
(2)	Beginning in July 2016 through June 2031, the coal for Four Corners will be purchased from the Navajo Transitional Energy Company (NTEC). NTEC purchased the mine located near Four Corners from BPH Billiton and will begin operating the mine in 2016.

The ACC’s RES requires UNS Electric, TEP and other affected 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. Affected utilities must file annual RES implementation plans for review and approval by the ACC. The approved costs of carrying out those plans are recovered from retail customers through the RES surcharge. Any surcharge collections above or below the costs incurred to implement the plans are deferred and reflected in UNS Electric’s financial statements as a regulatory asset or liability.

In 2011, UNS Electric spent $5 million on RES implementation and met the 2011 renewable energy target of 3%. UNS Electric expects to collect $8 million in surcharges from retail customers in 2012 to implement its RES plan and expects to meet the 2012 renewable energy target of 3.5%.

~~For more information see~~~~Power Supply and Transmission~~,~~Renewable Energy Resources,~~~~above, and~~~~Item 7. Management’s Discussion and Analysis, UNS Electric, Factors Affecting Results of Operations, Renewable Energy Standard and Tariff.~~

~~In 2010, the ACC approved EE Standards designed to require UNS Electric, TEP, and other affected electric utilities to implement cost effective DSM programs. For more information, see~~~~TEP, Rates and Regulation, Electric Energy Efficiency Standards and Decoupling~~~~, above.~~

UNS Electric is subject to environmental regulation of air and water quality, resource extraction, waste disposal and land use by federal, state and local authorities. UNS Electric believes that its facilities are in substantial compliance with all existing regulations and will be in compliance with expected environmental regulations. See~~Item. 1 – Business, TEP, Environmental Matters, for more information.~~

~~As of~~EMPLOYEES (At December 31, ~~2011, Millennium had assets of $20 million including a $15 million note receivable (see~~~~Sabinas~~~~below), and cash and cash equivalents of $5 million. In total, Millennium’s assets represented less than 1% of UniSource Energy’s total consolidated assets. See~~~~Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Other Non-Reportable Business Segments,~~~~for more information.~~

~~In 2009, Millennium sold its 50% interest in Sabinas and recorded a $6 million pre-tax gain on the sale.~~

Millennium received an upfront $5 million cash payment in January 2009. Other key terms of the transaction included a three-year, 6% interest-bearing, collateralized $15 million note, which matures in June 2012.

~~SES, a wholly owned subsidiary of Millennium, provides electrical contracting and meter reading services in Arizona, as well as other services at the Springerville Generating Station.~~

As a holding company, ~~UniSource~~UNS Energy ~~is dependent on the earnings~~has no operations of its own and ~~distributions~~derives all of ~~funds~~its revenues and cash flow from its ~~subsidiaries to service its debt and pay dividends to shareholders.~~

~~Restrictions include:~~

subsidiaries. TEP, UNS ~~Gas~~Electric, and UNS ~~Electric are restricted from lending to affiliates~~Gas could experience reduced levels of liquidity, or ~~issuing securities without ACC approval;~~

~~The Federal Power Act restricts electric utilities’~~face other restrictions, which could adversely impact their ability to pay dividends ~~out~~to UNS Energy.

The debt levels at TEP, UNS Electric, and UNS Gas:

require UNS Energy's subsidiaries to dedicate a substantial portion of their cash flow to pay principal and interest on their debt, which could reduce the funds ~~that are properly included~~available for working capital, capital expenditures, acquisitions, and other general corporate purposes; and

could limit their ability to borrow additional amounts for working capital, capital expenditures, acquisitions, dividends, debt service requirements, execution of their business strategy, or other purposes.

TEP, UNS Electric, and UNS Gas may be required to post margin under their power and fuel supply agreements which could negatively impact their liquidity. The agreements under which we contract for power and fuel include requirements to post credit enhancement in ~~their capital account. TEP has an accumulated deficit rather than positive retained earnings. Although~~ the ~~terms~~form of cash or letters of credit (LOCs) under certain circumstances, including changes in market prices which affect contract values, or a change in creditworthiness of the ~~Federal Power Act are unclear, we believe there is a reasonable basis for TEP~~respective companies. In order to ~~pay dividends from current year earnings; and~~

post such credit enhancement, TEP, UNS ~~Gas~~Electric, and UNS Gas would have to use available cash, draw under their revolving credit agreements, or issue LOCs under their revolving credit agreements.

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Regulatory rules and other restrictions include:

TEP's, UNS Electric's, and UNS Gas' inability to lend to affiliates without ACC approval; and

TEP, UNS Electric, and UNS Gas must be in compliance with their respective debt agreements to make dividend payments to ~~UniSource~~UNS Energy.

~~Unanticipated financing needs or reductions to net income could adversely impact our ability to comply with financial covenants in the UniSource Energy, TEP and UES Credit Agreements.~~

The UniSource Energy, TEP and UES credit and reimbursement agreements include a maximum leverage ratio. The leverage ratios are calculated as the ratio of total indebtedness to total capital. The ability to comply with these covenants could be adversely impacted by unanticipated borrowing needs or unexpected charges to earnings or shareholder equity. In the event that we seek to renegotiate these provisions to provide additional flexibility, we may need to pay fees or increased interest rates on borrowings as a condition to any amendments or waivers.

OPERATIONAL

The operation of electric generating stations, and transmission and distribution systems, involves risks that could result in ~~unplanned outages or~~ reduced generating capability or unplanned outages that could adversely affect TEP’s or UNS Electric’s results of operations, net income, and cash flows.

The operation of electric generating stations, and transmission and distribution systems, involves certain risks, including equipment breakdown or failure, fires 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 failure or other complications, occur from time to time and are an inherent risk of our business. If TEP’s or UNS Electric’s generating stations and transmission and distribution systems operate below expectations, TEP or UNS ~~Electric~~Electric’s operating results could be adversely affected.

The ~~operation~~lack of ~~electric transmission~~access to sufficient supplies of water could have a material adverse impact on TEP’s business and ~~distribution systems involves~~results of operations.

Natural gas and coal-fired generating plants require continuous water supply for their operation. The region in which our power plants are located is prone to drought conditions, which could potentially affect the plants’ water supplies. Any material reduction in the water supply for such facilities would limit the ability of TEP and UNS Electric to produce and market electricity from such facilities and could have a ~~risk~~material adverse impact on our results of ~~significant unplanned outages~~operations. Further, any change in regulations or the level of regulation with regard to use, treatment and discharge of water, or the licensing of water rights in the jurisdictions where TEP and UNS Electric operate, could have a material adverse impact on our results of operations.

TEP receives power from certain generating facilities that are jointly owned and operated by third parties. Therefore, TEP may not have the ability to affect the management or operations at such facilities which could adversely affect TEP’s ~~and UNS Electric’s businesses,~~ results of operations, net income, and cash flows.

Certain of the generating stations from which TEP receives power are jointly owned with, or are operated by, third parties. TEP may not have the sole discretion or any ability to affect the management or operations at such facilities. As a result of this reliance on other operators, TEP may not be able to ensure the proper management of the operations and maintenance of the plants. Further, TEP may have no ability or a limited ability to make determinations on how best to manage the changing regulations which may affect such facilities. In addition, TEP will not have sole discretion as to how to proceed in the face of requirements relating to environmental compliance which could require significant capital expenditures or the closure of such generating stations. A divergence in the interests of TEP and the co-owners or operators, as applicable, of such generating facilities could negatively impact the business and operations of TEP.

The nature of our gas operations presents inherent risks of loss that could adversely affect our results of operations.

The operation of ~~electric~~UNS Gas’ transmission and distribution systems involves certain risks, including ~~equipment failure~~gas leaks, fires, natural disasters, catastrophic accidents, explosions, pipeline ruptures, and ~~damage caused by storms, fires~~other hazards and risks that may cause unforeseen interruptions, personal injury, or ~~other hazards. Unplanned outages occur from time to time and are~~property damage. Any such incident could have an ~~inherent risk of our business. If TEP’s or~~adverse effect on UNS ~~Electric’s transmission and distribution systems experience a significant failure, TEP or UNS Electric could be adversely affected.~~

~~TEP could be subject to higher costs and the possibility of significant penalties as a result of mandatory transmission standards.~~

As a result of the Energy Policy Act of 2005, owners and operators of bulk power transmission systems, including TEP, are subject to mandatory transmission standards developed and enforced by NERC and subject to the oversight of 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.

Gas.

We may be subject to physical and/or cyber ~~attacks and information security risks.~~

attacks.

As operators of critical energy infrastructure, we may face a heightened risk of physical and/or cyber ~~attack,~~attacks. Our electric generation, transmission, and ~~our corporate and informational technology~~distribution systems may be vulnerable to disability or failures as a result of physical or cyber acts of war or terrorism, vandalism or other causes.

Our corporate and information technology systems may be vulnerable to unauthorized access due to hacking, viruses, acts of war or terrorism, and other causes. In addition, our utility business requires access to sensitive customer data, including personal and credit information, in the ordinary course of business.

If, despite our security measures, a significant physical attack or ~~widely publicized~~cyber breach occurred, we could have our operations disrupted, property damaged, and customer information stolen; experience substantial loss of revenues, response costs, and

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other financial loss; and be subject to increased regulation, litigation, and damage to our reputation, any of which could have a negative impact on our business and results of operations.

TEP or UNS Electric might not be able to secure adequate right-of-way to construct transmission lines and distribution-related facilities, and could be required to find alternate ways to provide adequate sources of energy and maintain reliable service for their customers.

TEP and UNS Electric rely on federal, state, and local governmental agencies to secure right-of-way and siting permits to construct transmission lines and distribution-related facilities. If adequate right-of-way and siting permits to build new transmission lines cannot be ~~secured:~~

secured, TEP and UNS Electric may need to rely on more costly alternatives to provide energy to their ~~customers;~~

~~TEP and UNS Electric~~customers, may not be able to maintain reliability in their service ~~areas;~~areas, or

~~TEP and UNS Electric’s~~ their ability to provide electric service to new customers may be negatively impacted.

~~ITEM 1B.~~

~~– UNRESOLVED STAFF COMMENTS~~

~~None.~~

~~ITEM 2.~~

~~– PROPERTIES~~

ITEM 1B. – UNRESOLVED STAFF COMMENTS
None.

ITEM 2. – PROPERTIES

TEP PROPERTIES

~~TEP’s transmission~~Transmission facilities owned by TEP and by third parties, are located in Arizona and New Mexico and transmit the output from TEP’s remote electric generating stations at Four Corners, Navajo, San Juan, Springerville, and Luna to the Tucson area for use by TEP’s retail ~~customers (see~~~~Item 1. Business, TEP, Generating and Other Resources~~).customers. The transmission system is interconnected at various points in Arizona and New Mexico with other regional utilities. TEP has arrangements with approximately 140 companies to interchange generation capacity and transmission of energy. See

~~As of~~Item 1. Business, TEP, Generating and Other Resources.

At December 31, ~~2011,~~2013, TEP owned or participated in an overhead electric transmission and distribution system consisting of:

~~512~~564 circuit-miles of 500-kV lines;

1,088 circuit-miles of 345-kV lines;

~~405~~413 circuit-miles of 138-kV lines;

~~479~~481 circuit-miles of 46-kV lines; and

~~2,615~~2,605 circuit-miles of lower voltage primary lines.

TEP’s underground electric distribution system includes ~~4,389 cable-miles.~~4,442 cable-miles of lines. TEP owns approximately ~~76%~~77% of the poles on which its lower voltage lines are located. Electric substation capacity consists of ~~103~~104 substations with a total installed transformer capacity of ~~13,266,850~~14,879,950 kilovolt amperes.

~~Substantially all of the utility assets owned by TEP are subject to the lien of the 1992 Mortgage. Springerville Unit 2, which is owned by San Carlos Resources, is not subject to the lien.~~

The electric generating stations (except as noted below), administrative headquarters, warehouse and service center are located on land owned by TEP. The electric distribution and transmission facilities owned by TEP are located:

on property owned by TEP;

under or over streets, alleys, highways, and other places in the public domain, as well as in national forests and state lands, under franchises, easements, or other rights which are generally subject to termination;

under or over private property as a result of easements obtained primarily from the record holder of title; or

over American Indian reservations under grant of easement by the Secretary of Interior or lease by American Indian tribes.

It is possible that some of the easements, and the property over which the easements were granted, may have title defects or ~~may be subject to mortgages or~~ liens existing at the time the easements were acquired.

Springerville is located on property ~~owned~~held by TEP under a long-term surface ownership agreement with the State of Arizona.

Four Corners and Navajo are located on properties held under easements from the United States and under leases from the Navajo ~~Nation, respectively.~~Nation. TEP, individually and in conjunction with PNM in connection with San Juan, has acquired land rights,

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easements and leases for the plant, transmission lines and a water diversion facility located on land owned by the Navajo Nation. TEP also has acquired easements for transmission facilities related to San Juan, Four Corners, and Navajo across the Zuni, Navajo, and Tohono O’dham American Indian Reservations. TEP, in conjunction with PNM and ~~Phelps Dodge,~~Freeport McMoRan, holds an undivided ownership interest in the property on which Luna is located.

TEP’s rights under these various easements and leases may be subject to defects such as:

possible conflicting grants or encumbrances due to the absence of, or inadequacies in, the recording laws or record systems of the Bureau of Indian Affairs (BIA) and the American Indian tribes;

possible inability of TEP to legally enforce its rights against adverse claimants and the American Indian tribes without Congressional consent; or

failure or inability of the American Indian tribes to protect TEP’s interests in the easements and leases from disruption by the U.S. Congress, Secretary of the Interior, or other adverse claimants.

These possible defects have not interfered, and are not expected to materially interfere, with TEP’s interest in and operation of its facilities.

TEP, under separate sale and leaseback arrangements, leases the following generation facilities (which do not include land):

Springerville Coal Handling Facilities;

a 50% undivided interest in the Springerville Common Facilities; and

Springerville Unit 1 and the remaining 50% undivided interest in the Springerville Common Facilities.

See ~~Note 6~~ ~~and~~ Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, Tucson Electric Power Company, ~~Liquidity~~ Factors Affecting Results of Operations, Springerville Unit 1 and ~~Capital Resources, Contractual Obligations, for additional information on TEP’s capital lease obligations.~~Note 6.

UES PROPERTIES

~~UNS Gas~~

~~As of~~

At December 31, ~~2011,~~2013, UNS Electric’s transmission and distribution system consisted of approximately 60 circuit-miles of 138-kV transmission lines, 274 circuit-miles of 69-kV transmission lines, and 3,651 circuit-miles of underground and overhead distribution lines. UNS Electric also owns the 62 MW Valencia plant, the 90 MW BMGS, as well as 40 substations having a total installed capacity of 1,549,000 kilovolt amperes.

At December 31, 2013, UNS Gas’ transmission and distribution system consisted of approximately 31 miles of steel transmission mains, ~~4,220~~4,238 miles of steel and plastic distribution piping, and ~~137,160~~138,951 customer service lines.

~~UNS Electric~~

As of December 31, 2011, UNS Electric’s transmission and distribution system consisted of approximately 56 circuit-miles of 115-kV transmission lines, 274 circuit-miles of 69-kV transmission lines, and 3,616 circuit-miles of underground and overhead distribution lines. UNS Electric also owns the 65 MW Valencia plant, the 90 MW BMGS as well as 39 substations having a total installed capacity of 1,494,000 kilovolt amperes.

The gas and electric distribution and transmission facilities owned by UNS ~~Gas~~Electric and UNS ~~Electric~~Gas are located:

on property owned by UNS ~~Gas~~Electric or UNS ~~Electric;~~

Gas;

under or over streets, alleys, highways, and other places in the public domain, as well as national forests and state lands, under franchises, easements, or other rights which are generally subject to termination; or

under or over private property as a result of easements obtained primarily from the record holder of title.

~~ITEM 3.~~

~~– LEGAL PROCEEDINGS~~

ITEM 3. – LEGAL PROCEEDINGS

Shareholder Lawsuits

Five putative shareholder class action lawsuits challenging the merger have been filed, four in the Superior Court of Pima County, Arizona: (i) Phillip Malenovshy v. UNS Energy Corporation, et al. (Case No. C20136942); (ii) Paul Parshall v. UNS Energy Corporation, et al. (Case No. C20136943); (iii) Hillary Kramer v. Paul J. Bonavia, et al. (Case No. C2014-0026); and (iv) Vandermeer Trust U/A DTD 03/11/1997 v. UNS Energy Corporation, et al. (Case No. C2014-0107); and one in federal court in the United States District Court for the District of Arizona: Milton Pfeiffer v. Paul J. Bonavia, et al. (Case No. 4:13-CV-02619-JGZ).

The lawsuits generally allege, among other things, that the directors of UNS Energy breached their fiduciary duties to shareholders of UNS Energy purportedly by agreeing to a transaction pursuant to an inadequate process and for failing to

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obtain the highest value for UNS Energy shareholders. The lawsuits allege that the Fortis entities also aided and abetted the directors of UNS Energy in the alleged breach of their fiduciary duties.

The lawsuits seek, in general, and among other things, (i) injunctive relief enjoining the transactions contemplated by the merger agreement, (ii) rescission or an award of rescissory damages in the event a merger is consummated, (iii) an award of plaintiffs’ costs including reasonable attorneys’ and experts’ fees, (iv) an accounting by the defendants to plaintiffs for all damages caused by the defendants, and (v) such further relief as the court deems just and proper.

These lawsuits are at a preliminary stage. UNS Energy, its directors and the other defendants believe that these lawsuits are without merit and intend to defend against them vigorously.

Right of Way Matters

TEP previously reported it was a defendant in a class action filed in February 2009 in the United States District Court in Albuquerque, New Mexico by members of the Navajo Nation. The plaintiffs alleged, among other things, that the rights of way for defendants’ transmission lines on Navajo lands were improperly granted and that the compensation paid for such rights of way was inadequate. The plaintiffs were requesting, among other things, that the transmission lines on these lands be removed. In ~~June 2009, TEP and the other defendants filed motions to dismiss the lawsuit on procedural grounds. In~~ March 2010, the ~~Court granted several of the defendants’ motions to dismiss and~~court entered a final judgment dismissing the ~~case in April 2010.~~case. The plaintiffs filed a Notice of Appeal with the Bureau of Indian

Affairs (BIA) in May 2010, appealing the BIA’s decision to grant the rights of way that were the subject of the now-dismissed complaint. In June 2010, the BIA found that the Notice of Appeal failed to meet the minimum filing requirements. In September 2010, the plaintiffs filed new Notices of Appeal concerning the same rights of way. ~~The appeals are currently pending.~~In August 2013, the Interior Board of Indian Appeals dismissed the plaintiffs’ appeal for failure to meet procedural requirements. TEP cannot predict if the ~~outcome~~plaintiffs will again attempt to appeal the BIA’s decision to grant the rights of ~~these appeals.~~

way.

In addition, see legal proceedings ~~described~~discussed in Note 4.

~~ITEM 4.~~

~~– MINE SAFETY DISCLOSURES~~

ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable.

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PART II

~~ITEM 5.~~

~~– MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF COMMON EQUITY~~

ITEM 5. – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF COMMON EQUITY

Stock Trading

~~UniSource~~

UNS Energy’s ~~common stock~~Common Stock is traded under the ticker symbol UNS and is listed on the New York Stock Exchange. On February ~~21, 2012,~~14, 2014, the closing price was ~~$37.76,~~$60.21 with ~~8,339~~7,392 shareholders of record.

TEP’s common stock is wholly-owned by ~~UniSource~~UNS Energy and is not listed for trading on any stock exchange.

Dividends

~~UniSource~~

UNS Energy

~~UniSource~~

UNS Energy’s Board of Directors expects to continue to ~~pay~~authorize the payment of regular quarterly cash dividends on our ~~common stock;~~Common Stock; however, such dividends are subject to the Board’s evaluation of our financial condition, earnings, cash flows, and dividend policy.

The merger agreement with Fortis allows UNS Energy's Board of Directors to authorize quarterly dividends of up to $0.48 per share until the merger is completed, including a pro rata dividend determined by the number of days from the last declared record date to the date the merger is completed. See Item. 1- Business, Overview of Consolidated Businesses, Agreement and Plan of Merger.

On February 24, ~~2012, UniSource~~2014, UNS Energy declared a first quarter cash dividend of ~~$0.43~~$0.48 per share ~~on its common stock.~~of Common Stock. The first quarter dividend, totaling approximately ~~$16~~$20 million, will be paid March ~~22, 2012,~~25, 2014 to shareholders of record at the close of business March ~~12, 2012.~~13, 2014. The table below summarizes ~~UniSource~~UNS Energy’s dividends paid in ~~2009~~2011 through ~~2011.~~

September 30, September 30, September 30,
     2011      2010      2009
Quarterly Dividend Per Common Share
     $ 0.42         $ 0.39         $ 0.29
Annual Dividend Per Common Share
     $ 1.68         $ 1.56         $ 1.16
Common Stock Dividends Paid
     $ 62 million         $ 57 million         $ 41 million

~~UniSource~~2013.



	2013		2012		2011
Quarterly Dividend Per Common Share	$	0.435	$	0.43	$	0.42
Annual Dividend Per Common Share	$	1.74	$	1.72	$	1.68
Common Stock Dividends Paid	$72 million		$70 million		$62 million

UNS Energy ~~is the sole shareholder of TEP’s common stock and~~ relies on dividends from its subsidiaries, primarily TEP, to declare and pay ~~dividends. The~~ dividends to its shareholders.

TEP

TEP ~~Board~~paid dividends to UNS Energy of ~~Directors typically declares a dividend at the end of each year.~~

~~TEP~~

$40 million in 2013 and $30 million in 2012. TEP did not pay any dividends to ~~UniSource~~UNS Energy in 2011. ~~TEP declared and paid cash dividends to UniSource Energy of $60 million in 2010 and $60 million in 2009.~~

TEP can pay dividends if it maintains compliance with the TEP Credit Agreement and certain financial covenants. ~~As of~~At December 31, ~~2011,~~2013, TEP was in compliance with the terms of the TEP Credit Agreement.

UNS Electric

UNS Electric paid dividends to UNS Energy of $10 million in 2013 and 2012. UNS Electric did not pay any dividends to UNS Energy in 2011. UNS Electric’s ability to pay future dividends will depend on the cash needs for capital expenditures and various other factors.

The ~~Federal Power Act states that~~note purchase agreement for UNS Electric contains restrictions on dividends. UNS Electric may pay dividends ~~shall not be paid out~~so long as (a) no default or event of ~~funds properly included~~default exists and (b) it could incur additional debt under the debt incurrence test. At December 31, 2013, UNS Electric was in ~~capital accounts. Although~~compliance with the terms of ~~the Federal Power Act are unclear, we believe that there is a reasonable basis for TEP to pay dividends from current year earnings.~~

its note purchase agreement.

UNS Gas

UNS Gas paid dividends to ~~UniSource~~UNS Energy of $10 million in ~~both 2011~~2013, $20 million in 2012, and ~~2010. In February 2012, UNS Gas paid a~~ $10 million ~~dividend to UniSource Energy.~~in 2011. UNS Gas’ ability to pay future dividends will depend on the cash needs for capital expenditures and various other factors.

The note purchase agreement for UNS Gas contains restrictions on dividends. UNS Gas may pay dividends so long as (a) no default or event of default exists and (b) it could incur additional debt under the debt incurrence test. ~~As of~~At December 31, ~~2011,~~2013, UNS Gas was in compliance with the terms of its note purchase agreement.

~~UNS Electric~~

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Table of ~~December 31, 2011, UNS Electric had not~~Contents

Other Non-Reportable Segments

Millennium paid dividends to ~~UniSource Energy.~~ UNS ~~Electric’s ability~~Energy of $1 million in 2013, $14 million in 2012 and $3 million in 2011.

UED did not pay any dividends to ~~pay dividends will depend on the cash needs for capital expenditures and various other factors.~~

~~The note purchase agreement for~~ UNS ~~Electric contains restrictions on dividends. UNS Electric may pay dividends so long as (a) no default~~Energy in 2013 or ~~event of default exists and (b) it could incur additional debt under the debt incurrence test. As of December 31, 2011, UNS Electric was in compliance with the terms of its note purchase agreement.~~

~~Other Non-Reportable Segments~~

~~In 2011, 2010, and 2009~~2012. UED paid dividends to ~~UniSource~~UNS Energy of $39 million $9in 2011, of which $28 million ~~and $30 million, respectively. Of those dividends paid by UED, the portions representing~~represented a return of ~~capital were $28 million in 2011, $4 million in 2010 and $30 million in 2009.~~

capital.

SeeItem 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, ~~UniSource~~UNS Energy Consolidated, Liquidity and Capital Resources, Dividends on Common ~~Stock~~Stock.

Common Stock Dividends and Price Ranges

September 30, September 30, September 30, September 30, September 30, September 30,
     2011      2010
Quarter:
     Market Price per           Market Price per
        Share of Common
Stock⁽¹⁾      Dividends      Share of Common
Stock⁽¹⁾      Dividends
     High      Low      Declared      High      Low      Declared
First
     $ 37.74         $ 34.84         $ 0.42         $ 33.54         $ 29.13         $ 0.39
Second
     38.71         35.47         0.42         34.42         29.04         0.39
Third
     38.55         34.36         0.42         33.75         29.85         0.39
Fourth
     39.25         34.28         0.42         36.92         33.19         0.39












Total
               $ 1.68                   $ 1.56



	2013						2012
	Market Price per						Market Price per
	Share of Common				Dividends		Share of Common				Dividends
	Stock ⁽¹⁾				Declared		Stock ⁽¹⁾				Declared
Quarter:	High		Low				High		Low
First	$	49.13	$	43.10	$	0.435	$	38.66	$	35.83	$	0.43
Second	51.54		42.51		0.435		38.86		35.20		0.43
Third	51.86		43.81		0.435		42.71		38.43		0.43
Fourth	60.02		45.30		0.435		43.56		39.02		0.43
Total					$	1.74					$	1.72


⁽¹⁾	~~UniSource~~UNS Energy’s ~~common stock~~Common Stock price as reported by the New York Stock Exchange.

Convertible Senior Notes

In March 2005, UniSource Energy issued $150 million of 4.50% convertible bonds due 2035. Each $1,000 of convertible bonds can be converted into 28.814 shares of UniSource Energy common stock at any time. The conversion ratio represents a conversion price of approximately $34.71 per share of common stock and is subject to adjustments including an adjustment to reduce the conversion price upon the payment of quarterly dividends in excess of $0.19 per share. As of February 21, 2012, there were $115 million of convertible bonds outstanding.

See~~Item 7.- Management’s Discussion and Analysis of Financial Condition and Results of Operations, UniSource Energy Consolidated, Liquidity and Capital Resources, Convertible Senior Notes,below, for more information.~~

Note 6.

Issuer Purchases of Common Equity

~~UniSource~~

UNS Energy did not purchase any shares of ~~its common stock~~Common Stock during ~~2011, 2010,~~2013, 2012, or ~~2009.~~

2011.

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ITEM 6. – SELECTED FINANCIAL DATA

UNS Energy



	2013			2012			2011			2010			2009
	In Thousands (Except per Share Data)
Income Statement Data
Operating Revenues	$	1,484,560		$	1,461,766		$	1,478,702		$	1,425,947		$	1,396,606
Net Income	127,478			90,919			109,975			112,984			105,901
Basic Earnings Per Share	3.06			2.25			2.98			3.10			2.95
Diluted Earnings Per Share	3.04			2.20			2.75			2.86			2.73
Shares of Common Stock Outstanding:
Weighted Average	41,618			40,362			36,962			36,415			35,858
End of Year	41,538			41,344			36,918			36,542			35,851

Cash Dividends Declared per Share	$	1.74		$	1.72		$	1.68		$	1.56		$	1.16

Balance Sheet Data
Total Utility Plant – Net	$	3,534,837		$	3,300,363		$	3,182,263		$	2,961,498		$	2,785,714
Total Investments in Lease Debt and Equity	36,194			45,457			65,829			103,844			132,168
Other Investments and Other Property	34,971			36,537			34,205			61,676			60,239
Total Assets	4,273,069			4,140,429			3,989,279			3,796,246			3,615,211

Long-Term Debt	$	1,507,070		$	1,498,442		$	1,517,373		$	1,352,977		$	1,307,795
Non-Current Capital Lease Obligations	149,767			262,138			352,720			429,074			488,349
Common Stock Equity	1,130,784			1,065,465			888,474			830,756			759,329
Total Capitalization	2,787,621			2,826,045			2,758,567			2,612,807			2,555,473

Cash Flow Data
Net Cash Flows From Operating Activities	$	420,512		$	348,109		$	337,320		$	346,920		$	347,310
Capital Expenditures	(325,886		)	(307,277		)	(374,122		)	(330,629		)	(294,020		)
Net Cash Flows From Financing Activities	(135,742		)	(37,682		)	(1,441		)	(51,183		)	(28,916		)

Ratio of Earnings to Fixed Charges ⁽¹⁾	2.77			2.30			2.43			2.62			2.46

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TEP



	2013			2012			2011			2010			2009
	Thousands of Dollars
Income Statement Data
Operating Revenues	$	1,196,690		$	1,161,660		$	1,156,386		$	1,125,267		$	1,099,338
Net Income	101,342			65,470			85,334			108,260			90,688

Balance Sheet Data
Total Utility Plant – Net	$	2,944,455		$	2,750,421		$	2,650,652		$	2,410,077		$	2,261,325
Total Investments in Lease Debt and Equity	36,194			45,457			65,829			103,844			132,168
Other Investments and Other Property	33,488			35,091			32,313			43,588			31,813
Total Assets	3,556,060			3,461,046			3,277,661			3,078,411			2,924,108

Long-Term Debt	1,223,070			1,223,442			1,080,373			1,003,615			903,615
Non-Current Capital Lease Obligations	149,767			262,138			352,720			429,074			488,311
Common Stock Equity	925,923			860,927			824,943			709,884			650,591
Total Capitalization	2,298,760			2,346,507			2,258,036			2,142,573			2,042,517

Cash Flow Data
Net Cash Flows From Operating Activities	$	346,191		$	267,919		$	268,294		$	302,483		$	268,064
Capital Expenditures	(252,848		)	(252,782		)	(351,890		)	(277,309		)	(240,079		)
Net Cash Flows From Financing Activities	(140,937		)	11,987			51,452			(51,882		)	(29,320		)

Ratio of Earnings to Fixed Charges ⁽¹⁾	2.67			2.10			2.40			2.74			2.56

~~ITEM 6.~~

~~– SELECTED CONSOLIDATED FINANCIAL DATA~~

September 30, September 30, September 30, September 30, September 30,
UniSource Energy
     2011    2010*    2009*    2008*    2007*
     - In Thousands -
     (except per share data)
Summary of Operations

Operating Revenues
     $ 1,509,515       $ 1,453,966       $ 1,397,052       $ 1,410,407       $ 1,381,660
Net Income
     $ 109,975       $ 112,984       $ 105,901       $ 16,955       $ 60,712
Basic Earnings per Share:

Net Income
     $ 2.98       $ 3.10       $ 2.95       $ 0.47       $ 1.70
Diluted Earnings per Share:

Net Income
     $ 2.75       $ 2.86       $ 2.73       $ 0.53       $ 1.62
Shares of Common Stock Outstanding

Average
     36,962       36,415       35,858       35,632       35,486
End of Year
     36,918       36,542       35,851       35,458       35,315
Year-end Book Value per Share
     $ 24.07       $ 22.73       $ 21.18       $ 19.35       $ 19.65
Cash Dividends Declared per Share
     $ 1.68       $ 1.56       $ 1.16       $ 0.96       $ 0.90










Financial Position

Total Utility Plant – Net
     $ 3,182,263       $ 2,961,498       $ 2,785,714       $ 2,617,693       $ 2,407,295
Investments in Lease Debt and Equity
     $ 65,829       $ 103,844       $ 132,168       $ 126,672       $ 152,544
Other Investments and Other Property
     $ 34,205       $ 61,676       $ 60,239       $ 64,096       $ 70,677
Total Assets
     $ 3,985,231       $ 3,791,243       $ 3,610,065       $ 3,503,821       $ 3,189,747
Long-Term Debt
     $ 1,517,373       $ 1,352,977       $ 1,307,795       $ 1,313,615       $ 993,870
Non-Current Capital Lease Obligations
     352,720       429,074       488,349       513,517       530,973
Common Stock Equity
     888,474       830,756       759,329       686,090       693,958










Total Capitalization
     $ 2,758,567       $ 2,612,807       $ 2,555,473       $ 2,513,222       $ 2,218,801










Selected Cash Flow Data











Net Cash Flows From Operating Activities
     $ 337,320       $ 346,920       $ 347,310       $ 273,767       $ 320,642










Capital Expenditures
     $ (374,122 )    $ (330,629 )    $ (294,020 )    $ (354,080 )    $ (243,242 )
Other Investing Cash Flows⁽¹⁾
     47,034       25,569       (2,624 )    (95,493 )    27,961










Net Cash Flows From Investing Activities
     $ (327,088 )    $ (305,060 )    $ (296,644 )    $ (449,573 )    $ (215,281 )










Net Cash Flows From Financing Activities
     $ (1,441 )    $ (51,183 )    $ (28,916 )    $ 140,605       $ (119,229 )










Ratio of Earnings to Fixed Charges⁽²⁾
     2.46       2.64       2.48       1.28       1.71

September 30, September 30, September 30, September 30, September 30,
TEP
     2011    2010*    2009*    2008*    2007*
     -Thousands of Dollars-
Summary of Operations

Operating Revenues
     $ 1,156,386       $ 1,125,267       $ 1,099,338       $ 1,092,148       $ 1,070,789
Net Income
     $ 85,334       $ 108,260       $ 90,688       $ 7,206       $ 55,591










Financial Position

Total Utility Plant – Net
     $ 2,650,652       $ 2,410,077       $ 2,261,325       $ 2,120,619       $ 1,957,506
Investments in Lease Debt and Equity
     65,829       103,844       132,168       126,672       152,544
Other Investments and Other Property
     32,313       43,588       31,813       31,291       35,460
Total Assets
     $ 3,275,484       $ 3,075,978       $ 2,922,062       $ 2,847,408       $ 2,567,808
Long-Term Debt
     $ 1,080,373       $ 1,003,615       $ 903,615       $ 903,615       $ 682,870
Non-Current Capital Lease Obligations
     352,720       429,074       488,311       513,370       530,714
Common Stock Equity
     824,943       709,884       650,591       589,613       580,512










Total Capitalization
     $ 2,258,036       $ 2,142,573       $ 2,042,517       $ 2,006,598       $ 1,794,096










Selected Cash Flow Data

Net Cash Flows From Operating Activities
     $ 268,294       $ 302,483       $ 268,064       $ 265,756       $ 262,714










Capital Expenditures
     $ (351,890 )    $ (277,309 )    $ (240,079 )    $ (291,990 )    $ (161,141 )
Other Investing Cash Flows⁽¹⁾
     39,879       24,273       (9,522 )    (95,814 )    25,414










Net Cash Flows From Investing Activities
     $ (312,011 )    $ (253,036 )    $ (249,601 )    $ (387,804 )    $ (135,727 )










Net Cash Flows From Financing Activities
     $ 51,452       $ (51,882 )    $ (29,320 )    $ 128,713       $ (120,088 )










Ratio of Earnings to Fixed Charges⁽²⁾
     2.42       2.76       2.58       1.18       1.78

*	~~As revised. See Note 1 to the financial statements for more information.~~

⁽¹⁾	~~Other Investing Cash Flows in 2008 includes the $133 million deposit to Trustee for Repayment of Collateral Trust Bonds.~~

⁽²⁾

For purposes of this computation, earnings are defined as pre-tax earnings from continuing operations before minority interest, or income/loss from equity method investments, plus interest expense and amortization of debt discount and expense related to indebtedness. Fixed charges are interest expense, including amortization of debt discount, interest on operating lease payments, and expense on indebtedness.

SeeItem 7. – Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.~~Operations

~~ITEM 7. –~~ ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

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ITEM 7. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis explains the results of operations, the general financial condition, and the outlook for ~~UniSource~~UNS Energy and its three primary business ~~segments and~~segments. It includes the following:

outlook and strategies;

operating results during ~~2011~~2013 compared with ~~2010,~~2012, and ~~2010~~2012 compared with ~~2009;~~

2011;

factors ~~which affect~~affecting our results and outlook;

liquidity, capital needs, capital resources, and contractual obligations;

dividends; and

critical accounting ~~policies.~~

estimates.

~~UniSource~~

UNS ENERGY CORPORATION

UNS Energy ~~Corporation (UniSource Energy)~~ is a utility services holding company engaged, through its primary subsidiaries, in the electric generation and energy delivery business. Each of ~~UniSource~~UNS Energy’s subsidiaries is a separate legal entity with its own assets and liabilities. ~~UniSource~~UNS Energy owns 100% of ~~Tucson Electric Power Company (TEP), UniSource Energy Services, Inc. (UES), Millennium Energy Holdings, Inc. (Millennium),~~TEP and ~~UniSource Energy Development Company (UED).~~

TEP is a regulated public utility and UniSource Energy’s largest operating subsidiary, representing approximately 82% of UniSource Energy’s total assets as of December 31, 2011. TEP generates, transmits and distributes electricity to approximately 404,000 retail electric customers in a 1,155 square mile area in southeastern Arizona. TEP also sells electricity to other utilities and power marketing entities, located primarily in the western U.S. In addition, TEP operates Springerville Unit 3 on behalf of Tri-State Generation and Transmission Association, Inc. (Tri-State) and Springerville Unit 4 on behalf of Salt River Project Agriculture Improvement and Power District (SRP).

UES holds the common stock of UNS Gas, Inc. (UNS Gas) and UNS Electric, Inc. (UNS Electric). UNS Gas is a regulated gas distribution company with approximately 148,000 retail customers in Mohave, Yavapai, Coconino, and Navajo counties in northern Arizona, as well as in Santa Cruz County in southern Arizona. UNS Electric is a regulated vertically integrated public utility with approximately 91,000 retail customers in Mohave and Santa Cruz counties.

UED developed the Black Mountain Generating Station (BMGS) in northwestern Arizona. The facility includes two natural gas-fired combustion turbines. Prior to July 2011, UNS Electric received energy from BMGS through a power sales agreement with UED. In July 2011, UNS Electric purchased BMGS from UED, leaving UED with no significant remaining assets. The transaction had no impact on UniSource Energy’s consolidated financial statements.

~~Millennium’s investments in unregulated businesses represent less than 1% of UniSource Energy’s assets as of December 31, 2011.~~

~~Our business is comprised of three reporting segments – TEP, UNS Gas, and UNS Electric.~~

UES.

References to “we” and “our” are to ~~UniSource~~UNS Energy and its subsidiaries, collectively.

~~UNISOURCE ENERGY CONSOLIDATED~~

OUTLOOK AND STRATEGIES

Agreement and Plan of Merger

In December 2013, UNS Energy entered into an Agreement and Plan of Merger with Fortis Parent, Fortis and Merger Sub. The Boards of Directors of each of UNS Energy and Fortis Parent have approved the Merger. At the completion of the Merger, each outstanding share of UNS Energy common stock will be converted into the right to receive $60.25 in cash and UNS Energy will become a wholly-owned subsidiary of Fortis.

The Merger is subject to the approval of stockholders holding a majority of the outstanding shares of UNS Energy and other customary closing conditions, including, among other things:

the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;

approvals of the Arizona Corporation Commission and the Federal Energy Regulatory Commission;

confirmation of review, without unresolved concerns, from the Committee on Foreign Investment in the United States; and

the absence of any injunction, order or other law prohibiting the Merger.

On February 18, 2014, we filed definitive proxy materials with the SEC. We expect UNS Energy's shareholders to formally consider a proposal to approve the Merger Agreement at a meeting on March 26, 2014.

In January 2014, UNS Energy and Fortis Parent filed an application and supporting testimony with the ACC requesting approval of the Merger. The ACC administrative law judge (ALJ) assigned to this matter issued a procedural order that calls for settlement discussions to commence on April 28, 2014, and a hearing before the ALJ to commence on June 16, 2014. In February 2014, we filed an application with FERC requesting approval of the Merger. The Merger is expected to close by the end of 2014. If the Merger is completed, UNS Energy expects to record approximately $22 million of expenses related to the Merger in 2014.

Operating Plans and Strategies

Our financial prospects and outlook are affected by many factors including: ~~the TEP 2008 Rate Order that freezes Base Rates through 2012;~~ national, regional, and ~~regional~~local economic conditions; volatility in the financial markets; environmental laws and regulations; and other regulatory factors. Our plans and strategies include the following:

~~Focusing on~~Completing the proposed Merger with Fortis including obtaining all necessary approvals;

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Completing the purchases of Gila River Unit 3 and additional interests in Springerville Unit 1, which are both key components of our ~~core~~long-term diversification strategy for our generating portfolio. The focus of our resource strategy is to provide long-term rate stability for our customers, mitigate environmental impacts, comply with regulatory requirements, and leverage our existing utility ~~businesses through operational excellence, investing in~~infrastructure.

Strengthening the underlying financial condition of our utility ~~rate base, emphasizing customer satisfaction, maintaining a strong community presence, and~~subsidiaries by achieving constructive regulatory ~~outcomes.~~

outcomes, improving our capital structure and our credit ratings, and promoting economic development in our service territories.

Developing strategic responses to new environmental regulations and potential new legislation, including potential limits on greenhouse gas emissions. We are evaluating ~~TEP’s~~TEP's existing mix of generation resources and defining steps to achieve environmental objectives that ~~provide an appropriate return~~protect the financial stability of our utility businesses.

Focusing on ~~investment~~our core utility businesses through operational excellence, investing in utility rate base, emphasizing customer service, and ~~are consistent with earnings growth.~~maintaining a strong community presence.

Expanding ~~TEP’s~~TEP's and UNS ~~Electric’s~~Electric's portfolio of renewable energy resources and programs to meet ~~Arizona’s~~Arizona's Renewable Energy Standard (RES) while creating ownership opportunities for renewable energy projects that benefit customers, shareholders, and the communities we serve.

Developing strategic responses to ~~Arizona’s~~Arizona's Energy Efficiency Standards that protect the financial stability of our utility businesses and provide benefits to our customers.

RESULTS OF OPERATIONS

Contribution by Business Segment

~~We conduct our business through three primary business segments – TEP, UNS Gas, and UNS Electric.~~

The table below shows the contributions to our consolidated ~~after-tax earnings~~net income by ~~these~~ business ~~segments.~~

September 30, September 30, September 30,
     2011    2010    2009
TEP
     $ 85       $ 108       $ 91
UNS Gas
     10       9       7
UNS Electric
     18       15       11
Other Non-Reportable Segments and Adj.⁽¹⁾
     (3 )    (19 )    (3 )






Consolidated Net Income
     $ 110       $ 113       $ 106

segment:



	2013		2012		2011
	Millions of Dollars
TEP	$	101	$	65	$	85
UNS Electric	12		17		18
UNS Gas	11		9		10
Other Non-Reportable Segments and Adjustments ⁽¹⁾	3		—		(3		)
Consolidated Net Income	$	127	$	91	$	110


⁽¹⁾	Includes: ~~UniSource~~UNS Energy parent company expenses; Millennium; UED; and ~~UED.~~ inter-company eliminations.

~~Revision of Prior Period Financial Statements~~

In the second and third quarters of 2011, we identified errors related to amounts recorded, at their dollar value, owed to or payable by TEP for electricity deliveries settled in-kind or to be settled in-kind during prior years under three of our transmission agreements. In the second quarter of 2011, we also identified errors in prior years in the calculation of income tax expense arising from not treating Allowance for Equity Funds Used During Construction (AFUDC) as a permanent book to tax difference.

We assessed the materiality of these errors on prior period financial statements and concluded they were not material to any prior annual or interim periods; however, the cumulative impact, if recognized in 2011, could be material to results in 2011. In accordance with Staff Accounting Bulletin 108 and as set forth in Note 1 to the Financial Statements in our Quarterly Report on Form 10-Q for the quarters ended June 30, 2011, and September 30, 2011, we revised our prior period financial statements to correct these errors. See Note 1 for more information.

Executive Overview

2013

~~2011~~ Compared with ~~2010~~

2012

TEP

TEP reported net income of $101 million in 2013 compared with net income of $65 million in 2012. The increase in net income is due in part to: a $41 million increase in retail margin revenues related to a non-fuel base rate increase that was effective on July 1, 2013 and higher retail kWh sales resulting from favorable weather conditions; a $2 million increase in the margin on long-term wholesale sales due to higher market prices for wholesale power; and a $9 million decrease in interest expense due in part to a reduction in capital lease obligation balances; partially offset by a $12 million increase in Base O&M due in part to planned and unplanned maintenance on TEP's generating facilities, as well as merger-related expenses of $6 million recorded in December 2013; and a $3 million increase in taxes other than income taxes due in part to an increase in property tax rates and higher asset balances.

Additionally, TEP's net income in 2013 includes an income tax benefit of $11 million. In June 2013, we recorded a regulatory asset and corresponding reduction of income tax expense of $11 million to recover previously recorded income tax expense through future rates as a result of the 2013 TEP Rate Order. The regulatory asset will be amortized as income tax expense as the qualifying assets are depreciated. See Note 9. TEP's 2013 results also include additional fuel expense of $3 million related to a one-time credit to customers resulting from the 2013 TEP Rate Order. TEP's results in 2012 reflect a $3 million reduction

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to pre-tax income due to an unplanned outage at Springerville Unit 3 and a $5 million write-off of transmission related assets. See Tucson Electric Power Company, Results of Operations.

UNS Electric

UNS Electric reported net income of $12 million in 2013 compared with net income of $17 million in 2012. The decrease in net income was due in part to lower mining kWh sales during 2013 and the loss of an industrial customer in the second half of 2012. See UNS Electric, Results of Operations.

UNS Gas

UNS Gas reported net income of $11 million in 2013 compared with net income of $9 million in 2012. The increase in net income is due primarily to: higher sales volumes resulting from cold weather, which contributed to an improvement in retail margin revenues; and a non-fuel base rate increase that was effective in May 2012. See UNS Gas, Results of Operations.

2012 Compared with 2011

TEP

TEP reported net income of $65 million in 2012 compared with $85 million in ~~2011 compared with $108 million in 2010.~~2011. The decrease in net income was due primarily to: a $7 million decline in retail margin revenues resulting from lower retail kWh sales due to milder summer weather than 2011, as well as the effects of the ACC’s energy efficiency and distributed generation requirements; an $8 million decline in long-term wholesale margin ~~revenues;~~revenues resulting primarily from a ~~decrease~~change in the pricing of energy sold under the SRP wholesale ~~transmission revenues;~~contract that was effective on June 1, 2011; an $11 million increase in depreciation and amortization expense as a result of an increase in ~~Base O&M; higher depreciation expense;~~utility plant-in-service; and ~~an increase~~a $5 million decrease in ~~interest expense. Those~~pre-tax income related to the partial write-off of transmission-related assets. These factors were partially offset by a decrease in TEP’s Base O&M, resulting primarily from fewer planned generating plant outages. Net income in 2011 included the recognition of a $7 million pre-tax gain related to the settlement of a dispute with El Paso Electric. SeeTucson Electric Power, Results of Operations~~below for more information.~~

UNS ~~Gas~~Electric and UNS ~~Electric~~

~~UNS~~ Gas ~~reported net income of $10 million in 2011 compared with net income of $9 million in 2010. See~~~~UNS Gas, Results of Operations,~~~~below for more information.~~

UNS Electric reported net income of ~~$18~~$17 million in ~~2011~~2012 compared with net income of ~~$15~~$18 million in ~~2010. The increase is due in part to a Base Rate increase that took effect in October 2010.~~2011. SeeUNS Electric, Results of Operations~~below for more information.~~

~~Other Non-Reportable Segments~~.

Millennium’s financial results are included in UniSource Energy’s Other Non-Reportable Segments. Millennium reported net income of $2 million in 2011 compared with a net loss of $13 million in 2010. Millennium’s results in the 2010 reflect losses related to the write-off of deferred taxes and impairment losses. See~~Other Non-Reportable Segments, Results of Operations,below, for more information.~~

~~2010 Compared with 2009~~

~~TEP~~

TEP reported net income of $108 million in 2010 compared with net income of $91 million in 2009. The increase was due primarily to: a $17 million decrease in depreciation and amortization expense resulting from a change in depreciation rates for TEP’s transmission assets, the purchase of Sundt Unit 4, and a decline in amortization on capital lease obligations (the decrease excludes adjustments made to depreciation and amortization in 2009 related to an investment in Springerville Unit 1 lease equity); operating benefits of $11 million related to the start of commercial operation of Springerville Unit 4 in December 2009; a $3 million decrease in Base O&M resulting from a decline in planned power plant maintenance outages, cost-containment efforts and lower pension and post retirement medical expense; and a $5 million decrease in retail margin revenues resulting from a 0.8% decrease in retail kWh sales.

~~UNS Gas and UNS Electric~~

UNS Gas reported net income of $9 million in ~~2010 compared with $7 million in 2009. The increase was due primarily to an increase in retail sales due to colder winter weather and an increase in Base Rates that took effect in April 2010.~~

UNS Electric reported net income of $15 million in 2010 compared with $11 million in 2009. The increase was due primarily to an increase in demand from a mining customer; the addition of a new industrial customer; and an increase in Base Rates that took effect in October 2010; and a pre-tax gain of $3 million related to the settlement of a dispute regarding wholesale energy transactions.

~~Other Non-Reportable Segments~~

~~Millennium recorded a net loss of $13 million in 2010~~2012 compared with net income of $2$10 million in ~~2009. The net loss in 2010 resulted from several factors, including the write-off~~2011. See UNS Gas, Results of ~~deferred tax assets~~Operations.

Operations and ~~impairment losses on certain investments.~~

Maintenance Expense

~~O&M~~

The table below summarizes the items included in ~~UniSource~~UNS Energy’s Operations and Maintenance (O&M) expense. In 2013, Base O&M ~~expense.~~

September 30, September 30, September 30,
     2011    2010    2009
     -Millions of Dollars-
TEP Base O&M (non-GAAP)⁽¹⁾
     $ 237       $ 228       $ 231
UNS Gas Base O&M (non-GAAP)⁽¹⁾
     24       25       25
UNS Electric Base O&M (non-GAAP)⁽¹⁾
     20       21       21
Consolidating Adjustments and Other⁽²⁾
     (11 )    (9 )    (7 )






UniSource Energy Base O&M (non-GAAP)
     270       265       270
Reimbursed Expenses Related to Springerville Units 3 & 4
     63       65       41
Expenses Related to Customer-Funded Renewable Energy and Demand Side Management Programs
     46       40       23






Total UniSource Energy O&M (GAAP)
     $ 379       $ 370       $ 334

includes merger-related expenses of $7 million.



	2013		2012		2011
	Millions of Dollars
UNS Energy Base O&M (Non-GAAP)⁽¹⁾	$	288	$	266	$	271
Reimbursed Expenses Related to Springerville Units 3 and 4	70		72		63
Expenses Related to Customer-Funded Renewable Energy and Demand Side Management (DSM) Programs⁽²⁾	32		46		45
Total UNS Energy O&M (GAAP)	390		$	384	$	379

⁽¹⁾

Base O&M, a non-GAAP financial measure, should not be considered as an alternative to ~~Other~~ O&M, which is determined in accordance with ~~GAAP.~~generally accepted accounting principles (GAAP). We believe Base O&M provides useful information to investors because it represents the fundamental level of operating and maintenance expense related to our core business. Base O&M excludes expenses that are directly offset by revenues collected from customers and other third parties.


⁽²⁾	~~Includes Millennium, UED,~~Represents expenses related to customer-funded renewable energy and ~~UniSource Energy stand-alone O&M,~~DSM programs; these expenses are being collected from customers and ~~inter-company eliminations.~~ the corresponding amounts are recorded in retail revenue.

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LIQUIDITY AND CAPITAL RESOURCES

UNS Energy Consolidated Liquidity

~~Liquidity~~

~~Dividends~~Cash flows may vary during the year, with cash flow from ~~UniSource Energy’s subsidiaries, primarily TEP, represent~~operations typically the ~~parent company’s main source of liquidity. Under UniSource Energy’s tax sharing agreement, subsidiaries make income tax payments~~lowest in the first quarter and highest in the third quarter due to ~~UniSource Energy, which makes payments on behalf~~TEP’s summer peaking load. As a result of the ~~consolidated group.~~varied seasonal cash flow, UNS Energy will use, as needed, its revolving credit facility to assist in funding its business activities. The table below provides a summary of the liquidity position of ~~UniSource~~UNS Energy and each of its ~~segments.~~

September 30, September 30, September 30,
Balances as of February 21, 2012
     Cash and Cash
Equivalents Borrowings under
Revolving Credit
Facility⁽¹⁾      Amount Available
under Revolving
Credit Facility
     -Millions of Dollars-
UniSource Energy Stand-Alone
     $ 5    $ 52         $ 73
TEP
     21    86         114
UNS Gas
     40    —           70 ⁽²⁾
UNS Electric
     6    6         64 ⁽²⁾
Other
     6 ⁽³⁾ N/A         N/A



Total
     $ 78

segments:



Balances at December 31, 2013	Cash and Cash Equivalents		Borrowings under Revolving Credit Facility⁽¹⁾		Amount Available under Revolving Credit Facility
	Millions of Dollars
UNS Energy Stand-Alone	$	9	$	54	$	71
TEP	25		1		199
UNS Electric⁽²⁾	5		22		48
UNS Gas⁽²⁾	33		—		70
Other⁽³⁾	3		N/A		N/A
Total	$	75


⁽¹⁾	Includes ~~LOCs~~Letters of Credit (LOCs) issued under revolving credit facilities.


⁽²⁾	Either UNS Gas or UNS Electric may borrow up to a maximum of $70 million; the total combined amount borrowed by both companies cannot exceed $100 million.


⁽³⁾	Includes cash and cash equivalents at Millennium and UED.

In March 2014, TEP expects to issue a $15 million LOC to a subsidiary of Entegra to satisfy a condition of the Gila River Unit 3 purchase agreement. TEP's borrowing capacity under the TEP Credit Agreement will be reduced by $15 million until the Gila River transaction closes and the LOC is terminated.

Dividends from UNS Energy’s subsidiaries represent the parent company’s main source of liquidity.

Dividends from Subsidiaries

UNS Energy received $40 million in dividends from TEP and $10 million in dividends from each of UNS Electric and UNS Gas in 2013, and $1 million from Millennium. In 2012, UNS Energy received dividends of $30 million from TEP, $20 million from UNS Gas, $14 million from Millennium, and $10 million from UNS Electric.

Short-term Investments

~~UniSource~~

UNS Energy’s short-term investment policy governs the investment of excess cash balances. We regularly review and update this policy in response to market conditions. ~~As of~~ At December 31, ~~2011, UniSource~~2013, UNS Energy’s short-term investments included highly-rated and liquid money market funds and certificates of ~~deposit, and commercial paper. These short-term investments are classified as Cash and Cash Equivalents on the Balance Sheet.~~

deposit.

Access to Revolving Credit Facilities

~~UniSource Energy and its three primary subsidiaries~~

We have access to working capital through revolving credit agreements with lenders. Each of these agreements is a committed facility that expires in November 2016. The TEP Revolving Credit Facility and UNS ~~Gas/~~Electric/UNS ~~Electric Credit Agreements~~Gas Revolver may be used for revolving borrowings as well as to issue ~~letters of credit.~~LOCs. TEP, UNS ~~Gas,~~Electric, and UNS ~~Electric~~Gas each issue ~~letters of credit~~LOCs from time to time to provide credit enhancement to counterparties for their ~~power or gas~~energy procurement and hedging activities. The ~~UniSource~~UNS Credit Agreement also may be used to issue ~~letters of credit~~LOCs for general corporate purposes.

We believe that we have sufficient liquidity under our revolving credit facilities to meet short-term working capital needs and to provide credit enhancement as necessary under energy procurement and hedging agreements. However, TEP will need to issue long-term debt or enter into additional short-term credit facilities by June 2014 to meet capital expenditure requirements and scheduled mid-year capital lease payments. SeeItem 7A.Quantitative and Qualitative Disclosures about Market Risk ~~Credit Risk, below.~~

~~Liquidity Outlook~~.

~~In November 2011, UniSource Energy, TEP,~~

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UNS ~~Gas, and UNS Electric each amended and extended their respective Credit Agreements that were due to expire in 2014 to extend the expiration dates to November 2016.~~

~~UniSource~~ Energy Consolidated Cash Flows

September 30, September 30, September 30,
     2011    2010    2009
     -Millions of Dollars-
Operating Activities
     $ 337       $ 347       $ 347
Investing Activities
     (327 )    (305 )    (297 )
Financing Activities
     (1 )    (51 )    (29 )

~~UniSource~~



	Years Ended December 31,
	2013			2012			2011
	Millions of Dollars
Operating Activities	$	421		$	348		$	337
Investing Activities	(334		)	(263		)	(327		)
Financing Activities	(136		)	(37		)	(2		)
Net Increase (Decrease) in Cash	(49		)	48			8
Beginning Cash	124			76			68
Ending Cash	$	75		$	124		76

UNS Energy’s operating cash flows are generated primarily by ~~the~~ retail and wholesale energy sales at TEP, UNS ~~Gas~~Electric, and UNS ~~Electric,~~Gas, net of the related payments for fuel and purchased power. Generally, cash from operations is lowest in the first quarter and highest in the third quarter due to TEP’s summer-peaking load. ~~UniSource Energy,~~ TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas typically use their revolving credit facilities to ~~fund~~assist in funding their business activities during periods when sales are seasonally lower.

Capital expenditures at TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas represent the primary use of cash for investing activities.

Cash used for investing and financing activities can fluctuate year-to-year depending on: capital ~~expenditures,~~expenditures; repayments and borrowings under revolving credit facilities; debt issuances or retirements; capital lease payments by TEP; and dividends paid by ~~UniSource~~UNS Energy to its shareholders.

Operating Activities

In ~~2011,~~2013, net cash flows from operating activities were ~~$10~~$73 million ~~lower~~ higher than they were in ~~2010 due to:~~

2012. The following items affected the year-over-year change in operating cash flows: a ~~$32 million increase in O&M costs due in part to higher planned generating plant outage costs, higher up-front incentive payments for customer-installed solar systems, and higher DSM payments; and~~

~~a $17 million increase in taxes other than income taxes paid due to a higher sales tax rate effective in June 2010 and sales taxes paid on higher retail kWh sales;~~

~~partially offset by~~

~~a $14~~$23 million increase in cash receipts from ~~electric~~retail and ~~gas~~wholesale sales, net of fuel and purchased ~~energy costs. The~~power costs paid, due to a non-fuel base rate increase ~~was~~that became effective on July 1, 2013, an increase in sales volumes from warmer weather compared to 2012, and higher market prices for wholesale power; a $27 million decrease in operations and maintenance costs and wages paid, net of amounts capitalized, due in part ~~to:~~to renewable prepayments made in 2012; and a Base Rate increase at UNS Gas in April 2010; a Base Rate increase at UNS Electric in October 2010; an increase in retail electric sales; higher fuel and purchased power cost recoveries from UNS Electric customers; and higher sales tax collections from customers resulting from a 1% increase in the sales tax rate that took effect in June 2010; and

~~a $26~~$6 million decrease in ~~income taxes~~interest paid ~~net of income tax refunds~~on capital lease obligations due to ~~lower taxable income resulting from bonus depreciation deductions.~~

a decline in the balance of capital lease obligations.

Investing Activities

Net cash flows used for investing activities increased ~~by $22~~$71 million in ~~2011. Capital expenditures during 2011 were $374 million~~2013 compared with ~~$331~~2012 due in part to: a $19 million ~~last year. TEP’s 2011~~increase in capital expenditures; a $17 million increase in REC purchases due to an increase in renewable energy PPAs; a $15 million decrease in proceeds from a note receivable; and a $10 million decrease in the return of investment in Springerville lease debt.

Capital Expenditures



	Actual		Estimated
	2013		2014		2015		2016		2017		2018
	Millions of Dollars
TEP	$	253	$	528	$	469	$	223	$	276	$	218
UNS Electric	56		95		39		33		37		49
UNS Gas	17		13		13		14		15		16
UNS Energy Consolidated	$	326	$	636	$	521	$	270	$	328	$	283

TEP's estimated capital expenditures ~~include $85~~include:

$164 million ~~related to construction of a new administrative headquarters. Capital expenditures in 2010 included~~for the purchase of ~~Sundt~~75% of Gila River Unit ~~4 by TEP~~3 in 2014;

$65 million for ~~$51 million. Investing activities in 2011 included a $13 million increase in proceeds from investments in Springerville lease debt.~~

~~Capital Expenditures Forecast~~

September 30, September 30, September 30, September 30, September 30, September 30,
     Actual
Estimated

     2011    2012      2013      2014      2015      2016
        -Millions of Dollars-
TEP
     $ 352       $ 289         $ 346         $ 379         $ 331         $ 418
UNS Gas
     13       11         12         13         14         14
UNS Electric (1)
     33       34         41         41         31         35
Consolidating Adjustments (2)
     (24 )    —           —           —           —           —












UniSource Energy Consolidated
     $ 374       $ 334         $ 399         $ 433         $ 376         $ 467

~~(1)~~

~~UNS Electric purchased BMGS from UED for approximately $63 million in 2011. Since this is an inter-company transaction, it is not included in~~ the ~~chart, as it is eliminated from UniSource Energy consolidated capital expenditures. See~~~~UNS Electric~~,~~Factors Affecting Results of Operations, Rates,~~~~below, for more information.~~

~~(2)~~

Consolidating adjustments of approximately $24 million represent costs incurred during 2010 at UniSource Energy for the construction of a new administrative headquarters building. These costs were reimbursed to UniSource Energy when TEP purchased the building in November 2011.

~~TEP’s estimated capital expenditures exclude the potential~~ purchase of ~~interests in~~35.4% of Springerville Unit 1 in 2014 and 2015, and $73 million for ~~$159 million and~~TEP's share of the ~~potential~~expected purchase of interests in the Springerville Coal Handling ~~Facilities~~facilities in April 2015;

$147 million for ~~$120~~TEP-related transmission investments during 2014 and 2015;

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$35 million for TEP's share of potential environmental expenditures related to the installation of SNCR at San Juan Unit 1. See Item 1 Business, TEP, Environmental Matters andNote 7; and

$38 million for TEP's share of the expected purchase of the Springerville Common Facilities upon the expiration of ~~their respective~~one of the two leases in ~~January 2015.~~

2017.

UNS Electric's estimated capital expenditures include the purchase of 25% of Gila River Unit 3 for approximately $55 million in 2014.

These estimates are subject to continuing review and adjustment. Actual capital expenditures may differ from these estimates due to changes in business conditions, construction schedules, environmental requirements, state or federal regulations and other factors.

See ~~For more information regarding TEP’s capital expenditures, see~~Tucson Electric Power Company, Liquidity and Capital Resources, Investing Activities, Capital Expenditures~~below.~~

Financing Activities

Net cash flows used for financing activities were ~~$50~~$98 million ~~lower~~ higher in ~~2011~~2013 when compared with ~~2010 primarily~~2012 due to:

a ~~$16~~$10 million increase in ~~proceeds from~~scheduled capital lease payments; a $3 million increase in dividends paid on Common Stock; and the issuance of ~~long-term debt (net~~$150 million of long-term debt ~~repayments~~by TEP in 2012.

Capital Contributions

UNS Energy made no capital contributions to its subsidiaries in 2013 and ~~issuance/retirement costs);~~

2012.

~~a $70 million increase in borrowings (net of repayments) under revolving credit facilities;~~

~~partially offset by~~

~~an $18 million increase in payments on capital lease obligations;~~

~~a $5 million increase in common stock dividends paid; and~~

~~a $7 million decrease in cash from other financing activities.~~

~~Capital Contributions~~

In ~~July~~ 2011, ~~UniSource~~UNS Energy contributed $20 million in capital to UNS Electric to help fund its purchase of BMGS from UED.

~~In December~~

Also in 2011, ~~UniSource~~UNS Energy contributed $30 million in capital to ~~TEP.~~

~~In 2010, UED paid UniSource Energy a $9 million dividend, of which $4 million represented a return of capital distribution. UniSource Energy contributed $15 million in capital to~~ TEP ~~in 2010~~ to help fund the purchase of ~~Sundt Unit 4.~~

TEP’s headquarters building.

See~~Other Non-Reportable Business Segments, UED~~ ~~and~~Tucson Electric Power Company, Liquidity and Capital Resources~~, below for more information.~~

~~UniSource~~.

UNS Credit Agreement

The UNS Credit Agreement, which expires in November ~~2011, UniSource Energy amended its existing credit agreement (the UniSource Credit Agreement). The UniSource Credit Agreement~~2016, consists of a $125 million revolving credit and ~~revolving letter of credit~~LOC facility. ~~The amendment extended the term of the UniSource Credit Agreement by two years to November 2016. As of~~ At December 31, ~~2011,~~2013, there was ~~$57~~$54 million outstanding at a ~~weighted average~~weighted-average interest rate of ~~2.0%~~1.66%.

The ~~UniSource~~UNS Credit Agreement restricts additional indebtedness, liens, mergers, and sales of assets. The ~~UniSource~~UNS Credit Agreement also requires ~~UniSource~~UNS Energy to meet a minimum cash flow to ~~interest~~debt service coverage ratio determined on a ~~UniSource~~UNS Energy stand-alone basis. Additionally, ~~UniSource~~UNS Energy cannot exceed a maximum leverage ratio determined on a consolidated basis. Under the terms of the ~~UniSource~~UNS Credit Agreement, ~~UniSource~~UNS Energy may pay dividends so long as it maintains compliance with the agreement.

As UNS Energy’s obligations under the agreement are secured by a pledge of the common stock of Millennium, UES, and UED.

At December 31, ~~2011,~~2013, we were in compliance with the terms of the ~~UniSource~~UNS Credit Agreement.

Interest Rate Risk

~~UniSource~~UNS Energy is subject to interest rate risk resulting from changes in interest rates on its borrowings under the revolving credit facility. The interest paid on revolving credit borrowings is variable. ~~UniSource~~UNS Energy may be required to pay higher rates of interest on borrowings under its revolving credit facility if LIBOR and other benchmark interest rates increase. SeeItem 7A. Quantitative and Qualitative Disclosures about Market Risk ~~Credit Risk, below.~~

~~Convertible Senior Notes~~.

~~In March 2005, UniSource Energy issued $150 million~~

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Table of 4.50% Convertible Senior Notes due 2035. Each $1,000 of Convertible Senior Notes can be converted into 28.814 shares of UniSource Energy common stock at any time. The conversion ratio represents a conversion price of approximately $34.71 per share of common stock and is subject to adjustments including an adjustment to reduce the conversion price upon the payment of quarterly dividends in excess of $0.19 per share.

On December 28, 2011, UniSource Energy gave notice of a partial redemption of the Convertible Senior Notes by calling $35 million of the $150 million outstanding. The redemption period ended on January 12, 2012. Holders of the called Convertible Senior Notes had the option of converting their interests to common stock or redeeming the Convertible Senior Notes at par plus accrued interest. The notes were convertible into shares of UniSource Energy’s common stock at a conversion rate of 28.814 shares per $1,000 principal amount of Convertible Senior Notes. Approximately $33.5 million of the Convertible Senior Notes selected for redemption converted their interests into approximately 964,000 shares of UniSource Energy’s common stock. The remaining $1.5 million was redeemed for cash on January 12, 2012.

~~The closing price of UniSource Energy’s Common Stock was $37.76 on February 21, 2012.~~

UniSource Energy has the option to redeem the remaining Convertible Senior Notes, in whole or in part, for cash, at a price equal to 100% of the principal amount plus accrued and unpaid interest. Holders of the Convertible Senior Notes will have the right to require UniSource Energy to repurchase the Convertible Senior Notes, in whole or in part, for cash on March 1, 2015, 2020, 2025 and 2030, or if certain specified fundamental changes involving UniSource Energy occur. The repurchase price will be 100% of the principal amount of the remaining notes plus accrued and unpaid interest.

Contents

Contractual Obligations

The following chart displays ~~UniSource~~UNS Energy’s consolidated contractual obligations by maturity and by type of obligation as of December 31, ~~2011.~~

000000 000000 000000 000000 000000 000000 000000 000000
UniSource Energy’s Contractual Obligations
- Millions of Dollars -

Payment Due in Years
Ending December 31,
2012 2013 2014 2015 2016 2017
and after Other Total
Long Term Debt

Principal^{(1) (9)}
$ —      $ —      $ 37    $ 130    $ 235    $ 1,115    $ —      $ 1,517
Interest⁽²⁾
73    73    73    73    67    728    —      1,087
Capital Lease Obligations⁽³⁾
118    122    195    23    18    61    —      537
Operating Leases
2    2    2    1    1    10    —      18
Purchase Obligations:

Fuel⁽⁴⁾
107    71    68    50    47    96    —      439
Purchased Power
83    61    48    16    16    227    —      451
Transmission
7    5    5    4    4    23    —      48
Other Long-Term Liabilities⁽⁵⁾:

Pension & Other Post Retirement Obligations⁽⁶⁾
28    5    6    6    6    34    —      85
Acquisition of Springerville Coal Handling and Common Facilities⁽⁷⁾
—      —      —      120    —      106    —      226
Solar Equipment⁽⁸⁾
12    12    —      —      —      —      —      24
Unrecognized Tax Benefits
—      —      —      —      —      —      29    29

Total Contractual Cash Obligations
$ 430    $ 351    $ 434    $ 423    $ 394    $ 2,400    $ 29    $ 4,461

2013:



	UNS Energy Contractual Obligations
Payment Due in Years Ending December 31,	2014		2015		2016		2017		2018		Thereafter		Other		Total
	Millions of Dollars
Long-Term Debt
Principal⁽¹⁾	$	—	$	130	$	132	$	—	$	100	$	1,146	$	—	$	1,508
Interest⁽²⁾	67		66		61		60		61		480		—		795
Capital Lease Obligations⁽³⁾	214		69		17		18		11		30		—		359
Operating Leases	4		4		3		2		2		14		—		29
Purchase Obligations⁽⁴⁾:
Fuel⁽⁵⁾	103		83		80		75		49		345		—		735
Purchased Power	75		17		—		—		—		—		—		92
Transmission	7		13		12		12		11		27		—		82
Renewable Power Purchase Agreements⁽⁶⁾	36		37		37		37		37		485				669
RES Performance-Based Incentives⁽⁷⁾	9		9		9		9		9		85		—		130
Acquisition of Springerville Coal Handling & Common Facilities⁽⁸⁾	—		120		—		38		—		68		—		226
Other Long-Term Liabilities⁽⁹⁾:
Pension & Other Post Retirement Obligations⁽¹⁰⁾	17		6		6		6		6		33		—		74
Unrecognized Tax Benefits	—		—		—		—		—		—		4		4
Total Contractual Obligations	$	532	$	554	$	357	$	257	$	286	$	2,713	$	4	$	4,703

⁽¹⁾

Certain of TEP’s variable rate ~~IDBs~~industrial development revenue bonds (IDBs) or pollution control revenue bonds are secured by ~~letters of credit~~LOCs issued pursuant to the TEP Credit Agreement, which expires in 2016, and the 2010 TEP Reimbursement Agreement, which expires in ~~2014.~~2019. Although the $115 million of variable rate ~~IDBs~~bonds mature between ~~2018~~2022 and 2032, the above maturity reflects a redemption or repurchase of such bonds as though the ~~letters of credit~~LOCs terminate without replacement upon expiration of the TEP Credit Agreement in 2016 (that supports $78 million of variable rate bonds) and the 2010 TEP Reimbursement Agreement in ~~2014.~~

2019 (that supports $37 million of variable rate bonds). Additionally, TEP's 2013 variable-rate IDBs, which mature in 2032, are subject to mandatory tender for purchase after the current five-year term and are therefore reflected as maturing in 2018. Excludes approximately $1 million of debt discount.


⁽²⁾	Excludes interest on revolving credit ~~facilities.~~ facilities and includes interest on TEP's 2013 tax-exempt IDBs through the end of the current five-year term.

⁽³⁾

Capital lease obligations include the purchase of Springerville Unit 1 in December 2014 and January 2015. See Note 6. Effective with commercial operation of Springerville Unit 3 in July 2006 and Unit 4 in December 2009, Tri-State and SRP are reimbursing TEP for various operating costs related to the common facilities on an ongoing basis, including a total of $14 million annually related to the Springerville Common and Springerville Coal Handling Facilities Leases. TEP remains the obligor under these capital leases, and Capital Lease Obligations do not reflect any reduction associated with this reimbursement.


⁽⁴⁾	Excludes the acquisition of Gila River Unit 3 pending regulatory approvals. See Note 8.


⁽⁵⁾	Excludes TEP’s liability for final environmental reclamation at the coal mines which supply the Navajo, San Juan and Four Corners generating stations as the timing of payment has not been determined. See Note 4. 7.

⁽⁵⁾	~~Excludes asset retirement obligations expected to occur through 2066.~~

⁽⁶⁾

These obligations represent TEP’s and UES’ expected contributions to pension plans in 2012, TEP’s expected benefit payments for its unfunded Supplemental Executive Retirement Plan and TEP’s expected postretirement benefit costs to cover medical and life insurance claims as determined by the plans’ actuaries. TEP and ~~UES do~~UNS Electric have entered into 20-year PPAs with renewable energy generation producers to comply with the RES tariff. TEP and UNS Electric are obligated to purchase 100% of the output of these facilities. The table above includes estimated future payments based on expected power deliveries under these contracts. TEP and UNS Electric have entered into additional long-term renewable PPAs to comply with the RES; however, TEP's and UNS Electric's obligations to accept and pay for electric power under these agreements does not ~~know and have not included pension contributions beyond 2012 for their funded pension plans due to~~begin until the significant impact that returns on plan assets and changes in discount rates might have on such amounts. TEP previously funded the postretirement benefit plan on a pay-as-you-go basis. In 2009, TEP established a VEBA Trust to partially fund expected future benefits for union employees. Benefit paymentsfacilities are ~~not expected to be made from the Trust for several years. The 2012 obligation includes expected VEBA contributions. VEBA contributions for periods beyond 2012 cannot be determined at this time.~~

operational.


⁽⁷⁾	TEP and UNS Electric have entered into REC purchase agreements to purchase the environmental attributes from retail customers with solar installations. Payments for the RECs are termed Performance Based Incentives (PBIs) and are paid in contractually agreed upon intervals (usually quarterly) based on metered renewable energy production. PBIs are recoverable through the RES tariff. See Note 3.

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⁽⁸⁾

TEP has agreed with the owners of Springerville Units 3 and 4 that, prior to expiration of the Springerville Coal Handling Facilities and Common Facilities Leases, TEP will either renew such leases or exercise its fixed price purchase option under such leases and acquire the leased facilities. TEP has the option of purchasing the facilities at the end of the initial lease term or after one or more renewal periods through 2025 for the Springerville Common Facilities and through 2035 for the Springerville Coal Handling Facilities. The table above reflects the purchase as if TEP exercised the fixed price purchase option at the end of the initial lease term. Upon such acquisitions by TEP, the ~~owners~~owner of Springerville Unit 3 ~~have the option~~ and the owner of Springerville Unit 4 ~~has~~have the obligation to purchase from TEP a 17% interest in the Springerville Coal Handling Facilities and a 14% interest in the Springerville Common Facilities.

⁽⁸⁾	TEP has a commitment to purchase 9 MW of photovoltaic equipment through December 2013. 6 MW were approved by the ACC, and 3 MW remain subject to ACC approval, which is expected in the fourth quarter of 2012.

⁽⁹⁾
~~In January 2012, UniSource Energy redeemed $35 million of~~Excludes asset retirement obligations expected to occur through 2066.
⁽¹⁰⁾
These obligations represent TEP’s and UES’ expected contributions to pension plans in 2014, TEP’s expected benefit payments for its ~~convertible senior notes. Pursuant~~unfunded Supplemental Executive Retirement Plan (SERP), and TEP’s expected retiree benefit costs to cover medical and life insurance claims as determined by the plans’ actuaries. TEP and UES do not know and have not included pension and retiree benefit contributions beyond 2014 for their funded plans due to the ~~redemption, substantially all of the notes were converted into approximately 1 million shares of UniSource Energy Common Stock.~~
significant impact that returns on plan assets and changes in discount rates might have on such amounts.

We have reviewed our contractual obligations and provide the following additional information:

We do not have any provisions in any of our debt or lease agreements that would cause an event of default or cause amounts to become due and payable in the event of a credit rating downgrade.

None of our contracts or financing arrangements contains acceleration clauses or other consequences triggered by changes in our stock price.

~~Dividends on Common Stock~~

On February 24, 2012, UniSource Energy declared a first quarter cash dividend of $0.43 per share on its common stock. The first quarter dividend, totaling approximately $16 million, will be paid March 22, 2012 to shareholders of record at the close of business March 12, 2012. The table below summarizes UniSource Energy’s dividends paid in 2009 through 2011.

Income Tax Position

~~As of December 31, 2011, UniSource Energy and TEP had the following carry-forward amounts:~~

September 30, September 30, September 30, September 30,

UniSource Energy

TEP

     Amount      Expiring Year      Amount      Expiring Year
     -Amounts in Millions of Dollars-
Capital Loss
     $ 8         2015         $ —           —
Federal Net Operating Loss
     230         2031         212         2031
State Net Operating Loss
     —           2016         13         2016
State Credits
     1         2016         2         2016
AMT Credit
     43         None         25         None

The 2010 Federal Tax Relief Act ~~includes~~and the American Taxpayer Relief Act of 2012 include provisions that make qualified property placed ~~into~~in service between ~~September 8,~~ 2010 and ~~January 1, 2012~~2013 eligible for ~~100%~~ bonus depreciation for tax purposes. ~~The same law makes qualified property placed in service during 2012 eligible for 50% bonus depreciation for tax purposes. This is~~In addition, the IRS issued new guidance related to the treatment of expenditures to maintain, replace, or improve property. These provisions are an acceleration of tax benefits ~~UniSource~~UNS Energy and TEP otherwise would have received over 20 years. As a result of these provisions, ~~UniSource~~UNS Energy ~~did not pay any federal income taxes for the tax year 2011~~ and ~~does~~TEP do not expect to pay any federal or state income taxes ~~for 2012.~~

through 2017.

TUCSON ELECTRIC POWER COMPANY

RESULTS OF OPERATIONS

~~Executive Summary~~

TEP’s financial condition and results of operations are the principal factors affecting the financial condition and results of operations of ~~UniSource~~UNS Energy. The following discussion relates to ~~TEP’s utility operations,~~TEP, unless otherwise noted.

~~2011 Compared~~2013 compared with ~~2010~~2012

TEP reported net income of $101 million in 2013 compared with net income of $65 million in 2012. The following factors affected TEP’s results in 2013:

a $41 million increase in retail margin revenues due to a non-fuel base rate increase that was effective on July 1, 2013, $2 million of LFCR revenues recorded in the fourth quarter of 2013, and favorable weather during 2013 compared with the same period last year. Favorable weather conditions contributed to a 0.2% increase in retail kilowatt-hour (kWh) sales during 2013;

a $2 million increase in the margin on long-term wholesale sales due in part to an increase in the market price for wholesale power;

a $3 million increase in pre-tax income related to the operation of Springerville Units 3 and 4. An unplanned outage at Springerville Unit 3 negatively affected results in 2012;

a $9 million decrease in interest expense due to a reduction in the balance of capital lease obligations;

an $11 million tax benefit related to a regulatory asset recorded in June 2013 to recover previously recorded income tax expense through future rates as a result of the 2013 TEP Rate Order. See Note 9; and

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a $5 million increase in pre-tax income as a result of the 2012 write-off of a portion of the planned Tucson to Nogales transmission line;

partially offset by

a charge of $3 million recorded to fuel and purchased energy expense resulting from the 2013 TEP Rate Order. See Factors Affecting Results of Operations, Purchased Power and Fuel Adjustor Clause, below;

a $12 million increase in Base O&M due in part to higher planned and unplanned generating plant maintenance expense, as well as merger-related expenses of $6 million recorded in December 2013; and

a $3 million increase in taxes other than income taxes due in part to an increase in property tax rates and higher asset balances.

2012 compared with 2011

TEP reported net income of $65 million in 2012 compared with net income of $85 million in ~~2011 compared with $108 million in 2010.~~2011. The following factors contributed to the decrease in ~~TEP’s~~TEP's net income:

a ~~$15~~$7 million decline in retail margin revenues resulting from lower retail kWh sales due to milder summer weather than 2011, as well as the effects of the ACC's energy efficiency and distributed generation requirements;

an $8 million decline in long-term wholesale margin revenues resulting primarily from a change in the pricing of energy sold under the SRP wholesale contract effective June 1, 2011;

a $5$3 million decrease in ~~wholesale transmission revenues. In~~pre-tax income related to the ~~first quarter~~operation of ~~2010, transmission revenues benefitted from the temporary sale of transmission capacity to SRP;~~

~~an $9 million increase~~Springerville Units 3 and 4. An unplanned outage at Springerville Unit 3 negatively affected results in ~~Base O&M primarily due to TEP’s share of planned generating plant maintenance expense at San Juan; and~~

2012;

~~a $5 million increase in depreciation expense as a result of an increase in plant-in-service;~~

~~partially offset by~~

a $7 million pre-tax gain recorded in 2011 related to the settlement of a dispute with El Paso Electric;

an $11 million increase in depreciation and

~~a $3 million loss recorded in 2010 related to the settlement of disputed wholesale power transactions.~~

~~2010 Compared with 2009~~

~~TEP recorded net income of $108 million in 2010 compared with net income of $91 million in 2009. The following factors contributed to the change in TEP’s net income:~~

•

$11 million of pre-tax benefits recognized by TEP related primarily to Springerville Unit 4 for operating fees and contributions toward common facility costs received from the owner of Springerville Unit 4. Commercial operation of the unit began in December 2009. See~~Factors Affecting Results of Operations, Springerville Units 3 and 4, below for more information;~~

•

a $10 million decrease in depreciation expense due to lower depreciation rates on TEP’s transmission assets and a lengthened depreciation period for leasehold improvements at Sundt Unit 4, partially offset by depreciation related to an increase in plant-in-service. The decrease excludes a $7 million adjustment that increased depreciation expense in the second quarter of 2009, related to a change in accounting for TEP’s investment in Springerville Unit 1 lease equity. See~~Factors Affecting Results of Operations,below for more information;~~

•

a $3 million decrease in base O&M expense, which excludes costs directly offset by customer surcharges for renewable energy and demand side management programs and third party reimbursements. The decrease resulted from a decline in pension and postretirement medical expense and lower power plant maintenance expense. See~~Operating Expenses, O&M,below for more information;~~

~~a $7 million decrease in~~ amortization expense ~~due to~~as a ~~decline~~result of an increase in the balance of capital lease obligations. The decrease excludes a $3 million adjustment made in the second quarter of 2009 that decreased amortization expense. The adjustment was related to a change in accounting for TEP’s investment in Springerville Unit 1 lease equity;

utility plant-in-service; and

a $5 million decrease in ~~interest expense on capital lease obligations, excluding an adjustment made in 2009 related~~pre-tax income as a result of the write-off of a portion of the planned Tucson to an investment in Springerville Unit 1 lease equity. As TEP pays down its capital lease obligations over time, the resulting interest expense also declines. The decrease in capital lease interest expense was offset by a $5 million decline in interest income during 2010. TEP’s investment in lease debt balance, and resulting interest income, also declines over time as TEP pays down its capital lease obligations;

~~a $3 million increase in long-term wholesale margin revenues due primarily to an increase in sales volumes to one of TEP’s long-term wholesale customers; and~~

~~a $2 million increase in wholesale~~Nogales transmission ~~revenues as TEP temporarily provided transmission capacity for Springerville Unit 4 during the first quarter of 2010.~~

line;

~~These factors were~~

partially offset ~~by:~~

~~an $8~~a $4 million decrease in ~~total other income~~Base O&M primarily due ~~in part~~ to interest related to an income tax refund received in 2009 and a decline in gains recognized on company owned life insurance. The decrease excludes a $3 million adjustment that increased other income in the second quarterlower planned generating plant maintenance expense at San Juan.

K-42

Table of ~~2009, related to a change in accounting for TEP’s investment in Springerville Unit 1 lease equity;~~

Contents

a $6 million increase in interest expense on long-term debt due primarily to the conversion of $130 million of debt from a variable rate to a fixed rate. Although the fixed interest rate is higher than the variable interest rate that was in effect at the time of the conversion, the fixed rate conversion reduced TEP’s future interest rate risk and provided other benefits; and

a $5 million decrease in total retail margin revenues. Weather, the implementation of energy efficiency measures and weak economic conditions contributed to a 0.8% decrease in kWh sales compared with 2009. Cooling Degree Days during 2010 were 3.5% below 2009.

In June 2009, TEP adjusted its accounting for a 2006 investment in 14% of Springerville Unit 1 lease equity. As a result, TEP recorded a net increase to the income statement of $0.6 million, before tax. The adjustment recorded in June 2009 for the period from July 2006 through June 2009 included additional depreciation expense of $7 million; a reduction in amortization expense of $3 million; a reduction of interest expense on capital leases of $2 million; and $3 million of equity in earnings, which is included in Other Income on the income statement.

Utility Sales and Revenues

Customer growth, weather, economic conditions and other consumption factors affect retail sales of electricity. Electric wholesale revenues are affected by prices in the wholesale energy market, the availability of TEP’s generating resources, and the level of wholesale forward contract activity.

The table below provides ~~trend information on~~a summary of TEP’s retail kWh sales, ~~by major customer class over the last three years as well as~~revenues, and weather data ~~for TEP’s service territory.~~

September 30, September 30, September 30, September 30, September 30,
Energy Sales, kWh (in millions)
     2011      2010      2011 vs.
2010
% Change* 2009      2010 vs.
2009
% Change*
Electric Retail Sales:

Residential
     3,888         3,870         0.5 % 3,906         (0.9 %)
Commercial
     1,973         1,963         0.5 % 1,988         (1.3 %)
Industrial
     2,145         2,139         0.3 % 2,161         (1.0 %)
Mining
     1,083         1,079         0.3 % 1,065         1.4 %
Public Authorities
     243         241         1.1 % 251         (4.1 %)








Total Electric Retail Sales
     9,332         9,292         0.4 % 9,371         (0.8 %)








Retail Margin Revenues (in millions):

Residential
     $ 252         $ 252         0.2 % $ 254         (0.9 %)
Commercial
     160         159         0.6 % 160         (0.5 %)
Industrial
     95         97         (2.1 %) 100         (3.1 %)
Mining
     32         31         1.9 % 30         3.0 %
Public Authorities
     12         12         0.8 % 12         (2.4 %)








Total Retail Margin Revenues (Non-GAAP)**
     $ 551         $ 551         0.0 % $ 556         (1.0 %)
PPFAC Revenues
     307         279         9.6 % 287         (2.2 %)
RES and DSM Revenues
     46         38         23.3 % 25         48.8 %








Total Retail Revenues (GAAP)
     $ 904         $ 868         4.1 % $ 868         0.1 %








Avg. Retail Margin Revenue (cents / kWh):

Residential
     6.48         6.50         (0.3 %) 6.49         0.2 %
Commercial
     8.11         8.10         0.1 % 8.04         0.8 %
Industrial
     4.42         4.53         (2.4 %) 4.62         (2.1 %)
Mining
     2.92         2.87         1.7 % 2.82         1.6 %
Public Authorities
     5.05         5.07         (0.4 %) 4.98         1.7 %








Avg. Retail Margin Revenue / kWh
     5.90         5.93         (0.5 %) 5.93         (0.1 %)
Avg. PPFAC Revenue / kWh
     3.29         3.01         9.3 % 3.05         (1.4 %)
Avg. RES & DSM Revenue / kWh
     0.50         0.41         22.0 % 0.27         50.0 %








Total Avg. Retail Revenue / kWh
     9.69         9.35         3.7 % 9.25         0.9 %








Cooling Degree Days

Actual
     1,528         1,543         (1.0 %) 1,599         (3.5 %)
10-Year Average
     1,473         1,468         NM    1,469         NM
Heating Degree Days

Actual
     1,597         1,469         8.7 % 1,287         14.1 %
10-Year Average
     1,417         1,430         NM    1,434         NM

during 2013, 2012, and 2011:



	2013		2012		Percent⁽¹⁾		2011	Percent⁽¹⁾
Energy Sales, kWh (in Millions):
Electric Retail Sales:
Residential	3,867		3,821		1.2	%	3,888	(1.7	)%
Commercial⁽²⁾	2,187		2,187		—	%	2,184	0.2	%
Industrial	2,114		2,132		(0.9	)%	2,145	(0.6	)%
Mining	1,079		1,093		(1.2	)%	1,083	0.9	%
Other⁽²⁾	32		32		1.6	%	32	0.7	%
Total Electric Retail Sales	9,279		9,265		0.2	%	9,332	(0.7	)%
Retail Margin Revenues (in Millions):
Residential	$	271	$	248	9.3	%	252	(1.4	)%
Commercial	181		171		5.9	%	170	0.5	%
Industrial	97		93		5.4	%	95	(2.5	)%
Mining	34		30		11.5	%	32	(3.8	)%
Other	2		2		5.9	%	2	(15.0	)%
Total Retail Margin Revenues (Non-GAAP)⁽³⁾	585		544		7.7	%	551	(1.2	)%
Fuel and Purchased Power Revenues	300		327		(8.1	)%	307	6.5	%
RES, DSM, ECA and LFCR Revenues	49		45		6.8	%	46	(2.6	)%
Total Retail Revenues (GAAP)	$	934	$	916	2.0	%	904	1.3	%
Average Retail Margin Rate (Cents / kWh):⁽¹⁾
Residential	7.02		6.50		8.0	%	6.48	0.3	%
Commercial	8.28		7.82		5.9	%	7.80	0.3	%
Industrial	4.61		4.33		6.5	%	4.42	(2.0	)%
Mining	3.14		2.78		12.9	%	2.92	(4.8	)%
Other	5.56		5.34		4.1	%	6.32	(15.5	)%
Average Retail Margin Revenue	6.31		5.87		7.5	%	5.90	(0.5	)%
Average Fuel and Purchased Power Revenue	3.24		3.52		(8.0	)%	3.29	7.0	%
Average RES, DSM, ECA and LFCR Revenue	0.52		0.49		6.1	%	0.50	(2.0	)%
Total Average Retail Revenue	10.07		9.88		1.9	%	9.69	2.0	%

Weather Data:
Cooling Degree Days
Year Ended December 31,	1,631		1,556		4.8	%	1,528	1.8	%
10-Year Average	1,491		1,484		NM		1,473	NM
Heating Degree Days
Year Ended December 31,	1,449		1,201		20.6	%	1,597	(24.8	)%
10-Year Average	1,404		1,394		NM		1,417	NM

*	~~Percent change calculated~~
⁽¹⁾	Calculated on un-rounded ~~data;~~data and may not correspond exactly to data shown in table.

**
⁽²⁾	Retail kWh sales to commercial and other customers for 2012 and 2011 have been adjusted to reflect a change in the methodology for counting customers resulting from rate design changes from the 2013 TEP Rate Order.

⁽³⁾

Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative to ~~Net Electric~~Total Retail ~~Sales,~~Revenues, which is determined in accordance with GAAP. Retail Margin Revenues ~~excludes:~~exclude: (i) revenues collected from retail customers that are directly offset by expenses recorded in other line items; and (ii) revenues collected from third parties that are unrelated to kWh sales to retail customers. We believe the change in Retail Margin Revenues between periods provides useful information to investors because it demonstrates the underlying revenue trend and performance of our core utility business. Retail Margin Revenues represents the portion of retail operating revenues available to cover the non-fuel operating expenses of our core utility business.

K-43

Table of Contents

2013 compared with 2012

Residential

Residential kWh sales were

1.2% higher in 2013 due in part to favorable weather conditions compared with 2012. A non-fuel base rate increase effective July 1, 2013 and higher sales volumes led to an increase in residential margin revenues of 9.3%, or $23 million. The average number of residential customers grew by 0.7% in 2013 compared with 2012.

Commercial

Commercial kWh sales were the same when compared with 2012. A non-fuel base rate increase effective July 1, 2013 contributed to an increase in commercial margin revenues of 5.9%, or $10 million.

Industrial

Industrial kWh sales decreased by 0.9% compared with 2012. Lower sales due to certain customers changing their usage patterns were more than offset by a non-fuel base rate increase effective July 1, 2013, which led to an increase in industrial margin revenues of $4 million.

Mining

Mining kWh sales decreased by 1.2% compared with 2012. One of TEP's mining customers performed maintenance on its facilities resulting in a temporary decrease in production. A non-fuel base rate increase effective July 1, 2013 led to an increase in margin revenues from mining customers of 11.5%, or $4 million. See Factors Affecting Results of Operations, Sales to Mining Customers.

2012 compared with 2011

Residential

In ~~2011,~~2012, residential kWh sales ~~increased~~decreased by ~~0.5%~~1.7% compared with ~~2010~~2011 due in part to a ~~0.2% increase~~decrease in the number of ~~residential customers.~~ Cooling Degree Days during the summer months of 2012 compared with 2011. Other factors affecting TEP’s 2012 retail sales volumes included the ACC’s Electric EE Standards and distributed generation requirements, as well as the pace of economic recovery.

Residential margin revenues in ~~2011 were unchanged~~2012 decreased by $4 million when compared with ~~2010.~~

2011.

Commercial

Commercial kWh sales increased by ~~0.5%~~0.1% compared with ~~2010~~2011 due primarily to a ~~0.6%~~0.4% increase in the number of commercial customers. Commercial margin revenues increased by less than $1 million, or ~~0.6%~~0.1%, compared with ~~2010.~~

2011.

Industrial

Industrial kWh sales ~~increased~~decreased by ~~0.3%~~0.6% in ~~2011~~2012 compared with ~~2010,~~2011, while margin revenues declined by ~~2.1%~~2.5%. The decline in margin revenues ~~despite higher kWh sales,~~ resulted from a change in usage patterns by certain industrial customers that reduced their demand charges paid to TEP.

Mining

The continuation of high copper prices led to increased mining activity, resulting in a ~~0.3%~~0.9% increase in sales volumes in ~~2011~~2012 compared with ~~2010. Margin~~2011. However, margin revenues from mining customers ~~increased~~decreased by ~~1.9% over 2010,~~3.8% compared with 2011, due to ~~higher energy consumption and~~ changing usage patterns which resulted in ~~higher~~lower demand charges paid to TEP.

~~2010 Compared with 2009~~

~~Residential~~

~~Residential kWh sales were 0.9% lower in 2010 compared with 2009, which led to a decrease in residential margin revenues~~

K-44

Table of ~~$2 million. The decline in residential kWh sales can be attributed to a 3.5% decrease in Cooling Degree Days compared with 2009, weak local economic conditions and energy efficiency measures.~~

~~Commercial~~

Commercial kWh sales in 2010 were 1.3% below 2009 levels. A decline in Cooling Degree Days and weak economic conditions contributed to the sales decline. The lower sales volumes, and resulting lower demand charges, led to a decline in commercial margin revenues of $1 million.

~~Industrial~~

Industrial kWh sales declined by 1.0% compared with 2009, due primarily to weak economic conditions. Margin revenues from industrial customers decreased by 3.1%, or $3 million due to changing usage patterns that reduced demand charges.

~~Mining~~

Higher copper prices led to increased mining activity resulting in a 1.4% increase in sales volumes in 2010 compared with 2009. Margin revenues from mining customers increased $1 million, or 3.0%, compared with the prior year due to changing usage patterns that increased demand charges.

Contents

Wholesale Sales and Transmission Revenues

September 30, September 30, September 30,
     2011      2010      2009
Long-Term Wholesale Revenues:
     -Millions of Dollars-
Long-Term Wholesale Margin Revenues (Non-GAAP)*
     $ 13         $ 28         $ 25
Fuel and Purchased Power Expense Allocated to Long- Term Wholesale Revenues
     28         28         23






Total Long-Term Wholesale Revenues
     $ 41         $ 56         $ 48
Transmission Revenues
     16         21         19
Short-Term Wholesale Revenues
     73         64         86






Electric Wholesale Sales (GAAP)
     $ 130         $ 141         $ 153



	2013		2012		2011
	Millions of Dollars
Long-Term Wholesale Revenues:
Long-Term Wholesale Margin Revenues (Non-GAAP)⁽¹⁾	$	7	$	5	$	13
Fuel and Purchased Power Expense Allocated to Long- Term Wholesale Revenues	19		20		28
Total Long-Term Wholesale Revenues	26		25		41
Transmission Revenues	15		16		16
Short-Term Wholesale Revenues	92		70		73
Electric Wholesale Sales (GAAP)	$	133	$	111	$	130

~~Long-Term~~

⁽¹⁾

Long-term Wholesale Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative to Electric Wholesale Sales, which is determined in accordance with GAAP. We believe the change in Long-Term Wholesale Margin Revenues between periods provides useful information to investors because it demonstrates the underlying profitability of TEP’s long-term wholesale sales contracts. Long-Term Wholesale Margin Revenues represents the portion of long-term wholesale revenues available to cover the operating expenses of our core utility business.

~~Long-term~~Long-Term Wholesale Margin Revenues in 2013 were higher when compared with 2012 due in part to higher market prices for wholesale ~~margin revenues from long-term wholesale contracts~~power. Long-Term Wholesale Margin Revenues in 2012 were ~~$15 million~~ lower ~~than in 2010. The decrease was~~when compared with 2011 due ~~primarily~~ to a change in the pricing of energy sold under the SRP contract. SeeFactors Affecting Results of Operations, Long-Term Wholesale Sales, ~~Salt River Project,~~ ~~below, for more information.~~

below.

Short-Term Wholesale ~~transmission revenues in 2011 decreased by $5 million compared with 2010. In 2010, TEP provided short-term transmission capacity to SRP for Springerville Unit 4.~~

~~TEP credits all~~Revenues

All revenues from short-term wholesale sales and ~~90%~~10% of the ~~margin on~~profits from wholesale trading activity are credited against the fuel and purchased power costs eligible for recovery in the PPFAC. ~~There was no wholesale trading activity in 2009, 2010 and 2011.~~

In April 2010, TEP settled all remaining claims arising from certain of its transactions with the California Power Exchange (CPX) and the California Independent System Operator (CISO) during the California energy crisis of 2000 and 2001. As a result of this settlement, TEP recorded a $3 million pre-tax charge against income in the first quarter of 2010. In December 2009, TEP recorded a pre-tax charge of $4 million against income also related to transactions with the CPX and CISO in 2000 and 2001.

Other Revenues

September 30, September 30, September 30,
     2011      2010      2009
     -Millions of Dollars-
Revenue related to Springerville Units 3 and 4⁽¹⁾
     $ 97         $ 97         $ 60
Other Revenue
     26         22         23






Total Other Revenue
     $ 123         $ 119         $ 83



	2013		2012		2011
	Millions of Dollars
Revenue related to Springerville Units 3 and 4⁽¹⁾	$	102	$	101	$	97
Other Revenue	28		33		26
Total Other Revenue	$	130	$	134	$	123


⁽¹⁾	Represents revenues and reimbursements ~~for expenses incurred by~~from Tri-State and SRP, owners of Springerville Units 3 and 4, respectively, to TEP related to the operation of ~~Springerville Units 3 and 4.~~ these plants.

In addition to reimbursements related to Springerville Units 3 and 4, TEP’s other revenues ~~include:~~include inter-company revenues from UNS Gas and UNS Electric for corporate services provided by ~~TEP;~~TEP, and miscellaneous service-related revenues such as rent on power pole attachments, damage claims, and customer late fees.

K-45

Table of Contents

Operating Expenses

~~2011 Compared with 2010~~

Fuel and Purchased Power Expense

TEP’s fuel and purchased power expense and energy resources for ~~2011, 2010~~2013, 2012 and ~~2009~~2011 are detailed below:

September 30, September 30, September 30, September 30, September 30, September 30,
TEP
     Generation and Purchased Power    Fuel and Purchased Power
Expense
     2011    2010    2009    2011    2010    2009
     -Millions of kWh-    -Millions of Dollars-
Coal-Fired Generation
     9,946       9,481       9,272       $ 254       $ 217       $ 198
Gas-Fired Generation
     929       1,078       992       55       60       76
Renewable Generation
     37       32       30       —         —         —












Total Generation
     10,912       10,591       10,294       309       277       274
Purchased Power
     2,687       2,846       3,810       106       119       145
Reimbursed Fuel Expense
     —         —         —         8       7       5
Transmission
     —         —         —         (1 )    3       3
Increase (Decrease) to Reflect PPFAC Treatment
     —         —         —         (6 )    (21 )    (18 )












Total Resources
     13,599       13,437       14,104       $ 416       $ 385       $ 409






Less Line Losses and Company Use
     (795 )    (876 )    (941 )







Total Energy Sold
     12,804       12,561       13,163



	Generation and Purchased Power						Fuel and Purchased Power Expense
	2013		2012		2011		2013			2012		2011
	Millions of kWh						Millions of Dollars
Coal-Fired Generation	10,254		9,702		9,946		$	273		$	247	$	254
Gas-Fired Generation	1,007		1,435		929		46			65		55
Renewable Generation	38		45		28		—			—		—
Reimbursed Fuel Expense for Springerville Units 3 and 4	—		—		—		7			7		8
Total Fuel	11,299		11,182		10,903		326			319		317
Total Purchased Power	2,329		2,328		2,687		112			80		106
Transmission and Other PPFAC Recoverable Costs	—		—		—		12			6		(1		)
Increase (Decrease) to Reflect PPFAC Recovery Treatment	—		—		—		(12		)	31		(6		)
Total Resources	13,628		13,510		13,590		$	438		$	436	$	416
Less Line Losses and Company Use	(885	)	(839	)	(786	)
Total Energy Sold	12,743		12,671		12,804

Generation

~~Generation~~

Total generating output increased ~~during 2011~~in 2013 when compared with ~~2010. The~~2012 due in part to higher ~~output was primarily~~retail kWh sales than the same period last year. Coal-fired generation increased by 6% in 2013 when compared with 2012 due in part to the ~~increased availability~~use of ~~TEP’s largest coal-fired generating plants, Springerville Units 1 and 2. In 2010, Springerville Units 1 and 2 experienced unplanned outages, in addition~~coal to ~~a planned maintenance outage at Springerville~~fuel Sundt Unit 1.

~~Purchased Power~~

~~Purchased power volumes decreased in 2011 compared with 2010. The lower volume~~4 instead of ~~power purchases was primarily due to the increased availability of TEP’s coal-fired generating resources.~~

natural gas.

The table below summarizes TEP’s average cost per kWh generated or ~~purchased.~~

September 30, September 30, September 30,
     2011      2010      2009
     -cents per kWh generated-
Coal
     2.56         2.29         2.14
Gas
     5.99         5.58         7.66
Purchased Power
     3.94         4.17         3.79

~~Market Prices~~purchased:

As a participant in the western U.S. wholesale power markets, TEP is affected by changes in market conditions. We cannot predict whether changes in various factors that influence demand and supply will cause prices to change during 2012.

September 30,
Average Market Price for Around-the-Clock Energy
     $/MWh
2011
     $ 30
2010
     34
2009
     $ 30

September 30,
Average Market Price for Natural Gas
     $/MMBtu
2011
     $ 3.89
2010
     4.18
2009
     $ 3.34



	2013	2012	2011
	cents per kWh
Coal	2.66	2.54	2.56
Gas	4.57	4.54	5.99
Purchased Power	4.83	3.44	3.94
All Sources	3.54	3.19	3.30

O&M

The table below summarizes the items included in TEP’s O&M expense.

September 30, September 30, September 30,
     2011    2010    2009
     -Millions of Dollars-
Base O&M (Non-GAAP)⁽¹⁾
     $ 237       $ 228       $ 231
O&M recorded in Other Expense
     (8 )    (7 )    (7 )
Reimbursed expenses related to Springerville Units 3 and 4
     63       65       41
Expenses related to customer funded renewable energy and DSM programs
     39       31       18






Total O&M (GAAP)
     $ 331       $ 317       $ 283



	2013			2012			2011
	Millions of Dollars
Base O&M (Non-GAAP)⁽¹⁾	$	246		$	234		$	238
O&M Recorded in Other Expense	(7		)	(6		)	(8		)
Reimbursed Expenses Related to Springerville Units 3 and 4	70			72			63
Expenses Related to Customer Funded Renewable Energy and DSM Programs⁽²⁾	26			35			38
Total O&M (GAAP)	$	335		$	335		$	331

⁽¹⁾

Base O&M is a non-GAAP financial measure and should not be considered as an alternative to ~~Other~~ O&M, which is determined in accordance with GAAP. ~~We believe~~TEP believes that Base O&M, which is O&M less reimbursed expenses and expenses related to customer-funded renewable energy and DSM programs, provides useful information to investors because it represents the fundamental level of operating and maintenance expense related to our core business. ~~Base O&M excludes~~


⁽²⁾	Represents expenses ~~that~~related to customer-funded renewable energy and DSM programs; these expenses are ~~directly offset by revenues~~being collected from customers and ~~other third parties.~~ the corresponding amounts are recorded in retail revenue.

~~TEP’s base O&M expense in 2011 was $237 million, or $9 million above 2010.~~

K-46

Table of Contents

The ~~increase is due primarily to unplanned outages at San Juan in 2011.~~

~~Income Tax Expense~~

~~In 2011,~~table below summarizes TEP’s ~~effective tax rate was 38% compared with 36% in 2010. The increase is primarily due to a decrease in federal deductions along with federal and state tax credits. See Note 8 for more information.~~

~~2010 Compared with 2009~~

~~Generation~~

Coal-related fuel expense in 2010 increased by $19 million compared with 2009 due primarily to the switching of fuel at Sundt Unit 4 from natural gas to coal. TEP fueled Sundt 4 on coal for eight months in 2010, compared with two months in 2009. Gas-related fuel expense decreased in 2010 due primarily to a decrease in realized losses on gas hedging activities.

~~Purchased Power~~

Purchased power volumes and expense during 2010 were lower than 2009 due to a decrease in short-term wholesale sales activity, an increase in coal-fired generating output, and a decline in retail sales volumes.

~~O&M~~

~~TEP’s base O&M expense in 2010 was $228 million, or $3 million below 2009. The decline is due primarily to fewer plant maintenance outages and a decrease in~~ pension and ~~postretirement medical expense~~other retiree benefit expenses included in ~~2010 compared with 2009.~~

TEP's Base O&M in 2013, 2012, and 2011. See Note 10.

2013 2012 2011
Millions of Dollars
Pension Expense Charged to O&M $ 10
$ 10
$ 10
Retiree Benefit Expense Charged to O&M 5
5
4
Total $ 15
$ 15
$ 14

FACTORS AFFECTING RESULTS OF OPERATIONS

~~Base~~

2013 TEP Rate ~~Increase Moratorium~~

~~Pursuant to~~Order

In June 2013, the ~~2008~~ACC issued an order (2013 TEP Rate Order) that resolved the rate case filed by TEP in July 2012, which was based on a test year ended December 31, 2011. The 2013 TEP Rate Order ~~TEP’s~~approved new rates effective July 1, 2013.

The provisions of the 2013 TEP Rate Order include, but are not limited to:

an increase in non-fuel retail Base Rates ~~are frozen through at least December 31, 2012. TEP is prohibited from submitting an application for new Base Rates before June 30, 2012. The~~of approximately $76 million over adjusted test year revenues;

an Original Cost Rate Base (OCRB) of approximately $1.5 billion and a Fair Value Rate Base (FVRB) of approximately $2.3 billion;

a return on equity of 10.0%, a long-term cost of debt of 5.18%, and a short-term cost of debt of 1.42%, resulting in a weighted average cost of capital of 7.26%;

a capital structure of approximately 43.5% equity, 56.0% long-term debt, and 0.5% short-term debt;

a 0.68% return on the fair value increment of rate base (the fair value increment of rate base represents the difference between OCRB and FVRB of approximately $800 million);

a revision in depreciation rates from an average rate of 3.32% to 3.0% for generation and distribution plant regulated by the ACC, primarily due to revised estimates of asset removal costs, which will have the effect of reducing depreciation expense by approximately $11 million annually; and

an agreement by TEP to seek recovery of costs related to the Nogales transmission line from the Federal Energy Regulatory Commission (FERC) before seeking rate recovery from the ACC.

The 2013 TEP Rate Order also approved the following cost recovery mechanisms:

A Lost Fixed Cost Recovery mechanism (LFCR) that allows TEP to recover certain non-fuel costs that would otherwise go unrecovered due to reduced kWh sales attributed to energy efficiency programs and distributed generation. The LFCR rate will be adjusted annually and is subject to ACC review and a year-over-year cap of 1% of TEP's total retail revenues. TEP expects to file its first LFCR report with the ACC on or before May 15, 2014. We expect the new LFCR rate to become effective on July 1, 2014. TEP’s 2015 LFCR report may include an estimated $6 million to $8 million of unrecovered non-fuel costs incurred during 2014. In the fourth quarter of 2013, TEP recorded LFCR revenues of $2 million for unrecovered non-fuel costs incurred during 2013.

An Environmental Compliance Adjustor (ECA) mechanism that allows TEP to recover the costs of complying with environmental standards required by federal or other governmental agencies between rate cases. The ECA will be adjusted annually to recover environmental compliance costs and is subject to ACC approval and a cap of $0.00025 per kWh, which approximates 0.25% of TEP's total retail revenues. TEP expects to file its first ECA report on or before March 1, 2014. That report will include qualified investments and costs to be ~~used~~included in ~~TEP’s next Base Rate application~~the ECA. TEP expects the new ECA rate to become effective on May 1, 2014. We estimate that the ECA could benefit pre-tax income by less than $1 million in 2014.

An energy efficiency provision which includes a 2013 calendar year budget to fund programs that support the ACC's Electric Energy Efficiency Standards (Electric EE Standards), as well as a performance incentive. See Electric Energy Efficiency Standards, below.

A new rate under TEP's PPFAC. See Purchased Power and Fuel Adjustment Clause, below.

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Competition

Retail Electric Competition Rules

In 1999, the ACC approved the Rules that provided a framework for the introduction of retail electric competition in Arizona. Certain portions of the ACC Rules that enabled Electric Service Providers (ESPs) to compete in the retail market were invalidated by an Arizona Court of Appeals decision in 2004. During 2012, several companies filed applications for a Certificate of Convenience and Necessity (CC&N) with the ACC to provide competitive retail electric services in TEP's service territory as an ESP. Unless and until the ACC clarifies the Rules and/or grants a CC&N to an ESP, it is not possible for TEP's retail customers to use an alternative ESP.

In May 2013, the ACC voted to commence a process to consider the possibility of opening Arizona to retail electric competition. The first step in the process was to solicit comments on questions raised by the ACC on the potential benefits and risks to Arizona electric customers associated with retail electric competition. In July 2013, various parties, including TEP and UNS Electric, filed comments. TEP and UNS Electric oppose opening Arizona to retail electric competition. Responsive comments from the parties were filed in August 2013. In September 2013, the ACC voted to close the docket and did not take any steps to implement retail electric competition. We cannot ~~end earlier than December 31, 2011.~~

~~Notwithstanding the rate increase moratorium, Base Rates and adjustor mechanisms may change under emergency conditions beyond TEP’s control~~predict if the ACC ~~concludes such~~will consider retail electric competition in the future.

Technological Developments and Energy Efficiency

New technological developments and the implementation of Electric EE Standards have reduced energy consumption by TEP's retail customers. TEP's customers also have the ability to install renewable energy technologies and conventional generation units that could reduce their reliance on TEP's services.

Coal-Fired Generating Resources

At December 31, 2013, approximately 70% of TEP's generating capacity was fueled by coal (of which 120 MW can be converted to 156 MW of natural gas capacity at Sundt Unit 4). Existing and proposed federal environmental regulations, as well potential changes in state regulation, may increase the cost of operating coal-fired generating facilities. TEP is evaluating various strategies for reducing the proportion of coal in its fuel mix. TEP's ability to reduce its coal-fired generating capacity will depend on several factors, including, but not limited to:

the resolution of the non-binding agreement between the State of New Mexico, the EPA, and PNM as it relates to San Juan, see Note 7;

TEP's future ownership interest in Springerville Unit 1, see Springerville Unit 1; and

the potential purchase of a combined cycle natural gas plant, see Gila River Generating Station Unit 3.

Springerville Unit 1

TEP leases Unit 1 of the Springerville Generating Station and an undivided one-half interest in certain Springerville Common Facilities (collectively Springerville Unit 1) under seven separate lease agreements (Springerville Unit 1 Leases) that are ~~required~~accounted for as capital leases. The leases expire in January 2015 and include fair market value renewal and purchase options. In 2006, TEP purchased a 14.1% undivided ownership interest in Springerville Unit 1, representing approximately 55 MW of capacity.

In 2011, TEP and the owner participants of Springerville Unit 1 completed a formal appraisal procedure to ~~protect~~determine the ~~public interest.~~fair market value purchase price of Springerville Unit 1 in accordance with the Springerville Unit 1 Leases. The ~~moratorium~~purchase price was determined to be $478 per kW of capacity based on a capacity rating of 387 MW.

In August 2013, TEP notified certain owner participants and their lessors that TEP elected to purchase their undivided ownership interests in Springerville Unit 1, at the appraised value upon the expiration of the lease term in January 2015. In total, TEP elected to purchase leased interests comprising 24.8% of Springerville Unit 1, representing 96 MW of capacity, for an aggregate purchase price of $46 million.

In October 2013, TEP agreed to purchase an additional 10.6% leased interest in Springerville Unit 1 for $20 million, the appraised value, with the purchase scheduled to occur in December 2014. The 10.6% ownership interest represents 41 MW of capacity.

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Upon the close of these lease option purchases, TEP will own 49.5% of Springerville Unit 1, or 192 MW of capacity. Due to TEP’s purchase commitments, TEP and UNS Energy recorded an increase to both Utility Plant Under Capital Leases and Capital Lease Obligations on their balance sheets in the aggregate amount of approximately $55 million.

TEP does not ~~preclude~~expect that its final undivided ownership interest in Springerville Unit 1 will exceed 49.5%, or 192 MW of capacity. The remaining 50.5% of Springerville Unit 1, or 195 MW of capacity, will be owned by third parties. TEP ~~from seeking rate relief in the event~~is not obligated to purchase any of the ~~imposition~~remaining power from Springerville Unit 1; however, TEP is obligated to operate Springerville Unit 1 for the remaining third-party owners following the expiration of the leases. TEP expects to replace the 195 MW of expiring leased capacity with the purchase of Gila River Unit 3. See Gila River Generating Station Unit 3, below.

Gila River Generating Station Unit 3

In December 2013, TEP and UNS Electric entered into an agreement (the Purchase Agreement) to purchase Gila River Unit 3 for $219 million from a ~~federal carbon tax~~subsidiary of Entegra. The purchase price is subject to adjustments to prorate certain fees and expenses through the closing and in respect of certain operational matters. It is anticipated that TEP will purchase a 75% undivided interest in Gila River Unit 3 (413 MW) for approximately $164 million and UNS Electric will purchase the remaining 25% undivided interest (137 MW) for approximately $55 million, although TEP and UNS Electric may modify the percentage ownership allocation between them. We expect the transaction to close in December 2014.

The Purchase Agreement is subject to, among other things:

the expiration or ~~related federal carbon regulations.~~

termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;

the approval of the FERC;

an amendment satisfactory to TEP, UNS Electric and the owners of the other units of the Gila River Power Station of the agreement with the other unit owners to address the ownership, operations and maintenance of common facilities and future generation located at the station;

the completion of certain other agreements associated with the operation of Gila River Unit 3; and

other customary closing conditions.

TEP expects to provide a letter of credit in March 2014 for $15 million to satisfy a condition of the Purchase Agreement. The seller of Gila River Unit 3 would be entitled to draw upon the letter of credit and apply such amount as liquidated damages if it has validly terminated the Purchase Agreement as a result of misrepresentations by TEP and UNS Electric or the failure of TEP and UNS Electric to close the transaction when the closing conditions have been satisfied. Upon the close of the transaction, the letter of credit would be canceled.

The purchase of Gila River Unit 3, which would replace the expiring coal-fired leased capacity from Springerville Unit 1 and the expected reduction of coal-fired generating capacity from San Juan Unit 2, is consistent with TEP's strategy to diversify its generation fuel mix. See Note 7.

In December 2013, UNS Electric filed an application requesting the ACC to approve an accounting order that would authorize UNS Electric to defer for future recovery specific non-fuel operating costs associated with its anticipated ownership of 25% of Gila River Unit 3. See UNS Electric, Factors Affecting Results of Operations, Gila River Generating Station Unit 3 and Note 8.

Springerville Units 3 and 4

TEP ~~operates and~~ receives annual benefits in the form of rental payments and other fees and cost savings from operating Springerville Unit 3 on behalf of Tri-State and ~~Springerville~~ Unit 4 on behalf of SRP. ~~Springerville Unit 4 began commercial operations in December 2009. TEP recorded pre-tax income~~

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Table of ~~$24 million in 2011 and 2010, and $13 million in 2009 related to the operation of these units.~~ Contents

The table below summarizes the income statement line items ~~where~~in which TEP records revenues and expenses related to Springerville Units 3 and 4.

September 30, September 30, September 30,
     2011    2010    2009
     -Millions of Dollars-
Other Revenues
     $ 97       $ 97       $ 60
Fuel Expense
     (8 )    (7 )    (5 )
Operations and Maintenance Expense
     (63 )    (65 )    (41 )
Taxes Other Than Income Taxes
     (2 )    (1 )    (1 )






Total Pre-Tax Income
     $ 24       $ 24       $ 13

~~Pension and Postretirement Benefit Expense~~4:

~~The table below summarizes TEP’s pension and other postretirement benefit expenses charged to O&M in 2009, 2010, and 2011. See Note 9 for more information.~~

September 30, September 30, September 30,
     2011      2010      2009
     -Millions of Dollars-
Pension Expense Charged to O&M
     $ 10         $ 9         $ 12
Other Postretirement Benefit Expense Charged to O&M
     4         4         4






Total
     $ 14         $ 13         $ 16

~~In 2012, TEP expects to charge $10 million of pension and $5 million of other postretirement benefit expense to O&M.~~



	2013			2012			2011
	Millions of Dollars
Other Revenues	$	102		$	101		$	97
Fuel Expense	(7		)	(7		)	(8		)
O&M Expense	(69		)	(72		)	(63		)
Taxes Other Than Income Taxes	(2		)	(1		)	(2		)

Long-Term Wholesale Sales

~~In 2011 and 2010, TEP’s margin on long-term wholesale sales was $13 million and $28 million, respectively.~~

TEP’s two primary long-term wholesale contracts are with SRP and ~~NTUA.~~

the Navajo Tribal Utility Authority (NTUA).

Salt River Project

Prior to June 1, 2011, under the terms of the SRP contract, TEP received a monthly demand charge of approximately $1.8 million, or $22 million annually, and sold the energy at a price based on TEP’s average fuel cost. From June 1, 2011 to December 31, 2011, SRP was required to purchase 73,000 MWh per month.

From January 1, 2012, through the end of the contract in May 2016, SRP is required to purchase 500,000 MWh of on-peak energy per year. TEP does not receive a demand charge and the price of energy is based on a discount to the wholesale market price of on-peak ~~power on Palo Verde Market Index. As of February 21, 2012, the average forward price of on-peak power on the Palo Verde Market Index for the calendar year 2012 was $30.33 MWh.~~

power.

Navajo Tribal Utility Authority

TEP serves the portion of ~~NTUA’s~~NTUA's load that is not served from ~~NTUA’s~~NTUA's allocation of federal hydroelectric power. Over the last three years, sales to NTUA averaged 225,000 MWh. ~~Since 2010,~~Prior to June 30, 2013, the ~~price of 50%~~power sold to NTUA was at a fixed price. In May 2013, TEP amended its contract with NTUA and extended the contract term from December 2015 to December 2022.

As a result of the ~~MWh sales~~amendment, on July 1, 2013, TEP began receiving monthly capacity payments in exchange for providing 15 MW from ~~June~~July to September ~~has been based on~~(June to September beginning in 2014 and thereafter) and 50 MW for the ~~Palo Verde Market Index. In 2011, approximately 12%~~remainder of each year. Starting in 2016, the ~~total~~July to September capacity increases to 25 MW. TEP prices the energy sold to NTUA ~~was priced based on~~at its monthly PPFAC eligible cost rate. Any energy sold in excess of the ~~Palo Verde Market Index. The remaining power sales occur at a fixed price under TEP’s contract with NTUA.~~

~~For more information on long-term wholesale sales, see~~~~Item. 1 Business, TEP, Service Area and Customers, Wholesale Business.~~

~~Electric Energy Efficiency Standards (EE Standards)~~

~~In August 2010, the ACC approved new EE Standards designed~~seasonal capacity amounts will be indexed to require TEP, UNS Electric and other affected electric utilities to implement cost-effective programs to reduce customers’ energy consumption. In 2011, TEP’s programs saved energy equal to approximately 1.4% of its 2010 sales. In 2012, the EE Standards target total kWh savings of 3% of 2011 sales. The EE Standards increase annually thereafter up to a targeted cumulative annual reduction in retail kWh sales of 22% by 2020.

The EE Standards can be met by new and existing DSM programs, direct load control programs and energy efficient building codes. The EE Standards provide for the recovery of costs incurred to implement DSM programs. TEP’s programs and Retail Rates charged to customers for such programs are subject to annual approval by the ACC.

In January 2012, TEP filed a modification to its Energy Efficiency Implementation Plan with the ACC. The proposal includes a request for an increase in the performance incentive based on TEP’s ability to meet the EE targets for 2012 and for 2013. TEP’s proposed annual performance incentive for 2012 and 2013 ranges from $6 million to $8 million. TEP expects the ACC to issue a decision on this matter in the first quarter of 2012.

~~Decoupling~~

In December 2010, the ACC issued a policy statement recognizing the need to adopt rate decoupling or another mechanism to make Arizona’s EE Standards viable. A decoupling mechanism is designed to encourage energy conservation by restructuring utility Retail Rates to separate the recovery of fixed costs from the level of energy consumed. The policy statement allows affected utilities to file rate decoupling proposals in their next general rate case. TEP expects to file its next general rate case on or after June 30, 2012.

~~Competition~~

New technological developments and the implementation of EE Standards may reduce energy consumption by TEP’s retail customers. TEP’s customers also have the ability to install renewable energy technologies and conventional generation units that could reduce their reliance on TEP’s services. Self-generation by TEP’s customers has not had a significant impact to date. In the wholesale market price of natural gas. TEP ~~competes with other utilities, power marketers~~estimates that sales to NTUA will be approximately 225,000 MWh in 2014 and ~~independent power producers in the sale of electric capacity and energy. See~~~~Item 1. Business, TEP, Rates and Regulation, Electric Energy Efficiency Standards and Decoupling~~ ~~for more information.~~

~~Renewable Energy Standard and Tariff~~

In 2010, the ACC approved a funding mechanism that allows TEP to recover operating costs, depreciation, property taxes, and a return on investments in company-owned solar projects through RES funds until such costs are reflected in TEP’s Base Rates. TEP invested $14 million in two solar projects that were completed in December 2010 and began cost recovery through the RES surcharge in January 2011. During 2011, TEP earned approximately $1 million pre-tax on its 2010 investment in solar projects. In accordance with the funding mechanism approved by the ACC in 2010, TEP could earn approximately $1 million pre-tax in 2012 on solar investments made in 2010 and 2011.

In December 2011, the ACC approved TEP’s RES implementation plan including investments of $28 million in 2012 and $8 million in 2013 for company-owned solar projects. In 2011, TEP’s renewable energy investments totaled $28 million. In accordance with the funding mechanism approved by the ACC, TEP could earn approximately $1 million pre-tax in 2012 on solar investments made in 2010 and 2011 and approximately $4 million pre-tax in 2013. For more information see~~Item 1. Business, TEP, Rates and Regulation, Renewable Energy Standard and Tariff.~~

2015.

Sales to Mining Customers

~~The continuation of copper prices of $3 per pound has led to increased mining activity at the copper mines operating in TEP’s service area. TEP’s~~

TEP's mining customers have indicated they are taking initial steps to increase production either through expansion of their current mining operations or by the re-opening of non-operational mine sites. If efforts to increase production are successful, ~~TEP’s~~TEP's mining load could increase by up to 100 MW over the next several years. The market price for copper and the ability to obtain necessary permits could affect the mining ~~industry’s~~industry's expansion plans.

~~In 2011, sales to TEP’s mining customers increased 0.3% compared with 2010 and represented 11% of TEP’s total retail kWh sales and 6% of total retail margin revenues.~~

In addition to the mining customers that TEP currently serves, ~~in 2007,~~ Augusta Resources Corporation ~~(Augusta)~~ filed a plan of operations with the United States Forest Service ~~(USFS)~~in 2007 for the proposed Rosemont Copper Mine near Tucson, Arizona. The Rosemont ~~mine~~Copper Mine requires electric service from TEP via a ~~138kV~~138 kilo-volt (kV) transmission line for the construction and ongoing operation of the mine. ~~A certificate of environmental compatibility (CEC) from the ACC’s~~The state line siting committee ~~was~~ approved a Certificate of Environmental Compatibility (CEC) in ~~December~~ 2011 for the 138 kV transmission line. ~~Appeals have been filed relative to~~In 2012, the ~~issuance of~~ACC finalized the CEC. If the Rosemont Copper Mine is constructed and reaches full production, it would be expected to become ~~TEP’s~~TEP's largest retail ~~customer.~~customer, with TEP ~~would serve approximately 100 MW of~~serving the ~~Rosemont Copper Mine’s total~~mine's estimated load of approximately ~~110~~85 MW.

TEP cannot predict if or when existing mines will expand operations or new or re-opened mines will commence operations.

Interest Rates

TEP is exposed to interest rate risk resulting from changes in interest rates on certain of its variable rate debt obligations, as well as borrowings under its revolving credit facility. As a result, TEP may be required to pay significantly higher rates of interest on outstanding variable rate debt and borrowings under ~~its revolving credit facility.~~the TEP Revolving Credit Facility. At December 31, ~~2011~~2013, TEP had $215 million in tax-exempt variable rate debt outstanding. The interest rates on TEP’s tax-exempt variable rate debt are reset weekly ~~by its remarketing agents. The maximum interest payable under the indentures for the bonds is 10% on the $37 million of bonds and 20% on the other $178 million. During 2011,~~or monthly. In 2013, the average rates paid ranged from ~~0.05%~~0.06% to ~~0.34%~~0.48%. ~~At February 21, 2012, the average rate on the debt was 0.26%.~~

TEP has a fixed-for-floating interest rate swap ~~in place~~ to hedge $50 million of its tax-exempt variable rate ~~IDBs.~~

debt.

TEP is also subject to interest rate risk resulting from changes in interest rates on its borrowings under the ~~revolving credit facility.~~TEP Revolving Credit Facility. The interest paid on revolving credit borrowings is variable. If LIBOR and other benchmark interest rates

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increase, TEP may be required to pay higher rates of interest on borrowings under its revolving credit facility. See Item 7A.Quantitative and Qualitative Disclosures about Market Risk ~~Interest Rate Risk, below.~~

~~San Juan Mine Fire~~.

In September 2011, a fire at the underground mine that provides coal to San Juan caused mining operations to shut down. TEP owns approximately 20% of San Juan, which is operated by PNM. As we are unable to predict when operations will resume at the mine, we and the other owners of San Juan are considering alternatives for operating the facility.

However, based on information we have received to date, we do not expect the mine fire to have a material effect on our financial condition, results of operations, or cash flows due to the current inventory of previously mined coal and the current low market price of wholesale power. TEP expects that any incremental fuel and purchased power costs would be recoverable from customers through the PPFAC, subject to ACC approval.

~~Fair Value Measurements~~

TEP’s income statement exposure to risk is mitigated as TEP reports the change in fair value of energy contract derivatives as a regulatory asset or a regulatory liability, or as a component of AOCI rather than in the income statement. See Note 11 for more information.

LIQUIDITY AND CAPITAL RESOURCES

TEP Cash Flows

The ~~table~~tables below ~~shows the~~show TEP's net cash ~~available to TEP~~flows after capital expenditures, scheduled lease debt payments, and payments on capital lease obligations:

September 30, September 30, September 30,
     2011    2010    2009
Net Cash Flows – Operating Activities (GAAP)
     $ 268       $ 302       $ 268
Amounts from Statements of Cash Flows:

Less: Capital Expenditures⁽¹⁾
     (352 )    (277 )    (240 )






Net Cash Flows after Capital Expenditures (Non-GAAP)*
     (84 )    25       28
Amounts From Statements of Cash Flows:

Less: Retirement of Capital Lease Obligations
     (74 )    (56 )    (24 )
Plus: Proceeds from Investment in Lease Debt
     38       26       13






Net Cash Flows after Capital Expenditures and Required Payments on Debt and Capital Lease Obligations (Non-GAAP)*
     $ (120 )    $ (5 )    $ 17



	2013			2012			2011
	Millions of Dollars
Net Cash Flows – Operating Activities (GAAP)	$	346		$	268		$	268
Less: Capital Expenditures	(253		)	(253		)	(352		)
Net Cash Flows after Capital Expenditures (Non-GAAP)⁽¹⁾	93			15			(84		)
Less: Payments of Capital Lease Obligations	(100		)	(89		)	(74		)
Plus: Proceeds from Investment in Lease Debt	9			19			38
Net Cash Flows after Capital Expenditures and Required Payments on Lease Debt and Capital Lease Obligations (Non-GAAP)⁽¹⁾	$	2		$	(55	)	$	(120	)



	2013			2012			2011
	Millions of Dollars
Net Cash Flows – Operating Activities (GAAP)	$	346		$	268		$	268
Net Cash Flows – Investing Activities (GAAP)	(260		)	(228		)	(312		)
Net Cash Flows – Financing Activities (GAAP)	(141		)	12			52
Net Increase (Decrease) in Cash	(55		)	52			8
Beginning Cash	80			28			20
Ending Cash	$	25		$	80		$	28

~~(1)~~

~~2010 includes a $51 million payment for the purchase of Sundt Unit 4 lease equity.~~

September 30, September 30, September 30,
     2011    2010    2009
Net Cash Flows – Operating Activities (GAAP)
     $ 268       $ 302       $ 268
Net Cash Flows – Investing Activities (GAAP)
     (312 )    (253 )    (250 )
Net Cash Flows – Financing Activities (GAAP)
     51       (52 )    (29 )
Net Cash Flows after Capital Expenditures (Non-GAAP)*
     (84 )    25       28
Net Cash Flows after Capital Expenditures and Required Payments on Debt and Capital Lease Obligations (Non-GAAP)*
     (120 )    (5 )    17

⁽¹⁾

Net Cash Flows after Capital Expenditures and Net Cash Flows ~~Available~~ after Capital Expenditures and Required Payments on Lease Debt and Capital Lease Obligations, both non-GAAP measures of liquidity, should not be considered as alternatives to Net Cash ~~Flows -~~ Flows—Operating Activities, which is determined in accordance with GAAP. We believe that Net Cash Flows after Capital Expenditures and Net Cash Flows ~~Available~~ after Capital Expenditures and Required Payments on Lease Debt and Capital Lease Obligations provide useful information to investors as measures of TEP’s ability to fund capital requirements, make required ~~principal~~ payments on lease debt and capital lease obligations, ~~(net),~~ and pay dividends to ~~UniSource Energy.~~UNS Energy before consideration of financing activities.

Liquidity Outlook

~~During 2012, TEP expects to generate sufficient internal cash flows to fund the majority of its capital expenditures and operating activities.~~

Cash flows may vary during the year, with cash flow from operations typically the lowest in the first quarter and highest in the third quarter due to TEP’s summer peaking load. As a result of the varied seasonal cash flow, TEP will use, as needed, its revolving credit facility to ~~fund~~assist in funding its business activities.

Additionally, due to capital expenditure requirements and scheduled mid-year lease payments, TEP will need to issue long-term debt or enter into additional short-term credit facilities by June 2014. Due to additional purchase commitments for Gila River Unit 3 and Springerville Unit 1, additional external financing will be needed by year-end 2014.

If the Merger Agreement is approved by all necessary parties, Fortis will contribute $200 million of equity capital to UNS Energy upon closing. If the contribution is made by December 2014, UNS Energy may then contribute this capital to TEP and UNS Electric to help fund the Gila River Unit 3 and Springerville Unit 1 purchase commitments.

Operating Activities

In ~~2011,~~2013, net cash flows from operating activities ~~decreased by~~were $78 million higher than in 2012. The increase was due primarily to: a $34 million ~~compared with 2010. Net cash flows were impacted by:~~

~~a $38 million~~ increase ~~in O&M costs due in part to higher generating plant outage costs, higher up-front incentive payments for customer-installed solar systems, and higher DSM payments;~~

~~a $5 million increase in taxes other than income taxes due to a higher sales tax rate effective in June 2010 and sales taxes paid on higher retail kWh sales; and~~

~~a $10 million decrease~~ in cash receipts from ~~electric~~retail and wholesale sales, net of fuel and purchased power ~~costs. This decrease was due to higher coal~~ costs paid, resulting from a base rate increase that became effective on July 1, 2013, an increase in retail sales volumes, and ~~lower long-term~~an increase in wholesale ~~margins compared with 2010;~~

~~partially offset by~~

power prices; a ~~$17~~$30 million decrease in ~~income taxes~~operations and maintenance costs paid due in part to lower renewable prepayments, lower incentive payments under DSM programs, and lower payments for remote plants; and a $6 million decrease in capital

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lease interest paid due to ~~lower taxable income resulting from bonus depreciation deductions.~~

a decline in capital lease obligation balances; partially offset by a $6 million increase in wages paid (net of amounts capitalized).

Investing Activities

Net cash flows used for investing activities increased by ~~$59~~$32 million in ~~2011~~2013 compared with ~~2010. Capital expenditures during 2011 were $75 million higher than in 2010, which was partially offset by~~2012 due primarily to: a ~~$13~~$14 million increase in purchases of RECs due to an increase in renewable energy PPAs; and $10 million in lower proceeds from ~~the return of~~ investment in ~~Springerville~~ lease debt.

~~Capital Expenditures~~TEP’s capital expenditures were

~~TEP’s~~$253 million in each of 2013 and 2012.

TEP's forecasted capital expenditures are summarized below:

September 30, September 30, September 30, September 30, September 30,
     2012      2013      2014      2015      2016
     -Millions of Dollars-
Transmission and Distribution
     $ 158         $ 179         $ 129         $ 99         $ 118
Generation Facilities
     57         80         93         72         169
Renewable Energy Generation
     32         30         30         30         30
Environmental
     2         19         89         94         64
General and Other
     40         38         38         36         37










Total
     $ 289         $ 346         $ 379         $ 331         $ 418

TEP’s estimated capital expenditures in 2015 exclude the potential $159 million purchase of interests in Springerville Unit 1 and the potential $120 million purchase of interests in Springerville Coal Handling Facilities upon the expiration of their respective leases in January 2015. See~~Capital Lease Obligations, below for more information.~~

~~TEP’s capital expenditures also exclude the estimated cost to construct a proposed Tucson to Nogales, Arizona 345 KV transmission line of $120 million. See~~~~Item 1. Business, TEP, Transmission Access, Tucson to Nogales Transmission Line~~~~for more information.~~

All of these estimates are subject to continuing review and adjustment. Actual capital expenditures may be different from these estimates due to changes in business conditions, construction schedules, environmental requirements, state or federal regulations and other factors.

~~Investments in Springerville Lease Debt~~

At December 31, 2011, TEP had $29 million of investments in lease debt on its balance sheet. Unless TEP makes new investments in lease debt, the investment in lease debt balance declines over time due to the amortization of lease debt that occurs as a result of the normal payments TEP makes on its capital lease obligations. The Springerville Unit 1 and Springerville Coal Handling Facilities leases expire in 2015.

~~See Note 6 for more information~~.



	2014	2015	2016	2017	2018
	Millions of Dollars
Transmission and Distribution	$135	$169	$84	$80	$81
Generation Facilities	109	101	63	83	61
Renewable Energy Generation	45	30	31	31	31
Springerville Lease Purchases⁽¹⁾	20	119	—	38	—
Gila River Unit 3 Purchase	164	—	—	—	—
General and Other	55	50	45	44	45
Total	$528	$469	$223	$276	$218


⁽¹⁾	Includes: Springerville Unit 1 purchases of $65 million, $20 million in 2014, and $46 million in 2015; TEP's portion of the Springerville Coal Handling facilities purchase of $73 million in 2015; and Springerville Common facilities purchases of $38 million in 2017.

Financing Activities

In ~~2011,~~2013, net cash from financing activities was ~~$103~~$153 million ~~higher~~ lower than 2012. Financing activities in ~~2010 due to:~~2013 included a ~~$45~~$10 million increase in ~~borrowings (net of repayments) under TEP’s revolving credit facility; a $15 million increase in capital contributions from UniSource~~dividend payments to UNS Energy ~~in 2011;~~ and a ~~$60 million reduction in dividends paid to UniSource Energy during 2011; partially offset by an $18~~$10 million increase in payments made on capital lease obligations.

Financing activities in 2012 included: the issuance of $150 million of long-term debt; $7 million of repayments of long-term debt; and $10 million of repayments (net of borrowings) under the TEP Revolving Credit ~~Agreement~~Facility.

TEP Mortgage Indenture

Prior to November ~~2011, TEP amended and extended its existing credit agreement (the TEP Credit Agreement). The~~2013, the TEP Credit Agreement ~~consisted~~and the 2010 TEP Reimbursement Agreement were secured by $423 million in Mortgage Bonds issued under the 1992 Mortgage. As a result of a credit rating upgrade, in October 2013, TEP (i) requested $423 million in Mortgage Bonds be returned to TEP for cancellation, and (ii) discharged the 1992 Mortgage, which had created a lien on and security interest in substantially all of TEP’s utility plant assets. TEP’s obligations under the TEP Credit Agreement and the 2010 TEP Reimbursement Agreement are now unsecured. See Note 6.

TEP Credit Agreement

TEP Credit Agreement consists of a $200 million revolving credit, ~~and~~ revolving ~~letter of credit~~LOC facility and ~~a $341~~an $82 million ~~letter of credit~~LOC facility to support ~~variable rate~~ tax-exempt bonds. The ~~amendment extended the term of the~~ TEP Credit Agreement ~~by two years to~~expires in November 2016.

In December ~~2011,~~2013, TEP reduced its letter of credit facility from ~~$341~~$186 million to ~~$186~~$82 million, following the ~~repurchase~~refinancing of ~~$150~~$100 million of variable rate ~~IDBs~~bonds and the cancellation of ~~$155~~$104 million of LOCs supporting those bonds. ~~The TEP Credit Agreement is secured by $386 million of Mortgage Bonds. See~~~~2011 Bond Issuances, Purchase and Redemptions,~~ ~~below.~~

At December 31, ~~2011, TEP had $10 million in~~2013, there were no outstanding borrowings ~~outstanding~~ and $1 million of ~~letters of credit~~LOCs issued under the ~~revolving credit facility.~~

TEP Revolving Credit Facility.

The TEP Credit Agreement contains restrictions on ~~liens,~~ mergers and sale of assets. The TEP Credit Agreement also requires TEP not to exceed a maximum leverage ratio. If TEP complies with the terms of the TEP Credit Agreement, TEP may pay dividends to ~~UniSource~~UNS Energy. ~~As of~~ At December 31, ~~2011,~~2013, TEP was in compliance with the terms of the TEP Credit Agreement.

See Note 6.

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2010 TEP Reimbursement Agreement

In December 2010, TEP entered into a four-year $37 million reimbursement agreement (2010 TEP Reimbursement Agreement). A $37 million ~~letter of credit~~LOC was issued pursuant to the 2010 TEP Reimbursement Agreement. The ~~letter of credit~~LOC supports $37 million aggregate principal amount of variable rate tax-exempt ~~IDBs~~pollution control bonds that were issued on behalf of TEP in December 2010.

In February 2014, TEP amended the 2010 TEP Reimbursement Agreement to extend the expiration date of the LOC from 2014 to 2019.

The 2010 TEP Reimbursement Agreement contains substantially the same restrictive covenants as the TEP Credit Agreement described above. ~~As of~~ At December 31, ~~2011,~~2013, TEP was in compliance with the terms of the 2010 TEP Reimbursement Agreement.

See ~~Capital Contribution from UniSource Energy~~Note 6

2013 Bond Issuances and Redemptions

In ~~December 2011, UniSource Energy contributed $30~~March 2013, approximately $91 million of ~~capital to~~unsecured tax-exempt industrial development bonds were issued on behalf of TEP.

~~In March 2010, UniSource Energy contributed $15 million of capital to TEP. TEP used the proceeds to help fund the purchase of Sundt Unit 4.~~

~~In March 2009, UniSource Energy contributed $30 million of capital to TEP. TEP used the proceeds to purchase Springerville Unit 1 lease debt.~~

~~2011 Bond Issuances, Purchases and Redemptions~~

~~In November 2011, TEP issued $250 million in unsecured notes due in November 2021 (TEP Notes).~~ The ~~TEP Notes~~bonds bear interest at ~~5.15%~~a fixed rate of 4.0%, mature in September 2029 and ~~are callable prior to August 2021 with a make-whole redemption premium. The TEP Notes contain a limitation~~may be redeemed at par on or after March 1, 2023. In April 2013, the ~~amount of secured debt that TEP may have outstanding. TEP used the net~~ proceeds ~~from the sale~~ of the ~~TEP Notes~~bond issuance were used to ~~(i) repurchase $150 million of its tax-exempt variable rate bonds, (ii)~~ redeem approximately ~~$22 million of fixed rate bonds with a coupon of 6.1% and (iii) repay $78 million on its revolving credit facility.~~

~~The $150~~$91 million of tax-exempt ~~variable~~bonds with an interest rate ~~debt purchased by TEP was not retired but will be held in treasury~~of 6.375% and ~~may be reissued or refunded in the future.~~

a maturity date of September 2029. See ~~2010 Bond Issuances~~Note 6

In ~~2010, $137~~November 2013, $100 million of unsecured tax-exempt industrial development revenue bonds were issued on behalf of TEP ~~with $37 million of such~~and sold in a private placement. The bonds ~~being applied to redeem a corresponding amount of outstanding tax-exempt bonds. In addition, in 2010 TEP converted the~~bear interest ~~rate mode on $100 million of tax-exempt bonds from~~at a variable rate, ~~to a fixed rate.~~

~~Tax-Exempt Bonds~~

TEP has financed a substantial portion of utility plant assets with revenue bonds issued by governmental entities on TEP’s behalf. The interest on these bonds is excluded from gross income of the bondholder for federal income tax purposes. The proceeds ofmature in April 2032, and may be redeemed at any time while the bonds are ~~loaned to TEP, with TEP agreeing to repay the loans by making payments~~ in amounts and at times to enable payments of principal of and interest on the tax-exempt bonds to be paid when due. Of the $831 million of tax-exempt bonds outstanding as of December 31, 2011, $616 million are unsecured and bear interest at fixed rates and $215 million are variable rate mode and upon proper notice by TEP. Also in November 2013, TEP entered into a Lender Rate Mode Covenants Agreement (2013 Covenants Agreement), with the purchaser of the bonds. The ~~variable rate bonds accrue interest at a weekly rate, with bondholders having~~2013 Covenants Agreement contains covenants and events of default which are the right to require their bonds to be purchased upon demand at a purchase price of par plus accrued interest. Variable rate bonds which have been put for purchase are generally remarketed to third parties to pay the purchase price. Payments of principal, interest and purchase price on the variable rate bonds are supported by direct-pay letters of credit, with TEP being required to reimburse the letter of credit banks for drawings on the letters of credit. See~~TEP Credit Agreement~~ ~~and~~~~TEP Reimbursement Agreement~~~~for more information.~~

~~Mortgage Indenture~~

~~TEP’s mortgage indenture creates a lien on and security interest~~same, in most of TEP’s utility plant assets. Springerville Unit 2, which is owned by San Carlos, is not subject to this lien and security interest. The mortgage indenture allows TEP to issue additional mortgage bonds on the basis of (1) a percentage of net utility property additions and/or (2) the principal amount of retired mortgage bonds. The amount of bonds that TEP may issue is also subject to a net earnings test under the mortgage indenture.

~~At December 31, 2011, TEP had a total of $423 million~~all material respects, as those in ~~outstanding Mortgage Bonds, consisting of $386 million in bonds securing~~ the TEP Credit Agreement, including restrictions on mergers and ~~$37~~sale of assets and requiring TEP not to exceed a maximum leverage ratio.

Under the terms of the 2013 Covenants Agreement, TEP may pay dividends to UNS Energy so long as it maintains compliance with the agreement. In December 2013, the proceeds of the bond issuance were used to redeem $100 million inof variable rate tax-exempt bonds ~~securing the 2010 TEP Reimbursement Agreement.~~

with a maturity date of December 2018. See Note 6.

Capital Lease Obligations

At December 31, ~~2011,~~2013, TEP had ~~$430~~$317 million of total capital lease obligations on its balance sheet. The table below provides a summary of the outstanding lease ~~amounts in each of the obligations.~~

September 30, September 30, September 30,
Leases
     Capital Lease Obligation
Balance      Expiration      Renewal/Purchase
Option
     -Millions of Dollars-
Springerville Unit 1⁽¹⁾
     $ 253         2015         Fair market value
purchase option of $159 million
Springerville Coal Handling Facilities Lease
     65         2015         Fixed price
purchase option
of $120 million⁽²⁾
Springerville Common Facilities⁽³⁾
     112
2017 and
2021
        Fixed price purchase
option of $106 million⁽²⁾



Total Capital Lease Obligations
     $ 430

obligations:



	Capital Lease Obligation Balance As Of
Capital Leases	December 31, 2013		Expiration	Renewal/Purchase Option
	Millions of Dollars
Springerville Unit 1⁽¹⁾	$	193	2015	Fair market value⁽²⁾
Springerville Coal Handling Facilities	28		2015	Fixed price purchase option of $120 million⁽³⁾
Springerville Common Facilities⁽⁴⁾	96		2017 and 2021	Fixed price purchase option of $106 million⁽³⁾
Total Capital Lease Obligations	$	317

~~(1)~~
⁽¹⁾	The Springerville Unit 1 Leases cover both Unit 1 and an undivided one-half interest in certain Springerville Common Facilities. The $193 million balance includes the present value of the lease purchase options elected and agreed to in August and October 2013. See Factors Affecting Results of Operations, Coal-Fired Generating Resources, Springerville Unit 1. Also see Note 6.


⁽²⁾	As determined in December 2011 in an appraisal procedure undertaken pursuant to the Springerville Unit 1 lease agreements. TEP elected and agreed to purchase certain interests in the Springerville Unit 1 lease agreements in August and October 2013. See Factors Affecting Results of Operations, Coal-Fired Generating Resources, Springerville Unit 1. Also see Note 6.

⁽³⁾

TEP agreed with Tri-State, the ~~owner~~lessee of Springerville Unit 3 and SRP, the owner of Springerville Unit 4, that if the Springerville Coal Handling Facilities and Common Leases are not renewed, TEP will exercise the purchase options under these contracts. SRP will then be obligated to buy a portion of these facilities and Tri State will then be obligated to either 1) buy a portion of these facilities; or 2) continue making payments to TEP for the use of these facilities.

~~(3)~~
⁽⁴⁾	The Springerville Common Facilities Leases cover an undivided one-half interest in certain Springerville Common Facilities.

~~TEP’s~~

TEP's capital lease obligation balances decline over time due to the normal capital lease payments made by TEP.

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Income Tax Position

See ~~Note 6 for more information about the fixed purchase price amounts.~~

UNS Energy Consolidated, Liquidity and Capital Resources, Income Tax Position.

Contractual Obligations

The following chart displays TEP’s contractual obligations ~~as of December 31, 2011~~ by maturity and by type of ~~obligation.~~

~~TEP’s Contractual Obligations~~

~~- Millions~~obligation as of ~~Dollars -~~December 31, 2013:

000000 000000 000000 000000 000000 000000 000000 000000
Payment Due in Years
Ending December 31,
2012 2013 2014 2015 2016 2017
and after Other Total
Long Term Debt

Principal
$ —      $ —      $ 37    $ —      $ 178    $ 866    $ —      $ 1,081
Interest
53    53    53    53    53    551    —      816
Capital Lease Obligations
118    122    195    23    18    61    —      537
Operating Leases
2    2    2    1    1    10    —      18
Purchase Obligations:

Fuel (including Transportation)
84    59    58    44    41    75    —      361
Purchased Power¹
29    21    17    13    13    184    —      277
Transmission
3    3    3    3    3    23    —      38
Other Long-Term Liabilities:

Pension & Other Post
Retirement Obligations
26    5    6    6    6    34    —      83
Acquisition of Springerville
Coal Handling and Common Facilities
—      —      —      120    —      106    —      226
Solar Equipment
12    12    —      —      —      —      —      24
Unrecognized Tax Benefits
—      —      —      —      —      —      24    24

Total Contractual Cash Obligations
$ 327    $ 277    $ 371    $ 263    $ 313    $ 1,910    $ 24    $ 3,485

Purchased Power includes two long-term Power Purchase Agreements (PPAs) with renewable energy generation producers to meet compliance under the RES tariff. The facilities achieved commercial operation in 2011. TEP is obligated to purchase 100% of the output from these facilities. The table above includes estimated future payments based on expected power deliveries under these contracts through 2031. TEP has entered into additional long-term renewable PPAs to comply with the RES tariff; however, TEP’s obligation to accept and pay for electric power under these agreements does not begin until the facilities are constructed and operational.



	TEP Contractual Obligations
Payment Due in Years Ending December 31,	2014		2015		2016		2017		2018		Thereafter		Other		Total
	Millions of Dollars
Long-Term Debt
Principal	$	—	$	—	$	78	$	—	$	100	$	1,046	$	—	$	1,224
Interest	54		53		54		53		54		443		—		711
Capital Lease Obligations	214		69		17		18		11		30		—		359
Operating Leases	3		3		2		2		2		14		—		26
Purchase Obligations⁽¹⁾:
Fuel	77		63		64		62		36		285		—		587
Purchased Power	27		5		—		—		—		—		—		32
Transmission	3		6		6		6		6		21		—		48
Renewable Power Purchase Agreements	30		31		31		31		31		410				564
RES Performance-Based Incentives	8		8		8		8		8		83		—		123
Acquisition of Springerville Coal Handling and Common Facilities	—		120		—		38		—		68		—		226
Other Long-Term Liabilities:
Pension & Other Post Retirement Obligations	15		6		6		6		6		33		—		72
Unrecognized Tax Benefits	—		—		—		—		—		—		2		2
Total Contractual Obligations	$	431	$	364	$	266	$	224	$	254	$	2,433	$	2	$	3,974

⁽¹⁾ Excludes the acquisition of Gila River Unit 3 pending regulatory approvals. See Note 8.

See~~UniSource~~UNS Energy Consolidated, Liquidity and Capital Resources, Contractual Obligations, ~~above,~~ for a description of these obligations.

We have reviewed our contractual obligations and provide the following additional information:

~~TEP’s~~The TEP Credit Agreement, ~~contains~~the 2010 Reimbursement Agreement, and the 2013 Covenants Agreement contain pricing based on TEP’s credit ratings. A change in TEP’s credit ratings can cause an increase or decrease in the amount of interest TEP pays on its borrowings, and the amount of fees it pays for its ~~letters of credit~~LOCs and unused commitments. A downgrade in TEP’s credit ratings would not cause a restriction in TEP’s ability to borrow under its revolving credit facility.

•

TEP’s Credit Agreement contains certain financial and other restrictive covenants, including a leverage test. Failure to comply with these covenants would entitle the lenders to accelerate the maturity of all amounts outstanding. At December 31, 2011, TEP was in compliance with these covenants. See~~TEP Credit Agreementabove.~~

The TEP Credit Agreement, the 2010 Reimbursement Agreement, and the 2013 Covenants Agreement contain certain financial and other restrictive covenants, including a leverage test. Failure to comply with these covenants would entitle the lenders to accelerate the maturity of all amounts outstanding. At December 31, 2013, TEP was in compliance with these covenants. See TEP Credit Agreement, above.

TEP conducts its wholesale marketing and risk management activities under certain master agreements whereby TEP may be required to post credit enhancements in the form of cash or ~~a letter of credit~~an LOC due to exposures exceeding unsecured credit limits provided to TEP, changes in contract values, a change in TEP’s credit ratings, or if there has been a material change in TEP’s creditworthiness. As of December 31, ~~2011,~~2013, TEP had posted aless than $1 million ~~letter of credit~~in LOCs as collateral with counterparties for credit enhancement.

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Dividends on Common Stock

TEP paid dividends to UNS Energy of $40 million in

2013 and $30 million in 2012. TEP did not pay any dividends to ~~UniSource~~UNS Energy in ~~2011. TEP declared and paid dividends to UniSource Energy of $60 million in 2010 and $60 million in 2009.~~

2011.

TEP can pay dividends to UNS Energy if it maintains compliance with the TEP Credit Agreement, the 2010 TEP Reimbursement Agreement and ~~certain financial covenants. As of~~ the 2013 Covenants Agreement. At December 31, ~~2011,~~2013, TEP was in compliance with the terms of the TEP Credit Agreement, the 2010 TEP Reimbursement Agreement and the ~~2010 Reimbursement~~2013 Covenants Agreement.

The Federal Power Act states that dividends shall not be paid out of funds properly included in capital accounts. Although the terms of the Federal Power Act are unclear, we believe that there is a reasonable basis for TEP to pay dividends from current year earnings.

UNS ~~GAS~~

ELECTRIC

RESULTS OF OPERATIONS

UNS ~~Gas~~Electric reported net income of ~~$10~~$12 million in ~~2011, $9~~2013, $17 million in ~~2010~~2012, and $7$18 million in ~~2009. We expect~~2011. The decline in net income in 2013 is related to a reduction in mining kWh sales as well as the loss of an industrial customer during the fourth quarter of 2012.

Like TEP, UNS Electric’s operations ~~at UNS Gas to vary with the seasons,~~are typically seasonal in nature, with peak energy ~~usage~~demand occurring in the ~~winter~~summer months.

The table below provides summary financial information for UNS ~~Gas.~~

September 30, September 30, September 30,
     2011      2010      2009
     -Millions of Dollars-
Gas Revenues
     $ 148         $ 146         $ 149
Other Revenues
     3         4         4






Total Operating Revenues
     151         150         153






Purchased Gas Expense
     90         91         99
Other Operations and Maintenance Expense
     25         26         25
Depreciation and Amortization
     9         8         7
Taxes Other Than Income Taxes
     3         3         3






Total Other Operating Expenses
     127         128         134






Operating Income
     24         22         19
Total Interest Expense
     7         7         6
Income Tax Expense
     7         6         6






Net Income
     $ 10         $ 9         $ 7

Electric:



	2013			2012			2011
	Millions of Dollars
Retail Electric Revenues	$	168		$	171		$	182
Wholesale Electric Revenues	6			17			6
Other Revenues	2			2			2
Total Operating Revenues	176			190			190
Purchased Energy Expense	7			81			91
Fuel Expense	76			10			7
Transmission Expense	13			11			12
Increase (Decrease) to Reflect PPFAC Recovery	(2		)	(1		)	(4		)
O&M	32			31			27
Depreciation and Amortization Expense	19			18			17
Taxes Other Than Income Taxes	6			4			4
Total Other Operating Expenses	151			154			154
Operating Income	25			36			36
Other Income	1			—			—
Interest Expense	7			8			7
Income Tax Expense	7			11			11
Net Income	$	12		$	17		18

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The table below shows UNS ~~Gas’ therm~~Electric’s kWh sales and ~~revenues for 2011, 2010 and 2009.~~

September 30, September 30, September 30, September 30, September 30,
               Increase (Decrease)
     2011      2010      Amount    Percent* 2009
Energy Sales, Therms (in millions)

Gas Retail Sales:

Residential
     74         73         1       1.2 % 70
Commercial
     31         30         1       2.9 % 30
Industrial
     2         2         —         22.9 % 2
Public Authorities
     7         7         —         (0.2 %) 6








Total Gas Retail Sales
     114         112         2       1.9 % 108
Negotiated Sales Program (NSP)
     26         28         (2 )    (8.4 %) 30








Total Gas Sales
     140         140         —         (0.2 %) 138








Gas Revenues (in millions):

Retail Margin Revenues:

Residential
     $ 40         $ 39         $ 1       2.6 % $ 36
Commercial
     11         10         1       4.9 % 10
Industrial
     —           —           —         21.9 % —
Public Authorities
     2         2         —         4.8 % 2








Total Retail Margin Revenues (Non-GAAP)**
     53         51         2       3.1 % 48
Transport and NSP
     17         17         —         (4.6 %) 16
DSM
     1         1         —         10.0 % 1
Retail Fuel Revenues
     77         77         —         1.0 % 84








Total Gas Revenues (GAAP)
     $ 148         $ 146         $ 2       1.2 % $ 149








Weather Data:

Heating Degree Days

Year Ended December 31
     25,794         25,457         337       1.3 % 24,305
10-Year Average
     24,894         24,828         NM       NM    24,739

margin revenues:



	2013		2012		Percent⁽¹⁾		2011		Percent⁽¹⁾
Electric Retail Sales, kWh (in Millions):
Residential	844		836		1.0	%	828		1.0	%
Commercial	607		614		(1.2	)%	602		2.0	%
Industrial	185		213		(13.2	)%	221		(3.5	)%
Mining	61		91		(32.7	)%	200		(54.8	)%
Other	2		2		20.5	%	2		(1.7	)%
Total Electric Retail Sales	1,699		1,756		(3.2	)%	1,853		(5.3	)%

Retail Margin Revenues (in Millions):
Residential	$	32	$	32	0.9	%	$	31	2.6	%
Commercial	28		29		(1.7	)%	29		—	%
Industrial	8		9		(14.4	)%	9		—	%
Mining	4		7		(34.4	)%	7		(1.5	)%
Other	—		—		—	%	—		(33.3	)%
Total Retail Margin Revenues (Non-GAAP)⁽²⁾	$	72	$	77	(4.8	)%	$	76	0.8	%
Fuel and Purchased Power Revenues	88		83		5.0	%	99		71.2	%
RES & DSM Revenues	8		11		(31.9	)%	7		(15.9	)%
Total Retail Revenues (GAAP)	$	168	$	171	(1.8	)%	$	182	(5.8	)%
Weather Data:
Cooling Degree Days
Year Ended December 31,	3,278		3,489		(6.0	)%	3,243		7.6	%
10-Year Average	3,271		3,285		NM		3,283		NM

*
⁽¹⁾	Percent change calculated on ~~unrounded~~un-rounded data and may not correspond exactly to data shown in table.

⁽²⁾

Total Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative to Total Retail Revenues, which is determined in accordance with GAAP. Total Retail Margin Revenues exclude revenues collected from retail customers that are directly offset by expenses recorded in other line items. We believe the change in Total Retail Margin Revenues between periods provides useful information to investors because it demonstrates the underlying revenue trend and performance of our core utility business. Total Retail Margin Revenues represents the portion of retail operating revenues available to cover the non-fuel operating expenses of our core utility business.

In 2013, total retail kWh sales decreased by 3.2% and retail margin revenues decreased by 4.8% compared with 2012. The decline in sales volumes and resulting reduction in retail margin revenues is due primarily to one of UNS Electric's mining customers generating a portion of its own electricity and the loss of an industrial customer in the fourth quarter of 2012.

FACTORS AFFECTING RESULTS OF OPERATIONS

2013 UNS Electric Rate Order

In December 2012, UNS Electric filed a rate case application with the ACC as required by the ACC in UNS Electric's 2010 rate order. UNS Electric's rate filing was based on a test year ended June 30, 2012.

In December 2013, the ACC approved a new rate structure for UNS Electric that became effective on January 1, 2014 (2013 UNS Electric Rate Order). The provisions of the 2013 UNS Electric Rate Order include, but are not limited to:

an increase in non-fuel retail Base Rates of approximately $3 million;

an Original Cost Rate Base (OCRB) of approximately $213 million and a Fair Value Rate Base (FVRB) of approximately $283 million;

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a return on equity of 9.50% and a long-term cost of debt of 5.97% resulting in a weighted average cost of capital of 7.83%;

a 0.50% return on the fair value increment of rate base (the fair value increment of rate base represents the difference between OCRB and FVRB of approximately $70 million); and

a capital structure of 52.6% equity and 47.4% long-term debt.

The 2013 UNS Electric Rate Order also approved the following cost recovery mechanisms:

an LFCR mechanism that will allow UNS Electric to recover certain non-fuel costs that would otherwise go unrecovered due to reduced kWh sales attributed to compliance with the ACC's Electric EE Standards and distributed generation requirements under the ACC's RES. The LFCR is not a full decoupling mechanism because it is not intended to recover lost fixed costs attributable to weather or economic conditions; and

a Transmission Cost Adjustment Mechanism (TCA) that will allow more timely recovery of transmission costs associated with serving retail customers at the level approved by FERC. UNS Electric's approved Base Rates include a transmission component based on UNS Electric’s current FERC Open Access Transmission Tariff (OATT) rate. The OATT rates are adjusted annually and the TCA will be limited to the recovery (or refund) of costs associated with future changes in UNS Electric’s OATT rate. UNS Electric expects to make an informational TCA filing with the ACC on or before May 1, 2014. The filing will include an updated retail transmission rate calculated pursuant to UNS Electric's OATT rate.

Gila River Generating Station Unit 3

In December 2013, TEP and UNS Electric entered into an agreement to purchase Gila River Unit 3 for $219 million. It is anticipated that TEP will purchase a 75% undivided interest in Gila River Unit 3 (413 MW) for approximately $164 million and UNS Electric will purchase the remaining 25% undivided interest (137 MW) for approximately $55 million, although TEP and UNS Electric may modify the percentage ownership allocation between them. We expect the transaction to close in December 2014. See Tucson Electric, Factors Affecting Results of Operations, Gila River Generating Station Unit 3 and Note 8.

Also in December 2013, UNS Electric filed an application requesting the ACC to approve an accounting order that would authorize UNS Electric to defer for future recovery specific non-fuel operating costs associated with Gila River Unit 3. If UNS Electric purchases 25% of Gila River Unit 3, the deferred costs, including depreciation, amortization, property taxes, O&M expense and a carrying cost on UNS Electric's investment in Gila River Unit 3, are expected to total approximately $9 million by the end of 2015. We cannot predict if the ACC will approve UNS Electric's request.

Competition

See Tucson Electric Power, Factors Affecting Results of Operations, Competition.

Fair Value Measurements

UNS Electric’s income statement exposure to risk is mitigated as UNS Electric reports the change in fair value of energy contract derivatives as a regulatory asset or a regulatory liability rather than in the income statement. See Note 15.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Outlook

UNS Electric expects operating cash flows to fund a portion of its construction expenditures during 2014. Additional sources of funding capital expenditures could include draws on the UNS Electric/UNS Gas Revolver, additional credit lines, the issuance of long-term debt, or capital contributions from UNS Energy.

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Cash Flows and Capital Expenditures

The table below provides summary cash flow information for UNS Electric:



	2013			2012			2011
	Millions of Dollars
Cash Provided By (Used In):
Operating Activities	$	43		$	50		$	43
Investing Activities	(59		)	(37		)	(93		)
Financing Activities	13			(10		)	44
Net Increase/(Decrease) in Cash	(3		)	3			(6		)
Beginning Cash	8			5			11
Ending Cash	$	5		$	8		$	5

Operating Activities

Cash provided by operating activities decreased by $7 million in 2013 when compared with 2012 due primarily to a $6 million decrease in cash receipts from electric sales (net of fuel and purchased energy costs paid) caused by a lower PPFAC rate effective in June 2012, the loss of an industrial customer, and lower mining sales volumes.

Investing Activities

UNS Electric had capital expenditures of $56 million in 2013 compared with $38 million in 2012. The increase is related to a transmission line that was constructed to increase reliability to UNS Electric's service territory in Nogales, Arizona.

Financing Activities

Cash provided by financing activities at UNS Electric in 2013 increased by $23 million when compared with 2012. Financing activities in 2013 included $22 million of borrowings under the UNS Electric/UNS Gas Revolver (net of repayments) and a $2 million receipt related to a contribution in aid of construction from a large customer.

UNS Electric/UNS Gas Credit Agreement

The UNS Electric/UNS Gas Credit Agreement consists of a $100 million unsecured revolving credit and revolving letter of credit facility. Either company can borrow up to a maximum of $70 million as long as the combined amount borrowed does not exceed $100 million. The UNS Electric/UNS Gas Credit Agreement expires November 2016.

UNS Electric is only liable for UNS Electric’s borrowings, and similarly, UNS Gas is only liable for UNS Gas' borrowings under the UNS Electric/UNS Gas Credit Agreement.

The UNS Electric/UNS Gas Credit Agreement restricts additional indebtedness, liens, and mergers. It also requires each borrower not to exceed a maximum leverage ratio. Each borrower may pay dividends so long as it maintains compliance with the agreement. At December 31, 2013, UNS Electric and UNS Gas each were in compliance with the terms of the UNS Electric/UNS Gas Credit Agreement.

UNS Electric expects to draw upon the UNS Electric/UNS Gas Revolver from time to time for seasonal working capital purposes, to fund a portion of its capital expenditures or to issue LOCs to provide credit enhancement for its energy procurement and hedging activities. At December 31, 2013, UNS Electric had $22 million of outstanding borrowings and less than $1 million of LOCs issued under the UNS Electric/UNS Gas Credit Agreement.

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Table of Contents

Contractual Obligations



	UNS Electric Contractual Obligations
Payment Due in Years Ending December 31,	2014		2015		2016		2017		2018		Thereafter		Other		Total
	Millions of Dollars
Long-Term Debt
Principal	$	—	$	80	$	—	$	—	$	—	$	50	$	—	$	130
Interest	7		7		4		4		4		17		—		43
Purchase Obligations⁽¹⁾:
Purchased Power	48		12		—		—		—		—		—		60
Transmission	4		7		6		6		5		6		—		34
Renewable Power Purchase Agreements	6		6		6		6		6		75		—		105
RES Performance-Based Incentives	1		1		1		1		1		2				7
Other Long-Term Liabilities:
Pension & Other Post Retirement Obligations	1		—		—		—		—		—		—		1
Unrecognized Tax Benefits	—		—		—		—		—		—		2		2
Total Contractual Obligations	$	67	$	113	$	17	$	17	$	16	$	150	$	2	$	382

⁽¹⁾ Excludes the acquisition of Gila River Unit 3 pending regulatory approvals. See Note 8.

See UNS Energy Consolidated, Liquidity and Capital Resources, Contractual Obligations, for a description of these obligations.

Dividends on Common Stock

UNS Electric paid dividends to UNS Energy, through UES, of $10 million in both 2013 and 2012. UNS Electric did not pay any dividends to UNS Energy in 2011. UNS Electric’s ability to pay future dividends will depend on the cash needs for capital expenditures and various other factors.

The note purchase agreement for UNS Electric contains restrictions on dividends. UNS Electric may pay dividends so long as (i) no default or event of default exists, and (ii) it could incur additional debt under the debt incurrence test. At December 31, 2013, UNS Electric was in compliance with the terms of its note purchase agreement and the terms of the UNS Electric/UNS Gas Revolver.

UNS GAS

RESULTS OF OPERATIONS

UNS Gas reported net income of $11 million in 2013, $9 million in 2012, and $10 million in 2011. The increase in net income in 2013 is due primarily to an improvement in retail margin revenues caused by cold weather in the first and fourth quarters, which contributed to an increase retail therm sales, as well as a non-fuel base rate increase that was effective in May 2012.

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Table of Contents

The table below provides summary financial information for UNS Gas:



	2013			2012		2011
	Millions of Dollars
Gas Revenues	$	131		$	128	$	148
Other Revenues	3			5		3
Total Operating Revenues	134			133		151
Purchased Gas Expense	73			72		85
Increase (Decrease) to Reflect PGA Recovery Treatment	(2		)	2		5
O&M	26			25		25
Depreciation and Amortization	9			9		8
Taxes Other Than Income Taxes	4			4		4
Total Other Operating Expenses	110			112		127
Operating Income	24			21		24
Interest Expense	6			6		7
Income Tax Expense	7			6		7
Net Income	$	11		$	9	$	10

The table below includes UNS Gas' therm sales and margin revenues:



	2013		2012		Percent⁽¹⁾		2011		Percent⁽¹⁾
Gas Retail Sales, Therms (in Millions):
Residential	76		67		12.7	%	74		(9.1	)%
Commercial	31		29		7.2	%	31		(5.7	)%
All Other	9		8		13.1	%	9		(13.5	)%
Total Gas Retail Sales	116		104		11.2	%	114		(8.5	)%
Negotiated Sales Program (NSP)	27		32		(15.2	)%	26		21.2	%
Total Gas Sales	143		136		5.1	%	140		(3.0	)%
Retail Margin Revenues (in Millions):
Residential	$	42	$	38	9.7	%	$	40	(3.5	)%
Commercial	12		11		7.4	%	11		0.9	%
All Other	2		2		14.3	%	2		(4.5	)%
Total Retail Margin Revenues (Non-GAAP)⁽²⁾	56		51		9.4	%	53		(2.7	)%
DSM Revenue	1		1		(18.2	)%	1		—	%
Transport and NSP	17		16		6.3	%	17		(4.2	)%
Retail Fuel Revenues	57		60		(4.5	)%	77		(22.5	)%
Total Gas Revenues (GAAP)	$	131	$	128	2.3	%	$	148	(13.2	)%
Weather Data:
Heating Degree Days
Year Ended December 31,	4,588		4,089		12.2	%	4.615		(11.4	)%
10-Year Average	4,401		4,431		NM		4,399		NM


⁽¹⁾	Percent change calculated on un-rounded data and may not correspond exactly to data shown in table.

⁽²⁾

Total Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative to Total Gas Revenues, which is determined in accordance with GAAP. Total Retail Margin Revenues excludes revenues collected from retail customers that are directly offset by expenses recorded in other line items. We believe the change in Total Retail Margin Revenues between periods provides useful information to investors because it demonstrates the underlying revenue trend and performance of our core utility business. Total Retail Margin Revenues represents the portion of retail operating revenues available to cover the non-fuel operating expenses of our core utility business.

Retail therm sales ~~during 2011~~in 2013 increased by ~~1.9%~~11.2% when compared with ~~2010~~2012 due ~~in part~~ to a ~~1.3%~~12.2% increase in ~~heating degree days and an~~Heating Degree Days. The increase in ~~the number of~~ retail ~~customers. Retail margin revenues increased by 3.1%, or $2 million, during 2011 due in part to colder winter weather and~~therm sales, as well as a Base Rate increase ~~that was~~ implemented in ~~April 1, 2010. As of December 31, 2011, UNS Gas had approximately 148,000 retail customers, which represents~~May 2012, contributed to an increase in retail margin revenues of ~~less than 1%~~9.4%, or $5 million, when compared with ~~the end~~2012.

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Table of ~~2010.~~

UNS Gas supplies natural gas to some of its large transportation customers. Approximately one half of the margin earned on these NSP sales is retained by UNS Gas while the remainder benefits retail customers through a credit to the PGA mechanism which reduces the gas commodity price.

Contents

FACTORS AFFECTING RESULTS OF OPERATIONS

Competition

New technological developments and the implementation of the ACC’s Gas Energy Efficiency Standards (Gas EE ~~Standards~~Standards) may reduce energy consumption by UNS Gas’ retail customers. Customers of UNS Gas also have the ability to switch from gas to an alternate energy source that could reduce their reliance on services provided by UNS Gas. ~~See~~~~Item 1. Business, UNS Gas, Rates and Regulation, Gas Utility Energy Efficiency Standards and Decoupling~~~~for more information.~~

~~Rates~~

~~See~~~~Item 1. Business, UNS Gas, Rates and Regulation, 2011~~

2012 UNS Gas Rate ~~Filing.~~Order

In April 2012, the ACC approved a Base Rate increase of

$2.7 million as well as a LFCR mechanism to enable UNS Gas to recover lost fixed-cost revenues as a result of implementing the Gas EE Standards. The LFCR is expected to recover lost fixed-cost revenues of less than $0.1 million in 2014, based on estimated lost retail therm sales from May 2012 through December 2013.

The new rates became effective on May 1, 2012. The impact of the Base Rate increase on customers’ bills was offset by a temporary credit adjustment to the PGA. See Purchased Gas Adjustor.

Fair Value Measurements

UNS Gas’ income statement exposure to risk is mitigated as UNS Gas reports the change in fair value of energy contract derivatives as a regulatory asset or a regulatory liability rather than in the income statement. See Note 15.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Outlook

UNS Gas expects operating cash flows to fund all of its construction expenditures during 2014. If natural gas prices rise and UNS Gas is not allowed to recover its projected gas costs or PGA bank balance on a timely basis, UNS Gas may require additional funding to meet operating and capital requirements in future periods. Sources of funding future capital expenditures could include existing cash balances, draws on the UNS Electric/UNS Gas Revolver, additional credit lines, the issuance of long-term debt, or capital contributions from UNS Energy.

Cash Flows and Capital Expenditures

The table below provides summary cash flow information for UNS Gas:



	2013			2012			2011
	Millions of Dollars
Cash Provided By (Used In):
Operating Activities	$	27		$	28		$	32
Investing Activities	(15		)	(15		)	(12		)
Financing Activities	(10		)	(20		)	(11		)
Net Increase/(Decrease) in Cash	2			(7		)	9
Beginning Cash	31			38			29
Ending Cash	$	33		$	31		$	38

UNS Gas' operating cash flows during 2013 were $1 million lower than 2012 due in part to the PGA credit that was effective in April 2012.

UNS Electric/UNS Gas Credit Agreement

At December 31, 2013, UNS Gas had no outstanding borrowings under the UNS Electric/UNS Gas Credit Agreement.

See UNS Electric, Liquidity and Capital Resources, UNS Electric/UNS Gas Credit Agreement.

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Table of Contents

Interest ~~Rates~~

Rate Risk

UNS Gas is subject to interest rate risk resulting from changes in interest rates on its borrowings under its revolving credit facility. The interest paid on revolving credit borrowings is variable. If LIBOR or other benchmark interest rates increase, UNS Gas may be required to pay higher rates of interest on borrowings under its revolving credit facility. SeeItem 7A. Quantitative and Qualitative Disclosures about Market Risk ~~Interest Rate Risk, below.~~

~~Fair Value Measurements~~.

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Liquidity Outlook~~

UNS Gas’ capital requirements consist primarily of capital expenditures. In 2011, capital expenditures were $13 million. UNS Gas expects operating cash flows to fund its future operating activities and a large portion of its construction expenditures. If natural gas prices rise and UNS Gas is not allowed to recover its projected gas costs or PGA bank balance on a timely basis, UNS Gas may require additional funding to meet operating and capital requirements. Sources of funding future capital expenditures could include draws on the revolving credit facility, additional credit lines, the issuance of long-term debt, or capital contributions from UniSource Energy.

~~Operating Cash Flow and Capital Expenditures~~

~~The table below provides summary cash flow information for UNS Gas.~~

September 30, September 30, September 30,
     2011    2010    2009
     -Millions of Dollars-
Cash Provided By (Used In):

Operating Activities
     $ 32       $ 18       $ 37
Investing Activities
     (12 )    (9 )    (13 )
Financing Activities
     (11 )    (11 )    —






Net Increase (Decrease in Cash)
     9       (2 )    24
Beginning Cash
     29       31       7






Ending Cash
     $ 38       $ 29       $ 31

~~Operating cash flows increased in 2011 due in part to the temporary over-collection of PGA gas costs from customers.~~

~~UNS Gas/UNS Electric Revolver~~

In November 2011, UNS Gas and UNS Electric amended their existing unsecured credit agreement. The UNS Electric/UNS Gas Revolver consists of a $100 million unsecured revolving credit and revolving letter of credit facility. Either company can borrow up to a maximum of $70 million as long as the combined amount borrowed does not exceed $100 million. The amendment extended the term of the UNS Electric/UNS Gas Revolver by two years to November 2016.

UNS Gas is only liable for UNS Gas’ borrowings, and similarly, UNS Electric is only liable for UNS Electric’s borrowings under the UNS Gas/UNS Electric Revolver. UES guarantees the obligations of both UNS Gas and UNS Electric.

The UNS Gas/UNS Electric Revolver restricts additional indebtedness, liens, and mergers. It also requires each borrower not to exceed a maximum leverage ratio. Each borrower may pay dividends so long as it maintains compliance with the agreement. As of December 31, 2011, UNS Gas and UNS Electric each were in compliance with the terms of the UNS Gas/UNS Electric Revolver.

UNS Gas expects to draw upon the UNS Gas/UNS Electric Revolver from time to time for seasonal working capital purposes, to fund a portion of its capital expenditures, or to issue letters of credit to provide credit enhancement for its natural gas procurement and hedging activities. As of December 31, 2011, UNS Gas had no outstanding borrowings or letters of credit under the UNS Gas/UNS Electric Revolver.

~~Senior Unsecured Notes~~

~~UNS Gas has $100 million of senior unsecured notes outstanding, of which $50 million matures in 2015 and $50 million matures in 2026.~~

All of UNS Gas’ senior unsecured notes are guaranteed by UES. The note purchase agreements for UNS Gas restrict transactions with affiliates, mergers, liens, restricted payments and incurrence of indebtedness. The agreements also contain a minimum net worth test. As of December 31, 2011, UNS Gas was in compliance with the terms of its note purchase agreements.

UNS Gas must meet a leverage test and an interest coverage test to issue additional debt or to pay dividends. However, UNS Gas may, without meeting these tests, refinance existing debt and incur up to $5 million in short-term debt.

~~Note Issuance~~

~~In August 2011, UNS Gas issued $50 million of 5.39% senior unsecured notes. The proceeds were used to pay off $50 million of senior unsecured notes that matured in August 2011.~~

Contractual Obligations

~~UNS Gas Supply Contracts~~

UNS Gas directly manages its gas supply and transportation contracts. The market price for gas varies based upon the period during which the commodity is purchased. UNS Gas has firm transportation agreements with capacity sufficient to meet its current load requirements. These contracts expire in various years between 2012 and 2023. These costs are passed through to UNS Gas’ customers via the PGA.

UNS Gas hedges its gas supply prices by entering into fixed price forward contracts and financial swaps at various times during the year to provide more stable prices to its customers. These purchases and hedges are made up to three years in advance with the goal of hedging at least 45% of the expected monthly gas consumption with fixed prices prior to entering into the month. UNS Gas hedged approximately 45% of its expected monthly consumption for the 2011/2012 winter season (November through March). Additionally, UNS Gas has approximately 38% of its expected gas consumption hedged for April through October 2012, and 32% hedged for the period November 2012 through March 2013.

The following table displays UNS Gas’ contractual obligations as of December 31, ~~2011~~2013 by maturity and by type of ~~obligation.~~

000000 000000 000000 000000 000000 000000 000000 000000 000000
UNS Gas Contractual Obligations
-Millions of Dollars-

Payment Due in Years
Ending December 31,
2012 2013 2014 2015 2016 2017
and
after Other Total
Long Term Debt

Principal
$ —      $ —      $ —      $ 50    $ —      $ 50    $ —      $ 100
Interest
6    6    6    6    3    27    —      54
Purchase Obligations—Fuel
23    12    10    6    6    21    —      78
Pension & Other Post Retirement Obligations
1    —      —      —      —      —      —      1
Unrecognized Tax Benefits
—      —      —      —      —      —      1    1


Total Contractual Cash Obligations
$ 30    $ 18    $ 16    $ 62    $ 9    $ 98    $ 1    $ 234

UNS Gas conducts certain of its gas procurement and risk management activities under agreements whereby UNS Gas may be required to post margin due to changes in contract values, a change in UNS Gas’ creditworthiness or exposures exceeding credit limits provided to UNS Gas. As of December 31, 2011, UNS Gas had not posted any such credit enhancements.

obligation:



	UNS Gas Contractual Obligations
Payment Due in Years Ending December 31,	2014		2015		2016		2017		2018		Thereafter		Other		Total
	Millions of Dollars
Long-Term Debt
Principal	$	—	$	50	$	—	$	—	$	—	$	50	$	—	$	100
Interest	6		6		3		3		3		20		—		41
Operating Leases	1		1		1		—		—		—		—		3
Purchase Obligations:
Fuel	26		20		16		13		13		60		—		148
Other Long-Term Liabilities:
Pension & Other Post Retirement Obligations	1		—		—		—		—		—		—		1
Total Contractual Obligations	$	34	$	77	$	20	$	16	$	16	$	130	$	—	$	293

Dividends on Common Stock

UNS Gas paid dividends to ~~UniSource~~UNS Energy, through UES, of $10 million 2013, $20 million in ~~2010, 2011,~~2012, and $10 million in ~~February 2012.~~2011. UNS Gas’ ability to pay future dividends will depend on the cash needs for capital expenditures and various other factors.

The note purchase agreement for UNS Gas contains restrictions on dividends. UNS Gas may pay dividends so long as ~~(a)~~(i) no default or event of default exists, ~~and (b)~~(ii) it could incur additional debt under the debt incurrence test. ~~As of~~ At December 31, ~~2011,~~2013, UNS Gas was in compliance with the terms of its note purchase ~~agreement. See~~~~Senior Unsecured Notes~~~~, above.~~

~~UNS ELECTRIC~~

~~RESULTS OF OPERATIONS~~

~~In its September 2010 UNS Electric rate order, the ACC approved UNS Electric’s purchase of BMGS from UED, subject to FERC approval~~agreement and other conditions. FERC approved the purchase in June 2011, and UNS Electric completed the purchase of BMGS for $63 million on July 1, 2011. In accordance with accounting rules related to the transfer of a business held under common control, we reflect UNS Electric’s purchase of BMGS as if it occurred on January 1, 2009. The transaction had ~~no impact on UniSource Energy’s consolidated financial statements for 2009 or 2010.~~

~~UNS Electric had net income of $18 million in 2011, compared with net income of $15 million in 2010. The increase is due primarily to a rate increase that was implemented in October 2010.~~

~~Results in 2010 included $3 million of pre-tax income related to a settlement with Arizona Public Service Company for refunds related to transactions with the California Power Exchange.~~

~~As with TEP, UNS Electric’s operations are generally seasonal in nature, with peak energy demand occurring in the summer months.~~

~~The table below provides summary financial information for UNS Electric.~~

September 30, September 30, September 30,
     2011      2010      2009
     -Millions of Dollars-
Retail Electric Revenues
     $ 182         $ 183         $ 180
Wholesale Electric Revenues
     37         31         5
Other Revenues
     2         2         2






Total Operating Revenues
     221         216         187
Purchased Energy and Fuel Expense
     137         137         116
Other Operations and Maintenance Expense
     27         29         26
Depreciation and Amortization Expense
     17         17         16
Taxes Other Than Income Taxes
     4         4         4






Total Other Operating Expenses
     185         187         162






Operating Income
     36         29         25
Other Income
     —           3         —
Total Interest Expense
     7         7         7
Income Tax Expense
     11         10         7






Net Income
     $ 18         $ 15         $ 11

~~The table below summarizes UNS Electric’s kWh sales and margin revenues for 2011, 2010 and 2009.~~

September 30, September 30, September 30, September 30, September 30,
               Increase (Decrease)
     2011      2010      Amount    Percent* 2009
Energy Sales, kWh (in millions)

Electric Retail Sales:

Residential
     828         820         8       0.9 % 814
Commercial
     602         606         (4 )    (0.7 %) 608
Industrial
     221         219         2       0.8 % 197
Mining
     200         210         (10 )    (4.2 %) 163
Public Authorities
     2         2         —         (16.3 %) 2








Total Electric Retail Sales
     1,853         1,857         (4 )    (0.2 %) 1,784








Electric Retail Revenues (in millions):

Retail Margin Revenues:

Residential
     $ 31         $ 27         $ 4       13.9 % $ 21
Commercial
     29         27         2       5.9 % 22
Industrial
     9         9         —         4.7 % 7
Mining
     7         6         1       22.2 % 3
Public Authorities
     —           —           —         (25.0 %) —








Total Retail Margin Revenues (Non-GAAP)**
     $ 76         $ 69         $ 7       10.0 % $ 53
Retail Fuel Revenues
     99         105         (6 )    (5.6 %) 121
DSM and RES Revenues
     7         9         (2 )    (22.4 %) 6








Total Retail Revenues (GAAP)
     $ 182         $ 183         $ (1 )    (0.5 %) $ 180

September 30, September 30, September 30, September 30, September 30,
Weather – Cooling Degree Days
     2011      2010           2009
Year Ended December 31
     9,092         8,821         271         3.1 % 9,183
10-Year Average
     8,994         9,031         NM         NM    9,059

*	~~Percent change calculated on unrounded data and may not correspond exactly to data shown in table.~~

Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative to Total Retail Revenues, which is determined in accordance with GAAP. Retail Margin Revenues exclude revenues collected from retail customers that are directly offset by expenses recorded in other line items. We believe the change in Retail Margin Revenues between periods provides useful information to investors because it demonstrates the underlying revenue trend and performance of our core utility business. Retail Margin Revenues represents the portion of retail operating revenues available to cover the operating expenses of our core utility business.

In 2011, retail kWh sales decreased by 0.2% compared with 2010. A 4% Base Rate increase that took effect in October 2010, contributed to a $7 million increase in retail margin revenues in 2011 compared with 2010.

~~As of December 31, 2011, UNS Electric had approximately 91,000 retail customers, which was an increase of less than 1% compared with 2010.~~

Wholesale revenues increased by $6 million in 2011 due to an increase in short-term wholesale sales. All revenues from wholesale sales are credited against costs recovered through UNS Electric’s PPFAC.

~~FACTORS AFFECTING RESULTS OF OPERATIONS~~

~~Competition~~

New technological developments and the implementation of EE Standards may reduce energy consumption by UNS Electric’s retail customers. UNS Electric’s customers also have the ability to install renewable energy technologies and conventional generation units that could reduce their reliance on UNS Electric’s services. Self-generation by UNS Electric’s customers has not had a significant impact to date. See~~Item 1. Business, UNS Electric, Rates and Regulation, Energy Efficiency Standards and Decoupling~~ ~~for more information.~~

~~Rates~~

~~See~~~~Item 1. Business, UNS Electric, Rates and Regulation, 2010 UNS Electric Rate Order~~ ~~for more information.~~

~~Mining Customer~~

UNS Electric’s largest customer, a copper mine located near Kingman, Arizona, began generating a portion of its own electricity needs in 2011. In 2012, UNS Electric expects its mining kWh sales to decrease by approximately 50% compared with 2011; however, due to UNS Electric’s retail rate structure, UNS Electric expects the margin revenues from this customer to be near the same level as 2011. In 2011, UNS Electric’s mining-related margin revenues were $7 million.

~~Renewable Energy Standard and Tariff~~

As part of the 2010 UNS Electric rate order, the ACC authorized UNS Electric to recover operating costs, depreciation, property taxes and a return on its investment in company-owned solar projects through RES funds until these costs are reflected in its Base Rates. Under these terms, UNS Electric expects to invest $5 million annually in 2012 through 2014 in solar photovoltaic projects. We estimate that each $5 million investment would build approximately 1.25 MW of solar capacity. For more information, see~~Item 1. Business, UNS Electric, Rates and Regulation, Renewable Energy Standard and Tariff.~~

~~Interest Rates~~

UNS Electric is subject to interest rate risk resulting from changes in interest rates on its borrowings under its revolving credit facility. The interest paid on revolving credit borrowings is variable. If LIBOR or other benchmark interest rates increase, UNS Electric may be required to pay higher rates of interest on borrowings under its revolving credit facility. See~~Item 7A. Quantitative and Qualitative Disclosures about Market Risk, Interest Rate Risk, below.~~

~~Fair Value Measurements~~

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Liquidity Outlook~~

In 2011, UNS Electric’s capital expenditures were $96 million which included the purchase of BMGS for $63 million from an affiliate, UED. Going forward, UNS Electric expects operating cash flows to fund a large portion of its construction expenditures. Additional sources of funding future capital expenditures could include draws on the UNS Gas/UNS Electric Revolver, additional credit lines, the issuance of long-term debt, or capital contributions from UniSource Energy.

~~Operating Cash Flow~~

~~The table below provides summary cash flow information for UNS Electric.~~

September 30, September 30, September 30,
     2011    2010    2009
     -Millions of Dollars-
Cash Provided By (Used In):

Operating Activities
     $ 43       $ 34       $ 48
Investing Activities
     (93 )    (23 )    (28 )
Financing Activities
     44       (10 )    (19 )






Net Increase (Decrease in Cash)
     (6 )    1       1
Beginning Cash
     11       10       9






Ending Cash
     $ 5       $ 11       $ 10

~~Operating cash flows increased in 2011 due in part to a Base Rate increase that became effective in October 2010 as well as an increase in wholesale sales.~~

~~UNS Gas/UNS Electric Revolver~~

~~See~~~~UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver~~ ~~above for description of UNS Electric’s unsecured revolving credit agreement.~~

UNS Electric expects to draw upon the UNS Gas/UNS Electric Revolver from time to time for seasonal working capital purposes, to fund a portion of its capital expenditures or to issue letters of credit to provide credit enhancement for its energy procurement and hedging activities. At February 21, 2012, UNS Electric had $6 million outstanding under the UNS Gas/UNS Electric Revolver.

~~Senior Unsecured Notes~~

UNS Electric has $100 million of senior unsecured notes outstanding, consisting of $50 million of 6.50% notes due in 2015 and $50 million of 7.10% notes due August 2023. The notes are guaranteed by UES. The note purchase agreement for UNS Electric contains certain restrictive covenants, including restrictions on transactions with affiliates, mergers, liens to secure indebtedness, restricted payments, and incurrence of indebtedness. As of December 31, 2011, UNS Electric was in compliance with the terms of its note purchase agreement.

UNS Electric must meet a leverage test and an interest coverage test to issue additional debt or to pay dividends. However, UNS Electric may, without meeting these tests, refinance existing debt and incur up to $5 million in short-term debt.

~~UNS Electric Credit Agreement~~

In August 2011, UNS Electric entered into a four-year $30 million variable rate term loan credit agreement. UNS Electric used the $30 million in proceeds to repay borrowings under its revolving credit facility. The interest rate currently in effect is three-month LIBOR plus 1.25%. At the same time, UNS Electric entered into a fixed-for-floating interest rate swap in which UNS Electric will pay a fixed rate of 0.97% and receive a three month LIBOR rate on a $30 million notional amount over a four year period ending August 10, 2015. The UNS Electric term loan credit agreement, included in Long-Term Debt in the balance sheet, is guaranteed by UES.

The term loan credit agreement contains certain restrictive covenants for UNS Electric and UES. The covenants include restrictions on transactions with affiliates, restricted payments, additional indebtedness, liens and mergers. UNS Electric must meet an interest coverage ratio to issue additional debt. However, UNS Electric may, without meeting these tests, refinance indebtedness and incur short-term debt in an amount not to exceed $5 million. The credit agreement also requires UNS Electric to maintain a maximum leverage ratio, and allows UNS Electric to pay dividends so long as it maintains compliance with the credit agreement. As of December 31, 2011, UNS Electric was in compliance with the terms of the credit agreement.

~~Contractual Obligations~~

~~UNS Electric Power Supply and Transmission Contracts~~

~~UNS Electric enters into various power supply agreements for periods of one to five years. Certain of these contracts are at a fixed price per MW and others are indexed to natural gas prices.~~

UNS Electric’s power purchase contracts and risk management activities are subject to master agreements that may require UNS Electric to post margin due to changes in contract values or if there has been a material change in UNS Electric’s creditworthiness, or exposures exceeding credit limits provided to UNS Electric. As of December 31, 2011, UNS Electric had posted $6 million of such credit enhancements in the form of letters of credit.

~~UNS Electric imports the power it purchases over the Western Area Power Administration’s (WAPA) transmission lines. See~~~~Item 1. Business, UNS Electric, Power Supply and Transmission, Transmission~~ ~~for more information.~~

~~The following table displays UNS Electric’s contractual obligations as of December 31, 2011 by maturity and by type of obligation.~~

Sept 30 Sept 30 Sept 30 Sept 30 Sept 30 Sept 30 Sept 30 Sept 30
UNS Electric Contractual Obligations
-Millions of Dollars-

Payment Due in Years
Ending December 31,
     2012      2013      2014      2015      2016      2017
and
after      Other      Total
Long Term Debt:

Principal
     $ —           $ —           $ —           $ 80         $ —           $ 50         $ —           $ 130
Interest
     7         7         7         7         4         25         —           57
Purchase Obligations:

Purchased Power¹
     54         40         31         3         3         43         —           174
Transmission
     4         2         2         1         1         —           —           10
Pension & Other Post Retirement Obligations
     1         —           —           —           —           —           —           1
Unrecognized Tax Benefits
     —           —           —           —           —           —           4         4
















Total Contractual Cash Obligations
     $ 66         $ 49         $ 40         $ 91         $ 8         $ 118         $ 4         $ 376

Purchased Power includes a long-term Power Purchase Agreement (PPA) with a renewable energy generation producer to meet compliance under the RES tariff. The facility achieved commercial operation in September 2011. UNS Electric is obligated to purchase 100% of the output from this facility. The table above includes estimated future payments based on expected power deliveries under the contract through 2031. UNS Electric has entered into additional long-term renewable PPAs to comply with the RES tariff; however, UNS Electric’s obligation to accept and pay for electric power under these agreements does not begin until the facilities are constructed and operational.

~~Dividends on Common Stock~~

As of December 31, 2011, UNS Electric had not paid dividends to UniSource Energy. UNS Electric’s ability to pay dividends will depend on the cash needs for capital expenditures and various other factors.

~~The note purchase agreement for UNS Electric contains restrictions on dividends. UNS Electric may pay dividends so long as (a) no default or event of default exists and (b) it could incur~~sufficient additional debt under the debt incurrence ~~test. As~~test to pay dividends.

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Table of ~~December 31, 2011, UNS Electric was in compliance with the terms of its note purchase agreement. See~~~~Senior Unsecured Notes~~~~, above.~~

Contents~~OTHER NON-REPORTABLE BUSINESS SEGMENTS~~

~~RESULTS OF OPERATIONS~~

~~The table below summarizes the income (loss) for the other non-reportable segments in the last three years.~~

September 30, September 30, September 30,
     2011    2010    2009
     - Millions of Dollars -
Millennium
     $ 2       $ (13 )    $ 2
Other (1)
     (5 )    (6 )    (5 )






Total Other Net Loss
     $ (3 )    $ (19 )    $ (3 )

~~(1)~~

~~Includes parent company expenses, UED and reconciling adjustments.~~

~~Millennium~~

Millennium recorded net income of $2 million in 2011 compared with a net loss of $13 million in 2010. The net loss in 2010 resulted from several factors including the write-off of deferred tax assets and impairment losses on certain investments. Millennium’s results in 2009 included a $6 million pre-tax gain on the sale of an investment.

~~In December 2011 and December 2010, Millennium received annual interest payments of $1 million on its $15 million note receivable from Mimosa.~~

~~UniSource Energy Parent Company~~

~~UniSource Energy parent company expenses primarily include interest expense (net of tax) related to the UniSource Energy Convertible Senior Notes and the UniSource Credit Agreement.~~

~~UED~~

In its September 2010 UNS Electric rate order, the ACC approved UNS Electric’s purchase of BMGS from UED, subject to FERC approval and other conditions. FERC approved the purchase in June 2011, and UNS Electric completed the purchase of BMGS for $63 million on July 1, 2011.

In 2011, UED paid dividends of $39 million to UniSource Energy of which $28 million represented a return of capital. In 2010, UED paid a $9 million dividend to UniSource Energy, of which $4 million represented a return of capital. In 2009, UED paid a $30 million dividend to UniSource Energy which also represented a return of capital.

~~FACTORS AFFECTING RESULTS OF OPERATIONS~~

~~Millennium Investments~~

Millennium is in the process of exiting its remaining investments which may yield gains or losses. At December 31, 2011, Millennium had assets of $20 million including a $15 million note receivable and a cash balance of $5 million.

~~In July 2011, Millennium sold a building for $3 million resulting in an after-tax gain of approximately $1 million.~~

In June 2009, Millennium finalized the sale of its 50% interest in Sabinas to Mimosa. The terms called for an upfront $5 million payment which Millennium received in January 2009. Other key terms of the transaction include a three-year, 6% interest-bearing, collateralized $15 million note from Mimosa due June 2012. In June 2009, Millennium recorded a $6 million pre-tax gain on the sale.

Millennium made $3 million in dividend payments to UniSource Energy in 2011, $8 million in 2010 and $3 million in 2009. All of these dividends represented return of capital distributions. Millennium’s remaining commitment for all of its investments combined is less than $1 million.

CRITICAL ACCOUNTING POLICIES

The preparation of ~~the~~ financial statements in accordance with ~~U.S. Generally Accepted Accounting Principles (GAAP)~~GAAP requires management to apply accounting policies and to make estimates and assumptions that affect results of operations and the amounts of assets and liabilities reported in the financial statements and ~~accompanying~~related notes. ~~UniSource Energy considers~~Management believes that the areas described below require significant judgment in the ~~Critical Accounting Policies as those that could yield materially different financial statement results based on~~ application ~~and interpretation~~ of accounting ~~policy. Since~~policy or in making estimates and assumptions that are ~~subjective~~inherently uncertain and ~~complex, actual results could differ~~that may change in subsequent periods. ~~For additional~~Additional information on ~~UniSource~~UNS Energy’s other significant accounting policies can be found in Note 1.

Accounting for Regulated Operations

We account for our regulated electric and ~~recently issued~~gas operations based on accounting standards ~~see Note 1.~~

~~Accounting for Rate Regulation~~

~~We generally use~~that allow the ~~same accounting policies~~actions of our regulators, the ACC and ~~practices used~~the FERC, to be reflected in our financial statements. Regulator actions may cause us to capitalize certain costs that would otherwise be included as an expense, or in Accumulated Other Comprehensive Income (AOCI), in the current period by unregulated ~~companies for financial reporting under GAAP. However, sometimes these principles require special accounting treatment for regulated companies to show the effect~~companies. Regulatory assets represent incurred costs that have been deferred because they are probable of ~~regulation. For example, the ACC can determine~~future recovery in customer rates. Regulatory liabilities generally represent expected future costs that we are allowed to recover certain expenses at a designated time in the future. In this situation, we defer these items as regulatory assets on the balance sheet and then reflect the costs as expenses when we are allowed to recover the costshave already been collected from ~~ratepayers. Similarly, certain revenue items may be deferred as regulatory liabilities and not reflected as revenue until Retail Rates to customers are reduced.~~customers. We evaluate regulatory assets and liabilities each period and believe future recovery or settlement is probable.

If Our assessment includes consideration of recent rate orders, historical regulatory treatment of similar costs, and changes in the ~~future a portion of operations no longer meets~~ regulatory ~~accounting criteria,~~and political environment. If management's assessment is ultimately different than actual regulatory outcomes, the impact ~~would~~on our results of operation, financial position, and future cash flows could be material to the financial statements. If we stopped applying regulatory accounting to all our regulated operations, we would write off the related balances of regulatory assets as an expense and record the regulatory liabilities as revenue on the income statement or in accumulated other comprehensive income (AOCI).

material.

At December 31, ~~2011,~~2013, regulatory ~~assets net of regulatory liabilities totaled $4 million at TEP and $15 million at UNS Electric. Regulatory~~ liabilities net of regulatory assets totaled ~~$26~~$103 million at TEP, $9 million at UNS Gas. We regularly assess whether we can continue to apply regulatory accounting to cost-based rate regulated operations. Expectations of future recovery are generally based on orders issued by regulatory commissionsElectric and ~~historical experience.~~$40 million at UNS Gas. There are no current or expected proposals or changes in the regulatory environment that impact our ability to apply regulated operations accounting. If we conclude, in a future period, that our operations no longer meet the ~~probability~~criteria in this guidance, we would reflect our regulatory pension assets in AOCI and recognize the impact of ~~future recovery~~other regulatory assets and liabilities in the income statements, both of ~~these assets.~~which would be material to our financial statements. See Note 2.

Accounting for Asset Retirement Obligations

~~TEP~~

~~TEP is~~

We are required to record the fair value of a liability for a legal obligation to retire ana long-lived tangible asset in the period in which the liability is incurred. This includes obligations resulting from conditional future events. ~~TEP incurs~~We incur legal obligations as a result of environmental and other governmental regulations, contractual agreements and other factors. To estimate the liability, management must use significant judgment and assumptions in: determining whether a legal obligation exists to remove assets; estimating the probability of a future event for a conditional obligation; estimating the fair value of the cost of removal; estimating when final removal will occur; and estimating the credit-adjusted risk-free interest rates to be used to discount the future liabilities. Changes that may arise over time with regard to these assumptions and determinations will change amounts recorded in the future as expense for asset retirement obligations.

Beginning July 1, 2013, TEP began deferring costs associated with the majority of its legal AROs as regulatory assets because new depreciation rates approved in the 2013 TEP Rate Order include these costs. Deferred costs are amortized over the life of the underlying asset.

A liability for the fair value of ana legal asset retirement obligation (ARO) is recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as a part of the carrying amount of the long-lived assets. The asset retirement cost is subsequently charged to depreciation expense over ~~its~~the useful ~~life.~~life of the asset or lease term. Upon retirement of the asset, ~~TEP~~we will either ~~settles~~settle the obligation for its recorded amount or ~~incurs~~incur a gain or loss if the actual costs differ from the recorded amount.

TEP identified legal obligations to retire generation plant assets specified in land leases for its jointly-owned Navajo and Four Corners Generating Stations. The land on which these stations reside is leased from the Navajo Nation. The provisions of the leases require the lessees to remove the facilities upon request of the Navajo Nation at the expiration of the leases. Additionally, TEP and UNS Electric entered into a ground lease ~~agreement~~agreements with ~~Campus Research Corporation~~certain land owners for the installation of photovoltaic (PV) assets. The provisions of the PV ground ~~lease~~leases require TEP or UNS Electric to remove the PV facilities upon expiration of the ~~lease in 2031. The legal retirement obligation~~leases. TEP's ARO related to the PV assets is estimated to be approximately $4$9 million at the retirement ~~date.~~dates, and UNS Electric's ARO is estimated to be approximately $3 million. TEP also has certain environmental obligations at the Luna, San Juan, Sundt and Springerville Generating Stations. TEP ~~estimated~~estimates that its share of the ~~cost~~AROs to remove the Navajo and Four Corners facilities and settle the Luna, San Juan, Sundt and Springerville environmental obligations will be approximately ~~$160~~$166 million at the retirement dates. No other legal obligations to retire generation plant assets were identified.

TEP, ~~has~~UNS Electric and UNS Gas have various transmission and distribution lines that operate under leases and rights-of-way that contain end dates and ~~restrictive~~may contain site restoration clauses. TEP, ~~operates its~~UNS Electric and UNS Gas operate transmission and distribution lines as if they will be operated in perpetuity and would continue to be used or sold without land remediation. As such, there are no ~~legal obligations that require application~~AROs for these assets.

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The total net present value of TEP's ARO liability was $22 million at December 31, 2013. The net present value of UNS Electric's ARO liability was $1 million at December 31, 2013. ARO liabilities are reported in Deferred Credits and Other Liabilities—Other on the ~~accounting requirements~~balance sheets. UNS Gas has not identified any AROs associated with removal of its long-lived assets. See Note 5.

Additionally, the authorized depreciation rates for ~~asset retirement obligations. Nevertheless, included in the revenue requirement underlying the Company’s electric service Retail Rates is~~TEP, UNS Electric and UNS Gas include a component ~~of depreciation expense intended to enable TEP~~designed to accrue the future costs of retiring assets for which no legal obligations ~~exists.~~exist. The accumulated ~~balance of such~~balances at December 31, 2013 representing non-legal asset retirement obligation accruals, less actual removal costs incurred, net of salvage proceeds realized, ~~is reported as a regulatory liability.~~are included in Deferred Credits and Other Liabilities, Regulatory Liabilities – Noncurrent on the balance sheets. See Note ~~2 for details regarding net cost of removal for interim retirements.~~

~~UNS Gas and UNS Electric~~

UNS Gas and UNS Electric have various transmission and distribution lines that operate under land leases and rights-of-way that contain end dates and restorative clauses. UNS Gas and UNS Electric operate their transmission and distribution lines as if they will be operated in perpetuity and would continue to be used or sold without land remediation. As a result, UNS Gas and UNS Electric are not recognizing the cost of final removal of the transmission and distribution lines in the financial statements. See Note 2.

Pension and Other ~~Postretirement~~Retiree Benefit Plan Assumptions

TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas record plan assets, obligations, and expenses related to pension and other ~~postretirement~~retiree benefit plans based on actuarial valuations, which include key assumptions on discount rates, expected returns on plan assets, compensation increases, and health care cost trend rates. These actuarial assumptions are reviewed annually and modified as appropriate. The effect of modifications is generally recorded or amortized over future periods. We believe that the assumptions used in recording obligations are reasonable based on prior experience, market conditions, and the advice of plan actuaries. Note 910 discusses the rate of return and discount rate used in the calculation of pension plan and other ~~postretirement~~retiree plan obligations for TEP, UNS ~~Gas~~Electric, and UNS ~~Electric.~~

Gas.

TEP is required to recognize the underfunded status of its defined benefit pension and other ~~postretirement~~retiree plans as a liability. The underfunded status is the difference between the fair value of the plans assets and the projected benefit obligation for pension plans or accumulated ~~postretirement~~retiree benefit obligation for other ~~postretirement~~retiree benefit plans. As the funded status, discount rates, and actuarial facts change, the liability will vary significantly in future years. TEP records the underfunded amount for its pension and other ~~postretirement~~retiree obligations as a liability and a regulatory asset to reflect expected recovery of pension and other ~~postretirement~~retiree obligations through ~~Retail Rates.~~

the rates charged to retail customers.

At December 31, ~~2011,~~2013, TEP discounted its future pension plan obligations at between 5.0% and 5.1% and its other ~~postretirement~~retiree plan obligations at a rate of 4.7%. The discount rate for future pension plan and other ~~postretirement~~retiree plan obligations is determined annually based on the rates currently available on high-quality, non-callable, long-term bonds. The discount rate is based on a corporate yield curve using an average yield between the 60^th and 90^th percentile of AA-graded U.S. corporate bonds with future cash flows that match the timing and amount of expected future benefit payments. For TEP’s pension plans, a 25-basis point change in the discount rate would increase or decrease the ~~projected benefit obligation~~Projected Benefit Obligation (PBO) by approximately $9$10 million and the ~~2012~~ plan expense by $1 million. For TEP’s other ~~postretirement~~retiree benefit plan, a 25-basis point change in the discount rate would increase or decrease the ~~accumulated postretirement benefit obligation~~Accumulated Postretirement Benefit Obligation (APBO) by approximately $2 million. A 25-basis point change in the discount rate would not significantly impact plan ~~expense by less than $1 million.~~expense.

TEP calculates the market-related value of pension plan assets using the fair value of the assets on the measurement date. TEP assumed that its pension plans’ assets would generate a long-term rate of return of ~~7.0%~~7% at December 31, ~~2011.~~2013. In establishing its assumption as to the expected return on assets, TEP reviews the asset allocation and develops return assumptions for each asset class based on advice from an investment consultant and the pension’s actuary that includes both historical performance analysis and forward-looking views of the financial markets. Pension expense decreases as the expected rate of return on assets increases. A 25-basis point change in the expected return on assets would impact pension expense in ~~2012~~2014 by ~~less than~~ $1 million.

TEP used a current year health care cost trend rate of ~~6.9%~~6.7% in valuing its ~~postretirement~~retiree benefit obligation at December 31, ~~2011.~~2013. This rate reflects both market conditions and historical experience. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would change the ~~postretirement~~retiree benefit obligation by approximately $5 million and the related plan expense in ~~2012~~2014 by ~~less than~~ $1 million.

In ~~2012,~~2014, TEP will incur pension costs of approximately $8 million and other ~~postretirement~~retiree benefit costs of approximately ~~$14 million and~~ $6 ~~million, respectively.~~million. TEP expects to charge approximately ~~$15~~$10 million of these costs to O&M expense, $3 million to capital, and $2$1 million to Other Expense. TEP expects to make pension plan contributions of ~~$20~~$9 million in ~~2012.~~2014. In 2009, TEP established a ~~Voluntary Employee Beneficiary Association (VEBA)~~VEBA trust to fund its other ~~postretirement~~retiree benefit plan. In ~~2012,~~2014, TEP expects to make benefit payments to retirees under the ~~postretirement~~retiree benefit plan of approximately $4$5 million and contributions to the VEBA trust of ~~$2 million.~~

$1 million, net of distributions.

UNS ~~Gas~~Electric and UNS ~~Electric~~Gas discounted their future pension plan obligations using a rate of ~~4.9%~~5.2% at December 31, ~~2011.~~2013. For UNS ~~Gas~~Electric and UNS ~~Electric’s~~Gas' pension plan, a 25-basis point change in the discount rate would impact the benefit obligation and ~~2012~~ pension expense by less than $1 million. UNS ~~Gas~~Electric and UNS ~~Electric~~Gas will record pension expense of $2 million in ~~2012,~~2014, of which less than $1 million will be capitalized. UNS ~~Gas~~Electric and UNS ~~Electric~~Gas expect to make combined pension plan contributions of $3$1 million in ~~2012.~~

2014.

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UNS ~~Gas~~Electric and UNS ~~Electric~~Gas discounted their other ~~postretirement~~retiree plan obligations using a rate of 4.7% at December 31, ~~2011.~~2013. UNS Electric and UNS Gas ~~and UNS Electric~~ will record ~~postretirement~~retiree medical benefit expense and make benefit payments to retirees under the ~~postretirement~~retiree benefit plan of less than $1$0.5 million in ~~2012.~~

2014.

Accounting for Derivative Instruments and Hedging Activities

Commodity Derivative Contracts

TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas enter into forward contracts to purchase or sell capacity or energy at contract prices over a given period of time, typically for one month, three months, or one year, within established limits to meet forecasted load requirements or to take advantage of favorable market opportunities. In general, TEP enters into forward purchase contracts when market conditions provide the opportunity to purchase energy for its load at prices that are below the marginal cost of its supply resources or to supplement its own resources (e.g., during plant outages and summer peaking periods). TEP enters into forward sales contracts when it forecasts that it has excess supply and the market price of energy exceeds its marginal cost. TEP and UNS Gas enter into forward gas commodity price swap agreements to lock in fixed prices on a portion of forecasted ~~summer~~ gas purchases.

UNS Electric enters into forward gas commodity price swap agreements to hedge the price risk associated with forward power purchase agreements that are indexed to natural gas prices.

For all commodity derivative instruments that do not meet the normal purchase or normal sale scope exception, we recognize derivative instruments as either assets or liabilities on the consolidated balance sheets and measure those instruments at fair value. Unrealized gains and losses on commodity derivative contracts entered into for retail customer load are recorded as either a regulatory asset or regulatory liability on the balance sheets of TEP, UNS ~~Gas~~Electric, and UNS ~~Electric.~~Gas based on our ability to recover the prudent costs of hedging activities entered into to mitigate energy price risk for retail customers. There are no current or expected proposals or changes in the regulatory environment that impact the probability of future recovery of these assets through the PPFAC or PGA mechanisms.

The market prices used to determine fair values for ~~TEP,~~TEP’s, UNS ~~Gas~~Electric’s, and UNS ~~Electric’s~~Gas' derivative instruments at December 31, ~~2011,~~2013, are estimated based on various factors including broker quotes, exchange prices, over the counter prices, and time value.

TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas manage the risk of counterparty default by performing financial credit reviews, setting limits, monitoring exposures, requiring collateral when needed, and using a standardized agreement, which allows for the netting of current period exposures to and from a single counterparty.

Interest Rate Swaps

TEP hedges the cash flow risk associated with unfavorable changes in the variable interest rates ~~related~~tied to LIBOR on the Springerville Common Facilities Lease. AtAs of December 31, ~~2011, TEP hedged~~2013, approximately ~~$29 million and $34~~$25 million of variable rate lease debt ~~payments~~ for the Springerville Common Facilities Lease ~~to a fixed~~had been hedged through an interest rate swap agreement through July 1, 2014, and $34 million had been hedged through January 2, ~~2020, respectively.~~2020. In August 2009, TEP entered into a swap that had the effect of converting $50 million of ~~variable rate industrial development bonds~~variable-rate IDBs to a fixed rate from September 2009 through September 2014.

In August 2011, UNS Electric entered into an interest rate swap with the effect of converting the variable interest rate for their $30 million term loan to a fixed rate from August 2011 through August 2015. See Note 6.

Commodity Cash Flow Hedge

TEP hedges the cash flow risk associated with a six-year power wholesale supply agreement using a six-year power purchase swap agreement. Unrealized gains and losses are recorded in AOCI. See ~~Note 1 for additional details regarding Cash Flow Hedges.~~

~~See~~Item 7A. Quantitative and Qualitative Disclosures about Market Risk, Commodity Price ~~Risk.~~Risk

~~Unbilled~~ and Note 1.

Revenue

~~TEP,~~ Recognition

TEP’s, UNS ~~Gas~~Electric’s, and UNS ~~Electric’s~~Gas' retail revenues, which are recognized in the period that electricity or energy is delivered and consumed by customers, include unbilled revenue based on an estimate of ~~MWh/~~kWh/therms delivered at the end of each period. Unbilled revenues are dependent upon a number of factors that require management’s judgment including estimates of retail sales and customer usage patterns. The unbilled revenue is estimated by comparing the estimated ~~MWh/~~kWh/therms delivered to the ~~MWh/~~kWh/therms billed to ~~TEP, UNS Gas and UNS Electric’s~~our retail customers. The excess of estimated ~~MWh/~~kWh/therms delivered over ~~MWh/~~kWh/therms billed is then allocated to the retail customer classes based on estimated usage by each customer class. ~~TEP, UNS Gas and UNS Electric~~We then record revenue for each customer class based on the various Retail Rates for each customer class. Due to the seasonal fluctuations of TEP and UNS Electric’s actual load, the unbilled revenue amount increases during the spring and summer and decreases during the fall and

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winter. Conversely the unbilled revenue amount for UNS Gas sales increases during the fall and winter and decreases during the spring and summer. A provision for uncollectible accounts is recorded as a component of ~~operations and maintenance~~O&M expense.

Plant Asset Depreciable Lives

TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas have significant investments in electric generation assets and electric and natural gas transmission and distribution assets. We calculate depreciation expense based on our estimate of the useful lives of our plant assets and expected net removal costs. ~~Useful life~~The useful lives of plant assets isare further detailed in Note 5. Changes to depreciation estimates resulting from a change of estimated service life or removal costs could have a significant impact on the amount of depreciation expense recorded onin the income ~~statement.~~statements. The ~~estimated useful lives and~~ACC approves depreciation rates ~~presently used to calculate depreciation expense~~ for ~~electric~~all generation and distribution ~~assets for TEP, UNS Gas and UNS Electric have been approved by the ACC in prior rate decisions.~~assets. Depreciation rates for such assets cannot be changed without ACC approval. ~~For current approved ACC depreciation rates see Note 1. Depreciation rates for electric~~TEP and UNS Electric transmission assets ~~fall under~~are subject to the jurisdiction of the FERC.

See Note 1.

The 2013 TEP Rate Order approved a change in authorized depreciation rates for generation and distribution plant from an average of 3.32% to 3.00% , effective July 1, 2013. The change in depreciation rates will have the effect of reducing depreciation expense by approximately $11 million annually. The reduction in depreciation expense is primarily due to revised estimates of removal costs, net of estimated salvage value for interim and final retirements. See Note 3.

In January 2010, TEP obtained an updated depreciation study which indicated that its transmission assets’ depreciable lives should be extended. As a result, TEP adopted new FERC approved transmission depreciation rates effective January ~~2010, which have the effect of reducing depreciation expense by approximately $14 million annually.~~

2010.

Income Taxes

Due to the differences between GAAP and income tax laws, many transactions are treated differently for income tax purposes than they are in the financial statements. We account for this difference by recording deferred income tax assets and liabilities using the effective income tax rate at our balance sheet date.

Consolidated income tax liabilities are allocated to subsidiaries based on their taxable income and deductions as reported in the consolidated tax return.

A valuation allowance is established against deferred tax assets for which management believes it is more likely than not that the deferred asset will not be realized. In making this judgment, management evaluates all available evidence and gives more weight to objective verifiable evidence. At December 31, ~~2011, UniSource~~2013, UNS Energy had a $7 million valuation allowance. The valuation allowances related to unregulated investments’ losses are treated as capital losses for income tax purposes. If ~~UniSource~~UNS Energy incurs additional capital losses in the future, a valuation allowance will be recorded against the deferred tax asset unless management can identify future capital gains to offset the losses. ~~For additional information see~~See Note 8.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The ~~following recently~~FASB issued ~~accounting standards are not yet reflected~~guidance for the recognition, measurement, and disclosure of certain obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. On adoption, an entity would recognize and disclose in the ~~UniSource Energy~~financial statements its obligation from a joint and ~~TEP financial statements:~~

~~The Financial Accounting Standards Board (FASB) issued authoritative~~several liability arrangement as the sum of the amount the entity agreed with its co-obligors that it will pay, and any additional amount the entity expects to pay on behalf of its co-obligors. This guidance ~~that~~ will ~~eliminate the current option to report other comprehensive income~~be effective in the first quarter of 2014. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations, or cash flows.

The FASB issued guidance which permits an entity to designate the Federal Funds Rate (the interest rate at which depository institutions lend balances to each other overnight) as a benchmark interest rate for fair value and cash flow hedges. Prior to this guidance, only interest rates on direct treasury obligations of the U.S. Government and the LIBOR were considered benchmark interest rates in the U.S. This guidance is effective immediately, and can be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We have not entered into any new cash flow or fair value hedges since the effective date of this guidance. We do not expect this guidance to have a material impact on our financial condition, results of operations, or cash flows.

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The FASB issued new guidance on the financial statement presentation of ~~changes in equity. An entity can elect to present items of~~unrecognized tax benefits when a net ~~income and other comprehensive income in one continuous statement,~~operating loss carryforward, a similar tax loss, or ~~in two separate but consecutive statements.~~a tax credit carryforward exists. We will be required to comply with the guidance on a prospective basis beginning in the first quarter of ~~2012 and plan to present a separate statement~~2014. Although adoption of ~~other comprehensive income.~~

~~The FASB issued authoritative~~this new guidance that changed some fair value measurement principles and disclosure requirements. The most significant disclosure change is expansion of required information for unobservable inputs. We will be required to comply in the first quarter of 2012, andmay impact how such items are classified on our balance sheets, we do not expect ~~this pronouncement~~such changes to ~~have a~~be material. In addition, we do not expect any material ~~impact on the valuation techniques used to estimate the fair value of assets and liabilities.~~

~~The FASB issued authoritative guidance that requires entities to disclose both gross and net information about instruments and transactions eligible for offset~~changes in the ~~statement~~presentations of our other financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting arrangements. We will be required to comply in the first quarter of 2013.

statements.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. ~~UniSource~~UNS Energy and TEP are 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 ~~UniSource~~UNS Energy or TEP in this Annual Report on Form 10-K. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or 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”, “estimates”, “expects”, “intends”, “plans”, “predicts”, “projects”, 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 ~~UniSource~~UNS Energy or TEP, are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward-looking statements. In addition, ~~UniSource~~UNS Energy and TEP disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report.

Forward-looking statements involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. We express our expectations, beliefs, and projections in good faith and believe them to have a reasonable basis. However, we make no assurances that management’s expectations, beliefs, or projections will be achieved or accomplished. We have identified the following important factors that could cause actual results to differ materially from those discussed in our forward-looking statements. These may be in addition to other factors and matters discussed in Item 1A. Risk Factors,Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other parts of this report: state and federal regulatory and legislative decisions and actions; regional economic and market conditions which could affect customer growth and energy usage; weather variations affecting energy usage; the cost of debt and equity capital and access to capital markets; the performance of the stock market and changing interest rate environment, which affect the value of our pension and other ~~postretirement~~retiree benefit plan assets and the related contribution requirements and expense; unexpected increases in O&M expense; resolution of pending litigation matters; changes in accounting standards; changes in critical accounting estimates; the ongoing restructuring of the electric industry; changes to long-term contracts; the cost of fuel and power supplies; cyber attacks or challenges to our information security; and the performance of TEP’s generating plants.

ITEM 7A. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

We are exposed to various forms of market risk. Changes in interest rates, returns on marketable securities, and changes in commodity prices may affect our future financial results.

~~For additional information concerning risk factors, including market risks, see~~See Safe Harbor for Forward-Looking ~~Statements~~~~, above.~~Statements.

Risk Management Committee

We have a Risk Management Committee responsible for the oversight of commodity price risk and credit risk related to the wholesale energy marketing activities of TEP and the fuel and power procurement activities at TEP, UNS ~~Gas~~Electric, and UNS ~~Electric.~~Gas. Our Risk Management Committee, which meets on a quarterly basis and as needed, consists of officers from the finance, accounting, legal, wholesale marketing, transmission and distribution operations, and generation operations departments of ~~UniSource~~UNS Energy. To limit TEP, UNS ~~Gas~~Electric, and UNS ~~Electric’s~~Gas’s exposure to commodity price risk, the Risk Management Committee sets trading and hedging policies and limits, which are reviewed frequently to respond to constantly changing market conditions. To limit TEP, UNS ~~Gas~~Electric, and UNS ~~Electric’s~~Gas’s exposure to credit risk, the Risk Management Committee reviews counterparty credit exposure as well as credit policies and limits.

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Interest Rate Risk

Long-Term Debt

TEP is exposed to interest rate risk resulting from changes in interest rates on certain of its variable rate debt obligations. ~~At December 31, 2011 and December 31, 2010,~~ TEP had $215 million ~~and $365 million, respectively,~~at December 31, 2013 in tax-exempt variable rate debt outstanding. The interest rates on TEP’s tax-exempt variable rate debt are reset weekly by its remarketing agents. The maximum interest rate payable under the indentures for these bonds is 10% for $37 million of variable rate IDBs, and 20% on the remaining $178 million in variable rate IDBs.or monthly. The average ~~interest~~ rate on ~~TEP’s~~TEP's weekly variable rate debt (excluding letter of credit fees) was ~~0.18%~~0.12% in ~~2011~~2013 and ~~0.26%~~0.17% in ~~2010.~~2012. The average weekly interest rate ranged from ~~0.05%~~0.06% to ~~0.34%~~0.48% in ~~2011~~2013 and ~~0.17%~~0.06% to ~~0.39%~~0.26% during ~~2010.~~2012. Although short-term interest rates have been relatively low and stable in ~~2011~~2013 and ~~2010,~~2012, TEP may still be subject to volatility in its tax-exempt variable rate debt. A 100 basis point increase in average interest rates on this debt, over a twelve month period, would result in a decrease in TEP’s pre-tax net income of approximately $2 million.

TEP manages its exposure to variable interest rate risk by entering into interest rate swaps and financing transactions to rebalance its mix of variable rate and fixed rate long-term debt.

TEP has fixed-for-floating interest rate swaps in place to hedge floating rate interest rate risk associated with ~~$63~~$55 million of Springerville Common Facilities lease debt and $50 million of its variable rate IDBs.

In ~~addition, in 2010 and~~ 2011 ~~TEP entered into the following transactions to change its mix of fixed and floating rate debt.~~

~~In 2010, TEP converted the interest rate on its $130 million IDBs from a variable rate to an unsecured fixed rate of 5.75% through maturity in 2029;~~

~~In 2010, TEP refinanced $37 million of its 7.125% unsecured fixed rate IDBs with variable rate IDBs; and~~

~~TEP issued $250 million of 5.15% unsecured notes in 2011, and repurchased $150 million of variable rate IDBs to hold in treasury, and redeemed $22 million of its 6.1% unsecured fixed-rate IDBs.~~

~~As a result of these transactions, TEP’s variable rate debt comprised approximately 15% and 31% of its total long-term debt at December 31, 2011 and 2010, respectively.~~

~~In August 2011,~~, UNS Electric entered into a fixed-for-floating interest rate swap in which UNS Electric will pay a fixed rate of 0.97% and receive a three-month LIBOR rate on a $30 million notional amount through August 2015 to hedge the interest rate risk associated with its $30 million credit agreement.

Interest Rate Swaps

To adjust the value of TEP’s interest rate swaps, classified as a cash flow ~~hedge,~~hedges, to fair value in Other Comprehensive Income (Loss), TEP recorded the following net unrealized gains (losses):

September 30, September 30, September 30,
     2011    2010    2009
     - Millions of Dollars -
Unrealized Gains (Losses)
     $ (5 )    $ (8 )    $ 1



	2013			2012			2011
	Millions of Dollars
Unrealized Gains (Losses)	$	(1	)	$	(2	)	$	(5	)

Revolving Credit Facilities

~~UniSource~~

UNS Energy, TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas are also subject to interest rate risk resulting from changes in interest rates on their borrowings under revolving credit facilities. Revolving credit borrowings may be made on the basis of a spread over LIBOR or an Alternate Base Rate. With the recent disruptions in the financial markets, the spread between LIBOR and other similar maturity short-term rates, such as U.S. Treasury securities, has been significantly higher than historical relationships. As a result, ~~UniSource~~UNS Energy, TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas may experience significant volatility in the rates paid on LIBOR borrowings under their revolving credit facilities.

Marketable Securities Risk

~~UniSource~~

UNS Energy has a short-term investment policy which governs the investment of excess cash balances by ~~UniSource~~UNS Energy and its subsidiaries. We review this policy periodically in response to market conditions to adjust, if necessary, the maturities and concentrations by investment type and issuer in the investment portfolio. ~~As of~~At December 31, ~~2011, UniSource~~2013, UNS Energy’s short-term investments consisted of liquid, highly-rated money market funds ~~commercial paper,~~ and certificates of deposit. These short-term investments are classified as Cash and Cash Equivalents on the balance sheet.

TEP had marketable securities comprised of investments in lease ~~debt and~~ equity with an estimated fair value of ~~$50~~$25 million at December 31, ~~2011,~~2013, and ~~$111~~$32 million of lease debt and equity at December 31, ~~2010.~~2012. At December 31, ~~2011,~~2013, the carrying value exceeded fair value by ~~$16~~$11 million. No impairment was recorded as TEP expects to recover the full carrying value of its lease equity investment in future ~~Retail Rates.~~rates charged to retail customers. At December 31, ~~2010,~~2012, the carrying value exceeded the fair value ~~exceeded the carrying value~~ by $6$13 million. These securities represent TEP’s investments in lease debt and equity underlying certain of TEP’s capital lease obligations. Changes in the fair value of such debt securities do not present a material risk to TEP, as TEP intends to hold these investments to maturity.

Commodity Price Risk

TEP

TEP is exposed to commodity price risk primarily relating to changes in the market price of electricity, natural gas, and coal. This risk is mitigated through hedging practices and a PPFAC mechanism which fully recovers the actual retail fuel and purchased power costs incurred on a timely basis from TEP’s retail customers. The PPFAC mechanism has a forward component and a true-up component. The forward component of the PPFAC rate is based on forecasted fuel and purchased

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power costs. The true-up component reconciles actual fuel and purchased power costs with the amounts collected in the prior year and any amounts under/over-collected will be collected from/credited to customers. If the actual price of power is higher than the forecasted PPFAC rate, ~~TEP is exposed to~~TEP's operating cash flows are reduced by the price difference until the subsequent 12-month period when the true-up component is adjusted to allow the recovery of this difference.

Purchases and Sales of Energy

To manage its exposure to energy price risk, TEP enters into forward contracts to buy or sell energy at a specified price and future delivery period. Generally, TEP commits to future sales based on expected excess generating capability, forward prices and generation costs, using a diversified market approach to provide a balance between long-term, mid-term, and spot energy sales. TEP generally enters into forward purchases during its summer peaking period to ensure it can meet its load and reserve requirements, and account for other contracts and resource contingencies. TEP also enters into limited forward purchases and sales to optimize its resource portfolio and take advantage of ~~locational~~geographical differences in price. These positions are managed on both a volumetric and dollar basis and are closely monitored using risk management policies and procedures overseen by the Risk Management Committee. For example, the risk management policies provide that TEP should not take a short physical position in the third quarter and must have owned generation backing up all physical forward sales positions at the time the sale is made. TEP’s risk management policies also ~~restrict entering~~place limits on the duration of transactions in both gas and power.

TEP enters into some forward ~~positions with maturities extending beyond the end of the next calendar year except for approved hedging purposes.~~

~~TEP’s risk management policies also allow for financial~~contracts considered to be normal purchases and sales of energy subject to specified risk parameters established and monitored by the Risk Management Committee. These include financial trades in a futures account on an exchange, with the intent of optimizing market opportunities.

~~The majority of TEP’s forward contracts are considered to be “normal purchases and sales”~~ of electric energy and are therefore not accounted for as derivatives. TEP records revenues on its “normal sales” and expenses on its “normal purchases” in the period in which the energy is delivered. ~~From time to time, however,~~ TEP also enters into forward contracts that are not considered to be “normal purchases and sales” and therefore are accounted for as derivatives. When TEP has derivative forward contracts, it marks them to market using actively quoted prices obtained from brokers for power traded over-the-counter at Palo Verde and at other Southwestern U.S. trading hubs. TEP believes that these broker quotations used to calculate the mark-to-market values represent accurate measures of the fair values of TEP’s positions because of the short-term nature of TEP’s positions, as limited by risk management policies, and the liquidity in the short-term market.

Long-Term Wholesale Sales

Through the end of the contract in May 2016, SRP is required to purchase 500,000 MWh of

on-peak energy per ~~year.~~year from TEP. TEP does not receive a demand charge and the price of energy is based on a discount to the price of on-peak power on the Palo Verde Market Index. As of February ~~21, 2012,~~14, 2014, the average forward price of on-peak power on the Palo Verde Market Index for the calendar year ~~2012~~2014 was ~~$30.33~~$46 per MWh.

~~The chart below summarizes the annual~~

Each $5 change in ~~pre-tax income if~~ the per MWh market price of on-peak power ~~on the Palo Verde Market Index changes~~can affect annual pre-tax income by ~~$5 per MWh.~~

September 30, September 30,
     Change in Per MWh Price
     $5 Increase      $5 Decrease
     -Millions of Dollars-
Change in Pre-Tax Income
     $ 3         $ (3 )

approximately $3 million.

Natural Gas

TEP is also subject to commodity price risk from changes in the price of natural gas. In addition to energy from its coal-fired facilities, TEP typically uses power purchases, supplemented by generation from its gas-fired units to meet the summer peak demands of its retail customers and to meet local reliability needs. Some of these purchased power contracts are ~~price~~ indexed to natural gas prices. Short-term and spot power purchase prices are also closely correlated to natural gas prices. Due to its increasing ~~seasonal~~ gas and purchased power usage, TEP hedges a portion of its total natural gas exposure from plant fuel, gas-indexed power purchases, and spot market purchases with ~~fixed price contracts for a maximum of three years.~~various instruments up to 3 years in advance. TEP purchases its remaining gas fuel ~~needs~~ and ~~purchased~~ power needs in the spot and short-term markets.

As required by fair value accounting rules, for the year ended December 31, ~~2011,~~2013, TEP considered the impact of non-performance risk in the measurement of fair value of its derivative assets and derivative liabilities net of collateral posted. ~~The adjustment required for TEP was less than $0.5 million at December 31, 2011.~~

To adjust the value of its commodity derivatives to fair value in ~~Regulatory Assets~~regulatory assets or ~~Regulatory Liabilities,~~regulatory liabilities, TEP recorded the following net unrealized gains (losses):

September 30, September 30, September 30,
     2011    2010      2009
     - Millions of Dollars -
Unrealized Gains (Losses)
     $ (2 )    $ 4         $ 11



	2013		2012		2011
	Millions of Dollars
Unrealized Gains (Losses)	$	—	$	6	$	(2	)

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The chart below displays the valuation methodologies and maturities of TEP’s power and gas derivative contracts.

September 30, September 30, September 30, September 30,

Unrealized Gain (Loss) of TEP’s
Hedging Activities

     - Millions of Dollars -
Source of Fair Value at Dec. 31, 2011
     Maturity 0 –6
months    Maturity 6 –12
months    Maturity
over 1 yr.    Total
Unrealized
Gain
(Loss)
Prices actively quoted
     $ (3 )    $ (5 )    $ (3 )    $ (11 )
Prices based on models and other valuation methods
     —         1       1       2








Total
     $ (3 )    $ (4 )    $ (2 )    $ (9 )



	Unrealized Gain (Loss) of TEP’s Hedging Activities Millions of Dollars
Source of Fair Value at Dec. 31, 2013	Maturity 0 – 6 months			Maturity 6 – 12 months			Maturity over 1 yr.		Total Unrealized Gain (Loss)
Prices Actively Quoted	$	(1	)	$	1		$	1	$	1
Prices Based on Models and Other Valuation Methods	(1		)	(1		)	—		(2		)
Total	$	(2	)	$	—		$	1	$	(1	)

Sensitivity Analysis of Derivatives

TEP uses sensitivity analysis to measure the impact of favorable and unfavorable changes in market prices on the fair value of its derivative forward contracts. TEP records unrealized gains and losses as either a regulatory asset or regulatory liability. As contracts settle, the unrealized gains and losses are reversed and realized gains or losses are recorded to the PPFAC. ~~The chart below summarizes the~~For TEP's non-cash flow power hedges, a 10% change in the market price of power would affect unrealized net losses reported as a regulatory asset by approximately $1 million; for gas swaps and collars contracts, a 10% change in the market price of energy would affect unrealized net gains ~~or losses if market prices increase or decrease~~reported as a regulatory liability by ~~10%.~~

September 30, September 30,
     - Millions of Dollars -
Change in Market Price As of December 31, 2011
     10% Increase      10% Decrease
Non-Cash Flow Hedges

Forward power sales and purchase contracts
     $ 2         $ (2 )

approximately $3 million.

Coal

TEP is subject to commodity price risk from changes in the price of coal used to fuel its coal-fired generating plants.

~~In 2003, TEP amended and extended~~ This risk is mitigated through a PPFAC mechanism which allows for the ~~long-term~~recovery of costs from retail customers.

TEP's coal supply contract for Springerville Units 1 and 2 ~~through 2020 and~~expires in 2020. TEP expects coal reserves to be sufficient to supply the estimated requirements for Units 1 and 2 for their presently estimated remaining lives. ~~During the extension period from 2011 through 2020, the~~The coal price is determined by the cost of Powder River Basin coal delivered to Springerville Unit 3 subject to a floor and ceiling. ~~This range would be from $19.30 to $26.15 per ton. TEP estimates its future minimum annual payments under this contract to be $14 million from 2012 through 2020.~~

TEP does not have a long-term coal supply contract for Sundt Unit 4. TEP purchases coal for Sundt Unit 4 on the spot market and can supply that unit with natural gas when the price is competitive with coal. Coal burned at Sundt Unit 4 represents less than 10% of TEP’s total coal consumption. In December 2011, the take-or-pay obligations under a coal transportation agreement previously effective through December 2015 were terminated. As a result, TEP is relieved of a $4 million obligation recognized under this contract in December 2010. TEP reversed a $4 million regulatory asset. TEP has a short-term coal supply contract for Sundt Unit 4 ending December 31, 2012, and has hedged gas costs through September 2012.

TEP also participates in jointly-owned generating facilities at Four Corners, Navajo, and San Juan, where coal supplies are under long-term contracts administered by the operating agents. TEP expects coal reserves available to these three jointly-owned generating facilities to be sufficient for the remaining lives of the stations.

The contracts to purchase coal for use at the jointly-owned facilities require TEP to purchase minimum amounts of coal at an estimated average annual cost of $21 million for the next five years. SeeItem 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations, ~~UniSource~~UNS Energy Consolidated, Liquidity and Capital Resources, Contractual Obligations and Note 4.7.

UNS Electric

UNS Electric is exposed to commodity price risk from changes in the price for electricity and natural gas. This risk is mitigated through hedging practices, and UNS Electric has a PPFAC mechanism which allows for the recovery of purchased power and fuel costs from retail customers.

The PPFAC allows UNS Electric to recover its fuel, transmission, and purchased power costs, including demand charges, broker fees, and the prudent costs of contracts for hedging fuel and purchased power costs for its retail customers.

As a result of the 2013 UNS Electric Rate Order, UNS Electric's PPFAC rate reflects a weighted, 12-month rolling average of actual fuel and purchased power costs incurred by UNS Electric. The PPFAC rate adjusts monthly, but the change in the PPFAC rate is banded, so the new monthly PPFAC rate cannot increase or decrease the total average retail purchased power and fuel rate by more than 0.83 percent from the preceding month’s rate. UNS Electric is required to file for a PPFAC rate adjustment if the PPFAC bank balance is over-collected by more than $10 million on a billed-to-customer basis. At December 31, 2013, the PPFAC bank balance was over-collected by $14 million on a billed-to-customer basis. The new PPFAC rate effective on January 1, 2014 is designed to address any over- or under-collected balances. See Note 3.

UNS Electric enters into various power supply agreements for periods of one to five years. Certain of these contracts are at a fixed price per MW and others are indexed to natural gas prices. Because of the new 12-month rolling average structure of the current PPFAC, costs are expected to be recovered on a more timely basis.

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For UNS Electric’s forward power contracts, a 10% change in market prices would affect unrealized net losses reported as a regulatory asset by approximately $3 million.

UNS Electric hedges a portion of its natural gas exposure from gas-indexed purchased power agreements with fixed price contracts. In addition, UNS Electric hedges a portion of its anticipated natural gas exposure from plant fuel. UNS Electric will satisfy its remaining gas and purchased power needs through a combination of purchases in the short-term and spot markets.

As required by fair value accounting rules, for the year ended December 31, 2013, UNS Electric considered the impact of non-performance risk in the measurement of fair value of its derivative assets and derivative liabilities net of collateral posted.

To adjust the value of its commodity derivatives to fair value in regulatory assets or regulatory liabilities, UNS Electric recorded the following net unrealized gains (losses):



	2013		2012		2011
	Millions of Dollars
Unrealized Gains (Losses)	$	5	$	9	$	(1	)

For UNS Electric’s forward gas contracts, a 10% increase in market prices would result in an increase in unrealized net gains reported as a regulatory liability by approximately $5 million. A 10% decrease in market prices would result in a decrease in unrealized net gains reported as a regulatory liability by approximately $4 million.

UNS Gas

UNS Gas is subject to commodity price risk, primarily from the changes in the price of natural gas purchased for its customers. This risk is mitigated through the PGA mechanism which provides an adjustment to UNS Gas’ Retail Rates to recover the prudently incurred actual costs of gas and transportation. UNS Gas further reduces this risk by purchasing forward fixed price contracts or entering into financial gas swaps for a portion of its projected gas needs under its Price Stabilization Plan. ~~UNS Gas purchases at least 45% of its estimated gas needs in this manner.~~

As required by fair value accounting rules, for the year ended December 31, ~~2011,~~2013, UNS Gas considered the impact of non-performance risk in the measurement of fair value of its derivative assets and derivative liabilities net of collateral posted. ~~The adjustment required for UNS Gas was less than $0.5 million at December 31, 2011.~~

To adjust the value of its commodity derivatives to fair value in ~~Regulatory Assets~~regulatory assets or ~~Regulatory Liabilities,~~regulatory liabilities, UNS Gas recorded the following net unrealized ~~gains (losses):~~

September 30, September 30, September 30,
     2011    2010    2009
     - Millions of Dollars -
Unrealized Gains (Losses)
     $ (1 )    $ (2 )    $ 6

gains:



	2013		2012		2011
	Millions of Dollars
Unrealized Gains	$	4	$	6	$	1

For UNS Gas’ forward gas ~~purchase~~ contracts, a 10% ~~decrease~~change in market prices would result in an increase in unrealized net losses reported as a regulatory asset of $2 million, while a 10% increase in market prices would result in a decrease in unrealized net losses reported as a reduction in regulatory assets of $2 million.

~~UNS Electric~~

UNS Electric is exposed to commodity price risk from changes in the price for electricity and natural gas. This risk is mitigated through a PPFAC mechanism which allows for the recovery of costs from retail customers. The PPFAC mechanism has a forward component and a true-up component. The forward component of the PPFAC rate is based on forecasted fuel and purchased power costs. The true-up component reconciles actual fuel and

purchased power costs with the amounts collected in the prior year and any amounts under/over-collected will be collected from/credited to customers. If the actual price of power is higher than the forecasted PPFAC rate, UNS Electric is exposed to the price difference until the subsequent 12-month period when the true-up component is adjusted to allow the recovery of this difference.

UNS Electric enters into various power supply agreements for periods of one to five years. Certain of these contracts are at a fixed price per MW and others are indexed to natural gas prices. UNS Electric estimates its future minimum payments under these contracts to be $51 million in 2012, $37 million in 2013, and $28 million in 2014 based on natural gas prices at December 31, 2011.

Because a portion of the costs under these contracts will vary from period to period based on the market price of gas, the PPFAC, as currently structured, may not provide recovery of the costs incurred under these new contracts on a timely basis.

~~For UNS Electric’s forward power sales and purchase contracts, a 10% decrease in market prices would result in an increase in~~affect unrealized net gains reported as a regulatory ~~asset of $5 million, while a 10% increase in market prices would result in a decrease in unrealized net gains reported as a reduction in regulatory assets of $5~~liability by approximately $2 million.

UNS Electric hedges a portion of its natural gas exposure from gas-indexed purchased power agreements with fixed price contracts. In addition, UNS Electric hedges a portion of its anticipated natural gas exposure from plant fuel. UNS Electric currently has approximately 53% of this aggregate summer exposure hedged for the summer of 2012. UNS Electric will satisfy its remaining gas and purchased power needs through a combination of additional forward purchases and purchases in the short-term and spot markets.

UNS Electric considered the impact of non-performance risk in the measurement of fair value of its derivative assets and derivative liabilities net of collateral posted. The adjustment required for UNS Electric was less than $0.5 million at December 31, 2011.

~~To adjust the value of its commodity derivatives to fair value in Regulatory Assets or Regulatory Liabilities, UNS Electric recorded the following net unrealized gains (losses):~~

September 30, September 30, September 30,
     2011      2010    2009
     - Millions of Dollars-
Unrealized Gains (Losses)
     $ 1         $ (2 )    $ 12

For UNS Electric’s forward gas purchase contracts, a 10% decrease in market prices would result in an increase in unrealized net losses reported as a regulatory asset of $1 million, while a 10% increase in market prices would result in a decrease in unrealized net losses reported as a reduction in regulatory assets of $1 million.

Credit Risk

~~UniSource~~

UNS Energy is exposed to credit risk in its energy-related marketing activities related to potential ~~nonperformance~~non-performance by counterparties. We manage the risk of counterparty default by performing financial credit reviews, setting limits, monitoring exposures, requiring collateral when needed, and using standard agreements which allow for the netting of current period exposures to and from a single counterparty. We calculate counterparty credit exposure by adding any outstanding receivable (net of amounts payable if a netting agreement exists) to the mark-to-market value of any forward contracts. A positive ~~number~~value means that we are exposed to the creditworthiness of our counterparties. If exposure exceeds credit limits or contractual collateral thresholds, we may request that a counterparty provide credit enhancement in the form of cash collateral or a letter of credit. Conversely, a negative ~~exposure~~value means that a counterparty is exposed to the creditworthiness of TEP, UNS Gas, or UNS Electric. If such exposure exceeds credit limits or collateral thresholds, we may be required to post collateral in the form of cash or ~~letters of credit.~~

LOCs.

TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas each have entered into short-term and long-term transactions with several financial institution counterparties with terms of one month through five years. ~~Due to the recent turmoil in the financial and credit markets, we have been closely monitoring our transactions with financial institutions.~~ As of December 31, ~~2011,~~2013, the combined credit exposure to TEP, UNS ~~Gas~~Electric, and UNS ~~Electric~~Gas from financial institution counterparties was approximately $4$3 million.

As of December 31, ~~2011,~~2013, TEP’s total credit exposure related to its wholesale marketing and gas hedging activities was approximately ~~$17~~$15 million. TEP had one non-investment grade counterparty with exposure of greater than 10% of its total credit exposure, totaling approximately $4$3 million. TEP’s total exposure to non-investment grade counterparties was $4$3 million.

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At December 31, ~~2011,~~2013, TEP posted no cash collateral and less than $1 million in ~~letters of credit~~LOCs as credit enhancements with its counterparties, and did not hold any collateral from its counterparties.

UNS Gas is subject to credit risk from non-performance by its supply and hedging counterparties to the extent that these contracts have a mark-to-market value in favor of UNS Gas. As of December 31, ~~2011,~~2013, UNS Gas had purchased under fixed price contracts approximately ~~32%~~30% of its expected consumption for the ~~2012/2013~~2014/2015 winter season. At December 31, ~~2011,~~2013, UNS Gas had no mark-to-market credit exposure under its supply and hedging contracts.As of December 31, ~~2011,~~2013 UNS Gas had posted no cash collateral and no ~~letters of credit~~LOCs as credit enhancements with its counterparties, and did not hold any collateral from counterparties.

UNS Electric enters into energy purchase agreements as well as gas hedging contracts to hedge the risk in its gas-indexed power purchase agreements. To the extent that such contracts have a positive mark-to-market value, UNS Electric is exposed to credit risk under those contracts. At December 31, ~~2011,~~2013, UNS Electric had less than $1 million in credit exposure under such contracts. As of December 31, ~~2011,~~2013, UNS Electric had posted $6less than $1 million in ~~letters of credit~~LOCs and no cash collateral as credit enhancements with its counterparties, and had not collected any collateral margin from its counterparties.

ITEM 8. – CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~UniSource~~

UNS Energy—Management’s Report on Internal Controls Over Financial Reporting

~~UniSource~~

UNS Energy’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of ~~UniSource~~UNS Energy’s internal control over financial reporting as of December 31, ~~2011.~~2013. In making this assessment, management used the criteria set forth by the 1992 Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.

Based on management’s assessment using those criteria management has concluded that, as of December 31, ~~2011, UniSource~~2013, UNS Energy’s internal control over financial reporting was effective.

The effectiveness of ~~UniSource~~UNS Energy’s internal control over financial reporting as of December 31, ~~2011,~~2013, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report in Item 8 of this Annual Report on Form 10-K.

Tucson Electric Power Company—Management’s Report on Internal Controls Over Financial Reporting

~~Tucson Electric Power Company’s~~

TEP’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of ~~Tucson Electric Power Company’s~~TEP’s internal control over financial reporting as of December 31, ~~2011.~~2013. In making this assessment, management used the criteria set forth by the ~~Committee of Sponsoring Organizations of the Treadway Commission (COSO) in~~1992 COSO Internal Control – Integrated Framework.

Based on management’s assessment using those criteria, management has concluded that, as of December 31, ~~2011, Tucson Electric Power Company’s~~2013, TEP’s internal control over financial reporting was effective.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

~~UniSource~~

UNS Energy Corporation:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of ~~UniSource~~UNS Energy Corporation and its subsidiaries at December 31, ~~2011~~2013 and December 31, ~~2010,~~2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2011~~2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the ~~Index~~index appearing under Item 15(a)(2) ~~present~~presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2011,~~2013, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal ~~Controls Over~~Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

~~Phoenix, Arizona~~

February ~~27, 2012~~25, 2014

K-73

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of

Tucson Electric Power Company:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Tucson Electric Power Company and its subsidiaries at December 31, ~~2011~~2013 and December 31, ~~2010~~2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2011~~2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the ~~Index~~index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

~~Phoenix, Arizona~~

February ~~27, 2012~~25, 2014

K-74

~~UNISOURCE~~

UNS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

September 30, September 30, September 30,
     Years Ended December 31,
     2011    2010    2009
     - Thousands of Dollars -
     (Except Per Share Amounts)
Operating Revenues

Electric Retail Sales
     $ 1,085,822       $ 1,051,002       $ 1,047,619
Electric Wholesale Sales
     163,159       151,962       131,255
California Power Exchange (CPX) Provision for Wholesale Refunds
     —         (2,970 )    (4,172 )
Gas Revenue
     145,053       141,036       144,609
Other Revenues
     115,481       112,936       77,741






Total Operating Revenues
     1,509,515       1,453,966       1,397,052






Operating Expenses

Fuel
     324,520       295,652       296,248
Purchased Energy
     307,423       307,288       296,861
Transmission
     7,334       10,945       10,181
Decrease to Reflect PPFAC/PGA Recovery Treatment
     (4,932 )    (29,622 )    (14,553 )






Total Fuel and Purchased Energy
     634,345       584,263       588,737
Other Operations and Maintenance
     379,220       370,037       333,579
Depreciation
     133,832       128,215       144,960
Amortization
     30,983       28,094       31,058
Taxes Other Than Income Taxes
     49,463       46,243       45,858






Total Operating Expenses
     1,227,843       1,156,852       1,144,192






Operating Income
     281,672       297,114       252,860






Other Income (Deductions)

Interest Income
     4,568       7,779       12,072
Other Income
     8,293       11,038       18,063
Other Expense
     (5,249 )    (15,202 )    (5,292 )






Total Other Income (Deductions)
     7,612       3,615       24,843






Interest Expense

Long-Term Debt
     73,217       65,020       58,134
Capital Leases
     40,359       46,740       49,270
Other Interest Expense
     2,535       1,651       3,468
Interest Capitalized
     (3,753 )    (2,587 )    (2,302 )






Total Interest Expense
     112,358       110,824       108,570






Income Before Income Taxes
     176,926       189,905       169,133
Income Tax Expense
     66,951       76,921       63,232






Net Income
     $ 109,975       $ 112,984       $ 105,901






Weighted-Average Shares of Common Stock Outstanding (000)

Basic
     36,962       36,415       35,858






Diluted
     41,609       41,041       40,450






Earnings per Share

Basic
     $ 2.98       $ 3.10       $ 2.95






Diluted
     $ 2.75       $ 2.86       $ 2.73






Dividends Declared per Share
     $ 1.68       $ 1.56       $ 1.16



	Years Ended December 31,
	2013			2012			2011
	Thousands of Dollars
	(Except Per Share Amounts)
Operating Revenues
Electric Retail Sales	$	1,102,769		$	1,087,279		$	1,085,822
Electric Wholesale Sales	135,160			125,414			132,346
Gas Retail Sales	125,478			123,133			145,053
Other Revenues	121,153			125,940			115,481
Total Operating Revenues	1,484,560			1,461,766			1,478,702
Operating Expenses
Fuel	332,279			327,832			324,520
Purchased Energy	252,532			224,696			276,610
Transmission and Other PPFAC Recoverable Costs	23,012			14,540			7,334
Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment	(16,313		)	32,246			(4,932		)
Total Fuel and Purchased Energy	591,510			599,314			603,532
Operations and Maintenance	389,699			383,689			379,220
Depreciation	149,615			141,303			133,832
Amortization	27,557			35,784			30,983
Taxes Other Than Income Taxes	54,683			49,881			49,428
Total Operating Expenses	1,213,064			1,209,971			1,196,995
Operating Income	271,496			251,795			281,707
Other Income (Deductions)
Interest Income	534			1,106			4,568
Other Income	7,880			4,928			7,958
Other Expense	(3,463		)	(7,723		)	(5,278		)
Appreciation in Fair Value of Investments	2,833			1,892			329
Total Other Income (Deductions)	7,784			203			7,577
Interest Expense
Long-Term Debt	71,180			71,909			73,217
Capital Leases	25,140			33,613			40,359
Other Interest Expense	538			1,983			2,535
Interest Capitalized	(3,483		)	(2,153		)	(3,753		)
Total Interest Expense	93,375			105,352			112,358
Income Before Income Taxes	185,905			146,646			176,926
Income Tax Expense	58,427			55,727			66,951
Net Income	$	127,478		$	90,919		$	109,975
Weighted-Average Shares of Common Stock Outstanding (000)
Basic	41,618			40,362			36,962
Diluted	41,975			41,755			41,609
Earnings Per Share
Basic	$	3.06		$	2.25		$	2.98
Diluted	$	3.04		$	2.20		$	2.75
Dividends Declared Per Share	$	1.74		$	1.72		$	1.68

See Notes to Consolidated Financial Statements.

~~UNISOURCE~~

UNS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

September 30, September 30, September 30,
     Years Ended December 31,
     2011    2010    2009
     - Thousands of Dollars -
Cash Flows from Operating Activities

Cash Receipts from Electric Retail Sales
     $ 1,163,537       $ 1,142,364       $ 1,145,051
Cash Receipts from Electric Wholesale Sales
     183,151       194,580       175,679
Cash Receipts from Gas Sales
     159,529       157,397       162,725
Cash Receipts from Operating Springerville Units 3 & 4
     104,754       102,563       68,951
Cash Receipts from Wholesale Gas Sales
     12,404       422       716
Performance Deposits Received
     7,050       18,470       34,630
Interest Received
     6,334       10,026       13,470
Income Tax Refunds Received
     4,672       341       20,242
Other Cash Receipts
     23,937       32,011       26,176
Purchased Energy Costs Paid
     (328,713 )    (364,132 )    (334,481 )
Payment of Other Operations and Maintenance Costs
     (291,607 )    (255,988 )    (246,895 )
Fuel Costs Paid
     (281,441 )    (247,484 )    (300,810 )
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
     (179,766 )    (163,037 )    (161,574 )
Wages Paid, Net of Amounts Capitalized
     (122,370 )    (125,893 )    (122,245 )
Interest Paid, Net of Amounts Capitalized
     (68,027 )    (59,749 )    (54,641 )
Capital Lease Interest Paid
     (32,103 )    (38,646 )    (38,598 )
Wholesale Gas Costs Paid
     (11,822 )    —         —
Performance Deposits Paid
     (4,550 )    (19,220 )    (22,260 )
Income Taxes Paid
     (700 )    (22,797 )    (9,050 )
Other Cash Payments
     (6,949 )    (14,308 )    (9,776 )






Net Cash Flows - Operating Activities
     337,320       346,920       347,310






Cash Flows from Investing Activities

Capital Expenditures
     (374,122 )    (279,240 )    (294,020 )
Purchase of Intangibles - Renewable Energy Credits
     (5,992 )    (7,514 )    —
Purchase of Sundt Unit 4 Lease Asset
     —         (51,389 )    —
Purchase of Springerville Lease Debt
     —         —         (31,375 )
Prepayment Deposits on UED Debt
     —         (3,188 )    (3,625 )
Other Cash Payments
     (578 )    (2,302 )    (868 )
Return of Investments in Springerville Lease Debt
     38,353       25,615       12,736
Other Cash Receipts
     15,251       12,958       20,508






Net Cash Flows - Investing Activities
     (327,088 )    (305,060 )    (296,644 )






Cash Flows from Financing Activities

Proceeds from Borrowings Under Revolving Credit Facilities
     391,000       239,000       203,000
Proceeds from Issuance of Long-Term Debt
     340,285       127,815       —
Proceeds from Stock Options Exercised
     8,115       13,391       3,441
Proceeds from Issuance of Short-Term Debt
     —         —         30,000
Other Cash Receipts
     4,743       12,406       8,937
Repayments of Borrowings Under Revolving Credit Facilities
     (351,000 )    (268,500 )    (198,000 )
Repayments of Long-Term Debt
     (252,125 )    (51,592 )    (6,000 )
Payments of Capital Lease Obligations
     (74,381 )    (55,997 )    (24,192 )
Common Stock Dividends Paid
     (61,904 )    (56,590 )    (41,429 )
Payments of Debt Issue/Retirement Costs
     (4,361 )    (8,341 )    (2,268 )
Other Cash Payments
     (1,813 )    (2,775 )    (2,405 )






Net Cash Flows - Financing Activities
     (1,441 )    (51,183 )    (28,916 )






Net Increase (Decrease) in Cash and Cash Equivalents
     8,791       (9,323 )    21,750
Cash and Cash Equivalents, Beginning of Year
     67,599       76,922       55,172






Cash and Cash Equivalents, End of Year
     $ 76,390       $ 67,599       $ 76,922






Non-Cash Financing Activity

Repayment of UED Short-Term Debt
     $ —         $ (3,188 )    $ (3,625 )

~~See Note 15 for supplemental cash flow information.~~

COMPREHENSIVE INCOME



	Years Ended December 31,
	2013		2012			2011
	Thousands of Dollars
Comprehensive Income
Net Income	$	127,478	$	90,919		$	109,975
Other Comprehensive Income (Loss)
Net Changes in Fair Value of Cash Flow Hedges, net of income tax (expense) benefit of $(1,850), $(743), and $964	2,825		1,134			(1,473		)
SERP Benefit Amortization, net of income tax (expense) benefit of $(572), $608, and $(804)	916		(840		)	1,158
Total Other Comprehensive Income (Loss), Net of Tax	3,741		294			(315		)
Total Comprehensive Income	$	131,219	$	91,213		$	109,660

See Notes to Consolidated Financial Statements.

~~UNISOURCE~~

K-76

UNS ENERGY CORPORATION

CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF CASH FLOWS

September 30, September 30,
     December 31,
     2011    2010
     - Thousands of Dollars -
ASSETS

Utility Plant

Plant in Service
     $ 4,856,108       $ 4,452,928
Utility Plant Under Capital Leases
     582,669       583,374
Construction Work in Progress
     89,749       210,971




Total Utility Plant
     5,528,526       5,247,273
Less Accumulated Depreciation and Amortization
     (1,869,300 )    (1,824,843 )
Less Accumulated Amortization of Capital Lease Assets
     (476,963 )    (460,932 )




Total Utility Plant - Net
     3,182,263       2,961,498




Investments and Other Property

Investments in Lease Debt and Equity
     65,829       103,844
Other
     34,205       61,676




Total Investments and Other Property
     100,034       165,520




Current Assets

Cash and Cash Equivalents
     76,390       67,599
Accounts Receivable - Customer
     94,585       98,333
Unbilled Accounts Receivable
     51,464       53,084
Allowance for Doubtful Accounts
     (5,572 )    (6,125 )
Fuel Inventory
     33,263       29,216
Materials and Supplies
     82,649       65,832
Derivative Instruments
     11,966       5,214
Regulatory Assets - Current
     97,056       56,962
Deferred Income Taxes - Current
     23,158       30,822
Other
     32,577       30,091




Total Current Assets
     497,536       431,028




Regulatory and Other Assets

Regulatory Assets - Noncurrent
     173,199       192,966
Derivative Instruments
     2,019       9,806
Other Assets
     30,180       30,425




Total Regulatory and Other Assets
     205,398       233,197




Total Assets
     $ 3,985,231       $ 3,791,243



	Years Ended December 31,
	2013			2012			2011
	Thousands of Dollars
Cash Flows from Operating Activities
Cash Receipts from Electric Retail Sales	$	1,208,967		$	1,197,390		$	1,163,537
Cash Receipts from Electric Wholesale Sales	160,947			149,722			183,151
Cash Receipts from Gas Retail Sales	138,775			141,590			159,529
Cash Receipts from Operating Springerville Units 3 & 4	114,258			107,927			104,754
Cash Receipts from Gas Wholesale Sales	3,740			5,233			12,404
Interest Received	517			2,947			6,334
Income Tax Refunds Received	11			1,821			4,672
Performance Deposits Received	—			200			7,050
Other Cash Receipts	35,142			24,105			23,937
Fuel Costs Paid	(285,812		)	(321,355		)	(277,386		)
Purchased Energy Costs Paid	(280,920		)	(250,231		)	(328,713		)
Payment of Operations and Maintenance Costs	(260,453		)	(291,512		)	(295,662		)
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized	(182,488		)	(187,257		)	(179,766		)
Wages Paid, Net of Amounts Capitalized	(131,710		)	(127,176		)	(122,370		)
Interest Paid, Net of Amounts Capitalized	(66,610		)	(69,478		)	(68,027		)
Capital Lease Interest Paid	(22,553		)	(28,788		)	(32,103		)
Income Taxes Paid	(316		)	—			(700		)
Performance Deposits Paid	—			(200		)	(4,550		)
Wholesale Gas Costs Paid	—			—			(11,822		)
Other Cash Payments	(10,983		)	(6,829		)	(6,949		)
Net Cash Flows—Operating Activities	420,512			348,109			337,320
Cash Flows from Investing Activities
Capital Expenditures	(325,886		)	(307,277		)	(374,122		)
Purchase of Intangibles—Renewable Energy Credits	(26,948		)	(10,317		)	(5,992		)
Return of Investments in Springerville Lease Debt	9,104			19,278			38,353
Change in Restricted Cash	4,134			(1,445		)	—
Proceeds from Note Receivable	—			15,000			—
Other, net	5,786			21,862			14,673
Net Cash Flows—Investing Activities	(333,810		)	(262,899		)	(327,088		)
Cash Flows from Financing Activities
Proceeds from Borrowings Under Revolving Credit Facilities	139,000			359,000			391,000
Repayments of Borrowings Under Revolving Credit Facilities	(108,000		)	(381,000		)	(351,000		)
Payments of Capital Lease Obligations	(99,621		)	(89,452		)	(74,381		)
Common Stock Dividends Paid	(72,234		)	(69,648		)	(61,904		)
Proceeds from Stock Options Exercised	3,831			3,570			8,115
Proceeds from Common Stock Issuance	464			—			—
Proceeds from Issuance of Long-Term Debt	—			149,513			340,285
Repayments of Long-Term Debt	—			(9,341		)	(252,125		)
Other, net	818			(324		)	(1,431		)
Net Cash Flows—Financing Activities	(135,742		)	(37,682		)	(1,441		)
Net Increase (Decrease) in Cash and Cash Equivalents	(49,040		)	47,528			8,791
Cash and Cash Equivalents, Beginning of Year	123,918			76,390			67,599
Cash and Cash Equivalents, End of Year	$	74,878		$	123,918		$	76,390

See Note 14 for supplemental cash flow information.

See Notes to Consolidated Financial Statements.

~~(Consolidated Balance Sheets Continued)~~

~~UNISOURCE~~

K-77

UNS ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

September 30, September 30,
     December 31,
     2011      2010
     - Thousands of Dollars -
CAPITALIZATION AND OTHER LIABILITIES

Capitalization

Common Stock Equity
     $ 888,474         $ 830,756
Capital Lease Obligations
     352,720         429,074
Long-Term Debt
     1,517,373         1,352,977




Total Capitalization
     2,758,567         2,612,807




Current Liabilities

Current Obligations Under Capital Leases
     77,482         60,347
Current Maturities of Long-Term Debt
     —           57,000
Borrowing Under Revolving Credit Facility
     10,000         —
Accounts Payable - Trade
     109,759         108,950
Interest Accrued
     38,302         39,120
Accrued Taxes Other than Income Taxes
     41,997         39,140
Accrued Employee Expenses
     24,917         26,969
Customer Deposits
     32,485         29,795
Regulatory Liabilities - Current
     41,911         69,483
Derivative Instruments
     36,467         30,574
Other
     5,151         1,678




Total Current Liabilities
     418,471         463,056




Deferred Credits and Other Liabilities

Deferred Income Taxes - Noncurrent
     300,326         246,466
Regulatory Liabilities - Noncurrent
     234,945         201,329
Derivative Instruments
     20,403         22,969
Pension and Other Postretirement Benefits
     139,356         127,343
Other
     113,163         117,273




Total Deferred Credits and Other Liabilities
     808,193         715,380




Commitments, Contingencies, and Proposed Environmental Matters (Note 4)






Total Capitalization and Other Liabilities
     $ 3,985,231         $ 3,791,243



	December 31,
	2013			2012
	Thousands of Dollars
ASSETS
Utility Plant
Plant in Service	$	5,192,122		$	5,005,768
Utility Plant Under Capital Leases	637,957			582,669
Construction Work in Progress	201,959			128,621
Total Utility Plant	6,032,038			5,717,058
Less Accumulated Depreciation and Amortization	(1,982,524		)	(1,921,733		)
Less Accumulated Amortization of Capital Lease Assets	(514,677		)	(494,962		)
Total Utility Plant—Net	3,534,837			3,300,363
Investments and Other Property
Investments in Lease Equity	36,194			36,339
Other	34,971			36,537
Total Investments and Other Property	71,165			72,876
Current Assets
Cash and Cash Equivalents	74,878			123,918
Accounts Receivable—Customer	104,596			93,742
Unbilled Accounts Receivable	52,403			53,568
Allowance for Doubtful Accounts	(6,833		)	(6,545		)
Materials and Supplies	88,085			93,322
Deferred Income Taxes—Current	59,681			34,260
Regulatory Assets—Current	52,763			51,619
Fuel Inventory	44,317			62,019
Derivative Instruments	5,629			3,165
Investments in Lease Debt	—			9,118
Other	15,354			33,567
Total Current Assets	490,873			551,753
Regulatory and Other Assets
Regulatory Assets—Noncurrent	150,584			191,077
Derivative Instruments	1,180			3,801
Other Assets	24,430			20,559
Total Regulatory and Other Assets	176,194			215,437
Total Assets	$	4,273,069		$	4,140,429

See Notes to Consolidated Financial Statements.

~~(Consolidated Balance Sheets Concluded)~~(Continued)

~~UNISOURCE~~

K-78

UNS ENERGY CORPORATION

CONSOLIDATED ~~STATEMENTS OF CAPITALIZATION~~

September 30, September 30, September 30, September 30,
               December 31,
               2011    2010
               - Thousands of Dollars -
COMMON STOCK EQUITY

Common Stock-No Par Value
               $ 725,903       $ 715,687

2011

2010

Shares Authorized
     75,000,000      75,000,000
Shares Outstanding
     36,918,024      36,541,954
Accumulated Earnings
               172,655       124,838
Accumulated Other Comprehensive Loss
               (10,084 )    (9,769 )




Total Common Stock Equity
               888,474       830,756




PREFERRED STOCK

No Par Value, 1,000,000 Shares Authorized, None Outstanding
               —         —




CAPITAL LEASE OBLIGATIONS

Springerville Unit 1
               253,481       302,229
Springerville Coal Handling Facilities
               65,022       76,583
Springerville Common Facilities
               111,699       110,571
Other
               —         38




Total Capital Lease Obligations
               430,202       489,421
Less Current Maturities
               (77,482 )    (60,347 )




Total Long-Term Capital Lease Obligations
               352,720       429,074




LONG-TERM DEBT

Issue

Maturity

Interest Rate

UniSource Energy:

Convertible Senior Notes
     2035      4.50%      150,000       150,000
Credit Agreement
     2016      Variable      57,000       27,000
Tucson Electric Power Company:

Variable Rate IDBs
     2014 - 2016      Variable      215,300       365,300
Unsecured Fixed Rate IDBs
     2020 - 2040      3.25% to 6.375%      615,855       638,315
Unsecured Notes
     2021      5.15%      249,218       —
UNS Gas and UNS Electric:

Senior Unsecured Notes
     2015 - 2026      5.39% to 7.1%      230,000       200,000
UED:

Secured Term Loan
     2012      Variable      —         29,362
Total Stated Principal Amount
               1,517,373       1,409,977
Less Current Maturities
               —         (57,000 )




Total Long-Term Debt
               1,517,373       1,352,977




Total Capitalization
               $ 2,758,567       $ 2,612,807

BALANCE SHEETS



	December 31,
	2013		2012
	Thousands of Dollars
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity	$	1,130,784	$	1,065,465
Capital Lease Obligations	149,767		262,138
Long-Term Debt	1,507,070		1,498,442
Total Capitalization	2,787,621		2,826,045
Current Liabilities
Current Obligations Under Capital Leases	167,659		90,583
Borrowings Under Revolving Credit Facilities	22,000		—
Accounts Payable—Trade	117,503		107,740
Regulatory Liabilities—Current	53,935		43,516
Accrued Taxes Other than Income Taxes	43,880		41,939
Customer Deposits	30,671		34,048
Accrued Employee Expenses	28,148		24,094
Accrued Interest	27,786		31,950
Derivative Instruments	7,534		14,742
Other	17,775		10,517
Total Current Liabilities	516,891		399,129
Deferred Credits and Other Liabilities
Deferred Income Taxes—Noncurrent	481,662		364,756
Regulatory Liabilities—Noncurrent	302,482		279,111
Pension and Other Retiree Benefits	90,923		159,401
Derivative Instruments	7,100		12,709
Other	86,390		99,278
Total Deferred Credits and Other Liabilities	968,557		915,255
Commitments, Contingencies, and Environmental Matters (Note 7)
Total Capitalization and Other Liabilities	$	4,273,069	$	4,140,429

See Notes to Consolidated Financial Statements.

~~UNISOURCE~~

(Concluded)

K-79

UNS ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CAPITALIZATION

December 31,
2013 2012
Thousands of Dollars
COMMON STOCK EQUITY
Common Stock-No Par Value $ 889,301
$ 882,138
2013 2012
Shares Authorized 75,000,000
75,000,000

Shares Outstanding 41,538,343
41,343,851

Retained Earnings 247,532
193,117
Accumulated Other Comprehensive Loss (6,049 ) (9,790 )
Total Common Stock Equity 1,130,784
1,065,465
PREFERRED STOCK
No Par Value, 1,000,000 Shares Authorized, None Outstanding —
—
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 192,871
196,843
Springerville Coal Handling Facilities 27,878
48,038
Springerville Common Facilities 96,677
107,840
Total Capital Lease Obligations 317,426
352,721
Less Current Maturities (167,659 ) (90,583 )
Total Long-Term Capital Lease Obligations 149,767
262,138
LONG-TERM DEBT
Maturity Interest Rate
UNS Energy:
Credit Agreement 2016 Variable 54,000
45,000
Tucson Electric Power Company:
Variable Rate Bonds 2016 - 2032 Variable 214,802
215,300
Fixed Rate Bonds 2020 - 2040 3.85% – 5.75% 1,008,268
1,008,142
UNS Electric and UNS Gas:
Senior Notes 2015 – 2026 5.39% – 7.10% 200,000
200,000
UNS Electric:
Term Loan 2015 Variable 30,000
30,000
Total Long-Term Debt 1,507,070
1,498,442
Total Capitalization $ 2,787,621
$ 2,826,045

See Notes to Consolidated Financial Statements.

K-80

UNS ENERGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY ~~AND COMPREHENSIVE INCOME~~

September 30, September 30, September 30, September 30, September 30,
Common
Shares
Outstanding* Common
Stock Accumulated
Earnings Accumulated
Other
Comprehensive
Loss Total
Stockholders’
Equity
- Thousands of Dollars -
Balances at December 31, 2008
35,458    $ 687,360    $ 5,590    $ (6,855 ) $ 686,095

Comprehensive Income:

2009 Net Income
105,901    105,901
Unrealized Loss on Cash Flow Hedges (net of $33 income taxes)
51    51
Reclassification of Realized Losses on Cash Flow Hedges to Net Income (net of $690 income taxes)
1,053    1,053
Employee Benefit Obligations Amortization of SERP Net Prior Service Cost Included in Net Periodic Benefit Cost (net of $33 income taxes)
(51 ) (51 )

Total Comprehensive Income
106,954
Dividends, Including Non-Cash Dividend Equivalents
(42,566 ) (42,566 )
Shares Issued under Deferred Compensation Plans
10    279    279
Shares Issued for Stock Options
282    4,077    4,077
Shares Issued Under Stock Compensation Plans
101    —      —
Other
4,490    4,490

Balances at December 31, 2009
35,851    $ 696,206    $ 68,925    $ (5,802 ) $ 759,329

Comprehensive Income:

2010 Net Income
112,984    112,984
Unrealized Loss on Cash Flow Hedges (net of $4,216 income taxes)
(6,431 ) (6,431 )
Reclassification of Realized Losses on Cash Flow Hedges to Net Income (net of $2,140 income taxes)
3,264    3,264
Employee Benefit Obligations Amortization of SERP Net Prior Service Cost Included in Net Periodic Benefit Cost (net of $523 income taxes)
(800 ) (800 )

Total Comprehensive Income
109,017
Dividends, Including Non-Cash Dividend Equivalents
(57,071 ) (57,071 )
Shares Issued under Deferred Compensation Plans
16    519    519
Shares Issued for Stock Options
660    12,756    12,756
Shares Issued Under Stock Compensation Plans
15    —      —
Other
6,206    6,206

Balances at December 31, 2010
36,542    $ 715,687    $ 124,838    $ (9,769 ) $ 830,756

Comprehensive Income:

2011 Net Income
109,975    109,975
Unrealized Loss on Cash Flow Hedges (net of $2,376 income taxes)
(3,626 ) (3,626 )
Reclassification of Realized Losses on Cash Flow Hedges to Net Income (net of $1,412 income taxes)
2,153    2,153
Employee Benefit Obligations Amortization of SERP Net Prior Service Cost Included in Net Periodic Benefit Cost (net of $804 income taxes)
1,158    1,158

Total Comprehensive Income
109,660
Dividends, Including Non-Cash Dividend Equivalents
(62,158 ) (62,158 )
Shares Issued for Stock Options
319    8,176    8,176
Shares Issued Under Stock Compensation Plans
57    —      —
Other
2,040    2,040

Balances at December 31, 2011
36,918    $ 725,903    $ 172,655    $ (10,084 ) $ 888,474

*	~~UniSource Energy has 75 million authorized shares of Common Stock.~~



	Common Shares Outstanding	Common Stock		Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Thousands of Shares	Thousands of Dollars
Balances at December 31, 2010	36,542	$	715,687	$	124,838		$	(9,769	)	$	830,756
Net Income				109,975						109,975
Other Comprehensive Loss, net of tax							(315		)	(315		)
Dividends Declared				(62,158		)				(62,158		)
Shares Issued for Stock Options	319	8,176								8,176
Shares Issued under Performance Share Awards	57	—								—
Share-based Compensation		2,040								2,040
Balances at December 31, 2011	36,918	725,903		172,655			(10,084		)	888,474
Net Income				90,919						90,919
Other Comprehensive Income, net of tax							294			294
Dividends Declared				(70,457		)				(70,457		)
Shares Issued on Conversion of Notes and Related Tax Effect	4,262	149,805								149,805
Shares Issued for Stock Options	133	3,511								3,511
Shares Issued under Performance Share Awards	31	—								—
Share-based Compensation		2,919								2,919
Balances at December 31, 2012	41,344	882,138		193,117			(9,790		)	1,065,465
Net Income				127,478						127,478
Other Comprehensive Income, net of tax							3,741			3,741
Dividends Declared				(73,063		)				(73,063		)
Shares Issued under Dividend Reinvestment Plan	10	464								464
Shares Issued for Stock Options	127	3,831								3,831
Shares Issued under Performance Share Awards	57	—								—
Share-based Compensation		2,868								2,868
Balances at December 31, 2013	41,538	$	889,301	$	247,532		$	(6,049	)	$	1,130,784

We describe limitations on our ability to pay dividends in Note 7.

13.

See Notes to Consolidated Financial Statements.

K-81

TUCSON ELECTRIC POWER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

September 30, September 30, September 30,
     Years Ended December 31,
     2011    2010    2009
     - Thousands of Dollars -
Operating Revenues

Electric Retail Sales
     $ 903,930       $ 868,188       $ 867,516
Electric Wholesale Sales
     129,861       141,103       153,306
California Power Exchange (CPX) Provision for Wholesale Refunds
     —         (2,970 )    (4,172 )
Other Revenues
     122,595       118,946       82,688






Total Operating Revenues
     1,156,386       1,125,267       1,099,338






Operating Expenses

Fuel
     318,268       284,744       279,303
Purchased Power
     105,766       118,716       144,529
Transmission
     (1,435 )    3,254       3,066
Decrease to Reflect PPFAC Recovery Treatment
     (6,165 )    (21,541 )    (18,186 )






Total Fuel and Purchased Energy
     416,434       385,173       408,712
Other Operations and Maintenance
     330,801       316,625       282,986
Depreciation
     104,894       99,510       116,970
Amortization
     34,650       32,196       35,931
Taxes Other Than Income Taxes
     40,226       37,732       37,406






Total Operating Expenses
     927,005       871,236       882,005






Operating Income
     229,381       254,031       217,333






Other Income (Deductions)

Interest Income
     3,567       6,707       11,471
Other Income
     5,693       6,629       10,996
Other Expense
     (12,037 )    (11,506 )    (9,589 )






Total Other Income (Deductions)
     (2,777 )    1,830       12,878






Interest Expense

Long-Term Debt
     49,858       42,378       36,226
Capital Leases
     40,358       46,734       49,258
Other Interest Expense
     1,127       433       1,571
Interest Capitalized
     (2,073 )    (1,880 )    (1,752 )






Total Interest Expense
     89,270       87,665       85,303






Income Before Income Taxes
     137,334       168,196       144,908
Income Tax Expense
     52,000       59,936       54,220






Net Income
     $ 85,334       $ 108,260       $ 90,688



	Years Ended December 31,
	2013			2012			2011
	Thousands of Dollars
Operating Revenues
Electric Retail Sales	$	934,357		$	915,879		$	903,930
Electric Wholesale Sales	132,500			111,194			129,861
Other Revenues	129,833			134,587			122,595
Total Operating Revenues	1,196,690			1,161,660			1,156,386
Operating Expenses
Fuel	325,903			318,901			318,268
Purchased Power	112,452			80,137			105,766
Transmission and Other PPFAC Recoverable Costs	12,233			5,722			(1,435		)
Increase (Decrease) to Reflect PPFAC Recovery Treatment	(12,458		)	31,113			(6,165		)
Total Fuel and Purchased Energy	438,130			435,873			416,434
Operations and Maintenance	335,321			334,553			330,801
Depreciation	118,076			110,931			104,894
Amortization	31,294			39,493			34,650
Taxes Other Than Income Taxes	43,498			40,323			40,199
Total Operating Expenses	966,319			961,173			926,978
Operating Income	230,371			200,487			229,408
Other Income (Deductions)
Interest Income	120			136			3,567
Other Income	5,770			3,953			5,364
Other Expense	(10,715		)	(13,574		)	(12,064		)
Appreciation in Fair Value of Investments	2,833			1,892			329
Total Other Income (Deductions)	(1,992		)	(7,593		)	(2,804		)
Interest Expense
Long-Term Debt	56,378			55,038			49,858
Capital Leases	25,140			33,613			40,358
Other Interest Expense	87			1,446			1,127
Interest Capitalized	(2,554		)	(1,782		)	(2,073		)
Total Interest Expense	79,051			88,315			89,270
Income Before Income Taxes	149,328			104,579			137,334
Income Tax Expense	47,986			39,109			52,000
Net Income	$	101,342		$	65,470		$	85,334

See Notes to Consolidated Financial Statements.

K-82

TUCSON ELECTRIC POWER COMPANY

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

September 30, September 30, September 30,
     Years Ended December 31,
     2011    2010    2009
     - Thousands of Dollars -
Cash Flows from Operating Activities

Cash Receipts from Electric Retail Sales
     $ 963,247       $ 947,498       $ 944,873
Cash Receipts from Electric Wholesale Sales
     152,618       190,779       199,918
Cash Receipts from Operating Springerville Units 3 & 4
     104,754       102,563       68,951
Reimbursement of Affiliate Charges
     18,448       18,356       19,998
Cash Receipts from Wholesale Gas Sales
     11,825       —         —
Income Tax Refunds Received
     7,492       3,369       14,462
Interest Received
     5,367       8,998       12,768
Performance Deposits Received
     1,640       5,040       14,000
Other Cash Receipts
     17,971       18,389       19,440
Payment of Other Operations and Maintenance Costs
     (283,560 )    (245,050 )    (233,075 )
Fuel Costs Paid
     (276,030 )    (236,436 )    (282,653 )
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
     (139,728 )    (134,540 )    (124,053 )
Purchased Power Costs Paid
     (117,224 )    (169,658 )    (185,129 )
Wages Paid, Net of Amounts Capitalized
     (100,942 )    (101,815 )    (97,289 )
Interest Paid, Net of Amounts Capitalized
     (45,433 )    (38,232 )    (33,128 )
Capital Lease Interest Paid
     (32,103 )    (38,640 )    (38,586 )
Wholesale Gas Costs Paid
     (11,822 )    —         —
Income Taxes Paid
     (2,346 )    (19,663 )    (14,606 )
Performance Deposits Paid
     (1,640 )    (5,040 )    (14,000 )
Other Cash Payments
     (4,240 )    (3,435 )    (3,827 )






Net Cash Flows - Operating Activities
     268,294       302,483       268,064






Cash Flows from Investing Activities

Capital Expenditures
     (351,890 )    (225,920 )    (240,079 )
Purchase of Intangibles - Renewable Energy Credits
     (5,111 )    (7,903 )    —
Purchase of Sundt Unit 4 Lease Asset
     —         (51,389 )    —
Purchase of Springerville Lease Debt
     —         —         (31,375 )
Other Cash Payments
     (558 )    (1,483 )    (411 )
Return of Investments in Springerville Lease Debt
     38,353       25,615       12,736
Other Cash Receipts
     7,195       8,044       9,528






Net Cash Flows - Investing Activities
     (312,011 )    (253,036 )    (249,601 )






Cash Flows from Financing Activities

Proceeds from Issuance of Long-Term Debt
     260,285       118,245       —
Proceeds from Borrowings Under Revolving Credit Facility
     220,000       177,000       171,000
Equity Investment from UniSource Energy
     30,000       15,000       30,000
Other Cash Receipts
     2,458       3,241       2,447
Repayments of Borrowings Under Revolving Credit Facility
     (210,000 )    (212,000 )    (146,000 )
Repayments of Long-Term Debt
     (172,460 )    (30,000 )    —
Payments of Capital Lease Obligations
     (74,343 )    (55,889 )    (24,091 )
Payments of Debt Issue/Retirement Costs
     (3,594 )    (5,988 )    (1,329 )
Dividends Paid to UniSource Energy
     —         (60,000 )    (60,000 )
Other Cash Payments
     (894 )    (1,491 )    (1,347 )






Net Cash Flows - Financing Activities
     51,452       (51,882 )    (29,320 )






Net Increase (Decrease) in Cash and Cash Equivalents
     7,735       (2,435 )    (10,857 )
Cash and Cash Equivalents, Beginning of Year
     19,983       22,418       33,275






Cash and Cash Equivalents, End of Year
     $ 27,718       $ 19,983       $ 22,418

~~See Note 15 for supplemental cash flow information.~~

COMPREHENSIVE INCOME



	Years Ended December 31,
	2013		2012			2011
	Thousands of Dollars
Comprehensive Income
Net Income	$	101,342	$	65,470		$	85,334
Other Comprehensive Income (Loss)
Net Changes in Fair Value of Cash Flow Hedges, net of income tax (expense) benefit of $(1,793), $(887), and $941	2,738		1,354			(1,433		)
SERP Benefit Amortization, net of income tax (expense) benefit of $(572), $608, and $(804)	916		(840		)	1,158
Total Other Comprehensive Income (Loss), Net of Tax	3,654		514			(275		)
Total Comprehensive Income	$	104,996	$	65,984		$	85,059

See Notes to Consolidated Financial Statements.

K-83

TUCSON ELECTRIC POWER COMPANY

CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF CASH FLOWS



	Years Ended December 31,
	2013			2012			2011
	Thousands of Dollars
Cash Flows from Operating Activities
Cash Receipts from Electric Retail Sales	$	1,020,903		$	1,006,926		$	963,247
Cash Receipts from Electric Wholesale Sales	146,880			124,594			152,618
Cash Receipts from Operating Springerville Units 3 & 4	114,258			107,927			104,754
Reimbursement of Affiliate Charges	23,468			20,926			18,448
Cash Receipts from Gas Wholesale Sales	3,271			4,652			11,825
Interest Received	509			2,025			5,367
Income Tax Refunds Received	77			493			7,492
Other Cash Receipts	25,079			18,850			19,611
Fuel Costs Paid	(280,639		)	(313,742		)	(271,975		)
Payment of Operations and Maintenance Costs	(253,054		)	(282,752		)	(287,615		)
Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized	(144,849		)	(147,859		)	(139,728		)
Purchased Power Costs Paid	(115,008		)	(81,328		)	(117,224		)
Wages Paid, Net of Amounts Capitalized	(110,995		)	(104,955		)	(100,942		)
Interest Paid, Net of Amounts Capitalized	(52,589		)	(52,125		)	(45,433		)
Capital Lease Interest Paid	(22,553		)	(28,786		)	(32,103		)
Income Taxes Paid	—			(1,796		)	(2,346		)
Wholesale Gas Cost Paid	—			—			(11,822		)
Other Cash Payments	(8,567		)	(5,131		)	(5,880		)
Net Cash Flows—Operating Activities	346,191			267,919			268,294
Cash Flows from Investing Activities
Capital Expenditures	(252,848		)	(252,782		)	(351,890		)
Purchase of Intangibles—Renewable Energy Credits	(23,280		)	(8,889		)	(5,111		)
Return of Investments in Springerville Lease Debt	9,104			19,278			38,353
Change in Restricted Cash	4,134			(1,445		)	—
Other, net	3,228			15,957			6,637
Net Cash Flows—Investing Activities	(259,662		)	(227,881		)	(312,011		)
Cash Flows from Financing Activities
Proceeds from Borrowings Under Revolving Credit Facility	78,000			189,000			220,000
Repayments of Borrowings Under Revolving Credit Facility	(78,000		)	(199,000		)	(210,000		)
Payments of Capital Lease Obligations	(99,621		)	(89,452		)	(74,343		)
Dividends Paid to UNS Energy	(40,000		)	(30,000		)	—
Proceeds from Issuance of Long-Term Debt	—			149,513			260,285
Repayments of Long-Term Debt	—			(6,535		)	(172,460		)
Equity Investment from UNS Energy	—			—			30,000
Other, net	(1,316		)	(1,539		)	(2,030		)
Net Cash Flows—Financing Activities	(140,937		)	11,987			51,452
Net Increase (Decrease) in Cash and Cash Equivalents	(54,408		)	52,025			7,735
Cash and Cash Equivalents, Beginning of Year	79,743			27,718			19,983
Cash and Cash Equivalents, End of Year	$	25,335		$	79,743		$	27,718

See

September 30, September 30,
     December 31,
     2011    2010
     - Thousands of Dollars -
ASSETS

Utility Plant

Plant in Service
     $ 4,222,236       $ 3,863,431
Utility Plant Under Capital Leases
     582,669       582,669
Construction Work in Progress
     76,517       153,981




Total Utility Plant
     4,881,422       4,600,081
Less Accumulated Depreciation and Amortization
     (1,753,807 )    (1,729,747 )
Less Accumulated Amortization of Capital Lease Assets
     (476,963 )    (460,257 )




Total Utility Plant - Net
     2,650,652       2,410,077




Investments and Other Property

Investments in Lease Debt and Equity
     65,829       103,844
Other
     32,313       43,588




Total Investments and Other Property
     98,142       147,432




Current Assets

Cash and Cash Equivalents
     27,718       19,983
Accounts Receivable - Customer
     71,435       78,200
Unbilled Accounts Receivable
     32,386       32,217
Allowance for Doubtful Accounts
     (3,766 )    (4,106 )
Accounts Receivable - Due from Affiliates
     4,049       5,444
Fuel Inventory
     32,981       29,209
Materials and Supplies
     70,749       54,732
Derivative Instruments
     1,439       1,318
Regulatory Assets - Current
     71,747       34,023
Deferred Income Taxes - Current
     21,678       32,077
Other
     13,753       26,467




Total Current Assets
     344,169       309,564




Regulatory and Other Assets

Regulatory Assets - Noncurrent
     157,386       182,304
Derivative Instruments
     1,398       1,834
Other Assets
     23,737       24,767




Total Regulatory and Other Assets
     182,521       208,905




Total Assets
     $ 3,275,484       $ 3,075,978

Note 14 for supplemental cash flow information.

See Notes to Consolidated Financial Statements.

~~(Consolidated Balance Sheets Continued)~~

K-84

TUCSON ELECTRIC POWER COMPANY

CONSOLIDATED BALANCE SHEETS

September 30, September 30,
     December 31,
     2011      2010
     - Thousands of Dollars -
CAPITALIZATION AND OTHER LIABILITIES

Capitalization

Common Stock Equity
     $ 824,943         $ 709,884
Capital Lease Obligations
     352,720         429,074
Long-Term Debt
     1,080,373         1,003,615




Total Capitalization
     2,258,036         2,142,573




Current Liabilities

Current Obligations Under Capital Leases
     77,482         60,309
Borrowing Under Revolving Credit Facility
     10,000         -
Accounts Payable - Trade
     84,508         77,021
Accounts Payable - Due to Affiliates
     4,827         3,990
Interest Accrued
     30,877         31,771
Accrued Taxes Other than Income Taxes
     32,155         29,873
Accrued Employee Expenses
     21,356         23,710
Customer Deposits
     23,743         21,191
Derivative Instruments
     9,040         7,288
Regulatory Liabilities - Current
     23,702         58,936
Other
     4,524         3,379




Total Current Liabilities
     322,214         317,468




Deferred Credits and Other Liabilities

Deferred Income Taxes - Noncurrent
     263,225         227,615
Regulatory Liabilities - Noncurrent
     200,599         170,223
Derivative Instruments
     14,142         11,650
Pension and Other Postretirement Benefits
     130,660         120,590
Other
     86,608         85,859




Total Deferred Credits and Other Liabilities
     695,234         615,937




Commitments, Contingencies, and Proposed Envirionmental Matters (Note 4)






Total Capitalization and Other Liabilities
     $ 3,275,484         $ 3,075,978



	December 31,
	2013			2012
	Thousands of Dollars
ASSETS
Utility Plant
Plant in Service	$	4,467,667		$	4,348,041
Utility Plant Under Capital Leases	637,957			582,669
Construction Work in Progress	180,485			98,460
Total Utility Plant	5,286,109			5,029,170
Less Accumulated Depreciation and Amortization	(1,826,977		)	(1,783,787		)
Less Accumulated Amortization of Capital Lease Assets	(514,677		)	(494,962		)
Total Utility Plant—Net	2,944,455			2,750,421
Investments and Other Property
Investments in Lease Equity	36,194			36,339
Other	33,488			35,091
Total Investments and Other Property	69,682			71,430
Current Assets
Cash and Cash Equivalents	25,335			79,743
Accounts Receivable—Customer	80,211			71,813
Unbilled Accounts Receivable	34,369			33,782
Allowance for Doubtful Accounts	(4,825		)	(4,598		)
Accounts Receivable—Due from Affiliates	6,064			5,720
Materials and Supplies	75,200			80,377
Deferred Income Taxes—Current	63,497			37,212
Fuel Inventory	44,027			61,737
Regulatory Assets—Current	42,555			34,345
Derivative Instruments	2,137			2,230
Investments in Lease Debt	—			9,118
Other	12,923			32,163
Total Current Assets	381,493			443,642
Regulatory and Other Assets
Regulatory Assets—Noncurrent	141,030			178,330
Derivative Instruments	167			1,354
Other Assets	19,233			15,869
Total Regulatory and Other Assets	160,430			195,553
Total Assets	$	3,556,060		$	3,461,046

See Notes to Consolidated Financial Statements.

~~(Consolidated Balance Sheets Concluded)~~

(Continued)

K-85

TUCSON ELECTRIC POWER COMPANY

CONSOLIDATED ~~STATEMENTS OF CAPITALIZATION~~

September 30, September 30, September 30, September 30,
               December 31,
               2011    2010
               - Thousands of Dollars -
COMMON STOCK EQUITY

Common Stock-No Par Value
               $ 888,971       $ 858,971

2011

2010

Shares Authorized
     75,000,000      75,000,000
Shares Outstanding
     32,139,434      32,139,434
Capital Stock Expense
               (6,357 )    (6,357 )
Accumulated Deficit
               (47,627 )    (132,961 )
Accumulated Other Comprehensive Loss
               (10,044 )    (9,769 )




Total Common Stock Equity
               824,943       709,884




PREFERRED STOCK

No Par Value, 1,000,000 Shares Authorized, None Outstanding
               —         —




CAPITAL LEASE OBLIGATIONS

Springerville Unit 1
               253,481       302,229
Springerville Coal Handling Facilities
               65,022       76,583
Springerville Common Facilities
               111,699       110,571




Total Capital Lease Obligations
               430,202       489,383
Less Current Maturities
               (77,482 )    (60,309 )




Total Long-Term Capital Lease Obligations
               352,720       429,074




LONG-TERM DEBT

Issue

Maturity

Interest Rate

Variable Rate IDBs
     2014 - 2016      Variable      215,300       365,300
Unsecured Fixed Rate IDBs
     2020 - 2040      3.25% to 6.375%      615,855       638,315
Unsecured Notes
     2021      5.15%      249,218       —




Total Long-Term Debt
               1,080,373       1,003,615




Total Capitalization
               $ 2,258,036       $ 2,142,573

BALANCE SHEETS



	December 31,
	2013		2012
	Thousands of Dollars
CAPITALIZATION AND OTHER LIABILITIES
Capitalization
Common Stock Equity	$	925,923	$	860,927
Capital Lease Obligations	149,767		262,138
Long-Term Debt	1,223,070		1,223,442
Total Capitalization	2,298,760		2,346,507
Current Liabilities
Current Obligations Under Capital Leases	167,659		90,583
Accounts Payable—Trade	88,556		82,122
Accounts Payable—Due to Affiliates	9,153		3,134
Accrued Taxes Other than Income Taxes	34,485		33,060
Accrued Employee Expenses	24,454		20,715
Regulatory Liabilities—Current	23,701		20,822
Accrued Interest	22,785		26,965
Customer Deposits	21,354		24,846
Derivative Instruments	5,531		4,899
Other	9,244		7,085
Total Current Liabilities	406,922		314,231
Deferred Credits and Other Liabilities
Deferred Income Taxes—Noncurrent	420,878		319,216
Regulatory Liabilities—Noncurrent	263,270		241,189
Pension and Other Retiree Benefits	84,936		149,718
Derivative Instruments	5,161		10,565
Other	76,133		79,620
Total Deferred Credits and Other Liabilities	850,378		800,308
Commitments, Contingencies, and Environmental Matters (Note 7)
Total Capitalization and Other Liabilities	$	3,556,060	$	3,461,046

See Notes to Consolidated Financial Statements.

(Concluded)

K-86

TUCSON ELECTRIC POWER COMPANY

CONSOLIDATED STATEMENTS OF CAPITALIZATION

December 31,
2013 2012
Thousands of Dollars
COMMON STOCK EQUITY
Common Stock-No Par Value $ 888,971
$ 888,971
2013 2012
Shares Authorized 75,000,000
75,000,000

Shares Outstanding 32,139,434
32,139,434

Capital Stock Expense (6,357 ) (6,357 )
Accumulated Earnings (Deficit) 49,185
(12,157 )
Accumulated Other Comprehensive Loss (5,876 ) (9,530 )
Total Common Stock Equity 925,923
860,927
PREFERRED STOCK
No Par Value, 1,000,000 Shares Authorized, None Outstanding —
—
CAPITAL LEASE OBLIGATIONS
Springerville Unit 1 192,871
196,843
Springerville Coal Handling Facilities 27,878
48,038
Springerville Common Facilities 96,677
107,840
Total Capital Lease Obligations 317,426
352,721
Less Current Maturities (167,659 ) (90,583 )
Total Long-Term Capital Lease Obligations 149,767
262,138
LONG-TERM DEBT
Maturity Interest Rate
Variable Rate Bonds 2016 - 2032 Variable 214,802
215,300
Fixed Rate Bonds 2020 - 2040 3.85% – 5.75% 1,008,268
1,008,142
Total Long-Term Debt 1,223,070
1,223,442
Total Capitalization $ 2,298,760

$ 2,346,507

See Notes to Consolidated Financial Statements.

K-87

TUCSON ELECTRIC POWER COMPANY

CONSOLIDATED STATEMENT OF CHANGES IN ~~STOCKHOLDER’S~~STOCKHOLDER'S EQUITY ~~AND COMPREHENSIVE INCOME~~

September 30, September 30, September 30, September 30, September 30,
Common
Stock Capital
Stock
Expense Accumulated
Deficit Accumulated
Other
Comprehensive
Loss Total
Stockholder’s
Equity
- Thousands of Dollars -
Balances at December 31, 2008
$ 813,971    $ (6,357 ) $ (211,146 ) $ (6,855 ) $ 589,613

Comprehensive Income:

2009 Net Income
90,688    90,688
Unrealized Loss on Cash Flow Hedges (net of $33 income taxes)
51    51
Reclassification of Realized Losses on Cash Flow Hedges to Net Income (net of $690 income taxes)
1,053    1,053
Employee Benefit Obligations Amortization of SERP Net Prior Service Cost Included in Net Periodic Benefit Cost (net of $33 income taxes)
(51 ) (51 )

Total Comprehensive Income
91,741
Capital Contribution from UniSource Energy
30,000    30,000
Dividends
(60,763 ) (60,763 )

Balances at December 31, 2009
843,971    (6,357 ) (181,221 ) (5,802 ) 650,591

Comprehensive Income:

2010 Net Income
108,260    108,260
Unrealized Loss on Cash Flow Hedges (net of $4,216 income taxes)
(6,431 ) (6,431 )
Reclassification of Realized Losses on Cash Flow Hedges to Net Income (net of $2,140 income taxes)
3,264    3,264
Employee Benefit Obligations Amortization of SERP Net Prior Service Cost Included in Net Periodic Benefit Cost (net of $523 income taxes)
(800 ) (800 )

Total Comprehensive Income
104,293
Capital Contribution from UniSource Energy
15,000    15,000
Dividends Paid
(60,000 ) (60,000 )

Balances at December 31, 2010
858,971    (6,357 ) (132,961 ) (9,769 ) 709,884

Comprehensive Income:

2011 Net Income
85,334    85,334
Unrealized Loss on Cash Flow Hedges (net of $2,331 income taxes)
(3,555 ) (3,555 )
Reclassification of Realized Losses on Cash Flow Hedges to Net Income (net of $1,390 income taxes)
2,122    2,122
Employee Benefit Obligations Amortization of SERP Net Prior Service Cost Included in Net Periodic Benefit Cost (net of $804 income taxes)
1,158    1,158

Total Comprehensive Income
85,059
Capital Contribution from UniSource Energy
30,000    30,000

Balances at December 31, 2011
$ 888,971    $ (6,357 ) $ (47,627 ) $ (10,044 ) $ 824,943



	Common Stock		Capital Stock Expense			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive Loss			Total Stockholder’s Equity
	Thousands of Dollars
Balances at December 31, 2010	$	858,971	$	(6,357	)	$	(132,961	)	$	(9,769	)	$	709,884
Net Income						85,334						85,334
Other Comprehensive Loss, net of tax									(275		)	(275		)
Capital Contribution from UNS Energy	30,000											30,000
Balances at December 31, 2011	888,971		(6,357		)	(47,627		)	(10,044		)	824,943
Net Income						65,470						65,470
Other Comprehensive Income, net of tax									514			514
Dividends Declared						(30,000		)				(30,000		)
Balances at December 31, 2012	888,971		(6,357		)	(12,157		)	(9,530		)	860,927
Net Income						101,342						101,342
Other Comprehensive Income, net of tax									3,654			3,654
Dividends Declared						(40,000		)				(40,000		)
Balances at December 31, 2013	$	888,971	$	(6,357	)	$	49,185		$	(5,876	)	$	925,923

We describe limitations on our ability to pay dividends in Note 7.

13.

See Notes to Consolidated Financial Statements.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

K-88

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

~~UniSource~~

UNS Energy Corporation ~~(UniSource~~(UNS Energy) is a utility services holding company engaged, through its subsidiaries, in the electric generation and energy delivery business. Each of ~~UniSource~~UNS Energy’s subsidiaries is a separate legal entity with its own assets and liabilities. ~~UniSource~~UNS Energy owns 100% of Tucson Electric Power Company (TEP), UniSource Energy Services, Inc. (UES), Millennium Energy Holdings, Inc. (Millennium), and UniSource Energy Development Company (UED).

TEP is a regulated ~~public~~ utility and ~~UniSource~~UNS Energy’s largest operating subsidiary, representing approximately ~~82%~~83% of ~~UniSource~~UNS Energy’s total assets as of December 31, ~~2011.~~2013. TEP generates, transmits and distributes electricity to approximately ~~404,000~~413,000 retail electric customers in a 1,155 square mile area in southeastern Arizona. TEP also sells electricity to other utilities and power marketing entities, located primarily in the western ~~U.S.~~United States. In addition, TEP operates Springerville Generating Station (Springerville) Unit 3 on behalf of Tri-State Generation and Transmission Association, Inc. (Tri-State) and Springerville Unit 4 on behalf of Salt River Project Agriculture Improvement and Power District (SRP).

UES ~~holds the common stock of~~wholly-owns two regulated ~~public utilities,~~utilities: UNS Electric, Inc. (UNS Electric) and UNS Gas, Inc. (UNS Gas) ~~and~~. UNS Electric ~~Inc. (UNS Electric).~~is a regulated utility, which generates, transmits and distributes electricity to approximately 93,000 retail customers in Mohave and Santa Cruz counties in Arizona. UNS Gas is a regulated gas distribution company, which services approximately ~~148,000~~150,000 retail customers in Mohave, Yavapai, Coconino, ~~and~~ Navajo, counties in northern Arizona, as well as in Santa Cruz County in southern Arizona. UNS Electric is a regulated public utility, which generates, transmits and distributes electricity to approximately 91,000 retail customers in Mohave and Santa Cruz ~~counties.~~

counties in Arizona.

and Millennium’s investments in unregulated businesses represent less than 1% of ~~UniSource~~UNS Energy’s assets as of December 31, 2011. Millennium’s $13 million net loss for 2010, which reflected impairment losses, caused it to be a reportable segment at December 31, 2010. Millennium is not a reportable segment at December 31, 2011.

2013.

Our business is comprised of three reporting segments – TEP, UNS ~~Gas,~~Electric, and UNS ~~Electric.~~

Gas.

References to “we” and “our” are to ~~UniSource~~UNS Energy and its subsidiaries, collectively.

~~REVISION~~

See Note 2 for information regarding a pending merger with Fortis, Inc.

BASIS OF ~~PRIOR PERIOD FINANCIAL STATEMENTS~~

In the second and third quarters of 2011, we identified errors related to amounts recorded as owed to or payable by TEP for electricity deliveries settled in-kind or to be settled in-kind during prior years under our transmission, interconnection and certain joint operating agreements. These agreements typically provide that the parties to such agreements will monitor transmission and delivery losses and other energy imbalances and make payments to each other to compensate for any losses and imbalances. Payments for such losses and imbalances are made in-kind with energy (MWh) rather than cash. The amount of these losses and imbalances is typically a very low portion of the energy flows subject to these agreements and is usually settled on a one day or one month lag. We also identified minor errors to prior year amounts billed to third parties for operations and maintenance expense. Separately, in the second quarter of 2011, we identified errors in prior years in the calculation of income tax expense arising from not treating Allowance for Equity Funds Used During Construction (AFUDC) as a permanent book to tax difference.

~~We assessed the materiality of these errors on prior period~~PRESENTATION

UNS Energy's consolidated financial statements and concluded they were not material to any prior annual or interim periods, but the cumulative impact, if recognized in 2011, could be material to the annual period ending December 31, 2011 and the interim period ended June 30, 2011. As a result,disclosures are presented in accordance with ~~Staff Accounting Bulletin 108, we revised our prior period~~generally accepted accounting principles (GAAP) in the United States which includes specific accounting guidance for regulated operations. See Note 3. The consolidated financial statements ~~to correct these~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~errors. We assessed~~include the ~~materiality~~accounts of ~~the third quarter 2011 errors, together with the errors identified in the first half of 2011, on prior period financial statements~~UNS Energy and ~~concluded that, while they were not material to any prior annual or interim periods, we should update the prior revision to reflect~~ all of its subsidiaries. In the ~~errors identified in 2011.~~

The income tax adjustment affected fiscal years 2003 through 2010 for UniSource Energy and fiscal years 2009 and 2010 for TEP. The adjustment for transmission and delivery losses and energy imbalances settled in-kind or to be settled in-kind affected fiscal years 2004 through 2010. The operations and maintenance expense adjustment affected fiscal years 2006 through 2010. The revision increased UniSource Energy’s net income by $2 million for each of the years ended December 31, 2010 and 2009. The revision increased TEP’s net income by $1 million for each of the years ended December 31, 2010 and 2009. UniSource Energy’s Accumulated Earnings increased by $7 million for the periods prior to January 1, 2009, as a result of the revisions.

The revised amounts include reclassifications to conform to the current year presentation. TEP reclassified Other Operations and Maintenance costs of $7 million in 2010, and $6 million in 2009 to Other Expense to correctly account for the regulatory treatment of certain expenses.

~~The revision and reclassifications impacted statements of income and balance sheets as shown in the tables below:~~

September 30, September 30, September 30, September 30,
     UniSource Energy    TEP
     Year Ended
December 31, 2010
     As
Reported    As
Revised    As
Reported    As
Revised
     -Thousands of Dollars- (Except Per Share Amounts)
Income Statement

Electric Wholesale Sales
     $ 151,673       $ 151,962       $ 140,815       $ 141,103
Fuel
     296,980       295,652       286,071       284,744
Purchased Energy
     307,288       307,288       118,716       118,716
Decrease to Reflect PPFAC/PGA Recovery Treatment
     (31,105 )    (29,622 )    (23,025 )    (21,541 )
Other Operations and Maintenance
     370,067       370,037       323,537       316,625
Income Tax Expense
     78,266       76,921       61,057       59,936
Net Income
     111,477       112,984       106,978       108,260
Basic EPS
     3.06       3.10       N/A       N/A
Diluted EPS
     2.82       2.86       N/A       N/A
Balance Sheet

Accounts Receivable -Customer
     91,556       98,333       71,425       78,200
Deferred Income Taxes –Current Assets
     32,386       30,822       33,640       32,077
Regulatory Assets -Noncurrent
     196,736       192,966       186,074       182,304
Common Stock Equity
     828,368       830,756       707,495       709,884
Accounts Payable -Trade
     109,896       108,950       77,967       77,021
Deferred Income Taxes –Noncurrent Liabilities
     246,466       246,466       227,615       227,615

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

September 30, September 30, September 30, September 30,
     UniSource Energy    TEP
     Year Ended
December 31, 2009
     As
Reported    As
Revised    As
Reported    As
Revised
     -Thousands of Dollars- (Except Per Share Amounts)
Income Statement

Electric Wholesale Sales
     $ 130,904       $ 131,255       $ 152,955       $ 153,306
Fuel
     298,655       296,248       281,710       279,303
Purchased Energy
     296,861       296,861       144,528       144,529
Decrease to Reflect PPFAC/PGA Recovery Treatment
     (17,091 )    (14,553 )    (20,724 )    (18,186 )
Other Operations and Maintenance
     333,887       333,579       289,765       282,986
Income Tax Expense
     64,348       63,232       55,130       54,220
Net Income
     104,258       105,901       89,248       90,688
Basic EPS
     2.91       2.95       N/A       N/A
Diluted EPS
     2.69       2.73       N/A       N/A

~~BASIS OF PRESENTATION~~

~~We consolidate our investments in subsidiaries when we hold a majority of the voting stock and we can exercise control over the operations and policies of the company. Consolidation means~~consolidation process, accounts of the parent and ~~subsidiary~~subsidiaries are combined, and intercompany balances and transactions are eliminated. Intercompany profits on transactions between regulated entities are not ~~eliminated.~~

~~We used the equity and cost methods to report Millennium’s investments until the assets became fully impaired in 2010.~~eliminated if recovery from ratepayers is probable. See Note ~~13.~~

4. TEP jointly owns several generating stations and transmission facilities with non-affiliated entities. TEP's proportionate share of jointly owned facilities is recorded as Utility Plant on the consolidated balance sheets, and our proportionate share of the operating costs associated with these facilities is included in the consolidated statements of income. See Note 5.

USE OF ACCOUNTING ESTIMATES

Management ~~makes~~uses estimates and assumptions when preparing financial statements under ~~generally accepted accounting principles (GAAP) in the U.S.~~GAAP. These estimates and assumptions affect:

Assets and liabilities inon our balance sheets at the dates of the financial statements;

Our disclosures about contingent assets and liabilities at the dates of the financial statements; and

Our revenues and expenses in our income statements during the periods presented.

Because these estimates involve judgments based upon our evaluation of relevant facts and circumstances, actual ~~amounts~~results may differ from the estimates.

ACCOUNTING FOR ~~RATE REGULATION~~

REGULATED OPERATIONS

We ~~generally use~~apply accounting standards that recognize the same accounting policies and practices used by unregulated companies. However, sometimes regulatory accounting requires that rate-regulated companies apply special accounting treatment to show the effecteconomic effects of rate regulation. ~~For example,~~As a result, we capitalize certain costs that would be ~~included~~recorded as expense or in ~~the current period~~Accumulated Other Comprehensive Income (AOCI) by unregulated companies.

K-89

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in ~~customer Retail Rates.~~the rates charged to retail customers or to wholesale customers through FERC-approved transmission tariffs. Regulatory liabilities generally represent expected future costs that have already been collected from customers or items that are expected to be returned to customers through future billing reductions.

Estimates of recovering deferred costs and returning deferred credits are based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are amortized consistent with the treatment in the rate setting process. We evaluate regulatory assets each period and believe recovery is probable. If future recovery of costs ceases to be probable, the assets would be written off as a charge into current period ~~earnings.~~

Weearnings or AOCI. See Note 3.

TEP, UNS Electric, and UNS Gas apply regulatory accounting as the following conditions exist:

An independent regulator sets rates;

The regulator sets the rates to recover the specific enterprise’s costs of providing service; and

Rates are set at levels that will recover the ~~entity's~~entity’s costs and can be charged to and collected from customers.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In 2013, we adopted authoritative guidance that:

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~Requires disclosure related to offsetting derivative assets and derivative liabilities in accordance with GAAP. See

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~Note 15

Requires additional disclosures for amounts reclassified out of Accumulated Other Comprehensive Income (AOCI) by component. See Note 16.

CASH AND CASH EQUIVALENTS

We ~~define Cash and Cash Equivalents as cash (unrestricted demand deposits) and~~consider all highly liquid investments ~~purchased~~ with ~~an original~~a remaining maturity of three months or ~~less.~~

less at acquisition to be cash equivalents.

RESTRICTED CASH

Cash balances that are restricted regarding withdrawal or usage based on contractual or regulatory considerations are reported in Investments and Other Property—Other on the balance sheets. Restricted cash was $2 million at December 31, 2013 and $7 million at December 31, 2012.

UTILITY PLANT

Utility Plant includes the business property and equipment that supports electric and gas services, consisting primarily of generation, transmission, and distribution facilities. We report utility plant at original cost. Original cost includes materials and labor, contractor services, construction overhead ~~(where~~(when applicable), and an Allowance for Funds Used During Construction (AFUDC).

, less contributions in aid of construction.

We record the cost of repairs and maintenance, including planned major overhauls, to ~~Other~~ Operations and Maintenance ~~Expense on~~(O&M) expense in the income statements as ~~the~~ costs are incurred.

When a unit of regulated property is retired, we reduce accumulated depreciation by the original cost plus removal costs less any salvage value. There is no income statement impact.

AFUDC and Capitalized Interest

AFUDC reflects the cost of debt orand equity funds used to finance construction and is capitalized as part of the cost of regulated utility plant. AFUDC amounts are capitalized ~~are included~~and amortized through depreciation expense as a recoverable cost in ~~rate base for establishing~~ Retail Rates. For operations that do not apply regulatory accounting, we capitalize interest related only to debt as a cost of construction. The capitalized interest ~~capitalized~~ that relates to debt ~~reduces Other~~is recorded as a reduction in Interest Expense onin the income statements. The capitalized cost ~~capitalized~~ for equity funds is recorded as Other ~~Income.~~

September 30, September 30, September 30,
Average AFUDC Rate on Regulated Construction Expenditures
     2011 2010 2009
TEP
     6.72 % 6.65 % 6.40 %
UNS Gas
     8.32 % 8.19 % 7.05 %
UNS Electric
     8.18 % 8.22 % 7.62 %

~~UniSource~~Income in the income statements.

K-90

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The average AFUDC rates on regulated construction expenditures are included in the table below:



	2013		2012		2011
TEP	7.38	%	7.22	%	6.72	%
UNS Electric	8.07	%	7.89	%	8.18	%
UNS Gas	7.89	%	7.95	%	8.32	%

UNS Energy did not capitalize interest related to non-regulated construction activity in 2013 or 2012. UNS Energy capitalized interest on non-regulated construction activity at a rate of 3.30% for ~~2011 and 1.96% for 2010 related to the development of a new corporate headquarters.~~

2011.

Depreciation

~~Depreciation~~

We compute depreciation for owned utility plant on a group method straight-line basis at depreciation rates based on the economic lives of the assets. See Note 3 and Note 5. The ~~ACC~~Arizona Corporation Commission (ACC) approves depreciation rates for all ~~utility plant. TEP transmission~~generation and distribution assets. Transmission assets are subject to ~~FERC jurisdiction.~~the jurisdiction of the Federal Energy Regulatory Commission (FERC). Depreciation rates are based on average useful lives and ~~reflect estimated removal costs, net of estimated~~include estimates for salvage value ~~for interim retirements.~~and removal costs. Below are the summarized average annual depreciation rates for all utility ~~plants.~~

September 30, September 30, September 30, September 30,
     TEP UNS Gas UNS Electric UED
2011
     3.15 % 3.32 % 4.31 % 3.03 %
2010
     3.14 % 2.83 % 4.35 % 2.57 %
2009
     3.64 % 2.76 % 4.33 % 2.57 %

~~UNISOURCE ENERGY,~~ plant:



	2013		2012		2011
TEP	3.16	%	3.22	%	3.14	%
UNS Electric	3.94	%	3.99	%	4.02	%
UNS Gas	2.63	%	2.69	%	2.84	%

TEP ~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Utility Plant Under Capital Leases

TEP financed the following generation assets with capital leases: Springerville Unit 1; facilities at Springerville used in common with Springerville Unit 1 and Unit 2 (Springerville Common Facilities); and the Springerville Coal Handling Facilities. The capital lease expense incurred consists of Amortization Expense (see Note 5) and Interest Expense—Capital Leases. The lease terms are described in Note 6.

Computer Software Costs

We capitalize costs incurred to purchase and develop internal use computer software ~~for internal use~~ and amortize those costs over the estimated economic life of the product. If the software is no longer useful, we immediately charge capitalized computer software costs to expense.

~~TEP Utility Plant under Capital Leases~~

TEP financed the following generation assets with capital leases: Springerville Common Facilities, Springerville Unit 1 and the Springerville Coal Handling Facilities. The amount of lease expense incurred for TEP’s generation-related capital leases consists of amortization expense, as described in Note 5, and Interest Expense on Capital Leases as reflected on the income statements. The lease terms are described in Note 6.

INVESTMENTS IN LEASE DEBT AND EQUITY

TEP ~~holds investments~~held an investment in lease debt ~~in TEP’s~~relating to Springerville Unit 1 ~~capital leases. These holdings are considered held-to-maturity investments because TEP has the ability~~through its maturity date in January 2013 and ~~intent to hold them until maturity. TEP records these investments~~recorded this investment at amortized cost and ~~recognizes~~recognized interest income. TEP holds a 14% equity interest in Springerville Unit 1 and a 7% interest in certain Springerville Common Facilities (Springerville Unit 1 Leases). The fair value of these investments is described in Note ~~11.~~15. These investments do not reduce the capital lease obligations reflected on the balance sheet because there is no legal right of offset. TEP makes lease payments to a trustee who then distributes the payments to ~~debt and~~the equity holders.

TEP accounts for its ~~14%~~ equity interest in the Springerville Unit 1 ~~lease~~Lease trust using the equity method.

~~JOINTLY-OWNED FACILITIES~~

~~TEP has investments in several generation and transmission facilities jointly-owned with other companies. These projects are accounted for on a proportionate consolidation basis. See Note 5.~~

ASSET RETIREMENT OBLIGATIONS

TEP and UNS Electric have identified legal Asset Retirement Obligations (AROs) related to the retirement of certain generation assets. Additionally, TEP and UNS Electric incurred AROs related to their photovoltaic assets as a result of entering into various ground leases. We record a liability for a legal ARO in the ~~estimated present value of a conditional asset retirement obligation as follows:~~

~~When~~period in which it is ~~able to reasonably estimate the fair value of any future obligation to retire as a result of an existing or enacted law, statute, ordinance or contract; or~~

Ifincurred if it can be reasonably ~~estimate the fair value.~~

estimated. When ~~the liability~~a new obligation is ~~initially~~ recorded, ~~at net present value, TEP and UNS Electric~~we capitalize the cost of the liability by increasing the carrying amount of the related long-lived asset. ~~TEP and UNS Electric adjust~~We record the increase in the liability due to ~~its present value~~the passage of time by recognizing accretion expense in ~~Other Operations and Maintenance~~O&M expense, and depreciate the capitalized cost ~~is depreciated in Depreciation and Amortization expense~~ over the useful life of the related ~~asset.~~

asset or when applicable, the terms of the lease subject to ARO requirements. Beginning July 1, 2013, TEP ~~and UNS Electric record cost~~began deferring costs associated with the majority of ~~removal for generation~~its legal AROs as regulatory assets ~~that are recoverable through Retail Rates charged to customers. See Note 2. We record cost of removal for transmission and distribution assets through~~because new depreciation rates ~~and~~approved in the 2013 TEP Rate Order include these costs.

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Depreciation rates for all of our utilities also include a component for estimated future removal costs that have not been identified as legal obligations. We recover those amounts in ~~Retail Rates~~the rates charged to ~~customers. There are no legal obligations associated with these assets. We~~retail customers and have recorded an obligation for estimated costs of removal as regulatory liabilities.

EVALUATION OF ASSETS FOR IMPAIRMENT

We evaluate long-lived assets and investments for impairment whenever events or circumstances indicate the carrying value of the assets may be impaired. If ~~discounted~~ expected future cash flows (without discounting) are less than the carrying value of the asset, an impairment loss is recognized if the impairment is ~~other than temporary~~other-than-temporary and the loss is not recoverable through ~~rates, and the asset is written down to the fair value of the asset.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

rates.

DEFERRED FINANCING COSTS

We defer the costs to issue debt and amortize such costs to interest expense on a straight-line basis over the life of the debt as this approximates the effective interest method. These costs include underwriters’ commissions, discounts or premiums, and other costs such as legal, accounting, regulatory fees, and printing costs.

We defer and amortize the gains and losses on reacquired debt associated with regulated operations to interest expense over the remaining life of the original debt.

~~UTILITY~~

OPERATING REVENUES

We ~~record utility operating~~recognize revenues related to the sale of energy when services or commodities are delivered to customers. The billing of electricity and gas sales to retail customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. Operating revenues include an estimate for unbilled revenues from service that has been provided but not billed by the end of an accounting period.

~~We determine amounts delivered through periodic readings of customer meters.~~ At the end of the month, ~~the usage~~amounts of energy delivered since the last meter reading isare estimated and the corresponding unbilled revenue is ~~calculated. Unbilled revenue is estimated based on daily generation or purchased volumes, estimated customer usage by class, estimated line losses and estimated~~calculated using average customer Retail Rates. Accrued unbilled revenues are reversed the following month when actual billings occur. The accuracy of the unbilled revenue estimate is affected by factors that include fluctuations in energy demands, weather, line losses, customer Retail Rates

For purchased power and ~~changes in the composition of customer classes.~~

We are authorized a rate-adjustment mechanism that provides for the recovery of actual fuel, transmission and purchased power/energy cost. The revenue surcharge or surcredit adjusts the customers’ retail rate for delivered electricity or gas to collect or return under- or over- recovered energy costs. The ACC revises these rate-adjustment mechanisms periodically (annually for TEP and UNS Electric; monthly for UNS Gas) and may increase or decrease the level of costs recovered through Retail Rates for any difference between the total amount collected under the clauses and the recoverable costs incurred. See Note 2.

Arizona’s mandatory Renewable Energy Standard (RES) requires TEP and UNS Electric to increase their use of renewable energy and allows recovery of RES compliance costs through a surcharge to customers. We charge customers a Demand Side Management (DSM) surcharge to recover the cost of ACC-approved energy efficiency programs. We defer differences between actual RES or DSM qualified costs incurred and the recovery of such costs through the RES and DSM surcharges. Cost over-recoveries (the excess of cost recoveries through the RES and DSM surcharges over actual qualified costs incurred) are deferred as regulatory liabilities and cost under-recoveries (the excess of actual qualified costs incurred over cost recoveries through the RES and DSM surcharges) are deferred as regulatory assets. The surcharges are reset annually and incorporate an adjustor mechanism that, upon approval of the ACC, allows us to apply any shortage or surplus in the prior year’s program expenses to the subsequent year’s RES or DSM surcharge. See Note 2.

~~For~~wholesale sales contracts that are not settled with energy, TEP ~~nets~~and UNS Electric net the sales contracts with the purchase power contracts and ~~reflects~~reflect the net amount as Electric Wholesale Sales. The corresponding cash receipts are recorded in the statement of cash flows as Cash Receipts from Electric Wholesale Sales, while cash payments are recorded as Purchased ~~Energy~~Energy/Power Costs Paid.

TEP recognizes monthly management fees in Other Revenues as the operator of Springerville Unit 3 on behalf of Tri-State and Springerville Unit 4 on behalf of SRP. Additionally, Other Revenues include reimbursements from Tri-State and SRP for various operating expenses at Springerville and for the use of the Springerville Common Facilities and the Springerville Coal Handling Facilities. The offsetting expenses are recorded in the respective line items of the income statements based on the nature of services provided. As the operating agent for Tri-State and SRP, TEP may earn performance incentives based on unit availability which are recognized in Other Revenues in the period earned.

The ACC has authorized mechanisms for Lost Fixed Cost Recovery (LFCR) associated with energy sales that no longer occur due to EE Standards and distributed generation. We recognize revenues in the period that verifiable energy savings occur. Revenue recognition related to the LFCR creates a regulatory asset until such time as the revenue is collected.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We record an Allowance for Doubtful Accounts to reduce accounts receivable for amounts estimated to be uncollectible. The allowance is determined based on historical bad debt patterns, retail sales, and economic conditions.

INVENTORY

We ~~refer uncollected accounts to external collection agencies after 90 days.~~

~~TEP recognizes revenue from operating Springerville Unit 3~~value materials, supplies and Unit 4 on behalf of Tri-State and SRP as Other Revenues. Effective with commercial operation of Springerville Unit 3 in July 2006 and Springerville Unit 4 in December 2009, Tri-State and SRP reimburse TEP for various operating costs at the Springerville generating station. Tri-State and SRP also pay TEP for the use of the Springerville Common Facilities and the Springerville Coal Handling Facilities which are recorded as Other Revenues. Operating expenses are recorded in the respective line item of the income statements based on the nature of service or materials provided.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~INVENTORY~~

~~Materials and supplies consist of transmission, distribution and generation construction and repair materials. We record~~ fuel ~~materials and supply inventories~~inventory at the lower of weighted average cost or market, ~~prices.~~unless evidence indicates that the weighted average cost (even if in excess of market) will be recovered in retail rates. We capitalize handling and procurement costs (such as ~~materials,~~ labor, overhead costs, and transportation costs) as part of the cost of the inventory.

~~RECOVERY OF~~ Materials and Supplies consist of generation, transmission, and distribution construction and repair materials.

FUEL AND PURCHASED ENERGY ~~COSTS~~

COST RECOVERY MECHANISMS

TEP and UNS Electric Purchased Power and Fuel Adjustment Clause ~~(PPFAC)~~

TEP and UNS Electric ~~defer differences between~~recover actual fuel, ~~transmission and~~ purchased power ~~costs~~ and ~~current PPFAC~~transmission costs incurred to provide electric service to retail customers through base fuel rates and a Purchased Power and Fuel Adjustment Clause (PPFAC); the ~~recovery~~ACC periodically adjusts

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the PPFAC rate at which TEP and UNS Electric recover these costs. The difference between costs ~~in base rates.~~recovered through rates and actual fuel, purchased power and transmission costs prudently incurred to provide retail electric service is deferred. Cost over-recoveries ~~(the excess of fuel costs recoveries in Base Rates over actual costs incurred)~~ are deferred as regulatory liabilities and cost under-recoveries ~~(the excess of actual costs incurred over fuel costs recovered in Base Rates)~~ are deferred as regulatory assets. See Note 2.

UNS Gas Purchased Gas Adjustor ~~(PGA)~~

UNS Gas ~~defers the difference between~~recovers actual gas costs incurred ~~and the recovery of such costs under~~through a Purchased Gas Adjustor (PGA) ~~mechanism.~~mechanism that adjusts monthly. Gas cost over-recoveries ~~(the excess of gas costs recovered under the PGA mechanism over actual gas costs incurred)~~ are deferred as regulatory liabilities and under-recoveries ~~(the excess of actual gas costs incurred over gas costs recovered via the PGA mechanism)~~ are deferred as regulatory assets. See Note 2.

RENEWABLE ENERGY and ENERGY EFFICIENCY PROGRAMS

The ACC’s Renewable Energy Standard (RES) requires TEP and UNS Electric to increase their use of renewable energy each year until it represents at least 15% of their total annual retail energy requirements in 2025. The utilities must file annual RES implementation plans for review and approval by the ACC. The approved cost of carrying out those plans is recovered from retail customers through the RES surcharge. The ACC has also approved recovery of operating costs, depreciation, property taxes, and a return on investments in company-owned solar projects through the RES tariff until such costs are reflected in retail customer rates.

TEP, UNS Electric, and UNS Gas are required to implement cost-effective Demand-Side Management (DSM) programs to comply with the ACC’s Energy Efficiency (EE) Standards. The EE Standards provide for a DSM surcharge to recover, from retail customers, the costs to implement DSM programs. The Electric EE Standards require increasing annual targeted retail kWh savings equal to22% by 2020. The Gas EE Standards require increasing annual targeted retail therm sales equal to 6% by 2020.

Any RES or DSM surcharge collections above or below the costs incurred to implement the plans are deferred and reflected in the financial statements as a regulatory asset or liability. TEP and UNS Electric recognize RES and DSM surcharge revenue in Electric Retail Sales in amounts necessary to offset recognized qualifying expenditures. Similarly, UNS Gas recognizes DSM surcharge revenue in Gas Retail Sales.

RENEWABLE ENERGY CREDITS ~~(RECs)~~

The ACC ~~uses~~measures compliance with the RES requirements through Renewable Energy Credits (RECs) ~~to measure compliance with the RES requirements.~~. A REC ~~equals~~represents one kWh generated from renewable resources. ~~The cost of REC purchases are qualified renewable expenditures recoverable through the RES surcharge.~~ When TEP or UNS Electric ~~purchase~~purchases renewable energy, the premium paid above the market cost of conventional power isequals the REC ~~cost, a qualified~~ cost recoverable through the RES ~~surcharge, and~~surcharge. As described above, the ~~remaining~~market cost of conventional power is recoverable through the PPFAC.

When RECs are purchased, TEP and UNS Electric record the cost of the RECs (an indefinite-lived intangible asset) as Other Assets, and a corresponding regulatory liability, to reflect the obligation to use the RECs for future RES compliance. ~~Unretired RECs are recorded as Other Assets on the balance sheet. RECs are expensed to the income statements when the~~When RECs are reported to the ACC for compliance with ~~the~~ RES ~~requirements.~~requirements, TEP and UNS Electric recognize Purchased Power expense and Other Revenues in an equal amount. See Note 2.

INCOME TAXES

Due to the difference between GAAP and income tax laws, many transactions are treated differently for income tax purposes than ~~they are in the~~for financial ~~statements.~~statement presentation purposes. Temporary differences are accounted for by recording deferred income tax assets and liabilities on our balance sheets. These assets and liabilities are recorded using income tax rates expected to be in effect when the deferred tax assets and liabilities are realized or settled. We ~~record a valuation allowance to~~ reduce deferred tax assets by a valuation allowance when, ~~we believe~~in the opinion of management, it is more likely than not that some portion or the entire deferred income tax asset will not be realized.

Tax benefits are recognized ~~in the financial statements~~ when it is more likely than not that a tax position will be sustained upon examination by the tax authorities based on the technical merits of the position. The tax benefit recorded is the largest amount that is more than 50% likely to be realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest ~~Expense includes interest accrued by UniSource Energy and TEP on~~expense accruals relating to income tax ~~positions taken on tax returns which have not been reflected~~obligations are recorded in ~~the financial statements.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Other Interest Expense.

Prior to 1990, TEP flowed through to ratepayers certain accelerated tax benefits related to utility plant as the benefits were recognized on tax returns. Regulatory Assets – Noncurrent includes ~~Income Taxes Recoverable Through Future Rates,~~income taxes recoverable through future rates, which reflects the future revenues due us from ratepayers as these tax benefits reverse. See Note 2.

We account for ~~Federal Energy Credits~~federal energy credits generated prior to 2012 using the grant accounting model. The credit is treated as deferred revenue, which is recognized over the depreciable life of the underlying asset. The deferred tax benefit of the credit is treated as a reduction to income tax expense in the year the credit arises. ~~This benefit is offset by~~Federal energy credits generated since 2012 are

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deferred as Regulatory Liabilities – Noncurrent and amortized as a reduction in Income Tax Expense over the tax ~~expense~~life of the underlying asset. Income Tax Expense attributable to the reduction in tax basis ~~required~~is accounted for in the year the federal energy credit is generated and are deferred as regulatory assets effective July 1, 2013 due to ~~be recognized.~~the 2013 TEP Rate Order. All other federal and state income tax credits are treated as a reduction to ~~income tax expense~~Income Tax Expense in the year the credit arises.

Consolidated income tax liabilities are allocated to subsidiaries based on their taxable income as reported in the consolidated tax return.

TAXES OTHER THAN INCOME TAXES

We act as conduits or collection agents for sales taxes, utility taxes, franchise fees, and regulatory assessments. As we bill customers for these taxes and assessments, we record trade receivables. At the same time, we record liabilities payable to governmental agencies on the balance sheet for these taxes and assessments. These amounts are not reflected in the income statements.

DERIVATIVE ~~FINANCIAL~~ INSTRUMENTS

~~Risks~~

We use various physical and ~~Overview~~

~~We are exposed~~financial derivative instruments, including forward contracts, financial swaps and call and put options, to energy price risk associated with gas and purchased power requirements, volumetric risk associated with seasonal load, and operational risk associated with power plants, transmission and transportation systems. We reduce our energy price risk through a variety of derivative and non-derivative instruments. The objectives for entering into such contracts include: creating price stability; ensuring we can meet forecasted load and reserve ~~requirements; and reducing~~requirements, to reduce our exposure to energy commodity price volatility and to hedge our interest rate risk exposure. For all derivative instruments that ~~may result from delayed recovery under~~do not meet the ~~PPFAC~~normal purchase or ~~PGA. See Note 2.~~

~~We consider~~normal sale scope exception, we recognize derivative instruments as either assets or liabilities on the ~~effect of counterparty credit risk~~consolidated balance sheets and measure those instruments at fair value. The accounting for changes in ~~determining~~ the fair value of a derivative instruments that are in a net asset position after incorporating collateral posted by counterparties and allocate the credit risk adjustment to individual contracts. We also consider the impact of our own credit risk after considering collateral posted on instruments that are in a net liability position and allocate the credit risk adjustment to all individual contracts.

We present cash collateral and derivative assets and liabilities associated with the same counterparty separately in our financial statements, and we bifurcate all derivatives into current and long-term portionsdepends on the ~~balance sheet.~~

intended use of the derivative and the resulting designation.

Cash Flow Hedges

TEP hedges the cash flow risk associated with unfavorable changes in the variable interest rates related to the leveraged lease arrangements for the Springerville Common ~~Facilities~~ Lease and variable rate industrial development ~~bonds.~~revenue or pollution control revenue bonds (IDBs). In addition, TEP hedges the cash flow risk associated with a ~~six-year~~long-term wholesale power supply agreement that does not qualify for regulatory recovery using a six-year power purchase swap agreement. UNS Electric ~~entered into~~uses a cash flow hedge ~~in August 2011~~ to ~~fix~~effectively convert the interest rate on the UNS Electric term loan from a variable ~~interest~~rate to a fixed rate. TEP and UNS Electric account for cash flow hedges as follows:

The effective portion of the ~~changes~~change in the fair value ~~of the interest rate swaps and TEP’s six-year power purchase swap agreement are~~is recorded in ~~Accumulated Other Comprehensive Income (AOCI)~~AOCI and the ineffective portion, if any, is recognized in earnings; and

When TEP and UNS Electric determine a contract is no longer effective in offsetting the changes in cash flow of a hedged item, TEP and UNS Electric recognize the ~~changes~~change in fair value in earnings. The unrealized gains and losses at that time remain in AOCI and are reclassified into earnings as the underlying hedged transaction occurs.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

We formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives have been and are expected to remain highly effective in offsetting changes in the cash flows of hedged items.

Energy Contracts - Regulatory Recovery

TEP, UNS Electric and UNS Gas are authorized to recover the prudent costs of hedging activities entered into to mitigate energy price risk for retail customers. We discontinue hedge accounting when: (1) the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) we determine that designating the derivative as a hedging instrument is no longer appropriate.

~~Mark-to-Market~~

~~TEP~~

TEP’s hedges, such as forward power purchase contracts indexed to gas, short-term forward power sales contracts, or call and put options (gas collars), that did not qualify for either cash flow hedge accounting treatment or the normal scope exception are considered mark-to-market transactions. TEP hedges a portion of its monthly natural gas exposure for plant fuel, gas-indexed purchased power and spot market purchases with fixed price contracts for a maximum of three years. Unrealizedrecord unrealized gains and losses ~~are recorded~~on these energy derivatives as either a regulatory asset or regulatory liability to the extent they qualify for recovery through the ~~PPFAC.~~

~~In 2009 through 2011 we had no trading activity.~~

PPFAC or PGA mechanism.

~~UNS Gas~~

Master Netting Agreements

~~UNS Gas enters into~~

We have elected gross presentation for our derivative contracts ~~such as forward gas purchases~~under master netting agreements and ~~gas swaps, creating price stability~~collateral positions. We separate all derivatives into current and ~~reducing exposure to natural gas price volatility that may result in delayed recovery under~~long-term portions on the ~~PGA. Unrealized gains and losses are recorded as either a regulatory asset or regulatory liability, as the UNS Gas PGA mechanism permits the recovery of the cost of hedging contracts.~~

balance sheet.

~~UNS Electric~~

UNS Electric hedges a portion of its purchased power exposure to fixed price and natural gas-indexed contracts with forward power purchases, financial gas swaps, and call and put options. Unrealized gains and losses are recorded as either a regulatory asset or regulatory liability, as the UNS Electric PPFAC mechanism allows recovery of the prudent costs of contracts for hedging fuel and purchased power costs.

Normal ~~Purchase~~Purchases and Normal ~~Sale~~

Sales

We enter into forward energy purchase and sales contracts, including call options, with counterparties that have generating capacity to support our current load forecasts ~~with~~or counterparties ~~for~~that have load serving ~~requirements~~requirements. We have elected the normal purchase or ~~counterparties with generating capacity. These~~normal sales exception for these contracts which are not required to be ~~marked-to-market~~measured at fair value and are accounted for on an accrual basis.

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Commodity Trading

We ~~evaluate our counterparties on an ongoing basis for non-performance risk to ensure it does~~did not ~~impact our ability to obtain the normal scope exception.~~

engage in trading of derivative financial instruments.

PENSION AND OTHER ~~POSTRETIREMENT~~RETIREE BENEFITS

We sponsor noncontributory, defined benefit pension plans for substantially all employees and certain affiliate employees. Benefits are based on ~~employees’~~ years of service and average compensation. We also ~~maintain a Supplemental Executive Retirement Plan for upper management. TEP also provides~~provide limited health care and life insurance benefits for retirees.

We recognize the underfunded status of our defined benefit pension plans as a liability on our balance sheets. The underfunded status is measured as the difference between the fair value of the pension plans’ assets and the projected benefit obligation for the pension plans. We recognize a regulatory asset to the extent these future costs are probable of recovery in the rates charged to retail customers and expect to recover these costs over the estimated service lives of employees.

Additionally, we maintain a Supplemental Executive Retirement Plan (SERP) for senior management. Changes in SERP benefit obligations are recognized as a component of AOCI.

Pension and other ~~postretirement~~retiree benefit ~~expense~~expenses are determined by actuarial valuations based on assumptions that we evaluate annually. See Note 9.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

10.

NOTE 2. PENDING MERGER WITH FORTIS
On December 11, 2013, UNS Energy announced that it had entered into an agreement and plan of merger, subject to shareholder and required regulatory approvals, to be acquired by Fortis for $60.25 per share of Common Stock in cash. Following the merger, UNS Energy will continue as a wholly owned subsidiary of Fortis. The Board of Directors of each of UNS Energy and Fortis Parent have approved the merger.

NOTE 3. REGULATORY MATTERS

~~RATES AND REGULATION~~

The ~~ACC~~Arizona Corporation Commission (ACC) and the ~~FERC~~Federal Energy Regulatory Commission (FERC) each regulate portions of the utility accounting practices and rates ~~used by~~of TEP, UNS ~~Gas~~Electric, and UNS ~~Electric.~~Gas. The ACC regulates rates charged to retail customers, the siting of generation and transmission facilities, the issuance of securities, ~~and~~ transactions with affiliated ~~parties.~~parties, and the pending merger. The FERC regulates terms and prices of transmission services and wholesale electricity ~~sales.~~

sales, and the pending merger.

2013 TEP ~~2008 Rate Order~~

~~The 2008~~RATE ORDER

In June 2013, the ACC issued the 2013 TEP Rate Order ~~issued~~that resolved the rate case filed by TEP in July 2012 which was based on a test year ended December 31, 2011. The 2013 TEP Rate Order approved new rates effective July 1, 2013.

The provisions of the ~~ACC and effective December 1, 2008, provided~~ 2013 TEP Rate Order include, but are not limited to:

an ~~average base rate~~ increase ~~of 6% over TEP’s previous Base Rates; an 8% authorized rate of return on original cost rate base; a fuel rate included~~ in non-fuel retail Base Rates of ~~2.9~~approximately $76 million over adjusted test year revenues;

an Original Cost Rate Base (OCRB) of approximately $1.5 billion and a Fair Value Rate Base (FVRB) of approximately $2.3 billion;

a return on equity of 10.0%, a long-term cost of debt of 5.18%, and a short-term cost of debt of 1.42%, resulting in a weighted average cost of capital of 7.26%;

a capital structure of approximately 43.5% equity, 56.0% long-term debt, and 0.5% short-term debt;

a 0.68% return on the fair value increment of rate base (the fair value increment of rate base represents the difference between OCRB and FVRB of approximately $800 million);

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a revision in depreciation rates from an average rate of 3.32% to 3.0% for generation and distribution plant, primarily due to revised estimates of asset removal costs, which will have the effect of reducing depreciation expense by approximately $11 million annually; and

an agreement by TEP to seek recovery of costs related to the discontinued Nogales transmission project from the FERC before seeking rate recovery from the ACC.

The 2013 TEP Rate Order also includes the following cost recovery mechanisms:

a new Purchased Power and Fuel Adjustment Clause (PPFAC) credit of 0.1388 cents per ~~kilowatt-hour (kWh);~~ kWh effective July 1, 2013. The credit reflects the following:


◦	a reduction in the PPFAC bank balance, recorded in June 2013, as an increase to fuel expense, of $3 million related to prior sulfur credits; and


◦	a transfer of $10 million, recorded in June 2013, from the PPFAC bank balance to a new regulatory asset to defer coal costs related to the San Juan mine fire. These costs will be eligible for recovery through the PPFAC upon final settlement with the San Juan operator related to insurance proceeds.

a modification of the PPFAC mechanism to include recovery of generation-related lime costs offset by sulfur credits.

a Lost Fixed Cost Recovery mechanism (LFCR) to recover certain non-fuel costs related to kWh sales lost due to energy efficiency programs and distributed generation. In the fourth quarter of 2013, TEP recorded revenues of $2 million related to unrecovered non-fuel costs incurred during 2013.

an Environmental Compliance Adjustor (ECA) mechanism to recover certain capital carrying costs to comply with government-mandated environmental regulations between rate cases. The ECA rate is capped at 0.025 cents per kWh, which approximates 0.25% of TEP's total retail revenues, and will be charged to customers beginning in May 2014 for any qualifying costs incurred between August 2013 and December 2013.

an energy efficiency provision which includes a 2013 calendar year budget of approximately $21 million to fund programs that support the ACC's Electric Energy Efficiency Standards, as well as a $2 million performance incentive.

2013 UNS ELECTRIC RATE ORDER

In December 2013, the ACC issued the 2013 UNS Electric Rate Order that resolved the rate case filed by UNS Electric in December 2012 which was based on a test year ended June 30, 2012. The 2013 UNS Electric Rate Order approved new rates effective January 1, ~~2009;~~2014.

The provisions of the 2013 UNS Electric Rate Order include, but are not limited to:

an increase in non-fuel retail Base Rates of approximately $3 million;

an OCRB of approximately $213 million and a FVRB of approximately $283 million;

a return on equity of 9.50% and a long-term cost of debt of 5.97% resulting in a weighted average cost of capital of 7.83%;

a 0.50% return on the fair value increment of rate base (the fair value increment of rate ~~increase moratorium through January 1, 2013.~~

base represents the difference between OCRB and FVRB of approximately ~~2010~~$70 million); and

a capital structure of 52.6% equity and 47.4% long-term debt.

The 2013 UNS ~~Gas~~Electric Rate Order

~~Effective~~ also includes the following cost recovery mechanisms:

a LFCR mechanism to recover certain non-fuel costs related to kWh sales lost due to energy efficiency programs and distributed generation; and

a Transmission Cost Adjustor (TCA), which will allow more timely recovery of transmission costs associated with serving retail customers.

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2012 UNS GAS RATE ORDER

In April ~~2010,~~2012, the ACC approved a ~~base rate increase of 2% ($3 million), including an 8% authorized rate of return on original cost rate base.~~

~~Pending UNS Gas~~Base Rate ~~Case~~

~~In April 2011, UNS Gas filed a general rate case (on a cost-of-service basis) with the ACC requesting a base rate increase of 3.8% to cover a revenue deficiency of $5.6 million.~~

~~In February 2012, ACC Staff recommended a base rate~~ increase of $2.7 million, ~~as well as a~~or 1.8%, and an LFCR mechanism to enable UNS Gas to recover lost ~~fixed-cost~~fixed cost revenues as a result of implementing the ACC’s Gas Energy Efficiency Standards (Gas EE ~~Standards.~~ Standards).

The ACC ~~is expected to issue a final order in the second quarter of 2012.~~

~~2008 UNS Electric Rate Order~~

~~In May 2008, the ACC~~ approved ~~a base rate increase of 2.5% ($4 million) effective June 2008.~~

~~2010 UNS Electric Rate Order~~

~~In September 2010, the ACC approved a base rate increase of 4% ($7 million), including~~ an 8% authorized rate of return of 8.3% on ~~original cost~~an OCRB of $183 million, and a 1.0% return on the fair value increment of rate base ~~effective October 1, 2010.~~(the fair value increment of rate base represents the difference between OCRB and FVRB of approximately $70 million). The ~~ACC approved~~ new ~~depreciation~~ rates became effective in ~~October 2010.~~

~~In July 2011,~~May 2012.

COST RECOVERY MECHANISMS

TEP, UNS Electric, ~~completed the ACC~~ and FERC approved purchase of BMGS from UED for $63 million, UED’s book value for the assets. BMGS was included in UNS Electric’s rate base through a revenue-neutral rate reclassification of approximately 0.7 cents per kWh from base power supply rate to non-fuel Base Rates.

~~COST RECOVERY MECHANISMS~~

~~TEP,~~ UNS Gas ~~and UNS Electric~~ have received regulatory decisions that allow for more timely recovery of certain costs through the ~~following~~ recovery ~~mechanisms.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

mechanisms described below.

Purchased Power and Fuel Adjustment Clause ~~(PPFAC)~~

The PPFAC provides for the adjustment of Retail Rates to reflect variations in retail fuel, transmission and purchased power costs, including demand charges, and the prudent costs of contracts for hedging fuel. TEP and UNS Electric record deferrals for recovery or refund to the extent actual retail fuel, transmission and purchased power costs vary from the fuel rate and current PPFAC rates. The TEP PPFAC became effective in January 2009. A

TEP's PPFAC rate ~~adjustment~~ is ~~made~~adjusted annually each April 1st (unless otherwise approved by the ACC) and goes into effect for the subsequent 12-month period ~~automatically~~ unless suspended by the ACC. ~~UNS Electric’s~~

TEP's PPFAC rate ~~adjustment is made annually each June 1~~^st~~, effective for the subsequent 12-month period.~~

~~The PPFAC rate includes (a)~~includes: 1) a ~~“Forward Component,”~~forward component, under which TEP ~~and UNS Electric recover~~recovers or ~~refund~~refunds differences between a) forecasted fuel, transmission, and purchased power costs for the upcoming calendar year and b) those embedded in the fuel rate and the current PPFAC rates; ~~(b)~~and 2) a ~~“True-up Component,”~~true-up component, which reconciles differences between prudently incurred actual fuel, transmission, and purchased power costs and those recovered through the combination of the fuel rate and the forward component for the preceding 12-month period.

Prior to the 2013 UNS Electric Rate Order, UNS Electric’s PPFAC rate was adjusted annually each June 1^st, effective for the subsequent 12-month period. As a result of the 2013 UNS Electric Rate Order, effective January 1, 2014, UNS Electric's PPFAC rate reflects a weighted 12-month rolling average of actual fuel and purchased power costs incurred by UNS Electric. The ~~table~~PPFAC rate adjusts monthly, but it is restricted from changing by more than 0.83 percent from the preceding month's rate. If the PPFAC deferral balance reflects an over-collection of $10 million or more on a billed-to-customer basis, UNS Electric must file for a PPFAC rate adjustment. At December 31, 2013, the PPFAC bank balance was over-collected by $14 million on a billed-to-customer basis.

The tables below ~~summarizes~~summarize TEP’s and UNS Electric’s PPFAC ~~rates in cents per kWh that are compared against actual fuel cost to create regulatory assets or liabilities:~~

September 30, September 30, September 30, September 30, September 30, September 30,
     2011    2010
     June -
December    April -
May    January -
March    June –
December    April -
May    January -
March⁽²⁾
TEP

PPFAC
     0.53       0.53       0.09       0.09       0.09       0.18
CTC⁽¹⁾
     (0.53 )    (0.53 )    (0.09 )    (0.09 )    (0.09 )    (0.18 )












Total PPFAC Rate
     —         —         —         —         —         —
UNS Electric
     (0.88 )    0.08       0.08       (0.28 )    (1.06 )    (1.06 )

rates:



	TEP
	2013		2012
	July - December	January - June	April - December	January - March
	Cents per kWh
PPFAC Rate	0.14	0.77	0.77	0.53
Competition Transition Charge ⁽¹⁾	—	—	—	(0.53	)
Net TEP PPFAC Rate	0.14	0.77	0.77	—

~~(1)~~
⁽¹⁾	TEP's PPFAC became effective January 1, 2009. However, TEP was initially required to refund amounts to customers through the PPFAC mechanism that were over collected under the Competition Transition Charge

~~(2)~~

~~TEP’s first~~ (CTC) in place from 1999 through 2008. As a result, the authorized net PPFAC charge was set at zero until all over collected CTC revenue was fully refunded to customers (November 2011). TEP then continued deferring PPFAC eligible costs but was not authorized to bill customers until a new PPFAC rate ~~began~~was approved by the ACC in April ~~2009 at 0.18 cents per kWh. UNS Electric’s PPFAC rate from January to May 2009 was 1.50 cents per kWh, and the PPFAC rate from June to December 2009 was (1.06) cents per kWh.~~2012.

As part of the 2008 Rate Order, TEP was required to credit previously collected revenues to customers through the PPFAC. As a result, the PPFAC charge has been zero since it became effective in January 2009. In November 2011, the Fixed CTC revenue was fully refunded to customers and TEP began deferring the PPFAC eligible costs until a new PPFAC rate is approved by the ACC.

~~The following table shows the changes in TEP’s PPFAC related accounts and the impacts on revenue and expense for the year ended December 31, 2011:~~

September 30, September 30, September 30, September 30,
     Assets
(Liability) at
December 31,    Year Ended
December 31, 2011
     2011      2010    Increase to
Revenue      Reduction to
Fuel and
Purchased
Power Expense
     -Millions of Dollars-
PPFAC - Fixed CTC Revenue to be Refunded (current and noncurrent)
     $ —           $ (36 )    $ 36







PPFAC (current and noncurrent)
     $ 60         $ 54            $ 6

For the year ended December 31, 2010, changes in the deferred PPFAC regulatory asset (liability) resulted in a $10 million increase to revenue and a $22 million decrease to fuel and purchased power expense.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~



	UNS Electric
	2013						2012
	September - December		June - August		January - May		June - December		January - May
	Cents per kWh
PPFAC Rate	(0.40	)	(0.92	)	(1.44	)	(1.44	)	(0.88	)

UNS Gas Purchased Gas Adjustor ~~(PGA)~~

The PGA mechanism ~~provides for the adjustment of~~allows UNS Gas to adjust Retail Rates to ~~reflect variations~~recover fluctuations in natural gas costs. UNS Gas records deferrals for recovery or refund to the extent actual natural gas costs vary from the PGA rate. The PGA rate reflects a weighted,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

rolling average of the gas costs incurred by UNS Gas over the preceding 12 months. The PGA rate automatically adjusts monthly, but it is restricted from rising or falling more than ~~$0.15~~15 cents per therm in a twelve-month period. UNS Gas is required to request an additional surcredit if deferral balances reflect $10 million or more on a ~~billed~~billed-to-customer basis.

In October 2013, the ACC approved an increase to the existing PGA credit from 4.5 cents per therm to 10 cents per therm in order to reduce the over-collected PGA bank balance. The new PGA credit will be effective for the period November 1, 2013 through April 30, 2014. At December 31, 2013 and December 31, 2012, the PGA bank balance was over-collected by $10 million on a billed-to-customer basis.

The PGA rate ranged from ~~$0.6593~~0.4504 to ~~$0.7296~~0.5280 cents per therm in ~~2011,~~2013, and ranged from ~~$0.6433~~0.5202 to ~~$0.7306~~0.6501 cents per therm in ~~2010.~~

~~RES and~~2012.

Renewable Energy ~~Efficiency~~ Standards

~~The ACC has a mandatory RES that requires~~

TEP and UNS Electric are required to expand their use of renewable energy ~~through efforts funded by customer surcharges.~~in order to meet the ACC’s RES. TEP and UNS Electric, ~~are required to file five-year implementation plans~~through a customer surcharge, recover costs associated with meeting the ~~ACC~~RES. These costs include the purchases of RECs through Power Purchase Agreements (PPAs) and ~~annually seek approval for the upcoming year’s RES funding amount. Similarly, TEP, UNS Gas and UNS Electric recover the cost~~Performance Based Incentives (PBIs), as well as costs associated with utility-scale ownership of ~~ACC-approved energy efficiency programs through DSM surcharges established by the ACC.~~

~~The following table shows RES and DSM tariffs collected:~~

September 30, September 30, September 30, September 30, September 30,
     TEP RES      UNS Electric RES      TEP DSM      UNS Gas DSM      UNS Electric
DSM
     -Millions of Dollars-
2011
     $ 35         $ 7         $ 11         $ 1         $ 2
2010
     32         7         10         1         2
2009
     29         5         7         1         1

~~Renewable Energy Standard~~

~~In 2010, the ACC approved:~~

~~A funding mechanism for approximately $14 million of TEP-owned renewable energy projects in 2010, and approximately $5 million in UNS Electric owned~~ solar ~~projects per year between 2011 and 2014. TEP’s projects were completed in 2010, and TEP began recovering its costs through the RES tariff in January 2011.~~

~~TEP’s 2011 RES implementation plan. As approved by the plan, TEP invested $28 million in TEP-owned solar projects in 2011.~~

~~In 2011, the ACC approved TEP’s 2012 RES implementation plan. The plan allows TEP to invest $28 million in 2012, and $8 million in 2013 for TEP-owned solar projects.~~

~~The funding mechanism allows TEP and UNS Electric to use RES funds to recover operating costs, depreciation, and property taxes and to earn a return on company-owned solar projects~~assets until the projects can be incorporated in Base Rates.

In October 2013, the ACC approved TEP's 2014 RES plan and authorized a total 2014 RES budget of $40 million with $34 million to be collected through the 2014 RES funding mechanism. TEP earned returns on solar investments of $2 million in each of 2013 and 2012 and $1 million in 2011.

In October 2013, the ACC approved UNS Electric's 2014 RES plan and authorized a total 2014 RES budget of $7 million with $6 million to be collected through the 2014 RES funding mechanism. UNS Electric earned returns on solar investments of less than $0.5 million in 2013 and 2012. No return was earned in 2011.

Energy Efficiency Standards

TEP, UNS Electric, and UNS ~~Electric entered into multiple ACC approved long-term purchase power agreements with companies developing renewable energy generation facilities. TEP and UNS Electric~~Gas are required to ~~purchase the full output of each facility for 20 years. Both utilities are authorized~~implement cost-effective DSM programs to ~~recover a portion of the cost of renewable energy through the PPFAC,~~comply with the ~~balance of costs recoverable through the RES tariff.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Electric Energy Efficiency Standards~~

In 2010, the ACC approved new Electric Energy Efficiency (EE) Standards designed to require TEP and UNS Electric to implement cost-effective Demand Side Management (DSM) programs, effective in 2011. In 2011, theACC’s EE ~~Standards targeted total retail kWh savings equal to 1.25% of 2010 sales increasing to 22% by 2020.~~Standards. The EE Standards provide for a DSM surcharge to recover, from retail customers, the costs to implement DSM programs.

In ~~January~~December 2013, the ACC approved UNS Electric’s 2013-2014 energy efficiency implementation plan that included a 2014 calendar year budget of approximately $5 million to fund programs that support the ACC’s Electric EE Standards as well as a performance incentive.

In June 2013, the ACC approved the UNS Gas 2011-2012 energy efficiency implementation plan with certain modifications. The approval included an annual energy efficiency budget of approximately $2 million and a waiver of the Gas EE Standards through 2013.

Lost Fixed Cost Recovery Mechanism

The LFCR is a mechanism to recover certain non-fuel costs that would go unrecovered due to lost sales as a result of implementing ACC approved EE Standards and distributed generation targets.

In April 2012, the ACC ~~granted UNS Electric~~authorized a ~~waiver from complying with the 2011 and 2012 EE Standards.~~

~~The ACC approved new Gas EE Standards which required~~LFCR mechanism that enables UNS Gas to ~~implement cost effective DSM programs~~recover non-purchased energy related costs that would go unrecovered due to ~~reduce~~lost therm sales as a result of implementing the Gas EE Standards.

In June 2013, the ACC authorized a LFCR mechanism for TEP subject to a year-over-year cap of 1% of TEP's total retail ~~therm sales in 2011,~~revenues. TEP expects the LFCR rate which will recover 2013 costs, to be effective on July 1, 2014, upon review by ~~701,113 therms, or 0.5%~~the ACC of ~~2010~~verified lost kWh sales. ~~Targeted savings increase annually in subsequent years until they reach~~

In December 2013, as part of the 2013 UNS Electric Rate Order, the ACC authorized a ~~cumulative annual reduction in retail therm sales~~LFCR for UNS Electric, to be effective on July 1, 2014.

K-98

Table of ~~6% by 2020.~~

In January 2012, TEP filed a modification to its 2012/2013 Energy Efficiency Implementation Plan with the ACC. The proposal includes a request for an increase in the performance incentive based on TEP’s ability to meet the EE targets for 2012 and for 2013. TEP’s proposed annual performance incentive in each of 2012 and 2013 ranges from $6 million to $8 million.

~~Renewable Energy Credits~~

~~The following table shows the REC activity for 2011 and 2010:~~

September 30, September 30, September 30, September 30,
     UniSource Energy    TEP
     December 31,    December 31,
     2011    2010    2011    2010
     -Millions of Dollars-
Beginning Balance, included in Other Assets
     $ 3       $ —         $ 2       $ —
RECs Purchased
     6       8       5       8
RECs Recovered Through Revenues (RES surcharge)
     (8 )    (5 )    (7 )    (6 )








Ending Balance, included in Other Assets
     $ 1       $ 3       $ —         $ 2

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

REGULATORY ASSETS AND LIABILITIES

~~Regulatory Assets and Liabilities~~

The following tables summarize regulatory assets and liabilities:

September 30, September 30, September 30, September 30,
     December 31, 2011
     TEP    UNS
Gas    UNS
Electric    UniSource
Energy
     -Millions of Dollars-
Regulatory Assets—Current

Property Tax Deferrals⁽¹⁾
     $ 16       $ —         $ —         $ 16
Derivative Instruments (Notes 11 and 16)
     7       7       10       24
Deregulation Costs⁽²⁾
     3       —         —         3
PPFAC⁽³⁾
     34       —         7       41
DSM⁽³⁾
     8       —         1       9
Other Current Regulatory Assets⁽⁴⁾
     4       —         —         4








Total Regulatory Assets—Current
     72       7       18       97








Regulatory Assets—Noncurrent

Pension and Other Postretirement Benefits (Note 9)
     107       3       4       114
Income Taxes Recoverable through Future Revenues⁽⁵⁾
     10       —         2       12
PPFAC/PGA⁽³⁾
     6       —         —         6
PPFAC—Final Mine Reclamation and Retiree Health Care Costs⁽⁶⁾
     20       —         —         20
Derivative Instruments (Notes 11 and 16)
     2       2       3       7
Other Regulatory Assets⁽⁴⁾
     12       1       1       14








Total Regulatory Assets—Noncurrent
     157       6       10       173








Regulatory Liabilities—Current

PPFAC/PGA⁽⁷⁾
     —         (15 )    —         (15 )
RES⁽⁷⁾
     (22 )    —         (3 )    (25 )
Other Current Regulatory Liabilities
     (2 )    —         —         (2 )








Total Regulatory Liabilities—Current
     (24 )    (15 )    (3 )    (42 )








Regulatory Liabilities—Noncurrent

Net Cost of Removal for Interim Retirements⁽⁸⁾
     (198 )    (23 )    (10 )    (231 )
Other Regulatory Liabilities
     (3 )    (1 )    —         (4 )








Total Regulatory Liabilities—Noncurrent
     (201 )    (24 )    (10 )    (235 )








Total Net Regulatory Assets (Liabilities)
     $ 4       $ (26 )    $ 15       $ (7 )

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~



	December 31, 2013
	TEP			UNS Electric			UNS Gas			UNS Energy
	Millions of Dollars
Regulatory Assets—Current
Property Tax Deferrals ⁽¹⁾	$	20		$	—		$	—		$	20
Derivative Instruments (Note 15)	1			—			—			1
San Juan Mine Fire Cost Deferral ⁽²⁾	10			—			—			10
PPFAC ⁽²⁾	4			10			—			14
DSM and LFCR ⁽²⁾	3			—			—			3
Other Current Regulatory Assets ⁽³⁾	5			—			—			5
Total Regulatory Assets—Current	43			10			—			53
Regulatory Assets—Noncurrent
Pension and Other Retiree Benefits (Note 10)	75			3			2			80
Income Taxes Recoverable through Future Revenues ⁽⁴⁾	22			3			—			25
PPFAC—Final Mine Reclamation and Retiree Health Care Costs ⁽⁵⁾	25			—			—			25
Discontinued Nogales Transmission Project ⁽⁶⁾	5			—			—			5
Other Regulatory Assets ⁽³⁾	14			2			—			16
Total Regulatory Assets—Noncurrent	141			8			2			151
Regulatory Liabilities—Current
PGA ⁽²⁾	—			—			(15		)	(15		)
RES ⁽²⁾	(22		)	(9		)	—			(31		)
Other Current Regulatory Liabilities	(2		)	(6		)	—			(8		)
Total Regulatory Liabilities—Current	(24		)	(15		)	(15		)	(54		)
Regulatory Liabilities—Noncurrent
Net Cost of Removal for Interim Retirements ⁽⁷⁾	(254		)	(12		)	(26		)	(292		)
Income Taxes Payable through Future Rates	(5		)	—			(1		)	(6		)
Deferred Investment Tax Credit ⁽⁸⁾	(4		)	—			—			(4		)
Total Regulatory Liabilities—Noncurrent	(263		)	(12		)	(27		)	(302		)
Total Net Regulatory Assets (Liabilities)	$	(103	)	$	(9	)	$	(40	)	$	(152	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, September 30, September 30, September 30,
     December 31, 2010
     TEP    UNS
Gas    UNS
Electric    UniSource
Energy
     -Millions of Dollars-
Regulatory Assets—Current

Property Tax Deferrals⁽¹⁾
     $ 16       $ —         $ —         $ 16
Derivative Instruments (Notes 11 and 16)
     5       8       12       25
Deregulation Costs⁽²⁾
     4       —         —         4
PPFAC⁽³⁾
     —         —         3       3
DSM⁽³⁾
     5       —         —         5
Other Current Regulatory Assets⁽⁴⁾
     4       —         —         4








Total Regulatory Assets—Current
     34       8       15       57








Regulatory Assets—Noncurrent

Pension and Other Postretirement Benefits (Note 9)
     90       2       2       94
Income Taxes Recoverable through Future Revenues⁽⁵⁾
     22       —         1       23
PPFAC/PGA⁽³⁾
     37       —         —         37
PPFAC—Final Mine Reclamation and Retiree Health Care Costs ⁽⁶⁾
     17       —         —         17
Deregulation Costs⁽²⁾
     3       —         —         3
Derivative Instruments (Notes 11 and 16)
     —         2       2       4
Other Regulatory Assets⁽⁴⁾
     13       2       —         15








Total Regulatory Assets—Noncurrent
     182       6       5       193








Regulatory Liabilities—Current

PPFAC/PGA⁽⁷⁾
     —         (9 )    —         (9 )
PPFAC—Fixed CTC Revenue to be Refunded⁽⁷⁾
     (36 )    —         —         (36 )
RES⁽⁷⁾
     (22 )    —         (1 )    (23 )
Other Current Regulatory Liabilities
     (1 )    —         —         (1 )








Total Regulatory Liabilities—Current
     (59 )    (9 )    (1 )    (69 )








Regulatory Liabilities—Noncurrent

Net Cost of Removal for Interim Retirements⁽⁸⁾
     (169 )    (22 )    (9 )    (200 )
Other Regulatory Liabilities
     (1 )    —         —         (1 )








Total Regulatory Liabilities—Noncurrent
     (170 )    (22 )    (9 )    (201 )








Total Net Regulatory Assets (Liabilities)
     $ (13 )    $ (17 )    $ 10       $ (20 )



	December 31, 2012
	TEP			UNS Electric			UNS Gas			UNS Energy
	Millions of Dollars
Regulatory Assets—Current
Property Tax Deferrals ⁽¹⁾	$	18		$	—		$	—		$	18
Derivative Instruments (Note 15)	2			6			3			11
PPFAC ⁽²⁾	7			8			—			15
DSM ⁽²⁾	5			—			—			5
Other Current Regulatory Assets ⁽³⁾	2			—			1			3
Total Regulatory Assets—Current	34			14			4			52
Regulatory Assets—Noncurrent
Pension and Other Retiree Benefits (Note 10)	130			5			4			139
Income Taxes Recoverable through Future Revenues ⁽⁴⁾	8			2			—			10
PPFAC—Final Mine Reclamation and Retiree Health Care Costs ⁽⁵⁾	22			—			—			22
Discontinued Nogales Transmission Project ⁽⁶⁾	5			—			—			5
Other Regulatory Assets ⁽³⁾	13			1			1			15
Total Regulatory Assets—Noncurrent	178			8			5			191
Regulatory Liabilities—Current
PGA ⁽²⁾	—			—			(17		)	(17		)
RES ⁽²⁾	(19		)	(4		)	—			(23		)
Other Current Regulatory Liabilities	(2		)	(1		)	(1		)	(4		)
Total Regulatory Liabilities—Current	(21		)	(5		)	(18		)	(44		)
Regulatory Liabilities—Noncurrent
Net Cost of Removal for Interim Retirements ⁽⁷⁾	(231		)	(11		)	(25		)	(267		)
Income Taxes Payable through Future Rates	(5		)	—			(1		)	(6		)
Deferred Investment Tax Credit ⁽⁸⁾	(5		)	—			—			(5		)
Other Regulatory Liabilities	—			(1		)	—			(1		)
Total Regulatory Liabilities—Noncurrent	(241		)	(12		)	(26		)	(279		)
Total Net Regulatory Assets (Liabilities)	$	(50	)	$	5		$	(35	)	$	(80	)

Regulatory assets are either being collected in Retail Rates or are expected to be collected through Retail Rates in a future period. We describe regulatory assets ~~and state when~~below. With the exception of interest earned on under-recovered PPFAC costs, we do not earn a return ~~below:~~

on regulatory assets.


⁽¹⁾	Property Tax is recovered over an approximately a six-month period as costs are paid, rather than as costs are accrued.

~~(2)~~

Deregulation costs represent deferred expenses that TEP incurred to comply with various ACC deregulation orders, as authorized by the ACC. TEP earns a return on this asset and is recovering these costs through Retail Rates over a four-year period ending November 2012.

~~(3)~~

⁽²⁾

See Cost Recovery Mechanisms ~~discussion.~~discussion above.

~~(4)~~

⁽³⁾

TEP’s other regulatory assets include unamortized loss on reacquired debt (recovery through 2032);, coal contract amendment (recovery through 2017);, rate case costs (recovery over three years), environmental compliance costs, Springerville Unit 1 lease deferrals and other assets (recovery through 2014). ~~UNS Gas’ other assets consist of rate case costs (recovery over 3 years), and costs of the low income assistance program.~~

~~(5)~~
⁽⁴⁾	Income Taxes Recoverable through Future Revenues are amortized over the life of the assets.

~~(6)~~

⁽⁵⁾

Final Mine Reclamation and Retiree Health Care Costs stem from TEP’s jointly-owned facilities at the San Juan Generating Station, the Four Corners Generating Station, and ~~Navajo.~~the Navajo Generating Station. TEP is required to recognize the present value of its liability associated with final mine reclamation and retiree health care ~~obligations.~~obligations over the life of the coal supply agreements. TEP recorded a regulatory asset because TEP is permitted to fully recover these costs through the PPFAC when the costs are invoiced by the miners. TEP expects to recover these costs over the remaining life of the mines, which is estimated to be between 1514 and 2120 years.

⁽⁶⁾
TEP and UNS Electric will request recovery from FERC for the prudent costs incurred to develop a high-voltage transmission line from Tucson to Nogales. TEP and UNS Electric are not going to proceed with the project. See Note 7.

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Regulatory liabilities represent items that ~~TEP~~we either ~~expects~~expect to pay to customers through billing reductions in future periods or ~~plans~~plan to use for the purpose for which they were collected from customers, as described below:

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~(7)~~

~~See Cost Recovery Mechanisms discussion above.~~

~~(8)~~

⁽⁷⁾

Net Cost of Removal for Interim Retirements represents ~~an estimate~~amounts recovered through depreciation rates associated with asset retirement costs expected to be incurred in the future.

⁽⁸⁾

The Deferred Investment Tax Credit relates to federal energy credits generated in 2012 and is amortized over the tax life of the cost of future asset retirement obligations net of salvage value. These are amounts collected through revenue for the net cost of removal of interim retirements for transmission, distribution, general and intangible plant which are not yet expended. TEP and UNS Electric have also collected amounts for generation plant, which they have not yet expended.underlying asset.

~~Income Statement Impact~~

IMPACTS OF REGULATORY ACCOUNTING

If we determine that we no longer meet the criteria for continued application of ~~Applying Regulatory Accounting~~

~~Regulatory accounting had the following effects on TEP’s net income:~~

September 30, September 30, September 30,
     Years Ended December 31,
     2011    2010    2009
     -Millions of Dollars-
TEP

Operating Revenues

Amortization of the Fixed CTC Revenue to be Refunded
     $ 36       $ 10       $ 13
Operating Expenses

Depreciation (related to Net Cost of Removal for Interim
Retirements)
     (29 )    (30 )    (41 )
Deferral of PPFAC Costs
     6       22       18
Other
     —         (8 )    (16 )
Non-Operating Income/Expenses

Long-Term Debt (Amortization of Loss on Reacquired Debt Costs)
     1       1       —
AFUDC—Equity
     4       4       4
Income Taxes—Deferral
     (8 )    1       —
Offset by the Tax Effect of the Above Adjustments
     (4 )    —         9






Net (Decrease)/Increase to Net Income
     $ 6       $ —         $ (13 )

UNS Gas and UNS Electric would have recognized the difference between expected and actual purchased energy costs and commodity derivative unrealized gains or losses as a change in income statement expense, rather than as a change in regulatory balances.

September 30, September 30, September 30,
     Years Ended December 31,
     2011    2010    2009
     -Millions of Dollars-
UNS Gas

Net (Decrease)/Increase to Net Income
     $ (5 )    $ (1 )    $ 6
UNS Electric

Net (Decrease)/Increase to Net Income
     3       (7 )    7

~~Future Implications of Discontinuing Application of Regulatory Accounting~~

~~We regularly assess whether we can continue to apply~~ regulatory accounting, we would be required to ~~regulated~~write off our regulatory assets and liabilities related to those operations ~~and concluded~~not meeting the regulatory accounting ~~is applicable. If we stopped applying~~requirements. Discontinuation of regulatory accounting tocould have a material impact on our ~~regulated operations the following would occur:~~

financial statements.

~~Regulatory pension assets would be reflected in AOCI;~~

~~We would write-off remaining regulatory assets as an expense and regulatory liabilities as income on the income statements;~~

~~At December 31, 2011, based on the regulatory assets balances, net of regulatory liabilities:~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~TEP would have recorded an extraordinary after-tax gain of $62 million and an after-tax loss in AOCI of $64 million;~~

~~UNS Gas would have recorded an extraordinary after-tax gain of $18 million and an after-tax loss in AOCI of $2 million; and~~

~~UNS Electric would have recorded an extraordinary after-tax loss of $6 million and an after-tax loss in AOCI of $3 million.~~

~~While future regulatory orders and market conditions may affect cash flows, our cash flows would not be affected if we stopped applying regulatory accounting to our regulated operations.~~

NOTE ~~3. SEGMENT AND RELATED INFORMATION~~

4. BUSINESS SEGMENTS

We have three reportable segments ~~that are determined based on the way we organize~~regularly reviewed by our ~~operations~~chief operating decision makers to evaluate performance and ~~evaluate performance:~~

make operating decisions.


(1)	TEP, a regulated electric utility ~~business, is~~and our largest ~~subsidiary;~~subsidiary


(2)	UNS Electric, a regulated electric utility


(3)	UNS Gas, is a regulated gas distribution utility ~~business; and~~

~~(3)~~

~~UNS Electric is a regulated electric utility business.~~

~~Results for the UniSource Energy and UES holding companies, Millennium and UED are included in Other below.~~

In accordance with accounting rules related to the transfer of a business held under common control, we reflect UNS Electric’s purchase of BMGS as if it occurred on January 1, 2009. UNS Electric’s net income and reconciling adjustments in the table below increased by $3 million for the year ended December 31, 2011, and $5 million for each of the years ended December 31, 2010 and 2009. The transaction had no impact on UniSource Energy’s consolidated financial statements. In addition, the segments disclosed in the 2010 and 2009 sections of the table below were revised to move Millennium into the “Other” segment as it is no longer a reportable segment.

We disclose selected financial data for our reportable segments in the following tables:

September 30, September 30, September 30, September 30, September 30, September 30,
     Reportable Segments
2011
     TEP    UNS
Gas    UNS
Electric    Other    Reconciling
Adjustments    UniSource
Energy
     -Millions of Dollars-
Income Statement

Operating Revenues-External
     $ 1,141       $ 149       $ 219       $ —         $ 1       $ 1,510
Operating Revenues- Intersegment
     15       2       2       23       (42 )    —
Depreciation and Amortization
     140       8       17       1       (1 )    165
Interest Income
     4       —         —         1       —         5
Interest Expense
     89       7       7       9       —         112
Income Tax Expense (Benefit)
     52       7       11       (1 )    (2 )    67
Net Income (Loss)
     85       10       18       —         (3 )    110












Cash Flow Statement

Capital Expenditures
     (352 )    (13 )    (96 )    (34 )    121       (374 )












Balance Sheet

Total Assets
     3,275       319       370       1,172       (1,151 )    3,985

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~



	Reportable Segments
	TEP			UNS Electric			UNS Gas			Other ⁽²⁾			Reconciling Adjustments			UNS Energy
	Millions of Dollars
2013
Income Statement
Operating Revenues-External	$	1,180		$	174		$	131		$	2		$	(2	)	$	1,485
Operating Revenues-Intersegment ⁽¹⁾	17			2			3			17			(39		)	—
Depreciation and Amortization	149			19			9			—			—			177
Interest Income	—			1			—			—			—			1
Interest Expense	79			7			6			1			—			93
Income Tax Expense	48			7			7			(4		)	—			58
Net Income	101			12			11			3			—			127
Cash Flow Statement
Capital Expenditures	(253		)	(56		)	(17		)	—			—			(326		)
Balance Sheet
Total Assets	3,556			404			311			1,194			(1,192		)	4,273

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September 30, September 30, September 30, September 30, September 30, September 30,
     Reportable Segments





2010
     TEP    UNS
Gas    UNS
Electric    Other    Reconciling
Adjustments    UniSource
Energy
     -Millions of Dollars-
Income Statement

Operating Revenue-External
     $ 1,096       $ 144       $ 213       $ —         $ 1       $ 1,454
Operating Revenue- Intersegment
     29       6       2       28       (65 )    —
Depreciation and Amortization
     132       8       16       2       (2 )    156
Interest Income
     7       —         —         1       —         8
Interest Expense
     88       7       7       9       —         111
Net Loss from Equity Method
Investments
     —         —         —         (6 )    —         (6 )
Income Tax Expense (Benefit)
     60       6       10       4       (3 )    77
Net Income (Loss)
     108       9       15       (14 )    (5 )    113












Cash Flow Statement

Capital Expenditures
     (277 )    (12 )    (24 )    (18 )    —         (331 )












Balance Sheet

Total Assets
     3,076       310       356       1,152       (1,103 )    3,791












2009

Income Statement

Operating Revenues-External
     $ 1,065       $ 148       $ 183       $ —         $ 1       $ 1,397
Operating Revenues- Intersegment
     34       5       4       28       (71 )    —
Depreciation and Amortization
     153       7       16       2       (2 )    176
Interest Income
     11       —         —         1       —         12
Net Gain from Equity Method
Investments
     —         —         —         5       —         5
Interest Expense
     85       6       7       11       —         109
Income Tax Expense (Benefit)
     54       5       7       —         (3 )    63
Net Income (Loss)
     91       7       11       2       (5 )    106












Cash Flow Statement

Capital Expenditures
     (240 )    (15 )    (29 )    (10 )    —         (294 )

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Reconciling adjustments consist of the elimination of intersegment revenue resulting from the following transactions, and they are eliminated in consolidation:~~

September 30, September 30, September 30, September 30,
     Reportable Segments
     TEP      UNS
Gas      UNS
Electric      Other
     -Millions of Dollars-
Intersegment Revenue

2011:

Wholesale Sales—TEP to UNS Electric⁽⁴⁾
     $ 2         $ —           $ —           $ —
Wholesale Sales—UNS Electric to TEP⁽⁴⁾
     —           —           2         —
Wholesale Sales—UED to UNS Electric
     —           —           —           5
Wholesale Sales—UNS Gas to TEP⁽⁵⁾
     —           —           —           —
Gas Revenue—UNS Gas to UNS Electric
     —           2         —           —
Other Revenue—TEP to Affiliates⁽¹⁾
     10         —           —           —
Other Revenue—Millennium to TEP, UNS Electric, & UNS Gas⁽²⁾
     —           —           —           18
Other Revenue—TEP to UNS Electric⁽³⁾
     3         —           —           —








Total Intersegment Revenue
     $ 15         $ 2         $ 2         $ 23








2010:

Wholesale Sales—TEP to UNS Electric⁽⁴⁾
     $ 18         $ —           $ —           $ —
Wholesale Sales—UNS Electric to TEP⁽⁴⁾
     —           —           2         —
Wholesale Sales—UED to UNS Electric
     —           —           —           11
Wholesale Sales—UNS Gas to TEP⁽⁵⁾
     —           1         —           —
Gas Revenue—UNS Gas to UNS Electric
     —           5         —           —
Other Revenue—TEP to Affiliates⁽¹⁾
     8         —           —           —
Other Revenue—Millennium to TEP, UNS Electric, & UNS Gas⁽²⁾
     —           —           —           17
Other Revenue—TEP to UNS Electric⁽³⁾
     3         —           —           —








Total Intersegment Revenue
     $ 29         $ 6         $ 2         $ 28








2009:

Wholesale Sales—TEP to UNS Electric⁽⁴⁾
     $ 23         $ —           $ —           $ —
Wholesale Sales—UNS Electric to TEP⁽⁴⁾
     —           —           4         —
Wholesale Sales—UED to UNS Electric
     —           —           —           12
Gas Revenue—UNS Gas to UNS Electric
     —           5         —           —
Other Revenue—TEP to Affiliates⁽¹⁾
     8         —           —           —
Other Revenue—Millennium to TEP, UNS Electric, & UNS Gas⁽²⁾
     —           —           —           16
Other Revenue—TEP to UNS Electric⁽³⁾
     3         —           —           —








Total Intersegment Revenue
     $ 34         $ 5         $ 4         $ 28



	Reportable Segments
	TEP			UNS Electric			UNS Gas			Other ⁽²⁾			Reconciling Adjustments			UNS Energy
	Millions of Dollars
2012
Income Statement
Operating Revenues-External	$	1,145		$	189		$	129		$	—		$	(1	)	$	1,462
Operating Revenues-Intersegment ⁽¹⁾	17			1			4			18			(40		)	—
Depreciation and Amortization	150			18			9			—			—			177
Interest Income	—			—			—			1			—			1
Interest Expense	88			8			6			3			—			105
Income Tax Expense	39			11			6			—			—			56
Net Income	65			17			9			—			—			91
Cash Flow Statement
Capital Expenditures	(253		)	(38		)	(16		)	—			—			(307		)
Balance Sheet
Total Assets	3,461			370			310			1,121			(1,122		)	4,140
2011
Income Statement
Operating Revenues-External	$	1,141		$	188		$	149		$	—		$	1		$	1,479
Operating Revenue-Intersegment ⁽¹⁾	15			2			2			23			(42		)	—
Depreciation and Amortization	140			17			8			1			(1		)	165
Interest Income	4			—			—			1			—			5
Interest Expense	89			7			7			9			—			112
Income Tax Expense	52			11			7			(1		)	(2		)	67
Net Income	85			18			10			—			(3		)	110
Cash Flow Statement
Capital Expenditures	(352		)	(96		)	(13		)	(34		)	121			(374		)

~~(1)~~	~~Common~~
⁽¹⁾	Operating Revenues – Intersegment includes common costs ~~(systems,~~(system, facilities, etc.) ~~are~~ allocated to affiliates on a cost-causative basis and recorded as revenue by ~~TEP. Management believes this method~~TEP, sales of ~~allocation is reasonable.~~

~~(2)~~

Millennium provides a supplemental workforce and meter-reading services to TEP, UNS Gas and UNS Electric. Amounts are based on costs of services performed, and management believes that the charges for services are reasonable. Millennium charged TEP $17 million in 2011, $16 million in 2010, and $15 million in 2009 for these services.

~~(3)~~

~~TEP charged UNS Electric for control area services based on a FERC approved tariff.~~

~~(4)~~

power between TEP and UNS Electric ~~sell power to each other at Dow Jones Four Corners Daily Index prices.~~

~~(5)~~

~~Starting in 2010, UNS Gas provides gas to TEP for generation of power~~ at third-party market ~~prices.~~prices, control area services provided by TEP to UNS Electric based on a FERC-approved tariff, sales of gas by UNS Gas at third-party market prices for use in UNS Electric's generating facilities, and supplemental workforce charges charges (primarily meter reading services) provided to the utilities by an unregulated affiliate.

TEP provides all corporate services (finance, accounting, tax, information technology services, etc.) to UniSource Energy, UNS Gas and, UNS Electric as well as to UniSource Energy’s non-utility businesses. Costs are directly assigned to the benefiting entity. Direct costs charged by TEP to affiliates were $10 million in 2011, 2010, and 2009.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

⁽²⁾
Other includes the UNS Energy and UES holding companies, Millennium, and UED.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5. UTILITY PLANT AND JOINTLY-OWNED FACILITIES

UTILITY PLANT

The following table shows Utility Plant in Service by major class:

~~UniSource~~



	UNS Energy				TEP
	December 31,				December 31,
	2013		2012		2013		2012
	Millions of Dollars
Plant in Service:
Electric Generation Plant	$	1,974	$	1,932	$	1,889	$	1,847
Electric Transmission Plant	912		842		825		796
Electric Distribution Plant	1,529		1,495		1,298		1,271
Gas Distribution Plant	252		240		—		—
Gas Transmission Plant	18		18		—		—
General Plant	356		347		312		309
Intangible Plant - Software Costs ^{(1) (2)}	142		124		141		123
Intangible Plant - Other	5		5		—		—
Electric Plant Held for Future Use	4		3		3		2
Total Plant in Service	$	5,192	$	5,006	$	4,468	$	4,348

Utility Plant under Capital Leases⁽³⁾	$	638	$	583	$	638	$	583


⁽¹⁾	Unamortized computer software costs were $40 million for UNS Energy and $39 million for TEP as of December 31, 2013, and $36 million for UNS Energy and $35 million for TEP as of December 31, 2012.


⁽²⁾	The amortization of computer software costs in UNS Energy’s and TEP's income statements was $14 million in 2013, $13 million in 2012, and $10 million in 2011.


⁽³⁾	In 2013, TEP entered into agreements to purchase certain Springerville Unit 1 leased interests. See Note 6.

TEP Utility Plant under Capital Leases

All TEP utility plant under capital leases is used in TEP’s generation operations and amortized over the primary lease term. See Note 6. At December 31, 2013, the utility plant under capital leases includes: 1) Springerville Unit 1; 2) Springerville Common Facilities; and 3) Springerville Coal Handling Facilities. The following table shows the amount of lease expense incurred for TEP’s generation-related capital leases:



	Years Ended December 31,
	2013		2012		2011
	Millions of Dollars
Lease Expense:
Interest Expense – Included in:
Capital Leases	25		$	34	$	40
Operating Expenses – Fuel	2		3		4
Other Expense	—		—		1
Amortization of Capital Lease Assets – Included in:
Operating Expenses – Fuel	5		4		3
Operating Expenses – Amortization	15		14		14
Total Lease Expense	$	47	$	55	$	62

Utility plant depreciation rates and approximate average remaining service lives based on the most recent depreciation studies available at December 31, 2013, were as follows:

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	TEP
	December 31, 2013
	Annual Depreciation Rate ⁽⁵⁾	Average Remaining Life in Years
Major Class of Utility Plant in Service:
Electric Generation Plant ⁽¹⁾	3.31%	22
Electric Transmission Plant	1.48%	32
Electric Distribution Plant ⁽¹⁾	2.08%	35
General Plant ⁽¹⁾	5.48%	11
Intangible Plant ⁽²⁾	Various	Various



	UNS Electric
	December 31, 2013
	Annual Depreciation Rate ⁽⁵⁾	Average Remaining Life in Years
Major Class of Utility Plant in Service:
Electric Generation Plant	2.56%	36
Electric Transmission Plant	3.36%	19
Electric Distribution Plant	3.97%	15
General Plant	8.01%	7
Intangible Plant ⁽³⁾	Various	Various



	UNS Gas
	December 31, 2013
	Annual Depreciation Rate ⁽⁵⁾	Average Remaining Life in Years
Major Class of Utility Plant in Service:
Gas Generation Plant	2.37%	41
Gas Transmission Plant	1.54%	54
General Plant	4.38%	7
Intangible Plant ⁽⁴⁾	Various	Various


⁽¹⁾	In June 2013, the ACC issued the 2013 TEP Rate Order that approved a change in depreciation rates which reflects changes in the remaining average useful lives for our generation, distribution, and general plant assets. See Note 3.


⁽²⁾	The majority of TEP's investment in intangible plant represents computer software, which is being amortized over its expected useful life based on either the average lives of 3 to 5 years for smaller application software or remaining lives ranging from 5 to 19 years for large enterprise software.


⁽³⁾	UNS Electric's intangible plant primarily represents capitalized interconnection costs, which are amortized based on either an average life of 23 years or a remaining life of 35 years.


⁽⁴⁾	UNS Gas' intangible plant consists of miscellaneous intangible assets, which are amortized over an average life of either 15 or 25 years.


⁽⁵⁾	The depreciation rates represent a composite of the depreciation rates of assets within each major class of utility plant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JOINTLY-OWNED FACILITIES

At December 31, 2013, TEP’s interests in jointly-owned generating stations and transmission systems were as follows:



	Ownership Percentage	Plant in Service		Construction Work in Progress		Accumulated Depreciation		Net Book Value
		Millions of Dollars
San Juan Units 1 and 2	50.0%	$	448	$	6	$	230	$	224
Navajo Units 1, 2, and 3	7.5%	152		1		110		43
Four Corners Units 4 and 5	7.0%	101		2		75		28
Luna Energy Facility	33.3%	53		—		2		51
Transmission Facilities	Various	330		43		190		183
Total		$	1,084	$	52	$	607	$	529

TEP is responsible for its share of operating costs for the above facilities as well as providing financing. TEP accounts for its share of operating expenses and utility plant costs related to these facilities using proportionate consolidation.

ASSET RETIREMENT OBLIGATIONS

The accrual of AROs is primarily related to generation and photovoltaic assets and is included in Deferred Credits and Other Liabilities on the balance sheets. The following table reconciles the beginning and ending aggregate carrying amounts of ARO accruals on the balance sheets:



	UNS Energy
	December 31,
	2013		2012
	Millions of Dollars
Beginning Balance	$	14	$	13
Liabilities Incurred	1		—
Accretion Expense or Regulatory Deferral	1		1
Revisions to the Present Value of Estimated Cash Flows ⁽¹⁾	7		—
Ending Balance	$	23	$	14


⁽¹⁾	Primarily related to changes in expected retirement dates of generating facilities.

The table above primarily reflects TEP's ARO obligations. UNS Electric's ARO obligations were less than $1 million at December 31, 2013 and 2012.

NOTE 6. DEBT, CREDIT FACILITIES, AND CAPITAL LEASE OBLIGATIONS

Long-term debt matures more than one year from the date of the financial statements. We summarize UNS Energy’s and TEP’s long-term debt in the statements of capitalization.

UNS ENERGY CONVERTIBLE SENIOR NOTES

In 2005, UNS Energy ~~incurs corporate costs that are allocated to~~ issued $150 million of 4.50% Convertible Senior Notes due in 2035. In 2012, UNS Energy converted approximately $147 million of the Convertible Senior Notes into approximately 4.3 million shares of Common Stock and redeemed $3 million for cash.

TEP ~~and its other subsidiaries. Corporate costs are allocated~~DEBT ISSUANCES AND REDEMPTIONS

Unsecured Tax-Exempt Variable Rate Bonds

In November 2013, the Industrial Development Authority of Apache County, Arizona issued $100 million of tax-exempt, variable rate Industrial Development Revenue Bonds (IDRBs), due April 2032. The lender resets the interest rate monthly based on a ~~weighted-average~~percentage of ~~three factors: assets, payroll~~an index rate equal to one-month LIBOR plus a bank margin rate; the rate at December 31, 2013 was

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0.948% per annum. These bonds are multi-modal bonds, and ~~revenues. Management believes this method~~the initial term is set at five years through November 2018, at which time the bonds will be subject to mandatory tender for purchase. Proceeds were deposited with a trustee to redeem $100 million variable rate bonds in December 2013.

Secured Tax-Exempt Variable Rate Bonds and Interest Rate Swap

Certain of ~~allocation is reasonable~~TEP's tax-exempt, variable rate bonds are secured by Letter of Credits (LOCs) issued under the TEP Credit Agreement and ~~approximates~~TEP Reimbursement Agreement, see below.

The following table shows interest rates on TEP’s weekly variable rate bonds, which are reset weekly by its remarketing agents:



	Years Ended December 31,
	2013	2012	2011
Interest Rates on Bonds:
Average Interest Rate	0.10%	0.17%	0.18%
Range of Average Weekly Rates	0.06% - 0.25%	0.06% - 0.26%	0.05% - 0.34%

In August 2009, TEP entered into an interest rate swap that had the ~~cost~~effect of converting $50 million of variable rate bonds to a fixed rate of 2.4% from September 2009 to September 2014.

Unsecured Tax-Exempt Fixed Rate Bonds

In March 2013, TEP issued approximately $91 million aggregate principal amount of Pima County, Arizona, unsecured tax-exempt Industrial Development Bonds (IDBs). The bonds bear interest at a fixed rate of 4.0%, mature in September 2029, and may be redeemed at par on or after March 1, 2023. The proceeds from the sale of the bonds were deposited with a trustee to retire approximately $91 million of 6.375% unsecured tax-exempt bonds in April 2013.

In June 2012, TEP issued approximately $16 million of Pima County, Arizona, unsecured tax-exempt IDBs. The bonds bear interest at a fixed rate of 4.5%, mature in June 2030, and may be redeemed at par on or after June 1, 2022. The proceeds from the sale of the bonds were deposited with a trustee to retire approximately $16 million of unsecured, tax-exempt bonds with interest rates of 5.85% and 5.875%, and maturity dates ranging from 2026 to 2033.

In March 2012, TEP issued $177 million of Apache County, Arizona, unsecured, tax-exempt pollution control bonds. The bonds bear interest at a fixed rate of 4.5%, mature in March 2030, and may be redeemed at par on or after March 1, 2022. The proceeds from the sale of the bonds, together with $7 million of principal and $1 million for accrued interest provided by TEP, were deposited with a trustee to retire $184 million of unsecured tax-exempt bonds with interest rates of 5.85% and 5.875% and maturity dates ranging from 2026 to 2033.

Unsecured Fixed Rate Notes

In September 2012, TEP issued $150 million of 3.85% unsecured notes due March 2023. TEP may call the debt prior to December 15, 2022, with a make-whole premium plus accrued interest. After December 15, 2022, TEP may call the debt at par plus accrued interest. The unsecured notes contain a limitation on the amount of secured debt that TEP ~~would~~may have ~~incurred~~outstanding. TEP used the net proceeds to repay approximately $72 million outstanding on the revolving credit facility, with the remaining proceeds used for general corporate purposes.

TEP MORTGAGE INDENTURE

Prior to November 2013, the TEP Credit Agreement and the 2010 TEP Reimbursement Agreement were secured by $423 million in mortgage bonds issued under the 1992 Mortgage. As a result of TEP's credit rating upgrade, in October 2013, TEP canceled $423 million in mortgage bonds and discharged the 1992 Mortgage, which had created a lien on and security interest in substantially all of TEP’s utility plant assets. TEP’s obligations under the TEP Credit Agreement and the 2010 TEP Reimbursement Agreement are now unsecured.

UNS ENERGY CREDIT AGREEMENT

The UNS Energy Credit Agreement consists of a $125 million revolving credit facility and revolving LOC facility and expires in November 2016. UNS Energy’s obligations under the agreement are secured by a pledge of the capital stock of Millennium, UES, and UED.

UNS Energy had $54 million of outstanding borrowings at December 31, 2013 and $45 million of outstanding borrowings at December 31, 2012, under its revolving credit facility. The weighted average interest rate on the revolver was 1.66% at

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December 31, 2013 and 1.96% at December 31, 2012. We report the revolver borrowings in Long-Term Debt on the balance sheet as UNS Energy has the ability and the intent to have outstanding borrowings for the next twelve months. As of February 14, 2014, outstanding borrowings under the UNS Energy Credit Agreement totaled $52 million.

Interest rates and fees under the UNS Energy Credit Agreement are based on a pricing grid tied to UNS Energy’s credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.25% for Eurodollar loans or Alternate Base Rate plus 0.25% for Alternate Base Rate loans.

TEP CREDIT AGREEMENT

The TEP Credit Agreement consists of a $200 million revolving credit, revolving LOC facility, and a $82 million LOC facility to support tax-exempt bonds, and expires in November 2016. In December 2013, TEP reduced its letter of credit facility from $186 million to $82 million, following the refinancing of $100 million of variable rate bonds and the cancellation of $104 million of LOCs supporting those bonds.

Interest rates and fees under the TEP Credit Agreement are based on a pricing grid tied to TEP’s credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.125% for Eurodollar loans or Alternate Base Rate plus 0.125% for Alternate Base Rate loans. The margin rate currently in effect on the $82 million LOC facility is 1.125%.

TEP had no borrowings and $1 million outstanding in LOCs issued under its revolving credit facility at December 31, 2013 and December 31, 2012. The revolving loan balance was included in Current Liabilities on UNS Energy’s and TEP’s balance sheets. The outstanding LOCs are off-balance sheet obligations of TEP. As of February 14, 2014, TEP had $90 million in borrowings and $1 million outstanding in LOCs under its revolving credit facility.

2010 TEP REIMBURSEMENT AGREEMENT

A $37 million LOC was issued pursuant to the 2010 TEP Reimbursement Agreement. The LOC supports $37 million aggregate principal amount of variable rate tax-exempt bonds that were issued on behalf of TEP in December 2010. In February 2014, TEP amended the agreement to extend the LOC expiration date from 2014 to 2019. Fees are payable on the aggregate outstanding amount of the LOC at a rate of 1.00% per annum.

UNS ELECTRIC/UNS GAS CREDIT AGREEMENT

The UNS Electric/UNS Gas Credit Agreement consists of a $100 million revolving credit and revolving LOC facility, and expires in November 2016. The maximum borrowings outstanding at any one time for UNS Gas or UNS Electric under the agreement may not exceed $70 million. UNS Electric and UNS Gas each are liable for only their own individual borrowings under the UNS Electric/UNS Gas Credit Agreement. UES guarantees the obligations of both UNS Electric and UNS Gas. The UNS Electric/UNS Gas Credit Agreement may be used to issue LOCs, as well as for revolver borrowings. UNS Electric and UNS Gas issue LOCs, which are off-balance sheet obligations, to support power and gas purchases and hedges.

Interest rates and fees under the UNS Electric/UNS Gas Credit Agreement are based on a pricing grid tied to their credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.125% for Eurodollar loans or Alternate Base Rate plus 0.125% for Alternate Base Rate loans.

UNS Electric had $22 million in borrowings and less than $0.5 million in outstanding LOCs under the UNS Electric/UNS Gas Credit Agreement as of December 31, 2013. The revolving loan balance was included in Current Liabilities on UNS Energy’s balance sheet. UNS Electric had no borrowings outstanding and less than $0.5 million LOCs under UNS Electric/UNS Gas Credit Agreement as of December 31, 2012. The oustanding LOCs balances are not shown on the balance sheet. As of February 14, 2014, UNS Electric had $25 million in borrowings and less than $0.5 million in outstanding LOCs under the UNS Electric/UNS Gas Credit Agreement.

UNS ELECTRIC TERM LOAN CREDIT AGREEMENT AND INTEREST RATE SWAP

In August 2011, UNS Electric entered into a four-year $30 million variable rate term loan credit agreement. The interest rate currently in effect is three-month LIBOR plus 1.125%. At the same time, UNS Electric entered into a fixed-for-floating interest rate swap in which UNS Electric will pay a fixed rate of 0.97% and receive a three-month LIBOR rate on a $30 million notional amount over a four years period ending August 2015. The UNS Electric term loan credit agreement, included in Long-Term Debt on the balance sheet, is guaranteed by UES.

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COVENANT COMPLIANCE

Our credit agreements, the 2010 TEP Reimbursement Agreement, and certain of our long-term debt agreements contain restrictive covenants, including restrictions on additional indebtedness, liens to secure indebtedness, mergers, sales of assets, transactions with affiliates, and restricted payments. The UNS Energy Credit Agreement also requires UNS Energy to meet a minimum cash flow to interest coverage ratio, and each of our credit agreements stipulate a maximum leverage ratio. UNS Energy and its subsidiaries may pay dividends so long as we maintain compliance with our credit agreements.

At December 31, 2013, we were in compliance with the terms of our long-term debt, credit agreements, and the 2010 TEP Reimbursement Agreement. No amounts of net income were subject to dividend restrictions.

TEP CAPITAL LEASE OBLIGATIONS

In January 2014, through scheduled lease payments, TEP reduced its capital lease obligations by $80 million.

Springerville Unit 1 Capital Lease Purchase Commitments

The Springerville Unit 1 Leases have an initial term to January 2015, and include a fair market value purchase option at the end of the initial lease term. In 2011, TEP and the owner participants of Springerville Unit 1 completed a formal appraisal procedure to determine the fair market value purchase price of Springerville Unit 1 in accordance with the Springerville Unit 1 Leases. The purchase price was determined to be $478 per kW of capacity based on a capacity rating of 387 MW.

In August 2013, TEP elected to purchase leased interests comprising 24.8% of Springerville Unit 1, representing 96 MW of capacity, for an aggregate purchase price of $46 million, the appraised value, upon the expiration of the lease term in January 2015.

In October 2013, TEP elected to purchase an additional 10.6% leased interest in Springerville Unit 1, representing 41 MW of capacity, for $20 million, the appraised value, with the purchase scheduled to occur in December 2014.

Upon close of these lease option purchases, TEP will own 49.5% of Springerville Unit 1, or 192 MW of capacity. Due to TEP's purchase commitments, TEP and UNS Energy recorded an increase of approximately $55 million to both Utility Plant Under Capital Leases and Capital Lease Obligations on their balance sheets.

Springerville Coal Handling and Common Facilities Leases

The Springerville Coal Handling Facilities Leases have an initial term to April 2015 and provide for fixed-rate lease renewal options if certain conditions are satisfied as well as a ~~standalone entity. Charges allocated~~fixed-price purchase provision of $120 million. The leases provide for one renewal period of six years beginning in April 2015, with additional renewal periods of five or more years through 2035.

The Springerville Common Facilities Leases have an initial term to December 2017 for one lease and January 2021 for the other two leases, subject to optional renewal periods of two or more years through 2025. Instead of extending the leases, TEP may exercise a fixed-price purchase provision. The fixed prices for the acquisition of the common facilities are $38 million in 2017 and $68 million in 2021.

TEP agreed with Tri-State, the owner of Springerville Unit 3, and SRP, the owner of Springerville Unit 4, that if the Springerville Coal Handling Facilities and Common Facilities Leases are not renewed, TEP will exercise the purchase options under these contracts. SRP will then be obligated to buy a portion of these facilities and Tri-State will then be obligated to either: buy a portion of these facilities; or continue making payments to TEP ~~were $2~~for the use of these facilities.

Lease Debt and Equity

Investments in Springerville Lease Debt and Equity

In January 2013, TEP received the final maturity payment of $9 million on the investment in ~~2011, $3~~Springerville Unit 1 lease debt. TEP also held an undivided equity ownership interest in the Springerville Unit 1 Leases totaling $36 million ~~in 2010,~~at December 31, 2013 and ~~$2 million in 2009.~~

~~Other~~

~~Other significant reconciling adjustments include intercompany~~December 31, 2012.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest Rate Swaps—Springerville Common Facilities Lease Debt

TEP’s interest ~~between UniSource Energy~~rate swaps hedge the floating interest rate risk associated with the Springerville Common Facilities lease debt. Interest on the lease debt is payable at six-month London Interbank Offered Rate (LIBOR) plus a spread. The applicable spread was 1.75% at December 31, 2013 and ~~UED,~~December 31, 2012.

The swaps have the ~~elimination~~effect of ~~investments in subsidiaries held by UniSource Energy~~fixing the interest rates on the amortizing principal balances as follows:



Lease Debt Outstanding at December 31, 2013	Fixed Rate		LIBOR Spread
Swap 1 - Notional Amount $33 million - Effective Date June 2006	5.77	%	1.75	%
Swap 2 - Notional Amount $16 million - Effective Date May 2009	3.18	%	1.75	%
Swap 3 - Notional Amount $6 million - Effective Date May 2009	3.32	%	1.75	%

TEP recorded these interest rate swaps as a cash flow hedge for financial reporting purposes. See Note 15.

DEBT MATURITIES

Long-term debt, including term loan payments, revolving credit facilities classified as long-term, and ~~reclassifications~~capital lease obligations mature on the following dates:



	TEP Long-Term Debt Maturities ⁽¹⁾		TEP Capital Lease Obligations			TEP Total			UNS Electric		UNS Gas		UNS Energy Parent Company		Total
	Millions of Dollars
2014	$	—	$	214		$	214		$	—	$	—	$	—	$	214
2015	—		69			69			80		50		—		199
2016	78		17			95			—		—		54		149
2017	—		18			18			—		—		—		18
2018	100		11			111			—		—		—		111
Total 2014 – 2018	178		329			507			80		50		54		691
Thereafter	1,046		30			1,076			50		50		—		1,176
Less: Imputed Interest	—		(42		)	(42		)	—		—		—		(42		)
Total	$	1,224	$	317		$	1,541		$	130	$	100	$	54	$	1,825

⁽¹⁾

$115 million of TEP’s variable rate bonds are backed by LOCs issued pursuant to TEP’s Credit Agreement, which expires in November 2016, and TEP’s Reimbursement Agreement, which expires in December 2019. Although the variable rate bonds mature between 2022 and 2032, the above table reflects a redemption or repurchase of such bonds in 2016 and 2019 as though the LOCs terminate without replacement upon expiration of the TEP Credit Agreement. TEP's 2013 tax-exempt variable rate IDBs, which mature in 2032, are subject to mandatory tender for purchase after the current five-year term and are therefore reflected as maturing in 2018. The repayment of TEP Unsecured Notes is not reduced by the approximately $1 million discount.

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Table of ~~deferred tax assets and liabilities.~~

Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4.7. COMMITMENTS, CONTINGENCIES, AND ~~PROPOSED~~ ENVIRONMENTAL MATTERS

COMMITMENTS

~~TEP COMMITMENTS~~

~~Firm Purchase Commitments~~

At December 31, ~~2011,~~2013, UNS Energy and TEP had the following firm, non-cancelable, minimum purchase ~~commitments (minimum purchase obligations)~~obligations and operating ~~leases:~~

September 30, September 30, September 30, September 30, September 30, September 30, September 30,
     Purchase Commitments
     2012      2013      2014      2015      2016      Thereafter      Total
     -Millions of Dollars-
Fuel (including Transportation)
     $ 84         $ 59         $ 58         $ 44         $ 41         $ 75         $ 361
Purchased Power
     29         21         17         13         13         184         277
Solar Equipment
     12         12         —           —           —           —           24
Transmission
     3         3         3         3         3         23         38
Operating Leases
     2         2         2         1         1         10         18














Total Unrecognized Firm
Commitments
     $ 130         $ 97         $ 80         $ 61         $ 58         $ 292         $ 718

~~Fuel, Purchased Power~~leases. UNS Energy's commitments represent the obligations of TEP, UNS Electric, and ~~Transmission Contracts~~UNS Gas:



	UNS Energy Purchase Commitments
	2014		2015		2016		2017		2018		Thereafter		Total
	Millions of Dollars
Fuel, Including Transportation	$	103	$	83	$	80	$	75	$	49	$	345	$	735
Purchased Power	75		17		—		—		—		—		92
Transmission	7		13		12		12		11		27		82
Renewable Power Purchase Agreements	36		37		37		37		37		485		669
RES Performance-Based Incentives	9		9		9		9		9		85		130
Operating Leases	4		4		3		2		2		14		29
Total Purchase Commitments	$	234	$	163	$	141	$	135	$	108	$	956	$	1,737

At December 31, 2013, TEP had the following firm, non-cancelable, minimum purchase obligations and operating leases:



	TEP Purchase Commitments
	2014		2015		2016		2017		2018		Thereafter		Total
	Millions of Dollars
Fuel, Including Transportation	$	77	$	63	$	64	$	62	$	36	$	285	$	587
Purchased Power	27		5		—		—		—		—		32
Transmission	3		6		6		6		6		21		48
Renewable Power Purchase Agreements	30		31		31		31		31		410		564
RES Performance-Based Incentives	8		8		8		8		8		83		123
Operating Leases	3		3		2		2		2		14		26
Total Purchase Commitments	$	148	$	116	$	111	$	109	$	83	$	813	$	1,380

Fuel

TEP has long-term contracts for the purchase and delivery of coal ~~and natural gas~~ with various expiration dates ~~from 2012~~ through ~~2020.~~2031. Amounts paid under these contracts depend on actual quantities purchased and delivered. Some of these contracts include a price adjustment clause that will affect the future cost. TEP expects to spend more ~~to meet its fuel requirements~~ than the minimum purchase obligations ~~outlined above.~~

to meet its fuel requirements. TEP's fuel costs are recoverable from customers through the PPFAC.

UNS Gas purchases gas from various supplies at market prices. However, UNS Gas' risk of loss due to increased costs is mitigated through the use of the PGA, which provides for the pass-through of actual commodity costs to customers. UNS Gas' forward gas purchase agreements expire through 2016. Certain of these contracts are at a fixed price per Million British Thermal Units (MMbtu) and others are indexed to natural gas prices. The commitment amounts included in the table are based on projected marked prices as of December 31, 2013. UNS Gas has firm transportation agreements with capacity sufficient to meet its load requirements. These contracts expire in various years between 2016 and 2023.

Purchased Power and Transmission

TEP ~~has~~and UNS Electric have agreements with utilities and other energy suppliers for purchased power to meet system load and energy requirements, replace generation from company-owned units under maintenance and during outages, and meet operating reserve obligations. In general, these contracts provide for capacity payments and energy payments based on actual power taken under the contracts. These contracts expire in ~~various years between 2012~~2014 and ~~2014.~~2015. Certain of these contracts are at a fixed price per MW and others are indexed to natural gas prices. The commitment amounts included in the table are based on projected market prices as of December 31, ~~2011.~~

~~Additionally, Purchased~~2013.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

TEP has agreements with other utilities to provide transmission services. These contracts expire in various years between 2018 and 2028. UNS Electric imports the power it purchases over the Western Area Power ~~includes two 20-year~~Administration's (WAPA) transmission lines. UNS Electric's transmission capacity agreements with WAPA provide for annual rate adjustments and expire in 2016.

TEP's and UNS Electric's purchased power and transmission costs are recoverable from customers through their respective PPFAC mechanisms.

Renewable Power Purchase Agreements and RES Performance-Based Incentives

TEP and UNS Electric have entered into 20 year Renewable Power Purchase Agreements (PPAs) ~~with renewable energy generation facilities that achieved commercial operation in 2011.~~which require TEP ~~is obligated~~and UNS Electric to purchase 100% of the output ~~from these facilities.~~of certain renewable energy generation facilities that have achieved commercial operation. TEP has entered into additional long-term renewable PPAs to comply with ~~the~~ RES requirements; however, TEP’s obligation to purchase power under these agreements does not begin until the facilities are operational.

~~Fuel, purchased power~~ A portion of the cost of renewable energy is recoverable through the PPFAC, with the balance of costs recoverable through the RES tariff. See Note 3.

TEP and ~~transmission costs~~UNS Electric have entered into REC purchase agreements to purchase the environmental attributes from retail customers with solar installations. Payments for the RECs are termed Performance-Based Incentives (PBIs) and are paid in contractually agreed-upon intervals (usually quarterly) based on metered renewable energy production. PBIs are recoverable ~~from customers~~ through the ~~PPFAC.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Solar Equipment~~

TEP has a commitment to purchase 9 MW of photovoltaic equipment through December 2013. The ACC approved 6 MW, and we are seeking approval from the ACC for the remaining 3 MW in 2012. TEP spent $10 million in 2011 under this contract. TEP earns a return on company-owned solar projects.RES tariff. See Note 2.

Operating Leases

~~TEP’s aggregate~~

Our operating lease expense is primarily for rail cars, office facilities, land easements, and ~~computer equipment,~~rights of way with varying terms, provisions, and expiration dates. ~~This~~UNS Energy's operating lease expense totaled $3 million in each of 2013, 2012, and 2011, and TEP's operating lease expense totaled $2 million in each of ~~2011, 2010, and 2009.~~

~~UNS GAS and UNS ELECTRIC COMMITMENTS~~

~~At December 31, 2011, UNS Gas had firm non-cancelable purchase commitments for fuel, including transportation, as described in the table below:~~

UNS Gas purchases gas from various suppliers at market prices. However, UNS Gas’ risk of loss due to increased costs (as a result of changes in market prices of fuel) is mitigated through the use of the PGA, which provides for the pass-through of actual commodity costs to customers. UNS Gas’ forward gas purchase agreements expire through 2015. Certain of these contracts are at a fixed price per MMBtu and others are indexed to natural gas prices. The commitment amounts included in the table above are based on market prices as of December 31, 2011. UNS Gas has firm transportation agreements with capacity sufficient to meet its load requirements. These contracts expire in various years between2013, 2012, and ~~2024.~~

~~At December 31, 2011, UNS Electric had various firm non-cancelable purchase commitments as described in the table below:~~

~~UNS Electric enters into agreements with various energy suppliers for purchased power at market prices to meet its energy requirements.~~ 2011.

TEP CONTINGENCIES

Potential Purchase of Gas-Fired Generation Facility

In general, these contracts provide for capacity payments and energy payments based on actual power taken under the contracts. These contracts expire in various years through 2014. Certain of these contracts are at a fixed price per MW, and others are indexed to natural gas prices. The commitment amounts included in the table above are based on market prices as of December 31, 2011. Purchased power commitments also include one 20-year PPA with a renewable energy generation facility that achieved commercial operation in September 2011. UNS Electric is obligated to purchase 100% of the output from this facility.

UNS Electric imports the power it purchases over the Western Area Power Administration’s (WAPA) transmission lines. UNS Electric’s transmission capacity agreements with WAPA provide for annual rate adjustments and expire in 2012 and 2016. However, the effects of both purchased power and transmission cost adjustments are mitigated through a purchased power rate-adjustment mechanism.

~~UNISOURCE ENERGY,~~2013, TEP ~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~UNS Gas~~ and UNS Electric have operating lease expense, primarily for office facilities and computer equipment, with varying terms and expiration dates. The expense was $1 million in each of the years 2011, 2010, and 2009. UNS Gas’ and UNS Electric’s estimated future minimum payments under non-cancelable operating leases are less than $1 million per year for 2012 through 2017.

~~TEP CONTINGENCIES~~

~~San Juan Mine Fire~~

~~In September 2011,~~entered into an agreement to purchase a fire at the underground mine that provides coal to San Juan caused mining operations to shut down. TEP owns approximately 20% of San Juan, which is operated by PNM. As we are unable to predict when operations will resume at the mine, we and the other owners of San Juan are considering alternatives for operating the facility.

~~Claims~~gas-fired generation facility; see Note 8.

Claim Related to San Juan Generating Station

In April 2010, the Sierra Club filed a citizens’ suit under the Resource Conservation and Recovery Act (RCRA) and the Surface Mine Control and Reclamation Act (SMCRA) in the U.S. District Court for the District of New Mexico against PNM, as operator of San Juan; PNM’s parent PNM Resources, Inc. (PNMR);

San Juan Coal Company (SJCC), which operates the San Juan mine that supplies coal to San Juan; and SJCC’s parent BHP Minerals International Inc. (BHP). The Sierra Club alleges in the suit that certain activities at San Juan and the San Juan mine associated with the treatment, storage and disposal of coal and coal combustion residuals (CCRs), primarily coal ash, are causing imminent and substantial harm to the environment, including ground and surface water in the region, and that placement of CCRs at the mine constitute “open dumping” in violation of RCRA. The RCRA claims are asserted against PNM, PNMR, SJCC and BHP. The suit also includes claims under SMCRA which are directed only against SJCC and BHP. The suit seeks the following relief: an injunction requiring the parties to undertake certain mitigation measures with respect to the placement of CCRs at the mine or to cease placement of CCRs at the mine; the imposition of civil penalties; and attorney’s fees and costs. With the agreement of the parties, the court entered a stay of the action in August 2010, to allow the parties to try to address the Sierra Club’s concerns. If the parties are unable to settle the matter, PNM has indicated that it plans an aggressive defense of the RCRA claims in the suit.

~~SJCC~~ operates an underground coal mine in an area where certain gas producers have oil and gas leases with the federal government, the State of New Mexico, and private parties. These gas producers allege that SJCC’s underground coal mine interferes with their operations, reducing the amount of natural gas they can recover. SJCC ~~has~~ compensated certain gas producers for any remaining production from wells deemed close enough to the mine to warrant plugging and abandoning them. These settlements, however, do not resolve all potential claims by gas producers in the area. TEP owns 50% of Units 1 and 2 at San Juan Generating Station (San Juan), which represents approximately 20% of the total generation capacity at San Juan, and is responsible for its share of any settlements. TEP cannot estimate the impact of any future claims by these gas producers on the cost of coal at San Juan.

~~TEP owns 50%~~

In August 2013, the Bureau of Land Management (BLM) proposed regulations that, among other things, redefine the term “underground mine” to exclude high-wall mining operations and impose a higher surface mine coal royalty on high-wall mining. SJCC utilized high-wall mining techniques at its surface mines prior to beginning underground mining operations in January 2003. If the proposed regulations become effective, SJCC may be subject to additional royalties on coal delivered to San Juan ~~Units~~ between August 2000 and January 2003 totaling approximately $5 million of which TEP’s proportionate share would approximate $1 ~~and 2, which represents approximately 20%~~million. TEP cannot predict the final outcome of the ~~total generation capacity of the entire San Juan Generating Station, and is responsible for its share of any resulting liabilities.~~

BLM’s proposed regulations.

Claims Related to Four Corners Generating Station

In October 2011, EarthJustice, on behalf of several environmental organizations, filed a lawsuit in the United States District Court for the District of New Mexico against ~~APS~~Arizona Public Service Company (APS) and the other Four Corners Generating Station (Four Corners) participants alleging violations of the Prevention of Significant Deterioration (PSD) provisions of the Clean Air Act at Four Corners. In January 2012, EarthJustice amended their complaint alleging violations of New Source Performance Standards resulting from equipment replacements at Four Corners. Among other things, the plaintiffs seek to have the court ~~enjoin~~issue an order to cease operations at Four Corners until any required PSD permits are issued and order the payment of civil penalties, including a beneficial mitigation project.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

In April 2012, APS filed motions to dismiss with the court for all claims asserted by EarthJustice in the amended complaint. The joint participants have applied to have the matter stayed until March 17, 2014 in furtherance of settlement talks.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

TEP owns 7% of Four Corners Units 4 and 5 and is liable for its share of any resulting liabilities.

TEP cannot predict the final outcome of the claims relating to ~~San Juan and~~ Four Corners, and, due to the general and non-specific nature of the claims and the indeterminate scope and nature of the injunctive relief sought for ~~these claims,~~this claim, TEP cannot determine estimates of the range of loss ~~cannot be determined~~ at this time. TEP accrued estimated losses of less than $1$1 million in 2011 for this claim based on its share of a settlement offer to resolve the claim.

In May 2013, the New Mexico Taxation and Revenue Department issued a notice of assessment for coal severance tax, penalties, and interest totaling $30 million to the coal supplier at Four Corners. The coal supplier and Four Corners’ operating agent intend to contest the validity of the assessment on behalf of the participants in ~~respect~~Four Corners, who will be liable for their share of ~~these claims.~~

any resulting liabilities. TEP’s share of the assessment based on its ownership of Four Corners is approximately $1 million. TEP cannot predict the outcome or timing of resolution of this claim.

Mine Closure Reclamation at Generating Stations Not Operated by TEP

TEP pays ongoing reclamation costs related to coal mines that supply generating stations in which TEP has an ownership interest but does not operate. TEP is liable for a portion of final reclamation costs upon closure of ~~these mines.~~the mines servicing Navajo, San Juan, and Four Corners. TEP’s share of ~~the~~ reclamation costs ~~for~~at all three mines is expected to be $44 million upon expiration of the coal supply agreements, ~~expiring in 2016 through 2019 is approximately $26 million. TEP recognizes this cost over the remaining terms~~which expire between 2017 and 2031. The reclamation liability (present value of ~~these coal supply agreements and had~~future liability) recorded ~~liabilities of $13~~was $18 million at December 31, ~~2011,~~2013 and ~~$11~~$16 million at December 31, ~~2010.~~

2012.

Amounts recorded for final reclamation are subject to various assumptions, such as estimations of reclamation costs, the dates when final reclamation will occur, and the credit-adjusted risk-free interest rate to be used to discount future liabilities. As these assumptions change, TEP will prospectively adjust the expense amounts for final reclamation over the remaining coal supply ~~agreement~~agreements’ terms. TEP does not believe that recognition of its final reclamation obligations will be material to TEP in any single year because recognition will occur over the remaining terms of its coal supply agreements.

TEP’s PPFAC allows ~~TEP~~us to pass through most fuel costs, ~~(including~~including final reclamation ~~costs)~~costs, to customers. Therefore, TEP classifies these costs as a regulatory ~~asset. TEP will increase~~asset by increasing the regulatory asset and the reclamation liability over the remaining life of the coal supply agreements ~~on an accrual basis~~ and ~~recover~~recovers the regulatory asset through the PPFAC as final mine reclamation costs are paid to the coal suppliers.

~~Tucson to Nogales~~

Discontinued Transmission ~~Line~~

Project

TEP and UNS Electric ~~are parties to~~had initiated a project ~~development agreement for the joint construction of an approximately 60-mile~~to jointly construct a 60-mile transmission line from Tucson, Arizona to Nogales, ~~Arizona. UNS Electric’s participation in this project was initiated~~Arizona in response to an order by the ACC to UNS Electric to improve the reliability of electric service in Nogales. ~~That order was issued before UniSource Energy purchased the electric system in Nogales and surrounding Santa Cruz County from Citizens Utilities in August 2003.~~

In 2002, the ACC authorized construction of the proposed 345-kV line along a route identified as the Western Corridor subject to a number of conditions, including the issuance of all required permits from state and federal agencies. The U.S. Forest Service subsequently expressed its preference for a different route in its final Environmental Impact Statement for the project. TEP and UNS Electric ~~are considering options~~will not proceed with the project based on the cost of the proposed 345-kV line, the difficulty in reaching agreement with the Forest Service on a path for the line, and concurrence by the ACC of recent transmission plans filed by TEP and UNS Electric supporting elimination of this project. ~~If a decision is made~~As part of the 2013 TEP Rate Order, TEP agreed to ~~pursue an alternative route, approvals will be needed~~seek recovery of the project costs from FERC before seeking rate recovery from the ~~ACC, the Department of Energy, U.S. Forest Service, Bureau of Land Management, and the International Boundary and Water Commission. As of December 31, 2011, and December 31, 2010,~~ACC. See Note 3. In 2012, TEP ~~had capitalized $11~~wrote off $5 million related to the project, including $2 million to secure land and land rights. If TEP does not receive the required approvals or abandons the project, TEP believes cost recovery is probable for prudent and reasonably incurred costs related to the project as a consequence of the ~~ACC’s requirement~~capitalized costs believed not probable of recovery and recorded a regulatory asset of $5 million for the balance deemed probable of recovery.

Performance Guarantees

The participants in each of the remote generating stations in which TEP participates, including TEP, have guaranteed certain performance obligations of the other participants. Specifically, in the event of payment default of a ~~second transmission line serving~~participant, the ~~Nogales, Arizona area.~~

~~RESOLUTION OF~~non-defaulting participants have agreed to bear a proportionate share of expenses otherwise payable by the defaulting participant. In exchange, the non-defaulting participants are entitled to receive their proportionate share of the generating capacity of the defaulting participants. TEP's joint participation agreements expire in 2016 through 2046.

UNS ELECTRIC CONTINGENCIES

~~Settlement~~

Potential Purchase of ~~El Paso Electric Dispute~~

Gas-Fired Generation Facility

In ~~November 2011, a settlement agreement between~~2013, TEP and ~~El Paso became effective after receiving FERC approval in August 2011. The settlement resolved~~UNS Electric entered into an agreement to purchase a ~~dispute over transmission service from Luna to TEP’s system, totaling $11 million, under the 1982 Power Exchange and Transmission Agreement between the parties (Exchange Agreement).~~

~~The settlement reduced TEP’s rights for transmission under the Exchange Agreement from 200 MW to 170 MW and required TEP to pay El Paso a lump-sum~~gas-fired generation facility. See Note 8.

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Table of ~~$5 million, equivalent to the total amount that TEP would have paid El Paso for 30 MW of transmission from February 1, 2006, through the settlement date, including interest.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Under the PPFAC mechanism, TEP is allowed to recover $2 million of this additional transmission expense from its customers. In accordance with the settlement agreement, TEP has entered into two new firm transmission service agreements under El Paso’s Open Access Transmission Tariff for a total of 40 MW. The settlement agreement also required El Paso to withdraw its appeal before the United States Court of Appeals District of Columbia Circuit and required TEP to withdraw its related complaint before the Arizona District of the United States District Court.

TEP recognized a pre-tax gain of approximately $7 million, including interest, in the third quarter of 2011. To reflect the gain, TEP recorded a $7.1 million net reduction to Transmission Expense, $0.9 million of Interest Income, and $0.6 million of Interest Expense on the income statements. TEP recorded the payment of $5 million in Purchased Power in the cash flow statements.

~~Take-Or-Pay Accrual for Coal Transportation Agreement~~

In December 2010, TEP recorded a $4 million liability and regulatory asset for take-or-pay obligations under a coal transportation agreement for Sundt Unit 4, effective through December 2015. In December 2011, TEP’s take-or-pay obligations were terminated. As a result, TEP reversed its $4 million liability and regulatory asset.

~~Claims Related to Navajo Generating Station~~

In June 1999, the Navajo Nation filed suit in the U.S. District Court for the District of Columbia (D.C. Lawsuit) against parties including SRP; several Peabody Coal Company entities including Peabody Western Coal Company (Peabody), the coal supplier to Navajo Generating Station (Navajo); Southern California Edison Company (SCE); and other defendants. Although TEP is not a named defendant in the D.C. Lawsuit, TEP owns 7.5% of Navajo Units 1, 2 and 3. The D.C. Lawsuit alleged, among other things, that the defendants obtained a favorable coal royalty rate on the lease agreements under which Peabody mines coal by improperly influencing the outcome of a federal administrative process pursuant to which the royalty rate was to be adjusted. The suit initially sought $600 million in damages, treble damages, punitive damages of not less than $1 billion, and the ejection of defendants from all possessory interests and Navajo Tribal lands arising out of the primary coal lease.

In July 2001, the District Court dismissed all claims against SRP. In April 2010, the Navajo Nation filed a Second Amended Complaint which dropped the treble damages claim. In August 2011, the Navajo Nation, Peabody, SCE and SRP executed a written settlement agreement in return for the Navajo Nation’s dismissal of all claims in the D.C. Lawsuit. SRP asked that the Navajo participants, including TEP, contribute toward the settlement based on their respective ownership interests in the Navajo plant, which for TEP is 7.5%. TEP paid SRP the requested contribution which did not have a material impact on TEP’s financial statements.

In 2004, Peabody filed a complaint in the Circuit Court for the City of St. Louis, Missouri against the participants at Navajo, including TEP, for reimbursement of royalties and other costs arising out of the D.C. Lawsuit. In July 2008, the parties entered into a joint stipulation of dismissal of these claims which was approved by the Circuit Court. TEP does not believe the lawsuit will be re-filed based upon the final outcome of the D.C. Lawsuit.

~~PROPOSED~~

ENVIRONMENTAL MATTERS

Environmental Regulation

~~ENVIRONMENTAL REGULATION~~

~~TEP’s generating facilities are subject to~~The Environmental Protection Agency (EPA) limits on the amount of sulfur dioxide (SO₂), nitrogen oxide (NOx), particulate matter, mercury and other emissions released into the ~~atmosphere.~~atmosphere by power plants. TEP capitalized $5 million in 2013, $2 million in 2012, and $8 million in 2011 ~~$18 million in 2010 and $24 million in 2009~~ in construction costs to comply with environmental ~~requirements, including TEP’s share of new pollution control equipment installed at San Juan Generating Station (San Juan) described below.~~requirements. TEP expects to capitalize environmental compliance costs of $7$12 million in 2014 and $36 million in 2015. In addition, TEP recorded O&M expenses of $8 million in 2013, $15 million in 2012, and ~~$25 million in 2013. In addition, TEP recorded operating expenses of~~ $12 million in ~~2011, $14 million in 2010 and $13 million in 2009 related to environmental compliance.~~2011. TEP expects environmental O&M expenses to be ~~$14~~$5 million in ~~2012.~~each of 2014 and 2015.

TEP may incur ~~additional~~added costs to comply with future changes in federal and state environmental laws, ~~and~~ regulations, and permit requirements at its ~~electric generating facilities. Compliance~~power plants. Complying with these changes may reduce operating efficiency.

~~UNISOURCE ENERGY,~~ TEP ~~AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

expects to recover the cost of environmental compliance from its ratepayers.

Hazardous Air Pollutant Requirements

~~The Clean Air Act requires~~

In February 2012, the EPA ~~to develop emission limit standards for hazardous air pollutants that reflect the maximum achievable control technology. The EPA is required to develop~~issued final rules ~~establishing standards~~ for the control of mercury emissions ~~of mercury~~ and other hazardous air pollutants from ~~electric generating units. The EPA issued the final rule in December 2011.~~

~~Navajo~~

power plants. Based on the ~~EPA’s~~EPA's final ~~standards, mercury~~Mercury and ~~particulate~~Air Toxics (MATs) rule, additional emission control equipment ~~may~~will be required at Navajo by 2015. TEP’s share of the estimated capital cost of this equipment is less than $1 million for mercury control and approximately $43 million if the installation of baghouses to control particulates is necessary.

~~Springerville~~

~~Based on the EPA’s final standards, mercury emission control equipment may be required at Springerville~~ by 2015. The estimated ~~capital cost of this equipment for Springerville Units 1~~costs include:



Estimated Emissions Control Costs:	Navajo		Four Corners		Springerville
	Millions of Dollars
Capital Expenditures - Mercury Emissions Control	$	1	$	1	$	5
Annual O&M Expenses	1		1		3

TEP expects Sundt and ~~2 is approximately $5 million. The annual operating cost associated with the mercury~~San Juan's current emission ~~control equipment is expected to be approximately $3 million.~~

~~San Juan~~

~~Current emission~~ controls ~~at San Juan are expected~~ to be adequate to ~~achieve compliance~~comply with the ~~EPA’s~~EPA's final ~~federal~~ standards.

~~Sundt~~

~~TEP does not anticipate the final EPA rule will have a material capital impact on Sundt Unit 4.~~

~~Four Corners~~

Based on the EPA’s final standards, mercury emission control equipment may be required at Four Corners by 2015. The estimated capital cost of this equipment is less than $1 million. The annual operating cost associated with the mercury emission control equipment is expected to be less than $1 million.

Regional Haze Rules

The EPA's ~~regional haze rules~~Regional Haze Rules require emission controls known as ~~Best Available Retrofit Technology (BART)~~BART for certain industrial facilities emitting air pollutants that reduce ~~visibility.~~visibility in national parks and wilderness areas. The rules call for all states to establish goals and emission reduction strategies for improving ~~visibility in national parks~~visibility. States must submit these goals and ~~wilderness areas and to submit a state implementation plan~~strategies to the EPA for approval. Because Navajo and Four Corners are located on the Navajo Indian Reservation, ~~and therefore~~they are not subject to state ~~regulatory jurisdictions. The~~oversight; the EPA oversees regional haze planning for these power plants.

~~Compliance~~

In the western U.S., Regional Haze BART determinations have focused on controls for NOx, often resulting in a requirement to install SCRs. Complying with the EPA’s BART ~~determinations, coupled~~rules, and with other future environmental rules, may make it economically impractical to continue operating the ~~financial impact of future climate change legislation, other environmental regulations and other business considerations could jeopardize the economic viability of the~~Navajo, San Juan, and Four Corners ~~and Navajo~~power plants or ~~the ability of~~for individual ~~participants~~owners to ~~meet their obligations and maintain participation~~continue to participate in these power plants. TEP cannot predict the ultimate outcome of these matters.

~~San Juan~~TEP's estimated potential costs involved in meeting these rules are:

~~In August 2011, EPA Region VI issued a Federal Implementation Plan (FIP) establishing new emission limits for NOx, SO~~₂ ~~and sulfuric acid emissions at the San Juan Generating Station. The FIP requires~~



Estimated Potential Emissions Control Costs:	Navajo⁽¹⁾		San Juan ⁽²⁾	Four Corners⁽³⁾		Sundt⁽⁴⁾
	Millions of Dollars
Capital - SCR	$	42	$ 180-200	$	35	$	—
Capital - SNCR	—		35	—		12
Annual O&M - SCR	1		6	2		—
Annual O&M - SNCR	—		1	—		5-6

⁽¹⁾

The EPA is considering a better-than-BART plan wherein: one unit at Navajo will be shut down by 2020; SCR installation (or the equivalent) will be installed on the remaining two units by 2030; and conventional coal-fired generation will cease by December 2044. TEP expects the EPA to reach a decision in 2014. In addition, the installation of SCR technology could increase particulates which may require that baghouses be installed. The additional capital cost of baghouses approximates $43 million with O&M on the baghouses expected to be less than $1 million per year.

K-113

Table of Selective Catalytic Reduction (SCR) technology with sorbent injection on all four units within five years to reduce NOx and control sulfuric acid emissions. Based on two cost analyses commissioned by PNM, TEP’s share of the cost to install SCR with sorbent injection is estimated to be between $180 million and $200 million.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

⁽²⁾

The Federal Implementation Plan (FIP) requires SCR; as part of a proposal for an alternative, PNM, the State of New Mexico, and the EPA signed a non-binding agreement in which PNM agreed to close Units 2 & 3 by December 31, 2017 and install SNCRs on Units 1 & 4 by January 2016 or later. The State of New Mexico has submitted this plan to the EPA for approval. TEP expects the EPA will reach a decision in 2014. TEP owns 50% of San Juan Unit 2. At December 31, 2013, the net book value of TEP's share in San Juan Unit 2 was $113 million. If Unit 2 is retired early, we expect to request ACC approval to recover, over a reasonable time period, all costs associated with the early closure of the unit.


⁽³⁾	On December 30, 2013, APS, on behalf of the co-owners of Four Corners, notified the EPA that they have chosen the alternative BART compliance strategy; APS closed Units 1, 2, and 3 in December 2013 and has agreed to the installation of SCR on Units 4 & 5 by July 31, 2018. TEP owns 7% of Four Corners Units 4 and 5.

⁽⁴⁾

In ~~September 2011, PNM filed a petition to review the Federal Implementation Plan with the 10th Circuit Court of Appeals challenging various aspects of that plan. In addition, PNM filed a request with~~January 2014, the EPA ~~to stay the five-year installation timeframe for environmental upgrades ordered by the Federal Implementation Plan until the 10th Circuit considers and rules on the petition to review.~~

~~In October 2011, PNM filed~~issued a Petition for Reconsideration of the Federal Implementation Plan. PNM also filed a Request to Stay the effective date of the final BART Federal Implementation Plan under the Clean Air Act with the EPA. In November 2011, PNM filed with the 10th Circuit a Motion to Stay the Federal Implementation Plan. WildEarth Guardians, Dine Citizens against Ruining our Environment, National Parks Conservation Association, New Energy Economy, San Juan Citizens Alliance and Sierra Club were granted leave to intervene in PNM’s petition to review in the 10th Circuit. Neither the Petition in the 10th Circuit, nor the Petition for Reconsideration by the EPA delays the implementation timeframe unless a stay is granted. WildEarth Guardians filed a separate appeal against the EPA challenging the five-year, rather than three-year, implementation schedule. PNM was granted leave to intervene in that appeal.

In October 2011, Governor Susana Martinez of New Mexico and the New Mexico Environment Department filed a Petition for Review of the EPA’s final Federal Implementation Plan determination in the 10th Circuit and a Petition for Reconsideration of the rule with the EPA. In November 2011, the New Mexico Governor and Environment Department filed a motion with the 10th Circuit to stay the rule. These appeals and motions are all currently pending.

~~Four Corners~~

~~In February 2011, the EPA supplemented the proposed FIP for the BART determination at Four Corners~~proposal that would require TEP to either (i) install SNCR by mid-2017 or (ii) eliminate the ~~installation~~use of ~~SCR on Units 4 and 5~~coal by ~~2018. TEP’s estimated share~~the end of 2017 as a better-than-BART alternative. Under the ~~capital costs~~proposal, TEP would be required to ~~install SCR is approximately $35 million.~~

~~Navajo~~

notify the EPA of its decision by July 31, 2015. The EPA is expected to issue a ~~proposed rule establishing~~final BART determination by July 2014. At December 31, 2013, the net book value of the Sundt coal handling facilities was $27 million. If the coal handling facilities are retired early, we expect to request ACC approval to recover, over a reasonable time period, all the remaining costs of the coal handling facilities.

BART provisions of Regional Haze Rules requiring emission control upgrades do not apply to Springerville because the plant was built after the BART-applicable dates.

NOTE 8. POTENTIAL PURCHASE OF GAS-FIRED GENERATION FACILITY

On December 23, 2013, TEP and UNS Electric entered into a purchase agreement with a subsidiary of Entegra to purchase Gila River Generating Station Unit 3 for ~~Navajo following~~$219 million, subject to certain closing adjustments. Gila River Unit 3, a gas-fired combined cycle unit with a nominal capacity rating of 550 MW, is located in Gila Bend, Arizona. TEP expects to purchase a 75% undivided interest in Gila River Unit 3 (413 MW) for approximately $164 million, and UNS Electric expects to purchase the ~~consideration of a report by~~remaining 25% undivided interest (137 MW) for approximately $55 million. TEP and UNS Electric expect the ~~National Renewable Energy Laboratory (NREL)~~transaction to close in ~~partnership~~December 2014, subject to regulatory approvals and other closing conditions. In December 2013, UNS Electric filed an application for an accounting order with the ~~Department~~ACC requesting authorization for UNS Electric to defer for future recovery specific non-fuel operating costs associated with Gila River Unit 3.

TEP expects to provide a letter of credit in March 2014 for $15 million to satisfy a condition of the ~~Interior~~purchase agreement. The seller of Gila River Unit 3 would be entitled to draw upon the letter of credit and apply such amount as liquidated damages if it has validly terminated the ~~Department~~Purchase Agreement as a result of ~~Energy. The report addresses potential energy, environmental~~misrepresentations by TEP and ~~economic issues related~~UNS Electric or the failure of TEP and UNS Electric to ~~compliance with~~close the ~~regional haze rule. The report was submitted to~~transaction when the ~~EPA in January 2012. If~~closing conditions have been satisfied. Upon the EPA determines that SCR is required at Navajo, the capital cost impact to TEP is estimated to be $42 million. In addition, the installation of SCR at Navajo could increase the plant’s particulate emissions, necessitating the installation of baghouses. If baghouses are required, TEP’s estimated shareclose of the ~~capital expenditure for~~transaction, the ~~required baghouses~~letter of credit would be ~~approximately $43 million. The cost~~canceled.

K-114

Table of required pollution controls will not be known until final determinations are made by the regulatory agencies. TEP anticipates that if the EPA finalizes a BART rule for Navajo that requires SCR, the owners would have five years to achieve compliance.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE ~~5. UTILITY PLANT AND JOINTLY-OWNED FACILITIES~~

9. INCOME TAXES

~~UTILITY PLANT~~

~~The following table shows Utility Plant in Service by major class.~~

September 30, September 30, September 30, September 30,
     UniSource Energy      TEP
     December 31,      December 31,
     2011      2010      2011      2010
     -Millions of Dollars-
Plant in Service:

Electric Generation Plant
     $ 1,879         $ 1,787         $ 1,795         $ 1,709
Electric Transmission Plant
     810         741         766         705
Electric Distribution Plant
     1,453         1,368         1,234         1,168
Gas Distribution Plant
     233         224         —           —
Gas Transmission Plant
     18         18         —           —
General Plant
     331         215         302         187
Intangible Plant—Software Costs
     44         34         43         33
Intangible Plant—Other
     83         61         78         57
Electric Plant Held for Future Use
     5         5         4         4








Total Plant in Service⁽¹⁾
     4,856         4,453         4,222         3,863








Utility Plant under Capital Leases
     $ 583         $ 583         $ 583         $ 583

⁽¹⁾	At December 31, 2010, UniSource Energy’s total plant included $65 million of non-regulated plant in service related to BMGS, with $4 million of accumulated depreciation. See Note 2 for information regarding UNS Electric’s 2011 purchase of BMGSIncome tax expense differs from ~~UED.~~

~~TEP Utility Plant under Capital Leases~~

All TEP utility plant under capital leases is used in TEP’s generation operations and amortized over the primary lease term. See Note 6. In April 2010, TEP terminated the capital lease of Sundt Unit 4 and purchased the related leased assets. At December 31, 2011, the utility plant under capital leases includes Springerville Common Facilities, Springerville Unit 1, and Springerville Coal Handling Facilities. The following table shows the amount of ~~lease~~income tax determined by applying the United States statutory federal income tax rate of 35% to pre-tax income due to the following:



	UNS Energy									TEP
	Years Ended December 31,
	2013			2012			2011			2013			2012			2011
	Millions of Dollars
Federal Income Tax Expense at Statutory Rate	$	65		$	51		$	62		$	52		$	37		$	48
State Income Tax Expense, Net of Federal Deduction	8			7			8			7			5			6
Federal/State Tax Credits	(2		)	(1		)	(3		)	(2		)	(1		)	(2		)
Allowance for Equity Funds Used During Construction	(2		)	(1		)	(1		)	(1		)	(1		)	(1		)
Deferred Tax Asset Valuation Allowance	—			—			—			2			—			—
Investment Tax Credit Basis Adjustment - Creation of Regulatory Asset	(11		)	—			—			(11		)	—			—
Other	—			—			1			1			(1		)	1
Total Federal and State Income Tax Expense	$	58		$	56		$	67		$	48		$	39		$	52

Investment Tax Credit Basis Adjustment - Creation of Regulatory Asset

Renewable energy assets are eligible for investment tax credits. We reduce the income tax basis of those qualifying assets by half of the related investment tax credit. Historically, the difference between the income tax basis of the asset and the book basis under GAAP was recorded as a deferred tax liability with an offsetting charge to income tax expense ~~incurred for TEP’s generation-related capital leases:~~

September 30, September 30, September 30,
     Years Ended December 31,
     2011      2010      2009
     -Millions of Dollars-
Lease Expense:

Interest Expense – Included in:

Capital Leases
     $ 40         $ 47         $ 49
Operating Expenses – Fuel
     4         4         4
Other Expense
     1         2         1
Amortization of Capital Lease Assets – Included in:

Operating Expenses – Fuel
     3         3         2
Operating Expenses – Depreciation and Amortization
     14         14         26






Total Lease Expense
     $ 62         $ 70         $ 82

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~The depreciable lives as of December 31, 2011 were as follows:~~


~~Major Class of Utility Plant in Service~~	~~TEP~~	~~UNS Gas and~~ ~~UNS Electric~~

~~Electric Generation Plant~~	~~6-59 years~~	~~38-42 years~~
~~Electric Transmission Plant~~	~~20-60 years~~	~~20-50 years~~
~~Electric Distribution Plant~~	~~28-60 years~~	~~23-50 years~~
~~Gas Distribution Plant~~	~~n/a~~	~~30-55 years~~
~~Gas Transmission Plant~~	~~n/a~~	~~30-65 years~~
~~General Plant~~	~~5-31 years~~	~~5-40 years~~
~~Intangible Plant~~	~~3-18 years~~	~~5-32 years~~

~~See~~~~Utility Plant~~~~in Note 1 and~~~~TEP Capital Lease Obligations~~~~in Note 6.~~

~~JOINTLY-OWNED FACILITIES~~

~~At December 31, 2011, TEP’s interests in jointly-owned generating stations and transmission systems were as follows:~~

September 30, September 30, September 30, September 30, September 30,
     Ownership
Percentage Plant
in
Service      Construction
Work in
Progress      Accumulated
Depreciation      Net
Book
Value
     -Millions of Dollars-
San Juan Units 1 and 2
     50.0% $ 430         $ 8         $ 219         $ 219
Navajo Station Units 1, 2 and 3
     7.5 146         1         99         48
Four Corners Units 4 and 5
     7.0 96         2         71         27
Transmission Facilities
     7.5 to 95.0 289         9         179         119
Luna Energy Facility
     33.3 52         —           1         51








Total
     $ 1,013         $ 20         $ 569         $ 464

~~TEP has financed or provided funds for the above facilities and TEP’s share of its operating expenses is reflected~~ in the year the qualifying asset was placed in service. In June 2013, we recorded a regulatory asset and corresponding reduction of income ~~statements based on the nature~~tax expense of ~~the expense.~~

~~NOTE 6. DEBT, CREDIT FACILITIES, AND CAPITAL LEASE OBLIGATIONS~~

~~Long-term debt matures more than one year from the date of the financial statements. We summarize UniSource Energy’s and TEP’s long-term debt in the statements of capitalization.~~

~~UNISOURCE ENERGY DEBT- Convertible Senior Notes~~

~~In 2005, UniSource Energy issued $150~~$11 million ~~of 4.50% Convertible Senior Notes (Convertible Senior Notes) due in 2035. UniSource Energy has the option~~ to redeem the Convertible Senior Notes, in whole or in part, for cash at par plus accrued interest. Investors may require UniSource Energy to repurchase the Convertible Senior Notes, in whole or in part, for cash at par plus accrued interest on March 1 of 2015, 2020, 2025 and 2030, and upon the occurrence of certain fundamental changes, such as a change in control. Each $1,000 of Convertible Senior Notes can be converted into 28.814 shares of UniSource Energy Common Stock at any time, which is equivalent to a conversion price of approximately $34.71 per share of common stock. The conversion rate is subject to adjustments including an adjustment to reduce the conversion price upon the payment of quarterly dividends in excess of $0.19 per share.

In December 2011, UniSource Energy announced that it would redeem $35 million of the $150 million outstanding Convertible Senior Notes on January 12, 2012, at a redemption price of 100% of the principal amount plus accrued interest. In January 2012, holders of approximately $33 million of the Convertible Senior Notes converted their interests into approximately 964,000 shares of UniSource Energy Common Stock. The remaining $2 million of

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Convertible Senior Notes were redeemed for cash. After the partial redemption, UniSource Energy had $115 million of Convertible Senior Notes outstanding.~~

~~TEP DEBT~~

~~Variable Rate Tax-Exempt Bonds (IDBs)~~

At December 31, 2011, TEP had $215 million in tax-exempt variable rate debt outstanding. At December 31, 2010, TEP had $365 million outstanding. Each series of bonds is supported by a letter of credit issued under the TEP Credit Agreement or separate TEP Letter of Credit and Reimbursement Agreements. The letters of credit are secured by mortgage bonds issued under TEP’s 1992 Mortgage.

In November 2011, TEP repurchased $150 million of variable rate IDBs. TEP did not cancel the repurchased bonds, which remained outstanding under their respective indentures but were not reflected as debt on the balance sheet. See 2011 TEP Unsecured Notes below.

In December 2010, TEP issued $37 million of Coconino County, Arizona, tax-exempt pollution control bonds (2010 Coconino Bonds). The 2010 Coconino Bonds are supported by a letter of credit (LOC). The LOC is secured by $37 million of 1992 Mortgage Bonds and expires December 2014. The bonds accrue interest at a variable weekly rate and are due October 2032. These bonds are multi-modal bonds that allow TEP to change the interest feature of the bonds. They are callable at any time at par plus accrued interest and are subject to mandatory redemption under certain circumstances if the LOC is not extended. The average interest rate on TEP’s 2010 Coconino Bonds was 0.23% in 2011 and 0.38% in 2010. TEP used the proceeds to redeem a corresponding principal amount of fixed rate Coconino pollution control bonds.

~~TEP capitalized less than $1 million in costs related to the issuance of these bonds and will amortize the costs to interest~~recover previously recorded income tax expense through ~~October 2032, the term of the bonds.~~

~~The following table shows interest~~future rates ~~on TEP’s variable rate IDBs which are reset weekly by its remarketing agents:~~

September 30, September 30, September 30,
     Years Ended December 31,
     2011 2010 2009
Interest Rates on IDBs:

Average Interest Rate
     0.18 % 0.26 % 0.41 %
Range of Average Weekly Rates


0.05
to 0.34
%
%

0.17
to 0.39
%
%

0.25
to 0.79
%
%

~~In August 2009, TEP entered into an interest rate swap that had the effect of converting $50 million of variable rate IDBs to a fixed rate of 2.4% from September 2009 to September 2014.~~

~~Unsecured Fixed Rate IDBs~~

~~At December 31, 2011, TEP had $616 million in unsecured fixed rate IDBs. At December 31, 2010, TEP had $638 million outstanding.~~

~~In November 2011, TEP redeemed $22 million in unsecured fixed rate IDBs. See 2011 TEP Unsecured Notes below.~~

In October 2010, TEP issued $100 million of Pima County, Arizona tax-exempt IDBs. The IDBs are unsecured, bear interest at a rate of 5.25%, mature in October 2040, and are callable at par on or after October 1, 2020. Net of an underwriting discount, $99 million of proceeds were deposited in a construction fund with the bond trustee. The proceeds were applied to the construction of certain of TEP’s transmission and distribution facilities used to provide electric service in Pima County. TEP drew down $88 million of the proceeds from the construction fund in 2010 and $11 million in 2011.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~TEP capitalized approximately $1 million in costs related to the issuance of these bonds and will amortize the costs to interest expense through October 2040, the term of the bonds.~~

~~2011 TEP Unsecured Notes~~

In November 2011, TEP issued $250 million of 5.15% Notes due November 2021 at a discount of $0.8 million. The debt is callable anytime before August 15, 2021, with a make-whole premium plus accrued interest. Anytime after August 15, 2021, the debt is callable at par plus accrued interest. TEP used the net proceeds from the sale to 1) repurchase $150 million of variable rate IDBs, 2) redeem $22 million of 6.1% fixed rate IDBs and 3) repay $78 million of outstanding revolving credit facility balances, with any remaining proceeds to be applied to general corporate purposes. The variable rate IDBs were supported by letters of credit (LOCs) issued under TEP’s Credit Facility. Asas a result of the ~~repurchase of the variable rate IDBs,~~2013 TEP ~~cancelled $155 million of LOCs and reduced its mortgage bonds supporting the LOCs by the same amount.~~

~~TEP capitalized $2 million in costs related to the issuance of the notes and~~Rate Order. The regulatory asset will ~~amortize the costs to interest~~be amortized as income tax expense ~~through November 2021, the term of the notes.~~

~~1992 Mortgage~~

TEP's 1992 Mortgage creates liens on and security interests in most of TEP's utility plant assets, with the exception of Springerville Unit 2. San Carlos Resources Inc., a wholly-owned subsidiary of TEP, holds title to Springerville Unit 2. Utility Plant under Capital Leases is not subject to such liens or available to TEP creditors, other than the lessors. The net book value of TEP's utility plant subject to the lien of the indenture was approximately $2 billion at December 31, 2011 and December 31, 2010.

~~TEP CAPITAL LEASE OBLIGATIONS~~

~~Springerville Leases~~

~~The terms of TEP’s capital leases are as follows:~~

The Springerville Common Facilities Leases have an initial term to December 2017 for one lease and January 2021 for the other two leases, subject to optional renewal periods of two or more years through 2025. Instead of extending the leases TEP may exercise a fixed-price purchase provision. The fixed prices for the acquisition of common facilities are: $38 million in 2017 and $68 million in 2021.

The Springerville Coal Handling Facilities Leases have an initial term to April 2015 but have fixed-rate lease renewal options if certain conditions are satisfied as well as a fixed-price purchase provision of $120 million. The lease provides for one renewal period of six years beginning in April 2015, with additional renewal periods of five or more years through 2035.

The Springerville Unit 1 Leases have an initial term to January 2015 and provide for renewal periods of three or more years through 2030. TEP has a fair market value purchase option for facilities under the Springerville Unit 1 Lease.

TEP agreed with Tri-State, the owner of Springerville Unit 3, and SRP, the owner of Springerville Unit 4, that if the Springerville Coal Handling Facilities and Common Leases are not renewed, TEP will exercise the purchase options under these contracts. SRP will then be obligated to buy a portion of these facilities and Tri State will then be obligated to either 1) buy a portion of these facilities; or 2) continue making payments to TEP for the use of these facilities.

In December 2011, TEP and the owner participants of the Springerville Unit 1 Leases completed a formal appraisal process to determine the fair market value purchase price, in accordance with the Springerville Unit 1 Leases agreements. Based on that appraisal, TEP would have to pay $159 million in 2015 for the 86% interest not already owned by TEP.

~~In January 2012, through scheduled lease payments, TEP reduced its capital lease obligations by $74 million.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Investments in Springerville Lease Debt and Equity~~

TEP’s investments in Springerville Unit 1 lease debt totaled $29 million at December 31, 2011 and $67 million at December 31, 2010. The investments in lease debt mature in 2013. TEP also held an undivided equity ownership interest in the Springerville Unit 1 Leases totaling $37 million at December 31, 2011 and December 31, 2010.

~~Interest Rate Swaps—Springerville Common Facilities Lease Debt~~

TEP’s interest rate swaps hedge the floating interest rate risk associated with the Springerville Common Facilities Lease Debt. Interest on the lease debt is payable at six-month LIBOR plus a spread. The applicable spread was 1.625% at each of December 31, 2011 and December 31, 2010. The swaps have the effect of fixing the interest rates on the amortizing principal balances as follows:

September 30, September 30,
Outstanding at December 31, 2011
     Fixed
Ratio LIBOR
Spread
$ 34 million
     5.77 % 1.625 %
$ 22 million
     3.18 % 1.625 %
$ 7 million
     3.32 % 1.625 %

~~TEP recorded these interest rate swaps as a cash flow hedge for financial reporting purposes. See Note 16.~~

~~UNS ELECTRIC SENIOR UNSECURED NOTES~~

UNS Electric has $100 million of senior unsecured notes; $50 million at 6.5%, due 2015 and $50 million at 7.1%, due 2023. The UNS Electric long-term notes are guaranteed by UES. The notes may be prepaid with a make-whole call premium reflecting a discount rate equal to an equivalent maturity U.S. Treasury security yield plus 50 basis points.

UNS Electric’s long-term notes contain certain restrictive covenants, including restrictions on transactions with affiliates, mergers, liens to secure indebtedness, restricted payments and incurrence of indebtedness.

~~UNS ELECTRIC TERM LOAN CREDIT AGREEMENT AND INTEREST RATE SWAP~~

In August 2011, UNS Electric entered into a four-year $30 million variable rate term loan credit agreement. UNS Electric used the $30 million in proceeds to repay borrowings under its revolving credit facility. The interest rate currently in effect is three-month LIBOR plus 1.25%. At the same time, UNS Electric entered into a fixed-for-floating interest rate swap in which UNS Electric will pay a fixed rate of 0.97% and receive a three-month LIBOR rate on a $30 million notional amount over a four-year period ending August 10, 2015. The UNS Electric term loan credit agreement, included in Long-Term Debt on the balance sheet, is guaranteed by UES.

~~UNS GAS SENIOR UNSECURED NOTES~~

In August 2011, UNS Gas issued $50 million of senior guaranteed notes at 5.39%, due August 2026. UNS Gas used the proceeds to pay in full the $50 million of UNS Gas 6.23% notes that matured in August 2011. UNS Gas has another $50 million of notes at 6.23%, due August 2015. The notes may be prepaid with a make-whole call premium reflecting a discount rate equal to an equivalent maturity U.S. Treasury security yield plus 50 basis points. UES guarantees the notes.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~UNS Gas capitalized less than $0.5 million of costs related to the issuance of the notes and will amortize these costs over the life of the notes.~~

UNS Gas’ long-term debt contains certain restrictive covenants, including restrictions on transactions with affiliates, mergers, liens to secure indebtedness, restricted payments and incurrence of indebtedness.

~~UNISOURCE CREDIT AGREEMENT~~

~~In November 2011, UniSource Energy amended its existing credit agreement to extend the expiration date from November 2014 to November 2016.~~

In November 2010, UniSource Energy amended and restated its existing credit agreement. As amended, the agreement consists of a $125 million revolving credit facility and revolving letter of credit facility. UniSource Energy's obligations under the agreement are secured by a pledge of the capital stock of Millennium, UES and UED.

UniSource Energy capitalized less than $0.5 million related to the 2011 credit agreement amendment and $1 million related to the 2010 credit agreement amendment and restatement and will amortize these costs through November 2016.

Unisource Energy had $57 million outstanding borrowings at December 31, 2011 and $27 million outstanding borrowings at December 31, 2010, under its revolving credit facility. The weighted average interest rate on the revolver was 2.04% at December 31, 2011, and 3.26% at December 31, 2010. We have included the revolver borrowings in Long-Term Debt as UniSource Energy has the ability and the intent to have outstanding borrowings for the next twelve months. As of February 21, 2012, outstanding borrowings under the UniSource Credit Agreement were $52 million.

Interest rates and fees under the UniSource Credit Agreement are based on a pricing grid tied to UniSource Energy’s credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.75% for Eurodollar loans or Alternate Base Rate plus 0.75% for Alternate Base Rate loans.

The UniSource Credit Agreement contains a number of covenants which restrict UniSource Energy and its subsidiaries, including restrictions on additional indebtedness, liens, mergers and sales of assets. The UniSource Credit Agreement also requires UniSource Energy to meet a minimum cash flow to interest coverage ratio determined on a UniSource Energy standalone basis and not to exceed a maximum leverage ratio determined on a consolidated basis. Under the UniSource Credit Agreement, UniSource Energy may pay dividends so long as it maintains compliance with the agreement.

~~TEP CREDIT AGREEMENT~~

In December 2011, TEP reduced its letter of credit facility from $341 million to $186 million, following the repurchase of $150 million of variable rate IDBs and the cancellation of $155 million of LOCs supporting those bonds.

~~In November 2011, TEP amended its existing credit agreement to extend the expiration date from November 2014 to November 2016.~~

In November 2010, TEP amended and restated its existing credit agreement, consisting of a $200 million revolving credit and revolving letter of credit facility and a $341 million letter of credit facility to support tax-exempt bonds.

~~The TEP credit facility is secured by $386 million of mortgage bonds issued under the 1992 Mortgage, which creates a lien on and security interest in most of TEP’s utility plant assets.~~

TEP capitalized $1 million related to the 2011 credit agreement amendment and $4 million related to the 2010 credit agreement amendment and restatement and will amortize these costs through November 2016.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The TEP Credit Agreement contains a number of covenants which restrict TEP and its subsidiaries, including restrictions on liens, mergers and sale of assets. The TEP Credit Agreement also requires TEP not to exceed a maximum leverage ratio. Under the TEP Credit Agreement, TEP may pay dividends to UniSource Energy so long as it maintains compliance with the agreement.

As of December 31, 2011, TEP had $10 million in borrowings and $1 million outstanding in letters of credit under its revolving credit facility. The weighted average interest rate on the revolver was 3.38%, at December 31, 2011. As of December 31, 2010, TEP only had $1 million outstanding in letters of credit under its revolving credit facility. The revolving loan balance was included in Current Liabilities in the UniSource Energy and TEP balance sheets. The outstanding letters of credit are off-balance sheet obligations of TEP. As of February 21, 2012, TEP had $85 million in borrowings and $1 million outstanding in letters of credit under its revolving credit facility.

~~2010 TEP REIMBURSEMENT AGREEMENT~~

In December 2010, TEP entered into a four-year $37 million reimbursement agreement (2010 TEP Reimbursement Agreement). A $37 million letter of credit was issued pursuant to the 2010 TEP Reimbursement Agreement. The letter of credit supports $37 million aggregate principal amount of variable rate tax-exempt IDBs that were issued on behalf of TEP in December 2010 (See Variable Rate Tax-Exempt Bonds above).

The 2010 TEP Reimbursement Agreement is secured by $37 million of mortgage bonds issued under TEP’s 1992 Mortgage. Fees are payable on the aggregate outstanding amount of the letter of credit at a rate of 1.50% per annum.

~~The 2010 TEP Reimbursement Agreement contains substantially the same restrictive covenants~~ as the ~~TEP Credit Agreement described above.~~

~~UNS GAS/UNS ELECTRIC CREDIT AGREEMENT~~

~~In November 2011, UNS Gas and UNS Electric amended their existing unsecured credit agreement to extend the expiration date from November 2014 to November 2016.~~

In November 2010, UNS Gas and UNS Electric amended and restated their existing unsecured credit agreement. As amended, the UNS Gas/UNS Electric Credit Agreement consists of a $100 million revolving credit and revolving letter of credit facility. The maximum borrowings outstanding at any one time for UNS Gas or UNS Electric under the agreement may not exceed $70 million. UNS Gas and UNS Electric eachqualifying assets are liable for only their own individual borrowings under the UNS Gas/UNS Electric Credit Agreement. UES guarantees the obligations of both UNS Gas and UNS Electric. The UNS Gas/UNS Electric Credit Agreement may be used to issue letters of credit, as well as for revolver borrowings. UNS Gas and UNS Electric issue letters of credit, which are off-balance sheet obligations, to support power and gas purchases and hedges.

UNS Gas and UNS Electric capitalized less than $0.5 million of costs related to the 2011 credit agreement amendment and $1 million related to the 2010 credit agreement amendment and restatement, and will amortize these costs through November 2016.

Interest rates and fees under the UNS Electric/UNS Gas Credit Agreement are based on a pricing grid tied to their credit ratings. The interest rate currently in effect on borrowings is LIBOR plus 1.5% for Eurodollar loans or Alternate Base Rate plus 0.5% for Alternate Base Rate loans.

The UNS Electric/UNS Gas Credit Agreement contains a number of covenants which impose restrictions on UNS Gas, UNS Electric and UES, including restrictions on additional indebtedness, liens and mergers. The UNS Electric/UNS Gas Credit Agreement also stipulates a maximum leverage ratio. Under the terms of the UNS Electric/UNS Gas Credit Agreement, UNS Gas and UNS Electric may pay dividends so long as they maintain compliance with the agreement.

depreciated.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

UNS Electric had $6 million and $13 million in outstanding letters of credit under the UNS Gas/UNS Electric Credit Agreement as of December 31, 2011, and December 31, 2010, respectively, which are not shown on the balance sheet.

~~UED SECURED TERM LOAN~~

~~In July 2011, UED received $63 million from UNS Electric from the sale of BMGS. UED used a portion of those funds to fully repay the $27 million outstanding under its secured term loan.~~

~~Other~~

As of December 31, 2011, UniSource Energy and its subsidiaries were in compliance with the terms of their respective loan, note purchase and credit agreements. No amounts of net income were subject to dividend restrictions.

~~DEBT MATURITIES~~

~~Long-term debt, including term loan payments, revolving credit facilities classified as long-term, and capital lease obligations mature on the following dates:~~

000000 000000 000000 000000 000000 000000 000000 000000
TEP
Variable
Rate IDBs
Supported
by Letters
of Credit⁽¹⁾ TEP
Scheduled
Debt
Retirements⁽²⁾ TEP
Capital
Lease
Obligations TEP
Total UNS
Gas UNS
Electric UniSource
Energy
Parent
Company⁽³⁾ Total
- Millions of Dollars -
2012
$ —      $ —      $ 118    $ 118    $ —      $ —      $ —      $ 118
2013
—      —      122    122    —      —      —      122
2014
37    —      195    232    —      —      —      232
2015
—      —      23    23    50    80    —      153
2016
178    —      18    196    —      —      57    253

Total 2012 – 2016
215    —      476    691    50    80    57    878
Thereafter
—      866    61    927    50    50    150    1,177
Less: Imputed Interest
—      —      (107 ) (107 ) —      —      —      (107 )

Total
$ 215    $ 866    $ 430    $ 1,511    $ 100    $ 130    $ 207    $ 1,948

⁽¹⁾

TEP’s Variable Rate IDBs are backed by $186 million in LOCs issued pursuant to TEP’s Credit Agreement which expires in November 2016 and TEP’s $37 million Reimbursement Agreement which expires December 2014. Although the Variable Rate IDBs mature between 2018 and 2032, the above table reflects a redemption or repurchase of such bonds in 2014 and 2016 as though the LOCs terminate without replacement upon expiration of the TEP Credit Agreement.

⁽²⁾	~~The repayment of TEP Unsecured Notes is not reduced by the approximately $1 million discount.~~

⁽³⁾	In January 2012, UniSource Energy redeemed $35 million of its convertible senior notes. Pursuant to the redemption, substantially all of the notes were converted into approximately 1 million shares of UniSource Energy Common Stock.

~~NOTE 7. STOCKHOLDERS’ EQUITY~~

~~DIVIDEND LIMITATIONS~~

~~UniSource Energy~~

Our ability to pay cash dividends on Common Stock outstanding depends, in part, upon cash flows from our subsidiaries: TEP, UES, Millennium and UED, as well as compliance with various debt covenant requirements. UniSource Energy and each of its subsidiaries were in compliance with debt covenants at December 31, 2011; therefore, TEP and the other subsidiaries were not restricted from paying dividends.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

In February 2012, UniSource Energy declared a first quarter dividend to shareholders of $0.43 per share of UniSource Energy Common Stock. The dividend, totaling approximately $16 million, will be paid on March 22, 2012, to common shareholders of record as of March 12, 2012.

In January 2012, holders of approximately $33 million of the Convertible Senior Notes converted their interests into approximately 964,000 shares of UniSource Energy Common Stock increasing common stock equity by $33 million.

~~TEP~~

UniSource Energy is the holder of TEP’s common stock. TEP pays dividends from current year earnings; therefore the dividend restriction in the Federal Power Act does not limit TEP’s payment of dividends from net income. TEP paid dividends to UniSource Energy of $60 million in both 2010 and 2009. TEP did not pay dividends to UniSource Energy in 2011.

~~UniSource Energy contributed capital to TEP of $30 million in 2011, $15 million in 2010, and $30 million in 2009.~~

~~NOTE 8. INCOME TAXES~~

~~A reconciliation of the federal statutory income tax rate to each company’s effective income tax rate follows:~~

000000 000000 000000 000000 000000 000000
UniSource Energy TEP
Years Ended December 31,
2011 2010 2009 2011 2010 2009
-Millions of Dollars-
Federal Income Tax Expense at Statutory Rate
$ 62    $ 66    $ 59    $ 48    $ 58    $ 51
State Income Tax Expense, Net of Federal Benefit
8    9    7    6    8    6
Deferred Tax Asset Valuation Allowance
—      8    —      —      —      —
Deferred Tax Asset Write-Off Related to Unregulated Investment
—      3    —      —      —      —
AFUDC Equity
(1 ) (1 ) (1 ) (1 ) (1 ) (1 )
Domestic Production Deduction
—      (3 ) (1 ) —      (3 ) (1 )
Federal/State Tax Credits
(3 ) (2 ) (1 ) (2 ) (2 ) (1 )
Other
1    (3 ) —      1    —      —

Total Federal and State Income Tax Expense
$ 67    $ 77    $ 63    $ 52    $ 60    $ 54

Effective Tax Rate
38 % 41 % 37 % 38 % 36 % 37 %

In 2010, UniSource Energy recorded a $3 million out-of-period income tax expense. The out-of-period expense related to the write-off of a previously recorded deferred tax asset associated with the excess of tax over book basis difference in a consolidated unregulated investment. Management concluded that this out-of-period adjustment was not material to the current and prior period financial statements.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Income tax expense included in the income statements consists of the following:

September 30, September 30, September 30, September 30, September 30, September 30,
     UniSource Energy      TEP
     Years Ended December 31,
     2011    2010    2009      2011    2010 2009
     -Millions of Dollars-
Current Tax Expense (Benefit)

Federal
     $ (7 )    $ 34       $ 6         $ (5 )    $ 28    $ 7
State
     (2 )    7       —           (2 )    7    1










Total
     (9 )    41       6         (7 )    35    8










Deferred Tax Expense (Benefit)

Federal
     64       32       47         50       24    38
Federal Investment Tax Credits
     (1 )    (1 )    —           (1 )    (1 ) —
State
     13       5       10         10       2    8










Total
     76       36       57         59       25    46










Total Federal and State Income Tax Expense
     $ 67       $ 77       $ 63         $ 52       $ 60    $ 54



	UNS Energy									TEP
	Years Ended December 31,
	2013			2012			2011			2013			2012			2011
	Millions of Dollars
Current Tax Expense (Benefit):
Federal	$	(11	)	$	(2	)	$	(7	)	$	(8	)	$	(4	)	$	(5	)
State	(2		)	(2		)	(2		)	(2		)	(2		)	(2		)
Total Current Tax Expense (Benefit)	(13		)	(4		)	(9		)	(10		)	(6		)	(7		)
Deferred Tax Expense (Benefit):
Federal	61			51			64			47			38			50
Federal Investment Tax Credits	(1		)	—			(1		)	(1		)	—			(1		)
State	11			9			13			12			7			10
Total Deferred Tax Expense (Benefit)	71			60			76			58			45			59
Total Federal and State Income Tax Expense	$	58		$	56		$	67		$	48		$	39		$	52

K-115

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The significant components of deferred income tax assets and liabilities consist of the following:

September 30, September 30, September 30, September 30,
     UniSource Energy
December 31,    TEP
December 31,
     2011    2010    2011    2010
     -Millions of Dollars-
Gross Deferred Income Tax Assets

Capital Lease Obligations
     $ 169       $ 192       $ 169       $ 192
Net Operating Loss Carryforwards
     81       —         76       —
Customer Advances and Contributions in Aid of Construction
     30       43       17       27
Alternative Minimum Tax Credit
     43       34       25       16
Accrued Postretirement Benefits
     23       24       23       24
Renewable Energy Credit Up-Front Incentive Payments
     22       14       18       11
Emission Allowance Inventory
     10       11       10       11
Unregulated Investment Losses
     9       9       —         —
Other
     34       29       29       26








Gross Deferred Income Tax Assets
     421       356       367       307








Deferred Tax Assets Valuation Allowance
     (7 )    (8 )    —         —








Gross Deferred Income Tax Liabilities

Plant—Net
     (581 )    (465 )    (513 )    (413 )
Capital Lease Assets—Net
     (41 )    (48 )    (41 )    (48 )
Regulatory Asset—Income Taxes Recoverable Through Future Revenues
     (4 )    (7 )    (3 )    (7 )
Pensions
     (17 )    (12 )    (18 )    (13 )
PPFAC
     (19 )    (1 )    (16 )    —
Other
     (29 )    (30 )    (17 )    (22 )








Gross Deferred Income Tax Liabilities
     (691 )    (563 )    (608 )    (503 )








Net Deferred Income Tax Liabilities
     $ (277 )    $ (215 )    $ (241 )    $ (196 )



	UNS Energy						TEP
	December 31,						December 31,
	2013			2012			2013			2012
	Millions of Dollars
Gross Deferred Income Tax Assets:
Capital Lease Obligations	$	127		$	141		$	127		$	141
Net Operating Loss Carryforwards	94			72			104			85
Customer Advances and Contributions in Aid of Construction	33			34			19			19
Alternative Minimum Tax Credit	43			43			24			24
Accrued Postretirement Benefits	23			23			23			23
Renewable Energy Credit Up-Front Incentive Payments	—			26			—			20
Emission Allowance Inventory	10			10			10			10
Unregulated Investment Losses	7			9			—			—
Other	50			44			44			43
Total Gross Deferred Income Tax Assets	387			402			351			365
Deferred Tax Assets Valuation Allowance	(7		)	(7		)	(2		)	—
Gross Deferred Income Tax Liabilities:
Plant – Net	(708		)	(648		)	(615		)	(571		)
Capital Lease Assets – Net	(47		)	(34		)	(47		)	(34		)
Pensions	(21		)	(23		)	(22		)	(24		)
PPFAC	(5		)	(6		)	(2		)	(3		)
Other	(21		)	(15		)	(20		)	(15		)
Total Gross Deferred Income Tax Liabilities	(802		)	(726		)	(706		)	(647		)
Net Deferred Income Tax Liabilities	$	(422	)	$	(331	)	$	(357	)	$	(282	)

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The ~~balance sheets display the~~ net deferred income tax liability on the balance sheet is as follows:

September 30, September 30, September 30, September 30,
     UniSource Energy    TEP
     December 31,    December 31,
     2011    2010    2011    2010
     -Millions of Dollars-
Deferred Income Taxes – Current Assets
     $ 23       $ 31       $ 22       $ 32
Deferred Income Taxes – Noncurrent Liabilities
     (300 )    (246 )    (263 )    (228 )








Net Deferred Income Tax Liability
     $ (277 )    $ (215 )    $ (241 )    $ (196 )

~~Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred income tax asset will not be realized.~~



	UNS Energy						TEP
	December 31,						December 31,
	2013			2012			2013			2012
	Millions of Dollars
Deferred Income Taxes – Current Assets	$	60		$	34		$	64		$	37
Deferred Income Taxes – Noncurrent Liabilities	(482		)	(365		)	(421		)	(319		)
Net Deferred Income Tax Liability	$	(422	)	$	(331	)	$	(357	)	$	(282	)

The ~~$9 million~~ unregulated investment loss deferred tax asset includes $7 million of capital loss at December 31, ~~2011~~2013 and ~~$8 million at~~ December 31, ~~2010.~~2012. The deferred tax asset can only be used if the company has capital gains to offset the losses. Management believes that it is more likely than not that the company will not be able to generate future capital gains. As a result, ~~UniSource~~UNS Energy recorded a $7 million valuation allowance against the deferred tax asset as of December 31, ~~2011~~2013, and ~~$8 million at~~ December 31, ~~2010.~~2012. Management believes that based on its historical pattern of taxable income, ~~UniSource~~UNS Energy will produce sufficient income in the future to realize all other deferred income tax assets.

~~State Tax Rate Change~~

~~We record~~ TEP has recorded a $2 million valuation allowance against state tax credit carryforward deferred tax assets ~~and liabilities using the~~at December 31, 2013. Management believes TEP will not produce sufficient taxable income to use all state tax ~~rates expected to be in effect when the deferred tax assets and liabilities are realized or settled. In the first quarter~~credits before they expire.

K-116

Table of ~~2011, the Arizona legislature passed a bill reducing the corporate income tax rate from the current rate~~Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Tax Position

As of 6.968%. The tax rate reduction will be phased in beginning in 2014, with a reduction of approximately 0.5% per year until the income tax rate reaches 4.9% for 2017 and later years. As a result of these tax rate reductions, we reduced the net deferred tax liabilities at UniSourceDecember 31, 2013, UNS Energy and TEP ~~by $13 million, offset entirely by adjustments to regulatory assets and liabilities. The income tax rate change did not have~~had the following carryforward amounts:



	UNS Energy			TEP
	Amount		Expiring Year	Amount		Expiring Year
	Millions of Dollars			Millions of Dollars
Capital Loss	$	7	2015	$	—	N/A
Federal Net Operating Loss	266		2031-33	286		2031-33
State Net Operating Loss	30		2032-33	99		2016-33
State Credits	5		2016-18	6		2016-18
Alternative Minimum Tax Credit	43		None	24		None
Investment Tax Credits	6		2032-33	6		2032-33

If the pending Merger is approved there would be an ~~impact~~annual limitation on ~~UniSource Energy’s and TEP’s effective tax rate for 2011.~~

~~Uncertain Tax Positions~~

In accordance with accounting rules related to uncertain tax positions, we are required to determine whether it is “more likely than not” that we will sustain an income tax position under examination. Each income tax position is measured to determine the amount of ~~benefit~~carryforwards that can be utilized.

Excess Tax Benefit Realized from Share-Based Compensation Plans

UNS Energy records excess tax benefits as an increase to ~~recognize~~Common Stock when tax deductions for share-based compensation exceed the expense recorded in the financial ~~statements.~~statements and they result in a reduction to income taxes payable. As of December 31, 2013, UNS Energy had $4 million of excess tax benefits that were not recorded in Common Stock. The ~~following table shows~~excess benefits will be recorded in Common Stock when the ~~changes in~~Federal net operating loss carryforwards of $266 million are used.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of unrecognized tax benefits ~~of UniSource Energy and TEP:~~

September 30, September 30, September 30, September 30,
     UniSource Energy    TEP
     December 31,    December 31,
     2011    2010    2011    2010
     -Millions of Dollars-
Unrecognized Tax Benefits, beginning of year
     $ 41       $ 19       $ 35       $ 19
Additions based on tax positions taken in the current year
     9       11       8       8
Reductions based on settlements with tax authorities
     (22 )    —         (19 )    —
Additions based on tax positions taken in the prior year
     1       16       —         13
Reductions based on tax positions taken in the prior year
     —         (4 )    —         (4 )
Reductions based on expiration of the statute of limitations
     —         (1 )    —         (1 )








Unrecognized Tax Benefits, end of year
     $ 29       $ 41       $ 24       $ 35

follows:



	UNS Energy						TEP
	December 31,						December 31,
	2013			2012			2013			2012
	Millions of Dollars
Unrecognized Tax Benefits, Beginning of Year	$	30		$	29		$	23		$	24
Additions Based on Tax Positions Taken in the Current Year	2			5			1			3
Reductions of Positions from Prior Year Based on Tax Authority Ruling	(28		)	(4		)	(22		)	(4		)
Unrecognized Tax Benefits, End of Year	$	4		$	30		$	2		$	23

Unrecognized tax benefits, ~~of $1 million,~~if recognized, would not reduce income tax expense at December 31, 2013. Unrecognized tax benefits, if recognized, would reduce ~~the effective~~income tax ~~rate~~expense by $1 million at December 31, ~~2011,~~2012 for both UNS Energy and TEP.

UNS Energy and TEP recognized a $1 million reduction to interest expense in 2013 and no reduction in 2012. UNS Energy and TEP had no interest payable balance at December 31, ~~2010, for both UniSource Energy~~2013 and ~~TEP. Included~~$1 million at December 31, 2012. We have no penalties accrued in ~~reductions based on settlements with authorities is $13 million for UniSource Energy and $10 million for TEP related to~~the years presented.

In February 2013, we received a ~~change in accounting method filed with~~favorable ruling from the Internal Revenue Service (IRS) allowing us to deduct up-front incentive payments to customers who install renewable energy resources. These customers transfer environmental attributes or RECs associated with their renewable installations to us over the expected life of the contract for an up-front incentive payment based on the generating capacity of their installation. As a result of the IRS ruling in ~~2011.~~the first quarter of 2013, UNS Energy reduced unrecognized tax benefits by $28 million, and TEP reduced unrecognized tax benefits by $22 million. The ~~remaining~~changes in tax benefits primarily affected the balance sheets.

UNS Energy and TEP have been audited by the IRS through tax year 2010 and the IRS has provided notice of intent to audit the 2011 tax returns. UNS Energy and TEP are not currently under audit by any state tax agencies. The balance in unrecognized tax benefits could change in the next ~~twelve~~12 months as a result of ongoing IRS audits, but we are unable to determine the amount of ~~the~~ change.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

K-117

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~UniSource~~

Tangible Property Regulations

In September 2013, the U.S. Treasury Department released final income tax regulations on the deduction and capitalization of expenditures related to tangible property. These final regulations apply to tax years beginning on or after January 1, 2014. Several of the provisions within the regulations will require a tax accounting method change to be filed with the IRS resulting in a cumulative effect adjustment. The adoption of these regulations by UNS Energy and TEP ~~recognize interest accrued related~~resulted in a $4 million increase to ~~unrecognized~~plant-related deferred tax ~~benefits in Other Interest Expense in the income statements. UniSource Energy~~liabilities and TEP recorded a reduction to interest expense of $1 million in 2011 and 2009. We did not recognize a reduction to interest expense in 2010. The balance of interest payable for UniSource Energy and TEP was $1 millionnet operating loss deferred tax assets at December 31, ~~2011 and $2 million at December 31, 2010. We have no penalties accrued in the years presented.~~

UniSource Energy and TEP have been audited by the IRS through tax year 2006 and are currently under audit by the IRS for 2008 through 2010. 2007 was not selected for audit. We are unable to determine when the audits will be completed. UniSource Energy and TEP are not currently under audit by any state tax agencies.

2013.

NOTE 9.10. EMPLOYEE BENEFIT PLANS

PENSION BENEFIT PLANS

We ~~maintain~~sponsor three noncontributory, defined benefit pension plans for substantially all ~~regular~~ employees and certain affiliate employees. Benefits are based on years of service and ~~the employee's~~ average compensation. We fund the pension plans by contributing at least the minimum amount required under Internal Revenue Service (IRS) regulations.

We ~~recognize the underfunded status of our defined benefit pension plans as~~also maintain a liability on our balance sheets. The underfunded status is measured as the difference between the fair value of the pension plans’ assets and the projected benefit obligation for pension plans. We recognize a regulatory asset to the extent these future costs are probable of recovery in Retail Rates, and expect to recover these costs over the estimated service lives of employees.

~~Additionally, we provide supplemental retirement benefits to certain employees whose benefits are limited by Internal Revenue Service benefit or compensation limitations. Changes in~~ Supplemental Executive Retirement Plan (SERP) ~~benefit obligations are recognized as a component of accumulated other comprehensive income (AOCI).~~

~~Pension Contributions~~

~~The Pension Protection Act of 2006 (The Pension Act) established minimum funding targets~~ for pension plans. A plan’s funding target is the present value of all benefits accrued or earned as of the beginning of the plan year. While the annual targets are not legally required, benefit payment options are limited for plans that do not meet the targets, and a funding deficiency notice must be sent to all plan participants. Our plans are in compliance with The Pension Act.

~~In 2012, UniSource Energy expects to contribute $23 million to the pension plans, including $20 million in contributions by TEP.~~

executive management.

OTHER ~~POSTRETIREMENT~~RETIREE BENEFIT PLANS

TEP provides limited health care and life insurance benefits for retirees. ~~All regular~~Active TEP employees may become eligible for these benefits if they reach retirement age while working for TEP or an affiliate. UNS ~~Gas~~Electric and UNS ~~Electric~~Gas provide ~~postretirement~~retiree medical benefits for current retirees. UNS ~~Gas~~Electric's and UNS ~~Electric~~Gas' active employees doare not ~~participate in the postretirement~~eligible for retiree medical ~~plan.~~

~~In 2009,~~ benefits.

TEP ~~established~~funds its other retiree benefits for classified employees through a Voluntary Employee Beneficiary Association (VEBA) ~~to fund its other postretirement benefit plan.~~. TEP contributed $2$3 million in each of ~~2011~~2013 and ~~2010~~2012 and $1$2 million in ~~2009~~2011 to the VEBA. Other retiree benefits for unclassified employees are self funded.

TEP’s other retiree benefit plan was amended in 2012 to increase the participant contributions for classified employees who retire after February 1, 2014. The effect on the benefit obligation was less than $1 million.

REGULATORY RECOVERY

We record changes in our non-SERP pension plans and other ~~postretirement obligation,~~retiree benefit plan, not yet reflected in net periodic benefit cost, as a regulatory asset, as such amounts are probable of future recovery in ~~Retail Rates. TEP’s retiree medical plan was amended effective December 31, 2011~~the rates charged to ~~increase~~retail customers. Changes in the ~~participant contributions for unclassified employees who retire on or after July 1, 2012.~~

SERP obligation, not yet reflected in net periodic benefit cost, are recorded in Other Comprehensive Income since SERP expense is not currently recoverable in rates.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The pension and other ~~postretirement~~retiree benefit related amounts (excluding tax balances) included on the ~~UniSource~~UNS Energy balance sheet are:

September 30, September 30, September 30, September 30,
     Pension Benefits    Other Postretirement
Benefits
     Years Ended December 31,
     2011    2010    2011    2010
     -Millions of Dollars-
Regulatory Pension Asset included in Other Regulatory Assets
     $ 106       $ 86       $ 8       $ 8
Accrued Benefit Liability included in Accrued Employee Expenses
     (1 )    —         (2 )    (4 )
Accrued Benefit Liability included in Pension and Other Postretirement Benefits
     (72 )    (63 )    (66 )    (65 )
Accumulated Other Comprehensive Loss (SERP)
     2       4       —         —








Net Amount Recognized
     $ 35       $ 27       $ (60 )    $ (61 )



	Pension Benefits						Other Retiree Benefits
	Years Ended December 31,
	2013			2012			2013			2012
	Millions of Dollars
Regulatory Pension Asset Included in Other Regulatory Assets	$	75		$	129		$	4		$	10
Accrued Benefit Liability Included in Accrued Employee Expenses	(1		)	(1		)	(2		)	(2		)
Accrued Benefit Liability Included in Pension and Other Retiree Benefits	(28		)	(90		)	(63		)	(69		)
Accumulated Other Comprehensive Loss (related to SERP)	2			4			—			—
Net Amount Recognized	$	48		$	42		$	(61	)	$	(61	)

The table above includes accrued pension benefit liabilities for UNS ~~Gas~~Electric and UNS ~~Electric~~Gas of approximately $8$5 million at December 31, ~~2011,~~2013 and $6$9 million at December 31, ~~2010.~~2012. The table also includes ~~a postretirement~~an other retiree benefit liability of $1 million for UNS ~~Gas~~Electric and UNS ~~Electric~~Gas for each period presented.

K-118

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

OBLIGATIONS AND FUNDED STATUS

We measured the actuarial present values of all pension benefit obligations and other ~~postretirement~~retiree benefit plans at December 31, ~~2011,~~2013 and December 31, ~~2010.~~2012. The ~~tables~~table below ~~include~~includes TEP’s, UNS ~~Gas’~~Electric’s, and UNS ~~Electric’s~~Gas’ plans. ~~The change in~~All plans have projected benefit ~~obligation and~~obligations in excess of fair value of plan assets for each period presented. The status of our pension benefit and ~~reconciliation of the funded status~~other retiree benefit plans are ~~as follows:~~

September 30, September 30, September 30, September 30,
     Pension Benefits    Other Postretirement
Benefits
     Years Ended December 31,
     2011    2010    2011    2010
     -Millions of Dollars-
Change in Projected Benefit Obligation

Benefit Obligation at Beginning of Year
     $ 283       $ 242       $ 73       $ 71
Actuarial (Gain) Loss
     22       28       —         (1 )
Interest Cost
     16       15       4       4
Service Cost
     10       8       3       3
Amendments
     —         —         (2 )    —
Other
     —         1       —         —
Benefits Paid
     (12 )    (11 )    (5 )    (4 )








Projected Benefit Obligation at End of Year
     319       283       73       73








Change in Plan Assets

Fair Value of Plan Assets at Beginning of Year
     220       184       4       2
Actual Return on Plan Assets
     14       25       —         —
Benefits Paid
     (12 )    (11 )    (5 )    (4 )
Employer Contributions (1)
     23       22       6       6








Fair Value of Plan Assets at End of Year
     245       220       5       4








Funded Status at End of Year
     $ (74 )    $ (63 )    $ (68 )    $ (69 )

summarized below:



	Pension Benefits						Other Retiree Benefits
	Years Ended December 31,
	2013			2012			2013			2012
	Millions of Dollars
Change in Projected Benefit Obligation
Benefit Obligation at Beginning of Year	$	380		$	319		$	78		$	73
Actuarial (Gain) Loss	(38		)	51			(5		)	3
Interest Cost	15			15			3			3
Service Cost	13			10			3			3
Benefits Paid	(18		)	(15		)	(4		)	(4		)
Projected Benefit Obligation at End of Year	352			380			75			78
Change in Plan Assets
Fair Value of Plan Assets at Beginning of Year	289			245			7			5
Actual Return on Plan Assets	29			36			1			1
Benefits Paid	(18		)	(15		)	(4		)	(4		)
Employer Contributions ⁽¹⁾	23			23			6			5
Fair Value of Plan Assets at End of Year	323			289			10			7
Funded Status at End of Year	$	(29	)	$	(91	)	$	(65	)	$	(71	)


⁽¹⁾	TEP made ~~$20~~$22 million in pension contributions and $6 million ofin other ~~postretirement~~retiree benefits contributions in ~~2011~~2013 and ~~2010.~~$20 million in pension contributions and $5 million of other retiree benefits contributions in 2012. In 2014, UNS Energy expects to contribute $10 million to the pension plans, including $9 million in contributions by TEP.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~In March 2010,~~

The table above includes the ~~Patient Protection~~following for UNS Electric and ~~Affordable Care Act (PPACA) was signed into law. One provision~~UNS Gas:

Pension benefit obligations of ~~PPACA imposes a 40% excise tax on plans in which the aggregate value~~$21 million at December 31, 2013 and $23 million at December 31, 2012;

Plan assets of ~~employer-sponsored health insurance exceeds a threshold amount starting in 2018. There are uncertainties surrounding implementation~~$16 million at December 31, 2013 and ~~calculation of the excise tax. Our best estimate of the potential impact resulted in an increase in the postretirement~~$14 million at December 31, 2012; and

A retiree benefit obligation of $1 million at December 31, ~~2011 and $2 million at December 31, 2010.~~

~~The table above includes the following for UNS Gas and UNS Electric:~~

~~Pension benefit obligations of $8 million at December 31, 2011, and $6 million at December 31, 2010;~~

~~Plan assets of $10 million December 31, 2011, and $9 million at December 31, 2010; and~~

~~A postretirement benefit liability of $1 million at December 31, 2011~~2013 and December 31, ~~2010.~~

2012.

The following table provides the components of ~~UniSource~~UNS Energy’s regulatory assets and accumulated other comprehensive loss that have not been recognized as components of net periodic benefit cost as of the dates presented:

September 30, September 30, September 30, September 30,
     Pension Benefits      Other Postretirement
Benefits
     Years Ended December 31,
     2011      2010      2011    2010
     -Millions of Dollars-
Net Loss
     $ 108         $ 89         $ 11       $ 11
Prior Service Cost (Benefit)
     1         1         (3 )    (3 )

~~Information~~



	Pension Benefits				Other Retiree Benefits
	Years Ended December 31,
	2013		2012		2013			2012
	Millions of Dollars
Net Loss	$	77	$	133	$	7		$	13
Prior Service Cost (Benefit)	—		1		(3		)	(3		)

The accumulated benefit obligation aggregated for all pension plans ~~with Accumulated Benefit Obligations in excess~~is $314 million at December 31, 2013 and $334 million at December 31, 2012.



Information for Pension Plans with Accumulated Benefit Obligations in excess of Pension Plan Assets:
	December 31,
	2013	2012
	Millions of Dollars
Accumulated Benefit Obligation at End of Year	30	334
Fair Value of Plan Assets at End of Year	16	289

K-119

Table of ~~pension plan assets follows:~~

September 30, September 30,
     December 31,
     2011      2010
     -Millions of Dollars-
Projected Benefit Obligation at End of Year
     $ 319         $ 283
Accumulated Benefit Obligation at End of Year
     281         243
Fair Value of Plan Assets at End of Year
     245         220

Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 31, ~~2011, and December 31, 2010,~~2012, all ~~UniSource~~four UNS Energy defined benefit pension plans had accumulated benefit obligations in excess of ~~pension~~ plan assets.

~~The components~~ Due to 2013 contributions, returns on plan assets, and the favorable impact of the increase in the discount rate on the accumulated benefit obligations, only the SERP, which is unfunded, and the UES plan have accumulated benefit obligations in excess of plan assets at December 31, 2013.

UNS Energy’s net periodic benefit ~~costs are as follows:~~

September 30, September 30, September 30, September 30, September 30, September 30,
     Pension Benefits    Other Postretirement
Benefits
     Years Ended December 31,
     2011    2010    2009    2011    2010    2009
     -Millions of Dollars-
Service Cost
     $ 10       $ 8       $ 7       $ 3       $ 3       $ 2
Interest Cost
     15       15       14       4       4       4
Expected Return on Plan Assets
     (16 )    (14 )    (11 )    —         —         —
Prior Service Cost Amortization
     —         —         1       (1 )    (2 )    (2 )
Recognized Actuarial Loss
     6       5       7       —         —         1












Net Periodic Benefit Cost
     $ 15       $ 14       $ 18       $ 6       $ 5       $ 5

plan cost, comprised primarily of TEP's cost, includes the following components:



	Pension Benefits									Other Retiree Benefits
	Years Ended December 31,
	2013			2012			2011			2013			2012		2011
	Millions of Dollars
Service Cost	$	13		$	10		$	10		$	4		$	3	$	3
Interest Cost	15			16			15			3			3		4
Expected Return on Plan Assets	(20		)	(17		)	(16		)	(1		)	—		—
Prior Service Cost Amortization	—			—			—			(1		)	—		(1		)
Actuarial Loss Amortization	9			7			6			1			—		—
Net Periodic Benefit Cost	$	17		$	16		$	15		$	6		$	6	$	6

Approximately ~~19%~~21% of the net periodic benefit cost was capitalized as a cost of construction and the remainder was included in ~~current year earnings.~~

income.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The changes in plan assets and benefit obligations recognized as regulatory assets or in AOCI are as follows:

September 30, September 30, September 30, September 30, September 30,
     Pension Benefits
     2011    2010      2009
     Regulatory
Asset    AOCI    Regulatory
Asset    AOCI      Regulatory
Asset
     -Millions of Dollars-
Current Year Actuarial (Gain) Loss
     $ 25       $ (2 )    $ 16       $ 1         $ (21 )
Amortization of Actuarial (Gain) Loss
     (5 )    —         (5 )    —           (7 )
Plan Amendments
     —         —         —         —           (1 )










Total Recognized (Gain) Loss
     $ 20       $ (2 )    $ 11       $ 1         $ (29 )

September 30, September 30, September 30,
     Other Postretirement Benefits
     2011    2010    2009
     Regulatory
Asset    Regulatory
Asset    Regulatory
Asset
     -Millions of Dollars-
Prior Service Cost (Credit)
     $ (2 )    $ —         $ —
Current Year Actuarial (Gain) Loss
     —         (1 )    1
Amortization of Actuarial Gain (Loss)
     —         (1 )    (1 )
Prior Service (Cost) Amortization
     1       2       2






Total Recognized (Gain) Loss
     $ (1 )    $ —         $ 2



	Pension Benefits
	2013						2012					2011
	Regulatory Asset			AOCI			Regulatory Asset			AOCI		Regulatory Asset			AOCI
	Millions of Dollars
Current Year Actuarial (Gain) Loss	$	(46	)	$	(1	)	$	30		$	1	$	25		$	(2	)
Amortization of Actuarial Gain (Loss)	(8		)	—			(7		)	—		(5		)	—
Total Recognized (Gain) Loss	$	(54	)	$	(1	)	$	23		$	1	$	20		$	(2	)



	Other Retiree Benefits
	2013			2012		2011
	Regulatory Asset			Regulatory Asset		Regulatory Asset
	Millions of Dollars
Prior Service Cost (Credit)	$	—		$	—	$	(2	)
Current Year Actuarial (Gain) Loss	(6		)	2		—
Amortization of Actuarial (Gain) Loss	(1		)	—		—
Amortization of Prior Service (Cost) Credit	1			—		1
Total Recognized (Gain) Loss	$	(6	)	$	2	$	(1	)

For all pension plans, we amortize prior service costs on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. We will amortize $7$4 million estimated net loss and less than ~~$0.5~~$1 million prior service cost from other regulatory assets and less than ~~$0.5~~$1 million prior service cost from AOCI into net periodic benefit cost in ~~2012.~~2014. The estimated ~~net loss~~prior service benefit for the ~~defined~~other retiree benefit ~~postretirement plans~~plan that will be amortized from other regulatory assets into net periodic benefit cost in ~~2012~~2014 is less than $1$1.0 million. ~~The estimated prior service benefit that will be amortized is less than $1 million.~~

September 30, September 30, September 30, September 30,
     Pension Benefits      Other Postretirement
Benefits
        2011      2010      2011      2010
Weighted-Average Assumptions Used to Determine Benefit Obligations as of the Measurement Date

Discount Rate
     4.9%-5.0%         5.5% - 5.6%         4.7%         5.2%
Rate of Compensation Increase
     3.0%         3.0% – 5.0%         N/A         N/A

September 30, September 30, September 30, September 30, September 30, September 30,
     Pension Benefits      Other Postretirement
Benefits
        2011      2010      2009      2011      2010      2009
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31

Discount Rate
     5.5%-5.6%      6.3%      6.3%      5.2%      6.0%      6.5%
Rate of Compensation Increase
     3.0%-5.0%      3.0%–5.0%      3.0% -5.0%      N/A      N/A      N/A
Expected Return on Plan Assets
     7.0%      7.5%      8.0%      5.1%      5.6%      N/A



	Pension Benefits		Other Retiree Benefits
	2013	2012	2013	2012
Weighted-Average Assumptions Used to Determine Benefit Obligations as of December 31,
Discount Rate	5.0% - 5.2%	4.1%-4.3%	4.7%	3.8%
Rate of Compensation Increase	3.0%	3.0%	N/A	N/A

K-120

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Pension Benefits			Other Retiree Benefits
	2013	2012	2011	2013	2012	2011
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31,
Discount Rate	4.1%-4.3%	4.9% - 5.0%	5.5% - 5.6%	3.8%	4.7%	5.2%
Rate of Compensation Increase	3.0%	3.0%	3.0% - 5.0%	N/A	N/A	N/A
Expected Return on Plan Assets	7.0%	7.0%	7.0%	7.0%	7.0%	5.1%

Net periodic benefit cost is subject to various assumptions and determinations, such as the discount rate, the rate of compensation increase, and the expected return on plan assets.

We use a combination of sources in selecting the expected long-term rate-of-return-on-assets assumption, including an investment return model. The model used provides a “best-estimate” range over 20 years from the 25^th percentile to the 75^th percentile. The model, used as a guideline for selecting the overall rate-of-return-on-assets assumption, is based on forward looking return expectations only. The above method is used for all asset classes.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Changes that may arise over time with regard to these assumptions and determinations will change amounts recorded in the future as net periodic benefit cost.

September 30, September 30,
     December 31,
     2011 2010
Assumed Health Care Cost Trend Rates

Health Care Cost Trend Rate Assumed for Next Year
     6.9 % 7.9 %
Ultimate Health Care Cost Trend Rate Assumed
     4.5 % 4.5 %
Year that the Rate Reaches the Ultimate Trend Rate
     2049    2027

The assumed health care cost trend rates follow:



	December 31,
	2013	2012
Health Care Cost Trend Rate Assumed for Next Year	6.7%	6.9%
Ultimate Health Care Cost Trend Rate Assumed	4.5%	4.5%
Year that the Rate Reaches the Ultimate Trend Rate	2027	2027

Assumed health care cost trend rates significantly affect the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the December 31, ~~2011~~2013, amounts:

September 30, September 30,
     One-Percentage-
Point Increase      One-Percentage-
Point Decrease
     -Millions of Dollars-
Effect on Total of Service and Interest Cost Components
     $ 1         $ (1 )
Effect on Postretirement Benefit Obligation
     5         (5 )



	One-Percentage- Point Increase		One-Percentage- Point Decrease
	Millions of Dollars
Effect on Total Service and Interest Cost Components	$	1	$	(1	)
Effect on Retiree Benefit Obligation	6		(5		)

PENSION PLAN AND OTHER ~~POSTRETIREMENT~~RETIREE BENEFIT ASSETS

Pension Assets

We calculate the fair value of plan assets on December 31, the measurement date. Pension plan asset allocations, by asset category, on the measurement date were as follows:

September 30, September 30, September 30, September 30,
     TEP Plan Assets UNS Gas and UNS Electric Plan Assets
     December 31,
2011 December 31,
2010 December 31,
2011 December 31,
2010
Asset Category

Equity Securities
     49 % 57 % 55 % 57 %
Fixed Income Securities
     42    34    34    32
Real Estate
     7    7    11    11
Other
     2    2    —      —


Total
     100 % 100 % 100 % 100 %

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~



	TEP Plan Assets				UNS Electric and UNS Gas Plan Assets
	2013		2012		2013		2012
Asset Category
Equity Securities	50	%	50	%	50	%	56	%
Fixed Income Securities	40		41	%	40		33
Real Estate	7		7	%	10		11
Other	3		2	%	—		—
Total	100	%	100	%	100	%	100	%

K-121

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables set forth the fair value measurements of pension plan assets by level within the fair value hierarchy:

September 30, September 30, September 30, September 30,
     Fair Value Measurements of Pension Assets
December 31, 2011
     Quoted Prices
in Active
Markets
(Level 1)      Significant Other
Observable
Inputs
(Level 2)      Significant
Unobservable
Inputs
(Level 3)      Total
     - Millions of Dollars -
Asset Category

Cash Equivalents
     $ 1         $ —           $ —           $ 1
Equity Securities:

U.S. Large Cap
     —           61         —           61
U.S. Small Cap
     —           13         —           13
Non-U.S.
     —           47         —           47
Fixed Income
     —           101         —           101
Real Estate
     —           7         11         18
Private Equity
     —           —           4         4








Total
     $ 1         $ 229         $ 15         $ 245

September 30, September 30, September 30, September 30,
     Fair Value Measurements of Pension Assets
December 31, 2010
     Quoted Prices
in Active
Markets
(Level 1)      Significant
Other
Observable
Inputs
(Level 2)      Significant
Unobservable
Inputs
(Level 3)      Total
     - Millions of Dollars -
Asset Category

Cash Equivalents
     $ 1         $ —           $ —           $ 1
Equity Securities:

U.S. Large Cap
     —           63         —           63
U.S. Small Cap
     —           12         —           12
Non-U.S.
     —           51         —           51
Fixed Income
     —           75         —           75
Real Estate
     —           6         10         16
Private Equity
     —           —           2         2








Total
     $ 1         $ 207         $ 12         $ 220



	Fair Value Measurements of Pension Assets December 31, 2013
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	Millions of Dollars
Asset Category
Cash Equivalents	$	1	$	—	$	—	$	1
Equity Securities:
United States Large Cap	—		80		—		80
United States Small Cap	—		17		—		17
Non-United States	—		65		—		65
Fixed Income	—		130		—		130
Real Estate	—		9		14		23
Private Equity	—		—		7		7
Total	$	1	$	301	$	21	$	323
	Fair Value Measurements of Pension Assets December 31, 2012
	Level 1		Level 2		Level 3		Total
	Millions of Dollars
Asset Category
Cash Equivalents	$	1	$	—	$	—	$	1
Equity Securities:
United States Large Cap	—		71		—		71
United States Small Cap	—		15		—		15
Non-United States	—		59		—		59
Fixed Income	—		116		—		116
Real Estate	—		8		13		21
Private Equity	—		—		6		6
Total	$	1	$	269	$	19	$	289

Level 1 cash equivalents are based on observable market prices and are comprised of the fair value of commercial paper, money market funds, and certificates of deposit.

Level 2 investments comprise amounts held in commingled equity funds, ~~U.S.~~United States bond funds, and real estate funds. Valuations are based on active market quoted prices for assets held by each respective fund.

Level 3 real estate investments were valued using a real estate index value. The real estate index value was developed based on appraisals comprising 85% of real estate assets tracked by the index in ~~2011,~~2013 and comprising ~~94%~~87% in ~~2010.~~

2012.

Level 3 private equity funds are classified as funds-of-funds. They are valued based on individual fund manager valuation models.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The tables above reflecting the fair value measurements of pension plan assets include Level 2 assets for the ~~UES~~UNS Electric and UNS Gas pension plan of ~~$10~~$16 million at December 31, ~~2011,~~2013 and $9$14 million at December 31, ~~2010.~~

2012.

The following tables set forth a reconciliation of changes in the fair value of pension assets classified as Level 3 in the fair value hierarchy. There were no transfers in or out of Level 3.

September 30, September 30, September 30, September 30,
     Year Ended
December 31, 2011
     Private Equity      Real Estate      Hedge Fund      Total
     - Millions of Dollars -
Beginning Balance at January 1, 2011
     $ 2         $ 10         $ —           $ 12
Actual Return on Plan Assets:

Assets Held at Reporting Date
     —           1         —           1
Assets Sold During the Period
     —           —           —           —
Purchases, Sales, and Settlements
     2         —           —           2








Ending Balance at December 31, 2011
     $ 4         $ 11         $ —         $ 15

September 30, September 30, September 30, September 30,
     Year Ended
December 31, 2010
     Private Equity      Real Estate      Hedge Fund    Total
     - Millions of Dollars -
Beginning Balance at January 1, 2010
     $ 1         $ 8         $ 1       $ 10
Actual Return on Plan Assets:

Assets Held at Reporting Date
     —           1         —         1
Assets Sold During the Period
     —           —           (1 )    (1 )
Purchases, Sales, and Settlements
     1         1         —         2








Ending Balance at December 31, 2010
     $ 2         $ 10         $ —       $

12

~~UES has~~

K-122

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Year Ended December 31, 2013
	Private Equity		Real Estate		Total
	Millions of Dollars
Beginning Balance at January 1, 2013	$	6	$	13	$	19
Actual Return on Plan Assets:
Assets Held at Reporting Date	1		1		2
Purchases, Sales, and Settlements	—		—		—
Ending Balance at December 31, 2013	$	7	$	14	$	21



	Year Ended December 31, 2012
	Private Equity		Real Estate		Total
	Millions of Dollars
Beginning Balance at January 1, 2012	$	4	$	11	$	15
Actual Return on Plan Assets:
Assets Held at Reporting Date	1		2		3
Purchases, Sales, and Settlements	1		—		1
Ending Balance at December 31, 2012	$	6	$	13	$	19

UNS Electric and UNS Gas have no pension assets classified as Level 3 in the fair value hierarchy.

Pension Plan Investments

Investment Goals

~~Strategic asset~~

Asset allocation is the principal method for achieving each pension plan’s investment ~~objective,~~objectives while maintaining an appropriate ~~level~~levels of risk. We ~~will~~ consider the projected impact on benefit security of any proposed changes to the current asset allocation policy. The expected long-term returns and implications for pension plan sponsor funding ~~will be~~are reviewed in selecting policies to ensure that current asset pools are projected to be adequate to meet the expected liabilities of the pension plans. We expect to use asset allocation policies weighted most heavily to equity and fixed income funds, while maintaining some exposure to real estate and opportunistic funds. Within the fixed income allocation, long-duration funds may be used to partially hedge interest rate risk.

Risk Management

We recognize the difficulty of achieving investment objectives in light of the uncertainties and complexities of the investment markets. We also recognize some risk must be assumed to achieve a pension plan’s long-term investment objectives. In establishing risk tolerances, the following factors affecting risk tolerance and risk objectives will be considered: 1) plan ~~status; 2)~~status, plan sponsor financial status and ~~profitability; 3)~~profitability, plan ~~features;~~features, and 4) workforce characteristics. We have determined that the pension plans can tolerate some interim fluctuations in market value and rates of return in order to achieve long-term objectives. TEP tracks each pension plan’s portfolio relative to the benchmark through quarterly investment reviews. The reviews consist of a performance and risk assessment of all investment categories and on the portfolio as a whole. Investment managers for the pension plan may use derivative financial instruments for risk management purposes or as part of their investment strategy. Currency hedges may also ~~have been~~be used for defensive purposes.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Relationship between Plan Assets and Benefit Obligations

The overall health of each plan will be monitored by comparing the value of plan obligations (both Accumulated Benefit Obligation and Projected Benefit Obligation) against the ~~market~~fair value of assets and tracking the changes in each. The frequency of this monitoring will depend on the availability of plan data, but will be no less frequent than annually via ~~annual~~ actuarial valuation.

K-123

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Target Allocation Percentages

The current target allocation percentages for the major asset categories of the plan ~~assets~~ as of December 31, ~~2011~~2013 follow. Each plan allows a variance of +/- 2% from these targets before funds are automatically rebalanced.

September 30, September 30, September 30,
     TEP Plan UES Plan VEBA Trust
Fixed Income
     41 % 33 % 38 %
U.S. Large Cap
     24 % 28 % 33 %
Non-U.S. Developed
     15 % 17 % 9 %
Real Estate
     8 % 11 % —
U.S. Small Cap
     5 % 5 % 7 %
Non-U.S. Emerging
     5 % 6 % 11 %
Private Equity
     2 % —      —
Cash / Treasury Bills
     —      —      2 %


Total
     100 % 100 % 100 %



	TEP Plan	UNS Electric and UNS Gas Plan	VEBA Trust
Fixed Income	41%	42%	38%
United States Large Cap	24%	24%	39%
Non-United States Developed	15%	14%	7%
Real Estate	8%	10%	—%
United States Small Cap	5%	5%	5%
Non-United States Emerging	5%	5%	9%
Private Equity	2%	—%	—%
Cash/Treasury Bills	—%	—%	2%
Total	100%	100%	100%

Pension Fund Descriptions

~~The funds are manager~~

For each type of ~~manager funds, which allow different~~asset category selected by the Pension Committee, our investment consultant assembles a group of third-party fund managers and allocates a portion of the total investment to ~~make investment decisions, with~~each fund manager. In the ~~exception~~case of the private equity fund, ~~which holds~~our investment consultant directs investments to a ~~portfolio of investment~~private equity manager that invests in third-parties’ funds.

Other ~~Postretirement~~Retiree Benefit Assets

As of December 31, ~~2011,~~2013, the fair value of VEBA trust assets was $10 million, of which $4 million were $5fixed income investments and $6 million were equities. As of December 31, 2012, the fair value of VEBA trust assets was $7 million, of which $3 million were fixed income investments and $2$4 million were equities. ~~As of December 31, 2010, the fair value of~~The VEBA trust assets ~~was $4 million, including $2 million of fixed income investments and approximately $2 million of equity and money market funds.~~are primarily Level 2. There are no ~~level three~~Level 3 assets in the VEBA trust.

ESTIMATED FUTURE BENEFIT PAYMENTS

TEP expects the following benefit payments to be made by the defined benefit pension plans and ~~postretirement~~other retiree benefit plan, which reflect future service, as appropriate.

September 30, September 30,
     Pension
Benefits      Other
Postretirement
Benefits
     -Millions of Dollars-
2012
     $ 13         $ 4
2013
     15         5
2014
     16         5
2015
     17         5
2016
     18         5
Years 2017-2021
     109         31



	2014		2015		2016		2017		2018		2019-2023
	Millions of Dollars
Pension Benefits	$	15	$	16	$	17	$	18	$	20	$	114
Other Retiree Benefits	5		5		5		5		5		29

One of TEP’s noncontributory defined benefit pension plans was amended in 2012 to allow terminated participants to elect early retirement benefits equal to the actuarial equivalent of the participant’s termination retirement benefit. The impact of the amendment on estimated future benefit payments was approximately $5 million in total, and the effect on the pension benefit obligation was less than $1 million.

UNS Electric and UNS Gas ~~and UNS Electric~~ expect annual ~~pension and postretirement~~ benefit payments, ~~of approximately $6 million in 2012 through 2016 and $9 million in 2017 through 2021 to be~~ made by the defined benefit pension and ~~postretirement plans.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

retiree plans, to be approximately $7 million in 2014 through 2018, and $9 million in 2019 through 2023.

DEFINED CONTRIBUTION ~~PLANS~~

PLAN

We offer a defined contribution savings ~~plans~~plan to all eligible employees. The Internal Revenue Code identifies the ~~plans~~plan as a qualified 401(k) ~~plans.~~plan. Participants direct the investment of contributions to certain funds in their account which may include a UNS Energy stock fund. We match part of a participant’s contributions to the ~~plans.~~plan. TEP made matching contributions to ~~these plans~~the plan of $5 million in ~~2011 and $4 million in~~ each of ~~2010~~2013, 2012, and ~~2009.~~2011. UNS ~~Gas~~Electric and UNS ~~Electric~~Gas made matching contributions of less than $1 million in each of ~~2011, 2010,~~2013, 2012, and ~~2009.~~

2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE ~~10.~~11. SHARE-BASED COMPENSATION ~~PLAN~~

~~In 2011, UniSource Energy shareholders approved~~PLANS

Under the ~~UniSource~~UNS Energy 2011 Omnibus Stock and Incentive Plan (2011 Plan), ~~a new share-based compensation plan. Under the 2011 Plan,~~ the Compensation Committee of the ~~UniSource~~UNS Energy Board of Directors (Compensation Committee) may issue various types of share-based compensation, including stock options, restricted ~~shares/~~stock units, and performance shares. The total number of shares which may be awarded under the 2011 Plan cannot exceed 1.2 million shares. The 2011 Plan supersedes and replaces the UniSource Energy 2006 Omnibus Stock and Incentive Plan (2006 Plan) and all other prior equity compensation plans (Prior Plans). The Prior Plans, however, remain in effect until all stock options and other awards granted thereunder have been exercised, forfeited, canceled, expired or terminated.

STOCK OPTIONS

~~No stock options were granted by the Compensation Committee during 2011 or 2010. In 2009, the Compensation Committee granted 248,760 stock options to officers with an exercise price of $26.11.~~

Stock options are granted with an exercise price equal to the fair market value of the stock on the date of grant, vest over three years, become exercisable in one-third increments on each anniversary date of the grant, and expire on the tenth anniversary of the grant. ~~Compensation~~We recognize compensation expense ~~is recorded~~ on a straight-line basis over the service period for the total award based on the grant date fair value of the options less estimated forfeitures. For awards granted to ~~retirement eligible~~retirement-eligible officers, we recognize compensation expense ~~is recorded~~ immediately. The 2002 stock option award accrues dividend equivalents that are paid in cash on the earlier of the date of separation of service or the date the option expires. Dividend equivalents are recorded as dividends when paid.

The fair value of the 2009 option award was estimated on the date of grant using the Black-Scholes-Merton option pricing model with the assumptions noted in the following table. The expected term of theNo stock options were granted by the Compensation Committee in 2009 was estimated using historical exercise data. The risk-free rate was based on the rate available on a U.S. Treasury Strip with a maturity equal to the expected term of the option at the time of the grant. The expected volatility was based on historical volatility for UniSource Energy’s stock for a period equal to the expected term of the award. The expected dividend yield on a share of stock was calculated using the historical dividend yield with the implicit assumption that current dividend yields will continue in the future.

September 30,
     2009
Expected Term (years)
     7
Risk-free Rate
     3.4 %
Expected Volatility
     25.0 %
Expected Dividend Yield
     3.2 %
Weighted-Average Grant-Date Fair Value of

Options Granted During the Period
     $ 5.53

2013, 2012, or 2011.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

See summary of ~~the~~ stock option activity in the table below:

September 30, September 30, September 30, September 30, September 30, September 30,
(Shares in Thousands)
     2011      2010      2009
Stock Options
     Shares    Weighted
Average
Exercise
Price      Shares    Weighted
Average
Exercise
Price      Shares    Weighted
Average
Exercise
Price
Outstanding, Beginning of Year
     921       $ 27.96         1,598       $ 24.50         1,635       $ 22.50
Granted
     —         —           —         —           249       26.11
Exercised
     (319 )    25.60         (660 )    19.33         (282 )    14.46
Forfeited/Expired
     (21 )    31.92         (17 )    37.88         (4 )    12.28







Outstanding, End of Year
     581       29.11         921       27.96         1,598       24.50







Exercisable, End of Year
     508       $ 29.53         654       $ 28.70         1,085       $ 23.06
Aggregate Intrinsic Value of Options Exercised ($000s)
     $ 3,690            $ 9,124            $ 4,177

September 30,
     At December 31, 2011
Aggregate Intrinsic Value for Options Outstanding ($000s)
     $ 4,670
Aggregate Intrinsic Value for Options Exercisable ($000s)
     $ 3,892
Weighted Average Remaining Contractual Life of Outstanding Options
     5.6 years
Weighted Average Remaining Contractual Life of Exercisable Options
     5.4 years



	2013				2012				2011
Stock Options	Shares (000s)		Weighted Average Exercise Price		Shares (000s)		Weighted Average Exercise Price		Shares (000s)		Weighted Average Exercise Price
Outstanding, Beginning of Year	409		$	29.09	581		$	29.11	921		$	27.96
Exercised	(127	)	30.12		(132	)	26.54		(319	)	25.60
Forfeited/Expired	—		—		(40	)	37.88		(21	)	31.92
Outstanding, End of Year	282		28.63		409		29.09		581		29.11
Exercisable, End of Year	282		$	28.63	409		$	29.09	508		$	29.53
Aggregate Intrinsic Value of Options Exercised ($000s)			$	2,897			$	1,878			$	3,690

See summary of stock options in the ~~table~~tables below:

September 30, September 30, September 30, September 30, September 30,
     Options Outstanding      Options Exercisable
Range of Exercise Prices
     Number of
Shares
(000s)      Weighted-
Average
Remaining
Contractual
Life      Weighted-
Average
Exercise
Price      Number of
Shares
(000s)      Weighted-
Average
Exercise
Price
$17.44 - $17.84
     20         1.3 years         $ 17.75         20         $ 17.75
$26.11 - $37.88
     561         5.7 years         $ 29.51         489         $ 30.01



	December 31, 2013
Aggregate Intrinsic Value for Options Outstanding ($000s)	$	8,795
Aggregate Intrinsic Value for Options Exercisable ($000s)	$	8,795
Weighted Average Remaining Contractual Term of Outstanding Options	4.1 years
Weighted Average Remaining Contractual Term of Exercisable Options	4.1 years



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares (000s)	Weighted Average Remaining Contractual Term	Weighted Average Exercise Price		Number of Shares (000s)	Weighted Average Exercise Price
$26.11—$37.88	282	4.1 years	$	28.63	282	$	28.63

RESTRICTED STOCK ~~UNITS/AWARDS~~UNITS AND PERFORMANCE SHARES

Restricted Stock Units

~~Restricted~~

In 2013, 2012, and 2011, the Compensation Committee granted restricted stock ~~and stock~~ units ~~are generally granted~~ to non-employee directors. Restricted stock is an award of Common Stock that is subject to forfeiture if the restrictions specified in the award are not satisfied. Stock units are a non-voting unit of measure that is equivalent to one share of Common Stock. The directors may elect to receive stock units in lieu of restricted stock. Restricted stock generally vests over periods ranging from one to three years and is payable in Common Stock. Stock units vest either immediately or over periods ranging from one to three years. The restricted stock units vest immediately upon death, disability, or retirement. In the January following the year the person is no longer a director, Common Stock shares will be issued for the vested stock units. CompensationWe recognize compensation expense equal to the fair ~~market value~~valuin the tablee on the grant date ~~is recognized~~ over the one-year vesting period. The grant date fair value was calculated by reducing the grant date share price by the present value of the dividends expected to be paid on the shares during the vesting period. Fully vested but undistributed non-employee director stock unit awards accrue dividend equivalent stock units based on the fair market value of common shares on the date the dividend is paid.

We issue Common Stock for the vested stock units in the January following the year the person is no longer a director.

In 2013, the Compensation Committee granted restricted stock units to certain management employees. The restricted stock units vest on the third anniversary of grant and are distributed in shares of Common Stock upon vesting. We recognize compensation expense equal to the fair value on the grant date over the vesting period. The grant date fair value was the closing Common Stock market price on the date of grant. These restricted stock units accrue dividend equivalents during the vesting period, which are distributed in shares of Common Stock upon vesting.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

See summary of restricted stock units awarded in the table below:



	Non-Employee Directors			Management Employees
Award Year	Restricted Stock Units	Grant Date Fair Value		Restricted Stock Units	Grant Date Fair Value
2013	8,870	$	48.99	21,560	$	46.23
2012	15,303	35.94		—	—
2011	14,655	37.53		—	—

Performance Shares

In 2013, 2012, and 2011, the Compensation Committee granted performance share awards to certain management employees. Half of the performance share awards will be paid out in Common Stock based on UNS Energy’s compound annualized Total Shareholder Return (TSR) relative to the companies included in the Edison Electric Institute Utility Index for the three-year performance period. The grant date fair values of these awards were derived based on a Monte Carlo simulation. We recognize compensation expense equal to the fair value on the grant date over the vesting period if the requisite service period is fulfilled, whether or not the threshold is achieved. The remaining half will be paid out in Common Stock based on cumulative net income (CNI) for the three-year performance period. The grant date fair values of these awards were the closing Common Stock market prices on the dates of grant. We recognize compensation expense equal to the fair value on the grant date over the requisite service period only for the awards that ultimately vest.

The performance shares vest based on the achievement of these goals by the end of the three-year performance period; any unearned awards are forfeited. Performance shares accrue dividend equivalents during the performance period, which are paid upon vesting.

See summary of performance shares awarded in the table below:



		Grant Date Fair Value
Award Year	Performance Shares	TSR-Based Award		CNI-Based Award
2013	43,120	$	45.54	$	46.23
2012	80,140	32.71		36.40
2011	80,440	33.73		36.58

At December 31, 2013, upon completion of the three-year performance period, 68,158 shares were earned and vested based on goal attainment at 150% of target for the awards based on TSR and 57.8% of target for the awards based on CNI; 28,682 shares were unearned and forfeited. The vested performance shares also earned 8,521 in dividend equivalent shares.

See summary of restricted stock units and performance shares current year activity in the table below:



	Restricted Stock Units				Performance Shares
	Shares (000s)		Weighted Average Grant Date Fair Value		Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested, Beginning of Year	15		$	35.94	145		$	34.83
Granted	31		47.04		52		44.94
Vested	(16	)	36.27		(52	)	35.35
Forfeited	(2	)	46.23		(32	)	37.57
Non-vested, End of Year	28		47.12		113		38.45

The total fair value of restricted stock units and performance shares vested were as follows:



	Restricted Stock Units						Performance Shares
	2013		2012		2011		2013		2012		2011
	Thousands of Dollars
Total Fair Value of Shares Vested	$	574	$	550	$	495	$	2,387	$	2,377	$	1,069

Common Stock shares totaling 57,253 in 2013, 31,058 in 2012, and 56,705 in 2011 ~~14,866 in 2010, and 101,765 in 2009~~ were issued with no additional increase in equity as the expense was previously recognized over the vesting period.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~The Compensation Committee granted the following stock units to non-employee directors:~~

~~May 2011—14,655 stock units at a weighted average fair value of $37.53 per share,~~

~~May 2010—15,620 stock units at a weighted average fair value of $31.69 per share,~~

~~May 2009—21,886 stock units at a weighted average fair value of $26.73 per share.~~

~~Performance Share Awards~~

In 2011, the Compensation Committee granted performance share awards to officers. Half of the performance share awards had a grant date fair value, based on a Monte Carlo simulation, of $33.73 per share. Those awards will be paid out in shares of UniSource Energy Common Stock based on a comparison of UniSource Energy’s cumulative Total Shareholder Return to the Edison Electric Institute Index during the performance period of January 1, 2011 through December 31, 2013. The remaining half had a grant date fair value of $36.58 per share and will be paid out in shares of UniSource Energy Common Stock based on cumulative net income for the three-year period ending December 31, 2013. The performance shares vest based on the achievement of goals by the end of the performance period; any unearned awards are forfeited. Performance shares are eligible for dividend equivalents during the performance period.

In 2010, the Compensation Committee granted performance share awards to officers. Half of the performance share awards had a grant date fair value, based on a Monte Carlo simulation, of $31.26 per share. Those awards will be paid out in shares of UniSource Energy Common Stock based on a comparison of UniSource Energy’s cumulative Total Shareholder Return to the Edison Electric Institute Index during the performance period of January 1, 2010 through December 31, 2012. The remaining half had a grant date fair value of $30.52 per share and will be paid out in shares of UniSource Energy Common Stock based on cumulative net income for the three-year period ending December 31, 2012. The performance shares vest based on the achievement of goals by the end of the performance period; any unearned awards are forfeited. Performance shares are eligible for dividend equivalents during the performance period.

In 2009, the Compensation Committee granted performance share awards to officers at a grant date fair value, based on a Monte Carlo simulation, of $21.62 per share. At December 31, 2011, upon completion of the three-year performance period, 45,642 shares vested based on goal attainment at 75% of targeted UniSource Energy Total Shareholder Return during the performance period compared to the Total Shareholder Return over the same period of an industry or peer group; 23,414 shares were unearned and forfeited. Compensation expense equal to the fair value on the grant date was recognized over the vesting period for the requisite service period.

September 30, September 30, September 30, September 30,
     Performance Shares      Restricted Stock Units
     Shares
(000s)    Weighted-
Average
Grant-Date
Fair Value      Shares
(000s)    Weighted-
Average
Grant-Date
Fair Value
Non-vested at January 1, 2011
     156       $ 27.19         16       $ 31.69
Granted
     93       35.26         15       37.53
Vested
     (46 )    23.41         (16 )    31.69
Forfeited
     (50 )    28.29         —         —





Non-vested at December 31, 2011
     153       $ 32.85         15       $ 37.53

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

SHARE-BASED COMPENSATION EXPENSE ~~(Stock Options, Performance Shares~~

In 2013, UNS Energy and ~~Restricted Stock Units)~~

~~Annually during 2009 through~~TEP recorded share-based compensation expense of $3 million. In 2012 and 2011, ~~UniSource~~UNS Energy recorded share-based compensation expense of $3 million, $2 million of which related to TEP. No share-based compensation was capitalized as part of the cost of an asset. ~~UniSource~~UNS Energy did not realize a tax deduction from the exercise of share-based payment arrangements in 2013 or 2011. In ~~each of 2010 and 2009, UniSource Energy realized an~~2012, the actual tax deduction realized from the exercise of share-based payment arrangements ~~of $3~~totaled less than $0.5 million.

At December 31, ~~2011,~~2013, the total unrecognized compensation cost related to non-vested share-based compensation was $2$3 million, which will be recorded as compensation expense over the remaining vesting periods through February 2016. At December ~~2013. The total number of~~31, 2013, less than 0.5 million shares were awarded but not yet issued, including target performance ~~based~~ shares, under the share-based compensation ~~plans~~plans.

NOTE 12. UNS ENERGY EARNINGS PER SHARE

We compute basic Earnings Per Share (EPS) by dividing Net Income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could result if outstanding stock options, share-based compensation awards, or UNS Energy's Convertible Senior Notes were exercised or converted into Common Stock. We excluded anti-dilutive stock options and contingently issuable shares from the calculation of diluted EPS. The numerator in calculating diluted EPS is Net Income adjusted for the interest on Convertible Senior Notes (net of tax) that would not be paid if the notes were converted to Common Stock.

The following table illustrates the effect of dilutive securities on net income and weighted average Common Stock outstanding:



	Years Ended December 31,
	2013		2012		2011
	Thousands of Dollars
Numerator:
Net Income	$	127,478	$	90,919	$	109,975
Income from Assumed Conversion of Convertible Senior Notes ⁽¹⁾	—		1,100		4,390
Adjusted Net Income Available for Diluted Common Stock Outstanding	$	127,478	$	92,019	$	114,365

	Thousands of Shares
Denominator:
Weighted Average Shares of Common Stock Outstanding:
Common Shares Issued	41,446		40,212		36,780
Fully Vested Deferred Stock Units	172		150		129
Participating Securities	—		—		53
Total Weighted Average Common Stock Outstanding and Participating Securities—Basic	41,618		40,362		36,962
Effect of Dilutive Securities:
Convertible Senior Notes ⁽¹⁾	—		1,062		4,281
Options and Stock Issuable Under Share-Based Compensation Plans	357		331		366
Total Weighted Average Common Stock Outstanding —Diluted	41,975		41,755		41,609


⁽¹⁾	In 2012, the Convertible Senior Notes were converted to Common Stock or redeemed for cash.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We excluded the following outstanding stock options, with an exercise price above market, and contingently issuable shares from our diluted EPS computation as their effect would be anti-dilutive:



	Years Ended December 31,
	2013	2012	2011
	Thousands of Shares
Stock Options	—	50	153
Restricted Stock Units	6	—	—
Total Anti-Dilutive Shares Excluded from the Diluted EPS Computation	6	50	153

NOTE 13. STOCKHOLDERS’ EQUITY

DIVIDEND LIMITATIONS

UNS Energy

UNS Energy’s ability to pay cash dividends on Common Stock outstanding depends, in part, upon cash flows from our subsidiaries: TEP, UES, Millennium, and UED, as well as compliance with various debt covenant requirements. UNS Energy and each of its subsidiaries were in compliance with debt covenants at December 31, ~~2011, was 0.7~~2013; therefore, TEP and the other subsidiaries were not restricted from paying dividends.

In February 2014, UNS Energy declared a first quarter dividend to shareholders of $0.48 per share of UNS Energy Common Stock. The dividend, totaling approximately $20 million, will be paid on March 25, 2014, to common shareholders of record as of March 13, 2014.

In the first half of 2012, $147 million of the Convertible Senior Notes outstanding were converted into approximately 4.3 million shares of UNS Energy Common Stock increasing common stock equity by $147 million.

TEP

TEP paid dividends to UNS Energy of $40 million in 2013 and $30 million in 2012. TEP paid no dividends to UNS Energy in 2011.

UNS Energy made no capital contributions to TEP in 2013 or 2012, and made capital contributions to TEP of $30 million in 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE ~~11.~~14. SUPPLEMENTAL CASH FLOW INFORMATION
A reconciliation of Net Income to Net Cash Flows from Operating Activities follows:
UNS Energy
Years Ended December 31,
2013 2012 2011
Thousands of Dollars
Net Income $ 127,478
$ 90,919
$ 109,975
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities
Depreciation Expense 149,615
141,303
133,832
Amortization Expense 27,557
35,784
30,983
Depreciation and Amortization Recorded to Fuel and O&M Expense 7,288
6,622
6,140
Amortization of Deferred Debt-Related Costs included in Interest Expense 3,050
3,000
3,985
Provision for Retail Customer Bad Debts 2,263
2,767
2,072
Use of Renewable Energy Credits for Compliance 17,706
5,935
5,695
Deferred Income Taxes 83,501
60,264
75,515
Investment Tax Credit Basis Adjustment - Creation of Regulatory Asset (11,039 ) —
—
Pension and Retiree Expense 22,783
21,856
21,202
Pension and Retiree Funding (29,161 ) (29,058 ) (28,775 )
Share-Based Compensation Expense 3,399
2,573
2,599
Allowance for Equity Funds Used During Construction (6,190 ) (3,464 ) (4,496 )
Increase (Decrease) to Reflect PPFAC/PGA Recovery (16,313 ) 32,246
(4,932 )
PPFAC Reduction - 2013 TEP Rate Order 3,000
—
—
Competition Transition Charge Revenue Refunded —
—
(35,958 )
Partial Write-off of Tucson to Nogales Transmission Line —
4,668
—
Liquidated Damages for Springerville Unit 3 Outage —
2,050
—
Gain on Settlement of El Paso Electric Dispute —
—
(7,391 )
Changes in Assets and Liabilities which Provided (Used)
Cash Exclusive of Changes Shown Separately
Accounts Receivable (6,338 ) 3,369
2,743
Materials and Fuel Inventory 16,197
(39,429 ) (20,864 )
Accounts Payable 3,223
595
8,792
Income Taxes (15,868 ) (11,557 ) (2,739 )
Interest Accrued 4,875
6,922
14,344
Taxes Other Than Income Taxes 1,941
(58 ) 2,857
Current Regulatory Liabilities 11,124
(684 ) 2,644
Other 20,421
11,486
19,097
Net Cash Flows – Operating Activities $ 420,512
$ 348,109
$ 337,320

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

TEP
Years Ended December 31,
2013 2012 2011
Thousands of Dollars
Net Income $ 101,342
$ 65,470
$ 85,334
Adjustments to Reconcile Net Income
To Net Cash Flows from Operating Activities
Depreciation Expense 118,076
110,931
104,894
Amortization Expense 31,294
39,493
34,650
Depreciation and Amortization Recorded to Fuel and O&M Expense 6,219
5,384
4,509
Amortization of Deferred Debt-Related Costs Included in Interest Expense 2,452
2,227
2,378
Provision for Retail Customer Bad Debts 1,678
1,871
1,447
Use of RECs for Compliance 15,990
5,071
5,190
Deferred Income Taxes 69,950
45,232
59,309
Investment Tax Credit Basis Adjustment - Creation of Regulatory Asset (10,751 ) —
—
Pension and Retiree Expense 19,878
19,289
18,816
Pension and Retiree Funding (27,636 ) (25,899 ) (25,878 )
Share-Based Compensation Expense 2,709
2,029
2,027
Allowance for Equity Funds Used During Construction (4,526 ) (2,840 ) (3,842 )
Increase (Decrease) to Reflect PPFAC Recovery (12,458 ) 31,113
(6,165 )
PPFAC Reduction - 2013 TEP Rate Order 3,000
—
—
Competition Transition Charge Revenue Refunded —
—
(35,958 )
Partial Write-off of Tucson to Nogales Transmission Line —
4,484
—
Liquidated Damages for Springerville Unit 3 Outage —
2,050
—
Gain on Settlement of El Paso Electric Dispute —
—
(7,391 )
Changes in Assets and Liabilities which Provided (Used)
Cash Exclusive of Changes Shown Separately
Accounts Receivable (6,041 ) (871 ) 4,809
Materials and Fuel Inventory 16,145
(38,384 ) (19,789 )
Accounts Payable 334
1,115
14,561
Income Taxes (10,790 ) (11,421 ) (5,582 )
Interest Accrued 4,859
8,055
14,268
Taxes Other Than Income Taxes 1,425
905
2,282
Current Regulatory Liabilities 3,331
(3,040 ) 303
Other 19,711
5,655
18,122
Net Cash Flows – Operating Activities $ 346,191
$ 267,919
$ 268,294
NON-CASH TRANSACTIONS
In 2013, the following non-cash transactions occurred:
TEP recorded an increase of $55 million to both Utility Plant Under Capital Leases and Capital Lease Obligations due to TEP's commitment to purchase leased interests in December 2014 and January 2015. See Note 6.
In November 2013, TEP issued $100 million of tax-exempt bonds and the proceeds were deposited with the trustee to redeem debt in December 2013. TEP had no cash receipts or payments as a result of this transaction. See Note 6.
In March 2013, TEP issued $91 million of tax-exempt bonds and used the proceeds to redeem debt using a trustee. Since the cash flowed through a trust account, the issuance and redemption of debt resulted in a non-cash transaction. See Note 6.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In 2012, the following non-cash transactions occurred:
UNS Energy converted $147 million of the previously outstanding $150 million Convertible Senior Notes into Common Shares. See Note 6; and
TEP redeemed $193 million of tax-exempt bonds and reissued debt using a trustee. Since the cash flowed through trust accounts, the redemption and reissuance of debt resulted in a non-cash transaction at TEP. See Note 6.
Other non-cash investing and financing activities that affected recognized assets and liabilities but did not result in cash receipts or payments were as follows:
Years Ended December 31,
2013 2012 2011
Thousands of Dollars
(Decrease)/Increase to Utility Plant Accruals⁽¹⁾
$ 4,995
$ 4,813
$ (2,741 )
Net Cost of Removal of Interim Retirements⁽²⁾
25,182
35,983
31,626
Capital Lease Obligations⁽³⁾
9,039
11,967
15,162
Asset Retirement Obligations⁽⁴⁾
8,064
789
7,638
⁽¹⁾
The non-cash additions to Utility Plant represent accruals for capital expenditures.
⁽²⁾
The non-cash net cost of removal of interim retirements represents an accrual for future asset retirement obligations that does not impact earnings.
⁽³⁾
The non-cash change in capital lease obligations represents interest accrued for accounting purposes in excess of interest payments.
⁽⁴⁾
The non-cash additions to asset retirement obligations and related capitalized assets represent revision of estimated asset retirement cost due to changes in timing and amount of expected future asset retirement obligations.

NOTE 15. FAIR VALUE MEASUREMENTS

AND DERIVATIVE INSTRUMENTS

We categorize our assets and liabilities accounted for at fair value into the three-level hierarchy based on inputs used to determine the fair value. Level 1 inputs are unadjusted quoted prices for identical assets or liabilities in an active market. Level 2 inputs include quoted prices for similar assets or liabilities, quoted prices in non-active markets, and pricing models whose inputs are observable, directly or indirectly. Level 3 inputs are unobservable and supported by little or no market activity.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE ON A RECURRING BASIS

The following tables ~~set forth,~~present, by level within the fair value hierarchy, ~~UniSource~~UNS Energy’s and TEP’s assets and liabilities accounted for at fair value on a recurring basis. These assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. ~~There were no transfers between Levels 1, 2 or 3 for either reporting period.~~

September 30, September 30, September 30, September 30,
     UniSource Energy
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)      Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)    Total
     December 31, 2011
     - Millions of Dollars -
Assets

Cash Equivalents⁽¹⁾
     $ 23         $ —         $ —         $ 23
Rabbi Trust Investments to support the Deferred Compensation and SERP Plans⁽²⁾
     —           16       —         16
Energy Contracts⁽⁴⁾
     —           —         14       14








Total Assets
     23         16       14       53








Liabilities

Energy Contracts⁽⁴⁾
     —           (21 )    (24 )    (45 )
Interest Rate Swaps⁽⁵⁾
     —           (12 )    —         (12 )








Total Liabilities
     —           (33 )    (24 )    (57 )








Net Total Assets and (Liabilities)
     $ 23         $ (17 )    $ (10 )    $ (4 )

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~



	UNS Energy
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	December 31, 2013
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	14		$	14	$	—		$	—		$	—		$	14
Restricted Cash⁽¹⁾	2			2		—			—			—			2
Rabbi Trust Investments⁽²⁾	22			—		22			—			—			22
Energy Contracts - Regulatory Recovery⁽³⁾	7			—		3			4			(5		)	2
Total Assets	45			16		25			4			(5		)	40
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(7		)	—		(2		)	(5		)	5			(2		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(1		)	—		—			(1		)	—			(1		)
Interest Rate Swaps⁽⁴⁾	(7		)	—		(7		)	—			—			(7		)
Total Liabilities	(15		)	—		(9		)	(6		)	5			(10		)
Net Total Assets (Liabilities)	$	30		$	16	$	16		$	(2	)	$	—		$	30



	UNS Energy
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	December 31, 2012
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	20		$	20	$	—		$	—		$	—		$	20
Restricted Cash⁽¹⁾	7			7		—			—			—			7
Rabbi Trust Investments⁽²⁾	19			—		19			—			—			19
Energy Contracts - Regulatory Recovery⁽³⁾	7			—		2			5			(5		)	2
Total Assets	53			27		21			5			(5		)	48
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(15		)	—		(7		)	(8		)	5			(10		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(2		)	—		—			(2		)	—			(2		)
Interest Rate Swaps⁽⁴⁾	(10		)	—		(10		)	—			—			(10		)
Total Liabilities	(27		)	—		(17		)	(10		)	5			(22		)
Net Total Assets (Liabilities)	$	26		$	27	$	4		$	(5	)	$	—		$	26

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, September 30, September 30, September 30,
     UniSource Energy
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)      Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)    Total
     December 31, 2010
     - Millions of Dollars -
Assets

Cash Equivalents⁽¹⁾
     $ 38         $ —         $ —         $ 38
Rabbi Trust Investments to support the Deferred Compensation and SERP Plans⁽²⁾
     —           16       —         16
Collateral Posted⁽³⁾
     —           3       —         3
Energy Contracts⁽⁴⁾
     —           —         15       15








Total Assets
     38         19       15       72








Liabilities

Energy Contracts⁽⁴⁾
     —           (19 )    (25 )    (44 )
Interest Rate Swaps⁽⁵⁾
     —           (10 )    —         (10 )








Total Liabilities
     —           (29 )    (25 )    (54 )








Net Total Assets and (Liabilities)
     $ 38         $ (10 )    $ (10 )    $ 18

September 30, September 30, September 30, September 30,
     TEP
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)      Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)    Total
     December 31, 2011
     - Millions of Dollars -
Assets

Cash Equivalents⁽¹⁾
     $ 8         $ —         $ —         $ 8
Rabbi Trust Investments to support the Deferred Compensation and SERP Plans⁽²⁾
     —           16       —         16
Energy Contracts⁽⁴⁾
     —           —         3       3








Total Assets
     8         16       3       27








Liabilities

Energy Contracts⁽⁴⁾
     —           (9 )    (3 )    (12 )
Interest Rate Swaps⁽⁵⁾
     —           (11 )    —         (11 )








Total Liabilities
     —           (20 )    (3 )    (23 )








Net Total Assets and (Liabilities)
     $ 8         $ (4 )    $ —         $ 4

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

September 30, September 30, September 30, September 30,
     TEP
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)      Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)    Total
     December 31, 2010
     - Millions of Dollars -
Assets

Cash Equivalents⁽¹⁾
     $ 21         $ —         $ —         $ 21
Rabbi Trust Investments to support the Deferred Compensation and SERP Plans⁽²⁾
     —           16       —         16
Energy Contracts⁽⁴⁾
     —           —         3       3








Total Assets
     21         16       3       40








Liabilities

Energy Contracts⁽⁴⁾
     —           (7 )    (2 )    (9 )
Interest Rate Swaps⁽⁵⁾
     —           (10 )    —         (10 )








Total Liabilities
     —           (17 )    (2 )    (19 )








Net Total Assets and (Liabilities)
     $ 21         $ (1 )    $ 1       $ 21



	TEP
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	December 31, 2013
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	—		$	—	$	—		$	—		$	—		$	—
Restricted Cash⁽¹⁾	2			2		—			—			—			2
Rabbi Trust Investments⁽²⁾	22			—		22			—			—			22
Energy Contracts - Regulatory Recovery⁽³⁾	2			—		1			1			(1		)	1
Total Assets	26			2		23			1			(1		)	25
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(2		)	—		—			(2		)	1			(1		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(1		)	—		—			(1		)	—			(1		)
Interest Rate Swaps⁽⁴⁾	(7		)	—		(7		)	—			—			(7		)
Total Liabilities	(10		)	—		(7		)	(3		)	1			(9		)
Net Total Assets (Liabilities)	$	16		$	2	$	16		$	(2	)	$	—		$	16



	TEP
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	December 31, 2012
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	1		$	1	$	—		$	—		$	—		$	1
Restricted Cash⁽¹⁾	7			7		—			—			—			7
Rabbi Trust Investments⁽²⁾	19			—		19			—			—			19
Energy Contracts - Regulatory Recovery⁽³⁾	3			—		1			2			(1		)	2
Total Assets	30			8		20			2			(1		)	29
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(3		)	—		(3		)	—			1			(2		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(2		)	—		—			(2		)	—			(2		)
Interest Rate Swaps⁽⁴⁾	(10		)	—		(10		)	—			—			(10		)
Total Liabilities	(15		)	—		(13		)	(2		)	1			(14		)
Net Total Assets (Liabilities)	$	15		$	8	$	7		$	—		$	—		$	15

⁽¹⁾

Cash Equivalents ~~are based on observable market prices~~ and ~~include the fair value of commercial paper,~~Restricted Cash represent amounts held in money market funds and certificates of ~~deposit. These amounts~~deposit valued at cost, including interest. Cash Equivalents are included in Cash and Cash Equivalents ~~and~~on the balance sheets. Restricted Cash is included in Investments and Other ~~Property—~~Property – Other on the balance sheets.

⁽²⁾

Rabbi Trust Investments include amounts related to deferred compensation and Supplement Executive Retirement Plan (SERP) benefits held in mutual and money market funds ~~related to deferred compensation and SERP benefits. The valuation is based on~~valued at quoted prices traded in active markets. These investments are included in Investments and Other ~~Property—~~Property – Other on the balance sheets.

~~(3)~~

~~Collateral provided for energy contracts with counterparties to reduce credit risk exposure. Collateral Posted is included in Current Assets—Other on the UniSource Energy balance sheet.~~

~~(4)~~

⁽³⁾

Energy Contracts include gas swap agreements (Level 2), power options (Level 2 or Level 3), gas ~~collars~~options (Level 3), forward power purchase and sales contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to reduce exposure to energy price risk. These contracts are included in Derivative Instruments on the UNS Energy and TEP balance sheets. The valuation techniques are described below. ~~See Note 16.~~

~~(5)~~
(4)	Interest Rate Swaps are valued based on the 3-month or 6-month LIBOR index or the Securities Industry and Financial Markets Association ~~(SIFMA) Municipal Swap~~municipal swap index. These interest rate swaps are included in Derivative Instruments on the balance sheets.

~~Energy Contracts~~

⁽⁵⁾
All energy contracts are subject to legally enforceable master netting arrangements to mitigate credit risk. We have presented the effect of offset by counterparty; however, we present derivatives on a gross basis on the balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DERIVATIVE INSTRUMENTS

We primarily apply the market approach for recurring fair value measurements. When we have observable inputs for substantially the full term of the asset or ~~liability—such as gas swap derivatives valued using New York Mercantile Exchange (NYMEX) pricing, adjusted for basis differences—~~liability or use quoted prices in an inactive market, we categorize the instrument in Level 2. We categorize derivatives in Level 3 ~~using~~when we use an aggregate pricing service or published prices that represent a consensus reporting of multiple brokers.

For both power and gas prices ~~TEP and UNS Electric~~we obtain quotes from brokers, major market participants, exchanges, or industry publications and rely on our own price experience from active transactions in the market. We primarily use one set of quotations each for power and for gas and then validate those prices using other sources. We believe that the market information provided is reflective of market conditions as of the time and date indicated.

Published prices for energy derivative contracts may not be available due to the nature of contract delivery terms ~~including: delivery periods during~~such as non-standard time blocks ~~delivery during only a few months of a given year when prices are quoted only for the annual average, or delivery at illiquid~~and non-standard delivery points. In these cases, we ~~use percentage multipliers to value non-standard time blocks, we~~ apply adjustments based on historical price curve relationships, ~~to calendar year quotes, and we include adjustments for~~ transmission, and line ~~losses~~losses.

We estimate the fair value of our gas options using a Black-Scholes-Merton option pricing model which includes inputs such as implied volatility, interest rates, and forward price curves. Beginning in the third quarter of 2013, the fair value of our power options is based on contractually specified option premiums instead of the Black-Scholes-Merton option pricing model because the needed inputs are no longer available. Based on the change, we transferred the power options out of Level 3 and in to Level 2 at the end of third quarter of 2013. The amount transferred was less than $0.5 million. We record transfers between levels in the fair value ~~contracts~~hierarchy at ~~illiquid delivery points.~~ the end of the reporting period. There were no other transfers between levels in the periods presented.

We also consider the impact of counterparty credit risk using current and historical default and recovery rates, as well as our own credit risk using ~~market~~ credit default swap data. ~~We review these assumptions quarterly.~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

TEP estimates the fair value of its purchase power call option using an internal pricing model which includes assumptions about market risks such as liquidity, volatility, and contract valuation. This model also considers credit and non-performance risk.

UNS Gas estimates the fair value of its gas collar using the Black-Scholes-Merton option pricing model which includes assumptions about future prices of energy, interest rates, volatility, credit worthiness and credit spread.

~~UniSource Energy’s and TEP’s~~

Our assessments of the significance of a particular input to the fair value measurements ~~requires~~require judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

We review the assumptions underlying our contracts monthly.

Cash Flow Hedges

The interest rate swap agreements expire through January 2020. The power purchase swap agreement expires in September 2015. The after-tax unrealized gains and losses on cash flow hedge activities and amounts reclassified to earnings are reported in the statements of other comprehensive income and Note 16. The loss expected to be reclassified to earnings within the next twelve months is estimated to be $4 million.

Financial Impact of Energy Contracts

We record unrealized gains and losses on energy contracts that are recoverable through the PPFAC or PGA on the balance sheets as a regulatory asset or a regulatory liability rather than reporting the transaction in the income statements or in the statements of other comprehensive income, as shown in following tables:



	UNS Energy								TEP
	Years Ended December 31,
	2013			2012			2011		2013		2012			2011
	Millions of Dollars
Increase (Decrease) to Regulatory Assets/Liabilities	$	(9	)	$	(21	)	$	2	$	—	$	(6	)	$	2

Realized gains and losses on settled contracts are fully recoverable through the PPFAC or PGA. At December 31, 2013, UNS Energy and TEP have energy contracts that will settle through the fourth quarter of 2016.

Derivative Volumes

The volumes associated with our energy contracts were as follows:



	UNS Energy		TEP
	December 31, 2013	December 31, 2012	December 31, 2013	December 31, 2012
Power Contracts GWh	1,583	2,228	779	820
Gas Contracts GBtu	33,371	17,851	9,615	7,958

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Level 3 Fair Value Measurements

The following table provides quantitative information regarding significant unobservable inputs in UNS Energy’s Level 3 fair value measurements:



		Fair Value at
		December 31, 2013						Range of
	Valuation Approach	Assets		Liabilities			Unobservable Inputs	Unobservable Input
		Millions of Dollars
Forward Contracts⁽¹⁾	Market approach	$	1	$	(4	)	Market price per MWh	$	26.54		-	$	51.75

Option Contracts⁽²⁾	Option model	3		(2		)	Market Price per MMbtu	$	3.87		-	$	4.32
							Gas Volatility	25.05		%	-	35.07		%
Level 3 Energy Contracts		$	4	$	(6	)


⁽¹⁾	TEP comprises $1 million of the forward contract assets and $3 million of the forward contract liabilities.


⁽²⁾	TEP comprises less than $1 million of the option contract assets.

Our exposure to risk resulting from changes in the unobservable inputs identified above is mitigated as we report the change in fair value of energy contract derivatives as a regulatory asset or a regulatory liability recoverable through the PPFAC or PGA mechanisms, or as a component of other comprehensive income, rather than in the income statement.

The following tables ~~set forth~~present a reconciliation of changes in the fair value of assets and liabilities classified as Level 3 in the fair value hierarchy:

September 30, September 30,
     Year Ended
December 31, 2011
     UniSource
Energy    TEP
     Energy Contracts
     -Millions of Dollars-
Balance as of December 31, 2010
     $ (10 )    $ 1
Gains and (Losses) (Realized/Unrealized) Recorded to:

Net Regulatory Assets – Derivative Instruments
     (9 )    2
Other Comprehensive Income
     (1 )    (1 )
Settlements
     10       (2 )




Balance as of December 31, 2011
     $ (10 )    $ —




Total gains (losses) attributable to the change in unrealized gains or losses relating to assets/liabilities still held at the end of the period
     $ (9 )    $ —

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

September 30, September 30, September 30, September 30,
     Year Ended
December 31, 2010
     UniSource Energy    TEP
     Energy
Contracts    Equity
Investments⁽¹⁾    Total    Energy
Contracts
     - Millions of Dollars -
Balance as of December 31, 2009
     $ (13 )    $ 6       $ (7 )    $ (4 )
Gains and (Losses) (Realized/Unrealized) Recorded to:

Net Regulatory Assets – Derivative Instruments
     (9 )    —         (9 )    9
Other Comprehensive Income
     (1 )    —         (1 )    (1 )
Other Expense
     —         (6 )    (6 )    —
Settlements
     13       —         13       (3 )








Balance as of December 31, 2010
     $ (10 )    $ —         $ (10 )    $ 1








Total gains (losses) attributable to the change in unrealized gains or losses relating to assets/liabilities still held at the end of the period
     $ (4 )    $ —         $ (4 )    $ 5

~~(1)~~

~~In December 2010, Millennium reduced to zero the book value of its equity investments classified as Level 3 in the fair value hierarchy.~~

~~Financial Instruments Not Carried at Fair Value~~

The market price received when selling an asset or paid to transfer a liability at the measurement date is the fair value of a financial instrument. We use the following methods and assumptions for estimating the fair value of our financial instruments:

The carrying amounts of our current assets and liabilities, including Current Maturities of Long-Term Debt, and amounts outstanding under our credit agreements approximate their fair value due to the short-term nature of these instruments; with the exception of $50 million of UNS Gas Senior Unsecured Notes, outstanding at December 31, 2010, with a make-whole provision on a call premium that have a fair value of $51 million. These items have been excluded from the table below.



	UNS Energy			TEP
	Millions of Dollars
Balances at December 31, 2012	$	(5	)	$	—
Realized/Unrealized Gains/(Losses) Recorded to:
Net Regulatory Assets/Liabilities – Derivative Instruments	(1		)	(2		)
Settlements	4			—
Balances at December 31, 2013	$	(2	)	$	(2	)

Total Gains/(Losses) Attributable to the Change in Unrealized Gains/(Losses) Relating to Assets/Liabilities Still Held at the End of the Period	$	(1	)	$	(1	)

Investments in Lease Debt and Equity: TEP calculates the present value of remaining cash flows at the balance sheet date using current market rates for instruments with similar characteristics with respect to credit rating and time-to-maturity. We also incorporate the impact of counterparty credit risk using market credit default swap data. The fair value of TEP’s Investment in Lease Equity decreased significantly during the fourth quarter of 2011 based on the recent Springerville Unit 1 appraisal. No impairment was recorded as TEP expects to recover the full carrying value in Retail Rates.



	UNS Energy			TEP
	Millions of Dollars
Balances at December 31, 2011	$	(10	)	$	—
Realized/Unrealized Gains/(Losses) Recorded to:
Net Regulatory Assets/Liabilities – Derivative Instruments	(5		)	1
Settlements	10			(1		)
Balances at December 31, 2012	$	(5	)	$	—

Total Gains/(Losses) Attributable to the Change in Unrealized Gains/(Losses) Relating to Assets/Liabilities Still Held at the End of the Period	$	(1	)	$	—

Long-Term Debt: UniSource Energy and TEP use quoted market prices, where available, or calculate the present value of remaining cash flows at the balance sheet date using current market rates for bonds with similar characteristics with respect to credit rating and time-to-maturity. TEP considers the principal amounts of variable rate debt outstanding to be reasonable estimates of their fair value. We also incorporate the impact of our own credit risk using a credit default swap rate when determining the fair value of long-term debt.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The use of different estimation methods and/or market assumptions may yield different estimated fair value amounts. The amount recorded on the balance sheet (carrying value) and the estimated fair values of our financial instruments included the following:

September 30, September 30, September 30, September 30,
     December 31,
     2011      2010
     Carrying
Value      Fair
Value      Carrying
Value      Fair
Value
     -Millions of Dollars-
Assets:

TEP Investment in Lease Debt and Equity
     $ 66         $ 50         $ 105         $ 111
Liabilities:

Long-Term Debt

TEP
     1,080         1,061         1,004         862
UniSource Energy
     1,517         1,543         1,353         1,238

TEP intends to hold the $29 million investment in Springerville Lease Debt Securities to maturity. This investment is stated at amortized cost, which means the purchase cost has been adjusted for the amortization of the premium and discount to maturity.

~~NOTE 12. UNISOURCE ENERGY EARNINGS PER SHARE (EPS)~~

We compute basic EPS by dividing Net Income by the weighted average number of common shares outstanding during the period. Except when the effect would be anti-dilutive, the diluted EPS calculation includes the impact of shares that could be issued upon exercise of outstanding stock options; contingently issuable shares under equity-based awards or common shares that would result from the conversion of convertible notes. The numerator in calculating diluted EPS is Net Income adjusted for the interest on Convertible Senior Notes (net of tax) that would not be paid if the notes were converted to common shares.

~~The following table shows the effects of potentially dilutive common stock on the weighted average number of shares:~~

September 30, September 30, September 30,
     Years Ended December 31,
     2011      2010      2009
     -Thousands of Dollars-
Numerator:

Net Income
     $ 109,975         $ 112,984         $ 105,901
Income from Assumed Conversion of Convertible Senior Notes
     4,390         4,390         4,390






Adjusted Numerator
     $ 114,365         $ 117,374         $ 110,291






     -Thousands of Shares-
Denominator:

Weighted Average Shares of Common Stock Outstanding:

Common Shares Issued
     36,780         36,200         35,653
Fully Vested Deferred Stock Units
     129         123         105
Participating Securities
     53         92         100






Total Weighted Average Shares of Common Stock Outstanding and Participating Securities—Basic
     36,962         36,415         35,858
Effect of Diluted Securities:

Convertible Senior Notes
     4,281         4,178         4,093
Options and Stock Issuable under Share Based Compensation
Plans
     366         448         499






Total Shares—Diluted
     41,609         41,041         40,450

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The following table shows the number of stock options excluded from the diluted EPS computation because the stock option’s exercise price was greater than the average market price of the Common Stock:

September 30, September 30, September 30,
     Years Ended December 31,
     2011      2010      2009
     -Thousands of Shares-
Stock Options Excluded from the Diluted EPS Computation
     153         212         395

In January 2012, holders of approximately $33 million of Convertible Senior Notes converted their interests into approximately 964,000 shares of UniSource Energy Common Stock. This conversion of convertible notes to common stock will have a minimal impact on diluted EPS as the dilutive effect of the convertible notes has been reflected in the diluted EPS computation.

~~NOTE 13. MILLENNIUM INVESTMENTS~~

In 2010, Millennium recorded impairment losses of $10 million reducing the book value of its unconsolidated equity and cost method investments to zero. Millennium received notification of valuation changes and ownership percentage reductions as projects lost viability and funding failed. In addition, Millennium sold a wholly-owned subsidiary, and recorded a gain of less than $1 million. Gains and losses were included in Other Income or Other Expense on UniSource Energy's income statements. Millennium also wrote off $3 million of Deferred Tax Assets related to its investments.

In 2009, Millennium sold an equity investment and recorded a $6 million gain on the sale which is included in Other Income on UniSource Energy's income statements. Millennium received an upfront payment of $5 million in 2009 and a $15 million, three-year, 6%, secured note receivable due in June 2012. Principal on the note is due at maturity; interest on the note is due annually on December 31. The $15 million note is included in Current Asset – Other on UniSource Energy’s balance sheet.

~~NOTE 14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS~~

~~The following recently issued accounting standards are not yet reflected in the financial statements:~~

The Financial Accounting Standards Board (FASB) issued authoritative guidance that will eliminate the current option to report other comprehensive income in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement, or in two separate but consecutive statements. We will be required to comply in the first quarter of 2012 and plan to present a separate statement of other comprehensive income.

The FASB issued authoritative guidance that changed some fair value measurement principles and disclosure requirements. The most significant disclosure change is expansion of required information for unobservable inputs. We will be required to comply in the first quarter of 2012, and we do not expect this pronouncement to have a material impact on the valuation techniques used to estimate the fair value of assets and liabilities.

The FASB issued authoritative guidance that will require entities to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting arrangements. We will be required to comply in the first quarter of 2013.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION~~

~~A reconciliation of net income to net cash flows from operating activities follows:~~

September 30, September 30, September 30,
     UniSource Energy
     Years Ended December 31,
     2011    2010    2009
     -Thousands of Dollars-
Net Income
     $ 109,975       $ 112,984       $ 105,901
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities

Depreciation Expense
     133,832       128,215       144,960
Amortization Expense
     30,983       28,094       31,058
Depreciation and Amortization Recorded to Fuel and Other O&M Expense
     6,140       5,432       4,929
Amortization of Deferred Debt-Related Costs included in Interest Expense
     3,985       3,753       4,171
Provision for Retail Customer Bad Debts
     2,072       3,724       3,583
Use of Renewable Energy Credits for Compliance
     5,695       4,745       —
California Power Exchange Provision for Wholesale Revenue Refunds Refunds
     —         —         4,172
Deferred Income Taxes
     75,588       28,142       57,452
Deferred Tax Valuation Allowance
     (73 )    7,510       —
Pension and Postretirement Expense
     21,202       19,688       23,594
Pension and Postretirement Funding
     (28,775 )    (27,742 )    (30,078 )
Share Based Compensation Expense
     2,599       2,751       2,779
Excess Tax Benefit from Stock Options Exercised
     —         (3,338 )    (3,256 )
Allowance for Equity Funds Used During Construction
     (4,496 )    (4,232 )    (4,113 )
CTC Revenue Refunded
     (35,958 )    (10,095 )    (12,726 )
Decrease to Reflect PPFAC/PGA Recovery
     (4,932 )    (29,622 )    (14,553 )
Gain on Settlement of El Paso Electric Dispute
     (7,391 )    —         —
Loss/(Gain) on Millennium’s Investments
     —         9,936       (4,730 )
Changes in Assets and Liabilities which Provided (Used)

Cash Exclusive of Changes Shown Separately

Accounts Receivable
     2,743       (8,851 )    6,458
Materials and Fuel Inventory
     (20,864 )    21,744       (24,621 )
Accounts Payable
     7,397       2,661       (8,243 )
Income Taxes
     (2,739 )    24,470       11,443
Interest Accrued
     14,344       14,354       15,956
Current Regulatory Liabilities
     2,644       2,788       10,009
Taxes Other Than Income Taxes
     2,857       2,442       (48 )
Other
     20,492       7,367       23,213






Net Cash Flows – Operating Activities
     $ 337,320       $ 346,920       $ 347,310

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

September 30, September 30, September 30,
     TEP
     Years Ended December 31,
     2011    2010    2009
     -Thousands of Dollars-
Net Income
     $ 85,334       $ 108,260       $ 90,688
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities

Depreciation Expense
     104,894       99,510       116,970
Amortization Expense
     34,650       32,196       35,931
Depreciation and Amortization Recorded to Fuel and Other O&M Expense
     4,509       3,855       3,439
Amortization of Deferred Debt-Related Costs included in Interest Expense
     2,378       2,146       2,364
Provision for Retail Customer Bad Debts
     1,447       2,506       2,342
Use of Renewable Energy Credits for Compliance
     5,190       4,245       —
California Power Exchange Provision for Wholesale Revenue Refunds Refunds
     —         —         4,172
Deferred Income Taxes
     59,309       24,897       45,678
Pension and Postretirement Expense
     18,816       17,454       21,294
Pension and Postretirement Funding
     (25,878 )    (25,672 )    (28,330 )
Share Based Compensation Expense
     2,027       2,131       2,121
Allowance for Equity Funds used During Construction
     (3,842 )    (3,567 )    (3,516 )
CTC Revenue Refunded
     (35,958 )    (10,095 )    (12,726 )
Decrease to Reflect PPFAC Recovery
     (6,165 )    (21,541 )    (18,186 )
Gain on Settlement of El Paso Electric Dispute
     (7,391 )    —         —
Changes in Assets and Liabilities which Provided (Used)

Cash Exclusive of Changes Shown Separately

Accounts Receivable
     4,809       (5,156 )    (951 )
Materials and Fuel Inventory
     (19,789 )    20,920       (23,794 )
Accounts Payable
     13,166       (447 )    (10,456 )
Income Taxes
     (5,582 )    20,203       (2,714 )
Interest Accrued
     14,268       14,431       16,142
Current Regulatory Liabilities
     303       2,500       10,555
Taxes Other Than Income Taxes
     2,282       1,469       725
Other
     19,517       12,238       16,316






Net Cash Flows – Operating Activities
     $ 268,294       $ 302,483       $ 268,064

Proceeds from the issuance of the 2010 Coconino Bonds were deposited with a trustee and were used in 2010 to redeem $37 million of pollution control bonds. TEP had no cash receipts or payments as a result of this transaction.

Proceeds from the issuance of $100 million of Pima County tax-exempt IDBs were deposited in a construction fund with a trustee. TEP drew down funds as qualified expenditures were incurred. The $11 million remaining in the construction fund at December 31, 2010 affected recognized assets and liabilities but did not result in cash receipts or payments. TEP drew down the remaining funds in the construction fund by March 2011.

Proceeds from the issuance of $95 million of unsecured fixed rate IDBs in 2009 were deposited with a trustee and were used in 2009, to redeem approximately $95 million of unsecured fixed rate IDBs. TEP had no cash receipts or payments as a result of this transaction.

~~Other non-cash investing and financing activities that affected recognized assets and liabilities but did not result in cash receipts or payments were as follows:~~

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

September 30, September 30, September 30,
     Years Ended December 31,
     2011    2010    2009
     -Thousands of Dollars-
(Decrease)/Increase to Utility Plant Accruals⁽¹⁾
     $ (2,154 )    $ 8,514       $ 1,082
Net Cost of Removal of Interim Retirements⁽²⁾
     31,626       4,592       43,381
Capital Lease Obligations⁽³⁾
     15,162       16,630       17,984
Asset Retirement Obligations⁽⁴⁾
     7,638       (1,872 )    —
UED Secured Term Loan Prepayments⁽⁵⁾
     —         3,188       3,625

~~(1)~~

~~The non-cash additions to Utility Plant represent accruals for capital expenditures.~~

~~(2)~~

~~The non-cash net cost of removal of interim retirements represents an accrual for future asset retirement obligations that does not impact earnings.~~

~~(3)~~

~~The non-cash change in capital lease obligations represents interest accrued for accounting purposes in excess of interest payments.~~

~~(4)~~

The non-cash additions to asset retirement obligations and related capitalized assets represent revision of estimated asset retirement cost due to changes in timing and amount of expected future asset retirement obligations.

~~(5)~~

~~The non-cash UED Secured Term Loan prepayment represents deposits applied to $30 million of loan principal.~~

~~NOTE 16. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES~~

~~FINANCIAL IMPACT OF DERIVATIVES~~

~~Cash Flow Hedges~~

~~At December 31, 2011, UniSource Energy and TEP had liabilities related to their cash flow hedges of $14 million and $12 million at December 31, 2010.~~

~~The net after-tax unrealized gains and losses on derivative activities reported in AOCI were as follows:~~

~~Regulatory Treatment of Commodity Derivatives~~

The following table discloses unrealized gains and losses on energy contracts that are recoverable through the PPFAC or PGA on the balance sheet as a regulatory asset or a regulatory liability rather than as a component of AOCI or in the income statements.

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~The fair value of derivative assets and liabilities were as follows:~~

September 30, September 30, September 30, September 30,
     UniSource Energy    TEP
     December 31,
2011    December 31,
2010    December 31,
2011    December 31,
2010
     -Millions of Dollars-
Assets
     $ 14       $ 15       $ 3       $ 3
Liabilities
     (43 )    (42 )    (9 )    (7 )








Net Assets (Liabilities)
     $ (29 )    $ (27 )    $ (6 )    $ (4 )

~~The realized losses on settled gas swaps that are fully recoverable through the PPFAC or PGA were as follows:~~

~~At December 31, 2011, UniSource Energy and TEP had contracts that will settle through the third quarter of 2015.~~

~~Other Commodity Derivatives~~

~~The settlement of forward purchased power and sales contracts that do not result in physical delivery were reflected in the financial statements of UniSource Energy and TEP as follows:~~

September 30, September 30, September 30,
     2011    2010    2009
     -Millions of Dollars-
Recorded in Wholesale Sales:

Forward Power Sales
     $ 10       $ 27       $ 20
Forward Power Purchases
     (15 )    (34 )    (18 )






Total Sales and Purchases Not Resulting in Physical Delivery
     $ (5 )    $ (7 )    $ 2

~~DERIVATIVE VOLUMES~~

At December 31, 2011, UniSource Energy had gas swaps totaling 14,856 Billion British thermal units (GBtu) and power contracts totaling 3,147 Gigawatt-hours (GWh) while TEP had gas swaps totaling 6,855 GBtu and power contracts totaling 815 GWh. At December 31, 2010, UniSource Energy had gas swaps totaling 14,973 GBtu and power contracts totaling 4,807 GWh while TEP had gas swaps totaling 6,424 GBtu and power contracts totaling 1,144 GWh. We account for gas swaps and power contracts as derivatives.

CREDIT RISK ~~ADJUSTMENT~~

When the fair value of our derivative contracts is reflected as an asset, the counterparty owes us and this creates credit risk. We also consider the impact of our own credit risk on instruments that are in a net liability position. The impact of counterparty credit risk and our own credit risk on the fair value of derivative asset contracts was less than $0.5 million at December 31, 2011, and December 31, 2010.

~~CONCENTRATION OF CREDIT RISK~~

The use of contractual arrangements to manage the risks associated with changes in energy commodity prices creates credit risk exposure resulting from the possibility of non-performance by counterparties pursuant to the terms of their contractual obligations. We enter into contracts for the physical delivery of energy and gas which contain remedies in the event of non-performance by the supply counterparties. In addition, volatile energy prices can create significant credit exposure from energy market receivables and ~~mark-to-market valuations.~~

subsequent measurement at fair value.

We have contractual agreements for energy procurement and hedging activities that contain certain provisions requiring each company to post collateral under certain circumstances. These circumstances include: exposures

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

in excess of unsecured credit limits provided to TEP, UNS ~~Gas~~Electric, or UNS ~~Electric;~~Gas; credit rating downgrades; or a failure to meet certain financial ratios. In the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

event that such credit events were to occur, we would have to provide certain credit enhancements in the form of cash or ~~letters of credit~~LOCs to fully collateralize our exposure to these counterparties.

~~The following table shows~~

We consider the ~~sum~~effect of counterparty credit risk in determining the fair value of ~~all~~ derivative instruments ~~under contracts with credit-risk related contingent features~~that are in a net asset position after incorporating collateral posted by counterparties and allocate the credit risk adjustment to individual contracts. We also consider the impact of our own credit risk after considering collateral posted on instruments that are in a net liability position at and allocate the credit risk adjustment to all individual contracts.

Material adverse changes could trigger credit risk-related contingent features. At December 31, ~~2011. It also shows cash collateral~~2013, the fair value of derivative instruments in a net liability position under contracts with credit risk-related contingent features was $21 million for UNS Energy and ~~letters of credit posted, and~~$5 million for TEP. The additional collateral to be posted if credit-risk ~~related~~ contingent features were ~~triggered.~~

September 30, September 30,
     TEP      UniSource
Energy
     December 31, 2011
     -Millions of Dollars-
Net Liability Position
     $ 16         $ 64
Cash Collateral Posted
     —           —
Letters of Credit
     1         6
Additional Collateral to Post if Contingent Features Triggered
     16         61

Astriggered would be $21 million for UNS Energy and $5 million for TEP.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE

The fair value of ~~December 31, 2011, TEP had $17 million~~a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. We use the following methods and assumptions for estimating the fair value of our financial instruments:

The carrying amounts of our current assets, current liabilities, including current maturities of long-term debt, and amounts outstanding under our credit ~~exposure~~agreements approximate the fair values due to ~~other counterparties’ creditworthiness related~~the short-term nature of these financial instruments. These items have been excluded from the table below.

For Investment in Lease Debt, we calculated the present value of remaining cash flows using current market rates for instruments with similar characteristics such as credit rating and time-to-maturity. We also incorporated the impact of counterparty credit risk using market credit default swap data. TEP's Investment in Lease Debt matured in January 2013.


��	For Investment in Lease Equity, we estimate the price at which an investor would realize a target internal rate of return. Our estimates include: the mix of debt and equity an investor would use to finance the purchase; the cost of debt; the required return on equity; and income tax rates. The estimate assumes a residual value based on an appraisal of Springerville Unit 1 conducted in 2011.

For Long-Term Debt, we use quoted market prices, when available, or calculate the present value of remaining cash flows at the balance sheet date. When calculating present value, we use current market rates for bonds with similar characteristics such as credit rating and time-to-maturity. We consider the principal amounts of variable rate debt outstanding to its wholesale marketing and gas hedging activities; and UNS Electric had $1 million of such exposure related to its supply and hedging contracts. TEP had four counterparties which individually comprise greater than 10%be reasonable estimates of the ~~total~~fair value. We also incorporate the impact of our own credit ~~exposure~~risk using a credit default swap rate.

The use of different estimation methods and/or market assumptions may yield different estimated fair value amounts. The carrying values recorded on the balance sheets and ~~UNS Electric had one. At December 31, 2011, UNS Gas had no exposure to other counterparties’ creditworthiness.~~

the estimated fair values of our financial instruments include the following:

December 31, 2013 December 31, 2012

Fair Value
Hierarchy

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
Millions of Dollars
Assets:
TEP Investment in Lease Debt Level 2 $ —
$ —
$ 9
$ 9
TEP Investment in Lease Equity Level 3 36
25
36
23
Liabilities:
Long-Term Debt
UNS Energy Level 2 1,507
1,521
1,498
1,583
TEP Level 2 1,223
1,214
1,223
1,271

K-136
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The realized changes in AOCI by component are as follows:
Details About Accumulated Other Comprehensive Income Components Amount Reclassified from Other Comprehensive Income Affected Line Item in the Income Statement
UNS Energy TEP
Year Ended December 31, 2013
Thousands of Dollars
Realized Losses on Cash Flow Hedges
Interest Rate Swaps - Debt $ (1,377 ) $ (1,166 ) Interest Expense Long-Term Debt
Interest Rate Swaps - Capital Leases (2,429 ) (2,429 ) Interest Expense Capital Leases
Commodity Contracts (747 ) (747 ) Purchased Energy/Purchased Power
Tax Benefit 1,801
1,718

Realized Losses on Cash Flow Hedges, Net of Taxes (2,752 ) (2,624 )

Amortization of SERP and Defined Benefit Plans
Prior Service Costs (1,488 ) (1,488 ) Other Expense
Tax Benefit 572
572

Amortization, Net of Taxes (916 ) (916 )

Total Reclassifications from Other Comprehensive Income for the Period $ (3,668 ) $ (3,540 )

NOTE 17. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued guidance for the recognition, measurement, and disclosure of certain obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. On adoption, an entity would recognize and disclose in the financial statements its obligation from a joint and several liability arrangement as the sum of the amount the entity agreed with its co-obligors that it will pay, and any additional amount the entity expects to pay on behalf of its co-obligors. This guidance will be effective in the first quarter of 2014. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations, or cash flows.
The FASB issued guidance which permits an entity to designate the Federal Funds Rate (the interest rate at which depository institutions lend balances to each other overnight) as a benchmark interest rate for fair value and cash flow hedges. Prior to this guidance, only interest rates on direct treasury obligations of the U.S. Government and the LIBOR were considered benchmark interest rates in the U.S. This guidance is effective immediately, and can be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We have not entered into any new cash flow or fair value hedges since the effective date of this guidance. We do not expect this guidance to have a material impact on our financial condition, results of operations, or cash flows.
The FASB issued new guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We will be required to comply with the guidance on a prospective basis beginning in the first quarter of 2014. Although adoption of this new guidance may impact how such items are classified on our balance sheets, we do not expect such change to be material. In addition, we do not expect any material changes in the presentations of our other financial statements.

NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

Our quarterly financial information is unaudited but, in management’s opinion, includes all adjustments necessary for a fair presentation. Our utility businesses are seasonal in nature. Peak sales periods for TEP and UNS Electric generally occur during the summer while UNS Gas’ sales generally peak during the winter. Accordingly, comparisons among quarters of a year may not represent overall trends and changes in operations.

September 30, September 30, September 30, September 30,
     UniSource Energy
     First      Second      Third      Fourth

-Thousands of Dollars-
(Except Per Share Amounts)

2011

Operating Revenue
     $ 344,766         $ 369,673         $ 450,948         $ 344,128
Operating Income
     44,820         71,289         123,760         41,803
Net Income
     13,472         28,604         59,712         8,187
Basic EPS
     0.37         0.77         1.61         0.22
Diluted EPS
     0.35         0.71         1.46         0.22
2010

Operating Revenue
     $ 318,849         $ 339,114         $ 438,830         $ 357,173
Operating Income
     52,955         72,301         123,524         48,334
Net Income
     20,178         25,889         55,665         11,252
Basic EPS
     0.56         0.71         1.52         0.31
Diluted EPS
     0.52         0.66         1.38         0.30



	UNS Energy
	First		Second		Third		Fourth
	Thousands of Dollars (Except Per Share Amounts)
2013
Operating Revenue	$	332,141	$	365,217	$	437,041	$	350,161
Operating Income	39,895		60,803		129,765		41,033
Net Income	11,345		34,618		67,990		13,525
Basic EPS	0.27		0.83		1.63		0.32
Diluted EPS	0.27		0.83		1.62		0.32
2012
Operating Revenue	$	315,387	$	363,998	$	434,108	$	348,273
Operating Income ⁽¹⁾	34,403		68,065		106,409		42,918
Net Income	6,476		26,273		50,664		7,506
Basic EPS	0.17		0.65		1.22		0.18
Diluted EPS	0.17		0.64		1.21		0.18

EPS is computed independently for each of the quarters presented. Therefore, the sum of the quarterly EPS amounts may not equal the total for the year.



	TEP
	First			Second		Third		Fourth
	Thousands of Dollars
2013
Operating Revenue	$	247,751		$	304,263	$	371,239	$	273,437
Operating Income	22,747			53,433		123,177		31,014
Net Income	1,478			30,787		64,167		4,910
2012
Operating Revenue	$	223,978		$	299,419	$	366,910	$	271,353
Operating Income ⁽¹⁾	17,898			58,211		94,079		30,299
Net Income (Loss)	(1,461		)	21,910		44,569		452

~~UNISOURCE ENERGY, TEP AND SUBSIDIARIES~~⁽¹⁾

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)~~

September 30, September 30, September 30, September 30,
     TEP
     First      Second      Third      Fourth
     -Thousands of Dollars-
2011

Operating Revenue
     $ 239,588         $ 295,233         $ 369,846         $ 251,719
Operating Income
     27,792         62,497         111,479         27,613
Net Income
     4,704         25,157         53,912         1,561
2010

Operating Revenue
     $ 231,083         $ 274,694         $ 354,638         $ 264,852
Operating Income
     38,248         63,901         116,055         35,827
Net Income
     10,490         27,941         59,704         10,125

~~The following tables reflect the~~Immaterial variances from quarterly ~~impact~~amounts previously reported result from line item reclassifications.

K-138

Table of ~~revisions recorded in the second and third quarters of 2011 (See Note 1):~~

Sept Sept Sept Sept Sept Sept Sept Sept
2010
Three Months Ended
March 31, June 30, September 30, December 31,
As
Reported As
Revised As
Reported As
Revised As
Reported As
Revised As
Reported As
Revised
-Thousands of Dollars- (Except Per Share Amounts)
UniSource Energy
Income Statement

Net Income
$ 19,972    $ 20,178    $ 25,886    $ 25,889    $ 54,883    $ 55,665    $ 11,082    $ 11,252
Basic EPS
0.55    0.56    0.71    0.71    1.50    1.52    0.30    0.31
Diluted EPS
0.52    0.52    0.66    0.66    1.36    1.38    0.29    0.30
TEP
Income Statement

Net Income
$ 10,349    $ 10,490    $ 27,938    $ 27,941    $ 58,993    $ 59,704    $ 9,999    $ 10,125

Contents

~~Schedule Valuation and Qualifying Accounts~~

Schedule II—Valuation and Qualifying Accounts – ~~UniSource~~UNS Energy

September 30, September 30, September 30, September 30,
Description
     Beginning
Balance      Additions-
Charged
to Income      Deductions      Ending
Balance
Year Ended December 31,      -Millions of Dollars-
Reserve for Uncollectible Accounts⁽¹⁾

2011
     $ 13         $ 5         $ 2         $ 16
2010
     $ 13         $ 4         $ 4         $ 13
2009
     $ 27         $ 4         $ 18         $ 13
Deferred Tax Assets Valuation Allowance⁽²⁾

2011
     $ 8         $ —           $ 1         $ 7
2010
     $ —           $ 8         $ —           $ 8
2009
     $ —           $ —           $ —           $ —
Other⁽³⁾

2011
     $ 4                   $ 6
2010
     $ 2                   $ 4
2009
     $ 4                   $ 2

⁽¹⁾

TEP, UNS Gas and UNS Electric record additions to the Reserve for Uncollectible Accounts based on historical experience and any specific customer collection issues identified. Deductions principally reflect amounts charged off as uncollectible, less amounts recovered. Amounts include reserves for trade receivables, wholesale sales and in-kind transmission imbalances.

⁽²⁾

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred income tax asset will not be realized. Management believes that it is more likely than not that we will not be able to generate future capital gains to offset the capital losses related to an unregulated investment loss deferred tax asset. As a result, an $8 million valuation allowance was recorded against the deferred tax asset as of December 31, 2010.

⁽³⁾	~~Principally reserves for sales tax audits, litigation and damages billable to third parties.~~



Allowance for Doubtful Accounts ⁽¹⁾	Beginning Balance		Additions- Charged to Income		Deductions		Ending Balance
	Millions of Dollars
Year Ended December 31,
2013	$	7	$	2	$	2	$	7
2012	16		4		13		7
2011	13		5		2		16



Other Reserves⁽²⁾	Beginning Balance		Ending Balance
	Millions of Dollars
Year Ended December 31,
2013	$	9	$	6
2012	6		9
2011	4		6

Schedule II—Valuation and Qualifying Accounts—TEP

September 30, September 30, September 30, September 30,
Description
     Beginning
Balance      Additions-
Charged
to Income      Deductions      Ending
Balance
Year Ended December 31,      -Millions of Dollars-
Reserve for Uncollectible Accounts⁽¹⁾

2011
     $ 11         $ 4         $ 1         $ 14
2010
     $ 11         $ 3         $ 3         $ 11
2009
     $ 24         $ 2         $ 15         $ 11
Other⁽²⁾

2011
     $ 3                   $ 4
2010
     $ —                     $ 3
2009
     $ 4                   $ —



Allowance for Doubtful Accounts ⁽¹⁾	Beginning Balance		Additions- Charged to Income		Deductions		Ending Balance
	Millions of Dollars
Year Ended December 31,
2013	$	5	$	2	$	2	$	5
2012	14		3		12		5
2011	11		4		1		14



Other Reserves ⁽²⁾	Beginning Balance		Ending Balance
	Millions of Dollars
Year Ended December 31,
2013	$	8	$	4
2012	4		8
2011	3		4

⁽¹⁾

TEP, ~~records~~UNS Electric, and UNS Gas record additions to the ~~Reserve~~Allowance for ~~Uncollectible~~Doubtful Accounts based on historical experience and any specific customer collection issues identified. Deductions principally reflect amounts charged off as uncollectible, less amounts recovered. Amounts include reserves for trade receivables, wholesales sales, and in-kind transmission imbalances.


⁽²⁾	As the Other reserves are not individually significant, additions and deductions need not be disclosed. Principally reserves for sales tax audits, litigation matters, and damages billable to third parties.

~~ITEM 9. –~~ ~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~

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ITEM 9. – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

~~ITEM 9A. –~~

~~CONTROLS AND PROCEDURES~~

~~UniSource Energy~~

ITEM 9A. – CONTROLS AND PROCEDURES

UNS Energy’s and TEP’s Chief Executive Officer and Chief Financial Officer supervised and participated in ~~UniSource Energy~~UNS Energy’s and TEP’s evaluation of their disclosure controls and procedures as such term is defined under Rule ~~13(a)~~13a – 15(e) or Rule ~~15(d)~~15d – 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of ~~December 31, 2011.~~the end of the period covered by this report. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in ~~UniSource Energy~~UNS Energy’s and TEP’s periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures are also designed to ensure that information required to be disclosed by ~~UniSource~~UNS Energy and TEP in the reports that they file or submit under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon the evaluation performed, ~~UniSource Energy~~UNS Energy’s and TEP’s Chief Executive Officer and Chief Financial Officer concluded that ~~UniSource Energy~~UNS Energy’s and TEP’s disclosure controls and procedures are effective.

While ~~UniSource~~UNS Energy and TEP continually strive to improve their disclosure controls and procedures to enhance the quality of their financial reporting, there has been no change in ~~UniSource Energy~~UNS Energy’s or TEP’s internal control over financial reporting during the fourth quarter of ~~2011,~~2013 that has materially affected, or is reasonably likely to materially affect, ~~UniSource Energy~~UNS Energy’s or TEP’s internal control over financial reporting.

~~UniSource~~

UNS Energy’s and TEP’s Management’s Reports on Internal Control Over Financial Reporting Under 404 of Sarbanes-Oxley appear as the first two reports under Item 8 in ~~UniSource~~UNS Energy’s and TEP’s ~~2011~~2013 Annual Report on Form 10-K, the Report of Independent Registered Public Accounting Firm for ~~UniSource~~UNS Energy appears as the third report under Item 8, and the Report of Independent Registered Public Accounting Firm for TEP appears as the fourth report under Item 8.

~~ITEM 9B. –~~

~~OTHER INFORMATION~~

~~None.~~

ITEM 9B. – OTHER INFORMATION
None.

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PART III

~~ITEM 10. –~~

~~DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANTS~~

ITEM 10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANTS

Directors – ~~UniSource~~UNS Energy

September 30, September 30, September 30,
Name
     Age      Board
Committee*      Director
Since
Paul J. Bonavia
     60      None      2009
Lawrence J. Aldrich
     59      2,3,5      2000
Barbara M. Baumann
     56      1,2,4      2005
Larry W. Bickle
     66      3,4,5      1998
Harold W. Burlingame
     71      2,3,5      1998
Robert A. Elliott
     56      1,2,3,4,5      2003
Daniel W.L. Fessler
     70      1,3,5      2005
Louise L. Francesconi
     59      1,2,4      2008
Warren Y. Jobe
     71      1,2,4      2001
Ramiro G. Peru
     56      1,2,4      2008
Gregory A. Pivirotto
     59      1,3,4      2008
Joaquin Ruiz
     59      2,3,5      2005



Name	Age	Board Committee*	Director Since
Paul J. Bonavia	62	None	2009
David G. Hutchens	47	None	2013
Lawrence J. Aldrich	61	1,2,3	2000
Barbara M. Baumann	58	1,2,4	2005
Larry W. Bickle	68	4,5	1998
Robert A. Elliott	58	1,2,3,4,5	2003
Daniel W.L. Fessler	72	2,3	2005
Louise L. Francesconi	61	1,2,3	2008
Ramiro G. Peru	58	1,4,5	2008
Gregory A. Pivirotto	61	1,2,4	2008
Joaquin Ruiz	61	3,5	2005



*	Board Committees


(1)	Audit


(2)	Compensation


(3)	Corporate Governance and Nominating


(4)	Finance


(5)	Environmental, Safety and Security




Paul J. Bonavia		Mr. Bonavia has served as Chairman and Chief Executive Officer of ~~UniSource~~UNS Energy and TEP since January 2009; he also served as President from January 2009 to December 2011. Prior to joining ~~UniSource~~UNS Energy, Mr. Bonavia served as President of the Utilities Group of Xcel Energy. Mr. Bonavia previously served as President of Xcel Energy’s Commercial Enterprises business unit and President of the company’s Energy Markets unit.


David G. Hutchens		Mr. Hutchens has served as President and Chief Operating Officer of UNS Energy and TEP since August 2013. In December 2011 Mr. Hutchens was named President of UNS Energy and TEP. In March 2011, Mr. Hutchens was named Executive Vice President of UNS Energy and TEP. In May 2009, Mr. Hutchens was named Vice President of Energy Efficiency and Resource Planning. In January 2007, Mr. Hutchens was elected Vice President of Wholesale Energy at UNS Energy and TEP. Mr. Hutchens joined TEP in 1995.

Lawrence J. Aldrich		Chairman and Executive Director, Arizona Business Coalition on Health, since October 2011; President and Chief Executive Officer of University Physicians Healthcare (UPH), a healthcare organization, from ~~2009-2010.~~2009 to 2010; Senior Vice President/Corporate Operations and General Counsel for UPH from 2007 to 2008; President of Aldrich Capital Company, an acquisition, management and consulting firm, since January 2007; Chief Operating Officer of The Critical Path Institute, a non-profit medical research company focusing in drug development, from ~~2005-2007; General Partner of Valley Ventures, LP from September 2002~~2005 to ~~December 2005; Managing Director and Founder of Tucson Ventures, LLC, from February 2000 to September 2002.~~2007.

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Barbara M. Baumann		President and Owner of Cross Creek Energy Corporation, a management consultant and investor company for oil and gas, since 2003; ~~Executive Vice President~~Director of ~~Associated~~Devon Energy ~~Managers, LLC from 2000 to 2003; former Vice President of Amoco Production Company;~~Corporation, an oil and gas exploration company, since 2014; Director of SM Energy Company ~~since 2002; member~~(formerly St. Mary Land & Exploration), an oil and gas production company, from 2002 - 2014; Member of the Board of Trustees of ~~the~~The Putnam ~~Mutual~~ Funds since 2010; Director of Cody Resources, a privately held energy, ranching and commercial real estate company, since 2010.


Larry W. Bickle		Director of SM Energy Company (formerly St. Mary Land & Exploration), an oil and gas production company, since 1994; Retired private equity ~~investor;~~investor since 2007; Managing Director of Haddington Ventures, LLC, a private equity fund, from 1997 to ~~2007.~~2007; Non-executive Chairman of Quantum Natural Gas ~~Strategies,~~Storage, LLC, a natural gas storage company, since ~~2008.~~2008; Co-founder, Chairman and CEO of TPC Corp (NYSE: TPC), a natural gas company, until sold to PacifiCorp in 1997.

~~Harold W. Burlingame~~

Executive Vice President of AT&T from 1986-2001; Senior Executive Advisor for ATT Wireless from 2001-2005; Chairman of ORC Worldwide from 2004-2010; President of IRC Foundation since December 2010; Director of Cornerstone On Demand since 2006.

Robert A. Elliott

President and owner of ~~The~~ Elliott Accounting, ~~Group~~an accounting, tax, management and investment advisory services firm, since 1983; Vice Chairman of AAA of Arizona, a regional automotive and travel club, since 2012 and Director since 2007; Director and Corporate Secretary of Southern Arizona Community Bank, a banking institution, from ~~1998-2010;~~1998 to 2010; Television Analyst/~~Pre- game~~Pre-game Show Co-host for Fox Sports Arizona from ~~1998-2009; Chairman of the Board of~~

~~Tucson Metropolitan Chamber of Commerce from 2002~~1998 to ~~2003; Chairman of the Board of Tucson Urban League from 2003 to 2004;~~2009; Chairman of the Board of the Tucson Airport Authority, an airport operator/manager, from January 2006 to January 2007; ~~Director of AAA since 2007; Director~~President and Chairman of the ~~NBA~~Board of the National Basketball Retired Players Association ~~since 2010; and~~from 2011 to 2013; Director of ~~the~~ University of Arizona ~~Foundation.~~
Foundation, a philanthropic organization, since 2011.


Daniel W.L. Fessler		President of the California Public Utility Commission, a public utility regulatory agency, from ~~1991-1996;~~1991 to 1996; Professor Emeritus of the University of California, an educational institution, since 1994; Of ~~counsel~~Counsel for the law firm of Holland & Knight from ~~2003-2007;~~2003 to 2007; Partner in the law firm of LeBoeuf, Lamb, Greene & MacRae LLP from 1997 to 2003; previously served on the ~~UniSource~~UNS Energy and TEP boards of directors from 1998 to 2003; Managing Principal of Clear Energy Solutions, LLC, a company that advocates coal-to-synthetic fuels, since December 2004.


Louise L. Francesconi	~~Retired~~	President of Raytheon Missile ~~Systems;~~Systems, a defense electronics corporation, from 1997 to 2008; Director of Stryker Corporation, a medical technology company, since July 2006; Chairman of the Board of Trustees for TMC ~~Healthcare;~~Healthcare, a hospital, since 1999; Director of Global Solar Energy, Inc. ~~since 2008.~~, a manufacturer of solar panels and other solar-related products, from 2008 to 2011.

~~Warren Y. Jobe~~

Certified Public Accountant (licensed, but not practicing); Senior Vice President of Southern Company from 1998 to 2001; Executive Vice President and Chief Financial Officer of Georgia Power Company from 1987-1998; Director of WellPoint Health Networks, Inc. from 2003 to December 2004; Director of WellPoint, Inc. since December 2004; Trustee of RidgeWorth Funds since 2004. Director of Home Banc Corp. from 2005-2009.

Ramiro G. Peru

Executive Vice President and Chief Financial Officer of Swift Corporation ~~a trucking company,~~ from June 2007 to December 2007; Executive Vice President and Chief Financial Officer of Phelps Dodge Corporation from ~~October~~ 2004 to ~~March~~ 2007; Senior Vice President and Chief Financial Officer of Phelps Dodge Corporation from ~~May~~ 1999 to ~~September 2004; Director of WellPoint Health Networks, Inc. from 2003 to December~~ 2004; Director of WellPoint, Inc. since ~~December 2004; Director of Southern Peru Copper Corporation from 2002 to~~ 2004.


Gregory A. Pivirotto		Adjunct Professor at the University of Arizona College of Law since 2013; President, ~~and~~ Chief Executive Officer and Director of University Medical Center Corporation, in Tucson, from ~~1994-2010; Certified Public Accountant~~1994 to 2010; certified public accountant since 1978; Director of Arizona Hospital & Healthcare Association, a trade association providing advocacy, education and service to hospitals and other healthcare organizations, from 1997 to ~~2005.~~2005; Director of Tucson Airport Authority, ~~since 2008;~~an airport operator/manager, from 2008 - January 2014; Member of the Advisory Board of Harris Bank from 2010 - 2013. Director of the Arizona Donor Network Association from 1993 to 2006 and since ~~2010.~~2012.


Joaquin Ruiz		Professor of Geosciences, University of Arizona, an educational institution, since 1983; Dean, College of Science, University of Arizona, since 2000; Executive Dean of the University of Arizona College of Letters, Arts and Science since ~~2009.~~2009 and Vice President for Strategy and Innovation since 2012.

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Directors – TEP

September 30, September 30,
Name
     Age      Director
Since
Paul J. Bonavia
     60         2009
Michael J. DeConcini
     47         2009
David G. Hutchens
     45         2011
Kevin P. Larson
     55         2009



Name	Age	Director Since
Paul J. Bonavia	62	2009
David G. Hutchens	47	2011
Kevin P. Larson	57	2009




Paul J. Bonavia		Mr. Bonavia has served as Chairman and Chief Executive Officer of ~~UniSource~~UNS Energy and TEP since January 2009; he also served as President from January 2009 to December 2011. Prior to joining ~~UniSource~~UNS Energy, Mr. Bonavia served as President of the Utilities Group of Xcel Energy. Mr. Bonavia previously served as President of Xcel Energy’s Commercial Enterprises business unit and President of the company’s Energy Markets unit.

~~Michael J. DeConcini~~

~~Mr. DeConcini has served as Senior Vice President, Operations of UniSource Energy since May 2010 and Senior Vice President and Chief Operating Officer of TEP from May~~

2009 to December 2011 when his title at TEP was changed to Senior Vice President, Operations. Mr. DeConcini joined TEP in 1988 and was elected Senior Vice President and Chief Operating Officer of the Energy Resources business unit of TEP, effective January 1, 2003. In August 2006, he was named Senior Vice President and Chief Operating Officer, Transmission and Distribution.

David G. Hutchens

Mr. Hutchens has served as President of ~~UniSource~~UNS Energy and TEP since December 2011. In March 2011, Mr. Hutchens was named Executive Vice President of ~~UniSource~~UNS Energy and TEP. In May 2009, Mr. Hutchens was named Vice President of Energy Efficiency and Resource Planning. In January 2007, Mr. Hutchens was elected Vice President of Wholesale Energy at ~~UniSource~~UNS Energy and TEP. Mr. Hutchens joined TEP in 1995.



Kevin P. Larson		Mr. Larson has served as Senior Vice President and Chief Financial Officer of ~~UniSource~~UNS Energy and TEP since September 2005. Mr. Larson is also Treasurer of ~~UniSource~~UNS Energy. Mr. Larson joined TEP in 1985 and thereafter held various positions in its finance department and investment subsidiaries. He was elected Treasurer in August 1994 and Vice President in March 1997. In October 2000, he was elected Vice President and Chief Financial Officer.

Executive Officers of ~~UniSource~~UNS Energy and TEP

SeeItem 1. Business, Executive Officers of the Registrants.

Information required by Items 401, 405, 406 and 407 (c)(3), (d)(4) and (d)(5) of SEC Regulation S-K will be included in ~~UniSource~~UNS Energy’s Proxy Statement relating to the ~~2012~~2014 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December 31, ~~2011,~~2013, which information is incorporated herein by reference.

~~ITEM 11. –~~

~~EXECUTIVE COMPENSATION~~

ITEM 11. – EXECUTIVE COMPENSATION

Information concerning Executive Compensation will be contained in ~~UniSource~~UNS Energy’s Proxy Statement relating to the ~~2012~~2014 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December 31, ~~2011,~~2013, which information is incorporated herein by reference.

~~ITEM 12. –~~

~~SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS~~

ITEM 12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

General

At February ~~21, 2012, UniSource~~14, 2014, UNS Energy had outstanding ~~38.0~~41,633,535 million shares of Common Stock. At February ~~21, 2012,~~14, 2014, the number of shares of Common Stock beneficially owned by all directors and officers of ~~UniSource~~UNS Energy as a group amounted to ~~approximately 3%~~0.7% of the outstanding Common Stock.

At February ~~21, 2012, UniSource~~14, 2014, UNS Energy owned 100% of the outstanding shares of common stock of TEP.

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Security Ownership of Certain Beneficial Owners

Information concerning the security ownership of certain beneficial owners of ~~UniSource~~UNS Energy will be contained in ~~UniSource~~UNS Energy’s Proxy Statement relating to the ~~2012~~2014 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December 31, ~~2011,~~2013, which information is incorporated herein by reference.

Security Ownership of Management

Information concerning the security ownership of the Directors and Executive Officers of ~~UniSource~~UNS Energy will be contained in ~~UniSource~~UNS Energy’s Proxy Statement relating to the ~~2012~~2014 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December 31, ~~2011,~~2013, which information is incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

Information concerning securities authorized for issuance under equity compensation plans will be contained in ~~UniSource~~UNS Energy’s Proxy Statement relating to the ~~2012~~2014 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December 31, ~~2011,~~2013, which information is incorporated herein by reference.

~~ITEM 13. –~~

~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE~~

ITEM 13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information concerning certain relationships and related transactions, and director independence of ~~UniSource~~UNS Energy and TEP will be contained under Transactions with Management and Others, Director Independence and Compensation Committee Interlocks, and Insider Participation in ~~UniSource~~UNS Energy’s Proxy Statement relating to the ~~2012~~2014 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December 31, ~~2011,~~2013, which information is incorporated herein by reference.

~~ITEM 14. –~~

~~PRINCIPAL ACCOUNTANT FEES AND SERVICES~~

ITEM 14. – PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning UNS Energy's principal accountant fees and services will be contained in ~~UniSource~~UNS Energy’s Proxy Statement relating to the ~~2012~~2014 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after December 31, ~~2011,~~2013, which information is incorporated herein by reference.

Pre-Approved Policies and Procedures

Rules adopted by the SEC in order to implement requirements of the Sarbanes-Oxley Act of 2002 require public company audit committees to pre-approve audit and non-audit services. UNS Energy’s Audit Committee has adopted a policy pursuant to which audit, audit-related, tax and other services are pre-approved by category of service. Recognizing that situations may arise where it is in the Company’s best interest for the auditor to perform services in addition to the annual audit of the Company’s financial statements, the policy sets forth guidelines and procedures with respect to approval of the four categories of service designed to achieve the continued independence of the auditor when it is retained to perform such services for UNS Energy. The policy requires the Audit Committee to be informed of each service and does not include any delegation of the Audit Committee’s responsibilities to management. The Audit Committee may delegate to the Chair of the Audit Committee the authority to grant pre-approvals of audit and non-audit services requiring Audit Committee approval where the Audit Committee Chair believes it is desirable to pre-approve such services prior to the next regularly scheduled Audit Committee meeting. The decisions of the Audit Committee Chair to pre-approve any such services from one regularly scheduled Audit Committee meeting to the next shall be reported to the Audit Committee.

Fees

The following table details fees paid to PwC for professional services during 2012 and 2013. The Audit Committee has considered whether the provision of services to TEP by PwC, beyond those rendered in connection with their audit and review of the Company’s financial statements, is compatible with maintaining their independence as auditor.

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Table of Contents~~PART IV~~

TEP's fees for principal accountant services are as follows:



	2013		2012
Audit Fees	$	941,942	$	970,791
Audit-Related Fees	46,500		54,878
Tax Fees⁽¹⁾	61,612		186,605
All Other Fees	53,273		10,800
Total	$	1,103,327	$	1,223,074

Notes:

~~ITEM 15. –~~

~~EXHIBITS AND FINANCIAL STATEMENT SCHEDULES~~


1)	The decrease in tax fees is for work performed by PWC on behalf of the Company’s Tax Services department to evaluate the tax treatment of repairs and review of the TEP tax rate case during 2012.

Audit fees include fees for the audit of TEP’s consolidated financial statements included in the Company’s Annual Report on Form 10-K and review of financial statements included in the Company’s Quarterly Reports on Form 10-Q. Audit fees also include services provided by PwC in connection with the audit of the effectiveness of internal control over financial reporting and on management’s assessment of the effectiveness of internal control over financial reporting, comfort letters, consents and other services related to SEC matters and financing transactions, statutory and regulatory audits.

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PART IV

ITEM 15. – EXHIBITS AND FINANCIAL STATEMENT SCHEDULE


~~September 30,~~

~~Page~~	Page
(a) (1). Consolidated Financial Statements as of December 31, ~~2011~~2013 and ~~2010~~2012 and for Each of the Three Years in the Period Ended December 31, ~~2011~~ 2013

UNS Energy Corporation
~~UniSource Energy Corporation~~
Report of Independent Registered Public Accounting Firm		78	K-73
Consolidated Statements of Income		80	K-75
Consolidated Statements of Comprehensive Income	K-76
Consolidated Statements of Cash Flows		81	K-77
Consolidated Balance Sheets		82	K-78
Consolidated Statements of Capitalization		84	K-80
Consolidated Statements of Changes in Stockholders’ Equity		85	K-81
Notes to Consolidated Financial Statements	K-89
	92

Tucson Electric Power Company
Report of Independent Registered Public Accounting Firm		79	K-74
Consolidated Statements of Income		86	K-82
Consolidated Statements of Comprehensive Income	K-83
Consolidated Statements of Cash Flows		87	K-84
Consolidated Balance Sheets		88	K-85
Consolidated Statements of Capitalization		90	K-87
Consolidated Statements of Changes in Stockholder’s Equity		91	K-88
Notes to Consolidated Financial Statements	K-89
	92
(2) Financial Statement Schedule
~~(2). Financial Statement Schedules~~ Schedule II

~~Schedule II~~
Valuation and Qualifying Accounts	K-139
	~~153~~

(3). Exhibits
~~Reference is made to the Exhibit Index commencing on page 162.~~

Reference is made to the Exhibit Index commencing on page K-150.

K-146

SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



			~~UNISOURCE~~
		UNS ENERGY CORPORATION

~~Date: February 27, 2012~~
Date:	February 25, 2014	By:	/s/ Kevin P. Larson
				Kevin P. Larson
				Senior Vice President and ~~Principal~~
				Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



~~Date: February 27, 2012~~
Date:	February 25, 2014		/s/ Paul J. Bonavia*
				Paul J. Bonavia
				Chairman of the Board and
				~~Principal~~ Chief Executive Officer
			(Principal Executive Officer)

Date:	February ~~27, 2012~~25, 2014				/s/ Kevin P. Larson
				Kevin P. Larson
				~~Principal~~Senior Vice President and Chief Financial Officer
			(Principal Financial Officer)

Date:	February ~~27, 2012~~25, 2014				/s/ Karen G. KissingerFrank P. Marino
			Frank P. Marino
		~~Karen G. Kissinger~~
		Vice President and Controller
			(Principal Accounting ~~Officer~~Officer)

Date:	February ~~27, 2012~~25, 2014				/s/ Lawrence J. Aldrich*
				Lawrence J. Aldrich
				Director

Date:	February ~~27, 2012~~25, 2014				/s/ Barbara M. Baumann*
				Barbara M. Baumann
				Director

Date:	February ~~27, 2012~~25, 2014				/s/ Larry W. Bickle*
				Larry W. Bickle
				Director

Date:	February ~~27, 2012~~25, 2014				/s/ Harold W. Burlingame*
				~~Harold W. Burlingame~~
				~~Director~~

~~Date: February 27, 2012~~				/s/ Robert A. Elliott*
				Robert A. Elliott
				Director

K-147




Date:	February ~~27, 2012~~25, 2014				/s/ Daniel W.L. Fessler*
				Daniel W.L. Fessler
				Director

Date:	February ~~27, 2012~~25, 2014				/s/ Louise L. Francesconi*
				Louise L. Francesconi
				Director

Date:	February ~~27, 2012~~25, 2014				/s/ Warren Y. Jobe*
				~~Warren Y. Jobe~~
				~~Director~~

~~Date: February 27, 2012~~				/s/ Ramiro Peru*
				Ramiro Peru
				Director

Date:	February ~~27, 2012~~25, 2014				/s/ Gregory A. Pivirotto*
				Gregory A. Pivirotto
				Director

Date:	February ~~27, 2012~~25, 2014				/s/ Joaquin Ruiz*
				Joaquin Ruiz
				Director

Date:	February ~~27, 2012~~	25, 2014	By:		/s/ Kevin P. Larson
				Kevin P. Larson
				As attorney-in-fact for each
				of the persons indicated

~~SIGNATURES~~




		TUCSON ELECTRIC POWER COMPANY

Date:	February ~~27, 2012~~		25, 2014	By:		/s/ Kevin P. Larson
					Kevin P. Larson
					Senior Vice President and ~~Principal~~
					Chief Financial Officer

K-148



~~Date: February 27, 2012~~
Date:	February 25, 2014		/s/ Paul J. Bonavia*
					Paul J. Bonavia
					Chairman of the Board and
					~~Principal~~ Chief Executive Officer
			(Principal Executive Officer)

Date:	February ~~27, 2012~~25, 2014					/s/ Kevin P. Larson
					Kevin P. Larson
					~~Principal~~Senior Vice President, Chief Financial Officer and Director
			(Principal Financial Officer)

Date:	February ~~27, 2012~~25, 2014					/s/ Karen G. KissingerFrank P. Marino
			Frank P. Marino
		~~Karen G. Kissinger~~
		Vice President and Controller
			(Principal Accounting ~~Officer~~Officer)

Date:	February ~~27, 2012~~25, 2014					/s/ Michael J. DeConcini*
					~~Michael J. DeConcini~~
					~~Director~~

~~Date: February 27, 2012~~					/s/ David G. Hutchens*
					David G. Hutchens
					Director

Date:	February ~~27, 2012~~		25, 2014	By:		/s/ Kevin P. Larson
					Kevin P. Larson
					As attorney-in-fact for each of the persons indicated

K-149

EXHIBIT INDEX





*2(a)	—		Agreement and Plan of ~~Exchange,~~Merger, dated as of ~~March 20, 1995, between TEP, UniSource~~December 11, 2013, among FortisUS Inc., Color Acquisition Sub Inc., UNS Energy Corporation and ~~NCR Holding,~~solely for purposes of Section 5.5(a) and 8.15, Fortis Inc. (Form ~~10-K for the year ended~~8-K, dated December ~~31,1997,~~12, 2013, File No. ~~13739 – Exhibit. 2(a)).~~1-13739 - Exhibit 2.1)

*2(b)(1)	—		Asset Purchase and Sale Agreement, dated as of December 23, 2013, between Gila River Power LLC and Tucson Electric Power Company and UNS Electric, Inc. (Form 8-K, dated December 27, 2013, File No. 1-13739 - Exhibit 2.1)

2(b)(2)	—		First Amendment, dated February 14, 2014, to the Asset Purchase and Sale Agreement between Gila River Power LLC and Tucson Electric Power Company and UNS Electric, Inc.

*3(a)	—		Restated Articles of Incorporation of TEP, filed with the ACC on August 11, 1994, as amended by Amendment to Article Fourth of our Restated Articles of Incorporation, filed with the ACC on May 17, 1996. (Form 10-K for the year ended December 31, 1996, File No. 1-5924-Exhibit No 3(a)).

*3(a)(1)	—		TEP Articles of Amendment filed with the ACC on September 3, 2009 (Form 10-K for the year ended December 31, 2010, File No. 1-1379 – Exhibit 3(a))

*3(b)	—		Bylaws of TEP, as amended as of August 31, 2009 (Form 10-Q for the quarter ended September 30, 2009, File No. 13739 – Exhibit 3.1).

*3(c)	—		Amended and Restated Articles of Incorporation of ~~UniSource Energy.~~UNS Energy, as amended. (Form ~~8-A/A,~~8-K, dated ~~January 30, 1998,~~May 10, 2012, File No. 1-13739 – Exhibit ~~2(a))~~3.1).

*3(d)	—		Revised and restated bylaws of ~~UniSource~~UNS Energy, as revised and restated December 14, 2011 (Form 8-K, dated December 15, 2011, File No. 13739 – Exhibit 3.1)

~~4(a)~~		—		~~Reserved.~~

*~~4(b)~~4(a)(1)	—		Loan Agreement, dated as of October 1, 1982, between the Pima County Authority and TEP relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company ~~Sundt~~Irvington Project). (Form 10-Q for the quarter ended September 30, 1982, File No. 1-5924 — Exhibit 4(a)).

*~~4(b)~~4(a)(2)	—		Indenture of Trust, dated as of October 1, 1982, between the Pima County Authority and Morgan Guaranty authorizing Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company ~~Sundt~~Irvington Project). (Form 10-Q for the quarter ended September 30, 1982, File No. 1-5924 — Exhibit 4(b)).

*~~4(b)~~4(a)(3)	—		First Supplemental Loan Agreement, dated as of March 31, 1992, between the Pima County Authority and TEP relating to Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company ~~Sundt~~Irvington Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(h)(3)).

*~~4(b)~~4(a)(4)	—		First Supplemental Indenture of Trust, dated as of March 31, 1992, between the Pima County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company ~~Sundt~~Irvington Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(h)(4)).

*~~4(c)~~4(b)(1)	—		Loan Agreement, dated as of December 1, 1982, between the Pima County Authority and TEP relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company Projects). (Form 10-K for the year ended December 31, 1982, File No. 1-5924 — Exhibit 4(k)(1)).

K-150




*~~4(c)~~4(b)(2)	—	Indenture of Trust dated as of December 1, 1982, between the Pima County Authority and Morgan Guaranty authorizing Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company Projects). (Form 10-K for the year ended December 31, 1982, File No. 1-5924 — Exhibit 4(k)(2)).

*~~4(c)~~4(b)(3)	—	First Supplemental Loan Agreement, dated as of March 31, 1992, between the Pima County Authority and TEP relating to Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company Projects). (Form S-4, Registration No. 33-52860 — Exhibit 4(i)(3)).




*~~4(c)~~4(b)(4)	—	First Supplemental Indenture of Trust, dated as of March 31, 1992, between the Pima County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds, 1982 Series A (Tucson Electric Power Company Projects). (Form S-4, Registration No. 33-52860 — Exhibit 4(i)(4)).



*~~4(d)~~4(c)(1)	—	Loan Agreement, dated as of December 1, 1983, between the Apache County Authority and TEP relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1983, File No. 1-5924 — Exhibit 4(I)(1)).

*4(d)(2)	—	Indenture of Trust, dated as of ~~December~~March 1, ~~1983,~~2008, between The Industrial Development Authority of the ~~Apache~~ County ~~Authority~~of Pima and ~~Morgan Guaranty~~U.S. Bank Trust National Association authorizing ~~Floating Rate Monthly Demand~~ Industrial Development Revenue Bonds, ~~1983~~2008 Series A (Tucson Electric Power Company ~~Springerville~~ Project). (Form ~~10-K for the year ended December 31, 1983,~~8-K dated March 19, 2008, File ~~no.~~Nos. 1-5924 and 1-13739 — Exhibit ~~4(I)(2)~~4(a)).

*~~4(d)(3)~~	—	First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and TEP relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 — Exhibit 4(k)(3)).

*4(d)(4)	—	First Supplemental Indenture, dated as of December 1, 1985, between the Apache County Authority and Morgan Guaranty relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 — Exhibit 4(k)(4)).

*4(d)(5)	—	Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and TEP relating to Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(k)(5)).

*4(d)(6)	—	Second Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds, 1983 Series A (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(k)(6)).

*4(e)(1)4(c)(2)	—	Loan Agreement, dated as of ~~December~~March 1, ~~1983,~~2008, between the ~~Apache County Authority and TEP relating to Variable Rate Demand~~ Industrial Development ~~Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville Project). (Form 10-K for~~Authority of the ~~year ended December 31, 1983, File No. 1-5924 — Exhibit 4(m)(1)).~~

*4(e)(2)	—	~~Indenture~~County of Trust dated as of December 1, 1983, between the Apache County Authority and Morgan Guaranty authorizing Variable Rate Demand Industrial Development Revenue Bonds. 1983 Series B (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1983, File No. 1-5924 — Exhibit 4(m)(2)).

*4(e)(3)	—	First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and TEP relating to Floating Rate Monthly Demand Industrial Developmental Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 — Exhibit 4(I)(3)).

*4(e)(4)	—	First Supplemental Indenture, dated as of December 1, 1985, between the Apache County Authority and Morgan Guaranty relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 — Exhibit 4(I)(4)).

*4(e)(5)	—	~~Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority~~Pima and TEP relating to Industrial Development Revenue Bonds, ~~1983~~2008 Series BA (Tucson Electric Power Company ~~Springerville~~ Project). (Form ~~S-4, Registration No. 33-52860~~8-K dated March 19, 2008, File Nos. 1-5924 and 1-13739 — Exhibit ~~4(I)(5)~~4(b)).




*~~4(e)(6)~~	—	Second Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds, 1983 Series B (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(I)(6)).

~~4(e)(7)~~	—	Third Supplemental Indenture of Trust, dated as of December 7, 2011, between the Apache County Authority and U.S. Bank Trust National Association, as successor trustee, relating to Industrial Development Bonds 1983 Series B (Tucson Electric Power Company Springerville Project)

*4(f)(1)	—	Loan Agreement, dated as of December 1, 1983, between the Apache County Authority and TEP relating to Variable Rate Demand Industrial Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company Springerville Project). (Form 10-K for year ended December 31, 1983, File No. 1-5924 — Exhibit 4(n)(1)).

*4(f)(2)	—	Indenture of Trust dated as of December 1, 1983, between the Apache County Authority and Morgan Guaranty authorizing Variable Rate Demand Industrial Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1983, File No. 1-5924 — Exhibit 4(n)(2)).

*4(f)(3)	—	First Supplemental Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and TEP relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 — Exhibit 4(m)(3)).

*4(f)(4)	—	First Supplemental Indenture, dated as of December 1, 1985, between the Apache County Authority and Morgan Guaranty relating to Floating Rate Monthly Demand Industrial Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1987, File No. 1-5924 — Exhibit 4(m)(4)).

*4(f)(5)	—	Second Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and TEP relating to Industrial Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(m)(5)).

*4(f)(6)	—	Second Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds, 1983 Series C (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(m)(6)).

~~4(f)(7)~~	—	Third Supplemental Indenture of Trust, dated as of December 7, 2011, between the Apache County Authority and U.S. Bank Trust National Association, as successor trustee, relating to Industrial Development Bonds 1983 Series C (Tucson Electric Power Company Springerville Project)

~~4(g)~~	—	~~Reserved~~

*4(h)(1)	—	Loan Agreement, dated as of December 1, 1985, between the Apache County Authority and TEP relating to Variable Rate Demand Industrial Development Revenue Bonds, 1985 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1985, File No. 1-5924 — Exhibit 4(r)(1)).

*4(h)(2)	—	Indenture of Trust dated as of December 1, 1985, between the Apache County Authority and Morgan Guaranty authorizing Variable Rate Demand Industrial Development Revenue Bonds, 1985 Series A (Tucson Electric Power Company Springerville Project). (Form 10-K for the year ended December 31, 1985, File No. 1-5924 — Exhibit 4(r)(2)).

*4(h)(3) — First Supplemental Loan Agreement, dated as of March 31, 1992, between the Apache County Authority and TEP relating to Industrial Development Revenue Bonds, 1985 Series A (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(o)(3)).
*4(h)(4) — First Supplemental Indenture of Trust, dated as of March 31, 1992, between the Apache County Authority and Morgan Guaranty relating to Industrial Development Revenue Bonds, 1985 Series A (Tucson Electric Power Company Springerville Project). (Form S-4, Registration No. 33-52860 — Exhibit 4(o)(4)).
*4(i)(1) — ~~Indenture of Mortgage and Deed of Trust dated as of December 1, 1992, to Bank of Montreal Trust Company, Trustee. (Form S-1, Registration No. 33-55732 — Exhibit 4(r)(1)).~~
*4(i)(2) — ~~Supplemental Indenture No. 1 creating a series of bonds designated Second Mortgage Bonds, Collateral Series A, dated as of December 1, 1992. (Form S-1, Registration No. 33-55732 — Exhibit 4(r)(2)).~~
*4(i)(3) — Supplemental Indenture No. 2 creating a series of bonds designated Second Mortgage Bonds, Collateral Series B, dated as of December 1, 1997. (Form 10-K for year ended December 31, 1997, File No. 1-5924 — Exhibit 4(m)(3)).
*4(i)(4) — Supplemental Indenture No. 3 creating a series of bonds designated Second Mortgage Bonds, Collateral Series, dated as of August 1, 1998. (Form 10-Q for the quarter ended June 30, 1998, File No. 1-5924 — Exhibit 4(c)).
*4(i)(5) — Supplemental Indenture No. 4 creating a series of bonds designated Second Mortgage Bonds, Collateral Series C, dated as of November 1, 2002. (Form 8-K dated November 27, 2002, File Nos. 1-05924 and 1-13739 — Exhibit 99.2).
*4(i)(6) — Supplemental Indenture No. 5 creating a series of bonds designated Second Mortgage Bonds, Collateral Series D, dated as of March 1, 2004. (Form 8-K dated March 31, 2004, File Nos. 1-05924 and 1-13739 — Exhibit 10 (b)).
*4(i)(7) — Supplemental Indenture No. 6 creating a series of bonds designated Second Mortgage Bonds, Collateral Series E, dated as of May 1, 2005. (Form 10-Q for the quarter ended March 31, 2005, File Nos. 1-5924 and 1-13739 – Exhibit 4(b)).
*4(i)(8) — Supplemental Indenture No. 7 creating a series of bonds designated First Mortgage Bonds, Collateral Series F, dated as of December 1, 2006. (Form 8-K dated December 22, 2006, File Nos. 1-5924 and 1-13739 – Exhibit 4.1).
*4(i)(9) — Supplemental Indenture No. 8 creating a series of bonds designated First Mortgage Bonds, Collateral Series G, dated as of June 1, 2008. (Form 8-K dated June 25, 2008, File Nos. 1-5924 and 1-13739 – Exhibit 4(b)).
*4(i)(10) — ~~Supplemental Indenture No. 9 dated as of July 3, 2008, (Form 10-K for the year ended December 31, 2009, File No. 1-3739, Exhibit 4(i)(10)).~~
*4(i)(11) — Supplemental Indenture No. 10 creating a series of bonds designated as First Mortgage Bonds, Collateral Series H, dated as of March 1, 2010. (Form 8-K dated March 5, 2010, File No. 1-13739, Exhibit 4(b)).
*4(i)(12) — Supplemental Indenture No.11, dated as of November 1, 2010, between Tucson Electric Power Company and The Bank of New York Mellon, as trustee. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.5).
*4(i)(13) — Supplemental Indenture No. 12, dated as of December 1, 2010, between TEP and the Bank of New York Mellon, creating a series of bonds designated First Mortgage Bonds, Collateral Series J. (Form 8-K dated December 17, 2010, File No. 1-13739, Exhibit 4(b)).

~~4(i)(14)~~ — Supplemental Indenture No.13, dated as of November 1, 2011, between Tucson Electric Power Company and The Bank of New York Mellon, amending terms of bonds designated First Mortgage Bonds, Collateral Series I.
*4(j)4(d)(1) — Indenture of Trust, dated as of June 1, 2008, between The Industrial Development Authority of the County of Pima and U.S. Bank Trust National Association authorizing Industrial Development Revenue Bonds, 2008 Series B (Tucson Electric Power Company Project). (Form 8-K dated June 25, 2008, File Nos. 1-5924 and 1-13739 — Exhibit 4(a)).
*~~4(j)~~4(d)(2) — Loan Agreement, dated as of June 1, 2008, between The Industrial Development Authority of the County of Pima and TEP relating to Industrial Development Revenue Bonds, 2008 Series B (Tucson Electric Power Company Project). (Form 8-K dated June 25, 2008, File Nos. 1-5924 and 1-13739 — Exhibit 4(b)).
*~~4(k)(1)~~ — Indenture of Trust, dated as of December 1, 2010, between the Coconino County, Arizona Pollution Control Corporation and U.S. Bank Trust National Association authorizing Pollution Control Bonds, 2010 Series A (Tucson Electric Power Company Navajo Project). (Form 8-K dated December 17, 2010, File No. 1-13739, Exhibit 4(c)).
*4(k)(2) — Loan Agreement, dated as of December 1, 2010, between the Coconino County, Arizona Pollution Control Corporation and TEP relating to Pollution Control Bonds, 2010 Series A (Tucson Electric Power Company Navajo Project). (Form 8-K dated December 17, 2010, File No. 1-13739, Exhibit 4(d)).
*4(l)(1) — Loan Agreement, dated as of March 1, 1998, between The Industrial Development Authority of the County of Apache and TEP relating to Pollution Control Revenue Bonds, 1998 Series A (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 — Exhibit 4(a)).
*4(l)(2) — Indenture of Trust, dated as of March 1, 1998, between The Industrial Development Authority of the County of Apache and First Trust of New York, National Association, authorizing Pollution Control Revenue Bonds, 1998 Series A (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 — Exhibit 4(b)).
*4(m)(1) — Loan Agreement, dated as of March 1, 1998, between The Industrial Development Authority of the County of Apache and TEP relating to Pollution Control Revenue Bonds, 1998 Series B (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 — Exhibit 4(c)).
*4(m)(2) — Indenture of Trust, dated as of March 1, 1998, between The Industrial Development Authority of the County of Apache and First Trust of New York, National Association, authorizing Pollution Control Revenue Bonds, 1998 Series B (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 — Exhibit 4(d)).
*4(n)(1) — Loan Agreement, dated as of March 1, 1998, between The Industrial Development Authority of the County of Apache and TEP relating to Industrial Development Revenue Bonds, 1998 Series C (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 — Exhibit 4(e)).
*4(n)(2) — Indenture of Trust, dated as of March 1, 1998, between The Industrial Development Authority of the County of Apache and First Trust of New York, National Association, authorizing Industrial Development Revenue Bonds, 1998 Series C (Tucson Electric Power Company Project). (Form 10-Q for the quarter ended March 31, 1998, File No. 1-5924 — Exhibit 4(f)).
*4(o)(1) — Second Amended and Restated Credit Agreement, dated as of November 9, 2010, among Tucson Electric Power Company, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.3).
~~4(o)(2)~~ – ~~Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of November 18, 2011, among Tucson Electric Power Company, Union Bank, N.A., as Administrative Agent, and a group of lenders.~~

*4(p)(1) — Note Purchase and Guaranty Agreement dated August 11, 2003 among UNS Gas, Inc., and UniSource Energy Services, Inc., and certain institutional investors. (Form 8-K dated August 21, 2003, File Nos. 1-5924 and 1-13739 — Exhibit 99.2).
*4(p)(2) — ~~Note Purchase Agreement, dated as of May 4, 2011, among UNS Gas, Inc., UniSource Energy Services, Inc., and a group of purchasers, (Form 8-K dated August 12, 2011, File 1-13739 — Exhibit 4.1).~~
*4(q)(1) — Note Purchase and Guaranty Agreement dated August 5, 2008, among UNS Electric, Inc., and UniSource Energy Services, Inc., and certain institutional investors. (Form 10-Q for the quarter ended June 30, 2008, File Nos. 1-5924 and 1-13739 — Exhibit 4).
*4(r)(1) — ~~Indenture dated as of March 1, 2005, to The Bank of New York, as Trustee. (Form 8-K dated March 3, 2005, File Nos. 1-5924 and 1-13739 — Exhibit 4.1).~~
*4(s)(1) — Second Amended and Restated Credit Agreement, dated as of November 9, 2010, among UniSource Energy Corporation, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.1).
~~4(s)(2)~~ — ~~Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of November 18, 2011, among UniSource Energy Corporation, Union Bank, N.A., as Administrative Agent, and a group of lenders.~~
*4(t)(1) — Second Amended and Restated Credit Agreement, dated as of November 9, 2010, among UNS Electric, Inc., UNS Gas, Inc., UniSource Energy Services, Inc., Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.4).
~~4(t)(2)~~ — Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of November 18, 2011, among UNS Electric, Inc., UNS Gas, Inc., UniSource Energy Services, Inc., Union Bank, N.A., as Administrative Agent, and a group of lenders.
*4(u)(1) — Reimbursement Agreement, dated as of December 14, 2010, among TEP, as Borrower, the financial institutions from time to time, parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and as Issuing Bank. (Form 8-K dated December 17, 2010, File No. 1-13739, Exhibit 4(a)).
*4(v)(1) — Second Amended and Restated Pledge Agreement, dated as of November 9, 2010, among UniSource Energy Corporation, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.2).
*4(w)(1) — Indenture of Trust, dated as of March 1, 2008, between The Industrial Development Authority of the County of Pima and U.S. Bank Trust National Association authorizing Industrial Development Revenue Bonds, 2008 Series A (Tucson Electric Power Company Project). (Form 8-K dated March 19, 2008, File Nos. 1-5924 and 1-13739 — Exhibit 4(a)).
*4(w)(2) — Loan Agreement, dated as of March 1, 2008, between the Industrial Development Authority of the County of Pima and TEP relating to Industrial Development Revenue Bonds, 2008 Series A (Tucson Electric Power Company Project). (Form 8-K dated March 19, 2008, File Nos. 1-5924 and 1-13739 — Exhibit 4(b)).
*4(x)(1) — Indenture of Trust, dated as of October 1, 2009, between The Industrial Development Authority of the County of Pima and U.S. Bank Trust National Association authorizing Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric Power Company Navajo Project). (Form 8-K dated October 13, 2009, File No. 1-13739- Exhibit 4(A)).

*~~4(x)~~4(e)(2) —    Loan Agreement, dated as of October 1, 2009, between The Industrial Development Authority of the County of Pima and TEP relating to Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric Power Company San Juan Project). (Form 8-K dated October 13, 2009, File No. 1-13739- Exhibit 4(B)).
*~~4(x)(3)~~4(f)(1) —    Indenture of Trust, dated as of October 1, 2009, between Coconino County, Arizona Pollution Control Corporation and U.S. Bank Trust National Association authorizing Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric Power Company Navajo Project). (Form 8-K dated October 13, 2009, File No. 1-13739- Exhibit 4(C)).
*~~4(x)(4)~~4(f)(2) —    Loan Agreement, dated as of October 1, 2009, between Coconino County, Arizona Pollution Control Corporation and TEP relating to Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric Power Company Navajo Project). (Form 8-K dated October 13, 2009, File No. 1-13739- Exhibit 4(D)).

K-151



*~~4(y)~~4(g)(1)	—	Indenture of Trust, dated as of October 1, 2010, between the Industrial Development Authority of the County of Pima and U.S. Bank Trust National Association, authorizing Industrial Development Revenue Bonds, 2010 Series A (Tucson Electric Power Company Project). (Form 8-K dated October 8, 2010, File No. 1-13739 Exhibit 4(a)).

*~~4(y)~~4(g)(2)	—	Loan Agreement, dated as of October 1, 2010, between the Industrial Development Authority of the County of Pima and TEP, relating to Industrial Development Revenue Bonds, 2010 Series A (Tucson Electric Power Company Project). (Form 8-K dated October 8, 2010, File No. 1-13739 Exhibit 4(b)).

*4(h)(1)	—	Indenture of Trust, dated as of December 1, 2010, between the Coconino County, Arizona Pollution Control Corporation and U.S. Bank Trust National Association authorizing Pollution Control Bonds, 2010 Series A (Tucson Electric Power Company Navajo Project). (Form 8-K dated December 17, 2010, File No. 1-13739, Exhibit 4(c)).

*4(h)(2)	—	Loan Agreement, dated as of December 1, 2010, between the Coconino County, Arizona Pollution Control Corporation and TEP relating to Pollution Control Bonds, 2010 Series A (Tucson Electric Power Company Navajo Project). (Form 8-K dated December 17, 2010, File No. 1-13739, Exhibit 4(d)).

*4(i)(1)	—	Indenture of Trust, dated as of March 1, 2012, between The Industrial Development Authority of the County of Apache and U.S. Bank Trust National Association, authorizing Pollution Control Revenue Bonds, 2012 Series A (Tucson Electric Power Company Project). (Form 8-K dated March 21, 2012, File No. 1-13739, Exhibit 4(a)).

*4(i)(2)	—	Loan Agreement, dated as of March 1, 2012, between The Industrial Development Authority of the County of Apache and TEP, relating to Pollution Control Revenue Bonds, 2012 Series A (Tucson Electric Power Company Project). (Form 8-K dated March 21, 2012, File No. 1-13739, Exhibit 4(b)).

*4(j)(1)	—	Indenture of Trust, dated as of June 1, 2012, between The Industrial Development Authority of the County of Pima and U.S. Bank Trust National Association, authorizing Industrial Development Revenue Bonds, 2012 Series A (Tucson Electric Power Company Project). (Form 8-K dated June 21, 2012, File No. 1-13739, Exhibit 4(a)).

*4(j)(2)	—	Loan Agreement, dated as of June 1, 2012, between The Industrial Development Authority of the County of Pima and TEP, relating to Industrial Development Revenue Bonds, 2012 Series A (Tucson Electric Power Company Project). (Form 8-K dated June 21, 2012, File No. 1-13739, Exhibit 4(b)).

*4(k)(1)	—	Indenture of Trust, dated as of March 1, 2013, between The Industrial Development Authority of the County of Pima and U.S. Bank Trust National Association, authorizing Industrial Development Revenue Bonds, 2013 Series A (Tucson Electric Power Company Project). (Form 8-K dated March 14, 2013, File No. 1-13739, Exhibit 4(a)).

*4(k)(2)	—	Loan Agreement, dated as of March 1, 2013, between The Industrial Development Authority of the County of Pima and TEP, relating to Industrial Development Revenue Bonds, 2013 Series A (Tucson Electric Power Company Project). (Form 8-K dated March 14, 2013, File No. 1-13739, Exhibit 4(b)).

*4(l)(1)	—	Indenture of Trust, dated as of November 1, 2013, between The Industrial Development Authority of the County of Apache and U.S. Bank Trust National Association, authorizing Industrial Development Revenue Bonds, 2013 Series A (Tucson Electric Power Company Springerville Project). (Form 8-K dated November 14, 2013, File No. 1-13739 - Exhibit 4(a)).

K-152



*~~4(z)~~4(l)(2)	—	Loan Agreement, dated as of November 1, 2013, between The Industrial Development Authority of the County of Apache and Tucson Electric Power Company, relating to Industrial Development Revenue Bonds, 2013 Series A (Tucson Electric Power Company Springerville Project). (Form 8-K dated November 14, 2013, File No. 1-13739 - Exhibit 4(b)).

*4(l)(3)	—	Lender Rate Mode Covenants Agreement, dated as of November 1, 2013, between Tucson Electric Power Company and STI Institutional & Government, Inc. (Form 8-K dated November 14, 2013, File No. 1-13739 - Exhibit 4(c)).

*4(m)(1)	—	Indenture, dated November 1, 2011, between Tucson Electric Power Company and U.S. Bank National Association, as trustee, authorizing unsecured Notes (Form 8-K dated November 8, 2011, File 1-13739 — Exhibit 4.1).

*4(m)(2)	—	Officers Certificate, dated November 8, 2011, authorizing 5.15% Notes due 2021. (Form 8-K dated November 8, 2011, File No. 1-13739 - Exhibit 4.2).

*4(m)(3)	—	Officers Certificate, dated September 14, 2012, authorizing 3.85% Notes due 2023. (Form 8-K dated September 14, 2012, File No. 1-13739 - Exhibit 4.1).

*4(n)(1)	—	Note Purchase and Guaranty Agreement dated August 11, 2003 among UNS Gas, Inc., UniSource Energy Services, Inc., and certain institutional investors. (Form 8-K dated August 21, 2003, File Nos. 1-5924 and 1-13739 — Exhibit 99.2).



*4(o)(2)	—	Note Purchase Agreement, dated as of May 4, 2011, among UNS Gas, Inc., UniSource Energy Services, Inc., and a group of purchasers. (Form 8-K dated August 12, 2011, File 1-13739 — Exhibit 4.1).

*4(p)	—	Note Purchase and Guaranty Agreement dated August 5, 2008, among UNS Electric, Inc., UniSource Energy Services, Inc., and certain institutional investors. (Form 10-Q for the quarter ended June 30, 2008, File Nos. 1-5924 and 1-13739 — Exhibit 4).

*4(q)(1)	—	Second Amended and Restated Credit Agreement, dated as of November 9, 2010, among UNS Energy Corporation, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.1).

*4(q)(2)	—	Second Amended and Restated Pledge Agreement, dated as of November 9, 2010, among UNS Energy Corporation, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.2).

*4(q)(3)	—	Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of November 18, 2011, among UNS Energy Corporation, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 10-K for the year ended December 31, 2011, File No. 1-13739, Exhibit 4(s)(2)).

*4(r)(1)	—	Second Amended and Restated Credit Agreement, dated as of November 9, 2010, among Tucson Electric Power Company, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.3).

*4(r)(2)	—	Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of November 18, 2011, among Tucson Electric Power Company, Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 10-K for the year ended December 31, 2011, File No. 1-13739, Exhibit 4(o)(2)).

*4(s)(1)	—	Second Amended and Restated Credit Agreement, dated as of November 9, 2010, among UNS Electric, Inc., UNS Gas, Inc., UniSource Energy Services, Inc., Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 8-K dated November 15, 2010, File No. 1-13739, Exhibit 4.4).

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*4(s)(2)	—	Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of November 18, 2011, among UNS Electric, Inc., UNS Gas, Inc., UniSource Energy Services, Inc., Union Bank, N.A., as Administrative Agent, and a group of lenders. (Form 10-K for the year ended December 31, 2011, File No. 1-13739, Exhibit 4(t)(2)).

*4(t)(1)	—	Reimbursement Agreement, dated as of December 14, 2010, among TEP, as Borrower, the financial institutions from time to time, parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and as Issuing Bank. (Form 8-K dated December 17, 2010, File No. 1-13739, Exhibit 4(a)).

4(t)(2)	—	Amendment No. 1 to Reimbursement Agreement, dated as of February 11, 2014 among TEP, as Borrower, the financial institutions from time to time, parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and as Issuing Bank.



*4(u)(1)	—		Credit Agreement, dated as of August 10, 2011, among UNS Electric, Inc., UniSource Energy Services, Inc., and Union Bank, N.A., as Administrative Agent (Form 8-K dated August 12, 2011, File 1-13739 — Exhibit 4.2).

*4(aa)(1)		—		Indenture, dated November 1, 2011, between Tucson Electric Power Company and U.S. Bank National Association, as trustee, authorizing 5.15% Notes due 2021 (Form 8-K dated November 8, 2011, File 1-13739 — Exhibit 4.1).

*10(a)(1)	—		Lease Agreements, dated as of December 1, 1984, between Valencia and United States Trust Company of New York, as Trustee, and Thomas B. Zakrzewski, as Co-Trustee, as amended and supplemented. (Form 10-K for the year ended December 31, 1984, File No. 1-5924 — Exhibit 10(d)(1)).

*10(a)(2)	—		Guaranty and Agreements, dated as of December 1, 1984, between TEP and United States Trust Company of New York, as Trustee, and Thomas B. Zakrzewski, as Co-Trustee. (Form 10-K for the year ended December 31, 1984, File No. 1-5924 — Exhibit 10(d)(2)).

*10(a)(3)	—		General Indemnity Agreements, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors; General Foods Credit Corporation, Harvey Hubbell Financial, Inc. and J.C. Penney Company, Inc. as Owner Participants; United States Trust Company of New York, as Owner Trustee; Teachers Insurance and Annuity Association of America as Loan Participant; and Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December 31, 1984, File No. 1-5924 — Exhibit 10(d)(3)).

*10(a)(4)	—		Tax Indemnity Agreements, dated as of December 1, 1984, between General Foods Credit Corporation, Harvey Hubbell Financial, Inc. and J.C. Penney Company, Inc., each as Beneficiary under a separate Trust Agreement dated December 1, 1984, with United States Trust of New York as Owner Trustee, and Thomas B. Zakrzewski as Co-Trustee, Lessor, and Valencia, Lessee, and TEP, Indemnitors. (Form 10-K for the year ended December 31, 1984, File No. 1-5924 — Exhibit 10(d)(4)).

*10(a)(5)	—		Amendment No. 1, dated December 31, 1984, to the Lease Agreements, dated December 1, 1984, between Valencia and United States Trust Company of New York, as Owner Trustee, and Thomas B. Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(5)).

*10(a)(6) — Amendment No. 2, dated April 1, 1985, to the Lease Agreements, dated December 1, 1984, between Valencia and United States Trust Company of New York, as Owner Trustee, and Thomas B. Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(6)).
*10(a)(7) — Amendment No. 3 dated August 1, 1985, to the Lease Agreements, dated December 1, 1984, between Valencia and United States Trust Company of New York, as Owner Trustee, and Thomas Zakrzewski as Co-Trustee. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(7)).

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*10(a)(8)	—	Amendment No. 4, dated June 1, 1986, to the Lease Agreement, dated December 1, 1984, between Valencia and United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-Trustee, under a Trust Agreement dated as of December 1, 1984, with General Foods Credit Corporation as Owner Participant. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(8)).

*10(a)(9)	—	Amendment No. 4, dated June 1, 1986, to the Lease Agreement, dated December 1, 1984, between Valencia and United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-Trustee, under a Trust Agreement dated as of December 1, 1984, with J.C. Penney Company, Inc. as Owner Participant. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(9)).

*10(a)(10)	—	Amendment No. 4, dated June 1, 1986, to the Lease Agreement, dated December 1, 1984, between Valencia and United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-Trustee, under a Trust Agreement dated as of December 1, 1984, with Harvey Hubbell Financial Inc. as Owner Participant. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(10)).

*10(a)(11)	—	Lease Amendment No. 5 and Supplement No. 2, to the Lease Agreement, dated July 1, 1986, between Valencia, United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-Trustee and J.C. Penney as Owner Participant. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(11)).

*10(a)(12)	—	Lease Amendment No. 5, to the Lease Agreement, dated June 1, 1987, between Valencia, United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-Trustee and General Foods Credit Corporation as Owner Participant. (Form 10-K for the year ended December 31, 1988, File No. 1-5924 — Exhibit 10(f)(12)).

*10(a)(13)	—	Lease Amendment No. 5, to the Lease Agreement, dated June 1, 1987, between Valencia, United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-Trustee and Harvey Hubbell Financial Inc. as Owner Participant. (Form 10-K for the year ended December 31, 1988, File No. 1-5924 — Exhibit 10(f)(13)).

*10(a)(14)	—	Lease Amendment No. 6, to the Lease Agreement, dated June 1, 1987, between Valencia, United States Trust Company of New York as Owner Trustee, and Thomas Zakrzewski as Co-Trustee and J.C. Penney Company, Inc. as Owner Participant. (Form 10-K for the year ended December 31, 1988, File No. 1-5924 — Exhibit 10(f)(14)).

*10(a)(15)	—	Lease Supplement No. 1, dated December 31, 1984, to Lease Agreements, dated December 1, 1984, between Valencia, as Lessee and United States Trust Company of New York and Thomas B. Zakrzewski, as Owner Trustee and Co-Trustee, respectively (document filed relates to General Foods Credit Corporation; documents relating to Harvey Hubbell Financial, Inc. and JC Penney Company, Inc. are not filed but are substantially similar). (Form S-4 Registration No. 33-52860 — Exhibit 10(f)(15)).

*10(a)(16) — Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors, General Foods Credit Corporation, as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(12)).
*10(a)(17) — Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(13)).

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*10(a)(18)	—	Amendment No. 1, dated June 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors, Harvey Hubbell Financial, Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(14)).

*10(a)(19)	—	Amendment No. 2, dated as of July 1, 1986, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860 — Exhibit 10(f)(19)).

*10(a)(20)	—	Amendment No. 2, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors, General Foods Credit Corporation, as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860 ~~--Exhibit~~—Exhibit 10(f)(20)).

*10(a)(21)	—	Amendment No. 2, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors, Harvey Hubbell Financial, Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860 — Exhibit 10(f)(21)).

*10(a)(22)	—	Amendment No. 3, dated as of June 1, 1987, to the General Indemnity Agreement, dated as of December 1, 1984, between Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860 — Exhibit 10(f)(22)).

*10(a)(23)	—	Supplemental Tax Indemnity Agreement, dated July 1, 1986, between J.C. Penney Company, Inc., as Owner Participant, and Valencia and TEP, as Indemnitors. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(15)).

*10(a)(24)	—	Supplemental General Indemnity Agreement, dated as of July 1, 1986, among Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form 10-K for the year ended December 31, 1986, File No. 1-5924 — Exhibit 10(e)(16)).

*10(a)(25)	—	Amendment No. 1, dated as of June 1, 1987, to the Supplemental General Indemnity Agreement, dated as of July 1, 1986, among Valencia and TEP, as Indemnitors, J.C. Penney Company, Inc., as Owner Participant, United States Trust Company of New York, as Owner Trustee, Teachers Insurance and Annuity Association of America, as Loan Participant, and Marine Midland Bank, N.A., as Indenture Trustee. (Form S-4, Registration No. 33-52860 — Exhibit 10(f)(25)).

*10(a)(26) — Valencia Agreement, dated as of June 30, 1992, among TEP, as Guarantor, Valencia, as Lessee, Teachers Insurance and Annuity Association of America, as Loan Participant, Marine Midland Bank, N.A., as Indenture Trustee, United States Trust Company of New York, as Owner Trustee, and Thomas B. Zakrzewski, as Co-Trustee, and the Owner Participants named therein relating to the Restructuring of Valencia’s lease of the coal-handling facilities at the Springerville Generating Station. (Form S-4, Registration No. 33-52860 — Exhibit 10(f)(26)).

K-156



*10(a)(27)	—	Amendment, dated as of December 15, 1992, to the Lease Agreements, dated December 1, 1984, between Valencia, as Lessee, and United States Trust Company of New York, as Owner Trustee, and Thomas B. Zakrzewski, as Co-Trustee. (Form S-1, Registration No. 33-55732 — Exhibit 10(f)(27)).

*10(b)(1)	—	Lease Agreements, dated as of December 1, 1985, between TEP and San Carlos Resources Inc. (San Carlos) (a wholly-owned subsidiary of the Registrant) jointly and severally, as Lessee, and Wilmington Trust Company, as Trustee, as amended and supplemented. (Form 10-K for the year ended December 31, 1985, File No. 1-5924 — Exhibit 10(f)(1)).

*10(b)(2)	—	Tax Indemnity Agreements, dated as of December 1, 1985, between Philip Morris Credit Corporation, IBM Credit Financing Corporation and Emerson Finance Co., each as beneficiary under a separate trust agreement, dated as of December 1, 1985, with Wilmington Trust Company, as Owner Trustee, and William J. Wade, as Co-Trustee, and TEP and San Carlos, as Lessee. (Form 10-K for the year ended December 31, 1985, File No. 1-5924 — Exhibit 10(f)(2)).

*10(b)(3)	—	Participation Agreement, dated as of December 1, 1985, among TEP and San Carlos as Lessee, Philip Morris Credit Corporation, IBM Credit Financing Corporation, and Emerson Finance Co. as Owner Participants, Wilmington Trust Company as Owner Trustee, The Sumitomo Bank, Limited, New York Branch, as Loan Participant, and Bankers Trust Company, as Indenture Trustee. (Form 10-K for the year ended December 31, 1985, File No. 1-5924 — Exhibit 10(f)(3)).

*10(b)(4)	—	Restructuring Commitment Agreement, dated as of June 30, 1992, among TEP and San Carlos, jointly and severally, as Lessee, Philip Morris Credit Corporation, IBM Credit Financing Corporation and Emerson Capital Funding, William J. Wade, as Owner Trustee and Co-Trustee, respectively, The Sumitomo Bank, Limited, New York Branch, as Loan Participant and United States Trust Company of New York, as Indenture Trustee. (Form S-4, Registration No. 33-52860 — Exhibit 10(g)(4)).

*10(b)(5)	—	Lease Supplement No.1, dated December 31, 1985, to Lease Agreements, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee Trustee and Co-Trustee, respectively (document filed relates to Philip Morris Credit Corporation; documents relating to IBM Credit Financing Corporation and Emerson Financing Co. are not filed but are substantially similar). (Form S-4, Registration No. 33-52860 — Exhibit 10(g)(5)).

*10(b)(6)	—	Amendment No. 1, dated as of December 15, 1992, to Lease Agreements, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, as Lessor. (Form S-1, Registration No. 33-55732 — Exhibit 10(g)(6)).

*10(b)(7)	—	Amendment No. 1, dated as of December 15, 1992, to Tax Indemnity Agreements, dated as of December 1, 1985, between Philip Morris Credit Corporation, IBM Credit Financing Corporation and Emerson Capital Funding Corp., as Owner Participants and TEP and San Carlos, jointly and severally, as Lessee. (Form S-1, Registration No. 33-55732 — Exhibit 10(g)(7)).

*10(b)(8) — Amendment No. 2, dated as of December 1, 1999, to Lease Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust Agreement with Philip Morris Capital Corporation as Owner Participant. (Form 10-K for the year ended December 31, 1999, File No. 1-5924 — Exhibit 10(b)(8)).

K-157



*10(b)(9)	—	Amendment No. 2, dated as of December 1, 1999, to Lease Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust Agreement with IBM Credit Financing Corporation as Owner Participant. (Form 10-K for the year ended December 31, 1999, File No. 1-5924 — Exhibit 10(b)(9)).

*10(b)(10)	—	Amendment No. 2, dated as of December 1, 1999, to Lease Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust Agreement with Emerson Finance Co. as Owner Participant. (Form 10-K for the year ended December 31, 1999, File No. 1-5924 — Exhibit 10(b)(10)).

*10(b)(11)	—	Amendment No. 2, dated as of December 1, 1999, to Tax Indemnity Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Philip Morris Capital Corporation as Owner Participant, beneficiary under a Trust Agreement dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, together as Lessor. (Form 10-K for the year ended December 31, 1999, File No. 1-5924 — Exhibit 10(b)(11)).

*10(b)(12)	—	Amendment No. 2, dated as of December 1, 1999, to Tax Indemnity Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and IBM Credit Financing Corporation as Owner Participant, beneficiary under a Trust Agreement dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, together as Lessor. (Form 10-K for the year ended December 31, 1999, File No. 1-5924 — Exhibit 10(b)(12)).

*10(b)(13)	—	Amendment No. 2, dated as of December 1, 1999, to Tax Indemnity Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Emerson Finance Co. as Owner Participant, beneficiary under a Trust Agreement dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, together as Lessor. (Form 10-K for the year ended December 31, 1999, File No. 1-5924 — Exhibit 10(b)(13)).

*10(b)(14)	—	Amendment No. 3 dated as of June 1, 2003, to Lease Agreements, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust Agreement with Philip Morris Capital Corporation as Owner Participant. (Form 10-Q for the quarter ended June 30, 2003, File No. 1-5924 – Exhibit 10(a)).

*10(b)(15)	—	Amendment No. 3 dated as of June 1, 2003, to Lease Agreements, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust Agreement with IBM Credit, LLC as Owner Participant. (Form 10-Q for the quarter ended June 30, 2003, File No. 1-5924 – Exhibit 10(b)).

*10(b)(16)	—	Amendment No. 3 dated as of June 1, 2003, to Lease Agreements, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, under a Trust Agreement with Emerson Finance Co. as Owner Participant. (Form 10-Q for the quarter ended June 30, 2003, File No. 1-5924 – Exhibit 10(c)).

*10(b)(17) — Amendment No. 3 dated as of June 1, 2003, to Tax Indemnity Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Philip Morris Capital Corporation as Owner Participant, beneficiary under a Trust Agreement dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, together as Lessor. (Form 10-Q for the quarter ended June 30, 2003, File No. 1-5924 – Exhibit 10(d)).

K-158



*10(b)(18)	—	Amendment No. 3 dated as of June 1, 2003, to Tax Indemnity Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and IBM Credit, LLC as Owner Participant, beneficiary under a Trust Agreement dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, together as Lessor. (Form 10-Q for the quarter ended June 30, 2003, File No. 1-5924 – Exhibit 10(e)).

*10(b)(19)	—	Amendment No. 3 dated as of June 1, 2003, to Tax Indemnity Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Emerson Finance Co. as Owner Participant, beneficiary under a Trust Agreement dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, together as Lessor. (Form 10-Q for the quarter ended June 30, 2003, File No. 1-5924 – Exhibit 10(f)).

*10(b)(20)	—	Amendment No. 4, dated as of June 1, 2006, to Lease Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Cotrustee, respectively, under a Trust Agreement with Philip Morris Capital Corporation as Owner Participant. (Form 8-K dated June 12, 2006, File No. 1-5924 – Exhibit 10.1).

*10(b)(21)	—	Amendment No. 4, dated as of June 1, 2006, to Lease Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Cotrustee, respectively, under a Trust Agreement with Selco Service Corporation as Owner Participant. (Form 8-K dated June 12, 2006, File No. 1-5924 – Exhibit 10.2).

*10(b)(22)	—	Amendment No. 4, dated as of June 1, 2006, to Lease Agreement, dated as of December 1, 1985, between TEP and San Carlos, jointly and severally, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Cotrustee, respectively, under a Trust Agreement with Emerson Finance LLC as Owner Participant. (Form 8-K dated June 12, 2006, File No. 1-5924 – Exhibit 10.3).

*10(b)(23)	—	Amendment No. 4, dated as of June 1, 2006 to Tax Indemnity Agreement, dated as of December 1, 1985, between TEP and San Carlos, as Lessee, and Philip Morris Capital Corporation as Owner Participant, beneficiary under a Trust Agreement, dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Cotrustee, respectively, together as Lessor. (Form 8-K dated June 12, 2006, File No. 1-5924 – Exhibit 10.4).

*10(b)(24)	—	Amendment No. 4, dated as of June 1, 2006 to Tax Indemnity Agreement , dated as of December 1, 1985, between TEP and San Carlos, as Lessee, and Selco Service Corporation as Owner Participant, beneficiary under a Trust Agreement, dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Cotrustee, respectively, together as Lessor. (Form 8-K dated June 12, 2006, File No. 1-5924 – Exhibit 10.5).

*10(b)(25)	—	Amendment No. 4, dated as of June 1, 2006 to Tax Indemnity Agreement , dated as of December 1, 1985, between TEP and San Carlos, as Lessee, and Emerson Finance LLC as Owner Participant, beneficiary under a Trust Agreement, dated as of December 1, 1985, with Wilmington Trust Company and William J. Wade, as Owner Trustee and Cotrustee, respectively, together as Lessor. (Form 8-K dated June 12, 2006, File No. 1-5924 – Exhibit 10.6).

*~~10(d)~~10(c)(1) — Participation Agreement, dated as of June 30, 1992, among TEP, as Lessee, various parties thereto, as Owner, Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, and LaSalle National Bank, as Indenture Trustee relating to TEP’s lease of Springerville Unit 1. (Form S-1, Registration No. 33-55732 — Exhibit 10(u)).
*~~10(e)~~10(c)(2) — Lease ~~Agreement,~~Agreements, dated as of December 15, 1992, between TEP, as Lessee, and Wilmington Trust Company and William J. Wade, as Owner Trustee and Co-Trustee, respectively, as Lessor. (Form S-1, Registration No. 33-55732 — Exhibit 10(v)).

K-159



*~~10(f)~~10(c)(3)	—	Tax Indemnity Agreements, dated as of December 15, 1992, between the various Owner Participants parties thereto and TEP, as Lessee. (Form S-1, Registration No. 33-55732 — Exhibit 10(w)).

~~+*10(h)~~	—	~~1994 Omnibus Stock and Incentive Plan of UniSource Energy. (Form S-8 dated January 6, 1998, File No. 333-43767).~~

+*~~10(i)~~	—	~~Management and Directors Deferred Compensation Plan of UniSource Energy. (Form S-8 dated January 6, 1998, File No. 333-43769).~~

~~+*10(j)~~	—	~~TEP Supplemental Retirement Account for Classified Employees. (Form S-8 dated May 21, 1998, File No. 333-53309).~~

~~+*10(k)~~	—	~~TEP Triple Investment Plan for Salaried Employees. (Form S-8 dated May 21, 1998, File No. 333-53333).~~

~~+*10(m)~~	—	Notice of Termination of Change in Control Agreement from TEP to Karen G. Kissinger, dated as of March 3, 2005 (including a schedule of other officers who received substantially identical notices). (Form 10-K for the year ended December 31, 2004, File No. 1-5924 – Exhibit 10(q)).

~~+*10(n)~~10(d)	—	Amended and Restated ~~UniSource~~UNS Energy 1994 Outside Director Stock Option Plan of ~~UniSource~~UNS Energy. (Form S-8 dated September 9, 2002, File No. 333-99317).

*~~10(o)~~10(e)	—	Asset Purchase Agreement dated as of October 29, 2002, by and between UniSource Energy and Citizens Communications Company relating to the Purchase of Citizens’ Electric Utility Business in the State of Arizona. (Form 8-K dated October 31, 2002, File No. 1-13739 — Exhibit 99-1).

~~+*10(p)~~	—	~~UniSource~~UNS Energy 2006 Omnibus Stock and Incentive Plan. (Form S-8 dated January 31, 2007, File No. 333-140353).

+*~~10(q)~~10(f)	—	~~Stock Option Agreement between UniSource Energy and Raymond S. Heyman dated as of September 15, 2005 (Form 10-K for the year ended December 31, 2007, File No. 1-13739, Exhibit 10(r)).~~

~~+*10(r)~~	—	~~Management and Directors Deferred Compensation Plan II of UniSource Energy. (Form S-8 dated December 30, 2008, File No. 333-156491).~~

~~+*10(s)~~	—	~~Letter of Employment dated as of December 9, 2008, between UniSource Energy and Paul J. Bonavia. (Form 8-K dated December 15, 2008, File No. 1-13739).~~



~~+*10(t)~~	—	Amended and Restated Officer Change in Control Agreement, dated as of October 9, 2009, between TEP and Michael J. DeConcini (including a schedule of other officers who are covered by substantially identical agreements) (Form 8-K dated October 13, 2009, File No. 1-13739 – Exhibit 10(A)).

~~+*10(u)~~	—	~~Employment Agreement, dated May 4, 2009, between UniSource Energy and Paul J. Bonavia. (Form 10-Q for the quarter ended March 31, 2009, File No. 13739 – Exhibit 4).~~

~~+*10(v)~~	—	~~UniSource~~UNS Energy Corporation 2011 Omnibus Stock and Incentive Plan. (Form 8-K dated May 10, 2011, File 1-13739 – Exhibit 10.1).

10(g) — UNS Energy Officer Change in Control Agreement (including a schedule of officers who are covered by the agreement or substantially identical agreements), between UNS Energy and officers of the company.
*10(h) — Management and Directors Deferred Compensation Plan II of UNS Energy. (Form S-8 dated December 30, 2008, File No. 333-156491).
*10(i) — UNS Energy Corporation Severance Pay Plan, as amended (Form 8-K, dated July 27, 2013, File No. 1-13739 - Exhibit 10(b)).
*10(j) — Severance Agreement between Michael J. DeConcini and Tucson Electric Power Company (Form 8-K, dated July 27, 2013, File No. 1-13739 - Exhibit 10(a)).
12(a) —    Computation of Ratio of Earnings to Fixed Charges – ~~UniSource~~UNS Energy.
12(b) —    Computation of Ratio of Earnings to Fixed Charges – TEP.
21 —    Subsidiaries of the Registrants.
23(a) —
Consent of Independent Registered Public Accounting Firm – ~~UniSource~~UNS Energy.

K-160




23(b)	—	Consent of Independent Registered Public Accounting Firm – TEP.

24(a)	—	Power of Attorney – ~~UniSource~~UNS Energy.

24(b)	—	Power of Attorney – TEP.

31(a)	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act – ~~UniSource~~UNS Energy, by Paul J. Bonavia.

31(b)	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act – ~~UniSource~~UNS Energy, by Kevin P. Larson.

31(c)	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act – TEP, by Paul J. Bonavia.

31(d)	—	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act – TEP, by Kevin P. Larson.

**3232(a)	—	Statements of Corporate Officers (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). - UNS Energy.

#***32(b)	—	Statements of Corporate Officers (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) - TEP.

101	—	The following materials from ~~UniSource~~UNS Energy’s and TEP’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2011,~~2012, formatted in XBRL (Extensible Business Reporting Language):


				(a)		~~UniSource~~UNS Energy’s and TEP’s (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income (iii) Consolidated Statements of Cash Flows, ~~(iii)~~(iv) Consolidated Balance Sheets, ~~(iv)~~(v) Consolidated Statements of Capitalization, ~~(v)~~(vi) Consolidated Statements of Changes in Stockholders’ ~~Equity and Comprehensive Income;~~Equity; and


				(b)		Notes to Consolidated Financial Statements.

#
	~~These exhibits are deemed furnished and not filed pursuant to Rule 406T of Regulation S-T.~~

(*)	Previously filed as indicated and incorporated herein by reference.



(+)	Management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by item 601(b)(10)(iii) of Regulation S-K.



**	Pursuant to Item 601(b)(32)(ii) of Regulation S-K, this certificate is not being “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

~~K-175~~

K-161



Commission File Number	Registrant; State of Incorporation; Address; and Telephone Number	IRS Employer Identification Number

1-13739	~~UNISOURCE~~ UNS ENERGY CORPORATION (An Arizona Corporation) 88 E.East Broadway Boulevard Tucson, AZ 85701 (520) 571-4000	86-0786732

~~1-5924~~
1-5924	TUCSON ELECTRIC POWER COMPANY (An Arizona Corporation) 88 E.East Broadway Boulevard Tucson, AZ 85701 (520) 571-4000	86-0062700



~~UniSource Energy Corporation~~		~~Yes~~ x		No ¨
	UNS Energy Corporation		Yes x		No ¨
	Tucson Electric Power Company		Yes ¨		No x



~~UniSource Energy Corporation~~		~~Yes~~ ¨		No x
	UNS Energy Corporation		Yes ¨		No x
	Tucson Electric Power Company		Yes ¨		No x



~~UniSource~~UNS Energy Corporation	Yes x		~~Yes~~ No x¨
		No ¨
Tucson Electric Power Company	Yes x		~~Yes~~ x	No ¨

x

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



~~UniSource~~UNS Energy Corporation	Large Accelerated Filer	~~Large Accelerated Filer~~ x	Accelerated Filer¨	~~Non-accelerated filer~~ ¨
	Non-accelerated Filer	¨	Smaller Reporting Company¨	¨



Tucson Electric Power Company	Large Accelerated Filer	~~Large Accelerated Filer~~ ¨	Accelerated Filer¨	~~Non-accelerated filer~~ x¨
	Non-accelerated Filer	x	Smaller Reporting Company¨		¨



~~UniSource~~UNS Energy Corporation	Yes ¨	~~Yes~~ No ¨x	No x
Tucson Electric Power Company	Yes ¨	~~Yes~~ No ¨x	No x


~~Definitions~~		iv
~~— PART I —~~


Definitions	v
PART I
Item 1. – Business		1	K-1
Overview of Consolidated Business		1	K-1
~~TEP~~Tucson Electric Power Company		2	K-3
~~Service Area and Customers~~UNS Electric		2	K-16
~~Generating and Other Resources~~		4
~~Fuel Supply~~		7
~~Transmission Access~~		8
~~Rates and Regulation~~		9
~~TEP’s Utility Operating Statistics~~		11
~~Environmental Matters~~		12
UNS Gas		15	K-18
~~Service Territory and Customers~~Employees		15	K-20
~~Gas Supply and Transmission~~		15
~~Rates and Regulation~~		15
~~Environmental Matters~~		17
~~UNS Electric~~		17
~~Service Territory and Customers~~		17
~~Power Supply and Transmission~~		17
~~Rates and Regulation~~		18
~~Environmental Matters~~		19
~~Other Non-Reportable Segments~~		19
~~Millennium~~		19
~~Employees~~		19
Executive Officers of the Registrants		20	K-20
SEC Reports Available on ~~UniSource~~UNS Energy’s Website		21	K-21

Item 1A. – Risk Factors		21	K-22
Item 1B. – Unresolved Staff Comments		27	K-27
Item 2. – Properties		27	K-27
~~TEP Properties~~		27
~~UES Properties~~		28
Item 3. – Legal Proceedings		28	K-28
Item 4. – Mine Safety Disclosures	K-29
	29
PART II
~~— PART II —~~

Item 5. – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Common Equity	K-30
	29

Item 6. – Selected ~~Consolidated~~ Financial Data	K-32
	31
~~UniSource Energy~~		31
~~TEP~~		32

Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations		33	K-34
~~UniSource~~UNS Energy Consolidated		33	K-34
~~Outlook and Strategies~~		33
~~Results of Operations~~		34
~~Liquidity and Capital Resources~~		36
Tucson Electric Power Company		41	K-41
~~Results of Operations~~UNS Electric		41	K-55
~~Factors Affecting Results of Operations~~		48
~~Liquidity and Capital Resources~~		51


~~— PART III —~~

Item 10. – Directors, Executive Officers and Corporate Governance of the Registrants		~~155~~	K-141

Item 11. – Executive Compensation		~~157~~	K-143

Item 12. – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		~~157~~	K-143

Item 13. – Certain Relationships and Related Transactions and Director Independence		~~158~~	K-144

Item 14. – Principal Accountant Fees and Services	K-144
	~~158~~
PART IV
~~— PART IV —~~

Item 15. – Exhibits and Financial Statement ~~Schedules~~Schedule		~~158~~	K-146
Signatures		~~159~~	K-147
Exhibit Index		~~162~~	K-150



~~1992 Mortgage~~		~~TEP’s Indenture of Mortgage and Deed of Trust, dated as of December 1, 1992, to the Bank of New York Mellon, successor trustee, as supplemented~~
~~1999 Settlement Agreement~~		~~TEP’s Settlement Agreement approved by the ACC in November 1999 that provided for electric retail competition and transition asset recovery~~
~~2008 TEP Rate Order~~		~~A rate order issued by the ACC resulting in a new retail rate structure for TEP, effective December 1, 2008~~
ACC		Arizona Corporation Commission
~~AMT~~		~~Alternative Minimum Tax~~
~~AOCI~~		~~Accumulated Other Comprehensive Income~~
APS		Arizona Public Service Company
~~ARO~~		~~Asset Retirement Obligation~~
BART		Best Available Retrofit Technology
Base O&M		A non-GAAP financial measure that represents the fundamental level of operating and maintenance expense related to our business
Base Rates		The portion of TEP’s and UNS Electric’s Retail Rates attributed to generation, transmission, distribution costs, and customer charge; and ~~UNSGas’~~UNS Gas’ delivery costs and customer ~~charge~~
~~BMGS~~		~~Black Mountain Generating Station~~charge. Base Rates exclude costs that are passed through to customers for fuel and purchased energy costs
Btu		British thermal unit(s)
~~CCRs~~		~~Coal combustion residuals~~
~~Capacity~~		~~The ability to produce power; the most power a unit can produce or the maximum that can be taken under a contract; measured in MWs~~
~~CO2~~		~~Carbon dioxide~~
~~Common Stock~~		~~UniSource Energy’s common stock, without par value~~
~~Company or UniSource Energy~~		~~UniSource Energy Corporation~~
Cooling Degree Days		An index used to measure the impact of weather on energy usage calculated by subtracting 75 from the average of the high and low daily temperatures
DSM		Demand ~~side management~~Side Management
~~EE Standards~~ECA		~~Electric and Gas Energy Efficiency Standards~~Environmental Compliance Adjustor
~~Emission Allowance(s)~~Entegra		~~An allowance issued by the Environmental Protection Agency which permits emission~~a subsidiary of ~~one ton of sulfur dioxide or one ton of nitrogenoxide; allowances can be bought and sold~~
~~Energy~~		~~The amount of power produced over a given period of time; measured in MWh~~
~~EPA~~		~~The Environmental Protection Agency~~
~~EL Paso~~		~~El Paso Electric Company~~
~~EPNG~~		~~El Paso Natural Gas Company~~
~~ESP~~		~~Energy Service Provider~~
~~Express Line~~		~~A dedicated 345-kV transmission line from Springerville Unit 2 to TEP’s retail service area~~ Entegra Power Group LLC
FERC		Federal Energy Regulatory Commission
~~Fixed CTC~~FVRB		~~Competition Transition Charge that was included in TEP’s retail rate for~~Fair Value Rate Base
Fortis		FortisUS, Inc., a Delaware corporation whose ultimate parent company is Fortis Parent
Fortis Parent		Fortis, Inc., a corporation incorporated under the ~~purpose~~Corporations Act of ~~recovering TEP’s TRA; approximately $58 million is being credited to customers through the PPFAC~~ Newfoundland and Labrador, Canada
Four Corners		Four Corners Generating Station
~~GAAP~~GBtu		~~Generally Accepted Accounting Principles~~
~~Gas EE Standards~~		~~Gas Utility Energy Efficiency Standards~~
~~GHG~~		~~Greenhouse gases~~Billion British thermal units
GWh		Gigawatt-hour(s)
~~Haddington~~Gila River Unit 3		~~Haddington Energy Partners II, LP, a limited partnership that funds energy-related investments~~ Unit 3 of the Gila River Generating Station
Heating Degree Days		An index used to measure the impact of weather on energy usage calculated by subtracting the average of the high and low daily temperatures from 65


~~IDBs~~ kV		~~Industrial development revenue or pollution control revenue bonds~~ Kilo-volt
~~IRS~~ kWh		~~Internal Revenue Service~~ Kilowatt-hour(s)
~~kWh~~ LFCR		~~Kilowatt-hour(s)~~ Lost Fixed Cost Recovery Mechanism
kV Millennium		~~Kilovolt(s)~~
~~LIBOR~~		~~London Interbank Offered Rate~~
~~Long-Term Wholesale Margin Revenues~~		~~A non-GAAP measure that demonstrates the underlying profitability of TEP’s long-term wholesale sales contracts~~
~~Luna~~		~~Luna Energy Facility~~
~~Mark-to-Market Adjustments~~		Forward energy sales and purchase contracts that are considered to be derivatives and are adjusted monthly by recording unrealized gains and losses to reflect the market prices at the end of each month
~~Millennium~~		Millennium Energy Holdings, Inc., a wholly-owned subsidiary of ~~UniSource~~UNS Energy Corporation
MMBtu		Million British ~~Thermal Units~~ thermal units
~~Mortgage Bonds~~ MW		~~Bonds issued under the 1992 Mortgage~~ Megawatt(s)
MW MWh		~~Megawatt(s)~~ Megawatt-hour(s)
~~MWh~~ Navajo		~~Megawatt-hour(s)~~ Navajo Generating Station
~~Navajo~~ NTUA		~~Navajo Generating Station~~
~~NERC~~		~~North American Electric Reliability Corporation~~
~~NOx~~		~~Nitrogen oxide~~
~~NTUA~~		Navajo Tribal Utility Authority
~~O&M~~ OATT		~~Operations and Maintenance Expense~~ Open Access Transmission Tariff
~~PGA~~ OCRB		Original Cost Rate Base
PGA		Purchased Gas ~~Adjuster,~~Adjustor, a ~~retail rate~~Retail Rate mechanism designed to recover the cost of gas purchased for retail gas customers
~~Pima Authority~~ PNM		~~The Industrial Development Authority of the County of Pima~~
~~PNM~~		Public Service Company of New Mexico
PPA		Power Purchase Agreement
PPFAC		Purchased Power and Fuel Adjustment Clause
PV REC		~~Photovoltaic~~ Renewable Energy Credit
RES		Renewable Energy Standard ~~and Tariff~~
~~Reimbursement Agreement~~ Regional Haze Rules		~~Reimbursement Agreement dated as of December 14, 2010 among TEP as borrower~~Rules promulgated by the EPA to improve visibility at national parks and ~~a group of financial institutions~~ wilderness areas



Retail ~~Margin Revenues~~ Rates		~~A non-GAAP financial measure that demonstrates the underlying revenue trend and performance of our core utility businesses.~~
~~Retail Rates~~		Rates designed to allow a regulated utility an opportunity to recover its reasonable operating and capital costs and earn a return on its utility plant in service
~~Rules~~ San Juan		~~Retail Electric Competition Rules~~
~~Sabinas~~		~~Carboelectrica Sabinas, S. de R.L. de C.V., a Mexican limited liability company; prior to June 2009, Millennium owned 50% of Sabinas~~
~~San Carlos~~		~~San Carlos Resources Inc., a wholly-owned subsidiary of TEP~~
~~San Juan~~		San Juan Generating Station
~~SERP~~ SCR		~~Supplemental Executive Retirement Plan~~ Selective Catalytic Reduction
~~SCR~~ SJCC		~~Selective catalytic reduction~~ San Juan Coal Company
~~SES~~ SNCR		~~Southwest Energy Solutions, a wholly-owned subsidiary of Millennium~~ Selective Non-Catalytic Reduction
~~SO2~~ Springerville		~~Sulfur dioxide~~
~~Springerville~~		Springerville Generating Station
Springerville Coal Handling Facilities Leases		~~Leveraged lease arrangements relating to the coal~~Coal handling facilities ~~serving~~at Springerville used in common by all four Springerville units
Springerville Common Facilities		Facilities at Springerville used in common ~~with~~by all four Springerville ~~Unit 1 and Springerville Unit 2~~ units
Springerville Common Facilities Leases		Leveraged lease arrangements relating to an undivided one-half interest in certain Springerville Common ~~Facilities.~~ Facilities
Springerville Unit 1		Unit 1 of the Springerville Generating Station
Springerville Unit 1 Leases		Leveraged lease arrangement relating to Springerville Unit 1 and an undivided one-half interest in certain Springerville Common Facilities


Springerville Unit 2		Unit 2 of the Springerville Generating Station
Springerville Unit 3		Unit 3 of the Springerville Generating Station
Springerville Unit 4		Unit 4 of the Springerville Generating Station
SRP		Salt River Project Agricultural Improvement and Power District
Sundt		H. Wilson Sundt Generating Station ~~(formerly known as the Irvington Generating Station)~~
Sundt ~~Lease~~ Unit 4		~~The leveraged lease arrangement relating to Sundt Unit 4~~
~~Sundt Unit 4~~		Unit 4 of the H. Wilson Sundt Generating Station
~~SWG~~ TCA		~~Southwest Gas Corporation~~ Transmission Cost Adjustor
TEP		Tucson Electric Power Company, the principal subsidiary of ~~UniSource~~UNS Energy Corporation
~~TEP Credit Agreement~~ Therm		~~Second Amended and Restated Credit Agreement between TEP and a syndicate of Banks, dated as of November 9, 2010 (as amended)~~
~~TEP Letter of Credit Facility~~		~~Letter of credit facility under the TEP Credit Agreement~~
~~TEP Revolving Credit Facility~~		~~Revolving credit facility under the TEP Credit Agreement~~
~~Therm~~		A unit of heating value equivalent to 100,000 ~~British thermal units (Btu)~~ Btus
~~TRA~~ Tri-State		~~Transition Recovery Asset, a $450 million regulatory asset established in TEP’s 1999 Settlement Agreement that was fully recovered in May 2008~~
~~Transwestern~~		~~Transwestern Pipeline Company~~
~~Tri-State~~		Tri-State Generation and Transmission Association, Inc.
UED		UniSource Energy Development Company, a wholly-owned subsidiary of ~~UniSource~~UNS Energy ~~which engages in developing generation resources and other project development services and related activities~~ Corporation
UES		UniSource Energy Services, Inc., ana wholly-owned subsidiary of UNS Energy, and intermediate holding company established to own the operating companies ~~(UNS Gas~~UNS Electric and UNS ~~Electric) which acquired the Citizens Arizona gas and electric utility assets in 2003~~ Gas
~~UniSource Credit Agreement~~ UNS Electric		~~Second Amended and Restated Credit Agreement between UniSource Energy and a syndicate of banks, dated as of November 9, 2010 (as amended)~~
~~UniSource Energy~~		~~UniSource Energy Corporation~~
~~UNS Electric~~		UNS Electric, Inc., a wholly-owned subsidiary of UES
UNS ~~Electric Term Loan~~ Energy		~~Four-year $30 million term loan agreement dated~~UNS Energy Corporation (formerly known as ~~of August 10, 2011.~~ UniSource Energy Corporation)
UNS Gas		UNS Gas, Inc., a wholly-owned subsidiary of UES
~~UNS Gas/UNS Electric Revolver~~		Revolving credit facility under the Second Amended and Restated Credit Agreement among UNS Gas and UNS Electric as borrowers, and UES as guarantor, and a syndicate of banks, dated as of November 9, 2010 (as amended)
~~Valencia~~		~~Valencia power plant owned by UNS Electric~~
~~VEBA~~		~~Voluntary Employee Beneficiary Association~~
~~WAPA~~		~~Western Area Power Administration~~

		September 30,			September 30,			September 30,
	2011			2010			2009
	-Millions of Dollars-
TEP	$	85		$	108		$	91
UNS Gas		10			9			7
UNS Electric		18			15			11
Other⁽¹⁾		(3	)		(19	)		(3	)

Consolidated Net Income	$	110		$	113		$	106



	Unit		Date	Resource	Capacity	Operating	TEP’s Share
Generating Source	No.	Location	In Service	Type	MW	Agent	%	MW
Springerville Station⁽¹⁾	1	Springerville, AZ	1985	Coal	387	TEP	100.0	387
Springerville Station	2	Springerville, AZ	1990	Coal	390	TEP	100.0	390
San Juan Station	1	Farmington, NM	1976	Coal	340	PNM	50.0	170
San Juan Station	2	Farmington, NM	1973	Coal	340	PNM	50.0	170
Navajo Station	1	Page, AZ	1974	Coal	750	SRP	7.5	56
Navajo Station	2	Page, AZ	1975	Coal	750	SRP	7.5	56
Navajo Station	3	Page, AZ	1976	Coal	750	SRP	7.5	56
Four Corners Station	4	Farmington, NM	1969	Coal	784	APS	7.0	55
Four Corners Station	5	Farmington, NM	1970	Coal	784	APS	7.0	55
Luna Generating Station	1	Deming, NM	2006	Gas	555	PNM	33.3	185
Sundt Station	1	Tucson, AZ	1958	Gas/Oil	81	TEP	100.0	81
Sundt Station	2	Tucson, AZ	1960	Gas/Oil	81	TEP	100.0	81
Sundt Station	3	Tucson, AZ	1962	Gas/Oil	104	TEP	100.0	104
Sundt Station	4	Tucson, AZ	1967	Coal/Gas	156	TEP	100.0	156
Sundt Internal Combustion Turbines		Tucson, AZ	1972-1973	Gas/Oil	50	TEP	100.0	50
DeMoss Petrie		Tucson, AZ	1972	Gas/Oil	75	TEP	100.0	75
North Loop		Tucson, AZ	2001	Gas	95	TEP	100.0	95
Springerville Solar Station		Springerville, AZ	2002-2010	Solar	6	TEP	100.0	6
Tucson Solar Projects		Tucson, AZ	2010-2012	Solar	12	TEP	100.0	12
Total TEP Capacity ⁽²⁾								2,240


⁽²⁾	Excludes 683 MW of additional resources, which consist of certain capacity purchases and interruptible retail load. At December 31, 2013, total owned capacity was 1,853 MW and leased capacity was 387 MW.



Peak Demand	2013		2012		2011		2010		2009
	MW
Retail Customers	2,230		2,290		2,334		2,333		2,354
Firm Sales to Other Utilities	484		286		322		340		385
Coincident Peak Demand (A)	2,714		2,576		2,656		2,673		2,739
Total Generating Resources	2,240		2,267		2,262		2,245		2,229
Other Resources ⁽¹⁾	775		683		1,009		799		781
Total TEP Resources (B)	3,015		2,950		3,271		3,044		3,010
Total Margin (B) – (A)	301		374		615		371		271
Reserve Margin (% of Coincident Peak Demand)	11	%	15	%	23	%	14	%	10	%


⁽¹⁾	Other Resources include firm power purchases and interruptible retail and wholesale loads. ~~Additional firm power purchases were made in 2009 and 2010 to displace more expensive owned gas generation.~~



	Average Cost per kWh (cents per kWh)			Percentage of Total kWh Resources
	2013	2012	2011	2013		2012		2011
Coal	2.66	2.54	2.56	75	%	72	%	73	%
Gas	4.57	4.54	5.99	8	%	11	%	7	%
Purchased Power	4.83	3.44	3.94	17	%	17	%	20	%
All Sources	3.54	3.19	3.30	100	%	100	%	100	%



Station	Coal Supplier	2013 Coal Consumption (tons in 000’s)	Contract Expiration	Avg. Sulfur Content	Coal Obtained From⁽¹⁾
Springerville	Peabody Coalsales	3,172	2020	1.0%	Lee Ranch Coal Co.
Four Corners⁽²⁾	BHP Billiton	381	2016	0.8%	Navajo Indian Tribe
San Juan	San Juan Coal Co.	1,306	2017	0.8%	Federal and State Agencies
Navajo	Peabody Coalsales	560	2019	0.6%	Navajo and Hopi Indian Tribes

~~(A)~~
⁽¹⁾	Substantially all of the suppliers’ mining leases extend at least as long as coal is being mined in economic quantities.



Generating Facility	Estimated Annual O&M Expense		Estimated Capital Expenditures		Regulation (Compliance Date)	Upgrades
	Millions of Dollars
Springerville Units 1 & 2⁽¹⁾	$	3	$	5	MATS (2015)	Mercury Controls
San Juan Unit 1	1 - 6		35 - 200		Regional Haze/BART (2016)	SNCRs or SCRs
Navajo Units 1-3	3		86		MATS (2015) Regional Haze/BART (2030)	Mercury Controls; SCRs; Baghouses
Four Corners Units 4 & 5	3		36		MATS (2015) Regional Haze/BART (2018)	Mercury Controls; SCRs
Sundt Unit 4	5 - 6		12		Regional Haze (2017)	SNCR


⁽¹⁾	TEP will own 49.5% of Springerville Unit 1 upon close of the lease option purchases by early 2015; after the completion of such purchases, 50.5% of environmental costs attributed to Springerville Unit 1 will be reimbursed by third party owners.


~~Test year – 12 months ended Dec. 31, 2010~~		~~Initial Request by UNS Gas~~
~~Original cost rate base~~		~~$184 million~~
~~Revenue deficiency~~		~~$5.6 million~~
~~Total rate increase (over test year revenues)~~		~~3.8%~~
~~Cost of equity~~		~~10.5%~~
~~Actual capital structure~~		~~51% equity / 49% debt~~
~~Weighted average cost of capital~~		~~8.7%~~



Name	Age	Position(s) Held	Executive Officer Since
Paul J. Bonavia	62	Chairman and Chief Executive Officer	2009
David G. Hutchens	47	President and Chief Operating Officer	2007
Kevin P. Larson	57	Senior Vice President and Chief Financial Officer⁽¹⁾	2000
Philip J. Dion III	45	Senior Vice President, Public Policy and Customer Solutions	2008
Kentton C. Grant	55	Vice President, Finance and Rates⁽²⁾	2007
Todd C. Hixon	47	Vice President and General Counsel	2011
Karen G. Kissinger	59	Vice President and Chief Compliance Officer	1991
Mark C. Mansfield	58	Vice President, Energy Resources	2012
Frank P. Marino	49	Vice President and Controller	2013
Thomas A. McKenna	65	Vice President, Energy Delivery	2007
Catherine E. Ries	54	Vice President, Human Resources and Information Technology	2007
Herlinda H. Kennedy	52	Corporate Secretary	2006



*Paul J. Bonavia*		Mr. Bonavia has served as Chairman and Chief Executive Officer of ~~UniSource~~UNS Energy and TEP since January ~~2009; he~~2009. He also served as President from January 2009 to December 2011. Prior to joining ~~UniSource~~UNS Energy, Mr. Bonavia served as President of the Utilities Group of Xcel Energy. Mr. Bonavia previously served as President of Xcel Energy’s Commercial Enterprises business unit and President of the company’s Energy Markets unit.

*David G. Hutchens*		Mr. Hutchens has served as President and Chief Operating Officer of ~~UniSource~~UNS Energy and TEP since August 2013. In December ~~2011.~~2011 Mr. Hutchens was named President of UNS Energy and TEP. In March 2011, Mr. Hutchens was named Executive Vice President of ~~UniSource~~UNS Energy and TEP. In May 2009, Mr. Hutchens was named Vice President of Energy Efficiency and Resource Planning. In January 2007, Mr. Hutchens was elected Vice President of Wholesale Energy at ~~UniSource~~UNS Energy and TEP. Mr. Hutchens joined TEP in 1995.

*~~Michael J. DeConcini~~*		Mr. DeConcini has served as Senior Vice President, Operations of UniSource Energy since May 2010 and Senior Vice President and Chief Operating Officer of TEP from May 2009 to December 2011 when his title at TEP was changed to Senior Vice President, Operations. Mr. DeConcini joined TEP in 1988 and was elected Senior Vice President and Chief Operating Officer of the Energy Resources business unit of TEP, effective January 1, 2003. In August 2006, he was named Senior Vice President and Chief Operating Officer, Transmission and Distribution.

*Kevin P. Larson*		Mr. Larson has served as Senior Vice President and Chief Financial Officer of ~~UniSource~~UNS Energy and TEP since September 2005. Mr. Larson is also Treasurer of ~~UniSource~~UNS Energy. Mr. Larson joined TEP in 1985 and thereafter held various positions in its finance department and investment subsidiaries. He was elected Treasurer in August 1994 and Vice President in March 1997. In October 2000, he was elected Vice President and Chief Financial Officer.



*Philip J. Dion III*		Mr. Dion has served as Senior Vice President, of Public Policy and Customer Solutions of ~~UniSource~~UNS Energy and TEP since August 2013. Mr. Dion was named Vice President, Public Policy in April 2010. Mr. Dion joined ~~UniSource~~UNS Energy in February 2008 as Vice President of Legal and Environmental Services. Prior to joining ~~UniSource~~UNS Energy, Mr. Dion was chief of staff and chief legal advisor to Commissioner Marc Spitzer of the FERC. Mr. Dion previously worked in various roles at the ACC, including as an administrative law judge and as an advisor to Mr. Spitzer, prior to his appointment to the FERC.



*Kentton C. Grant*		Mr. Grant has served as Vice President of Finance and Rates of ~~UniSource~~UNS Energy and TEP since January 2007. Mr. Grant also serves as Treasurer of TEP. Mr. Grant joined TEP in 1995.

*Todd C. Hixon*		Mr. Hixon has served as Vice President and General Counsel of ~~UniSource~~UNS Energy and TEP since May 2011. Mr. Hixon joined TEP’s legal department in 1998 and served in a variety of capacities, most recently serving as Associate General Counsel.

*~~Arie Hoekstra~~*		Mr. Hoekstra has served as Vice President of Generation of UniSource Energy and TEP since January 2007. Mr. Hoekstra joined TEP in 1979 and thereafter served in various positions at TEP’s generating stations in Tucson and Springerville.

*Karen G. Kissinger*		Ms. Kissinger has served as Vice President ~~Controller~~ and ~~Principal Accounting~~Chief Compliance Officer of ~~UniSource~~UNS Energy and TEP since ~~January 1998 and has~~August 2013. Ms. Kissinger served as Vice President, Controller, and Chief Compliance Officer ~~since 2003.~~from 2001 to 2013. Ms. Kissinger joined TEP as Vice President and Controller in January 1991.
Mark C. Mansfield	Mr. Mansfield has served as Vice President, Energy Resources since 2012. He joined the company in 2008, most recently serving as Senior Director of Generation. Prior to joining TEP, Mr. Mansfield held various leadership positions at PacifiCorp Energy from 1992-2008.
*Frank P. Marino*	Mr. Marino has served as Vice President and Controller of UNS Energy and TEP since August 2013. Mr. Marino joined UNS Energy as Assistant Controller in January 2013. Prior to joining UNS Energy, he served various roles at the AES Corporation, a global power company. In 2012 he served as AES' Vice President for Business Demand and Outsourcing Management, and from 2007-2011 he served as Chief Financial Officer for two different business units.
Thomas A. McKenna		Mr. McKenna has served as Vice President, ofEnergy Delivery since August 2013. Mr. McKenna was named Vice President, Engineering ~~of UniSource Energy and TEP since~~in January 2007. Mr. McKenna joined Nations Energy Corporation (a then wholly-owned subsidiary of Millennium) in 1998.

*Catherine E. Ries*		Ms. Ries has served as Vice President, Human Resources and Information Technology, since May 2013. Ms. Ries joined UNS Energy and TEP as Vice President of Human Resources ~~of UniSource Energy and TEP since~~in June 2007. Prior to joining ~~UniSource~~UNS Energy, Ms. Ries worked for Clopay Building Products, a division of Griffon Corporation, from 2000 to 2007, and held the position of Vice President of Human Resources.

*Herlinda H. Kennedy*		Ms. Kennedy has served as Corporate Secretary of ~~UniSource~~UNS Energy and TEP since September 2006. Ms. Kennedy joined TEP in 1980 and was named assistant Corporate Secretary in 1999.

	~~September 30,~~	~~September 30,~~
~~Leased Asset~~	~~Expiration~~	~~Purchase Option~~
~~Springerville Unit 1~~	~~2015~~	~~Fair market value purchase option of $159 million~~
~~Springerville Coal Handling Facilities~~	~~2015~~	~~Fixed price purchase option of $120 million~~

		000000		000000		000000		000000		000000		000000		000000		000000
UniSource Energy’s Contractual Obligations - Millions of Dollars -
Payment Due in Years Ending December 31,	2012		2013		2014		2015		2016		2017 and after		Other		Total
Long Term Debt
Principal^{(1) (9)}	$	—	$	—	$	37	$	130	$	235	$	1,115	$	—	$	1,517
Interest⁽²⁾		73		73		73		73		67		728		—		1,087
Capital Lease Obligations⁽³⁾		118		122		195		23		18		61		—		537
Operating Leases		2		2		2		1		1		10		—		18
Purchase Obligations:
Fuel⁽⁴⁾		107		71		68		50		47		96		—		439
Purchased Power		83		61		48		16		16		227		—		451
Transmission		7		5		5		4		4		23		—		48
Other Long-Term Liabilities⁽⁵⁾:
Pension & Other Post Retirement Obligations⁽⁶⁾		28		5		6		6		6		34		—		85
Acquisition of Springerville Coal Handling and Common Facilities⁽⁷⁾		—		—		—		120		—		106		—		226
Solar Equipment⁽⁸⁾		12		12		—		—		—		—		—		24
Unrecognized Tax Benefits		—		—		—		—		—		—		29		29

Total Contractual Cash Obligations	$	430	$	351	$	434	$	423	$	394	$	2,400	$	29	$	4,461

		September 30,
Average Market Price for Around-the-Clock Energy	$/MWh
2011	$	30
2010		34
2009	$	30

		September 30,
Average Market Price for Natural Gas	$/MMBtu
2011	$	3.89
2010		4.18
2009	$	3.34

~~Registrant~~

Registrant

Title of Each Class

Name of Each Exchange
on Which Registered

Tucson Electric Power Company

Common Stock, without par value