FORM 10-K


                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K
      (Mark One)
         [X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
               THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
                  For the fiscal year ended December 31, 19941995
                                       OR
          [  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
             THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
            For the transition period from            __________ to           __________..
                         Commission File Number 1-5924
                         TUCSON ELECTRIC POWER COMPANY
             (Exact name of registrant as specified in its charter)
          ARIZONA                       86-0062700
(State or other jurisdiction ofOther Jurisdiction           (IRS Employer
             incorporation or organization)of                     Identification No.)
      Incorporation or
       Organization)                   P.O. BOX 711
                                           85702
   220 WEST SIXTH STREET,               (Zip Code)
      TUCSON, ARIZONA
           P.O. BOX 711
                           85701                          85702
   (Address of principal executive offices)       (Zip Code)Principal
     Executive Offices)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (602)(520) 571-4000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                     NAME OF EACH EXCHANGE
 TITLE OF EACH CLASS                 ON WHICH REGISTERED

COMMON STOCK, NO PAR VALUE            New York Stock Exchange
                                      Pacific Stock Exchange
FIRST MORTGAGE BONDS
8-1/8%     Series due 2001            New York Stock Exchange
7.55%      Series due 2002            New York Stock Exchange
7.65%      Series due 2003            New York Stock Exchange

       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:  NONE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes    X   No

     ____

     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 registrant's 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. [ X ]

     The aggregate market value of the registrant's outstanding voting Common
Stock held by non-affiliates of the registrant is $542,442,494.25$502,084,300.00 based on the
last reported sale price thereof on the consolidated tape on March 6, 1995.1, 1996.

     At March 6, 1995, 160,723,7021, 1996, 160,666,976 shares of the registrant's Common Stock, no
par value (the only class of Common Stock), were outstanding.

     Documents incorporated by reference:  Specified portions of Tucson Electric
Power Company's Proxy Statement relating to the 19951996 Annual Meeting of
Shareholders are incorporated by reference into PART III.
                            TABLE OF CONTENTS
                                                              Page

Definitions                                                           viDefinitions....................................................vi

                                   - PART I -

Item 1. ------ Business
 The Company 1...................................................1
 Certain Risks                                                         1
 The Financial Restructuring                                           1Risks; Forward-Looking Information ....................1
 Utility Operations
   Peak Demand and Customers 2...................................1
     Peak Demand                                                       2Demand................................................1
   Sales for Resale 3............................................3
   Competition 3
     Nations Energy Corporation                                        4.................................................3
 Generating and Other Resources
   Company Resources 5...........................................4
     Springerville Station                                             5Station......................................4
     Irvington Station                                                 6Station..........................................5
   SCE/TEP Power Exchange Agreement 6............................5
   Future Generating Resources 6.................................5
   Other Purchases 6.............................................6
 Rates and Regulation
   General 7.....................................................6
   1995 Rate Application .......................................7
   Notice of Intent to Form a Holding Company ..................8
   1994 Rate Order 7.............................................8
   Other Rate Matters 8..........................................8
 Fuel Supply
   General 8.....................................................9
   Coal 8........................................................9
   Valencia 9...................................................10
   Gas 10........................................................11
 Water Supply 10.................................................11
 Environmental Matters
   General 10....................................................11
   Four Corners Generating Station 11............................12
   Irvington Generating Station 11...............................12
   Navajo Generating Station 11..................................13
   San Juan Generating Station 11................................13
   Springerville Generating Station 11...........................13
 Employees 12....................................................13
 Discontinued Investment Subsidiary Operations 12................13
 Utility Operating Statistics 13.................................14

Item 2. ---- Properties                                               14-- Properties..........................................15

Item 3. ------ Legal Proceedings
 SDGE/FERC Proceedings 15........................................16
 Tax Assessments ..............................................16
 Water Rights Adjudication 15
 Tax Assessments                                                      15....................................16

Item 4. --- Submission of Matters to a Vote of Security Holders         15Holders.16

                                  - PART II -

Item 5. ------ Market for Registrant's Common Equity and Related
Stockholder Matters                                                               16Matters...........................................17

Item 6. ------ Selected Consolidated Financial Data                     17

                                        
                                        
                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                     PageData................18

Item 7. ------ Management's Discussion and Analysis of Financial Condition and
Results of Operations
   Overview
   18
 ProposedGeneral ....................................................19
 Competition
   Wholesale ..................................................20
   Retail .....................................................21
 Holding Company 19Proposal .....................................22
   Nations Energy Corporation .................................23
 Results of Operations ........................................23
   Results of Utility Operations
     Sales and Revenues                                               20Revenues........................................23
     Operating Expenses                                               20Expenses........................................24
     Other Income (Deductions)                                        21.................................25
     Interest Expense                                                 22
     Results of Discontinued Operations                               22Expense..........................................25
 Accounting for the Effects of Regulation 22.....................26
 Dividends 23....................................................26
 Liquidity and Capital Resources
   Cash Flows 23.................................................27
   Financing Developments 24.....................................28
   Short-Term Credit Facilities
     Revolving Credit                                                 24
     Other                                                            24Credit..........................................28
     Other.....................................................28
 Income Tax Position ..........................................29
 Restrictive Covenants
   General First Mortgage Covenants 25...........................29
   General Second Mortgage Covenants 25
   Prepayments                                                        25..........................30
   Additional Restrictive Covenants 26...........................30
Construction Expenditures 26....................................30

Item 8. ------ Consolidated Financial Statements and
 Supplementary Data 26Data............................................31
 Independent Auditors' Report 27.................................32
 Consolidated Statements of Income (Loss) 28
 Consolidated Balance Sheets                                          29
 Consolidated Statements of Capitalization                            30.....................33
 Consolidated Statements of Cash Flows 31........................34
 Consolidated Balance Sheets ..................................35
 Consolidated Statements of Capitalization ....................36
 Consolidated Statements of Changes in Stockholders'
  Equity (Deficit) 32.............................................37

 Notes to Consolidated Financial Statements
 Note 1. Nature of Operations and Summary of Significant Accounting Policies
   Nature of Operations 33.......................................38
   Basis of Presentation 33......................................38
   Use of Estimates 33...........................................38
   Regulation 33.................................................38
   Accounting for the Effects of Regulation 33...................38
   Utility Plant 34..............................................40
   Utility Plant Under Capital Leases 35
   Allowance for.........................40
   Springerville Unit 1 35Allowance .............................41
   Deferred Common Facility Costs 36.............................41
   Utility Operating Revenues 36
   Amortization of.................................41
   MSR Option Gain Regulatory Liability 36.......................41
   Fuel and Purchased Power Costs 36
   Financial Restructuring Costs                                      36.............................42
   Income Taxes 37
   Debt Expense                                                       37...............................................42
   EPA Allowances .............................................42
   Fair Value of Financial Instruments 37........................43
   Reclassification 37...........................................43
   New Accounting Standards ...................................43
 Note 2. Rate Matters
   1995 Rate Increase Application .............................44
   1994 Rate Order 38............................................44
 Note 3. 1992 Consummation of the Financial Restructuring             38
   Banks                                                              39
                                        
                                        
                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                     Page

   Springerville Unit 1                                               39
   Capital Leases                                                     39
   Preferred Stock                                                    39
   Other                                                              40Income Taxes  ........................................45
 Note 4. Income Taxes                                                 40Consolidated Subsidiaries
   Nations Energy Corporation..................................47
   Discontinued Operations ....................................48
 Note 5. Discontinued Operations                                      42
 Note 6. Long and Short-Term Debt and Capital Lease Obligations
   Long-Term Debt .............................................48
     First Mortgage Bonds and Installment Sale Agreement              43
     Restructured Arrangements                                        43Bonds......................................48
     MRA.......................................................48
     Dividends - Restrictive Covenants.........................49
     Letters of Credit                                                43Credit.........................................49
     Renewable Term Loan                                                        44
     Additional Restrictive Covenants                                 44Loan.......................................49
     Fair Value of Long-Term Debt                                     44Debt..............................50
     Authorization To Issue Tax-Exempt Bonds...................50
   Capital Lease Obligations ..................................50
   Maturities and Sinking Fund Requirements ...................51
   Short-Term Debt
     Revolving Credit                                                 45
     Discontinued Operations                                          45
   Capital Lease Obligations                                          45Credit..........................................51
     Investment Subsidiaries...................................51
 Note 7.6. Commitments and Contingencies
   Utility Contractual Matters
     Coal and Transportation Contracts 45- Reversal of
      Accrued Liabilities......................................52
     Fuel Purchase Commitments                                        46Commitments.................................52
   Commitments-Environmental Regulation 46.......................52
   Contingencies
    SDGE/FERC Proceedings                                            47
      San Diego Gas & Electric v. Tucson Electric Power
        Company       47Company................................................53
      Alamito Company, Docket No ER79-97-009 47..................53
     Tax Assessments                                                  48Assessments...........................................53
 Note 8. SCECorp/SCE Litigation Settlement                            48
 Note 9.7. Jointly Owned Facilities 49.............................54
 Note 10.8. Employee Benefits Plans
   49
   Pension Plans 49..............................................54
   Postretirement Benefits Other Than Pensions 50
   Adoption of FAS 112                                                50................55
   Stock Option Plans 50.........................................56
 Note 11.9. Quarterly Financial Data (unaudited) 52.................58
 Note 12.10. Supplemental Cash Flow Information 53..................59

Item 9. ------ Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure                                                  54Disclosure...........................................60
    
                                 - PART III -

Item 10. ------ Directors and Executive Officers of the Registrant
 Directors 54....................................................60
 Executive Officers 54...........................................60

Item 11. ------ Executive Compensation                                  56Compensation.............................62

Item 12. ------ Security Ownership of Certain Beneficial Owners and Management
 General 56......................................................62
 Security Ownership of Certain Beneficial Owners 56..............62
 Security Ownership of Management 56.............................62

Item 13. ------ Certain Relationships and Related Transactions          56


                                        
                                        
                                TABLE OF CONTENTS
                                   (CONCLUDED)
                                                                     PageTransactions.....62


                                  - PART IV -

Item 14. ------ Exhibits, Financial Statement Schedules, and
 Reports on Form 8-K
578-K...........................................63
 Signatures 58...................................................64
 Exhibit Index 60................................................66




                                  DEFINITIONS

The abbreviations and acronyms used in the 19941995 Form 10-K are defined below:



ACCACC...............   Arizona Corporation Commission.
ACC StaffStaff.........   Staff of the Arizona Corporation Commission.
ADEQADEQ..............   Arizona Department of Environmental Quality.
AFDCAFDC..............   Allowance for Funds Used During Construction.
APB11                Accounting Principles Board Opinion #11:  Accounting for
Income Taxes.
APSAPS...............   Arizona Public Service Company.
ArticlesArticles..........   Company's Restated Articles of Incorporation, as amended.
BanksBanks.............   Various banks with which the Company has credit
                      relationships.
BrooklandBrookland.........   Brookland Financial Corporation, a wholly-owned, indirect
                      subsidiary of SRI.
BTUSRI, which formerly initiated and sold
                      vehicle contract receivable portfolios.
BTU...............   British Thermal Unit(s).
CAAACAAA..............   Federal Clean Air Act Amendments.
CatalystCatalyst..........   Catalyst Energy Corporation, the parent company of
                      Century.
CenturyCentury...........   Century Power Corporation, an indirect subsidiary of
                      Catalyst and formerly known as Alamito Company.
Citadel              Citadel Holding Corporation, a California-based holding
company.
ClosingClosing...........   The closing of the transactions contemplated by the
                       Financial Restructuring, which occurred on December 15,
                       1992.
Commission or SECSEC.   Securities and Exchange Commission.
Common StockStock......   The Company's common stock, without par value.
Company or TEPTEP....   Tucson Electric Power Company.
Creditors            Certain of the Company's creditors and lease participants
                     and Century and the      Springerville Unit 1 Leases'
                     participants.
CWIPCWIP..............   Construction Work In Progress.
Emission
 Allowance(s).....   An EPA issued allowance which permits emission of one ton
                      of sulfur dioxide.  Such allowances can be sold.
Energy ActAct........   The Energy Policy Act of 1992.
EPAEPA...............   The Environmental Protection Agency.
FAS 13               Statement of Financial Accounting Standards #13:
                     Accounting for Leases.
FAS 15               Statement of Financial Accounting Standards #15:
                     Accounting by Debtors and     Creditors for Troubled Debt
                     Financial Restructurings.
FAS 7171............   Statement of Financial Accounting Standards #71:
                      Accounting for the Effects of Certain Types of Regulation.
FAS 9292............   Statement of Financial Accounting Standards #92:
                      Regulated Enterprises - Accounting for Phase-In Plans.
FAS 98                     Statement of Financial Accounting Standards #98:
                      Accounting for Leases:  Sale Leaseback Transactions
                      Involving Real Estate, Sales-Type Leases of Real Estate,
                      Definition of the Lease Term, Initial Direct Costs of
                      Direct Financing Leases.
FAS 101101...........   Statement of Financial Accounting Standards #101:
                      Regulated Enterprises-Enterprises - Accounting for the Discontinuation
                      of Application of FAS 71.
FERCFERC..............   The Federal Energy Regulatory Commission.
Financial
 RestructuringRestructuring....   The comprehensive financial restructuring of the Company's
                      obligations to Creditorscertain of the Company's creditors and
                      lease participants and Century and the Springerville Unit
                      1 Leases' participants and the reclassification of all
                      shares of the Preferred Stock into Common Stock which
                      occurred on December 15, 1992.
First Mortgage
 BondsBonds............   The Company's first mortgage bonds issued under the
                     General First Mortgage.
Four CornersCorners......   Four Corners Generating Station.
GAAPGAAP..............   Generally Accepted Accounting Principles.
Gallo Wash           Gallo Wash Development Company, a wholly-owned subsidiary
                     of Valencia.
General First
 MortgageMortgage.........   The Indenture, dated as of April 1, 1941, of Tucson Gas,
                      Electric Light and Power Company to The Chase National
                      Bank of the City of New York, as trustee, as supplemented
                      and amended.
General Second
 MortgageMortgage.........   The Indenture, dated as of December 1, 1992, of Tucson
                      Electric Power Company to Bank of Montreal Trust Company
                      of the City of New York, as trustee, as supplemented.
Holding Company
ActAct...............   The Public Utility Holding Company Act of 1935, as
                      amended.
IBEW 11161116.........   International Brotherhood of Electrical Workers labor
                      union, Local Chapter 1116.
IDBsIDBs..............   Industrial development revenue or pollution control
                      revenue bonds.
DEFINITIONS
                                   (continued)


Installment Sale
 Agreement      $52Agreement........   $49 million principal amount of City of Farmington, New
                      Mexico, 6.25% Pollution Control Revenue Bonds Series
                      1973.
Interconnection Agreement       The Company's agreement with Century for
                      receiving, delivering and transmitting power.
IRSIRS...............   Internal Revenue Service.
IrvingtonIrvington.........   Irvington Generating Station.
Irvington LeaseLease...   The leveraged lease arrangement relating to Irvington Unit
                      4.
Irvington Unit 44..   Unit 4 of the Irvington Generating Station.
ITCITC...............   Investment Tax Credit.
kWtax credit.
kW................   Kilowatt(s).
kWhkWh...............   Kilowatt-hour(s).
kVkV................   Kilovolt(s).
kVAkVA...............   Kilovoltampere(s).
LOCLOC...............   Letter of Credit.
MRAMRA...............   The master financial restructuring agreement completed
                      during the Financial Restructuring agreement between the Company
                      and the Banks (other than the Bank providingcertain banks excluding the LOC relating to the 1981
                      Apache B Bonds) which includes the Renewable Term Loan,
                      Revolving Credit, Additional
                      Reimbursement Agreement and Replacement Reimbursement
                      Agreement.
MSRLOCs.
MSR...............   Modesto, Santa Clara and Redding Public Power Agency.
MWMW................   Megawatt(s).
MWhMWh...............   Megawatt-hour(s).
Nations EnergyEnergy....   Nations Energy Corporation, a wholly-owned subsidiary of
                      the Company.
NavajoNavajo............   Navajo Generating Station.
NOL...............   Net Operating Losses.
1989 Rate OrderOrder...   The ACC's October 24, 1989, Rate Order concerning the
                      Company's 1988 application for a rate increase.
1981 Apache A Bonds        $100 million principal amount of variable rate IDBs
                      assumed by Century in 1984 from which the Company
                      released Century as part of the Financial Restructuring.
1981 Apache B
 BondsBonds............   $100 million principal amount of variable rate IDBs which
                      are secured by First Mortgage Bonds.
1990 Pima A BondsBonds.   $20 million principal amount of variable rate IDBs which
                      are secured by First Mortgage Bonds.
1994 Rate OrderOrder...   The ACC's January 11, 1994, Rate Order concerning an
                      increase in the Company's retail base rates and
                      regulatory write-offs.
1991 Rate OrderOrder...   The ACC's October 11, 1991, Rate Order concerning an
                      increase in the Company's retail base rates, regulatory
                      write-offs and rate and accounting synchronization.
NPC                  Nevada Power Company.
NTUANTUA..............   Navajo Tribal Utility Authority.
Palo Verde           The Palo Verde Nuclear Generating Station.
Payment Moratorium         Payment moratoria implemented by the Company with
                      respect to certain obligations of the Company commencing
                      January 31, 1991.
PDEQPDEQ..............   Pima County Department of Environmental Quality.
P&M&M...............   Pittsburg & Midway Coal Mining Co.
PNM                        Public Service Company of New Mexico.
Preferred StockStock...   The Company's previously outstanding Cumulative Preferred
                      Stock, $100 Par Value, and Cumulative Preferred Stock (No
                      Par) which were reclassified into Common Stock pursuant
                      to the Financial Restructuring.
PNMProposed Settlement
  Agreement.......   The Agreement between the Company and the ACC Staff that
                      proposed to settle both the 1995 rate application and the
                      notice of intent to form a holding company.
PNM...............   Public Service Company of New Mexico.
PURPA ............   The Public Utility Regulatory Policies Act of 1978, as
                      amended.
Reimbursement
 AgreementsAgreements.......   Eleven separate reimbursement agreements between the
                      Company and individual Banks pursuant to which LOCs were
                      issued by such Banks to trustees for issues of tax-exempt
                      IDBs issued by several government entities to finance
                      certain facilities of the Company.
Renewable Term
LoanLoan.............    The credit facility that replaces the Term Loan pursuant
                      to the MRA Sixth Amendment, dated as of November 1, 1994,
                      completed March 7, 1995.
Replacement LOCs     The extensions to at least 1997 of the LOCs as part of the
                      Financial Restructuring.
ReplacementReplacment Reimbursement
  AgreementAgreement.......   A new master reimbursement agreement entered into among
                      the Company and all Banks that are parties to the
                      Reimbursement Agreements with the exception of the Bank
                      which issued the LOC supporting the 1981 Apache B Bonds.
DEFINITIONS
                                   (concluded)


Restated Century Purchase
  Contract                 Contract pursuant to which the Company was obligated
                      to purchase the entire capacity of Springerville Unit 1
                      from Century through December 31, 2014.RUCO..............   Residential Utility Consumer Office.
Revolving CreditCredit..   The $50 million revolving credit facility entered into
                      between a syndicate of certain of the Banks and the
                      Company as part of the Financial Restructuring.
RTGsRTGs..............   Regional Transmission Groups.
San CarlosCarlos........   San Carlos Resources Inc., a wholly-owned subsidiary of
                      the Company.
San JuanJuan..........   San Juan Generating Station.
San Juan Unit 33...   Unit 3 of San Juan.
SCESCE...............   Southern California Edison Company, a subsidiary of SCECorp.
SDGEEdison
                      International.
SDGE..............   San Diego Gas & Electric Company.Company, a subsidiary of Enova
                      Corporation.
Second Mortgage
 BondsTheBonds............   The Company's second mortgage bonds issued under the
                      General Second Mortgage.
Securities Exchange
 ActAct..............   The Securities Exchange Act of 1934, as amended.
Southwest GasGas.....   Southwest Gas Corporation.
SWRTA ............   Southwest Regional Transmission Association.
SpringervilleSpringerville.....   Springerville Generating Station.
Springerville Common
  Facilities Leases  The leveraged lease arrangement relating to the Company's
                      undivided one-half interest in certain facilities at
                      Springerville used in common with Springerville Unit 1
                      and Springerville Unit 2.
Springerville
Unit 11............   Unit 1 of the Springerville Generating Station.
Springerville
 Unit 1 LeasesLeases....   The leveraged lease arrangement pursuant to which Century
                      leased Springerville Unit 1 and which has been assumed by
                      the Company.
Springerville
 Unit 22...........   Unit 2 of the Springerville Generating Station.
SRISRI...............   Sierrita Resources Inc., a wholly-owned investment
                      subsidiary of the Company.
SRPSRP...............   Salt River Project Agricultural Improvement and Power
                      District.
Term LoanLoan.........   The $243.4 million original principal amount term loan
                      provided by a syndicate of certain Banks as part of the
                      Financial Restructuring.
TRITNP...............   Texas New Mexico Power Company.
TRI...............   Tucson Resources Inc., a wholly-owned investment
                      subsidiary of the Company.
Unit 2 First
 MortgageMortgage.........   First mortgage lien on and security interest in
                      Springerville Unit 2 which secures, in part, the Term
                      Loan, the Revolving Credit and the Replacement
                      Reimbursement Agreement.
ValenciaValencia..........   Valencia Energy Company, a wholly-owned subsidiary of the
                     Company.
Valencia LeasesLeases...   Valencia's leveraged lease arrangement relating to the
                      coal handling facilities serving Springerville.
WarrantsWarrants..........   Warrants for purchase of the Common Stock which were
                      issued under the Financial Restructuring to the owner
                      participants in the Springerville Unit 1 Leases.
WRTA .............   Western Regional Transmission Association.
WSCCWSCC..............   Western Systems Coordinating Council.

                                    PART I

ITEM 1. --- BUSINESS

  THE COMPANY

     Tucson Electric Power Company was incorporated under the laws of the State
of Arizona on December 16, 1963.  The Company is the successor by merger as of
February 20, 1964, to a Colorado corporation which was incorporated on January
25, 1902.  The Company is an operating public utility engaged in the generation,
purchase, transmission, distribution and sale of electricity for customers in
the City of Tucson and the surrounding area and to wholesale customers.  The
Company holds a franchise which expires in 2001 to provide electric service to
customers in the City of Tucson.

     The Company owns all of the outstanding stock of (i) Valencia Energy
Company (Valencia), which supplies coal to the Springerville Generating Station
(see Fuel Supply Valencia), all of the outstanding stock ofValencia ), (ii) San Carlos Resources Inc. (San Carlos),
which holds title to Springerville Unit 2, and all of the
outstanding stock of(iii) Nations Energy Corporation.Corporation
which is active in the development of independent power projects worldwide.  See
Competition below for a description of Nations Energy.  The Company also owns
all of the outstanding stock of two non-energy related investment subsidiaries,
Tucson Resources Inc. (TRI) and Sierrita Resources Inc. (SRI).  See Consolidated Statements of Income (Loss) and Note 5 of Notes to
Consolidated Financial Statements, Discontinued Operations for comparative
financial information relating to the Company's investment business segments.In 1994, TRI and
SRI have substantially completed the process of liquidating their respective 
investments.

  CERTAIN RISKSRISKS; FORWARD-LOOKING INFORMATION

     For descriptions of certain factors affecting the Company, including
commitments and contingencies, which subject the Company to continuing risks,
see (i) 1995 Rate Application and 1994 Rate Order; (ii) Discontinued Investment Subsidiary Operations;
(iii) Item 3., Legal 
Proceedings; (iv)(iii) Item 7., Management's Discussion and Analysis of Financial 
Condition and Results of Operations, Overview; and (v)(iv) Notes 1, 2 and 76 of 
Notes to Consolidated Financial Statements, 1994Nature of Operations and Summary of 
Significant Accounting Policies, Rate Order,Matters, and Commitments and 
Contingencies, respectively.

     THE FINANCIAL RESTRUCTURING

      In December 1992,The forward-looking statements contained herein regarding growth in the
number of customers, growth in retail peak demand and retail sales growth are
based, in part, upon publicly available population and demographic studies
conducted by persons or entities unaffiliated with the Company.  Such statements
are also based upon various assumptions including, without limitation,
assumptions relating to weather, economic and competitive conditions and the
assumption that the Company consummated a comprehensive restructuringwill incur no significant loss of obligationsretail customers
due to certain creditors and reclassified its preferred stock into
common stock.  The Financial Restructuring was concluded following negotiations
with various creditors including, but not limited to, bank lenders and lease
participants.  See Note 3 of Notes to Consolidated Financial Statements, 1992
Consummation of the Financial Restructuring.  The Company initiated the
Financial Restructuring because it projected that it might have insufficient
liquidity to meet its cash obligations by the end of the first quarter of 1991.
A payment moratorium on certain of the Company's debt, lease, coal and rail
obligations during part of the period of negotiations provided cash flow
sufficient to meet the Company's other obligations.

     The Company believes that the Financial Restructuring provides the Company
the opportunity to return gradually to long-term financial viability.  However,
the Financial Restructuring itself will not be sufficient to assure the
Company's long-term financial viability.  Also, the Company's capital structure
remains highly leveraged and the Company's financial prospects and cash flows
remain subject to significant economic, regulatory and other uncertainties, many
of which are beyond the Company's control.self-generation or retail wheeling.  Actual experience may vary
significantly from forward-looking information.

  UTILITY OPERATIONS

   PEAK DEMAND AND CUSTOMERS

     Certain operating and system data related to the Company's utility
operations for each of the last five years were as follows:

PEAK DEMAND

PEAK DEMAND 1995 1994 1993 1992 1991 1990 - MW ----- ---- ---- ---- ---- -MW- Retail Customers-Net One Hour 1,617 1,585 1,449 1,399 1,319 1,356 Other Utilities-Firm 223 226 225 150 150 100----- ----- ----- ----- ----- Non-Coincident Peak Demand (A) 1,840 1,811 1,674 1,549 1,469 1,456----- ----- ----- ----- ----- Total Generating Resources (B) 2,085 1,975 1,975 1,983 2,048 2,048----- ----- ----- ----- ----- Total Reserves ((B) - (A)) 245 164 301 434 579 592===== ===== ===== ===== ===== Reserve Margin (% of Non-Coincident Peak Demand) 13% 9% 18% 28% 39% 41%===== ===== ===== ===== =====
The peak demand for the Company's retail service area occurs during the summer months due to the space cooling requirements of its retail customers. The Company has experienced growth in peak demand (excluding the demand of its copper mining customers which fluctuates widely)customers) at an average annual rate of approximately 4.9%3.9% for the past five years. Including the load of its mining customers, which comprised on average approximately 8.0%8.5% of the retail peak demand for the past five years, the Company experienced growth in peak demand of retail customers at an average annual rate of approximately 4.0%3.6% during the same period. In 1994,1995, based on non-coincident peak demand, the Company's reserve margin was only 9%13% compared with 18%9% in the prior year.year due to the addition of the SCE/TEP power exchange to the Company's available resources. (See SCE/TEP Power Exchange Agreement below.) The Company seeks to maintain a reserve margin equal to its largest single hazard plus 5% of its non- coincidentnon-coincident peak demand in accordance with guidelines established by the WSCC. The targeted reserve requirement was 295296 MW in 19941995 or 16% of non-coincident peak demand. The Company's operations were not adversely affected by the Company's failure to maintain its targeted reserve requirement in 1994.1995. It is expected that near-termnear- term growth in demand will be met with existing resources and the additional capacity provided under a power exchange agreement between the Company and SCE. See SCE/TEP Power Exchange Agreementresources as discussed in Future Generating Resources below. Also, see Generating Resources below for a discussion of the Company's electric generating resources. The averagegrowth in the number of retail customers servedremained strong in 1995, increasing by 2.9% compared to the Company increased 2.9% in 1994 compared with 1993 and 2.1% onfive-year annual average annually over the past five years.of 2.4%. The Company is currently projecting an average annual customer growth rate of approximately 2.5% and an average annual growth rate in the number of customers is expected to be approximately 2.2% through the year 2000. Retail peak demand of retail customers of approximately 1.4% for the period 1995 through 1999. Realized growth in customers and retail demand may be affected by factors discussed under Competition below. Customer growth rates are projectedis expected to exceed historical growth rates because the Company anticipates greater population and economic growth than occurred in the past five years. Also, the Company is projecting a 2.3%grow at an average annual rate of 2.1% during the same period. The average annual rate of growth rate inof energy sales to retail customers overis anticipated to be in the next five years. Sales to2.3% range for the remainder of the decade. On average, residential, non-mining industrial, and mining customersenergy sales are expected to account for approximately 41%34%, 26%28%, and 10%17%, respectively, of the projected sales.sales for the remainder of the decade. The Company has two principal copper mining customers. In 1994,1995, the sales to suchthese customers represented 11% and 6%totaled approximately 16.6% of the Company's total retail energy sales, and their contract demands were 6% and 5%, respectively,totaled approximately 11% of the Company's 19941995 retail non- coincident peak demand. The total coincident peak load for the Company's two mining customers was 8.6%6.9% of the Company's 1994 retailcoincident peak demand. Revenues from sales to mining customers have comprised betweenaccounted for an average of approximately 10% and 11% of the Company's revenues from retail customersrevenues in each of the three years in the period ended December 31, 1994. In March 1994, thefrom 1993 to 1995. The Company and the largeserves its two principal mining customer to which the Company supplied approximately 50 MW, executed a new contract that included acustomers under reduced rate contracts designed to induce such customerthem to remain oncontinue to purchase electricity from the Company's systemCompany rather than self-generate. In April 1994, the ACC approved such contract. Revenues from this customer were $23.6 million and $22.3 million in 1993 and 1994, respectively. In 1993, the Company entered into a similar contract with its largest mining customer although at a different rate level. These contracts expire after the year 2000. However, such contracts contain various provisions allowing the customers to terminate partially or entirely, under certain circumstances, provided that the Company has beenis notified at least one and up to two years prior to such termination. The ability to extend contracts and to avoid early termination will be dependentdepend on market conditions at the time and alternatives available to customers at that time.alternatives. Future markets and prices for fuel, access to capital, as well as ACC decisions regarding rate design, and the timing of rate decisions will affect the economics of self-generation projects (including cogeneration) and may ultimately affect whether customers, such as the mining customers described above, if any, might reduce or terminate their contract demanddemands on the Company's system. Seesystem (see Competition below.below). SALES FOR RESALE The Company makes sales for resale to others on both a firm and an interruptible basis. To the extent capacity is not providing energy to the Company's retail customers, such as during off-peak periods, the Company markets this capacity and energy at wholesale. Surplus energy is sold from time to time under various power pooling arrangements. The Company currently has contracts to sell firm capacity as follows: Minimum (or Maximum) Contract Company Demand MW Contract Term ------- --------- ------------- SRP 100 June 1, 1991 - May 31, 2011 NPC 50 May 16, 1990 - December 31, 1995 NTUA (1) 45 June 1, 1993 - May 31, 1999 TNP 30 January 1, 1996 - December 31, 1996 (1)The agreement with NTUA provides for a minimum contract demand of 45 MW and requires NTUA to obtain all of its electric power requirements from the Company. NTUA'sNTUA is a winter peaking utility and their coincident peak demand is expected to be aboutreach approximately 70 MW. COMPETITION Under current law,MW during the Company is not in direct competition with any other regulated electric utility for electric service in the Company's retail service territory. Regardlessterm of such regulation, the Company competes for retail markets against gas service suppliers and others who may provide energy services which would be substitutes for, or bypass of, the Company's services.this contract. The Company does compete with other utilities, marketerscontinues to actively market long-term and independent power producers in the saleshort-term sales of electricexcess capacity and energy in the wholesale market. It is expected that competitionenergy. Competition to sell capacity willis expected to remain vigorous and that prices will remain depressed for severalin the next few years due to increased competition andas a result of surplus capacity in the southwesternSouthwestern United States. Competition for the sale of capacityStates and energy is influenced by many factors, including the availability of capacity of the 3,810 MW Palo Verde nuclear generating station and other generating stationsdepressed prices in the southwestern United States, the availability and prices of natural gas and oil, spot energy prices and transmission access. In addition, the Energy Act has increased competition in the wholesale electric power markets. The Energy Act addresses a wide range of energy issues, including several matters affecting bulk power competition in the electric utility industry. It creates exemptions from regulation under the Holding Company Act for persons or corporations that own and/or operate in the United States certain generating and interconnecting transmission facilities dedicated exclusively to wholesale sales, thereby encouraging the participation of utility affiliates, independent power producers and other non-utility participants in the development of power generation. In order to facilitate competition in power generation, the Energy Act also confers expanded authority upon FERC to issue orders requiring electric utilities to transmit power and energy to or for wholesale purchasers and sellers, and to require electric utilities to enlarge or construct additional transmission capacity to provide these services. While the Energy Act prohibits FERC from issuing any such order that would unreasonably impair the continuing reliability of affected electric systems or that would be conditioned upon or require transmission services directly to an ultimate consumer, the Energy Act creates the potential for utilities and other power producers to gain increased accessmarket due to the transmission systemsabundance of other entities to facilitate wholesale sales. FERC is encouraging all parties interested in transmission access to form RTGs to facilitate access to and development of transmission service and to assist in settling disputes regarding such matters. RTGs will not relieve FERC of its responsibilities related to transmission access; however, such organizations could provide for more efficient handling of transmission service requests and planning for regional transmission needs. The Company is currently involved in the development of two RTGs in the West, SWRTA and WRTA. WRTA and SWRTA both filed applications for approval with the FERC during 1994 which have yet to be accepted. The Company currently intends to become a member of SWRTA and is also considering membership in WRTA. On the retail level, industrial and large commercial customers may have the ability to own and operate facilities to generate their own electric energy requirements and, if such facilities are qualifying facilities, to require the displaced electric utility to purchase the output of such facilities at "avoided costs" pursuant to PURPA. Such facilities may be operated by the customers themselves or by other entities engaged for such purpose. Finally, the legislatures and/or the regulatory commissions in several states have considered or are considering "retail wheeling" which, in general terms, means the transmission by an electric utility of energy produced by another entity over its transmission and distribution system to a retail customer in such utility's service territory. A requirement to transmit directly to retail customers could have the result of permitting retail customers to purchase electric capacity and energy from, at the election of such customers, the electric utility in whose service area they are located or from other electric utilities or independentlow-cost hydroelectric power producers. In Arizona, the ACC Staff issued its first report on a retail electric competition workshop held in October of 1994. This report is the first in a series of reports that will be issued on various workshops that will be held from time to time to identify and address policy issues related to competition. While other states are considering competition proposals, the ACC effort is designed to obtain information about competition. No specific proposals are currently being considered. The report proposes that Staff develop a comprehensive set of options to better inform the ACC about its choices. Staff recommended that three options be considered: 1) encouraging retail competition, 2) tolerating limited retail competition, and 3) discouraging retail competition by prohibiting retail wheeling and tolerating distributed energy services. The ACC has also established a working group on retail electric competition. Membership in the working group includes ACC Staff, Arizona utilities, and other interested parties, and the first meeting of the group took place in January 1995. A report from the group is expected by August 1995. The Company cannot predict what the working group will recommend and what, if any, changes in electric regulation and competition will be implemented by the ACC. See Peak Demand and Customers above for information concerning mining customers which have considered self-generation and Generating and Other Resources and Other Purchases and Item 2., Properties below for information concerning the Company's transmission access to and interchange relationships with other utilities in the southwestern United States. The Company continues to assess the impact of the Energy Act and other possible legislation on the Company's ability to remain competitive in the electric utility industry. The Company is unable to predict the ultimate impact the Energy Act or any other possible legislation will have on its operations. NATIONS ENERGY CORPORATION The Company's wholly-owned subsidiary Nations Energy Corporation (previously known as Escalante Resources, Inc.) is pursuing opportunities in the independent power business. Nations Energy is exploring independent power prospects in the domestic and foreign energy markets. Such prospects may include, for instance, the development of cogeneration facilities, the acquisition of interests in existing power production facilities that sell to utilities or utility authorities, or the construction of independent power projects in countries that are privatizing their electric utility industry. Initially, an emphasis will be placed on exploring opportunities in the Western hemisphere. To date, no projectUnited States. Regarding the contracts described above, the Company cannot currently make any predictions about the replacement or extension of such contracts in the future. However, the Company has been approved for development or acquisition. Nations Energy's activities may be limited due to various restrictions including certain restrictions imposed bynotified that TNP will not renew its current contract with the MRA.Company in 1997. COMPETITION See Item 7., -- Management's Discussion and Analysis of Financial Condition and Results of Operations, Restrictive Covenants, Additional Restrictive Covenants. In an effort to adapt its structure toCompetition, for a discussion of developments regarding competition in the new competitive environment,industry at the Company is currently planning to create a holding company. See Item 7., Management's Discussion and Analysis of Financial Condition and Results of Operations, Proposed Holding Company.wholesale as well as at the retail level. GENERATING AND OTHER RESOURCES COMPANY RESOURCES The total net generating capability currently owned or leased by the Company at December 31, 19941995 was 1,952 MW as set forth in the table below:
Net Capa- Unit Fuel bility Operating Company Share Generating Source No. Location Type MW Agent % MW - ----------------- ---- -------- ---- ------ --------- -------------- Springerville Station 1 Springerville, AZ Coal 360 TEP 100.0 360 Springerville Station 2 Springerville, AZ Coal 360 TEP 100.0 360 San Juan Station 1 Farmington, NM Coal 316 PNM 50.0 158 San Juan Station 2 Farmington, NM Coal 312 PNM 50.0 156 Navajo Station 1 Page, AZ Coal 750 SRP 7.5 56 Navajo Station 2 Page, AZ Coal 750 SRP 7.5 56 Navajo Station 3 Page, AZ Coal 750 SRP 7.5 56 Four Corners Station 4 Farmington, NM Coal 784 APS 7.0 55 Four Corners Station 5 Farmington, NM Coal 784 APS 7.0 55 Irvington Station 1 Tucson, AZ Gas/Oil 81 TEP 100.0 81 Irvington Station 2 Tucson, AZ Gas/Oil 81 TEP 100.0 81 Irvington Station 3 Tucson, AZ Gas/Oil 104 TEP 100.0 104 Irvington Station 4 Tucson, AZ Coal/Gas/Oil 156 TEP 100.0 156 Internal Combustion Turbines Tucson, AZ Gas/Oil 218 TEP 100.0 218 ----- Total Company Capacity(1) 1,952 ===== (1)Excludes 23 MW of additional resources, which consists of certain other capacity purchases and interruptible retail load. Total Company Capacity(1) 1,952
(1) Excludes 133 MW of additional resources, which consists of certain other capacity purchases and interruptible retail load. Total Company-owned capacity is 1,339 MW and Company-leased capacity owned is 1,339 MW and leased is 613 MW. Internal combustion turbines with 100 MW of capacity are leased by the Company. At the end of such lease in 1998, the Company may exercise fair market value purchase and renewal options. SPRINGERVILLE STATION Springerville Station consists of two 360 MW coal fired units. Springerville Unit 1 began commercial operation in 1985 and is currently leased and operated by the Company. Springerville Unit 2 commenced commercial operation in June 1990 and is owned by San Carlos and operated by the Company. Prior to the Closing, the Springerville Station was operated by Century, Century leased Springerville Unit 1 and the Company purchased capacity and energy from Springerville Unit 1 under the Restated Century Purchase Contract. The primary terms of the Springerville Unit 1 Leases expire on January 1, 2015. At December 31, 1994,1995, the capitalized lease asset related to Springerville Unit 1, net of allowance and accumulated amortization, was $260 million for financial statement purposes.$257 million. At the end of the primary term, the Company may exercise fair market value purchase and renewal options. Annual lease payments for the Springerville Unit 1 Leases will range from $33 million to $176 million, but averageaveraging approximately $73$76 million. The average cash cost to the Company of Springerville Unit 1 capacity attributable to rent obligations and other operation and maintenance expenses after December 15, 1992, is estimated to be approximately $18 per kW per month (approximately $78 million per year), for the period from January 1993 through December 1997 and willis expected to increase thereafter. However, due to timing differences between cash and accrued expenses, capacity costs attributable to rent obligations and other operation and maintenance expenses will be accrued in the Company's financial statements over the 1993 - 1997 period at an average of approximately $22 per kW per month (approximately $95 million per year) before amortization of the regulatory disallowance and interest expense thereon. The 1991 Rate Order allows the Company to recover the cost of the entire 360 MW capacity of Springerville Unit 1, but limits such recovery to a rate of $15 per kW per month (approximately $65 million per year). Substantially all of the present value of disallowed Springerville Unit 1 costs was recorded as a loss in 1990, and as a result of the Financial Restructuring, an additional loss was recorded in 1992. The losses together reflect the present value of the difference between projected costs and the amount the Company is allowed to recover through the lease term ending January 1, 2015. See NotesNote 1 and 3 of Notes to Consolidated Financial Statements, Nature of Operations and Summary of Significant Accounting Policies, Allowance for Springerville Unit 1 and 1992 Consummation of the Financial Restructuring, Capital Leases, respectively.Allowance. In December 1985, pursuant to the Springerville Common Facilities Leases, the Company sold and leased back its 50% interest in the common facilities at Springerville. The sales price of such facilities was $132 million. At December 31, 1994,1995, the capitalized lease asset related to Springerville common facilities, net of accumulated amortization, was $126 million for financial statement purposes.$124 million. The initial lease term for the common facilities expires in 2017 for one owner participant and 2021 for the other two owner participants, subject to optional renewal periods and purchase options. Annual lease payments for the common facilities vary with changes in the interest rate on the underlying debt. In 1993 and 1994, suchSuch lease payments totalledtotaled $12 million in both 1994 and 1995, and totaled $7 million and $12 million, respectively.in 1993. Based on current interest rates, annual lease payments would average approximately $13 million. Including the cost of leased common facilities (but excluding the cost of coal-handling facilities at Springerville which are included in recoverable fuel costs), the total initial cost of Springerville Unit 2 was $838 million, or $2,328 per kW. Approximately 26% of such cost is attributable to AFDC accrued prior to July 1, 1989. In the 1991 Rate Order, the ACC disallowed recovery from retail customers of $175 million of the book value of Springerville Unit 2. The Company recorded a loss for such disallowance in 1991. The net recoverable cost, including the leased common facilities, is $1,842 per kW. See Rates and Regulation, 1994 Rate Order and Note 2 of Notes to Consolidated Financial Statements, 1994 Rate Order. IRVINGTON STATION In January 1988, the Company began coal-fired commercial operation and entered into a sale and leaseback arrangement for Irvington Unit 4 pursuant to the Irvington Lease. The unit was sold at its cost of $152 million. At December 31, 1994,1995, the capitalized lease asset related to Irvington Unit 4, net of accumulated amortization, was $128 million for financial statement purposes.$123 million. This lease calls for annual payments which will range from approximately $9 million to $28 million and which average approximately $13 million. The lease term expires in 2011, but the lease provisions have optional renewal periods and purchase options. With the addition of coal firing capability, Irvington Unit 4 (156 MW capability) has the flexibility to operate on coal, gas or fuel oil. Coal has been the primary fuel and natural gas the secondary fuel. SCE/TEP POWER EXCHANGE AGREEMENT As part of a 1992 litigation settlement, the Company and SCE have agreed to a ten-year power exchange agreement. Under the agreement, beginningwhich began in May 1995, SCE will provideprovides firm system capacity of 110 MW to the Company during summer months, for which the Company will paypays an annual capacity charge of approximately $1 million increasing annually after the first five years to a maximum of approximately $2 million annually. The Company will beis entitled to schedule firm energy deliveries from SCE during the summer (May 15 through September 15) of up to 36,300 MWh per month, and will beis obligated to return to SCE on an interruptible basis the same amount of energy the following winter season (November 1 through February 28). The Company will incur fuel expense relatedenergy provided pursuant to the exchange in an amount equal tois expensed based upon the cost of interruptible energy provided to SCE. The Company believes the agreement may reduce the Company's overall system fuel costs, allow it to sell additional capacity on the wholesale market, and/or permit it to defer the construction of future generating resources. The agreement has been accepted for filing by the FERC. The 1994 Rate Order directed the Company to propose an allocation of the benefits of this agreement with its retail customers. The Company expects to includeincluded such an allocation proposal in its next1995 rate filing.application and in the Proposed Settlement Agreement. See Rates and Regulation, 19941995 Rate Order.Application. In 1995, pursuant to the exchange agreement, the Company received 91,000 MWh, and as of the end of January 1996, the Company had provided 72,255 MWh SCE. FUTURE GENERATING RESOURCES In December 1992,1995, the Company filed an integrated resource plan pursuant to the ACC's regulations governing resource planning. In its filing the Company projected nothe need for any newan additional 128 MW of peaking or intermediate generation facilities until afterresources in 1998 and additional peaking resources in the year 2000 or2002 and beyond. No need for additional base load generation facilities until afterwas forecast through the year 2007.2010. The Company has begun a program to determine whether the 1998 peaking resource should be constructed by the Company or purchased. In addition, the Company projected that demand-side management programs should reduce peak demand and, therefore, capacity requirements, from what they would be without such programs by 7660 MW by the year 2000. As part of the integrated resource plan, the Company has committed to adding 5 MW of renewable generation resources generation by the year 2000. Also as mentioned above, the Company has a power exchange agreement with SCE; such exchange will provide additional generating resources to the Company. OTHER PURCHASES In addition to generating electricity at generating stations owned or leased by the Company and the SCE/TEP Power Exchange , the Company participates in a number of interchange agreements through which it can purchase additional electric energy from other utilities. The amount of energy purchased from other utilities varies substantially from time to time depending on both the cost of purchased energy as compared to the Company's cost of generating energy and the availability of such energy. Through these same agreements, the Company may also sell its surplus electric energy from time to time. The Company has transmission access to and/or power transaction arrangements with over 74130 electric systems or suppliers, including those in the southern California markets. The Company is a member of the Inland Power Pool, which is comprised of a group of utilities serving customers in portions of the western United States. The Inland Power Pool membership facilitates interchange with companies having system peak periods different from those of the Company. The Company is also a member of the WSCC, a group of western electric systems and suppliers that works cooperatively to assure the reliability of the region's interconnected generation and transmission systems. In 1990, the Company joined the Western Systems Power Pool which is a voluntary power pooling experiment to achieve more efficient use of electric generation and transmission facilities among its members. See Competition for a discussion of possible changes in transmission issues. RATES AND REGULATION GENERAL The Company is subject to the jurisdiction of the ACC, which has authority, among other things, to prescribe the classifications of accounts to be used and the rates and charges to be made and collected from retail customers, and to regulate the issuance of securities. The ACC also has authority to approve affiliate transactions and the establishment of holding companies and subsidiaries under ACC promulgated Affiliated Interest Rules. The Company is also subject to regulation by FERC in certain respects, including the terms and prices of sales to other utilities. Arizona statutelaw requires that the Company's rates for retail sales of electric energy be determined by the ACC on a "cost of service" basis and be designed to provide, after recovery of allowable operating expenses, an opportunity to earn a reasonable rate of return on "fair value rate base". Fair value rate base is, generally, determined by the ACC by reference to the original cost and the reproduction cost (in each case, 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. Thus, over time, rate base is increased by additions to utility plant in service and reduced by depreciation and retirements of utility plant from service. Both operating expenses and fair value rate base determination are subject to judgementjudgment by the ACC regarding prudency and recoverability. The Company's rates for wholesale sales of capacity and energy, generally, are not permitted by FERC to exceed rates determined on a cost of service basis. In all instances,With respect to long-term firm sales, the Company's wholesale rates are substantially below rates determined on a fully allocated cost of service basis, but, in any eventall instances, rates exceed the level necessary to recover fuel and other variable costs. The ACC consists of three commissioners, each serving a six-year term. One of the three is elected at each general election except when a vacancy occurs prior to the expiration of a commissioner's term. The present commissioners are: - - Renz D. Jennings (Democrat), Chairman, was elected to a third term in 1992. His term expires in 1999. - - Marcia Weeks (Democrat) was elected to a second term in 1990. Her term expires in 1997. - - Carl Kunasek (Republican) was elected to a first term in 1994. His term expires in 2001. Under a 1992 Arizona law, commissioners cannot serve consecutive terms and can be elected to another term only after the passing of six years after the end of their previous term as commissioners. 1995 RATE APPLICATION On June 13, 1995, the Company filed an application with the ACC requesting an overall 4.9% increase in retail rates (approximately $28.4 million in annual revenues). The Company's request was based on original cost rate base of approximately $1.17 billion, a rate of return on original cost rate base of 8.2%, a rate of return on common equity of 11.5%, and a 1994 test period. The proposed rate structure was a continuation of the Company's effort to insure that retail customer classes pay their appropriate allocated share of the cost of providing service. The Company proposed increases of 7.5% for residential customers, 3.6% for commercial customers, and 5.0% for industrial customers. The proposed increase would result in an increase of $5.37 in the average monthly residential bill, from $70.92 (9.46 cents per kWh) to $76.29 (10.17 cents per kWh) for residential customers using an average 750 kilowatt- hours per month. The application requested recovery of the costs associated with the remaining 37.5% (135 MW) of Springerville Unit 2 that is "used and useful" in accordance with ACC methodologies. Currently, the Company is only allowed to recover 62.5% of the costs related to Springerville Unit 2. In 1994, the Company's system peak demand was 139 MW over the demand upon which current rates are based. Total proposed additions to rate base due to the inclusion of the remaining 37.5% of Springerville Unit 2, including related deferrals of previously incurred costs, amounted to approximately $191 million. The Company's request contained elements of traditional cost of service/rate of return ratemaking as well as several proposals designed to increase the Company's competitiveness. Such proposals included, among others, the flexibility to enter into special contracts with customers without specific ACC approval at prices below previously approved tariff levels; allocation of the savings resulting from improved operating efficiencies between the Company and its customers; allocation of the benefits of the 110 MW added generating capacity related to the SCE/TEP Power Exchange solely to the retail customers; and allocation of new long-term wholesale sales based on marginal costs of a wholesale transaction rather than the Company's average costs. The Company further proposed that, if the ACC approved the Company's request and proposals as filed, the Company would not file another rate case until the year 2000, absent any emergencies. On November 30, 1995, the Company reached an agreement with the ACC Staff proposing to resolve the Company's application for a rate increase, and the Company's notice of intent to form a holding company. The Proposed Settlement Agreement was subject to final approval by the full ACC following a hearing which started on January 17, 1996. At the conclusion of such hearings, on January 19, 1996, the ACC denied the Proposed Settlement Agreement by a 2 to 1 vote. On January 24, 1996, the Company filed a motion for reconsideration with the ACC. On February 13, 1996, the motion for reconsideration was deemed denied by operation of law. Although the Company's application for a rate increase remains pending, the Company intends to propose and seek approval of a revised settlement agreement in March 1996. The Proposed Settlement Agreement called for a one-time base rate increase of 1.8%, or $8.4 million annually. Also, the Company agreed not to seek another increase in base rates before January 1, 2000. The agreement also would have permitted the Company to invest up to $50 million annually in energy-related businesses. Although the agreement would not have approved the holding company structure, it did provide that the Company could re-file for authority to establish a holding company in 18 months from the approval of the Proposed Settlement Agreement. See Notice of Intent to Form a Holding Company below for a description of further action taken by the ACC with respect to the formation of a holding company. NOTICE OF INTENT TO FORM A HOLDING COMPANY In February 1995, the Company filed a Notice of Intent to Form a Holding Company with the ACC. In June 1995, the ACC Staff filed testimony recommending that the ACC deny the Company's request on the basis that retail customers would be exposed to certain risks resulting from diversification. However, ACC Staff recommended that, in the event that the ACC approves formation of the holding company, the ACC impose various operating and financial conditions on the Company and the holding company. In concurrently filed testimony, RUCO, an intervenor in the matter, did not oppose the formation of the holding company. The Company filed rebuttal testimony on July 27, 1995, and a public hearing was held on August 22, 1995. In November 1995, the Company and the ACC Staff entered into the Proposed Settlement Agreement which included a proposal to resolve the Company's holding company application. On January 19, 1996, the Proposed Settlement Agreement was denied (see 1995 Rate Application above). Following the denial of the Proposed Settlement Agreement, the ACC Hearing Officer submitted a recommended order on the holding company proposal. On February 22, 1996, the ACC denied the formation of a holding company. However, the ACC granted the Company a waiver for the authority to invest in subsidiaries that will engage in energy related projects in an amount equal to the lesser of $25 million or the maximum amount allowed by the MRA. To the extent that the Company obtains retroactive approval or waiver of projects from the ACC, the energy related diversification amount will be reinstated up to the $25 million limit. This investment authority is subject to the conditions that (i) the total waiver amount shall not exceed $50 million annually, (ii) 60% of net profits from diversified activities be applied to repay the Company's debt and (iii) total investment in such diversified activities does not exceed 15% of the Company's capitalization. 1994 RATE ORDER On January 11, 1994, the ACC issued a decision approving a 4.2% retail rate increase for the Company. The new rates were effective as of January 11, 1994. According to the 1994 Rate Order, the new rates were intended to produce an annual increase in gross revenues of approximately $21.6 million based upon a test year ended June 30, 1992. This reflects an allowed original cost rate base of approximately $1.0 billion and a return on original cost rate base (after write-offs) of 8.51% based upon a rate of return on common equity of 11%. The Company requested in its January 1993 filing a $49 million increase in gross revenues based on an original cost rate base of approximately $1.1 billion and a rate of return base of 9.17% based upon 12.5% return on equity. In determining the required return on rate base, the 1994 Rate Order utilized a hypothetical capital structure of 49.8% long-term debt, 44.1% common equity, 4.7% preferred equity and 1.4% short-term debt as contemplated under a 1991 rate settlement agreement. The decision authorized the inclusion of an additional 17.5% of Springerville Unit 2 in rate base, for a total of 62.5%. The 1994 Rate Order also allowed inclusion of 62.5% of the Springerville Unit 2 rate synchronization and excess capacity deferred expenses in rate base. Amortization of those rate synchronization deferred expenses allowed in rate base was authorized to be recovered from retail customers over a three-year period. However, amortization of the excess capacity deferred expenses allowed in rate base was authorized to be recovered from retail customers over 37.4 years. The 37.5% of the rate synchronization and excess capacity expenses not currently being recovered continue to accrue at a 7.19% interest carrying charge. See Note 2 of Notes to Consolidated Financial Statements, 1994 Rate Order. Based on the 1994 Rate Order, the Company recorded an additional $13.6 million in write-offs related to previously capitalized Springerville Unit 2 costs and certain other minor costs for which recovery was permanently disallowed. See Note 2 of Notes to Consolidated Financial Statements, 1994 Rate Order. The Company's filing also discussed a proposal for the allocation of the future benefits of the 1992 settlement of a lawsuit brought against SCECorp. and SCE for interference with the Company's 1988 attempted merger with SDGE. SCE paid the Company a $40 million cash settlement and entered into a ten-year, 110- megawatt power exchange agreement to begin in 1995 which FERC has accepted for filing. The ACC stipulated in the 1994 Rate Order that the Company use $27 million of the litigation settlement, which is equal to the $40 million less costs of litigation, to prepay debt. Also, the ACC ordered the Company to submit a proposal for the sharing of the benefits of the SCE power exchange agreement. The Company expects to include such benefit sharing proposal in its next rate filing. The Company intends to seek rate recovery of the costs associated with the remaining 37.5% of Springerville Unit 2 that is not in base rates. This rate request is expected to be filed in 1995. See Note 2 of Notes to Consolidated Financial Statements, 1994 Rate Order, for additional discussion concerning theMatters, 1994 Rate Order. OTHER RATE MATTERS See Utility Operations, Peak Demand and Customers for a discussion of the Company's contracts and negotiations with certain of its mining customers. FUEL SUPPLY GENERAL The Company's principal fuel for electric generation is low-sulfur coal. The following table provides fuel cost information for the years 19941995 through 1990: Cost Per Million BTU Consumed Percentage of Total BTU Consumed 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 Coal(A)(B) $2.06 $2.01 $1.89 $2.04 $1.94 98% 99% 99% 99% 99% Gas 1.86 2.76 2.39 2.14 2.67 2 1 1 1 1 --- --- --- --- --- All Fuels 2.05 2.02 1.90 2.05 1.95 100% 100% 100% 100% 100% === === === === ===1991: Cost Per Million BTU Consumed Percentage of Total BTU Consumed ----------------------------- -------------------------------- 1995 1994 1993 1992 1991 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Coal (A) $1.89 $2.06 $2.01 $1.89 $2.04 99% 98% 99% 99% 99% Gas 1.69 1.86 2.76 2.39 2.14 1 2 1 1 1 --- --- --- --- --- All Fuels 1.89 2.05 2.02 1.90 2.05 100% 100% 100% 100% 100% ==== ==== ==== ==== ====
(A)The average cost per ton of coal for each of the last five years (1994(1995 - 1990)1991) was $35.53, $38.93, $37.60, $36.46 $39.55 and $37.90, respectively. (B) Includes the cost of fuel handling facilities at Springerville. Such costs per million BTU consumed were: $0.36, $0.37, $0.26, $0.35 and $0.25 for 1994 to 1990,$39.55, respectively. COAL The Company is the operator for the Springerville and Irvington generating stations. Their coal supplies are transported from northwestern New Mexico by railroad. The coal contract for Springerville is for the remaining lives of Units 1 and 2 with a bilateral option to renegotiate the contract price and escalation procedures in 2009 and every five years thereafter. At Irvington, the contract termination date is the earlier of 2015 or the remaining life of Unit 4. The Springerville and Irvington contracts have various adjustment clauses which will affect the future cost of coal delivered. Coal reserves are expected to be sufficient to supply the estimated requirements of Springerville and Irvington for their presently estimated remaining lives. TEP is a participant in the San Juan Generation Station and shares a 50/50 responsibility split of the coal agreement. The coal quantities for the San Juan Station, a mine mouth operation, are partially contracted through the year 2017. The Company also participates in jointly owned generating facilities under long-term contracts entered into by the operating agents. Coal supplies are surface-mined in northern Arizona and northwestern New Mexico. The coal quantities under contract for Four Corners terminate in 2005. The coal quantities under contract for the Navajo and Four Corners mine-mouth coal fired generating stationsstation are expected to be sufficient to supply the estimated requirements for theirits presently estimated remaining lives. The coal quantities for San uan, also a mine-mouth generating station, are partially contracted through the year 2017.life. Additional information concerning the coal contracts is set forth below:on the following page:
Year Average Cost Per Year Average Million Contract Sulfur BTU inMillion BTU(A) Station Coal Supplier Terminates Content 1994(A)1995 1994 1993 Coal Obtained From(B) - ------- ------------- ----------- ------- ---- ---- ---- --------------------- Four Corners BHP Utah International, Inc. 2005 0.8% $1.15 $1.28 $1.15 Navajo Indian Tribe San Juan San Juan Coal Company 2017 0.8% $1.76 $1.81 $1.89 Federal and State Agencies Navajo Peabody Coal Company 2011 0.6% $1.12 $1.09 $1.11 Navajo and Hopi Indian Tribes Springerville Hanson Natural Resources Company (C) 0.7% $2.33(C)$2.20(D) $2.47(D) $2.33(D) Lee Ranch Coal Company Irvington The Pittsburg & Midway Coal Mining Company 2015 0.4% $2.20 $2.21 $2.50 Navajo Indian Tribe and Federal and Federal and State Agencies
(A)Includes costs of transportation and handling in addition to the purchase price under the basic contract. (B) Substantially all of the suppliers' leases extend at least as long as coal is being mined in economic quantities. (C) The coal contract for Springerville is for the remaining lives of Units 1 and 2 with a bilateral option to renegotiate the contract price and escalation procedures in 2009. (D) The Springerville costs include approximately $0.93 per million BTU for costs associated with Valencia operations, including the costs of the Valencia Leases. Such costs were 65 cents, 60 cents, and 56 cents for 1995, 1994 and 1993, respectively. Valencia is responsible for the handling of fuel for the Springerville Station. In 1991, 1992, 1993 and 1994, the Company obtained various amendments to its contracts with the Springerville and Irvington coal and rail transportation suppliers. The Company estimates that such amendments produced aggregate savings of $59.6 million, $42.7 million, and $27.8 million in 1994, 1993 and 1992, respectively, compared with the costs which would have been incurred had such amendments not been obtained. Some of the 1991 amendments provided for the repayment of certain amounts withheld during the Payment Moratorium and the forgiveness of other amounts in exchange for certain land. All of the 1991 amendments provide for the preservation of the suppliers' claims under the original contracts, as though such contracts had not been amended, for a period of four years from the amendments if the Company does not perform under the terms of the amended contracts. See Note 7 of Notes to Consolidated Financial Statements, Commitments and Contingencies. Also, in July 1992 the contract with the San Juan coal suppliersupply agreement was amended to, among other things, reduce operations and maintenance pass-through costs by 10%, reduce ash handling costs and also to provide price reduction incentives for coal purchased above certain minimum quantities. Such amendment provides yearly savings to the Company of approximately 6%, or $1.4 million. On September 1, 1995, the San Juan agreement was amended to allow the mines the flexibility of mining more economical leases. The reductions will be passed on to TEP in the form of lower unit costs. The Company intends to continue to actively negotiate its fuel and transportation contracts in 19951996 and in the future. VALENCIA Valencia is responsible for the acquisition, transportation and handling of fuel for Springerville. Pursuant to a fuel burn agreement with the Company, Valencia has the exclusive right and obligation to provide all of the fuel requirements for Springerville. Pursuant to the Valencia Leases, Valencia is the lessee of the coal- handling facilities at Springerville under a capital lease with a remaining initial lease term of approximately 2120 years with incremental extensions of five to six years depending on certain criteria at the date of each extension. At December 31, 1994,1995, the capitalized lease asset related to Springerville coal- handlingValencia coal-handling facilities, net of accumulated amortization, was $184 million for financial statement purposes.$181 million. Annual rental payments range from approximately $15$10 million to $25$28 million but average $21 million. Rental payments and other obligations of Valencia under the leases are guaranteed by the Company. Valencia allocates portions of its costs to deferred expense for future recovery through sales of fuel. See Note 1 of Notes to Consolidated Financial Statements, Nature of Operations and Summary of Significant Accounting Policies, for a description of the accounting for Valencia lease costs. GAS In 1994,1995, the Company purchased a small amount of natural gas for power generation (less than 2% of total Company generation) from Southwest Gas, Anthem Energy, BridgeGas, Chevron, Natural Gas Clearinghouse, Mobil and USGT. During 1994,1995, the Company received natural gas sufficient to meet all of its gas fuel requirements; however, as in the past, the Company's supply of natural gas for boiler fuel may be limited occasionally in the future.requirements. WATER SUPPLY Arrangements have been made for water sufficient to supply the requirements of existing and planned units of all electric generating stations in which the Company has an interest for their estimated lives. ENVIRONMENTAL MATTERS GENERAL The Company must operate its generating stations in accordance with numerous local, state and federal guidelines, laws, regulations and ordinances designed to preserve and enhance environmental integrity. Resource extraction and waste disposal operations are also regulated for environmental compatibility. Generally, air quality and water quality are under the most stringent regulations. Land use is also carefully regulated. Various federal, state and local laws, regulations and requirements for air quality control continue to have a significant impact on the Company. Due to theirthe proximity toof national parks, monuments, wilderness areas and Indian reservations and due to the relatively high air quality at such locations, the principal generating units of the Company are subject to control standards of best available control technology (BACT) and best available retrofit technology (BART). Such standards relate to the "prevention of significant deterioration" of visibility and tall stack limitation rules. Certain other generating units of the Company are located in areas which have been designated by federal and state agencies as "non-attainment" areas (where federal ambient air quality standards are not achieved). This designation requires such generating units to comply with "lowest achievable emission rate" or "reasonably available control technology" standards or "offset" requirements. New Mexico has adopted emission regulations restricting the emissions from both existing and future coal, oil and gas-fired plants located in New Mexico. Regulations adopted by the New Mexico Environmental Improvement Board (NMEIB) are in some instances more stringent than those adopted by the EPA. The NMEIB has adopted regulations, which apply to all units at the San Juan and Four Corners generating stations, that prohibit emissions of sulfur dioxide, particulates, and nitrogen oxide above certain levels. The Company expended $6.2$11 million during 19941995 for environmental construction costs in maintaining compliance with environmental requirements. The Company estimates that it will make expenditures for environmental facilities of approximately $9.8$12 million in 19951996 and $8.8$9 million in 1996.1997. These amounts include the Company's estimated share of initial expenditures for improvements to the pollution control facilities at the Navajo station which are associated with the final rule issued by EPA on October 3, 1991, regarding visibility impairment in Grand Canyon National Park (see Navajo Generating Station below for information regarding the projected total cost of such facilities), and procurement of continuous emission monitors for Irvington Units 1, 2, 3, and 4 and Springerville Units 1 and 2. With the construction expenditures described above, the. The Company believes that all existing generating facilities are or will be in compliance with all existing or expected environmental regulations except as described below. In the fall of 1990, Congress adopted certain Federal Clean Air Act Amendments (CAAA) with respect to reductions in sulfur dioxide and nitrogen oxide emissions which will affect the Company's operation. The nitrogen oxide reductions will be based upon EPA regulations expected to be finalized in 1995 for certain boilers and expected to be finalized by 1997 for all remaining boilers. In addition, the rules expected to be promulgated in 1995 may be revised in 1997. The required reductions of sulfur dioxide emissions will be implemented in two phases which will beare effective in 1995 and 2000, respectively. The Company is not affected by the requirements for sulfur dioxide emissions and nitrogen oxide reductions which gowent into effect in 1995 (Phase I), but is subject to the requirements that go into effect January 1, 2000 (Phase II). In Phase II, the maximum sulfur dioxide emission rates are set at 1.2 pounds per million BTU. Because of the Company's general use of low-sulfur coal and installed scrubbers at certain units, the Company's coal-fired generating stations already meet the sulfur dioxide emission rate requirements for Phase II. Additionally, further reductions are to be met through a proposed market- based system. Affected Company generating units will be allocated allowancesEmission Allowances based on required emission reductions and past use. An allowance permits emission of one ton of sulfur dioxide and may be sold. Generating station units must hold allowancesEmission Allowances equal to their level of emissions or face penalties and a requirement to offset excess tons in future years. On March 23,In 1993, the EPA published the final sulfur dioxide allowance allocationsallocated Emission Allowances for all Phase I and Phase II affected utility units, including the allowances that will be allocated to all Company units. An analysis of the sulfur dioxide allowancesEmission Allowances that were allocated to the Company shows that the Company would have sufficient allowances to permit normal plant operation and be in compliance with the sulfur dioxide regulations once the Phase II requirements become effective. However, until all the rulemaking regulation processes for implementing the CAAA are completed, the Company is unable to predict the specific impacts of all such amendments. The CAAA also introduced the concept of an organized market for the trading of Emission Allowances. This market would have allowed utilities to buy and sell the right to emit sulfur dioxide and served as the mechanism to enforce compliance with the new standards promulgated under the CAAA. The CAAA also required the EPA to hold or sponsor an auction for Emission Allowances within the first three months of each year. The first of such auction was held in March 1993, following the allocation of Emission Allowances to Utilities in January 1993. Title V of the CAAA established a new air quality permitting system that will be administered in Arizona by the ADEQ. Electric utilities in the state were required to submit applications for Title V permits by February 1, 1995; processing1995. Processing and issuance of thesesuch permits is expected to take at least 18 months. Until a Title V permit is issued, permits that expire during that period will either be honored or will be reissued by ADEQ with additional requirements reflecting Title V regulations. The CAAA also require multi-year studies of visibility impairment in specified areas and studies of hazardous air pollutants which relate to the necessity of future regulations of electric utility generating units. Since these activities involve the gathering of information not currently available, the Company cannot predict the outcome of these studies. As a result of recent and possible future changes in federal and state environmental laws, regulations and permit requirements, the Company may incur additional costs for the purchase or upgrading of pollution control emission monitoring equipment on existing electric generating facilities and may experience a reduction in operating efficiency. There may be a need for variances from certain environmental standards and operating permit conditions until required equipment and processes for control, handling and disposal of emissions are operational and reliable. Failure to comply with any EPA or state compliance requirements may result in substantial penalties or fines which are provided for by law and which in some cases are mandatory. FOUR CORNERS GENERATING STATION The Company believes that all units at Four Corners are presently operating in compliance with federal and state regulations. IRVINGTON GENERATING STATION The Company has anCompany's ADEQ operating permit for Irvington Unit 4 which expiresexpired on February 8, 1996. By law, the permit remains in effect until ADEQ issues a new facility-wide Title V permit in 1996. The other facilities at the Irvington station were under the jurisdiction of the PDEQ until 1993. However, because of 1990 CAAA requirements which require the facility to obtain a Title V permit, the entire facility was placed under the jurisdiction of ADEQ in April 1994. The Company hastimely filed a Title V permit application for the Irvington facility on February 1, 1995.1995, thus providing the facility with a permit application shield. Each major source requiring a Title V permit must pay an annual emission- basedemission-based fee. The 1995 emission fee in 1996 for emissions at the Irvington facility was assessed at $179,000$191,000 and is expected to range between $150,000 to $250,000 for 1996.1997. NAVAJO GENERATING STATION In 1991, the EPA adopted a rule for the reduction of Navajo's sulfur dioxide emissions on an annual averaging basis by 90% to address visibility impairment at Grand Canyon National Park. The Company estimates that its share of the required capital expenditures remaining as of December 31, 19941995 relating to the rule's implementation will be approximately $44$31 million, including AFDC, through 1999. SAN JUAN GENERATING STATION The Company believes that all units at San Juan are presently operating in compliance with federal and state regulations. SPRINGERVILLE GENERATING STATION Springerville Units 1 and 2 meet all existing federal and state regulations pertaining to environmental quality. Springerville Units 1 and 2 are operating under an operating permit issued by ADEQ on December 19, 1994, which expires on December 19, 1999. Springerville Generating Station is a major source requiring a Title V permit, and the Company filed a Title V permit application for the Springerville facility on February 1, 1995. As a result of requirements imposed by the CAAA of 1990, each major source requiring a Title V permit must pay an annual emission-based fee. The 1995 emission fee in 1996 for emissions at the Springerville Generating Station Units 1 and 2 was assessed at $316,000$328,000 and is expected to be approximately the same for 1996.1997. EMPLOYEES The Company and the IBEW 1116, which represents about 63% of the 1,3961,366 employees of the Company and its subsidiaries at December 31, 1994,1995, are parties to a two-year collective bargaining agreement for the period from December 1, 1994 through November 30, 1996. The collective bargaining agreement, which was negotiated with and approved by the IBEW 1116 in November 1994, includes annual wage increases of 3.6% and 4.0% in 1995 and 1996, respectively, and modifications to the pension, health and supplemental retirement plans. The Company expects to begin negotiations to extend and modify the collective bargaining agreement after June 1996. DISCONTINUED INVESTMENT SUBSIDIARY OPERATIONS The Company directly owns two non-energy related investment subsidiaries, TRI and SRI. TRI and SRI each wholly own several subsidiaries both directly and indirectly. In July 1990, each of the Board of Directors of TRI and SRI adopted resolutions for the liquidation of substantially all of the assets of these subsidiaries. As a consequence, the investment subsidiaries were reclassified as discontinued operations for financial statement purposes. This reclassification required the Company to estimate the net realizable value of the investment subsidiary assets in light of the projected time frame of the liquidation and in accordance therewith, the Company established appropriate reserves for losses. The estimated net realizable value of the investment subsidiaries' net assets as of December 31, 1994 was approximately $8.5 million. The Company intends to continue to liquidate the remaining assets. The investment subsidiaries have been in the process of liquidating their assets and have dividended available asset-sale proceeds to the Company.purposes through 1994. During 1994, the investment subsidiaries sold all of their remaining interests in cogeneration and independent power projects, as well as the hotels located in Louisville, Kentucky and Woodland Hills, California.California, substantially completing the liquidation of the investment subsidiary assets. In January and February 1995, the remaining equity securities were sold. The Company intends to continue to liquidate the remaining assets. The Company received cash dividends from TRI of $10$50 million in April 1994 $15and $13 million in June 1994 and $25 million in December 1994.March 1995. Since July 1990, a total of $97$110 million of cash dividends has been received by the Company from the investment subsidiaries. See Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations, Restrictive Covenants, Prepayments. See Note 5 of Notes to Consolidated Financial Statements, Discontinued Operations. UTILITY OPERATING STATISTICS
For Years Ended December 31, 1995 1994 1993 1992 1991 1990 Generation and Purchased Power-kWh (000)- -------------------------------------------------------------------------------------------------------- Generation and Purchased Power-kWh (000) Remote Generation (Coal) 8,716,513 9,341,342 8,986,350 6,148,825 5,518,543 5,191,186 Local Generation (Oil, Gas & Coal) 500,958 825,385 615,100 527,405 314,441 692,651 Purchased Power 692,769 501,269 335,897 2,436,152 2,736,620 2,685,647--------- ---------- --------- --------- --------- --------- Total Generation and Purchased Power 9,910,240 10,667,996 9,937,347 9,112,382 8,569,604 8,569,484 Less Losses and Company Use 661,901 639,278 591,412 610,040 585,964 584,101--------- ---------- --------- --------- --------- --------- Total Energy Sold 9,248,339 10,028,718 9,345,935 8,502,342 7,983,640 7,985,383========= ========== ========= ========= ========= ========= Sales-kWh (000) Residential 2,330,191 2,374,868 2,223,479 2,146,268 2,081,476 2,069,718 Commercial 1,280,752 1,281,050 1,242,367 1,215,179 1,182,599 1,193,964 Large Users 1,979,317 1,948,331 1,832,278 1,771,937 1,756,887 1,751,263 Mining 1,147,281 1,135,424 1,090,061 1,081,791 951,646 898,584 Public Authorities 204,746 183,525 159,310 165,922 164,380 162,575--------- ---------- --------- --------- --------- --------- Total-Retail Customers 6,942,287 6,923,198 6,547,495 6,381,097 6,136,988 6,076,104 Sales to Other Utilities 2,306,052 3,105,520 2,798,440 2,121,245 1,846,652 1,909,279--------- ---------- --------- --------- --------- --------- Total 9,248,339 10,028,718 9,345,935 8,502,342 7,983,640 7,985,383========= ========== ========= ========= ========= ========= Operating Revenues (000) (A) Residential $218,208 $220,341 $197,368 $190,089 $174,054 $159,813 Commercial 138,294 137,508 128,688 125,655 114,826 107,373 Large Users 146,409 144,677 131,858 127,456 121,269 109,236 Mining 54,948 53,821 53,510 57,266 49,996 46,365 Public Authorities 14,952 13,435 11,464 11,757 11,273 10,079 Other 2,114 1,651 1,925 1,791 1,583 1,475 -------- -------- -------- -------- -------- Total-Retail Customers 574,925 571,433 524,813 514,014 473,001 434,341 Amortization of MSR Option Gain Regulatory Liability 20,053 20,053 6,053 6,053 16,553 - Sales to Other Utilities 75,591 99,987 93,273 70,026 65,441 60,199 -------- -------- -------- -------- -------- Total $670,569 $691,473 $624,139 $590,093 $554,995 $494,540 ======== ======== ======== ======== ======== Customers (End of Period) Residential 273,976 266,060 258,168 251,656 246,538 242,539 Commercial 27,858 27,360 26,838 26,441 26,144 25,938 Large Users 620 588 551 527 531 516 Mining 4 4 4 4 34 Public Authorities 59 59 59 59 59 ------- ------- ------- ------- ------- Total Retail Customers 302,517 294,071 285,620 278,687 273,276 269,055 ======= ======= ======= ======= ======= Average Revenue per kWh Sold (cents) (A) Residential 9.4 9.3 8.9 8.9 8.4 7.7 Commercial 10.8 10.7 10.4 10.3 9.7 9.0 Large Users and Mining 6.4 6.4 6.3 6.5 6.3 5.9 Total - Retail Customers 8.3 8.3 8.0 8.1 7.7 7.1 Average Revenue per Residential Customer $809 $841 $776 $765 $714 $666 Average kWh Sales per Residential Customer 8,641 9,066 8,739 8,632 8,534 8,621 (A) Amounts for 1993-1990 have been restated to eliminate revenue related taxes. See Note 1 of Notes to Consolidated Financial Statements, Nature of Operations and Summary of Significant Accounting Policies, Reclassification.
ITEM 2. --- PROPERTIES The Company's transmission facilities are located within the states of Arizona and New Mexico. The primary purpose of the Company's transmission facilities is to transmit electricity from the Company's remote electric generating stations at Four Corners, Navajo, San Juan and Springerville to the Tucson area for use by the Company's retail customers.customers (see Item 1, Business, Generating and Other Resources for the location of the Company's plants). The transmission system is directly interconnected with systems operated by the following utilities: Utility Location ------- -------- Arizona Public Service Co. Arizona Arizona Electric Power Cooperative Arizona El Paso Electric Co. New Mexico, Texas Public Service Co. of New Mexico New Mexico Salt River Project Arizona The Company has arrangements with approximately 74130 companies, including the five listed above, which are utilized to interchange capacity and energy. As of December 31, 1994,1995, the Company owned or participated in an overhead electric transmission and distribution system consisting of 511 circuit-miles of 500 kV lines, 1,122 circuit-miles of 345 kV lines, 335 circuit-miles of 138 kV lines, 454 circuit-miles of 46 kV lines and 8,9479,233 circuit-miles of lower voltage primary lines. The underground electric distribution system was comprised of 4,2234,514 cable-miles. Approximately 25%24% of the poles upon which the lower voltage lines are located are not owned by the Company. Electric substation capacity associated with the above-described electric system consisted of 165166 substations with a total installed transformer capacity of 5,209,3555,258,355 kVA. The electric generating stations (except as noted below), the Company's general office building, operating headquarters and the warehouse and service center are located on land owned by the Company in fee. The electric distribution and transmission facilities owned by the Company are located (1) on property owned in fee by the Company, (2) 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, with some exceptions, are subject to termination, (3) under or over private property by virtue of easements obtained for the most part from the record holder of title, and (4) under Indian reservations under grant of easement by the Secretary of Interior or lease by Indian tribes. In most instances, no examination has been made by counsel for the Company as to the title to easements of the Company from the record holder or to the property over which the easement has been granted, or as to possible liens, encumbrances, reservations or restrictions thereon. Therefore, some of the easements and the property over which the easements have been secured may be subject to title defects and encumbered by, or subject to, mortgages and liens existing at the time the easements were acquired. Most of the land parcels comprising Springerville are held by the Company under a long-term surface ownership agreement with the State of Arizona. The Company's 50% interest in the common facilities of Springerville and its 100% interest in Irvington Unit 4 and related common facilities were sold and are leased back by the Company. The coal-handling facilities at Springerville were sold and leased back by Valencia. The Company leases Springerville Unit 1 and the remaining 50% interest in the common facilities at Springerville. Four Corners and Navajo are located on properties held under easements from the United States and under leases from the Navajo Indian Tribe. The Company, 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 the Navajo Indian Reservation. The Company has also acquired easements for transmission facilities, related to San Juan and Navajo, across the Zuni, Navajo and Tohono O'odham Indian Reservations. The Company's rights under the various easements and leases described under this heading may be subject to possible defects (including conflicting grants or encumbrances not ascertainable because of absence of or inadequacies in the recording laws or the record systems of the Bureau of Indian Affairs and the Indian tribes, the possible inability of the Company to resort to legal process to enforce its rights against certain possible adverse claimants and the Indian tribes without Congressional consent, the possible failure or inability of the Indian tribes to protect the Company's interests in, and use and occupancy of, these facilities from interference or interruption, and, in the case of the leases, possible impairment or termination under certain circumstances by Congress, the Secretary of the Interior or certain possible adverse claimants). However, these possible defects have not and are not expected to materially interfere with the Company's interest in and operation of its facilities. With the exception of Springerville Unit 2, substantially all of the utility assets of the Company are subject to the lien of the General First Mortgage and the General Second Mortgage. Legal title to Springerville Unit 2, which is not subject to such lien,liens, is held by San Carlos. Springerville Unit 2 is subject to the Unit 2 First Mortgage. The Company provided to certain banks, at the time of the Closing, the Unit 2 First Mortgage, a first mortgage lien on and security interest in Springerville Unit 2, and $50 million in principal amount of collateral bonds issued under the General Second Mortgage, a second mortgage, junior to the lien of the General First Mortgage, on all the utility assets (other than excepted property). ITEM 3. --- LEGAL PROCEEDINGS SDGE/FERC PROCEEDINGS See SDGE/FERC Proceedings in Note 76 of Notes to Consolidated Financial Statements. TAX ASSESSMENTS See Tax Assessments in Note 6 of Notes to Consolidated Financial Statements. WATER RIGHTS ADJUDICATION On March 13, 1975, the State of New Mexico filed an action entitled State of New Mexico v. United States, et al., in the District Court of San Juan County, New Mexico, to adjudicate all water rights in the San Juan River Stream System. The action is expected to adjudicate certain water rights applicable to the water supply for San Juan and Four Corners. The Company was made a party to this action in June 1976 and an answer was filed on behalf of the Company and others in May 1978. For the past several years, the State of New Mexico Engineer's Office has reportedly been completing reports on hydrographic surveys performed in conjunction with the litigation. It is anticipated that once those reports are completed, offers of judgment will be issued to the Company and other parties. The Company is unable to predict the effect, if any, of any adjudication on its present arrangements for a water supply to these stations. However, pursuant to an agreement reached in 1985, the Navajo Tribe will provide sufficient water to Four Corners from its own allocation to offset any portion of the water rights affected by this proceeding. TAX ASSESSMENTS See Tax Assessments in Note 7 of Notes to Consolidated Financial Statements. ITEM 4. --- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. --- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the periods indicated, the high and low sale prices of the Company's Common Stock on the consolidated tape as reported by The Wall Street Journal.Dow Jones. No dividends were paid on Common Stock during such periods. Market Price per Quarter Share of Common Stock High Low 1995 First...... $3.75 $3.00 Second..... 3.50 3.00 Third...... 3.25 2.63 Fourth..... 3.25 2.88 1994 FirstFirst..... $4.13 $3.38 SecondSecond..... 3.88 2.88 ThirdThird...... 3.75 2.88 FourthFourth..... 3.88 3.00 1993 First $3.75 $1.88 Second 4.50 2.75 Third 4.63 3.63 Fourth 4.38 3.25 The closing price of the Common Stock on March 6, 19951, 1996 was $3.375.$3.125. The Common Stock is traded on the New York Stock Exchange and the Pacific Stock Exchange. At March 6, 1995,1, 1996, there were 39,19935,870 shareholders of record of the Common Stock. See Item 7., Management's Discussion and Analysis of Financial Condition and Results of Operations, Dividends on Common Stock. ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
1995 1994 1993 1992 1991 1990 (In thousands - except per share data and ratios) Summary of Operations - ---------------------------------------------------------------------------------------------------------------- Operating Revenues (A)$670,569 $691,473 $624,139 $590,093 $554,995 $494,540Regulatory Disallowances and Adjustments - - (13,777) - (239,232) Income Taxes-Net 20,436 4,911 5,277 5,745 6,638 Loss on Restructuring - - - (26,669) - Income (Loss) from: Continuing Operations 54,905 20,740 (21,816) (79,022) (421,493) (269,643) Discontinued Operations - - - - (12,659) Provision for Loss on Disposal of Discontinued Operations - - (4,000) (44,047) (36,000) (104,727) Net Income (Loss) 54,905 20,740 (25,816) (123,069) (457,493) (387,029) Net Income (Loss) for Common Stock $20,740 $(25,816) $(123,069) $(465,339) $(397,226)54,905 20,740 (25,816) (123,069) (465,339) Income (Loss) per Average Share of Common Stock from: Continuing Operations $0.34 $0.13 $(0.14) $(2.48) $(16.70) $(10.92) Discontinued Operations - - - - (0.49) Provision for Loss on Disposal of Discontinued Operations - - (0.02) (1.38) (1.40) (4.09) Total Net Income (Loss) per Average Share of Common Stock $0.34 $0.13 $(0.16) $(3.86) $(18.10) $(15.50) Shares of Common Stock Outstanding Average 160,691 160,724 160,544 31,872 25,716 25,633 End of Year 160,671 160,724 160,724 160,430 25,716 25,716 Rate of Return on Average Common Equity N/M N/M N/M N/M (79.26)%- ---------------------------------------------------------------------------------------------------------------- Financial Position - ---------------------------------------------------------------------------------------------------------------- Total Utility Plant-NetPlant - Net $1,978,126 $2,007,422 $2,029,764 $2,052,695 $1,351,729 $1,599,707 Total Investments 52,116 12,992 62,850 98,126 203,712 229,328 Total Assets 2,701,936 2,714,0962,530,930 2,699,593 2,711,753 2,656,089 2,004,336 2,214,497 Long-Term Debt - Net 1,207,460 1,381,935 1,416,352 1,466,555 500,060 500,915 Capital Lease Obligations 897,958 922,735 927,201 931,163 5,836 6,646 Total Preferred Stock - - - - 82,793 82,793 Total Common Stock Equity (Deficit) 12,488 (42,233) (62,973) (38,209) (191,903) 265,590 Total Capitalization 2,117,906 2,262,437 2,280,580 2,359,509 396,786 855,944 Defaulted Long-Term Debt - Due on Demand - - - - 760,966 661,909 Defaulted Short-Term Debt - Due on Demand - - - - 219,800 219,800 Regulatory Liabilities 41,214 54,924 53,910 226,645 249,610 Reserve for Litigation and Contract Disputes - - - 27,500 27,219 17,219 Total Capitalization and Other Liabilities and Stockholders' Equity $2,701,936 $2,714,0962,530,930 2,699,593 $2,711,753 $2,656,089 $2,004,336 $2,214,497- ---------------------------------------------------------------------------------------------------------------- Selected Cash Flow Data - ---------------------------------------------------------------------------------------------------------------- Cash Flow Interest Coverage (A) 2.5x 3.0x 2.3x 2.0x 3.2x Cash & Cash Equivalents/Current Liabilities (B) 0.48 1.29 0.91 1.06 N/M Construction Expenditures (including AFDC) $62,317 $64,479 $48,375 $30,207 $48,728 $66,147 Cash Generated as a Percent of Construction ExpendituresExpenditures: Internally Generated (B)(C) 191.6% 222.7% 184.7% 293.4%(C) 232.6%(C) (110.8)% Internally Generated (B)(C), Including Drawdowns of Funds Held in Trust 191.6% 222.7% 226.0% 348.8%(C) 232.6%(C) (59.0)% - ---------------------------------------------------------------------------------------------------------------- Note: Total investments, assets and liabilities and stockholders' equity have been restated to reflect the adoption of discontinued operations. Also, seeSee Item 7., Management's Discussion and Analysis of Financial Condition and Results of Operations. (A) Due to the adoption of FERC Order No. 529 interchange sales of electricity have been reclassified to Sales to Other Utilities for all periods. Revenue related taxes were removedCash from Operating Revenues for all periods.Continuing Operations plus Interest Paid divided by Interest Paid. (B) Excludes Cash from Discontinued Operations. (C) Cash generated is cash provided from continuing operations less cash dividends. (C)Ratios for 1992 and 1991 ratios include cash conserved under the Payment Moratorium.payment moratoria implemented by the Company on certain obligations during 1992 and 1991. N/M - Not meaningful.
ITEM 7. --- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following contains information regarding the Company's continuing and discontinued operations during 1995 compared with 1994 and 1994 compared with 1993 and 1993 compared with 1992 and changes in liquidity and capital resources of the Company during 1994.1995. Also, management's expectations of identifiable material trends are discussed herein. OVERVIEW In December 1992, the Company consummated a comprehensive Financial Restructuring of obligations to certain creditors and reclassified its preferred stock into common stock. The Financial Restructuring was concluded following nearly two years of negotiations with various creditors including, but not limited to, bank lenders and lease participants.GENERAL The Company initiatedclosed 1995 with positive earnings for the Financial Restructuring because it projected that it might have insufficient liquiditysecond consecutive year and with positive common stock equity (instead of a deficit) for the first time since 1990. In addition to meet its cash obligations byunderlying growth, results reflect the endCompany's efforts to lower operating costs as well as reduce capital costs and strengthen the balance sheet. The results also reflect a one-time $12.2 million non-cash accounting reversal of fuel expenses and the non-cash recognition of $23 million of defined tax benefits based on the expectation of the first quarterrealization of 1991. A payment moratorium on certain ofsuch benefits in the Company's debt, lease, coal and rail obligations during part of the period of negotiations provided cash flow sufficient to meet the Company's other obligations. The Company believes that the Financial Restructuring provides the Company the opportunity to return gradually to long-term financial viability. However, the Financial Restructuring itself is not sufficient to assure the Company's long-term financial viability. The Company's capital structure remains highly leveraged andfuture from net operating loss carryforwards. Despite such improvements, the Company's financial prospects and cash flows remaincontinue to be subject to significant economic, regulatory and other uncertainties, some of which are beyond the Company's control. These uncertainties include the degree of utilization of generation capacity through either retail electric service or wholesale sales and the extent to which the Company, due to continued high financial and operating leverage, can alter operations and reduce costs in response to unanticipated economic downturns or industry changes due to continued high financial and operating leverage.changes. The Company's ability to recover the costs of serving retail customers is dependent upon pricing of the Company's services, which requires ACC approval, and the level of sales to such customers. The Company anticipates continued growth in sales over the next five years primarily as a result of anticipated population and economic growth in the Tucson area. However, a number of factors such as changes in economic conditions and the increasingly competitive electric markets could affect the Company's levels of sales. Increased revenues, including increases for the recovery of plant and operating costs associated with the remaining 37.5% of Springerville Unit 2, which is not currently included in rate base, may be required in order for the Company to maintain its existing level of liquidity over the longer term as obligations become due. See Item 1., Business, Rates and Regulation, 1994 Rate Order. Also, see Notes 2 and 7 of Notes to Consolidated Financial Statements, 1994 Rate Order and Commitments and Contingencies, respectively. The level of cash flow from wholesale sales is affected generally by factors affecting the market for such sales, including the availability of capacity and energy in the western United States with pricing and procurement processes influenced by the ongoing review of bulk power markets by FERC and the various state public utility commissions. In addition, because the Company has a significant amount of variable rate debt, the Company's future cash flows are also affected by the level of interest rates. See Liquidity and Capital Resources, Cash Flows below. If the Company is unable to make sales at prices adequate to recover its costs or if for other reasons the Company fails to maintain or improve its cash flows, the Company's ability to meet its obligations may be jeopardized. The Company hasDuring the 1997-2001 period, approximately $1.1 billion of the Company's long-term debt will be maturing, including approximately $774 million in reimbursement agreements relating to letters of credit which expire, during the 1997-2001 period. See Consolidated Statements of Capitalization and Note 6 of Notes to Consolidated Financial Statements.will expire. The Company intends to pay or refinance maturing bonds and bank loans and to replace or extend such reimbursement agreements. There can be no assurance, however, that the Company will be able to pay such debt or replace or extend such reimbursement agreements. In addition, the Company has a significant amount of variable rate debt and, as a result, the Company's future cash flows are also affected by the level of interest rates. See Liquidity and Capital Resources below. The Company's capital structure is highly leveraged and its ability to raise capital (through either public or private financings) is limited. The Company's ability to obtain debt financing will beis limited by reason of limited free cash flow available to meet additional interest expense and due to the restrictive covenants contained in itsexisting obligations to creditors. Further, ifTo the extent the Company is required to refinancerefinances its debt obligations in order to repay them when due, such refinancing may be made on terms which aremay be adverse to the Company. Such terms could include, among other things, higher interest rates and various restrictive covenants, such as dividend payment restrictions. Access to equity capital may be limited because of the Company's likely limited future profitability and its present inability to pay dividends for the foreseeable future.dividends. See Dividends on Common Stock below. During the next twelve months, the Company does not expect any needexpects to obtain new debt financingbe able to fund continuing operating activities and construction expenditures. The Company instead will rely onexpenditures with internal cash flows, existing cash balances, and, if necessary, borrowingsdrawdowns under the Renewable Term Loan and/or a revolving credit line providedborrowings under the MRA. TheRevolving Credit. However, the Company may issue debt to take advantage of lower interest rates resulting from tax-exempt financings. At December 31, 1995, the Company's cash balance excluding the cash of the investment subsidiaries, but including cash equivalents at December 31, 1994, was approximately $233$85 million. Cash balances are invested in investment grade, money-market securities with an emphasis on preserving the principal amount invested. COMPETITION WHOLESALE The Company competes with other utilities, marketers and independent power producers in the sale of electric capacity and energy in the wholesale market. The Company's rates for wholesale sales of capacity and energy, generally, are not permitted to exceed rates determined on a cost of service basis. In 1993the current market, wholesale prices are substantially below costs determined on a fully allocated cost of service basis, but, in all instances, prices exceed the level necessary to recover fuel and other variable costs. It is expected that competition to sell capacity will remain vigorous, and that prices will remain depressed for at least the next several years, due to increased competition and surplus capacity in the southwestern United States. Competition for the sale of capacity and energy is influenced by many factors, including the availability of capacity in the southwestern United States, the availability and prices of natural gas and oil, spot energy prices and transmission access. In addition, the Energy Act has promoted increased competition in the wholesale electric power markets. The Energy Policy Act of 1992 addresses a wide range of energy issues, including several matters affecting bulk power competition in the electric utility industry. It creates exemptions from regulation under the Holding Company Act for persons or corporations that own and/or operate in the United States certain generating and interconnecting transmission facilities dedicated exclusively to wholesale sales, thereby encouraging the participation of utility affiliates, independent power producers and other non-utility participants in the development of power generation. In order to facilitate competition in power generation, the Energy Act also confers expanded authority upon FERC to issue orders requiring electric utilities to transmit power and energy to or for wholesale purchasers and sellers, and to require electric utilities to enlarge or construct additional transmission capacity to provide these services. While the Energy Act prohibits FERC from issuing any such order that would unreasonably impair the continuing reliability of affected electric systems or that would be conditioned upon or require transmission services directly to an ultimate consumer, the Energy Act creates the potential for utilities and other power producers to gain increased access to the transmission systems of other entities to facilitate wholesale sales. FERC is encouraging all parties interested in transmission access to form RTGs to facilitate access to and development of transmission service and to assist in settling disputes regarding such matters. RTGs will not relieve FERC of its responsibilities related to transmission access; however, such organizations could provide for more efficient handling of transmission service requests and planning for regional transmission needs. The Company is currently involved in the development of two RTGs in the West, SWRTA and WRTA. WRTA was approved by FERC on May 16, 1995 and SWRTA was approved on October 31, 1995. The Company is a member of SWRTA and is also considering membership in WRTA. As a condition of its approval of WRTA and SWRTA as RTGs the FERC has required all transmitting utility members of each RTG to offer comparable transmission services at least to other members of such RTG through tariffs that set forth the rates, terms and conditions of service. On March 29, 1995, the FERC issued a Notice of Proposed Rulemaking (NOPR) on Open Access Non-Discriminatory Transmission Services by Public Utilities and Transmitting Utilities (the Open Access NOPR) and a supplemental NOPR on Recovery of Stranded Costs (the Stranded Costs NOPR). The rules proposed in the Open Access NOPR are intended to facilitate competition among electric generators for sales in the bulk power market. If adopted, the NOPR on open access transmission would require public utilities under the Federal Power Act to provide third party access to their transmission systems and would establish guidelines for their doing so. Under the Open Access NOPR, each public utility would also be required to establish separate rates for its transmission and generation services for new wholesale service, and to take transmission services, including ancillary services, under the same tariffs that would be applicable to third-party users for all of its new wholesale sales and purchases of energy. In addition, the FERC requested comment on the desirability of unified standards for both wholesale and retail transmission services, suggesting, as a possible approach, the establishment by each vertically integrated electric utility of a distribution function which would, for ratemaking purposes, be treated as a wholesale customer taking transmission services under the utility's filed wholesale transmission tariff. The FERC recognized, and numerous comments received by the FERC confirm, that such an approach would change the traditional approach of state-federal allocation of transmission costs. The Stranded Costs NOPR would provide a basis for recovery by regulated public utilities of legitimate and verifiable stranded costs associated with existing wholesale requirements customers and retail customers who become unbundled wholesale transmission customers of the utility. The FERC would provide public utilities a mechanism for recovery of stranded costs that result from municipalization, former retail customers becoming wholesale customers, or the loss of a wholesale customer. The FERC would consider allowing recovery of stranded investment costs associated with retail wheeling only if a state regulatory commission lacks the authority to consider that issue. The Company does not believe that the Open Access NOPR or the Stranded Costs NOPR will have a material effect on the Company's results from continuingof operations, were affected by certain unusualassuming that the final rule is adopted substantially as proposed. On December 13, 1995, FERC issued a third and infrequent adjustmentssupplemental NOPR on Real- Time Information Networks and accruals.Standards of Conduct. This NOPR proposes that each public utility that owns and/or controls transmission facilities would be required to create or participate in an electronic information network which would provide customers with information regarding, among other things, the availability and pricing of transmission capacity. Additionally, FERC is proposing that a code of conduct be established which would govern the relationships between the transmission and generation marketing functions of all regulated public utilities. FERC is proposing that these functions should be separated and that the generation marketing function be required to follow the same procedures to acquire transmission access that third party competitors are required to utilize. The table below showsFERC is currently expected to issue final rules on these NOPRs in the second or third quarter of 1996. RETAIL Under current law, the Company is not in direct competition with any other regulated electric utility for electric service in the Company's incomeretail service territory. Nevertheless, the Company competes for retail markets against gas service suppliers and others who may provide energy services which would be substitutes for, or lossesbypass of, the Company's services. Electric energy for meeting retail customers' needs primarily competes with natural gas, an alternative fuel source for certain retail energy uses. Such uses may include heating, cooling and a limited number of other energy applications. In most applications, electric energy is a cost effective source of energy compared with natural gas. Also, customers, particularly industrial and large commercial customers, may own and operate facilities to generate their own electric energy requirements and, if such facilities are qualifying facilities, to require the displaced electric utility to purchase the output of such facilities at "avoided costs" pursuant to PURPA. Such facilities may be operated by the customers themselves or by other entities engaged for such purpose. The Company actively markets energy and customized energy-related services to meet customer needs. The Company has to date lost no customers to self- generation in part because of such efforts and in part because such self- generation alternatives have proven to be uneconomic in comparison with Company- provided electric service. For example, the Company's two mining customers, which provide approximately 10% of the Company's total annual revenues from continuing operationsretail customers, each have considered self-generation. However, following negotiations with the Company in 1993 and income/loss1994, new contracts were executed that included, among other things, rate reductions and term extensions. These contracts expire after the year 2000, subject to various provisions allowing the customers to terminate partially or entirely, under certain circumstances upon at least one and up to two years prior notice. To date, no such notice has been received. The ability to enter into or extend contracts, to avoid early termination, and to retain customers will be dependent on, among other things, the Company's ability to contain its costs, market conditions and alternatives available to customers from continuing operations per average sharetime to time. The legislatures and/or the regulatory commissions in several states have considered or are considering "retail wheeling" which, in general terms, means the transmission by an electric utility of Common Stock hadenergy produced by another entity over its transmission and distribution system to a retail customer in such unusualutility's service territory. A requirement to transmit directly to retail customers could have the result of permitting retail customers to purchase electric capacity and infrequent adjustmentsenergy from, at the election of such customers, the electric utility in whose service area they are located or from other electric utilities or independent power producers. While retail wheeling would expose the Company's service territory to increased competition, it would also open additional markets into which the Company may sell its electric power. In Arizona, the ACC Staff issued its first report on a retail electric competition workshop held in October of 1994. This report is the first in a series of reports that will be issued on various workshops that will be held from time to time to identify and accruals not been recorded. December 31, 1994 1993 1992 - Thousandsaddress policy issues related to competition. While other states are considering competition proposals, the ACC effort is designed to obtain information about competition. No specific proposals are currently being considered. The report proposes that Staff develop a comprehensive set of Dollars - Income (Loss) From Continuing Operations $20,740 $(21,816) $(79,022) ------- -------- -------- Regulatory Disallowancesoptions to better inform the ACC about its choices. Staff recommended that three options be considered: 1) encouraging retail competition, 2) permitting limited retail competition, and Adjustments-Net - 13,177 - Financial Restructuring Costs - 1,498 29,511 Loss3) discouraging retail competition by prohibiting retail wheeling and allowing distributed energy services. The ACC has also established a working group on Financial Restructuring - - 26,669 SCECorp/SCE Litigation Settlement - - (40,000) ------- -------- -------- Total Adjustmentsretail electric competition. Membership in the working group includes ACC Staff, Arizona utilities, and other interested parties, and the first meeting of the group took place in January 1995. A report from the group was issued in October 1995. This report concludes Phase I of the Commission's investigation into retail electric competition. In February 1996, Phase II started and is focusing on obtaining more information from interested parties and recommendations on policy. The Company cannot predict what the working group will recommend and what, if any, changes in electric regulation and competition will be implemented by the ACC. The Company continues to Income (Loss) From Continuing Operations - 14,675 16,180 ------- -------- -------- Adjusted Income (Loss) From Continuing Operations $20,740 $ (7,141) $(62,842) ======= ======== ======== Adjusted Income (Loss) From Continuing Operations Per Average Shareassess the impact of Common Stock $0.13 $(0.04) $(1.97) ===== ====== ====== PROPOSEDthe Energy Act and other possible legislation on the Company's ability to remain competitive in the electric utility industry. The Company is unable to predict the ultimate impact the Energy Act or any other possible legislation will have on its operations. HOLDING COMPANY ThePROPOSAL In 1995, the Company intendssought approvals to establish in early 1996through a one-for-one share exchange a new corporate structure in which the Company will bewould have been a subsidiary of a new holding company, UniSource Energy Corporation (UniSource). The Company proposessought to establish a holding company structure because the Company believes that it is in the best interests of its shareholders for the Company to participate in various segments of the evolving and expanding electric energy business. The Company believes that such participation would be enhanced by the holding company structure, a commonly used structure in the electric and other industries, to conduct different lines of business. ApprovalIn May 1995, shareholders of athe Company approved the proposed holding company structure will require the affirmative vote of holders of shares of common stock representing not less than a majority of all votes entitled to be cast by all holders of shares of common stock. Incompany. However, in addition to shareholder approval, consummationimplementation of the holding company plan iswas predicated upon receiving approval from the ACC and FERC. TheAlso, on September 27, 1995, the Company will also seekreceived a "no action" position from the Staffstaff of the SEC under the Public Utility Holding Company Act of 1935, as amended, or,amended. Also, on April 26, 1995, the Company filed an application with FERC requesting approval to form a holding company. In February 1995, the Company filed a Notice of Intent to Form a Holding Company with the ACC. In June 1995, the ACC Staff filed testimony recommending that the ACC deny the Company's request on the basis that retail customers would be exposed to certain risks resulting from diversification. However, ACC Staff recommended that, in the alternative,event that the ACC approves formation of the holding company, the ACC impose various operating and financial conditions on the Company and the holding company. In concurrently filed testimony, RUCO, an intervenor in the matter, did not oppose the formation of the holding company. The Company filed rebuttal testimony on July 27, 1995, and a public hearing was held on August 22, 1995. In November 1995, the Company and the ACC Staff entered into the Proposed Settlement Agreement which included a proposal to resolve the holding company application. On January 19, 1996, the ACC denied the Proposed Settlement Agreement. Following the denial of the Proposed Settlement Agreement, the ACC Hearing Officer submitted a recommended order on the holding company proposal. On February 22, 1996, the ACC denied the formation of a holding company. However, the ACC granted the Company a waiver authorizing it to invest in subsidiaries that will engage in energy related projects in an amount equal to the lesser of $25 million or the maximum amount allowed by the MRA. To the extent that the Company obtains retroactive approval or waiver of projects from the ACC, the energy related diversification amount will be reinstated up to the $25 million limit. This investment authority is subject to the conditions that (i) the total waiver amount shall not exceed $50 million annually, (ii) 60% of net profits from diversified activities be applied to repay the Company's debt and (iii) total investment in such diversified activities does not exceed 15% of the Company's capitalization. As a result of the ACC order, the Company will not establish the holding company proposal structure at this time and will withdraw its holding company application with FERC. The Company may, in the future, seek the approval of the SEC under such Act. The Company is inACC for the processestablishment of obtaining such approvals. If approved by the requisite vote of the Company shareholders and if required regulatory approvals are satisfactorily obtained, the outstanding shares of the Company common stock would be exchanged, on a share-for-share basis, for shares of UniSource. As a result, the holders of the Company common stock will become the owners of UniSource common stock, and UniSource will become the owner of the Company common stock. During the second quarter of 1995, the Company intends to provide a proxy statement-prospectus to all shareholders which will set forth in detail the holding company structure and could, upon the receipt of the requisite regulatory approvals, effect the plan of exchange. NATIONS ENERGY CORPORATION In 1995, the share exchangeCompany established Nations Energy (formerly known as Escalante Resources Inc.) for the purpose of investing in independent power projects in the domestic and foreign energy markets. The 1995 consolidated financial statements reflect the accounts of Nations Energy, a shareholder meeting date. Accompanying the proxy statement-prospectus will be a form of proxy solicited on behalf of the Board of Directorswholly-owned subsidiary of the Company. In September 1995, Nations Energy and Trigen Energy Corporation formed a limited partnership which purchased Coors Brewing Company's energy production (utility) assets. Nations Energy has a 49% interest in such partnership. The partnership will provide electricity and steam for the brewery operation in Golden, Colorado. In addition, the partnership expects to upgrade Coors' power plant to improve fuel efficiency and increase capacity. The investment of aproximately $12 million by Nations Energy is included in the Company's Consolidated Balance Sheet at December 31, 1995 under Investments and Other Property and in the Company's Consolidated Statement of Cash Flows for the year ended December 31, 1995 as Investment in Partnership. RESULTS OF OPERATIONS In 1995, the Company had net income of $54.9 million or $0.34 per average share of common stock compared with $20.7 million or $0.13 per average share of common stock in 1994 and a net loss of $25.8 million or $0.16 per average share of common stock in 1993. The improved positive earnings for the second consecutive year resulted from strong growth in the Company's service territory, an increase in income tax benefits due to the recognition of net operating loss carryforwards which will likely be realized in the future, a one time $12.2 million reduction in fuel expenses due to the satisfaction of certain requirements under fuel and transportation agreements restructured in 1991, and the Company's efforts to contain costs. RESULTS OF UTILITY OPERATIONS SALES AND REVENUES Sales and revenues are affected principally by price changes, consumption and growth factors. In 1995, much of the changes were attributable to growth, as the average number of retail customers grew 2.9% which led to a slight increase in consumption. Consumption was affected by milder temperatures in 1995 than the ten-year average. Prices did not change in 1995, and the change in revenues is also attributable to strong growth in the Company's retail customer base. Revenues from sales to retail customers increased 9.0%0.6% in 1995 compared with 1994 and 8.9% in 1994 compared with 1993 and 2.1% in 1993 compared with 1992.1993. The table below identifies the components of the increases in 19941995 and 1993.1994. 1995 1994 1993 - Millions of Dollars - 1994 Price Change $ 3 $17 $(3) Consumption Change (13) 15 3 Customer Growth 13 15 12 --- --- Increase in Retail Revenues $ 3 $47 $12 === ===KWh sales to retail customers increased less than 1% in 1995 compared with 1994. The revenuekWh sales increase in 1994 resulted from greater kWh sales due to continued growtha 2.9% increase in the average number of retail customers, increase inpartially offset by decreased usage due to warmercooler temperatures in 1995 than normal temperatures, and increased prices as a result of the 1994 Rate Order. There were 289,697 electric customers on average during 1994, an increase of 2.9% over 1993.in 1994. Based on billed cooling degree days, a commonly used measure in the electric industry that areis calculated by subtracting 75 degrees from the daily average of the high and low daily temperatures, the Tucson area registered a 26% increasean approximate 24% decrease in such billed cooling degree days infor 1995 compared with 1994, over 1993, and a 33% increase4% decrease in such billed cooling degree days in 1994 overfor 1995 compared with the 10 year average for the same period from 19841985 to 1993.1994. Specifically, billed cooling degree days were 1,399, 1,844, and 1,454 for 1995, 1994, and the 10 year average, respectively. The Company had 297,939 retail customers on average in 1995. KWh sales in 1994 compared with 1993 revenue decreaseincreased as a result of a 2.9% increase in the average number of customers and increased usage as a result of warmer than normal temperatures. Revenues from sales to retail customers increased in 1995 compared with 1994 due to changeslightly higher kWh sales discussed above and the rate increase allowed under the 1994 Rate Order being in price, shown in the table above, resulted from lower rates charged undereffect throughout 1995. In 1994, revenues increased 9% over 1993 due to greater kWh sales and increased prices as a renegotiated contract with oneresult of the Company's mining customers.1994 Rate Order. Amortization of the MSR Option Gain Regulatory Liability increased in 1994 compared with 1993 as a result of the 1991 Rate Order which set the non-cash operating revenue for the amortization of the regulatory liability for the MSR option gain at $6 million for 1992 and 1993, $20 million in 1994, 1995 and 1996, and $8 million in 1997 at which point the MSR Option Gain will be fully amortized. See Note 1 of Notes to Consolidated Financial Statements, Nature of Operations and Summary of Significant Accounting Policies. The Company makes sales for resale to the extent capacity is not needed for providing energy to the Company's retail customers. Rates for such sales are substantially below rates determined on a fully allocated cost of service basis, but, in all instances, rates exceed the level necessary to recover fuel and other variable costs. Lower kWh sales to other utilities in 1995 compared with 1994 resulted from lower regional loads due to mild weather conditions and the increased availability of lower cost hydroelectric power in the western United States. Lower revenues from sales to other utilities resulted from lower sales and lower spot market prices in 1995 than in 1994. Revenues from other utilities decreased by 24% compared with 1994. In 1994, revenues from Other Utilitiessales to other utilities increased 7.2%7% over 1993 as a result of a 13% increase in revenues from firm sales of energy, offset by a 4% decrease in revenues from economy sales. Revenues from Other Utilities increased 33%OPERATING EXPENSES Fuel and purchased power expense decreased in 19931995 compared with 1992 primarily due to a 56% increase in revenues from firm sales of energy and a 12% increase in the average revenue per kWh sold on a non- firm basis. In 1994 firm sales accounted for 37% of sales to Other Utilities and 58% of revenues from Other Utilities. In 1993, firm sales accounted for 33% of sales to Other Utilities and 56% of revenues from Other Utilities. The Company's ability to market available capacity and energy in the future, at levels comparable with 1994, may be limited due to lower prevailing prices and other market conditions. OPERATING EXPENSES Asas a result of the Financial Restructuring, the Company's Irvington Lease, Valencia Leases and the Springerville Common Facilities Leases were reclassified from operating leases to capital lease obligations. The effect of this reclassification significantly increased recorded assets and liabilities relating to these leases and resultedlower generation requirements in the reallocations of the lease1995 than in 1994, a one time $12.2 million reduction in fuel expenses relatingdue to the Irvington and Springerville Common Facilities Leases from Other Operations expense to Capital Lease Expense. The Valencia Leases expense continues to be expensed as a component of Fuel expense. In addition, as part of the Financial Restructuring, the Company became the direct lessee under the Springerville Unit 1 Leases which is also stated as a capital lease obligation. The assumption of the Springerville Unit 1 Leases and the termination of the Restated Century Purchase Contract increased assets and liabilities relating to capital leases and, for periods subsequent to the Financial Restructuring, result in the recognitionsatisfaction of certain expenses, which were previously includedrequirements under fuel and transportation agreements restructured in Purchased Power-Demand expense, as Capital Lease Expense1991 and various other operating expenses.lower incremental fuel costs resulting from fuel contracts negotiations. Fuel expenses increased 6.4% in 1994 over 1993 as a result of the fourth quarter 1994 reallocation of a reserve for sales tax disputes from Taxes Other than Income Taxes. See Note 76 of Notes to Consolidated Financial Statements, Commitments and Contingencies, Tax Assessments. Aggregate fuel expense increased 48.6% in 1993 compared with 1992 due to greater generation to accommodate increased sales to Other Utilities and Retail Customers and fuel expenses from Springerville Unit 1, which were previously accounted for as Purchased Power-Energy. Average cost per kWh of fuel and its transportation only, excluding accounting adjustments, were 1.55 cents, 1.71 cents and 1.79 cents infor 1995, 1994 and 1.76 cents in 1993. Following the Financial Restructuring, the Company no longer makes purchases under the Restated Century Purchase Contract, which was terminated, but purchases fuel directly from Valencia. Increased generation requirements were met primarily through increased generation at Springerville Unit 1. Purchased Power-Energy increased in 1994 over 1993, as a result of greater kWh requirements to provide for increased sales. Purchased Power-Energy expense decreased in 1993 compared with 1992 as a result of the termination of the Restated Century Purchase Contract and the change in the status of Springerville Unit 1 described above. Purchased Power-Demand expense decreased in 1993 compared with 1992 due to the termination of the Restated Century Purchase Contract. The increase in Capital Lease Expense in 1993 compared with 1992 reflects the reclassification of the Irvington Lease and Springerville Common Facilities Leases to capital lease obligations and the assumption of the Springerville Unit 1 Leases.respectively. Amortization of Springerville Unit 1 Allowance, a non-cash item, decreased in 1994 compared with 1993 due to lower projected operation and maintenance expenses included in the calculation of the Springerville Unit 1 Allowance. The Springerville Unit 1 Allowance was originally calculated by projecting the yearly costs associated with Springerville Unit 1 over the remaining life of the Springerville Unit 1 Leases and takingrecording the present value of the difference between such costs and the ACC allowed level of recovery. Such costs are then recognized in each period along with a corresponding interest accrual and amortization of the allowance as a credit to operating expenses. The interest accrual is included in the Consolidated Statements of Income (Loss) as Regulatory Interest. Amortization of Springerville Unit 1 Allowance, a non- cash credit originally resulting from the write-off of the portion of Springerville Unit 1 demand charges under the Restated Century Purchase Contract in excess of the $15 per kW per month allowed by the ACC, increased in 1993 compared with 1992 due to increased Springerville Unit 1 Leases expense. As a result of the assumption of the Springerville Unit 1 Leases, the Company's levelized amortization of lease expenses is basedInterest Imputed on rents over the full primary term of the leases rather than through 2001, the date utilized when the rents were paid by Century and passed through under the Restated Century Purchase Contract.Losses Recorded at Present Value. See Note 1 of Notes to Consolidated Financial Statements, Nature of Operations and Summary of Significant Accounting Policies. Other Operations expense decreased in 1995 due to cost containment measures implemented by the Company and increased in 1994 compared with 1993 as a result of the accrual of increased employee expenses related to compensation and pension benefits. Other Operations expense decreased in 1993 compared with 1992 primarily due to the reclassification of the Irvington Lease and the Springerville Common Facilities Leases expenses to Capital Lease Expense. Maintenance and Repairs expense was higher in 1993 compared with 1992 because of the change in the status of Springerville Unit 1 described above.benefits expenses. Depreciation and Amortization increased in 1994 over 1993 as a result of the amortization of 62.5% of the Springerville Unit 2 rate synchronization deferral costs over 3 years (beginning in January 1994) pursuant to the 1994 Rate Order. Depreciation expense increased in 1993 compared with 1992 primarily reflecting various additions to plant and equipment and a one-time adjustment decreasing depreciation expense mandated by FERC which was recorded in the second quarter of 1992. Taxes Other than Income Taxes decreasedincreased in 19941995 compared with 19931994 as a result of the fourth quarter 1994 reallocation of aan $8 million reserve for sales tax disputes to Fuel.Fuel in 1994. See Note 76 of Notes to Consolidated Financial Statements, Commitments and Contingencies, Tax Assessments. The increaseSuch reallocation caused taxes other than income taxes expense to decrease in Taxes Other than Income Taxes in 19931994 compared with 1992 reflects that property1993. Income tax expense related toincreased in 1995 compared with 1994 because the Company's assumption ofoperations produced taxable operating income for the Springerville Unit 1 Leases, which expense previously had been part of demand charges paid under the Restated Century Purchase Contract and included in Purchased Power-Demand is currently recorded as Taxes Other than Income Taxes. Financial Restructuring costs decreased in 1993 compared with 1992 as a result of the completion of the Financial Restructuring in December 1992.first time since 1988. OTHER INCOME (DEDUCTIONS) Regulatory Disallowances and Adjustments in 1993 reflect primarily the write-off of Springerville Unit 2 deferred expenses mandated by the 1994 Rate Order. Deferred Springerville Unit 2 Carrying Costs decreased in 1994 compared with 1993 as a result of the incorporation into rate base of 62.5% of Springerville Unit 2. The Loss on Financial Restructuring in 1992 was based on, among other things, the excess of the fair value of the Common Stock and Warrants issued, at values of $2.33 per share and $0.82 per warrant, respectively, compared to the amount of plant, materials and supplies inventories received by the Company from Century and accrued rent under the Springerville Unit 1 Leases, reflected on the Company's financial statements as of December 15, 1992 as demand charges payable to Century. In addition, the Company reversed a reserve of approximately $9 million due to the dismissal of related regulatory matters as a part of the Financial Restructuring. The restructuring of Bank obligations gave rise to a deferred gain of $21 million, which is being amortized as a reduction of interest expense over an eight-year period. See Note 3 of Notes to Consolidated Financial Statements, 1992 Consummation of the Financial Restructuring. Litigation Settlement income in 1993 decreased compared with 1992 due to the settlement of litigation against SCE in the third quarter of 1992. See Item 1., Business, SCE/TEP Power Exchange Agreement. OtherInterest Income increased in 1994 compared with 1993 due to greater interest earned on cash and cash equivalents. Income Tax benefits included in Other Income decreased(Deductions) increased in 19931995 compared with 1992 due to1994 and 1993. In 1994 and 1993, the collectionCompany was in 1992 of approximately $8 million in interest income on a Federalnet operating loss carryforward position and generating tax losses; therefore, the income tax refund.benefits included in the Consolidated Statements of Income (Loss) for the years 1994 and 1993 reflected only ITC amortization. In 1995, income tax benefits include the recognition of a portion of the Company's deferred tax benefits based on the expectation of realization of such benefits in the future from net operating loss carryforwards, as well as ITC amortization. Other income increased in 1995 compared with 1994 as a result of gains realized on the sales of equity securities held by the investment subsidiaries. As of January 1, 1995, the Company ceased to account for the investment subsidiaries as discontinued operations. Previously, when the investment subsidiaries were classified as discontinued operations for financial statement purposes, no income or loss related to discontinued operations was recorded unless the estimates of proceeds from disposition of investment subsidiary assets changed materially. INTEREST EXPENSE Interest expense on Long-Term Debt-NetDebt increased in 1994 compared with 1993 as a result of slightly higher interest rates. InterestAlthough interest rates increased in 1995, interest expense on Long-Term Debt-Net decreased in 1993 compared with 1992did not increase due to the prepaymentlower amounts of $68 million of long-term debt combined with significantly lower interest rates on the Company's obligations in the first quarter of 1993 compared with interest rates during the same period of 1992. The lower rates reflect primarily the elimination of default rates on such obligations in 1993 as a result of the Financial Restructuring (discussed below), and in part, lower market rates. The effect of lower rates was partly offset by the reclassification of previously outstanding short-term debt into the Term Loan which is classified as Long-Term Debt. In the first quarter of 1992, the Payment Moratorium was in effect on most obligations of the Company. Therefore, the Company accrued interest on such obligations at default rates, which were substantially higher than market rates. Interest at default rates was accrued on approximately $900 million of bank credit obligations including approximately $650 million of reimbursement obligations related to LOCs that provide credit support for variable-rate tax- exempt bond issues. The irrevocable LOCs were fully drawn through the first quarter of 1992. In March 1992, such issues were remarketed and the proceeds were used to pay reimbursement obligations for the drawn LOCs and interest was no longer accrued at default rates. There was no interest expense on Short-Term Debt in 1994 and 1993 as a result of the reclassification of previously outstanding short-term debt into the Term Loan which is classified as Long-Term Debt.outstanding. Interest Expense - Other decreased in 1994 compared with 1993 due to an accrual in 1993 for interest on contested tax payments and litigation settlement. Interest Expense - Other increased in 1993 compared with 1992 primarily due to the reinstatement of LOC fees and remarketing fees related to the remarketing of the tax exempt bonds supported by the LOCs. LOC fees and remarketing fees were not paid for part of 1992 because the LOCs were drawn and the IDBs were held by the banks. RESULTS OF DISCONTINUED OPERATIONS See Note 5 of Notes to Consolidated Financial Statements. ACCOUNTING FOR THE EFFECTS OF REGULATION The Company prepares its financial statements in accordance with the provisions of FAS 71. This statement requires a cost-based rate-regulated utility to reflect the effect of regulatory decisions in its financial statements. In certain circumstances, FAS 71 requires that certain costs and/or obligations be reflected in a deferral account in the balance sheet and not be reflected in the statement of income or loss until matching revenues are recognized. Therefore, the Company's Consolidated Balance Sheets at December 31, 1995, 1994 and 1993 contain certain line items (showing on the balance sheet under Deferred Debits - Regulatory Assets and MSR Option Gain Regulatory Liability, Accumulated Deferred Investment Tax Credits Regulatory Liability, and Other Regulatory Liabilities) solely as a result of the application of FAS 71. In addition, a number of line items in the Company's Consolidated Statements of Income (Loss) for the years ended December 31, 1995, 1994 1993 and 19921993 also reflect the application of FAS 71. See Note 1 of Notes to Consolidated Financial Statements, Nature of Operations and Summary of Significant Accounting Policies, Accounting for the Effects of Regulation. If, at some point in the future, the Company determines that all or a portion of the Company's regulated operations no longer meet the criteria for continued application of FAS 71, the Company would be required to adopt the provisions of FAS 101 for that portion of the operations for which FAS 71 no longer applied. Adoption of FAS 101 would require the Company to write off its regulatory assets and liabilities as of the date of adoption of FAS 101 and would preclude the future deferral in the balance sheet of costs not recovered through rates at the time such costs were incurred, even if such costs were expected to be recovered in the future. Based on the balances of the Company's regulatory assets and liabilities as of December 31, 1994,1995, the Company estimates that future adoption of FAS 101 for all of the Company's regulated operations would result in an extraordinary loss of $142$145 million, which includes a reduction for the related deferred income taxes. The Company's cash flows would not be affected by the adoption of FAS 101. DIVIDENDS The Company does not expect to be able to pay cash dividends on its Common Stock for the foreseeable future. The Company is currently precluded by State statute and restrictive covenants in certain debt agreements from declaring or paying dividends. No dividendsdividend on Common Stock havecommon stock has been declared or paid since 1989. Under current applicable provisions of the Arizona General Corporation Law, the Company is permitted to declare and pay dividends on its shares in cash, property, or its own shares, only out of unreserved and unrestricted earned surplus or out of the unreserved and unrestricted net earnings of the current fiscal year and the immediately preceding fiscal year taken as a single period, except that the Company may not declare or pay dividends when the Company is insolvent (unable to pay its debts as they become due in the ordinary course of business) or when the payment of the dividend would render the Company insolvent, or when the declaration or payment of the dividend would be contrary to any restriction contained in the Articles. At December 31, 1994, the Company had no earned surplus (its accumulated deficit on that date was $681 million), and the Company had no net earnings for the two fiscal years then ended taken together. Also, the Company expects to have no earned surplus and limited net earnings and cash flow for several years. Under applicable provisions of amendments to the Arizona General Corporation Law, which will be effectivein effect starting in 1996, a company will beis permitted to make distributions to shareholders unless, after giving effect to such distribution, either (i) the company would not be able to pay its debtsdebt as they come due in the usual course of business, or (ii) the company's total assets would be less than the sum of its total liabilities plus the amount necessary to satisfy any liquidation preferences of shareholders with preferential rights. As of December 31, 1994, the Company's common stock deficit was $42 million. AlthoughUnder such provisions, the Company expectsis currently able to meet the requirements under the amended corporation law for making distributions to shareholders within several years, restrictive covenants in certain existing debt agreements may continue to precludedeclare and pay a dividend. However, the Company from declaringmay not declare or paying dividends. Thepay dividends pursuant to covenants under both the MRA and the General First Mortgage. The Company's ability to pay a dividend is restricted by certain covenants of the General First Mortgage contains covenants, applicable so long as certain series of First Mortgage Bonds (aggregating $194$184 million in principal amount) are outstanding, whichoutstanding. These covenants restrict the payment of dividends on Common Stock if certain cash flow coverage and retained earnings tests are not met. The cash flow coverage and retained earnings test will prevent the Company from paying dividends on its Common Stock until such time as the Company's cash flow coverage ratio, as defined therein, is greater or equal to a ratio of 2 to 1, and the Company has positive retained earnings rather than an accumulated deficit. As of December 31, 1995, the Company had a cash flow coverage ratio slightly above 2 to 1 and the Company's accumulated deficit was $626 million. Such covenants will remain in effect until the First Mortgage Bonds of such series have been paid or redeemed. The latest maturity of such First Mortgage Bonds is in 2003. The MRA includescontains a similar dividend restriction based on retained earnings. Such restriction will no longer apply if (i) the Renewable Term Loan and the Revolving Credit have been paid in full and the commitments relating thereto have been terminated and (ii) the Company's senior long-term debt is rated investment grade. Currently, the Company's total outstanding amounts under the Renewable Term Loan are $31 million and to date no amounts have been borrowed under the Revolving Credit. Commitments relating to such facilities permit the Company to borrow $133 million under the Renewable Term Loan and $50 million under the Revolving Credit. Also, the Company's senior debt is currently rated below investment grade. In order for the Company to pay a dividend when such covenants would otherwise restrict such payment, the Company would have to (i) obtain a waiver or an amendment to the MRA's retained earnings covenant and (ii) redeem all outstanding First Mortgage Bonds of the series that contain dividend restrictions or amend the General First Mortgage. Such amendment would require approval by holders of 75% of all First Mortgage Bonds. In addition to such restrictive covenants, the Company may also be restricted under the Federal Power Act from paying dividends from funds properly included in the capital account. The provisions of the Federal Power Act leaves the scope of any such restriction and its potential applicability to the Company unclear. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS TheDue to growth in retail sales and cost containment efforts, the Company's net cash flows from continuing operations were more than sufficient, in all three years from 1993 to 1995, to cover all construction expenditures and debt maturities. Net cash equivalents, including such amounts heldflows from continuing operating activities decreased in aggregate $24 million in 1995 compared with 1994 due primarily to a $14.6 million tax payment in 1995 made by the Company's investment subsidiaries,Company relating to an appeal of a transaction privilege tax assessment (see Note 6 of Notes to Consolidated Financial Statements, Commitments and Contingencies, Tax Assessments); increased $86 million or 53%, over the 1993 year end balance of $162 million,compensation paid relating to the 1994 year end balanceincentive plan and increased employee compensation and pension benefits expenses; and lower cash receipts from sales to other utilities. Cash receipts from sales to other utilities decreased due to lower kWh sales and lower energy prices as a result of $248 million. Receiptslower regional loads and an abundance of hydroelectric power in the western United States. Increased cash expenditures were partially offset in 1995 by lower fuel and purchased power expenses and by revenues from retail customers increased $55 million over 1993 reflecting the sales and customers growth discussed above. Cash expenditures for continuing operatingof Emission Allowances. Net cash flows from investing activities increased,decreased in aggregate, $10 million, due primarily to increased sales levels. As1995 compared with 1994 as a result Net Cash Flow - Continuing Operating Activities increased 61% to $144 million for 1994. Construction expenditures, primarily for expansion and reinforcement of the Company's transmissionpurchase of lease debt securities described below under Financing Developments , and distribution systems, increased $14the investment in the Coors Energy project by Nations Energy through a partnership interest. Net cash flows from financing activities decreased $159 million over 1993 levels. In addition,in 1995 compared with 1994 as a result of the Company continued reducing its outstanding debt and lease obligations by retiring $3713% or $180 million in 1995. Such reduction was comprised of $17 million of such obligations in 1994.first mortgage bond and Installment Sale Agreement maturities, a $19 million permanent prepayment of the Term Loan and $143 million payment of the Renewable Term Loan of which $133 million can be reborrowed. During 1995,1996, the Company expects to generate sufficient internal cash flows to fund its continuing operating activities and construction expenditures providedexpenditures. Cash flow levels are subject to short-term interest rates remain near current levels and revenues from wholesale sales are similar to last year.remaining near current levels. An increase in short-term interest rates of 100 basis points (1%) would result in an approximate $10 million increase in interest expense. If 19941996 cash flows fall short of expectations, the Company would expect to usefund its cash requirements by reducing cash balances and/or borrowing under its Renewable Term Loan and/or the Revolving Credit. As a revolving credit line provided underresult of activities described above, the MRACompany's cash and cash equivalents, including such amounts held by the Company's investment subsidiaries, decreased $163 million or 66%, from the 1994 year-end balance of $248 million, to meet operating and capital requirements.the 1995 year-end balance of $85 million. The Company's cash balance including cash equivalents at March 7, 19951, 1996 was approximately $185 million (including the cash and cash equivalents of the investment subsidiaries).$52 million. Cash balances are invested in investment grade, money-market securities with an emphasis on preserving the principal amounts invested. FINANCING DEVELOPMENTS On December 30, 1994, the Company purchased and cancelled $17.25 million principal amount of its First Mortgage Bonds 12.22% Series due June 1, 2000. The payment was made to fulfill the Company's requirement under the MRA to utilize Extraordinary Cash to reduce outstanding indebtedness. The Extraordinary Cash was generated from cash dividends paid to the Company by the investment subsidiaries. See Restrictive Covenants, Prepayments. OnIn March 7, 1995, the Company and its banks completed the Sixth Amendmentan amendment to the MRA which eased certain debt prepayment restrictions and modified theallowed reborrowing of certain Renewal Term Loan to allow reborrowing of amounts which will have been previously prepaid (Renewable Term Loan).prepayments. The amendment will allow the Company to better manage its cash position and reduce capital costs while maintaining liquidity. Prior to the amendment the Company was not permitted to prepay non-MRA debt except to the extent that Excess Cash and Extraordinary Cash were generated, see Restrictive Covenants, Prepayments below for the description of such terms. The amendment, now in effect, renders the Excess Cash and Extraordinary Cash provisions inapplicable and allows the Company to optionally prepay outstandingnon-MRA debt of the Company provided certain conditions are met. Such conditions include that $1 of principal outstanding under the Renewable Term Loan is permanently prepaid and the commitment therefore terminated for every $2 used to permanently prepay other debt such as First Mortgage Bonds. The Renewable Term Loan allows the Company to reborrow amounts paid down to the extent of the remaining outstanding loan commitment. The commitment fee on the Renewable Term Loan will beis 0.5% of the unused portion of such commitment. As a condition to the amendment becoming effective, the Company permanently prepaid $19.3$19 million of the Term Loan reducing the outstanding balance from $193.4$193 million to approximately $174 million. Thus, the initial commitment and outstanding balance of the Renewable Term Loan was approximately $174 million. In May 1995, the Company purchased approximately $18 million of Springerville Unit 1 lease debt securities. The Company expects yearly cash earnings of approximately $2 million as a result of the above-mentioned purchase. This purchase is shown on the balance sheet under Investments and Other Property and the interest earned is included in Interest Income on the income statement. Also, as a result of the debt securities purchase, the Renewable Term Loan commitment was decreased by $10 million, to $164 million, to meet the prepayment provisions of the MRA. In aggregate, in 1995, the Company made payments on the Renewable Term Loan totaling $162 million. The Company can currently reborrow $133 million under the Renewable Term Loan. Also, in 1995, the Company reduced its long-term debt by $17 million, as a result of scheduled maturities. In January 1996, the Company obtained a tax-exempt volume cap allocation from the state of Arizona. The Company's allocation is for approximately $16.7 million to be issued by the Pollution Control Corporation of the county of Coconino in Arizona, for the benefit of the Company. The Company expects to issue such bonds in early April 1996. If the Company were to fail to issue the bonds by such time, the Company would lose its volume cap allocation. The proceeds will be used to reimburse the Company for expenditures relating to the Company's interest in pollution control facilities at the Navajo Generating Station. Also, in order for the Company to issue such bonds, the Company will need approval from the ACC. The Company filed a financing application with the ACC on February 14, 1996. See C onstruction Expenditures below. SHORT-TERM CREDIT FACILITIES REVOLVING CREDIT TheUnder the MRA, the Banks provided as part of the MRA a $50 million Revolving Credit for working capital purposes. To date, the Company had not borrowed any funds under the $50 million Revolving Credit. The Revolving Credit has a termination and maturity date of December 31, 1999, and bearsborrowings, if any, thereunder bear interest at a variable rate based upon, at the option of the Company, either (i) prime rate or (ii) an adjusted eurodollar rate plus a percentage ranging from 0.75%1% during 1994,1996, gradually increasing to 2% by 1998 and thereafter. The Company is required to repay loans under the Revolving Credit in full for at least 30 consecutive days in each twelve-month period prior to November 30 of each year. The annual commitment fee for the Revolving Credit equals 0.5% of the unused portion. The Revolving Credit is secured and contains restrictive covenants. See Restrictive Covenants below. As of December 31, 1994 the Company had not borrowed any funds under the $50 million Revolving Credit. OTHER The balancesbalance of $12 million, $12 million and $18 million of short-term debt of the investment subsidiaries as of December 31, 1995, and 1994, 1993 and 1992, respectively, werewas associated with wholly-owned subsidiaries indirectly owned by SRI and, therefore, suchSRI. Such debt is reflected in net assets of discontinued operations. Such debtShort-Term Debt and is without recourse to SRI or the Company. Approximately $220INCOME TAX POSITION At December 31, 1995, the Company had, for federal income tax purposes, approximately $508 million of utilitynet operating loss carryforwards expiring in 2004 through 2009 and utility-related short-term debt$148 million of alternative minimum tax loss carryforwards expiring in 2006 through 2008. For state income tax purposes, the Company has approximately $215 million of net operating loss carryforwards expiring in 1996 through 1999. In addition, for federal income tax purposes the Company has $26 million of unused ITC, the use of which will expire during 2002 through 2005, $3 million of alternative minimum tax credit which will carry forward to future years, and $21 million of capital loss carryforwards which expire during 1996 through 1999. Due to the Company's Financial Restructuring, the Company experienced a change in ownership under section 382 of the Internal Revenue Code in December 1991. As a result of that change, the amount of the taxable income for any post-change year which may be offset by pre-change net operating losses will be limited based on the value of the Company on the ownership change date. The Company estimates an annual limit of such offset by prechange losses of approximately $23 million. The total limitation may be increased to the extent of gain recognized on sales of assets whose fair market value was restructured upongreater than tax basis at the Closingownership change date, thereby representing a built-in-gain as of that date. The limitation may increase by built-in-gain recognized within a period of five years after the change in ownership. During 1992 through 1995, the limitation increased by approximately $102 million of built-in-gain recognized due to asset sales. Unused limitation may be carried forward until the pre-change tax attributes expire. At December 31, 1995, the Company had pre-change federal net operating loss, ITC, capital loss and reclassified as long-term debt.alternative minimum tax loss carryforwards of approximately $351 million, $26 million, $7 million and $115 million, respectively. Because the Company's results from operations have been steadily improving and have been positive for the last two years, the Company now believes it is more likely than not that it will realize at least $66.5 million of the total federal NOL carryforwards of $508 million. Accordingly, the Company recognized a $23 million income tax benefit related to the expected utilization of $66.5 million of tax operating loss carryforwards which is included in Income Taxes in Other Income (Deductions) in the Consolidated Statement of Income (Loss). Furthermore, the Company expects to record similar or greater amounts in 1996 provided the Company's results of operations continue to improve. RESTRICTIVE COVENANTS GENERAL FIRST MORTGAGE COVENANTS The Company's General First Mortgage places limits on the amount of additional First Mortgage Bonds which can be issued. Under the General First Mortgage, the Company may issue additional First Mortgage Bonds (a) to the extent of 60% of net additions to utility property if net earnings, as defined therein, for a specified period of 12 consecutive calendar months out of the 15 calendar months preceding the date of issuance are at least two (2.0) times the annual interest requirements on all First Mortgage Bonds to be outstanding and (b) to the extent of the principal amount of retired bonds. The net earnings test specified in clause (a) above generally need not be satisfied prior to the issuance of bonds in accordance with clause (b) above unless (x) (i) the new bonds are issued within one year after the issuance of, or more than two years prior to the stated maturity of, the retired bonds and (ii) the new bonds bear a greater rate of interest than the retired bonds or (y) the new bonds are issued in respect of retired bonds the interest charges on which have been excluded from any net earnings certificate filed with the indenture trustee since the retirement of such bonds. At December 31, 1994,1995, the Company had the ability to issue approximately $152$107 million of new First Mortgage Bonds on the basis of property additions, as described above, and, in addition, the Company had the ability to issue approximately $74$90 million of new First Mortgage Bonds on the basis of retired bonds. However, issuance of such amounts may be limited by MRA covenants. See Additional Restrictive Covenants below. See Dividends above for a discussion of restrictions on the payment of Common Stock dividends under the General First Mortgage. GENERAL SECOND MORTGAGE COVENANTS The General Second Mortgage establishes a second mortgage lien on and security interest in substantially all of the utility assets of the Company, subordinate only to the first mortgage lien and security interest. At December 31, 1994,1995, $50 million of such General Second Mortgage bonds had been issued and provided to the Banks as collateral for the Revolving Credit and, subsequent to January 2, 1997, subject to certain conditions, the Renewable Term Loan and the Replacement Reimbursement Agreement. The Company's General Second Mortgage allows the issuance of additional Second Mortgage Bonds under certain circumstances. The Company may issue additional Second Mortgage Bonds (a) to the extent of 70% of net additions to utility property if net earnings as defined therein, for a specified period of 12 consecutive calendar months within the 16 calendar months preceding the date of issuance are at least one and three-quarter (1-3/4) times the annual interest requirements on all First Mortgage Bonds and Second Mortgage Bonds to be outstanding and (b) to the extent of the principal amount of retired Second Mortgage Bonds and First Mortgage Bonds. Issuance of Second Mortgage Bonds on the basis of an amount of retired First Mortgage Bonds reduces by the same amount of First Mortgage Bonds which could be issued under the General First Mortgage on the basis of retired bonds. The net earnings test specified in clause (a) above generally need not be satisfied prior to the issuance of bonds in accordance with clause (b) above unless (x) (i) the new bonds are issued within one year after the issuance of, or more than two years prior to the stated maturity of, the retired bonds and (ii) the new bonds bear a greater rate of interest than the retired bonds or (y) the new bonds are issued in respect of retired bonds the interest charges on which have been excluded from any net earnings certificate filed with the indenture trustee since the retirement of such bonds. At December 31, 1994,1995, the amount of net additions and retired bonds would permit (and the net earnings test would not prohibit) the issuance of $455$596 million aggregate principal amount of new Second Mortgage Bonds (at an assumed interest rate of 12% per annum). The issuance of such amount of Second Mortgage Bonds assumes that the $226$197 million of First Mortgage Bonds available to be issued at December 31, 19941995 would be issued first at a rate of 11%. However, issuance of such amounts may be limited by MRA covenants. See Additional Restrictive Covenants below. PREPAYMENTS Prior to the Sixth Amendment to the MRA becoming effective on March 7, 1995, see Financing Developments above, certain prepayments of indebtedness were required. The required prepayment equaled the Company's adjusted operating income, as defined in the MRA, less certain capital expenditures and charges, for the preceding twelve-month period as of June 30 of each year; provided, however, that the prepayment amount (Excess Cash) was limited to the excess (if any) over $25 million of (i) the Company's cash balance, including cash equivalents, as of each June 30 plus (ii) the cumulative amount of all dividends, if any, paid on Common Stock from December 15, 1992 to such June 30. The Company was required to apply the Excess Cash to the prepayment of indebtedness. For the period ended June 30, 1994, the Company had $31 million which constituted Excess Cash. The Company had no such Excess Cash for the period ended June 30, 1993. The Company was also required to apply other funds as defined in the MRA (Extraordinary Cash) to the prepayment of its indebtedness. Extraordinary Cash included the net proceeds from the issuance of equity and certain debt securities of the Company or any subsidiary; provided, however, that upon prepayment of the Term Loan in a principal amount of $50 million, Extraordinary Cash did not include proceeds from the issuance of equity securities, and included only 50% of the proceeds from the issuance of debt securities. Extraordinary Cash also included all cash dividends received by the Company from its investment subsidiaries, TRI and SRI, or any subsidiary thereof. In 1993 and 1994, the Company received cash dividends of $6 million and $50 million, respectively, from TRI which constituted Extraordinary Cash. In April 1993, the MRA lenders waived, to the extent of $68 million, as consideration for certain prepayments, the requirement that the Company use Excess Cash and Extraordinary Cash to prepay debt as described above. Therefore, no mandatory prepayments were made during 1993 as a result of such prepayment provisions and although $81 million of excess cash and extraordinary cash was generated in 1994 ($87 million for 1993 and 1994 combined), the Company was required to prepay only $19 million of indebtedness in 1994. See Financing Developments above. ADDITIONAL RESTRICTIVE COVENANTS In addition to the prepayment provisions described above, the MRA contains a number of restrictive covenants including, but not limited to, covenants limiting, with certain exceptions, (i) the incurrence of additional indebtedness, including lease obligations, or the prepayment of existing indebtedness, or the guarantee of any such indebtedness, (ii) the incurrence of liens, (iii) the sale of assets or the merger with or into any other entity, (iv) the declaration or payment of dividends on Common Stock or any other class of capital stock, (v) the making of capital expenditures beyond those contemplated in the Company's 1992 ten-year capital budget, and (vi) the Company's ability to enter into sale-leaseback arrangements, operating lease arrangements and coal and railroad arrangements. All of these restrictive covenants described above, other than (i), (iv) and (vi), will be in effect until at least December 1997. The covenants described in (i), (iv) and (vi) will cease to be binding on the Company when both the Renewable Term Loan and the Revolving Credit are paid in full and commitments thereunder terminate and the Company's senior long-term debt is rated at least investment grade. In addition, the Company is required pursuant to the MRA to maintain an interest coverage ratio of (a) operating cash flows plus interest paid to (b) interest paid, through the year 2003, ranging from 1.21.40 to 1 in 19941995 and gradually increasing to 2 to 1 in 2000 continuing through the year 2003. For the year ended December 31, 1994,1995, the Company's MRA interest coverage ratio was 2.982.52 to 1. With respect to dividends, the MRA incorporates, until the Renewable Term Loan and the Revolving Credit are paid in full and commitments thereunder terminate and the Company's senior debt is rated investment grade, a restrictive covenant similar to that currently in the General First Mortgage which limits the Company's ability to pay dividends on Common Stock until it has positive retained earnings (through future earnings or otherwise) rather than an accumulated deficit (such accumulated deficit was $681$626 million at December 31, 1994). The Company does not anticipate being able1995. (See Dividends for a discussion of the effects of such covenants on the Company's ability to satisfy the test of this and other dividend restrictions (see Dividends above) and therefore, does not anticipate being permitted todeclare or pay cash dividends on its Common Stock for the foreseeable future.dividends.) CONSTRUCTION EXPENDITURES Estimated construction expenditures of the Company, including AFDC, for the five years 19951996 through 1999,2000, respectively, are $74$80 million, $67$97 million, $81$91 million, $85$52 million and $62$84 million. These amounts include the following: $190$180 million for transmission and distribution facilities in the Tucson area; $44$31 million for expenditures which are necessary to upgrade pollution control facilities at Navajo (see Item 1., Business, Environmental Matters, Navajo Generating Station); $85 million for new generation equipment; and $135$108 million for modifications to existing production facilities. These estimated construction expenditures include costs to comply with current federal and state environmental regulations. All of these estimates are subject to continuing review and adjustment. Actual construction expenditures may vary from these estimates due to factors such as changes in business conditions, construction schedules and environmental requirements. Due to the limitation on the Company's ability to issue debt or equity capital at economically feasible rates, and to apply such proceeds, if any, to capital requirements, the Company must financefund these construction expenditures and any Nations Energy equity investment funding with internally generated funds, tax-exempt debt when available, and/or reductions of its cash and short-term investments. In the event that funds from such sources are unavailable, the Company would be unable to expend the amounts shown above.cash equivalents. Also, see NoteNotes 5 and 6 of Notes to Consolidated Financial Statements, Long and Short-Term Debt and Capital Lease Obligations.Obligations, and Commitments and Contigencies, respectively. ITEM 8. --- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14, page 57,63, for a list of the Consolidated Financial Statements which are included in the following pages. See Note 119 of Notes to Consolidated Financial Statements. INDEPENDENT AUDITORS' REPORT TUCSON ELECTRIC POWER COMPANY We have audited the accompanying consolidated balance sheets and statements of capitalization of Tucson Electric Power Company and its subsidiaries (the Company) as of December 31, 19941995 and 1993,1994, and the related consolidated statements of income (loss), cash flows, and changes in stockholders'stockholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 1994.1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 19941995 and 1993,1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 19941995 in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the timing of the recovery of the costs associated with 37.5% of Springerville Unit 2 cannot presently be determined because the Company has not yet received rate relief for such costs. DELOITTE & TOUCHE LLP Tucson, Arizona January 31, 1995 (March 7, 1995 as to Note 6)29, 1996 CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the Years Ended December 31, 1995 1994 1993 1992 - Thousands of Dollars - Operating Revenues Retail Customers $ 574,925 $ 571,433 $ 524,813 $ 514,014 Amortization of MSR Option Gain Regulatory Liability 20,053 6,05320,053 6,053 Other Utilities 75,591 99,987 93,273 70,026 ---------- ---------- ---------- Total Operating Revenues 670,569 691,473 624,139 590,093 ---------- ---------- ---------- Operating Expenses Fuel 209,889 197,323 132,775 Purchased Power - Energy 13,878 9,032 62,726 Purchased Power - Demand - - 88,288 Deferred Fuel and Purchased Power 7,359 10,716 7,030186,330 231,126 217,071 Capital Lease Expense 95,441 93,056 92,844 19,854 Amortization of Springerville Unit 1 Allowance (28,432) (26,204) (33,398) (31,228) Other Operations 100,948 90,880 95,21899,493 101,039 92,469 Maintenance and Repairs 38,943 42,122 42,300 34,386 Depreciation and Amortization 92,179 89,905 74,184 69,445 Taxes Other than Income Taxes 55,640 46,118 54,814 48,632 Financial Restructuring Costs - 1,498 29,511Income Taxes 8,920 (91) (91) ---------- ---------- ---------- Total Operating Expenses 548,514 577,071 540,193 556,637 ---------- ---------- ---------- Operating Income 122,055 114,402 83,946 33,456 ---------- ---------- ---------- Other Income (Deductions) Regulatory Disallowances and Adjustments - - (13,777) - Deferred Springerville Unit 2 Carrying Costs 1,127 1,133 5,359 4,143 Loss on Financial Restructuring - - (26,669) Litigation Settlement - - 27,576 Interest Income 8,222 7,556 3,909 4,568 Income Taxes 29,356 4,820 5,186 5,654 Other Income 2,826 489 805 7,744 ---------- ---------- ---------- Total Other Income (Deductions) 41,531 13,998 1,482 23,016 ---------- ---------- ---------- Interest Expense Long-Term Debt - Net69,174 69,353 68,053 72,687 Regulatory Interest Imputed on Losses Recorded at Present Value 32,633 32,280 31,303 29,781 Short-Term Debt - - 26,311 Other 7,997 7,118 8,604 7,770 Allowance for Borrowed Funds Used During Construction (1,123) (1,091) (716) (1,055) ---------- ---------- ---------- Total Interest Expense 108,681 107,660 107,244 135,494 ---------- ---------- ---------- (continued on next page) CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Continued) For the Years Ended December 31, 1995 1994 1993 1992 - Thousands of Dollars - Income (Loss) from Continuing Operations 54,905 20,740 (21,816) (79,022) Provision for Loss on Disposal of Discontinued Operations - - (4,000) (44,047) ---------- ---------- ---------- Net Income (Loss) $ 54,905 $ 20,740 $ (25,816) $(123,069) ========== ========== ========== Average Shares of Common Stock Outstanding (000) 160,691 160,724 160,544 31,872 ========== ========== ========== Net Income (Loss) per Average Share Continuing Operations $ 0.34 $ 0.13 $ (0.14) $ (2.48) Discontinued Operations - - (0.02) (1.38) ---------- ---------- ---------- Total Net Income (Loss) per Average Share $ 0.34 $ 0.13 $ (0.16) $ (3.86) ========== ========== ========== See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1995 1994 1993 - Thousands of Dollars - Cash Flows from Continuing Operating Activities Cash Receipts from Retail Customers $616,064 $611,917 $557,222 Cash Receipts from Other Utilities 80,415 99,198 91,799 Fuel and Purchased Power Costs Paid (167,672) (187,130) (167,691) Wages Paid, Net of Amounts Capitalized (63,412) (51,960) (47,073) Payment of Other Operations and Maintenance Costs (75,504) (73,036) (86,582) Capital Lease Interest Paid (83,986) (82,511) (81,932) Interest Paid, Net of Amounts Capitalized (78,743) (72,556) (70,316) Taxes Paid, Net of Amounts Capitalized (120,759) (107,594) (105,748) Income Taxes Paid (1,960) - - Litigation Settlement - - (5,000) Emission Allowance Inventory Purchases (4,190) - - Emission Allowance Inventory Sales 11,255 - - Interest Received 7,882 7,288 4,652 --------- --------- --------- Net Cash Flows - Continuing Operating Activities 119,390 143,616 89,331 --------- --------- --------- Net Cash Flows - Discontinued Operations - 42,685 5,677 --------- --------- --------- Cash Flows from Investing Activities Construction Expenditures (59,097) (62,599) (48,162) Purchase of Debt Securities (17,697) - - Investment in Partnership (12,429) - - Other Investments - Net 3,321 103 (286) --------- --------- --------- Net Cash Flows - Investing Activities (85,902) (62,496) (48,448) --------- --------- --------- Cash Flows from Financing Activities Proceeds from Long-Term Debt - - 20,000 Payments to Retire Long-Term Debt (36,507) (19,424) (72,187) Payments on Renewable Term Loan (143,060) - - Payments to Retire Capital Lease Obligations (17,231) (17,747) (10,690) Other - Net 252 (478) 862 --------- --------- --------- Net Cash Flows - Financing Activities (196,546) (37,649) (62,015) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents (163,058) 86,156 (15,455) Cash and Cash Equivalents, Beginning of Year * 248,152 161,996 177,451 --------- --------- --------- Cash and Cash Equivalents, End of Year ** $ 85,094 $248,152 $161,996 ========= ========= ========= (continued on next page) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) * Beginning of year balance includes cash and cash equivalents from discontinued operations of $14,852,000 for 1995, $22,179,000 for 1994 and $22,502,000 for 1993 ** End of year balance includes cash and cash equivalents from discontinued operations of $14,852,000 for 1994 and $22,179,000 for 1993. See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS ASSETS December 31, 1995 1994 1993 - Thousands of Dollars - Utility Plant Plant in Service $2,095,679 $2,053,123 $2,004,112 Utility Plant Under Capital Leases 893,064 894,508893,064 Construction Work in Progress 50,898 40,870 33,568 ----------- ----------- Total Utility Plant 3,039,641 2,987,057 2,932,188 Less Accumulated Depreciation and Amortization (859,227) (791,617) (727,101) Less Accumulated Amortization of Capital Leases (40,113) (25,595) (12,634) Less Allowance for Springerville Unit 1 Allowance (162,175) (162,423) (162,689) ----------- ----------- Total Utility Plant - Net 1,978,126 2,007,422 2,029,764 ----------- ----------- Investments Investments and Other Property 52,116 4,307 Net Assets of Discontinued Operations - 8,685 58,480 Other Investments 4,307 4,370 ----------- ----------- Total Investments 52,116 12,992 62,850 ----------- ----------- Current Assets Cash and Cash Equivalents 85,094 233,300 139,817 Accounts Receivable 61,717 66,332 65,212 Materials and Fuel 42,168 36,109 36,312 Deferred Income TaxTaxes - Current 18,250 12,870 8,927 Other 10,719 10,5387,565 8,376 ----------- ----------- Total Current Assets 359,330 260,806214,794 356,987 ----------- ----------- Deferred Debits - Regulatory Assets Income Taxes Recoverable Through Future Rates 135,957 143,372 149,508 Deferred Common Facility Costs 63,303 65,843 68,383 Deferred Springerville Unit 2 Costs 42,039 54,983 67,543 Deferred Lease Expense 19,808 25,228 32,602 Deferred Fuel and Purchased Power Expense 5,872 13,231 Other Deferred Regulatory Assets 9,362 8,1658,576 15,234 Deferred Debits - Other 16,211 17,532 21,244 ----------- ----------- Total Deferred Debits 285,894 322,192 360,676 ----------- ----------- Total Assets $2,701,936 $2,714,096$2,530,930 $2,699,593 =========== =========== See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND OTHER LIABILITIES December 31, 1995 1994 1993 - Thousands of Dollars - Capitalization Common Stock Equity (Deficit) $ (42,233)12,488 $ (62,973)(42,233) Capital Lease Obligations 897,958 922,735 927,201 Long-Term Debt 1,207,460 1,381,935 1,416,352 ----------- ----------- Total Capitalization 2,117,906 2,262,437 2,280,580 ----------- ----------- Current Liabilities Short-Term Debt 12,039 - Current Obligations Under Capital Leases 33,389 12,803 Current Maturities of Long-Term Debt 12,075 17,167 2,203 Accounts Payable 25,178 39,777 40,190 Interest Accrued 57,389 59,480 65,738 Taxes Accrued 15,696 29,215 20,269 Accrued Employee Expenses 13,680 15,247 4,222 Current Obligations Under Capital Leases 12,803 14,825 Other 7,989 6,624 6,389 ----------- ----------- Total Current Liabilities 177,435 180,313 153,836 ----------- ----------- Deferred Credits and Other Liabilities MSR Option Gain Regulatory Liability 25,610 41,214 54,924 Accumulated Deferred Investment Tax Credits Regulatory Liability 19,603 24,368 29,279 AccumulatedOther Regulatory Liabilities 10,343 469 Deferred Income Taxes 166,684 168,833- Noncurrent 145,982 164,341 Other 26,920 26,64434,051 26,451 ----------- ----------- Total Deferred Credits and Other Liabilities 259,186 279,680235,589 256,843 ----------- ----------- Total Capitalization and Other Liabilities $2,701,936 $2,714,096$2,530,930 $2,699,593 =========== =========== See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, 1995 1994 1993 COMMON STOCK EQUITY (DEFICIT) - Thousands of Dollars - Common Stock--No Par Value 1995 1994 1993 ----------- ----------- Shares Authorized 200,000,000 200,000,000 Shares Outstanding 160,671,157 160,723,702 160,723,702Warrants Outstanding * 12,054,278 12,054,278 $ 645,479645,295 $ 645,479 Capital Stock Expense (6,357) (6,357) Accumulated Deficit (626,450) (681,355) (702,095) ----------- ----------- Total Common Stock Equity (Deficit) 12,488 (42,233) (62,973) ----------- ----------- PREFERRED STOCK, No Par Value, 1,000,000 Shares Authorized, None Outstanding - - CAPITAL LEASE OBLIGATIONS Springerville Unit 1 466,187 458,092 449,984 Springerville Common Facilities 136,128 139,076 144,114 Irvington Unit 4 142,878 143,407 143,909 Valencia Coal Handling Facilities 179,990 187,523 195,309 Other Leases 6,164 7,440 8,710 ----------- ----------- Total Capital Lease Obligations 931,347 935,538 942,026 Less Current Maturities (33,389) (12,803) (14,825) ----------- ----------- Total Long-Term Capital Lease Obligations 897,958 922,735 927,201 ----------- ----------- LONG-TERM DEBT Interest Issue Maturity Rate - ----------------------------------------------------- First Mortgage Bonds Corporate 1995 - 2009 4.55% to 12.22% 253,750 269,750 287,000 Industrial Development 2005 - 2025 6.10% to 8.25% Revenue Bonds (IDBs) and variable** 232,200 232,200 Loan Agreements (IDBs) 2003 - 2022 6.25% and variable** 702,585 703,600 704,555Renewable Term Loan 1997 - 1999 variable* 193,400* 31,000 - Term Loan (See Note 5) variable** - 193,400 Promissory Note 1992 - 1995 8.00% - 152 1,400 ----------- ----------- Total Stated Principal Amount 1,219,535 1,399,102 1,418,555(continued on next page) CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued) Less Current Maturities (12,075) (17,167) (2,203) ----------- ----------- Total Long-Term Debt 1,207,460 1,381,935 1,416,352 ----------- ----------- Total Capitalization $2,117,906 $2,262,437 $2,280,580 =========== =========== * The Warrants to purchase Common Stock at an exercise price of $3.20 per share, are exercisable and expire in 2002. ** Interest rates on variable rate tax-exempt (IDB) debt (IDBs) ranged from 1.50%1.65% to 5.75% during 19941995 and 1993,1994, and the average interest rate on such debt was 3.91% in 1995 and 2.96% in 1994 and 2.65% in 1993.1994. Interest rates on the Term Loan ranged from 3.63% to 6.69%6.75% in 19941995 and 1993,1994, and the average interest rate on such debt was 6.50% in 1995 and 4.92% in 1994 and 4.03% in 1993. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1994 1993 1992 - Thousands of Dollars - Cash Flows from Continuing Operating Activities Cash Receipts from Retail Customers $611,917 $557,222 $546,801 Cash Receipts from Other Utilities 99,198 91,799 68,775 Purchased Power - Energy (15,829) (9,610) (7,896) Purchased Power - Demand - (1,006) (34,114) Fuel Costs Paid (171,301) (157,075) (139,146) Wages Paid, Net of Amounts Capitalized (49,284) (44,394) (37,275) Payment of Other Operations and Maintenance Costs (78,808) (91,924) (110,993) Capital Lease Interest Paid (82,511) (81,932) - Interest Paid, Net of Amounts Capitalized (72,556) (70,316) (91,531) Taxes Paid, Net of Amounts Capitalized (104,498) (103,005) (92,673) Litigation Settlements - Net - (5,000) 35,000 Lease Payments, Net of Amounts Capitalized - - (61,328) Interest Received 7,288 4,652 11,588 Federal Income Tax Refund Received - - 1,440 Other - (80) (18) --------- --------- --------- Net Cash Flows - Continuing Operating Activities 143,616 89,331 88,630 --------- --------- --------- Net Cash Flows - Discontinued Operations 42,685 5,677 41,878 --------- --------- --------- Cash Flows from Capital Transactions Construction Expenditures (62,599) (48,162) (34,512) Other Investments 103 (286) 58 --------- --------- --------- Net Cash Flows - Capital Transactions (62,496) (48,448) (34,454) --------- --------- --------- Cash Flows from Financing Activities Proceeds from Long-Term Debt - 20,000 16,732 Payments to Retire Long-Term Debt (19,424) (72,187) (32,908) Payments to Retire Capital Lease Obligations (17,747) (10,690) (320) Other (478) 862 (306) --------- --------- --------- Net Cash Flows - Financing Activities (37,649) (62,015) (16,802) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 86,156 (15,455) 79,252 Cash and Cash Equivalents, Beginning of Year * 161,996 177,451 98,199 --------- --------- --------- Cash and Cash Equivalents, End of Year ** $248,152 $161,996 $177,451 ========= ========= ========= * Beginning of year balance includes cash and cash equivalents from discontinued operations of $22,179,000 for 1994, $22,502,000 for 1993 and $11,856,000 for 1992. ** End of year balance includes cash and cash equivalents from discontinued operations of $14,852,000 for 1994, $22,179,000 for 1993 and $22,502,000 for 1992.1994. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Premium on Capital Accumulated Preferred Common Capital Stock Earnings Stock Stock Stock Expense (Deficit) -------------------------------------------------------------------------------- - Thousands of Dollars - Balances at December 31, 1991 $82,793 $357,782 $7,007 $(3,482) $(553,210) 1992 Net Loss - - - - (123,069) 1992 Issuances: 134,713,860 Shares of Common Stock, including the reclassification of all Preferred Stock to Common Stock. See Note 3. (82,793) 286,645 (7,007) (2,875) - -------- -------- ------- -------- ---------- Balances at December 31, 1992 - 644,427 - (6,357) (676,279)$644,427 $(6,357) $(676,279) 1993 Net Loss - - - - (25,816) 1993 Sale of Treasury Stock: 294,050 Shares of CommonTreasury Stock - 1,052 - - - -------- -------- ---------------- -------- ---------- Balances at December 31, 1993 - 645,479 - (6,357) (702,095) 1994 Net Income - - - - 20,740 -------- -------- ---------------- -------- ---------- Balances at December 31, 1994 $645,479 (6,357) (681,355) 1995 Net Income - $645,479 $ - 54,905 52,545 Shares Purchased by Deferred Compensation Trust (184) - - --------- -------- ---------- Balances at December 31, 1995 $645,295 $(6,357) $(681,355) ======== ======== =======$(626,450) ========= ======== ========== See Note 6.5. Long-Term Debt - AdditionalDividends - Restrictive Covenants for discussion of restrictions on the Company's ability to pay dividends. See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------------------------------- NATURE OF OPERATIONS The Company is a public utility engaged in the business of generation, transmission, distribution and sale of electricity. The Company's retail service area encompasses 1,155 square miles in Pima and Cochise counties in Southern Arizona. The Company also engages in wholesale sales to other utilities in Arizona, California, Colorado, New Mexico, Oregon, Texas and Utah. Approximately 63% of the Company's work force is subject to a collective bargaining unit. The collective bargaining agreement in place at December 31, 19941995 terminates on December 1, 1996. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company, and threefour wholly-owned, utility-related subsidiaries and two investment subsidiaries on a consolidated basis. All significant intercompany balances and transactions have been eliminated in the consolidation. The results of operations, estimated net realizable value of net assets and cash flows of the Company's two investment subsidiaries have beenwere classified as discontinued operations sincefrom June 30, 1990.1990 until December 31, 1994. See Note 4. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REGULATION The Company's utility accounting practices and electricity rates are subject to regulation by the ACC and, in certain areas, by the FERC. ACCOUNTING FOR THE EFFECTS OF REGULATION The Company prepares its financial statements in accordance with the provisions of FAS 71. A regulated enterprise can prepare its financial statements in accordance with FAS 71 only if (i) the enterprise's rates for regulated services are established by or subject to approval by an independent third-party regulator, (ii) the regulated rates are designed to recover the enterprise's costs of providing the regulated services and (iii) in view of demand for the regulated services and the level of competition, it is reasonable to assume that rates set at levels that will recover the enterprise's costs can be charged to and collected from customers. FAS 71 requires a cost-based, rate-regulated enterprise to reflect the impact of regulatory decisions in its financial statements. In certain circumstances, FAS 71 requires that certain costs and/or obligations (such as incurred costs not currently recovered through rates, but expected to be so recovered in the future) be reflected in a deferral account in the balance sheet and not be reflected in the statement of income or loss until matching revenues are recognized. It is the Company's policy to assess the recoverability of costs recognized as regulatory assets and the Company's ability to continue to account for its activities in accordance with FAS 71, based on each rate action and the criteria set forth in FAS 71. The Company's Consolidated Balance Sheets at December 31, 19941995 and 19931994 contain certain amounts solely as a result of the application of FAS 71: Assets (Liabilities) 1995 1994 1993 -------------------- ----- ----- - Millions of Dollars - Income Taxes Recoverable Through Future Rates $136 $143 $150 Deferred Common Facility Costs 63 66 68 Deferred Springerville Unit 2 Costs 42 55 68 Deferred Lease Expense 20 25 33 Deferred Fuel and Purchased Power Expense 6 13 Other Deferred Charges 9 815 MSR Option Gain Regulatory Liability (26) (41) (55) Deferred Investment Tax Credits (20) (24) (29) Other Deferred Credits (1)(10) (1) Regulatory assets are recorded based on prior rate orders issued by the ACC which provide a mechanism for recovery in regulated rates or historical rate treatment which provides evidence as to the probability of future rate recovery. The material regulatory assets listed above earn either a return on investment through inclusion in rate base or earn a set rate of interest stipulated by the ACC. A number of accounts in the Company's Consolidated Statements of Income (Loss) for the three years in the period ended December 31, 19941995 also reflect the application of FAS 71: Income (Expense) 1995 1994 1993 1992 ---------------- ----- ----- ----- - Millions of Dollars - Amortization of MSR Option Gain Regulatory Liability $ 20 $ 620 $ 6 Amortization of Springerville Unit 2 Rate Synchronization (14) -(14) - Deferred Fuel and Purchased Power (6) (7) (11) (7) Amortization of Deferred Common Facility Costs (3) (3) (4)(3) Deferred Springerville Unit 2 Carrying Costs 1 1 5 4 Regulatory Disallowances and Adjustments - (14) - Amortization of(14) Investment Tax Credit Amortization 5 5 6 Regulatory5 Interest Relating to MSRImputed on Loss (MSR Option Gain Regulatory LiabilityLiability) Recorded at Present Value (4) (6) (7) (7) If the Company had not applied the provisions of FAS 71 in these years, each of these amounts appearing in the Consolidated Statements of Income (Loss) would have been reflected in the Consolidated Statements of Income or Loss in prior periods, except for two items which would not have been recorded: 1) the amortization of the MSR Option Gain Regulatory Liability, including regulatory interest;interest imputed on the loss recorded at present value; and 2) the Springerville Unit 2 carrying cost deferrals. Lease expense relating to the capital leases, while the same over the life of the leases, would be recognized at different annual amounts if the Company were to discontinue the application of FAS 71. See Utility Plant Under Capital Leases below. If at some point in the future the Company determines that it no longer meets the criteria for continued application of FAS 71 to all or a portion of the Company's regulated operations, the Company would be required to adopt the provisions of FAS 101 for that portion of the operations for which FAS 71 no longer applied. Adoption of FAS 101 would require the Company to write off its regulatory assets and liabilities as of the date of adoption of FAS 101 and would preclude the future deferral in the Consolidated Balance Sheet of costs not recovered through rates at the time such costs were incurred, even if such costs were expected to be recovered in the future. Based on the balances of the Company's regulatory assets and liabilities as of December 31, 1994,1995, the Company estimates that future adoption of FAS 101, if applied to all of the Company's regulated operations, would result in an extraordinary loss of $142$145 million, which includes a reduction for the related deferred income taxes.taxes of $69 million. The Company's cash flows would not be affected by the adoption of FAS 101. UTILITY PLANT Utility Plant by major classes at December 31, 19941995 and 19931994 is as follows: 1995 1994 1993 ---------- ---------- - Thousands of Dollars - Utility Plant: Production Plant $1,013,171 $1,002,409 $ 988,241 Transmission Plant 460,986 460,055 454,105 Distribution Plant 517,999 495,336 473,830 General Plant 92,069 84,441 77,874 Intangible Plant 10,441 10,238 8,685 Electric Plant Held for Future Use 1,013 644 1,377 ---------- ---------- Total Utility Plant $2,095,679 $2,053,123 $2,004,112 ========== ========== Utility plant is stated at original cost. In accordance with the Uniform System of Accounts prescribed by the FERC and accepted by the ACC, the Company capitalizes AFDC based on the cost of borrowed funds and a reasonable rate upon equity funds used to finance CWIP, when recovery of such costs from ratepayers is probable. The component of AFDC attributable to borrowed funds is presented as a reduction of Interest Expense. The Consolidated Statements of Income (Loss) reflect no AFDC - Equity as all construction expenditures were deemed under FERC prescribed rules to be financed with debt. In accordance with FERC Accounting Release No. 13, AFDC is recorded on construction expenditures1995, 1994 and on the balances of construction funds held in trust, if any are held. Interest income from construction funds held in trust, if any, net of income taxes, is credited to CWIP. Interest Expense on Long-Term Debt - Net reflects interest expense on the stated principal amount of bonds in excess of the average month-end balance of construction funds held in trust during the period. Interest expense on stated bond principal equal to the average month-end balance of construction funds held in trust is charged against AFDC. In 1994, 1993, and 1992, gross AFDC rates of 4.94%5.59%, 4.85%4.94% and 8.01%4.85%, respectively, were used for all CWIP. Depreciation is computed on a straight-line basis at component rates which are based on the economic lives of the assets. These component rates, which are authorized by the ACC, averaged 3.73%3.79%, 3.73% and 3.68% in 1995, 1994 and 3.71% in 1994, 1993, and 1992, respectively. The economic lives for production plant are based on remaining lives. The economic lives for transmission plant, distribution plant, general plant and intangible plant are based on average lives. The component rates also reflect estimated removal costs, net of estimated salvage value. Minor replacements and repairs are expensed as incurred. Retirements of utility plant, together with removal costs less salvage, are charged to accumulated depreciation. UTILITY PLANT UNDER CAPITAL LEASES As described in Note 3, since December 15, 1992, the date of closing of the Company's Financial Restructuring, theThe Company's leases of the Springerville Common Facilities, Springerville Unit 1, Valencia coal handling facilities and Irvington Unit 4 have beenare classified as capital leases in the Consolidated Balance Sheets. For rate making purposes, the ACC treats these leases as operating leases and has allowed for recovery of the lease costs by straight-line amortization of the total amount of lease rent payments over the primary term of the leases, except for the Valencia coal handling facilities lease. The Valencia coal handling facilities lease is being amortized on a straight-line basis over the primary term of the lease plus the first optional renewal period of six years to reflect the recovery period mandated by the ACC. Under GAAP, the lease term would have been only the primary term of the lease. Interest and depreciation relating to the leases are recorded as expense on a basis which reflects the regulatory straight- linestraight-line treatment. The amount of lease amortization incurred for the four above- describedabove-described leases, as well as the Company's remaining leases, for the years 1995, 1994 1993 and 19921993 amounted to: Years Ended December 31, 1995 1994 1993 1992 ----- ----- ----- - Millions of Dollars - Lease Amortization: Interest $ 97 $ 94 $ 93 $ 22 Depreciation 14 13 12 2 ---- ---- ---- Total Lease Amortization $111 $107 $105 $ 24 ==== ==== ==== Lease Amortization Included In: Operating Expenses - Fuel and Purchased Power $ 20 $ 20 $ 17 $ 1 Operating Expenses - Capital Lease Expense 95 93 93 20 Balance Sheet - Deferred Lease Expense (4) (6) (5) 3 ----- ----- ---- Total Lease Amortization $111 $107 $105 $ 24 ===== ===== ==== The Deferred Lease Expense of $25$20 million and $33$25 million at December 31, 19941995 and 1993,1994, respectively, reflects: 1) the cumulative difference between the straight-line method of amortizing the leases for regulatory purposes and capital lease amortization as promulgated by GAAP; and 2) the balance of the deferred costs described under Fuel and Purchased Power Costs below. Also, see Allowance for Springerville Unit 1 Allowance below. ALLOWANCE FOR SPRINGERVILLE UNIT 1 TheALLOWANCE In the 1989 Rate Order the ACC limited recovery through retail rates of Century demand charges fornon-fuel expenses of Springerville Unit 1 under the Restated Century Purchase Contract to a rate of only $15 per kW per month. From inception through termination of such contract on December 15, 1992, capacitySuch costs for Springerville Unit 1 averaged approximately $20 per kW per month. Prior to its termination as a part of the Financial Restructuring described in Note 3, the Restated Century Purchase Contract required the Company to purchase all of Springerville Unit 1 capacity through 2014, but was subject to cancellation by Century after 2001 on five years' advance notice. In addition, in 1990, industry and Company projections for the demand for power in the western United States indicated that excess capacity conditions would be likely to continue for a few years, but should not exist by the year 2000. Due to the significant uncertainties regarding the power markets beyond 2001 and the existence of Century's cancellation option, the amount of loss, if any, which may have been incurred as a result of the $15$22 per kW per month limitation beyond such date appeared significantly uncertain. In Decemberduring 1995, 1994 and 1993. Consequently, in 1990 and 1992, the Company therefore, recognized a loss of approximately $178 million and established a deferred liability for this estimated loss, the Allowance forrecorded losses, Springerville Unit 1 Allowance, equal to the present value of the excess of the Company's costs estimated to be incurred during the period through 20012014, the term of the lease, over $15 per kW per month using a discount rate of 13%. In connection with the Financial Restructuring, the Company assumed Century's lease ofThe balance sheet contra asset Springerville Unit 1 under a capital lease agreement extending to January 1, 2015. Accordingly, in December 1992, the remaining unamortized balance of the Allowance for Springerville Unit 1 was recalculated based on the $15 per kW rate currently permitted pursuant to the 1991 Rate Order and current cost estimates through the year 2014. This resulted in an additional loss of approximately $7 million, which was recorded as a component of the Loss on Financial Restructuring in the Consolidated Statement of Income (Loss) for the year ended December 31, 1992. In addition, the liability was reclassified to a contra-asset, Allowance for Springerville Unit 1. The Allowance for Springerville Unit 1 increases each year by the accrual of interest and decreases by the amount which is being amortized to income as a contra-expense, through 2014.Amortization of Springerville Unit 1 Allowance. In 1995, 1994 and 1993, the accrual of such interest was $28.2 million, $25.9 million and $24.2 million, respectively, and the amount amortized was $28.4 million, $26.2 million and $33.4 million, respectively. The imputed interest expense associated with this liability, calculated using a 13% discount rate, associated with this liability is included as part of Regulatory Interest Imputed on Losses Recorded at Present Value in the Interest Expense section in the Consolidated Statements of Income (Loss). DEFERRED COMMON FACILITY COSTS Springerville Common Facility Costs are lease costs and operating costs incurred for the Springerville Common Facilities during the period after Springerville Unit 1 was placed in service and before Springerville Unit 2 was placed in service. Pursuant to an accounting order from the ACC, these costs were deferred and are being amortized, as depreciation, over the primary term of the Springerville Common Facilities Leases. The ACC has allowed for the recovery of the amortization costs plus a return on investment. UTILITY OPERATING REVENUES Operating Revenues include accruals for unbilled revenues, thereby recognizing revenue that is earned, but not billed, at the end of an accounting period. AMORTIZATION OF MSR OPTION GAIN REGULATORY LIABILITY TheIn the 1989 Rate Order the ACC allocated to retail customers a portion of the price paid to the Company upon the 1982 sale of an option to purchase a 28.8% interest in San Juan Unit 4, asserting that such option was related to an interconnection agreement which the Company also entered into with MSR at that time. InThe ACC ordered the 1989 Rate Order, the ACC orderedCompany to recognize the MSR Option Gain be amortized over a six-year periodby amortizing amounts to operating revenue through 1995 as a $20 million per year revenue credit, and1997. Therefore, in 1990, the Company establishedrecorded a deferred liability forloss, MSR Option Gain Regulatory Liability, equal to the present value of the amount to be amortized to operating revenues through 1997, calculated using a 13% discount rate. Such deferred liabilityThe MSR Option Gain Regulatory Liability increases each year by the accrual of interest at 13% and decreases by the amount which is amortized to operating revenues. In 1995, 1994 and 1993, the accrual of revenue credit prescribed bysuch interest was $4.4 million, $6.4 million and $7.1 million, respectively, and the ACC. Such revenue credit is included in Operating Revenues.amount amortized was $20.1 million, $20.1 million and $6.1 million, respectively. The imputed interest accrualexpense associated with this liability, calculated using a 13% discount rate, is included as part of Regulatory Interest Imputed on Losses Recorded at Present Value in the Interest Expense section ofin the Consolidated Statements of Income (Loss). The 1991 Rate Order deferred amortization of a portion of the regulatory liability to 1996 and 1997. FUEL AND PURCHASED POWER COSTS Fuel inventory, primarily coal, is stated on a basis which approximates weighted average cost. The Company utilizes full absorption costing. Certain lease and interest costs incurred by Valencia, the Company's fuel-handling and procurement subsidiary for Springerville, are accounted for as deferred costs. These costs which were allocatedare being amortized to fuel inventory based on fuel quantities purchased and then amortized to Fuel expense and, prior to the closing of the Financial Restructuring on December 15, 1992, to Purchased Power - Energy, based on the rate of fuel burn at Springerville through December 31, 1992. Effective January 1, 1993, these costs are amortized to Fuel expense on a straight-line basis over 37.4 yearsthrough the year 2030 pursuant to the 1994 Rate Order. FINANCIAL RESTRUCTURING COSTSINCOME TAXES In January 1993, the Company adopted Statement of Financial Restructuring costs include costs incurredAccounting Standards No. 109 (FAS 109), Accounting for legal, accountingIncome Taxes, on a prospective basis. FAS 109 requires the recognition of deferred income tax liabilities and assets for the expected future income tax consequences of temporary differences between the carrying amounts and the tax bases of other consulting services in connection with the restructuringassets and liabilities. The adoption of FAS 109 increased both total assets and total liabilities of the Company's obligations, as describedCompany by $149 million in Note 3. INCOME TAXES1993. The increase in assets results primarily from the recording of a regulatory asset, Income Taxes Recoverable Through Future Rates. Such regulatory asset consists primarily of the right to recover income taxes relating to previously flowed- through differences, both timing and permanent, which provided rate benefits to past ratepayers. The increase in liabilities is primarily the net increase in deferred income tax assets and deferred income tax liabilities resulting from the adoption of FAS 109. Reductions in federal income taxes resulting from ITC relating to utility operations have been deferred. As authorized by the ACC, these amounts are amortized over the tax lives of the related property. As the Company has beenwas in a net operating loss carryforward position and generating tax losses, the income tax benefits reflected in the Consolidated Statements of Income (Loss) resultfor the years 1994 and 1993 resulted only from such ITC amortization. In 1995, income tax benefits include the recognition of a portion of the Company's net operating loss carryforwards, as well as ITC amortization. See Note 3. Income taxes are allocated to the subsidiaries based on contributions to the consolidated tax return liability. The investment subsidiaries' losses in 1994 1993 and 19921993 provided no tax benefits to the consolidated group and, therefore, no tax benefits are recorded as a reduction of the 1993 and 1992 ProvisionsProvision for Loss on Disposal of Discontinued Operations in the Consolidated Statements of Income (Loss). DEBT EXPENSE Debt discountEPA ALLOWANCES Purchased Emission Allowances are recorded in a noncurrent inventory account included in Investments and issuance costsOther Property on the Consolidated Balance Sheet at December 31, 1995. Emission Allowance inventory is recorded using the weighted average cost method. Gains on sales of Emission Allowances are deferred (included as part of Other Deferred Credits and Other Liabilities in the Consolidated Balance Sheet at December 31, 1995) and will be amortized overas income in 2000 - 2024, the lives ofperiod the related issues orCompany expects to use the related refunding issues.Emission Allowance inventory to meet EPA regulations. The amortization reflects the expected regulatory treatment for the gains. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value and fair value at December 31, 19941995 and 19931994 of the Company's financial instruments are as follows: 1995 1994 1993 ------ ------ Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- - Thousands of Dollars - Assets: Cash and Cash Equivalents $ 85,094 $ 85,094 $ 233,300 $ 233,300 $ 139,817 $ 139,817 Accounts Receivable 66,332 66,332 65,212 65,212Debt Securities (Included in Investments and Other Investments 4,307 4,307 4,370 4,370Property) 17,713 18,267 - - Liabilities: Accounts Payable (39,777) (39,777) (40,190) (40,190)Short-Term Debt (12,039) (12,039) - - Long-Term Debt, Including Current Portion (See Note 6)5) (1,219,535) (1,233,457) (1,399,102) (1,372,236) (1,418,555) (1,397,838) The carrying amounts of all financial instruments, except Long-TermCash and Cash Equivalents and Short-Term Debt are considered to be reasonable estimates of the fair value of each because of the short maturity of those instruments. The Company intends to hold the investment in Debt Securities to maturity (January 1, 2013.) Such Debt Securities are stated at amortized cost, adjusted for the amortization of the discount to maturity, and the fair value is based on current transactions for the same or similar debt. RECLASSIFICATION Minor reclassifications have been made to the prior year financial statements presented to conform to the current year's presentation. BeginningNEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires that an asset be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company adopted FAS 121 on January 1, 1996, and does not expect the application of FAS 121 to have a material impact on the Company's financial statements. This conclusion may change in the fourth quarter of 1994, state and city sales taxes and similar taxes collected on revenues were removed from Operating Revenues and Taxes Other Than Income Taxesfuture depending on the Consolidated Statementsextent that the Company's regulated and non- regulated operations are influenced by an increasingly competitive environment. In October 1995, the Financial Accounting Standards Board issued Statement of Income (Loss). These taxes are included as part of Accounts Receivable and Taxes AccruedFinancial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based Compensation. This statement encourages, but does not require, companies to adopt a new accounting method for stock-based compensation awards. Under the new method, an expense is recorded for stock compensation awards based on the Consolidated Balance Sheets. Such reclassification was made to enhance the comparabilityestimated fair value of the Company'saward at the grant date. The cost of the award is reflected as an expense over the period that the stock option vests. Companies that continue to follow existing standards and do not adopt the valuation method prescribed by FAS 123 are required to disclose pro forma net income and earnings per share as if the company had recognized expense based on FAS 123. Beginning with the 1996 financial statements, with thosecompanies will be required to meet these disclosure requirements for any awards made in 1995 and after. The Company plans to continue to follow existing standards (APB Opinion 25), rather than adopt FAS 123, for measurement and recognition of other companies. All financial information presented has been restated to conform to this presentation.stock-based compensation. The tax amounts reclassified were as follows: Years Ended December 31, 1994 1993 1992 ------- ------- ------- - ThousandsCompany will adopt the disclosure requirements of Dollars - State Sales Taxes $28,392 $26,027 $25,379 City Sales and Franchise Taxes 12,585 11,351 11,052 ACC Assessment Fee 934 920 952 ------- ------- ------- Total Taxes Reclassified $41,911 $38,298 $37,383 ======= ======= =======FAS 123 in 1996. NOTE 2. 1994 RATE ORDERMATTERS - ------------------------ Effective January 11, 1994,--------------------- 1995 RATE INCREASE APPLICATION On June 13, 1995, the Company filed an application with the ACC authorized a 4.2% increase in base rates.for an overall 4.9% or approximately $28.4 million rate increase. The 1994 Rate Order recognized that an additional 17.5%Company's rate request sought recovery of the operating and capital costs of the remaining 37.5% of Springerville Unit 2 capacity was used and useful for the retail jurisdiction, which lowered the percentage of that unit's capacity that is not incurrently being recovered. On November 30, 1995, the Company entered into the Proposed Settlement Agreement with the ACC Staff, subject to final approval by the ACC, that would have provided an overall 2% or approximately $10.4 million rate base toincrease including recovery of the remaining 37.5%. Therefore, the of Springerville Unit 2. The Company is not presently recovering through retail rates the depreciation, property taxes, operating and maintenance expenses other than fuel, or interest costs associated with the 37.5% of Springerville Unit 2 capacity which was not then considered to be used and useful for the retail jurisdiction at the time of the 1994 Rate Order and therefore was not included in rate base (hereinafter referred to as "retail excess capacity deferrals"). These expenses are being expensed as incurred. However, the 1994 Rate Order permits such costs to be deferred for future recovery over the remaining useful life of Springerville Unit 2. This phase-in plan does not qualify under FAS 92 and, therefore, such retail excess capacity deferrals, while deferred for regulatory purposes, cannot be deferred for financial reporting purposes. Such regulatory deferrals associated with the excluded Springerville Unit 2 capacity, not included in the financial statements, totaled $63$78 million at December 31, 1994.1995. Either inclusion in costs recoverable through retail rates or additional wholesale sales at sufficient prices of an equivalent amount of capacity (or a combination thereof) will be required to recover these retail excess capacity deferrals. The ACC denied the Proposed Settlement Agreement on January 19, 1996. The Company's application for a rate increase remains pending. The Company intends to propose and seek ACC approval of a revised settlement agreement in March 1996. 1994 RATE ORDER Effective January 11, 1994, the ACC authorized a 4.2% increase in base rates. The 1994 Rate Order recognized that an additional 17.5% of the Springerville Unit 2 capacity was used and useful for the retail jurisdiction, which lowered the percentage of that unit's capacity that is not in rate base to 37.5%. As a result of the 1994 Rate Order, the retail excess capacity deferrals allocable to the 62.5% of Springerville Unit 2 capacity allowed in rate base was also included in rate base. At December 31, 1993, the retail excess capacity deferrals allocable to the 17.5% of the Springerville Unit 2 capacity amounted to $17 million. As specified in the 1994 Rate Order, for rate purposes, these costs are being recovered over a 37.4 year period. The 1994 Rate Order allowed in rate base 62.5% of deferred Springerville Unit 2 rate synchronization costs, $42 million at December 31, 1993, which were non-fuel costs of Springerville Unit 2 incurred from January 1, 1991 through October 14, 1991, including an interest carrying charge, deferred pursuant to the 1991 Rate Order. For rate making purposes, such costs are being recovered over a three-year period and are included in Depreciation and Amortization on the Consolidated Statements of Income (Loss), in accordance with the 1994 Rate Order. The Company is not presently recovering through retail rates 37.5% of the deferred Springerville Unit 2 rate synchronization costs ($2628 million at December 31, 1994)1995). This amount, together with the balance of such costs ($2914 million at December 31, 1994)1995) that the Company is presently recovering through rates, are reported in the Company's consolidated financial statementsConsolidated Balance Sheets as Deferred Springerville Unit 2 Costs. The 1994 Rate Order provided that the rate synchronization and retail excess capacity deferrals associated with the 37.5% of Springerville Unit 2 capacity not found to be used and useful for the retail jurisdiction will continue to incur an interest charge of 7.19% until authorized to be included in rate base or for a period of three years ending in 1997, whichever occurs first. The 1994 Rate Order disallowed recovery of $13.6 million of previously capitalized Springerville Unit 2 rate synchronization costs and certain other minor costs. The $13.6 million is comprised of $5.2 million for wholesale power sale revenue credits which the Company had offset against the off- balanceoff-balance sheet retail excess capacity deferrals which the ACC stated should have been offset against the rate synchronization deferrals. The remaining $8.4 million of disallowance results from the ACC's finding that the Company should have calculated the 7.19% carrying charge on a net-of-tax basis rather than pre-tax, as calculated by the Company. Such disallowances were recorded in December 1993 and are reflected in Regulatory Disallowances and Adjustments in the Consolidated Statement of Income (Loss) for the year ended December 31, 1993. In connection with the 1994 Rate Order, on August 26, 1993, the ACC authorized the Company to collect the sum of $2.1 million through a temporary fuel surcharge of .96 mills per kWh beginning September 1, 1993 until further order of the ACC. The Company had requested a temporary rate surcharge to recover $4 million of previously authorized but uncollected deferred fuel expenses. The Company wrote-off $1.9 million of unrecovered deferred fuel costs in 1993. NOTE 3. 1992 CONSUMMATION OF THE FINANCIAL RESTRUCTURING - --------------------------------------------------------- On December 15, 1992, the Company consummated the transactions required to finalize its financial restructuring plan, including the comprehensive restructuring of obligations to certain of its creditors, lease participants, Century and the Springerville Unit 1 lease participants and the reclassification of all outstanding Preferred Stock into Common Stock. Approximately 135 million shares of Common Stock were issued in the Financial Restructuring, increasing the number of common shares outstanding to approximately 160 million. In addition, warrants to purchase an additional 12 million shares of Common Stock at an exercise price of $3.20 per share were issued in the Financial Restructuring. The issuance of Common Stock and Warrants is further discussed below. In accordance with FAS 15 such stock (other than the 55 million shares of Common Stock into which the Preferred Stock was reclassified) was recorded at fair value as determined by the Company on or about the date of issuance. In the accompanying financial statements, the Common Stock issued pursuant to the Financial Restructuring was recorded based on a fair value of $2.33 per share, which was the average of the high and low trading price reported by the Dow Jones Stock Quote Reporter Service during the period December 16, 1992 through December 31, 1992, the period immediately following the Closing. The Warrants were valued for purposes of these financial statements at an estimated value of $0.82 per share, calculated using an option pricing model and the $2.33 estimated fair value per share of Common Stock. Losses and deferred gains related to the issuance of the Common Stock and Warrants in the Financial Restructuring described in the succeeding paragraphs were determined using these values for such Common Stock and Warrants. Such values are not intended to be indicative of current or future trading values for either the Common Stock or the Warrants. BANKS The Company provided the banks approximately 32 million shares of Common Stock, a first mortgage lien on Springerville Unit 2, $50 million of bonds issued under a second mortgage as collateral, and $20.8 million in first mortgage bonds as collateral and became subject to certain restrictive financial and operating covenants. In exchange, the Company received the waiver of $96 million in accrued interest payments, more favorable credit terms, extensions of LOCs and related agreements, the restructuring of several prior debt agreements into the Term Loan, a new $20 million LOC and a new $50 million working capital revolving credit facility. The restructuring of these Bank obligations gave rise to a deferred gain of $21 million, which is being amortized as a reduction of interest expense over an eight-year period, the weighted average life of the restructured credit arrangements. These restructured bank credit arrangements also increased Common Stock Equity $75 million. See the Consolidated Statements of Changes in Stockholders' Equity (Deficit). SPRINGERVILLE UNIT 1 The Company provided the participants in the Springerville Unit 1 Leases approximately 48 million shares of Common Stock and Warrants to purchase 12,054,278 shares of Common Stock at an exercise price of $3.20 per share. The Warrants were exercisable at the Closing of the Financial Restructuring and expire in 2002. In addition, the Company assumed Century's former obligations under the Springerville Unit 1 Leases and released Century from its obligations relating to the 1981 Apache A Bonds. Amendments were also made to the Interconnection Agreement which the Company has with Century. In exchange, the Company received Century's leasehold interests in Springerville Unit 1, Century's investment in plant and inventories at Springerville Unit 1 and the Restated Century Purchase Contract was terminated. The Company also received the waiver of demand charge payments due under the Restated Century Purchase Contract equivalent to $57 million, the release from certain tax indemnification liabilities related to Springerville Unit 1, and the dismissal with prejudice of certain actions which had been filed against the Company by some of the Springerville Unit 1 owner participants. The restructuring of these obligations gave rise to approximately $31 million of the Loss on Financial Restructuring appearing in the Consolidated Statement of Income (Loss) for the year ended December 31, 1992. These transactions also increased Common Stock Equity by $122 million. See the Consolidated Statements of Changes in Stockholders' Equity (Deficit). Also, see Note 1 regarding the loss of approximately $7 million, which was recorded as a component of the Loss on Financial Restructuring in the Consolidated Statement of Income (Loss) for the year ended December 31, 1992, as a result of the assumption of the Springerville Unit 1 Leases. CAPITAL LEASES The terms of the Irvington Lease, the Valencia Leases, the Springerville Common Facilities Leases and the assumed Springerville Unit 1 Leases (see Note 1) were amended to waive certain accrued payment obligations, defer certain lease payments due in the next several years to later years, and extend the terms of certain leases. As a result of the lease amendments, in accordance with FAS 13, as amended by FAS 98, these leases are accounted for as capital leases subsequent to December 15, 1992. Amendment of these leases increased rent expense by $18 million in the Consolidated Statement of Income (Loss) for the year ended December 31, 1992. PREFERRED STOCK All of the Company's outstanding Preferred Stock was reclassified into approximately 55 million shares of newly issued Common Stock. The reclassification was recorded at the book value of the Preferred Stock. This increased Common Stock Equity by $90 million, decreased the Premium on Capital Stock by $7 million and decreased Preferred Stock by $83 million. See the Consolidated Statements of Changes in Stockholders' Equity (Deficit). OTHER The reversal of other reserves and accruals that were resolved by the Closing, primarily through the dismissal of certain regulatory proceedings, reduced the Loss on Financial Restructuring included in the Consolidated Statement of Income (Loss) for the year ended December 31, 1992 by $11 million. NOTE 4. INCOME TAXES - --------------------- In January 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes, on a prospective basis. The adoption of FAS 109 changed the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. Previously, the Company deferred the past income tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred income tax liabilities and assets for the expected future income tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. The adoption of FAS 109 increased both total assets and total liabilities of the Company by $149 million in 1993. The increase in assets results primarily from the recording of a regulatory asset for the recovery of income taxes from future ratepayers. See Note 1. Such regulatory asset consists primarily of the right to recover income taxes relating to previously flowed-through differences, both timing and permanent, which provided rate benefits to past ratepayers. The increase in liabilities is primarily the net increase in deferred income tax assets and deferred income tax liabilities resulting from the adoption of FAS 109. Deferred tax assets (liabilities) are comprised of the following: December 31, 1995 1994 1993 ----------- ---------- - Thousands of Dollars - Gross Deferred Income Tax Liabilities: Electric Plant - Net $(563,884) $(558,509) $(554,441) Regulatory Asset (Income Taxes Recoverable Through Future Rates) (54,904) (57,902) (60,615) Deferred Springerville Unit 2 Costs (16,974) (22,206) (27,384) Deferred Valencia Inventory Costs (21,654) (21,780) (21,628) Deferred Lease Payments (14,791) (15,510) (16,329) Property Taxes (10,476) (10,465) (10,340) Deferred Fuel - (2,372) (5,364) Other (7,357) (6,016) (7,371) ---------- ---------- Gross Deferred Income Tax Liability (690,040) (694,760) (703,472) ---------- ---------- Gross Deferred Income Tax Assets: Capital Lease Obligations 375,897 377,825 384,506 Tax Operating Loss Carryforwards 197,100 199,564 181,200 Springerville Unit 1 Disallowed Costs 65,491 65,597 65,959 Investment in Loans and Partnerships 12,576 7,757 34,205 Investment Tax Credit Carryforwards 26,396 28,088 28,100 MSR Option Gain Regulatory Liability 10,342 16,645 22,268 Capital Loss Carryforwards 8,572 19,078 20,700 Lease Interest Payable 17,626 17,429 17,570 Deferred Regulatory Capital Lease Expense 13,980 11,397 8,213 Financial Restructuring Costs Not Yet Deductible for Tax Purposes 7,907 8,034 7,773 Gain on Financial Restructuring of Long-Term Debt 5,374 6,458 7,571Alternative Minimum Tax 3,044 2,343 Other 26,789 27,166 29,492 ---------- ---------- Gross Deferred Income Tax Asset 785,038 807,557771,094 787,381 Deferred Tax Assets Valuation Allowance (208,786) (244,092) (263,991) ---------- ---------- Net Deferred Income Tax Liability $(153,814) $(159,906)$(127,732) $(151,471) ========== ========== The decrease of approximately $35 million in the gross deferred tax assets valuation allowance in 1995 is primarily due to an increase in the estimate of future income to be earned and the utilization of tax operating loss carryforwards and capital loss carryforwards. This adjustment reduced income tax expense for the current year. Previously the Company had provided a full deferred tax assets valuation allowance against the tax operating loss carryforwards, investment tax credit carryforwards and capital loss carryforwards due to the uncertainty of their future use. Because the Company's results from operations have been steadily improving and have been positive for the last two years, the Company believes it is more likely than not that the Company will realize at least $66.5 million of the total federal NOL carryforwards of $508 million. Accordingly, the Company recognized a $23 million income tax benefit related to the expected utilization of $66.5 million of tax operating loss carryforwards which is included in Income Taxes in Other Income (Deductions) in the Consolidated Statement of Income (Loss). The decrease of approximately $20 million in the gross deferred tax assets valuation allowance in 1994 primarily resulted from the sale of the discontinued operation's assets (see Note 5)4) which had corresponding deferred tax assets, which were fully reserved by the valuation allowance. The net deferred income tax liability is included in the Consolidated Balance Sheets in the following accounts: December 31, 1995 1994 1993 ---------- ---------- - Thousands of Dollars - Deferred Income TaxTaxes - Current $ 12,87018,250 $ 8,927 Accumulated12,870 Deferred Income Taxes (166,684) (168,833)- Noncurrent (145,982) (164,341) ---------- ---------- Net Deferred Income Tax Liability $(153,814) $(159,906)$(127,732) $(151,471) ========== ========== Income Tax Benefit isThe benefit for income taxes included in the Consolidated Statements of Income (Loss) inconsists of the following accounts:following: Years Ended December 31, 1995 1994 1993 1992 ---------- ---------- ---------- - Thousands of Dollars - Operating Expenses - Other OperationsCurrent Tax Expense Federal $ 91 $ 91 $ 91 Other Income (Deductions) - Income Taxes 4,820 5,186 5,654(4,439) State (683) ---------- ---------- ---------- Total IncomeCurrent Tax Expense (5,122) ---------- ---------- ---------- Deferred Tax Expense Federal (4,429) State (681) ---------- ---------- ---------- Total Deferred Tax Expense (5,110) ---------- ---------- ---------- Reduction in Valuation Allowance - Benefit 23,282 Investment Tax Credit Amortization 4,766 $ 4,911 $ 5,277 Other 2,620 - - ---------- ---------- ---------- Total Benefit for Federal and State Income Taxes $ 5,74520,436 $ 4,911 $ 5,277 ========== ========== ========== The differences between income tax benefit and the amount obtained by multiplying income (loss) before income taxes by the U.S. statutory federal income tax rate for each of the three years in the period ended December 31, 1994, are as follows: Years Ended December 31, 1995 1994 1993 1992 ---------- ---------- ---------- - Thousands of Dollars - Federal Income Tax (Expense) Benefit at Statutory Rate $ (12,064) $ (5,540) $ 10,883 $ 43,797State Income Tax Expense, Net of Federal Deduction (1,364) - - Investment Tax Credit amortizationAmortization 4,766 4,911 5,277 5,745Reduction in Valuation Allowance - Benefit 23,282 - - Loss for Which No Tax Benefit is Available - - (10,883) (43,797) Net Operating Loss Carryforwards 5,122 5,540 - Capital Loss Carryforwards 1,045 - - Other (351) - - ---------- ---------- ---------- Total Benefit for Federal and State Income Taxes $ 20,436 $ 4,911 $ 5,277 $ 5,745 ========== ========== ========== On August 10, 1993, the Revenue Reconciliation Act of 1993 was signed into law which, among other things, raised the maximum corporate U.S. statutory federal income tax rate from 34% to 35%, retroactively effective to January 1, 1993. The Company increased its deferred tax balances and the corresponding deferred tax asset valuation allowance at December 31, 1993 as a result of this rate change. At December 31, 1994,1995, the Company had, for federal income tax purposes, $28approximately $508 million of net operating loss carryforwards expiring in 2004 through 2009 and $148 million of alternative minimum tax loss carryforwards expiring in 2006 through 2008. For state income tax purposes, the Company has approximately $215 million of net operating loss carryforwards expiring in 1996 through 1999. In addition, for federal income tax purposes the Company has $26 million of unused ITC, the use of which will expire during 20012002 through 2005, $2$3 million of alternative minimum tax credit which will carry forward to future years, and $47$21 million of capital loss carryforwards which expire during 1995 through 1999. In addition, for federal income tax purposes the Company has approximately $494 million of net operating loss carryforwards expiring in 2004 through 2009 and $169 million of alternative minimum tax loss carryforwards expiring in 2005 through 2007. For state income tax purposes, the Company has approximately $352 million of net operating loss carryforwards expiring in 19951996 through 1999. Due to the Company's Financial Restructuring, as described in Note 3, the Company experienced a change in ownership under section 382 of the Internal Revenue Code in December 1991. As a result of that change, the amount of the taxable income for any post-changepost- change year which may be offset by pre-change lossnet operating losses will be limited to the section 382 limitation. The section 382 limitation is based on the value of the Company on the ownership change date. The Company estimates an annual section 382 limit of approximately $23 million. This limitThe total section 382 limitation may be increased to the extent of gain recognized on sales of assets whose fair market value was greater than tax basis at the ownership change date, the built-in-gain. The section 382 limitation may increase by built-in-gain recognized within a period of five years after the change in ownership. TheDuring 1992 through 1995, the section 382 limitation increased by approximately $84$102 million of built-in-gain recognized due to asset sales. Unused section 382 limitation may be carried forward until the pre-change tax attributes expire. At December 31, 1994,1995, the Company had pre-change federal net operating loss, ITC, capital loss and alternative minimum tax loss carryforwards of approximately $365$351 million, $28$26 million, $31$7 million and $136$115 million, respectively. NOTE 4. CONSOLIDATED SUBSIDIARIES - ---------------------------------- NATIONS ENERGY CORPORATION In 1995 the Company established Nations Energy (formerly known as Escalante Resources Inc.) for the purpose of investing in independent power projects in the domestic and foreign energy markets. The 1980 through 1985 Federal Income Tax Audit resulted1995 consolidated financial statements reflect the accounts of Nations Energy, a wholly-owned subsidiary of the Company. In September 1995, Nations Energy and Trigen Energy Corporation formed a limited partnership and purchased Coors Brewing Company's energy production (utility) assets. Nations Energy has a 49% interest in a 1992 federal tax refundsuch partnership. The partnership will provide electricity and steam for the brewery operation in Golden, Colorado. In addition, the partnership expects to upgrade Coors' power plant to improve fuel efficiency and increase capacity. The investment of approximately $1$12 million and approximately $8 million in interest. The interest income had not been previously accrued andby Nations Energy is included asin the Company's Consolidated Balance Sheet at December 31, 1995 under Investments and Other IncomeProperty and in the Company's Consolidated Statement of Income (Loss)Cash Flows for the year ended December 31, 1992. NOTE 5.1995 as Investment in Partnership. DISCONTINUED OPERATIONS - -------------------------------- In July 1990, the Boards of Directors of the Company's investment subsidiaries adopted formal plans of liquidation of the investment operations. Pursuant to such actions, investment subsidiaries' results of operations, estimated net realizable value of net assets and cash flows have beenwere classified as discontinued operations in the Company's consolidated financial statements since June 30, 1990. The Company recorded a provision for losses on disposal of discontinued operations of $105 million in 1990 to reduce the carrying values of the assets to their then-estimated net realizable values. The financial results of activities from discontinued operations subsequent to June 30, 1990 have been recorded as an adjustment tothrough December 31, 1994, the reservedate that the liquidation was substantially complete. The Company's Consolidated Statement of Income (Loss) for losses. Additional provisions for losses on disposal of discontinued operations of $36 million in 1991, $44 million in 1992, and1993 includes a $4 million in 1993 wereProvision for Loss on Disposal of Discontinued Operations made to reflect further weakening of markets for certain subsidiary investments and increased estimates of holding-periodholding- period costs for those assets and a $10assets. At December 31, 1994, the Company's Consolidated Balance Sheet reflected $9 million addition to the reserve for litigation in 1992. The components of net assets of discontinued operations are summarized as follows: December 31, 1994 1993 --------- --------- - Thousands of Dollars - Cash and Cash Equivalents $ 14,852 $ 22,179 Investment in Citadel - 23,374 Real Estate Investments 17,127 65,119 Vehicle Contracts Receivable 17,509 17,509 Other Assets and Investments 6,859 19,403 Reserve for Loss on Disposal of Discontinued Operations (34,494) (74,109) --------- --------- Total Assets 21,853 73,475 Current Liabilities (13,168) (14,995) --------- --------- Net Assets of Discontinued Operations $ 8,685 $ 58,480 ========= ========= Loss from discontinued operations is as follows: Years Ended December 31 1994 1993 1992 --------- --------- --------- - Thousands of Dollars - Investment Losses $(35,447) $(20,403) $(27,473) Hotel Revenues 13,171 13,930 13,669 Hotel Depreciation and Other Expense (16,242) (17,129) (16,914) Other Investment Expense (1,097) (2,289) (1,927) --------- --------- --------- Operating Loss (39,615) (25,891) (32,645) Reduction in Reserve for Losses 39,615 25,891 32,645 --------- --------- --------- Loss from Discontinued Operations $ - - $ - ========= ========= ========= Net assets of discontinued operations declined by approximately $50 million between December 31, 1993 and December 31, 1994 as a result of dividends paid by TRI to the Company. Gross investment losses during 1994 included losses of: $21 million on salescomprised mainly of real estate; $21 million onestate investments. Beginning January 1, 1995, the sale of the remaining Citadel common stock; and $5 million on the sale of two small power projects. Offsetting these losses were gains of: $9 million on the sale of various marketable securities and $1 million on the sale of a vehicle contracts receivable portfolio. The resulting net losses reduced the Reserve for Losses by an equal amount. Also included in Investment Losses is $2 million of other investment income. As of December 31, 1994, Real Estate Investments consist of 1) loans collateralized by real property and 2) land held for sale in Arizona. Vehicle Contracts Receivable consists principally of automobile installment sales contracts of Brookland, a financial services company. In January 1991, the Board of Directors of Brookland elected to discontinue its business operations. Brookland remains liable for credit obligations to outside lenders of $12 million. These credit obligations are collateralized by Brookland's vehicle contracts portfolio and other interests in Vehicle Contracts Receivable. As of December 31, 1994, the Company has substantially completed its disposal of discontinued operations. The losses from discontinued operations for the period June 30, 1990 through December 31, 1994 of $139 million have been recorded as reductions in the Reserve for Losses. The gross proceeds from the sale of assets, excluding scheduled collections on loans and notes receivable, for the period June 30, 1990 through December 31, 1994 amounted to $498 million. The remaining assets and liabilities will beare accounted for as a part of continuing operations beginning January 1, 1995.and are included in the Company's consolidated financial statements. As a result, Short-Term Debt of $12 million on the Consolidated Balance Sheet at December 31, 1995 was previously classified as Net Assets of Discontinued Operations. NOTE 6.5. LONG AND SHORT-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - --------------------------------------------------------------- LONG-TERM-DEBT First Mortgage Bonds and Installment Sale Agreement First Mortgage BondLONG-TERM DEBT During 1995 the Company reduced its long-term debt as a result of $17 million of bond and Installment Sale Agreement maturities, and cash sinking fund requirements for the next five years include $17 million in 1995, $12 million in 1996, $2 million in 1997, $3 million in 1998, anda $19 million in 1999. In addition, certainpermanent repayment of the Term Loan and payments totaling $143 million on the Renewable Term Loan. Pursuant to the terms of the Renewable Term Loan, $133 million of the payments on the Renewable Term Loan may be reborrowed, as needed by the Company. First Mortgage Bonds have additional annual sinking fund requirements which total approximately $3 million for each of the next five years. These sinking fund requirements can be and have been satisfied to date primarily by pledges of additional property. The Company's utility plant, with the exception of Springerville Unit 2, is subject to the lien of the General First Mortgage and the General Second Mortgage. Restructured Arrangements Approximately $900 millionMRA At December 31, 1995, the obligations covered by the provisions of the Company's previous bank obligations including bank lines, LOCs and related reimbursement agreements (excludingMRA were the reimbursement agreement relating to the 1981 Apache B Bonds) were combined and restructured into a master restructuring agreement between the Company and the Banks (the MRA) on December 15, 1992. The MRA provided for a $243.3$164 million Renewable Term Loan Replacementcommitment (of which $31 million was borrowed), LOCs supporting $674 million of IDBs, and athe $50 million Revolving Credit.Credit commitment (of which no amounts are borrowed). Obligations under the MRA are secured by a first mortgage lien on and security interest in Springerville Unit 2, and, under certain conditions, are secured by $50 million in principal amount of collateral bonds issued under the General Second Mortgage, junior to the General First Mortgage securing the Company's First Mortgage Bonds. Additionally, the MRA provided for an additional $20 million LOC which was issued in March 1993 to the indenture trustee for industrial development revenue bonds originally issued in 1990. The reimbursement agreement related to that LOC, which is secured by first mortgage bonds, allowed the debt proceeds to be released to the Company which reimbursed the Company for costs of qualifying facilities. See Letters of Credit below. In March 1995, the Company and its banks completed an amendment to the MRA which eased certain debt prepayment restrictions and modified theallowed reborrowing of certain Renewable Term Loan to allow reborrowing of amounts which will have been previously prepaid (Renewable Term Loan)prepayments (see Renewable Term Loan below). The amendment will allow the Company to better manage its cash position and reduce capital costs while maintaining liquidity. Prior to the amendment the Company was not permitted to prepay non-MRA debt except to the extent that certain cash amounts, as defined in the MRA, were generated. The amendment, now in effect, allows the Company to optionally prepay non-MRA debt provided certain conditions are met. Such conditions include that $1 of principal outstanding under the Renewable Term Loan is permanently prepaid and the commitment therefore terminated for every $2 used to permanently prepay other debt such as First Mortgage Bonds. To comply with provisions of the MRA prior to the March 7, 1995 amendment, the Company prepaid $17.25 million of First Mortgage Bonds during 1994. During 1993 the Company, under a bank waiver to certain restrictions of the MRA, voluntarily prepaid $49 million of First Mortgage Bonds and $19 million of the Term Loan. Additional details regarding the components and covenants of the MRA are described below. Letters of Credit At December 31, 1994 there were $774 million principal amount of variable rate tax-exempt IDBs outstanding. Payment of principal and interest on these bonds is secured by LOCs. The LOCs expire at various dates during the period December 31, 1999 through December 31, 2002. However, all the LOCs could expire by December 31, 2000, including an expiration as early as August 1997, if the Company's senior long-term debt is rated investment grade on certain dates or during certain periods subsequent to December 31, 1996. The reimbursement agreement related to the 1981 Apache B Bonds is secured by First Mortgage Bonds. The weighted average commitment fee on the Replacement LOCs is approximately 0.53% through 1997 and increases to 0.82% in 1998, 1.07% in 1999 and thereafter. Term Loan The Term Loan, on March 7, 1995, was amended and renamed the Renewable Term Loan. As a condition to the amendment becoming effective the Company permanently prepaid $19.34 million of the Term Loan reducing the outstanding balance from $193.4 million to approximately $174 million at March 7, 1995. Thus, the initial commitment and outstanding balance of the Renewable Term Loan was approximately $174 million. The Renewable Term Loan commitment amount at March 31, 1997 will be reduced as follows: 20% in 1997, 40% in 1998 and 40% in 1999. Any outstanding Renewable Term Loan balance in excess of the commitment will be payable immediately. The Renewable Term Loan bears interest at a variable rate based on an adjusted eurodollar rate plus 0.5% and the commitment fee is 0.5% of the unused portion. The adjusted eurodollar rate was approximately 4.92% per annum and 4.03% per annum for the years ended December 31, 1994 and 1993, respectively, and was approximately 3.66% for the one month period ended December 31, 1992. During 1993 and 1992 the Company prepaid $19 million and $31 million, respectively, of the outstanding balance. Additional Restrictive Covenants In addition to the prepayment provisions, described above, the MRA contains a number of restrictive covenants including, but not limited to, covenants limiting, with certain exceptions, (i) the incurrence of additional indebtedness, including lease obligations, or the prepayment of existing indebtedness, or the guarantee of any such indebtedness, (ii) the incurrence of liens, (iii) the sale of assets or the merger with or into any other entity, (iv) the declaration or payment of dividends on Common Stock or any other class of capital stock, (v) the making of capital expenditures beyond those contemplated in the Company's 1992 ten-year capital budget, and (vi) the Company's ability to enter into sale-leaseback arrangements, operating lease arrangements and coal and railroad arrangements. All of these restrictive covenants described above, other than (i), (iv) and (vi), will be in effect until at least December 1997. The covenants described in (i), (iv) and (vi) will cease to be binding on the Company when both the Renewable Term Loan and the Revolving Credit are paid in full and commitments thereunder terminate, and the Company's senior long-term debt is rated at least investment grade. In addition, the Company is required pursuant to the MRA to maintain an interest coverage ratio of (a) operating cash flows plus interest paid to (b) interest paid, through the year 2003, ranging from 1.21.40 to 1 in 19941995 and gradually increasing to 2 to 1 in 2000 continuing through the year 2003. For the year ended December 31, 1994,1995, the Company's MRA interest coverage ratio was 2.982.52 to 1. With respectDividends - Restrictive Covenants The Company's ability to dividends,pay a dividend is restricted by certain covenants in the MRA incorporates, until the Renewable Term Loan and the Revolving Credit are paid in full and commitments thereunder terminate, a restrictive covenant similar to that currently in theagreements of certain General First Mortgage which limitsBonds ($184 million at December 31, 1995). These covenants limit the Company's ability to pay dividends on Common Stock until it has positive retained earnings (through future earnings or otherwise) rather than an accumulated deficit (such accumulated deficit was $681$626 million at December 31, 1994). For1995) and the foreseeable future,Company's cash flow coverage ratio is greater or equal to a ratio of 2 to 1. As of December 31, 1995, the Company's cash flow coverage ratio was slightly above 2 to 1. The MRA contains, until the Renewable Term Loan and the Revolving Credit are paid in full and commitments thereunder terminate and the Company's senior long-term debt is rated investment grade, a similar dividend restriction based on retained earnings. The Company's senior long-term debt is currently rated below investment grade. Letters of Credit At December 31, 1995 there were $774 million principal amount of variable rate tax-exempt IDBs outstanding. Payment of principal and interest on these bonds is secured by LOCs. The LOCs expire at various dates during the period December 31, 1999 through December 31, 2002. However, all the LOCs could expire by December 31, 2000, including an expiration as early as August 1997, if the Company's senior long-term debt is rated investment grade on certain dates or during certain periods subsequent to December 31, 1996. The reimbursement agreement related to the 1981 Apache B Bonds is secured by First Mortgage Bonds. The weighted average commitment fee on the LOCs is approximately 0.53% through 1997 and increases to 0.82% in 1998, 1.07% in 1999 and thereafter. Renewable Term Loan The Term Loan, on March 7, 1995, was amended and renamed the Renewable Term Loan. As a condition to the amendment becoming effective the Company does not anticipate being ablepermanently prepaid $19 million of the Term Loan reducing the outstanding balance from $193 million to satisfyapproximately $174 million at March 7, 1995. Thus, the testsinitial commitment and outstanding balance of this restrictive covenant,the Renewable Term Loan was approximately $174 million. In May 1995, following the Company's purchase of approximately $18 million of debt securities, the Renewable Term Loan commitment was decreased by $10 million to approximately $164 million to meet the prepayment provisions of the MRA. The Renewable Term Loan commitment amount at March 31, 1997 will be reduced as follows: 20% in 1997, 40% in 1998 and therefore, does not anticipate being permitted to pay cash dividends40% in 1999. Any outstanding Renewable Term Loan balance in excess of the commitment will be payable immediately. The Renewable Term Loan bears interest at a variable rate based on its Common Stock.an adjusted eurodollar rate plus 0.5% and the commitment fee is 0.5% of the unused portion. Such rates averaged approximately 6.50%, 4.92% and 4.03% for the years ended December 31, 1995, 1994 and 1993, respectively. Fair Value of Long-Term Debt 1995 1994 1993 Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- - Thousands of Dollars - First Mortgage Bonds: Corporate $ 253,750 $ 267,902 $ 269,750 $ 256,009 $ 287,000 $ 275,687 IDBs 1981 Apache B Bonds 100,000 100,000 100,000 100,000 Pollution Control Financing Bonds 112,200 102,944112,276 112,200 106,030102,944 1990 Pima A Bonds 20,000 20,000 20,000 20,000 Loan Agreements: Installment Sale Agreement 48,985 48,679 50,000 46,131 50,955 47,646 IDBs 653,600 653,600 653,600 653,600 Renewable Term Loan 193,400 193,40031,000 31,000 - - Term Loan - - 193,400 193,400 Promissory Note - - 152 152 1,400 1,475 ---------- ---------- ---------- ---------- $1,219,535 $1,233,457 $1,399,102 $1,372,236 $1,418,555 $1,397,838 ========== ========== ========== ========== The principal amount of variable rate debt outstanding at December 31, 19941995 and 19931994 of the 1981 Apache B Bonds, the 1990 Pima A Bonds, the Loan Agreements-IDBs, and the Renewable Term Loan (Term Loan at December 31, 1994) are considered reasonable estimates of their fair value as these are variable interest rate liabilities. The fair value of the Company's fixed rate obligations including the Corporate First Mortgage Bonds, the Pollution Control Financing Bonds, the Installment Sale Agreement and Promissory Note was determined by calculating the present value of the cash flows of each fixed rate obligation. The discount rate used for each calculation was a rate consistent with market yields generally available as of December 1995 for 1995 amounts and December 1994 for 1994 amounts and December 1993 for 1993 amounts, obtained from the Moody's Bond Survey report, for bonds with similar characteristics with respect to: credit rating, time-to-maturity, and the tax status of the bond coupon for Federal income tax purposes. The use of different market assumptions and/or estimation methodologies may yield different estimated fair value amounts. SHORT-TERM DEBT Revolving CreditAuthorization To Issue Tax-Exempt Bonds In January 1996, the Company obtained a tax-exempt volume cap allocation from the state of Arizona. The $50Company's allocation is for approximately $16.7 million Revolving Credit, provided as partto be issued by the Pollution Control Corporation of the MRA, has a termination and maturity datecounty of December 31, 1999. No amounts have been borrowed byCoconino in Arizona, for the benefit of the Company. The Company expects to issue such bonds in early April 1996. If the Company under this facility. Revolving Credit borrowingswere to fail to issue the bonds by such time, the Company would bear interest at variable rates based upon,lose its volume cap allocation. The proceeds will be used to reimburse the Company for expenses relating to pollution control facilities at the option ofCompany's Navajo generating station. Also, in order for the Company either (i) prime rate or (ii) an adjusted eurodollar rate plus a margin of 0.75% in 1994 and 1995 which gradually increases to 2% by 1998 and thereafter.issue such bonds, the Company will need approval from the ACC. The Company is required to repayfiled a financing application with the Revolving Credit in full for at least 30 consecutive days in each twelve-month period prior to November 30 of each year. The annual commitment fee for the Revolving Credit equals 0.5% of the unused portion. Discontinued Operations Vehicle contracts receivable and other interests in vehicle contracts receivable held by Brookland are financed through a warehouse line of credit and a loan which totaled approximately $12 million at December 31, 1994 and 1993. The weighted average interest rate applicable to the warehouse line of credit at December 31, 1994 and 1993 was 17%.ACC on February 14, 1996. CAPITAL LEASE OBLIGATIONS A schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments (Capital Lease Obligations) as of December 31, 1994 follows: Years ending December 31, - Thousands of Dollars - 1995.......................... $ 99,262 1996.......................... 119,155 1997.......................... 95,019 1998.......................... 97,200 1999.......................... 103,277 Thereafter.................... 1,913,905 ------------ 2,427,818 Imputed Interest.............. (1,492,280) ------------ Capital Lease Obligations..... $ 935,538 ============ The Irvington Lease has an initial term to January 2011 and provides for renewal periods of two or more years through 2020. The Springerville Common Facilities Leases have an initial term of 2017 for one owner participant and 2021 for the other two owner participants, 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 Valencia Leases have an initial term to April 2015 and provide for an initial renewal period of six years, then additional renewal periods of five or more years through 2035. MATURITIES AND SINKING FUND REQUIREMENTS A schedule by years of the aggregate amount of maturities and sinking fund requirements for all long-term borrowings as of December 31, 1995 follows: Expiring Scheduled LOCs Long-Term Supporting Debt Capital Lease IDBs Retirements Obligations Total -------- -------- ------------ ---------- Years ending December 31, - Thousands of Dollars - 1996 $ 12,075 $ 119,155 $ 131,230 1997 8,335 95,019 103,354 1998 15,605 97,200 112,805 1999 $100,000 31,900 120,815 252,715 2000 364,900 83,325 164,121 612,346 -------- -------- ----------- ----------- Total 1996 - 2000 464,900 151,240 596,310 1,212,450 Thereafter 308,700 294,695 1,732,246 2,335,641 Imputed Interest - - (1,397,209) (1,397,209) -------- -------- ----------- ----------- Total $773,600 $445,935 $ 931,347 $2,150,882 ======== ======== =========== =========== The Company expects to refinance the LOCs supporting IDBs at expiration. The above schedule does not include sinking fund requirements for certain First Mortgage Bonds of approximately $1.6 million for each of the next five years. The Company expects to satisfy these sinking fund requirements with pledges of additional property of approximately $3 million each year. Maturities under capital lease obligations for 1999 and 2000 include $25 million and $45 million, respectively, of maturing lease debt that the Company expects to refinance so that the debt payments are extended over the remaining lease term. The capital lease obligations were recorded assuming completion of such refinancing. SHORT-TERM DEBT Revolving Credit The $50 million Revolving Credit, which is part of the MRA, has a termination and maturity date of December 31, 1999. No amounts have been borrowed by the Company under this facility. Revolving Credit borrowings would bear interest at variable rates based upon, at the option of the Company, either (i) prime rate or (ii) an adjusted eurodollar rate plus a margin of 1% in 1996 which gradually increases to 2% by 1998 and thereafter. The Company is required to repay the Revolving Credit in full for at least 30 consecutive days in each twelve-month period prior to November 30 of each year. The annual commitment fee for the Revolving Credit equals 0.5% of the unused portion. Investment Subsidiaries Vehicle contracts receivable and other interests in vehicle contracts receivable held by Brookland are financed through a warehouse line of credit and a loan which totaled approximately $12 million at December 31, 1995 and 1994. The weighted average interest rate applicable to the warehouse line of credit at December 31, 1995 and 1994 was 17%. NOTE 7.6. COMMITMENTS AND CONTINGENCIES - ------------------------------------- UTILITY CONTRACTUAL MATTERS Coal and Transportation Contracts On October 14,- Reversal of Accrued Liabilities In 1991 amendments to the contractcontracts with the Springerville coal supplier, the Irvington coal supplier and the Springerville rail transportation suppliers were entered into and became effective, which, among other things, reduced the price of coal shipments at Springerville. The amended contract containscontained provisions which protectprotected the claims of the Springerville coal suppliersuppliers under the original agreementagreements in the event that the Company doesdid not perform its obligations under the terms of the amended agreement at any time prior to August 23, 1995. If such a failure to perform occurs,agreements during the subsequent four year period. In 1995, the Company would be responsible for approximately $7 million per year in additional payments to the Springerville coal supplier. Also, at December 31, 1994, a $3 million accrued liability remained on the Company's Consolidated Balance Sheet which will be forgiven ifsatisfied all conditions are met during the four years subsequent to the amendment of the Springerville coal agreement.conditions of the amended contracts and, consequently, reversed $12 million of accrued liabilities. The reversal of the accrued liabilities reduced Fuel and Purchased Power expense by $12 million in the third quarter of 1995. Fuel Purchase Commitments The Company has contractedcontracts to purchase coal for use at Springerville and Irvington. The Springerville coal contract is for the remaining lives of the units with P&Ma bilateral option to supplyrenegotiate the contract price and escalation procedures in 2009 and every five years thereafter. The Irvington contract termination date is the earlier of 2015 or the remaining life of the coal-fired unit. Both contracts have various adjustment clauses that will affect the future cost of coal to Irvington. Originally, all units at Irvington were scheduled to be converted and coal supplies were contracted for those units.delivered. The original contract required annual minimum quantities of 650,000 tons. However,contracts, in the conversion of Units 1, 2 and 3 at Irvington was canceled. The then-existing P&M contract contained minimum take-or-pay provisions which requiredaggregate, require the Company to pay one-half of the base price of coal for any contract quantities not scheduled and delivered. On November 5, 1991, amendments to the contract with P&M were entered into and became effective, which, among other things, substantially reduced the minimum annual coal quantities to levels which the Company estimates can be utilized by Irvington Unit 4 alone (Irvington Unit 4 is expected to burn approximately 225,000take 2.1 million tons of coal per year), amended contract price adjustment procedures, extended the expiration date of the agreement from 2002 to 2015 and provided for an exchange of the proceeds of the sale of undeveloped land for the $8 million 1990 penalty payment which was withheld during the period of the Payment Moratorium (the $8 million 1990 penalty payment remains an accrued liability on the Company's Consolidated Balance Sheet at December 31, 1994). Additionally, the penalty provisions of the contract were amended. P&M maintains their claim under the prior contract if the Company does not perform its obligations under the terms of the amended agreement at any time prior to November 4, 1995. If the Company fails to perform, the Company would be required, pursuant to the prior contract, to pay for approximately 5.1 million tons, that would not be delivered to the Company, at one-half the base price of coal through 2002,year at an estimated aggregateannual cost of $98 million. Amendments$70 million from 1996 to transportation agreements have also been executed, effective October 18, 1991, with the Springerville and Irvington rail transportation suppliers which, among other things, reduced the price for coal shipments and limited annual changes in the contract price. As discussed above with respect to the coal contracts, the Springerville amended rail transportation agreement includes provisions which protect the supplier's claims under the original contract in the event the Company does not perform its obligations under the terms of the amended agreement at any time during the four years subsequent to the amendment. If such a failure to perform occurs, the Company would be responsible for approximately $3 million per year to the Springerville transportation supplier at current contract prices. At December 31, 1994, a $3 million accrued liability remained on the Company's Consolidated Balance Sheet which will be forgiven, if all conditions are met during the four years subsequent to amendment of the Springerville agreement.2009. The Company's contracts to purchase coal for use at the joint projects in which the Company participates expire at various dates from 2005 to 2017 and, in the aggregate, require the Company to take 1.5 million tons of coal per year at an estimated annual cost of $16 million. Fuel Purchase Commitments$45 million from 1996 to 2005. The Company's contracts to purchase coal for use at Springerville, Irvington and each of the joint projects in which the Company participates contain various provisions calling for the payment of a take-or-pay amount, if certain minimum quantities of coal are not scheduled and delivered. The Company's present fuel requirements are generally in excess of the stated take-or-pay minimum amounts; however, from time to time, the Company has purchased spot market alternative fuels or switched fuel burn from one generating station to another in order to achieve lower overall fuel costs, while incurring take-or-pay minimum charges. As a result, the Company incurred take-or-pay minimum charges of approximately $1 million during 1993 and 1992.1993. The Company incurred no take-or-pay charges in 1995 or 1994. COMMITMENTS - ENVIRONMENTAL REGULATION In the fall of 1990, Congress adopted certain Federal Clean Air Act Amendments (CAAA) with respect to reductions in sulfur dioxide and nitrogen oxide emissions which will affect the Company's operation. The nitrogen oxide reductions will be based upon EPA regulations expected to be finalized in 1995 for certain boilers and expected to be finalized by 1997 for all remaining boilers. In addition, the rules expected to be promulgated in 1995 may be revised in 1997. The required reductions of sulfur dioxide emissions will be implemented in two phases which will beare effective in 1995 and 2000, respectively. The Company is not affected by the requirements for sulfur dioxide emissions and nitrogen oxide reductions which gowent into effect in 1995 (Phase I), but is subject to the requirements that go into effect January 1, 2000 (Phase II). In Phase II, the maximum sulfur dioxide emission rates are set at 1.2 pounds per million BTU. Because of the Company's general use of low- sulfur coal and installed scrubbers at certain units, the Company's coal- fired generating stations already meet the sulfur dioxide emission rate requirements for Phase II. Additionally, further reductions are to be met through a proposed market-based system. Affected Company generating units will be allocated allowancesEmission Allowances based on required emission reductions and past use. An allowance permits emission of one ton of sulfur dioxide and may be sold. Generating station units must hold allowancesEmission Allowances equal to their level of emissions or face penalties and a requirement to offset excess tons in future years. On March 23,In 1993, the EPA published the final sulfur dioxide allowance allocationsallocated Emission Allowances for all Phase I and Phase II affected utility units, including the allowances that will be allocated to all Company units. An analysis of the sulfur dioxide allowancesEmission Allowances that were allocated to the Company shows that the Company would have sufficient allowances to permit normal plant operation and be in compliance with the sulfur dioxide regulations once the Phase II requirements become effective. However, until all the rulemaking regulation processes for implementing the CAAA are completed, the Company is unable to predict the specific impacts of all such amendments. The CAAA also require multi-year studies of visibility impairment in specified areas and studies of hazardous air pollutants which relate to the necessity of future regulations of electric utility generating units. Since these activities involve the gathering of information not currently available, the Company cannot predict the outcome of these studies. As a result of recent and possible future changes in federal and state environmental laws, regulations and permit requirements, the Company may incur additional costs for the purchase or upgrading of pollution control emission monitoring equipment on existing electric generating facilities and may experience a reduction in operating efficiency. There may be a need for variances from certain environmental standards and operating permit conditions until required equipment and processes for control, handling and disposal of emissions are operational and reliable. Failure to comply with any EPA or state compliance requirements may result in substantial penalties or fines which are provided for by law and which in some cases are mandatory. In 1991, the EPA adopted a rule for the reduction of Navajo's sulfur dioxide emissions on an annual averaging basis by 90% to address visibility impairment at Grand Canyon National Park. The Company estimates that its share of the required capital expenditures remaining as of December 31, 19941995 relating to the rule's implementation will be approximately $44$34 million, including AFDC, through 1999. CONTINGENCIES SDGE/FERC Proceedings San Diego Gas & Electric v. Tucson Electric Power Company On February 11, 1993, SDGE filed a complaint and motion for summary disposition against the Company and Century before the FERC (San Diego Gas & Electric Company v. Tucson Electric Power Company and Century Power Corporation, Docket No. EL93-13-000)EL93-19-001). The complaint allegesalleged that the Company and Century overbilled SDGE during Phases 3 through 5 of the Ten Year Power Sale Agreement (Ten Year Agreement) and requestsrequested that the FERC order refunds by the Company of an aggregate amount of approximately $14.5 million, plus interest. On April 23, 1993,The Company and SDGE have agreed to resolve this dispute by waiving all claims under the Company filed an answer denying the allegationsTen Year Agreement and dismissing all proceedings relating thereto. An Offer of the complaint. The matter is pending.Settlement was approved by FERC on January 18, 1996. Alamito Company, Docket No. ER79-97-009 On September 27, 1993, SDGE filed a motion for decision by the FERC in Alamito Company, Docket No. ER79-97-009. This proceeding involved the proper capital structure and rate of return for rates under which Century Power Corporation (formerly Alamito Company) sold Company system power to SDGE during Phase 5 of the Ten Year Agreement, from June 1, 1987 through May 31, 1989. An initial decision of an administrative law judge in January 1986, found the Company's capital structure was inflated and its return on equity excessive. SDGE claimed that the Company would owe Century on SDGE's behalf up to approximately $12 million, plus interest. On October 8, 1993, the Company filed an answer opposing SDGE's motion. It was the Company's position that the FERC's order of July 19, 1991 approving a settlement between SDGE and Century in Docket No. ER79-97-009, as well as the Company's and Century's mutual release ofmoved to dismiss all claims against each other as part of their Financial Restructuring, bars SDGE's claim. On December 23, 1993, the FERC issued an order confirming that the July 19, 1991 order disposed of this case, and denied SDGE's September 27, 1993 motion. On January 21, 1994, SDGE requested rehearing of the FERC's order. That request is pending. Based on consultations with counsel, the Company believes that the resolution ofappeals relating to the SDGE/FERC Proceedings described herein should not have a material adverse effect, if any, on the Company's Consolidated Financial Statements.February 23, 1996. Tax Assessments During the first quarter of 1993, the IRS completed an examination of the Company's consolidated federal income tax returns for tax years 1986 through 1990. The Company has reached a tentative settlement with the IRS, pending final approval, which would result in the Company paying additional taxes and interest, of approximately $5.4 million, as of December 31, 1994. The Arizona Department of Revenue has issued transaction privilege tax assessments to the Company for the period November 1985 through May 1993 alleging that Valencia is liable for sales tax on gross income received from coal sales, transportation, and coal-handling services to the Company during such period. The Company protested the assessments. On March 11, 1994, the Arizona Tax Court issued a Minute Entry granting Summary Judgment to the Arizona Department of Revenue and upholding the validity of the assessment issued for the period November 1985 through March 1990. The Company appealed this decision to the Court of Appeals. Generally, Arizona law requires payment of the assessment due prior to the appellate process. To date the Company has paid, under protest, a total of $23 million ($14.6 million in 1995, $2.8 million in 1994 and $5.6 million in 1993) of the disputed sales tax assessments, subject to refund in the event the Company prevails. Also, the Arizona Department of Revenue has issued transaction privilege tax assessments to the lessors from whom the Company leases certain property allegingproperty. The assessments allege sales tax liability on a component of rents paid by the Company on the Springerville Unit 1 Leases, Springerville Common Facilities Leases, Irvington Lease and Valencia Leases. Assessments cover the period August 1, 1988 to September 30, 1993. Under the terms of the lease agreements, if the Arizona Department of Revenue prevails the Company must indemnifyreimburse the lessors for taxes paid.paid by them pursuant to indemnification provisions. In the opinion of management, the Company has recorded, through the Consolidated StatementStatements of Income (Loss) in current and prior years, a liability for the amount of federal and state taxes and interest thereon for which the Company feels incurrence is probable of incurrence as of December 31, 1994.1995. In the event that all or most of the Arizona Department of Revenue's proposed assessments are sustained, additional liabilities would result. Based on the current status of the legal proceedings, the Company believes that the ultimate resolution of such disputes will occur over a period of one and a half to four years. Although it is reasonably possible that the ultimate resolution of such matters could result in a loss of up to approximately $25$27 million in excess of amounts accrued, management and outside tax counsel believe that the Company has meritorious defenses to mitigate or eliminate the assessed amounts. Based on consultations with counsel, the Company believes that the resolution of the tax matters described herein should not have a material adverse effect on the Company's Consolidated Financial Statements. NOTE 8. SCECorp/SCE LITIGATION SETTLEMENT - ------------------------------------------ On September 5, 1990, the Company commenced an action against SCECorp and SCE in the Superior Court of California for the County of San Diego. On September 15, 1992, the action was settled. Under the terms of the settlement agreement, SCECorp paid the Company $25 million in settlement of claims of interference with the proposed merger between the Company and SDGE, plus $15 million to cover the Company's litigation and related expenses. Pursuant to the terms of the settlement agreement, the lawsuit was dismissed with prejudice on September 28, 1992. In the Consolidated Statement of Income (Loss) for the year ended December 31, 1992, the proceeds from the settlement agreement are included as a reduction of Other Operations to the extent of litigation expenses incurred by the Company in pursuit of its claim (approximately $12 million as of December 31, 1992) and the remainder of the proceeds are included as Litigation Settlement. The Company and SCE also agreed to a ten-year power exchange agreement beginning in 1995. Under the agreement, beginning in 1995 SCE will provide firm system capacity of 110 MW to the Company during summer months, for which the Company will pay an annual capacity charge of approximately $1 million annually increasing to a maximum of approximately $2 million annually. The Company will be entitled to schedule firm energy deliveries from SCE during the summer of up to 36,300 MWh per month, and will be obligated to return to SCE on an interruptible basis the same amount of energy the following winter season. NOTE 9.7. JOINTLY OWNED FACILITIES - --------------------------------- At December 31, 1994,1995, the Company's interests in jointly owned generating and transmission facilities were as follows: Percent Plant Construction Owned By in Work in Accumulated Company Service Progress Depreciation ----------- -------- ------------ ------------ - Thousands of Dollars - San Juan Units 1 and 2 50.0 $294,156$294,456 $ 1,712 $190,7214,492 $204,250 Navajo Station 7.5 77,963 6,524 36,81978,016 16,082 39,165 Four Corners Units 4 and 5 7.0 75,725 1,520 47,56577,078 264 51,535 Transmission Facilities 7.5 to 95.0 204,930 1,166 90,159204,213 1,853 95,182 -------- ------- -------- Total $652,774 $10,922 $365,264$653,763 $22,691 $390,132 ======== ======= ======== The Company has financed or provided funds for the above facilities and its share of operating expenses is included in the Consolidated Statements of Income (Loss). NOTE 10.8. EMPLOYEE BENEFITS PLANS - ----------------------------------------------------------------- PENSION PLANS The Company has noncontributory pension plans for all regular employees. Benefits are based on years of service and the employee's average compensation. The Company makes annual contributions to the plans that are not greater than the maximum tax deductible contribution and not less than the minimum funding requirement by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide for both current and future accrued benefits. The following table sets forth the plans' funded status and amount recognized in the Company's Consolidated Financial Statements at December 31, 19941995 and 1993.1994. The actuarial present value of the benefit obligationsobligation and reconciliation of funding status at October 1, were as follows: 1995 1994 1993 -------- -------- - Thousands of Dollars - Accumulated Benefit ObligationsObligation Vested $75,014 $46,679 $51,955 Non-Vested 5,447 6,318 6,497 -------- -------- Total $80,461 $52,997 $58,452 ======== ======== Plan Assets at Fair Value, Principally Equity and Fixed Income Securities $93,317 $77,021 $78,478 Projected Benefit ObligationsObligation (91,414) (67,393) (78,997) -------- -------- Plan Assets in Excess of (Less Than) Projected Benefit ObligationsObligation 1,903 9,628 (519) Unrecognized Net (Gain) LossGain from Past Experience (8,136) (10,549) 568 Prior Service Cost Not Yet Recognized in Net Periodic Pension Cost 9,410 5,198 5,404 Unrecognized Net Assets at Transition Being Amortized Over 15 Years (1,729) (2,017) (2,305) -------- -------- Prepaid Pension Cost Included in the Balance Sheet $ 2,2601,448 $ 3,1482,260 ======== ======== The increases in the Accumulated Benefit Obligation and Projected Benefit Obligation from 1994 to 1995 reflect the decrease in the discount rate used from 8.5% in 1994 to 7.5% in 1995 and amendments to the plans which now generally allow an employee to receive a normal retirement benefit if his age and credited years of service equal at least 85. Years Ended December 31, 1995 1994 1993 1992 -------- -------- -------- - Thousands of Dollars - Components of Net Pension Cost Service Cost of Benefits Earned During Period $ 3,236 $ 2,680 $ 1,558 $ 1,390 Interest Cost ofon Projected Benefit Obligation 6,752 5,615 4,689 4,283 Actual (Gain) Loss on Plan Assets (8,417) 492 (14,508) (4,075) Net Amortization and Deferral 532 (6,214) 10,187 54 -------- -------- -------- Net Periodic Pension Cost $ 2,103 $ 2,573 $ 1,926 $ 1,652 ======== ======== ======== Assumed Rates Used to Determine Pension CostActuarial Assumptions: 1995 1994 1993 1992 ---- ---- ---- Discount Rate - Funding Status 7.5% 8.5% 7.0% 8.0% Average Compensation Increase 5.0 5.55.0 5.5 Expected Long-Term Rate of Return on Plan Assets 9.0 7.59.0 7.5 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Health care and life insurance benefits are provided for retired employees. All regular employees may become eligible for those benefits if they reach retirement age while working for the Company. Those and similar benefits are provided through an independent administrator handling health claims and a life insurance companycompanies that hasoffer premiums based on group rates. The Company adopted FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, in 1993. Adoption of FAS 106 resulted in an increase in the Company's annual expense for postretirement benefits of approximately $3 million in 1993. The accumulated postretirement benefit obligation as of January 1, 1993 of $19 million is being amortized to expense over a twenty-year period, in accordance with the provisions of FAS 106. The Company recognizes the FAS 106 periodic benefit cost as expense. In January 1994, the Company was authorized by the ACC to recover through rates the costs of benefits only as payments are made to retired employees; the postretirement benefits are currently funded entirely on a pay-as-you-go basis. Therefore, the Company has not recorded a regulatory asset for the excess of FAS 106 expense over actual benefit payments. 1995 1994 1993 --------- --------- - Thousands of Dollars - Accumulated Postretirement BenefitsBenefit Obligation Retirees $ (5,270)(6,993) $ (5,832)(5,270) Fully Eligible Active Plan Participants (4,273) (3,286) (3,130) Other Active Participants (13,885) (9,849) (11,295) --------- --------- Total Accumulated Postretirement BenefitsBenefit Obligation (25,151) (18,405) (20,257) Unrecognized Net GainLoss (Gain) from Past Experience 732 (4,429) (786) Unrecognized Portion of the Transition Obligation Being Amortized Over 20 Years 16,289 17,247 18,205 --------- --------- Accrued Postretirement Benefit Cost Included in the Balance Sheet $ (8,130) $ (5,587) $(2,838) ========= ========= Years Ended December 31, 1995 1994 1993 --------- ---------------- ------- ------- - Thousands of Dollars - Components of Net Postretirement Benefit Cost Service Cost of Benefits Earned During Period $ 838 $ 931 $ 950 Interest Cost of Projectedon Postretirement Benefit Obligation 1,541 1,395 1,491 Amortization of the Unrecognized Transition Obligation 958 958 --------- ---------958 Amortization of the Unrecognized Gain (152) - - ------- ------- ------- Net Periodic Postretirement Benefit Cost $ 3,284 $ 3,399 ========= =========$3,185 $3,284 $3,399 ======= ======= ======= The accumulated postretirement benefit obligation was determined using ana 7.0% and 8.5% and 7% discount rate for 19941995 and 1993,1994, respectively. The health care cost trend rates were assumed to be 10%9.21% and 11%10.33% for 19941995 and 1993,1994, respectively, gradually declining to 3.88% and 5%, respectively, in 2003 and thereafter. The effect of a one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 19941995 by approximately $2.8$4 million and the net periodic cost by $0.4 million for the year. ADOPTION OF FAS 112 In January 1994 the Company adopted FAS 112, Employers' Accounting for Postemployment Benefits. Prior to 1994, postemployment benefits other than those related to retirement benefits were recognized on a pay-as-you-go basis. The effect of this change was an increase in postemployment benefits expense of $0.6 million for the year ended December 31, 1994.1995. STOCK OPTION PLANS On May 20, 1994, the Shareholders of the Company approved two stock option plans, the 1994 Outside Director Stock Option Plan (Directors' Plan) and the 1994 Omnibus Stock and Incentive Plan (Omnibus Plan). The Directors' Plan provides for the annual grant of 6,000 non- qualified stock options to each eligible director. Under the Directors' Plan, the first grant on January 3, 1995 consisted of 48,000 optionsdirector, at an exercise price equal to the market price of $3.125; thesethe Company's Common Stock at the grant date, beginning January 3, 1995. These options vest ratably and become exercisable in one-third increments on each anniversary date of the grant and expire in 2005.on the tenth anniversary. The Omnibus Plan allows the Compensation Committee, a committee comprised solely of non-employee directors, to grant any or all of the following types of awards to each eligible employee of the Company: stock options, including incentive stock options, non-qualified stock options and discounted stock options; stock appreciation rights; restricted stock; performance units; performance shares; and dividend equivalents. The total number of shares of the Company's stock which may be awarded under the Omnibus Plan cannot exceed eight million. During 1995 and 1994, the Compensation Committee granted stock options intended to qualify as incentive stock options under the Internal Revenue Code to key employees and to all employees, withrespectively, at exercise prices greater than or equal to the market price of $3.25 - $3.50. Thethe Company's Common Stock at the grant date. These options vest ratably over a three year period, with the first third becomingand become exercisable in 1995,one- third increments on each anniversary date of the grant and expire in 2004. The aggregate number of shares attributable toon the 1994 grants is 2,214,205. The Company'stenth anniversary. Options outstanding under the 1985 Stock Option Plan remains in effect andhave exercise prices equal to the options outstanding thereunder, whichmarket price of the Company's Common Stock at the grant date, are fully exercisable and expire in 1995 to 1997. No options were exercised and the Company incurredrecorded no compensation expense for the 1985 Planplans during 19921993 through 1994.1995. The following summarizes the stock option transactions during the period December 31, 1992 through December 31, 1994: Number of Exercise Options Price -------1993, 1994 and 1995: 1994 1994 1985 Stock Omnibus Directors' Option Plan Plan Plan ----------- ---------- ---------- Options Outstanding, December 31, 1992 and 1993: 1985 Plan1993 37,803 - Primary 23,750 $40.375 to $58.625 Dividend Equivalents 14,053 ---- Granted During 1994: 1994 Omnibus Plan 2,214,205 $3.25 to $3.50 ---------- 2,212,364 - Canceled (2,706) - - ----------- ---------- ---------- Options Outstanding, December 31, 1994 2,252,008 =========35,097 2,212,364 - Granted - 414,579 54,000 Canceled or Expired (26,980) (50,466) (6,000) ----------- ---------- ---------- Options Outstanding, December 31, 1995 8,117 2,576,477 48,000 =========== ========== ========== Option Price Per Share $58.625 $3.25 to $3.125 to $3.563 $3.313 Options Exercisable At December 31, 1993 37,803 - - At December 31, 1994 35,097 - - At December 31, 1995 8,117 720,207 - NOTE 11.9. QUARTERLY FINANCIAL DATA (unaudited) - ---------------------------------------------- First Second Third Fourth --------- --------- --------- --------- - Thousands of Dollars - (except per share data) 1995 Operating Revenue $142,745 $162,305 $217,787 $147,732 Operating Income 6,748 26,970 84,357 3,980 Net Income (Loss) (14,960) 3,014 60,729 6,122 Net Income (Loss) per Average Share (0.09) 0.02 0.37 0.04 1994 Operating Revenue $146,579 $171,097 $220,486 $153,311 Operating Income 8,259 27,951 64,310 13,882 Net Income (Loss) (14,580) 4,432 40,688 (9,800) Net Income (Loss) per Average Share (0.09) 0.03 0.25 (0.06) 1993 Operating Revenue $136,149 $148,349 $189,432 $150,209 Operating Income 4,511 14,179 44,902 20,354 Income (Loss) from Continuing Operations (18,522) (7,978) 22,386 (17,702) Provision for Loss on Disposal of Discontinued Operations - - - (4,000) Net Income (Loss) (18,522) (7,978) 22,386 (21,702) Net Income (Loss) per Average Share Continuing Operations (0.12) (0.05) 0.14 (0.11) Provision for Loss on Disposal of Discontinued Operations - - - (0.02) Total Net Income (Loss) per Average Share (0.12) (0.05) 0.14 (0.13) Due to seasonal fluctuations in sales, recognition of regulatory disallowancesa $16 million net increase in income tax benefits and adjustments, and provisions for loss on discontinued operations,a one-time $12 million reduction in fuel expenses, the quarterly results are not indicative of annual operating results. See Notes 2 and 5Note 3 regarding significantthe income tax adjustments which were recorded during the fourth quarter of 1993. Beginning1995 and Note 6 regarding the one-time reduction in fuel expenses recorded during the fourththird quarter of 1994, state and city sales taxes and similar taxes collected on revenues were removed from Operating Revenues and Taxes Other Than Income Taxes on the Consolidated Statement of Income (Loss). See Note 1. The tax amounts reclassified were as follows: First Second Third Fourth --------- --------- --------- --------- - Thousands of Dollars - 1994 Operating Revenue - Historical $155,475 $180,671 $234,083 N/A Total Taxes Reclassified (8,896) (9,574) (13,597) N/A --------- --------- --------- --------- Operating Revenue - Restated $146,579 $171,097 $220,486 N/A ========= ========= ========= ========= 1993 Operating Revenue - Historical $144,424 $157,434 $201,204 $159,375 Total Taxes Reclassified (8,275) (9,085) (11,772) (9,166) --------- --------- --------- --------- Operating Revenue - Restated $136,149 $148,349 $189,432 $150,209 ========= ========= ========= =========1995. NOTE 12.10. SUPPLEMENTAL CASH FLOW INFORMATION - -------------------------------------------- For purposes of this statement, the Company defines Cash and Cash Equivalents as cash (unrestricted demand deposits) and all highly liquid investments purchased with a maturity of three months or less related to all of the Company's operations, including discontinued operations (see below).operations. A reconciliation of net income (loss) to net cash flows from continuing operating activities for the three years ended December 31, 19941995 follows: 1995 1994 1993 1992 ---------- ---------- ---------- - Thousands of Dollars - Income (Loss) from Continuing Operations $ 54,905 $ 20,740 $ (21,816) $ (79,022) Adjustments to Reconcile Income (Loss) from Continuing Operations to Net Cash FlowFlows Depreciation Expense 92,179 89,905 74,184 69,445 Capital Lease Rent Expense - - 13,161 Taxes Accrued (13,519) 8,946 (2,303) 6,578 Deferred Income Taxes and Investment Tax Credits - Net (21,136) (4,911) (5,277) (11,194) Deferred Fuel and Purchased Power 5,872 7,359 10,716 7,030 Litigation SettlementsSettlement - Net - (5,000) (5,000) Lease Payments Deferred 32,977 32,024 29,870 10,830 Deferred Springerville Unit 2 Costs (1,127) (1,133) (5,359) (4,143)Regulatory Amortizations, Net of Interest Imputed on Losses Recorded at Present Value (15,852) (13,977) (8,148) Regulatory Disallowances and Adjustments, Net of Amortization (13,977) 5,629 (4,501) Loss on Financial Restructuring - - 26,669 Payments Withheld due to Payment Moratorium - - 46,66513,777 Other (4,457) (506) 314 13,188 Changes in Assets and Liabilities which Provided (Used) Cash Exclusive of Changes Shown Separately Accounts Receivable - Other (375) 1,119 4,5264,615 (1,120) (6,014) Accounts Payable (14,599) (413) 1,634 Materials and Fuel (5,973) 343 6,484 (629) Unbilled Revenues 625 (1,438) (631) Other Current Assets and Liabilities 601 (2,029) 3,034(6,751) 2,384 2,032 Other Deferred Assets and Liabilities 12,256 3,975 4,237 (7,376) ---------- ---------- ---------- Net Cash Flows - Continuing Operating Activities $ 119,390 $ 143,616 $ 89,331 $ 88,630 ========== ========== ========== Non-cash capital transactionsinvesting and financing activities of the Company that affected recognized assets and liabilities but did not result in cash receipts or payments during the three years ended December 31, 19941995 were: 1995 1994 1993 1992 ---------- ---------- ---------- - Thousands of Dollars - Capital Lease Obligations $ 8,095 $ 8,107 $ 10,523 $ 926,169 Acquisition of Leased Assets - 3,385 883,607 Issuance of Common Stock and Warrants - - 197,128 Acquisition of Springerville Assets - - 30,6453,385 ITEM 9. --- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. --- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Information concerning Directors is contained under Election of Directors in the Company's Proxy Statement relating to the 19951996 Annual Meeting of Shareholders, which information is incorporated herein by reference. EXECUTIVE OFFICERS Executive Officers of the Company who are elected annually by the Company's Board of Directors, are as follows: Executive Officer Name Age Title Since - ------------------ --- ------------------------------- --------- Charles E. Bayless 5253 Chairman of the Board, President and Chief Executive Officer (a) 1989 Ira R. Adler 4445 Senior Vice President and Chief Financial Officer (b) 1988 James S. Pignatelli 5152 Senior Vice President - Business Development (c) 1994 Thomas A. Delawder 4849 Vice President - Energy Resources (d) 1985 Gary L. Ellerd 4445 Vice President - Operations (e) 1985 Steven J. Glaser 3738 Vice President - Wholesale /RetailWholesale/Retail Pricing and System Planning (f) 1994 Thomas N. Hansen 4445 Vice President - Technical Advisor (g) 1992 Karen G. Kissinger 4041 Vice President and Controller (h) 1991 George W. Miraben 5354 Vice President - Human Resources and Public Affairs (i) 1990 Dennis R. Nelson 4445 Vice President, General Counsel and Corporate Secretary (j) 1991 Gerald A. O'Brien 5354 Vice President - Customer Services & Marketing (k) 1990 Romano Salvatori 5758 Vice President - Independent Power (l) 1994 Susan R. Wallach 4748 Vice President - BusinessPlanning and Development (m) 1990 Kevin P. Larson 3839 Treasurer (n) 1994 (a) Charles E. Bayless: Mr. Bayless joined the Company as Senior Vice President and Chief Financial Officer in December 1989. He was elected President and Chief Executive Officer in July 1990 and was elected to the Board of Directors in June 1990. On January 28, 1992, Mr. Bayless was named Chairman of the Board of Directors. Prior to joining the Company, he was Senior Vice President and Chief Financial Officer of Public Service Company of New Hampshire from 1981 through 1989. (b) Ira R. Adler: Mr. Adler joined the Company in 1986 as Manager of Financial Planning. In 1987 he was elected as Vice President and Treasurer of TRI, one of the Company's investment subsidiaries, from which position he resigned in October 1988, when he was elected Treasurer of the Company. He was elected Vice President - Finance and Treasurer in July 1989 and was elected Senior Vice President and Chief Financial Officer in July 1990 and President of TRI and SRI in April 1992. Prior to joining the Company, he was Vice President - Finance of US WEST Financial Services, Inc. (c) James S. Pignatelli: Mr. Pignatelli joined the Company as Senior Vice President in August 1994. Prior to joining the Company, he was President and Chief Executive Officer from 1988 to 1993 of Mission Energy Company, a subsidiary of SCE Corp. (d) Thomas A. Delawder: Mr. Delawder joined the Company in 1974 and thereafter served in various engineering and operations positions. In April 1985 he was named Manager, Systems Operations and was elected Vice President - Power Supply and System Control in November 1985. In February 1991, he became Vice President - - Engineering and Power Supply and in January 1992 he became Vice President - System Operations. In 1994, he became Vice President - Energy Resources. (e) Gary L. Ellerd: Mr. Ellerd joined the Company as Vice President and Controller in January 1985. He was elected Vice President - Services and Chief Information Officer in January 1991 and in January 1992 he became Vice President - - Corporate Information Services and Chief Information Officer. In 1994, he was named Vice President - Retail Customers. In 1995, he was named Vice President - - Operations. (f) Steven J. Glaser: Mr. Glaser joined the Company in 1990 as a Senior Attorney in charge of Regulatory Affairs. He was Manager of the Company's Legal department from 1992 to 1994, and Manager of Contracts and Wholesale Marketing from 1994 until elected Vice President - Business Development. In 1995, he was named Vice President - Wholesale/Retail Pricing and System Planning. (g) Thomas N. Hansen: Mr. Hansen joined the Company in December 1992 as Vice President - Power Production. Prior to joining the Company, Mr. Hansen was Century's Vice President - Operations from 1989 and Plant Manager at Springerville from 1987 through 1988. In 1994, he was named Vice President - Technical Advisor. (h) Karen G. Kissinger: Ms. Kissinger joined the Company as Vice President and Controller in January 1991. Prior to joining the Company, she was a Manager with Deloitte & Touche from 1986 through 1989 and a Senior Manager through 1990. (i) George W. Miraben: Mr. Miraben was elected Vice President, Public Affairs, effective March 1990, and named Vice President - Human Resources and Public Affairs in 1994. Prior to joining the Company, he was Director of External Affairs for US WEST Communications' Arizona operation from 1981 through March 1990. (j)j) Dennis R. Nelson: Mr. Nelson joined the Company in 1976. He was manager of the Legal Department from 1985 to 1990. He was elected Vice President, General Counsel and Corporate Secretary in January 1991. (k) Gerald A. O'Brien: Mr. O'Brien joined the Company in 1961. Formerly Manager, Customer and Corporate Services, he was elected Vice President - - Customer Services and Human Resources in May 1990 and in January 1992 he became Vice President - Customer Operations. In 1994, he was named Vice President - Operations Support. In 1995, he was named Vice President - - Customer Services & Marketing. (l)Romano Salvatori: Mr. Salvatori joined the Company as Vice President - Independent Power in December 1994. Prior to joining the Company, he was Deputy General Manager, Power Generation Business Unit and General Manager, Power Generation Strategic Affairs Division of Westinghouse Electric Corporation from 1990 to 1994, and General Manager, Power Generation Commercial Operations Division from 1990 to 1993. In 1995, he was named President of Nations Energy Corporation, in addition to his responsibilities as Vice President - Independent Power. (m) Susan R. Wallach: Ms. Wallach joined the Company in 1974. Formerly Manager of Accounting Services and Assistant Controller, she was elected Vice President and Treasurer in July 1990. She was named Vice President - Future Marketing/Sales/Planning in 1994. In 1995, she was named Vice President - BusinessPlanning and Development. (n) Kevin P. Larson: Mr. Larson joined the Company in 1985 and thereafter held various positions in its finance department and at the Company's investment subsidiaries. In January 1991, he was elected Assistant Treasurer of the Company and named Manager of Financial Programs. He was elected Treasurer in August 1994. ITEM 11. --- EXECUTIVE COMPENSATION Information concerning Executive Compensation is contained under Executive Compensation and Other Information in the Company's Proxy Statement relating to the 19951996 Annual Meeting of Shareholders, which information is incorporated herein by reference. ITEM 12. --- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT GENERAL At March 6, 1995,1, 1996, the Company had outstanding 160,723,702160,666,976 shares of Common Stock. As of March 6, 1995,1, 1996, the number of shares of Common Stock beneficially owned by all directors and officers of the Company as a group amounted to less than 1% of the outstanding Common Stock. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Information concerning the security ownership of certain beneficial owners of the Company is contained under Security Ownership of Certain Beneficial Owners in the Company's Proxy Statement relating to the 19951996 Annual Meeting of Shareholders, which information is incorporated herein by reference. SECURITY OWNERSHIP OF MANAGEMENT Information concerning the security ownership of the Directors and Executive Officers of the Company is contained under Security Ownership of Certain Beneficial Owners in the Company's Proxy Statement relating to the 19951996 Annual Meeting of Shareholders, which information is incorporated herein by references.reference. ITEM 13. --- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. --- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page (a) 1. Consolidated Financial Statements as of December 31, 19941995 and 19931994 and for Each of the Three Years in the Period Ended December 31, 1994.1995. Independent Auditors' Report 2732 Consolidated Statements of Income (Loss) 28 Consolidated Balance Sheets 29 Consolidated Statements of Capitalization 3033 Consolidated Statements of Cash Flows 3134 Consolidated Balance Sheets 35 Consolidated Statements of Capitalization 36 Consolidated Statements of Changes in Stockholders' Equity (Deficit) 3237 Notes to Consolidated Financial Statements 3338 2. Supplemental Consolidated Schedules for the Years Ended December 31, 19921993 to 1994.1995. Schedules I to V, inclusive, are omitted because they are not applicable or not required. 3. Exhibits. Reference is made to the Exhibit Index commencing on page 6066 (b) Reports on Form 8-K. The Company has not filed any Current Reports on Form 8-K duringas follows: - Dated December 8, 1995 reporting on a settlement agreement between the last quarterCompany and the ACC proposing to resolve the Company's application for rate increase and the Company's notice of intent to form a holding company. - Dated January 26, 1996 reporting on the ACC's denial of the period covered in this report.Proposed Settlement Agreement. - Dated February 9, 1996 disclosing the ACC's Chief Hearing Officer recommendation regarding the Company's notice of intent to form a holding company. SIGNATURES Pursuant to the requirements of Section 13 or 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. TUCSON ELECTRIC POWER COMPANY Date: March 8, 19955, 1996 By Ira R. Adler ----------------------------------------------- IRA R. ADLER 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: March 8, 19955, 1996 Charles E. Bayless* ------------------------------------------------------------------------- Charles E. Bayless Chairman of the Board, President and Principal Executive Officer Date: March 8, 19955, 1996 Ira R. Adler --------------------------------------------------------------- Ira R. Adler Principal Financial Officer Date: March 8, 19955, 1996 Karen G. Kissinger* ---------------------------------------------------------------- Karen G. Kissinger Principal Accounting Officer Date: March 8, 19955, 1996 Elizabeth Alexander* ------------------------- Elizabeth Alexander Director Date: March 5, 1996 Jose Canchola* ------------------------------------------------------- Jose Canchola Director Date: March 8, 1995 Kathryn N. Dusenberry* ------------------------------------ Kathryn N. Dusenberry Director Date: March 8, 19955, 1996 John A. Jeter* ------------------------------------------------------- John A. Jeter Director Date: March 8, 19955, 1996 R. B. O'Rielly* -------------------------------------------------------- R. B. O'Rielly Director Date: March 8, 19955, 1996 Martha R. Seger* --------------------------------------------------------- Martha R. Seger Director Date: March 8, 19955, 1996 Donald G. Shropshire* -------------------------------------------------------------- Donald G. Shropshire Director Date: March 8, 19955, 1996 H. Wilson Sundt* --------------------------------------------------------- H. Wilson Sundt Director Date: March 8, 19955, 1996 J. Burgess Winter* ----------------------- J. Burgess Winter Director Date: March 5, 1996 By Ira R. Adler ----------------------------------------------- Ira R. Adler as attorney-in-fact for each of the persons indicated EXHIBIT INDEX *3(a) -- Restated Articles of Incorporation, filed with the ACC on August 11, 1994. (Form 10-Q for the quarter ended September 30, 1994, File No. 1-5924--Exhibit 3).) *3(b) -- Bylaws of the Registrant, as amended May 20, 1994. (Form 10-Q for the quarter ended June 30, 1994, File No. 1-5924--Exhibit 3).) *4(a)(1)-- Indenture dated as of April 1, 1941, to The Chase National Bank of the City of New York, as Trustee. (Form S-7, File No. 2-59906-- Exhibit2-59906--Exhibit 2(b)(1).) *4(a)(2)-- First Supplemental Indenture, dated as of October 1, 1946. (Form S-7,S- 7, File No. 2-59906--Exhibit 2(b)(2).) *4(a)(3)-- Second Supplemental Indenture dated as of October 1, 1947. (Form S-7,S- 7, File No. 2-59906--Exhibit 2(b)(3).) *4(a)(4)-- Third Supplemental Indenture, dated as of April 1, 1949. (Form S-7, File No. 2-59906--Exhibit 2(b)(4).) *4(a)(5)-- Fourth Supplemental Indenture, dated as of December 1, 1952. (Form S-7, File No. 2-59906--Exhibit 2(b)(5).) *4(a)(6)-- Fifth Supplemental Indenture, dated as of January 1, 1955. (Form S-7,S- 7, File No. 2-59906--Exhibit 2(b)(6).) *4(a)(7)-- Sixth Supplemental Indenture, dated as of January 1, 1958. (Form S-7,S- 7, File No. 2-59906--Exhibit 2(b)(7).) *4(a)(8)-- Seventh Supplemental Indenture, dated as of November 1, 1959. (Form S-7, File No. 2-59906--Exhibit 2(b)(8).) *4(a)(9)-- Eighth Supplemental Indenture, dated as of November 1, 1961. (Form S-7, File No. 2-59906--Exhibit 2(b)(9).) *4(a)(10)-- Ninth Supplemental Indenture, dated as of February 20, 1964. (Form S-7, File No. 2-59906--Exhibit 2(b)(10).) *4(a)(11)-- Tenth Supplemental Indenture, dated as of February 1, 1965. (Form S-7, File No. 2-59906--Exhibit 2(b)(11).) *4(a)(12)-- Eleventh Supplemental Indenture, dated as of February 1, 1966. (Form S-7, File No. 2-59906--Exhibit 2(b)(12).) *4(a)(13)-- Twelfth Supplemental Indenture, dated as of November 1, 1969. (Form S-7, File No. 2-59906--Exhibit 2(b)(13).) *4(a)(14)-- Thirteenth Supplemental Indenture, dated as of January 20, 1970. (Form S-7, File No. 2-59906--Exhibit 2(b)(14).) *4(a)(15)-- Fourteenth Supplemental Indenture, dated as of September 1, 1971. (Form S-7, File No. 2-59906--Exhibit 2(b)(15).) *4(a)(16)-- Fifteenth Supplemental Indenture, dated as of March 1, 1972. (Form S-7, File No. 2-59906--Exhibit 2(b)(16).) *4(a)(17)-- Sixteenth Supplemental Indenture, dated as of May 1, 1973. (Form S-7, File No. 2-59906--Exhibit 2(b)(17).) *4(a)(18)-- Seventeenth Supplemental Indenture, dated as of November 1, 1975. (Form S-7, File No. 2-59906--Exhibit 2(b)(18).) *4(a)(19)-- Eighteenth Supplemental Indenture, dated as of November 1, 1975. (Form S-7, File No. 2-59906--Exhibit 2(b)(19).) *4(a)(20)-- Nineteenth Supplemental Indenture, dated as of July 1, 1976. (Form S-7, File No. 2-59906--Exhibit 2(b)(20).) *4(a)(21)-- Twentieth Supplemental Indenture, dated as of October 1, 1977. (Form S-7, File No. 2-59906--Exhibit 2(b)(21).) *4(a)(22)-- Twenty-first Supplemental Indenture, dated as of November 1, 1977. (Form 10-K for year ended December 31, 1980, File No. 1-5924-- Exhibit 4(v).) *4(a)(23)-- Twenty-second Supplemental Indenture, dated as of January 1, 1978. (Form 10-K for year ended December 31, 1980, File No. 1-5924-- Exhibit 4(w).) *4(a)(24)-- Twenty-third Supplemental Indenture, dated as of July 1, 1980. (Form 10-K for year ended December 31, 1980, File No. 1-5924--Exhibit 4(x).) *4(a)(25)-- Twenty-fourth Supplemental Indenture, dated as of October 1, 1980. (Form 10-K for year ended December 31, 1980, File No. 1-5924-- Exhibit 4(y).) *4(a)(26)-- Twenty-fifth Supplemental Indenture, dated as of April 1, 1981. (Form 10-Q for quarter ended March 31, 1981, File No. 1-5924--Exhibit 4(a).) *4(a)(27)-- Twenty-sixth Supplemental Indenture, dated as of April 1, 1981. (Form 10-Q for quarter ended March 31, 1981, File No. 1-5924--Exhibit 4(b).) *4(a)(28)-- Twenty-seventh Supplemental Indenture, dated as of October 1, 1981. (Form 10-Q for quarter ended September 30, 1982, File No. 1-5924- -Exhibit1- 5924--Exhibit 4(c).) *4(a)(29)-- Twenty-eighth Supplemental Indenture, dated as of June 1, 1990. (Form 10-Q for quarter ended June 30, 1990, File No. 1-5924--Exhibit 4(a)(1).) *4(a)(30)-- Twenty-ninth Supplemental Indenture, dated as of December 1, 1992. (Form S-1, Registration No. 33-55732--Exhibit 4(a)(30).) *4(a)(31)-- Thirtieth Supplemental Indenture, dated as of December 1, 1992. (Form S-1, Registration No. 33-55732--Exhibit 4(a)(31).) *4(b)(1)-- Installment Sale Agreement, dated as of December 1, 1973, among the City of Farmington, New Mexico, Public Service Company of New Mexico and the Registrant. (Form 8-K for the month of January 1974, File No. 0-269--Exhibit 3.) *4(b)(2)-- Ordinance No. 486, adopted December 17, 1973, of the City of Farmington, New Mexico. (Form 8-K for the month of January 1974, File No. 0-269--Exhibit 4.) *4(c)(1)-- Loan Agreement, dated as of September 15, 1981, between the Industrial Development Authority of the County of Apache, Arizona and the Registrant, relating to Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form 10-K for year ended December 31, 1981, File No. 1- 5924--Exhibit 4(d)(1).) *4(c)(2)-- Indenture of Trust, dated as of September 15, 1981, between the Apache County Authority and Morgan Guaranty Trust Company of New York, authorizing Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form 10-K for year ended December 31, 1981, File No. 1-5924--Exhibit 4(d)(2).) *4(d)(1)-- Second Supplemental Loan Agreement, dated as of October 1, 1981, between the Apache County Authority and the Registrant, relating to Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form 10-K for year ended December 31, 1982, File No. 1-5924--Exhibit 4(f)(1).) *4(d)(2)-- Second Supplemental Indenture, dated as of October 1, 1981, between the Apache County Authority and Morgan Guaranty, relating to Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form 10-K for year ended December 31, 1982, File No. 1-5924--Exhibit 4(f)(2).) *4(d)(3)-- Third Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and the Registrant, relating to Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit 4(d)(3).) *4(d)(4)-- Third Supplemental Indenture, dated as of December 1, 1985, between the Apache County Authority and Morgan Guaranty, relating to Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit 4(d)(4).) *4(d)(5)-- Fourth Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache County Authority and Morgan Guaranty, relating to Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form S-4, Registration No. 33-52860- -Exhibit33-52860--Exhibit 4(d)(5).) *4(d)(6)-- Fourth Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and the Registrant, relating to Pollution Control Revenue Bonds, 1981 Series B (Tucson Electric Power Company Project). (Form S-4, Registration No. 33-52860--Exhibit 4(d)(6).) *4(e)(1)-- Loan Agreement, dated as of October 1, 1981, between The Industrial Development Authority of the County of Pima, Arizona (the Pima County Authority) and the Registrant, relating to Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series A (Tucson Electric Power Company Project). (Form 10-K for year ended December 31, 1981, File No. 1-5924--Exhibit 4(f)(1).) *4(e)(2)-- Indenture of Trust, dated as of October 1, 1981, between the Pima County Authority and Morgan Guaranty, authorizing Floating Rate Monthly Demand Pollution Control Revenue Bonds, 1981 Series A (Tucson Electric Power Company Project). (Form 10-K for year ended December 31, 1981, File No. 1-5924--Exhibit 4(f)(2).) *4(f)(1)-- Loan Agreement, dated as of July 1, 1982, between the Pima County Authority and the Registrant, relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company General Project). (Form 10-Q for quarter ended June 30, 1982, File No. 1-5924--Exhibit 4(a).) *4(f)(2)-- Indenture of Trust, dated as of July 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 General Project). (Form 10-Q for quarter ended June 30, 1982, File No. 1-5924--Exhibit 4(b).) *4(f)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992, between the Pima County Authority and the Registrant relating to Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company General Project). (Form S-4, Registration No. 33-52860- -Exhibit 4(f)(3).) *4(f)(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 General Project). (Form S-4, Registration No. 33-52860--Exhibit33-52860-- Exhibit 4(f)(4).) *4(g)(1)-- Loan Agreement, dated as of July 1, 1982, between the Pima County Authority and the Registrant, relating to Quarterly Tender Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power General Project). (Form 10-Q for quarter ended June 30, 1982, File No. 1-5924--Exhibit 4(c).) *4(g)(2)-- Indenture of Trust, dated as of July 1, 1982, between the Pima County Authority and Morgan Guaranty, authorizing Quarterly Tender Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company General Project). (Form 10-Q for quarter ended June 30, 1982, File No. 1-5924--Exhibit 4(d).) *4(g)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992, between the Pima County Authority and the Registrant relating to Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company General Project). (Form S-4, Registration No. 33-52860- -Exhibit 4(g)(3).) *4(g)(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 General Project). (Form S-4, Registration No. 33-52860--Exhibit33-52860-- Exhibit 4(g)(4).) *4(h)(1)-- Loan Agreement, dated as of October 1, 1982, between the Pima County Authority and the Registrant relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company Irvington Project). (Form 10-Q for quarter ended September 30, 1982, File No. 1-5924--Exhibit 4(a).) *4(h)(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 Irvington Project). (Form 10-Q for quarter ended September 30, 1982, File No. 1-5924--Exhibit 4(b).) *4(h)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992, between the Pima County Authority and the Registrant relating to Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company Irvington Project). (Form S-4, Registration No. 33- 52860--Exhibit 4(h)(3).) *4(h)(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 Irvington Project). (Form S-4, Registration No. 33-52860--Exhibit33- 52860--Exhibit 4(h)(4).) *4(i)(1)-- Loan Agreement, dated as of December 1, 1982, between the Pima County Authority and the Registrant relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company Projects). (Form 10-K for year ended December 31, 1982, File No. 1-5924--Exhibit 4(k)(1).) *4(i)(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 year ended December 31, 1982, File No. 1-5924--Exhibit 4(k)(2).) *4(i)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992, between the Pima County Authority and the Registrant 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(i)(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- -Exhibit33-52860--Exhibit 4(i)(4).) *4(j)(1)-- Loan Agreement, dated as of March 1, 1983, between the Pima County Authority and the Registrant relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company General Project). (Form 10-Q for the quarter ended March 31, 1983, File No. 1-5924--Exhibit 4(a).) *4(j)(2)-- Indenture of Trust, dated as of March 1, 1983, between the Pima County Authority and Morgan Guaranty authorizing Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company General Project). (Form 10-Q for the quarter ended March 31, 1983, File No. 1-5924--Exhibit 4(b).) *4(j)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992, between the Pima County Authority and the Registrant relating to Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company General Project) (Form S-4 dated October 2, 1992, Registration No. 33-52860--Exhibit 4(j)(3).) *4(j)(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, 1983 Series A (Tucson Electric Power Company General Project) (Form S-4 dated October 2, 1992, Registration No. 33-52860--Exhibit 4(j)(4).) *4(k)(1)-- Loan Agreement, dated as of December 1, 1983, between the Apache County Authority and the Registrant relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for year ended December 31, 1983, File No. 1-5924--Exhibit 4(l)(1).) *4(k)(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 year ended December 31, 1983, File No. 1-5924--Exhibit 4(l)(2).) *4(k)(3)-- First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and the Registrant 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(k)(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-- Exhibit1-5924--Exhibit 4(k)(4).) *4(k)(5)-- Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and the Registrant 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(k)(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--Exhibit33- 52860--Exhibit 4(k)(6).) *4(l)(1)-- Loan Agreement, dated as of December 1, 1983, between the Apache County Authority and the Registrant relating to Variable Rate Demand Industrial Development Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville Project). (Form 10-K for year ended December 31, 1983, File No. 1-5924--Exhibit 4(m)(1).) *4(l)(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 year ended December 31, 1983, File No. 1-5924--Exhibit 4(m)(2).) *4(l)(3)-- First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and the Registrant 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(l)(3).) *4(l)(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-- Exhibit1-5924--Exhibit 4(l)(4).) *4(l)(5)-- Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and the Registrant relating to Industrial Development Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33- 52860--Exhibit 4(l)(5).) *4(l)(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--Exhibit33- 52860--Exhibit 4(l)(6).) *4(m)(1)-- Loan Agreement, dated as of December 1, 1983, between the Apache County Authority and the Registrant 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(m)(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 year ended December 31, 1983, File No. 1-5924--Exhibit 4(n)(2).) *4(m)(3)-- First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and the Registrant 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(m)(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-- Exhibit1-5924--Exhibit 4(m)(4).) *4(m)(5)-- Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and the Registrant 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(m)(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--Exhibit33- 52860--Exhibit 4(m)(6).) *4(n) -- Reimbursement Agreement, dated as of September 15, 1981, as amended, between the Registrant and Manufacturers Hanover Trust Company. (Form 10-K for the year ended December 31, 1984, File No. 1- 5924--Exhibit1-5924--Exhibit 4(o)(4).) *4(o)(1)-- Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and the Registrant 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(o)(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(o)(3)-- First Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and the Registrant 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(o)(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--Exhibit33- 52860--Exhibit 4(o)(4).) *4(p)(1)-- Loan Agreement, dated as of February 22, 1991, between the Industrial Development Authority of the County of Pima and the Registrant, amending and restating the Loan Agreement, dated as of May 1, 1990, relating to Industrial Development Revenue Bonds, 1990 Series A (Tucson Electric Power Company Project). (Form 10-K for the year ended December 31, 1990, File No. 1-5924--Exhibit 4(p)(1).) *4(p)(2)-- Indenture of Trust, dated as of February 22, 1991, between the Industrial Development Authority of the County of Pima and Texas Commerce Bank National Association, amending and restating the Indenture of Trust, dated as of May 1, 1990, authorizing Industrial Development Revenue Bonds, 1990 Series A (Tucson Electric Power Company Project). (Form 10-K for the year ended December 31, 1990, File No. 1-5924--Exhibit 4(p)(2).) *4(q) -- Warrant Agreement and Form of Warrant, dated as of December 15, 1992. (Form S-1, Registration No. 33-55732--Exhibit 4(q).) *4(r)(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).) *4(r)(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).) *+10(a) -- 1985--1985 Stock Option Plan of the Registrant. (Form 10-K for the year ended December 31, 1985, File No. 1-5924--Exhibit 10(b).) *+10(b) -- 1987--1987 Phantom Stock Plan of the Registrant. (Form 10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit 10(c).) *10(c)(1)-- Lease Agreements, dated as of December 1, 1984, between Valencia Energy Company ("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(c)(2)-- Guaranty and Agreements, dated as of December 1, 1984, between the Registrant 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(c)(3)-- General Indemnity Agreements, dated as of December 1, 1984, between Valencia and the Registrant, 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(c)(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 the Registrant, Indemnitors. (Form 10-K for the year ended December 31, 1984, File No. 1-5924--Exhibit 10(d)(4).) *10(c)(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(c)(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(c)(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(c)(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).) *10(c)(9)-- 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).) *10(c)(10) -- 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).) *10(c)(11) -- 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).) *10(c)(12) -- 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).) *10(c)(13) -- 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).) *10(c)(14) -- 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).) *10(c)(15) -- 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 Hubbel 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).) *10(c)(16) -- Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and the Registrant, 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).) *10(c)(17) -- Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and the Registrant, 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).) *10(c)(18) -- Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and the Registrant, 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).) *10(c)(19) -- Amendment No. 2, dated as of July 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and the Registrant, 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).) *10(c)(20) -- Amendment No. 2, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and the Registrant, 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).) *10(c)(21) -- Amendment No. 2, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and the Registrant, 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).) *10(c)(22) -- Amendment No. 3, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and the Registrant, 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).) *10(c)(23) -- Supplemental Tax Indemnity Agreement, dated July 1, 1986, between J. C. Penney Company, Inc., as Owner Participant, and Valencia and the Registrant, as Indemnitors. (Form 10-K for the year ended December 31, 1986, File No. 1-5924--Exhibit 10(e)(15).) *10(c)(24) -- Supplemental General Indemnity Agreement, dated as of July 1, 1986, among Valencia and the Registrant, 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).) *10(c)(25) -- Amendment No. 1, dated as of June 1, 1987, to the Supplemental General Indemnity Agreement, dated as of July 1, 1986, among Valencia and the Registrant, 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).) *10(c)(26) -- Valencia Agreement, dated as of June 30, 1992, among the Registrant, 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 Valencia's lease of the coal-handling facilities at the Springerville Generating Station. (Form S-4, Registration No. 33-52860--Exhibit 10(f)(26).) *10(c)(27) -- 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).) *10(d)(1)-- Lease Agreements, dated as of December 1, 1985, between the Registrant 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).) *10(d)(2)-- 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 the Registrant and San Carlos, as Lessee. (Form 10-K for the year ended December 31, 1985, File No. 1-5924--Exhibit 10(f)(2).) *10(d)(3)-- Participation Agreement, dated as of December 1, 1985, among the Registrant 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).) *10(d)(4)-- Restructuring Commitment Agreement, dated as of June 30, 1992, among the Registrant 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 Cotrustee, 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).) *10(d)(5)-- Lease Supplement No. 1, dated December 31, 1985, to Lease Agreements, dated as of December 1, 1985, between the Registrant 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).) *10(d)(6)-- Amendment No. 1, dated as of December 15, 1992, to Lease Agreements, dated as of December 1, 1985, between the Registrant 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).) *10(d)(7)-- 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 the Registrant and San Carlos, jointly and severally, as Lessee. (Form S-1, Registration No. 33-55732--Exhibit 10(g)(7).) *10(e)(1)-- Amended and Restated Participation Agreement, dated as of November 15, 1987, among the Registrant, 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).) *10(e)(2)-- 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 the Registrant, as Lessee. (Form 10-K for the year ended December 31, 1987, File No. 1- 5924--Exhibit 10(j)(2).) *10(e)(3)-- Tax Indemnity Agreement, dated as of January 14, 1988, between the Registrant, 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).) *10(e)(4)-- 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 (the Registrant's Irvington Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit 10(j)(4).) *10(e)(5)-- 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 Irvington Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit 10(j)(5).) *10(e)(6)-- Lease Amendment No. 1, dated as of May 1, 1989, between the Registrant, 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 31,1990,31, 1990, File No. 1-5924--Exhibit 10(i)(6).) *10(e)(7)-- Lease Supplement, dated as of January 1, 1991, between the Registrant, 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 10K for the year ended December 31, 1991, File No. 1-5924--Exhibit 10(i)(8).) *10(e)(8)-- Lease Supplement, dated as of March 1, 1991, between the Registrant, 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).) *10(e)(9)-- Lease Supplement No. 4, dated as of December 1, 1991, between the Registrant, 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).) *10(e)(10) -- 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(i)10(I)(11).) *10(e)(11) -- Restructuring Commitment Agreement, dated as of June 30, 1992, among the Registrant, 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 Registrant's lease of Unit 4 at the Irvington Generating Station. (Form S-4, Registration No. 33-52860--Exhibit 10(i)(12).) *10(e)(12) -- Amendment No. 1, dated as of December 15, 1992, to Amended and Restated Participation Agreement, dated as of November 15, 1987, among the Registrant, 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).) *10(e)(13) -- Amended and Restated Lease, dated as of December 15, 1992, between the Registrant, 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).) *10(e)(14) -- Amended and Restated Tax Indemnity Agreement, dated as of December 15, 1992, between the Registrant, as Lessee, and Ford Motor Credit Company, as Owner Participant. (Form S-1, Registration No. 33- 55732--Exhibit 10(h)(14).) *10(f)-- Power Sale Agreement for the years 1990 to 2011, dated as of March 10, 1988, between the Registrant and Salt River Project Agricultural Improvement and Power District. (Form 10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit 10(k).) *+10(g)(1) -- Employment Agreements between the Registrant and Thomas A. Delawder and Gary L. Ellerd. (Form 10-K for the year ended December 31, 1987, File No. 1-5924--Exhibit 10(l).) *+10(g)(2) -- Employment Agreements between the Registrant and currently in effect with Ira R. Adler, Charles E. Bayless, Karen G. Kissinger, George W. Miraben, Dennis R. Nelson, Gerald A. O'Brien, Susan R. Wallach, James S. Pignatelli and Steven J. Glaser. (Form 10-K for the year ended December 31, 1989, File No. 1-5924--Exhibit 10(n)(2).) +10(g)*+10(g)(3)-- Release and Proposed Settlement Agreement between the Registrant and Frederic N. Finney. +10(g)(Form 10-K for the year ended December 31, 1994, File No. 1-5924--Exhibit 10(g)(3).) *+10(g)(4)-- Release and Proposed Settlement Agreement between the Registrant and Norman B. Johnsen. (Form 10-K for the year ended December 31, 1994, File No. 1-5924--Exhibit 10(g)(4).) *10(g)(5)-- Letter, dated February 25, 1992, from Dr. Martha R. Seger to the Registrant and Capital Holding Corporation. (Form S-4, Registration No. 33-52860--Exhibit 10(k)(4).) *+10(g)(6) -- Employment Agreement between the Registrant and Thomas N. Hansen. (Form 10-K for the year ended December 31, 1993, File No. 1- 5924--Exhibit 10(i)(5).) *10(h)-- Power Sale Agreement, dated April 29, 1988, for the dates of May 16, 1990 to December 31, 1995, between the Registrant and Nevada Power Company. (Form 10-K for the year ended December 31, 1988, File No 1- 5924--Exhibit 10(m)(2).) *10(i)-- Master Restructuring Agreement, dated as of June 30, 1992, among the Registrant, Escavada Company, Gallo Wash Development Company, Valencia, Barclays Bank PLC, New York Branch, as administrative agent and collateral agent and the several banks parties thereto. (Form S-4, Registration No. 33-52860--Exhibit 10(bb).) *10(j)-- Amendment No. 1, dated as of December 15 , 1992, to Master Restructuring Agreement, dated as of June 30, 1992, among the Registrant, Escavada Company, Gallo Wash Development Company, Valencia, Barclays Bank PLC, New York Branch, as administrative agent and collateral agent and the several banks parties thereto. (Form S- 1, Registration No. 33-55732--Exhibit 10(s)(2).) *10(k)-- Amendment No. 2, dated as of October 12, 1993, to Master Restructuring Agreement, dated as of June 30, 1992, among the Registrant, Escavada Company, Gallo Wash Development Company, Valencia, Barclays Bank PLC, New York Branch, as administrative agent and collateral agent and the several banks parties thereto. (Form 10- K10-K for the year ended December 31, 1993, File No. 1-5924--Exhibit 10(n).) *10(l)-- Amendment No. 3, dated as of December 20, 1993, to Master Restructuring Agreement, dated as of June 30, 1992, among the Registrant, Escavada Company, Gallo Wash Development Company, Valencia, Barclays Bank PLC, New York Branch, as administrative agent and collateral agent and the several banks parties thereto. (Form 10- K for the year ended December 31, 1993, File No. 1-5924--Exhibit 10(o).) *10(m)-- Amendment No. 4, dated as of April 13, 1994, to Master Restructuring Agreement, dated as of June 30, 1992, among the Registrant, Escavada Company, Gallo Wash Development Company, Valencia, Barclays Bank PLC, New York Branch, as administrative agent and collateral agent and the several banks parties thereto. (Form 10- Q10-Q for the quarter ended June 30, 1994, File No. 1-5924--Exhibit 10(a).) *10(n)-- Amendment No. 5, dated as of June 30, 1994, to Master Restructuring Agreement, dated as of June 30, 1992, among the Registrant, Escavada Company, Gallo Wash Development Company, Valencia, Barclays Bank PLC, New York Branch, as administrative agent and collateral agent and the several banks parties thereto. (Form 10- Q10-Q for the quarter ended June 30, 1994, File No. 1-5924--Exhibit 10(b).) 10(o) *10(o)-- Amendment No. 6, dated as of November 1, 1994, to Master Restructuring Agreement, dated as of June 30, 1992, among the Registrant, Escavada Company, Gallo Wash Development Company, Valencia, Barclays Bank PLC, New York Branch, as administrative agent and collateral agent and the several banks parties thereto. (Form 10-K for the year ended December 31, 1994, File No. 1-5924--Exhibit 10(o).) *10(p)-- Deed of Trust, Assignment of Rents and Leases and Security Agreement, dated as of June 30, 1992, from San Carlos to Transamerica Title Insurance Company, as trustee for the use and benefit of Barclays Bank PLC, New York Branch, as collateral agent. (Form S-1, Registration No. 33-55732--Exhibit 10(t).) *10(q)-- Participation Agreement, dated as of June 30, 1992, among the Registrant, 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 the Registrant's lease of Springerville Unit 1. (Form S-1, Registration No. 33-55732--Exhibit 10(u).) *10(r)-- Lease Agreement, dated as of December 15, 1992, between the Registrant, 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).) *10(s)-- Tax Indemnity Agreements, dated as of December 15, 1992, between the various Owner Participants parties thereto and the Registrant, as Lessee. (Form S-1, Registration No. 33-55732, Exhibit 10(w).) *10(t)-- Restructuring Agreement, dated as of December 1, 1992, between the Registrant and Century Power Corporation. (Form S-1, Registration No. 33-55732--Exhibit 10(x).) *10(u)-- Voting Agreement, dated as of December 15, 1992, between the Registrant and Chrysler Capital Corporation (documents relating to CILCORP Lease Management, Inc., MWR Capital Inc., US West Financial Services, Inc. and Philip Morris Capital Corporation are not filed but are substantially similar). (Form S-1, Registration No. 33-55732-- Exhibit 10(y).) *10(v)-- Wholesale Power Supply Agreement between the Registrant and Navajo Tribal Utility Authority dated January 5, 1993. (Form 10-K for the year ended December 31, 1992, File No. 1-5924--Exhibit 10(t).) 11 -- Statement re computation of per share earnings. 21 -- Subsidiaries of the Registrant. 23 -- Consents of experts and counsel. 24 -- Power of Attorney. 2727a -- Financial Data Schedule. 27b -- Financial Data Schedule. (*)Previously filed as indicated and incorporated herein by reference. (+)Management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by item 601(10)(iii) of Regulation S-K.