UniSource Energy Corporation (NYSE: UNS) is a holding entity that primarily operates in electricity and gas in Arizona. Operations are conducted by UniSource Energy’s subsidiaries, each of which is a separate legal entity with its own assets and liabilities. The company makes money through long-term and short-term sales to a diverse base of customers. As both gas and electricity share similar inputs, UNS is highly dependent upon pricing schemes of certain key commodities.
UNS conducts business in four primary business segments — TEP, UNS Gas, UNS Electric, and Millennium. TEP is an electric utility that provides electric service to the community of Tucson, Arizona. UES, through its two subsidiaries, UNS Gas and UNS Electric, provides gas and electric service to 30 communities in northern and southern Arizona. Finally, Millennium provides supplemental labor and meter reading services to TEP, UNS Gas and UNS Electric. The majority of UNS' growth, about 42% of total revenues, come from the residential sector as its customer base.
Recently, the company has been expanding heavily into Renewable Energy, sensing that the government support and public interest in cleaner energy provides better brand reputation. For example, UNS's subsidiary TEP ranked sixth in the nation last year for per-capita additions to its solar energy portfolio, according to a report released this month by the Solar Electric Power Association (SEPA). It was through SOLON Corp, a provider of turnkey solar power plants and manufacturer of crystalline silicon solar modules, that has signed an agreement with UNS to supply these modules for a proposed 1.22MW solar project.
Furthermore, TEP is finding more innovative ways for residential and small business customers to participate in a new no-cost pilot program that can help them to reduce energy consumption and lower their electric bills. By receiving a free thermostat that allows users to adjust temperature remotely, TEP system operators may cycle off an air condition to adjust the thermostat during peak periods of electric demand - a win-win situation for both parties.
With revenues recovering at sales growth of 4.1% though in FY2010 compared to roughly -0.9% growth in FY2009, and margins holding up at around 30%, it is apparent that the company has been able to counter with decreasing revenues in lieu with managing its own costs. Going forward, a strong economy recovering will help boost up energy utilization rates.
As a large part of UNS's business is centered in electricity generation for Tuscon, Arizona, customer growth and unemployment rates influence the amount of demand required tor those regions. A lower level of economic activity that changes discretionary spending thereby increases conservation efforts by customers and results in a decline in energy consumption. When customers are affected by increased unemployment, the ensuing customer bankruptcies or inability to pay on a timely basis poses as risks to UNS.
Typically, a largely dry region like Arizona experiences more extreme temperatures than coastal regions. As such, air conditioning is heavily used in the summer time (requiring electricity), and heating is heavily used in the winter (requiring natural gas). Because UNS is heavily invested in both natural gas and electricity as a utilities company, the combination of two operating segments tend to smooth out earnings better than companies that focus solely on one or the other. Regardless, both sources are heavily dependent upon several key inputs such as Natural Gas, Coal and Oil. The price at which UNS may acquire these inputs determine how much the company may charge to its customers.
Energy saving appliances and general implementation of EE Standards will reduce energy consumption for TEP's retail customers. Because TEP represents such a significant chunk of UNS's business, the ability for TEP customers to install alternative energy technologies and even conventional generation units reduce their reliance on TEP's services. The suppliers of these technologies include: