Nature of Operations and Basis of Accounting Presentation

6 Months Ended

Jun. 30, 2011

Nature of Operations and Basis of Accounting Presentation [Abstract]

NATURE OF OPERATIONS AND BASIS OF ACCOUNTING PRESENTATION

NOTE 1. NATURE OF OPERATIONS AND BASIS OF ACCOUNTING PRESENTATION

UniSource Energy Corporation (UniSource Energy) is a utility services holding company engaged, through its subsidiaries, in the electric generation and energy delivery business. Operations are conducted by UniSource Energy’s subsidiaries, each of which is a separate legal entity with its own assets and liabilities. UniSource Energy owns 100% of Tucson Electric Power Company (TEP), UniSource Energy Services, Inc. (UES), Millennium Energy Holdings, Inc. (Millennium) and UniSource Energy Development Company (UED).

TEP is a regulated public utility and UniSource Energy’s largest operating subsidiary, representing approximately 81% of UniSource Energy’s total assets as of June 30, 2011. TEP generates, transmits and distributes electricity to approximately 403,000 retail electric customers in a 1,155 square mile area in southeastern Arizona. TEP also sells electricity to other utilities and power marketing entities, primarily located in the western U.S. In addition, TEP operates Springerville Unit 3 on behalf of Tri-State Generation and Transmission Association, Inc. (Tri-State) and Springerville Unit 4 on behalf of Salt River Project Agriculture Improvement and Power District (SRP).

UES holds the common stock of UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (UNS Electric). UNS Gas is a gas distribution company with approximately 146,000 retail customers in Mohave, Yavapai, Coconino, and Navajo counties in northern Arizona, as well as in Santa Cruz County in southern Arizona. UNS Electric is an electric transmission and distribution company with approximately 91,000 retail customers in Mohave and Santa Cruz counties.

UED developed and owned the Black Mountain Generating Station (BMGS) in northwestern Arizona. The facility, which includes two natural gas-fired combustion turbines, provided energy to UNS Electric through a power sales agreement. In July 2011, UNS Electric purchased BMGS from UED.

Millennium’s investments in unregulated businesses represent less than 1% of UniSource Energy’s assets as of June 30, 2011. Millennium’s $13 million net loss for 2010, which reflected impairment losses, caused it to be a reportable segment at December 31, 2010. Millennium is not a reportable segment at June 30, 2011.

References to “we” and “our” are to UniSource Energy and its subsidiaries, collectively.

The accompanying quarterly financial statements of UniSource Energy and TEP are unaudited but reflect all normal recurring accruals and other adjustments which we believe are necessary for a fair presentation of the results for the interim periods presented. These financial statements are presented in accordance with the Securities and Exchange Commission’s interim reporting requirements, which do not include all the disclosures required by generally accepted accounting principles (GAAP) in the United States of America for audited annual financial statements. UniSource Energy and TEP reclassified certain amounts in the financial statements to conform to the current year presentation. The year-end condensed balance sheet data was derived from audited financial statements, but it does not include disclosures required by GAAP for audited annual financial statements. This quarterly report should be reviewed in conjunction with UniSource Energy’s and TEP’s 2010 Annual Report on Form 10-K.

Because weather and other factors cause seasonal fluctuations in the sales of TEP, UNS Gas and UNS Electric, quarterly results are not indicative of annual operating results.

REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

During the first half of 2011, we identified errors related to amounts owed to/from TEP for electricity deliveries settled or to be settled in-kind during prior years and in prior years the calculation of income tax expense. The calculation of income tax expense did not treat Allowance for Equity Funds Used During Construction (AFUDC) as a permanent book to tax difference. We assessed the materiality of these errors on prior period financial statements and concluded they were not material to any prior annual or interim periods, but the cumulative impact could be material to the annual period ending December 31, 2011 and the interim period ended June 30, 2011, if corrected in 2011. As a result, in accordance with Staff Accounting Bulletin 108, we have revised our prior period financial statements as described below to correct these errors.

The income tax adjustment impacted fiscal years 2003 through 2010 for UniSource Energy and fiscal years 2009 and 2010 for TEP. The adjustment for electricity deliveries settled or to be settled in-kind impacted fiscal years 2004 through 2010. The revision increased net income for UniSource Energy and TEP by $1 million for both the 2010 and 2009 annual periods. UniSource Energy Accumulated Earnings increased by $5 million for the periods prior to January 1, 2009 as a result of the revision.

The revision impacted statements of income and balance sheets as shown in the tables below:


	UniSource Energy						TEP
	Three Months Ended
	March 31, 2011
	As			As			As			As
	Reported			Revised			Reported			Revised
	-Thousands of Dollars- (Except Per Share Amounts)
Income Statement
Electric Wholesale Sales	$	40,781		$	40,913		$	35,122		$	35,255
Fuel		72,137			72,130			71,315			71,308
Purchased Energy		77,640			78,274			16,601			17,236
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(5,793	)		(6,235	)		(9,342	)		(9,783	)
Income Tax Expense		3,909			7,432			208			2,491
Net Income		16,992			13,416			6,983			4,648
Basic Earnings Per Share (EPS)		0.46			0.36			N/A			N/A
Diluted EPS		0.44			0.35			N/A			N/A
Balance Sheet
Deferred Income Taxes -Current		35,210			32,588			36,205			33,584
Accounts Receivable -Customer		73,350			80,343			53,560			60,553
Regulatory Assets -Noncurrent		191,238			191,429			180,723			180,913
Common Stock Equity		824,127			828,133			708,604			712,609
Accounts Payable -Trade		97,260			97,817			71,276			71,833


	UniSource Energy
	2010
	Three Months Ended
	March 31,						June 30,						September 30,						December 31,
	As			As			As			As			As			As			As		As
	Reported			Revised			Reported			Revised			Reported			Revised			Reported		Revised
	-Thousands of Dollars- (Except Per Share Amounts)
Income Statement
Electric Wholesale Sales⁽¹⁾	$	37,064		$	37,093		$	27,174		$	28,466		$	36,776		$	36,838		$	51,579	$	49,565
Fuel		60,448			60,605			69,246			69,304			90,493			90,668			76,793		77,003
Purchased Energy⁽¹⁾		82,805			82,805			65,376			66,591			93,889			93,889			66,137		64,003
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(12,631	)		(12,745	)		(10,330	)		(10,313	)		(12,373	)		(12,478	)		4,230		4,148
Income Tax Expense		12,435			12,247			16,300			15,956			44,533			43,773			5,000		4,870
Net Income		19,972			20,146			25,540			25,886			54,883			55,635			11,082		11,202
Basic EPS		0.55			0.56			0.70			0.71			1.50			1.52			0.30		0.31
Diluted EPS		0.52			0.52			0.65			0.66			1.36			1.38			0.29		0.30
Balance Sheet
Deferred Income Taxes - Current		51,106			48,457			50,066			47,417			54,705			52,059			35,028		32,386
Accounts Receivable Customer⁽¹⁾		69,543			75,060			78,626			86,342			110,014			117,636			84,048		91,556
Regulatory Assets — Noncurrent		145,821			149,236			150,608			154,576			184,097			189,421			191,124		196,736
Common Stock Equity		757,939			764,303			772,833			779,544			816,533			823,996			820,786		828,368
Accounts Payable -Trade		99,936			100,634			107,800			108,383			102,363			102,964			109,318		109,896
Deferred Income Taxes — Noncurrent		233,681			235,197			244,441			246,183			290,772			293,008			244,148		246,466


	TEP
	2010
	Three Months Ended
	March 31,						June 30,						September 30,						December 31,
	As			As			As			As			As			As			As		As
	Reported			Revised			Reported			Revised			Reported			Revised			Reported		Revised
	-Thousands of Dollars-
Income Statement
Electric Wholesale Sales⁽¹⁾	$	40,962		$	40,990		$	27,983		$	29,276		$	26,669		$	26,731		$	46,121	$	44,107
Fuel		58,351			58,507			66,694			66,753			85,793			85,968			75,233		75,444
Purchased Power⁽¹⁾		24,654			24,654			32,122			33,337			47,909			47,909			14,950		12,815
Increase (Decrease) to Reflect PPFAC Recovery Treatment		(3,118	)		(3,232	)		(7,618	)		(7,601	)		(13,362	)		(13,467	)		1,073		992
Income Tax Expense		6,348			6,224			15,028			14,728			38,139			37,452			1,543		1,456
Net Income		10,349			10,458			27,636			27,938			58,993			59,673			9,999		10,075
Balance Sheet
Deferred Income Taxes — Current		49,881			47,232			50,319			47,670			55,323			52,677			36,283		33,640
Accounts Receivable — Customer⁽¹⁾		54,957			60,669			63,627			71,342			92,197			99,819			63,916		71,425
Regulatory Assets — Noncurrent		136,013			137,641			140,102			142,209			170,287			173,631			182,514		186,074
Common Stock Equity		666,963			672,247			692,729			698,313			720,063			726,328			701,155		707,495
Accounts Payable -Trade		77,840			78,539			91,606			92,189			81,291			81,891			77,389		77,967
Deferred Income Taxes — Noncurrent		221,098			221,908			230,241			231,247			268,385			269,839			226,107		227,615


	UniSource Energy
	2010
	Six Months Ended						Nine Months Ended						Year Ended
	June 30,						September 30,						December 31,
	As			As			As			As			As			As
	Reported			Revised			Reported			Revised			Reported			Revised
	-Thousands of Dollars- (Except Per Share Amounts)
Income Statement
Electric Wholesale Sales⁽¹⁾	$	63,319		$	65,558		$	100,094		$	102,397		$	151,673		$	151,962
Fuel		129,694			129,909			220,187			220,577			296,980			297,580
Purchased Energy⁽¹⁾		147,261			149,396			241,151			243,285			307,288			307,288
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(22,962	)		(23,058	)		(35,335	)		(35,536	)		(31,105	)		(31,388	)
Income Tax Expense		28,735			28,201			73,266			71,975			78,266			76,845
Net Income		45,513			46,032			100,395			101,667			111,477			112,868
Basic EPS		1.26			1.27			2.76			2.80			3.06			3.10
Diluted EPS		1.17			1.18			2.53			2.56			2.82			2.86


	TEP
	2010
	Six Months Ended						Nine Months Ended						Year Ended
	June 30,						September 30,						December 31,
	As			As			As			As			As			As
	Reported			Revised			Reported			Revised			Reported			Revised
	-Thousands of Dollars-
Income Statement
Electric Wholesale Sales⁽¹⁾	$	68,025		$	70,265		$	94,694		$	96,996		$	140,815		$	141,103
Fuel		125,045			125,260			210,838			211,228			286,071			286,672
Purchased Power⁽¹⁾		55,857			57,992			103,766			105,901			118,716			118,716
Increase (Decrease) to Reflect PPFAC Recovery Treatment		(10,736	)		(10,833	)		(24,098	)		(24,299	)		(23,025	)		(23,307	)
Income Tax Expense		21,376			20,953			59,514			58,404			61,057			59,860
Net Income		37,986			38,396			96,979			98,069			106,978			108,144


	UniSource Energy						TEP
	Year Ended
	December 31, 2009
	As			As			As			As
	Reported			Revised			Reported			Revised
	-Thousands of Dollars- (Except Per Share Amounts)
Income Statement
Electric Wholesale Sales	$	130,904		$	131,255		$	152,955		$	153,306
Fuel		298,655			298,426			281,710			281,481
Purchased Energy		296,861			296,861			144,528			144,529
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(17,091	)		(16,558	)		(20,724	)		(20,190	)
Income Tax Expense		64,348			63,040			55,130			54,028
Net Income		104,258			105,608			89,248			90,396
Basic EPS		2.91			2.95			N/A			N/A
Diluted EPS		2.69			2.72			N/A			N/A
Balance Sheet
Deferred Income Taxes -Current		52,355			49,701			50,789			48,135
Accounts Receivable -Customer		80,191			88,138			62,508			70,456
Regulatory Assets -Noncurrent		147,325			150,324			137,147			138,466
Common Stock Equity		750,865			757,056			643,144			648,319
Accounts Payable -Trade		98,990			99,694			71,328			72,032
Deferred Income Taxes -Noncurrent		227,199			228,596			217,316			218,049


⁽¹⁾		The revised amounts include reclassifications to conform to the current year presentation.

- Definition

Description containing the entire organization, consolidation and basis of presentation of financial statements disclosure. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements.

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