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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission
    
    Registrant; State of Incorporation;
    
    IRS EmployerFile Number
    
    Address; and Telephone Number
    
    Identification Number1-13739
    
    UNISOURCE ENERGY CORPORATION
    
    86-0786732(An Arizona Corporation)One South Church Avenue, Suite 100Tucson, AZ  85701(520) 571-40001-5924
    
    TUCSON ELECTRIC POWER COMPANY
    
    86-0062700(An Arizona Corporation)One South Church Avenue, Suite 100Tucson, AZ  85701(520) 571-4000
  UniSource Energy Corporation
    
    Yes þ
    
    No oTucson Electric Power Company (1)
    
    Yes o
    
    No þ
 (1)
    
    Tucson Electric Power Company is not required to file reports under the Exchange Act. However,
Tucson Electric Power Company has filed all Exchange Act reports for the preceding 12 months.  UniSource Energy Corporation
    
    Yes o
    
    No oTucson Electric Power Company
    
    Yes o
    
    No o
  UniSource Energy Corporation
    
    Large Accelerated Filer þ
    
    Accelerated Filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company oTucson Electric Power Company
    
    Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated filer þ
    
    Smaller Reporting Company o
  UniSource Energy Corporation
    
    Yes o
    
    No þTucson Electric Power Company
    
    Yes o
    
    No þ




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Table of Contents
 Definitions
    
    iv PART I Reports of Independent Registered Public Accounting Firm
    
    
    1Item 1.   Financial Statements
    
    
    3UniSource Energy CorporationComparative Condensed Consolidated Statements of Income
    
    
    3Comparative Condensed Consolidated Statements of Cash Flows
    
    
    4Comparative Condensed Consolidated Balance Sheets
    
    
    5Condensed Consolidated Statement of Changes in Stockholders Equity and
Comprehensive Income
    
    
    7Tucson Electric Power CompanyComparative Condensed Consolidated Statements of Income (Loss)
    
    
    8Comparative Condensed Consolidated Statements of Cash Flows
    
    
    9Comparative Condensed Consolidated Balance Sheets
    
    
    10Condensed Consolidated Statement of Changes in Stockholders Equity and
Comprehensive Income
    
    
    12Notes to Condensed Consolidated Financial Statements  Unaudited
    
    
    13Note 1. Nature of Operations and Basis of Accounting Presentation
    
    
    13Note 2. Regulatory Matters
    
    
    13Note 3. Business Segments
    
    
    16Note 4. Debt, Credit Facilities and Capital Lease Obligations
    
    
    17Note 5. Income Taxes
    
    
    18Note 6. Commitments and Contingencies
    
    
    19Note 7. Fair Value of Financial Instruments Not Carried At Fair Value
    
    
    22Note 8. Employee Benefits Plans
    
    
    23Note 9. Share-Based Compensation Plans
    
    
    24Note 10. Fair Value Measurements
    
    
    24Note 11. UniSource Energy Earnings Per Share (EPS)
    
    
    28Note 12. Stockholders Equity
    
    
    28Note 13. Sale of Millenniums Investment in Nations Energy Corporation
    
    
    29Note 14. Transmission Assets Depreciation
    
    
    29Note 15. Recently Issued Accounting Pronouncements
    
    
    29Note 16. Supplemental Cash Flow Information
    
    
    30Note 17. Accounting for Derivative Instruments, Trading Activities and Hedging Activities
    
    
    32Note 18. Review by Independent Registered Public Accounting Firm
    
    
    35Item 2.   Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36UniSource Energy Consolidated
    
    
    36Overview of Consolidated Business
    
    
    36Outlook and Strategies
    
    
    36Results of Operations
    
    
    37Contribution by Business Segment
    
    
    38Liquidity and Capital Resources
    
    
    38Tucson Electric Power Company
    
    
    42Results of Operations
    
    
    42Factors Affecting Results of Operations
    
    
    46Liquidity and Capital Resources
    
    
    49UNS Gas
    
    
    53Results of Operations
    
    
    53Factors Affecting Results of Operations
    
    
    54Liquidity and Capital Resources
    
    
    56UNS Electric
    
    
    57Results of Operations
    
    
    57Factors Affecting Results of Operations
    
    
    59Liquidity and Capital Resources
    
    
    60
  ii




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Other Non-Reportable Business Segments
    
    
    62Results of Operations
    
    
    62Factors Affecting Results of Operations
    
    
    62Critical Accounting Estimates
    
    
    63Recently
Issued Accounting Pronouncements
    
    
    63Safe Harbor for Forward-Looking Statements
    
    
    63Item 3.   Quantitative and Qualitative Disclosures about Market Risk
    
    
    64Item 4.   Controls and Procedures
    
    
    66PART II  OTHER INFORMATIONItem 1.   Legal Proceedings
    
    
    67Item 1A.   Risk Factors
    
    
    67Item 2.   Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    67Item 5.   Other Information
    
    
    68Ratio of Earnings to Fixed Charges
    
    
    68Item 6. Exhibits
    
    
    68Signatures
    
    
    69Exhibit Index
    
    
    70Exhibit 12(a)Exhibit 12(b)Exhibit 15Exhibit 31(a)Exhibit 31(b)Exhibit 31(c)Exhibit 31(d)Exhibit 32
   iii




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DEFINITIONS
  1999 Settlement
Agreement
    
    TEPs 1999 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.APS
    
    Arizona Public Service Company.BMGS
    
    Black Mountain Generating Station owned by UED.Btu
    
    British thermal unit(s).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.Common Stock
    
    UniSource Energys common stock, without par value.Company
    
    UniSource Energy Corporation.DSM
    
    Demand side management.Emission Allowance(s)
    
    An allowance issued by the Environmental Protection Agency which
permits emission of one ton of sulfur dioxide or one ton of nitrogen
oxide. These allowances can be bought and sold.Energy
    
    The amount of power produced over a given period of time measured
in MWh.EPA
    
    Environmental Protection Agency.FERC
    
    Federal Energy Regulatory Commission.Four Corners
    
    Four Corners Generating Station.GBtu
    
    Billion British Thermal Units.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.IRS
    
    Internal Revenue Service.kWh
    
    Kilowatt-hour(s).LIBOR
    
    London Interbank Offered Rate.Luna
    
    Luna Energy Facility.Millennium
    
    Millennium Energy Holdings, Inc., a wholly-owned subsidiary of
UniSource Energy.MMBtu
    
    Million British Thermal Units.MW
    
    Megawatt(s).MWh
    
    Megawatt-hour(s).Navajo
    
    Navajo Generating Station.O&M
    
    Operations and Maintenance Expense.PGA
    
    Purchased Gas Adjuster, a retail rate mechanism designed to recover
the cost of gas purchased for retail gas customers.PPFAC
    
    Purchased Power and Fuel Adjustment Clause.REST
    
    Renewable Energy Standard and Tariff.Salt River Project
    
    A public power utility serving more than 900,000 customers in Phoenix, Arizona.San Juan
    
    San Juan Generating Station.Springerville
    
    Springerville Generating Station.Springerville Common
Facilities
    
    Facilities at Springerville used in common with Springerville Unit 1 and
Springerville Unit 2.Springerville Common
Facilities Leases
    
    Leveraged lease arrangements relating to an undivided one-half
interest in certain Springerville Common 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.
  iv




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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.Sundt Unit 4
    
    Unit 4 of the H. Wilson Sundt Generating Station.TEP
    
    Tucson Electric Power Company, the principal subsidiary of UniSource
Energy.TEP Credit Agreement
    
    Amended and Restated Credit Agreement between TEP and a syndicate of
banks, dated as of August 11, 2006.TEP Revolving Credit Facility
    
    Revolving credit facility under the TEP Credit Agreement.TEP Term Loan
    
    $30 million term loan
agreement dated as of March 1, 2010.Therm
    
    A unit of heating value equivalent to 100,000 British thermal units (Btu).TOU
    
    Time of use.TRA
    
    Transition Recovery Asset, a $450 million regulatory asset established in TEPs
1999 Settlement Agreement that was fully recovered in 2008.Tri-State
    
    Tri-State Generation and Transmission Association.UED
    
    UniSource Energy Development Company, a wholly-owned subsidiary
of UniSource Energy, which engages in developing generation
resources and other project development services and related
activities.UED Credit Agreement
    
    Credit agreement between UED and a syndicate of banks, dated as of March 26,
2009, guaranteed by UniSource Energy.UES
    
    UniSource Energy Services, Inc., an intermediate holding company
established to own the operating companies (UNS Gas and UNS
Electric).UniSource Credit Agreement
    
    Amended and Restated Credit Agreement between UniSource Energy and a
syndicate of banks, dated as of August 11, 2006.UniSource Energy
    
    UniSource Energy Corporation.UNS Electric
    
    UNS Electric, Inc., a wholly-owned subsidiary of UES.UNS Gas
    
    UNS Gas, Inc., a wholly-owned subsidiary of UES.UNS Gas/UNS Electric
Revolver
    
    Revolving credit facility under the Amended and Restated Credit
Agreement among UNS Gas and UNS Electric as borrowers, UES as
guarantor, and a syndicate of banks, dated as of August 11, 2006.
  v




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Report of Independent Registered Public Accounting Firm
 
     /s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLPPhoenix, ArizonaMay 3, 2010
  1




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Report of Independent Registered Public Accounting Firm
 
     /s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLPPhoenix, ArizonaMay 3, 2010
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-(Except Per Share Amounts)Operating RevenuesElectric Retail Sales
    
    $
    204,746
    
    
    $
    201,352Electric Wholesale Sales
    
    
    36,145
    
    
    
    35,295California Power Exchange (CPX) Provision for Wholesale Refunds
    
    
    (2,970
    )
    
    
    Gas Revenue
    
    
    55,781
    
    
    
    58,303Other Revenues
    
    
    24,200
    
    
    
    16,907Total Operating Revenues
    
    
    317,902
    
    
    
    311,857Operating ExpensesFuel
    
    
    60,448
    
    
    
    54,817Purchased Energy
    
    
    81,886
    
    
    
    76,695Transmission
    
    
    2,430
    
    
    
    2,259Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment
    
    
    (12,631
    )
    
    
    6,702Total Fuel and Purchased Energy
    
    
    132,133
    
    
    
    140,473Other Operations and Maintenance
    
    
    82,908
    
    
    
    84,954Depreciation
    
    
    31,099
    
    
    
    33,602Amortization
    
    
    6,572
    
    
    
    7,073Taxes Other Than Income Taxes
    
    
    12,273
    
    
    
    12,455Total Operating Expenses
    
    
    264,985
    
    
    
    278,557Operating Income
    
    
    52,917
    
    
    
    33,300Other Income (Deductions)Interest Income
    
    
    1,927
    
    
    
    2,098Other Income
    
    
    6,059
    
    
    
    1,458Other Expense
    
    
    (844
    )
    
    
    (1,484
    )Total Other Income (Deductions)
    
    
    7,142
    
    
    
    2,072Interest ExpenseLong-Term Debt
    
    
    15,240
    
    
    
    14,644Capital Leases
    
    
    12,083
    
    
    
    12,809Other Interest Expense, Net of Interest Capitalized
    
    
    329
    
    
    
    (256
    )Total Interest Expense
    
    
    27,652
    
    
    
    27,197Income Before Income Taxes
    
    
    32,407
    
    
    
    8,175Income Tax Expense
    
    
    12,435
    
    
    
    3,256Net Income
    
    $
    19,972
    
    
    $
    4,919Weighted-Average Shares of Common Stock Outstanding (000)
    
    
    36,052
    
    
    
    35,665Basic Earnings per Share
    
    $
    0.55
    
    
    $
    0.14Diluted Earnings per Share
    
    $
    0.52
    
    
    $
    0.14Dividends Declared per Share
    
    $
    0.39
    
    
    $
    0.29
   3




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UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    233,734
    
    
    $
    241,524Cash Receipts from Electric Wholesale Sales
    
    
    44,459
    
    
    
    55,200Cash Receipts from Gas Sales
    
    
    66,511
    
    
    
    71,103Cash Receipts from Operating Springerville Units 3 & 4
    
    
    24,906
    
    
    
    17,940Interest Received
    
    
    5,090
    
    
    
    4,522Income Tax Refunds Received
    
    
    
    
    
    
    14,962Performance Deposits Receipt
    
    
    2,700
    
    
    
    8,470Other Cash Receipts
    
    
    4,250
    
    
    
    3,313Purchased Energy Costs Paid
    
    
    (93,529
    )
    
    
    (94,013
    )Fuel Costs Paid
    
    
    (58,818
    )
    
    
    (59,021
    )Payment of Other Operations and Maintenance Costs
    
    
    (49,947
    )
    
    
    (53,583
    )Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
    
    
    (28,046
    )
    
    
    (27,148
    )Wages Paid, Net of Amounts Capitalized
    
    
    (36,941
    )
    
    
    (32,497
    )Interest Paid, Net of Amounts Capitalized
    
    
    (20,369
    )
    
    
    (20,768
    )Capital Lease Interest Paid
    
    
    (23,943
    )
    
    
    (22,821
    )Performance Deposit Payments
    
    
    (6,500
    )
    
    
    (14,100
    )Income Taxes Paid
    
    
    (234
    )
    
    
    Excess Tax Benefit from Stock Options Exercised
    
    
    (151
    )
    
    
    (4
    )Other Cash Payments
    
    
    (1,422
    )
    
    
    (1,858
    )Net Cash Flows  Operating Activities
    
    
    61,750
    
    
    
    91,221Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (60,383
    )
    
    
    (82,061
    )Purchase of Sundt Unit 4 Lease Asset
    
    
    (51,389
    )
    
    
    Purchase of Springerville Lease Debt
    
    
    
    
    
    
    (31,375
    )Return of Investment in Springerville Lease Debt
    
    
    21,667
    
    
    
    906Return of Investment from Millennium Energy Businesses
    
    
    423
    
    
    
    5,000Insurance Proceeds for Replacement Assets
    
    
    
    
    
    
    4,279Other Cash Receipts
    
    
    30
    
    
    
    Other Cash Payments
    
    
    (215
    )
    
    
    (319
    )Net Cash Flows  Investing Activities
    
    
    (89,867
    )
    
    
    (103,570
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facilities
    
    
    125,000
    
    
    
    34,000Proceeds from Issuance of Short-Term Debt
    
    
    
    
    
    
    30,000Proceeds from Stock Options Exercised
    
    
    2,621
    
    
    
    8Excess Tax Benefit from Stock Options Exercised
    
    
    151
    
    
    
    4Other Cash Receipts
    
    
    2,796
    
    
    
    699Proceeds from Issuance of Long-Term Debt
    
    
    39,570
    
    
    
    Repayments of Borrowings Under Revolving Credit Facilities
    
    
    (91,000
    )
    
    
    (39,000
    )Payments of Capital Lease Obligations
    
    
    (39,541
    )
    
    
    (14,471
    )Common Stock Dividends Paid
    
    
    (14,021
    )
    
    
    (10,330
    )Repayment of Long-Term Debt
    
    
    (2,445
    )
    
    
    (1,500
    )Payment of Debt Issue/Retirement Costs
    
    
    (1,631
    )
    
    
    (814
    )Other Cash Payments
    
    
    (340
    )
    
    
    (390
    )Net Cash Flows  Financing Activities
    
    
    21,160
    
    
    
    (1,794
    )Net Decrease in Cash and Cash Equivalents
    
    
    (6,957
    )
    
    
    (14,143
    )Cash and Cash Equivalents, Beginning of Year
    
    
    76,922
    
    
    
    55,172Cash and Cash Equivalents, End of Period
    
    $
    69,965
    
    
    $
    41,029
    4




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UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-ASSETSUtility PlantPlant in Service
    
    $
    4,176,496
    
    
    $
    4,147,268Utility Plant under Capital Leases
    
    
    772,016
    
    
    
    720,628Construction Work in Progress
    
    
    175,535
    
    
    
    144,551Total Utility Plant
    
    
    5,124,047
    
    
    
    5,012,447Less Accumulated Depreciation and Amortization
    
    
    (1,695,090
    )
    
    
    (1,652,296
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (579,150
    )
    
    
    (574,437
    )Total Utility Plant  Net
    
    
    2,849,807
    
    
    
    2,785,714Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    104,665
    
    
    
    132,168Other
    
    
    62,378
    
    
    
    60,239Total Investments and Other Property
    
    
    167,043
    
    
    
    192,407Current AssetsCash and Cash Equivalents
    
    
    69,965
    
    
    
    76,922Accounts Receivable  Retail and Other
    
    
    54,100
    
    
    
    64,230Accounts Receivable  Wholesale
    
    
    15,443
    
    
    
    18,288Unbilled Accounts Receivable
    
    
    42,011
    
    
    
    53,361Allowance for Doubtful Accounts
    
    
    (5,944
    )
    
    
    (5,977
    )Materials and Fuel Inventory
    
    
    117,333
    
    
    
    116,791Prepayments
    
    
    6,236
    
    
    
    6,759Derivative Instruments
    
    
    6,153
    
    
    
    2,653Regulatory Assets  Derivative Instruments
    
    
    33,196
    
    
    
    17,841Regulatory Assets  Other
    
    
    24,724
    
    
    
    23,931Deferred Income Taxes  Current
    
    
    51,106
    
    
    
    52,355Income Taxes Receivable
    
    
    
    
    
    
    620Investments in Lease Debt and Equity
    
    
    5,513
    
    
    
    Collateral Posted
    
    
    5,550
    
    
    
    1,750Other
    
    
    17,240
    
    
    
    16,781Total Current Assets
    
    
    442,626
    
    
    
    446,305Regulatory and Other AssetsIncome Taxes Recoverable Through Future Revenues
    
    
    18,072
    
    
    
    18,144Regulatory Assets  Pension and Other Postretirement Benefits
    
    
    83,208
    
    
    
    84,149Regulatory Assets  Derivative Instruments
    
    
    8,762
    
    
    
    9,503Regulatory Assets  Other
    
    
    35,779
    
    
    
    35,529Derivative Instruments
    
    
    9,539
    
    
    
    4,498Other Assets
    
    
    24,226
    
    
    
    24,993Total Regulatory and Other Assets
    
    
    179,586
    
    
    
    176,816Total Assets
    
    $
    3,639,062
    
    
    $
    3,601,242
  (Continued)
  5




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UNISOURCE ENERGY CORPORATION
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    757,939
    
    
    $
    750,865Capital Lease Obligations
    
    
    431,834
    
    
    
    488,349Long-Term Debt
    
    
    1,357,630
    
    
    
    1,307,795Total Capitalization
    
    
    2,547,403
    
    
    
    2,547,009Current LiabilitiesCurrent Obligations Under Capital Leases
    
    
    65,292
    
    
    
    40,441Borrowing Under Revolving Credit Facility
    
    
    55,000
    
    
    
    35,000Current Maturities of Long-Term Debt
    
    
    13,000
    
    
    
    12,195Accounts Payable
    
    
    55,940
    
    
    
    54,152Accounts Payable  Purchased Power
    
    
    43,996
    
    
    
    44,838Interest Accrued
    
    
    16,819
    
    
    
    41,396Income Taxes Payable
    
    
    2,657
    
    
    
    Accrued Taxes Other Than Income Taxes
    
    
    46,961
    
    
    
    36,698Accrued Employee Expenses
    
    
    21,456
    
    
    
    27,545Customer Deposits
    
    
    26,875
    
    
    
    25,978Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    14,341
    
    
    
    24,258Regulatory Liabilities  Other
    
    
    20,744
    
    
    
    17,971Derivative Instruments
    
    
    39,072
    
    
    
    21,186Other
    
    
    4,319
    
    
    
    4,038Total Current Liabilities
    
    
    426,472
    
    
    
    385,696Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    233,681
    
    
    
    227,199Regulatory Liabilities  Net Cost of Removal for Interim Retirements
    
    
    179,348
    
    
    
    195,177Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    11,018
    
    
    
    16,714Derivative Instruments
    
    
    25,930
    
    
    
    19,489Pension and Other Postretirement Benefits
    
    
    125,582
    
    
    
    123,476Customer Advances for Construction
    
    
    33,241
    
    
    
    31,803Other
    
    
    56,387
    
    
    
    54,679Total Deferred Credits and Other Liabilities
    
    
    665,187
    
    
    
    668,537Commitments and Contingencies (Note 6)Total Capitalization and Other Liabilities
    
    $
    3,639,062
    
    
    $
    3,601,242
  (Concluded)
  6




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UNISOURCE ENERGY CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalShares
    
    
    Common
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersOutstanding*
    
    
    Stock
    
    
    Earnings
    
    
    Loss
    
    
    Equity(Unaudited)-Thousands of Dollars-Balances at December 31, 2009
    
    
    35,851
    
    
    $
    696,206
    
    
    $
    60,461
    
    
    $
    (5,802
    )
    
    $
    750,865Comprehensive Income:2010 Year-to-Date Net Income
    
    
    
    
    
    
    
    
    
    
    19,972
    
    
    
    
    
    
    
    19,972Unrealized Loss on Cash Flow Hedges
(net of $1,516 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,312
    )
    
    
    (2,312
    )Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $478 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    729
    
    
    
    729Employee Benefit ObligationsAmortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $34 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    52Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,441Dividends
    
    
    
    
    
    
    
    
    
    
    (14,121
    )
    
    
    
    
    
    
    (14,121
    )Shares Issued under Stock Compensation Plans -
(net of shares redeemed for taxes)
    
    
    144
    
    
    
    1,985
    
    
    
    
    
    
    
    
    
    
    
    1,985Tax Benefit Realized from Share-Based Compensation Plans
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    151Other Share-Based Compensation
    
    
    
    
    
    
    618
    
    
    
    
    
    
    
    
    
    
    
    618Balances at March 31, 2010
    
    
    35,995
    
    
    $
    698,960
    
    
    $
    66,312
    
    
    $
    (7,333
    )
    
    $
    757,939
 *
    
    UniSource Energy has 75 million authorized shares of Common Stock.   7




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-Operating RevenuesElectric Retail Sales
    
    $
    167,419
    
    
    $
    157,764Electric Wholesale Sales
    
    
    40,043
    
    
    
    37,758California Power Exchange (CPX) Provision for Wholesale Refunds
    
    
    (2,970
    )
    
    
    Other Revenues
    
    
    25,667
    
    
    
    17,752Total Operating Revenues
    
    
    230,159
    
    
    
    213,274Operating ExpensesFuel
    
    
    58,351
    
    
    
    51,440Purchased Power
    
    
    23,735
    
    
    
    23,042Transmission
    
    
    796
    
    
    
    548Increase (Decrease) to Reflect PPFAC Recovery Treatment
    
    
    (3,118
    )
    
    
    (368
    )Total Fuel and Purchased Energy
    
    
    79,764
    
    
    
    74,662Other Operations and Maintenance
    
    
    72,023
    
    
    
    74,734Depreciation
    
    
    24,077
    
    
    
    26,757Amortization
    
    
    7,786
    
    
    
    8,293Taxes Other Than Income Taxes
    
    
    10,006
    
    
    
    10,256Total Operating Expenses
    
    
    193,656
    
    
    
    194,702Operating Income
    
    
    36,503
    
    
    
    18,572Other Income (Deductions)Interest Income
    
    
    1,690
    
    
    
    2,070Other Income
    
    
    1,199
    
    
    
    1,331Other Expense
    
    
    (761
    )
    
    
    (1,128
    )Total Other Income (Deductions)
    
    
    2,128
    
    
    
    2,273Interest ExpenseLong-Term Debt
    
    
    9,878
    
    
    
    9,191Capital Leases
    
    
    12,081
    
    
    
    12,805Other Interest Expense, Net of Interest Capitalized
    
    
    (25
    )
    
    
    (285
    )Total Interest Expense
    
    
    21,934
    
    
    
    21,711Income (Loss) Before Income Taxes
    
    
    16,697
    
    
    
    (866
    )Income Tax Expense (Benefit)
    
    
    6,348
    
    
    
    (313
    )Net Income (Loss)
    
    $
    10,349
    
    
    $
    (553
    )
   8




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    190,753
    
    
    $
    190,337Cash Receipts from Electric Wholesale Sales
    
    
    49,531
    
    
    
    58,850Cash Receipts from Operating Springerville Units 3 & 4
    
    
    24,906
    
    
    
    17,940Interest Received
    
    
    5,086
    
    
    
    4,500Income Tax Refunds Received
    
    
    
    
    
    
    14,962Reimbursement of Affiliate Charges
    
    
    4,202
    
    
    
    5,976Other Cash Receipts
    
    
    2,094
    
    
    
    2,106Performance Deposit Payments
    
    
    (1,540
    )
    
    
    (9,100
    )Fuel Costs Paid
    
    
    (57,288
    )
    
    
    (54,728
    )Purchased Power Costs Paid
    
    
    (29,214
    )
    
    
    (33,437
    )Payment of Other Operations and Maintenance Costs
    
    
    (47,017
    )
    
    
    (51,155
    )Capital Lease Interest Paid
    
    
    (23,941
    )
    
    
    (22,818
    )Wages Paid, Net of Amounts Capitalized
    
    
    (30,903
    )
    
    
    (26,867
    )Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
    
    
    (19,524
    )
    
    
    (17,427
    )Interest Paid, Net of Amounts Capitalized
    
    
    (10,399
    )
    
    
    (10,495
    )Income Taxes Paid
    
    
    (234
    )
    
    
    Other Cash Payments
    
    
    (767
    )
    
    
    (1,252
    )Net Cash Flows  Operating Activities
    
    
    55,745
    
    
    
    67,392Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (52,470
    )
    
    
    (69,459
    )Purchase of Sundt Unit 4 Lease Asset
    
    
    (51,389
    )
    
    
    Purchase of Springerville Lease Debt
    
    
    
    
    
    
    (31,375
    )Return of Investment in Springerville Lease Debt
    
    
    21,667
    
    
    
    906Insurance Proceeds for Replacement Assets
    
    
    
    
    
    
    4,279Other Cash Receipts
    
    
    30
    
    
    
    Other Cash Payments
    
    
    (1
    )
    
    
    (3
    )Net Cash Flows  Investing Activities
    
    
    (82,163
    )
    
    
    (95,652
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facility
    
    
    95,000
    
    
    
    20,000Repayments of Borrowings Under Revolving Credit Facility
    
    
    (75,000
    )
    
    
    (30,000
    )Equity Investment from UniSource Energy
    
    
    15,000
    
    
    
    30,000Proceeds from Issuance of Long-Term Debt
    
    
    30,000
    
    
    
    Payments of Capital Lease Obligations
    
    
    (39,523
    )
    
    
    (14,447
    )Other Cash Receipts
    
    
    61
    
    
    
    465Payment of Debt Issue/Retirement Costs
    
    
    (989
    )
    
    
    (9
    )Other Cash Payments
    
    
    (54
    )
    
    
    (139
    )Net Cash Flows  Financing Activities
    
    
    24,495
    
    
    
    5,870Net Decrease in Cash and Cash Equivalents
    
    
    (1,923
    )
    
    
    (22,390
    )Cash and Cash Equivalents, Beginning of Year
    
    
    22,418
    
    
    
    33,275Cash and Cash Equivalents, End of Period
    
    $
    20,495
    
    
    $
    10,885
    9




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-ASSETSUtility PlantPlant in Service
    
    $
    3,610,744
    
    
    $
    3,584,308Utility Plant under Capital Leases
    
    
    771,311
    
    
    
    719,922Construction Work in Progress
    
    
    137,731
    
    
    
    113,390Total Utility Plant
    
    
    4,519,786
    
    
    
    4,417,620Less Accumulated Depreciation and Amortization
    
    
    (1,619,807
    )
    
    
    (1,582,442
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (578,543
    )
    
    
    (573,853
    )Total Utility Plant  Net
    
    
    2,321,436
    
    
    
    2,261,325Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    104,665
    
    
    
    132,168Other
    
    
    33,658
    
    
    
    31,813Total Investments and Other Property
    
    
    138,323
    
    
    
    163,981Current AssetsCash and Cash Equivalents
    
    
    20,495
    
    
    
    22,418Accounts Receivable  Retail and Other
    
    
    40,388
    
    
    
    46,894Accounts Receivable  Wholesale
    
    
    14,569
    
    
    
    17,904Unbilled Accounts Receivable
    
    
    26,723
    
    
    
    32,368Allowance for Doubtful Accounts
    
    
    (3,878
    )
    
    
    (3,806
    )Accounts Receivable  Due from Affiliates
    
    
    7,149
    
    
    
    5,218Materials and Fuel Inventory
    
    
    106,628
    
    
    
    104,861Prepayments
    
    
    5,159
    
    
    
    5,678Derivative Instruments
    
    
    4,991
    
    
    
    5,043Regulatory Assets  Derivative Instruments
    
    
    8,994
    
    
    
    3,696Regulatory Assets  Other
    
    
    24,184
    
    
    
    23,330Deferred Income Taxes  Current
    
    
    49,881
    
    
    
    50,789Investments in Lease Debt and Equity
    
    
    5,513
    
    
    
    Other
    
    
    14,745
    
    
    
    16,394Total Current Assets
    
    
    325,541
    
    
    
    330,787Regulatory and Other AssetsRegulatory Assets  Pension and Other Postretirement Benefits
    
    
    79,313
    
    
    
    80,169Regulatory Assets  Derivative Instruments
    
    
    4,125
    
    
    
    4,631Regulatory Assets  Other
    
    
    34,503
    
    
    
    34,203Income Taxes Recoverable Through Future Revenues
    
    
    18,072
    
    
    
    18,144Derivative Instruments
    
    
    1,382
    
    
    
    1,075Other Assets
    
    
    19,519
    
    
    
    19,984Total Regulatory and Other Assets
    
    
    156,914
    
    
    
    158,206Total Assets
    
    $
    2,942,214
    
    
    $
    2,914,299
  (Continued)
  10




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)-Thousands of Dollars-CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    666,963
    
    
    $
    643,144Capital Lease Obligations
    
    
    431,814
    
    
    
    488,311Long-Term Debt
    
    
    933,615
    
    
    
    903,615Total Capitalization
    
    
    2,032,392
    
    
    
    2,035,070Current LiabilitiesCurrent Obligations Under Capital Leases
    
    
    65,183
    
    
    
    40,332Borrowing Under Revolving Credit Facility
    
    
    55,000
    
    
    
    35,000Accounts Payable
    
    
    50,351
    
    
    
    48,631Accounts Payable  Purchased Power
    
    
    27,489
    
    
    
    22,697Accounts Payable  Due to Affiliates
    
    
    2,926
    
    
    
    3,694Income Taxes Payable
    
    
    1,844
    
    
    
    Interest Accrued
    
    
    14,343
    
    
    
    33,970Accrued Taxes Other Than Income Taxes
    
    
    36,569
    
    
    
    28,404Accrued Employee Expenses
    
    
    18,692
    
    
    
    24,409Customer Deposits
    
    
    18,815
    
    
    
    18,125Derivative Instruments
    
    
    13,735
    
    
    
    9,434Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    8,785
    
    
    
    9,200Regulatory Liabilities  Other
    
    
    19,799
    
    
    
    17,439Other
    
    
    2,620
    
    
    
    1,445Total Current Liabilities
    
    
    336,151
    
    
    
    292,780Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    221,098
    
    
    
    217,316Regulatory Liabilities  Net Cost of Removal for Interim Retirements
    
    
    146,390
    
    
    
    162,764Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    11,018
    
    
    
    16,714Derivative Instruments
    
    
    13,136
    
    
    
    11,195Pension and Other Postretirement Benefits
    
    
    118,996
    
    
    
    116,991Customer Advances for Construction
    
    
    7,776
    
    
    
    7,891Other
    
    
    55,257
    
    
    
    53,578Total Deferred Credits and Other Liabilities
    
    
    573,671
    
    
    
    586,449Commitments and Contingencies (Note 6)Total Capitalization and Other Liabilities
    
    $
    2,942,214
    
    
    $
    2,914,299
  (Concluded)
  11




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 AccumulatedCapital
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Expense
    
    
    Deficit
    
    
    Loss
    
    
    Equity(Unaudited)-Thousands of Dollars-Balances at December 31, 2009
    
    $
    843,971
    
    
    $
    (6,357
    )
    
    $
    (188,668
    )
    
    $
    (5,802
    )
    
    $
    643,144Comprehensive Income:2010 Year-to-Date Net Income
    
    
    
    
    
    
    
    
    
    
    10,349
    
    
    
    
    
    
    
    10,349Unrealized Loss on Cash Flow Hedges
(net of $1,516 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,311
    )
    
    
    (2,311
    )Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $478 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    729
    
    
    
    729Employee Benefit ObligationsAmortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $34 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    52Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,819Capital Contribution from UniSource Energy
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Balances at March 31, 2010
    
    $
    858,971
    
    
    $
    (6,357
    )
    
    $
    (178,319
    )
    
    $
    (7,332
    )
    
    $
    666,963
   12




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Unaudited
 
 NOTE 1. NATURE OF OPERATIONS AND BASIS OF ACCOUNTING PRESENTATION
         
 NOTE 2. REGULATORY MATTERS
 ACCOUNTING FOR RATE REGULATION
  TEP PURCHASED POWER AND FUEL ADJUSTMENT CLAUSE (PPFAC)
   13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
  March 31,
    
    
    December 31,2010
    
    
    2009-Millions of Dollars-Fixed CTC Revenue to be Refunded Within the Next 12
Months; Included in Current Liabilities
    
    $
    (9
    )
    
    $
    (9
    )Under-Recovered Purchased Energy Costs  Regulatory
Basis as Billed to Customers
    
    $
    30
    
    
    $
    29Estimated Purchased Energy Costs Recovered through
Accrued Unbilled Revenues
    
    
    (7
    )
    
    
    (9
    )Fixed CTC Revenue to be Refunded
    
    
    (34
    )
    
    
    (37
    )Total Included in Deferred Credits and Other Liabilities
    
    $
    (11
    )
    
    $
    (17
    )
  UNS GAS RATES AND REGULATION
 2008 General Rate Case Filing
  Purchased Gas Adjuster (PGA) Mechanism
   March 31,
    
    
    December 31,2010
    
    
    2009-Millions of Dollars-(Over-) Recovered Purchased Gas Costs 
Regulatory Basis as Billed to Customers
    
    $
    
    
    
    $
    (2
    )Estimated Purchased Gas Costs Recovered
through Accrued Unbilled Revenues
    
    
    (5
    )
    
    
    (8
    )(Over-) Recovered Purchased Gas Costs (PGA)
Included as a Current Regulatory Liability
    
    $
    (5
    )
    
    $
    (10
    )
  14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 UNS ELECTRIC RATES AND REGULATION
 2009 General Rate Case Filing
  UNS Electric Purchased Power and Fuel Adjustment Clause (PPFAC)
   March 31,
    
    
    December 31,2010
    
    
    2009-Millions of Dollars-(Over-) Under-Recovered Purchased Power
Costs  Regulatory Basis as Billed to
Customers
    
    $
    3
    
    
    $
    (1
    )Estimated Purchased Power Costs Recovered
through Accrued Unbilled Revenues
    
    
    (3
    )
    
    
    (4
    )(Over-) Recovered Purchased Power Costs
(PPFAC) Included as a Current Regulatory
Liability
    
    $
    
    
    
    $
    (5
    )
 REST/DSM
     15




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 
 NOTE 3. BUSINESS SEGMENTS
  (1)
    
    TEP, a vertically integrated electric utility business, UniSource Energys largest
subsidiary;(2)
    
    UNS Gas, a regulated gas distribution utility business; and(3)
    
    UNS Electric, a regulated electric distribution utility business.
  Reportable SegmentsUNS
    
    
    UNSIntersegment Revenue
    
    TEP
    
    
    Gas
    
    
    Electric
    
    
    Other-Millions of Dollars-Three Months Ended March 31, 2010:Wholesale Sales  TEP to UNS Electric
    
    $
    6
    
    
    $
    
    
    
    $
    
    
    
    $
    Wholesale Sales   UNS Electric to TEP
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Wholesale Sales  UED to UNS Electric
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Gas Revenue  UNS Gas to UNS Electric & UED
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Other Revenue  TEP to Affiliates(1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Other Revenue  Millennium to TEP, UNS Electric, & UNS
Gas(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Other Revenue  TEP to UNS Electric(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Total Intersegment Revenue
    
    $
    9
    
    
    $
    1
    
    
    $
    1
    
    
    $
    7Three Months Ended March 31, 2009:Wholesale Sales  TEP to UNS Electric
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    Wholesale Sales   UNS Electric to TEP
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Wholesale Sales  UED to UNS Electric
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Gas Revenue  UNS Gas to UNS Electric & UED
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Other Revenue  TEP to Affiliates(1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Other
Revenue  Millennium to TEP, UNS Electric, & UNS
Gas(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Other Revenue  TEP to UNS Electric & UNS Gas(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Total Intersegment Revenue
    
    $
    5
    
    
    $
    1
    
    
    $
    1
    
    
    $
    7
 (1)
    
    TEP provides corporate services (finance, accounting, tax, information technology services,
etc.) to UniSource Energy and its subsidiaries.(2)
    
    Millennium provides supplemental workforce and meter reading services to TEP, UNS Electric and
UNS Gas.(3)
    
    TEP provides control area services to UNS Electric.   16




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
  Reportable Segments
    
    
    
    
    
    
    
    
    
    
    UniSourceUNS
    
    
    UNS
    
    
    
    
    
    
    Reconciling
    
    
    EnergyIncome Statement
    
    TEP
    
    
    Gas
    
    
    Electric
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated-Millions of Dollars-Three Months Ended March 31, 2010:Operating Revenues  External
    
    $
    221
    
    
    $
    56
    
    
    $
    40
    
    
    $
    
    
    
    $
    1
    
    
    $
    318Operating Revenues  Intersegment
    
    
    9
    
    
    
    1
    
    
    
    1
    
    
    
    7
    
    
    
    (18
    )
    
    
    Income Before Income Taxes
    
    
    17
    
    
    
    10
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    32Net Income
    
    
    10
    
    
    
    6
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    20Three Months Ended March 31, 2009:Operating Revenues  External
    
    $
    208
    
    
    $
    59
    
    
    $
    45
    
    
    $
    
    
    
    $
    
    
    
    $
    312Operating Revenues  Intersegment
    
    
    5
    
    
    
    1
    
    
    
    1
    
    
    
    7
    
    
    
    (14
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    (1
    )
    
    
    8
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    8Net Income (Loss)
    
    
    (1
    )
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    5
 
 NOTE 4. DEBT, CREDIT FACILITIES AND CAPITAL LEASE OBLIGATIONS
 UNISOURCE ENERGY CREDIT AGREEMENT
  Current
    
    
    Long-
    
    
    
    
    
    
    Current
    
    
    Long-Liabilities
    
    
    Term Debt
    
    
    Total
    
    
    Liabilities
    
    
    Term Debt
    
    
    Total-Millions of Dollars-March 31, 2010
    
    
    December 31, 2009Revolver
    
    $
    
    
    
    $
    45
    
    
    $
    45
    
    
    $
    
    
    
    $
    31
    
    
    $
    31Term Loan
    
    
    6
    
    
    
    2
    
    
    
    8
    
    
    
    6
    
    
    
    3
    
    
    
    9
  TEP SUNDT UNIT 4 CAPITAL LEASE PURCHASE
  TEP DEBT
   17




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 TEP Term Loan Borrowings
   2008 Pima B Bonds Interest Conversion
  UNS GAS/UNS ELECTRIC REVOLVING CREDIT AGREEMENT
  UNS
    
    
    UNS
    
    
    UNS
    
    
    UNSGas
    
    
    Electric
    
    
    Gas
    
    
    Electric-Millions of Dollars-March 31, 2010
    
    
    December 31, 2009Balance on the Revolver
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Outstanding Letters of Credit
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    11
 UED BORROWINGS
  OTHER
  
 NOTE 5. INCOME TAXES
    18




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 
 NOTE 6. COMMITMENTS AND CONTINGENCIES
 TEP COMMITMENTS
 Firm Purchase Commitments
  Renewable Energy Purchase Power Agreements
  UNS ELECTRIC COMMITMENTS
   UNS GAS COMMITMENTS
  UNISOURCE ENERGY COMMITMENTS
   19




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 TEP CONTINGENCIES
 El Paso Electric Transmission
   Claims Related to Navajo Generating Station
   Claims Related to San Juan Generating Station
   20




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 Environmental Reclamation at Remote Generating Stations
    California Energy Market Issues
  Tucson to Nogales Transmission Line
    21




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 Sierra Club San Juan Matter
  GUARANTEES
  
    
    UES guarantee of $100 million senior unsecured notes issued by UNS Gas and $100
million senior unsecured notes issued by UNS Electric;
 
    
    UES guarantee of the $60 million UNS Gas/UNS Electric Revolver;
 
    
    UniSource Energys guarantee of approximately $2 million in building lease payments for
UNS Gas; and
 
    
    UniSource Energys guarantee of the $35 million UED term loan.
    
 NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE
  
    
    The carrying amounts of our current assets and liabilities, including Current Maturities of
Long-Term Debt, term loans, and amounts outstanding under our credit agreements, approximate
their fair value due to the short-term nature of these instruments. Accordingly, these items
have been excluded from the table below.
 
    
    Investments in Lease Debt and Equity: TEP calculated 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 incorporated the impact of counterparty credit risk using
market credit default swap data.
  22




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 
    
    Fixed Rate Long-Term Debt: UniSource Energy and TEP used quoted market prices, where
available, or calculated 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. We also incorporate the impact of our own credit risk using a
credit default swap rate when determining the fair value of fixed rate long-term debt.
 
    
    Variable Rate Long-Term Debt: TEP considers the principal amounts of variable rate debt
outstanding to be reasonable estimates of their fair value. The fair value of variable rate
long-term debt has also been adjusted for credit risk using a credit default swap rate.
  March 31,
    
    
    December 31,2010
    
    
    2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value-Millions of Dollars-Assets:TEP Investment in Lease Debt and Equity
    
    $
    110
    
    
    $
    119
    
    
    $
    132
    
    
    $
    140Millennium Note Receivable
    
    
    15
    
    
    
    15
    
    
    
    15
    
    
    
    15Liabilities:Fixed Rate Long-Term DebtTEP
    
    
    575
    
    
    
    432
    
    
    
    445
    
    
    
    336UniSource Energy
    
    
    925
    
    
    
    802
    
    
    
    795
    
    
    
    693Variable Rate Long-Term DebtUniSource Energy and TEP
    
    
    329
    
    
    
    329
    
    
    
    459
    
    
    
    452
 
 NOTE 8. EMPLOYEE BENEFIT PLANS
 PENSION BENEFIT PLANS
    OTHER POSTRETIREMENT BENEFIT PLANS
   23




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 COMPONENTS OF NET PERIODIC BENEFIT COST
  Other PostretirementPension Benefits
    
    
    BenefitsThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009-Millions of Dollars-Components of Net Periodic Benefit CostService Cost
    
    $
    2
    
    
    $
    2
    
    
    $
    
    
    
    $
    Interest Cost
    
    
    4
    
    
    
    4
    
    
    
    1
    
    
    
    1Expected Return on Plan Assets
    
    
    (3
    )
    
    
    (3
    )
    
    
    
    
    
    
    Amortization of Net Loss
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    Net Periodic Benefit Cost
    
    $
    4
    
    
    $
    5
    
    
    $
    1
    
    
    $
    1
  
 NOTE 9. SHARE-BASED COMPENSATION PLANS
 PERFORMANCE SHARES
  SHARE-BASED COMPENSATION EXPENSE
   
 NOTE 10. FAIR VALUE MEASUREMENTS
   24




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 UniSource EnergyQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalMarch 31, 2010-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    52
    
    
    $
    
    
    
    $
    
    
    
    $
    52Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Equity Investments (3)
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Collateral Posted (4)
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Energy Contracts (5)
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    16Total Assets
    
    
    52
    
    
    
    20
    
    
    
    22
    
    
    
    94LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (26
    )
    
    
    (32
    )
    
    
    (58
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Total Liabilities
    
    
    
    
    
    
    (33
    )
    
    
    (32
    )
    
    
    (65
    )Net Total Assets and (Liabilities)
    
    $
    52
    
    
    $
    (13
    )
    
    $
    (10
    )
    
    $
    29
 UniSource EnergyQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalDecember 31, 2009-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    51
    
    
    $
    
    
    
    $
    
    
    
    $
    51Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Equity Investments (3)
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Collateral Posted (4)
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Energy Contracts (5)
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    7Total Assets
    
    
    51
    
    
    
    17
    
    
    
    12
    
    
    
    80LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (16
    )
    
    
    (19
    )
    
    
    (35
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Total Liabilities
    
    
    
    
    
    
    (22
    )
    
    
    (19
    )
    
    
    (41
    )Net Total Assets and (Liabilities)
    
    $
    51
    
    
    $
    (5
    )
    
    $
    (7
    )
    
    $
    39
  25




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 TEPQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalMarch 31, 2010-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    18
    
    
    $
    
    
    
    $
    
    
    
    $
    18Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Collateral Posted (4)
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Energy Contracts (5)
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Total Assets
    
    
    18
    
    
    
    16
    
    
    
    6
    
    
    
    40LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (12
    )
    
    
    (8
    )
    
    
    (20
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Total Liabilities
    
    
    
    
    
    
    (19
    )
    
    
    (8
    )
    
    
    (27
    )Net Total Assets and (Liabilities)
    
    $
    18
    
    
    $
    (3
    )
    
    $
    (2
    )
    
    $
    13
 TEPQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalDecember 31, 2009-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    8Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Energy Contracts (5)
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    6Total Assets
    
    
    8
    
    
    
    15
    
    
    
    5
    
    
    
    28LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (5
    )
    
    
    (9
    )
    
    
    (14
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Total Liabilities
    
    
    
    
    
    
    (11
    )
    
    
    (9
    )
    
    
    (20
    )Net Total Assets and (Liabilities)
    
    $
    8
    
    
    $
    4
    
    
    $
    (4
    )
    
    $
    8
 (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.(2)
    
    Level 2 Investments comprise amounts held in mutual and money market funds related to deferred
compensation and Supplemental Executive Retirement Plan (SERP) benefits. The valuation is based on
quoted prices, traded in active markets. These investments are included in Investments and Other
Property  Other in the UniSource Energy and TEP balance sheets.(3)
    
    Equity Investments are, in the absence of readily ascertainable market values, based on the
lower of the investment partners valuations or managements valuation and comprise Millenniums
equity investments in unregulated businesses. These investments are included in Investments and
Other Property  Other in the UniSource Energy balance sheet.(4)
    
    Collateral provided for energy contracts with counterparties to reduce credit risk exposure.  26




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 (5)
    
    Energy contracts include gas swap agreements (Level 2), forward power purchase and sales
contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to
take advantage of favorable market conditions and reduce exposure to energy price risk. The
valuation techniques are described below. See Note 17 for additional information.(6)
    
    Interest Rate Swaps are valued based on the six-month LIBOR index or the Securities Industry
and Financial Markets Association (SIFMA) Municipal Swap index (Level 2). Energy Contracts
     Three Months EndedMarch 31, 2010-Millions of Dollars-UniSource Energy
    
    
    TEPMark-to-
    
    
    
    
    
    
    
    
    
    
    Mark-to-Market
    
    
    
    
    
    
    
    
    
    
    MarketContracts
    
    
    Investments
    
    
    Total
    
    
    ContractsBalance, as of December 31, 2009
    
    $
    (13
    )
    
    $
    6
    
    
    $
    (7
    )
    
    $
    (4
    )Gains and (Losses) (Realized/Unrealized) Recorded to:Net Regulatory Assets-Derivative Instruments
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    3Other Comprehensive Income
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance, as of March 31, 2010
    
    $
    (16
    )
    
    $
    6
    
    
    $
    (10
    )
    
    $
    (2
    )
   27




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 
 NOTE 11. UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
   Three Months EndedMarch 31,2010
    
    
    2009-Thousands of Dollars-Numerator:Net Income
    
    $
    19,972
    
    
    $
    4,919Income from Assumed Conversion of Convertible Senior Notes
    
    
    1,097
    
    
    
    Adjusted Numerator
    
    $
    21,069
    
    
    $
    4,919
 -Thousands of Shares-Denominator:Weighted-Average Shares of Common Stock Outstanding:Common Shares Issued
    
    
    35,850
    
    
    
    35,557Fully Vested Deferred Stock Units
    
    
    107
    
    
    
    108Participating Securities
    
    
    95
    
    
    
    Total Weighted-Average Shares of Common Stock Outstanding and
Participating Securities  Basic
    
    
    36,052
    
    
    
    35,665Effect of Dilutive Securities:Convertible Senior Notes
    
    
    4,140
    
    
    
    Options and Stock Issuable Under Employee Benefit Plans
and the Directors Plans
    
    
    481
    
    
    
    540Total Shares  Diluted
    
    
    40,673
    
    
    
    36,205
  
 NOTE 12. STOCKHOLDERS EQUITY
    28




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 Dividends
  
 NOTE 13. SALE OF MILLENNIUMS INVESTMENT IN NATIONS ENERGY CORPORATION
  
 NOTE 14. TRANSMISSION ASSETS DEPRECIATION
  
 NOTE 15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  
    
    The FASB issued authoritative guidance for multiple deliverable revenue arrangements
that provides another alternative for determining the selling price of deliverables and
eliminates the residual method of allocating consideration. In addition, this
pronouncement requires expanded qualitative and quantitative disclosures and is effective
for revenue arrangements entered into after January 1, 2011. We are evaluating the impact
of this pronouncement.
 
    
    The FASB issued amendments that require some new disclosures and clarify some existing
disclosure requirements about fair value measurements. Disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, are effective for interim and annual reporting periods beginning January 1,
2011. We are evaluating the impact of these new disclosures on our financial statements.
  29




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 
 NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
  UniSource EnergyThree Months EndedMarch 31,2010
    
    
    2009-Thousands of Dollars-Net Income
    
    $
    19,972
    
    
    $
    4,919Adjustments to Reconcile Net Income
To Net Cash Flows from Operating ActivitiesDepreciation Expense
    
    
    31,099
    
    
    
    33,602Amortization Expense
    
    
    6,572
    
    
    
    7,073Depreciation and Amortization Recorded to Fuel and Other O&M Expense
    
    
    1,261
    
    
    
    816Amortization of Deferred Debt-Related Costs Included in Interest Expense
    
    
    922
    
    
    
    950Provision for Bad Debts
    
    
    814
    
    
    
    820Deferred Income Taxes
    
    
    8,804
    
    
    
    5,686Pension and Postretirement Expense
    
    
    4,876
    
    
    
    6,045Pension and Postretirement Funding
    
    
    (1,739
    )
    
    
    (909
    )Share-Based Compensation Expense
    
    
    784
    
    
    
    820Excess Tax Benefit from Stock Options Exercised
    
    
    (151
    )
    
    
    (4
    )CTC Revenue Refunded
    
    
    (2,993
    )
    
    
    Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment
    
    
    (12,631
    )
    
    
    6,702Changes in Assets and Liabilities which Provided (Used)
Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    23,478
    
    
    
    40,962Collateral Posted
    
    
    (3,800
    )
    
    
    (5,630
    )Materials and Fuel Inventory
    
    
    (542
    )
    
    
    (1,470
    )Accounts Payable
    
    
    (4,874
    )
    
    
    (21,412
    )Interest Accrued
    
    
    (16,700
    )
    
    
    (17,275
    )Income Taxes Payable
    
    
    3,277
    
    
    
    12,550Accrued Taxes Other Than Income Taxes
    
    
    10,263
    
    
    
    9,811Regulatory Liabilities  Other
    
    
    1,418
    
    
    
    6,384Accrued Employee Expenses
    
    
    (6,984
    )
    
    
    (3,018
    )Other
    
    
    (1,376
    )
    
    
    3,799Net Cash Flows  Operating Activities
    
    $
    61,750
    
    
    $
    91,221
  30




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 TEPThree Months EndedMarch 31,2010
    
    
    2009-Thousands of Dollars-Net Income (Loss)
    
    $
    10,349
    
    
    $
    (553
    )Adjustments to Reconcile Net Income (Loss)
To Net Cash Flows from Operating ActivitiesDepreciation Expense
    
    
    24,077
    
    
    
    26,757Amortization Expense
    
    
    7,786
    
    
    
    8,293Depreciation and Amortization Recorded to Fuel and Other
O&M Expense
    
    
    896
    
    
    
    441Amortization of Deferred Debt-Related Costs Included in
Interest Expense
    
    
    508
    
    
    
    692Provision for Bad Debts
    
    
    501
    
    
    
    408California Power Exchange Provision for Wholesale Revenue
Refunds
    
    
    2,970
    
    
    
    Deferred Income Taxes
    
    
    5,762
    
    
    
    (2,223
    )Pension and Postretirement Expense
    
    
    4,327
    
    
    
    5,469Pension and Postretirement Funding
    
    
    (1,463
    )
    
    
    (866
    )Share-Based Compensation Expense
    
    
    607
    
    
    
    627CTC Revenue Refunded
    
    
    (2,993
    )
    
    
    Increase (Decrease) to Reflect PPFAC Recovery Treatment
    
    
    (3,118
    )
    
    
    (368
    )Changes in Assets and Liabilities which Provided (Used)
Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    16,137
    
    
    
    30,443Materials and Fuel Inventory
    
    
    (1,767
    )
    
    
    (922
    )Accounts Payable
    
    
    (1,267
    )
    
    
    (12,920
    )Interest Accrued
    
    
    (11,750
    )
    
    
    (12,066
    )Income Taxes Payable
    
    
    1,844
    
    
    
    587Accrued Taxes Other Than Income Taxes
    
    
    8,165
    
    
    
    8,499Regulatory Liabilities  Other
    
    
    1,005
    
    
    
    5,736Accrued Employee Expenses
    
    
    (5,717
    )
    
    
    (1,637
    )Other
    
    
    (1,114
    )
    
    
    10,995Net Cash Flows  Operating Activities
    
    $
    55,745
    
    
    $
    67,392
  31




---



##### Table of Contents



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
 
 NOTE 17. ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND HEDGING ACTIVITIES
 RISKS AND OVERVIEW
    CASH FLOW HEDGES
  
    
    The effective portion of the changes in the fair value of TEPs interest rate swaps and
TEPs six-year power purchase swap agreement are recorded in AOCI and the ineffective
portion, if any, is recognized in earnings.
 
    
    When TEP determines a contract is no longer effective in offsetting the changes in cash
flow of a hedged item, TEP recognizes the changes in fair value in earnings. The gains and
losses at that time remain in AOCI and are reclassified into earnings as the underlying
hedged transaction occurs.
  MARK-TO-MARKET
 
    
    TEP
   32




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
  
    
    UNS Electric
  
    
    UNS Gas
  NORMAL PURCHASE AND NORMAL SALE
  FINANCIAL IMPACT OF DERIVATIVES
 Cash Flow Hedges
  Regulatory Treatment of Commodity Derivatives
   33




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  Unaudited
   Other Commodity Derivatives
   UniSource Energy and TEPThree MonthsEnded March 31,2010
    
    
    2009-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales
    
    $
    1
    
    
    $
    4Forward Power Purchases
    
    
    (1
    )
    
    
    (3
    )Total Sales and Purchases Not Resulting in Physical Delivery
    
    $
    
    
    
    $
    1
 DERIVATIVE VOLUMES
  CREDIT RISK ADJUSTMENT
  
  34




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)  Unaudited
 CONCENTRATION OF CREDIT RISK
    UniSourceTEP
    
    
    UNS Gas
    
    
    UNS Electric
    
    
    EnergyMarch 31, 2010-Millions of Dollars-Net Liability Position
    
    $
    33
    
    
    $
    23
    
    
    $
    26
    
    
    $
    82Cash Collateral Posted
    
    
    2
    
    
    
    3
    
    
    
    1
    
    
    
    6Letters of Credit
    
    
    1
    
    
    
    
    
    
    
    16
    
    
    
    17Additional Collateral to Post if Contingent Features Triggered
    
    
    31
    
    
    
    20
    
    
    
    14
    
    
    
    65
  
 NOTE 18. REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   35




---



##### Table of Contents



ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    outlook and strategies;
    
    operating results during the first quarter ended March 31, 2010 compared with the same
period in 2009;
    
    factors which affect our results and outlook;
    
    liquidity, capital needs, capital resources, and contractual obligations;
    
    dividends; and
    
    critical accounting estimates.
   
 UNISOURCE ENERGY CONSOLIDATED
 
 OVERVIEW OF CONSOLIDATED BUSINESS
      
 OUTLOOK AND STRATEGIES
  
    
    Develop strategic responses to potential new legislation on carbon emissions, including the
evaluation of TEPs existing mix of generation resources, and define steps to achieve
environmental objectives that provide an appropriate return on investment and are consistent
with earnings growth;
    
    Obtain ACC approval of a rate increase for UNS Electric to provide adequate
revenues to cover the rising cost of providing reliable and safe service to their customers;
  36




---



##### Table of Contents




    
    Expand TEP and UNS Electrics transmission system to meet increasing loads and provide
access to renewable energy resources;
    
    Expand TEP and UNS Electrics portfolio of renewable energy sources and programs to meet
Arizonas renewable energy standards;
    
    Create future ownership opportunities for renewable energy projects; and
    
    Ensure UniSource Energy continues to have adequate liquidity by maintaining sufficient
lines of credit and regularly reviewing and adjusting UniSource Energys short-term investment
strategies in response to market conditions.
 
 RESULTS OF OPERATIONS
 Executive Overview
 Seasonality of Utility Operations
  First Quarter of 2010 Compared with the First Quarter of 2009
  O&M
  Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-TEP Base O&M
    
    $
    54
    
    
    $
    63UNS Gas Base O&M
    
    
    6
    
    
    
    6UNS Electric Base O&M
    
    
    5
    
    
    
    5Consolidating Adjustments and Other (1)
    
    
    (2
    )
    
    
    (1
    )UniSource Energy Base O&M
    
    
    63
    
    
    
    73Reimbursed Expenses Related to Springerville Units 3 and 4
    
    
    13
    
    
    
    9Expenses related to customer-funded renewable energy programs(2)
    
    
    7
    
    
    
    3Total UniSource Energy O&M
    
    $
    83
    
    
    $
    85
 (1)
    
    Includes Millennium, UED and parent company O&M, and inter-company
eliminations(2)
    
    Represents expenses related to customer-funded renewable energy
programs; the offsetting funds collected from
customers are recorded in other revenue.  37




---



##### Table of Contents



CONTRIBUTION BY BUSINESS SEGMENT
  Three Months EndedMarch 31,2010
    
    
    2009-Millions of Dollars-TEP
    
    $
    10
    
    
    $
    (1
    )UNS Gas
    
    
    6
    
    
    
    5UNS Electric
    
    
    3
    
    
    
    1Other (1)
    
    
    1
    
    
    
    Consolidated Net Income
    
    $
    20
    
    
    $
    5
 (1)
    
    Includes: UniSource Energy parent company expenses; UniSource Energy
parent company interest expense (net of tax) on the UniSource Convertible Senior Notes
and on the UniSource Credit Agreement; income and losses from Millennium investments and
UED. 
 LIQUIDITY AND CAPITAL RESOURCES
 Liquidity
  Borrowings
    
    
    Amount AvailableBalances as of
    
    Cash and Cash
    
    
    under Revolving
    
    
    under RevolvingApril
30, 2010
    
    Equivalents
    
    
    Credit Facility(1)
    
    
    Credit Facility-Millions of Dollars-UniSource Energy stand-alone
    
    $
    4
    
    
    $
    34
    
    
    $
    36TEP
    
    
    14
    
    
    
    66
    
    
    
    84UNS Gas
    
    
    21
    
    
    
    
    
    
    
    45
    (2)UNS Electric
    
    
    10
    
    
    
    16
    
    
    
    29
    (2)Other
    
    
    3
    (3)
    
    
    N/A
    
    
    
    N/ATotal
    
    $
    52
 (1)
    
    Includes LOCs issued under Revolving Credit Facilities.(2)
    
    Either UNS Gas or UNS Electric may borrow up to a maximum of $45 million, but the
total combined amount borrowed cannot exceed $60 million.(3)
    
    Includes cash and cash equivalents at UED and Millennium. Short-term Investments
   38




---



##### Table of Contents



Access to Revolving Credit Facilities
  Quantitative and Qualitative Disclosures about Market Risk, Credit Risk
 Liquidity Outlook
 UniSource Energy Credit Agreement
 Executive Overview  UniSource Energy Consolidated Cash Flows
 Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    62
    
    
    $
    91Investing Activities
    
    
    (90
    )
    
    
    (104
    )Financing Activities
    
    
    21
    
    
    
    (2
    )
 Operating Activities
  Investing Activities
  Capital Expenditures
 Actual Year-to-Date
    
    
    EstimateMarch 31, 2010
    
    
    Full Year 2010-Millions of Dollars-TEP
    
    $
    104
    
    
    $
    258UNS Gas
    
    
    2
    
    
    
    14UNS Electric
    
    
    5
    
    
    
    26UniSource Energy Stand-Alone
    
    
    1
    
    
    
    16UniSource Energy Consolidated
    
    $
    112
    
    
    $
    314
  39




---



##### Table of Contents



Financing Activities
 TEP, Liquidity and Capital Resources, Financing Activities, TEP
Term Loan, Other Non-Reportable Business Segments, Results of Operations, UED .
 UniSource Energy Credit Agreement
     Interest Rate Risk
 Item 3. Quantitative and Qualitative Disclosures about Market Risk, Credit Risk
 Convertible Senior Notes
  Guarantees
  
    
    UES guarantee of $100 million senior unsecured notes issued by UNS Gas and $100 million
senior unsecured notes issued by UNS Electric;
    
    UES guarantee of the $60 million UNS Gas/UNS Electric Revolver;
  40




---



##### Table of Contents




    
    UniSource Energys guarantee of approximately $2 million in building lease payments for UNS
Gas; and
    
    UniSource Energys guarantee of the $35 million UED term loan.
    Contractual Obligations
  2015Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    after
    
    
    Total-Millions of Dollars-Long-Term Debt(1)
    
    $
    
    
    
    $
    30
    
    
    $
    35
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    65Purchase Obligations:Fuel
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Purchased Power
    
    
    
    
    
    
    9
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Building Commitments
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Total Additional Contractual Cash
Obligations
    
    $
    14
    
    
    $
    40
    
    
    $
    38
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    92
 (1)
    
    In February 2010, UED amended the UED Credit Agreement to extend the termination
date by two years to March 2012 and to increase borrowings by $9 million bringing the
outstanding balance to $35 million. In March 2010, TEP entered into an 18-month,
$30 million term loan facility. Dividends on Common Stock
  Dividend Amount Per ShareDeclaration Date
    
    Record Date
    
    Payment Date
    
    of Common StockFebruary 12, 2010
    
    February 23, 2010
    
    March 8, 2010
    
    $
    0.39
 Income Tax Position
 Financial
Statements Note 5. Income Taxes
  41




---



##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 RESULTS OF OPERATIONS
 Executive Summary
   First Quarter of 2010 Compared with First Quarter of 2009
  
    
    A $1 million increase in total retail margin revenues due to an increase in residential
and mining kWh sales compared with the first quarter of 2009, which was partially offset by
lower commercial and industrial sales resulting from weak economic conditions;
    
    a $4 million increase in wholesale transmission revenues as TEP temporarily provided
transmission capacity for Springerville Unit 4 during the first quarter of 2010;
    
    a $9 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, resulting primarily from fewer planned maintenance outages compared with the
first three months of 2009. See Other Operating Expenses, O&M,below;
    
    a $3 million decrease in depreciation expense due to lower depreciation rates on TEPs
transmission assets and lower depreciation related to Sundt Unit 4 compared with 2009. TEP
completed an updated depreciation study in the fourth quarter of 2009 and adopted new
depreciation rates for transmission assets in January 2010. This was partially offset by
higher depreciation related to additions to plant in service;
    
    a $1 million decrease in capital lease amortization expense due to the purchase in March
2010 of the previously leased Sundt Unit 4, a lengthened amortization period for leasehold
improvements at Sundt Unit 4, and lower balances on capital lease obligations; and
    
    a $4 million increase in the pre-tax benefit recognized by TEP related to Springerville
Units 3 and 4 for operating fees and contributions toward common facility costs. The
increase is primarily due to the start of commercial operation of Springerville Unit 4 in
December 2009; partially offset by
    
    a $3 million provision for wholesale refunds resulting from the settlement of disputes
related to wholesale sales to the California Power Exchange in 2000 and 2001.
  42




---



##### Table of Contents



Retail Sales and Revenues
 Increase (Decrease)Three Months Ended March 31,
    
    2010
    
    
    2009
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    755
    
    
    
    727
    
    
    
    28
    
    
    
    3.8
    %Commercial
    
    
    394
    
    
    
    404
    
    
    
    (10
    )
    
    
    (2.3
    %)Industrial
    
    
    474
    
    
    
    489
    
    
    
    (15
    )
    
    
    (3.2
    %)Mining
    
    
    261
    
    
    
    259
    
    
    
    2
    
    
    
    0.9
    %Public Authorities
    
    
    45
    
    
    
    50
    
    
    
    (5
    )
    
    
    (10.7
    )%Total Electric Retail Sales
    
    
    1,929
    
    
    
    1,929
    
    
    
    0
    
    
    
    0
    %Retail Margin Revenues (in millions):Residential
    
    $
    47
    
    
    $
    45
    
    
    $
    2
    
    
    
    4.4
    %Commercial
    
    
    31
    
    
    
    30
    
    
    
    1
    
    
    
    1.0
    %Industrial
    
    
    21
    
    
    
    23
    
    
    
    (2
    )
    
    
    (7.1
    %)Mining
    
    
    7
    
    
    
    7
    
    
    
    
    
    
    
    2.8
    %Public Authorities
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    (4.3
    %)Total Retail Margin Revenues
    
    $
    108
    
    
    $
    107
    
    
    
    1
    
    
    
    0.7
    %PPFAC Revenues
    
    
    51
    
    
    
    48
    
    
    
    3
    
    
    
    7.4
    %REST & DSM Revenues
    
    
    8
    
    
    
    2
    
    
    
    6
    
    
    NMTotal Retail Revenues
    
    $
    167
    
    
    $
    157
    
    
    $
    10
    
    
    
    6.3
    %Avg. Retail Margin Rate (cents / kWh):Residential
    
    
    6.27
    
    
    
    6.23
    
    
    
    0.04
    
    
    
    0.6
    %Commercial
    
    
    7.75
    
    
    
    7.50
    
    
    
    0.25
    
    
    
    3.4
    %Industrial
    
    
    4.43
    
    
    
    4.62
    
    
    
    (0.18
    )
    
    
    (4.0
    %)Mining
    
    
    2.80
    
    
    
    2.86
    
    
    
    (0.06
    )
    
    
    (2.2
    %)Public Authorities
    
    
    4.93
    
    
    
    4.60
    
    
    
    0.33
    
    
    
    7.1
    %Avg. Retail Margin Rate
    
    
    5.62
    
    
    
    5.59
    
    
    
    0.03
    
    
    
    0.5
    %Avg. PPFAC Rate
    
    
    2.64
    
    
    
    2.46
    
    
    
    0.18
    
    
    
    7.4
    %Avg. REST & DSM Rate
    
    
    0.41
    
    
    
    0.12
    
    
    
    0.29
    
    
    NMTotal Avg. Retail Rate
    
    
    8.68
    
    
    
    8.18
    
    
    
    0.50
    
    
    
    6.1
    %2010
    
    
    2009Weather Data:Heating Degree DaysThree Months Ended March 31
    
    
    881
    
    
    
    646
    
    
    
    235
    
    
    
    36.4
    %10-Year Average
    
    
    805
    
    
    
    805
    
    
    
    
    
    
    
    
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table Residential
  Commercial
   43




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##### Table of Contents



Industrial
  Mining
  Wholesale Sales and Revenues
 Increase (Decrease)Three Months Ended March 31,
    
    2010
    
    
    2009
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Wholesale Sales Delivered:Long-term Contracts
    
    
    288
    
    
    
    275
    
    
    
    13
    
    
    
    4.7
    %Other Sales
    
    
    450
    
    
    
    555
    
    
    
    (105
    )
    
    
    (18.9
    %)Total Electric Wholesale Sales
    
    
    738
    
    
    
    830
    
    
    
    (92
    )
    
    
    (11.1
    %)Electric Wholesale Revenues:Long-term Contracts
    
    $
    15
    
    
    $
    14
    
    
    $
    1
    
    
    
    5.6
    %Other Sales
    
    
    17
    
    
    
    20
    
    
    
    (3
    )
    
    
    (6.6
    %)Provision for Wholesale Refunds
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    NMTransmission
    
    
    8
    
    
    
    4
    
    
    
    4
    
    
    NMTotal Wholesale Revenues
    
    $
    37
    
    
    $
    38
    
    
    $
    (1
    )
    
    
    (2.6
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table Long-Term Wholesale and Transmission Revenues
   Note 6. Commitments and Contingencies
 Short-Term Wholesale and Trading Revenues
   44




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##### Table of Contents



Other Revenues
 Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Revenues related to Springerville Units 3 and 4
    
    $
    21
    
    
    $
    13Other Revenue
    
    
    5
    
    
    
    5Total Other Revenue
    
    $
    26
    
    
    $
    18
 Fuel and Purchased Power Expense
 Generation andTEP
    
    Purchased Power
    
    
    ExpenseThree Months Ended March 31,
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009-Millions of kWh-
    
    
    -Millions of Dollars-Coal-Fired Generation
    
    
    2,095
    
    
    
    2,112
    
    
    $
    48
    
    
    $
    43Gas-Fired Generation
    
    
    183
    
    
    
    169
    
    
    
    9
    
    
    
    7Renewable Generation
    
    
    7
    
    
    
    2
    
    
    
    
    
    
    
    Total Generation (1)
    
    
    2,285
    
    
    
    2,283
    
    
    
    57
    
    
    
    50Total Purchased Power
    
    
    536
    
    
    
    651
    
    
    
    24
    
    
    
    23Transmission
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Increase
(Decrease) to Reflect PPFAC Recovery Treatment
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Total Resources
    
    
    2,821
    
    
    
    2,934
    
    
    $
    79
    
    
    $
    74Less Line Losses and Company Use
    
    
    (154
    )
    
    
    (175
    )Total Energy Sold
    
    
    2,667
    
    
    
    2,759
 (1)
    
    Generation expense in the first quarters of 2010 and 2009 exclude $1 million
related to Springerville Units 3 and 4; these expenses were reimbursed by Tri-State and SRP
and recorded in Other Revenue. Generating Output
  Purchased Power
   Three Months Ended March 31,
    
    2010
    
    
    2009-cents per kWh-Coal
    
    
    2.29
    
    
    
    2.04Gas
    
    
    4.92
    
    
    
    4.14Purchased Power
    
    
    4.48
    
    
    
    3.53All Sources
    
    
    2.81
    
    
    
    2.52
  45




---



##### Table of Contents



Market Prices
  Average Market Price for Around-the-Clock Energy
    
    $/MWhQuarter ended March 31, 2010
    
    $
    40Quarter ended March 31, 2009
    
    
    30
 Average Market Price for Natural Gas
    
    $/MMBtuQuarter ended March 31, 2010
    
    $
    5.26Quarter ended March 31, 2009
    
    
    3.57
 Other Operating Expenses
 O&M
  Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Base O&M
    
    $
    54
    
    
    $
    63Reimbursed Expenses Related to Springerville Units 3 and 4
    
    
    13
    
    
    
    9Expenses related to Customer-Funded Renewable Energy and
DSM programs(1)
    
    
    5
    
    
    
    3Total O&M
    
    $
    72
    
    
    $
    75
 (1)
    
    Represents expenses related to TEPs customer-funded
renewable energy programs; the offsetting funds collected from customers
are recorded in retail revenue. 
 FACTORS AFFECTING RESULTS OF OPERATIONS
 Springerville Units 3 and 4
  Depreciation
   Sundt Unit 4
   46




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##### Table of Contents



Refinancing Activity
 Liquidity and Capital Resources, Financing Activities,TEP Credit Agreement, .
 Pension and Postretirement Benefit Expense
 Financial Statements Note 8. Employee Benefit Plans
 El Paso Electric Dispute
   Renewable Energy Standard and Tariff
     47




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##### Table of Contents



Electric Energy Efficiency Standards
  Rosemont Copper Mine
  Fair Value Measurements
  TEPQuoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalMarch 31, 2010-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    18
    
    
    $
    
    
    
    $
    
    
    
    $
    18Rabbi Trust Investments to support
the Deferred Compensation and
SERP Plans (2)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Collateral Posted (5)
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Energy Contracts (3)
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Total Assets
    
    
    18
    
    
    
    16
    
    
    
    6
    
    
    
    40LiabilitiesEnergy Contracts (3)
    
    
    
    
    
    
    (12
    )
    
    
    (8
    )
    
    
    (20
    )Interest Rate Swaps (4)
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Total Liabilities
    
    
    
    
    
    
    (19
    )
    
    
    (8
    )
    
    
    (27
    )Net Total Assets and (Liabilities)
    
    $
    18
    
    
    $
    (3
    )
    
    $
    (2
    )
    
    $
    13
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
money market funds and certificates of deposit.(2)
    
    Level 2 investments consist of amounts held in mutual and money market funds related to
deferred compensation and Supplemental Executive Retirement Plan (SERP) benefits. The valuation is
based on quoted prices, traded in active markets. These investments are included in Investments
and Other Property  Other in the UniSource Energy and TEP balance sheets.  48




---



##### Table of Contents



(3)
    
    Energy contracts include gas swap agreements (Level 2), forward power purchase and sales
contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to
take advantage of favorable market conditions and reduce exposure to energy price risk. The
valuation techniques are described below.(4)
    
    The Interest Rate Swaps are valued based on the six month LIBOR index or the Securities
Industry and Financial Markets Association (SIFMA) Municipal Swap Index.(5)
    
    Collateral provided for energy contracts with counterparties to reduce credit risk exposure.    
 LIQUIDITY AND CAPITAL RESOURCES
 TEP Cash Flows
  Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    56
    
    
    $
    67Amounts from Statements of Cash Flows:Less: Capital Expenditures (1)
    
    
    (104
    )
    
    
    (69
    )Net Cash Flows after Capital Expenditures
(non-GAAP)*
    
    
    (48
    )
    
    
    (2
    )Amounts from Statements of Cash Flows:Less: Retirement of Capital Lease Obligations
    
    
    (40
    )
    
    
    (14
    )Plus: Proceeds from Investment in Lease Debt
    
    
    22
    
    
    
    1Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)*
    
    $
    (66
    )
    
    $
    (15
    )
 (1)
    
    Includes $52 million payment for purchase of Sundt Unit 4 lease equity.  49




---



##### Table of Contents



Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    56
    
    
    $
    67Net Cash Flows  Investing Activities (GAAP)
    
    
    (82
    )
    
    
    (96
    )Net Cash Flows  Financing Activities (GAAP)
    
    
    24
    
    
    
    6Net Cash Flows after Capital Expenditures (non-GAAP)*
    
    
    (48
    )
    
    
    (2
    )Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)*
    
    
    (66
    )
    
    
    (15
    )
 *
    
    Net Cash Flows after Capital Expenditures and Net Cash Flows Available after Required Payments,
both non-GAAP measures of liquidity, should not be considered as alternatives to Net Cash Flows -
Operating Activities, which is determined in accordance with GAAP as a measure of liquidity. TEP
believes that Net Cash Flows after Capital Expenditures and Net Cash Flows Available after Required
Payments provide useful information to investors as measures of liquidity and its ability to fund
its capital requirements, make required payments on debt and capital lease obligations, and pay
dividends to UniSource Energy. Liquidity Outlook
  Operating Activities
  
    
    a $7 million decrease in cash flows from wholesale electric sales less fuel and
purchased power cost;
    
    a $15 million decrease in income tax refunds;
    
    a $2 million increase in taxes other than income taxes; partially offset by
    
    a $7 million increase in cash receipts related to the operation of Springerville Units 3
and 4; and
    
    an $8 million decrease in cash deposits made with power and gas trading counterparties.
 Investing Activities
  Financing Activities
   50




---



##### Table of Contents



TEP Term Loan
   TEP Credit Agreement
   Capital Contribution from UniSource Energy
 Investments in Springerville
Lease Debt and Equity,
 Interest Rate Risk
   51




---



##### Table of Contents



Capital Lease Obligations
  Capital Lease ObligationBalance
    
    
    
    
    
    
    Renewal/PurchaseLeased Asset
    
    at March 31, 2010
    
    
    Expiration
    
    
    Option-Millions of Dollars-Springerville Unit 1
    
    $
    297
    
    
    2015
    
    
    Fair market value purchase optionSpringerville Coal Handling Facilities
    
    
    87
    
    
    2015
    
    
    Fixed price purchase option of $120 millionSpringerville Common Facilities
    
    
    108
    
    
    2017 and 2021
    
    
    Fixed price purchase option of $106 millionSundt Unit 4
    
    
    5
    
    
    
    
    (1)
    
    Fair market value purchase optionTotal Capital Lease Obligations
    
    $
    497
 (1)
    
    In March 2010, TEP purchased 100% of the equity interest in Sundt Unit 4. See TEP, Factors
Affecting Results of Operations, Sundt Unit 4, above, for more information. Financial Statements Note 4. Debt, Credit Facilities and Capital Lease
Obligations
 Income Tax Position
 UniSource Energy Consolidated, Liquidity and Capital Resources, Income Tax Position,
 Contractual Obligations
  2015Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    after
    
    
    Total-Millions of Dollars-Long-Term Debt
    
    $
    
    
    
    $
    30
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    30Purchase Obligations:Purchased Power
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Total Additional Contractual Cash
Obligations
    
    $
    
    
    
    $
    34
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    34
  52




---



##### Table of Contents



Dividends on Common Stock
   
 UNS GAS
 
 RESULTS OF OPERATIONS
  Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Gas Revenues
    
    $
    56
    
    
    $
    59Other Revenues
    
    
    1
    
    
    
    1Total Operating Revenues
    
    
    57
    
    
    
    60Purchased Gas Expense
    
    
    37
    
    
    
    41Other Operations and Maintenance Expense
    
    
    6
    
    
    
    6Depreciation and Amortization
    
    
    2
    
    
    
    2Taxes Other Than Income Taxes
    
    
    1
    
    
    
    1Total Other Operating Expenses
    
    
    46
    
    
    
    50Operating Income
    
    
    11
    
    
    
    10Total Interest Expense
    
    
    2
    
    
    
    2Income Tax Expense
    
    
    3
    
    
    
    3Net Income
    
    $
    6
    
    
    $
    5
   53




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##### Table of Contents



Increase (Decrease)Three Months Ended March 31,
    
    2010
    
    
    2009
    
    
    Amount
    
    
    Percent*Energy Sales, Therms (in millions)Gas Retail Sales:Residential
    
    
    33
    
    
    
    30
    
    
    
    3
    
    
    
    13.0
    %Commercial
    
    
    12
    
    
    
    10
    
    
    
    2
    
    
    
    10.3
    %Industrial
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    5.0
    %Public Authorities
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    9.4
    %Total Gas Retail Sales
    
    
    49
    
    
    
    44
    
    
    
    5
    
    
    
    12.0
    %Negotiated Sales Program (NSP)
    
    
    7
    
    
    
    8
    
    
    
    (1
    )
    
    
    (14.7
    %)Total Gas Sales
    
    
    56
    
    
    
    52
    
    
    
    4
    
    
    
    7.6
    %Gas Revenues (in millions):Retail Margin Revenues:Residential
    
    $
    14
    
    
    $
    13
    
    
    $
    1
    
    
    
    9.3
    %Commercial
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    8.8
    %Industrial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.6
    %Public Authorities
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    8.1
    %Total Retail Margin Revenues
    
    $
    18
    
    
    $
    17
    
    
    $
    1
    
    
    
    9.1
    %Transport
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    (0.1
    %)Negotiated Sales Program (NSP)
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    (2.7
    %)Total Non-Fuel Base Revenues
    
    $
    23
    
    
    $
    22
    
    
    $
    1
    
    
    
    6.5
    %Retail Fuel Revenues
    
    $
    33
    
    
    $
    37
    
    
    
    (4
    )
    
    
    (11.4
    %)Other Revenue
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    (2.2
    %)Total Operating Revenues
    
    $
    57
    
    
    $
    60
    
    
    
    ($3
    )
    
    
    (4.8
    %)
 Increase (Decrease)Weather Data:
    
    2010
    
    
    2009
    
    
    Amount
    
    
    PercentHeating Degree DaysThree Months Ended March 31
    
    
    10,356
    
    
    
    9,254
    
    
    
    1,102
    
    
    
    11.9
    %10-Year Average
    
    
    9,885
    
    
    
    9,901
    
    
    
    (16
    )
    
    
    (0.2
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table   
 FACTORS AFFECTING RESULTS OF OPERATIONS
 Rates
 2010 UNS Gas Rate Order
   54




---



##### Table of Contents



Test year  12 months ended June 30, 2008
    
    Requested by UNS Gas
    
    2010 ACC OrderOriginal cost rate base
    
    $182 million
    
    $180 millionRevenue deficiency
    
    $10 million
    
    $3 millionTotal rate increase (over test year revenues)
    
    6%
    
    2%Cost of equity
    
    11.0%
    
    9.5%Actual capital structure
    
    50% equity / 50% debt
    
    50% equity / 50% debtWeighted average cost of capital
    
    8.75%
    
    8.0%Rate of return on fair value rate base
    
    6.80%
    
    5.75%
 Energy Cost Adjustment Mechanism
    Fair Value Measurements
  UNS GasMarch 31, 2010-Millions of Dollars-Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents(1)
    
    $
    24
    
    
    $
    
    
    
    $
    
    
    
    $
    24Cash Collateral(2)
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Energy Contracts(3)
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )Total
    
    $
    24
    
    
    $
    (7
    )
    
    $
    
    
    
    $
    17
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
money market funds, commercial paper and certificates of deposit.(2)
    
    Collateral provided to energy contract counterparties to reduce credit risk exposure.(3)
    
    Energy contracts include gas swap agreements (Level 2) entered into to take advantage of
favorable market conditions and reduce exposure to energy price risk. They are valued using New
York Mercantile Exchange (NYMEX) pricing, adjusted for basin difference. The amounts include
current and non-current liabilities and are net of current and non-current assets.  55




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Liquidity Outlook
  Operating Cash Flow and Capital Expenditures
  Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    4
    
    
    $
    11Investing Activities
    
    
    (2
    )
    
    
    (4
    )Financing Activities
    
    
    
    
    
    
    Net Increase (Decrease) in Cash
    
    
    2
    
    
    
    7Beginning Cash
    
    
    31
    
    
    
    7Ending Cash
    
    $
    33
    
    
    $
    14
  UNS Gas/UNS Electric Revolver
   Interest Rate Risk
 Item 3. Quantitative and
Qualitative Disclosures about Market Risk, Credit Risk
 Senior Unsecured Notes
   56




---



##### Table of Contents



Contractual Obligations
  2015Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    after
    
    
    Total-Millions of Dollars-Purchase Obligations:Fuel
    
    $
    
    
    
    $
    1
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2
 Dividends on Common Stock
 Senior Unsecured Notes
 
 UNS ELECTRIC
 
 RESULTS OF OPERATIONS
    Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Retail Electric Revenues
    
    $
    38
    
    
    $
    44Wholesale Electric Revenues
    
    
    3
    
    
    
    1Total Operating Revenues
    
    
    41
    
    
    
    45Purchased Energy Expense
    
    
    26
    
    
    
    21Fuel Expense
    
    
    2
    
    
    
    4Transmission Expense
    
    
    3
    
    
    
    2Increase (Decrease) to reflect PPFAC Recovery
    
    
    (4
    )
    
    
    6Other Operations and Maintenance Expense
    
    
    6
    
    
    
    5Depreciation and Amortization
    
    
    4
    
    
    
    3Taxes Other Than Income Taxes
    
    
    1
    
    
    
    1Total Other Operating Expenses
    
    
    38
    
    
    
    42Operating Income
    
    
    3
    
    
    
    3Other Income
    
    
    3
    
    
    
    Total Interest Expense
    
    
    2
    
    
    
    2Income Tax Expense
    
    
    1
    
    
    
    Net Income
    
    $
    3
    
    
    $
    1
   57




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##### Table of Contents



Increase (Decrease)Three Months Ended March 31,
    
    2010
    
    
    2009
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    175
    
    
    
    166
    
    
    
    9
    
    
    
    5.3
    %Commercial
    
    
    131
    
    
    
    134
    
    
    
    (3
    )
    
    
    (1.8
    %)Industrial
    
    
    52
    
    
    
    38
    
    
    
    14
    
    
    
    35.1
    %Mining
    
    
    47
    
    
    
    34
    
    
    
    13
    
    
    
    38.1
    %Public Authorities
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    (7.5
    %)Total Electric Retail Sales
    
    
    406
    
    
    
    373
    
    
    
    33
    
    
    
    8.8
    %Electric Wholesale Sales
    
    
    69
    
    
    
    38
    
    
    
    32
    
    
    
    84.7
    %Total Electric Sales
    
    
    475
    
    
    
    411
    
    
    
    65
    
    
    
    16.0
    %Electric Retail Revenues (in millions):Retail Margin Revenues:Residential
    
    $
    4
    
    
    $
    4
    
    
    $
    
    
    
    
    4.7
    %Commercial
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    (0.4
    %)Industrial
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    16.8
    %Mining
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    27.3
    %Public Authorities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.6
    %Total Retail Margin Revenues
    
    $
    12
    
    
    $
    11
    
    
    $
    1
    
    
    
    5.9
    %Retail Fuel Revenues
    
    
    23
    
    
    $
    31
    
    
    
    (8
    )
    
    
    (25.2
    %)DSM and REST Revenues
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    NMTotal Retail Revenues
    
    
    37
    
    
    
    43
    
    
    
    (6
    )
    
    
    (14.4
    %)Electric Wholesale Revenues
    
    
    3
    
    
    
    1
    
    
    
    2
    
    
    NMTotal Electric Revenues
    
    $
    40
    
    
    $
    44
    
    
    $
    (4
    )
    
    
    (6.8
    %)
 Weather  Heating Degree Days
    
    2010
    
    
    2009Three Months Ended March 31
    
    
    3,570
    
    
    
    3,121
    
    
    
    449
    
    
    
    14.4
    %10-Year Average
    
    
    3,389
    
    
    
    3,364
    
    
    
    25
    
    
    
    0.7
    %
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table   58




---



##### Table of Contents



FACTORS AFFECTING RESULTS OF OPERATIONS
 Rates
 2009 General Rate Case Filing
  Requested byTest  year  December 31, 2008
    
    UNS ElectricOriginal cost rate base
    
    $176 millionRevenue deficiency
    
    $13.5 millionTotal rate increase (over test year revenues)
    

    7.4%Cost of debt
    

    7.05%Cost of equity
    

    11.40%Actual capital structure
    
    46% equity / 54% debtWeighted average cost of capital
    

    9.04%Fair Value Rate Base
    
    $265 millionRate of Return on Fair Value Rate Base
    

    6.88%
  Purchased Power and Fuel Adjustment Clause
  Fair Value Measurements
  UNS ElectricMarch 31, 2010-Millions of Dollars-Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents(1)
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    3Cash Collateral(2)
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Energy Contracts(3)
    
    
    
    
    
    
    (5
    )
    
    
    (14
    )
    
    
    (19
    )Total
    
    $
    3
    
    
    $
    (4
    )
    
    
    (14
    )
    
    $
    (15
    )
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
money market funds.(2)
    
    Collateral provided to energy contract counterparties to reduce credit risk exposure.(3)
    
    Energy contracts include gas swap agreements (Level 2), forward power purchase and sales
contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to
take advantage of favorable market conditions and reduce exposure to energy price risk. The
amounts include current and non-current liabilities and are net of current and non-current assets.
The valuation techniques are described below.  59




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Liquidity Outlook
  UniSource Energy Consolidated, Outlook and Strategies, UniSource Energy
Consolidated, Liquidity and Capital Resources, Liquidity, Access to Revolving Credit Facilities
  60




---



##### Table of Contents



Operating Cash Flow and Capital Expenditures
  Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    1
    
    
    $
    14Investing Activities
    
    
    (5
    )
    
    
    (8
    )Financing Activities
    
    
    2
    
    
    
    (8
    )Net Increase (Decrease) in Cash
    
    
    (2
    )
    
    
    (2
    )Beginning Cash
    
    
    10
    
    
    
    9Ending Cash
    
    $
    8
    
    
    $
    7
  UNS Gas/UNS Electric Revolver
 UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver
  Senior Unsecured Notes
  Contractual Obligations
  2015Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    after
    
    
    Total-Millions of Dollars-Purchase Obligations:Purchased Power
    
    $
    
    
    
    $
    5
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7
 Dividends on Common Stock
 Senior Unsecured Notes
  61




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##### Table of Contents



OTHER NON-REPORTABLE BUSINESS SEGMENTS
 
 RESULTS OF OPERATIONS
  Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-UED
    
    $
    1
    
    
    $
    1Millennium
    
    
    1
    
    
    
    UniSource Energy Parent Company
    
    
    (1
    )
    
    
    (1
    )Total Other
    
    $
    1
    
    
    $
    
 UniSource Energy Parent Company
  UED
     
 FACTORS AFFECTING RESULTS OF OPERATIONS
 Millennium Investments
    62




---



##### Table of Contents



March 31, 2010-Millions of Dollars-Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents (1)
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    2Equity Investments (2)
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6Total
    
    $
    2
    
    
    $
    
    
    
    $
    6
    
    
    $
    8
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
money market funds.(2)
    
    Equity Investments are, in the absence of readily ascertainable market values, based on the
lower of the investment partners valuations or managements valuation and comprise
Millenniums equity investment in unregulated businesses. These investments are included in
Investments and Other Property  Other in the UniSource Energy balance sheet. 
 CRITICAL ACCOUNTING ESTIMATES
  
 RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
  
    
    The FASB issued authoritative guidance for multiple deliverable revenue arrangements
that provides another alternative for determining the selling price of deliverables and
eliminates the residual method of allocating consideration. In addition, this
pronouncement requires expanded qualitative and quantitative disclosures and is effective
for revenue arrangements entered into after January 1, 2011. We are evaluating the impact
of this pronouncement.
 
    
    The FASB issued amendments that require some new disclosures and clarify some existing
disclosure requirements about fair value measurements. The amendments are effective for
interim and annual reporting periods beginning January 1, 2010, except for disclosures
about purchases, sales, issuances, and settlements in the roll forward of activity in Level
3 fair value measurements, which are effective for interim and annual reporting periods
beginning January 1, 2011. We are evaluating the impact of these new disclosures on our
financial statements. See Financial Statements Note 10for our current fair value
disclosures.
 
 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
   63




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##### Table of Contents



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
  Commodity Price Risk
 TEP
  Natural Gas
  Purchases and Sales of Energy
   64




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##### Table of Contents



Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Unrealized Gains (Losses)
    
    $
    (3
    )
    
    $
    (14
    )
  Sensitivity Analysis of Derivatives
  Unrealized Gain (Loss) of TEPsHedging and Trading Activities-Millions of Dollars-TotalMaturity 0  6
    
    
    Maturity 6   12
    
    
    Maturity
    
    
    UnrealizedSource of Fair Value at March 31, 2010
    
    months
    
    
    months
    
    
    over 1 yr.
    
    
    Gain (Loss)Prices actively quoted
    
    $
    (10
    )
    
    $
    
    
    
    $
    (3
    )
    
    $
    (13
    )Prices based on models and other
valuation methods
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Total
    
    $
    (8
    )
    
    $
    
    
    
    $
    (5
    )
    
    $
    (13
    )
  -Millions of Dollars-Change in Market Price as of March 31, 2010
    
    10% Increase
    
    
    10% DecreaseNon-Cash Flow HedgesForward gas contracts
    
    $
    3
    
    
    $
    (3
    )Forward power sales and purchase contracts
    
    
    (1
    )
    
    
    1Cash Flow HedgesForward power purchase contracts
    
    
    1
    
    
    
    (1
    )
 UNS Gas
   Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Unrealized Gains (Losses)
    
    $
    (3
    )
    
    $
    (1
    )
  65




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##### Table of Contents



UNS Electric
   Three Months Ended March 31,
    
    2010
    
    
    2009-Millions of Dollars-Unrealized Gains (Losses)
    
    $
    (7
    )
    
    $
    (11
    )
   Credit Risk
    .
  
 ITEM 4.  CONTROLS AND PROCEDURES
   66




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.  LEGAL PROCEEDINGS
 Right of Way Matters
  Note 6 of Notes to Consolidated Financial Statements, Commitments and Contingencies in
Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.
 
 ITEM 1A.  RISK FACTORS
 Form 10-K.
 
 ITEM 2.  UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
   67




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##### Table of Contents



ITEM 5.  OTHER INFORMATION
 
 Ratio of Earnings to Fixed Charges
  3 Months Ended
    
    
    12 Months EndedMarch 31, 2010
    
    
    March 31, 2010UniSource Energy
    
    
    2.085
    
    
    
    2.713TEP
    
    
    1.699
    
    
    
    2.814
  Environmental Matters
  
 ITEM 6.  EXHIBITS
   68




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##### Table of Contents



SIGNATURES
  UNISOURCE ENERGY CORPORATION(Registrant)Date: May 3, 2010
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial OfficerTUCSON ELECTRIC POWER COMPANY(Registrant)Date: May 3, 2010
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial Officer  69




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##### Table of Contents



EXHIBIT INDEX
 **4
    (a)
    
    
    
    Loan Agreement, dated as of March 1, 2010, between Tucson Electric Power Company and JP Morgan Chase bank; as
Lender and Administrative agent. (Form 8-K dated March 5, 2010, File No. 4-13739  Exhibit 4(a))**4
    (b)
    
    
    
    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. 4-13739  Exhibit 4(b))**10
    (a)
    
    
    
    Change in Control Agreement, date as of March 4, 2010, between Tucson Electric Power Company and Michael J.
DeConcini (including a schedule of other officers who are covered substantially by identical agreements).
(Form 8-K dated March 5, 2010, File No. 4-13739  Exhibit 10(a))12
    (a)
    
    
    
    Computation of Ratio of Earnings to Fixed Charges  UniSource Energy.12
    (b)
    
    
    
    Computation of Ratio of Earnings to Fixed Charges  TEP.15
    
    
    
    
    Letter regarding unaudited interim financial information.31
    (a)
    
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  UniSource Energy, by Paul J. Bonavia.31
    (b)
    
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  UniSource 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.*32
    
    
    
    
    Statements of Corporate Officers (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).
 *
    
    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.**
    
    Previously filed as indicated and incorporated by reference. 
  70