UniSource Energy Reports Second Quarter 2011 Earnings, Maintains 2011 Earnings Guidance Range

TUCSON, Ariz.--(BUSINESS WIRE)-- UniSource Energy Corporation (NYSE: UNS) today reported second quarter 2011 net income of $28.6 million, or $0.71 per share of common stock on a fully-diluted basis, compared with $25.9 million, or $0.66 per diluted share, in the same period last year. For the six months ended June 30, 2011, UniSource Energy's net income was $42.0 million, or $1.07 per diluted share of common stock, compared with net income of $46.0 million, or $1.18 per diluted share, in the first six months of 2010.

"Our operating and financial results are consistent with our expectations," said Paul Bonavia, UniSource Energy's Chairman, President and CEO. "We continue to focus our efforts on managing our costs while safely and efficiently operating our utility businesses."

UniSource Energy's financial results primarily reflect those of TEP, which reported income of $25.1 million in the second quarter of 2011, compared with net income of $27.9 million in the same period last year. An increase in TEP's retail margin revenues was offset by higher depreciation and amortization expense and reduced margins on long-term wholesale sales.

TEP's second-quarter retail kWh sales were 1.6 percent higher than last year. Sales to residential and commercial customers increased 3.7 percent and 1.7 percent, respectively, compared with the second quarter of 2010. For the first six months of 2011, TEP's total retail kWh sales were up 1.5 percent compared with the same period last year.

"We are encouraged by the higher sales levels," Bonavia said. "However, cost increases associated with maintaining our generating units and higher depreciation expense have put pressure on our year-to-date earnings." TEP's current base rates have been in effect since December 2008 and cannot be increased before January 2013.

Tucson Electric Power

Retail kWh Sales and Revenues

TEP's retail kWh sales grew by 1.6 percent compared with the second quarter of 2010. Residential, commercial, and mining sales were up 3.7 percent, 1.7 percent, and 0.3 percent, respectively; industrial sales were down 0.8 percent.

Higher retail sales volumes led to an increase in retail margin revenues of approximately $3 million, or 1.8 percent, compared with the same period last year. Margin revenues do not include customer surcharges used to fund renewable energy and energy efficiency programs or revenues collected to recover the cost of fuel and purchased power.

Long-Term Wholesale and Transmission Revenues

The margin on TEP's long-term wholesale kWh sales fell by $3 million compared with the second quarter of 2010. The decrease reflects a change in the terms of TEP's wholesale sales contract with Salt River Project (SRP). Effective June 1, 2011, SRP no longer pays TEP a monthly demand charge of approximately $2 million. Instead, SRP is required to purchase 73,000 MWh per month, or 876,000 MWh annually, at an energy price set at a discount to the Palo Verde Market Index.

Other Operating Expenses

TEP's base operations and maintenance expense (O&M) increased by $0.5 million in the second quarter of 2011 over the same period last year. Base O&M excludes costs directly offset by customer surcharges and third-party reimbursements. In the second quarter of 2011, depreciation expense increased by $1 million as a result of additional plant-in-service compared with the same period last year.

Year-to-Date Results

In the first six months of 2011, TEP reported net income of $29.8 million compared with net income of $38.4 million in the same period last year. That decrease was due to: a decline in long-term wholesale margin revenues; a decrease in wholesale transmission revenues; an increase in Base O&M due to planned generating plant maintenance expense; and higher depreciation expense. Those factors were partially offset by an increase in retail margin revenues.

UNS Gas

UNS Gas reported net income of less than $1 million in the second quarters of 2011 and 2010.

UNS Gas filed a request in April for a base rate increase of $5.6 million, or 4 percent. UNS Gas' current rates reflect costs from late 2007 and early 2008, and the proposed rate increase would help recover higher operating and capital costs incurred since that time. The administrative law judge assigned to the case issued a procedural order that could lead to a final decision by the Arizona Corporation Commission in the first half of 2012.

UNS Electric

UNS Electric reported net income of $3 million in the second quarter of 2011 compared with $2 million in the same period last year. UNS Electric's retail kWh sales increased 3.2 percent compared with the second quarter of 2010 due primarily to higher energy usage by its two mining customers and a 5.0 percent increase in kWh sales to industrial customers.

Seasonality of Earnings

The net income and results of operations of TEP as well as of UNS Gas and UNS Electric — operating subsidiaries of UniSource Energy Services (UES) — are seasonal in nature. TEP and UNS Electric typically record the majority of their net income during the second and third quarters when hot weather contributes to higher energy consumption. TEP's retail rates, which include higher charges for higher levels of energy use, also shift a larger share of the company's earnings into those periods.

Energy demand from UNS Gas customers typically peaks during the winter. Accordingly, UNS Gas typically records the majority of its net income during the first and fourth quarters.

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