TEP |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Deferred Income Tax Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations |
|
$ |
208 |
|
|
$ |
209 |
|
|
$ |
208 |
|
|
$ |
209 |
|
Customer Advances and
Contributions in Aid of
Construction |
|
|
43 |
|
|
|
40 |
|
|
|
26 |
|
|
|
26 |
|
Alternative Minimum Tax Credit |
|
|
43 |
|
|
|
49 |
|
|
|
28 |
|
|
|
35 |
|
Accrued Postretirement Benefits |
|
|
24 |
|
|
|
24 |
|
|
|
24 |
|
|
|
24 |
|
Emission Allowance Inventory |
|
|
13 |
|
|
|
13 |
|
|
|
12 |
|
|
|
12 |
|
Other |
|
|
35 |
|
|
|
39 |
|
|
|
25 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Deferred Income Tax Assets |
|
|
366 |
|
|
|
374 |
|
|
|
323 |
|
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Deferred Income Tax Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Net |
|
|
(442 |
) |
|
|
(390 |
) |
|
|
(397 |
) |
|
|
(357 |
) |
Capital Lease Assets Net |
|
|
(58 |
) |
|
|
(61 |
) |
|
|
(58 |
) |
|
|
(61 |
) |
Regulatory Asset Income Taxes
Recoverable Through Future
Revenues |
|
|
(7 |
) |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(8 |
) |
Pensions |
|
|
(10 |
) |
|
|
(7 |
) |
|
|
(11 |
) |
|
|
(8 |
) |
Deferred Lease Payment |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(6 |
) |
Other |
|
|
(19 |
) |
|
|
(19 |
) |
|
|
(11 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Deferred Income Tax Liabilities |
|
|
(541 |
) |
|
|
(491 |
) |
|
|
(489 |
) |
|
|
(453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Income Tax Liabilities |
|
$ |
(175 |
) |
|
$ |
(117 |
) |
|
$ |
(166 |
) |
|
$ |
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance sheets display the net deferred income tax liability as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy |
|
|
TEP |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes Current Assets |
|
$ |
52 |
|
|
$ |
61 |
|
|
$ |
51 |
|
|
$ |
60 |
|
Deferred Income Taxes Noncurrent Liabilities |
|
|
(227 |
) |
|
|
(178 |
) |
|
|
(217 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Income Tax Liability |
|
$ |
(175 |
) |
|
$ |
(117 |
) |
|
$ |
(166 |
) |
|
$ |
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes Current Assets at December 31, 2009 and 2008 for UniSource Energy includes
$3 million of deferred tax assets related to losses of a foreign investment held by a Millennium
subsidiary. Management plans to dispose of its investment in the foreign joint venture and
recognize the deferred losses on UniSource Energys federal and state income tax returns. This
recognition on filed tax returns will allow for realization of the deferred tax asset. If
management is unable to complete its plans to dispose of the joint venture, UniSource Energy may be
required to write off the deferred tax asset of $3 million.
At December 31, 2008, UniSource Energy had $43 million and TEP had $28 million of state net
operating loss carryforwards which are expected to be used on the 2009 income tax returns.
Deferred tax assets also include $2 million of federal and state capital loss carryforward at
UniSource Energy which is also expected to be fully used on the 2009 income tax returns.
K-142
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Management believes that based on its historical pattern of taxable income, UniSource Energy will
produce sufficient income in the future to realize its deferred income tax assets. 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. No valuation
allowance has been recorded to reduce the balance in deferred tax assets since management believes
it is more likely than not that UniSource Energy will be able to recognize the tax deductions on
future returns.
The $13 million income tax receivable at December 31, 2008 is attributable to a 2008 net operating
loss which was carried back to prior years.
Uncertain Tax Positions
UniSource Energy and TEP adopted uncertain tax position accounting as of January 1, 2007. Accounting guidance requires us to determine whether it is more likely than not that we will
sustain a tax position under examination. Each tax position is measured to determine the amount of
benefit to recognize in the financial statements. The amount of unrecognized tax benefit reported
by UniSource Energy, all of which is recorded at TEP, was $19 million at December 31, 2009 and $20
million at December 31, 2008. The following table shows the changes in unrecognized tax benefits
of UniSource Energy and TEP:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Unrecognized Tax Benefits, beginning of year |
|
$ |
20 |
|
|
$ |
12 |
|
Additions based on tax positions taken in the current year |
|
|
1 |
|
|
|
6 |
|
Reductions based on settlements with tax authorities |
|
|
(1 |
) |
|
|
|
|
Additions based on tax positions taken in the prior year |
|
|
|
|
|
|
3 |
|
Reductions based on tax positions taken in the prior year |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Unrecognized Tax Benefits, end of year |
|
$ |
19 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
Unrecognized tax benefits which, if recognized, would reduce the effective tax rate, were $1
million at December 31, 2009 and 2008 for both UniSource Energy and TEP.
The $1 million decrease in the balance of unrecognized tax benefits from 2008 to 2009 relates to $1
million of tax benefit attributable to tax positions taken in 2009 which may not be sustainable,
offset by the recognition of $1 million of tax benefits from prior years and recognition of $1
million of tax benefits based on settlements with authorities. The balance in unrecognized tax
benefits could increase in the next twelve months as a result of the ongoing IRS audits, but the
amount of the increase cannot be determined.
TEP recognizes interest accrued related to unrecognized tax benefits in Other Interest Expense in
the income statements. In 2009 $1 million of interest expense was recorded and in 2008 no interest
expense was recognized. The balance of interest payable at December 31, 2009 is $2 million and at
December 31, 2008 it was $1 million. Penalties accrued are immaterial in amount.
UniSource Energy and TEP have been audited by the IRS through tax year 2004 and are currently under
audit by the IRS for 2005, 2006, and 2008. Tax Year 2007 has not yet been selected for audit. The
fieldwork for the 2005 and 2006 audits is complete and the audits are effectively settled. The
2005 and 2006 audits closed in January 2010. UniSource Energy and TEP have a current liability of
$2 million for taxes and interest to settle 2005 and 2006 audits. We are unable to determine when
the 2008 audit will be completed. UniSource Energy and TEP are not currently under audit by any
state tax agencies.
K-143
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
NOTE 10. EMPLOYEE BENEFIT PLANS
PENSION BENEFIT PLANS
TEP, UNS Gas and UNS Electric maintain noncontributory, defined benefit pension plans for
substantially all regular employees and certain affiliate employees. Employees receive benefits
based on their years of service and average compensation. TEP, UNS Gas and UNS Electric 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. In December
2008, as a result of the 2008 TEP Rate Order, TEP reapplied regulatory accounting to its generation
operations. Accordingly, TEP reclassified pension amounts related to its generation operations,
previously recognized in AOCI, to a regulatory asset.
TEP also provides supplemental retirement benefits to certain employees whose benefits are limited
by IRS benefit or compensation limitations. Changes in benefit obligations are recognized as a
component of AOCI.
Pension Contributions
The Pension Protection Act of 2006 (The Pension Act) establishes minimum funding targets for
pension plans beginning in 2008. A plans funding target is the present value of all benefits
accrued or earned as of the beginning of the plan year. While the annual targets are not legally
required, if a plan does not meet the annual funding targets, the plans benefit payment options
are limited and a funding deficiency notice must be sent to all plan participants. All TEP, UNS
Gas and UNS Electric plans are in compliance with The Pension Act.
UniSource Energy made pension plan contributions in 2009 of $25 million, of which $23 million was
made by TEP.
In 2010,
UniSource Energy expects to contribute $22 million to the
pension plans of which $20 million will be made by TEP.
TEP Salaried Employees Retirement Plan Amendment
In August 2009, TEP amended one of its defined benefit pension plans to limit early retirement
benefits for TEP non-union employees hired after June 1, 2009 and to modify disability retirement
and survivor benefits for all TEP non-union employees. As a result of the pension plan amendment,
the plan assets and liabilities were remeasured as of August 31, 2009. In performing the
remeasurement, management reviewed the key assumptions used to measure the plans benefit
obligation at December 31, 2008 and to calculate pension expense for 2009. TEP determined that the
discount rate should be increased to 6.40% from the 6.30% rate assumed at December 31, 2008. The
revised discount rate was determined using the same methodology as was employed at year-end 2008.
All other key assumptions, including the expected rate of return on assets, remained unchanged from
December 31, 2008.
The amendment reduced the annual expense for 2009 for the salaried plan by less than $1 million to
$8 million. The reduction in pension expense was recognized ratably from September to December of
2009. The remeasurement reduced the benefit obligation and corresponding regulatory asset by $8
million.
In December 2009, TEP amended its defined benefit pension plan for union employees to limit early
retirement benefits for TEP union employees hired on or after January 1, 2011, modify disability
retirement and survivor benefits for TEP union employees, and modify maximum credited service
beginning in 2009. Because the amendment was in December, there was no additional remeasurement.
K-144
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
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
and a small group of active employees.
In the 2008 TEP Rate Order, the ACC authorized accrual basis recovery of other postretirement
benefit plan costs based on a commitment to fund the plan. TEP established a Voluntary Employee
Beneficiary Association (VEBA) trust in 2009 to fund its other postretirement benefit plan and
began funding the plan. TEP, UNS Gas and UNS Electric now record changes in their other
postretirement obligation, not yet reflected in net periodic benefit cost, as a regulatory asset,
as such amounts are probable of future recovery in rates. Amounts previously recorded in AOCI were
reclassified to a regulatory asset in 2008.
The pension and other postretirement benefit related amounts (excluding tax balances) included in
the UniSource Energy balance sheet are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Regulatory Pension Asset included in Other Regulatory
Assets |
|
$ |
75 |
|
|
$ |
105 |
|
|
$ |
9 |
|
|
$ |
7 |
|
Accrued Benefit Liability included in Accrued Employee
Expenses |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
Accrued Benefit Liability included in Pension and Other
Postretirement Benefits |
|
|
(58 |
) |
|
|
(95 |
) |
|
|
(65 |
) |
|
|
(63 |
) |
Accumulated Other Comprehensive Loss |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount Recognized |
|
$ |
20 |
|
|
$ |
13 |
|
|
$ |
(60 |
) |
|
$ |
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above includes accrued pension benefit liabilities for UNS Gas and UNS Electric of
approximately $5 million and $7 million, at December 31, 2009 and 2008 respectively, and a
postretirement benefit liability of $1 million for UNS Gas and UNS Electric, for each period
presented.
The balance remaining in AOCI of $3 million relates to the TEP supplemental executive retirement
plan.
K-145
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
OBLIGATIONS AND FUNDED STATUS
We measured the actuarial present values of all pension benefit obligations and other
postretirement benefit plans at December 31, 2009 and 2008. The tables below include TEP, UNS Gas
and UNS Electric plans. The change in projected benefit obligation and plan assets and
reconciliation of the funded status are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Change in Projected Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation at Beginning of Year |
|
$ |
230 |
|
|
$ |
209 |
|
|
$ |
67 |
|
|
$ |
65 |
|
Actuarial (Gain) Loss |
|
|
|
|
|
|
13 |
|
|
|
1 |
|
|
|
|
|
Interest Cost |
|
|
14 |
|
|
|
14 |
|
|
|
4 |
|
|
|
4 |
|
Service Cost |
|
|
7 |
|
|
|
7 |
|
|
|
2 |
|
|
|
2 |
|
Measurement Date Change |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Amendments |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Benefits Paid |
|
|
(8 |
) |
|
|
(12 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation at End of Year |
|
|
242 |
|
|
|
230 |
|
|
|
71 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets at Beginning of Year |
|
|
135 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
Actual (Loss) Return on Plan Assets |
|
|
32 |
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
Benefits Paid |
|
|
(8 |
) |
|
|
(12 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
Employer Contributions |
|
|
25 |
|
|
|
10 |
|
|
|
5 |
|
|
|
4 |
|
Measurement Date Change |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets at End of Year |
|
|
184 |
|
|
|
135 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status at End of Year |
|
$ |
(58 |
) |
|
$ |
(95 |
) |
|
$ |
(69 |
) |
|
$ |
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above includes pension benefit obligations for UNS Gas and UNS Electric of approximately
$5 million and $7 million, at December 31, 2009 and 2008, respectively, plan assets of $6 million
and $4 million at December 31, 2009 and 2008, respectively, and a postretirement benefit liability
of less than $1 million, for UNS Gas and UNS Electric, for each period presented.
The following table provides the components of UniSource Energys regulatory assets and accumulated
other comprehensive loss that have not been recognized as components of net periodic benefit cost
as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
-Millions of Dollars- |
|
Net Loss |
|
$ |
77 |
|
|
$ |
105 |
|
|
$ |
13 |
|
|
$ |
13 |
|
Prior Service Cost (Benefit) |
|
|
1 |
|
|
|
3 |
|
|
|
(4 |
) |
|
|
(6 |
) |
K-146
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Information for pension plans with Accumulated Benefit Obligations in excess of plan assets
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Projected Benefit Obligation at End of Year |
|
$ |
242 |
|
|
$ |
230 |
|
Accumulated Benefit Obligation at End of Year |
|
|
210 |
|
|
|
198 |
|
Fair Value of Plan Assets at End of Year |
|
|
184 |
|
|
|
135 |
|
At December 31, 2008, and December 31, 2009, all UniSource Energy defined benefit pension plans had
accumulated benefit obligations in excess of plan assets.
The components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Cost |
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
8 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
2 |
|
Interest Cost |
|
|
14 |
|
|
|
14 |
|
|
|
13 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Expected Return on Plan Assets |
|
|
(11 |
) |
|
|
(16 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost Amortization |
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Recognized Actuarial Loss |
|
|
7 |
|
|
|
|
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
18 |
|
|
$ |
7 |
|
|
$ |
10 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 20% of the net periodic benefit cost was capitalized as a cost of construction and
the remainder was included in Other Operating and Maintenance costs.
K-147
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
The changes in plan assets and benefit obligations recognized as regulatory assets or in AOCI are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Regulatory |
|
|
|
|
|
|
Regulatory |
|
|
|
|
|
|
Regulatory |
|
|
|
|
|
|
Asset |
|
|
AOCI |
|
|
Asset |
|
|
AOCI |
|
|
Asset |
|
|
AOCI |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Year Actuarial (Gain) Loss |
|
$ |
(21 |
) |
|
$ |
|
|
|
$ |
85 |
|
|
$ |
1 |
|
|
$ |
(16 |
) |
|
$ |
(6 |
) |
Amortization of Actuarial Gain (Loss) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Prior Service (Cost) Amortization |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Plan Amendments |
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification from AOCI to
Regulatory Asset |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
Change in Additional Minimum Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized |
|
$ |
(29 |
) |
|
$ |
|
|
|
$ |
89 |
|
|
$ |
(7 |
) |
|
$ |
(18 |
) |
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
Regulatory |
|
|
Regulatory |
|
|
|
|
|
|
2007 |
|
|
|
Asset |
|
|
Asset |
|
|
AOCI |
|
|
AOCI |
|
|
|
-Millions of Dollars- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Year Actuarial (Gain) Loss |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1 |
) |
Amortization of Actuarial Gain (Loss) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Prior Service (Cost) Amortization |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Change in Additional Minimum Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Reclassification from AOCI to
Regulatory Asset |
|
|
|
|
|
|
6 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized |
|
$ |
2 |
|
|
$ |
7 |
|
|
$ |
(6 |
) |
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For all pension plans, we amortize prior service costs on a straight-line basis over the average
remaining service period of employees expected to receive benefits under the plan. We will
amortize $5 million estimated net loss and less than $1 million prior service cost from other
regulatory assets or AOCI into net periodic benefit cost in 2010. The estimated net loss and prior
service benefit for the defined benefit postretirement plans that will be amortized from other
regulatory assets into net periodic benefit cost in 2010 are $1 million and $2 million,
respectively.
K-148
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Weighted-Average Assumptions Used to Determine
Benefit Obligations as of the Measurement Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.0 |
% |
|
|
6.5 |
% |
Rate of Compensation Increase |
|
|
3.0 5.0 |
% |
|
|
3.0 5.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
Weighted-Average Assumptions Used to
Determine Net Periodic Benefit Cost for
Years Ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate |
|
|
6.3 |
% |
|
|
6.6 6.8 |
% |
|
|
5.9 |
% |
|
|
6.5 |
% |
|
|
6.5 |
% |
Rate of Compensation Increase |
|
|
3.0 5.0 |
% |
|
|
3.0 5.0 |
% |
|
|
3.0 5.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Expected Return on Plan Assets |
|
|
8.0 |
% |
|
|
7.75 8.3 |
% |
|
|
8.3 |
% |
|
|
N/A |
|
|
|
N/A |
|
Net periodic benefit cost for the other postretirement benefit plan was remeasured as of January 1,
2007 to reflect the plan amendment communicated to plan participants on January 2, 2007. A
discount rate of 5.6% was used for the January 2007 portion of the expense, while a discount rate
of 5.8% was used for the remaining eleven months.
Net periodic benefit cost is subject to various assumptions and determinations, such as the
discount rate, the rate of compensation increase, and the expected return on plan assets.
TEP, UNS Gas and UNS Electric use a combination of sources in selecting the expected long-term
rate-of-return-on-assets assumption, including an investment return model. The model used provides
a best-estimate range over 20 years from the 25th percentile to the 75th
percentile. The model used as a guideline for selecting the overall rate-of-return-on-assets
assumption is based on forward looking return expectations only. The above method is used for all
asset classes.
Changes that may arise over time with regard to these assumptions and determinations will change
amounts recorded in the future as net periodic benefit cost.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assumed Health Care Cost Trend Rates |
|
|
|
|
|
|
|
|
Health Care Cost Trend Rate Assumed for Next Year |
|
|
7.9 |
% |
|
|
7.5 |
% |
Ultimate Health Care Cost Trend Rate Assumed |
|
|
4.5 |
% |
|
|
5 |
% |
Year that the Rate Reaches the Ultimate Trend Rate |
|
|
2027 |
|
|
|
2017 |
|
K-149
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Assumed health care cost trend rates significantly affect the amounts reported for health care
plans. A one-percentage-point change in assumed health care cost trend rates would have the
following effects on the December 31, 2009 amounts:
|
|
|
|
|
|
|
|
|
|
|
One-Percentage- |
|
|
One-Percentage- |
|
|
|
Point Increase |
|
|
Point Decrease |
|
|
|
-Millions of Dollars- |
|
Effect on Total of Service and Interest Cost Components |
|
$ |
1 |
|
|
$ |
(1 |
) |
Effect on Postretirement Benefit Obligation |
|
|
5 |
|
|
|
(4 |
) |
PENSION PLAN AND OTHER POSTRETIREMENT BENEFIT ASSETS
TEP, UNS Gas and UNS Electric calculate the fair value of plan assets on December 31, the
measurement date. The 2007 measurement date was December 1. Pension plan asset allocations, by
asset category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNS Gas and UNS Electric |
|
|
|
TEP Plan Assets |
|
|
Plan Assets |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Asset Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
57 |
% |
|
|
51 |
% |
|
|
56 |
% |
|
|
67 |
% |
Fixed Income Securities |
|
|
34 |
% |
|
|
33 |
% |
|
|
33 |
% |
|
|
31 |
% |
Real Estate |
|
|
7 |
% |
|
|
13 |
% |
|
|
11 |
% |
|
|
|
|
Other |
|
|
2 |
% |
|
|
3 |
% |
|
|
|
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
K-150
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements of Pension Assets |
|
|
|
December 31, 2009 |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
in Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
Asset Category |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
Equity Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Large Cap |
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
53 |
|
U.S. Small Cap |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
Non-U.S. |
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
42 |
|
Fixed Income |
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
63 |
|
Real Estate |
|
|
|
|
|
|
5 |
|
|
|
8 |
|
|
|
13 |
|
Hedge Fund |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Private Equity |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1 |
|
|
$ |
173 |
|
|
$ |
10 |
|
|
$ |
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 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. |
|
|
|
|
Level 2 investments comprise amounts held in co-mingled equity funds, US bond and real estate
funds. Valuations are based on active market quoted prices for assets held by each respective
fund. |
|
|
|
|
Level 3 real estate investments were valued by appraisal at September 30, 2009, and
subsequently revalued at December 31, 2009. Revaluation comprised of using a preliminary real
estate index value to estimate the percentage change in asset value from September 30, 2009, to
December 31, 2009. The preliminary real estate index value was developed based on appraisals
comprising 82% of real estate assets tracked by the index. |
|
|
|
|
Level 3 hedge and private equity funds are classified as funds-of-funds. They are valued based
on individual fund manager valuation models. |
As of December 31, 2009, the fair value of VEBA trust assets were $1.5 million of which $1 million
were fixed income investments and $0.5 million were equities. There are no level three assets in
the VEBA trust.
A Reconciliation of Level 3 Assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity |
|
|
Real Estate |
|
|
Hedge Fund |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balances at December 31, 2008 |
|
$ |
1 |
|
|
$ |
12 |
|
|
$ |
3 |
|
|
$ |
16 |
|
Actual Return on Plan Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to Assets still held at
Reporting Date |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Relating to Assets sold during the Period |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Purchases, Sales, and Settlements |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance at December 31, 2009 |
|
$ |
1 |
|
|
$ |
8 |
|
|
$ |
1 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K-151
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Pension Plan Investments
Investment Goals
Strategic asset allocation is the principal method for achieving each plans investment objective,
while maintaining an appropriate level of risk. We will consider the projected impact on benefit
security of any proposed changes to the current asset allocation policy. The expected long-term
returns and implications for Plan Sponsor funding will be reviewed in selecting policies to ensure
that current asset pools are projected to be adequate to meet the expected liabilities of the
Plans. We expect to use asset allocation policies weighted most heavily to equity and fixed income
funds, while maintaining some exposure to real estate and opportunistic funds. Within the fixed
income allocation, long-duration funds may be used to partially hedge interest rate risk. The plan
seeks to provide returns in excess of a portfolio benchmark.
Risk Management
We recognize the difficulty of achieving investment objectives in light of the uncertainties and
complexities of the investment markets. We also recognize some risk must be assumed to achieve a
Plans long-term investment objectives. In establishing risk tolerances, the following factors
affecting risk tolerance and risk objectives will be considered: 1) Plan status; 2) Plan Sponsor
financial status and profitability; 3) Plan features; and 4) workforce characteristics. We have
determined that the Plans can tolerate some interim fluctuations in market value and rates of
return in order to achieve long-term objectives. TEP tracks the plans portfolio relative to the
benchmark through quarterly investment reviews. The reviews consist of a performance and risk
assessment of all investment managers and on the portfolio as a whole. Investment managers for the
plan may use derivative financial instruments for risk management purposes or as part of their
investment strategy. Currency hedges have also been used for defensive purposes.
Relationship between Plan Assets and Benefit Obligations
The overall health of the Plan will be monitored by comparing the value of Plan obligations (both
Accumulated Benefit Obligation and Projected Benefit Obligation) against the market value of assets
and tracking the changes in each. The frequency of this monitoring will depend on the availability
of Plan data, but will be no less frequent than annually via annual actuarial valuation.
The current target allocation percentages for the major categories or plan assets follow. For each
Plan, there is a range of +/- 2% of the target allocation before the fund will be automatically
rebalanced. The hedge fund is being closed, and is currently in the redemption/liquidation
process.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP Plan % |
|
|
UES Plan % |
|
|
VEBA Trust % |
|
Fixed Income |
|
|
31.7 |
% |
|
|
33.4 |
% |
|
|
62.5 |
% |
U.S. Large Cap |
|
|
26.4 |
% |
|
|
27.8 |
% |
|
|
27.6 |
% |
Non-US Developed |
|
|
15.9 |
% |
|
|
16.7 |
% |
|
|
3.3 |
% |
Real Estate |
|
|
10.6 |
% |
|
|
11.1 |
% |
|
|
|
|
U.S. Small Cap |
|
|
5.2 |
% |
|
|
5.5 |
% |
|
|
1.6 |
% |
Non-US Emerging |
|
|
5.2 |
% |
|
|
5.5 |
% |
|
|
|
|
Private Equity |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
Cash / Treasury Bills |
|
|
|
|
|
|
|
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
K-152
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Pension Fund Descriptions
The funds are manager of manager funds, with the exception of the hedge fund and the private equity
fund, which are funds of funds.
ESTIMATED FUTURE BENEFIT PAYMENTS
TEP expects the following benefit payments to be made by the defined benefit pension plans, which
reflect future service, as appropriate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
Pension |
|
|
Postretirement |
|
|
|
Benefits |
|
|
Benefits |
|
|
|
-Millions of Dollars- |
|
2010 |
|
$ |
10 |
|
|
$ |
5 |
|
2011 |
|
|
11 |
|
|
|
5 |
|
2012 |
|
|
12 |
|
|
|
5 |
|
2013 |
|
|
13 |
|
|
|
6 |
|
2014 |
|
|
14 |
|
|
|
6 |
|
Years 2015-2019 |
|
|
88 |
|
|
|
30 |
|
UNS Gas and UNS Electric expect pension and postretirement benefit payouts of approximately $4
million in 2010 through 2014 and $7 million in 2015 through 2019 to be made by the defined benefit
pension and postretirement plans.
DEFINED CONTRIBUTION PLANS
TEP, UNS Gas and UNS Electric offer defined contribution savings plans to all eligible employees.
The Internal Revenue Code identifies the plans as qualified 401(k) plans. Participants direct the
investment of contributions to certain funds in their account which may include a UNS stock fund.
TEP, UNS Gas, and UNS Electric match part of a participants contributions to the plans. TEP made
matching contributions to these plans of approximately $4 million in each of 2009, 2008, and 2007.
UNS Gas and UNS Electric made matching contributions of less than $0.5 million in each of 2009,
2008, and 2007.
NOTE 11. SHARE-BASED COMPENSATION PLANS
Under the 2006 Omnibus Stock and Incentive Plan, the Compensation Committee of the UniSource Energy
Board of Directors may issue various types of share-based compensation, including stock options,
restricted shares/units, and performance shares. The total number of shares which may be awarded
under the Plan cannot exceed 2.25 million shares. At December 31, 2009, the total number of shares
awarded under the 2006 Omnibus Stock and Incentive Plan was 1 million shares.
STOCK OPTIONS
In February 2009, the Compensation Committee of the UniSource Energy Board of Directors granted
248,760 stock options to officers with an exercise price of $26.11. In 2008, the Compensation
Committee of the UniSource Energy Board of Directors granted 303,550 stock options to officers with
an exercise price of $26.18. In 2007, the board granted 184,260 stock options to officers with an
exercise price of $37.88.
K-153
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Stock options are granted with an exercise price equal to the fair market value of the stock on the
date of grant, vest over three years, become exercisable in one-third increments on each
anniversary date of the grant and expire on the tenth anniversary of the grant. Compensation
expense is recorded on a straight-line basis over the service period for the total award based on
the grant date fair value of the options less estimated forfeitures. For awards granted to
retirement eligible officers, compensation expense is recorded immediately. One stock option award
accrues dividend equivalents that are paid in cash on the earlier of the date of exercise of the
underlying option or the date the option expires. Dividend equivalents are recorded as dividends
when declared. See discussion of dividend equivalents in Note 1.
The fair value of each option award was estimated on the date of grant using the
Black-Scholes-Merton option pricing model with the assumptions noted in the following table. The
expected terms of the stock options granted in 2009 and 2008 were estimated using historical
exercise data. The expected term of 2007 options granted was estimated using a simplified method
which considered the 3 year vesting period and the contractual term. The risk-free rate was based
on the rate available on a U.S. Treasury Strip with a maturity equal to the expected term of the
option at the time of the grant. The expected volatility for each award was based on historical
volatility for UniSource Energys stock for a period equal to the expected term of the award. The
expected dividend yield on a share of stock was calculated using the historical dividend yield with
the implicit assumption that current dividend yields will continue in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Expected Term (years) |
|
|
7 |
|
|
|
6 |
|
|
|
6 |
|
Risk-free Rate |
|
|
3.4 |
% |
|
|
3.1 |
% |
|
|
4.4 |
% |
Expected Volatility |
|
|
25.0 |
% |
|
|
18.8 |
% |
|
|
20.2 |
% |
Expected Dividend Yield |
|
|
3.2 |
% |
|
|
2.8 |
% |
|
|
2.4 |
% |
Weighted-Average Grant-Date Fair Value of
Options Granted During the Period |
|
$ |
5.53 |
|
|
$ |
4.23 |
|
|
$ |
8.13 |
|
K-154
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
A summary of the stock option activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
(Shares in Thousands) |
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
Stock Options |
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding, Beginning of Year |
|
|
1,635 |
|
|
$ |
22.50 |
|
|
|
1,451 |
|
|
$ |
21.21 |
|
|
|
1,388 |
|
|
$ |
18.59 |
|
Granted |
|
|
249 |
|
|
$ |
26.11 |
|
|
|
304 |
|
|
$ |
26.18 |
|
|
|
184 |
|
|
$ |
37.88 |
|
Exercised or Vested |
|
|
(282 |
) |
|
$ |
14.46 |
|
|
|
(120 |
) |
|
$ |
16.34 |
|
|
|
(120 |
) |
|
$ |
16.56 |
|
Forfeited/Expired |
|
|
(4 |
) |
|
$ |
12.28 |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
$ |
12.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, End of Year |
|
|
1,598 |
|
|
$ |
24.50 |
|
|
|
1,635 |
|
|
$ |
22.50 |
|
|
|
1,451 |
|
|
$ |
21.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, End of Year |
|
|
1,085 |
|
|
$ |
23.06 |
|
|
|
1,153 |
|
|
$ |
19.50 |
|
|
|
1,139 |
|
|
$ |
17.43 |
|
Aggregate Intrinsic Value of
Options Exercised ($000s) |
|
$ |
4,177 |
|
|
|
|
|
|
$ |
1,680 |
|
|
|
|
|
|
$ |
2,226 |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009($000s) |
|
Aggregate Intrinsic Value for Options Outstanding |
|
$ |
13,408 |
|
Aggregate Intrinsic Value for Options Exercisable |
|
$ |
10,679 |
|
Weighted Average Remaining Contractual Life of Outstanding Options |
|
4.4 years |
Weighted Average Remaining Contractual Life of Exercisable Options |
|
3.0 years |
A summary of stock options follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
Number of |
|
|
Remaining |
|
|
Average |
|
|
Number |
|
|
Average |
|
Range of |
|
Shares |
|
|
Contractual |
|
|
Exercise |
|
|
of Shares |
|
|
Exercise |
|
Exercise Prices |
|
(000s) |
|
|
Life |
|
|
Price |
|
|
(000s) |
|
|
Price |
|
$15.28 $18.84 |
|
|
664 |
|
|
1.6 years |
|
$ |
17.39 |
|
|
|
664 |
|
|
$ |
17.39 |
|
$26.11 $37.88 |
|
|
934 |
|
|
6.4 years |
|
$ |
29.55 |
|
|
|
421 |
|
|
$ |
31.99 |
|
We summarize the status of non-vested stock options as of December 31, 2009, and changes during
2009 below:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Weighted-Average |
|
Non-vested Shares |
|
(000s) |
|
|
Grant-Date Fair Value |
|
Non-vested at January 1, 2009 |
|
|
482 |
|
|
$ |
5.59 |
|
Granted |
|
|
249 |
|
|
|
5.53 |
|
Vested |
|
|
(218 |
) |
|
|
6.13 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2009 |
|
|
513 |
|
|
$ |
5.33 |
|
|
|
|
|
|
|
|
K-155
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
RESTRICTED STOCK UNITS/AWARDS AND PERFORMANCE SHARES
Restricted Stock Units
Restricted stock and stock units are generally granted under the Plan to non-employee directors.
Restricted stock is an award of Common Stock that is subject to forfeiture if the restrictions
specified in the award are not satisfied. Stock units are a non-voting unit of measure that is
equivalent to one share of Common Stock. The directors may elect to receive stock units in lieu of
restricted stock. Restricted stock generally vests over periods ranging from one to three years
and are payable in Common Stock. Stock units vest either immediately or over periods ranging from
one to three years. The restricted stock units vest immediately upon death, disability, or
retirement. In the January following the year the person is no longer a director, Common Stock
shares will be issued for the vested stock units. Compensation expense equal to the fair market
value on the grant date is recognized over the vesting period. Fully vested but undistributed
stock unit awards accrue dividend equivalent stock units based on the fair market value of common
shares on the date the dividend is paid.
The Compensation Committee of the UniSource Energy Board of Directors granted the following stock
units to non-employee directors:
|
|
|
May 2009 21,886 stock units at a weighted average fair value of $26.73 per share, |
|
|
|
|
February 2008 3,130 stock units at a weighted average fair value of $28.75 per share, |
|
|
|
|
May 2008 18,448 stock units at a weighted average fair value of $31.71 per share, |
|
|
|
|
August 2008 1,400 stock units at a weighted average fair value of $32.15 per share,
and |
|
|
|
|
2007 17,857 stock units at a weighted average fair value of $37.30 per share. |
Performance Share Awards
In February 2009, the Compensation Committee of the UniSource Energy Board of Directors granted
62,190 performance share awards (targeted shares) to Officers at a grant date fair value, based on
a Monte Carlo simulation, of $21.62 per share. The performance share awards 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, 2009 through December 31, 2011
compared with Total Shareholder Return over the same period of an industry peer group.
In February 2008, the Compensation Committee of the UniSource Energy Board of Directors granted
49,120 performance share awards (targeted shares) to Officers at a grant date fair value, based on
a Monte Carlo simulation, of $17.10 per share. The performance share awards will be paid out in
shares of UniSource Energy Common Stock based on UniSource Energys performance over the
performance period of January 1, 2008 through December 31, 2010. The performance criteria
specified in the awards is determined based on targeted UniSource Energy Total Shareholder Return
during the performance period compared to the Total Shareholder Return over the same period of an
industry or peer group. The performance shares vest based on goal attainment, upon completion of
the performance period; any unearned awards are forfeited. Compensation expense equal to the fair
value on the grant date is recognized over the vesting period if the requisite service period is
fulfilled whether or not the threshold is achieved.
In March 2007, the Compensation Committee of the UniSource Energy Board of Directors granted 37,270
performance share awards (targeted shares) to certain officers at a grant date fair value of $35.56
per share (market price of $37.88 less the present value of expected dividends of $2.32). At
December 31, 2009, upon completion of the 3-year performance period, 22,116 shares vested based on
achievement of targeted cumulative Cash Flows from Operations and cumulative Diluted Earnings per
Share over the performance period; 15,154 shares were unearned and forfeited. Compensation expense
equal to the fair market value on the grant date less the present value of expected dividends was
recognized over the performance period and adjusted for goals that were not achieved. In February
2010, the Board of Directors approved distribution of the 22,116 vested shares of UniSource Energy
Common Stock.
K-156
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Shares |
|
|
Restricted Stock Units |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Grant-Date |
|
|
Shares |
|
|
Grant-Date |
|
|
|
(000s) |
|
|
Fair Value |
|
|
(000s) |
|
|
Fair Value |
|
Non-vested at January 1, 2009 |
|
|
67 |
|
|
$ |
25.23 |
|
|
|
23 |
|
|
$ |
31.33 |
|
Granted |
|
|
62 |
|
|
|
21.62 |
|
|
|
22 |
|
|
|
26.73 |
|
Vested |
|
|
(22 |
) |
|
|
35.56 |
|
|
|
(23 |
) |
|
|
31.33 |
|
Forfeited |
|
|
(7 |
) |
|
|
35.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2009 |
|
|
100 |
|
|
$ |
19.92 |
|
|
|
22 |
|
|
$ |
26.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE-BASED COMPENSATION EXPENSE (Stock Options, Performance Shares and Restricted Stock Units)
Annually during 2007 through 2009, UniSource Energy and TEP recorded share-based compensation
expense of $3 million and $2 million, respectively. The actual tax deduction realized from the
exercise of share-based payment arrangements totaled $3 million for 2009, $1 million for 2008, and
$0.5 million in 2007. We capitalize approximately 30% of share-based compensation costs as a cost
of construction.
At December 31, 2009, the total unrecognized compensation cost related to non-vested share-based
compensation was $2 million, which will be recorded as compensation expense over the remaining
vesting periods through February 2011. The total number of shares awarded but not yet issued,
including target performance based shares, under the share-based compensation plans at December 31,
2009 was 2 million.
2010 SHARE-BASED COMPENSATION AWARDS
In February 2010, the Compensation Committee of the UniSource Energy Board of Directors granted
93,720 performance share awards (targeted shares). 50% of the performance share awards 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% 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.
NOTE 12. 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 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.
K-157
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 |
|
|
|
- Millions of Dollars - |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents (1) |
|
$ |
14 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
14 |
|
Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2) |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Equity Investments (3) |
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
Collateral Posted (4) |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Energy Contracts (5) |
|
|
|
|
|
|
1 |
|
|
|
6 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
14 |
|
|
|
24 |
|
|
|
17 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Contracts (5) |
|
|
|
|
|
|
(40 |
) |
|
|
(23 |
) |
|
|
(63 |
) |
Interest Rate Swaps (6) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
|
|
|
|
(48 |
) |
|
|
(23 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Total Assets and (Liabilities) |
|
$ |
14 |
|
|
$ |
(24 |
) |
|
$ |
(6 |
) |
|
$ |
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
K-158
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
December 31, 2008 |
|
|
|
- Millions of Dollars - |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents (1) |
|
$ |
8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8 |
|
Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2) |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
Energy Contracts (5) |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
8 |
|
|
|
9 |
|
|
|
10 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Contracts (5) |
|
|
|
|
|
|
(18 |
) |
|
|
(11 |
) |
|
|
(29 |
) |
Interest Rate Swaps (6) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
|
|
|
|
(26 |
) |
|
|
(11 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Total Assets and (Liabilities) |
|
$ |
8 |
|
|
$ |
(17 |
) |
|
$ |
(1 |
) |
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 investment 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. |
|
(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. |
|
(6) |
|
Interest Rate Swaps are valued based on either the six-month LIBOR index or the Securities
Industry and Financial Markets Association (SIFMA) Municipal Swap index (Level 2). |
K-159
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
Energy Contracts
TEP, UNS Gas, and UNS Electric 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 terms 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 and UNS Electrics purchase power call options 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.
K-160
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
The following tables set forth a reconciliation of changes in the fair value of financial assets and liabilities
classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2009 |
|
|
|
- Millions of Dollars - |
|
|
|
UniSource Energy |
|
|
TEP |
|
|
|
Mark-to- |
|
|
|
|
|
|
|
|
|
|
Mark-to- |
|
|
|
Market |
|
|
|
|
|
|
|
|
|
|
Market |
|
|
|
Contracts |
|
|
Investments |
|
|
Total |
|
|
Contracts |
|
Balance, as of January 1, 2009 |
|
$ |
(17 |
) |
|
$ |
11 |
|
|
$ |
(6 |
) |
|
$ |
(1 |
) |
Gains and (Losses) (Realized/Unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Regulatory Assets Derivative Instruments |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
(2 |
) |
OCI |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Other Expense |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
Cash Proceeds from Sale of Investment |
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, as of December 31, 2009 |
|
$ |
(13 |
) |
|
$ |
6 |
|
|
$ |
(7 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
There were no transfers in or out of Level 3 derivatives.
NOTE 13. 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 potentially dilutive common stock on the weighted average
number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-In Thousands- |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
104,258 |
|
|
$ |
14,021 |
|
|
$ |
58,373 |
|
Income from Assumed Conversion of Convertible Senior Notes |
|
|
4,390 |
|
|
|
|
|
|
|
4,390 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted Numerator |
|
$ |
108,648 |
|
|
$ |
14,021 |
|
|
$ |
62,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average Shares of Common Stock Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Issued |
|
|
35,653 |
|
|
|
35,415 |
|
|
|
35,264 |
|
Fully Vested Deferred Stock Units |
|
|
105 |
|
|
|
217 |
|
|
|
222 |
|
Participating Securities |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Weighted-average Shares of Common Stock Outstanding and
Participating Securities Basic |
|
|
35,858 |
|
|
|
35,632 |
|
|
|
35,486 |
|
|
|
|
|
|
|
|
|
|
|
Effect of Diluted Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Senior Notes |
|
|
4,093 |
|
|
|
|
|
|
|
4,000 |
|
Options and Stock Issuable under Employee Benefit Plans and
the Directors Plan |
|
|
499 |
|
|
|
537 |
|
|
|
583 |
|
|
|
|
|
|
|
|
|
|
|
Total Shares |
|
|
40,450 |
|
|
|
36,169 |
|
|
|
40,069 |
|
|
|
|
|
|
|
|
|
|
|
K-161
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
For the year ended December 31, 2008, 4 million potentially dilutive shares from the conversion of
convertible senior notes, and after-tax interest expense of $4 million was not included in the
computation of diluted EPS because to do so would be anti-dilutive.
Stock options to purchase an average of 395,000, 312,000 and 169,000 shares of Common Stock were
outstanding during 2009, 2008 and 2007, respectively, but were not included in the computation of
EPS because the stock options exercise price was greater than the average market price of the
Common Stock at year end.
NOTE 14. RELATED PARTY TRANSACTIONS
UniSource Energy incurs corporate costs that are allocated to its subsidiaries, including TEP.
Corporate costs are allocated based on a weighted-average of three factors: assets, payroll and
revenues. Management believes this method of allocation is reasonable and approximates the cost
that TEP and its other affiliates would have incurred as stand-alone entities. Charges allocated
to TEP were $7 million in each of 2009, 2008 and 2007. Charges allocated to UNS Gas and UNS
Electric were $1 million in each of 2009, 2008 and 2007.
TEP provides all corporate services (finance, accounting, tax, information technology services,
etc.) to UniSource Energy, UNS Gas and UNS Electric as well as to UniSource Energys non-utility
businesses. Costs are directly assigned to the benefiting entity where possible. Common costs are
allocated on a cost-causative basis. Management believes this method of allocation is reasonable.
The charges by TEP to the other companies were $15 million in 2009 and 2008, and $14
million in 2007.
TEP and UNS Electric began selling power to each other in 2008 at prices based on the Dow Jones
Four Corners Daily Index. TEP had wholesale power sales to UNS Electric of $23 million in 2009 and
$25 million in 2008. UNS Electric had wholesale power sales to TEP of $4 million in 2009 and $9
million in 2008.
TEP charged UNS Electric $3 million for control area services in 2009 and $2 million in 2008. No
such services were provided in 2007.
In May 2008, UED began providing energy from its Black Mountain Generating Station (BMGS) to UNS
Electric, through a power sale agreement. UED charged UNS Electric $12 million in 2009 and $7
million in 2008 for this energy. UNS Gas charged UNS Electric $5 million for gas used by the BMGS
facility in 2009 and $7 million in 2008. In 2008, UNS Gas charged UED $1 million for gas used by
BMGS facility.
Southwest Energy Solutions, Inc. (SES), a subsidiary of Millennium, provides a supplemental
workforce for TEP and UNS Electric. Types of services provided for TEP include dusk to dawn
lighting, facilities maintenance, meter reading, transmission and distribution, line locating,
fleet support, and general supplemental support. SES bills TEP for these services. Management
believes that the charges for services are reasonable and approximate the cost that TEP would have
incurred if it performed these services directly. SES charged TEP $15 million in 2009, $15 million
in 2008 and $14 million in 2007 for these services. SES provides meter reading services for UNS
Electric. SES charged UNS Electric $1 million for these services in 2009, 2008 and 2007.
K-162
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT
Audit Committee
2/19/10
NOTE 15. SALE OF MILLENNIUMS INVESTMENT IN SABINAS
In June 2009, Millennium finalized a sale of its 50% equity interest in Carboelectrica Sabinas, S.
de R.L. de C.V. (Sabinas), a Mexican limited liability company. Millennium received an upfront
payment of $5 million in January 2009 and a $15 million, three-year, 6%, secured note receivable
from Minerales de Monclova, S.A. de C.V. (Mimosa). Principal on the note is due at maturity;
interest on the note is due annually on December 31. The $15 million note is included in
Investments and Other Property Other on UniSource Energys balance sheet. Millennium recorded a
$6 million pre-tax gain on the sale included in Other Income on UniSource Energys income
statement.
NOTE 16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The following recently issued accounting standards are not yet reflected in the UniSource Energy
and TEPs financial statements:
|
|
|
The FASB issued authoritative guidance for transfers of financial assets that clarify
and change the criteria for a transfer to be accounted for as a sale, change the amount of
a recognized gain/loss on a sale when beneficial interests are received by the transferor,
and requires extensive disclosures. This standard is effective for interim and annual
periods beginning January 1, 2010. To date, we have not participated in any transfers to
which this guidance is applicable. |
|
|
|
|
The FASB issued authoritative guidance for variable interest entities requiring an
analysis to determine whether the enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity. This standard did not have a
material impact on our financial statements on adoption on January 1, 2010. |
|
|
|
|
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 and revised
disclosures on our financial statements. |
K-163
|
|
|
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT |
|
Audit Committee |
2/19/10
NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION
A reconciliation of net income to net cash flows from operating activities follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Thousands of Dollars- |
|
Net Income |
|
$ |
104,258 |
|
|
$ |
14,021 |
|
|
$ |
58,373 |
|
Adjustments to Reconcile Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
To Net Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense |
|
|
176,018 |
|
|
|
147,690 |
|
|
|
140,638 |
|
Depreciation and Amortization Recorded to Fuel and Other O&M
Expense |
|
|
4,929 |
|
|
|
6,467 |
|
|
|
6,897 |
|
Amortization of Deferred Debt-Related Costs included in
Interest Expense |
|
|
4,171 |
|
|
|
3,891 |
|
|
|
3,831 |
|
Provision for Bad Debts |
|
|
3,583 |
|
|
|
5,007 |
|
|
|
3,592 |
|
Deferred Income Taxes |
|
|
58,692 |
|
|
|
35,739 |
|
|
|
22,021 |
|
California Power Exchange Provision for Wholesale Revenue Refunds |
|
|
4,172 |
|
|
|
|
|
|
|
|
|
Pension and Postretirement Expense |
|
|
23,594 |
|
|
|
11,991 |
|
|
|
14,442 |
|
Pension and Postretirement Funding |
|
|
(30,078 |
) |
|
|
(13,928 |
) |
|
|
(13,809 |
) |
Gain on Sale of Millenniums Investment in Sabinas |
|
|
(5,979 |
) |
|
|
|
|
|
|
|
|
Stock Based Compensation Expense |
|
|
2,779 |
|
|
|
2,901 |
|
|
|
2,693 |
|
Excess Tax Benefit from Stock Options Exercised |
|
|
(3,256 |
) |
|
|
(633 |
) |
|
|
(541 |
) |
Mark-to-Market Transactions |
|
|
43 |
|
|
|
9,281 |
|
|
|
2,459 |
|
Impact of Reapplication of Regulatory Accounting |
|
|
|
|
|
|
(40,144 |
) |
|
|
|
|
Provision for Navajo Retiree Health Care and Mine Reclamation |
|
|
|
|
|
|
10,198 |
|
|
|
|
|
Amortization of Transition Recovery Asset |
|
|
|
|
|
|
23,945 |
|
|
|
77,681 |
|
CTC Revenue Refunded |
|
|
(12,141 |
) |
|
|
58,092 |
|
|
|
|
|
Over/Under Recovered Purchased Energy Cost |
|
|
(17,091 |
) |
|
|
(10,337 |
) |
|
|
2,377 |
|
Decrease in Value of Millennium Investments |
|
|
1,249 |
|
|
|
2,469 |
|
|
|
|
|
Net Unrealized Loss (Gain) on MEH Trading Activities |
|
|
|
|
|
|
|
|
|
|
2,562 |
|
Changes in Assets and Liabilities which Provided (Used) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Exclusive of Changes Shown Separately |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
17,696 |
|
|
|
432 |
|
|
|
4,981 |
|
Collateral Posted |
|
|
12,370 |
|
|
|
(14,120 |
) |
|
|
|
|
Materials and Fuel Inventory |
|
|
(24,621 |
) |
|
|
(10,176 |
) |
|
|
(8,805 |
) |
Accounts Payable |
|
|
(8,196 |
) |
|
|
8,164 |
|
|
|
(5,057 |
) |
Income Taxes |
|
|
14,924 |
|
|
|
(12,720 |
) |
|
|
(2,895 |
) |
Interest Accrued |
|
|
15,956 |
|
|
|
16,772 |
|
|
|
10,031 |
|
Other Regulatory Liabilities |
|
|
10,009 |
|
|
|
7,501 |
|
|
|
2,903 |
|
Taxes Other Than Income Taxes |
|
|
(48 |
) |
|
|
(29 |
) |
|
|
1,344 |
|
Other |
|
|
(5,723 |
) |
|
|
14,537 |
|
|
|
(2,952 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Operating Activities |
|
$ |
347,310 |
|
|
$ |
277,011 |
|
|
$ |
322,766 |
|
|
|
|
|
|
|
|
|
|
|
K-164
|
|
|
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT |
|
Audit Committee |
2/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Thousands of Dollars- |
|
Net Income |
|
$ |
89,248 |
|
|
$ |
4,363 |
|
|
$ |
53,456 |
|
Adjustments to Reconcile Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
To Net Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense |
|
|
152,901 |
|
|
|
126,040 |
|
|
|
119,811 |
|
Depreciation and Amortization Recorded to Fuel and Other O&M
Expense |
|
|
3,439 |
|
|
|
5,039 |
|
|
|
5,339 |
|
Amortization of Deferred Debt-Related Costs included in
Interest Expense |
|
|
2,364 |
|
|
|
2,826 |
|
|
|
2,677 |
|
Provision for Bad Debts |
|
|
2,342 |
|
|
|
2,957 |
|
|
|
2,161 |
|
California Power Exchange Provision for Wholesale Revenue Refunds |
|
|
4,172 |
|
|
|
|
|
|
|
|
|
Deferred Income Taxes |
|
|
46,721 |
|
|
|
24,410 |
|
|
|
8,310 |
|
Pension and Postretirement Expense |
|
|
21,294 |
|
|
|
10,402 |
|
|
|
12,683 |
|
Pension and Postretirement Funding |
|
|
(28,330 |
) |
|
|
(12,439 |
) |
|
|
(12,479 |
) |
Stock Based Compensation Expense |
|
|
2,121 |
|
|
|
2,239 |
|
|
|
2,097 |
|
CTC Revenue Refunded |
|
|
(12,141 |
) |
|
|
58,092 |
|
|
|
|
|
Over/Under Recovered Purchased Energy Cost |
|
|
(20,724 |
) |
|
|
|
|
|
|
|
|
Mark-to-Market Transactions |
|
|
44 |
|
|
|
9,283 |
|
|
|
2,459 |
|
Impact of Reapplication of regulatory accounting |
|
|
|
|
|
|
(40,144 |
) |
|
|
|
|
Provision for Navajo Retiree Health Care and Mine Reclamation |
|
|
|
|
|
|
10,198 |
|
|
|
|
|
Amortization of Transition Recovery Asset |
|
|
|
|
|
|
23,945 |
|
|
|
77,681 |
|
Changes in Assets and Liabilities which Provided (Used) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Exclusive of Changes Shown Separately |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
9,488 |
|
|
|
131 |
|
|
|
4,013 |
|
Materials and Fuel Inventory |
|
|
(23,794 |
) |
|
|
(8,774 |
) |
|
|
(9,103 |
) |
Accounts Payable |
|
|
(10,410 |
) |
|
|
14,812 |
|
|
|
(6,230 |
) |
Income Taxes |
|
|
(2,057 |
) |
|
|
10,127 |
|
|
|
(3,378 |
) |
Interest Accrued |
|
|
16,142 |
|
|
|
15,857 |
|
|
|
10,113 |
|
Taxes Other Than Income Taxes |
|
|
725 |
|
|
|
(1,011 |
) |
|
|
1,463 |
|
Other Regulatory Liabilities |
|
|
10,555 |
|
|
|
6,449 |
|
|
|
|
|
Other |
|
|
3,964 |
|
|
|
3,904 |
|
|
|
(6,961 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Flows Operating Activities |
|
$ |
268,064 |
|
|
$ |
268,706 |
|
|
$ |
264,112 |
|
|
|
|
|
|
|
|
|
|
|
UED prepaid $2 million for its LIBOR borrowing with Union Bank on July 28 and again on October 30,
2009 in accordance with the terms of the UED Credit Agreement. In August and November 2009,
the deposits were applied to the $30 million principal giving rise to a $4 million non-cash
financing activity that affected recognized assets and liabilities but did not result in cash
receipts or payments.
The proceeds from the issuance of the 2009 Pima A San Juan Bonds and the 2009 Coconino A Bonds
were deposited with a trustee and were used in November 2009, to redeem approximately $80 million of 6.95% 1997 Series A City of Farmington, New Mexico Pollution Control
Bonds and approximately $15 million of 7.0% 1997 Series B Coconino County, Arizona Pollution Control Bonds. TEP had no cash receipts or payments as a result of this transaction.
In the third quarter of 2008, TEP deposited the Pima B redemption proceeds for its 7.5% collateral
trust bonds with a trustee. On August 1, 2008, the deposit was applied to the payment of $128
million of principal plus $5 million of accrued interest upon maturity of the bonds giving rise to
a $128 million non-cash financing activity that affected recognized assets and liabilities but did
not result in cash receipts or payments.
K-165
|
|
|
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT |
|
Audit Committee |
2/19/10
Other non-cash investing and financing activities of UniSource Energy and TEP that affected
recognized assets and liabilities but did not result in cash receipts or payments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Thousands of Dollars- |
|
(Decrease)/Increase to Utility Plant Accruals |
|
$ |
1,082 |
|
|
$ |
(25,450 |
) |
|
$ |
24,915 |
|
Net Cost of Removal of Interim Retirements |
|
|
43,381 |
|
|
|
45,100 |
|
|
|
21,301 |
|
Capital Lease Obligations |
|
|
17,984 |
|
|
|
16,612 |
|
|
|
13,259 |
|
The non-cash additions to Utility Plant represent accruals for capital expenditures.
The non-cash net cost of removal of interim retirements represents an accrual for future asset
retirement obligations that does not impact earnings.
The non-cash change in capital lease obligations represents interest accrued for accounting
purposes in excess of interest payments.
NOTE 18. ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND HEDGING ACTIVITIES
See Note 1 for description of our related accounting policies.
Financial Impact of Derivatives
The net unrealized gains and losses on these contracts reported in AOCI were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy and TEP |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Cash Flow Hedges Unrealized Gains (Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Forward Power Contracts |
|
$ |
(1 |
) |
|
$ |
(7 |
) |
|
$ |
|
|
Gas Price Swaps |
|
|
|
|
|
|
3 |
|
|
|
(5 |
) |
Interest Rate Swaps |
|
|
1 |
|
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Pre-Tax Unrealized Gains (Losses) |
|
$ |
|
|
|
$ |
(9 |
) |
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-Tax Unrealized Gains (Losses) Recorded in AOCI |
|
$ |
|
|
|
$ |
(5 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After-Tax Unrealized (Gains) Losses Reclassified to Net Income |
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
Regulatory Treatment of Commodity Derivatives
Prior to December 2008, unrealized gains and losses resulting from changes in the market prices of
non-trading hedges or short-term forward power sales contracts were recorded on the same line in
the income statement as the hedged transaction. Beginning in December 2008, as a result of the
2008 TEP Rate Order, which permits the recovery of prudent costs associated with hedging contracts
through the PPFAC, unrealized gains and losses are recorded as either a regulatory asset or
regulatory liability.
K-166
|
|
|
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT |
|
Audit Committee |
2/19/10
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. UniSource Energy recorded
decreases to regulatory balances of $29 million and increases of $65 million in 2009 and 2008,
respectively. In 2007, UniSource Energy recorded an increase to regulatory balances of $6 million.
TEP recorded decreases to regulatory balances of $11 million and increases of $19 million in 2009
and 2008, respectively. Realized gains and losses on settled gas swaps are fully recovered through
the PPFAC or PGA. In 2009, 2008, and 2007, UniSource Energy realized losses of $51 million, $9
million and $9 million, respectively. TEP realized losses of $29 million, $4 million and $9
million in 2009, 2008, and 2007, respectively.
At December 31, 2009, 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 fourth quarter of 2012.
Other Commodity Derivatives
UniSource Energy and TEP record unrealized gains and losses on energy trading contracts in
Wholesale Sales. In 2009, 2008, and 2007, net unrealized gains and losses were less than $0.5
million.
Derivative Volumes
At December 31, 2009, UniSource Energy and TEP had gas swaps totaling 13,321GBtu and 5,658 GBtu,
respectively, and power contracts totaling 3,859 GWh and 1,247 GWh, respectively, which were
accounted for as derivatives.
The settlement of forward purchased power and sales contracts that do not result in physical
delivery were reflected in the financial statements of UniSource Energy and TEP as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
-Millions of Dollars- |
|
Recorded in Wholesale Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Forward Power Sales |
|
$ |
23 |
|
|
$ |
30 |
|
|
$ |
28 |
|
Forward Purchased Power |
|
|
(21 |
) |
|
|
(30 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
Net Impact in Wholesale Sales |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Adjustment
When the fair value of our derivative contracts are 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 subordinated bonds, we consider the impact of counterparty credit
worthiness in determining the fair value of our derivatives as well as its possible effect on
continued qualification for cash flow hedge accounting. At December 31, 2009, and December 31,
2008, 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 December
31, 2009, and December 31, 2008, the impact of our own credit risk was less than $0.5 million.
K-167
|
|
|
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT |
|
Audit Committee |
2/19/10
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. TEP, UNS Gas and UNS
Electric 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.
TEP, UNS Gas and UNS Electric 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 credit rating downgrades, or a failure to meet
certain financial ratios. In the event that such credit events were to occur, TEP, UNS Gas and UNS
Electric 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 along with net
payable position under contracts with credit-risk-related contingent features that are in a net
liability position at December 31, 2009. 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 |
|
|
|
December 31, 2009 |
|
|
|
-Millions of Dollars- |
|
Net Liability Position |
|
$ |
26 |
|
|
$ |
25 |
|
|
$ |
20 |
|
|
$ |
71 |
|
Cash Collateral Posted |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Letters of Credit |
|
|
1 |
|
|
|
|
|
|
|
11 |
|
|
|
12 |
|
Additional Collateral to Post if Contingent Features Triggered |
|
|
26 |
|
|
|
23 |
|
|
|
14 |
|
|
|
63 |
|
As of December 31, 2009, TEP had $20 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 December
31, 2009, UNS Gas and UNS Electric had immaterial exposure to other counterparties.
K-168
|
|
|
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) DRAFT |
|
Audit Committee |
2/19/10
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Our quarterly financial information is unaudited but, in managements opinion, includes all
adjustments necessary for a fair presentation. Our utility businesses are seasonal in nature.
Peak sales periods for TEP and UNS Electric generally occur during the summer months and peak sales
periods for UNS Gas generally occur during the winter months. Accordingly, comparisons among
quarters of a year may not represent overall trends and changes in operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UniSource Energy |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
-Thousands of Dollars- |
|
|
|
(except per share data) |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue |
|
$ |
311,857 |
|
|
$ |
337,784 |
|
|
$ |
414,239 |
|
|
$ |
330,544 |
|
Operating Income |
|
|
33,300 |
|
|
|
59,090 |
|
|
|
116,858 |
|
|
|
43,085 |
|
Net Income |
|
|
4,919 |
|
|
|
31,275 |
|
|
|
57,646 |
|
|
|
10,418 |
|
Basic EPS |
|
|
0.14 |
|
|
|
0.88 |
|
|
|
1.60 |
|
|
|
0.29 |
|
Diluted EPS |
|
|
0.14 |
|
|
|
0.80 |
|
|
|
1.45 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue |
|
$ |
330,134 |
|
|
$ |
360,322 |
|
|
$ |
387,852 |
|
|
$ |
319,203 |
|
Operating Income |
|
|
22,017 |
|
|
|
34,627 |
|
|
|
13,900 |
|
|
|
69,899 |
|
Net Income (Loss) |
|
|
(2,614 |
) |
|
|
4,747 |
|
|
|
(11,039 |
) |
|
|
22,927 |
|
Basic EPS |
|
|
(0.07 |
) |
|
|
0.13 |
|
|
|
(0.31 |
) |
|
|
0.64 |
|
Diluted EPS |
|
|
(0.07 |
) |
|
|
0.13 |
|
|
|
(0.31 |
) |
|
|
0.60 |
|
EPS is computed independently for each of the quarters presented. Therefore, the sum of the
quarterly EPS amounts may not equal the total for the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEP |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
-Thousands of Dollars- |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue |
|
$ |
213,274 |
|
|
$ |
271,544 |
|
|
$ |
357,189 |
|
|
$ |
254,704 |
|
Operating Income |
|
|
18,572 |
|
|
|
51,594 |
|
|
|
108,055 |
|
|
|
31,902 |
|
Net Income (Loss) |
|
|
(553 |
) |
|
|
26,507 |
|
|
|
55,277 |
|
|
|
8,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue |
|
$ |
228,602 |
|
|
$ |
294,141 |
|
|
$ |
323,312 |
|
|
$ |
233,198 |
|
Operating Income |
|
|
7,460 |
|
|
|
29,752 |
|
|
|
6,329 |
|
|
|
58,969 |
|
Net Income (Loss) |
|
|
(8,862 |
) |
|
|
5,765 |
|
|
|
(12,237 |
) |
|
|
19,697 |
|
K-169
|
|
|
UNISOURCE ENERGY, TEP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded) DRAFT |
|
Audit Committee |
2/19/10
The principal unusual items for TEP and UniSource Energy include:
UniSource Energy and TEP
|
|
|
Fourth Quarter 2009. In December 2009, based on settlement discussions related to its
sales to the CPX and CISO, TEP wrote off the remaining receivable balance of $2 million and
accrued an additional liability of $2 million resulting in a $4 million ($2.4 million
after-tax) reduction in net income. |
|
|
|
Fourth Quarter 2008. In the fourth quarter of 2008, as a result of the 2008 TEP Rate
Order, TEP reapplied regulatory accounting to its generation operations, and consequently,
recorded a reduction to fuel expense, O&M and Taxes Other Than Income Taxes of $32 million,
$1 million and $7 million, respectively. The total after-tax impact on net income was an
increase of $24 million. |
|
|
|
|
Third Quarter 2008. In the third quarter of 2008, as a result of a settlement between
Peabody and the Navajo Generating Station participants, TEP recorded, as fuel expense, the
present value of its share of the Navajo Generating Station mine reclamation and
postretirement benefit costs, totaling $9 million ($5 million after-tax). |
UniSource Energy
|
|
|
Second Quarter 2009. Millennium recorded a $6 million ($3.6 million after-tax) gain on
the sale of its Sabinas investment. |
K-170
Schedule II Valuation and Qualifying Accounts UniSource Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions- |
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Charged to |
|
|
|
|
|
|
Ending |
|
Description |
|
Balance |
|
|
Income |
|
|
Deductions |
|
|
Balance |
|
|
|
-Millions of Dollars- |
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
20 |
|
|
$ |
4 |
|
|
$ |
18 |
|
|
$ |
6 |
|
2008(2) |
|
|
18 |
|
|
|
5 |
|
|
|
3 |
|
|
|
20 |
|
2007(2) |
|
|
17 |
|
|
|
4 |
|
|
|
3 |
|
|
|
18 |
|
|
|
|
(1) |
|
TEP, UNS Gas and UNS Electric record additions to the Allowance for Doubtful
Accounts based on historical experience and any specific customer collection issues identified.
Deductions principally reflect amounts charged off as uncollectible, less amounts
recovered. |
|
(2) |
|
Balances are related primarily to TEP reserves for sales to the CPX and CISO in 2000 and
2001. The accounts were written off in 2009 as a result of negotiations in the fourth quarter of 2009.
See Note 4. |
K-171
Schedule II Valuation and Qualifying Accounts TEP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions- |
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
Charged to |
|
|
|
|
|
|
Ending |
|
Description |
|
Balance |
|
|
Income |
|
|
Deductions |
|
|
Balance |
|
|
|
-Millions of Dollars- |
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
17 |
|
|
$ |
2 |
|
|
$ |
15 |
|
|
$ |
4 |
|
2008(2) |
|
|
17 |
|
|
|
3 |
|
|
|
3 |
|
|
|
17 |
|
2007(2) |
|
|
16 |
|
|
|
2 |
|
|
|
1 |
|
|
|
17 |
|
|
|
|
(1) |
|
TEP record additions to the Allowance for Doubtful
Accounts based on historical experience and any specific customer collection issues identified.
Deductions principally reflect amounts charged off as uncollectible, less amounts
recovered. |
|
(2) |
|
Balances are related primarily to TEP reserves for sales to the CPX and CISO in 2000 and
2001. The accounts were written off in 2009 as a result of negotiations in the fourth quarter of 2009.
See Note 4. |
TEP had no deferred tax assets valuation allowance in the periods presented.
K-172
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 31, 2009. 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 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.
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 fourth quarter of
2009, that has materially affected, or is reasonably likely to materially affect, UniSource Energy
or TEPs internal control over financial reporting.
UniSource Energys and TEPs Managements Reports on Internal Control Over Financial Reporting
Under 404 of Sarbanes-Oxley appear as the first two reports under Item 8 in UniSource Energys and
TEPs 2009 Annual Report on Form 10-K, the Report of Independent Registered Public Accounting Firm
for UniSource Energy appears as the third report under Item 8, and the Report of Independent
Registered Public Accounting Firm for TEP appears as the fourth report under Item 8.
ITEM 9B. OTHER INFORMATION
None.
K-173
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANTS
Directors UniSource Energy
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Board |
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Director |
Name |
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Age |
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Committee* |
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Since |
Paul J. Bonavia
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58 |
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None
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2009 |
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Lawrence J. Aldrich
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57 |
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3, 5
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2000 |
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Barbara M. Baumann
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54 |
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1, 2, 4
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2005 |
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Larry W. Bickle
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64 |
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3, 4, 5
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1998 |
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Elizabeth T. Bilby
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70 |
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4, 5
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1995 |
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Harold W. Burlingame
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69 |
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2, 3, 5
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1998 |
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John L. Carter
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75 |
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1, 2, 3, 4, 5
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1996 |
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Robert A. Elliott
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54 |
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1, 3, 5
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2003 |
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Daniel W.L. Fessler
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68 |
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1, 5
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2005 |
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Louise L. Francesconi
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57 |
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1, 2, 3
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2008 |
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Warren Y. Jobe
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69 |
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1, 2, 4
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2001 |
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Ramiro G. Peru
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54 |
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1, 2
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2008 |
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Gregory A. Pivirotto
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57 |
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1, 3, 4
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2008 |
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Joaquin Ruiz
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57 |
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2, 3, 5
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2005 |
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* |
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Board Committees |
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(1) |
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Audit |
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(2) |
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Compensation |
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(3) |
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Corporate Governance and Nominating |
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(4) |
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Finance |
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(5) |
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Environmental, Safety and Security |
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Paul J. Bonavia
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Mr. Bonavia became Chairman, President and Chief Executive Officer of UniSource Energy and TEP in January
2009. Prior to joining UniSource Energy and TEP, Mr. Bonavia served as President of the Utilities Group
of Xcel Energy. Mr. Bonavia previously served as President of Xcel Energys Commercial Enterprises
business unit and President of the companys Energy Markets unit. |
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Lawrence J. Aldrich
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President and Chief Executive Officer of University Physicians Healthcare since January 2009. President
of Aldrich Capital Company since January 2007; Chief Operating Officer of The Critical Path Institute
from January 2006 to December 2006; General Partner of Valley Ventures, LP from September 2002 to
December 2005; Managing Director and Founder of Tucson Ventures, LLC, from February 2000 to September
2002. |
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Barbara M. Baumann
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President and Owner of Cross Creek Energy Corporation since 2003; Executive Vice President of Associated
Energy Managers, LLC from 2000 to 2003; former Vice President of Amoco Production Company; Director of
St. Mary Land & Exploration since 2002. |
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Larry W. Bickle
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Director of St. Mary Land & Exploration since 1995; Retired private equity investor; Managing Director of
Haddington Energy Partners from 1997 to 2005. |
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Elizabeth T. Bilby
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Retired President of Gourmet Products, Inc., an agricultural product marketing company; retired Director
of Marketing of Green Valley Pecans. |
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Harold W. Burlingame
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Former Executive Vice President of AT&T; Chairman of ORC Worldwide since December 2004. |
K-174
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John L. Carter
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Retired as Executive Vice President and Chief Financial Officer of Burr Brown Corporation in 1996. |
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Robert A. Elliott
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President and owner of The Elliott Accounting Group since 1983; Director and Corporate Secretary of
Southern Arizona Community Bank since 1998; Television Analyst/Pre-game Show Co-host for Fox Sports
Arizona since 1999; Chairman of the Board of Tucson Metropolitan Chamber of Commerce from 2002 to 2003;
Treasurer of Tucson Urban League from 2002 to 2003; Chairman of the Board of Tucson Urban League from
2003 to 2004; Chairman of the Board of the Tucson Airport Authority from January 2006 to January 2007. |
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Daniel W.L. Fessler
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Professor Emeritus of the University of California; Partner in the law firm of LeBoeuf, Lamb, Greene &
MacRae LLP from 1997 to 2003; previously served on the UniSource Energy and TEP boards of directors from
1998 to 2003; Managing Principal of Clear Energy Solutions, LLC since December 2004. |
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Louise L. Francesconi
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Retired Vice President and General Manager of Raytheon Missile Systems. |
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Warren Y. Jobe
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Certified Public Accountant (licensed, but not practicing); Senior Vice President of
Southern Company from 1998 to 2001; Executive Vice President and Chief Financial Officer of
Georgia Power Company from 1987-1998; Director of WellPoint Health Networks, Inc. from 2001 to
December 2004; Director of WellPoint, Inc. since December 2004; Trustee of RidgeWorth Funds
since 2004. |
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Ramiro G. Peru
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Executive Vice President and Chief Financial Officer of Phelps Dodge Corporation from 2004 to 2007;
Director of WellPoint Health Networks, Inc. since 2003; Director of Southern Peru Copper Corporation from
2002 to 2004; Director of University of Arizona Foundation since 2005. |
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Gregory A. Pivirotto
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Retired President and Chief Executive Officer and Director of University Medical Center Corporation since 1994;
Certified Public Accountant since 1978; Director of Arizona Hospital & Healthcare Association from 1997
to 2005. |
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Joaquin Ruiz
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Professor of Geosciences, University of Arizona since 1983; Dean, College of Science, University of
Arizona since 2000. |
Directors
TEP
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Director |
Name |
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Age |
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Since |
Paul J. Bonavia
|
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58 |
|
|
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2009 |
|
Michael J. DeConcini
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|
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45 |
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|
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2009 |
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Raymond S. Heyman
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54 |
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2009 |
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Kevin P. Larson
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53 |
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2009 |
|
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|
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Paul J. Bonavia
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|
Mr. Bonavia became Chairman, President and Chief
Executive Officer of UniSource Energy and TEP in
January 2009. Prior to joining UniSource Energy and
TEP, Mr. Bonavia served as President of the Utilities
Group of Xcel Energy. Mr. Bonavia previously served
as President of Xcel Energys Commercial Enterprises
business unit and President of the companys Energy
Markets unit. |
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Michael J. DeConcini
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Mr. DeConcini joined TEP in 1988 and was elected
Senior Vice President and Chief Operating Officer of
the Energy Resources business unit of TEP, effective
January 1, 2003. In August 2006, he was named Senior
Vice President and Chief Operating Officer,
Transmission and Distribution. In May 2009, he was
named Senior Vice President and Chief Operating
Officer. |
K-175
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Raymond S. Heyman
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Mr. Heyman was elected to the position of Senior Vice
President and General Counsel of TEP and UniSource
Energy in September 2005. Prior to joining UniSource
Energy and
TEP, Mr. Heyman was a member of the Phoenix, Arizona law firm Roshka, Heyman &
DeWulf, PLC. |
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Kevin P. Larson
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Mr. Larson joined TEP in 1985 and thereafter held various positions in its finance
department and at TEPs investment subsidiaries. He was elected Treasurer of TEP in August
1994 and Vice President in March 1997. In October 2000, he was elected Vice President and
Chief Financial Officer of both UniSource Energy and TEP and serves as Treasurer of both
organizations. He was named Senior Vice President in September 2005. |
Executive Officers of UniSource Energy and TEP
See Item 1. Business, Executive Officers of the Registrants.
Information required by Items 401, 405, 406 and 407 (c)(3), (d)(4) and (d)(5) of SEC Regulation S-K
will be included in UniSource Energys Proxy Statement relating to the 2010 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120 days after December 31, 2009,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning Executive Compensation will be contained in UniSource Energys Proxy
Statement relating to the 2010 Annual Meeting of Shareholders, which will be filed with the SEC not
later than 120 days after December 31, 2009, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
General
At February 23, 2010, UniSource Energy had outstanding 35.9 million shares of Common Stock. As of
February 23, 2010, the number of shares of Common Stock beneficially owned by all directors and
officers of UniSource Energy as a group amounted to approximately 2% of the outstanding Common Stock.
At February 23, 2010, UniSource Energy owned 100% of the outstanding shares of common stock of TEP.
Security Ownership of Certain Beneficial Owners
Information concerning the security ownership of certain beneficial owners of UniSource Energy will
be contained in UniSource Energys Proxy Statement relating to the 2010 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120 days after December 31, 2009,
which information is incorporated herein by reference.
Security Ownership of Management
Information concerning the security ownership of the Directors and Executive Officers of UniSource
Energy and TEP will be contained in UniSource Energys Proxy Statement relating to the 2010 Annual
Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December
31, 2009, which information is incorporated herein by reference.
K-176
Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning securities authorized for issuance under equity compensation plans will be
contained in UniSource Energys Proxy Statement relating to the 2010 Annual Meeting of
Shareholders, which will be filed with the SEC not later than 120 days after December 31, 2009,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions, and director independence of
UniSource Energy and TEP will be contained under Transactions with Management and Others, Director
Independence and Compensation Committee Interlocks and Insider Participation in UniSource Energys
Proxy Statement relating to the 2010 Annual Meeting of Shareholders, which will be filed with the
SEC not later than 120 days after December 31, 2009, which information is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services will be contained in UniSource
Energys Proxy Statement relating to the 2010 Annual Meeting of Shareholders, which will be filed
with the SEC not later than 120 days after December 31, 2009, which information is incorporated
herein by reference.
K-177
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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Page |
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(a) 1. Consolidated Financial Statements as of December 31, 2009
and 2008 and for Each of the Three Years in the Period
Ended December 31, 2009 |
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84 |
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86 |
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87 |
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88 |
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90 |
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91 |
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98 |
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85 |
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92 |
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93 |
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94 |
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96 |
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97 |
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Notes to Consolidated Financial Statements |
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2. Financial Statement Schedules |
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171 |
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3. Exhibits |
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|
Reference is made to the Exhibit Index commencing on page 154.
K-178
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
UNISOURCE ENERGY CORPORATION
|
|
Date: February 25, 2010 |
By: |
/s/ Kevin P. Larson |
|
|
|
Kevin P. Larson |
|
|
|
Senior Vice President and Principal
Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Date: February 25, 2010 |
/s/ Paul J. Bonavia*
|
|
|
Paul J. Bonavia |
|
|
Chairman of the Board, President and
Principal Executive Officer |
|
|
|
|
Date: February 25, 2010 |
/s/ Kevin P. Larson
|
|
|
Kevin P. Larson |
|
|
Principal Financial Officer |
|
|
|
|
Date: February 25, 2010 |
/s/ Karen G. Kissinger*
|
|
|
Karen G. Kissinger |
|
|
Principal Accounting Officer |
|
|
|
|
Date: February 25, 2010 |
/s/ Lawrence J. Aldrich*
|
|
|
Lawrence J. Aldrich |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Barbara Baumann*
|
|
|
Barbara Baumann |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Larry W. Bickle*
|
|
|
Larry W. Bickle |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Elizabeth T. Bilby*
|
|
|
Elizabeth T. Bilby |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Harold W. Burlingame*
|
|
|
Harold W. Burlingame |
|
|
Director |
|
K-179
|
|
|
|
|
|
|
|
Date: February 25, 2010 |
/s/ John L. Carter*
|
|
|
John L. Carter |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Robert A. Elliott*
|
|
|
Robert A. Elliott |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Daniel W.L. Fessler*
|
|
|
Daniel W.L. Fessler |
|
|
|
|
Date: February 25, 2010 |
/s/ Louise L. Francesconi*
|
|
|
Louise L. Francesconi |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Warren Y. Jobe*
|
|
|
Warren Y. Jobe |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Ramiro Peru*
|
|
|
Ramiro Peru |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Gregory A. Pivirotto*
|
|
|
Gregory Pivirotto |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Joaquin Ruiz*
|
|
|
Joaquin Ruiz |
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
By: |
/s/ Kevin P. Larson
|
|
|
|
Kevin P. Larson |
|
|
|
As attorney-in-fact for each
of the persons indicated |
|
K-180
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
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|
|
|
TUCSON ELECTRIC POWER COMPANY
|
|
Date: February 25, 2010 |
By: |
/s/ Kevin P. Larson
|
|
|
|
Kevin P. Larson |
|
|
|
Senior Vice President and
Principal
Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Date: February 25, 2010 |
/s/ Paul J. Bonavia*
|
|
|
Paul J. Bonavia |
|
|
Chairman of the Board, President and
Principal Executive Officer |
|
|
|
|
Date: February 25, 2010 |
/s/ Kevin P. Larson
|
|
|
Kevin P. Larson |
|
|
Principal Financial Officer and Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Karen G. Kissinger*
|
|
|
Karen G. Kissinger |
|
|
Principal Accounting Officer |
|
|
|
|
Date: February 25, 2010 |
/s/ Michael J. DeConcini*
|
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
/s/ Raymond S. Heyman*
|
|
|
Director |
|
|
|
|
Date: February 25, 2010 |
By: |
/s/ Kevin P. Larson
|
|
|
|
Kevin P. Larson |
|
|
|
As attorney-in-fact for each
of the persons indicated |
|
K-181
EXHIBIT INDEX
|
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|
*2(a)
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|
Agreement and Plan of Exchange, dated as of March 20,
1995, between TEP, UniSource Energy and NCR Holding,
Inc. |
|
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|
*3(a)
|
|
|
|
Restated Articles of Incorporation of TEP, filed with
the ACC on August 11, 1994, as amended by Amendment to
Article Fourth of our Restated Articles of
Incorporation, filed with the ACC on May 17, 1996. (Form
10-K for year ended December 31, 1996, File No. 1-5924
Exhibit 3(a).) |
|
|
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|
|
*3(b)
|
|
|
|
Bylaws of TEP, as amended as of August 31, 2009 (Form
10-Q for the quarter ended September 30, 2009, File No.
13739 Exhibit 3.1). |
|
|
|
|
|
*3(c)
|
|
|
|
Amended and Restated Articles of Incorporation of
UniSource Energy. (Form 8-A/A, dated January 30, 1998,
File No. 1-13739 Exhibit 2(a)). |
|
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|
|
*3(d)
|
|
|
|
Bylaws of UniSource Energy, as amended February 27, 2008
(Form 10-K for the year ended December 31, 2007, File
No. 13739 Exhibit 3(b)). |
|
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|
|
|
*4(b)(1)
|
|
|
|
Loan Agreement, dated as of October 1, 1982, between the
Pima County Authority and TEP relating to Floating Rate
Monthly Demand Industrial Development Revenue Bonds,
1982 Series A (Tucson Electric Power Company Sundt
Project). (Form 10-Q for the quarter ended September 30,
1982, File No. 1-5924 Exhibit 4(a).) |
|
|
|
|
|
*4(b)(2)
|
|
|
|
Indenture of Trust, dated as of October 1, 1982, between
the Pima County Authority and Morgan Guaranty
authorizing Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1982 Series A (Tucson
Electric Power Company Sundt Project). (Form 10-Q for
the quarter ended September 30, 1982, File No. 1-5924
Exhibit 4(b).) |
|
|
|
|
|
*4(b)(3)
|
|
|
|
First Supplemental Loan Agreement, dated as of March 31,
1992, between the Pima County Authority and TEP relating
to Industrial Development Revenue Bonds, 1982 Series A
(Tucson Electric Power Company Sundt Project). (Form
S-4, Registration No. 33-52860 Exhibit 4(h)(3).) |
|
|
|
|
|
*4(b)(4)
|
|
|
|
First Supplemental Indenture of Trust, dated as of March
31, 1992, between the Pima County Authority and Morgan
Guaranty relating to Industrial Development Revenue
Bonds, 1982 Series A (Tucson Electric Power Company
Sundt Project). (Form S-4, Registration No. 33-52860
Exhibit 4(h)(4).) |
|
|
|
|
|
*4(c)(1)
|
|
|
|
Loan Agreement, dated as of December 1, 1982, between
the Pima County Authority and TEP relating to Floating
Rate Monthly Demand Industrial Development Revenue
Bonds, 1982 Series A (Tucson Electric Power Company
Projects). (Form 10-K for the year ended December 31,
1982, File No. 1-5924 Exhibit 4(k)(1).) |
|
|
|
|
|
*4(c)(2)
|
|
|
|
Indenture of Trust dated as of December 1, 1982, between
the Pima County Authority and Morgan Guaranty
authorizing Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1982 Series A (Tucson
Electric Power Company Projects). (Form 10-K for the
year ended December 31, 1982, File No. 1-5924 Exhibit
4(k)(2).) |
|
|
|
|
|
*4(c)(3)
|
|
|
|
First Supplemental Loan Agreement, dated as of March 31,
1992, between the Pima County Authority and TEP relating
to Industrial Development Revenue Bonds, 1982 Series A
(Tucson Electric Power Company Projects). (Form S-4,
Registration No. 33-52860 Exhibit 4(i)(3).) |
|
|
|
|
|
*4(c)(4)
|
|
|
|
First Supplemental Indenture of Trust, dated as of March
31, 1992, between the Pima County Authority and Morgan
Guaranty relating to Industrial Development Revenue
Bonds, 1982 Series A (Tucson Electric Power Company
Projects). (Form S-4, Registration No. 33-52860
Exhibit 4(i)(4).) |
K-182
|
|
|
|
|
*4(d)(1)
|
|
|
|
Loan Agreement, dated as of December 1, 1983, between
the Apache County Authority and TEP relating to Floating
Rate Monthly Demand Industrial Development Revenue
Bonds, 1983
Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for
the year ended December 31, 1983, File No. 1-5924 Exhibit 4(I)(1).) |
|
|
|
|
|
*4(d)(2)
|
|
|
|
Indenture of Trust, dated as of December 1, 1983, between the Apache County Authority and
Morgan Guaranty authorizing Floating Rate Monthly Demand Industrial Development Revenue
Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K
for the year ended December 31, 1983, File no. 1-5924 Exhibit 4(I)(2).) |
|
|
|
|
|
*4(d)(3)
|
|
|
|
First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County
Authority and TEP relating to Floating Rate Monthly Demand Industrial Development Revenue
Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K
for the year ended December 31, 1987, File No. 1-5924 Exhibit 4(k)(3).) |
|
|
|
|
|
*4(d)(4)
|
|
|
|
First Supplemental Indenture, dated as of December 1, 1985, between the Apache County
Authority and Morgan Guaranty relating to Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company Springerville
Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 Exhibit
4(k)(4).) |
|
|
|
|
|
*4(d)(5)
|
|
|
|
Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County
Authority and TEP relating to Industrial Development Revenue Bonds, 1983 Series A (Tucson
Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860
Exhibit 4(k)(5).) |
|
|
|
|
|
*4(d)(6)
|
|
|
|
Second Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache
County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds,
1983 Series A (Tucson Electric Power Company Springerville Project). (Form S-4,
Registration No. 33-52860 Exhibit 4(k)(6).) |
|
|
|
|
|
*4(e)(1)
|
|
|
|
Loan Agreement, dated as of December 1, 1983, between the Apache County Authority and TEP
relating to Variable Rate Demand Industrial Development Revenue Bonds, 1983 Series B
(Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended
December 31, 1983, File No. 1-5924 Exhibit 4(m)(1).) |
|
|
|
|
|
*4(e)(2)
|
|
|
|
Indenture of Trust dated as of December 1, 1983, between the Apache County Authority and
Morgan Guaranty authorizing Variable Rate Demand Industrial Development Revenue Bonds.
1983 Series B (Tucson Electric Power Company Springerville Project). (Form 10-K for the
year ended December 31, 1983, File No. 1-5924 Exhibit 4(m)(2).) |
|
|
|
|
|
*4(e)(3)
|
|
|
|
First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County
Authority and TEP relating to Floating Rate Monthly Demand Industrial Developmental
Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville Project). (Form
10-K for the year ended December 31, 1987, File No. 1-5924 Exhibit 4(I)(3).) |
|
|
|
|
|
*4(e)(4)
|
|
|
|
First Supplemental Indenture, dated as of December 1, 1985, between the Apache County
Authority and Morgan Guaranty relating to Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville
Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 Exhibit
4(I)(4).) |
|
|
|
|
|
*4(e)(5)
|
|
|
|
Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County
Authority and TEP relating to Industrial Development Revenue Bonds, 1983 Series B (Tucson
Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860
Exhibit 4(I)(5).) |
|
|
|
|
|
*4(e)(6)
|
|
|
|
Second Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache
County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds,
1983 Series B (Tucson Electric Power Company Springerville Project). (Form S-4,
Registration No. 33-52860 Exhibit 4(I)(6).) |
K-183
|
|
|
|
|
*4(f)(1)
|
|
|
|
Loan Agreement, dated as of December 1, 1983, between the Apache County Authority and TEP
relating to Variable Rate Demand Industrial Development Revenue Bonds, 1983 Series C
(Tucson Electric Power Company Springerville Project). (Form 10-K for year ended December
31, 1983, File No. 1-5924 Exhibit 4(n)(1).) |
|
|
|
|
|
*4(f)(2)
|
|
|
|
Indenture of Trust dated as of December 1, 1983, between the Apache County Authority and
Morgan Guaranty authorizing Variable Rate Demand Industrial Development Revenue Bonds,
1983 Series C (Tucson Electric Power Company Springerville Project). (Form 10-K for the
year ended December 31, 1983, File No. 1-5924 Exhibit 4(n)(2).) |
|
|
|
|
|
*4(f)(3)
|
|
|
|
First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County
Authority and TEP relating to Floating Rate Monthly Demand Industrial Development Revenue
Bonds, 1983 Series C (Tucson Electric Power Company Springerville Project). (Form 10-K
for the year ended December 31, 1987, File No. 1-5924 Exhibit 4(m)(3).) |
|
|
|
|
|
*4(f)(4)
|
|
|
|
First Supplemental Indenture, dated as of December 1, 1985, between the Apache County
Authority and Morgan Guaranty relating to Floating Rate Monthly Demand Industrial
Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company Springerville
Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 Exhibit
4(m)(4).) |
|
|
|
|
|
*4(f)(5)
|
|
|
|
Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County
Authority and TEP relating to Industrial Development Revenue Bonds, 1983 Series C (Tucson
Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860
Exhibit 4(m)(5).) |
|
|
|
|
|
*4(f)(6)
|
|
|
|
Second Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache County Authority and
Morgan Guaranty relating to Industrial Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company
Springerville Project). (Form S-4, Registration No. 33-52860 Exhibit 4(m)(6).) |
|
|
|
|
|
*4(g)
|
|
|
|
Reimbursement Agreement, dated as of September 15, 1981, as amended, between TEP and
Manufacturers Hanover Trust Company. (Form 10-K for the year ended December 31, 1984,
File No. 1-5924 Exhibit 4(o)(4).) |
|
|
|
|
|
*4(h)(1)
|
|
|
|
Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and TEP
relating to Variable Rate Demand Industrial Development Revenue Bonds, 1985 Series A
(Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended
December 31, 1985, File No. 1-5924 Exhibit 4(r)(1).) |
|
|
|
|
|
*4(h)(2)
|
|
|
|
Indenture of Trust dated as of December 1, 1985, between the Apache County Authority and
Morgan Guaranty authorizing Variable Rate Demand Industrial Development Revenue Bonds,
1985 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for the
year ended December 31, 1985, File No. 1-5924 Exhibit 4(r)(2).) |
|
|
|
|
|
*4(h)(3)
|
|
|
|
First Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County
Authority and TEP relating to Industrial Development Revenue Bonds, 1985 Series A (Tucson
Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860
Exhibit 4(o)(3).) |
|
|
|
|
|
*4(h)(4)
|
|
|
|
First Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache
County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds,
1985 Series A (Tucson Electric Power Company Springerville Project). (Form S-4,
Registration No. 33-52860 Exhibit 4(o)(4).) |
|
|
|
|
|
*4(i)(1)
|
|
|
|
Indenture of Mortgage and Deed of Trust dated as of December 1, 1992, to Bank of Montreal
Trust Company, Trustee. (Form S-1, Registration No. 33-55732 Exhibit 4(r)(1).) |
K-184
|
|
|
|
|
*4(i)(2)
|
|
|
|
Supplemental Indenture No. 1 creating a series of bonds designated Second Mortgage Bonds,
Collateral Series A, dated as of December 1, 1992. (Form S-1, Registration No. 33-55732
Exhibit 4(r)(2).) |
|
|
|
|
|
*4(i)(3)
|
|
|
|
Supplemental Indenture No. 2 creating a series of bonds designated Second Mortgage Bonds,
Collateral Series B, dated as of December 1, 1997. (Form 10-K for year ended December 31,
1997, File No. 1-5924 Exhibit 4(m)(3).) |
|
|
|
|
|
*4(i)(4)
|
|
|
|
Supplemental Indenture No. 3 creating a series of bonds designated Second Mortgage Bonds,
Collateral Series, dated as of August 1, 1998. (Form 10-Q for the quarter ended June 30,
1998, File No. 1-5924 Exhibit 4(c).) |
|
|
|
|
|
*4(i)(5)
|
|
|
|
Supplemental Indenture No. 4 creating a series of bonds designated Second Mortgage Bonds,
Collateral Series C, dated as of November 1, 2002. (Form 8-K dated November 27, 2002,
File Nos. 1-05924 and 1-13739 Exhibit 99.2.) |
|
|
|
|
|
*4(i)(6)
|
|
|
|
Supplemental Indenture No. 5 creating a series of bonds designated Second Mortgage Bonds,
Collateral Series D, dated as of March 1, 2004. (Form 8-K dated March 31, 2004, File Nos.
1-05924 and 1-13739 Exhibit 10(b).) |
|
|
|
|
|
*4(i)(7)
|
|
|
|
Supplemental Indenture No. 6 creating a series of bonds designated Second Mortgage Bonds,
Collateral Series E, dated as of May 1, 2005. (Form 10-Q for the quarter ended March 31,
2005, File Nos. 1-5924 and 1-13739 Exhibit 4(b).) |
|
|
|
|
|
*4(i)(8)
|
|
|
|
Supplemental Indenture No. 7 creating a series of bonds designated First Mortgage Bonds,
Collateral Series F, dated as of December 1, 2006. (Form 8-K dated December 22, 2006,
File Nos. 1-5924 and 1-13739 Exhibit 4.1.) |
|
|
|
|
|
*4(i)(9)
|
|
|
|
Supplemental Indenture No. 8 creating a series of bonds designated First Mortgage Bonds,
Collateral Series G, dated as of June 1, 2008. (Form 8-K dated June 25, 2008, File Nos.
1-5924 and 1-13739 Exhibit 4(b).). |
|
|
|
|
|
4(i)(10)
|
|
|
|
Supplemental Indenture No. 9 dated as of July 3, 2008. |
|
|
|
|
|
*4(j)(1)
|
|
|
|
Loan Agreement, dated as of April 1, 1997 between Coconino County, Arizona Pollution
Control Corporation and TEP relating to Pollution Control Revenue Bonds, 1997 Series A
(Tucson Electric Power Company Navajo Project). (Form 10-Q for the quarter ended March
31, 1997, File No. 1-5924 Exhibit 4(c).) |
|
|
|
|
|
*4(j)(2)
|
|
|
|
Indenture of Trust, dated as of April 1, 1997, between Coconino County, Arizona Pollution
Control Corporation and First Trust of New York, National Association, authorizing
Pollution Control Revenue Bonds, 1997 Series A (Tucson Electric Power Company Navajo
Project). (Form 10-Q for the quarter ended March 31, 1997, File No. 1-5924 Exhibit
4(d).) |
|
|
|
|
|
*4(l)(1)
|
|
|
|
Loan Agreement, dated as of September 15, 1997, between The Industrial Development
Authority of the County of Pima and TEP relating to Industrial Development Revenue Bonds,
1997 Series A (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended
September 30, 1997, File No. 1-5924 Exhibit 4(a).) |
|
|
|
|
|
*4(l)(2)
|
|
|
|
Indenture of Trust, dated as of September 15, 1997, between The Industrial Development
Authority of the County of Pima and First Trust of New York, National Association,
authorizing Industrial Development Revenue Bonds, 1997 Series A (Tucson Electric Power
Company Project). (Form 10-Q for the quarter ended September 30, 1997, File No. 1-5924
Exhibit 4(b).) |
|
|
|
|
|
*4(m)(1)
|
|
|
|
Loan Agreement, dated as of March 1, 1998, between The Industrial Development Authority of
the County of Apache and TEP relating to Pollution Control Revenue Bonds, 1998 Series A
(Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998,
File No. 1-5924 Exhibit 4(a).) |
K-185
|
|
|
|
|
*4(m)(2)
|
|
|
|
Indenture of Trust, dated as of March 1, 1998, between The Industrial Development
Authority of the County of Apache and First Trust of New York, National Association,
authorizing Pollution Control Revenue Bonds, 1998 Series A (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 Exhibit
4(b).) |
|
|
|
|
|
*4(n)(1)
|
|
|
|
Loan Agreement, dated as of March 1, 1998, between The Industrial Development Authority of
the County of Apache and TEP relating to Pollution Control Revenue Bonds, 1998 Series B
(Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998,
File No. 1-5924 Exhibit 4(c).) |
|
|
|
|
|
*4(n)(2)
|
|
|
|
Indenture of Trust, dated as of March 1, 1998, between The Industrial Development
Authority of the County of Apache and First Trust of New York, National Association,
authorizing Pollution Control Revenue Bonds, 1998 Series B (Tucson Electric Power Company
Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 Exhibit
4(d).) |
|
|
|
|
|
*4(o)(1)
|
|
|
|
Loan Agreement, dated as of March 1, 1998, between The Industrial Development Authority of
the County of Apache and TEP relating to Industrial Development Revenue Bonds, 1998 Series
C (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31,
1998, File No. 1-5924 Exhibit 4(e).) |
|
|
|
|
|
*4(o)(2)
|
|
|
|
Indenture of Trust, dated as of March 1, 1998, between The Industrial Development
Authority of the County of Apache and First Trust of New York, National Association,
authorizing Industrial Development Revenue Bonds, 1998 Series C (Tucson Electric Power
Company Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924
Exhibit 4(f).) |
|
|
|
|
|
*4(q)(1)
|
|
|
|
Amended and Restated TEP Credit Agreement dated as of August 11, 2006, among TEP, the
Lenders Party Thereto, the Issuing Banks Party Thereto, Union Bank of California, N.A., as
Lead Arranger and Administrative Agent, The Bank of New York and JPMorgan Chase, N.A., as
Co-Syndication Agents, and Wells Fargo Bank, National Association, and ABN Amro Bank N.V.
as Co-Documentation Agents. (Form 8-K dated August 15, 2006, File Nos. 1-5924 and 1-13739
Exhibit 4.3.) |
|
|
|
|
|
*4(r)(2)
|
|
|
|
Amendment No. 1 to Amended and Restated TEP Credit Agreement, dated September 1, 2006.
(Form 10-Q for the quarter ended September 30, 2006, File No. 1-5924 Exhibit 4.) |
|
|
|
|
|
*4(r)(3)
|
|
|
|
Amendment No. 2 to Amended and Restated TEP Credit Agreement, dated May 30, 2008.
(Form 10-K dated December 31, 2008, File No. 1-13739)
|
|
|
|
|
|
*4(r)(4)
|
|
|
|
Amendment No. 3 to Amended and Restated TEP Credit Agreement, dated September 16, 2008.
(Form 10-K dated December 31, 2008, File No. 1-13739)
|
|
|
|
|
|
*4(s)(1)
|
|
|
|
Note Purchase and Guaranty Agreement dated August 11, 2003 among UNS Gas, Inc., and
UniSource Energy Services, Inc., and certain institutional investors. (Form 8-K dated
August 21, 2003, File Nos. 1-5924 and 1-13739 Exhibit 99.2.) |
|
|
|
|
|
*4(t)(1)
|
|
|
|
Note Purchase and Guaranty Agreement date August 5, 2008 among UNS Electric, Inc., and
UniSource Energy Services, Inc., and certain institutional investors. (Form 10-Q for the
quarter ended June 30, 2008, File Nos. 1-5924 and 1-13739 Exhibit 4.). |
|
|
|
|
|
*4(u)(1)
|
|
|
|
Indenture dated as of March 1, 2005, to The Bank of New York, as Trustee. (Form 8-K dated
March 3, 2005, File Nos. 1-5924 and 1-13739 Exhibit 4.1). |
|
|
|
|
|
*4(w)(1)
|
|
|
|
Amended and Restated Credit Agreement dated as of August 11, 2006, among UniSource Energy,
the Lenders Party Hereto, Union Bank of California, N.A., as Lead Arranger and
Administrative Agent, The Bank of New York and JPMorgan Chase, N.A., as Co-Syndication
Agents, and Wells Fargo Bank, National Association, and ABN Amro Bank N.V. as
Co-Documentation Agents. (Form 8-K dated August 15, 2006, File Nos. 1-5924 and 1-13739
Exhibit 4.1.) |
K-186
|
|
|
|
|
*4(w)(2)
|
|
|
|
Amendment No. 1 to the Amended and Restated UniSource Energy Credit Agreement, dated
September 16, 2008. (Form 10-K dated December 31, 2008, File No. 1-13739)
|
|
|
|
|
|
*4(w)(3)
|
|
|
|
Amendment No. 2 to the Amended and Restated UniSource Energy Credit Agreement, dated
February 26, 2009. (Form 10-K dated December 31, 2008, File No. 1-13739)
|
|
|
|
|
|
*4(x)(1)
|
|
|
|
Amended and Restated Credit Agreement dated as of August 11, 2006, among UNS Electric and
UNS Gas, UniSource Energy Services as Guarantor, and the Banks Named Herein and the Other
Lenders from Time to Time party Hereto, Union Bank of California, N.A., as Lead Arranger
and Administrative Agent, The Bank of New York and JPMorgan Chase, N.A., as Co-Syndication
Agents, and Wells Fargo Bank, National Association, and ABN Amro Bank N.V. as
Co-Documentation Agents. (Form 8-K dated August 15, 2006, File Nos. 1-5924 and 1-13739
Exhibit 4.4.) |
|
|
|
|
|
*4(x)(2)
|
|
|
|
Amendment No. 1 to the Amended and Restated UNS Gas/UNS Electric Credit Agreement, dated
as of April 30, 2007. (Form 10-K dated December 31, 2008, File No. 1-13739)
|
|
|
|
|
|
*4(x)(3)
|
|
|
|
Amendment No. 2 to the Amended and Restated UNS Gas/UNS Electric Credit Agreement, dated
as of July 31, 2008. (Form 10-K dated December 31, 2008, File No. 1-13739)
|
|
|
|
|
|
*4(z)(1)
|
|
|
|
Indenture of Trust, dated as of March 1, 2008, between The Industrial Development
Authority of the County of Pima and U.S. Trust National Association authorizing Industrial
Development Revenue Bonds, 2008 Series A (Tucson Electric Power Company Project). (Form
8-K dated March 19, 2008, File Nos. 1-5924 and 1-13739 Exhibit 4(a).) |
|
|
|
|
|
*4(z)(2)
|
|
|
|
Loan Agreement, dated as of March 1, 2008, between the Industrial Development Authority of
the County of Pima and TEP relating to Industrial Development Revenue Bonds, 2008 Series A
(Tucson Electric Power Company Project). (Form 8-K dated March 19, 2008, File Nos. 1-5924
and 1-13739 Exhibit 4(b).) |
|
|
|
|
|
*4(aa)(1)
|
|
|
|
Indenture of Trust, dated as of June 1, 2008, between The Industrial Development Authority
of the County of Pima and U.S. Trust National Association authorizing Industrial
Development Revenue Bonds, 2008 Series B (Tucson Electric Power Company Project). (Form
8-K dated June 25, 2008, File Nos. 1-5924 and 1-13739 Exhibit 4(a).) |
|
|
|
|
|
*4(aa)(2)
|
|
|
|
Loan Agreement, dated as of June 1, 2008, between The Industrial Development Authority of
the County of Pima and TEP relating to Industrial Development Revenue Bonds, 2008 Series B
(Tucson Electric Power Company Project). (Form 8-K dated June 25, 2008, File Nos. 1-5924
and 1-13739 Exhibit 4(b).) |
|
|
|
|
|
*4(aa)(3)
|
|
|
|
Indenture of Trust, dated as of October 1, 2009, between The Industrial Development
Authority of the County of Pima and U.S. Bank Trust National Association authorizing
Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric Power Company Navajo
Project) (Form 8-K dated October 13, 2009, File No. 1-13739- Exhibit 4(A)). |
|
|
|
|
|
*4(aa)(4)
|
|
|
|
Loan Agreement, dated as of October 1, 2009, between The Industrial Development Authority
of the County of Pima and TEP relating to Pollution Control Revenue Bonds, 2009 Series A
(Tucson Electric Power Company San Juan Project) (Form 8-K dated October 13, 2009, File
No. 1-13739- Exhibit 4(B)). |
|
|
|
|
|
*4(aa)(5)
|
|
|
|
Indenture of Trust, dated as of October 1, 2009, between Coconino County, Arizona
Pollution Control Corporation and U.S. Bank Trust National Association authorizing
Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric Power Company Navajo
Project) (Form 8-K dated October 13, 2009, File No. 1-13739- Exhibit 4(C)). |
|
|
|
|
|
*4(aa)(6)
|
|
|
|
Loan Agreement, dated as of October 1, 2009, between Coconino County, Arizona Pollution
Control Corporation and TEP relating to Pollution Control Revenue Bonds, 2009 Series A
(Tucson Electric Power Company Navajo Project) (Form 8-K dated October 13, 2009, File No.
1-13739- Exhibit 4(D)). |
K-187
|
|
|
|
|
*4(aa)(7)
|
|
|
|
UniSource Energy Development Credit Agreement, dated as of March 26, 2009, between UED and
Union Bank, N.A. and the banks named therein and from time to time parties thereto. (Form
8-K dated April 1, 2009, File No. 1-13739- Exhibit 4(a)). |
|
|
|
|
|
*4(aa)(8)
|
|
|
|
Guaranty Agreement, dated as of March 26, 2009, made by UniSource Energy in favor of Union
Bank, N.A. as Agent for each of the secured parties as defined in the UED Credit
Agreement. (Form 8-K dated April 1, 2009, File No. 1-13739- Exhibit 4(b)). |
|
|
|
|
|
4(aa)(9)
|
|
|
|
Amendment No. 1 to UED Credit Agreement, dated as of February 3, 2010, among UED, Union
Bank, N.A. as Agent, and the banks named therein and from time to time party thereto. |
|
|
|
|
|
*10(a)(1)
|
|
|
|
Lease Agreements, dated as of December 1, 1984, between Valencia and United States Trust
Company of New York, as Trustee, and Thomas B. Zakrzewski, as Co-Trustee, as amended and
supplemented. (Form 10-K for the year ended December 31, 1984, File No. 1-5924 Exhibit
10(d)(1).) |
|
|
|
|
|
*10(a)(2)
|
|
|
|
Guaranty and Agreements, dated as of December 1, 1984, between TEP and United States Trust
Company of New York, as Trustee, and Thomas B. Zakrzewski, as Co-Trustee. (Form 10-K for
the year ended December 31, 1984, File No. 1-5924 Exhibit 10(d)(2).) |
|
|
|
|
|
*10(a)(3)
|
|
|
|
General Indemnity Agreements, dated as of December 1, 1984, between Valencia and TEP, as
Indemnitors; General Foods Credit Corporation, Harvey Hubbell Financial, Inc. and J.C.
Penney Company, Inc. as Owner Participants; United States Trust Company of New York, as
Owner Trustee; Teachers Insurance and Annuity Association of America as Loan Participant;
and Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended
December 31, 1984, File No. 1-5924 Exhibit 10(d)(3).) |
|
|
|
|
|
*10(a)(4)
|
|
|
|
Tax Indemnity Agreements, dated as of December 1, 1984, between General Foods Credit
Corporation, Harvey Hubbell Financial, Inc. and J.C. Penney Company, Inc., each as
Beneficiary under a separate Trust Agreement dated December 1, 1984, with United States
Trust of New York as Owner Trustee, and Thomas B. Zakrzewski as Co-Trustee, Lessor, and
Valencia, Lessee, and TEP, Indemnitors. (Form 10-K for the year ended December 31, 1984,
File No. 1-5924 Exhibit 10(d)(4).) |
|
|
|
|
|
*10(a)(5)
|
|
|
|
Amendment No. 1, dated December 31, 1984, to the Lease Agreements, dated December 1, 1984,
between Valencia and United States Trust Company of New York, as Owner Trustee, and Thomas
B. Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31, 1986, File No.
1-5924 Exhibit 10(e)(5).) |
|
|
|
|
|
*10(a)(6)
|
|
|
|
Amendment No. 2, dated April 1, 1985, to the Lease Agreements, dated December 1, 1984,
between Valencia and United States Trust Company of New York, as Owner Trustee, and Thomas
B. Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31, 1986, File No.
1-5924 Exhibit 10(e)(6).) |
|
|
|
|
|
*10(a)(7)
|
|
|
|
Amendment No. 3 dated August 1, 1985, to the Lease Agreements, dated December 1, 1984,
between Valencia and United States Trust Company of New York, as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31, 1986, File No.
1-5924 Exhibit 10(e)(7).) |
|
|
|
|
|
*10(a)(8)
|
|
|
|
Amendment No. 4, dated June 1, 1986, to the Lease Agreement, dated December 1, 1984,
between Valencia and United States Trust Company of New York as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee, under a Trust Agreement dated as of December 1, 1984, with
General Foods Credit Corporation as Owner Participant. (Form 10-K for the year ended
December 31, 1986, File No. 1-5924 Exhibit 10(e)(8).) |
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*10(a)(9)
|
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|
Amendment No. 4, dated June 1, 1986, to the Lease Agreement, dated December 1, 1984,
between Valencia and United States Trust Company of New York as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee, under a Trust Agreement dated as of December 1, 1984, with J.C.
Penney Company, Inc. as Owner Participant. (Form 10-K for the year ended December 31,
1986, File No. 1-5924 Exhibit 10(e)(9).) |
K-188
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*10(a)(10)
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Amendment No. 4, dated June 1, 1986, to the Lease Agreement, dated December 1, 1984,
between Valencia and United States Trust Company of New York as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee, under a Trust Agreement dated as of December 1, 1984, with
Harvey Hubbell Financial Inc. as Owner Participant. (Form 10-K for the year ended
December 31, 1986, File No. 1-5924 Exhibit 10(e)(10).) |
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*10(a)(11)
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Lease Amendment No. 5 and Supplement No. 2, to the Lease Agreement, dated July 1, 1986,
between Valencia, United States Trust Company of New York as Owner Trustee, and Thomas
Zakrzewski as Co-Trustee and J.C. Penney as Owner Participant. (Form 10-K for the year
ended December 31, 1986, File No. 1-5924 Exhibit 10(e)(11).) |
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*10(a)(12)
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Lease Amendment No. 5, to the Lease Agreement, dated June 1, 1987, between Valencia,
United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as
Co-Trustee and General Foods Credit Corporation as Owner Participant. (Form 10-K for the
year ended December 31, 1988, File No. 1-5924 Exhibit 10(f)(12).) |
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*10(a)(13)
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Lease Amendment No. 5, to the Lease Agreement, dated June 1, 1987, between Valencia,
United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as
Co-Trustee and Harvey Hubbell Financial Inc. as Owner Participant. (Form 10-K for the
year ended December 31, 1988, File No. 1-5924 Exhibit 10(f)(13).) |
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*10(a)(14)
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Lease Amendment No. 6, to the Lease Agreement, dated June 1, 1987, between Valencia,
United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as
Co-Trustee and J.C. Penney Company, Inc. as Owner Participant. (Form 10-K for the year
ended December 31, 1988, File No. 1-5924 Exhibit 10(f)(14).) |
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*10(a)(15)
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Lease Supplement No. 1, dated December 31, 1984, to Lease Agreements, dated December 1,
1984, between Valencia, as Lessee and United States Trust Company of New York and Thomas
B. Zakrzewski, as Owner Trustee and Co-Trustee, respectively (document filed relates to
General Foods Credit Corporation; documents relating to Harvey Hubbell Financial, Inc. and
JC Penney Company, Inc. are not filed but are substantially similar). (Form S-4
Registration No. 33-52860 Exhibit 10(f)(15).) |
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*10(a)(16)
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Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of
December 1, 1984, between Valencia and TEP, as Indemnitors, General Foods Credit
Corporation, as Owner Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and
Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December
31, 1986, File No. 1-5924 Exhibit 10(e)(12).) |
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*10(a)(17)
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Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of
December 1, 1984, between Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as
Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers
Insurance and Annuity Association of America, as Loan Participant, and Marine Midland
Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December 31, 1986, File
No. 1-5924 Exhibit 10(e)(13).) |
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*10(a)(18)
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Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of
December 1, 1984, between Valencia and TEP, as Indemnitors, Harvey Hubbell Financial,
Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee,
Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine
Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December 31,
1986, File No. 1-5924 Exhibit 10(e)(14).) |
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*10(a)(19)
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Amendment No. 2, dated as of July 1, 1986, to the General Indemnity Agreement, dated as of
December 1, 1984, between Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as
Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers
Insurance and Annuity Association of America, as Loan Participant, and Marine Midland
Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860 Exhibit
10(f)(19).) |
K-189
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*10(a)(20)
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Amendment No. 2, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of
December 1, 1984, between Valencia and TEP, as Indemnitors, General Foods Credit
Corporation, as Owner Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and
Marine Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860
Exhibit 10(f)(20).) |
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*10(a)(21)
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Amendment No. 2, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of
December 1, 1984, between Valencia and TEP, as Indemnitors, Harvey Hubbell Financial,
Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee,
Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine
Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860
Exhibit 10(f)(21).) |
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*10(a)(22)
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Amendment No. 3, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of
December 1, 1984, between Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as
Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers
Insurance and Annuity Association of America, as Loan Participant, and Marine Midland
Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860 Exhibit
10(f)(22).) |
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*10(a)(23)
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Supplemental Tax Indemnity Agreement, dated July 1, 1986, between J.C. Penney Company,
Inc., as Owner Participant, and Valencia and TEP, as Indemnitors. (Form 10-K for the year
ended December 31, 1986, File No. 1-5924 Exhibit 10(e)(15).) |
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*10(a)(24)
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Supplemental General Indemnity Agreement, dated as of July 1, 1986, among Valencia and
TEP, as Indemnitors, J.C. Penney Company, Inc., as Owner Participant, United States Trust
Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of
America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form
10-K for the year ended December 31, 1986, File No. 1-5924 Exhibit 10(e)(16).) |
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*10(a)(25)
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Amendment No. 1, dated as of June 1, 1987, to the Supplemental General Indemnity
Agreement, dated as of July 1, 1986, among Valencia and TEP, as Indemnitors, J.C. Penney
Company, Inc., as Owner Participant, United States Trust Company of New York, as Owner
Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and
Marine Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860
Exhibit 10(f)(25).) |
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*10(a)(26)
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Valencia Agreement, dated as of June 30, 1992, among TEP, as Guarantor, Valencia, as
Lessee, Teachers Insurance and Annuity Association of America, as Loan Participant, Marine
Midland Bank, N.A., as Indenture Trustee, United States Trust Company of New York, as
Owner Trustee, and Thomas B. Zakrzewski, as Co-Trustee, and the Owner Participants named
therein relating to the Restructuring of Valencias lease of the coal-handling facilities
at the Springerville Generating Station. (Form S-4, Registration No. 33-52860 Exhibit
10(f)(26).) |
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*10(a)(27)
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Amendment, dated as of December 15, 1992, to the Lease Agreements, dated December 1, 1984,
between Valencia, as Lessee, and United States Trust Company of New York, as Owner
Trustee, and Thomas B. Zakrzewski, as Co-Trustee. (Form S-1, Registration No. 33-55732
Exhibit 10(f)(27).) |
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*10(b)(1)
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Lease Agreements, dated as of December 1, 1985, between TEP and San Carlos Resources Inc.
(San Carlos) (a wholly-owned subsidiary of the Registrant) jointly and severally, as
Lessee, and Wilmington Trust Company, as Trustee, as amended and supplemented. (Form 10-K
for the year ended December 31, 1985, File No. 1-5924 Exhibit 10(f)(1).) |
K-190
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*10(b)(2)
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Tax Indemnity Agreements, dated as of December 1, 1985, between Philip Morris Credit
Corporation, IBM Credit Financing Corporation and Emerson Finance Co., each as beneficiary
under a separate trust agreement, dated as of December 1, 1985, with Wilmington Trust
Company, as Owner Trustee, and William J. Wade, as Co-Trustee, and TEP and San Carlos, as
Lessee. (Form 10-K for the year ended December 31, 1985, File No. 1-5924 Exhibit
10(f)(2).) |
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*10(b)(3)
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Participation Agreement, dated as of December 1, 1985, among TEP and San Carlos as Lessee,
Philip Morris Credit Corporation, IBM Credit Financing Corporation, and Emerson Finance
Co. as Owner Participants, Wilmington Trust Company as Owner Trustee, The Sumitomo Bank,
Limited, New York Branch, as Loan Participant, and Bankers Trust
Company, as Indenture Trustee. (Form 10-K for the year ended December 31, 1985,
File No. 1-5924 Exhibit 10(f)(3).) |
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*10(b)(4)
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Restructuring Commitment Agreement,
dated as of June 30, 1992, among TEP
and San Carlos, jointly and
severally, as Lessee, Philip Morris
Credit Corporation, IBM Credit
Financing Corporation and Emerson
Capital Funding, William J. Wade, as
Owner Trustee and Co-Trustee,
respectively, The Sumitomo Bank,
Limited, New York Branch, as Loan
Participant and United States Trust
Company of New York, as Indenture
Trustee. (Form S-4, Registration No.
33-52860 Exhibit 10(g)(4).) |
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*10(b)(5)
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Lease Supplement No. 1, dated December
31, 1985, to Lease Agreements, dated
as of December 1, 1985, between TEP
and San Carlos, jointly and
severally, as Lessee Trustee and
Co-Trustee, respectively (document
filed relates to Philip Morris Credit
Corporation; documents relating to
IBM Credit Financing Corporation and
Emerson Financing Co. are not filed
but are substantially similar).
(Form S-4, Registration No. 33-52860
Exhibit 10(g)(5).) |
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*10(b)(6)
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Amendment No. 1, dated as of December
15, 1992, to Lease Agreements, dated
as of December 1, 1985, between TEP
and San Carlos, jointly and
severally, as Lessee, and Wilmington
Trust Company and William J. Wade, as
Owner Trustee and Co-Trustee,
respectively, as Lessor. (Form S-1,
Registration No. 33-55732 Exhibit
10(g)(6).) |
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*10(b)(7)
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Amendment No. 1, dated as of December
15, 1992, to Tax Indemnity
Agreements, dated as of December 1,
1985, between Philip Morris Credit
Corporation, IBM Credit Financing
Corporation and Emerson Capital
Funding Corp., as Owner Participants
and TEP and San Carlos, jointly and
severally, as Lessee. (Form S-1,
Registration No. 33-55732 Exhibit
10(g)(7).) |
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*10(b)(8)
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Amendment No. 2, dated as of December
1, 1999, to Lease Agreement, dated as
of December 1, 1985, between TEP and
San Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Co-Trustee, respectively, under a
Trust Agreement with Philip Morris
Capital Corporation as Owner
Participant. (Form 10-K for the year
ended December 31, 1999, File No.
1-5924 Exhibit 10(b)(8).) |
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*10(b)(9)
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Amendment No. 2, dated as of December
1, 1999, to Lease Agreement, dated as
of December 1, 1985, between TEP and
San Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Co-Trustee, respectively, under a
Trust Agreement with IBM Credit
Financing Corporation as Owner
Participant. (Form 10-K for the year
ended December 31, 1999, File No.
1-5924 Exhibit 10(b)(9).) |
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*10(b)(10)
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Amendment No. 2, dated as of December
1, 1999, to Lease Agreement, dated as
of December 1, 1985, between TEP and
San Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Co-Trustee, respectively, under a
Trust Agreement with Emerson Finance
Co. as Owner Participant. (Form 10-K
for the year ended December 31, 1999,
File No. 1-5924 Exhibit
10(b)(10).) |
K-191
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*10(b)(11)
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Amendment No. 2, dated as of December
1, 1999, to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, jointly and
severally, as Lessee, and Philip
Morris Capital Corporation as Owner
Participant, beneficiary under a
Trust Agreement dated as of December
1, 1985, with Wilmington Trust
Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively,
together as Lessor. (Form 10-K for
the year ended December 31, 1999,
File No. 1-5924 Exhibit
10(b)(11).) |
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*10(b)(12)
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Amendment No. 2, dated as of December
1, 1999, to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, jointly and
severally, as Lessee, and IBM Credit
Financing Corporation as Owner
Participant, beneficiary under a
Trust Agreement dated as of December
1, 1985, with Wilmington Trust
Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively,
together as Lessor. (Form 10-K for
the year ended December 31, 1999,
File No. 1-5924 Exhibit
10(b)(12).) |
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*10(b)(13)
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Amendment No. 2, dated as of December
1, 1999, to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, jointly and
severally, as Lessee, and Emerson
Finance Co. as Owner Participant,
beneficiary under a Trust Agreement
dated as of December 1, 1985, with
Wilmington Trust Company and William
J. Wade, as Owner Trustee and
Co-Trustee, respectively, together as
Lessor. (Form 10-K for the year
ended December 31, 1999, File No.
1-5924 Exhibit 10(b)(13).) |
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*10(b)(14)
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Amendment No. 3 dated as of June 1,
2003, to Lease Agreements, dated as
of December 1, 1985, between TEP and
San Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Co-Trustee, respectively, under a
Trust Agreement with Philip Morris
Capital Corporation as Owner
Participant. (Form 10-Q for the
quarter ended June 30, 2003, File No.
1-5924 Exhibit 10(a).) |
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*10(b)(15)
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Amendment No. 3 dated as of June 1,
2003, to Lease Agreements, dated as
of December 1, 1985, between TEP and
San Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Co-Trustee, respectively, under a
Trust Agreement with IBM Credit, LLC
as Owner Participant. (Form 10-Q for
the quarter ended June 30, 2003, File
No. 1-5924 Exhibit 10(b).) |
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*10(b)(16)
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Amendment No. 3 dated as of June 1,
2003, to Lease Agreements, dated as
of December 1, 1985, between TEP and
San Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Co-Trustee, respectively, under a
Trust Agreement with Emerson Finance
Co. as Owner Participant. (Form 10-Q
for the quarter ended June 30, 2003,
File No. 1-5924 Exhibit 10(c).) |
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*10(b)(17)
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Amendment No. 3 dated as of June 1,
2003, to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, jointly and
severally, as Lessee, and Philip
Morris Capital Corporation as Owner
Participant, beneficiary under a
Trust Agreement dated as of December
1, 1985, with Wilmington Trust
Company and William J. Wade, as Owner
Trustee and Co-Trustee, respectively,
together as Lessor. (Form 10-Q for
the quarter ended June 30, 2003, File
No. 1-5924 Exhibit 10(d).) |
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*10(b)(18)
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Amendment No. 3 dated as of June 1,
2003, to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, jointly and
severally, as Lessee, and IBM Credit,
LLC as Owner Participant, beneficiary
under a Trust Agreement dated as of
December 1, 1985, with Wilmington
Trust Company and William J. Wade, as
Owner Trustee and Co-Trustee,
respectively, together as Lessor.
(Form 10-Q for the quarter ended June
30, 2003, File No. 1-5924 Exhibit
10(e).) |
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*10(b)(19)
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Amendment No. 3 dated as of June 1,
2003, to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, jointly and
severally, as Lessee, and Emerson
Finance Co. as Owner Participant,
beneficiary under a Trust Agreement
dated as of December 1, 1985, with
Wilmington Trust Company and William
J. Wade, as Owner Trustee and
Co-Trustee, respectively, together as
Lessor. (Form 10-Q for the quarter
ended June 30, 2003, File No. 1-5924
Exhibit 10(f).) |
K-192
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*10(b)(20)
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|
Amendment No. 4, dated as of June 1, 2006, to Lease
Agreement, dated as of December 1, 1985, between TEP and San
Carlos, jointly and severally, as Lessee, and Wilmington Trust
Company and William J. Wade, as Owner Trustee and Cotrustee,
respectively, under a Trust Agreement with Philip Morris
Capital Corporation as Owner Participant. (Form 8-K dated June
12, 2006, File No. 1-5924 Exhibit 10.1.) |
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*10(b)(21)
|
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|
Amendment No. 4, dated as of June 1,
2006, to Lease Agreement, dated as of
December 1, 1985, between TEP and San
Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Cotrustee, respectively, under a
Trust Agreement with Selco Service
Corporation as Owner Participant.
(Form 8-K dated June 12, 2006, File
No. 1-5924 Exhibit 10.2.) |
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*10(b)(22)
|
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|
Amendment No. 4, dated as of June 1,
2006, to Lease Agreement, dated as of
December 1, 1985, between TEP and San
Carlos, jointly and severally, as
Lessee, and Wilmington Trust Company
and William J. Wade, as Owner Trustee
and Cotrustee, respectively, under a
Trust Agreement with Emerson Finance
LLC as Owner Participant. (Form 8-K
dated June 12, 2006, File No. 1-5924
Exhibit 10.3.) |
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*10(b)(23)
|
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|
Amendment No. 4, dated as of June 1,
2006 to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, as Lessee, and
Philip Morris Capital Corporation as
Owner Participant, beneficiary under
a Trust Agreement, dated as of
December 1, 1985, with Wilmington
Trust Company and William J. Wade,
as Owner Trustee and Cotrustee,
respectively, together as Lessor.
(Form 8-K dated June 12, 2006, File
No. 1-5924 Exhibit 10.4.) |
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*10(b)(24)
|
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|
Amendment No. 4, dated as of June 1,
2006 to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, as Lessee, and
Selco Service Corporation as Owner
Participant, beneficiary under a
Trust Agreement, dated as of December
1, 1985, with Wilmington Trust
Company and William J. Wade, as
Owner Trustee and Cotrustee,
respectively, together as Lessor.
(Form 8-K dated June 12, 2006, File
No. 1-5924 Exhibit 10.5.) |
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*10(b)(25)
|
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|
Amendment No. 4, dated as of June 1,
2006 to Tax Indemnity Agreement,
dated as of December 1, 1985, between
TEP and San Carlos, as Lessee, and
Emerson Finance LLC as Owner
Participant, beneficiary under a
Trust Agreement, dated as of December
1, 1985, with Wilmington Trust
Company and William J. Wade, as
Owner Trustee and Cotrustee,
respectively, together as Lessor.
(Form 8-K dated June 12, 2006, File
No. 1-5924 Exhibit 10.6.) |
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*10(c)(1)
|
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|
Amended and Restated Participation
Agreement, dated as of November 15,
1987, among TEP, as Lessee, Ford
Motor Credit Company, as Owner
Participant, Financial Security
Assurance Inc., as Surety, Wilmington
Trust Company and William J. Wade in
their respective individual
capacities as provided therein, but
otherwise solely as Owner Trustee and
Co-Trustee under the Trust Agreement,
and Morgan Guaranty, in its
individual capacity as provided
therein, but Secured Party. (Form
10-K for the year ended December 31,
1987, File No. 1-5924 Exhibit
10(j)(1).) |
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*10(c)(2)
|
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|
Lease Agreement, dated as of January
14, 1988, between Wilmington Trust
Company and William J. Wade, as Owner
Trust Agreement described therein,
dated as of November 15, 1987,between
such parties and Ford Motor Credit
Company, as Lessor, and TEP, as
Lessee. (Form 10-K for the year
ended December 31, 1987, File
No. 1-5924 Exhibit 10(j)(2).) |
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*10(c)(3)
|
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Tax Indemnity Agreement, dated as of
January 14, 1988, between TEP, as
Lessee, and Ford Motor Credit
Company, as Owner Participant,
beneficiary under a Trust Agreement,
dated as of November 15, 1987, with
Wilmington Trust Company and William
J. Wade, Owner Trustee and
Co-Trustee, respectively, together as
Lessor. (Form 10-K for the year
ended December 31, 1987, File No.
1-5924 Exhibit 10(j)(3).) |
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*10(c)(4)
|
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|
Loan Agreement, dated as of January
14, 1988, between the Pima County
Authority and Wilmington Trust
Company and William J. Wade in their
respective individual capacities as
expressly stated, but otherwise
solely as Owner Trustee and
Co-Trustee, respectively, under
and pursuant to a Trust Agreement, dated as of November 15, 1987, with Ford Motor
Credit Company as Trustor and Debtor relating to Industrial Development Lease
Obligation Refunding Revenue Bonds, 1988 Series A (TEPs Sundt Project). (Form
10-K for the year ended December 31, 1987, File No. 1-5924 Exhibit 10(j)(4).) |
K-193
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*10(c)(5)
|
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Indenture of Trust, dated as of January 14, 1988, between the Pima County Authority and Morgan Guaranty
authorizing Industrial Development Lease Obligation Refunding Revenue Bonds, 1988 Series A (Tucson Electric
Power Company Sundt Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 Exhibit
10(j)(5).) |
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*10(c)(6)
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Lease Amendment No. 1, dated as of May 1, 1989, between TEP, Wilmington Trust Company and William J. Wade
as Owner Trustee and Co-Trustee, respectively under a Trust Agreement dated as of November 15, 1987 with
Ford Motor Credit Company. (Form 10-K for the year ended December 31, 1990, File No. 1-5924 Exhibit
10(i)(6).) |
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*10(c)(7)
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Lease Supplement, dated as of January 1, 1991, between TEP, Wilmington Trust Company and William J. Wade as
Owner Trustee and Co-Trustee, respectively, under a Trust Agreement dated as of November 15, 1987, with
Ford. (Form 10-K for the year ended December 31, 1991, File No. 1-5924 Exhibit 10(i)(8).) |
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*10(c)(8)
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Lease Supplement, dated as of March 1, 1991, between TEP, Wilmington Trust Company and William J. Wade as
Owner Trustee and Co-Trustee, respectively, under a Trust Agreement dated as of November 15, 1987, with
Ford. (Form 10-K for the year ended December 31, 1991, File No. 1-5924 Exhibit 10(i)(9).) |
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*10(c)(9)
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Lease Supplement No. 4, dated as of December 1, 1991, between TEP, Wilmington Trust Company and William J.
Wade as Owner Trustee and Co-Trustee, respectively, under a Trust Agreement dated as of November 15, 1987,
with Ford. (Form 10-K for the year ended December 31, 1991, File No. 1-5924 Exhibit 10(i)(10).) |
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*10(c)(10)
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Supplemental Indenture No. 1, dated as of December 1, 1991, between the Pima County Authority and Morgan
Guaranty relating to Industrial Lease Development Obligation Revenue Project. (Form 10-K for the year
ended December 31, 1991, File No. 1-5924 Exhibit 10(l)(11).) |
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*10(c)(11)
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Restructuring Commitment Agreement, dated as of June 30, 1992, among TEP, as Lessee, Ford Motor Credit
Company, as Owner Participant, Wilmington Trust Company and William J. Wade, as Owner Trustee and
Co-Trustee, respectively, and Morgan Guaranty, as Indenture Trustee and Refunding Trustee, relating to the
restructuring of the Registrants lease of Unit 4 at the Sundt Generating Station. (Form S-4, Registration
No. 33-52860 Exhibit 10(i)(12).) |
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*10(c)(12)
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Amendment No. 1, dated as of December 15, 1992, to Amended and Restated Participation Agreement, dated as
of November 15, 1987, among TEP, as Lessee, Ford Motor Credit Company, as Owner Participant, Wilmington
Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, Financial Security
Assurance Inc., as Surety, and Morgan Guaranty, as Indenture Trustee. (Form S-1, Registration No. 33-55732
Exhibit 10(h)(12).) |
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*10(c)(13)
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Amended and Restated Lease, dated as of December 15, 1992, between TEP as Lessee and Wilmington Trust
Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, as Lessor. (Form S-1,
Registration No. 33-55732 Exhibit 10(h)(13).) |
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*10(c)(14)
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Amended and Restated Tax Indemnity Agreement, dated as of December 15, 1992, between TEP as Lessee and Ford
Motor Credit Company, as Owner Participant. (Form S-1,
Registration No. 33-55732 Exhibit 10(h)(14).) |
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*10(d)
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Participation Agreement, dated as of June 30, 1992, among TEP, as Lessee, various parties thereto, as
Owner, Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, and
LaSalle National Bank, as Indenture Trustee relating to TEPs lease of Springerville Unit 1. (Form S-1,
Registration No. 33-55732 Exhibit 10(u).) |
K-194
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*10(e) |
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Lease Agreement, dated as of December 15, 1992, between TEP, as Lessee and Wilmington Trust Company and
William J. Wade, as Owner Trustee and Co-Trustee, respectively, as Lessor. (Form S-1, Registration No.
33-55732 Exhibit 10(v).) |
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*10(f) |
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Tax Indemnity Agreements, dated as of December 15, 1992, between the various Owner Participants parties
thereto and TEP, as Lessee. (Form S-1, Registration No. 33-55732 Exhibit 10(w).) |
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+*10(h) |
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1994 Omnibus Stock and Incentive Plan of UniSource Energy. (Form S-8 dated January 6, 1998, File No.
333-43767.) |
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+*10(i) |
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Management and Directors Deferred Compensation Plan of UniSource Energy. (Form S-8 dated January 6, 1998,
File No. 333-43769.) |
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+*10(j) |
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TEP Supplemental Retirement Account for Classified Employees. (Form S-8 dated May 21, 1998, File No.
333-53309.) |
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+*10(k) |
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TEP Triple Investment Plan for Salaried Employees. (Form S-8 dated May 21, 1998, File No. 333-53333.) |
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+*10(m) |
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Notice of Termination of Change in Control Agreement from TEP to Karen G. Kissinger, dated as of March 3,
2005 (including a schedule of other officers who received substantially identical notices.) (Form 10-K for
the year ended December 31, 2004, File No. 1-5924 Exhibit 10(q)) |
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+*10(n) |
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Amended and Restated UniSource Energy 1994 Outside Director Stock Option Plan of UniSource Energy. (Form
S-8 dated September 9, 2002, File No. 333-99317.) |
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*10(o)(1) |
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Asset Purchase Agreement dated as of October 29, 2002, by and between UniSource Energy and Citizens
Communications Company relating to the Purchase of Citizens Electric Utility Business in the State of
Arizona. (Form 8-K dated October 31, 2002. File No. 1-13739 Exhibit 99-1.) |
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+*10(p) |
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UniSource Energy 2006 Omnibus Stock and Incentive Plan (Form S-8 dated January 31, 2007. File No.
333-140353.) |
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+*10(q) |
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Stock Option Agreement between UniSource Energy and Raymond S. Heyman dated as of September 15, 2005 (Form
10-K for the year ended December 31, 2007, File No. 1-13739, Exhibit 10(r).) |
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+*10(r) |
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Management and Directors Deferred Compensation Plan II of UniSource Energy. (Form S-8 dated December 30,
2008, File No. 333-156491.) |
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+*10(s) |
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Letter of Employment dated as of December 9, 2008, between UniSource Energy and Paul J. Bonavia. (Form 8-K
dated December 15, 2008, File No. 1-13739.) |
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+*10(t) |
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Amended and Restated Officer Change in Control Agreement, dated as of October 9, 2009, between TEP and
Michael J. DeConcini (including a schedule of other officers who are covered by substantially identical
agreements) (Form 8-K dated October 13, 2009, File No. 1-13739 Exhibit 10(A)). |
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+*10(u) |
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Officer Change in Control Agreement, dated as of October 9, 2009, between UniSource Energy Corporation and
Raymond S. Heyman (Form 8-K dated October 13, 2009, File No. 1-13739 Exhibit 10(B)). |
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+*10(v) |
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Employment Agreement, dated May 4, 2009, between UniSource Energy and Paul J. Bonavia (Form 10-Q for the
quarter ended March 31, 2009, File No. 13739 Exhibit 4). |
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12(a) |
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Computation of Ratio of Earnings to Fixed Charges TEP. |
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12(b) |
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Computation of Ratio of Earnings to Fixed Charges UniSource Energy. |
K-195
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21 |
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Subsidiaries of the Registrants. |
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23 |
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Consent of Independent Registered Public Accounting Firm. |
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24(a) |
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Power of Attorney UniSource Energy. |
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24(b) |
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Power of Attorney TEP. |
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31(a) |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act UniSource Energy, by Paul J. Bonavia. |
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31(b) |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act UniSource Energy by Kevin P. Larson. |
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31(c) |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act TEP, by Paul J. Bonavia. |
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31(d) |
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act TEP, by Kevin P. Larson. |
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**32 |
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Statements of Corporate Officers (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). |
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(*) |
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Previously filed as indicated and incorporated herein by reference. |
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(+) |
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Management contracts or compensatory plans or arrangements required to be filed as exhibits to
this Form 10-K by item 601(b)(10)(iii) of Regulation S-K. |
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** |
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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. |
K-196