This Annual Report on Form 10-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Tucson Electric Power Company (TEP)(TEP or the Company) is including the following cautionary statements to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by or for TEP in this Annual Report on Form 10-K. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future operational, economic, or financial performance and underlying assumptions, and other statements that are not statements of historical facts. Forward-looking statements may be identified by the use of words such as anticipates, believes, estimates, expects, intends, may, plans, predicts, projects, would, and similar expressions. From time to time, we may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral, and whether made by or on behalf of TEP, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, TEP disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws.

AtAs of December 31, 2015,2016, approximately 49%52% of TEP's generatinggeneration capacity was fueled by coal. Existing and proposed federal environmental regulations, as well as potential changes in state regulation, may increase the cost of operatingis coal-fired generating facilities.generation. TEP is executing strategies and evaluating additional steps to reduce its dependency on coalcoal-fired generation while still meeting its peak load requirements. In August 2015, TEP exhausted its existing coal supply at Unit 4 of the H. Wilson Sundt Generating Station (Sundt Unit 4). TEP expects to continue operating Sundt Unit 4 on natural gas as a primary fuel source.requirements and maintaining affordable Retail Rates.

The Purchased Power and Fuel Adjustment Clause (PPFAC) allows TEP to recover its fuel, transmission, and purchased power costs, including demand charges, and the costs of contracts for hedging fuel and purchased power costs for its retail customers. The PPFAC consists of a forward component and a true-up component.

The forward component adjusts for any costs over or under base fuel collection rates expected over a 12-month period. The true-up component reconciles any over/under collected amounts from the preceding 12-month period and is creditedcalculated to credit or recoveredrecover these amounts from customers in the subsequent year.

AtAs of December 31, 2015,2016, TEP had over-collected fuel and purchased power costs by $18$38 million.

The ACC’s RES requires TEP and other affectedArizona utilities to increase their use of renewable energy each year until it represents at least 15% of their total annual retail energy requirements in 2025, with distributed generationDG accounting for 30% of the annual renewable energy requirement. Affected utilities must file an annual RES implementation plan for review and approval by the ACC. The approved costcosts of carrying out those plans is recovered from retail customers through the RES surcharge until such costs are reflected in TEP’s Base Rates.non-fuel base rates. The associated lost revenues attributable to meeting distributed generation targets will be partially recovered through the Lost Fixed Cost Recovery Mechanism (LFCR). See Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.

In July 2015, TEP submitted its application forMay 2016, the ACC approved TEP's 2016 RES implementation plan that includes a budget of $57 million, which will bewas partially offset by applying approximately $9 million of previously recovered carryover funds. TEP proposed towill recover the remaining $48 million through the RES surcharge. The budgetrecovery will fund the following: (i) the above market cost of renewable energypower purchases; (ii) previously awarded performance-based incentives for customer installed distributed generation;DG; (iii) depreciation and a return on TEP'scertain TEP investments in company-owned solar projects; and (iv) various other program costs. TEP expects to receive a

In 2010,Under the ACC approved new Energy Efficiency Standards (EE Standards) designed to require, the ACC requires electric utilities to implement cost-effective programs to reduce customers' energy consumption. The EE Standards require increasing cumulative annual targeted retail kWh savings equal to 22% by 2020. Since the implementationAs of the EE Standards,December 2016, TEP’s cumulative annual energy savings arewas approximately 9.3% of retail kWh sales in 2015.12%. Compliance with the EE Standards is determined throughgoverned by the ACC's reviewACC’s approval of the company'sTEP's annual energy efficiency implementation plan.

In 2016, the FERC issued orders related to the late-filed Transmission Service Agreements (TSA), which directed TEP to issue time value refunds to the counterparties to these TSAs (FERC Refund Orders). As a result of the FERC Refund Orders and ongoing discussions with the OE, TEP recorded $22 million in time value refunds in 2016. Of the total amount recorded, TEP paid $17 million in 2016 and accrued the remaining $5 million as of December 31, 2016. In June 2016, to preserve its rights, TEP petitioned the D.C. Circuit Court of Appeals to review the FERC Refund Orders. In January 2017, TEP and one of the TSA counterparties entered into a settlement. Under the settlement, the counterparty paid TEP $8 million in January 2017 and TEP dismissed the appeal with prejudice. See Note 27 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.information related to the FERC Refund Orders.

Implementation of the rule is scheduled as follows:

TEP makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practical after weit electronically filefiles or furnishfurnishes them to the Securities and Exchange Commission (SEC). These reports are available free of charge through TEP’s website address at www.tep.com/about/investors/.

UNS Energy’s code of ethics, which applies to the Board of Directors and all officers and employees of UNS Energy and its subsidiaries, including TEP, and any amendments or any waivers made to the code of ethics, is also available on TEP’s website at www.tep.com/about/investors/.

TEP is providing the address of TEP’s website solely for the information of investors and does not intend the address to be an active link. Information contained at TEP’s website is not a part of, or incorporated by reference into, any report or other filing filed with the SEC by TEP.

The business and financial results of TEP are subject to a number of risks and uncertainties, including those set forth below. These risks and uncertainties fall primarily into five major categories: revenues, regulatory, environmental, financial, and operational. Additional risks and uncertainties that are not currently known to TEP or that are not currently believed by TEP to be material may also harm TEP’s business and financial results.

Economic conditions have contributed significantly to a reduction in TEP’s retailservice area have a significant impact on customer growth, use per customer and lower energy usage by the company’s residential, commercial, and industrial customers.overall sales levels. As a result of weak economic conditions, TEP’s average retail customer base grew by less than 1% in each year from 20112012 through 2015 compared with2016. Additionally, economic conditions contributed to a declining average increases of approximately 1% in each year from 2005 to 2009. TEP estimates that a 1% change in annual retailuse per customer and lower overall sales could impact pre-tax net income and pre-tax cash flows by approximately $6 million.over this same period.

Research and development activities are ongoing for new technologies that produce power orand reduce power consumption. These technologies include renewable energy, customer-owned generation, andcustomer-sited DG, appliances, equipment, battery storage and control systems. Continued development and use of these technologies and compliance with the ACC's EE Standards and RES could furthernegatively impact the results of operations, net income, and cash flows of TEP.

TEP typically earns the majority of its operating revenue and net income in the third quarter because retail customers increase their air conditioning usage during the summer. Conversely, TEP’s first quarter net income is typically limited by relatively mild winter weather in its retail service territory. Cool summers or warm winters may reduce customer usage, adverselynegatively affecting operating revenues, cash flows, and net income by reducing sales.

TEP’s ten largest customers represented 11% of total revenues in 2016. TEP sells electricity to mines, military installations, and other large industrial customers. In 2015, 35% of TEP’s retail kWh sales were to 592 industrialcommercial and miningindustrial customers. Retail sales volumes and revenues from these customer classescustomers could

The ACC is a constitutionally created body composed of five elected commissioners. Commissioners are elected state-wide for staggered four-year terms and are limited to serving a total of two terms. As a result, the composition of the commission, and therefore its policies, are subject to change every two years.

TEP’s Retail Rates consist of Base Ratesbase rates and various rate adjustors that are intended to allow for timely recovery of certain costs between rate cases. The ACC is charged with setting Retail Rates at levels that are intended to allow TEP to recover its costs of service and provide it with an opportunity to earn a reasonable rate of return. In setting TEP’s Retail Rates, the ACC could disallow the recovery of costs, or not provide for the timely recovery of costs.costs or increase regulatory oversight. If customers or regulators have or develop a negative opinion of the Company's utility services or the electric utility industry in general, this could negatively affect TEP's regulatory outcomes. The decisions made by the ACC on such matters impact the net income and cash flows of TEP.

TEP is subject to the impact of comprehensive and changing governmental regulation at the federal level that continues to change the structure of the electric and gas utility industriesindustry and the ways in which these industries arethis industry is regulated. TEP is subject to regulation by the FERC. The FERC has jurisdiction over rates for electric transmission in interstate commerce and rates for wholesale sales of electric power, including terms and prices of transmission services and sales of electricity at wholesale.

Owners and operators of bulk power systems, including TEP, are subject to mandatory transmission standards developed and enforced by NERC and subject to the oversight of the FERC. Compliance with modified or new transmission standards may subject TEP to higher operating costs and increased capital costs. Failure to comply with the mandatory transmission standards could subject TEP to sanctions, including substantial monetary penalties.

TEP is subject to numerous environmental laws and regulations that may increase its cost of operations or expose it to environmentally-relatedenvironmental-related litigation and liabilities. Many of these regulations could have a significant impact on TEP due to its reliance on coal as its primary fuel for electric generation.

Numerous federal, state, and local environmental laws and regulations affect present and future operations. Those laws and regulations include rules regarding air emissions, water use, wastewater discharges, solid waste, hazardous waste, and management of coal combustion residuals.

These laws and regulations can contribute to higher capital, operating, and other costs, particularly with regard to enforcement efforts focused on existing power plantsgeneration facilities and new compliance standards related to new and existing power plants.generation facilities. These laws and regulations generally require usTEP to obtain and comply with a wide variety of environmental licenses, permits, authorizations, and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. Failure to comply with applicable laws and regulations may result in litigation, and the imposition of fines, penalties, and a requirement by regulatory authorities for costly equipment upgrades.

Existing environmental laws and regulations may be revised and new environmental laws and regulations may be adopted or become applicable to our facilities. Increased compliance costs or additional operating restrictions from revised or additional regulation could have an adversea negative effect on ourTEP's results of operations, particularly if those costs are not fully recoverable from ourTEP customers. TEP’s obligation to comply with the EPA’s Best Available Retrofit Technology (BART) determinationsRegional Haze Rule requirements as a participant or owner in the Springerville, San Juan, Four Corners, and Navajo, plants, coupled with the financial impact of future climate change legislation, other environmental regulations and other business considerations, could jeopardize the economic viability of these plantsgeneration faculties. Additionally, these regulations may jeopardize continued generation facility operations or the ability of individual participants to meet their obligations and willingness to continue their participation in these plants.facilities potentially resulting in increased operational cost for the remaining participants. TEP cannot predict the ultimate outcome of these matters.

TEP also is contractually obligated to pay a portion of the environmental reclamation costs incurred at generating stationsgeneration facilities in which it has a minority interest and is obligated to pay similar costs at the mines that supply these generating stations.generation facilities. While TEP has recorded the portion of its costs that can be determined at this time, the total costs for final reclamation at these sites are unknown and could be substantial.

TEP's coal-fired generating stationsgeneration facilities may be required to be closed before the end of their useful lives in response to economic conditions and/or recent or future changes in environmental regulation, including potential regulation relating to greenhouse gas emissions. If any of the coal-fired generation plants, or coal handling facilities from which TEP obtains power are closed prior to the end of their useful life, TEP could be required to recognize an impairment of its assets and incur added expenses relating to accelerated depreciation and amortization, decommissioning, reclamation and cancellation of long-term coal contracts of such generating plants andgeneration facilities. Closure of any of such generating stationsgeneration facilities may force TEP to incur higher costs for replacement capacity and energy. TEP may not be permitted full recovery of these costs in the rates it charges its customers. As of December 31, 2015,2016, approximately 49%52% of TEP's generating capacity is fueled by coal.

We rely on access to the bank markets and capital markets as a significant source of liquidity and for capital requirements not satisfied by the cash flowflows from our operations. Market disruptions such as those experienced in 2008 and 2009 in the United States and abroad may increase our cost of borrowing or adverselynegatively affect our ability to access sources of liquidity needed to finance our operations and satisfy our obligations as they become due. These disruptions may include turmoil in the financial services industry, including substantial uncertainty surrounding particular lending institutions and counterparties we do business with, unprecedented volatility in the markets where our outstanding securities trade, and general economic downturns in our utility service territories. If we are unable to access credit at competitivereasonable rates, or if our borrowing costs dramatically increase, our ability to finance our operations, meet our short-termdebt obligations, and execute our financial strategy could be adverselynegatively affected.

ChangingIncreases in short-term interest rates would increase the cost of borrowing on TEP's tax-exempt variable rate debt obligations of $137 million as of December 31, 2016, and increase the cost of borrowings under its credit facility. In addition, changing market conditions could negatively affect the market value of assets held in our pension and other retireepostretirement plans and may increase the amount and accelerate the timing of required future funding contributions.

TEP has financed a substantial portion of utility plant assets with the proceeds of pollution control revenue bonds and industrial development revenue bonds issued by governmental authorities. Interest on these bonds is, subject to certain exceptions, excluded from gross income for federal tax purposes. This tax-exempt status is based, in part, on continued use of the assets for pollution control purposes or the local furnishing of energypower within TEP’s two-county retail service area.

As of December 31, 2015,2016, there were outstanding approximately $309 million aggregate principal amount of tax-exempt bonds that financed pollution control facilitiesexpenditures at TEP’s generating units.generation facilities. Should certain of TEP’s generating unitsgeneration facilities be retired and dismantled prior to the stated maturity dates of the related tax-exempt bonds, it is possible that some or all of the bonds financing such facilitiespollution control expenditures would be subject to mandatory early redemption by TEP. Of the total amount outstanding, $37 million of the principal amount of the bonds can currently be redeemed at par upon notice to holders, and $272 million principal amount of the bonds have early redemption dates or final maturities ranging from 2019 to 2022.

The operation of electric generating stations,generation facilities and transmission and distribution systems involves certain risks and uncertainties, including equipment breakdown or failure,failures, fires, weather, and other hazards, interruption of fuel supply, and lower than expected levels of efficiency or operational performance. Unplanned outages, including extensions of planned outages due to equipment failurefailures or other complications, occur from time to time andtime. They are an inherent risk of our business.business and can cause damage to our reputation. If TEP’s generating stationsgeneration facilities and transmission and distribution systems operate below expectations, TEP’s operating results could be adverselynegatively affected and/or TEP's capital spending could be increased.

As operators of critical energy infrastructure, weTEP may face a heightened risk of physical attacks on ourthe Company's electric systems. Our electric generation, transmission, and distribution assets and systems are geographically dispersed and are often in rural or unpopulated areas which make themmakes it especially difficult to adequately detect, defend from, and respond to such attacks.

If, despite our security measures, a significant physical attack occurred, we could have our operations disrupted, property damaged, experience loss of revenues, response costs, and other financial loss; and be subject to increased regulation, litigation, and damage to our reputation, any of which could have a negative impact on ourTEP's business and results of operations.

WeTEP may face a heightened risk of cyber attacks. OurThe Company's information and operations technology systems may be vulnerable to unauthorized access due to hacking, viruses, acts of war or terrorism, and other causes. OurTEP's operations technology systems have direct control over certain aspects of the electric system, and in addition, ourthe Company's utility business requires access to sensitive customer data, including personal and credit information, in the ordinary course of business.

TEP's financial prospects and outlook are affected by many factors including: global, national, regional, and local economic conditions; volatility in the financial markets; environmental laws and regulations; and other regulatory factors. Our plans and strategies include the following: