Nature of Operations and Basis of Accounting Presentation

9 Months Ended

Sep. 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. Each of UniSource Energy’s subsidiaries 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 September 30, 2011. TEP generates, transmits and distributes electricity to approximately 404,000 retail electric customers in a 1,155 square mile area in southeastern Arizona. TEP also sells electricity to other utilities and power marketing entities, located primarily 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.

In 2008, UED developed the Black Mountain Generating Station (BMGS) in northwestern Arizona. The facility includes two natural gas-fired combustion turbines. Prior to July 2011, UNS Electric received energy from BMGS through a power sales agreement with UED. In July 2011, UNS Electric purchased BMGS from UED, leaving UED with no significant remaining assets. The transaction had no impact on UniSource Energy’s consolidated financial statements.

Millennium’s investments in unregulated businesses represent less than 1% of UniSource Energy’s assets as of September 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 September 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

In the second quarter of 2011, we identified errors related to amounts recorded, at their dollar value, owed to or payable by TEP for electricity deliveries settled in-kind or to be settled in-kind during prior years under three of our transmission agreements. Transmission, interconnection and certain joint operating agreements typically provide that the parties to such agreements will monitor transmission and delivery losses and other energy imbalances and make payments to each other to compensate for any losses and imbalances. Payments for such losses and imbalances are made in-kind with energy (MWh) rather than cash. The amount of these losses and imbalances is typically a very low portion of the energy flows subject to these agreements and is usually settled on a one day or one month lag. Separately, we also had identified errors in prior years in the calculation of income tax expense arising from not treating 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, if recognized in 2011, could be material to the annual period ending December 31, 2011 and the interim period ended June 30, 2011. As a result, in accordance with Staff Accounting Bulletin 108 and as set forth in Note 1 to the Financial Statements in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, we revised our prior period financial statements to correct these errors.

In the third quarter of 2011, we conducted a review of all of our remaining agreements that provided for in-kind payments for transmission and delivery losses or energy imbalances and identified additional errors related to recording, at their dollar value, amounts owed to or payable by TEP for electricity deliveries settled in-kind or to be settled in-kind during prior years. We also identified minor errors to prior year amounts billed to third parties for operations and maintenance expense. We assessed the materiality of these errors, considered together with the errors identified in the first half of 2011, on prior period financial statements and concluded that, while they were not material to any prior annual or interim periods, we should update the prior revision to reflect all of the errors identified in 2011.

The income tax adjustment affected fiscal years 2003 through 2010 for UniSource Energy and fiscal years 2009 and 2010 for TEP. The adjustment for transmission and delivery losses and energy imbalances settled in-kind or to be settled in-kind affected fiscal years 2004 through 2010. The operations and maintenance expense adjustment affected fiscal years 2006 through 2010. The updated revision increased UniSource Energy’s net income by $2 million for both the 2010 and 2009 annual periods and by $3 million in 2008. The updated revision increased TEP’s net income by $1 million for both the 2010 and 2009 annual periods and by $3 million in 2008. UniSource Energy’s Accumulated Earnings increased by $4 million for the periods prior to January 1, 2008, as a result of the revisions.

The revised amounts include reclassifications to conform to the current year presentation. TEP reclassified Other Operations and Maintenance costs of $7 million in 2010, and $6 million in 2009 to Other Expense to correctly account for the regulatory treatment of certain expenses. Additionally, for the nine months ended September 30, 2009, Unisource Energy and TEP reclassified Electric Wholesale Sales of $2 million to Purchased Energy to correctly account for the net settlement of certain wholesale sales contracts.

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

	UniSource Energy
	2011
	Three Months Ended						Three Months Ended				Six Months Ended
	March 31,						June 30,				June 30,
	As			As			As		As		As			As
	Reported			Revised			Reported		Revised		Reported			Revised
	-Thousands of Dollars- (Except Per Share Amounts)
Income Statement
Electric Wholesale Sales	$	40,781		$	40,914		$	38,744	$	38,744	$	79,658		$	79,658
Fuel		72,137			71,192			82,563		81,949		154,692			153,141
Purchased Energy		77,640			78,274			66,336		66,336		144,610			144,610
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(5,793	)		(5,388	)		3,227		3,790		(3,008	)		(1,598	)
Income Tax Expense		3,909			7,468			17,229		17,320		24,731			24,788
Net Income		16,992			13,472			28,574		28,604		41,990			42,076
Basic Earnings Per Share (EPS)		0.46			0.37			0.77		0.77		1.14			1.14
Diluted EPS		0.44			0.36			0.71		0.71		1.07			1.07
Balance Sheet
Deferred Income Taxes — Current		35,210			30,989			34,839		33,219		34,839			33,219
Accounts Receivable — Customer		73,350			88,050			94,618		103,102		94,618			103,102
Regulatory Assets — Noncurrent		191,238			186,812			166,311		161,131		166,311			161,131
Common Stock Equity		824,127			830,577			847,095		849,569		847,095			849,569
Accounts Payable — Trade		97,260			96,862			123,508		122,717		123,508			122,717

	TEP
	2011
	Three Months Ended						Three Months Ended				Six Months Ended
	March 31,						June 30,				June 30,
	As			As			As		As		As			As
	Reported			Revised			Reported		Revised		Reported			Revised
	-Thousands of Dollars-
Income Statement
Electric Wholesale Sales	$	35,122		$	35,256		$	31,759	$	31,759	$	67,015		$	67,015
Fuel		71,315			70,370			80,831		80,217		152,138			150,587
Purchased Power		16,601			17,236			26,445		26,444		43,680			43,680
Increase (Decrease) to Reflect PPFAC Recovery Treatment		(9,342	)		(8,937	)		2,112		2,675		(7,671	)		(6,262	)
Income Tax Expense		208			2,528			15,133		15,154		17,624			17,682
Net Income		6,983			4,703			25,128		25,158		29,776			29,861
Balance Sheet
Deferred Income Taxes — Current		36,205			31,985			35,723		34,102		35,723			34,102
Accounts Receivable — Customer		53,560			68,259			76,988		85,471		76,988			85,471
Regulatory Assets — Noncurrent		180,723			176,296			156,345		151,165		156,345			151,165
Common Stock Equity		708,604			715,054			736,916		739,390		736,916			739,390
Accounts Payable — Trade		71,276			70,879			98,251		97,458		98,251			97,458

	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	$	37,064		$	37,092		$	28,466		$	28,467		$	36,776		$	36,838		$	51,579	$	49,565
Fuel		60,448			60,167			69,304			69,151			90,493			89,874			76,793		76,460
Purchased Energy		82,805			82,805			66,591			66,591			93,889			93,889			66,137		64,003
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(12,631	)		(12,361	)		(10,313	)		(10,164	)		(12,373	)		(11,735	)		4,230		4,638
Other Operations and Maintenance		82,908			82,909			87,134			87,134			88,936			88,936			111,089		111,058
Income Tax Expense		12,435			12,267			15,956			15,958			44,533			43,793			5,000		4,903
Net Income		19,972			20,178			25,886			25,889			54,883			55,665			11,082		11,252
Basic EPS		0.55			0.56			0.71			0.71			1.50			1.52			0.30		0.31
Diluted EPS		0.52			0.52			0.66			0.66			1.36			1.38			0.29		0.30
Balance Sheet
Deferred Income Taxes — Current		51,106			46,948			50,066			45,906			54,705			50,528			32,386		30,822
Accounts Receivable — Customer		69,543			80,005			78,626			91,776			110,014			123,750			91,556		98,333
Regulatory Assets — Noncurrent		145,821			146,847			150,608			152,038			184,097			186,140			196,736		192,966
Common Stock Equity		757,939			766,607			772,833			781,851			816,533			826,334			828,368		830,756
Accounts Payable — Trade		99,936			99,377			107,800			107,461			102,363			101,929			109,896		108,950
Deferred Income Taxes — Noncurrent		233,681			235,197			244,441			246,183			290,772			293,008			246,466		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	$	40,962		$	40,989		$	29,276		$	29,276		$	26,669		$	26,731		$	46,121	$	44,107
Fuel		58,351			58,070			66,753			66,599			85,793			85,174			75,233		74,901
Purchased Power		24,654			24,655			33,337			33,337			47,909			47,909			14,950		12,815
Increase (Decrease) to Reflect PPFAC Recovery Treatment		(3,118	)		(2,847	)		(7,601	)		(7,452	)		(13,362	)		(12,724	)		1,073		1,482
Other Operations and Maintenance		70,365			70,364			74,613			74,613			76,277			74,687			99,096		96,961
Income Tax Expense		6,348			6,245			14,728			14,730			38,139			37,472			1,543		1,489
Net Income		10,349			10,490			27,938			27,941			58,993			59,704			9,999		10,125
Balance Sheet
Deferred Income Taxes — Current		49,881			45,724			50,319			46,159			55,323			51,147			33,640		32,077
Accounts Receivable — Customer		54,957			65,615			63,627			76,777			92,197			105,933			71,425		78,200
Regulatory Assets — Noncurrent		136,013			135,252			140,102			139,671			170,287			170,350			186,074		182,304
Common Stock Equity		666,963			674,551			692,729			700,621			720,063			728,666			707,495		709,884
Accounts Payable — Trade		77,840			77,282			91,606			91,267			81,291			80,856			77,967		77,021
Deferred Income Taxes — Noncurrent		221,098			221,908			230,241			231,247			268,385			269,839			227,615		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	$	65,558		$	65,558		$	100,094		$	102,397		$	151,673		$	151,962
Fuel		129,909			129,318			220,187			219,192			296,980			295,652
Purchased Energy		149,396			149,396			241,151			243,285			307,288			307,288
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(23,058	)		(22,525	)		(35,335	)		(34,260	)		(31,105	)		(29,622	)
Other Operations and Maintenance		170,042			170,042			258,979			258,979			370,067			370,037
Income Tax Expense		28,201			28,225			73,266			72,018			78,266			76,921
Net Income		46,032			46,067			100,395			101,732			111,477			112,984
Basic EPS		1.27			1.27			2.76			2.80			3.06			3.10
Diluted EPS		1.18			1.18			2.53			2.57			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	$	70,265		$	70,265		$	94,694		$	96,997		$	140,815		$	141,103
Fuel		125,260			124,669			210,838			209,843			286,071			284,744
Purchased Power		57,992			57,992			103,766			105,900			118,716			118,716
Increase (Decrease) to Reflect PPFAC Recovery Treatment		(10,833	)		(10,299	)		(24,098	)		(23,023	)		(23,025	)		(21,541	)
Other Operations and Maintenance		144,977			144,977			224,441			219,664			323,537			316,625
Income Tax Expense		20,953			20,975			59,514			58,447			61,057			59,936
Net Income		38,396			38,431			96,979			98,135			106,978			108,260

	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			296,248			281,710			279,303
Purchased Energy		296,861			296,861			144,528			144,529
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment		(17,091	)		(14,553	)		(20,724	)		(18,186	)
Other Operations and Maintenance		333,887			333,579			289,765			282,986
Income Tax Expense		64,348			63,232			55,130			54,220
Net Income		104,258			105,901			89,248			90,688
Basic EPS		2.91			2.95			N/A			N/A
Diluted EPS		2.69			2.73			N/A			N/A
Balance Sheet
Deferred Income Taxes — Current		52,355			48,213			50,789			46,647
Accounts Receivable — Customer		80,191			92,781			62,508			75,099
Regulatory Assets — Noncurrent		147,325			148,319			137,147			136,461
Common Stock Equity		750,865			759,329			643,144			650,591
Accounts Payable — Trade		98,990			98,573			71,328			70,911
Deferred Income Taxes — Noncurrent		227,199			228,596			217,316			218,049

	UniSource Energy				TEP
	Year Ended
	December 31, 2008
	As		As		As		As
	Reported		Revised		Reported		Revised
	-Thousands of Dollars- (Except Per Share Amounts)
Income Statement
Electric Wholesale Sales	$	248,855	$	249,195	$	272,411	$	272,750
Fuel		299,987		295,802		289,985		285,799
Purchased Energy		454,765		454,765		250,580		250,580
Other Operations and Maintenance		295,658		295,478		256,584		256,404
Income Tax Expense		16,975		18,747		10,867		12,729
Net Income		14,021		16,955		4,363		7,206
Basic EPS		0.39		0.47		N/A		N/A
Diluted EPS		0.39		0.47		N/A		N/A