EX-99 2 pressrelease_0207.txt PRESS RELEASE [GRAPHIC OMITTED] FOR IMMEDIATE RELEASE February 7, 2005 Media Contact: Joe Salkowski, (520) 884-3625 Page 1 of 7 Financial Analyst Contact: Jo Smith, (520) 884-3650 UNISOURCE ENERGY REPORTS 2004 EARNINGS, INCREASES DIVIDEND TUCSON, ARIZ. - UniSource Energy Corporation (NYSE: UNS) reported earnings today for 2004 of $45 million, or $1.30 per share of common stock. UniSource Energy also announced that its Board of Directors has increased the company's quarterly dividend by 19 percent to $0.19 per share and that management expects the company's 2005 earnings will be between $1.50 and $1.75 per share. Higher revenues from UniSource Energy's utility subsidiaries contributed to its financial performance. Tucson Electric Power (TEP), UniSource Energy's principal subsidiary, saw its utility gross margin (the sum of electric retail and wholesale revenues less fuel and purchased power expenses) increase by $27 million, or 5 percent, compared with 2003. An increase in Transition Recovery Asset (TRA) amortization related to TEP's generation assets as well as costs related to the failed acquisition of UniSource Energy partially offset the benefits of higher utility gross margin. UniSource Energy's 2004 earnings include $10 million in net income from the first full year of operations of UniSource Energy Services (UES), the subsidiary formed to operate gas and electric systems acquired from Citizens Communications Company (NYSE: CZN) in August 2003. "Our core utility businesses enjoyed another strong year," said James S. Pignatelli, Chairman, President and Chief Executive Officer of UniSource Energy. "Our pursuit of the proposed transaction did not prevent us from serving our growing customer base, making sound investments in our energy infrastructure and providing a solid return for our shareholders." UniSource Energy was able to fund its capital expenditures of $155 million and continue to reduce debt at TEP with cash flows from operations. In 2004, the Company generated cash flows from operations of $309 million. The company's 2003 earnings of $114 million, or $3.37 per share of common stock, included an after-tax gain of $67 million, or $1.99 per share of common stock, associated with the adoption of a new financial accounting standard (FAS 143). Excluding the impact of that change, UniSource Energy's 2003 earnings were $46 million, or $1.38 per share of common stock. Results for 2003 also included the recognition of $15 million in tax benefits related to net operating losses and investment tax credits from prior years. In December 2004, the Arizona Corporation Commission rejected the proposed acquisition of UniSource Energy by Saguaro Utility Group L.P., a limited partnership composed of Sage Mountain, L.L.C. as general partner and limited partners including investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P., J.P. Morgan Partners, LLC, and Wachovia Capital Partners. UniSource Energy incurred $12 million in pre-tax costs associated with the transaction during 2004. Lower fees resulting from TEP's entry into a new $401 million credit agreement in 2004 contributed to a $3 million reduction in UniSource Energy's interest expense. The company also benefited from a $12 million year-over-year reduction in operating losses at Millennium Energy Holdings (MEH), parent company of UniSource Energy's unregulated energy businesses. TUCSON ELECTRIC POWER COMPANY In 2004, TEP reported earnings of $45 million, or $1.30 per UniSource Energy share, compared to 2003 earnings of $129 million, or $3.81 per UniSource Energy share. Excluding the impact of adopting FAS 143, TEP's earnings in 2003 were $61 million, or $1.82 per UniSource Energy share. TEP's reported earnings in 2003 also include the recognition of $15 million in tax benefits related to net operating losses and investment tax credits from prior years. TEP's retail customer base grew by 2 percent in 2004 to 375,532. Customer growth and higher kWh sales to mining customers contributed to a $28 million, or 4 percent, increase in retail revenues during 2004. The average price of copper was 59 percent higher in 2004, leading to increased mining activity and an $11 million, or 38 percent, increase in revenues from sales to TEP's mining customers. Revenue from commercial customers increased by $11 million or 6 percent compared with 2003. "Our weather was milder than the year before, but TEP's growing customer base and our region's economy contributed to solid results," Pignatelli said. Cooling degree days declined by 17 percent in 2004, while heating degree days - a less critical measure in Tucson's relatively warm climate - increased by 23 percent over 2003. TEP's wholesale revenues increased by $9 million, or 6 percent, in 2004 due to higher market prices for power. The average price for around-the-clock energy at the Dow Jones Palo Verde Index increased by 7 percent to nearly $44 per MWh in 2004. Higher power prices contributed to an increase of $7 million, or 11 percent, in purchased power costs at TEP. The utility increased its use of purchased power to replace generation lost due to planned and unplanned outages at several power plants, including a longer-than-expected outage to allow the upgrade of emission control equipment at the Springerville Generating Station. Acquisition-related costs and planned and unplanned plant outages contributed to a $20 million increase in TEP's operations and maintenance expenses. The utility's results were also negatively impacted by an $18 million increase in TRA amortization compared to 2003. UNISOURCE ENERGY SERVICES UES reported earnings of $10 million in 2004, its first full year of operations, compared with net income of $3 million in 2003. UES's gas operations contributed $6 million to earnings, while its electric operations contributed $4 million. UES began providing gas and electric service in northern and southern Arizona in August 2003. Total revenues from UES's electric operations reached $144 million in 2004, compared to $55 million from less than five months of operations in 2003. UES's gas operations produced $129 million in total revenues in 2004, compared to $47 million during 2003. The customer base for UES's electric and gas operations grew by 5 percent in 2004 to 85,465 and 133,403, respectively. MILLENNIUM ENERGY HOLDINGS MEH reported an annual net loss of $4 million, or $0.12 per UniSource Energy share, compared to an annual net loss of $16 million, or $0.48 per UniSource Energy share, in 2003. Reduced losses at Global Solar Energy, a key MEH holding, combined with income from other investments contributed to MEH's improved performance. Global Solar Energy recorded a net loss of $5 million in 2004, compared to a net loss of $7 million in 2003. MEH recorded income related to the sale of an energy asset by Haddington Energy Partners II, LP, a limited partnership that funds energy-related investments. YEAR END 4TH QUARTER PER UNISOURCE ENERGY SHARE 2004 2003 2004 2003 ----------------------------------------------------------------------------- Tucson Electric Power $1.30 $1.82 $0.00 $0.70 UniSource Energy Services (1) 0.29 0.09 0.12 0.09 Millennium Energy Holdings (0.12) (0.48) (0.04) (0.12) UniSource Energy Development (0.03) 0.21 - 0.21 Inter-Company and Other (0.14) (0.26) (0.03) (0.07) ----------------------------------------------------------------------------- Income Before Cumulative Effect $1.30 $1.38 $0.05 $0.81 of Accounting Change Cumulative Effect of Accounting Change - Net of Tax - 1.99 - - ----------------------------------------------------------------------------- UniSource Energy Consolidated $1.30 $3.37 $0.05 $0.81 ============================================================================= Avg. Shares Outstanding (millions) 34.4 33.8 34.5 33.9 1) Results for 2003 are for the period of August 11 to December 31 UniSource Energy believes that the presentation of TEP, UES, MEH and UniSource Energy Development (UED) net income or loss on a per UniSource Energy share basis, which is a non-GAAP financial measure, provides useful information to investors by disclosing the results of operations of its business segments on a basis consistent with UniSource Energy's reported earnings. QUARTERLY RESULTS UniSource Energy's consolidated fourth quarter 2004 earnings were $2 million, or $0.05 per share, compared to $27 million, or $0.81 per share, in 2003. Much of the year-over-year decrease can be attributed to $15 million in tax benefits recorded by TEP in the fourth quarter of 2003 as well as a $6 million development fee paid to UED in the fourth quarter of 2003 for the expansion of TEP's Springerville Generating Station. QUARTERLY DIVIDEND On February 4, 2005, UniSource Energy's Board of Directors declared a quarterly dividend for common shareholders of $0.19 per share, an increase of 19 percent over the previous quarterly dividend of $0.16 per share. The dividend will be paid on March 8, 2005, to common shareholders of record as of February 15, 2005. The board also indicated its desire to target, over the next several years, a dividend payout level of up to 50 percent of net income. The declaration of dividend payments is at the board's sole discretion and subject to numerous factors that ordinarily affect dividend policy, including the results of UniSource Energy's operations and its financial position as well as general economic and business conditions. EARNINGS OUTLOOK UniSource Energy's management currently estimates that its 2005 full-year earnings will be between $1.50 and $1.75 per share. Numerous factors can affect UniSource Energy's ability to reach the 2005 estimates. The factors include, but are not limited to: uncertainties prevailing in the wholesale power market; regulatory decisions; performance of TEP's generating plants; the weather; the pace and strength of the economic recovery in the region; fuel and purchased power expense; changes to long-term contracts; changes in asset depreciable lives; changes in accounting standards; and the amount of research, development and operating expenses incurred by UniSource Energy's unregulated energy technology investments. UniSource Energy's earnings are subject to its utilities' seasonal energy sales. Generally, TEP records a significant portion of its earnings during the third quarter as a result of peak energy usage during the summer. DISCUSSION OF FOURTH QUARTER 2004 AND ANNUAL EARNINGS AND CORPORATE STRATEGY UniSource Energy Corporation officials will discuss the Company's 2004 year-end earnings, outlook for 2005 and corporate strategies on Tuesday, Feb. 8 during a company-hosted luncheon in New York City. The event will be hosted by James S. Pignatelli, UniSource Energy's Chairman, President and Chief Executive Officer. The live telephone and audio-only webcast of the Company's presentation is scheduled for Tuesday, Feb. 8, beginning at 12:00 p.m. EST. TELEPHONE ACCESS To listen to the presentation via telephone, dial (877) 582-0446 five to 10 minutes prior to the event and reference confirmation code 3719822. A telephone replay will be available for seven days starting Feb. 8. To listen to the replay, dial 800-642-1687 and reference confirmation code 3719822. INTERNET ACCESS A live audio-only webcast of the presentation will be available via a link at www.UniSourceEnergy.com. Listeners are encouraged to visit the Web site at least 30 minutes before the event to register, download and install any necessary audio software. A recording of the webcast will be available at www.UniSourceEnergy.com. SUPPLEMENTAL MATERIALS Supplemental materials to be used in connection with UniSource Energy's presentation on Tuesday, Feb. 8, will be posted on the Company's website at www.UniSourceEnergy.com prior to the commencement of the presentation at 12:00 p.m. EST. UniSource Energy's primary subsidiaries include Tucson Electric Power Co., which serves more than 370,000 customers in southern Arizona; UniSource Energy Services, provider of natural gas and electric service for more than 218,000 customers in northern and southern Arizona; and Millennium Energy Holdings, parent company of UniSource Energy's unregulated energy businesses. For more information about UniSource Energy and its subsidiaries, visit www.UniSourceEnergy.com. This news release contains forward-looking information that involves risks and uncertainties, that include, but are not limited to, the outcome of regulatory proceedings; the ongoing restructuring of the electric industry; regional economic and market conditions which could affect customer growth and the cost of fuel and power supplies; changes to long-term contracts; performance of TEP's generating plants; the weather; changes in asset depreciable lives; changes related to the recognition of unbilled revenue; the cost of debt and equity capital; changes in accounting standards; and other factors listed in UniSource Energy's Form 10-K and 10-Q filings with the Securities and Exchange Commission. The preceding factors may cause future results to differ materially from outcomes currently expected by UniSource Energy. UNISOURCE ENERGY 2004 RESULTS UNISOURCE ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended (in thousands of dollars, except per share amounts) December 31, INCREASE / (DECREASE) --------------------------- (UNAUDITED) 2004 2003 AMOUNT PERCENT ------------------------------------------------------------------------------------------------------------------------ OPERATING REVENUES Electric Retail Sales $ 186,750 $ 185,526 $ 1,224 0.7 Electric Wholesale Sales 38,955 43,055 (4,100) (9.5) Gas Revenue 41,841 36,305 5,536 15.2 Other Revenues 5,958 15,297 (9,339) (61.1) ------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING REVENUES 273,504 280,183 (6,679) (2.4) ------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES Fuel 46,211 47,651 (1,440) (3.0) Purchased Energy 65,830 52,915 12,915 24.4 Other Operations and Maintenance 74,391 65,028 9,363 14.4 Depreciation and Amortization 33,858 35,171 (1,313) (3.7) Amortization of Transition Recovery Asset 10,441 6,486 3,955 61.0 Taxes Other Than Income Taxes 9,736 12,696 (2,960) (23.3) ------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 240,467 219,947 20,520 9.3 ------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME 33,037 60,236 (27,199) (45.2) ------------------------------------------------------------------------------------------------------------------------ OTHER INCOME (DEDUCTIONS) Interest Income 5,304 5,113 191 3.7 Other Income 2,305 3,154 (849) (26.9) Other Expense (86) (1,668) 1,582 94.8 ------------------------------------------------------------------------------------------------------------------------ TOTAL OTHER INCOME (DEDUCTIONS) 7,523 6,599 924 14.0 ------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Long-Term Debt 19,904 21,927 (2,023) (9.2) Interest on Capital Leases 20,539 21,289 (750) (3.5) Other Interest Expense, Net of Amounts Capitalized 76 805 (729) (90.6) ------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 40,519 44,021 (3,502) (8.0) ------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 41 22,814 (22,773) (99.8) Income Tax Expense (Benefit) (1,565) (4,485) 2,920 65.1 ------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 1,606 $ 27,299 $ (25,693) (94.1) ======================================================================================================================== WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (000) 34,477 33,914 563 1.7 ======================================================================================================================== BASIC EARNINGS PER SHARE $0.05 $0.81 $(0.76) (93.8) ======================================================================================================================== DILUTED EARNINGS PER SHARE $0.05 $0.79 $(0.74) (93.7) ======================================================================================================================== DIVIDENDS PAID PER SHARE $0.32 $0.15 $0.17 N/M ======================================================================================================================== Three Months Ended TUCSON ELECTRIC POWER December 31, INCREASE / (DECREASE) --------------------------- ELECTRIC KWH SALES (000): 2004 2003 AMOUNT PERCENT ------------------------------------------------------------------------------------------------------------------------ Retail Sales 1,900,989 1,896,721 4,268 0.2 Wholesale Sales 740,321 991,498 (251,177) (25.3) ------------------------------------------------------------------------------------------------------------------------ TOTAL 2,641,310 2,888,219 (246,909) (8.5) ======================================================================================================================== N/M - Not Meaningful Reclassifications have been made to prior periods to conform to the current period's presentation. UNISOURCE ENERGY 2004 RESULTS UNISOURCE ENERGY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Twelve Months Ended (in thousands of dollars, except per share amounts) December 31, INCREASE / (DECREASE) --------------------------- (UNAUDITED) 2004 2003 AMOUNT PERCENT ----------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES Electric Retail Sales $ 862,258 $ 746,578 $ 115,680 15.5 Electric Wholesale Sales 160,154 151,111 9,043 6.0 Gas Revenue 126,666 46,520 80,146 N/M Other Revenues 19,900 28,546 (8,646) (30.3) ----------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUES 1,168,978 972,755 196,223 20.2 ----------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Fuel 212,514 210,163 2,351 1.1 Purchased Energy 250,668 132,754 117,914 88.8 Other Operations and Maintenance 252,711 216,323 36,388 16.8 Depreciation and Amortization 141,926 130,643 11,283 8.6 Amortization of Transition Recovery Asset 50,153 31,752 18,401 58.0 Taxes Other Than Income Taxes 48,227 48,115 112 0.2 ----------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 956,199 769,750 186,449 24.2 ----------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 212,779 203,005 9,774 4.8 ----------------------------------------------------------------------------------------------------------------------- OTHER INCOME (DEDUCTIONS) Interest Income 20,192 20,493 (301) (1.5) Other Income 15,029 7,306 7,723 N/M Other Expense (6,439) (5,620) (819) (14.6) ----------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INCOME (DEDUCTIONS) 28,782 22,179 6,603 29.8 ----------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Long-Term Debt 82,807 80,844 1,963 2.4 Interest on Capital Leases 81,440 84,080 (2,640) (3.1) Other Interest Expense, Net of Amounts Capitalized (411) 1,708 (2,119) N/M ----------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 163,836 166,632 (2,796) (1.7) ----------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 77,725 58,552 19,173 32.7 Income Tax Expense 33,098 12,082 21,016 N/M ----------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 44,627 46,470 (1,843) (4.0) CUMULATIVE EFFECT OF ACCOUNTING CHANGE - NET OF TAX - 67,471 (67,471) N/M ----------------------------------------------------------------------------------------------------------------------- NET INCOME $ 44,627 $ 113,941 $ (69,314) (60.8) ======================================================================================================================= WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (000) 34,380 33,828 552 1.6 ======================================================================================================================= BASIC EARNINGS PER SHARE INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $1.30 $1.38 $(0.08) (5.8) CUMULATIVE EFFECT OF ACCOUNTING CHANGE - NET OF TAX - 1.99 (1.99) N/M ----------------------------------------------------------------------------------------------------------------------- NET INCOME $1.30 $3.37 $(2.07) (61.4) ======================================================================================================================= DILUTED EARNINGS PER SHARE INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $1.27 $1.35 $(0.08) (5.9) CUMULATIVE EFFECT OF ACCOUNTING CHANGE - NET OF TAX - 1.97 (1.97) N/M ----------------------------------------------------------------------------------------------------------------------- NET INCOME $1.27 $3.32 $(2.05) (61.7) ======================================================================================================================= DIVIDENDS PAID PER SHARE $0.64 $0.60 $0.04 6.7 ======================================================================================================================= Twelve Months Ended TUCSON ELECTRIC POWER December 31, INCREASE / (DECREASE) --------------------------- ELECTRIC KWH SALES (000): 2004 2003 AMOUNT PERCENT ----------------------------------------------------------------------------------------------------------------------- Retail Sales 8,542,990 8,275,775 267,215 3.2 Wholesale Sales 3,292,315 3,364,010 (71,695) (2.1) ----------------------------------------------------------------------------------------------------------------------- TOTAL 11,835,305 11,639,785 195,520 1.7 ======================================================================================================================= N/M - Not Meaningful Reclassifications have been made to prior periods to conform to the current period's presentation.