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 economic conditions, future operational 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, potential, 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.

TEP and its predecessor companies have served the greater Tucson metropolitan area for over 100125 years. TEP was incorporated in the State of Arizona in 1963. TEP is a regulated electric utility company serving approximately 417,000422,000 retail customers. TEP’s service territory covers 1,155 square miles and includes a population of approximatelyover one million people in Pima County, as well as parts of Cochise County. TEP's principal business operations include generating, transmitting, and distributing electricity to its retail customers. In addition to retail sales, TEP sells electricity, transmission, and ancillary services to other utilities, municipalities, and energy marketing companies on a wholesale basis. TEP is subject to comprehensive state and federal regulation. The regulated electric utility operation is TEP's only segment.

TEP is a wholly owned subsidiary of UNS Energy Corporation (UNS Energy), a utility services holding company. In August 2014, UNS Energy was acquired by Fortis Inc. (Fortis) and became an indirect wholly owned subsidiary of Fortis which is a leader in the North American electric and gas utility business.

TEP delivers electricity to retail customers in southern Arizona. TEP owns or has contracts for coal, natural gas, wind, solar, and landfill gassolar generation resources to provide electricity. This electricity, together with electricity purchased on the wholesale market, is delivered over transmission lines which are part of the Western Interconnection, a regional grid in the United States. The electricity is then transformed to lower voltages and delivered to customers through TEP's distribution system.

TEP operates under a certificate of public convenience and necessity as regulated by the Arizona Corporation Commission (ACC), under which TEP is obligated to provide electricity service to customers within its service territory. The ACC establishes retail rates on a cost-of-service basis, whichthat are designed to allow TEP to recovera regulated utility recovery of its costscost of providing services and an opportunity to earn a reasonable return on its investment.investment (Retail Rates).

TEP provides electric utility service to a diverse group of residential, commercial, industrial, and public sector customers. Major industries served include copper mining, cement manufacturing, defense, health care,healthcare, education, military bases, and other governmental entities. TEP’s retail sales are influenced by several factors including economic conditions, seasonal weather patterns, Demand Side Management (DSM) initiatives and the increasing use of energy efficientenergy-efficient products, and customer owned distributed generation.customer-sited Distributed Generation (DG).

Local, regional, and national economic factors impact the growth in the number of customers in TEP’s service territory. In each of the past five years, TEP’s average number of retail customers increased by less than 1%. TEP expects the number of retail customers to increase at a rate of approximately 1% in 20162018 based on the estimated population growth in its service territory.

TEP’s retail sales volume in 20152017 was approximately 9,0538,926 gigawatt-hours (GWh), which is a decrease of 3%3.8% from 20112013 levels. During the past five years, local economic conditions combined withmining load reductions and state requirements to reduce retail sales through energy efficiency and distributed generationDG have resulted in lower sales volumes and lower use per customer.volumes.

TwoTEP’s mining customers make up 11% of TEP’s largesttotal retail customers are in the copper mining industry.sales. TEP’s GWh sales to mining customers depend on a variety of factors including commodity prices, the electricity rate paid by mining customers,prices, and the mines’ development of their own electric generationself-generating resources. TEP’s GWh sales to mining customers decreased by 2% in 20158% from 2013 levels as a result of mining curtailments duethe decline in commodity prices requiring the mines to declining commodity prices. In 2016, TEP expects additional curtailments to certain mining customers based on announced plans and current commodity prices.curtail production starting in 2016. TEP cannot predict how long thefuture commodity prices will remain low or the impact pricesthey will have on mining production.

TEP’s electric utility operations include the wholesale marketing of electricity to other utilities and power marketers. Wholesale sales transactions are made on both a firm and interruptible basis. A firm contract requires TEP to supply power on demand (except under limited emergency circumstances), while an interruptible contract allows TEP to stop supplying power under defined conditions.

Generally, TEP commits to future sales based on expected generatinggeneration capability, forward prices, and generation costs using a diversified portfolio approach to provide a balance between long-term, mid-term, and spot energy sales. TEP’s wholesale sales consist primarily of two types:

Long-termContracts for long-term wholesale contractssales cover periods of one year or greater. TEP typically uses its own generation to serve the requirements of its long-term wholesale customers. In 2015,

ForwardCertain contracts commitfor short-term wholesale sales cover periods of less than one year and obligate TEP to sell a specified amount of capacity or energypower at a specified price over a given period of time, typically for one-month or three-month periods.fixed price. TEP also engages in short-term sales by selling energypower in the daily or hourly markets at fluctuating spot market prices and making other non-firm energypower sales. The majority of our revenues from short-term wholesale sales offset fuel and purchased power costs and are passed through to TEP’s retail customers.customers offsetting fuel and purchased power costs. TEP uses short-term wholesale sales as part of its hedging strategy to reduce customer exposure to fluctuating power prices.

TEP is the primary electric service provider to retail customers within its service territory and operates under a certificate of public convenience and necessity as regulated by the ACC. TEP is subject to competition from customer-sited distributed generation, energy efficiency, and other emerging technologies. TEP is experiencing increases in the levels

The Federal Energy Regulatory Commission (FERC) regulates rates for wholesale power sales and transmission services. TEP'sTEP engages in long-term wholesale activity primarily consists of Short-Term Wholesale Sales to manage fuel and purchased power supplies to serve retail customer energy requirements and Long-Term Wholesale Salessales to optimize its generation capacity.resources. As a result of its wholesale power activity, TEP competes with other utilities, power marketers, and independent power producers in the wholesale markets.

TEP has a 49.5%TEP's other interests in Springerville include: (i) undivided interests in certain common facilities at Springerville (Springerville Common Facilities) made up of 67.8% of ownership interest and 32.2% of leased interest, that includes assets such as, but not limited to: administration building, roads, and well fields used to serve all four units at Springerville that cannot be proportioned to each unit; and (ii) an 82.95% ownership interest in Unit 1 of the Springerville Generating Station (Springerville Unit 1) and operates the remaining interestsCoal Handling Facilities.

As of December 31, 2017, TEP holds two leveraged lease arrangements related to a 32.2% undivided interest in Springerville Unit 1 on behalf of third parties, Wilmington Trust CompanyCommon Facilities. The lease arrangements are scheduled to expire in January 2021 and William J. Wade,have fair market value renewal options as Owner Trustee and Co-trustee under a separate trust agreement with each of the remaining two owner participants, Alterna Springerville LLC (Alterna) and LDVF1 TEP LLC (LDVF1) (Alterna and LDVF1, together with the Owner Trustees and Co-trustees, the Third-Party Owners). The Owner Trustees and Co-Trustees are responsible for their share of operating and capital costs for the facility. well as fixed-price purchase options totaling $68 million.

See Note 76 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information regarding the Third-Party Owners.

Springerville Units 3 and 4 are each approximately 400 MW coal-fired generatinggeneration facilities that are operated but not owned by TEP. These facilities are located at the same site as Springerville Units 1 and 2. The lessee of Springerville Unit 3 and the owner of Springerville Unit 4 compensatecompensates TEP for operating the facilities and paypays an allocated portion of the fixed costs related to the Springerville common facilitiesCommon Facilities and Springerville Coal Handling Facilities.

As of December 31, 2015,2017, TEP owned 4651 MW of photovoltaic (PV) solar generating capacity. In 2016, TEP plans to complete an additional solar project adding 5 MW of PV solar generating capacity.generation capacity measured in DC. The solar generatinggeneration facilities are located on properties held under land easements and leases. In December 2015, TEP also acquired a 5 MW concentrated solar project which does not increase capacity but displaces the equivalent amount of steam produced by burning fossil fuel.

As of December 31, 2015,2017, TEP hashad renewable PPAs for 175198 MW of capacity measured in direct current (DC)DC from solar resources, 80 MW of capacity measured in alternating current (AC)AC from wind resources and 4 MW of capacity measured in AC from aassociated with the purchase of landfill gas generation plant.gas. The solar PPAs contain options that allow TEP to purchase all or part of the related project at a future period.date.

TEP purchases power from other utilities and power marketers. TEP may enter into contracts to purchase: (i) energypower under long-term contracts to serve retail load and long-term wholesale contracts; (ii) capacity or energypower during periods of planned outages or for peak summer load conditions; and (iii) energypower for resale to certain wholesale customers under load and resource management agreements. See Note 7 of Notes to Consolidated Financial Statements related to the commitment amount of purchased power in Part II, Item 8 of this Form 10-K.

TEP is a member of a regional reserve-sharing organization and has reliability and power sharingpower-sharing relationships with other utilities. These relationships allow TEP to call upon other utilities during emergencies, such as plantfacility outages and system disturbances, and reduce the amount of reserves TEP is required to carry.

Peak demand occurs during the summer months due to the cooling requirements of retail customers.customers in TEP’s service territory. Retail peak demand varies from year-to-year due to weather, energy conservation, DG, economic conditions, and other factors. Retail peak demand has primarily declined over the five-year periodin 2017 increased 6% compared to 2016 due to weak economic conditions and the implementation of energy efficiency programs and distributed generation.unseasonably hot weather.

Forecasted retail peak demand for 20162018 is 2,1092,270 MW compared with actual peak demand of 2,2222,415 MW in 2015.2017. TEP’s 20162018 estimated retail peak demand is based on weather patterns observed over a 10-year period and other factors, including estimates of customer usage and planned curtailment of mining customers.usage. TEP believes that existing generation capacity and PPAs are sufficient to meet the expected demand in 2016 and established reserve margin criteria.requirements in 2018.

In July 2015, TEP submitted its application for2017, the 2016 RES implementation plan that includes a budget of $57 million, which will be partially offset by applying approximately $9 million of previously recovered carryover funds. TEP proposed to recover $48 million through the RES surcharge. The budget will fund the following: the above market cost of renewable energy purchases; previously awarded performance-based incentives for customer installed distributed generation; depreciation and a return on TEP's investments in company-owned solar projects; and various other program costs. TEP expects to receive a

In February2016, the ACC held proceedings under the Value and Cost of Distributed Generation (Value of DG) docket to examine the ACC’s net metering rules and determine the value that utilities should pay DG customers who deliver electricity from rooftop solar systems back to the grid. Prior to this proceeding, the ACC’s net metering rules allowed DG customers who overproduced electricity to carry-over or “bank” excess electricity at a value equal to the full retail rate per kWh. Banked kWh could then be used by the customer to offset future energy usage that could not be met by their DG system.

In December 2016, the ACC approved an order that will begin to reform net metering in Arizona. The order adopts a number of net metering changes and policies, including:

The initial compensation for DG exports will be based on a five-year historical average cost per kWh of TEP’s 2016 energy efficiency implementation plan. Under the 2016 plan, TEP has been approved to recover approximately $14 million from retail customersportfolio of owned and contracted utility-scale solar projects and will offer customers new and existing DSM programs. Energy savings realized through the programs will count toward Arizona’s EE Standards and the associated lost revenuebe established in a second phase of TEP's rate case (Phase 2). The DG

In 2016, the FERC issued orders relating to certain late-filed Transmission Service Agreements (TSA), which resulted in TEP recording a liability and paying time-value refunds to the counterparties under these TSAs (FERC Refund Orders). In May 2017, the FERC informed TEP that the related investigation was closed. 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.

In September 2015, as part of the Clean Water Act, the EPA published the final Effluent Limitation Guidelines (ELG) setting technology standards and limitations for steam electric power plantgeneration facility discharges. The ELG rule setsestablishes discharge limits for fly ash and mercury-contaminated wastewater at those facilities that require a National Pollution Discharge Elimination System (NPDES) with an effective date between November 2018 and November 2023. With the first federal limits onexception of Four Corners, none of the levels of toxic metalsother TEP owned facilities require an NPDES permit and therefore are not affected. With regard to Four Corners, until a draft NPDES permit is proposed during the 2018-2023 time-frame, TEP cannot predict what will be required to control these discharges to be in wastewatercompliance with the finalized effluent limitations at that can be discharged from power plants, based on technology improvements in the steam electric power industry over the last three decades. TEP is evaluating the effects of this rule on its facilities including Navajo, San Juan, and Four Corners. Since the majority of TEP's facilities are zero discharge,facility. TEP does not anticipate a significant financial impact.impact from these requirements.

As of December 31, 2015,2017, TEP had 1,4781,510 employees, of which approximately 688 were671 are represented by the International Brotherhood of Electrical Workers (IBEW) Local No. 1116. A newThe current collective bargaining agreementagreements between the IBEW and TEP was entered intoexpire in January 2016 and expires in January 2019.December 2018.