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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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
 þ o  o þ
  o o  o 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
 þ o  o þ




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Table of Contents
 Definitions
    
    
    iii PART I Reports of Independent Registered Public Accounting Firm
    
    
    2Item 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
    
    
    14Note 3. Business Segments
    
    
    17Note 4. Debt and Credit Facilities
    
    
    19Note 5. Accounting for Derivative Instruments and Trading Activities
    
    
    20Note 6. Income Tax Matters
    
    
    28Note 7. Commitments and Contingencies
    
    
    29Note 8. Employee Benefits Plans
    
    
    31Note 9. Share-Based Compensation Plans
    
    
    33Note 10. Fair Value Measurements
    
    
    35Note 11. UniSource Energy Earnings Per Share (EPS)
    
    
    38Note 12. Stockholders Equity
    
    
    39Note 13. New Accounting Pronouncements
    
    
    39Note 14. Supplemental Cash Flow Information
    
    
    41Note 15. Review by Independent Registered Public Accounting Firm
    
    
    42Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43UniSource Energy Consolidated
    
    
    43Overview of Consolidated Business
    
    
    43Outlook and Strategies
    
    
    43Results of Operations
    
    
    45Contribution by Business Segment
    
    
    46Liquidity and Capital Resources
    
    
    46Tucson Electric Power Company
    
    
    50Results of Operations
    
    
    50Factors Affecting Results of Operations
    
    
    55Liquidity and Capital Resources
    
    
    58UNS Gas
    
    
    61Results of Operations
    
    
    61Factors Affecting Results of Operations
    
    
    63Liquidity and Capital Resources
    
    
    64UNS Electric
    
    
    65Results of Operations
    
    
    65Factors Affecting Results of Operations
    
    
    67Liquidity and Capital Resources
    
    
    68
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Other Non-Reportable Business Segments
    
    
    70Results of Operations
    
    
    70Critical Accounting Estimates
    
    
    71New Accounting Pronouncements
    
    
    71Safe Harbor for Forward-Looking Statements
    
    
    72Item 3.  Quantitative and Qualitative Disclosures about Market Risk
    
    
    73Item 4.  Controls and Procedures
    
    
    77PART II  OTHER INFORMATIONItem 1.  Legal Proceedings
    
    
    78Item 1A.  Risk Factors
    
    
    78Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    78Item 5.  Other Information
    
    
    78Ratio of Earnings to Fixed Charges
    
    
    78Item 6. Exhibits
    
    
    78Signatures
    
    
    79Exhibit Index
    
    
    80Exhibit 4Exhibit 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.AECC
    
    Arizonans for Electric Choice and Competition.AMT
    
    Alternative Minimum Tax.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 daily low 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.ESP
    
    Energy Service Provider.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.FAS 143
    
    Statement of Financial Accounting Standards No. 143: Accounting for Asset Retirement Obligations.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.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.ICRA
    
    Implementation Cost Regulatory Asset.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.
  iii




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PPFAC
    
    Purchased Power and Fuel Adjustment Clause.PWMT
    
    Pinnacle West Marketing and Trading.REST
    
    Renewable Energy Standard and Tariff.RUCO
    
    Residential Utility Consumer Office.Salt River Project
    
    A public power utility serving more than 900,000 customers in Phoenix, Arizona.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.2008 Proposed Settlement
Agreement
    
    Proposed Settlement Agreement filed with the ACC in TEPs 2007/2008 rate case
proceeding.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).TOU
    
    Time of use.TRA
    
    Transition Recovery Asset, a $450 million regulatory asset established in TEPs
1999 Settlement Agreement that was fully recovered in 2008.Tri-State
    
    Tri-State Generation and Transmission Association.UED
    
    UniSource Energy Development Company, a wholly-owned subsidiary
of UniSource Energy, which engages in developing generation
resources and other project development services and related
activities.UED Credit Agreement
    
    364-day credit agreement between UED and a syndicate of banks, dated as of March
26, 2009, guaranteed by UniSource Energy.UES
    
    UniSource Energy Services, Inc., an intermediate holding company
established to own the operating companies (UNS Gas and UNS
Electric) 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
 
     
  v




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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 (LOSS)
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-(Except Per Share Amounts)Operating RevenuesElectric Retail Sales
    
    $
    201,352
    
    
    $
    198,541Electric Wholesale Sales
    
    
    35,295
    
    
    
    52,367Gas Revenue
    
    
    58,303
    
    
    
    65,431Other Revenues
    
    
    16,907
    
    
    
    13,795Total Operating Revenues
    
    
    311,857
    
    
    
    330,134Operating ExpensesFuel
    
    
    54,817
    
    
    
    69,224Purchased Energy
    
    
    76,695
    
    
    
    108,081Transmission
    
    
    2,259
    
    
    
    3,664Increase (Decrease) to reflect PPFAC/PGA Recovery Treatment
    
    
    6,702
    
    
    
    (6,339
    )Total Fuel and Purchased Energy
    
    
    140,473
    
    
    
    174,630Other Operations and Maintenance
    
    
    84,954
    
    
    
    67,489Depreciation and Amortization
    
    
    40,675
    
    
    
    36,154Amortization of 1999 Transition Recovery Asset
    
    
    
    
    
    
    17,250Taxes Other Than Income Taxes
    
    
    12,455
    
    
    
    12,594Total Operating Expenses
    
    
    278,557
    
    
    
    308,117Operating Income
    
    
    33,300
    
    
    
    22,017Other Income (Deductions)Interest Income
    
    
    2,098
    
    
    
    3,165Other Income
    
    
    1,458
    
    
    
    3,036Other Expense
    
    
    (1,484
    )
    
    
    (1,128
    )Total Other Income (Deductions)
    
    
    2,072
    
    
    
    5,073Interest ExpenseLong-Term Debt
    
    
    14,644
    
    
    
    17,245Capital Leases
    
    
    12,809
    
    
    
    13,077Other Interest Expense
    
    
    470
    
    
    
    1,141Interest Capitalized
    
    
    (726
    )
    
    
    (1,548
    )Total Interest Expense
    
    
    27,197
    
    
    
    29,915Income (Loss) Before Income Taxes
    
    
    8,175
    
    
    
    (2,825
    )Income Tax Expense (Benefit)
    
    
    3,256
    
    
    
    (210
    )Net Income (Loss)
    
    $
    4,919
    
    
    $
    (2,615
    )Weighted-average Shares of Common Stock Outstanding (000)
    
    
    35,665
    
    
    
    35,559Basic Earnings (Loss) per Share
    
    $
    0.14
    
    
    $
    (0.07
    )Diluted Earnings (Loss) per Share
    
    $
    0.14
    
    
    $
    (0.07
    )Dividends Declared per Share
    
    $
    0.290
    
    
    $
    0.240
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UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    241,524
    
    
    $
    230,195Cash Receipts from Electric Wholesale Sales
    
    
    55,200
    
    
    
    78,889Cash Receipts from Gas Sales
    
    
    71,103
    
    
    
    75,021Cash Receipts from Operating Springerville Unit 3
    
    
    12,552
    
    
    
    13,490Interest Received
    
    
    4,522
    
    
    
    8,657Income Tax Refunds Received
    
    
    14,962
    
    
    
    6,566Performance Deposit Receipts
    
    
    8,470
    
    
    
    4Other Cash Receipts
    
    
    8,701
    
    
    
    4,143Purchased Energy Costs Paid
    
    
    (94,013
    )
    
    
    (140,713
    )Fuel Costs Paid
    
    
    (59,021
    )
    
    
    (59,226
    )Payment of Other Operations and Maintenance Costs
    
    
    (53,583
    )
    
    
    (42,544
    )Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
    
    
    (27,148
    )
    
    
    (26,591
    )Wages Paid, Net of Amounts Capitalized
    
    
    (32,497
    )
    
    
    (34,265
    )Interest Paid, Net of Amounts Capitalized
    
    
    (20,768
    )
    
    
    (23,450
    )Capital Lease Interest Paid
    
    
    (22,821
    )
    
    
    (26,667
    )Performance Deposits Payments
    
    
    (14,100
    )
    
    
    Income Taxes Paid
    
    
    
    
    
    
    (7,400
    )Excess Tax Benefit from Stock Options Exercised
    
    
    (4
    )
    
    
    (135
    )Other Cash Payments
    
    
    (1,858
    )
    
    
    (1,378
    )Net Cash Flows  Operating Activities
    
    
    91,221
    
    
    
    54,596Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (82,061
    )
    
    
    (90,261
    )Payments for Investment in Springerville Lease Debt
    
    
    (31,375
    )
    
    
    Proceeds from Investment in Springerville Lease Debt
    
    
    906
    
    
    
    11,333Return of Investment from Millennium Energy Businesses
    
    
    5,000
    
    
    
    Insurance Proceeds for Replacement Assets
    
    
    4,279
    
    
    
    Other Cash Receipts
    
    
    
    
    
    
    821Other Cash Payments
    
    
    (319
    )
    
    
    (678
    )Net Cash Flows  Investing Activities
    
    
    (103,570
    )
    
    
    (78,785
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facilities
    
    
    34,000
    
    
    
    117,000Proceeds from Issuance of Short-Term Debt
    
    
    30,000
    
    
    
    Proceeds from Stock Options Exercised
    
    
    8
    
    
    
    758Excess Tax Benefit from Stock Options Exercised
    
    
    4
    
    
    
    135Other Cash Receipts
    
    
    699
    
    
    
    3,208Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    90,745Repayments of Borrowings Under Revolving Credit Facilities
    
    
    (39,000
    )
    
    
    (109,000
    )Payments of Capital Lease Obligations
    
    
    (14,471
    )
    
    
    (62,153
    )Common Stock Dividends Paid
    
    
    (10,330
    )
    
    
    (8,497
    )Repayment of Long-Term Debt
    
    
    (1,500
    )
    
    
    (1,500
    )Payment of Debt Issue/Retirement Costs
    
    
    (814
    )
    
    
    (832
    )Other Cash Payments
    
    
    (390
    )
    
    
    (784
    )Net Cash Flows  Financing Activities
    
    
    (1,794
    )
    
    
    29,080Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (14,143
    )
    
    
    4,891Cash and Cash Equivalents, Beginning of Year
    
    
    55,172
    
    
    
    90,373Cash and Cash Equivalents, End of Period
    
    $
    41,029
    
    
    $
    95,264
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UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -ASSETSUtility PlantPlant in Service
    
    $
    3,920,446
    
    
    $
    3,870,493Utility Plant under Capital Leases
    
    
    701,226
    
    
    
    702,337Construction Work in Progress
    
    
    205,193
    
    
    
    171,996Total Utility Plant
    
    
    4,826,865
    
    
    
    4,744,826Less Accumulated Depreciation and Amortization
    
    
    (1,610,683
    )
    
    
    (1,580,308
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (551,099
    )
    
    
    (546,825
    )Total Utility Plant  Net
    
    
    2,665,083
    
    
    
    2,617,693Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    156,214
    
    
    
    126,672Other
    
    
    57,358
    
    
    
    64,096Total Investments and Other Property
    
    
    213,572
    
    
    
    190,768Current AssetsCash and Cash Equivalents
    
    
    41,029
    
    
    
    55,172Accounts Receivable  Retail and Other
    
    
    57,491
    
    
    
    74,288Accounts Receivable  Wholesale
    
    
    28,867
    
    
    
    44,725Unbilled Accounts Receivable
    
    
    43,997
    
    
    
    60,146Allowance for Doubtful Accounts
    
    
    (19,721
    )
    
    
    (19,684
    )Materials and Fuel Inventory
    
    
    93,640
    
    
    
    92,170Energy Contracts  Derivative Instruments
    
    
    3,160
    
    
    
    3,437Regulatory Assets  Derivative Instruments
    
    
    59,779
    
    
    
    38,276Regulatory Assets  Other
    
    
    23,398
    
    
    
    23,299Deferred Income Taxes  Current
    
    
    36,526
    
    
    
    61,398Income Tax Receivable
    
    
    170
    
    
    
    12,720Interest Receivable on Capital Lease Debt Investment
    
    
    2,957
    
    
    
    4,491Collateral Posted for Derivative Contracts
    
    
    19,750
    
    
    
    14,120Other
    
    
    17,378
    
    
    
    17,528Total Current Assets
    
    
    408,421
    
    
    
    482,086Regulatory and Other AssetsIncome Taxes Recoverable Through Future Revenues
    
    
    19,824
    
    
    
    19,814Regulatory Assets  Pension and Other Postretirement Benefits
    
    
    110,427
    
    
    
    112,035Regulatory Assets  Derivative Instruments
    
    
    22,305
    
    
    
    18,324Regulatory Assets  Other
    
    
    38,180
    
    
    
    39,395Energy Contracts  Derivative Instruments
    
    
    1,965
    
    
    
    3,113Other Assets
    
    
    26,314
    
    
    
    26,339Total Regulatory and Other Assets
    
    
    219,015
    
    
    
    219,020Total Assets
    
    $
    3,506,091
    
    
    $
    3,509,567
  (Continued)
  5




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UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    673,867
    
    
    $
    679,274Capital Lease Obligations
    
    
    493,505
    
    
    
    513,517Long-Term Debt
    
    
    1,317,115
    
    
    
    1,313,615Total Capitalization
    
    
    2,484,487
    
    
    
    2,506,406Current LiabilitiesCurrent Obligations Under Capital Leases
    
    
    32,169
    
    
    
    18,334Short-Term Borrowings
    
    
    30,000
    
    
    
    10,000Current Maturities of Long-Term Debt
    
    
    6,000
    
    
    
    6,000Accounts Payable
    
    
    54,245
    
    
    
    62,514Accounts Payable  Purchased Power
    
    
    33,442
    
    
    
    49,146Interest Accrued
    
    
    17,533
    
    
    
    43,440Accrued Taxes Other than Income Taxes
    
    
    46,557
    
    
    
    36,746Accrued Employee Expenses
    
    
    25,382
    
    
    
    26,859Customer Deposits
    
    
    23,637
    
    
    
    22,656Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    35,424
    
    
    
    25,665Regulatory Liabilities  Other
    
    
    14,482
    
    
    
    8,161Energy Contracts  Derivative Instruments
    
    
    62,365
    
    
    
    41,076Other
    
    
    1,756
    
    
    
    1,460Total Current Liabilities
    
    
    382,992
    
    
    
    352,057Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    159,300
    
    
    
    178,089Regulatory Liabilities  Net Cost of Removal for Interim Retirements
    
    
    156,362
    
    
    
    151,796Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    41,763
    
    
    
    44,469Energy Contracts  Derivative Instruments
    
    
    31,785
    
    
    
    29,849Pension and Other Postretirement Benefits
    
    
    161,214
    
    
    
    157,769Customer Advances for Construction
    
    
    30,659
    
    
    
    31,062Other
    
    
    57,529
    
    
    
    58,070Total Deferred Credits and Other Liabilities
    
    
    638,612
    
    
    
    651,104Commitments and Contingencies (Note 7)Total Capitalization and Other Liabilities
    
    $
    3,506,091
    
    
    $
    3,509,567
  (Concluded)
  6




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UNISOURCE ENERGY CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalShares
    
    
    Common
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersOutstanding*
    
    
    Stock
    
    
    Deficit
    
    
    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
    
    
    
    
    
    
    
    
    
    
    4,919
    
    
    
    
    
    
    
    4,919Unrealized Gain on Cash Flow Hedges
(net of $165 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    251
    
    
    
    251Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $190 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    290Employee Benefit Obligations
Amortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $33 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    50Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,510Dividends Declared
    
    
    
    
    
    
    
    
    
    
    (10,327
    )
    
    
    
    
    
    
    (10,327
    )Shares Issued under Deferred Compensation Plans
    
    
    10
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    279Shares
Issued under Stock Compensation Plans 
(net of shares redeemed for taxes)
    
    
    102
    
    
    
    (869
    )
    
    
    
    
    
    
    
    
    
    
    (869
    )Balances at March 31, 2009
    
    
    35,570
    
    
    $
    686,770
    
    
    $
    (6,639
    )
    
    $
    (6,264
    )
    
    $
    673,867
 *
    
    UniSource Energy has 75 million authorized shares of Common Stock.   7




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-Operating RevenuesElectric Retail Sales
    
    $
    157,764
    
    
    $
    161,923Electric Wholesale Sales
    
    
    37,758
    
    
    
    52,313Other Revenues
    
    
    17,752
    
    
    
    14,366Total Operating Revenues
    
    
    213,274
    
    
    
    228,602Operating ExpensesFuel
    
    
    51,440
    
    
    
    69,209Purchased Power
    
    
    23,042
    
    
    
    32,221Transmission
    
    
    548
    
    
    
    2,039Increase (Decrease) to reflect PPFAC Recovery Treatment
    
    
    (368
    )
    
    
    Total Fuel and Purchased Energy
    
    
    74,662
    
    
    
    103,469Other Operations and Maintenance
    
    
    74,734
    
    
    
    58,584Depreciation and Amortization
    
    
    35,050
    
    
    
    31,290Amortization of 1999 Transition Recovery Asset
    
    
    
    
    
    
    17,250Taxes Other Than Income Taxes
    
    
    10,256
    
    
    
    10,549Total Operating Expenses
    
    
    194,702
    
    
    
    221,142Operating Income
    
    
    18,572
    
    
    
    7,460Other Income (Deductions)Interest Income
    
    
    2,070
    
    
    
    2,788Other Income
    
    
    1,331
    
    
    
    2,298Other Expense
    
    
    (1,128
    )
    
    
    (1,013
    )Total Other Income (Deductions)
    
    
    2,272
    
    
    
    4,073Interest ExpenseLong-Term Debt
    
    
    9,191
    
    
    
    11,712Capital Leases
    
    
    12,805
    
    
    
    13,070Other Interest Expense
    
    
    349
    
    
    
    1,005Interest Capitalized
    
    
    (634
    )
    
    
    (1,056
    )Total Interest Expense
    
    
    21,711
    
    
    
    24,731Income (Loss) Before Income Taxes
    
    
    (867
    )
    
    
    (13,198
    )Income Tax Expense (Benefit)
    
    
    (313
    )
    
    
    (4,336
    )Net Income (Loss)
    
    $
    (553
    )
    
    $
    (8,862
    )
   8




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    190,337
    
    
    $
    187,776Cash Receipts from Electric Wholesale Sales
    
    
    58,850
    
    
    
    78,889Cash Receipts from Operating Springerville Unit 3
    
    
    12,552
    
    
    
    13,490Interest Received
    
    
    4,500
    
    
    
    8,035Income Tax Refunds Received
    
    
    14,962
    
    
    
    6,140Reimbursement of Affiliate Charges
    
    
    5,976
    
    
    
    5,480Other Cash Receipts
    
    
    7,494
    
    
    
    1,814Performance Deposit Payments
    
    
    (9,100
    )
    
    
    Fuel Costs Paid
    
    
    (54,728
    )
    
    
    (59,226
    )Purchased Power Costs Paid
    
    
    (33,437
    )
    
    
    (58,217
    )Payment of Other Operations and Maintenance Costs
    
    
    (51,155
    )
    
    
    (41,043
    )Capital Lease Interest Paid
    
    
    (22,818
    )
    
    
    (26,659
    )Wages Paid, Net of Amounts Capitalized
    
    
    (26,867
    )
    
    
    (28,482
    )Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
    
    
    (17,427
    )
    
    
    (17,474
    )Interest Paid, Net of Amounts Capitalized
    
    
    (10,495
    )
    
    
    (14,149
    )Other Cash Payments
    
    
    (1,252
    )
    
    
    (853
    )Net Cash Flows  Operating Activities
    
    
    67,392
    
    
    
    55,521Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (69,459
    )
    
    
    (73,700
    )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
    
    
    
    Other Cash Receipts
    
    
    
    
    
    
    5Other Cash Payments
    
    
    (3
    )
    
    
    (612
    )Net Cash Flows  Investing Activities
    
    
    (95,652
    )
    
    
    (62,974
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facility
    
    
    20,000
    
    
    
    90,000Repayments of Borrowings Under Revolving Credit Facility
    
    
    (30,000
    )
    
    
    (100,000
    )Equity Investment from UniSource Energy
    
    
    30,000
    
    
    
    Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    90,745Payments of Capital Lease Obligations
    
    
    (14,447
    )
    
    
    (62,137
    )Other Cash Receipts
    
    
    465
    
    
    
    254Payment of Debt Issue Costs
    
    
    (9
    )
    
    
    (816
    )Other Cash Payments
    
    
    (139
    )
    
    
    (178
    )Net Cash Flows  Financing Activities
    
    
    5,870
    
    
    
    17,868Net Increase (Decrease)  in Cash and Cash Equivalents
    
    
    (22,390
    )
    
    
    10,415Cash and Cash Equivalents, Beginning of Year
    
    
    33,275
    
    
    
    26,610Cash and Cash Equivalents, End of Period
    
    $
    10,885
    
    
    $
    37,025
    9




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -ASSETSUtility PlantPlant in Service
    
    $
    3,391,397
    
    
    $
    3,351,474Utility Plant under Capital Leases
    
    
    700,521
    
    
    
    701,631Construction Work in Progress
    
    
    176,080
    
    
    
    145,457Total Utility Plant
    
    
    4,267,998
    
    
    
    4,198,562Less Accumulated Depreciation and Amortization
    
    
    (1,556,685
    )
    
    
    (1,531,611
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (550,583
    )
    
    
    (546,332
    )Total Utility Plant  Net
    
    
    2,160,730
    
    
    
    2,120,619Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    156,214
    
    
    
    126,672Other
    
    
    29,559
    
    
    
    31,291Total Investments and Other Property
    
    
    185,773
    
    
    
    157,963Current AssetsCash and Cash Equivalents
    
    
    10,885
    
    
    
    33,275Accounts Receivable  Retail and Other
    
    
    36,930
    
    
    
    53,091Accounts Receivable  Wholesale
    
    
    28,749
    
    
    
    44,610Unbilled Accounts Receivable
    
    
    27,590
    
    
    
    33,554Allowance for Doubtful Accounts
    
    
    (17,058
    )
    
    
    (17,135
    )Accounts Receivable  Due from Affiliates
    
    
    3,725
    
    
    
    16,614Materials and Fuel Inventory
    
    
    81,989
    
    
    
    81,067Energy Contracts  Derivative Instruments
    
    
    9,969
    
    
    
    5,129Regulatory Assets  Derivative Instruments
    
    
    25,165
    
    
    
    14,242Regulatory Assets  Other
    
    
    22,970
    
    
    
    22,834Deferred Income Taxes  Current
    
    
    34,990
    
    
    
    59,615Interest Receivable on Capital Lease Debt Investment
    
    
    2,957
    
    
    
    4,491Collateral Posted for Derivative Contracts
    
    
    9,100
    
    
    
    Other
    
    
    15,650
    
    
    
    16,089Total Current Assets
    
    
    293,611
    
    
    
    367,476Regulatory and Other AssetsRegulatory Assets  Pension and Other Postretirement Benefits
    
    
    105,098
    
    
    
    106,596Regulatory Assets  Derivative Instruments
    
    
    8,824
    
    
    
    5,400Regulatory Assets  Other
    
    
    36,912
    
    
    
    38,180Income Taxes Recoverable Through Future Revenues
    
    
    19,824
    
    
    
    19,814Energy Contracts  Derivative Instruments
    
    
    3,206
    
    
    
    4,982Other Assets
    
    
    19,708
    
    
    
    20,741Total Regulatory and Other Assets
    
    
    193,572
    
    
    
    195,713Total Assets
    
    $
    2,833,686
    
    
    $
    2,841,771
  (Continued)
  10




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)- Thousands of Dollars -CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    613,644
    
    
    $
    583,606Capital Lease Obligations
    
    
    493,383
    
    
    
    513,370Long-Term Debt
    
    
    903,615
    
    
    
    903,615Total Capitalization
    
    
    2,010,642
    
    
    
    2,000,591Current LiabilitiesCurrent Obligations Under Capital Leases
    
    
    32,066
    
    
    
    18,231Borrowing Under Revolving Credit Facility
    
    
    
    
    
    
    10,000Accounts Payable
    
    
    46,709
    
    
    
    56,001Accounts Payable  Purchased Power
    
    
    21,760
    
    
    
    28,510Accounts Payable  Due to Affiliates
    
    
    7,704
    
    
    
    3,610Income Taxes Payable
    
    
    2,644
    
    
    
    2,057Interest Accrued
    
    
    15,130
    
    
    
    35,828Accrued Taxes Other than Income Taxes
    
    
    36,178
    
    
    
    27,679Accrued Employee Expenses
    
    
    22,353
    
    
    
    23,990Energy Contracts  Derivative Instruments
    
    
    34,563
    
    
    
    18,737Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    16,980
    
    
    
    14,310Regulatory Liability  Other
    
    
    12,756
    
    
    
    7,083Other
    
    
    17,850
    
    
    
    17,106Total Current Liabilities
    
    
    266,693
    
    
    
    263,142Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    153,644
    
    
    
    180,098Regulatory Liabilities  Net Cost of Removal for Interim Retirements
    
    
    125,865
    
    
    
    122,037Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    41,763
    
    
    
    44,469Energy Contracts  Derivative Instruments
    
    
    19,545
    
    
    
    18,794Pension and Other Postretirement Benefits
    
    
    153,068
    
    
    
    149,955Other
    
    
    62,466
    
    
    
    62,685Total Deferred Credits and Other Liabilities
    
    
    556,351
    
    
    
    578,038Commitments and Contingencies (Note 7)Total Capitalization and Other Liabilities
    
    $
    2,833,686
    
    
    $
    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 Loss
    
    
    
    
    
    
    
    
    
    
    (553
    )
    
    
    
    
    
    
    (553
    )Unrealized Gain on Cash Flow Hedges
(net of $165 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    251
    
    
    
    251Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $190 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    290Employee Benefit Obligations
Amortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $33 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    50Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Capital Contribution from UniSource Energy
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Balances at March 31, 2009
    
    $
    843,971
    
    
    $
    (6,357
    )
    
    $
    (217,706
    )
    
    $
    (6,264
    )
    
    $
    613,644
   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
   
    
    UniSource Energy and TEP reclassified Transmission expenses of $4 million and $2
million, respectively, from Other Operations and Maintenance to Transmission, a component
of Total Fuel and Purchased Energy;
 
    
    UniSource Energy and TEP reclassified Capital Lease expenses of $1 million from Capital
Leases to Purchased Energy; and
 
    
    UniSource Energy reclassified $6 million 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.
   13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 2. REGULATORY MATTERS
 ACCOUNTING FOR RATE REGULATION
 Accounting
for the Effects of Certain Types of 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 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.
   14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  March 31,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-Fixed CTC Revenue to be Refunded within the next 12
months; Amount is Included in Current Liabilities
    
    $
    (17
    )
    
    $
    (14
    )(Over) Under
Recovered Purchased Energy Costs 
Regulatory Basis as Billed to Customers
    
    $
    7
    
    
    $
    Estimated Purchased Energy Costs Recovered through
Accrued Unbilled Revenues
    
    
    (8
    )
    
    
    Fixed CTC Revenue to be Refunded
    
    
    (41
    )
    
    
    (44
    )Total Included in Deferred Credits and Other Liabilities
    
    $
    (42
    )
    
    $
    (44
    )
 2
 Future Implications of Discontinuing Application of FAS 71
  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.
  15




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
    March 31,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-(Over) Under Recovered Purchased Gas Costs 
Regulatory Basis as Billed to Customers
    
    $
    (1
    )
    
    $
    5Estimated Purchased Gas Costs Recovered
through Accrued Unbilled Revenues
    
    
    (5
    )
    
    
    (10
    )Over-Recovered Purchased Gas Costs (PGA)
Included as a Current Regulatory Liability
    
    $
    (6
    )
    
    $
    (5
    )
 Future Implications of Discontinuing Application of FAS 71
  UNS ELECTRIC RATES AND REGULATION
 2009 General Rate Case Filing
  Purchased Power and Fuel Adjustment Clause (PPFAC)
    16




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
   March 31,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-(Over) Under Recovered Purchased Power Costs
 Regulatory Basis as Billed to Customers
    
    $
    (8
    )
    
    $
    Estimated Purchased Power Costs Recovered
through Accrued Unbilled Revenues
    
    
    (4
    )
    
    
    (7
    )Over-Recovered Purchased Power Costs (PPFAC)
Included as a Current Regulatory Liability
    
    $
    (12
    )
    
    $
    (7
    )
 Future Implications of Discontinuing Application of FAS 71
  
 NOTE 3. BUSINESS SEGMENTS
  (1)
    
    TEP, a vertically integrated electric utility business, is UniSource Energys largest
subsidiary.
 (2)
    
    UNS Gas is a regulated gas distribution utility business.(3)
    
    UNS Electric is a regulated electric distribution utility business.
   17




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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 March 31, 2009:Wholesale Sales  TEP to UniSource Electric (UNSE)
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    Wholesale Sales   UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )
    
    
    Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (3
    )
    
    
    Gas Revenue  UniSource Gas (UNSG) to UNSE & UED
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Other Revenue  TEP to Affiliates(1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    Other Revenue  Millennium to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (4
    )
    
    
    Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Total Intersegment Revenue
    
    $
    5
    
    
    $
    1
    
    
    $
    1
    
    
    $
    7
    
    
    $
    (14
    )
    
    $
    Three Months Ended March 31, 2008:Other Revenue  TEP to Affiliates(1)
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    Other Revenue  Millennium to TEP &
UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (4
    )
    
    
    Total Intersegment Revenue
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    4
    
    
    $
    (6
    )
    
    $
    
 (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.   Reportable Segments
    
    
    
    
    
    
    
    
    
    
    UniSourceUNS
    
    
    UNS
    
    
    
    
    
    
    Reconciling
    
    
    EnergyTEP
    
    
    Gas
    
    
    Electric
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated-Millions of Dollars-Income StatementThree months ended March 31, 2009:Operating Revenues  External
    
    $
    208
    
    
    $
    59
    
    
    $
    45
    
    
    $
    
    
    
    $
    
    
    
    $
    312Operating Revenues  Intersegment
    
    
    5
    
    
    
    1
    
    
    
    1
    
    
    
    7
    
    
    
    (14
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    (1
    )
    
    
    8
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    8Net Income (Loss)
    
    
    (1
    )
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    5Three months ended March 31, 2008:Operating Revenues  External
    
    
    227
    
    
    
    66
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    330Operating Revenues  Intersegment
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (6
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    (13
    )
    
    
    10
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Net Income (Loss)
    
    
    (9
    )
    
    
    6
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Balance SheetTotal Assets, March 31, 2009
    
    
    2,834
    
    
    
    298
    
    
    
    292
    
    
    
    1,052
    
    
    
    (970
    )
    
    
    3,506Total Assets, December 31, 2008
    
    
    2,842
    
    
    
    294
    
    
    
    285
    
    
    
    1,061
    
    
    
    (972
    )
    
    
    3,510
  18




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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
   Current
    
    
    Long-
    
    
    
    
    
    
    Current
    
    
    Long-Liabilities
    
    
    Term Debt
    
    
    Total
    
    
    Liabilities
    
    
    Term Debt
    
    
    Total- Millions of Dollars-March 31, 2009
    
    
    December 31, 2008Revolver
    
    $
    
    
    
    $
    56
    
    
    $
    56
    
    
    $
    
    
    
    $
    43
    
    
    $
    43Term Loan
    
    
    6
    
    
    
    8
    
    
    
    14
    
    
    
    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-March 31, 2009
    
    
    December 31, 2008Balance on the Revolver
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8Outstanding Letters of Credit
    
    
    5
    
    
    
    17
    
    
    
    10
    
    
    
    7
    19




---



##### 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
 Energy-Related Derivatives
  TEP Forward Power Purchases and Sales
  TEP Natural Gas
  TEP Power and Energy Options
   20




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEP Trading
  UNS Gas
  UNS Electric
  TEP Interest Rate Swap
  Accounting Treatment
  
    
    Cash Flow Hedgesare used by TEP to hedge the cash flow risk associated with unfavorable
changes in the variable interest rate on the Springerville Common Lease. In addition, TEP
hedges the cash flow risk associated with a six-year power supply agreement using a
six-year power purchase swap agreement.
    21




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
    
    
    Mark-to-Markettransactions include:
 
    
    TEP non-trading hedges, such as forward power purchase contracts indexed
to gas or short-term forward power sales contracts, 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. Prior to December 2008, unrealized
gains and losses resulting from changes in the market prices of non-trading hedges
or short-term forward power sales contracts were recorded on the same line in the
income statement as the hedged transaction. 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 trading derivatives which are forward power purchase and sale
contracts entered into to reduce our exposure to energy and commodity prices. 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.
 
    
    UNS Electric derivatives such as forward power purchases and gas swaps.
In December 2006, UNS Electric received authorization from the ACC to defer the
unrealized gains and losses on the balance sheet as a regulatory asset or a
regulatory liability rather than as a component of AOCI or in the income statement.
 
    
    UNS Gas derivatives such as forward gas purchases and gas swaps.
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 Saletransactions are forward energy purchase and sales
contracts, including call options, entered into by TEP, UNS Gas and UNS Electric to support
the current load forecast and entered into with a counterparty with load serving
requirements or generating capacity. These contracts are not required to be
marked-to-market and are accounted for on an accrual basis. On an ongoing basis we
evaluate our counterparties for non-performance risk to ensure it does not impact our
ability to obtain the normal scope exception.
    22




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Financial Impact of Derivatives
  
    
    TEPs interest rate swap and TEPs six-year power purchase swap agreement are recorded
in AOCI;
 
    
    TEPs forward purchase and sale trading contracts are recorded in the income statement;
and
 
    
    All other commodity contracts are reflected on the balance sheet as either regulatory
assets or regulatory liabilities.
  
    
    TEPs interest rate swap, 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.
  UniSource Energy
    
    
    TEPThree Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,Cash Flow Hedges  Activity
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Unrealized Gains (Losses) recorded to AOCIForward Power Sales
    
    $
    
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    (2
    )Gas Price Swaps
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    11Interest Rate Swap
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Total Pre-Tax Unrealized Gain (Loss)
    
    $
    
    
    
    $
    9
    
    
    $
    
    
    
    $
    7After-Tax Unrealized Gain (Loss) Recorded in AOCI
    
    $
    
    
    
    $
    6
    
    
    $
    
    
    
    $
    4Unrealized (Gain) Loss Reclassified to Net Income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
  23




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  UniSource Energy
    
    
    TEPThree Months
    
    
    Three MonthsMark-to-Market Transactions  Unrealized Gains (Losses)
    
    Ended March 31,
    
    
    Ended March 31,Recorded in Earnings
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales(1)
    
    $
    
    
    
    $
    (5
    )
    
    $
    4
    
    
    $
    (5
    )Forward Power Purchases(1)
    
    
    
    
    
    
    4
    
    
    
    (4
    )
    
    
    4Forward Power Purchases Recorded in Purchased Energy
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Forward Gas Price Swaps Recorded in Fuel
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Total Pre-Tax Unrealized Gains (Losses)
    
    $
    
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    (3
    )
 (1)
    
    TEPs 2009 unrealized gains and losses are with an affiliate counterparty and
therefore are eliminated in the UniSource Energy financial statements.  UniSource Energy
    
    
    TEPThree Months
    
    
    Three MonthsMark-to-Market Transactions   Increase (Decrease)
    
    Ended March 31,
    
    
    Ended March 31,Recorded in Regulatory Accounts on the Balance Sheet
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Current Regulatory Assets  Derivatives:Gas Swaps
    
    $
    14
    
    
    $
    (1
    )
    
    $
    10
    
    
    $
    Gas Collars
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Power Purchases
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    Recorded in Current Regulatory Liabilities  Derivatives:Gas Swaps
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    Power Purchases
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    Recorded in Other Regulatory Assets  Derivatives:Gas Swaps
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Power Purchases
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Recorded in Other Regulatory Liabilities  Derivatives:Gas Swaps
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    Power Purchases
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    Total Increase (Decrease)
    
    $
    26
    
    
    $
    (16
    )
    
    $
    14
    
    
    $
    
   24




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  UniSource EnergyMarch 31, 2009Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    1
    
    
    $
    (42
    )
    
    $
    
    
    
    $
    (13
    )
    
    $
    (54
    )Power Purchases
    
    
    2
    
    
    
    (19
    )
    
    
    1
    
    
    
    (6
    )
    
    
    (22
    )Gas Collars
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Power Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Power Purchases  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Interest Rate Swap  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )$
    3
    
    
    $
    (62
    )
    
    $
    2
    
    
    $
    (32
    )
    
    $
    (89
    )
 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 Swap  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )$
    3
    
    
    $
    (41
    )
    
    $
    3
    
    
    $
    (30
    )
    
    $
    (65
    )
 TEPMarch 31, 2009Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    
    
    
    $
    (25
    )
    
    $
    
    
    
    $
    (6
    )
    
    $
    (31
    )Power Purchases
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Gas Collars
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Power Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Power Purchases  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Interest Rate Swap  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Power  Trading(1)
    
    
    9
    
    
    
    (9
    )
    
    
    2
    
    
    
    (2
    )
    
    
    $
    10
    
    
    $
    (35
    )
    
    $
    3
    
    
    $
    (20
    )
    
    $
    (42
    )
  25




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 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 Swap  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.   Derivative Volumes
  UniSource Energy2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013-2015
    
    
    TotalGas GBtuGas Swaps
    
    
    11,120
    
    
    
    5,578
    
    
    
    2,640
    
    
    
    264
    
    
    
    
    
    
    
    19,602Gas Collars
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Gas Purchases  Normal (1)
    
    
    3,874
    
    
    
    591
    
    
    
    309
    
    
    
    65
    
    
    
    
    
    
    
    4,839Power GWhPower Purchases Non-Trading
    
    
    1,318
    
    
    
    625
    
    
    
    213
    
    
    
    123
    
    
    
    123
    
    
    
    2,402Power Sales Non-Trading
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Power Options
    
    
    
    
    
    
    248
    
    
    
    246
    
    
    
    248
    
    
    
    248
    
    
    
    990Power Purchases Cash Flow Hedge
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    175Power Purchases Normal (1)
    
    
    527
    
    
    
    490
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,017Power Sales Normal (1)
    
    
    
    
    
    
    248
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    394Power Options Normal (1)
    
    
    342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342Power Trading GWhPower Purchases Trading
    
    
    144
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266Power Sales Trading
    
    
    144
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266
  26




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEP2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013-2015
    
    
    TotalGas GBtuGas Swaps
    
    
    7,414
    
    
    
    2,239
    
    
    
    838
    
    
    
    48
    
    
    
    
    
    
    
    10,539Gas Collars
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Gas Purchases Normal (1)
    
    
    2,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,964Power GWhPower Purchases Non-Trading
    
    
    366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    366Power Sales Non-Trading
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Power Options
    
    
    
    
    
    
    248
    
    
    
    246
    
    
    
    248
    
    
    
    248
    
    
    
    990Power Purchases Cash Flow Hedge
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    175Power Purchases Normal (1)
    
    
    465
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Power Sales Normal (1)
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    175Power Options Normal (1)
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245Power Trading GWhPower Purchases Trading
    
    
    144
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266Power Sales Trading
    
    
    144
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266
 (1)
    
    These are derivative contracts entered into by TEP, UNS Gas and UNS Electric to support
the current load forecast and entered into with a counterparty with load serving
requirements or generating capacity. These contracts are not required to be
marked-to-market and are accounted for on an accrual basis. Hedging Policy
  Credit Risk Adjustment
    27




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 CONCENTRATION OF CREDIT RISK
     
 NOTE 6. INCOME TAXES
     28




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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-Fuel (including Transportation)
    
    $
    14
    
    
    $
    2
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    19Purchased Power
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    12Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    5Total Additional, Unrecognized, Firm
Purchase Commitments
    
    $
    15
    
    
    $
    5
    
    
    $
    5
    
    
    $
    4
    
    
    $
    3
    
    
    $
    4
    
    
    $
    36
  UNS ELECTRIC COMMITMENTS
  UNS GAS COMMITMENTS
  TEP CONTINGENCIES
 El Paso Electric Transmission
    29




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 Claims Related to Navajo Generating Station
   Claims Related to San Juan Generating Station
 Conflicts at San Juan Mine Involving Oil and Gas Leaseholders
  Environmental Reclamation at Remote Generating Stations
     30




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEP Wholesale Accounts Receivable and Allowances
  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. EMPLOYEE BENEFIT PLANS
 PENSION BENEFIT PLANS
   31




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
    OTHER POSTRETIREMENT BENEFIT PLANS
  COMPONENTS OF NET PERIODIC BENEFIT COST
  Other PostretirementPension Benefits
    
    
    BenefitsThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars -Components of Net Periodic Benefit CostService Cost
    
    $
    2
    
    
    $
    2
    
    
    $
    
    
    
    $
    Interest Cost
    
    
    4
    
    
    
    4
    
    
    
    1
    
    
    
    1Expected Return on Plan Assets
    
    
    (3
    )
    
    
    (4
    )
    
    
    
    
    
    
    Amortization of Net Loss
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net Periodic Benefit Cost
    
    $
    5
    
    
    $
    2
    
    
    $
    1
    
    
    $
    1
   32




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 9. SHARE-BASED COMPENSATION PLANS
  STOCK OPTIONS
    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
  Three Months Ended March 31, 2009Total Stock OptionsOutstanding
    
    
    Non-Vested Stock 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
    
    
    (2
    )
    
    $
    12.28
    
    
    
    (163
    )
    
    $
    5.70Options Outstanding, March 31, 2009
    
    
    1,882
    
    
    $
    22.98
    
    
    
    568
    
    
    $
    5.53Options Exercisable, March 31, 2009
    
    
    1,314
    
    
    $
    20.88Aggregate Intrinsic Value of Options Exercised ($000s)
    
    
    
    
    
    $
    11
  33




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 At March 31, 2009($000s)Aggregate Intrinsic Value for Options Outstanding
    
    $
    12,242Aggregate Intrinsic Value for Options Exercisable
    
    $
    11,318Weighted 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
    
    
    AverageRange of
    
    Shares
    
    
    Contractual
    
    
    Exercise
    
    
    of Shares
    
    
    ExerciseExercise Prices
    
    (000s)
    
    
    Life
    
    
    Price
    
    
    (000s)
    
    
    Price$11.00  $15.28
    
    
    412
    
    
    1.0 years
    
    
    $
    14.13
    
    
    
    412
    
    
    $
    14.13$17.44  $18.84
    
    
    524
    
    
    2.7 years
    
    
    $
    18.02
    
    
    
    524
    
    
    $
    18.02$26.11  $37.88
    
    
    947
    
    
    7.1 years
    
    
    $
    29.57
    
    
    
    379
    
    
    $
    32.16
 RESTRICTED STOCK UNITS AND PERFORMANCE SHARES
 Restricted Stock Units
  Performance Share Awards
    SHARE-BASED COMPENSATION EXPENSE
    34




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 10. FAIR VALUE MEASUREMENTS
  UniSource EnergyQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalMarch 31, 2009- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    23
    
    
    $
    
    
    
    $
    
    
    
    $
    23Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Equity Investments (3)
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Collateral Posted (4)
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Energy Contracts (5)
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Total Assets
    
    
    23
    
    
    
    28
    
    
    
    15
    
    
    
    66LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (55
    )
    
    
    (30
    )
    
    
    (85
    )Interest Rate Swap (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (63
    )
    
    
    (30
    )
    
    
    (93
    )Net Total Assets and (Liabilities)
    
    $
    23
    
    
    $
    (35
    )
    
    $
    (15
    )
    
    $
    (27
    )
 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 Swap (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (48
    )
    
    
    (23
    )
    
    
    (71
    )Net Total Assets and (Liabilities)
    
    $
    14
    
    
    $
    (24
    )
    
    $
    (6
    )
    
    $
    (16
    )
  35




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEPQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalMarch 31, 2009- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    8Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Collateral Posted (4)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Energy Contracts (5)
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13Total Assets
    
    
    8
    
    
    
    17
    
    
    
    13
    
    
    
    38LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (30
    )
    
    
    (16
    )
    
    
    (46
    )Interest Rate Swap (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (38
    )
    
    
    (16
    )
    
    
    (54
    )Net Total Assets and (Liabilities)
    
    $
    8
    
    
    $
    (21
    )
    
    $
    (3
    )
    
    $
    (16
    )
 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 Swap (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.  36




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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 Swap is valued based on the six month LIBOR index.  Energy Contracts
     37




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Three Months EndedMarch 31, 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
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )
    
    
    (2
    )Balance, as of March 31, 2009
    
    $
    (26
    )
    
    $
    11
    
    
    $
    (15
    )
    
    $
    (3
    )
 Three Months EndedMarch 31, 2008- Millions of Dollars -UniSource Energy
    
    
    TEPMark-to-
    
    
    
    
    
    
    
    
    
    
    Mark-to-Market
    
    
    
    
    
    
    
    
    
    
    MarketContracts
    
    
    Investments
    
    
    Total
    
    
    ContractsBalance, as of January 1, 2008
    
    $
    10
    
    
    $
    14
    
    
    $
    24
    
    
    $
    Gains and (Losses)
(Realized/Unrealized)
Recorded to:Purchased Energy
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )AOCI
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Net Regulatory Liabilities
    
    
    11
    
    
    
    
    
    
    
    11
    
    
    
    Balance, as of March 31, 2008
    
    $
    17
    
    
    $
    14
    
    
    $
    31
    
    
    $
    (4
    )
   
 NOTE 11. UNISOURCE ENERGY EARNINGS (LOSS) PER SHARE (EPS)
   38




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Three Months EndedMarch 31,2009
    
    
    2008- In Thousands -Numerator:Net Income (Loss)
    
    $
    4,919
    
    
    $
    (2,615
    )Income from Assumed Conversion of Convertible Senior Notes
    
    
    
    
    
    
    Adjusted Numerator
    
    $
    4,919
    
    
    $
    (2,615
    )Denominator:Weighted-average Shares of Common Stock Outstanding:Common Shares Issued
    
    
    35,557
    
    
    
    35,354Fully Vested Deferred Stock Units
    
    
    108
    
    
    
    205Total Weighted-average Shares of Common Stock Outstanding-Basic
    
    
    35,665
    
    
    
    35,559Effect of Dilutive Securities:Convertible Senior Notes
    
    
    
    
    
    
    Options and Stock Issuable Under Employee Benefit Plans
and the Directors Plans
    
    
    540
    
    
    
    Total Shares  Diluted
    
    
    36,205
    
    
    
    35,559
  
 NOTE 12. STOCKHOLDERS EQUITY
  Dividends and Capital Contribution
  
 NOTE 13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  
    
    FAS 161, Disclosures About Derivative Instruments and Hedging Activitiesan 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 purpose of derivative use in
terms of the risks that the entity is intending to manage. 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.
  39




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
    
    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. The standard is applicable for fiscal years
beginning on or after December 15, 2008 and did not have a material impact on our financial
statements.
  
    
    FSP FAS 157, Determining Whether a Market is Not Active and a Transaction is Not
Distressed,issued April 2009, provides additional guidance on the factors that should be
considered in estimating fair value when there has been a significant decrease in market
activity for a financials asset or liability. In addition the pronouncement requires new
disclosures relating to fair value measurements inputs and valuation techniques. We are
assessing the impact of this pronouncement, which will be applicable for periods ending
after June 15, 2009.
    
    FSP FAS 115, FAS 124 and EITF 99-20, Recognition and Presentation of
Other-Than-Temporary Impairments,issued April 2009, changes the method for determining
whether an other-than-temporary impairment exists for debt securities and changes the
amount of an impairment to be recorded in earnings. The pronouncement requires an entity
to assess the likelihood of selling the debt security prior to recovering its cost basis.
We are assessing the impact of this pronouncement, which will be applicable for periods
ending after June 15, 2009.
    
    FSP FAS 107 and APB 28, 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 will adopt the requirements of this pronouncement in our 2009 second quarter
Form 10-Q.
    
    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.
  40




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
  UniSource EnergyThree Months EndedMarch 31,2009
    
    
    2008-Thousands of Dollars-Net Income (Loss)
    
    $
    4,919
    
    
    $
    (2,615
    )Adjustments to Reconcile Net Income (Loss)
To Net Cash Flows from Operating ActivitiesDepreciation and Amortization Expense
    
    
    40,675
    
    
    
    36,154Depreciation and Amortization Recorded to Fuel and
Other O&M Expense
    
    
    802
    
    
    
    1,660Amortization of Deferred Debt-Related Costs included in
Interest Expense
    
    
    950
    
    
    
    949Provision for Bad Debts
    
    
    820
    
    
    
    809Deferred Income Taxes
    
    
    5,686
    
    
    
    25,292Pension and Postretirement Expense
    
    
    6,045
    
    
    
    2,998Pension and Postretirement Funding
    
    
    (909
    )
    
    
    (3,273
    )Stock Based Compensation Expense
    
    
    820
    
    
    
    1,143Excess Tax Benefit from Stock Options Exercised
    
    
    (4
    )
    
    
    (135
    )Mark-to-Market Transactions
    
    
    (2
    )
    
    
    3,427Amortization of Transition Recovery Asset
    
    
    
    
    
    
    17,250Changes in Assets and Liabilities which Provided (Used)Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    40,962
    
    
    
    20,844Materials and Fuel Inventory
    
    
    (1,470
    )
    
    
    (514
    )Over (Under) Recovered Purchased Energy Cost
    
    
    7,053
    
    
    
    (6,931
    )Accounts Payable
    
    
    (21,412
    )
    
    
    (7,027
    )Interest Accrued
    
    
    (17,275
    )
    
    
    (20,858
    )Income Taxes
    
    
    12,550
    
    
    
    (26,012
    )Taxes Other Than Income Taxes
    
    
    9,811
    
    
    
    10,699Other
    
    
    1,200
    
    
    
    736Net Cash Flows  Operating Activities
    
    $
    91,221
    
    
    $
    54,596
  41




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded)  Unaudited
 TEPThree Months EndedMarch 31,2009
    
    
    2008-Thousands of Dollars-Net Income (Loss)
    
    $
    (553
    )
    
    $
    (8,862
    )Adjustments to Reconcile Net Income (Loss)
To Net Cash Flows from Operating ActivitiesDepreciation and Amortization Expense
    
    
    35,050
    
    
    
    31,290Depreciation and Amortization Recorded to Fuel and
Other O&M Expense
    
    
    441
    
    
    
    1,287Amortization of Deferred Debt-Related Costs included
in Interest Expense
    
    
    692
    
    
    
    670Provision for Bad Debts
    
    
    408
    
    
    
    391Deferred Income Taxes
    
    
    (2,223
    )
    
    
    24,371Pension and Postretirement Expense
    
    
    5,469
    
    
    
    2,601Pension and Postretirement Funding
    
    
    (866
    )
    
    
    (2,844
    )Stock Based Compensation Expense
    
    
    627
    
    
    
    882Mark-to-Market Transactions
    
    
    
    
    
    
    3,427Amortization of Transition Recovery Asset
    
    
    
    
    
    
    17,250Changes in Assets and Liabilities which Provided (Used)Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    30,443
    
    
    
    14,648Materials and Fuel Inventory
    
    
    (922
    )
    
    
    (688
    )Accounts Payable
    
    
    (12,920
    )
    
    
    (141
    )Interest Accrued
    
    
    (12,066
    )
    
    
    (16,252
    )Income Taxes
    
    
    587
    
    
    
    (21,888
    )Taxes Other Than Income Taxes
    
    
    8,499
    
    
    
    8,681Other
    
    
    14,726
    
    
    
    698Net Cash Flows  Operating Activities
    
    $
    67,392
    
    
    $
    55,521
 
 NOTE 15. REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   42




---



##### Table of Contents



ITEM 2. 

    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    outlook and strategies,
    
    operating results during the first quarter ended March 31, 2009 compared with the same
period 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;
    
    Expand TEP and UNS Electrics portfolio of renewable energy sources and demand side
management programs to meet Arizonas renewable energy standards;
  43




---



##### Table of Contents




    
    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
   Liquidity and Capital Resources Item 3. 
Quantitative and Qualitative Disclosures About Market Risk, Credit Risk,
  Part II,
Item 7. Managements Discussion and Analysis of Financial Condition and Result of Operations,
UniSource Energy Consolidated  Economic Conditions
 Environmental Matters
  2
 Item 5. Other Information, Environmental Matters
  44




---



##### Table of Contents



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. As a
result of the PPFAC, relative to prior periods, TEPs net income will 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 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
     45




---



##### Table of Contents



First Quarter of 2009 Compared with the First Quarter of 2008
  See Tucson Electric Power Company, Results of Operations
 
 CONTRIBUTION BY BUSINESS SEGMENT
  Three Months EndedMarch 31,2009
    
    
    2008-Millions of Dollars-TEP
    
    $
    (1
    )
    
    $
    (9
    )UNS Gas
    
    
    5
    
    
    
    6UNS Electric
    
    
    1
    
    
    
    1Other (1)
    
    
    
    
    
    
    (1
    )Consolidated Net Income
    
    $
    5
    
    
    $
    (3
    )
 (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
   46




---



##### Table of Contents



Borrowings
    
    
    Amount AvailableBalances as of
    
    Cash and Cash
    
    
    under Revolving
    
    
    under RevolvingMay 1, 2009
    
    Equivalents
    
    
    Credit Facility(1)
    
    
    Credit Facility-Millions of Dollars-UniSource Energy stand-alone
    
    $
    4
    
    
    $
    48
    
    
    $
    22TEP
    
    5
    
    
    
    51
    
    
    
    99
    (2)UNS Gas
    
    16
    
    
    
    5
    
    
    
    30
    (2)UNS Electric
    
    6
    
    
    
    17
    
    
    
    18Other
    
    6
    (3)
    
    
    N/A
    
    
    
    N/ATotal
    
    $
    37
    
    
    $
    121
 (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
  Quantitative and Qualitative Disclosures about Market Risk, Credit Risk
 Liquidity Outlook
 UniSource Energy Credit Agreement
  47




---



##### Table of Contents



Executive Overview  UniSource Energy Consolidated Cash Flows
 Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    91
    
    
    $
    55Investing Activities
    
    
    (104
    )
    
    
    (79
    )Financing Activities
    
    
    (2
    )
    
    
    29
 Operating Activities
  Investing Activities
  Capital Expenditures
 Actual Year-to-Date
    
    
    EstimateMarch 31, 2009
    
    
    Full Year 2009-Millions of Dollars-TEP
    
    $
    70
    
    
    $
    245UNS Gas
    
    
    4
    
    
    
    20UNS Electric
    
    
    8
    
    
    
    29UniSource Energy Consolidated
    
    $
    82
    
    
    $
    294
 Financing Activities
   UniSource Energy Credit Agreement
    48




---



##### Table of Contents



Interest Rate Risk
 Item 3. Quantitative and Qualitative Disclosures about Market Risk, Credit 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.
    49




---



##### Table of Contents



Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total- Millions of Dollars -Long-Term Debt
    
    $
    
    
    
    $
    30
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    30Purchase Obligations:Fuel
    
    
    17
    
    
    
    6
    
    
    
    7
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    33Purchased Power
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    12Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    5Total Additional Contractual Cash
Obligations
    
    $
    18
    
    
    $
    39
    
    
    $
    10
    
    
    $
    6
    
    
    $
    3
    
    
    $
    4
    
    
    $
    80
 Dividends on Common Stock
  Dividend Amount Per ShareDeclaration Date
    
    Record Date
    
    
    Payment Date
    
    
    of Common StockFebruary 13, 2009
    
    February 24, 2009
    
    March 9, 2009
    
    $
    0.29
 Income Tax Position
  
 TUCSON ELECTRIC POWER COMPANY
 
 RESULTS OF OPERATIONS
 Executive Summary
     50




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##### Table of Contents



First Quarter of 2009 Compared with First Quarter of 2008
  
    
    a $4 million decrease in retail revenues due to weak economic conditions and mild weather;
    
    a $15 million decrease in short-term wholesale revenues due primarily to lower market
prices. These revenues are credited to total fuel and purchased power costs eligible for
recovery through the PPFAC;
    
    a $29 million decrease in total fuel and purchased energy expense due to low generating
output and a decline in the market price of wholesale power and natural gas;
    
    a $16 million increase in O&M expense due to: an increase in planned generation plant
maintenance and outage related expenses of $10 million; a $3 million increase in O&M related
to Springerville Units 3 and 4, which is reimbursed to TEP by the owners of those units and
recorded in other revenues; and a $3 million increase in pension expense;
    
    a $4 million increase in depreciation and amortization expense due to: additions to plant
in service; new depreciation rates for generation assets; and amortization of regulatory
assets resulting from the 2008 TEP Rate Order;
    
    a $17 million decrease in the amortization of TEPs TRA. In May 2008, the TRA was fully
amortized;
    
    a $2 million decrease in other income due in part to lower interest income on investments
in lease debt. The interest income declines over time as the lease debt is amortized; and
    
    a $3 million decrease in total interest expense resulting primarily from lower interest
rates on variable rate long-term debt.
  Utility Sales and Revenues
   51




---



##### Table of Contents



Increase (Decrease)Three Months Ended March 31,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    727
    
    
    
    773
    
    
    
    (46
    )
    
    
    (5.9
    %)Commercial
    
    
    404
    
    
    
    415
    
    
    
    (11
    )
    
    
    (2.8
    %)Industrial
    
    
    489
    
    
    
    518
    
    
    
    (29
    )
    
    
    (5.4
    %)Mining
    
    
    259
    
    
    
    266
    
    
    
    (7
    )
    
    
    (2.9
    %)Public Authorities
    
    
    50
    
    
    
    55
    
    
    
    (5
    )
    
    
    (8.8
    %)Total Electric Retail Sales
    
    
    1,929
    
    
    
    2,027
    
    
    
    (98
    )
    
    
    (4.8
    %)Electric Wholesale Sales Delivered:Long-term Contracts
    
    
    275
    
    
    
    311
    
    
    
    (36
    )
    
    
    (11.6
    %)Other Sales
    
    
    555
    
    
    
    632
    
    
    
    (77
    )
    
    
    (12.2
    %)Total Electric Wholesale Sales
    
    
    830
    
    
    
    943
    
    
    
    (113
    )
    
    
    (12.0
    %)Total Electric Sales
    
    
    2,759
    
    
    
    2,970
    
    
    
    (211
    )
    
    
    (7.1
    %)Electric Retail Revenues (in millions):Residential
    
    $
    64
    
    
    $
    65
    
    
    
    ($1
    )
    
    
    (1.0
    %)Commercial
    
    
    41
    
    
    
    42
    
    
    
    (1
    )
    
    
    (4.2
    %)Industrial
    
    
    34
    
    
    
    36
    
    
    
    (2
    )
    
    
    (7.0
    %)Mining
    
    
    13
    
    
    
    14
    
    
    
    (1
    )
    
    
    (2.9
    %)Public Authorities
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    (12.4
    %)Total Retail Revenues
    
    $
    156
    
    
    $
    161
    
    
    
    (5
    )
    
    
    (3.2
    %)DSM and REST Revenues Collected from Customers
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    84.6
    %Total Retail Revenues
    
    $
    158
    
    
    $
    162
    
    
    
    ($4
    )
    
    
    (2.6
    %)Electric Wholesale Revenues:Long-term Contracts
    
    
    14
    
    
    
    15
    
    
    
    (1
    )
    
    
    (6.7
    %)Other Sales
    
    
    20
    
    
    
    34
    
    
    
    (14
    )
    
    
    (41.2
    %)Transmission
    
    
    4
    
    
    
    3
    
    
    
    1
    
    
    
    33.3
    %Total Wholesale Revenues
    
    
    38
    
    
    
    52
    
    
    
    (14
    )
    
    
    (27.8
    %)Total Retail and Wholesale Revenues
    
    $
    196
    
    
    $
    214
    
    
    
    ($18
    )
    
    
    (8.4
    %)Weather Data:
    
    
    2009
    
    
    
    2008Heating Degree DaysThree Months Ended March 31
    
    
    646
    
    
    
    858
    
    
    
    (212
    )
    
    
    (24.7
    %)10-Year Average
    
    
    805
    
    
    
    811
    
    
    
    (6
    )
    
    
    (0.7
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table TEP Retail Rates
 2008 TEP Rate Order
  52




---



##### Table of Contents



Residential
  Commercial
  Industrial
  Mining
  Non-Fuel and Fuel Revenues
  Three Months Ended March 31,
    
    2009Electric Retail Revenues (in millions):Non-Fuel Retail Base Revenues:Residential
    
    $
    45Commercial
    
    
    30Industrial
    
    
    22Mining
    
    
    8Public Authorities
    
    
    3Total Retail Non-Fuel Base Revenues
    
    $
    108Retail Fuel Revenues:Recovered From Customers
    
    
    48Total Non-Fuel and Fuel Revenues
    
    $
    156
 Long-Term Wholesale Revenues
 Factors Affecting Results of Operations, Long-Term
Wholesale Contracts,
 Short-Term Wholesale and Trading Revenues
 Operating Expenses, Fuel and Purchased Power Expense 2008 TEP Rate Order, Purchased Power and
Fuel Adjustment Clause,
 Other Revenues
 Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Reimbursements related to Springerville Units 3 and 4
    
    $
    13
    
    
    $
    10Other Revenue
    
    
    5
    
    
    
    4Total Other Revenue
    
    $
    18
    
    
    $
    14
  53




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##### Table of Contents



Fuel and Purchased Power Expense
 Generation andTEP
    
    Purchased Power
    
    
    ExpenseThree Months Ended March 31,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of kWh-
    
    
    -Millions of Dollars-Coal-Fired Generation
    
    
    2,112
    
    
    
    2,519
    
    
    $
    43
    
    
    $
    55Gas-Fired Generation
    
    
    169
    
    
    
    200
    
    
    
    7
    
    
    
    13Solar and Other
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    Total Generation (1)
    
    
    2,283
    
    
    
    2,721
    
    
    
    50
    
    
    
    68Total Purchased Power
    
    
    651
    
    
    
    430
    
    
    
    23
    
    
    
    32Total Resources
    
    
    2,934
    
    
    
    3,151
    
    
    $
    73
    
    
    $
    100Less Line Losses and Company Use
    
    
    (175
    )
    
    
    (181
    )Total Energy Sold
    
    
    2,759
    
    
    
    2,970
 (1)
    
    Generation expense in the first quarters of 2009 and 2008 exclude $1 million
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
 Coal
  Gas
  Purchased Power
  Market Prices
  Average Market Price for Around-the-Clock Energy
    
    $/MWhQuarter ended March 31, 2009
    
    $
    30Quarter ended March 31, 2008
    
    
    66
 Average Market Price for Natural Gas
    
    $/MMBtuQuarter ended March 31, 2009
    
    $
    3.57Quarter ended March 31, 2008
    
    
    7.30
  54




---



##### Table of Contents



Three Months Ended March 31,
    
    2009
    
    
    2008-cents per kWh-Coal
    
    
    2.04
    
    
    
    2.18Gas
    
    
    4.14
    
    
    
    6.50Purchased Power
    
    
    3.53
    
    
    
    7.44All Sources
    
    
    2.65
    
    
    
    3.18
 Other Operating Expenses
 TRA Amortization
  O&M
  Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Other O&M
    
    $
    64
    
    
    $
    52Reimbursed Expenses Related to Springerville Units 3 and 4
    
    
    9
    
    
    
    6Expenses related to customer-funded renewable energy and DSM programs(1)
    
    
    2
    
    
    
    1Total O&M
    
    $
    75
    
    
    $
    59
 (1)
    
    Represents expenses related 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.
  55




---



##### Table of Contents




    
    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
  El Paso Electric Dispute
   Pension and Postretirement Benefit Expense
 Note 8. Employee Benefit Plans
 Fair Value Measurements
 Fair Value Measurements
  56




---



##### Table of Contents



TEPQuoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalMarch 31, 2009- Millions of Dollars -AssetsCash Equivalents (1)
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    8Rabbi Trust Investments to support
the Deferred Compensation and SERP
Plans (2)
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Collateral Posted (5)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Energy Contracts (3)
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13Total Assets
    
    $
    8
    
    
    $
    17
    
    
    $
    13
    
    
    $
    38LiabilitiesEnergy Contracts (3)
    
    $
    
    
    
    $
    (30
    )
    
    $
    (16
    )
    
    $
    (46
    )Interest Rate Swap (4)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (38
    )
    
    
    (16
    )
    
    
    (54
    )Net Total Assets and (Liabilities)
    
    $
    8
    
    
    $
    (21
    )
    
    $
    (3
    )
    
    $
    (16
    )
 (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 Swap is valued based on the six month LIBOR index.(5)
    
    Collateral provided for energy contracts with counterparties to reduce credit risk exposure.     57




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 TEP Cash Flows
  Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    67
    
    
    $
    56Amounts from Statements of Cash Flows:Less: Capital Expenditures
    
    
    (69
    )
    
    
    (74
    )Net Cash Flows after Capital Expenditures
(non-GAAP)*
    
    
    (2
    )
    
    
    (18
    )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)*
    
    $
    (15
    )
    
    $
    (69
    )
 Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    67
    
    
    $
    56Net Cash Flows  Investing Activities (GAAP)
    
    
    (96
    )
    
    
    (63
    )Net Cash Flows  Financing Activities (GAAP)
    
    
    6
    
    
    
    18Net Cash Flows after Capital Expenditures (non-GAAP)*
    
    
    (2
    )
    
    
    (18
    )Net Cash Flows after Capital Expenditures and
Required Payments on Debt and Capital Lease
Obligations (non-GAAP)*
    
    
    (15
    )
    
    
    (69
    )
 *
    
    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
   58




---



##### Table of Contents



Operating Activities
  
    
    a $12 million increase in cash receipts from retail and wholesale electric sales, less
fuel and purchased power costs, resulting from lower fuel and purchased power costs;
    
    a $9 million increase in income tax refunds;
    
    a $7 million decrease in total interest paid due to lower capital lease obligation
balances and lower interest costs on variable rate debt; partially offset by
    
    a $10 million increase in O&M costs related to planned outage and maintenance costs and
general cost pressures resulting from inflation and other economic factors.
 Investing Activities
 Financing Activities Investments in Springerville Lease Debt and
Equity,
  2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013-Millions of Dollars-TEP Capital Expenditures
    
    $
    245
    
    
    $
    227
    
    
    $
    257
    
    
    $
    222
    
    
    $
    188
  Note 7. Commitments and
Contingencies
  Financing Activities
  TEP Credit Agreement
   59




---



##### Table of Contents



TEP Letter of Credit Facility
  Capital Contribution from UniSource Energy
 Investments in Springerville Lease Debt and
Equity,
 Interest Rate Risk
 Quantitative and Qualitative Disclosures about Market Risk, Interest Rate Risk
 Capital Lease Obligations
  Capital Lease ObligationBalance
    
    
    
    
    
    
    Renewal/PurchaseLeased Asset
    
    at March 31, 2009
    
    
    Expiration
    
    
    Option- In Millions -Springerville Unit 1
    
    $
    311
    
    
    
    2015
    
    
    Fair market value purchase optionSpringerville Coal Handling Facilities
    
    
    94
    
    
    
    2015
    
    
    Fixed price purchase optionSpringerville Common Facilities
    
    
    107
    
    
    
    2020
    
    
    Fixed price purchase optionSundt Unit 4
    
    
    13
    
    
    
    2011
    
    
    Fair market value purchase optionTotal Capital Lease Obligations
    
    $
    525
 Note 4 Debt,
Credit Facilities and Capital Lease Obligations
 Investments in Springerville Lease Debt and Equity
   60




---



##### Table of Contents



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:Fuel
    
    $
    14
    
    
    $
    2
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    19Purchased Power
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    12Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    5Total Additional Contractual Cash
Obligations
    
    $
    15
    
    
    $
    5
    
    
    $
    5
    
    
    $
    4
    
    
    $
    3
    
    
    $
    4
    
    
    $
    36
 Dividends on Common Stock
   
 UNS GAS
 
 RESULTS OF OPERATIONS
   Three Months Ended March 31,
    
    2009
    
    
    2008- Millions of Dollars -Gas Revenues
    
    $
    59
    
    
    $
    65Other Revenues
    
    
    1
    
    
    
    1Total Operating Revenues
    
    
    60
    
    
    
    66Purchased Gas Expense
    
    
    41
    
    
    
    45Other Operations and Maintenance Expense
    
    
    6
    
    
    
    6Depreciation and Amortization
    
    
    2
    
    
    
    2Taxes other than Income Taxes
    
    
    1
    
    
    
    1Total Other Operating Expenses
    
    
    50
    
    
    
    54Operating Income
    
    
    10
    
    
    
    12Total Interest Expense
    
    
    2
    
    
    
    2Income Tax Expense (Benefit)
    
    
    3
    
    
    
    4Net Income
    
    
    5
    
    
    
    6
  61




---



##### Table of Contents



Increase (Decrease)Three Months Ended March 31,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    PercentEnergy Sales, Therms (in millions)Gas Retail Sales:Residential
    
    
    30
    
    
    
    35
    
    
    
    (5
    )
    
    
    (15.0
    %)Commercial
    
    
    10
    
    
    
    12
    
    
    
    (2
    )
    
    
    (14.7
    %)Industrial
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    (14.8
    %)Public Authorities
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    (16.9
    %)Total Gas Retail Sales
    
    
    44
    
    
    
    51
    
    
    
    (7
    )
    
    
    (15.1
    %)Transport
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Negotiated Sales Program (NSP)
    
    
    9
    
    
    
    6
    
    
    
    3
    
    
    
    34.1
    %Total Gas Sales
    
    
    53
    
    
    
    57
    
    
    
    (4
    )
    
    
    (6.1
    %)Gas Retail Revenues (in millions):Non-Fuel Retail Base Revenues:Residential
    
    $
    13
    
    
    $
    14
    
    
    
    ($1
    )
    
    
    (12.2
    %)Commercial
    
    
    3
    
    
    
    4
    
    
    
    (1
    )
    
    
    (13.7
    %)Industrial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19.6
    %)Public Authorities
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    (15.7
    %)Total Retail Non-Fuel Base Revenues
    
    $
    17
    
    
    $
    19
    
    
    
    ($2
    )
    
    
    (12.7
    %)Transport
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    11.1
    %Negotiated Sales Program (NSP)
    
    
    4
    
    
    
    5
    
    
    
    (1
    )
    
    
    (19.8
    %)Total Non-Fuel Base Revenues
    
    $
    22
    
    
    $
    25
    
    
    
    ($3
    )
    
    
    (12.2
    %)Retail Fuel Revenues:Recovered From Customers
    
    $
    37
    
    
    $
    40
    
    
    
    (3
    )
    
    
    (7.6
    %)Other Revenue
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    15.6
    %Total Operating Revenues
    
    $
    60
    
    
    $
    66
    
    
    
    ($6
    )
    
    
    (9.0
    %)Weather Data:
    
    2009
    
    
    2008Heating Degree DaysThree Months Ended March 31
    
    
    11,127
    
    
    
    12,627
    
    
    
    (1,500
    )
    
    
    (11.9
    %)10-Year Average
    
    
    11,925
    
    
    
    11,960
    
    
    
    (35
    )
    
    
    (0.3
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table    62




---



##### Table of Contents



FACTORS AFFECTING RESULTS OF OPERATIONS
 RATES AND REGULATION
 Energy Cost Adjustment Mechanism
    2008 General Rate Case Filing
   Fair Value Measurements
 Fair Value Measurements Tucson Electric Power Factors Affecting Results of Operations
  UNS GasMarch 31, 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)
    
    $
    6
    
    
    $
    
    
    
    $
    
    
    
    $
    6Cash Collateral(2)
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Energy Contracts(3)
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Total
    
    $
    6
    
    
    $
    (5
    )
    
    $
    
    
    
    $
    1
 (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) 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.  63




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Liquidity Outlook
  Operating Cash Flow and Capital Expenditures
  Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    11
    
    
    $
    2Investing Activities
    
    
    (4
    )
    
    
    (4
    )Financing Activities
    
    
    
    
    
    
    2Net Increase (Decrease) in Cash
    
    
    7
    
    
    
    Beginning Cash
    
    
    7
    
    
    
    19Ending Cash
    
    $
    14
    
    
    $
    19
   2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013- Millions of Dollars -UNS Gas
    
    $
    20
    
    
    $
    19
    
    
    $
    21
    
    
    $
    22
    
    
    $
    23
 UNS Gas/UNS Electric Revolver
   Interest Rate Risk
 Item 3. Quantitative and
Qualitative Disclosures about Market Risk, Credit Risk
  64




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##### Table of Contents



Senior Unsecured Notes
  Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total- Millions of Dollars -Purchase Obligations:Fuel
    
    $
    1
    
    
    $
    3
    
    
    $
    4
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    10
 Dividends on Common Stock
 Senior Unsecured Notes
 
 UNS ELECTRIC
 
 RESULTS OF OPERATIONS
    Three Months Ended March 31,
    
    2009
    
    
    2008- Millions of Dollars -Retail Electric Revenues
    
    $
    44
    
    
    $
    37Wholesale Electric Revenues
    
    
    1
    
    
    
    Other Revenues
    
    
    
    
    
    
    Total Operating Revenues
    
    
    45
    
    
    
    37Purchased Energy Expense
    
    
    21
    
    
    
    24Fuel Expense
    
    
    4
    
    
    
    Transmission Expense
    
    
    2
    
    
    
    1Increase (Decrease) to reflect PPFAC Recovery
    
    
    6
    
    
    
    1Other Operations and Maintenance Expense
    
    
    5
    
    
    
    4Depreciation and Amortization
    
    
    3
    
    
    
    3Taxes other than Income Taxes
    
    
    1
    
    
    
    1Total Other Operating Expenses
    
    
    42
    
    
    
    34Operating Income
    
    
    3
    
    
    
    3Other Income
    
    
    
    
    
    
    Total Interest Expense
    
    
    2
    
    
    
    2Income Tax Expense
    
    
    
    
    
    
    Net Income
    
    $
    1
    
    
    $
    1
  65




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##### Table of Contents



Increase (Decrease)Three Months Ended March 31,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    PercentEnergy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    166
    
    
    
    183
    
    
    
    (17
    )
    
    
    (9.1
    %)Commercial
    
    
    134
    
    
    
    135
    
    
    
    (1
    )
    
    
    (0.7
    %)Industrial
    
    
    38
    
    
    
    45
    
    
    
    (7
    )
    
    
    (16.9
    %)Mining
    
    
    34
    
    
    
    5
    
    
    
    29
    
    
    
    N/MPublic Authorities
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    0.7
    %Total Electric Retail Sales
    
    
    373
    
    
    
    369
    
    
    
    4
    
    
    
    1.2
    %Electric Wholesale Sales
    
    
    38
    
    
    
    
    
    
    
    38
    
    
    
    N/MTotal Electric Sales
    
    
    411
    
    
    
    369
    
    
    
    42
    
    
    
    11.2
    %Electric Retail Revenues (in millions):Non-Fuel Retail Base Revenues:Residential
    
    $
    4
    
    
    $
    6
    
    
    
    ($2
    )
    
    
    (25.1
    %)Commercial
    
    
    5
    
    
    
    4
    
    
    
    1
    
    
    
    16.0
    %Industrial
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    N/MMining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/MPublic Authorities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.8
    %Total Retail Non-Fuel Base Revenues
    
    $
    11
    
    
    $
    10
    
    
    $
    1
    
    
    
    9.3
    %Electric Wholesale Revenues
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    N/MTotal Non-Fuel Base Revenues
    
    $
    12
    
    
    $
    10
    
    
    $
    2
    
    
    
    20.8
    %Retail Fuel Revenues:Recovered From Customers
    
    $
    31
    
    
    $
    26
    
    
    
    5
    
    
    
    21.0
    %DSM and REST Revenues Collected from Customers
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    N/MOther Revenue
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    (3.3
    %)Total Operating Revenues
    
    $
    45
    
    
    $
    37
    
    
    $
    8
    
    
    
    22.5
    %Weather Data:
    
    
    2009
    
    
    
    2008Heating Degree DaysThree Months Ended March 31
    
    
    3,121
    
    
    
    3,768
    
    
    
    (647
    )
    
    
    (17.2
    %)10-Year Average
    
    
    3,364
    
    
    
    3,368
    
    
    
    (4
    )
    
    
    (0.1
    %)
 Factors
Affecting Results of Operations, 2008 UNS Electric Rate Order,
   66




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##### Table of Contents



FACTORS AFFECTING RESULTS OF OPERATIONS
 Rates
 2008 UNS Electric Rate Order
  Purchased Power and Fuel Adjustment Clause
  2009 General Rate Case Filing
  Test year  December 31, 2008
    
    ACC OrderOriginal cost rate base
    
    $176 millionRevenue deficiency
    
    $13.5 millionTotal rate increase (over test year revenues)
    
    7.4%Cost of debt
    
    7.05%Cost of equity
    
    11.40%Actual capital structure
    
    46% equity / 54% debtWeighted average cost of capital
    
    9.04%Fair Value Rate Base
    
    $265 millionRate of Return on Fair Value Rate Base
    
    6.88%
  Fair Value Measurements
 Fair Value Measurements Tucson Electric
Power Factors Affecting Results of Operations
  67




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##### Table of Contents



UNS ElectricMarch 31, 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)
    
    $
    4
    
    
    $
    
    
    
    $
    
    
    
    $
    4Cash Collateral(2)
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Energy Contracts(3)
    
    
    
    
    
    
    (12
    )
    
    
    (23
    )
    
    
    (35
    )Total
    
    $
    4
    
    
    $
    (9
    )
    
    $
    (23
    )
    
    $
    (28
    )
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
Money Market Funds.(2)
    
    Collateral provided to energy contract counterparties to reduce credit risk exposure.(3)
    
    Energy contracts include gas swap agreements (Level 2), forward power purchase and sales
contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to
take advantage of favorable market conditions and reduce exposure to energy price risk. The
amounts include current and non-current liabilities and are net of current and non-current assets.
The level 3 valuation techniques are described below.   
 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
  68




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##### Table of Contents



Operating Cash Flow and Capital Expenditures
  Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    14
    
    
    $
    5Investing Activities
    
    
    (8
    )
    
    
    (8
    )Financing Activities
    
    
    (8
    )
    
    
    5Net Increase (Decrease) in Cash
    
    
    (2
    )
    
    
    2Beginning Cash
    
    
    9
    
    
    
    3Ending Cash
    
    $
    7
    
    
    $
    5
   2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013- Millions of Dollars -UNS Electric
    
    $
    29
    
    
    $
    24
    
    
    $
    23
    
    
    $
    37
    
    
    $
    16
 UNS Gas/UNS Electric Revolver
 UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver
  Senior Unsecured Notes
  Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total- Millions of Dollars -Purchase Obligations:Fuel
    
    $
    2
    
    
    $
    1
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4
 Dividends on Common Stock
 Senior Unsecured Notes
  69




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##### Table of Contents



OTHER NON-REPORTABLE BUSINESS SEGMENTS
 
 RESULTS OF OPERATIONS
  Three Months Ended March 31,
    
    2009
    
    
    2008- Millions of Dollars -UED
    
    $
    1
    
    
    $
    (2
    )Millennium Investments
    
    
    
    
    
    
    1UniSource Energy Parent Company
    
    
    (1
    )
    
    
    Total Other
    
    $
    
    
    
    $
    (1
    )
 UniSource Energy Parent Company
  UED
  UniSource Energy Consolidated, Liquidity and
Capital Resources, Capital Contributions
  FACTORS AFFECTING RESULTS OF OPERATIONS
 Millennium Investments
     70




---



##### Table of Contents



March 31, 2009- Millions of Dollars -Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalEquity Investments(1)
    
    $
    2
    
    
    $
    
    
    
    $
    11
    
    
    $
    13
 (1)
    
    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.
  
 NEW ACCOUNTING PRONOUNCEMENTS
  
    
    FAS 161, Disclosures About Derivative Instruments and Hedging Activitiesan 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 purpose of derivative use in
terms of the risks that the entity is intending to manage. 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.
    
    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. The standard is applicable for fiscal years
beginning on or after December 15, 2008 and did not have a material impact on our financial
statements.
  
    
    FSP FAS 157 Determining Whether a Market is Not Active and a Transaction is Not
Distressed,issued April 2009, provides additional guidance on the factors that should be
considered in estimating fair value when there has been a significant decrease in market
activity for a financials asset or liability. In addition the pronouncement requires new
disclosures relating to fair value measurements inputs and valuation
techniques. We are assessing the impact of this pronouncement, which will be applicable for
periods ending after June 15, 2009.
  71




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
    
    FSP FAS 115, FAS 124 and EITF 99-20 Recognition and Presentation of
Other-Than-Temporary Impairments,issued April 2009, changes the method for determining
whether an other-than-temporary impairment exists for debt securities and changes the
amount of an impairment to be recorded in earnings. The pronouncement requires an entity
to assess the likelihood of selling the debt security prior to recovering its cost basis.
We are assessing the impact of this pronouncement, which will be applicable for periods
ending after June 15, 2009.
    
    FSP FAS 107 and APB 28 Interim Disclosures About Fair Value of Financial
Instruments,issued April 2009, expands the fair value disclosures required for all
financial instruments not measures 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 will adopt the requirements of this pronouncement in our 2009 second quarter
Form 10-Q.
    
    FSP FAS 132(R)-1 Employers Disclosures about Postretirement Benefit Plan Assetsissued
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.
 
 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
    72




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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Safe Harbor for
Forward-Looking Statements
 Risk Management Committee
  Interest Rate Risk
   Marketable Securities Risk
  Commodity Price Risk
   73




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TEP
  Purchases and Sales of Energy
      Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Loss recorded in Regulatory Assets
    
    $
    1
    
    
    $
    Loss recorded in the Income Statement
    
    
    
    
    
    
    3Loss recorded in AOCI
    
    
    
    
    
    
    2
 Natural Gas
   74




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Three Months Ended March 31,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-MWhs-
    
    
    % of Total ResourcesGas-Fired Generation
    
    
    169,000
    
    
    
    200,000
    
    
    
    6
    %
    
    
    6
    %Purchased Power
    
    
    651,000
    
    
    
    430,000
    
    
    
    22
    %
    
    
    14
    %
  Three Months Ended March 31,
    
    2009
    
    
    2008-Millions of Dollars-Loss recorded in Regulatory Assets
    
    $
    13
    
    
    $
    Gain recorded in the Income Statement
    
    
    
    
    
    
    (1
    )Gain recorded in AOCI
    
    
    
    
    
    
    (11
    )
  Unrealized Gain (Loss) of TEP'sHedging and Trading Activities- Millions of Dollars -TotalMaturity 0  6
    
    
    Maturity 6  12
    
    
    Maturity
    
    
    UnrealizedSource of Fair Value At March 31, 2009
    
    months
    
    
    months
    
    
    over 1 yr.
    
    
    Gain (Loss)Prices actively quoted
    
    $
    (23
    )
    
    $
    (1
    )
    
    $
    (6
    )
    
    $
    (30
    )Prices based on models and other
valuation methods
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )
    
    
    (4
    )Total
    
    $
    (24
    )
    
    $
    (1
    )
    
    $
    (9
    )
    
    $
    (34
    )
 Sensitivity Analysis of Derivatives
  - Millions of Dollars -Change in Market Price As of March 31, 2009
    
    10% Increase
    
    
    10% DecreaseNon-Cash Flow HedgesGas swap agreements
    
    $
    4
    
    
    $
    4Power Trade
    
    
    1
    
    
    
    1Cash Flow HedgesForward power sales and purchase contracts
    
    
    1
    
    
    
    1
 Coal
   75




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UNS Gas
    UNS Electric
         76




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Credit Risk
     .
  
 ITEM 4.  CONTROLS AND PROCEDURES
   77




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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
  
 ITEM 5.  OTHER INFORMATION
 
 Ratio of Earnings to Fixed Charges
  3 Months Ended
    
    
    12 Months EndedMarch 31, 2009
    
    
    March 31, 2009UniSource Energy
    
    
    1.282
    
    
    
    1.354TEP
    
    
    0.963
    
    
    
    1.268
   
 Environmental Matters
  ITEM 6.  EXHIBITS
   78




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SIGNATURES
  UNISOURCE ENERGY CORPORATION

(Registrant)Date:  May 6, 2009
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial OfficerTUCSON ELECTRIC POWER COMPANY

(Registrant)Date:  May 6, 2009
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial Officer  79




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EXHIBIT INDEX
 4
    
    
    
    
    Employment Agreement, dated
May 4, 2009, between UniSource Energy and Paul J. Bonavai12
    (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.  80