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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 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
    
    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 þ No oTucson Electric Power Company
    
    Yes o No þ




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Table of Contents
 Definitions
    
    
    iii 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
    
    
    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
    
    
    13Note 1. Nature of Operations and Basis of Accounting Presentation
    
    
    13Note 2. Regulatory Matters
    
    
    15Note 3. Business Segments
    
    
    18Note 4. Debt and Credit Facilities
    
    
    21Note 5. Accounting for Derivative Instruments and Trading Activities
    
    
    22Note 6. Income Tax Matters
    
    
    30Note 7. Commitments and Contingencies
    
    
    31Note 8 Fair Value of Financial Instruments Not Carried at Fair Value
    
    
    33Note 9. Employee Benefits Plans
    
    
    34Note 10. Share-Based Compensation Plans
    
    
    35Note 11. Fair Value Measurements
    
    
    38Note 12. UniSource Energy Earnings Per Share (EPS)
    
    
    41Note 13. Stockholders Equity
    
    
    42Note 14. Millenniums Investment in Sabinas
    
    
    43Note 15 Recently Issued Accounting Pronouncements
    
    
    43Note 16. Supplemental Cash Flow Information
    
    
    45Note 17. Review by Independent Registered Public Accounting Firm
    
    
    46Item 2.   Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    47UniSource Energy Consolidated
    
    
    47Overview of Consolidated Business
    
    
    47Outlook and Strategies
    
    
    47Results of Operations
    
    
    49Contribution by Business Segment
    
    
    50Liquidity and Capital Resources
    
    
    50Tucson Electric Power Company
    
    
    54Results of Operations
    
    
    54Factors Affecting Results of Operations
    
    
    63Liquidity and Capital Resources
    
    
    66UNS Gas
    
    
    69Results of Operations
    
    
    69Factors Affecting Results of Operations
    
    
    72Liquidity and Capital Resources
    
    
    73UNS Electric
    
    
    74Results of Operations
    
    
    74Factors Affecting Results of Operations
    
    
    76Liquidity and Capital Resources
    
    
    78
  i




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Other Non-Reportable Business Segments
    
    
    79Results of Operations
    
    
    79Critical Accounting Estimates
    
    
    80New Accounting Pronouncements
    
    
    81Safe Harbor for Forward-Looking Statements
    
    
    82Item 3.  Quantitative and Qualitative Disclosures about Market Risk
    
    
    83Item 4.  Controls and Procedures
    
    
    85PART II  OTHER INFORMATIONItem 1.  Legal Proceedings
    
    
    85Item 1A.  Risk Factors
    
    
    85Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    85Item 4.  Submission of Matters to a Vote of Security Holders
    
    
    86Item 5.  Other Information
    
    
    86Ratio of Earnings to Fixed Charges
    
    
    86Item 6. Exhibits
    
    
    86Signatures
    
    
    87Exhibit Index
    
    
    88Exhibit 12(a)Exhibit 12(b)Exhibit 15Exhibit 31(a)Exhibit 31(b)Exhibit 31(c)Exhibit 31(d)Exhibit 32
   ii




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DEFINITIONS
  2008 TEP Rate Order
    
    A rate order issued by the ACC resulting in a new retail rate structure for
TEP, effective December 1, 2008.ACC
    
    Arizona Corporation Commission.AMT
    
    Alternative Minimum Tax.AOCI
    
    Accumulated Other Comprehensive Income.APS
    
    Arizona Public Service.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.Citizens
    
    Citizens Communications Company.Common Stock
    
    UniSource Energys common stock, without par value.Company
    
    UniSource Energy Corporation.Cooling Degree Days
    
    An index used to measure the impact of weather on energy usage calculated by
subtracting 75 from the average of the high and low daily temperatures.DSM
    
    Demand side management.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.FAS 71
    
    Statement of Financial Accounting Standards No. 71: Accounting for The Effects
of Certain Types of Regulation.FAS 133
    
    Statement of Financial Accounting Standards No. 133: Accounting for Derivative
Instruments and Hedging Activities, as amended.FERC
    
    Federal Energy Regulatory Commission.Fixed CTC
    
    Competition Transition Charge of approximately $0.009 per kWh that was
included in TEPs retail rate for the purpose of recovering TEPs $450 million
TRA by December 31, 2008.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.IDBs
    
    Industrial Development Revenue Bonds.IRS
    
    Internal Revenue Service.kWh
    
    Kilowatt-hour(s).LIBOR
    
    London Interbank Offered Rate.Luna
    
    Luna Energy Facility.Mark-to-Market Adjustments
    
    Unrealized gains and losses that are recorded monthly to reflect the market
prices at the end of each month on forward energy sales and purchase contracts
that are considered to be derivatives.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.PGA
    
    Purchased Gas Adjuster, a retail rate mechanism designed to recover the cost
of gas purchased for retail gas customers.Pima Authority
    
    The Industrial Development Authority of the County of Pima.PPFAC
    
    Purchased Power and Fuel Adjustment Clause.PWMT
    
    Pinnacle West Marketing and Trading.REST
    
    Renewable Energy Standard and Tariff.Sabinas
    
    Carboelectrica Sabinas, S. de R.L. de C.V., a Mexican limited liability company.
  iii




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San Juan
    
    San Juan Generating Station.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.Springerville
    
    Springerville Generating Station.Springerville Coal Handling 
Facilities Leases
    
    Leveraged lease arrangements relating to the coal handling facilities serving
Springerville.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.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 Letter of Credit Facility
    
    Letter of credit facility between TEP and a syndicate of banks, dated as of
April 30, 2008.TEP Revolving Credit Facility
    
    Revolving credit facility under the TEP Credit Agreement.Therm
    
    A unit of heating value equivalent to 100,000 British thermal units (Btu).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
    
    364-day credit agreement between UED and a bank, 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) which acquired the
Citizens Arizona gas and electric utility assets in 2003.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, which acquired the
Citizens Arizona electric utility assets in 2003.UNS Gas
    
    UNS Gas, Inc., a wholly-owned subsidiary of UES, which acquired the Citizens
Arizona gas utility assets in 2003.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.
  iv




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Report of Independent Registered Public Accounting Firm
 
     
  1




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Report of Independent Registered Public Accounting Firm
 
     
  2




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ITEM 1. FINANCIAL STATEMENTS
 
 UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    June 30,2009
    
    
    2008
    
    
    
    
    2009
    
    
    2008(Unaudited)
    
    
    
    
    (Unaudited)- Thousands of Dollars -
    
    
    
    
    - Thousands of Dollars -(Except Per Share Amounts)
    
    
    
    
    (Except Per Share Amounts)Operating Revenues$
    267,200
    
    
    $
    248,753
    
    
    Electric Retail Sales
    
    $
    468,552
    
    
    $
    447,293
    
    
    
    (14,898
    )
    
    Provision for Rate Refunds  CTC Revenue
    
    
    
    
    
    
    (14,898
    )267,200
    
    
    
    233,855
    
    
    Net Electric Retail Sales
    
    
    468,552
    
    
    
    432,39527,950
    
    
    
    77,456
    
    
    Electric Wholesale Sales
    
    
    63,246
    
    
    
    129,82524,661
    
    
    
    29,740
    
    
    Gas Revenue
    
    
    82,963
    
    
    
    95,17017,973
    
    
    
    19,271
    
    
    Other Revenues
    
    
    34,880
    
    
    
    33,066337,784
    
    
    
    360,322
    
    
    Total Operating Revenues
    
    
    649,641
    
    
    
    690,456Operating Expenses69,047
    
    
    
    75,982
    
    
    Fuel
    
    
    123,864
    
    
    
    145,20564,219
    
    
    
    123,478
    
    
    Purchased Energy
    
    
    140,914
    
    
    
    231,5582,991
    
    
    
    4,957
    
    
    Transmission
    
    
    5,251
    
    
    
    8,6213,618
    
    
    
    (4,892
    )
    
    Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment
    
    
    10,320
    
    
    
    (11,231
    )139,875
    
    
    
    199,525
    
    
    Total Fuel and Purchased Energy
    
    
    280,349
    
    
    
    374,15378,929
    
    
    
    70,670
    
    
    Other Operations and Maintenance
    
    
    163,882
    
    
    
    138,16047,527
    
    
    
    36,281
    
    
    Depreciation and Amortization
    
    
    88,202
    
    
    
    72,434
    
    
    
    6,695
    
    
    Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,94512,363
    
    
    
    12,525
    
    
    Taxes Other Than Income Taxes
    
    
    24,818
    
    
    
    25,120278,694
    
    
    
    325,696
    
    
    Total Operating Expenses
    
    
    557,251
    
    
    
    633,81259,090
    
    
    
    34,626
    
    
    Operating Income
    
    
    92,390
    
    
    
    56,644Other Income (Deductions)4,823
    
    
    
    3,039
    
    
    Interest Income
    
    
    6,921
    
    
    
    6,20413,878
    
    
    
    2,699
    
    
    Other Income
    
    
    14,385
    
    
    
    5,198(695
    )
    
    
    (2,291
    )
    
    Other Expense
    
    
    (1,228
    )
    
    
    (2,882
    )18,006
    
    
    
    3,447
    
    
    Total Other Income (Deductions)
    
    
    20,078
    
    
    
    8,520Interest Expense14,719
    
    
    
    18,175
    
    
    Long-Term Debt
    
    
    29,363
    
    
    
    35,42011,450
    
    
    
    13,074
    
    
    Interest on Capital Leases
    
    
    24,258
    
    
    
    26,151961
    
    
    
    582
    
    
    Other Interest Expense
    
    
    1,431
    
    
    
    1,723(619
    )
    
    
    (1,628
    )
    
    Interest Capitalized
    
    
    (1,344
    )
    
    
    (3,175
    )26,511
    
    
    
    30,203
    
    
    Total Interest Expense
    
    
    53,708
    
    
    
    60,11950,585
    
    
    
    7,870
    
    
    Income before Income Taxes
    
    
    58,760
    
    
    
    5,04519,310
    
    
    
    3,123
    
    
    Income Tax Expense
    
    
    22,566
    
    
    
    2,913$
    31,275
    
    
    $
    4,747
    
    
    Net Income
    
    $
    36,194
    
    
    $
    2,13235,687
    
    
    
    35,612
    
    
    Weighted-average Shares of Common Stock Outstanding (000)
    
    
    35,676
    
    
    
    35,585$
    0.88
    
    
    $
    0.13
    
    
    Basic Earnings per Share
    
    $
    1.01
    
    
    $
    0.06$
    0.80
    
    
    $
    0.13
    
    
    Diluted Earnings per Share
    
    $
    0.95
    
    
    $
    0.06$
    0.29
    
    
    $
    0.24
    
    
    Dividends Declared per Share
    
    $
    0.58
    
    
    $
    0.48
   3




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UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2009
    
    
    2008(Unaudited)- Thousands of Dollars -Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    499,791
    
    
    $
    462,364Cash Receipts from Electric Wholesale Sales
    
    
    92,347
    
    
    
    168,457Cash Receipts from Gas Sales
    
    
    109,245
    
    
    
    120,351Cash Receipts from Operating Springerville Unit 3 & 4
    
    
    32,523
    
    
    
    28,221Income Tax Refunds Received
    
    
    16,924
    
    
    
    13,082Interest Received
    
    
    6,150
    
    
    
    10,973Performance Deposits Receipts
    
    
    15,970
    
    
    
    4Sale of Excess Emission Allowances
    
    
    24
    
    
    
    1,494Other Cash Receipts
    
    
    6,730
    
    
    
    7,471Purchased Energy Costs Paid
    
    
    (165,411
    )
    
    
    (254,533
    )Fuel Costs Paid
    
    
    (121,318
    )
    
    
    (135,114
    )Payment of Other Operations and Maintenance Costs
    
    
    (113,975
    )
    
    
    (77,309
    )Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
    
    
    (78,321
    )
    
    
    (76,816
    )Wages Paid, Net of Amounts Capitalized
    
    
    (64,073
    )
    
    
    (57,303
    )Interest Paid, Net of Amounts Capitalized
    
    
    (26,967
    )
    
    
    (29,799
    )Capital Lease Interest Paid
    
    
    (23,802
    )
    
    
    (27,980
    )Performance Deposits Payments
    
    
    (15,750
    )
    
    
    Income Taxes Paid
    
    
    
    
    
    
    (9,900
    )Excess Tax Benefit from Stock Options Exercised
    
    
    (469
    )
    
    
    (594
    )Other Cash Payments
    
    
    (3,943
    )
    
    
    (2,893
    )Net Cash Flows  Operating Activities
    
    
    165,675
    
    
    
    140,176Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (177,255
    )
    
    
    (189,375
    )Deposit  Collateral Trust Bond Trustee
    
    
    
    
    
    
    (133,111
    )Payments for Investment in Springerville Lease Debt
    
    
    (31,375
    )
    
    
    Proceeds from Investment in Springerville Lease Debt
    
    
    906
    
    
    
    11,333Return of Investment from Millenniums Investment in Sabinas
    
    
    5,000
    
    
    
    816Insurance Proceeds for Replacement Assets
    
    
    4,279
    
    
    
    2,500Proceeds from the Sale of Land
    
    
    
    
    
    
    537Other Cash Receipts
    
    
    
    
    
    
    4,040Other Cash Payments
    
    
    (973
    )
    
    
    (765
    )Net Cash Flows  Investing Activities
    
    
    (199,418
    )
    
    
    (304,025
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facilities
    
    
    96,000
    
    
    
    167,000Proceeds from Issuance of Short-Term Debt
    
    
    30,000
    
    
    
    Proceeds from Stock Options Exercised
    
    
    988
    
    
    
    1,861Excess Tax Benefit from Stock Options Exercised
    
    
    469
    
    
    
    594Other Cash Receipts
    
    
    3,768
    
    
    
    4,280Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    220,745Repayments of Borrowings Under Revolving Credit Facilities
    
    
    (60,000
    )
    
    
    (122,000
    )Payments of Capital Lease Obligations
    
    
    (14,495
    )
    
    
    (62,177
    )Common Stock Dividends Paid
    
    
    (20,664
    )
    
    
    (17,000
    )Repayment of Long-Term Debt
    
    
    (3,000
    )
    
    
    (13,000
    )Payment of Debt Issue/Retirement Costs
    
    
    (950
    )
    
    
    (2,089
    )Other Cash Payments
    
    
    (675
    )
    
    
    (1,581
    )Net Cash Flows  Financing Activities
    
    
    31,441
    
    
    
    176,633Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (2,302
    )
    
    
    12,784Cash and Cash Equivalents, Beginning of Year
    
    
    55,172
    
    
    
    90,373Cash and Cash Equivalents, End of Period
    
    $
    52,870
    
    
    $
    103,157
    4




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UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -ASSETSUtility PlantPlant in Service
    
    $
    4,069,712
    
    
    $
    3,870,493Utility Plant under Capital Leases
    
    
    720,628
    
    
    
    702,337Construction Work in Progress
    
    
    121,741
    
    
    
    171,996Total Utility Plant
    
    
    4,912,081
    
    
    
    4,744,826Less Accumulated Depreciation and Amortization
    
    
    (1,609,871
    )
    
    
    (1,580,308
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (562,935
    )
    
    
    (546,825
    )Total Utility Plant  Net
    
    
    2,739,275
    
    
    
    2,617,693Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    144,650
    
    
    
    126,672Other
    
    
    64,616
    
    
    
    64,096Total Investments and Other Property
    
    
    209,266
    
    
    
    190,768Current AssetsCash and Cash Equivalents
    
    
    52,870
    
    
    
    55,172Accounts Receivable  Retail and Other
    
    
    70,017
    
    
    
    74,288Accounts Receivable  Wholesale
    
    
    31,154
    
    
    
    44,725Unbilled Accounts Receivable
    
    
    56,978
    
    
    
    60,146Allowance for Doubtful Accounts
    
    
    (19,703
    )
    
    
    (19,684
    )Materials and Fuel Inventory
    
    
    112,731
    
    
    
    92,170Energy Contracts  Derivative Instruments
    
    
    4,055
    
    
    
    3,437Regulatory Assets  Derivative Instruments
    
    
    52,150
    
    
    
    38,276Regulatory Assets  Other
    
    
    23,787
    
    
    
    23,299Deferred Income Taxes  Current
    
    
    36,213
    
    
    
    61,398Income Tax Receivable
    
    
    
    
    
    
    12,720Interest Receivable on Capital Lease Debt Investment
    
    
    5,922
    
    
    
    4,491Collateral Posted for Derivative Contracts
    
    
    13,900
    
    
    
    14,120Other
    
    
    18,245
    
    
    
    17,528Total Current Assets
    
    
    458,319
    
    
    
    482,086Regulatory and Other AssetsIncome Taxes Recoverable through Future Revenues
    
    
    19,294
    
    
    
    19,814Regulatory Assets  Pension and Other Postretirement Benefits
    
    
    108,819
    
    
    
    112,035Regulatory Assets  Derivative Instruments
    
    
    14,322
    
    
    
    18,324Regulatory Assets  Other
    
    
    37,022
    
    
    
    39,395Energy Contracts  Derivative Instruments
    
    
    3,802
    
    
    
    3,113Other Assets
    
    
    26,072
    
    
    
    26,339Total Regulatory and Other Assets
    
    
    209,331
    
    
    
    219,020Total Assets
    
    $
    3,616,191
    
    
    $
    3,509,567
 See Notes to Condensed Consolidated Financial Statements.
 (Continued)
  5




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##### Table of Contents



UNISOURCE ENERGY CORPORATION
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    697,747
    
    
    $
    679,274Capital Lease Obligations
    
    
    504,633
    
    
    
    513,517Long-Term Debt
    
    
    1,316,615
    
    
    
    1,313,615Total Capitalization
    
    
    2,518,995
    
    
    
    2,506,406Current LiabilitiesCurrent Obligations Under Capital Leases
    
    
    31,695
    
    
    
    18,334Short-Term Borrowings
    
    
    70,000
    
    
    
    10,000Current Maturities of Long-Term Debt
    
    
    6,000
    
    
    
    6,000Accounts Payable
    
    
    63,558
    
    
    
    62,514Accounts Payable  Purchased Power
    
    
    38,570
    
    
    
    49,146Interest Accrued
    
    
    30,730
    
    
    
    43,440Accrued Taxes Other than Income Taxes
    
    
    36,546
    
    
    
    36,746Accrued Employee Expenses
    
    
    21,278
    
    
    
    26,859Customer Deposits
    
    
    24,044
    
    
    
    22,656Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    37,764
    
    
    
    25,665Regulatory Liabilities  Other
    
    
    20,522
    
    
    
    8,161Energy Contracts  Derivative Instruments
    
    
    56,103
    
    
    
    41,076Income Tax Payable
    
    
    2,499
    
    
    
    Other
    
    
    2,443
    
    
    
    1,460Total Current Liabilities
    
    
    441,752
    
    
    
    352,057Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    175,365
    
    
    
    178,089Regulatory Liabilities  Net Cost of Removal for Interim Retirements
    
    
    173,387
    
    
    
    151,796Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    38,799
    
    
    
    44,469Energy Contracts and Other Derivative Instruments
    
    
    23,890
    
    
    
    29,849Pension and Other Postretirement Benefits
    
    
    155,343
    
    
    
    157,769Customer Advances for Construction
    
    
    32,734
    
    
    
    31,062Other
    
    
    55,926
    
    
    
    58,070Total Deferred Credits and Other Liabilities
    
    
    655,444
    
    
    
    651,104Commitments and Contingencies (Note 7)Total Capitalization and Other Liabilities
    
    $
    3,616,191
    
    
    $
    3,509,567
  (Concluded)
  6




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##### Table of Contents



UNISOURCE ENERGY CORPORATION
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalShares
    
    
    Common
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersOutstanding*
    
    
    Stock
    
    
    Earnings
    
    
    Loss
    
    
    Equity(Unaudited)- Thousands of Dollars -Balances at December 31, 2008
    
    
    35,458
    
    
    $
    687,360
    
    
    $
    (1,231
    )
    
    $
    (6,855
    )
    
    $
    679,274Comprehensive Income:2009 Year-to-Date Net Income
    
    
    
    
    
    
    
    
    
    
    36,194
    
    
    
    
    
    
    
    36,194Unrealized Gain on Cash Flow Hedges
(net of $789 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,203
    
    
    
    1,203Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $205 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313
    
    
    
    313Employee
Benefit Obligations Amortization
of SERP Net Prior Service Cost Included in Net Periodic Benefit Cost
(net of $66 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    100Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,810Dividends Declared
    
    
    
    
    
    
    
    
    
    
    (20,658
    )
    
    
    
    
    
    
    (20,658
    )Shares Issued under Deferred Compensation Plans
    
    
    10
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    279Shares Issued under Stock Compensation Plans 
(net of shares redeemed for taxes)
    
    
    184
    
    
    
    1,042
    
    
    
    
    
    
    
    
    
    
    
    1,042Balances at June 30, 2009
    
    
    35,652
    
    
    $
    688,681
    
    
    $
    14,305
    
    
    $
    (5,239
    )
    
    $
    697,747
 *
    
    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 Ended
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    June 30,2009
    
    
    2008
    
    
    
    
    2009
    
    
    2008(Unaudited)
    
    
    
    
    (Unaudited)- Thousands of Dollars -
    
    
    
    
    - Thousands of Dollars -Operating Revenues$
    220,007
    
    
    $
    205,486
    
    
    Electric Retail Sales
    
    $
    377,771
    
    
    $
    367,408
    
    
    
    (14,898
    )
    
    Provision for Rate Refunds  CTC Revenue
    
    
    
    
    
    
    (14,898
    )220,007
    
    
    
    190,588
    
    
    Net Electric Retail Sales
    
    
    377,771
    
    
    
    352,51031,985
    
    
    
    82,582
    
    
    Electric Wholesale Sales
    
    
    69,743
    
    
    
    134,89519,552
    
    
    
    20,971
    
    
    Other Revenues
    
    
    37,303
    
    
    
    35,338271,544
    
    
    
    294,141
    
    
    Total Operating Revenues
    
    
    484,817
    
    
    
    522,743Operating Expenses65,038
    
    
    
    74,006
    
    
    Fuel
    
    
    116,478
    
    
    
    143,21536,375
    
    
    
    78,554
    
    
    Purchased Power
    
    
    59,417
    
    
    
    110,7761,259
    
    
    
    2,430
    
    
    Transmission
    
    
    1,807
    
    
    
    4,469(3,634
    )
    
    
    
    
    
    Increase (Decrease) to reflect PPFAC Recovery Treatment
    
    
    (4,003
    )
    
    
    99,038
    
    
    
    154,990
    
    
    Total Fuel and Purchased Energy
    
    
    173,699
    
    
    
    258,46069,103
    
    
    
    61,481
    
    
    Other Operations and Maintenance
    
    
    143,837
    
    
    
    120,06541,769
    
    
    
    30,707
    
    
    Depreciation and Amortization
    
    
    76,820
    
    
    
    61,997
    
    
    
    6,695
    
    
    Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,94510,040
    
    
    
    10,516
    
    
    Taxes Other Than Income Taxes
    
    
    20,295
    
    
    
    21,064219,950
    
    
    
    264,389
    
    
    Total Operating Expenses
    
    
    414,651
    
    
    
    485,53151,594
    
    
    
    29,752
    
    
    Operating Income
    
    
    70,166
    
    
    
    37,212Other Income (Deductions)4,740
    
    
    
    2,678
    
    
    Interest Income
    
    
    6,809
    
    
    
    5,4667,389
    
    
    
    2,260
    
    
    Other Income
    
    
    7,977
    
    
    
    4,018(521
    )
    
    
    (258
    )
    
    Other Expense
    
    
    (906
    )
    
    
    (731
    )11,608
    
    
    
    4,680
    
    
    Total Other Income (Deductions)
    
    
    13,880
    
    
    
    8,753Interest Expense9,213
    
    
    
    12,624
    
    
    Long-Term Debt
    
    
    18,404
    
    
    
    24,33711,446
    
    
    
    13,070
    
    
    Interest on Capital Leases
    
    
    24,251
    
    
    
    26,139335
    
    
    
    464
    
    
    Other Interest Expense
    
    
    683
    
    
    
    1,469(498
    )
    
    
    (1,297
    )
    
    Interest Capitalized
    
    
    (1,132
    )
    
    
    (2,352
    )20,496
    
    
    
    24,861
    
    
    Total Interest Expense
    
    
    42,206
    
    
    
    49,59342,706
    
    
    
    9,571
    
    
    Income (Loss) Before Income Taxes
    
    
    41,840
    
    
    
    (3,628
    )16,199
    
    
    
    3,806
    
    
    Income Tax Expense (Benefit)
    
    
    15,887
    
    
    
    (530
    )$
    26,507
    
    
    $
    5,765
    
    
    Net Income (Loss)
    
    $
    25,953
    
    
    $
    (3,098
    )
   8




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2009
    
    
    2008(Unaudited)- Thousands of Dollars -Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    398,128
    
    
    $
    380,725Cash Receipts from Electric Wholesale Sales
    
    
    99,228
    
    
    
    168,272Cash
Receipts from Operating Springerville Unit 3 & 4
    
    
    32,523
    
    
    
    28,221Interest Received
    
    
    5,926
    
    
    
    9,921Income Tax Refunds Received
    
    
    10,423
    
    
    
    11,484Reimbursement of Affiliate Charges
    
    
    10,993
    
    
    
    6,814Other Cash Receipts
    
    
    3,875
    
    
    
    3,569Performance Deposit Receipts
    
    
    1,500
    
    
    
    Sale of Excess Emission Allowances
    
    
    24
    
    
    
    1,494Fuel Costs Paid
    
    
    (114,181
    )
    
    
    (134,967
    )Purchased Power Costs Paid
    
    
    (73,459
    )
    
    
    (119,557
    )Payment of Other Operations and Maintenance Costs
    
    
    (109,853
    )
    
    
    (73,929
    )Capital Lease Interest Paid
    
    
    (23,796
    )
    
    
    (27,966
    )Wages Paid, Net of Amounts Capitalized
    
    
    (50,926
    )
    
    
    (45,448
    )Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
    
    
    (55,617
    )
    
    
    (55,782
    )Interest Paid, Net of Amounts Capitalized
    
    
    (16,154
    )
    
    
    (19,598
    )Perfomance Deposits Payments
    
    
    (10,750
    )
    
    
    Income Tax Paid
    
    
    (4,059
    )
    
    
    Other Cash Payments
    
    
    (2,213
    )
    
    
    (2,086
    )Net Cash Flows  Operating Activities
    
    
    101,612
    
    
    
    131,167Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (151,367
    )
    
    
    (155,531
    )Deposit  Collateral Trust Bond Trustee
    
    
    
    
    
    
    (133,111
    )Payments for Investments in Springerville Lease Debt
    
    
    (31,375
    )
    
    
    Proceeds from Investments in Springerville Lease Debt
    
    
    906
    
    
    
    11,333Insurance Proceeds for Replacement Assets
    
    
    4,279
    
    
    
    2,500Proceeds from Sale of Land
    
    
    
    
    
    
    537Other Cash Receipts
    
    
    
    
    
    
    4,040Other Cash Payments
    
    
    (407
    )
    
    
    (699
    )Net Cash Flows  Investing Activities
    
    
    (177,964
    )
    
    
    (270,931
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facility
    
    
    73,000
    
    
    
    120,000Repayments of Borrowings Under Revolving Credit Facility
    
    
    (43,000
    )
    
    
    (110,000
    )Equity Investment from UniSource Energy
    
    
    30,000
    
    
    
    Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    220,745Repayments of Long-Term Debt
    
    
    
    
    
    
    (10,000
    )Payments of Capital Lease Obligations
    
    
    (14,447
    )
    
    
    (62,137
    )Other Cash Receipts
    
    
    2,186
    
    
    
    553Payment of Debt Issue Costs
    
    
    (13
    )
    
    
    (2,073
    )Other Cash Payments
    
    
    (279
    )
    
    
    (294
    )Net Cash Flows  Financing Activities
    
    
    47,447
    
    
    
    156,794Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (28,905
    )
    
    
    17,030Cash and Cash Equivalents, Beginning of Year
    
    
    33,275
    
    
    
    26,610Cash and Cash Equivalents, End of Period
    
    $
    4,370
    
    
    $
    43,640
    9




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -ASSETSUtility PlantPlant in Service
    
    $
    3,525,348
    
    
    $
    3,351,474Utility Plant under Capital Leases
    
    
    719,922
    
    
    
    701,631Construction Work in Progress
    
    
    95,971
    
    
    
    145,457Total Utility Plant
    
    
    4,341,241
    
    
    
    4,198,562Less Accumulated Depreciation and Amortization
    
    
    (1,550,497
    )
    
    
    (1,531,611
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (562,420
    )
    
    
    (546,332
    )Total Utility Plant  Net
    
    
    2,228,324
    
    
    
    2,120,619Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    144,650
    
    
    
    126,672Other
    
    
    30,970
    
    
    
    31,291Total Investments and Other Property
    
    
    175,620
    
    
    
    157,963Current AssetsCash and Cash Equivalents
    
    
    4,370
    
    
    
    33,275Accounts Receivable  Retail and Other
    
    
    54,571
    
    
    
    53,091Accounts Receivable  Wholesale
    
    
    30,875
    
    
    
    44,610Unbilled Accounts Receivable
    
    
    45,422
    
    
    
    33,554Allowance for Doubtful Accounts
    
    
    (17,262
    )
    
    
    (17,135
    )Accounts Receivable  Due from Affiliates
    
    
    5,832
    
    
    
    16,614Materials and Fuel Inventory
    
    
    100,752
    
    
    
    81,067Energy Contracts  Derivative Instruments
    
    
    12,198
    
    
    
    5,129Regulatory Assets  Derivative Instruments
    
    
    21,077
    
    
    
    14,242Regulatory Assets  Other
    
    
    23,303
    
    
    
    22,834Deferred Income Taxes  Current
    
    
    35,166
    
    
    
    59,615Interest Receivable on Capital Lease Debt Investment
    
    
    5,922
    
    
    
    4,491Collateral Posted for Derivative Contracts
    
    
    9,250
    
    
    
    Other
    
    
    16,595
    
    
    
    16,089Total Current Assets
    
    
    348,071
    
    
    
    367,476Regulatory and Other AssetsRegulatory Assets  Pension and Other Postretirement Benefits
    
    
    103,600
    
    
    
    106,596Regulatory Assets  Derivative Instruments
    
    
    6,603
    
    
    
    5,400Regulatory Assets  Other
    
    
    35,658
    
    
    
    38,180Income Taxes Recoverable through Future Revenues
    
    
    19,294
    
    
    
    19,814Energy Contracts  Derivative Instruments
    
    
    1,213
    
    
    
    4,982Other Assets
    
    
    20,087
    
    
    
    20,741Total Regulatory and Other Assets
    
    
    186,455
    
    
    
    195,713Total Assets
    
    $
    2,938,470
    
    
    $
    2,841,771
  (Continued)
  10




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    641,175
    
    
    $
    583,606Capital Lease Obligations
    
    
    504,536
    
    
    
    513,370Long-Term Debt
    
    
    903,615
    
    
    
    903,615Total Capitalization
    
    
    2,049,326
    
    
    
    2,000,591Current LiabilitiesCurrent Obligations Under Capital Leases
    
    
    31,592
    
    
    
    18,231Borrowing Under Revolving Credit Facility
    
    
    40,000
    
    
    
    10,000Accounts Payable
    
    
    56,687
    
    
    
    56,001Accounts Payable  Purchased Power
    
    
    29,870
    
    
    
    28,510Accounts Payable  Due to Affiliates
    
    
    3,274
    
    
    
    3,610Income Taxes Payable
    
    
    3,078
    
    
    
    2,057Interest Accrued
    
    
    23,235
    
    
    
    35,828Accrued Taxes Other than Income Taxes
    
    
    30,121
    
    
    
    27,679Accrued Employee Expenses
    
    
    18,785
    
    
    
    23,990Energy Contracts  Derivative Instruments
    
    
    33,183
    
    
    
    18,737Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    12,050
    
    
    
    14,310Regulatory
Liabilities  Other
    
    
    18,409
    
    
    
    7,083Other
    
    
    18,662
    
    
    
    17,106Total Current Liabilities
    
    
    318,946
    
    
    
    263,142Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    166,009
    
    
    
    180,098Regulatory Liabilities  Net Cost of Removal for Interim Retirements
    
    
    142,265
    
    
    
    122,037Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    38,799
    
    
    
    44,469Energy Contracts and Other Derivative Instruments
    
    
    13,582
    
    
    
    18,794Pension and Other Postretirement Benefits
    
    
    147,144
    
    
    
    149,955Other
    
    
    62,399
    
    
    
    62,685Total Deferred Credits and Other Liabilities
    
    
    570,198
    
    
    
    578,038Commitments and Contingencies (Note 7)Total Capitalization and Other Liabilities
    
    $
    2,938,470
    
    
    $
    2,841,771
  (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, 2008
    
    $
    813,971
    
    
    $
    (6,357
    )
    
    $
    (217,153
    )
    
    $
    (6,855
    )
    
    $
    583,606Comprehensive Income:2009 Year-to-Date Net Income
    
    
    
    
    
    
    
    
    
    
    25,953
    
    
    
    
    
    
    
    25,953Unrealized Gain on Cash Flow Hedges
(net of $789 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,203
    
    
    
    1,203Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $205 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313
    
    
    
    313Employee
Benefit Obligations Amortization of SERP Net Prior Service Cost Included in
Net Periodic Benefit Cost
(net of $66 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    100Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,569Capital Contribution from UniSource Energy
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Balances at June 30, 2009
    
    $
    843,971
    
    
    $
    (6,357
    )
    
    $
    (191,200
    )
    
    $
    (5,239
    )
    
    $
    641,175
   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
         RECLASSIFICATIONS
AND OTHER ADJUSTMENTS
    13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEP 2008 Rate Order
 Note 2.
  
    
    For the quarter ended June 30, 2008, UniSource Energy and TEP reclassified Transmission
expenses of $5 million and $2 million, respectively, from Other Operations and Maintenance
to Transmission, a component of Total Fuel and Purchased Energy. For the six-month period
ended June 30,2008, UniSource Energy and TEP reclassified Transmission expenses of $9
million and $4 million from Other Operations and Maintenance to Transmission, a component
of Total Fuel and Purchased Energy;
    
    For the quarter ended June 30, 2008, UniSource Energy and TEP reclassified capital lease
expenses of $1 million from Interest on Capital Leases to Fuel. For the six-month period
ended June 30,2008, UniSource Energy and TEP reclassified capital lease expenses of $2
million from Interest on Capital Leases to Fuel; and
    
    For the three and six-months ended June 30, 2008, UniSource Energy reclassified
$5 million and $11 million, respectively, of over-recovered PPFAC and PGA expenses from
Purchased Energy, Transmission, and Fuel to Increase (Decrease) to reflect PPFAC (or PGA)
Recovery Treatment, a component of Total Fuel and Purchased Energy.
  Other Reclassifications
   14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 2. REGULATORY MATTERS
 ACCOUNTING FOR RATE REGULATION
   
    
    an independent regulator sets rates;
    
    the regulator sets the rates to recover the specific costs of providing service; and
    
    the service territory lacks competitive pressures to reduce rates below the rates set
by the regulator.
 TEP 2008 Rate Order
   Purchased Power and Fuel Adjustment Clause (PPFAC)
  
    
    The forward component of 0.18 cents per kWh became effective
on April 1, 2009, and will
be updated each year. The forward component is based on the forecasted fuel and purchased
power costs for the twelve-month period from April 1 to March 31 the following year, less
the base cost of fuel and purchased power of approximately 2.9 cents per kWh, which is
embedded in base rates.
    
    The true-up component will reconcile any over/under collected amounts from the preceding
twelve-month period and will be credited to or recovered from customers in the subsequent
year.
   15




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  June 30,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-Fixed CTC Revenue to be Refunded within the next 12
months; Included in Current Liabilities
    
    $
    (12
    )
    
    $
    (14
    )Under-Recovered Purchased Energy Costs  Regulatory
Basis as Billed to Customers
    
    $
    18
    
    
    $
    Estimated Purchased Energy Costs Recovered through
Accrued Unbilled Revenues
    
    
    (14
    )
    
    
    Fixed CTC Revenue to be Refunded
    
    
    (43
    )
    
    
    (44
    )Total Included in Deferred Credits and Other Liabilities
    
    $
    (39
    )
    
    $
    (44
    )
 2
 UNS GAS RATES AND REGULATION
 2008 General Rate Case Filing
  Purchased Gas Adjuster (PGA) Mechanism
  (1)
    
    The PGA factor, computed monthly, is a calculation of the twelve-month rolling weighted
average gas cost, and automatically adjusts monthly, subject to limitations on how much the
price per therm may change in a twelve-month period. Effective December 2007, the ACC
increased the annual cap on the maximum increase in the PGA factor from $0.10 per therm to
$0.15 per therm in a twelve-month period.(2)
    
    At any time UNS Gas PGA bank balance is under-recovered, UNS Gas may request a PGA
surchargewith the goal of collecting the amount deferred from customers over a period
deemed appropriate by the ACC. When the PGA bank balance reaches an over-collected balance
of $10 million on a billed basis, UNS Gas is required to request a PGA surcreditwith the
goal of returning the over-collected balance to customers over a period deemed appropriate
by the ACC.
    16




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  June 30,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-(Over-) Under-Recovered Purchased Gas Costs
 Regulatory Basis as Billed to Customers
    
    $
    (8
    )
    
    $
    5Estimated Purchased Gas Costs Recovered
through Accrued Unbilled Revenues
    
    
    (2
    )
    
    
    (10
    )(Over-)Recovered Purchased Gas Costs (PGA)
Included as a Current Regulatory Liability
    
    $
    (10
    )
    
    $
    (5
    )
 UNS ELECTRIC RATES AND REGULATION
 2009 General Rate Case Filing
  Purchased Power and Fuel Adjustment Clause (PPFAC)
     June 30,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-(Over-)Recovered Purchased Power Costs 
Regulatory Basis as Billed to Customers
    
    $
    (11
    )
    
    $
    Estimated Purchased Power Costs Recovered
through Accrued Unbilled Revenues
    
    
    (5
    )
    
    
    (7
    )(Over-)Recovered Purchased Power Costs (PPFAC)
Included as a Current Regulatory Liability
    
    $
    (16
    )
    
    $
    (7
    )
  17




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 FUTURE IMPLICATIONS OF DISCONTINUING REGULATORY ACCOUNTING
  
 NOTE 3. BUSINESS SEGMENTS
  (1)
    
    TEP, a vertically integrated electric utility business, is UniSource Energys largest
subsidiary.(2)
    
    UNSG is a regulated gas distribution utility business.(3)
    
    UNSE is a regulated electric distribution utility business.
   18




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Reportable Segments
    
    
    
    
    
    
    UniSource
    
    
    UniSourceUNS
    
    
    UNS
    
    
    
    
    
    
    Energy
    
    
    EnergyTEP
    
    
    Gas
    
    
    Electric
    
    
    Other
    
    
    Eliminations
    
    
    Consolidated-Millions of Dollars-Intersegment RevenueThree Months Ended June 30, 2009:Wholesale Sales  TEP to UNSE
    
    $
    5
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    Wholesale Sales   UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )
    
    
    Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (3
    )
    
    
    Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Other Revenue  TEP to Affiliates(1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (4
    )
    
    
    Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Total Intersegment Revenue
    
    $
    8
    
    
    $
    1
    
    
    $
    1
    
    
    $
    7
    
    
    $
    (17
    )
    
    $
    Three Months Ended June 30, 2008:Wholesale Sales  TEP to UNSE
    
    $
    5
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    Wholesale Sales   UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Other Revenue  TEP to Affiliates(1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    (5
    )
    
    
    Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Total Intersegment Revenue
    
    $
    8
    
    
    $
    2
    
    
    $
    2
    
    
    $
    6
    
    
    $
    (18
    )
    
    $
    Six Months Ended June 30, 2009:Wholesale Sales  TEP to UNSE
    
    $
    7
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (7
    )
    
    $
    Wholesale Sales   UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    (6
    )
    
    
    Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Other Revenue  TEP to Affiliates(1)
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (8
    )
    
    
    Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Total Intersegment Revenue
    
    $
    12
    
    
    $
    2
    
    
    $
    2
    
    
    $
    14
    
    
    $
    (30
    )
    
    $
    Six Months Ended June 30, 2008:Wholesale Sales  TEP to UNSE
    
    $
    6
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (6
    )
    
    $
    Wholesale Sales   UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Other Revenue  TEP to Affiliates(1)
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (7
    )
    
    
    Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Total Intersegment Revenue
    
    $
    11
    
    
    $
    2
    
    
    $
    2
    
    
    $
    8
    
    
    $
    (23
    )
    
    $
    
 (1)
    
    TEP provides corporate services including finance, accounting, tax and information technology
services to UniSource Energy and its subsidiaries.(2)
    
    A Millennium subsidiary provides a supplemental workforce and meter reading services to TEP and
UNS Electric.(3)
    
    TEP provides energy scheduling services to UNS Electric.   19




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Reportable Segments
    
    
    
    
    
    
    
    
    
    
    UniSourceUNS
    
    
    UNS
    
    
    
    
    
    
    Reconciling
    
    
    EnergyTEP
    
    
    Gas
    
    
    Electric
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated-Millions of Dollars-Income StatementThree Months Ended June 30, 2009:Operating Revenues  External
    
    $
    264
    
    
    $
    26
    
    
    $
    48
    
    
    $
    
    
    
    $
    
    
    
    $
    338Operating Revenues  Intersegment
    
    
    8
    
    
    
    1
    
    
    
    1
    
    
    
    7
    
    
    
    (17
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    43
    
    
    
    
    
    
    
    3
    
    
    
    5
    
    
    
    
    
    
    
    51Net Income (Loss)
    
    
    27
    
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    (1
    )
    
    
    31Three Months Ended June 30, 2008:Operating Revenues  External
    
    $
    286
    
    
    $
    30
    
    
    $
    44
    
    
    $
    
    
    
    $
    
    
    
    $
    360Operating Revenues  Intersegment
    
    
    8
    
    
    
    2
    
    
    
    2
    
    
    
    6
    
    
    
    (18
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    10
    
    
    
    
    
    
    
    1
    
    
    
    (3
    )
    
    
    
    
    
    
    8Net Income (Loss)
    
    
    6
    
    
    
    
    
    
    
    1
    
    
    
    (2
    )
    
    
    
    
    
    
    5Six Months Ended June 30, 2009:Operating Revenues  External
    
    $
    473
    
    
    $
    85
    
    
    $
    92
    
    
    $
    
    
    
    $
    
    
    
    $
    650Operating Revenues  Intersegment
    
    
    12
    
    
    
    2
    
    
    
    2
    
    
    
    14
    
    
    
    (30
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    42
    
    
    
    8
    
    
    
    4
    
    
    
    5
    
    
    
    
    
    
    
    59Net Income (Loss)
    
    
    26
    
    
    
    5
    
    
    
    2
    
    
    
    3
    
    
    
    
    
    
    
    36Six Months Ended June 30, 2008:Operating Revenues  External
    
    $
    512
    
    
    $
    97
    
    
    $
    81
    
    
    $
    
    
    
    $
    
    
    
    $
    690Operating Revenues  Intersegment
    
    
    11
    
    
    
    2
    
    
    
    2
    
    
    
    8
    
    
    
    (23
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    (4
    )
    
    
    11
    
    
    
    2
    
    
    
    (4
    )
    
    
    
    
    
    
    5Net Income (Loss)
    
    
    (3
    )
    
    
    7
    
    
    
    1
    
    
    
    (3
    )
    
    
    
    
    
    
    2Balance SheetTotal Assets, June 30, 2009
    
    $
    2,938
    
    
    $
    295
    
    
    $
    298
    
    
    $
    1,084
    
    
    $
    (999
    )
    
    $
    3,616Total Assets, December 31, 2008
    
    
    2,842
    
    
    
    294
    
    
    
    285
    
    
    
    1,061
    
    
    
    (972
    )
    
    
    3,510
  20




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 4. DEBT, CREDIT FACILITIES AND CAPITAL LEASE OBLIGATIONS
 UNS CREDIT AGREEMENT
   Long-Current
    
    
    Term
    
    
    
    
    
    
    Current
    
    
    Long-Liabilities
    
    
    Debt
    
    
    Total
    
    
    Liabilities
    
    
    Term Debt
    
    
    Total-Millions of Dollars-June 30, 2009
    
    
    December 31, 2008Revolver
    
    $
    
    
    
    $
    57
    
    
    $
    57
    
    
    $
    
    
    
    $
    43
    
    
    $
    43Term Loan
    
    
    6
    
    
    
    6
    
    
    
    12
    
    
    
    6
    
    
    
    9
    
    
    
    15
  TEP CAPITAL LEASE OBLIGATIONS
 Investments in Springerville Lease Debt
  TEP CREDIT AGREEMENT
  UNS GAS/UNS ELECTRIC REVOLVING CREDIT AGREEMENT
  UNS
    
    
    UNS
    
    
    UNS
    
    
    UNSGas
    
    
    Electric
    
    
    Gas
    
    
    Electric-Millions of Dollars-June 30, 2009
    
    
    December 31, 2008Balance on the Revolver
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8Outstanding Letters of Credit
    
    
    
    
    
    
    12
    
    
    
    10
    
    
    
    7
   21




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 UED SHORT-TERM BORROWINGS
  
 NOTE 5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND HEDGING ACTIVITIES
 RISKS AND OVERVIEW
    CASH FLOW HEDGES
  
    
    Changes in the fair value of TEPs interest rate swaps and TEPs six-year power purchase
swap agreement are recorded in AOCI;
    
    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.
   22




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 MARK-TO-MARKET
 
    
    TEPTEP non-trading hedges, such as forward power purchase contracts indexed to gas, short-term
forward power sales contracts, or call and put options (gas collars), that did not qualify for
cash flow hedge accounting treatment or did not qualify for the normal scope exception, are
considered mark-to-market transactions. TEP hedges a portion of its monthly natural gas
exposure for natural gas purchased for plant fuel, gas-indexed purchased power and spot market
purchases with fixed price contracts for a maximum of three years. Beginning in December 2008,
as a result of the 2008 TEP Rate Order, which permits recovery in the PPFAC of hedging
transactions, unrealized gains and losses are recorded as either a regulatory asset or
regulatory liability only to the extent they qualify for recovery under the PPFAC mechanism.TEP enters into certain energy-related derivatives for trading purposes which are forward power
purchase and sale contracts entered into purely to profit from market price changes. As
unrealized gains and losses resulting from changes in the market prices of trading derivatives
are not recoverable in the PPFAC, unrealized gains and losses are recorded in the income
statement in Electric Wholesale Sales. The net trading activities represent a very small
portion (less than 1%) of TEPs revenue from wholesale sales.
    
    UNS ElectricAs a result of the expiration, in May 2008, of the fixed price full-requirements supply
agreement with PWMT, UNSE began hedging a portion of its purchased power exposure to fixed price
and natural gas-indexed contracts with forward power purchases or financial gas swaps. In April
2009, UNS Electric also began using call and put options, creating price stability and reducing
exposure to price volatility that may result in delayed recovery under the PPFAC.
    
    UNS GasUNS Gas enters into derivatives such as forward gas purchases and gas swaps, creating price
stability and reducing exposure to natural gas price volatility that may result in delayed
recovery under the PGA. Beginning in December 2008, unrealized gains and losses are recorded as
either a regulatory asset or regulatory liability, as the UNS Gas PGA mechanism permits the
recovery of the prudent cost of hedging contracts.
 NORMAL PURCHASE AND NORMAL SALE
  2008 ACCOUNTING SUMMARY
  
    
    TEPs interest rate swaps, TEPs forward contracts to sell excess capacity, and TEP and
UNS Gas forward gas swaps were recorded in AOCI;
    
    TEPs non-trading hedges such as forward power purchase contracts indexed to gas, and
TEPs forward purchase and sale trading contracts were recorded in the income statement;
and
    
    All other commodity contracts were reflected on the balance sheet as either regulatory
assets or regulatory liabilities.
  23




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 Financial Impact of Derivatives
  UniSource EnergyThree Months
    
    
    Six MonthsCash Flow Hedges  Unrealized Gains (Losses)
    
    Ended June 30,
    
    
    Ended June 30,Recorded to AOCI
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Forward Power Sales
    
    $
    
    
    
    $
    (1
    )
    
    $
    
    
    
    $
    (3
    )Gas Price Swaps
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    35Interest Rate Swaps
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    Total Pre-Tax Unrealized Gain (Loss)
    
    $
    2
    
    
    $
    23
    
    
    $
    2
    
    
    $
    32After-Tax Unrealized Gain (Loss) Recorded in AOCI
    
    $
    1
    
    
    $
    14
    
    
    $
    1
    
    
    $
    19Unrealized (Gain) Loss Reclassified to Net IncomeForward Power Sales
    
    $
    
    
    
    $
    1
    
    
    $
    
    
    
    $
    1Gas Price Swaps
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Total Pre-Tax Unrealized (Gain) Loss
    
    $
    
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    (3
    )After-Tax Unrealized (Gain) Loss Reclassified to Net Income
    
    $
    
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    (2
    )
 TEPThree Months
    
    
    Six MonthsCash Flow Hedges  Unrealized Gains (Losses)
    
    Ended June 30,
    
    
    Ended June 30,Recorded to AOCI
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Forward Power Sales
    
    $
    
    
    
    $
    (1
    )
    
    $
    
    
    
    $
    (3
    )Gas Price Swaps
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    28Interest Rate Swaps
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    Total Pre-Tax Unrealized Gain (Loss)
    
    $
    2
    
    
    $
    17
    
    
    $
    2
    
    
    $
    25After-Tax Unrealized Gain (Loss) Recorded in AOCI
    
    $
    1
    
    
    $
    10
    
    
    $
    1
    
    
    $
    15Unrealized
(Gain) Loss Reclassified to Net IncomeForward Power Sales
    
    $
    
    
    
    $
    1
    
    
    $
    
    
    
    $
    1Gas Price Swaps
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Total Pre-Tax Unrealized (Gain) Loss
    
    $
    
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    (3
    )After-Tax Unrealized (Gain) Loss Reclassified to Net Income
    
    $
    
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    (2
    )
  24




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  UniSource EnergyThree Months
    
    
    Six MonthsMark-to-Market Transactions  Unrealized Gains (Losses)
    
    Ended June 30,
    
    
    Ended June 30,Recorded in Earnings
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales(1)
    
    $
    
    
    
    $
    (10
    )
    
    $
    
    
    
    $
    (15
    )Forward Power Purchases(1)
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    14Forward Power Purchases Recorded in Purchased Energy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Forward Gas Price Swaps Recorded in Fuel
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    5Total Pre-Tax Unrealized Gains (Losses)
    
    $
    
    
    
    $
    4
    
    
    $
    
    
    
    $
    1
 TEPThree Months
    
    
    Six MonthsMark-to-Market Transactions  Unrealized Gains (Losses)
    
    Ended June 30,
    
    
    Ended June 30,Recorded in Earnings
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales(1)
    
    $
    (1
    )
    
    $
    (10
    )
    
    $
    3
    
    
    $
    (15
    )Forward Power Purchases(1)
    
    
    1
    
    
    
    10
    
    
    
    (3
    )
    
    
    14Forward Power Purchases Recorded in Purchased Energy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Forward Gas Price Swaps Recorded in Fuel
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    5Total Pre-Tax Unrealized Gains (Losses)
    
    $
    
    
    
    $
    4
    
    
    $
    
    
    
    $
    1
 (1)
    
    TEPs 2009 unrealized gains and losses are with an affiliate counterparty and therefore
are eliminated in the UniSource Energy financial statements.
  UniSource EnergyThree Months
    
    
    Six MonthsMark-to-Market Transactions  Increase (Decrease)
    
    Ended June 30,
    
    
    Ended June 30,Recorded in Regulatory Accounts on the Balance Sheet
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Current Regulatory Assets  Derivatives:Gas Swaps
    
    $
    7
    
    
    $
    
    
    
    $
    (7
    )
    
    $
    1Gas Collars
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Power Purchases
    
    
    1
    
    
    
    
    
    
    
    (6
    )
    
    
    Recorded in Current Regulatory Liabilities  Derivatives:Gas Swaps
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    6Power Purchases
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    21Recorded in Other Regulatory Assets  Derivatives:Gas Swaps
    
    
    5
    
    
    
    
    
    
    
    3
    
    
    
    Power Purchases
    
    
    3
    
    
    
    
    
    
    
    1
    
    
    
    Recorded in Other Regulatory Liabilities  Derivatives:Gas Swaps
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    4Power Purchases
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    3Total Increase (Decrease)
    
    $
    15
    
    
    $
    19
    
    
    $
    (10
    )
    
    $
    35
  25




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEPThree Months
    
    
    Six MonthsMark-to-Market Transactions  Increase (Decrease)
    
    Ended June 30,
    
    
    Ended June 30,Recorded in Regulatory Accounts on the Balance Sheet
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Current Regulatory Assets  Derivatives:Gas Swaps
    
    $
    5
    
    
    $
    
    
    
    $
    (6
    )
    
    $
    Gas Collars
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Recorded in Other Regulatory Assets  Derivatives:Gas Swaps
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Power Purchases
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Total Increase (Decrease)
    
    $
    6
    
    
    $
    
    
    
    $
    (8
    )
    
    $
    
  UniSource
Energy and TEPThree Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales
    
    $
    9
    
    
    $
    3
    
    
    $
    12
    
    
    $
    12Forward Power Purchases
    
    
    (9
    )
    
    
    (3
    )
    
    
    (12
    )
    
    
    (13
    )Total Sales and
Purchases Not Resulting
in Physical Delivery
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1
    )
  UniSource EnergyJune 30, 2009Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    1
    
    
    $
    (36
    )
    
    $
    1
    
    
    $
    (9
    )
    
    $
    (43
    )Power Purchases
    
    
    3
    
    
    
    (19
    )
    
    
    2
    
    
    
    (5
    )
    
    
    (19
    )Gas Collars
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Power Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Power Purchases  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )$
    4
    
    
    $
    (56
    )
    
    $
    4
    
    
    $
    (24
    )
    
    $
    (72
    )
  26




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 UniSource EnergyDecember 31, 2008Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    
    
    
    $
    (28
    )
    
    $
    
    
    
    $
    (12
    )
    
    $
    (40
    )Power Purchases
    
    
    3
    
    
    
    (13
    )
    
    
    2
    
    
    
    (7
    )
    
    
    (15
    )Power Options
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (3
    )
    
    
    (2
    )Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )$
    3
    
    
    $
    (41
    )
    
    $
    3
    
    
    $
    (30
    )
    
    $
    (65
    )
 TEPJune 30, 2009Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    
    
    
    $
    (20
    )
    
    $
    
    
    
    $
    (4
    )
    
    $
    (24
    )Power Purchases
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Gas Collars
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Power Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Power Purchases  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Power  Trading(1)
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    $
    12
    
    
    $
    (33
    )
    
    $
    1
    
    
    $
    (14
    )
    
    $
    (34
    )
 TEPDecember 31, 2008Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    
    
    
    $
    (14
    )
    
    $
    
    
    
    $
    (4
    )
    
    $
    (18
    )Power Purchases
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Power Options
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (3
    )
    
    
    (2
    )Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Power  Trading
    
    
    4
    
    
    
    (4
    )
    
    
    4
    
    
    
    (4
    )
    
    
    $
    5
    
    
    $
    (19
    )
    
    $
    5
    
    
    $
    (19
    )
    
    $
    (28
    )
 (1)
    
    TEPs 2009 power trading balances are with an affiliate counterparty and therefore are
eliminated in the UniSource Energy financial statements.    27




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 Derivative Volumes
  UniSource Energy2013-2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2015
    
    
    TotalGas GbtuGas Swaps
    
    
    8,714
    
    
    
    6,672
    
    
    
    3,538
    
    
    
    637
    
    
    
    
    
    
    
    19,561Gas Collars
    
    
    2,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,625Power GWhPower Purchases Non-Trading
    
    
    928
    
    
    
    943
    
    
    
    213
    
    
    
    123
    
    
    
    123
    
    
    
    2,330Power Sales Non-Trading
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154Power Options
    
    
    
    
    
    
    248
    
    
    
    246
    
    
    
    248
    
    
    
    248
    
    
    
    990Power Purchases Cash Flow Hedge
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    175Power Trading GWhPower Purchases Trading
    
    
    123
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245Power Sales Trading
    
    
    123
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245
  28




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEP2013-2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2015
    
    
    TotalGas GBtuGas Swaps
    
    
    5,570
    
    
    
    2,852
    
    
    
    1,255
    
    
    
    187
    
    
    
    
    
    
    
    9,864Gas Collars
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500Power GWhPower Purchases Non-Trading
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270Power Sales Non-Trading
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154Power Options
    
    
    
    
    
    
    248
    
    
    
    246
    
    
    
    248
    
    
    
    248
    
    
    
    990Power Purchases Cash Flow Hedge
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    175Power Trading GWhPower Purchases Trading
    
    
    123
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245Power Sales Trading
    
    
    123
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245
 Hedging Policy
  Credit Risk Adjustment
   CONCENTRATION OF CREDIT RISK
    29




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
   
 NOTE 6. INCOME TAXES
     30




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 7. COMMITMENTS AND CONTINGENCIES
 TEP COMMITMENTS
  2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    Total-Millions of Dollars-Purchased Power
    
    
    
    
    
    
    19
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    29Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    5Total Additional, Unrecognized, Firm
Purchase Commitments
    
    $
    1
    
    
    $
    20
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    4
    
    
    $
    34
  UNS ELECTRIC COMMITMENTS
  UNS GAS COMMITMENTS
  TEP CONTINGENCIES
 El Paso Electric Transmission
   Claims Related to Navajo Generating Station
   31




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Claims Related to San Juan Generating Station
  Environmental Reclamation at Remote Generating Stations
    TEP Wholesale Accounts Receivable and Allowances
   32




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 Tucson to Nogales Transmission Line
   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 $30 million UED Credit Agreement.
   
 NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE
  
    
    Investments in Lease Debt and Equity: TEP calculated the present value of remaining cash
flows at the balance sheet date using current market rates 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.
    
    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.
    
    UNS considers the carrying value of the MEH note receivable to approximate fair value. See
Note 14.
 
  33




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  June 30,
    
    
    December 31,2009
    
    
    2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value-Millions of Dollars-Assets:TEP Investment in Lease Debt and Equity
    
    $
    145
    
    
    $
    163
    
    
    $
    127
    
    
    $
    144MEH Note Receivable
    
    
    15
    
    
    
    15
    
    
    
    
    
    
    
    Liabilities:Fixed Rate Long-Term DebtTEP
    
    
    445
    
    
    
    310
    
    
    
    445
    
    
    
    322UniSource Energy
    
    
    795
    
    
    
    626
    
    
    
    795
    
    
    
    661Variable Rate Long-Term DebtTEP
    
    
    459
    
    
    
    444
    
    
    
    459
    
    
    
    441UniSource Energy
    
    
    528
    
    
    
    513
    
    
    
    525
    
    
    
    507
 
 NOTE 9. EMPLOYEE BENEFIT PLANS
 PENSION BENEFIT PLANS
     OTHER POSTRETIREMENT BENEFIT PLANS
   34




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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 EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars -Components of Net Periodic Benefit CostService Cost
    
    $
    2
    
    
    $
    2
    
    
    $
    
    
    
    $
    1Interest Cost
    
    
    4
    
    
    
    3
    
    
    
    1
    
    
    
    1Expected Return on Plan Assets
    
    
    (3
    )
    
    
    (4
    )
    
    
    
    
    
    
    (1
    )Amortization of Net Loss
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net Periodic Benefit Cost
    
    $
    5
    
    
    $
    1
    
    
    $
    1
    
    
    $
    1
 Other PostretirementPension Benefits
    
    
    BenefitsSix months Ended
    
    
    Six months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars -Components of Net Periodic Benefit CostService Cost
    
    $
    4
    
    
    $
    4
    
    
    $
    1
    
    
    $
    1Interest Cost
    
    
    7
    
    
    
    7
    
    
    
    2
    
    
    
    2Expected Return on Plan Assets
    
    
    (5
    )
    
    
    (8
    )
    
    
    
    
    
    
    Amortization of Prior Service Cost
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Amortization of Net Loss
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Net Periodic Benefit Cost
    
    $
    10
    
    
    $
    3
    
    
    $
    2
    
    
    $
    2
  
 NOTE 10. SHARE-BASED COMPENSATION PLANS
  STOCK OPTIONS
    35




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  2009 Grant
    
    
    2008 GrantExpected term (years)
    
    
    7
    
    
    
    6Risk-free rate
    
    
    3.4
    %
    
    
    3.1
    %Expected volatility
    
    
    25.0
    %
    
    
    18.8
    %Expected dividend yield
    
    
    3.2
    %
    
    
    2.8
    %Weighted-average grant-date fair value of options granted
    
    $
    5.53
    
    
    $
    4.23
  Six Months Ended June 30, 2009Total Stock Options
    
    
    Non-Vested StockOutstanding
    
    
    OptionsWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Grant Date(Shares in Thousands)
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    ValueOptions Outstanding, December 31, 2008
    
    
    1,635
    
    
    $
    22.50
    
    
    
    482
    
    
    $
    5.59Granted
    
    
    249
    
    
    $
    26.11
    
    
    
    249
    
    
    $
    5.53Exercised or Vested
    
    
    (84
    )
    
    $
    12.49
    
    
    
    (218
    )
    
    $
    6.13Options Outstanding, June 30, 2009
    
    
    1,800
    
    
    $
    23.46
    
    
    
    513
    
    
    $
    5.33Options Exercisable, June 30, 2009
    
    
    1,288
    
    
    $
    21.83Aggregate
Intrinsic Value of Options Exercised ($000s)
    
    
    
    
    
    $
    1,185
 At June 30, 2009($000s)Aggregate Intrinsic Value for Options Outstanding
    
    $
    8,632Aggregate Intrinsic Value for Options Exercisable
    
    $
    8,452Weighted Average Remaining Contractual Life of Options Outstanding
    
    4.5 yearsWeighted Average Remaining Contractual Life of Exercisable Options
    
    3.1 years
  Options Outstanding
    
    
    
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    Weighted-Number of
    
    
    Remaining
    
    
    Average
    
    
    Number of
    
    
    AverageRange of
    
    Shares
    
    
    Contractual
    
    
    Exercise
    
    
    Shares
    
    
    ExerciseExercise Prices
    
    (000s)
    
    
    Life
    
    
    Price
    
    
    (000s)
    
    

Price$11.00  $15.28
    
    
    333
    
    
    0.9 years
    
    $
    14.58
    
    
    
    333
    
    
    $
    14.58$17.44  $18.84
    
    
    521
    
    
    2.4 years
    
    $
    18.02
    
    
    
    521
    
    
    $
    18.02$26.11  $37.88
    
    
    947
    
    
    6.9 years
    
    $
    29.57
    
    
    
    434
    
    
    $
    31.95
  36




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 RESTRICTED STOCK UNITS AND PERFORMANCE SHARES
 Restricted Stock Units
  Performance Share Awards
    SHARE-BASED COMPENSATION EXPENSE
    37




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 11. FAIR VALUE MEASUREMENTS
  UniSource EnergyQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalJune 30, 2009- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    45
    
    
    $
    
    
    
    $
    
    
    
    $
    45Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Equity Investments (3)
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Collateral Posted (4)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Energy Contracts (5)
    
    
    
    
    
    
    1
    
    
    
    7
    
    
    
    8Total Assets
    
    
    45
    
    
    
    27
    
    
    
    18
    
    
    
    90LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (44
    )
    
    
    (30
    )
    
    
    (74
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Total Liabilities
    
    
    
    
    
    
    (50
    )
    
    
    (30
    )
    
    
    (80
    )Net Total Assets and (Liabilities)
    
    $
    45
    
    
    $
    (23
    )
    
    $
    (12
    )
    
    $
    10
 UniSource EnergyQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalDecember 31, 2008- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    14Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Equity Investments (3)
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Collateral Posted (4)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Energy Contracts (5)
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    7Total Assets
    
    
    14
    
    
    
    24
    
    
    
    17
    
    
    
    55LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (40
    )
    
    
    (23
    )
    
    
    (63
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (48
    )
    
    
    (23
    )
    
    
    (71
    )Net Total Assets and (Liabilities)
    
    $
    14
    
    
    $
    (24
    )
    
    $
    (6
    )
    
    $
    (16
    )
  38




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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)
    
    
    TotalJune 30, 2009- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    9Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Collateral Posted (4)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Energy Contracts (5)
    
    
    
    
    
    
    1
    
    
    
    12
    
    
    
    13Total Assets
    
    
    9
    
    
    
    22
    
    
    
    12
    
    
    
    43LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (24
    )
    
    
    (17
    )
    
    
    (41
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Total Liabilities
    
    
    
    
    
    
    (30
    )
    
    
    (17
    )
    
    
    (47
    )Net Total Assets and (Liabilities)
    
    $
    9
    
    
    $
    (8
    )
    
    $
    (5
    )
    
    $
    (4
    )
 TEPQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalDecember 31, 2008- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    8Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Energy Contracts (5)
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Total Assets
    
    
    8
    
    
    
    9
    
    
    
    10
    
    
    
    27LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (18
    )
    
    
    (11
    )
    
    
    (29
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (26
    )
    
    
    (11
    )
    
    
    (37
    )Net Total Assets and (Liabilities)
    
    $
    8
    
    
    $
    (17
    )
    
    $
    (1
    )
    
    $
    (10
    )
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
Commercial Paper and Money Market Funds.(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 (UniSource Energy table only) are, in the absence of readily ascertainable
market values, based on the investment partners valuations 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.(4)
    
    Collateral provided for energy contracts with counterparties to reduce credit risk exposure.  39




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 (5)
    
    Energy contracts include gas swap agreements (Level 2), gas collars (Level 3), 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.(6)
    
    Interest Rate Swaps are valued based on the six-month LIBOR index.  Energy Contracts
     40




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Three Months EndedJune 30, 2009- Millions of Dollars -UniSource Energy
    
    
    TEPMark-to-
    
    
    
    
    
    
    
    
    
    
    Mark-to-Market
    
    
    
    
    
    
    
    
    
    
    MarketContracts
    
    
    Investments
    
    
    Total
    
    
    ContractsBalance, as of April 1, 2009
    
    $
    (26
    )
    
    $
    11
    
    
    $
    (15
    )
    
    $
    (3
    )Gains and (Losses)
(Realized/Unrealized)
Recorded to:Net Regulatory Assets
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    (2
    )Balance, as of June 30, 2009
    
    $
    (23
    )
    
    $
    11
    
    
    $
    (12
    )
    
    $
    (5
    )
 Six Months EndedJune 30, 2009- Millions of Dollars -UniSource Energy
    
    
    TEPMark-to-
    
    
    
    
    
    
    
    
    
    
    Mark-to-Market
    
    
    
    
    
    
    
    
    
    
    MarketContracts
    
    
    Investments
    
    
    Total
    
    
    ContractsBalance, as of January 1, 2009
    
    $
    (17
    )
    
    $
    11
    
    
    $
    (6
    )
    
    $
    (1
    )Gains and (Losses)
(Realized/Unrealized)
Recorded to:Net Regulatory Assets
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )
    
    
    (4
    )Balance, as of June 30, 2009
    
    $
    (23
    )
    
    $
    11
    
    
    $
    (12
    )
    
    $
    (5
    )
   
 NOTE 12. UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
   41




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Thousands of Dollars-Numerator:Net Income
    
    $
    31,275
    
    
    $
    4,747
    
    
    $
    36,194
    
    
    $
    2,132Income from Assumed Conversion of Convertible Senior
Notes
    
    
    1,097
    
    
    
    
    
    
    
    2,195
    
    
    
    Adjusted Numerator
    
    $
    32,372
    
    
    $
    4,747
    
    
    $
    38,389
    
    
    $
    2,132Denominator:
    
    - Thousands of Shares -Weighted-average Shares of Common Stock Outstanding:Common Shares Issued
    
    
    35,589
    
    
    
    35,401
    
    
    
    35,573
    
    
    
    35,367Fully Vested Deferred Stock Units
    
    
    98
    
    
    
    211
    
    
    
    103
    
    
    
    218Total Weighted-average Shares of Common Stock
Outstanding-Basic
    
    
    35,687
    
    
    
    35,612
    
    
    
    35,676
    
    
    
    35,585Effect of Dilutive Securities:Convertible Senior Notes
    
    
    4,087
    
    
    
    
    
    
    
    4,079
    
    
    
    Options and Stock Issuable under Employee Benefit Plans
and the Directors Plan
    
    
    449
    
    
    
    563
    
    
    
    494
    
    
    
    540Total Shares  Diluted
    
    
    40,223
    
    
    
    36,175
    
    
    
    40,249
    
    
    
    36,125
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008- In Thousands -Stock Options Excluded from the Diluted EPS Computation
    
    
    395
    
    
    
    234
    
    
    
    395
    
    
    
    314
 
 NOTE 13. STOCKHOLDERS EQUITY
  Dividends and Capital Contribution
   42




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 14. SALE OF MILLENNIUMS INVESTMENT IN SABINAS
  
 NOTE 15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  
    
    FAS 161, Disclosures About Derivative Instruments and Hedging Activities,an amendment
to FAS 133, Accounting for Derivative Instruments and Hedging Activities,issued March
2008, requires enhanced disclosures about an entitys derivative and hedging activity.The
standard requires that the objectives for using derivative instruments be disclosed in
terms of underlying risk so that the reader understands the risks that the entity is
intending to manage through the use of the derivative instruments. The standard also
requires disclosure of the location in the financial statements of derivative balances as
well as the location of gains and losses incurred during the reporting period. See Note 5.
    
    EITF 08-6, Equity Method Investment Accounting Considerations, issued November 2008,
requires an entity to apply the cost accumulation model when determining the carrying value
of an equity investment. Share issuances by the investee should be accounted for as if the
equity investee had sold a proportionate share of its investment with any gain or loss
recognized in earnings. In addition, the EITF requires that impairment testing be
performed at an overall investment level. We adopted this standard on January 1, 2009 and
it did not have a material impact on our financial statements.
    
    FAS 165, Subsequent Events,issued May 2009, established general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The standard applies to reporting
periods starting second quarter 2009 and the relevant disclosure is included in Note 1.
    
    FSP FAS 107-1, and APB 28-1 Interim Disclosures About Fair Value of Financial
Instruments, issued April 2009, expands the fair value disclosures required for all
financial instruments not measured at fair value to interim periods. The pronouncement
requires entities to disclose the method and significant assumptions used to estimate the
fair value of financial instruments in the financial statements on an interim and annual
basis. We have adopted the requirements of this pronouncement. See Note 8.
  
    
    FSP FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets,
issued in December 2008, amends Statement 132(R)-1 to require more detailed disclosures
about employers plan assets, including employers investment strategies, major categories
of plan assets, concentrations of risk within plan assets, and valuation techniques used to
measure the fair value of plan assets. We will adopt the requirements of this
pronouncement in our 2009 Form 10-K.
    
    FAS 166, Accounting for Transfers of Financial Assets- an amendment of FASB Statement
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities a replacement of FASB Statement 125,issued June 2009, improves the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred financial assets. We are
assessing the impact of this pronouncement, which will be applicable for our 2009 10-K.
 
  43




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
    
    FAS 167, Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51,issued June 2009, amends Interpretation 46(R) to
require an enterprise to perform an analysis to determine whether the enterprises variable
interest or interests give it a controlling financial interest in a variable interest
entity. We are assessing the impact of this pronouncement, which will be applicable to us
for 2010.
    
    FAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FAS 162,issued June 2009, establishes the
FASB Accounting Standards Codification (Codification) as the source of authoritative
accounting principles in the preparation of financial statements in conformity with GAAP.
This statement is effective for financial statements issued in the third quarter 2009.
  44




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
  UniSource EnergySix Months EndedJune 30,2009
    
    
    2008-Thousands of Dollars-Net Income
    
    $
    36,194
    
    
    $
    2,132Adjustments to Reconcile Net Income to Net Cash Flows from Operating ActivitiesDepreciation and Amortization Expense
    
    
    88,202
    
    
    
    72,434Depreciation
and Amortization Recorded to Fuel and Other O&M Expense
    
    
    1,373
    
    
    
    3,296Amortization of Deferred Debt-Related Costs Included in
Interest Expense
    
    
    2,154
    
    
    
    1,916Provision for Bad Debts
    
    
    1,603
    
    
    
    1,736Deferred Income Taxes
    
    
    21,922
    
    
    
    22,299Equity in Investment in Lease Equity
    
    
    (3,144
    )
    
    
    Elimination of Capital Lease Interest Expense Related to
Investment in Springerville Lease Equity
    
    
    (1,609
    )
    
    
    Pension and Postretirement Expense
    
    
    12,089
    
    
    
    5,995Pension and Postretirement Funding
    
    
    (11,133
    )
    
    
    (6,929
    )Gain on Sale of Millenniums Investment in Sabinas
    
    
    (5,979
    )
    
    
    Stock Based Compensation Expense
    
    
    1,568
    
    
    
    1,860Excess Tax Benefit from Stock Options Exercised
    
    
    (469
    )
    
    
    (594
    )Mark-to-Market Transactions
    
    
    46
    
    
    
    327Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,945Provision for Rate Refunds
    
    
    
    
    
    
    14,912Impairment of Millennium Investments
    
    
    
    
    
    
    1,936Changes in Assets and Liabilities which Provided (Used)Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    12,368
    
    
    
    (26,592
    )Materials and Fuel Inventory
    
    
    (20,561
    )
    
    
    (6,155
    )Over/Under Recovered Purchased Energy Cost
    
    
    6,429
    
    
    
    (11,284
    )Accounts Payable
    
    
    (2,325
    )
    
    
    53,479Interest Accrued
    
    
    3,132
    
    
    
    1,922Income Taxes
    
    
    15,219
    
    
    
    (15,747
    )Taxes Other Than Income Taxes
    
    
    (200
    )
    
    
    345Other
Regulatory Liabilities
    
    
    12,714
    
    
    
    2,494Other
    
    
    (3,918
    )
    
    
    (3,551
    )Net Cash Flows  Operating Activities
    
    $
    165,675
    
    
    $
    140,176
  45




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded)  Unaudited
 TEPSix Months EndedJune 30,2009
    
    
    2008-Thousands of Dollars-Net Income (Loss)
    
    $
    25,953
    
    
    $
    (3,098
    )Adjustments to Reconcile Net Income (Loss)
to Net Cash Flows from Operating ActivitiesDepreciation and Amortization Expense
    
    
    76,820
    
    
    
    61,997Depreciation and Amortization Recorded to Fuel and
Other O&M Expense
    
    
    652
    
    
    
    2,573Amortization of Deferred Debt-Related Costs Included
in Interest Expense
    
    
    1,384
    
    
    
    1,362Provision for Bad Debts
    
    
    928
    
    
    
    866Deferred Income Taxes
    
    
    9,823
    
    
    
    14,092Equity in Investment in Lease Equity
    
    
    (3,144
    )
    
    
    Elimination of Capital Lease Interest Expense Related
to Investment in Springerville Lease Equity
    
    
    (1,609
    )
    
    
    Pension and Postretirement Expense
    
    
    10,939
    
    
    
    5,201Pension and Postretirement Funding
    
    
    (10,769
    )
    
    
    (6,143
    )Stock Based Compensation Expense
    
    
    1,198
    
    
    
    1,435Mark-to-Market Transactions
    
    
    33
    
    
    
    327Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,945Provision for Rate Refunds
    
    
    
    
    
    
    14,912Changes in Assets and Liabilities which Provided (Used)Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    (7,472
    )
    
    
    (36,932
    )Materials and Fuel Inventory
    
    
    (19,685
    )
    
    
    (5,534
    )Over/Under Recovered Purchased Energy Cost
    
    
    (7,930
    )
    
    
    Accounts Payable
    
    
    8,501
    
    
    
    62,329Interest Accrued
    
    
    3,249
    
    
    
    2,092Income Taxes
    
    
    1,020
    
    
    
    2,518Taxes Other Than Income Taxes
    
    
    2,442
    
    
    
    1,928Other
Regulatory Liabilities
    
    
    11,701
    
    
    
    2,134Other
    
    
    (2,422
    )
    
    
    (14,837
    )Net Cash Flows  Operating Activities
    
    $
    101,612
    
    
    $
    131,167
 
 NOTE 17. REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   46




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##### Table of Contents



ITEM 2.  
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    outlook and strategies;
 
    
    operating results during the second quarter and six-months ended June 30, 2009 compared
with the same periods in 2008;
 
    
    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
  
    
    Maintain and enhance TEPs system reliability and safety while operating under a base rate
freeze through 2012;
 
    
    Maintain an appropriate cost structure while operating under a base rate freeze through
2012;
 
    
    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;
  47




---



##### Table of Contents




    
    Expand TEP and UNS Electrics portfolio of renewable energy sources and demand side
management programs to meet Arizonas renewable energy standards;
 
    
    Enhance the value of TEPs transmission system while continuing to provide reliable access
to generation for TEP and UNS Electrics retail customers and market access for all generating
assets;
 
    
    Obtain ACC approval of rate increases for UNS Gas and UNS Electric to provide adequate
revenues to cover the rising cost of providing reliable and safe service to their customers;
and
 
    
    Develop strategic responses to potential new legislation on carbon emissions and define
steps to achieve environmental objectives that provide an appropriate return on investment and
are consistent with earnings growth.
 Economic Conditions
     Part II,
Item 7. Managements Discussion and Analysis of Financial Condition and Result of Operations,
UniSource Energy Consolidated  Economic Conditions
 Environmental Matters
  2
  48




---



##### Table of Contents



Item 5. Other Information, Environmental
Matters
 
 RESULTS OF OPERATIONS
 Executive Overview
 2009 compared with 2008
  
    
    A 6% base rate increase that was effective December 1, 2008 for TEPs customers and the
implementation of a purchased power and fuel adjustment clause (PPFAC) at TEP beginning
January 1, 2009. The base rate increase should generate approximately $50 million of
additional revenue based on 2008 retail kWh sales levels, while the PPFAC allows TEP to
pass through the actual cost of fuel and purchased power costs to retail customers.
Through the first six months of 2009, TEPs retail kWh sales
were 3.3% below kWh sales levels
during the same period of 2008. If sales volumes continue to lag behind 2008 levels during
the second half the year, the additional revenue generated from the base rate increase
could be less than $50 million. As a result of the PPFAC, relative to prior periods, TEPs
net income should not be as sensitive to changes in fuel and purchased power costs or
revenues from short-term wholesale sales which are an off-set to the recoverable PPFAC
costs;
    
    No amortization expense related to TEPs Transition Recovery Asset (TRA) will be
recorded in 2009 since that asset became fully amortized in May 2008. In 2008, TEP
recorded TRA amortization of $24 million; and
    
    TEP will not defer recognition of any revenues subject to refund during 2009. During
2008, TEP deferred $58 million of revenue to be refunded.
  
    
    Higher operating costs due to increases in general O&M costs, pension-related
expenses and planned generating plant maintenance; and
    
    An increase in depreciation and amortization expense caused by an increase in plant
in service, and the effects of the December 2008 TEP rate order that increased
depreciation rates on certain assets and amortization expense related to certain
regulatory assets.
 Seasonality of Utility Operations
    49




---



##### Table of Contents



Second Quarter of 2009 Compared with the Second Quarter of 2008
  See Tucson Electric Power Company, Other Non-Reportable Business Segments, Results of Operations
 Six Months Ended June 30, 2009 Compared with the Six Months Ended June 30, 2008
  See Tucson Electric Power Company, Other Non-Reportable Business Segments, Results of
Operations
 
 CONTRIBUTION BY BUSINESS SEGMENT
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008- Millions of Dollars -
    
    
    - Millions of Dollars -TEP
    
    $
    27
    
    
    $
    6
    
    
    $
    26
    
    
    $
    (3
    )UNS Gas
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    7UNS Electric
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Other (1)
    
    
    2
    
    
    
    (2
    )
    
    
    3
    
    
    
    (3
    )Consolidated Net Income Loss
    
    $
    31
    
    
    $
    5
    
    
    $
    36
    
    
    $
    2
 (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 UED; and income and losses
from Millennium investments. 
 LIQUIDITY AND CAPITAL RESOURCES
 UniSource Energy Consolidated Cash Flows
  Liquidity
   50




---



##### Table of Contents



Borrowings
    
    
    Amount AvailableBalances as of
    
    Cash and Cash
    
    
    under Revolving
    
    
    under RevolvingJuly 31, 2009
    
    Equivalents
    
    
    Credit Facility(1)
    
    
    Credit Facility-Millions of Dollars-UniSource Energy stand-alone
    
    $
    1
    
    
    $
    65
    
    
    $
    5TEP
    
    
    11
    
    
    
    50
    
    
    
    100UNS Gas
    
    
    26
    
    
    
    
    
    
    
    30
    (2)UNS Electric
    
    
    17
    
    
    
    12
    
    
    
    18
    (2)Other
    
    

    5
(3)
    
    
    N/A
    
    
    
    N/ATotal
    
    $
    60
    
    
    $
    127
    
    
    $
    153
 (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
  Access to Revolving Credit Facilities
   Liquidity Outlook
 UniSource Energy Credit Agreement
  51




---



##### Table of Contents



Executive Overview  UniSource Energy Consolidated Cash Flows
 Six Months Ended June 30,
    
    2009
    
    
    2008- Millions of Dollars -Cash provided by (used in):Operating Activities
    
    $
    166
    
    
    $
    140Investing Activities
    
    
    (199
    )
    
    
    (304
    )Financing Activities
    
    
    31
    
    
    
    177
 Operating Activities
  Investing Activities
  Capital Expenditures
 Actual Year-to-Date
    
    
    EstimateJune 30, 2009
    
    
    Full Year 2009- Millions of Dollars -TEP
    
    $
    152
    
    
    $
    245UNS Gas
    
    
    8
    
    
    
    20UNS Electric
    
    
    18
    
    
    
    29UniSource Energy Consolidated
    
    $
    178
    
    
    $
    294
 Financing Activities
  UniSource Energy Credit Agreement
     52




---



##### Table of Contents



Interest Rate Risk
  Convertible Senior Notes
  Capital Contributions
 Other Non-Reportable Business Segments,
UED, Tucson Electric Power Company Liquidity and Capital Resources,
 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 $30 million UED Credit Agreement.
    53




---



##### Table of Contents



Contractual Obligations
  2014andPayment Due in Years Ending December 31,
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total- Millions of Dollars -Short-Term Debt
    
    $
    
    
    
    $
    30
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    30Purchase Obligations:Fuel
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    7Purchased Power
    
    
    
    
    
    
    40
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    50Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    5Total Additional Contractual Cash Obligations
    
    $
    3
    
    
    $
    73
    
    
    $
    5
    
    
    $
    4
    
    
    $
    3
    
    
    $
    4
    
    
    $
    92
  Dividends on Common Stock
  Dividend Amount Per ShareDeclaration Date
    
    Record Date
    
    Payment Date
    
    of Common StockFebruary 13, 2009
    
    February 24, 2009
    
    March 9, 2009
    
    $
    0.29May 7, 2009
    
    May 20, 2009
    
    June 15, 2009
    
    $
    0.29
 Income Tax Position
  
 TUCSON ELECTRIC POWER COMPANY
 
 RESULTS OF OPERATIONS
 Executive Summary
  2
   54




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##### Table of Contents



Second Quarter of 2009 Compared with the Second Quarter of 2008
  
    
    a $15 million increase in retail revenues due primarily to the base rate increase that
took effect in December 2008 and the PPFAC that became effective in January 2009;
 
    
    a provision for rate refunds of $15 million recorded in the second quarter of 2008;
 
    
    a $3 million decrease in long-term wholesale revenues due primarily to lower kWh sales to
Salt River Project (SRP) and Navajo Tribal Utility Authority (NTUA);
 
    
    an $8 million decrease in total fuel and purchased energy expense, net of short-term
wholesale revenues, due to lower generating output and a decline in the market price of
wholesale power and natural gas;
 
    
    an $8 million increase in O&M expense due primarily to: a $3 million increase related to
maintenance outages at TEPs jointly-owned generating plants and a $3 million increase in
pension expense;
 
    
    an $11 million increase in depreciation and amortization expense due to: additions to
plant in service; new depreciation rates for generation assets; amortization of regulatory
assets resulting from the 2008 TEP Rate Order; and a $4 million adjustment related to a
change in accounting for TEPs investment in Springerville Unit 1 lease equity;
 
    
    a $7 million decrease in the amortization of TEPs TRA. In May 2008, the TRA was fully
amortized;
 
    
    a $7 million increase in total other income due to interest income related to an income
tax refund; and a $3 million adjustment related to a change in accounting for TEPs
investment in Springerville Unit 1 lease equity; and
 
    
    a $4 million decrease in total interest expense resulting from lower interest rates on
variable rate long-term debt, lower interest on capital leases; and a $2 million adjustment
related to a change in accounting for TEPs investment in Springerville Unit 1 lease equity.
   Six Months Ended June 30 of 2009 Compared with the same period of 2008
  
    
    a $10 million increase in retail revenues due primarily to the base rate increase that
took effect in December 2008 and the PPFAC that became effective in January 2009;
 
    
    a provision for rate refunds of $15 million recorded in the second quarter of 2008;
 
    
    a $4 million decrease in long-term wholesale revenues due primarily to lower kWh sales to
SRP and NTUA;
 
    
    a $24 million decrease in total fuel and purchased energy expense, net of short-term
wholesale revenues, due to lower generating output and a decline in the market price of
wholesale power and natural gas;
  55




---



##### Table of Contents




    
    a $24 million increase in O&M expense due in part to: higher planned power plant
maintenance costs of $12 million; a $6 million increase in pension expense; and a $3 million
increase in expenses related to renewable energy and energy efficiency programs that are
offset by revenues collected from customers.
 
    
    a $15 million increase in depreciation and amortization expense due to: additions to plant
in service; new depreciation rates for generation assets; amortization of regulatory assets
resulting from the 2008 TEP Rate Order; and a $4 million adjustment related to a change in
accounting for TEPs investment in Springerville Unit 1 lease equity ;
 
    
    a $24 million decrease in the amortization of TEPs TRA. In May 2008, the TRA was fully
amortized;
 
    
    a $5 million increase in total other income due to interest income related to an income
tax refund; and a $3 million adjustment related to a change in accounting for TEPs
investment in Springerville Unit 1 lease equity; and
 
    
    a $7 million decrease in total interest expense resulting from expense resulting from
lower interest rates on variable rate long-term debt, lower interest on capital leases; and a
$2 million adjustment related to a change in accounting for TEPs investment in Springerville
Unit 1 lease equity.
  Utility Sales and Revenues
    56




---



##### Table of Contents



Increase (Decrease)Three Months Ended June 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    949
    
    
    
    944
    
    
    
    5
    
    
    
    0.5
    %Commercial
    
    
    522
    
    
    
    542
    
    
    
    (20
    )
    
    
    (3.7
    %)Industrial
    
    
    549
    
    
    
    567
    
    
    
    (18
    )
    
    
    (3.1
    %)Mining
    
    
    265
    
    
    
    277
    
    
    
    (12
    )
    
    
    (4.5
    %)Public Authorities
    
    
    71
    
    
    
    73
    
    
    
    (2
    )
    
    
    (1.9
    %)Total Electric Retail Sales
    
    
    2,356
    
    
    
    2,403
    
    
    
    (47
    )
    
    
    (1.9
    %)Electric Wholesale Sales Delivered:Long-term Contracts
    
    
    165
    
    
    
    259
    
    
    
    (94
    )
    
    
    (36.2
    %)Short-term and Trading
    
    
    449
    
    
    
    902
    
    
    
    (453
    )
    
    
    (50.2
    %)Total Electric Wholesale Sales
    
    
    614
    
    
    
    1,161
    
    
    
    (547
    )
    
    
    (47.1
    %)Total Electric Sales
    
    
    2,970
    
    
    
    3,564
    
    
    
    (594
    )
    
    
    (16.7
    %)Electric Retail Revenues (in millions):Residential
    
    $
    93
    
    
    $
    88
    
    
    $
    5
    
    
    
    6.2
    %Commercial
    
    
    59
    
    
    
    57
    
    
    
    2
    
    
    
    4.4
    %Industrial
    
    
    43
    
    
    
    42
    
    
    
    1
    
    
    
    2.4
    %Mining
    
    
    16
    
    
    
    14
    
    
    
    2
    
    
    
    13.4
    %Public Authorities
    
    
    6
    
    
    
    5
    
    
    
    1
    
    
    
    7.9
    %Revenues excluding REST & DSM
    
    $
    217
    
    
    $
    206
    
    
    
    11
    
    
    
    5.5
    %REST and DSM Revenues
    
    
    3
    
    
    
    (1
    )
    
    
    4
    
    
    NMProvision for Rate Refunds
    
    
    
    
    
    
    (15
    )
    
    
    15
    
    
    NMTotal Retail Revenues
    
    $
    220
    
    
    $
    190
    
    
    $
    30
    
    
    
    15.4
    %Electric Wholesale Revenues:Long-term Contracts
    
    
    10
    
    
    
    13
    
    
    
    (3
    )
    
    
    (23.7
    %)Other Sales
    
    
    17
    
    
    
    65
    
    
    
    (48
    )
    
    
    (73.8
    %)Transmission
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    (15.1
    %)Total Wholesale Revenues
    
    
    32
    
    
    
    83
    
    
    
    (51
    )
    
    
    (61.3
    %)Total Retail and Wholesale Revenues
    
    $
    252
    
    
    $
    273
    
    
    
    (21
    )
    
    
    (7.8
    %)Weather Data:
    
    2009
    
    
    2008Cooling Degree DaysThree Months Ended June 30
    
    
    417
    
    
    
    420
    
    
    
    (3
    )
    
    
    (0.8
    %)10-Year Average
    
    
    440
    
    
    
    457
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table TEP Retail Rates
 2008 TEP Rate Order
 Residential and Commercial
   57




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##### Table of Contents



Industrial, Mining and Public Authority
  Retail Margin Revenues
  Three Months Ended June 30, 2009
    
    -millions-
    
    
    -cents / kWh-Revenues excluding base fuel, PPFAC, REST/DSM chargesResidential
    
    $
    62
    
    
    
    6.52Commercial
    
    
    42
    
    
    
    8.17Industrial
    
    
    26
    
    
    
    4.67Mining
    
    
    8
    
    
    
    2.93Public Authorities
    
    
    4
    
    
    
    5.11Retail Margin Revenues (non-GAAP)*
    
    $
    142
    
    
    
    6.01Base Fuel & PPFAC Revenues
    
    
    75
    
    
    
    3.15REST & DSM Revenues
    
    
    3
    
    
    
    0.12Net Electric Retail Sales (GAAP)
    
    $
    220
    
    
    
    9.16
 *
    
    Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative
to Net Electric Retail Sales, which is determined in accordance with GAAP. TEP believes that
Retail Margin Revenues provides useful information to investors as a measure of TEPs ability to
pay for operating expenses with retail revenues, after giving effect to related fuel and purchased
power expenses. Long-Term Wholesale Revenues
  Short-Term Wholesale and Trading Revenues
 Operating Expenses, Fuel and Purchased Power Expense 2008 TEP Rate Order, Purchased Power and
Fuel Adjustment Clause,
  58




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##### Table of Contents



Increase (Decrease)Six Months Ended June 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    1,676
    
    
    
    1,717
    
    
    
    (41
    )
    
    
    (2.4
    %)Commercial
    
    
    925
    
    
    
    957
    
    
    
    (32
    )
    
    
    (3.3
    %)Industrial
    
    
    1,039
    
    
    
    1,084
    
    
    
    (45
    )
    
    
    (4.2
    %)Mining
    
    
    524
    
    
    
    544
    
    
    
    (20
    )
    
    
    (3.7
    %)Public Authorities
    
    
    122
    
    
    
    128
    
    
    
    (6
    )
    
    
    (4.9
    %)Total Electric Retail Sales
    
    
    4,286
    
    
    
    4,430
    
    
    
    (144
    )
    
    
    (3.3
    %)Electric Wholesale Sales Delivered:Long-term Contracts
    
    
    440
    
    
    
    570
    
    
    
    (130
    )
    
    
    (22.8
    %)Other Sales
    
    
    1,004
    
    
    
    1,534
    
    
    
    (530
    )
    
    
    (34.6
    %)Total Electric Wholesale Sales
    
    
    1,444
    
    
    
    2,104
    
    
    
    (660
    )
    
    
    (31.4
    %)Total Electric Sales
    
    
    5,730
    
    
    
    6,534
    
    
    
    (804
    )
    
    
    (12.3
    %)Electric Retail Revenues (in millions):Residential
    
    $
    158
    
    
    $
    153
    
    
    $
    5
    
    
    
    3.1
    %Commercial
    
    
    100
    
    
    
    99
    
    
    
    1
    
    
    
    0.7
    %Industrial
    
    
    77
    
    
    
    78
    
    
    
    (1
    )
    
    
    (2.0
    %)Mining
    
    
    29
    
    
    
    28
    
    
    
    1
    
    
    
    5.5
    %Public Authorities
    
    
    9
    
    
    
    9
    
    
    
    
    
    
    
    (1.1
    %)Revenues excluding REST & DSM
    
    $
    373
    
    
    $
    367
    
    
    $
    6
    
    
    
    1.5
    %Provision for Rate Refunds
    
    
    
    
    
    
    (15
    )
    
    
    15
    
    
    NMREST and DSM Revenues
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    NMTotal Retail Revenues
    
    $
    378
    
    
    $
    352
    
    
    $
    26
    
    
    
    7.2
    %Electric Wholesale Revenues:Long-term Contracts
    
    
    24
    
    
    
    29
    
    
    
    (5
    )
    
    
    (15.5
    %)Short-term and Trading
    
    
    38
    
    
    
    97
    
    
    
    (59
    )
    
    
    (60.8
    %)Transmission
    
    
    8
    
    
    
    9
    
    
    
    (1
    )
    
    
    2.8
    %Total Wholesale Revenues
    
    
    70
    
    
    
    135
    
    
    
    (65
    )
    
    
    (48.3
    %)Total Retail and Wholesale Revenues
    
    $
    448
    
    
    $
    487
    
    
    
    ($39
    )
    
    
    (8.2
    %)
 Weather Data:
    
    2009
    
    
    2008Cooling Degree DaysSix Months Ended June 30
    
    
    417
    
    
    
    420
    
    
    
    (3
    )
    
    
    (0.7
    %)10-Year Average
    
    
    441
    
    
    
    457
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table Residential and Commercial
    59




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##### Table of Contents



Industrial, Mining and Public Authorities
  Retail Margin Revenues
  Six Months Ended June 30, 2009
    
    -millions-
    
    
    -cents / kWh-Revenues excluding fuel, PPFAC, REST/DSM chargesResidential
    
    $
    107
    
    
    
    6.39Commercial
    
    
    73
    
    
    
    7.88Industrial
    
    
    48
    
    
    
    4.57Mining
    
    
    16
    
    
    
    3.05Public Authorities
    
    
    6
    
    
    
    4.91Retail Margin Revenues (non-GAAP)*
    
    $
    250
    
    
    
    5.82Base Fuel & PPFAC Revenues
    
    
    123
    
    
    
    2.87REST & DSM Revenues
    
    
    5
    
    
    
    0.12Net Electric Retail Sales (GAAP)
    
    $
    378
    
    
    
    8.81
 *
    
    Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative
to Net Electric Retail Sales, which is determined in accordance with GAAP. TEP believes that
Retail Margin Revenues provides useful information to investors as a measure of TEPs ability to
pay for operating expenses with retail revenues, after giving effect to related fuel and purchased
power expenses. Long-Term Wholesale Revenues
  Other Revenues
 3 Months Ended
    
    
    6 Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008- Millions of Dollars -
    
    
    - Millions of Dollars -Revenue related to Springerville Units 3 and 4
    
    $
    14
    
    
    $
    16
    
    
    $
    27
    
    
    $
    26Other Revenue
    
    
    6
    
    
    
    5
    
    
    
    10
    
    
    
    9Total Other Revenue
    
    $
    20
    
    
    $
    21
    
    
    $
    37
    
    
    $
    35
 O&M
  60




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##### Table of Contents



Fuel and Purchased Power Expense
 Generation andTEP
    
    Purchased Power
    
    
    ExpenseThree Months Ended June 30,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of kWh-
    
    
    -Millions of Dollars-Coal-Fired Generation
    
    
    2,128
    
    
    
    2,779
    
    
    $
    45
    
    
    $
    57Gas-Fired Generation
    
    
    224
    
    
    
    216
    
    
    
    19
    
    
    
    18Solar and Other
    
    
    8
    
    
    
    3
    
    
    
    
    
    
    
    Total Generation (1)
    
    
    2,360
    
    
    
    2,998
    
    
    
    64
    
    
    
    75Total Purchased Power
    
    
    866
    
    
    
    825
    
    
    
    36
    
    
    
    79Total Resources
    
    
    3,226
    
    
    
    3,823
    
    
    $
    100
    
    
    $
    154Less Line Losses and Company Use
    
    
    (256
    )
    
    
    (259
    )Total Energy Sold
    
    
    2,970
    
    
    
    3,564
 (1)
    
    Generation expense in the second quarters of 2009 and 2008 exclude $1 million and
$2 million, respectively, related to Springerville Unit 3; these expenses were reimbursed by
Tri-State and recorded in Other Revenue. Generation andTEP
    
    Purchased Power
    
    
    ExpenseSix Months Ended June 30,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of kWh-
    
    
    -Millions of Dollars-Coal-Fired Generation
    
    
    4,240
    
    
    
    5,297
    
    
    $
    88
    
    
    $
    113Gas-Fired Generation
    
    
    393
    
    
    
    417
    
    
    
    26
    
    
    
    27Solar and Other
    
    
    13
    
    
    
    5
    
    
    
    
    
    
    
    Total Generation (1)
    
    
    4,646
    
    
    
    5,719
    
    
    
    114
    
    
    
    140Total Purchased Power
    
    
    1,517
    
    
    
    1,255
    
    
    
    59
    
    
    
    111Total Resources
    
    
    6,163
    
    
    
    6,974
    
    
    $
    173
    
    
    $
    251Less Line Losses and Company Use
    
    
    (433
    )
    
    
    (440
    )Total Energy Sold
    
    
    5,730
    
    
    
    6,534
 (1)
    
    Generation expense in the first six months of 2009 and 2008 exclude $2
million and $3 million, respectively, related to Springerville Unit 3; these expenses were
reimbursed by Tri-State and recorded in Other Revenue. PPFAC
 2008 TEP Rate Order Purchased Power and Fuel Adjustment Clause
 Energy Resources
    61




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-cents per
    
    
    -cents perkWh generated-
    
    
    kWh generated-Coal
    
    
    2.11
    
    
    
    2.05
    
    
    
    2.08
    
    
    
    2.13Gas
    
    
    8.48
    
    
    
    8.33
    
    
    
    6.62
    
    
    
    6.47Purchased Power
    
    
    4.16
    
    
    
    9.58
    
    
    
    3.89
    
    
    
    8.84
 Market Prices
  Average Market Price for Around-the-Clock Energy
    
    $/MWhQuarter ended June 30, 2009
    
    $
    25Quarter ended June 30, 2008
    
    
    79Six months ended June 30, 2009
    
    $
    28Six months ended June 30, 2008
    
    
    72
 Average Market Price for Natural Gas
    
    $/MMBtuQuarter ended June 30, 2009
    
    $
    2.76Quarter ended June 30, 2008
    
    
    9.44Six months ended June 30, 2009
    
    $
    3.17Six months ended June 30, 2008
    
    
    8.37
 Other Operating Expenses
 TRA Amortization
   62




---



##### Table of Contents



O&M
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-
    
    
    -Millions of Dollars-Other O&M
    
    $
    57
    
    
    $
    50
    
    
    $
    121
    
    
    $
    101Reimbursed expenses
related to
Springerville Units 3
and 4
    
    
    9
    
    
    
    10
    
    
    
    18
    
    
    
    17Expenses related to
customer-funded
renewable energy and
DSM
programs(1)
    
    
    3
    
    
    
    1
    
    
    
    5
    
    
    
    2Total O&M
    
    $
    69
    
    
    $
    61
    
    
    $
    144
    
    
    $
    120
 (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
 2008 TEP Rate Order
 Base Rate Increase
  Purchased Power and Fuel Adjustment Clause
  
    
    The forward component was established as of April 1, 2009 and will be updated on April
1 of each year. The forward component is based on the forecasted fuel and purchased power
costs for the 12-month period from April 1 to March 31, less the base cost of fuel and
purchased power of 2.9 cents per kWh, which is embedded in base rates. The ACC approved a
forward component of 0.18 cents per kWh, effective April 1, 2009.
 
    
    The true-up component will reconcile any over/under collected amounts from the
preceding 12 month period and will be credited to or recovered from customers in the
subsequent year.
 2
   63




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##### Table of Contents



El Paso Electric Dispute
   Pension and Postretirement Benefit Expense
 Note 9. Employee Benefit Plans
 Fair Value Measurements
    64




---



##### Table of Contents



TEPQuoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalJune 30, 2009- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    9Rabbi Trust Investments to support
the Deferred Compensation and SERP
Plans (2)
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Collateral Posted (5)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Energy Contracts (3)
    
    
    
    
    
    
    1
    
    
    
    13
    
    
    
    14Total Assets
    
    $
    9
    
    
    $
    22
    
    
    $
    13
    
    
    $
    44LiabilitiesEnergy Contracts (3)
    
    $
    
    
    
    $
    (24
    )
    
    $
    (17
    )
    
    $
    (41
    )Interest Rate Swaps (4)
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Total Liabilities
    
    
    
    
    
    
    (30
    )
    
    
    (17
    )
    
    
    (47
    )Net Total Assets and (Liabilities)
    
    $
    9
    
    
    $
    (8
    )
    
    $
    (4
    )
    
    $
    (3
    )
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
Commercial Paper and Money Market Funds.(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.(3)
    
    Energy contracts include gas swap agreements (Level 2); gas collars (Level 3); 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)
    
    Interest Rate Swaps are valued based on the six month LIBOR index.(5)
    
    Collateral provided for energy contracts with counterparties to reduce credit risk exposure.     65




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 TEP Cash Flows
  Six Months Ended June 30,
    
    2009
    
    
    2008-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    102
    
    
    $
    131Amounts from Statements of Cash Flows:Less: Capital Expenditures
    
    
    (151
    )
    
    
    (156
    )Net Cash Flows after Capital Expenditures (non-GAAP)*
    
    
    (49
    )
    
    
    (25
    )Amounts from Statements of Cash Flows:Less: Retirement of Capital Lease Obligations
    
    
    (14
    )
    
    
    (62
    )Plus: Proceeds from Investment in Lease Debt
    
    
    1
    
    
    
    11Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)*
    
    $
    (62
    )
    
    $
    (76
    )
 Six Months Ended June 30,
    
    2009
    
    
    2008-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    102
    
    
    $
    131Net Cash Flows  Investing Activities (GAAP)
    
    
    (178
    )
    
    
    (271
    )Net Cash Flows  Financing Activities (GAAP)
    
    
    47
    
    
    
    157Net Cash Flows after Capital Expenditures (non-GAAP)*
    
    
    (49
    )
    
    
    (25
    )Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)*
    
    
    (62
    )
    
    
    (76
    )
 *
    
    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
   66




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##### Table of Contents



Operating Activities
  
    
    a $15 million increase in cash receipts from retail and wholesale electric sales, less
fuel and purchased power costs, resulting from lower wholesale sales, fuel costs and
purchased power costs; and
 
    
    an $8 million decrease in total interest paid resulting from lower rates on variable rate debt
and lower capital lease interest paid; offset by
 
    
    a $36 million increase in O&M costs related primarily to planned major plant outage and
maintenance costs and general cost pressures resulting from inflation and other economic
factors; and
 
    
    an $11 million increase in performance deposit payments.
 Investing Activities
 Financing Activities Investments in Springerville Lease Debt and Equity,
 Financing Activities
  TEP Credit Agreement
   TEP Letter of Credit Facility
  Capital Contribution from UniSource Energy
 Investments in Springerville Lease Debt and
Equity,
 Interest Rate Risk
   67




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##### Table of Contents



Capital Lease Obligations
  Capital LeaseObligationBalance
    
    
    
    
    
    
    Renewal/PurchaseLeased Asset
    
    at June 30, 2009
    
    
    Expiration
    
    
    Option- Millions of Dollars -Springerville Unit 1
    
    $
    317
    
    
    
    2015
    
    
    Fair market value purchase optionSpringerville Coal Handling Facilities
    
    
    94
    
    
    
    2015
    
    
    Fixed price purchase optionSpringerville Common Facilities
    
    
    108
    
    
    
    2020
    
    
    Fixed price purchase optionSundt Unit 4
    
    
    13
    
    
    
    2011
    
    
    Fair market value purchase optionTotal Capital Lease Obligations
    
    $
    532
 Note. 4 Debt,
Credit Facilities and Capital Lease Obligations
 Investments in Springerville Lease Debt and Equity
  Income Tax Position
 UniSource Energy Consolidated, Liquidity and Capital Resources, Income Tax Position,
 Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total- Millions of Dollars -Purchase Obligations:Purchased Power
    
    
    
    
    
    
    19
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    29Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    5Total Additional Contractual Cash Obligations
    
    $
    1
    
    
    $
    20
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    4
    
    
    $
    34
   68




---



##### Table of Contents



Dividends on Common Stock
   
 UNS GAS
 
 RESULTS OF OPERATIONS
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    

June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008- Millions of Dollars -
    
    
    -Millions of Dollars-Gas Revenues
    
    $
    26
    
    
    $
    32
    
    
    $
    85
    
    
    $
    97Other Revenues
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2Total Operating Revenues
    
    
    27
    
    
    
    33
    
    
    
    87
    
    
    
    99Total Purchased Gas and PGA Expense
    
    
    17
    
    
    
    22
    
    
    
    58
    
    
    
    67Other Operations and Maintenance Expense
    
    
    6
    
    
    
    6
    
    
    
    12
    
    
    
    13Depreciation and Amortization
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    3Taxes other than Income Taxes
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2Total Other Operating Expenses
    
    
    26
    
    
    
    31
    
    
    
    76
    
    
    
    85Operating Income
    
    
    1
    
    
    
    2
    
    
    
    11
    
    
    
    14Total Interest Expense
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    3Income Tax Expense (Benefit)
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    4Net Income
    
    $
    
    
    
    $
    
    
    
    
    5
    
    
    
    7
  69




---



##### Table of Contents



Increase (Decrease)Three Months Ended June 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    PercentEnergy Sales, Therms (in millions)Gas Retail Sales:Residential
    
    
    9.8
    
    
    
    9.9
    
    
    
    (0.1
    )
    
    
    (1.4
    %)Commercial
    
    
    5.3
    
    
    
    5.4
    
    
    
    (0.1
    )
    
    
    (1.6
    %)Industrial
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    61.5
    %Public Authorities
    
    
    0.8
    
    
    
    1.0
    
    
    
    (0.2
    )
    
    
    (10.0
    %)Total Gas Retail Sales
    
    
    16.4
    
    
    
    16.6
    
    
    
    (0.2
    )
    
    
    (0.9
    %)Transport
    
    
    8.8
    
    
    
    9.7
    
    
    
    (0.9
    )
    
    
    (9.9
    %)Negotiated Sales Program (NSP)
    
    
    6.9
    
    
    
    7.5
    
    
    
    (0.6
    )
    
    
    (8.0
    %)Total Gas Sales
    
    
    32.1
    
    
    
    33.8
    
    
    
    (1.7
    )
    
    
    (5.1
    %)Gas Retail Revenues (in millions):Non-Fuel Retail Base Revenues:Residential
    
    $
    6.6
    
    
    $
    6.7
    
    
    
    ($0.1
    )
    
    
    (1.3
    %)Commercial
    
    
    1.9
    
    
    
    1.9
    
    
    
    
    
    
    
    (1.5
    %)Industrial
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    NMPublic Authorities
    
    
    0.2
    
    
    
    0.3
    
    
    
    (0.1
    )
    
    
    (1.2
    %)Total Retail Non-Fuel Base Revenues
    
    $
    8.8
    
    
    $
    8.9
    
    
    
    ($0.1
    )
    
    
    (1.2
    %)Transport
    
    
    0.8
    
    
    
    0.9
    
    
    
    (0.1
    )
    
    
    (15.4
    %)Negotiated Sales Program (NSP)
    
    
    2.7
    
    
    
    7.9
    
    
    
    (5.2
    )
    
    
    (66.5
    %)Total Non-Fuel Base Revenues
    
    $
    12.2
    
    
    $
    17.7
    
    
    $
    (5.5
    )
    
    
    (31.2
    %)Retail Fuel Revenues:Recovered From Customers
    
    $
    13.5
    
    
    $
    14.1
    
    
    
    (0.6
    )
    
    
    (4.1
    %)DSM Revenues Collected from Customers
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    3.1
    %Total Gas Revenues
    
    $
    25.8
    
    
    $
    31.9
    
    
    
    ($6.1
    )
    
    
    (19.1
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table    70




---



##### Table of Contents



Increase (Decrease)Six Months Ended June 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    PercentEnergy Sales, Therms (in millions)Gas Retail Sales:Residential
    
    
    39.4
    
    
    
    44.7
    
    
    
    (5.3
    )
    
    
    (12.0
    %)Commercial
    
    
    15.7
    
    
    
    17.6
    
    
    
    (1.9
    )
    
    
    (10.6
    %)Industrial
    
    
    1.1
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    5.2
    %Public Authorities
    
    
    3.7
    
    
    
    4.4
    
    
    
    (0.7
    )
    
    
    (15.4
    %)Total Gas Retail Sales
    
    
    59.9
    
    
    
    67.7
    
    
    
    (7.8
    )
    
    
    (11.6
    %)Transport
    
    
    18.5
    
    
    
    17.9
    
    
    
    0.6
    
    
    
    3.3
    %Negotiated Sales Program (NSP)
    
    
    15.5
    
    
    
    13.9
    
    
    
    1.6
    
    
    
    11.2
    %Total Gas Sales
    
    
    93.9
    
    
    
    99.5
    
    
    
    (5.6
    )
    
    
    (5.7
    %)Gas Retail Revenues (in millions):Non-Fuel Retail Base Revenues:Residential
    
    $
    19.5
    
    
    $
    21.4
    
    
    
    ($1.9
    )
    
    
    (8.8
    %)Commercial
    
    
    5.0
    
    
    
    5.6
    
    
    
    (0.6
    )
    
    
    (9.6
    %)Industrial
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    (3.4
    %)Public Authorities
    
    
    1.0
    
    
    
    1.1
    
    
    
    (0.1
    )
    
    
    (12.4
    %)Total Retail Non-Fuel Base Revenues
    
    $
    25.6
    
    
    $
    28.2
    
    
    
    ($2.6
    )
    
    
    (9.1
    %)Transport
    
    
    1.7
    
    
    
    1.8
    
    
    
    (0.1
    )
    
    
    (2.6
    %)Negotiated Sales Program (NSP)
    
    
    7.0
    
    
    
    12.9
    
    
    
    (5.9
    )
    
    
    (45.7
    %)Total Non-Fuel Base Revenues
    
    $
    34.3
    
    
    $
    42.9
    
    
    
    ($8.6
    )
    
    
    (20.0
    %)Retail Fuel Revenues:Recovered From Customers
    
    $
    50.7
    
    
    
    54.3
    
    
    
    (3.6
    )
    
    
    (6.7
    %)DSM Revenues Collected from Customers
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    100.0
    %Total Operating Revenues
    
    $
    85.2
    
    
    $
    97.4
    
    
    
    ($12.2
    )
    
    
    (12.5
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table   71




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##### Table of Contents



FACTORS AFFECTING RESULTS OF OPERATIONS
 RATES AND REGULATION
 Energy Cost Adjustment Mechanism
    2008 General Rate Case Filing
  Fair Value Measurements
 Tucson
Electric Power Factors Affecting Results of Operations
  UNS GasJune 30, 2009- Millions of Dollars -Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents(1)
    
    $
    21
    
    
    $
    
    
    
    $
    
    
    
    $
    21Cash Collateral(2)
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Energy Contracts(3)
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )Total
    
    $
    21
    
    
    $
    (7
    )
    
    $
    
    
    
    $
    14
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
Commercial Paper and Money Market Funds.(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. The amounts include current
and non-current liabilities and are net of current and non-current assets.  72




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Liquidity Outlook
 2008 General Rate Case
Filing
 Operating Cash Flow and Capital Expenditures
  Six Months Ended June 30,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    26
    
    
    $
    6Investing Activities
    
    
    (7
    )
    
    
    (8
    )Financing Activities
    
    
    
    
    
    
    2Net Increase (Decrease) in Cash
    
    
    19
    
    
    
    Beginning Cash
    
    
    7
    
    
    
    19Ending Cash
    
    $
    26
    
    
    $
    19
  UNS Gas/UNS Electric Revolver
   Interest Rate Risk
  Senior Unsecured Notes
   73




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##### Table of Contents



Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total- Millions of Dollars -Purchase Obligations:Fuel
    
    $
    2
    
    
    $
    2
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    7
 Dividends on Common Stock
 Senior Unsecured Notes
 
 UNS ELECTRIC
 
 RESULTS OF OPERATIONS
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008- Millions of Dollars -
    
    
    -Millions of Dollars-Retail Electric Revenues
    
    $
    47
    
    
    $
    43
    
    
    $
    91
    
    
    $
    80Wholesale Electric Revenues
    
    
    1
    
    
    
    3
    
    
    
    3
    
    
    
    3Other Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Operating Revenues
    
    
    48
    
    
    
    46
    
    
    
    94
    
    
    
    83Purchased Energy Expense
    
    
    23
    
    
    
    31
    
    
    
    44
    
    
    
    54Fuel Expense
    
    
    4
    
    
    
    2
    
    
    
    8
    
    
    
    2Transmission Expense
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    4Increase (Decrease) to reflect PPFAC Recovery
    
    
    4
    
    
    
    (3
    )
    
    
    10
    
    
    
    (2
    )Other Operations and Maintenance Expense
    
    
    6
    
    
    
    6
    
    
    
    11
    
    
    
    11Depreciation and Amortization
    
    
    4
    
    
    
    4
    
    
    
    7
    
    
    
    7Taxes other than Income Taxes
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2Total Other Operating Expenses
    
    
    44
    
    
    
    44
    
    
    
    87
    
    
    
    78Operating Income
    
    
    4
    
    
    
    2
    
    
    
    7
    
    
    
    5Other Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Interest Expense
    
    
    2
    
    
    
    1
    
    
    
    3
    
    
    
    3Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1Net Income
    
    $
    2
    
    
    $
    1
    
    
    $
    2
    
    
    $
    1
  74




---



##### Table of Contents



Increase (Decrease)Three Months Ended June 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    PercentEnergy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    184.1
    
    
    
    183.7
    
    
    
    0.4
    
    
    
    0.2
    %Commercial
    
    
    159.6
    
    
    
    167.5
    
    
    
    (7.9
    )
    
    
    (4.7
    %)Industrial
    
    
    49.4
    
    
    
    47.8
    
    
    
    1.6
    
    
    
    3.5
    %Mining
    
    
    39.7
    
    
    
    6.2
    
    
    
    33.5
    
    
    NMPublic Authorities
    
    
    0.5
    
    
    
    0.6
    
    
    
    (0.1
    )
    
    
    (16.7
    %)Total Electric Retail Sales
    
    
    433.3
    
    
    
    405.8
    
    
    
    27.5
    
    
    
    6.8
    %Electric Wholesale Sales
    
    
    36.5
    
    
    
    26.4
    
    
    
    10.1
    
    
    
    38.0
    %Total Electric Sales
    
    
    469.8
    
    
    
    432.2
    
    
    
    37.6
    
    
    
    8.7
    %Electric Retail Revenues (in millions):Non-Fuel Retail Base Revenues:Residential
    
    $
    4.7
    
    
    $
    5.4
    
    
    
    ($0.7
    )
    
    
    (11.8
    %)Commercial
    
    
    5.8
    
    
    
    5.8
    
    
    
    
    
    
    
    0.8
    %Industrial
    
    
    1.6
    
    
    
    0.3
    
    
    
    1.3
    
    
    NMMining
    
    
    0.8
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    80.3
    %Public Authorities
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    (14.5
    %)Total Retail Non-Fuel Base Revenues
    
    $
    13.0
    
    
    $
    12.0
    
    
    $
    1.0
    
    
    
    8.4
    %Electric Wholesale Revenues
    
    
    1.1
    
    
    
    2.5
    
    
    
    (1.4
    )
    
    
    (54.5
    %)Total Non-Fuel Base Revenues
    
    $
    14.1
    
    
    $
    14.5
    
    
    
    ($0.4
    )
    
    
    (2.3
    %)Retail Fuel Revenues:Recovered From Customers
    
    $
    33.2
    
    
    $
    31.1
    
    
    $
    2.1
    
    
    
    6.6
    %DSM and REST Revenues Collected from
Customers
    
    
    1.0
    
    
    
    0.1
    
    
    
    0.9
    
    
    NMTotal Electric Revenues
    
    $
    48.3
    
    
    $
    45.7
    
    
    $
    2.6
    
    
    
    5.7
    %
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table Factors
Affecting Results of Operations, 2008 UNS Electric Rate Order,
  75




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##### Table of Contents



Increase (Decrease)Six Months Ended June 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    PercentEnergy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    350.7
    
    
    
    367.0
    
    
    
    16.3
    
    
    
    (4.4
    %)Commercial
    
    
    293.2
    
    
    
    302.0
    
    
    
    (8.8
    )
    
    
    (2.9
    %)Industrial
    
    
    87.8
    
    
    
    92.6
    
    
    
    (4.8
    )
    
    
    (5.1
    %)Mining
    
    
    73.6
    
    
    
    11.7
    
    
    
    61.9
    
    
    NMPublic Authorities
    
    
    1.1
    
    
    
    1.2
    
    
    
    (0.1
    )
    
    
    (7.8
    %)Total Electric Retail Sales
    
    
    806.4
    
    
    
    774.5
    
    
    
    31.9
    
    
    
    4.1
    %Electric Wholesale Sales
    
    
    74.1
    
    
    
    27.0
    
    
    
    47.1
    
    
    NMTotal Electric Sales
    
    
    880.5
    
    
    
    801.5
    
    
    
    79.0
    
    
    
    9.9
    %Electric Retail Revenues (in millions):Non-Fuel Retail Base Revenues:Residential
    
    $
    9.1
    
    
    $
    11.1
    
    
    
    ($2.0
    )
    
    
    (18.7
    %)Commercial
    
    
    10.8
    
    
    
    10.1
    
    
    
    0.7
    
    
    
    7.3
    %Industrial
    
    
    3.5
    
    
    
    0.8
    
    
    
    2.7
    
    
    NMMining
    
    
    1.1
    
    
    
    0.5
    
    
    
    0.6
    
    
    NMPublic Authorities
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    (4.4
    %)Total Retail Non-Fuel Base Revenues
    
    $
    24.6
    
    
    $
    22.6
    
    
    $
    2.0
    
    
    
    8.8
    %Electric Wholesale Revenues
    
    
    2.4
    
    
    
    2.5
    
    
    
    (0.1
    )
    
    
    (4.4
    %)Total Non-Fuel Base Revenues
    
    $
    27.0
    
    
    $
    25.1
    
    
    $
    1.9
    
    
    
    7.5
    %Retail Fuel Revenues:Recovered From Customers
    
    
    64.5
    
    
    
    57.0
    
    
    
    7.5
    
    
    
    13.2
    %DSM and REST Revenues Collected from
Customers
    
    
    1.7
    
    
    
    0.2
    
    
    
    1.5
    
    
    NMTotal Electric Revenues
    
    $
    93.2
    
    
    $
    82.3
    
    
    $
    10.9
    
    
    
    13.3
    %
   
 FACTORS AFFECTING RESULTS OF OPERATIONS
 Rates
 2008 UNS Electric Rate Order
  Purchased Power and Fuel Adjustment Clause
   76




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##### Table of Contents



2009 General Rate Case Filing
  Fair Value Measurements
 Tucson
Electric Power Factors Affecting Results of Operations
  UNS ElectricJune 30, 2009- Millions of Dollars -Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents(1)
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    10Cash Collateral(2)
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Energy Contracts(3)
    
    
    
    
    
    
    (9
    )
    
    $
    (19
    )
    
    
    (28
    )Total
    
    $
    10
    
    
    $
    (8
    )
    
    $
    (19
    )
    
    $
    (17
    )
 (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), gas collars (Level 3), 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 level 3 valuation techniques are described below.    77




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Liquidity Outlook
  UniSource Energy Consolidated, Outlook and Strategies, Economic Conditions UniSource Energy, Liquidity and Capital Resources, Liquidity, Access to Revolving Credit
Facilities
 Operating Cash Flow and Capital Expenditures
  Six Months Ended June 30,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    30
    
    
    $
    11Investing Activities
    
    
    (17
    )
    
    
    (14
    )Financing Activities
    
    
    (8
    )
    
    
    3Net Increase (Decrease) in Cash
    
    
    5
    
    
    
    Beginning Cash
    
    
    9
    
    
    
    3Ending Cash
    
    $
    14
    
    
    $
    3
  UNS Gas/UNS Electric Revolver
 UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver
  Senior Unsecured Notes
   78




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##### Table of Contents



Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total- Millions of Dollars -Purchase Obligations:Fuel
    
    $
    
    
    
    $
    21
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21
 Dividends on Common Stock
 Senior Unsecured Notes
 
 OTHER NON-REPORTABLE BUSINESS SEGMENTS
 
 RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008- Millions of Dollars -
    
    
    - Millions of Dollars -UED
    
    $
    1
    
    
    $
    
    
    
    $
    2
    
    
    $
    Millennium Investments
    
    
    3
    
    
    
    (1
    )
    
    
    3
    
    
    
    1UniSource Energy Parent Company
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (4
    )Total Other
    
    $
    3
    
    
    $
    (2
    )
    
    $
    3
    
    
    $
    (3
    )
 UniSource Energy Parent Company
  UED
  UniSource Energy Consolidated, Liquidity and Capital Resources,
Capital Contributions
   79




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##### Table of Contents



Millennium Investments
  FACTORS AFFECTING RESULTS OF OPERATIONS
 Millennium Investments
    June 30, 2009- 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)
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Total Assets
    
    $
    2
    
    
    $
    
    
    
    $
    11
    
    
    $
    13
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
the Money Market Funds.(2)
    
    Equity Investments are, in the absence of readily ascertainable market values, based on the
investment partners valuations 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
  
    
    Accounting for Rate Regulation;
 
    
    Accounting for Asset Retirement Obligations;
 
    
    Pension and Other Postretirement Benefit Plan Assumptions;
 
    
    Accounting for Derivative Instruments, Trading Activities and Hedging Activities;
 
    
    Unbilled Revenue  TEP, UNS Gas and UNS Electric;
 
    
    Plant Asset Depreciable Lives  TEP, UNS Gas and UNS Electric; and
 
    
    Deferred Tax Valuation.
   80




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##### Table of Contents



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  
    
    FAS 161, Disclosures About Derivative Instruments and Hedging Activities,an amendment
to FAS 133, Accounting for Derivative Instruments and Hedging Activities,issued March
2008, requires enhanced disclosures about an entitys derivative and hedging activity.The
standard requires that the objectives for using derivative instruments be disclosed in
terms of underlying risk so that the reader understands the risks that the entity is
intending to manage through the use of the derivative instruments. The standard also
requires disclosure of the location in the financial statements of derivative balances as
well as the location of gains and losses incurred during the reporting period. See Note 5.
 
    
    EITF 08-6, Equity Method Investment Accounting Considerations, issued November 2008,
requires an entity to apply the cost accumulation model when determining the carrying value
of an equity investment. Share issuances by the investee should be accounted for as if the
equity investee had sold a proportionate share of its investment with any gain or loss
recognized in earnings. In addition, the EITF requires that impairment testing be
performed at an overall investment level. We adopted January 1, 2009 and it did not have a
material impact on our financial statements.
 
    
    FAS 165, Subsequent Events,issued May 2009, established general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The standard is applies to reporting
periods starting second quarter 2009 and is included in Note 1.
 
    
    FSP FAS 107-1, and APB 28-1 Interim Disclosures About Fair Value of Financial
Instruments, issued April 2009, expands the fair value disclosures required for all
financial instruments not measured at fair value to interim periods. The pronouncement
requires entities to disclose the method and significant assumptions used to estimate the
fair value of financial instruments in the financial statements on an interim and annual
basis. We have adopted the requirements of this pronouncement. See Note 8.
  
    
    FSP FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets,
issued in December 2008, amends Statement 132(R)-1 to require more detailed disclosures
about employers plan assets, including employers investment strategies, major categories
of plan assets, concentrations of risk within plan assets, and valuation techniques used to
measure the fair value of plan assets. We will adopt the requirements of this
pronouncement in our 2009 Form 10-K.
 
    
    FAS 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities a replacement of FASB Statement 125,issued June 2009, improves the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred financial assets. We are
assessing the impact of this pronouncement, which will be applicable for our 2009 10-K.
 
    
    FAS 167, Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51,issued June 2009, amends Interpretation 46(R) to
require an enterprise to perform an analysis to determine whether the enterprises variable
interest or interests give it a controlling financial interest in a variable interest
entity. We are assessing the impact of this pronouncement, which will be applicable to us
for 2010.
 
    
    FAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FAS 162,issued June 2009, establishes the
FASB Accounting Standards Codification (Codification) as the source of authoritative
accounting principles in the preparation
of financial statements in conformity with GAAP. This statement is effective for financial
statements issued third quarter 2009.
  81




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##### Table of Contents



SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
    82




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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
   Six Months Ended June 30,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-MWhs-
    
    
    % of Total ResourcesGas-Fired Generation
    
    
    393,000
    
    
    
    417,000
    
    
    
    6
    %
    
    
    6
    %Purchased Power
    
    
    1,517,000
    
    
    
    1,255,000
    
    
    
    25
    %
    
    
    18
    %
  Six Months Ended June 30,
    
    2009
    
    
    2008-Millions of Dollars-Loss recorded in Regulatory Assets
    
    $
    6
    
    
    $
    Gain recorded in the Income Statement
    
    
    
    
    
    
    (5
    )Gain recorded in AOCI
    
    
    
    
    
    
    (28
    )
  83




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##### Table of Contents



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 June 30, 2009
    
    months
    
    
    months
    
    
    over 1 yr.
    
    
    Gain (Loss)Prices actively quoted
    
    $
    
    
    
    $
    (
    )
    
    $
    (22
    )
    
    $
    (22
    )Prices based on models and other
valuation methods
    
    
    (1
    )
    
    
    
    
    
    
    (4
    )
    
    
    (5
    )Total
    
    $
    (1
    )
    
    $
    
    
    
    $
    (26
    )
    
    $
    (27
    )
  - Millions of Dollars -Change in Market Price As of June 30, 2009
    
    10% Increase
    
    
    10% DecreaseNon-Cash Flow HedgesForward gas contracts
    
    $
    5
    
    
    $
    (5
    )Forward power sales and purchase contracts
    
    
    (1
    )
    
    
    1Cash Flow HedgesForward power purchase contracts
    
    
    1
    
    
    
    (1
    )
 UNS Gas
  UNS Electric
   Credit Risk
   84




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##### Table of Contents



.
  
 ITEM 4.
    
     CONTROLS AND PROCEDURES
   
 PART
II  OTHER INFORMATION
 
 ITEM 1.
    
     LEGAL PROCEEDINGS
 Right of Way Matters
  Note 7 of Notes to Consolidated Financial Statements, Commitments and Contingencies and 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
   85




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##### Table of Contents



ITEM 4.
    
     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Proposal 1: Election of Directors
    
    Votes For
    
    
    Votes WithheldLawrence J. Aldrich
    
    
    30,675,452
    
    
    
    1,209,681Barbara M. Baumann
    
    
    30,913,962
    
    
    
    971,171Larry W. Bickle
    
    
    27,209,597
    
    
    
    4,675,536Elizabeth T. Bilby
    
    
    30,615,776
    
    
    
    1,269,357Paul J. Bonavia
    
    
    30,703,120
    
    
    
    1,182,013Harold W. Burlingame
    
    
    30,748,421
    
    
    
    1,136,712John L. Carter
    
    
    30,751,373
    
    
    
    1,133,760Robert A. Elliott
    
    
    30,927,117
    
    
    
    958,016Daniel W.L. Fessler
    
    
    30,778,736
    
    
    
    1,106,397Louise L. Francesconi
    
    
    30,806,833
    
    
    
    1,078,300Warren Y. Jobe
    
    
    30,909,495
    
    
    
    975,638Ramiro G. Peru
    
    
    30,915,192
    
    
    
    969,941Gregory A. Pivirotto
    
    
    30,920,691
    
    
    
    964,442Joaquin Ruiz
    
    
    30,922,861
    
    
    
    962,272
 Votes For
    
    
    Votes Against
    
    
    AbstainedProposal 2: Ratification of
Selection of Independent Auditor
    
    
    31,561,792
    
    
    
    309,613
    
    
    
    13,727
 
 ITEM 5.
    
     OTHER INFORMATION
 
 Ratio of Earnings to Fixed Charges
  6 Months Ended
    
    
    12 Months EndedJune 30, 2009
    
    
    June 30, 2009UniSource Energy
    
    
    1.971
    
    
    
    1.668TEP
    
    
    1.847
    
    
    
    1.591
  Environmental Matters
  
 ITEM 6.
    
     EXHIBITS
   86




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##### Table of Contents



SIGNATURES
  UNISOURCE ENERGY CORPORATION
                     (Registrant)Date:  August 5, 2009
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial OfficerTUCSON ELECTRIC POWER COMPANY
                     (Registrant)Date:  August 5, 2009
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial Officer  87




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##### Table of Contents



EXHIBIT INDEX
 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.  88