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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 September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to  .
 Commission
    
    Registrant; State of Incorporation;
    
    IRS EmployerFile Number
    
    Address; and Telephone Number
    
    Identification Number1-13739
    
    UNISOURCE ENERGY CORPORATION
    
    86-0786732(An Arizona Corporation)One South Church Avenue, Suite 100Tucson, AZ 85701(520) 571-40001-5924
    
    TUCSON ELECTRIC POWER COMPANY
    
    86-0062700(An Arizona Corporation)One South Church Avenue, Suite 100Tucson, AZ 85701(520) 571-4000
  UniSource Energy Corporation
    
    Yes þ
    
    No oTucson Electric Power Company (1)
    
    Yes o
    
    No þ
 (1)
    
    Tucson Electric Power Company is not required to file reports under the Exchange Act. However,
Tucson Electric Power Company has filed all Exchange Act reports for the preceding 12 months.  UniSource Energy Corporation
    
    Yes o
    
    No oTucson Electric Power Company
    
    Yes o
    
    No o
  UniSource Energy Corporation
    
    Large Accelerated Filer þ
    
    Accelerated Filer o
    
    Non-accelerated filer oSmaller Reporting Company oTucson Electric Power Company
    
    Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated filer þSmaller Reporting Company o
  UniSource Energy Corporation
    
    Yes þ
    
    No oTucson Electric Power Company
    
    Yes o
    
    No þ




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##### Table of Contents



Table of Contents
 Definitions
    
    iv PART I Reports of Independent Registered Public Accounting Firm
    
    
    1Item 1.  Financial Statements
    
    
    3UniSource Energy CorporationComparative Condensed Consolidated Statements of Income (Loss)
    
    
    3Comparative Condensed Consolidated Statements of Cash Flows
    
    
    4Comparative Condensed Consolidated Balance Sheets
    
    
    5Condensed Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income
    
    
    7Tucson Electric Power CompanyComparative Condensed Consolidated Statements of Income (Loss)
    
    
    8Comparative Condensed Consolidated Statements of Cash Flows
    
    
    9Comparative Condensed Consolidated Balance Sheets
    
    
    10Condensed Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income
    
    
    12Notes to Condensed Consolidated Financial Statements
    
    
    13Note 1. Nature of Operations and Basis of Accounting Presentation
    
    
    13Note 2. Regulatory Matters
    
    
    15Note 3. Business Segments
    
    
    18Note 4. Debt, Credit Facilities and Capital Lease Obligations
    
    
    20Note 5. Accounting for Derivative Instruments, Trading Activities and Hedging Activities
    
    
    22Note 6. Income Taxes
    
    
    30Note 7. Commitments and Contingencies
    
    
    31Note 8. Fair Value of Financial Instruments Not Carried at Fair Value
    
    
    34Note 9. Employee Benefits Plans
    
    
    34Note 10. Share-Based Compensation Plans
    
    
    36Note 11. Fair Value Measurements
    
    
    39Note 12. UniSource Energy Earnings Per Share (EPS)
    
    
    42Note 13. Stockholders Equity
    
    
    44Note 14. Sale of Millenniums Investment in Sabinas
    
    
    44Note 15 Recently Issued Accounting Pronouncements
    
    
    44Note 16. Supplemental Cash Flow Information
    
    
    46Note 17. Review by Independent Registered Public Accounting Firm
    
    
    48Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    49UniSource Energy Consolidated
    
    
    49Overview of Consolidated Business
    
    
    49Outlook and Strategies
    
    
    49Results of Operations
    
    
    51Contribution by Business Segment
    
    
    52Liquidity and Capital Resources
    
    
    52Tucson Electric Power Company
    
    
    56Results of Operations
    
    
    56Factors Affecting Results of Operations
    
    
    65Liquidity and Capital Resources
    
    
    68UNS Gas
    
    
    71Results of Operations
    
    
    71Factors Affecting Results of Operations
    
    
    74Liquidity and Capital Resources
    
    
    75UNS Electric
    
    
    76Results of Operations
    
    
    76Factors Affecting Results of Operations
    
    
    79Liquidity and Capital Resources
    
    
    81
  ii




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Other Non-Reportable Business Segments
    
    
    82Results of Operations
    
    
    82Factors Affecting Results of Operations
    
    
    83Critical Accounting Estimates
    
    
    83Recently Issued Accounting Pronouncements
    
    
    84Safe Harbor for Forward-Looking Statements
    
    
    85Item 3.  Quantitative and Qualitative Disclosures about Market Risk
    
    
    85Item 4.  Controls and Procedures
    
    
    88PART II  OTHER INFORMATIONItem 1.  Legal Proceedings
    
    
    88Item 1A.  Risk Factors
    
    
    89Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    89Item 5.  Other Information
    
    
    89Ratio of Earnings to Fixed Charges
    
    
    89Item 6. Exhibits
    
    
    89Signatures
    
    
    90Exhibit Index
    
    
    91Exhibit 3.1Exhibit 12aExhibit 12bExhibit 15Exhibit 31(a)Exhibit 31(b)Exhibit 31(c)Exhibit 31(d)Exhibit 32
   iii




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DEFINITIONS
  2008 TEP Rate Order
    
    A rate order issued by the ACC resulting in a new retail rate structure for TEP,
effective December 1, 2008.ACC
    
    Arizona Corporation Commission.AMT
    
    Alternative Minimum Tax.AOCI
    
    Accumulated Other Comprehensive Income.APS
    
    Arizona Public Service.BMGS
    
    Black Mountain Generating Station owned by UED.Btu
    
    British thermal unit(s).Capacity
    
    The ability to produce power; the most power a unit can produce or the
maximum that can be taken under a contract, measured in MWs.Citizens
    
    Citizens Communications Company.Coconino PCC
    
    The Coconino County, Arizona Pollution Control CorporationCommon Stock
    
    UniSource Energys common stock, without par value.Company
    
    UniSource Energy Corporation.Cooling Degree Days
    
    An index used to measure the impact of weather on energy usage calculated
by subtracting 75 from the average of the high and low daily temperatures.DSM
    
    Demand side management.Energy
    
    The amount of power produced over a given period of time measured
in MWh.EPA
    
    Environmental Protection Agency.FERC
    
    Federal Energy Regulatory Commission.Fixed CTC
    
    Competition Transition Charge of approximately $0.009 per kWh that was
included in TEPs retail rate for the purpose of recovering TEPs
$450 million TRA by December 31, 2008.Four Corners
    
    Four Corners Generating Station.GBtu
    
    Billion British Thermal Units.Heating Degree Days
    
    An index used to measure the impact of weather on energy usage
calculated by subtracting the average of the high and low daily
temperatures from 65.IDBs
    
    Industrial Development Revenue Bonds.IRS
    
    Internal Revenue Service.kWh
    
    Kilowatt-hour(s).LIBOR
    
    London Interbank Offered Rate.Luna
    
    Luna Energy Facility.Mark-to-Market Adjustments
    
    Unrealized gains and losses that are recorded monthly to reflect the market
prices at the end of each month on forward energy sales and purchase
contracts that are considered to be derivatives.Millennium
    
    Millennium Energy Holdings, Inc., a wholly-owned subsidiary of
UniSource Energy.MMBtu
    
    Million British Thermal Units.MW
    
    Megawatt(s).MWh
    
    Megawatt-hour(s).Navajo
    
    Navajo Generating Station.PGA
    
    Purchased Gas Adjuster, a retail rate mechanism designed to recover
the cost of gas purchased for retail gas customers.Pima Authority
    
    The Industrial Development Authority of the County of Pima.PPFAC
    
    Purchased Power and Fuel Adjustment Clause.REST
    
    Renewable Energy Standard and Tariff.Sabinas
    
    Carboelectrica Sabinas, S. de R.L. de C.V., a Mexican limited liability company.San Juan
    
    San Juan Generating Station.1999 Settlement Agreement
    
    TEPs 1999 Settlement Agreement approved by the ACC in November 1999
that provided for electric retail competition and transition asset recovery.Springerville
    
    Springerville Generating Station.SIFMA
    
    Securities Industry and Financial Markets Association.
  iv




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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 Revolving Credit Facility
    
    Revolving credit facility under the TEP Credit Agreement.Therm
    
    A unit of heating value equivalent to 100,000 British thermal units (Btu).TRA
    
    Transition Recovery Asset, a $450 million regulatory asset established in TEPs
1999 Settlement Agreement that was fully recovered in 2008.Tri-State
    
    Tri-State Generation and Transmission Association.UED
    
    UniSource Energy Development Company, a wholly-owned subsidiary
of UniSource Energy, which engages in developing generation
resources and other project development services and related
activities.UED Credit Agreement
    
    364-day credit agreement between UED and a bank, dated as of March 26, 2009,
guaranteed by UniSource Energy.UES
    
    UniSource Energy Services, Inc., an intermediate holding company
established to own the operating companies (UNS Gas and UNS
Electric) which acquired the Citizens Arizona gas and electric
utility assets in 2003.UniSource Credit Agreement
    
    Amended and Restated Credit Agreement between UniSource Energy and a
syndicate of banks, dated as of August 11, 2006.UniSource Energy
    
    UniSource Energy Corporation.UNS Electric
    
    UNS Electric, Inc., a wholly-owned subsidiary of UES, which acquired
the Citizens Arizona electric utility assets in 2003.UNS Gas
    
    UNS Gas, Inc., a wholly-owned subsidiary of UES, which acquired the
Citizens Arizona gas utility assets in 2003.UNS Gas/UNS Electric 
Revolver
    
    Revolving credit facility under the Amended and Restated Credit
Agreement among UNS Gas and UNS Electric as borrowers, UES as
guarantor, and a syndicate of banks, dated as of August 11, 2006.
  v




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

PricewaterhouseCoopers LLPPhoenix, ArizonaOctober 29, 2009
  1




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

PricewaterhouseCoopers LLPPhoenix, ArizonaOctober 29, 2009
  2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 
 UNISOURCE ENERGY CORPORATION
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 Three Months Ended
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    
    2009
    
    
    2008(Unaudited)
    
    
    
    
    (Unaudited)-Thousands of Dollars-
    
    
    
    
    -Thousands of Dollars-(Except Per Share Amounts)
    
    
    
    
    (Except Per Share Amounts)Operating Revenues$
    348,938
    
    
    $
    322,690
    
    
    Electric Retail Sales
    
    $
    817,490
    
    
    $
    769,983
    
    
    
    (29,517
    )
    
    Provision for Rate Refunds  CTC Revenue
    
    
    
    
    
    
    (44,415
    )348,938
    
    
    
    293,173
    
    
    Net Electric Retail Sales
    
    
    817,490
    
    
    
    725,56828,785
    
    
    
    57,279
    
    
    Electric Wholesale Sales
    
    
    92,031
    
    
    
    187,10316,226
    
    
    
    19,831
    
    
    Gas Revenue
    
    
    99,189
    
    
    
    115,00220,290
    
    
    
    17,569
    
    
    Other Revenues
    
    
    55,169
    
    
    
    50,635414,239
    
    
    
    387,852
    
    
    Total Operating Revenues
    
    
    1,063,879
    
    
    
    1,078,308Operating Expenses99,895
    
    
    
    112,389
    
    
    Fuel
    
    
    223,758
    
    
    
    257,59476,207
    
    
    
    135,086
    
    
    Purchased Energy
    
    
    217,121
    
    
    
    366,6442,356
    
    
    
    8,114
    
    
    Transmission
    
    
    7,607
    
    
    
    16,735(15,403
    )
    
    
    (1,842
    )
    
    Increase (Decrease) to Reflect PPFAC/PGA Recovery Treatment
    
    
    (5,083
    )
    
    
    (13,073
    )163,055
    
    
    
    253,747
    
    
    Total Fuel and Purchased Energy
    
    
    443,403
    
    
    
    627,90079,549
    
    
    
    73,364
    
    
    Other Operations and Maintenance
    
    
    243,432
    
    
    
    211,52443,679
    
    
    
    36,762
    
    
    Depreciation and Amortization
    
    
    131,881
    
    
    
    109,196
    
    
    
    
    
    
    Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,94511,098
    
    
    
    10,079
    
    
    Taxes Other Than Income Taxes
    
    
    35,915
    
    
    
    35,198297,381
    
    
    
    373,952
    
    
    Total Operating Expenses
    
    
    854,631
    
    
    
    1,007,763116,858
    
    
    
    13,900
    
    
    Operating Income
    
    
    209,248
    
    
    
    70,545Other Income (Deductions)2,609
    
    
    
    2,520
    
    
    Interest Income
    
    
    9,530
    
    
    
    8,7241,899
    
    
    
    1,069
    
    
    Other Income
    
    
    16,284
    
    
    
    6,267(812
    )
    
    
    (2,837
    )
    
    Other Expense
    
    
    (2,040
    )
    
    
    (5,719
    )3,696
    
    
    
    752
    
    
    Total Other Income (Deductions)
    
    
    23,774
    
    
    
    9,272Interest Expense14,317
    
    
    
    18,182
    
    
    Long-Term Debt
    
    
    43,680
    
    
    
    53,60312,504
    
    
    
    13,180
    
    
    Interest on Capital Leases
    
    
    36,762
    
    
    
    39,331980
    
    
    
    (349
    )
    
    Other Interest Expense
    
    
    2,411
    
    
    
    1,375(436
    )
    
    
    (1,304
    )
    
    Interest Capitalized
    
    
    (1,780
    )
    
    
    (4,480
    )27,365
    
    
    
    29,709
    
    
    Total Interest Expense
    
    
    81,073
    
    
    
    89,82993,189
    
    
    
    (15,057
    )
    
    Income (Loss) before Income Taxes
    
    
    151,949
    
    
    
    (10,012
    )35,543
    
    
    
    (4,018
    )
    
    Income Tax Expense (Benefit)
    
    
    58,110
    
    
    
    (1,106
    )$
    57,646
    
    
    $
    (11,039
    )
    
    Net Income (Loss)
    
    $
    93,839
    
    
    $
    (8,906
    )35,928
    
    
    
    35,677
    
    
    Weighted-average Shares of Common Stock Outstanding (000)
    
    
    35,829
    
    
    
    35,616$
    1.60
    
    
    $
    (0.31
    )
    
    Basic Earnings (Loss) per Share
    
    $
    2.62
    
    
    $
    (0.25
    )$
    1.45
    
    
    $
    (0.31
    )
    
    Diluted Earnings (Loss) per Share
    
    $
    2.40
    
    
    $
    (0.25
    )$
    0.29
    
    
    $
    0.24
    
    
    Dividends Declared per Share
    
    $
    0.87
    
    
    $
    0.72
   3




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UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2009
    
    
    2008(Unaudited)-Thousands of Dollars-Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    858,056
    
    
    $
    803,707Cash Receipts from Electric Wholesale Sales
    
    
    135,006
    
    
    
    272,558Cash Receipts from Gas Sales
    
    
    130,765
    
    
    
    147,754Cash Receipts from Operating Springerville Unit 3 & 4
    
    
    51,399
    
    
    
    42,955Income Tax Refunds Received
    
    
    16,961
    
    
    
    19,626Interest Received
    
    
    12,997
    
    
    
    17,069Performance Deposits Received
    
    
    27,720
    
    
    
    27,904Other Cash Receipts
    
    
    10,086
    
    
    
    10,638Purchased Energy Costs Paid
    
    
    (257,414
    )
    
    
    (461,561
    )Fuel Costs Paid
    
    
    (227,304
    )
    
    
    (223,273
    )Payment of Other Operations and Maintenance Costs
    
    
    (177,101
    )
    
    
    (140,936
    )Taxes Other Than Income Taxes Paid, Net of Amounts
Capitalized
    
    
    (110,271
    )
    
    
    (106,327
    )Wages Paid, Net of Amounts Capitalized
    
    
    (94,217
    )
    
    
    (84,543
    )Interest Paid, Net of Amounts Capitalized
    
    
    (48,312
    )
    
    
    (50,252
    )Capital Lease Interest Paid
    
    
    (38,050
    )
    
    
    (43,278
    )Performance Deposits Paid
    
    
    (21,010
    )
    
    
    (31,340
    )Income Taxes Paid
    
    
    
    
    
    
    (9,900
    )Excess Tax Benefit from Share-Based Compensation
    
    
    (1,929
    )
    
    
    (612
    )Other Cash Payments
    
    
    (5,084
    )
    
    
    (2,853
    )Net Cash Flows  Operating Activities
    
    
    262,298
    
    
    
    187,336Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (236,913
    )
    
    
    (258,883
    )Payments for Investment in Springerville Lease Debt
    
    
    (31,375
    )
    
    
    Prepayment
Deposit on UED Short-term Debt
    
    
    (2,069
    )
    
    
    Deposit  Collateral Trust Bond Trustee
    
    
    
    
    
    
    (133,111
    )Proceeds from Investment in Springerville Lease Debt
    
    
    12,736
    
    
    
    24,918Return of Millenniums Investments
    
    
    5,000
    
    
    
    839Insurance Proceeds for Replacement Assets
    
    
    4,928
    
    
    
    3,085Other Cash Receipts
    
    
    322
    
    
    
    5,056Other Cash Payments
    
    
    (866
    )
    
    
    (994
    )Net Cash Flows  Investing Activities
    
    
    (248,237
    )
    
    
    (359,090
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facilities
    
    
    158,000
    
    
    
    231,000Proceeds
from Issuance of Short-term Debt
    
    
    30,000
    
    
    
    Proceeds from Stock Options Exercised
    
    
    2,021
    
    
    
    1,910Excess Tax Benefit from Share-Based Compensation
    
    
    1,929
    
    
    
    612Other Cash Receipts
    
    
    4,517
    
    
    
    5,419Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    320,745Repayments of Borrowings Under Revolving Credit Facilities
    
    
    (140,000
    )
    
    
    (227,000
    )Payments of Capital Lease Obligations
    
    
    (24,157
    )
    
    
    (74,292
    )Common Stock Dividends Paid
    
    
    (31,037
    )
    
    
    (25,521
    )Repayment of Long-Term Debt
    
    
    (4,500
    )
    
    
    (74,500
    )Payment of Debt Issue/Retirement Costs
    
    
    (963
    )
    
    
    (3,561
    )Other Cash Payments
    
    
    (1,957
    )
    
    
    (2,866
    )Net Cash Flows  Financing Activities
    
    
    (6,147
    )
    
    
    151,946Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    7,914
    
    
    
    (19,808
    )Cash and Cash Equivalents, Beginning of Year
    
    
    55,172
    
    
    
    90,373Cash and Cash Equivalents, End of Period
    
    $
    63,086
    
    
    $
    70,565Non-Cash Financing ActivityRepayment of
UED Short-term Debt
    
    $
    (2,069
    )
    
    $
    Repayment of Collateral Trust Bond
    
    $
    
    
    
    $
    (128,300
    )
    4




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UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-ASSETSUtility PlantPlant in Service
    
    $
    4,106,190
    
    
    $
    3,870,493Utility Plant under Capital Leases
    
    
    720,628
    
    
    
    702,337Construction Work in Progress
    
    
    137,724
    
    
    
    171,996Total Utility Plant
    
    
    4,964,542
    
    
    
    4,744,826Less Accumulated Depreciation and Amortization
    
    
    (1,628,480
    )
    
    
    (1,580,308
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (568,698
    )
    
    
    (546,825
    )Total Utility Plant  Net
    
    
    2,767,364
    
    
    
    2,617,693Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    132,493
    
    
    
    126,672Other
    
    
    65,624
    
    
    
    64,096Total Investments and Other Property
    
    
    198,117
    
    
    
    190,768Current AssetsCash and Cash Equivalents
    
    
    63,086
    
    
    
    55,172Accounts Receivable  Retail and Other
    
    
    88,315
    
    
    
    74,288Accounts Receivable  Wholesale
    
    
    29,406
    
    
    
    44,725Unbilled Accounts Receivable
    
    
    58,699
    
    
    
    60,146Allowance for Doubtful Accounts
    
    
    (19,885
    )
    
    
    (19,684
    )Materials and Fuel Inventory
    
    
    124,190
    
    
    
    92,170Energy Contracts  Derivative Instruments
    
    
    3,289
    
    
    
    3,437Regulatory Assets  Derivative Instruments
    
    
    23,857
    
    
    
    38,276Regulatory Assets  Other
    
    
    22,865
    
    
    
    23,299Deferred Income Taxes  Current
    
    
    38,778
    
    
    
    61,398Income Tax Receivable
    
    
    
    
    
    
    12,720Interest Receivable on Capital Lease Debt Investment
    
    
    2,537
    
    
    
    4,491Collateral Posted for Derivative Contracts
    
    
    7,410
    
    
    
    14,120Other
    
    
    20,126
    
    
    
    17,528Total Current Assets
    
    
    462,673
    
    
    
    482,086Regulatory and Other AssetsIncome Taxes Recoverable through Future Revenues
    
    
    17,701
    
    
    
    19,814Regulatory Assets  Pension and Other Postretirement Benefits
    
    
    99,365
    
    
    
    112,035Regulatory Assets  Derivative Instruments
    
    
    9,639
    
    
    
    18,324Regulatory Assets  Other
    
    
    35,965
    
    
    
    39,395Energy Contracts  Derivative Instruments
    
    
    4,894
    
    
    
    3,113Other Assets
    
    
    25,541
    
    
    
    26,339Total Regulatory and Other Assets
    
    
    193,105
    
    
    
    219,020Total Assets
    
    $
    3,621,259
    
    
    $
    3,509,567
  (Continued)
  5




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##### Table of Contents



UNISOURCE ENERGY CORPORATION
COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    746,230
    
    
    $
    679,274Capital Lease Obligations
    
    
    486,232
    
    
    
    513,517Long-Term Debt
    
    
    1,312,115
    
    
    
    1,313,615Total Capitalization
    
    
    2,544,577
    
    
    
    2,506,406Current LiabilitiesCurrent
Obligations under Capital Leases
    
    
    40,435
    
    
    
    18,334Short-Term Borrowings
    
    
    52,931
    
    
    
    10,000Current Maturities of Long-Term Debt
    
    
    6,000
    
    
    
    6,000Accounts Payable
    
    
    59,586
    
    
    
    62,514Accounts Payable  Purchased Energy
    
    
    35,456
    
    
    
    49,146Interest Accrued
    
    
    22,977
    
    
    
    43,440Accrued Taxes Other than Income Taxes
    
    
    51,127
    
    
    
    36,746Accrued Employee Expenses
    
    
    24,799
    
    
    
    26,859Customer Deposits
    
    
    24,526
    
    
    
    22,656Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    35,270
    
    
    
    25,665Regulatory Liabilities  Other
    
    
    26,805
    
    
    
    8,161Energy Contracts  Derivative Instruments
    
    
    27,906
    
    
    
    41,076Income Tax Payable
    
    
    5,261
    
    
    
    Other
    
    
    1,175
    
    
    
    1,460Total Current Liabilities
    
    
    414,254
    
    
    
    352,057Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    206,942
    
    
    
    178,089Regulatory Liabilities  Net Cost of Removal for Interim
Retirements
    
    
    186,581
    
    
    
    151,796Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    20,968
    
    
    
    44,469Energy Contracts and Other Derivative Instruments
    
    
    21,340
    
    
    
    29,849Pension and Other Postretirement Benefits
    
    
    139,562
    
    
    
    157,769Customer Advances for Construction
    
    
    32,369
    
    
    
    31,062Other
    
    
    54,666
    
    
    
    58,070Total Deferred Credits and Other Liabilities
    
    
    662,428
    
    
    
    651,104Commitments and Contingencies (Note 7)Total Capitalization and Other Liabilities
    
    $
    3,621,259
    
    
    $
    3,509,567
  (Concluded)
  6




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##### Table of Contents



UNISOURCE ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalShares
    
    
    Common
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersOutstanding*
    
    
    Stock
    
    
    Earnings
    
    
    Loss
    
    
    Equity(Unaudited)-Thousands of Dollars-Balances at December 31, 2008
    
    
    35,458
    
    
    $
    687,360
    
    
    $
    (1,231
    )
    
    $
    (6,855
    )
    
    $
    679,274Comprehensive Income:2009 Year-to-Date Net Income
    
    
    
    
    
    
    
    
    
    
    93,839
    
    
    
    
    
    
    
    93,839Unrealized Loss on Cash Flow Hedges
(net of $285 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (434
    )
    
    
    (434
    )Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income (net of $489 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    746
    
    
    
    746Employee
Benefit Obligations
Amortization of SERP Net Prior
Service Cost
Included in Net Periodic Benefit Cost
(net of $98 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149
    
    
    
    149Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,300Dividends
    
    
    
    
    
    
    
    
    
    
    (32,119
    )
    
    
    
    
    
    
    (32,119
    )Shares Issued under Deferred Compensation Plans
    
    
    10
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    279Shares Issued under Stock Compensation Plans 
(net of shares redeemed for taxes)
    
    
    261
    
    
    
    485
    
    
    
    
    
    
    
    
    
    
    
    485Tax Benefit Realized from Stock-Based Compensation Plans
    
    
    
    
    
    
    1,929
    
    
    
    
    
    
    
    
    
    
    
    1,929Other Stock-Based Compensation
    
    
    
    
    
    
    2,082
    
    
    
    
    
    
    
    
    
    
    
    2,082Balances at September 30, 2009
    
    
    35,729
    
    
    $
    692,135
    
    
    $
    60,489
    
    
    $
    (6,394
    )
    
    $
    746,230
 *
    
    UniSource Energy has 75 million authorized shares of Common Stock.   7




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
 
 COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 Three Months Ended
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    
    September 30,2009
    
    
    2008
    
    
    
    
    2009
    
    
    2008(Unaudited)
    
    
    
    
    (Unaudited)-Thousands of Dollars-
    
    
    
    
    -Thousands of Dollars-Operating Revenues$
    297,418
    
    
    $
    260,555
    
    
    Electric Retail Sales
    
    $
    675,190
    
    
    $
    627,963
    
    
    
    (29,517
    )
    
    Provision for Rate Refunds  CTC Revenue
    
    
    
    
    
    
    (44,415
    )297,418
    
    
    
    231,038
    
    
    Net Electric Retail Sales
    
    
    675,190
    
    
    
    583,54838,018
    
    
    
    72,896
    
    
    Electric Wholesale Sales
    
    
    107,762
    
    
    
    207,79121,753
    
    
    
    19,378
    
    
    Other Revenues
    
    
    59,055
    
    
    
    54,716357,189
    
    
    
    323,312
    
    
    Total Operating Revenues
    
    
    842,007
    
    
    
    846,055Operating Expenses92,330
    
    
    
    108,350
    
    
    Fuel
    
    
    208,808
    
    
    
    251,56552,999
    
    
    
    100,418
    
    
    Purchased Power
    
    
    112,416
    
    
    
    211,194632
    
    
    
    5,098
    
    
    Transmission
    
    
    2,439
    
    
    
    9,567(12,895
    )
    
    
    
    
    
    Increase (Decrease) to Reflect PPFAC Recovery Treatment
    
    
    (16,898
    )
    
    
    133,066
    
    
    
    213,866
    
    
    Total Fuel and Purchased Energy
    
    
    306,765
    
    
    
    472,32669,232
    
    
    
    63,837
    
    
    Other Operations and Maintenance
    
    
    213,069
    
    
    
    183,90237,719
    
    
    
    31,201
    
    
    Depreciation and Amortization
    
    
    114,539
    
    
    
    93,198
    
    
    
    
    
    
    Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,9459,117
    
    
    
    8,079
    
    
    Taxes Other Than Income Taxes
    
    
    29,413
    
    
    
    29,143249,134
    
    
    
    316,983
    
    
    Total Operating Expenses
    
    
    663,786
    
    
    
    802,514108,055
    
    
    
    6,329
    
    
    Operating Income
    
    
    178,221
    
    
    
    43,541Other Income (Deductions)2,367
    
    
    
    2,238
    
    
    Interest Income
    
    
    9,176
    
    
    
    7,7041,686
    
    
    
    927
    
    
    Other Income
    
    
    9,671
    
    
    
    4,943(702
    )
    
    
    (2,526
    )
    
    Other Expense
    
    
    (1,616
    )
    
    
    (3,255
    )3,351
    
    
    
    639
    
    
    Total Other Income (Deductions)
    
    
    17,231
    
    
    
    9,392Interest Expense8,829
    
    
    
    12,317
    
    
    Long-Term Debt
    
    
    27,232
    
    
    
    36,65412,502
    
    
    
    13,176
    
    
    Interest on Capital Leases
    
    
    36,753
    
    
    
    39,315420
    
    
    
    (457
    )
    
    Other Interest Expense
    
    
    1,104
    
    
    
    1,012(261
    )
    
    
    (1,279
    )
    
    Interest Capitalized
    
    
    (1,393
    )
    
    
    (3,632
    )21,490
    
    
    
    23,757
    
    
    Total Interest Expense
    
    
    63,696
    
    
    
    73,34989,916
    
    
    
    (16,789
    )
    
    Income (Loss) Before Income Taxes
    
    
    131,756
    
    
    
    (20,416
    )34,639
    
    
    
    (4,552
    )
    
    Income Tax Expense (Benefit)
    
    
    50,527
    
    
    
    (5,081
    )$
    55,277
    
    
    $
    (12,237
    )
    
    Net Income (Loss)
    
    $
    81,229
    
    
    $
    (15,335
    )
   8




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY
COMPARATIVE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2009
    
    
    2008(Unaudited)-Thousands of Dollars-Cash Flows from Operating ActivitiesCash Receipts from Electric Retail Sales
    
    $
    701,988
    
    
    $
    658,958Cash Receipts from Electric Wholesale Sales
    
    
    152,897
    
    
    
    291,876Cash
Receipts from Operating Springerville Unit 3 & 4
    
    
    51,399
    
    
    
    42,955Interest Received
    
    
    12,759
    
    
    
    15,763Income Tax Refunds Received
    
    
    10,423
    
    
    
    18,028Reimbursement of Affiliate Charges
    
    
    19,625
    
    
    
    16,351Performance Deposit Received
    
    
    11,750
    
    
    
    10,150Sale of Excess Emission Allowances
    
    
    24
    
    
    
    1,494Other Cash Receipts
    
    
    6,073
    
    
    
    5,516Fuel Costs Paid
    
    
    (212,389
    )
    
    
    (218,664
    )Purchased Power Costs Paid
    
    
    (141,700
    )
    
    
    (287,785
    )Payment of Other Operations and Maintenance Costs
    
    
    (167,919
    )
    
    
    (135,053
    )Capital Lease Interest Paid
    
    
    (38,042
    )
    
    
    (43,260
    )Wages Paid, Net of Amounts Capitalized
    
    
    (75,162
    )
    
    
    (66,950
    )Taxes Other Than Income Taxes Paid, Net of Amounts Capitalized
    
    
    (81,716
    )
    
    
    (79,006
    )Interest Paid, Net of Amounts Capitalized
    
    
    (27,260
    )
    
    
    (30,585
    )Performance Deposits Paid
    
    
    (13,750
    )
    
    
    (10,150
    )Income Tax Paid
    
    
    (8,636
    )
    
    
    Other Cash Payments
    
    
    (2,890
    )
    
    
    (3,005
    )Net Cash Flows  Operating Activities
    
    
    197,474
    
    
    
    186,633Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (194,777
    )
    
    
    (212,397
    )Payments for Investments in Springerville Lease Debt
    
    
    (31,375
    )
    
    
    Deposit  Collateral Trust Bond Trustee
    
    
    
    
    
    
    (133,111
    )Proceeds from Investments in Springerville Lease Debt
    
    
    12,736
    
    
    
    24,918Insurance Proceeds for Replacement Assets
    
    
    4,928
    
    
    
    3,085Proceeds from Sale of Land
    
    
    
    
    
    
    537Other Cash Receipts
    
    
    
    
    
    
    4,518Other Cash Payments
    
    
    (409
    )
    
    
    (706
    )Net Cash Flows  Investing Activities
    
    
    (208,897
    )
    
    
    (313,156
    )Cash Flows from Financing ActivitiesProceeds from Borrowings Under Revolving Credit Facility
    
    
    126,000
    
    
    
    160,000Repayments of Borrowings Under Revolving Credit Facility
    
    
    (111,000
    )
    
    
    (160,000
    )Equity Investment from UniSource Energy
    
    
    30,000
    
    
    
    Dividends Paid to UniSource Energy
    
    
    (30,000
    )
    
    
    Payments of Capital Lease Obligations
    
    
    (24,091
    )
    
    
    (74,228
    )Proceeds from Issuance of Long-Term Debt
    
    
    
    
    
    
    220,745Repayments of Long-Term Debt
    
    
    
    
    
    
    (10,000
    )Other Cash Receipts
    
    
    2,246
    
    
    
    1,012Payment of Debt Issue Costs
    
    
    (24
    )
    
    
    (2,942
    )Other Cash Payments
    
    
    (1,282
    )
    
    
    (1,221
    )Net Cash Flows  Financing Activities
    
    
    (8,151
    )
    
    
    133,366Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (19,574
    )
    
    
    6,843Cash and Cash Equivalents, Beginning of Year
    
    
    33,275
    
    
    
    26,610Cash and Cash Equivalents, End of Period
    
    $
    13,701
    
    
    $
    33,453Non-Cash Financing Activity Repayment of Collateral Trust Bond
    
    $
    
    
    
    $
    (128,300
    )
    9




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY  COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-ASSETSUtility PlantPlant in Service
    
    $
    3,553,238
    
    
    $
    3,351,474Utility Plant under Capital Leases
    
    
    719,922
    
    
    
    701,631Construction Work in Progress
    
    
    103,298
    
    
    
    145,457Total Utility Plant
    
    
    4,376,458
    
    
    
    4,198,562Less Accumulated Depreciation and Amortization
    
    
    (1,563,673
    )
    
    
    (1,531,611
    )Less Accumulated Amortization of Capital Lease Assets
    
    
    (568,137
    )
    
    
    (546,332
    )Total Utility Plant  Net
    
    
    2,244,648
    
    
    
    2,120,619Investments and Other PropertyInvestments in Lease Debt and Equity
    
    
    132,493
    
    
    
    126,672Other
    
    
    31,874
    
    
    
    31,291Total Investments and Other Property
    
    
    164,367
    
    
    
    157,963Current AssetsCash and Cash Equivalents
    
    
    13,701
    
    
    
    33,275Accounts Receivable  Retail and Other
    
    
    74,734
    
    
    
    53,091Accounts Receivable  Wholesale
    
    
    29,262
    
    
    
    44,610Unbilled Accounts Receivable
    
    
    47,734
    
    
    
    33,554Allowance for Doubtful Accounts
    
    
    (17,599
    )
    
    
    (17,135
    )Accounts Receivable  Due from Affiliates
    
    
    10,167
    
    
    
    16,614Materials and Fuel Inventory
    
    
    112,213
    
    
    
    81,067Energy Contracts  Derivative Instruments
    
    
    7,828
    
    
    
    5,129Regulatory Assets  Derivative Instruments
    
    
    3,877
    
    
    
    14,242Regulatory Assets  Other
    
    
    22,373
    
    
    
    22,834Deferred Income Taxes  Current
    
    
    37,471
    
    
    
    59,615Interest Receivable on Capital Lease Debt Investment
    
    
    2,537
    
    
    
    4,491Collateral Posted for Derivative Contracts
    
    
    2,000
    
    
    
    Other
    
    
    18,009
    
    
    
    16,089Total Current Assets
    
    
    364,307
    
    
    
    367,476Regulatory and Other AssetsRegulatory Assets  Pension and Other Postretirement Benefits
    
    
    94,255
    
    
    
    106,596Regulatory Assets  Derivative Instruments
    
    
    4,792
    
    
    
    5,400Regulatory Assets  Other
    
    
    34,585
    
    
    
    38,180Income Taxes Recoverable through Future Revenues
    
    
    17,701
    
    
    
    19,814Energy Contracts  Derivative Instruments
    
    
    1,141
    
    
    
    4,982Other Assets
    
    
    20,019
    
    
    
    20,741Total Regulatory and Other Assets
    
    
    172,493
    
    
    
    195,713Total Assets
    
    $
    2,945,815
    
    
    $
    2,841,771
  (Continued)
  10




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY  COMPARATIVE CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)-Thousands of Dollars-CAPITALIZATION AND OTHER LIABILITIESCapitalizationCommon Stock Equity
    
    $
    664,534
    
    
    $
    583,606Capital Lease Obligations
    
    
    486,152
    
    
    
    513,370Long-Term Debt
    
    
    903,615
    
    
    
    903,615Total Capitalization
    
    
    2,054,301
    
    
    
    2,000,591Current LiabilitiesCurrent
Obligations under Capital Leases
    
    
    40,332
    
    
    
    18,231Borrowing Under Revolving Credit Facility
    
    
    25,000
    
    
    
    10,000Accounts Payable
    
    
    53,217
    
    
    
    56,001Accounts Payable  Purchased Power
    
    
    27,203
    
    
    
    28,510Accounts Payable  Due to Affiliates
    
    
    7,309
    
    
    
    3,610Income Taxes Payable
    
    
    5,299
    
    
    
    2,057Interest Accrued
    
    
    20,474
    
    
    
    35,828Accrued Taxes Other than Income Taxes
    
    
    42,892
    
    
    
    27,679Accrued Employee Expenses
    
    
    21,884
    
    
    
    23,990Energy Contracts  Derivative Instruments
    
    
    12,467
    
    
    
    18,737Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    12,050
    
    
    
    14,310Regulatory Liabilities  Other
    
    
    24,209
    
    
    
    7,083Other
    
    
    17,731
    
    
    
    17,106Total Current Liabilities
    
    
    310,067
    
    
    
    263,142Deferred Credits and Other LiabilitiesDeferred Income Taxes  Noncurrent
    
    
    198,792
    
    
    
    180,098Regulatory Liabilities  Net Cost of Removal for Interim Retirements
    
    
    154,906
    
    
    
    122,037Regulatory Liabilities  Over-Recovered Purchased Energy Costs
    
    
    20,968
    
    
    
    44,469Energy Contracts and Other Derivative Instruments
    
    
    12,740
    
    
    
    18,794Pension and Other Postretirement Benefits
    
    
    132,107
    
    
    
    149,955Other
    
    
    61,934
    
    
    
    62,685Total Deferred Credits and Other Liabilities
    
    
    581,447
    
    
    
    578,038Commitments and Contingencies (Note 7)Total Capitalization and Other Liabilities
    
    $
    2,945,815
    
    
    $
    2,841,771
  (Concluded)
  11




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##### Table of Contents



TUCSON ELECTRIC POWER COMPANY  CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 AccumulatedCapital
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Expense
    
    
    Deficit
    
    
    Loss
    
    
    Equity(Unaudited)-Thousands of Dollars-Balances at December 31, 2008
    
    $
    813,971
    
    
    $
    (6,357
    )
    
    $
    (217,153
    )
    
    $
    (6,855
    )
    
    $
    583,606Comprehensive Income:2009 Year-to-Date Net Income
    
    
    
    
    
    
    
    
    
    
    81,229
    
    
    
    
    
    
    
    81,229Unrealized Loss on Cash Flow Hedges
(net of $285 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (434
    )
    
    
    (434
    )Reclassification of Unrealized Losses
on Cash Flow Hedges to Net Income
(net of $489 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    746
    
    
    
    746Employee
Benefit Obligations
Amortization of SERP Net Prior Service Cost
Included in Net Periodic Benefit Cost
(net of $98 income taxes)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149
    
    
    
    149Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,690Capital Contribution from UniSource Energy
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Dividends
    
    
    
    
    
    
    
    
    
    
    (30,762
    )
    
    
    
    
    
    
    (30,762
    )Balances at September 30, 2009
    
    $
    843,971
    
    
    $
    (6,357
    )
    
    $
    (166,686
    )
    
    $
    (6,394
    )
    
    $
    664,534
   12




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Unaudited
 
 NOTE 1. NATURE OF OPERATIONS AND BASIS OF ACCOUNTING PRESENTATION
         RECLASSIFICATIONS AND OTHER ADJUSTMENTS
 Springerville Unit 1
   13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 REST and Demand Side Management (DSM) Revenues
  Dividend Equivalents
  Other
  TEP 2008 Rate Order
 Note 2
  
    
    For the quarter ended September 30, 2008, UniSource Energy and TEP reclassified
Transmission expenses of $8 million and $5 million, respectively, from Other Operations and
Maintenance to Transmission, a component of Total Fuel and Purchased Energy. For the
nine-month period ended September 30, 2008, UniSource Energy and TEP reclassified
Transmission expenses of $17 million and $10 million, respectively, from Other Operations
and Maintenance to Transmission, a component of Total Fuel and Purchased Energy;
    
    For the quarter ended September 30, 2008, UniSource Energy and TEP reclassified capital
lease expenses of $1 million from Interest on Capital Leases to Fuel. For the nine-month
period ended September 30, 2008, UniSource Energy and TEP reclassified capital lease
expenses of $4 million from Interest on Capital Leases to Fuel; and
    
    For the three and nine-months ended September 30, 2008, UniSource Energy reclassified $2
million and $13 million, respectively, of over-recovered PPFAC and PGA expenses from
Purchased Energy, Transmission, and Fuel to Increase (Decrease) to reflect PPFAC/PGA
Recovery Treatment, a component of Total Fuel and Purchased Energy.
   14




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##### Table of Contents



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




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  September 30,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-Fixed CTC Revenue to be Refunded within the next 12
months; Included in Current Liabilities
    
    $
    (12
    )
    
    $
    (14
    )Under-Recovered Purchased Energy Costs  Regulatory
Basis as Billed to Customers as Billed to Customers
    
    $
    31
    
    
    $
    Estimated Purchased Energy Costs Recovered through
Accrued Unbilled Revenues
    
    
    (14
    )
    
    
    Fixed CTC Revenue to be Refunded
    
    
    (38
    )
    
    
    (44
    )Total Included in Deferred Credits and Other Liabilities
    
    $
    (21
    )
    
    $
    (44
    )
  2
 UNS GAS RATES AND REGULATION
 2008 General Rate Case Filing
  Purchased Gas Adjuster (PGA) Mechanism
  (1)
    
    The PGA factor, computed monthly, is a calculation of the twelve-month rolling weighted
average gas cost, and automatically adjusts monthly, subject to limitations on how much the
price per therm may change in a twelve-month period. Effective December 2007, the ACC
increased the annual cap on the maximum increase in the PGA factor from $0.10 per therm to
$0.15 per therm in a twelve-month period.(2)
    
    At any time UNS Gas PGA bank balance is under-recovered, UNS Gas may request a PGA
surchargewith the goal of collecting the amount deferred from customers over a period
deemed appropriate by the ACC. When the PGA bank balance reaches an over-collected balance
of $10 million on a billed basis, UNS Gas is required to request a PGA surcreditwith the
goal of returning the over-collected balance to customers over a period deemed appropriate
by the ACC.
    16




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  September 30,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-(Over-) Under-Recovered Purchased Gas
Costs  Regulatory Basis as Billed to
Customers
    
    $
    (10
    )
    
    $
    5Estimated Purchased Gas Costs Recovered
through Accrued Unbilled Revenues
    
    
    (1
    )
    
    
    (10
    )(Over-)Recovered Purchased Gas Costs (PGA)
Included as a Current Regulatory Liability
    
    $
    (11
    )
    
    $
    (5
    )
 UNS ELECTRIC RATES AND REGULATION
 2009 General Rate Case Filing
  Purchased Power and Fuel Adjustment Clause (PPFAC)
     September 30,
    
    
    December 31,2009
    
    
    2008-Millions of Dollars-(Over-)Recovered Purchased Power
Costs  Regulatory Basis as Billed
to Customers
    
    $
    (7
    )
    
    $
    Estimated Purchased Power Costs
Recovered through Accrued Unbilled
Revenues
    
    
    (5
    )
    
    
    (7
    )(Over-)Recovered Purchased Power
Costs (PPFAC) Included as a Current
Regulatory Liability
    
    $
    (12
    )
    
    $
    (7
    )
  17




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##### Table of Contents



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




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Reportable Segments
    
    
    
    
    
    
    UniSourceUNS
    
    
    UNS
    
    
    
    
    
    
    EnergyTEP
    
    
    Gas
    
    
    Electric
    
    
    Other
    
    
    Eliminations-Millions of Dollars-Intersegment RevenueThree Months Ended September 30, 2009:Wholesale Sales  TEP to UNSE
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (9
    )Wholesale Sales  UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (3
    )Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Other Revenue  TEP to Affiliates(1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (4
    )Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Total Intersegment Revenue
    
    $
    12
    
    
    $
    2
    
    
    $
    1
    
    
    $
    7
    
    
    $
    (22
    )Three Months Ended September 30, 2008:Wholesale Sales  TEP to UNSE
    
    $
    16
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (16
    )Wholesale Sales  UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    (5
    )Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (3
    )Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Other Revenue  TEP to Affiliates(1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (4
    )Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Total Intersegment Revenue
    
    $
    19
    
    
    $
    3
    
    
    $
    5
    
    
    $
    7
    
    
    $
    (34
    )Nine Months Ended September 30, 2009:Wholesale Sales  TEP to UNSE
    
    $
    16
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (16
    )Wholesale Sales  UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (3
    )Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    (9
    )Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Other Revenue  TEP to Affiliates(1)
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    (12
    )Other Revenue  TEP to UNSE(3)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Total Intersegment Revenue
    
    $
    24
    
    
    $
    4
    
    
    $
    3
    
    
    $
    21
    
    
    $
    (52
    )Nine Months Ended September 30, 2008:Wholesale Sales  TEP to UNSE
    
    $
    22
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (22
    )Wholesale Sales  UNSE to TEP
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    (7
    )Wholesale Sales  UED to UNSE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (4
    )Gas Revenue  UNSG to UNSE & UED
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Other Revenue  TEP to Affiliates(1)
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Other Revenue  MEH to TEP & UNSE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    (12
    )Other Revenue  TEP to UNSE(3)
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Total Intersegment Revenue
    
    $
    29
    
    
    $
    6
    
    
    $
    7
    
    
    $
    16
    
    
    $
    (58
    )
 (1)
    
    TEP provides corporate services including finance, accounting, tax and information
technology services to UniSource Energy and its subsidiaries.(2)
    
    A Millennium subsidiary provides a supplemental workforce and meter reading services to TEP and
UNS Electric.(3)
    
    TEP provides energy scheduling services to UNS Electric.   19




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Reportable Segments
    
    
    
    
    
    
    
    
    
    
    UniSourceUNS
    
    
    UNS
    
    
    
    
    
    
    Reconciling
    
    
    EnergyTEP
    
    
    Gas
    
    
    Electric
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated-Millions of Dollars-Income StatementThree Months Ended September 30, 2009:Operating Revenues  External
    
    $
    345
    
    
    $
    17
    
    
    $
    52
    
    
    $
    
    
    
    $
    
    
    
    $
    414Operating Revenues  Intersegment
    
    
    12
    
    
    
    2
    
    
    
    1
    
    
    
    7
    
    
    
    (22
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    90
    
    
    
    (2
    )
    
    
    6
    
    
    
    (1
    )
    
    
    
    
    
    
    93Net Income (Loss)
    
    
    55
    
    
    
    (1
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    58Three Months Ended September 30, 2008:Operating Revenues  External
    
    $
    305
    
    
    $
    20
    
    
    $
    63
    
    
    $
    
    
    
    $
    
    
    
    $
    388Operating Revenues  Intersegment
    
    
    19
    
    
    
    3
    
    
    
    5
    
    
    
    7
    
    
    
    (34
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    (17
    )
    
    
    (2
    )
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Net Income (Loss)
    
    
    (12
    )
    
    
    (1
    )
    
    
    3
    
    
    
    (1
    )
    
    
    
    
    
    
    (11
    )Nine Months Ended September 30, 2009:Operating Revenues  External
    
    $
    818
    
    
    $
    102
    
    
    $
    144
    
    
    $
    
    
    
    $
    
    
    
    $
    1,064Operating Revenues  Intersegment
    
    
    24
    
    
    
    4
    
    
    
    3
    
    
    
    21
    
    
    
    (52
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    132
    
    
    
    6
    
    
    
    9
    
    
    
    4
    
    
    
    1
    
    
    
    152Net Income (Loss)
    
    
    81
    
    
    
    4
    
    
    
    6
    
    
    
    3
    
    
    
    
    
    
    
    94Nine Months Ended September 30, 2008:Operating Revenues  External
    
    $
    817
    
    
    $
    117
    
    
    $
    144
    
    
    $
    
    
    
    $
    
    
    
    $
    1,078Operating Revenues  Intersegment
    
    
    29
    
    
    
    6
    
    
    
    7
    
    
    
    16
    
    
    
    (58
    )
    
    
    Income (Loss) Before Income Taxes
    
    
    (20
    )
    
    
    9
    
    
    
    6
    
    
    
    (5
    )
    
    
    
    
    
    
    (10
    )Net Income (Loss)
    
    
    (15
    )
    
    
    5
    
    
    
    4
    
    
    
    (3
    )
    
    
    
    
    
    
    (9
    )Balance SheetTotal Assets, September 30, 2009
    
    $
    2,946
    
    
    $
    288
    
    
    $
    288
    
    
    $
    1,130
    
    
    $
    (1,031
    )
    
    $
    3,621Total Assets, December 31, 2008
    
    
    2,842
    
    
    
    294
    
    
    
    285
    
    
    
    1,061
    
    
    
    (972
    )
    
    
    3,510
 
 NOTE 4. DEBT, CREDIT FACILITIES AND CAPITAL LEASE OBLIGATIONS
 UNISOURCE ENERGY CREDIT AGREEMENT
   20




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Long-
    
    
    
    
    
    
    
    
    
    Long-Current
    
    
    Term
    
    
    
    
    
    
    Current
    
    
    TermLiabilities
    
    
    Debt
    
    
    Total
    
    
    Liabilities
    
    
    Debt
    
    
    Total-Millions of Dollars-September 30, 2009
    
    
    December 31, 2008Revolver
    
    $
    
    
    
    $
    54
    
    
    $
    54
    
    
    $
    
    
    
    $
    43
    
    
    $
    43Term Loan
    
    
    6
    
    
    
    5
    
    
    
    11
    
    
    
    6
    
    
    
    9
    
    
    
    15
  TEP CAPITAL LEASE OBLIGATIONS
 Investments in Springerville Lease Debt
  TEP CREDIT AGREEMENT
  TEP DEBT
 TEP Sale and Redemption of Bonds
    21




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 UNS GAS/UNS ELECTRIC REVOLVING CREDIT AGREEMENT
  UNS
    
    
    UNS
    
    
    UNS
    
    
    UNSGas
    
    
    Electric
    
    
    Gas
    
    
    Electric-Millions of Dollars-September 30, 2009
    
    
    December 31, 2008Balance on the Revolver
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8Outstanding Letters of Credit
    
    
    
    
    
    
    12
    
    
    
    10
    
    
    
    7
  UED SHORT-TERM BORROWINGS
  
 NOTE 5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES AND HEDGING ACTIVITIES
 RISKS AND OVERVIEW
     22




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 CASH FLOW HEDGES
  
    
    The effective portion of the changes in the fair value of TEPs interest rate swaps and
TEPs six-year power purchase swap agreement are recorded in AOCI and the ineffective
portion, if any, is recognized in earnings.
    
    When TEP determines a contract is no longer effective in offsetting the changes in cash
flow of a hedged item, TEP recognizes the changes in fair value in earnings. The gains and
losses at that time remain in AOCI and are reclassified into earnings as the underlying
hedged transaction occurs.
  MARK-TO-MARKET
 
    
    TEPTEP non-trading hedges, such as forward power purchase contracts indexed to gas, short-term
forward power sales contracts, or call and put options (gas collars), that did not qualify for
cash flow hedge accounting treatment or did not qualify for the normal scope exception, are
considered mark-to-market transactions. TEP hedges a portion of its monthly natural gas
exposure for plant fuel, gas-indexed purchased power and spot market purchases with fixed price
contracts for a maximum of three years. Beginning in December 2008, as a result of the 2008 TEP
Rate Order, which permits recovery in the PPFAC of hedging transactions, unrealized gains and
losses are recorded as either a regulatory asset or regulatory liability only to the extent they
qualify for recovery under the PPFAC mechanism.TEP enters into certain energy-related derivatives for trading purposes which are forward power
purchase and sale contracts entered into purely to profit from market price changes. As
unrealized gains and losses resulting from changes in the market prices of trading derivatives
are not recoverable in the PPFAC, unrealized gains and losses are recorded in the income
statement in Electric Wholesale Sales. The net trading activities represent a very small
portion (less than 1%) of TEPs revenue from wholesale sales.
    
    UNS ElectricUNS Electric hedges a portion of its purchased power exposure to fixed price and natural
gas-indexed contracts with forward power purchases or financial gas swaps. In April 2009, UNS
Electric also began using call and put options, creating price stability and reducing exposure
to price volatility that may result in delayed recovery under the PPFAC.
    
    UNS GasUNS Gas enters into derivatives such as forward gas purchases and gas swaps, creating price
stability and reducing exposure to natural gas price volatility that may result in delayed
recovery under the PGA. Beginning in December 2008, unrealized gains and losses are recorded as
either a regulatory asset or regulatory liability, as the UNS Gas PGA mechanism permits the
recovery of the prudent cost of hedging contracts.
  23




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 NORMAL PURCHASE AND NORMAL SALE
  2008 ACCOUNTING SUMMARY
  
    
    TEPs interest rate swaps, TEPs forward contracts to sell excess capacity, and TEP and
UNS Gas forward gas swaps were recorded in AOCI;
    
    TEPs non-trading hedges such as forward power purchase contracts indexed to gas, and
TEPs forward purchase and sale trading contracts were recorded in the income statement;
and
    
    All other commodity contracts were reflected on the balance sheet as either regulatory
assets or regulatory liabilities.
 Financial Impact of Derivatives
  UniSource EnergyThree Months
    
    
    Nine MonthsCash Flow Hedges  Unrealized Gains (Losses)
    
    Ended September 30,
    
    
    Ended September 30,Recorded to AOCI
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Forward Power Contracts
    
    $
    
    
    
    $
    5
    
    
    $
    (1
    )
    
    $
    2Gas Price Swaps
    
    
    
    
    
    
    (44
    )
    
    
    
    
    
    
    (10
    )Interest Rate Swaps
    
    
    (3
    )
    
    
    (1
    )
    
    
    
    
    
    
    Total Pre-Tax Unrealized Gain (Loss)
    
    $
    (3
    )
    
    $
    (40
    )
    
    $
    (1
    )
    
    $
    (8
    )After-Tax Unrealized Gain (Loss) Recorded in AOCI
    
    $
    (2
    )
    
    $
    (24
    )
    
    $
    
    
    
    $
    (5
    )Unrealized (Gain) Loss Reclassified to Net IncomeForward Power Contracts Recorded in Wholesale Sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1Gas Price Swaps Recorded in Fuel
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (2
    )Interest Rate Swaps Recorded in Interest Expense
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total Pre-Tax Unrealized (Gain) Loss
    
    $
    1
    
    
    $
    2
    
    
    $
    1
    
    
    $
    (1
    )After-Tax Unrealized (Gain) Loss Reclassified to Net Income
    
    $
    
    
    
    $
    1
    
    
    $
    1
    
    
    $
    (1
    )
  24




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEPThree Months
    
    
    Nine MonthsCash Flow Hedges  Unrealized Gains (Losses)
    
    Ended September 30,
    
    
    Ended September 30,Recorded to AOCI
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Forward Power Contracts
    
    $
    
    
    
    $
    5
    
    
    $
    (1
    )
    
    $
    2Gas Price Swaps
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    Interest Rate Swaps
    
    
    (3
    )
    
    
    (1
    )
    
    
    
    
    
    
    Total Pre-Tax Unrealized Gain (Loss)
    
    $
    (3
    )
    
    $
    (23
    )
    
    $
    (1
    )
    
    $
    2After-Tax Unrealized Gain (Loss) Recorded in AOCI
    
    $
    (2
    )
    
    $
    (14
    )
    
    $
    
    
    
    $
    1Unrealized (Gain) Loss Reclassified to Net IncomeForward Power Contracts Recorded in Wholesale Sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1Gas Price Swaps Recorded in Fuel
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (2
    )Interest Rate Swaps Recorded in Interest Expense
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total Pre-Tax Unrealized (Gain) Loss
    
    $
    1
    
    
    $
    2
    
    
    $
    1
    
    
    $
    (1
    )After-Tax Unrealized (Gain) Loss Reclassified to Net Income
    
    $
    
    
    
    $
    1
    
    
    $
    1
    
    
    $
    (1
    )
  UniSource EnergyThree Months
    
    
    Nine MonthsMark-to-Market Transactions  Unrealized Gains (Losses)
    
    Ended September 30,
    
    
    Ended September 30,Recorded in Earnings
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales(1)
    
    $
    
    
    
    $
    28
    
    
    $
    
    
    
    $
    13Forward Power Purchases(1)
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (14
    )Forward Power Purchases Recorded in Purchased Energy
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )Forward Gas Price Swaps Recorded in Fuel
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (3
    )Total Pre-Tax Unrealized Gains (Losses)
    
    $
    
    
    
    $
    (6
    )
    
    $
    
    
    
    $
    (5
    )
 TEPThree Months
    
    
    Nine MonthsMark-to-Market Transactions  Unrealized Gains (Losses)
    
    Ended September 30,
    
    
    Ended September 30,Recorded in Earnings
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales(1)
    
    $
    (3
    )
    
    $
    (28
    )
    
    $
    
    
    
    $
    13Forward Power Purchases(1)
    
    
    3
    
    
    
    28
    
    
    
    
    
    
    
    (14
    )Forward Power Purchases Recorded in Purchased Energy
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )Forward Gas Price Swaps Recorded in Fuel
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (3
    )Total Pre-Tax Unrealized Gains (Losses)
    
    $
    
    
    
    $
    (6
    )
    
    $
    
    
    
    $
    (5
    )
 (1)
    
    TEPs 2009 unrealized gains and losses are with UNS Electric and are eliminated in the
UniSource Energy financial statements.
  25




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  UniSource EnergyThree Months
    
    
    Nine MonthsMark-to-Market Transactions  Increase (Decrease)
    
    Ended September 30,
    
    
    Ended September 30,Recorded in Regulatory Accounts on the Balance Sheet
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Current Regulatory Assets  Derivatives:Gas Swaps
    
    $
    22
    
    
    $
    (2
    )
    
    $
    15
    
    
    $
    (2
    )Gas Collars
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Power Contracts
    
    
    5
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Recorded in Current Regulatory Liabilities  Derivatives:Gas Swaps
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    Power Contracts
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (3
    )Recorded in Other Regulatory Assets  Derivatives:Gas Swaps
    
    
    5
    
    
    
    (1
    )
    
    
    8
    
    
    
    (1
    )Power Contracts
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Recorded in Other Regulatory Liabilities  Derivatives:Gas Swaps
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Power Contracts
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (6
    )Total Increase (Decrease)
    
    $
    33
    
    
    $
    (58
    )
    
    $
    23
    
    
    $
    (22
    )
 TEPThree Months
    
    
    Nine MonthsMark-to-Market Transactions  Increase (Decrease)
    
    Ended September 30,
    
    
    Ended September 30,Recorded in Regulatory Accounts on the Balance Sheet
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Current Regulatory Assets  Derivatives:Gas Swaps
    
    $
    16
    
    
    $
    
    
    
    $
    10
    
    
    $
    Gas Collars
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Recorded in Other Regulatory Assets  Derivatives:Gas Swaps
    
    
    3
    
    
    
    
    
    
    
    4
    
    
    
    Power Contracts
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )
    
    
    Total Increase (Decrease)
    
    $
    19
    
    
    $
    
    
    
    $
    11
    
    
    $
    
  UniSource Energy and TEPThree Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Recorded in Wholesale Sales:Forward Power Sales
    
    $
    8
    
    
    $
    13
    
    
    $
    20
    
    
    $
    25Forward Power Purchases
    
    
    (7
    )
    
    
    (13
    )
    
    
    (18
    )
    
    
    (25
    )Total Sales and
Purchases Not Resulting in Physical
Delivery
    
    $
    1
    
    
    $
    
    
    
    $
    2
    
    
    $
    
  26




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  UniSource EnergySeptember 30, 2009Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    1
    
    
    $
    (14
    )
    
    $
    2
    
    
    $
    (5
    )
    
    $
    (16
    )Power Contracts
    
    
    2
    
    
    
    (13
    )
    
    
    3
    
    
    
    (4
    )
    
    
    (12
    )Power Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (7
    )
    
    
    (8
    )Total
    
    $
    3
    
    
    $
    (28
    )
    
    $
    5
    
    
    $
    (21
    )
    
    $
    (41
    )
 UniSource EnergyDecember 31, 2008Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    
    
    
    $
    (28
    )
    
    $
    
    
    
    $
    (12
    )
    
    $
    (40
    )Power Contracts
    
    
    3
    
    
    
    (13
    )
    
    
    2
    
    
    
    (7
    )
    
    
    (15
    )Power Options
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (3
    )
    
    
    (2
    )Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Total
    
    $
    3
    
    
    $
    (41
    )
    
    $
    3
    
    
    $
    (30
    )
    
    $
    (65
    )
 TEPSeptember 30, 2009Current
    
    
    Current
    
    
    Noncurrent
    
    
    NoncurrentAssets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities
    
    
    Total-Millions of Dollars-Gas Swaps
    
    $
    
    
    
    $
    (4
    )
    
    $
    1
    
    
    $
    (1
    )
    
    $
    (4
    )Power Contracts
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Power Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (7
    )
    
    
    (8
    )Power  Trading(1)
    
    
    7
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    8
    
    
    $
    (12
    )
    
    $
    1
    
    
    $
    (13
    )
    
    $
    (16
    )
  27




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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 Contracts
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Power Options
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (3
    )
    
    
    (2
    )Interest Rate Swaps  Cash Flow Hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Power  Trading(1)
    
    
    4
    
    
    
    (4
    )
    
    
    4
    
    
    
    (4
    )
    
    
    Total
    
    $
    5
    
    
    $
    (19
    )
    
    $
    5
    
    
    $
    (19
    )
    
    $
    (28
    )
 (1)
    
    TEPs power trading balances are with UNS Electric and are eliminated in the UniSource
Energy financial statements.
   Derivative Volumes
  UniSource Energy2013-2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2015
    
    
    TotalGas GBtuGas Swaps
    
    
    1,859
    
    
    
    7,144
    
    
    
    3,921
    
    
    
    871
    
    
    
    
    
    
    
    13,795Power GWhPower
Purchases  Non-Trading
    
    
    335
    
    
    
    1,187
    
    
    
    555
    
    
    
    123
    
    
    
    123
    
    
    
    2,323Power
Sales  Non-Trading
    
    
    52
    
    
    
    
    
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    271Power Options
    
    
    
    
    
    
    248
    
    
    
    246
    
    
    
    248
    
    
    
    248
    
    
    
    990Power
Purchases  Cash Flow Hedge
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    175
  28




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEP2013-2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2015
    
    
    TotalGas GBtuGas Swaps
    
    
    594
    
    
    
    3,068
    
    
    
    1,394
    
    
    
    277
    
    
    
    
    
    
    
    5,333Power GWhPower
Purchases  Non-Trading
    
    
    22
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Power Sales
 Non-Trading
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52Power Options
    
    
    
    
    
    
    248
    
    
    
    246
    
    
    
    248
    
    
    
    248
    
    
    
    990Power
Purchases  Cash Flow Hedge
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    29
    
    
    
    88
    
    
    
    175Power Trading GWhPower
Purchases  Trading(1)
    
    
    62
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184Power Sales
 Trading(1)
    
    
    62
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184
 (1)
    
    TEPs 2009 and 2010 power trading GWh are with UNS Electric and are eliminated in the
UniSource Energy financial statements.
 Hedging Policy
  Credit Risk Adjustment
   CONCENTRATION OF CREDIT RISK
   29




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
   UniSourceTEP
    
    
    UNS Gas
    
    
    UNS Electric
    
    
    EnergySeptember 30, 2009-Millions of Dollars-Net Liability Position
    
    $
    40
    
    
    $
    17
    
    
    $
    22
    
    
    $
    79Cash Collateral Posted
    
    
    2
    
    
    
    5
    
    
    
    1
    
    
    
    8Letters of Credit
    
    
    1
    
    
    
    
    
    
    
    12
    
    
    
    13Additional Collateral to Post if Contingent Features Triggered
    
    
    38
    
    
    
    13
    
    
    
    9
    
    
    
    60
  
 NOTE 6. INCOME TAXES
    30




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 7. COMMITMENTS AND CONTINGENCIES
 TEP COMMITMENTS
 Firm Purchase Commitments
  2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    Total-Millions of Dollars-Purchased Power
    
    $
    34
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2
    
    
    $
    4
    
    
    $
    44Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    4Total Additional, Unrecognized, Firm
Purchase Commitments
    
    $
    35
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    4
    
    
    $
    48
  Renewable Energy Purchase Power Agreements
  UNS ELECTRIC COMMITMENTS
   UNS GAS COMMITMENTS
  TEP CONTINGENCIES
 El Paso Electric Transmission
   31




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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
  Environmental Reclamation at Remote Generating Stations
    32




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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 $28 million of outstanding loans under the UED
Credit Agreement.
    33




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE
  
    
    Investments in Lease Debt and Equity  TEP calculated the present value of remaining cash
flows at the balance sheet date using current market rates with similar characteristics with
respect to credit rating and time-to-maturity. We also incorporated the impact of
counterparty credit risk using market credit default swap data;
    
    Fixed Rate Long-Term Debt  UniSource Energy and TEP used quoted market prices, where
available, or calculated the present value of remaining cash flows at the balance sheet date
using current market rates for bonds with similar characteristics with respect to credit
rating and time-to-maturity. We also incorporate the impact of our own credit risk using a
credit default swap rate when determining the fair value of fixed rate long-term debt;
    
    Variable Rate Long-Term Debt  TEP considers the principal amounts of variable rate debt
outstanding to be reasonable estimates of their fair value. The fair value of variable rate
long-term debt has also been adjusted for credit risk using a credit default swap rate; and
    
    UNS considers the carrying value of the MEH note receivable to approximate fair value. See
Note 14.
  September 30,
    
    
    December 31,2009
    
    
    2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value-Millions of Dollars-Assets:TEP Investment in Lease Debt and Equity
    
    $
    132
    
    
    $
    140
    
    
    $
    127
    
    
    $
    144MEH Note Receivable
    
    
    15
    
    
    
    15
    
    
    
    
    
    
    
    Liabilities:Fixed Rate Long-Term DebtTEP
    
    
    445
    
    
    
    325
    
    
    
    445
    
    
    
    322UniSource Energy
    
    
    795
    
    
    
    676
    
    
    
    795
    
    
    
    661Variable Rate Long-Term DebtTEP
    
    
    459
    
    
    
    448
    
    
    
    459
    
    
    
    441UniSource Energy
    
    
    523
    
    
    
    512
    
    
    
    525
    
    
    
    507
 
 NOTE 9. EMPLOYEE BENEFIT PLANS
 PENSION BENEFIT PLANS
     34




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  TEP Salaried Employees Retirement Plan Amendment
   OTHER POSTRETIREMENT BENEFIT PLANS
   COMPONENTS OF NET PERIODIC BENEFIT COST
  Other PostretirementPension Benefits
    
    
    BenefitsThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    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
    
    
    
    1
    
    
    
    
    
    
    
    Net Periodic Benefit Cost
    
    $
    5
    
    
    $
    3
    
    
    $
    1
    
    
    $
    1
  35




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 Other PostretirementPension Benefits
    
    
    BenefitsNine months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-Components of Net Periodic Benefit CostService Cost
    
    $
    6
    
    
    $
    6
    
    
    $
    2
    
    
    $
    1Interest Cost
    
    
    11
    
    
    
    11
    
    
    
    3
    
    
    
    3Expected Return on Plan Assets
    
    
    (8
    )
    
    
    (12
    )
    
    
    
    
    
    
    Amortization of Prior Service Cost
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    (1
    )Amortization of Net Loss
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Net Periodic Benefit Cost
    
    $
    14
    
    
    $
    6
    
    
    $
    4
    
    
    $
    3
  
 NOTE 10. 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
  36




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Nine Months Ended September 30, 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
    
    
    (164
    )
    
    $
    12.67
    
    
    
    (218
    )
    
    $
    6.13Options Outstanding, September 30, 2009
    
    
    1,720
    
    
    $
    23.95
    
    
    
    513
    
    
    $
    5.33Options Exercisable, September 30, 2009
    
    
    1,208
    
    
    $
    22.42Aggregate Intrinsic Value of Options
Exercised ($000s)
    
    
    
    
    
    $
    2,293
 At September 30,2009 ($000s)Aggregate Intrinsic Value for Options Outstanding
    
    $
    13,151Aggregate Intrinsic Value for Options Exercisable
    
    $
    11,072Weighted Average Remaining Contractual Life of Options Outstanding
    
    4.4 yearsWeighted Average Remaining Contractual Life of Exercisable Options
    
    3.0 years
  Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number of
    
    
    Remaining
    
    
    Average
    
    
    Number of
    
    
    AverageRange of
    
    Shares
    
    
    Contractual
    
    
    Exercise
    
    
    Shares
    
    
    ExerciseExercise Prices
    
    (000s)
    
    
    Life
    
    
    Price
    
    
    (000s)
    
    
    Price$11.00 - $15.28
    
    
    261
    
    
    0.8 years
    
    $
    15.22
    
    
    
    261
    
    
    $
    15.22$17.44 - $18.84
    
    
    512
    
    
    2.2 years
    
    $
    18.02
    
    
    
    512
    
    
    $
    18.02$26.11 - $37.88
    
    
    947
    
    
    6.6 years
    
    $
    29.57
    
    
    
    434
    
    
    $
    31.95
 RESTRICTED STOCK UNITS AND PERFORMANCE SHARES
 Restricted Stock Units
   37




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 Performance Share Awards
    SHARE-BASED COMPENSATION EXPENSE
    38




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 11. FAIR VALUE MEASUREMENTS
  UniSource EnergyQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalSeptember 30, 2009-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    44
    
    
    $
    
    
    
    $
    
    
    
    $
    44Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Equity Investments (3)
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Collateral Posted (4)
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7Energy Contracts (5)
    
    
    
    
    
    
    3
    
    
    
    5
    
    
    
    8Total Assets
    
    
    44
    
    
    
    23
    
    
    
    16
    
    
    
    83LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (19
    )
    
    
    (22
    )
    
    
    (41
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (27
    )
    
    
    (22
    )
    
    
    (49
    )Net Total Assets and (Liabilities)
    
    $
    44
    
    
    $
    (4
    )
    
    $
    (6
    )
    
    $
    34
 UniSource EnergyQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalDecember 31, 2008-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    14
    
    
    $
    
    
    
    $
    
    
    
    $
    14Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Equity Investments (3)
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Collateral Posted (4)
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Energy Contracts (5)
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    7Total Assets
    
    
    14
    
    
    
    24
    
    
    
    17
    
    
    
    55LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (40
    )
    
    
    (23
    )
    
    
    (63
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (48
    )
    
    
    (23
    )
    
    
    (71
    )Net Total Assets and (Liabilities)
    
    $
    14
    
    
    $
    (24
    )
    
    $
    (6
    )
    
    $
    (16
    )
  39




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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)
    
    
    TotalSeptember 30, 2009-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    8Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Collateral Posted (4)
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Energy Contracts (5)
    
    
    
    
    
    
    1
    
    
    
    8
    
    
    
    9Total Assets
    
    
    8
    
    
    
    16
    
    
    
    8
    
    
    
    32LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (5
    )
    
    
    (12
    )
    
    
    (17
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (13
    )
    
    
    (12
    )
    
    
    (25
    )Net Total Assets and (Liabilities)
    
    $
    8
    
    
    $
    3
    
    
    $
    (4
    )
    
    $
    7
 TEPQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalDecember 31, 2008-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    8Rabbi Trust Investments to
support the Deferred Compensation
and SERP Plans (2)
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Energy Contracts (5)
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Total Assets
    
    
    8
    
    
    
    9
    
    
    
    10
    
    
    
    27LiabilitiesEnergy Contracts (5)
    
    
    
    
    
    
    (18
    )
    
    
    (11
    )
    
    
    (29
    )Interest Rate Swaps (6)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (26
    )
    
    
    (11
    )
    
    
    (37
    )Net Total Assets and (Liabilities)
    
    $
    8
    
    
    $
    (17
    )
    
    $
    (1
    )
    
    $
    (10
    )
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
Commercial Paper and Money Market Funds.(2)
    
    Level 2 investments comprise amounts held in mutual and money market funds related to deferred
compensation and Supplemental Executive Retirement Plan (SERP) benefits. The valuation is based on
quoted prices, traded in active markets. These investments are included in Investments and Other
Property  Other in the UniSource Energy and TEP balance sheets.(3)
    
    Equity Investments (UniSource Energy table only) are, in the absence of readily ascertainable
market values, based on the investment partners valuations and comprise Millenniums equity
investment in unregulated businesses. These investments are included in Investments and Other
Property  Other in the UniSource Energy balance sheet.(4)
    
    Collateral provided for energy contracts with counterparties to reduce credit risk exposure.(5)
    
    Energy contracts include gas swap agreements (Level 2), gas collars (Level 3), forward power
purchase and sales contracts (Level 3), and forward power purchase contracts indexed to gas (Level
3), entered into to take advantage of favorable market conditions and reduce exposure to energy
price risk. The valuation techniques are described below.(6)
    
    Interest Rate Swaps are valued based on either the six-month LIBOR index or the Securities
Industry and Financial Markets Association (SIFMA) Municipal Swap index (Level 2).  40




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Energy Contracts
     41




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Three Months EndedSeptember 30, 2009-Millions of Dollars-UniSource Energy
    
    

TEPMark-to-Market
    
    
    
    
    
    
    
    
    
    
    Mark-to-MarketContracts
    
    
    Investments
    
    
    Total
    
    
    ContractsBalance, as of July 1, 2009
    
    $
    (23
    )
    
    $
    11
    
    
    $
    (12
    )
    
    $
    (5
    )Gains and (Losses)
(Realized/Unrealized) Recorded
to:Net Regulatory Assets
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    1Balance, as of September 30, 2009
    
    $
    (17
    )
    
    $
    11
    
    
    $
    (6
    )
    
    $
    (4
    )
 Nine Months EndedSeptember 30, 2009-Millions of Dollars-UniSource Energy
    
    
    TEPMark-to-Market
    
    
    
    
    
    
    
    
    
    
    Mark-to-MarketContracts
    
    
    Investments
    
    
    Total
    
    
    ContractsBalance, as of January 1, 2009
    
    $
    (17
    )
    
    $
    11
    
    
    $
    (6
    )
    
    $
    (1
    )Gains and (Losses)
(Realized/Unrealized) Recorded
to:Net Regulatory Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Balance, as of September 30, 2009
    
    $
    (17
    )
    
    $
    11
    
    
    $
    (6
    )
    
    $
    (4
    )
   
 NOTE 12. UNISOURCE ENERGY EARNINGS PER SHARE (EPS)
   42




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Thousands of Dollars-Numerator:Net Income
    
    $
    57,646
    
    
    $
    (11,039
    )
    
    $
    93,839
    
    
    $
    (8,906
    )Income from Assumed Conversion of Convertible Senior Notes
    
    
    1,097
    
    
    
    
    
    
    
    3,292
    
    
    
    Adjusted Numerator
    
    $
    58,743
    
    
    $
    (11,039
    )
    
    $
    97,131
    
    
    $
    (8,906
    )-Thousands of Shares-Denominator:Weighted-average Shares of Common Stock Outstanding:Common Shares Issued
    
    
    35,722
    
    
    
    35,453
    
    
    
    35,623
    
    
    
    35,398Participating Securities
    
    
    100
    
    
    
    
    
    
    
    102
    
    
    
    Fully Vested Deferred Stock Units
    
    
    106
    
    
    
    224
    
    
    
    104
    
    
    
    218Total Weighted-average Shares of Common Stock Outstanding and Participating
Securities  Basic
    
    
    35,928
    
    
    
    35,677
    
    
    
    35,829
    
    
    
    35,616Effect of Dilutive Securities:Convertible Senior Notes
    
    
    4,101
    
    
    
    
    
    
    
    4,086
    
    
    
    Options and Stock Issuable under Employee Benefit Plans and the Directors Plans
    
    
    507
    
    
    
    
    
    
    
    491
    
    
    
    Total Shares  Diluted
    
    
    40,536
    
    
    
    35,677
    
    
    
    40,406
    
    
    
    35,616
   43




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-In Thousands-Stock Options Excluded from the Diluted EPS Computation
    
    
    395
    
    
    
    234
    
    
    
    395
    
    
    
    288
 
 NOTE 13. STOCKHOLDERS EQUITY
  Dividends and Capital Contribution
  
 NOTE 14. SALE OF MILLENNIUMS INVESTMENT IN SABINAS
  
 NOTE 15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  
    
    In March 2008, the FASB revised the authoritative guidance for derivatives to require
enhanced disclosures about an entitys derivative and hedging activity.We are required to
disclose our objectives for using derivative instruments and our underlying risk. We are
also required to disclose in the financial statements the location of derivative balances,
and gains and losses incurred during the reporting period. See Note 5.
 
    
    In November 2008, the FASB revised the authoritative guidance for equity method
investments to require 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 guidance requires that
impairment testing be performed at an overall investment level. We adopted this standard
on January 1, 2009 and it did not have a material impact on our financial statements.
  44




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
    
    In May 2009, the FASB established general standards of accounting for and disclosure of
subsequent events. These are events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. We adopted this in the
second quarter of 2009 and the relevant disclosure is included in Note 1.
 
    
    In April 2009, the FASB revised the authoritative guidance for fair value measurements
of financial instruments to expand the fair value disclosures required for all financial
instruments not measured at fair value in interim periods. The pronouncement requires
entities to disclose the method and significant assumptions used to estimate the fair value
of financial instruments in the financial statements on an interim and annual basis. We
have adopted the requirements of this pronouncement. See Note 8.
 
    
    In June 2009, the FASB established the Accounting Standards Codification (Codification)
as the source of authoritative accounting principles in the preparation of financial
statements in conformity with GAAP. We adopted this guidance in the third quarter 2009.
  
    
    The FASB issued authoritative guidance for postretirement benefit plans in December
2008, requiring more detailed disclosures about employers plan assets. This includes
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.
 
    
    The FASB issued authoritative guidance for transfers of financial assets in June 2009,
that improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a transfer
of financial assets, including, the effects of a transfer on the reporting entitys
financial position, financial performance, and cash flows; and a transferors continuing
involvement, if any, in transferred financial assets. We are assessing the impact of this
pronouncement, which will be applicable for our first quarter 2010.
 
    
    The FASB issued authoritative guidance for variable interest entities in June 2009,
requiring an analysis to determine whether the enterprises variable interest or interests
give it a controlling financial interest in a variable interest entity. We are assessing
the impact of this pronouncement, which will be applicable to us for
our first quarter 2010.
 
    
    The FASB issued authoritative guidance in October 2009 on how companies should estimate
the fair value of certain alternative investments. The guidance allows companies to
determine the fair value of such investments using Net Asset Value (NAV) as a practical
expedient, unless it is probable the investment will be sold at something other than NAV.
New disclosures are required for each major category of alternative investments. We are
assessing the impact of this pronouncement, which will be applicable to us in our 2009 Form
10-K.
  45




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 
 NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
  UniSource EnergyNine Months EndedSeptember 30,2009
    
    
    2008-Thousands of Dollars-Net Income (Loss)
    
    $
    93,839
    
    
    $
    (8,906
    )Adjustments to Reconcile Net Income (Loss)
to Net Cash Flows from Operating ActivitiesDepreciation and Amortization Expense
    
    
    131,881
    
    
    
    109,196Depreciation and Amortization Recorded to Fuel and Other O&M Expense
    
    
    3,667
    
    
    
    4,953Amortization of Deferred Debt-Related Costs Included in Interest Expense
    
    
    3,170
    
    
    
    2,978Provision for Bad Debts
    
    
    2,537
    
    
    
    2,703Deferred Income Taxes
    
    
    52,849
    
    
    
    18,079Equity in Investment in Lease Equity
    
    
    (3,144
    )
    
    
    Elimination of Capital Lease Interest Expense Related to Investment in
Springerville Lease Equity
    
    
    (1,609
    )
    
    
    Pension and Postretirement Expense
    
    
    17,987
    
    
    
    8,993Pension and Postretirement Funding
    
    
    (23,275
    )
    
    
    (13,044
    )Gain on Sale of Millenniums Investment in Sabinas
    
    
    (5,979
    )
    
    
    Stock Based Compensation Expense
    
    
    2,120
    
    
    
    1,953Excess Tax Benefit from Stock Options Exercised
    
    
    (1,929
    )
    
    
    (612
    )Mark-to-Market Transactions
    
    
    29
    
    
    
    6,413Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,945CTC Revenue Subject to Refund
    
    
    
    
    
    
    44,415Provision for Navajo Retiree Health Care and Mine Reclamation
    
    
    
    
    
    
    10,080Impairment of Millennium Investments
    
    
    
    
    
    
    2,037Changes in Assets and Liabilities which Provided (Used)Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    (6,655
    )
    
    
    (12,911
    )Materials and Fuel Inventory
    
    
    (32,020
    )
    
    
    (8,458
    )Over/Under Recovered Purchased Energy Cost
    
    
    (13,896
    )
    
    
    (13,133
    )Accounts Payable
    
    
    (6,617
    )
    
    
    5,774Interest Accrued
    
    
    (4,621
    )
    
    
    (3,286
    )Income Taxes
    
    
    19,478
    
    
    
    (13,151
    )Taxes Other Than Income Taxes
    
    
    14,381
    
    
    
    12,479Other Regulatory Liabilities
    
    
    18,929
    
    
    
    6,229Other
    
    
    1,176
    
    
    
    610Net Cash
Flows  Operating Activities
    
    $
    262,298
    
    
    $
    187,336
  46




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)  Unaudited
 TEPNine Months EndedSeptember 30,2009
    
    
    2008-Thousands of Dollars-Net Income (Loss)
    
    $
    81,229
    
    
    $
    (15,335
    )Adjustments to Reconcile Net Income (Loss) to Net Cash Flows from Operating
ActivitiesDepreciation and Amortization Expense
    
    
    114,539
    
    
    
    93,198Depreciation and Amortization Recorded to Fuel and Other O&M Expense
    
    
    2,546
    
    
    
    3,888Amortization of Deferred Debt-Related Costs Included in Interest Expense
    
    
    1,882
    
    
    
    2,166Provision for Bad Debts
    
    
    1,626
    
    
    
    1,516Deferred Income Taxes
    
    
    42,350
    
    
    
    6,864Equity in Investment in Lease Equity
    
    
    (3,144
    )
    
    
    Elimination of Capital Lease Interest Expense Related to Investment in
Springerville Lease Equity
    
    
    (1,609
    )
    
    
    Pension and Postretirement Expense
    
    
    16,262
    
    
    
    7,802Pension and Postretirement Funding
    
    
    (21,793
    )
    
    
    (11,600
    )Stock Based Compensation Expense
    
    
    1,619
    
    
    
    1,508Mark-to-Market Transactions
    
    
    29
    
    
    
    6,372Amortization of Transition Recovery Asset
    
    
    
    
    
    
    23,945CTC Revenue Subject to Refund
    
    
    
    
    
    
    44,415Provision for Navajo Retiree Health Care and Mine Reclamation
    
    
    
    
    
    
    10,080Changes in Assets and Liabilities which Provided (Used)Cash Exclusive of Changes Shown SeparatelyAccounts Receivable
    
    
    (28,695
    )
    
    
    (25,233
    )Materials and Fuel Inventory
    
    
    (31,146
    )
    
    
    (7,488
    )Over/Under Recovered Purchased Energy Cost
    
    
    (25,761
    )
    
    
    Accounts Payable
    
    
    5,394
    
    
    
    19,076Interest Accrued
    
    
    488
    
    
    
    780Income Taxes
    
    
    3,242
    
    
    
    3,298Taxes Other Than Income Taxes
    
    
    15,213
    
    
    
    11,578Other Regulatory Liabilities
    
    
    17,411
    
    
    
    5,258Other
    
    
    5,792
    
    
    
    4,545Net Cash Flows  Operating Activities
    
    $
    197,474
    
    
    $
    186,633
    47




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##### Table of Contents



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (concluded)  Unaudited
 
 NOTE 17. REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   48




---



##### Table of Contents



ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
    
    outlook and strategies;
 
    
    operating results during the third quarter and nine months ended September 30, 2009
compared with the same periods in 2008;
 
    
    factors which affect our results and outlook;
 
    
    liquidity, capital needs, capital resources, and contractual obligations;
 
    
    dividends; and
 
    
    critical accounting estimates.
   
 UNISOURCE ENERGY CONSOLIDATED
 
 OVERVIEW OF CONSOLIDATED BUSINESS
   
 OUTLOOK AND STRATEGIES
  
    
    Maintain and enhance TEPs system reliability and safety while operating under a base rate
freeze through 2012;
 
    
    Maintain an appropriate cost structure while operating under a base rate freeze through
2012;
 
    
    Ensure UniSource Energy continues to have adequate liquidity by maintaining sufficient
lines of credit and regularly reviewing and adjusting UniSource Energys short-term investment
strategies in response to market conditions;
 
    
    Expand TEP and UNS Electrics portfolio of renewable energy sources and demand side
management programs to meet Arizonas renewable energy standards;
  49




---



##### 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
     Part II,
Item 7. Managements Discussion and Analysis of Financial Condition and Result of Operations,
UniSource Energy Consolidated -Economic Conditions
 Environmental Matters
  2
  50




---



##### 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.
Through the first nine months of 2009, TEPs retail kWh sales
were 1.0% below kWh sales
levels during the same period of 2008. As a result of the PPFAC, relative to prior
periods, TEPs net income should not be as sensitive to changes in fuel and purchased power
costs or revenues from short-term wholesale sales which are an off-set to the recoverable
PPFAC costs;
 
    
    No amortization expense related to TEPs Transition Recovery Asset (TRA) will be
recorded in 2009 since that asset became fully amortized in May 2008. In 2008, TEP
recorded TRA amortization of $24 million; and
 
    
    TEP will not defer recognition of any revenues subject to refund during 2009. During
2008, TEP deferred $58 million of revenue to be refunded.
  
    
    Higher operating costs due to increases in general O&M costs, pension-related
expenses and planned generating plant maintenance; and
 
    
    An increase in depreciation and amortization expense caused by an increase in plant
in service, and the effects of the 2008 TEP Rate Order that increased depreciation rates
on certain assets and amortization expense related to certain regulatory assets.
 Seasonality of Utility Operations
    51




---



##### Table of Contents



Third Quarter of 2009 Compared with the Third Quarter of 2008
  See Tucson
Electric Power Company, Results of Operations
 Nine Months Ended September 30, 2009 Compared with the Nine Months Ended September 30, 2008
  See Tucson Electric Power
Company, Other Non-Reportable Business Segments, Results of Operations
 
 CONTRIBUTION BY BUSINESS SEGMENT
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-
    
    
    -Millions of Dollars-TEP
    
    $
    55
    
    
    $
    (12
    )
    
    $
    81
    
    
    $
    (15
    )UNS Gas
    
    
    (1
    )
    
    
    (1
    )
    
    
    4
    
    
    
    5UNS Electric
    
    
    4
    
    
    
    3
    
    
    
    6
    
    
    
    4Other (1)
    
    
    
    
    
    
    (1
    )
    
    
    3
    
    
    
    (3
    )Consolidated Net Income
Loss
    
    $
    58
    
    
    $
    (11
    )
    
    $
    94
    
    
    $
    (9
    )
 (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
   52




---



##### Table of Contents



Liquidity
  Borrowings
    
    
    Amount AvailableBalances as of
    
    Cash and Cash
    
    
    under Revolving
    
    
    under RevolvingOctober
28, 2009
    
    Equivalents
    
    
    Credit Facility(1)
    
    
    Credit Facility-Millions of Dollars-UniSource Energy stand-alone
    
    $
    4
    
    
    $
    54
    
    
    $
    16TEP
    
    23
    
    
    11
    
    
    139UNS Gas
    
    27
    
    
    
    
    
    
    45
    (2)UNS Electric
    
    16
    
    
    11
    
    
    34
    (2)Other
    
    
    5
    (3)
    
    
    N/A
    
    
    
    N/ATotal
    
    $
    75
    
    
    $
    76
    
    
    $
    204
 (1)
    
    Includes LOCs issued under revolving credit facilities.(2)
    
    Either UNS Gas or UNS Electric may borrow up to a maximum of $45 million, but the
total combined amount borrowed cannot exceed $60 million.(3)
    
    Includes cash and cash equivalents at UED and Millennium. Short-term Investments
  Access to Revolving Credit Facilities
   Liquidity Outlook
 UniSource Energy Credit Agreement
  53




---



##### Table of Contents



Executive Overview  UniSource Energy Consolidated Cash Flows
 Nine Months Ended September 30,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    262
    
    
    $
    187Investing Activities
    
    
    (248
    )
    
    
    (359
    )Financing Activities
    
    
    (6
    )
    
    
    152
 Operating Activities
  Investing Activities
  Capital Expenditures
 Actual Year-to-Date
    
    
    EstimateSeptember 30, 2009
    
    
    Full Year 2009-Millions of Dollars-TEP
    
    $
    195
    
    
    $
    239UNS Gas
    
    
    11
    
    
    
    16UNS Electric
    
    
    23
    
    
    
    28Other
    
    
    8
    
    
    
    2UniSource Energy Consolidated
    
    $
    237
    
    
    $
    285
 Financing Activities
  UniSource Energy Credit Agreement
    54




---



##### Table of Contents



Interest Rate Risk
  Convertible Senior Notes
  Capital Contributions
 Other Non-Reportable Business Segments,
UED, Tucson Electric Power Company Liquidity and Capital Resources,
 Guarantees
  
    
    UES guarantee of $100 million senior unsecured notes issued by UNS Gas and $100 million
senior unsecured notes issued by UNS Electric;
 
    
    UES guarantee of the $60 million UNS Gas/UNS Electric Revolver;
 
    
    UniSource Energys guarantee of approximately $2 million in building lease payments for UNS
Gas; and
 
    
    UniSource Energys guarantee of $28 million in
outstanding loans under the UED 364 day term loan facility.
    55




---



##### Table of Contents



Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total-Millions of Dollars-Short-Term Debt
    
    $
    28
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28Purchase Obligations:Fuel
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    5Purchased Power
    
    
    64
    
    
    
    10
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    82Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    4Total Additional Contractual Cash
Obligations
    
    $
    95
    
    
    $
    13
    
    
    $
    4
    
    
    $
    3
    
    
    $
    4
    
    
    $
    119
  Dividends on Common Stock
  Dividend Amount Per ShareDeclaration Date
    
    Record Date
    
    Payment Date
    
    of Common StockFebruary 13, 2009
    
    February 24, 2009
    
    March 9, 2009
    
    $
    0.29May 7, 2009
    
    May 20, 2009
    
    June 15, 2009
    
    $
    0.29August 7, 2009
    
    August 20, 2009
    
    September 3, 2009
    
    $
    0.29
 Income Tax Position
  
 TUCSON ELECTRIC POWER COMPANY
 
 RESULTS OF OPERATIONS
 Executive Summary
  2
  56




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##### Table of Contents



Third Quarter of 2009 Compared with the Third Quarter of 2008
  
    
    a $37 million increase in retail revenues due primarily to: the 6% base rate increase that took effect in
December 2008; a new rate structure that charges higher rates
for higher levels of energy usage; and a 2.4%
increase in kWh sales resulting largely from a 32% increase in cooling degree days (CDD) compared with the
third quarter of 2008;
 

    
    a provision for rate refunds of $30 million recorded in the third quarter of 2008;
 

    
    a $4 million decrease in long-term wholesale revenues due primarily to lower kWh sales to
Salt River Project (SRP) and Navajo Tribal Utility Authority (NTUA);
 

    
    a $50 million decrease in total fuel and purchased energy expense, net of short-term
wholesale revenues, due to lower generating output and a decline in the market price of
wholesale power and natural gas;
 

    
    a $5 million increase in O&M. Excluding a $5 million increase in expenses directly offset by customer
surcharges and third party reimbursements, the increase in O&M
was less than $1 million;
 

    
    a $7 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 $3 million increase in total other income due in part to an
increase in the value of a company owned life insurance policy; and
 

    
    a $2 million decrease in total interest expense resulting primarily from lower interest
rates on variable rate debt.
  Nine Months Ended September 30, 2009 Compared with the same period of 2008
  

    
    a $47 million increase in retail revenues due primarily to: the 6% base rate increase and new rate structure
that charges higher rates for higher levels of energy usage that took effect in December 2008; and a $9 million
increase in surcharges collected from customers to fund renewable energy and energy efficiency programs;
 

    
    a provision for rate refunds of $44 million recorded in the first nine months of 2008;
 

    
    a $9 million decrease in long-term wholesale revenues due primarily to lower kWh sales to
SRP and NTUA;
 

    
    a $74 million decrease in total fuel and purchased energy expense, net of short-term
wholesale revenues, due to lower generating output and a decline in the market price of
wholesale power and natural gas;
 

    
    a $29 million increase in O&M expense due in part to: higher planned power plant
maintenance costs of $6 million; an $8 million increase in pension expense; a $9 million
increase in expenses related to renewable energy and energy efficiency programs that are
offset by revenues collected from customers; and a $3 million increase in O&M related to
Springerville Units 3 and 4, which is reimbursed to TEP.
 

    
    a $21 million increase in depreciation and amortization expense due to: additions to plant
in service; new depreciation rates for generation assets; amortization of regulatory assets
resulting from the 2008 TEP Rate Order; and a $4 million adjustment related to a change in accounting for TEPs investment in
Springerville Unit 1 lease equity;
  57




---



##### Table of Contents





    
    $24 million of amortization of TEPs TRA recorded in the first nine months of 2008. In
May 2008, the TRA was fully amortized;
 

    
    an $8 million increase in total other income due primarily to interest income of $4
million related to an income tax refund and a company owned life insurance policy and a $3
million adjustment in the second quarter of 2009 related to a change in accounting for TEPs
investment in Springerville Unit 1 lease equity; and
 

    
    a $10 million decrease in total interest expense resulting from lower interest rates on
variable rate long-term debt, lower interest on capital leases; and a $2 million adjustment
in the second quarter of 2009 related to a change in accounting for TEPs investment in
Springerville Unit 1 lease equity.
   Utility Sales and Revenues
    58




---



##### Table of Contents



Increase (Decrease)Three Months Ended September 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    1,453
    
    
    
    1,361
    
    
    
    92
    
    
    
    6.8
    %Commercial
    
    
    619
    
    
    
    613
    
    
    
    6
    
    
    
    1.0
    %Industrial
    
    
    628
    
    
    
    655
    
    
    
    (27
    )
    
    
    (4.2
    %)Mining
    
    
    269
    
    
    
    272
    
    
    
    (3
    )
    
    
    (1.0
    %)Public Authorities
    
    
    67
    
    
    
    65
    
    
    
    2
    
    
    
    2.2
    %Total Electric Retail Sales
    
    
    3,036
    
    
    
    2,966
    
    
    
    70
    
    
    
    2.4
    %Electric Wholesale Sales Delivered:Long-term Contracts
    
    
    126
    
    
    
    253
    
    
    
    (127
    )
    
    
    (50.2
    %)Short-term and Trading
    
    
    492
    
    
    
    652
    
    
    
    (160
    )
    
    
    (24.4
    %)Total Electric Wholesale Sales
    
    
    618
    
    
    
    905
    
    
    
    (287
    )
    
    
    (31.7
    %)Total Electric Sales
    
    
    3,654
    
    
    
    3,871
    
    
    
    (217
    )
    
    
    (5.6
    %)Electric Retail Revenues (in millions):Residential
    
    $
    148
    
    
    $
    128
    
    
    $
    20
    
    
    
    15.3
    %Commercial
    
    
    72
    
    
    
    64
    
    
    
    8
    
    
    
    12.2
    %Industrial
    
    
    50
    
    
    
    49
    
    
    
    1
    
    
    
    3.5
    %Mining
    
    
    17
    
    
    
    14
    
    
    
    3
    
    
    
    21.4
    %Public Authorities
    
    
    6
    
    
    
    5
    
    
    
    1
    
    
    
    12.7
    %Revenues excluding REST & DSM
    
    $
    293
    
    
    $
    260
    
    
    
    33
    
    
    
    12.6
    %REST and DSM Revenues
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    NMProvision for Rate Refunds
    
    
    
    
    
    
    (30
    )
    
    
    30
    
    
    NMTotal Retail Revenues
    
    $
    297
    
    
    $
    231
    
    
    $
    66
    
    
    
    28.7
    %Electric Wholesale Revenues:Long-term Contracts
    
    
    10
    
    
    
    14
    
    
    
    (4
    )
    
    
    (28.5
    %)Other Sales
    
    
    24
    
    
    
    55
    
    
    
    (31
    )
    
    
    (54.5
    %)Transmission
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    (3.8
    %)Total Wholesale Revenues
    
    
    38
    
    
    
    73
    
    
    
    (35
    )
    
    
    (47.8
    %)Total Retail and Wholesale Revenues
    
    $
    335
    
    
    $
    304
    
    
    $
    (31
    )
    
    
    10.4
    %2009
    
    
    2008Weather Data:Cooling Degree DaysThree Months Ended September 30
    
    
    1,155
    
    
    
    875
    
    
    
    280
    
    
    
    32
    %10-Year Average
    
    
    970
    
    
    
    935
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table TEP Retail Rates
 2008 TEP Rate Order
 Residential and Commercial
   59




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##### Table of Contents



Industrial, Mining and Public Authority
  Retail Margin Revenues
  Three Months Ended September 30, 2009
    
    -millions-
    
    
    -cents / kWh-Retail
Margin Revenues (non-GAAP)*Residential
    
    $
    97
    
    
    
    6.67Commercial
    
    
    52
    
    
    
    8.34Industrial
    
    
    29
    
    
    
    4.67Mining
    
    
    8
    
    
    
    2.87Public Authorities
    
    
    3
    
    
    
    5.19Retail Margin Revenues (non-GAAP)*
    
    $
    189
    
    
    
    6.23Base Fuel & PPFAC Revenues
    
    
    103
    
    
    
    3.41REST & DSM Revenues
    
    
    5
    
    
    
    0.16Net Electric Retail Sales (GAAP)
    
    $
    297
    
    
    
    9.80
 *
    
    Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an alternative to Net Electric
Retail Sales, which is determined in accordance with GAAP. TEP believes that Retail Margin Revenues, which is Net
Electric Retail Sales less base fuel and PPFAC revenues, and revenues for DSM and REST programs, provides useful
information to investors as a measure of TEPs ability to pay for operating expenses with retail revenues, after giving
effect to related fuel and purchased power expenses. Long-Term Wholesale Revenues
  Short-Term Wholesale and Trading Revenues
 Operating Expenses, Fuel and Purchased Power Expense 2008 TEP Rate Order, Purchased Power and
Fuel Adjustment Clause,
  60




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##### Table of Contents



Increase (Decrease)Nine Months Ended September 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    3,129
    
    
    
    3,078
    
    
    
    51
    
    
    
    1.7
    %Commercial
    
    
    1,545
    
    
    
    1,570
    
    
    
    (25
    )
    
    
    (1.6
    %)Industrial
    
    
    1,667
    
    
    
    1,740
    
    
    
    (73
    )
    
    
    (4.2
    %)Mining
    
    
    793
    
    
    
    815
    
    
    
    (22
    )
    
    
    (2.8
    %)Public Authorities
    
    
    188
    
    
    
    193
    
    
    
    (5
    )
    
    
    (2.5
    %)Total Electric Retail Sales
    
    
    7,322
    
    
    
    7,396
    
    
    
    (74
    )
    
    
    (1.0
    %)Electric Wholesale Sales Delivered:Long-term Contracts
    
    
    566
    
    
    
    823
    
    
    
    (257
    )
    
    
    (31.2
    %)Other Sales
    
    
    1,496
    
    
    
    2,186
    
    
    
    (690
    )
    
    
    (31.6
    %)Total Electric Wholesale Sales
    
    
    2,062
    
    
    
    3,009
    
    
    
    (947
    )
    
    
    (31.5
    %)Total Electric Sales
    
    
    9,384
    
    
    
    10,405
    
    
    
    1,021
    
    
    
    (9.8
    %)Electric Retail Revenues (in millions):Residential
    
    $
    305
    
    
    $
    281
    
    
    $
    24
    
    
    
    8.7
    %Commercial
    
    
    172
    
    
    
    163
    
    
    
    9
    
    
    
    5.3
    %Industrial
    
    
    127
    
    
    
    127
    
    
    
    
    
    
    
    0.1
    %Mining
    
    
    46
    
    
    
    41
    
    
    
    5
    
    
    
    10.8
    %Public Authorities
    
    
    15
    
    
    
    15
    
    
    
    
    
    
    
    3.9
    %Revenues excluding REST & DSM
    
    $
    665
    
    
    $
    627
    
    
    $
    38
    
    
    
    6.1
    %Provision for Rate Refunds
    
    
    
    
    
    
    (44
    )
    
    
    44
    
    
    NMREST and DSM Revenues
    
    
    10
    
    
    
    1
    
    
    
    9
    
    
    NMTotal Retail Revenues
    
    $
    675
    
    
    $
    584
    
    
    $
    91
    
    
    
    15.6
    %Electric Wholesale Revenues:Long-term Contracts
    
    
    34
    
    
    
    43
    
    
    
    (9
    )
    
    
    (20.9
    %)Short-term and Trading
    
    
    62
    
    
    
    152
    
    
    
    90
    
    
    
    (59.2
    %)Transmission
    
    
    12
    
    
    
    13
    
    
    
    (1
    )
    
    
    (3.1
    %)Total Wholesale Revenues
    
    
    108
    
    
    
    208
    
    
    
    (100
    )
    
    
    (48.1
    %)Total Retail and Wholesale Revenues
    
    $
    783
    
    
    $
    792
    
    
    $
    (9
    )
    
    
    (1.1
    %)2009
    
    
    2008Weather Data:Cooling Degree DaysNine Months Ended September 30
    
    
    1,571
    
    
    
    1,295
    
    
    
    276
    
    
    
    21.3
    %10-Year Average
    
    
    1,434
    
    
    
    1,392
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table Residential and Commercial
    61




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##### Table of Contents



Industrial, Mining and Public Authorities
  Retail Margin Revenues
  Nine Months Ended September 30, 2009
    
    -millions-
    
    
    -cents / kWh-Retail
Margin Revenues (non-GAAP)*Residential
    
    $
    204
    
    
    
    6.52Commercial
    
    
    125
    
    
    
    8.07Industrial
    
    
    77
    
    
    
    4.60Mining
    
    
    24
    
    
    
    2.99Public Authorities
    
    
    9
    
    
    
    5.01Retail Margin Revenues (Non-GAAP)*
    
    $
    439
    
    
    
    5.99Base Fuel & PPFAC Revenues
    
    
    226
    
    
    
    3.10REST & DSM Revenues
    
    
    10
    
    
    
    0.14Net Electric Retail Sales (GAAP)
    
    $
    675
    
    
    
    9.22
 *
    
    Retail Margin Revenues, a non-GAAP financial measure, should not be considered as an
alternative to Net Electric Retail Sales, which is determined in accordance with GAAP.
TEP believes that Retail Margin Revenues, which is Net Electric Retail Sales less base fuel
and PPFAC revenues, and revenues for DSM and REST programs, provides useful information to
investors as a measure of TEPs ability to pay for operating expenses with retail revenues,
after giving effect to related fuel and purchased power expenses. Long-Term Wholesale Revenues
  Other Revenues
 3 Months Ended
    
    
    9 Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-
    
    
    -Millions of Dollars-Revenue related to Springerville Units 3 and 4
    
    $
    16
    
    
    $
    15
    
    
    $
    43
    
    
    $
    41Other Revenue
    
    
    6
    
    
    
    4
    
    
    
    16
    
    
    
    14Total Other Revenue
    
    $
    22
    
    
    $
    19
    
    
    $
    59
    
    
    $
    55
 O&M
  62




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##### Table of Contents



Fuel and Purchased Power Expense
 Generation andTEP
    
    Purchased Power
    
    
    ExpenseThree Months Ended September 30,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of kWh-
    
    
    -Millions of Dollars-Coal-Fired Generation
    
    
    2,452
    
    
    
    2,774
    
    
    $
    51
    
    
    $
    65Gas-Fired Generation
    
    
    436
    
    
    
    305
    
    
    
    40
    
    
    
    42Solar, Bio Diesel and Methane
    
    
    17
    
    
    
    2
    
    
    
    
    
    
    
    Total Generation (1)
    
    
    2,905
    
    
    
    3,081
    
    
    
    91
    
    
    
    107Total Purchased Power
    
    
    1,079
    
    
    
    1,086
    
    
    
    53
    
    
    
    100Transmission
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    5Increase (Decrease) to Reflect
PPFAC Recovery Treatment
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    Total Resources
    
    
    3,984
    
    
    
    4,167
    
    
    $
    132
    
    
    $
    212Less Line Losses and Company Use
    
    
    (330
    )
    
    
    (296
    )Total Energy Sold
    
    
    3,654
    
    
    
    3,871
 (1)
    
    Generation expense in the third 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. Generation andTEP
    
    Purchased Power
    
    
    ExpenseNine Months Ended September 30,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of kWh-
    
    
    -Millions of Dollars-Coal-Fired Generation
    
    
    6,692
    
    
    
    8,071
    
    
    $
    139
    
    
    $
    179Gas-Fired Generation
    
    
    829
    
    
    
    722
    
    
    
    66
    
    
    
    69Solar, Bio Diesel and Methane
    
    
    22
    
    
    
    6
    
    
    
    
    
    
    
    Total Generation (1)
    
    
    7,542
    
    
    
    8,799
    
    
    
    205
    
    
    
    248Total Purchased Power
    
    
    2,596
    
    
    
    2,341
    
    
    
    112
    
    
    
    211Transmission
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    10Increase (Decrease) to Reflect
PPFAC Recovery Treatment
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    Total Resources
    
    
    10,139
    
    
    
    11,140
    
    
    $
    302
    
    
    $
    469Less Line Losses and Company Use
    
    
    (755
    )
    
    
    (735
    )Total Energy Sold
    
    
    9,384
    
    
    
    10,405
 (1)
    
    Generation expense in the first nine months of 2009 and 2008 exclude $3 million
and $4 million, respectively, related to Springerville Unit 3; these expenses were reimbursed
by Tri-State and recorded in Other Revenue. PPFAC
 2008 TEP Rate Order Purchased Power and Fuel Adjustment Clause
 Energy Resources
    63




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-cents per
    
    
    -cents perkWh generated-
    
    
    kWh generated-Coal
    
    
    2.09
    
    
    
    2.36
    
    
    
    2.08
    
    
    
    2.21Gas(1)
    
    
    9.15
    
    
    
    11.15
    
    
    
    7.99
    
    
    
    9.09Purchased Power(1)
    
    
    4.91
    
    
    
    9.14
    
    
    
    4.33
    
    
    
    9.11
 (1)
    
    Beginning in 2009, unrealized gains and losses related to
hedging activities are recorded as PPFAC-related expenses. Therefore,
2008 figures have been adjusted to exclude unrealized gains and losses
related to hedging activities for comparison purposes. Market Prices
  Average Market Price for Around-the-Clock Energy
    
    $/MWhQuarter ended September 30, 2009
    
    $
    29Quarter ended September 30, 2008
    
    
    69Nine months ended September 30, 2009
    
    $
    28Nine months ended September 30, 2008
    
    
    71
 Average Market Price for Natural Gas
    
    $/MMBtuQuarter ended September 30, 2009
    
    $
    2.98Quarter ended September 30, 2008
    
    
    8.68Nine months ended September 30, 2009
    
    $
    3.10Nine months ended September 30, 2008
    
    
    8.47
 Other Operating Expenses
 TRA Amortization
   64




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##### Table of Contents



O&M
  Three Months
    
    
    Nine MonthsEnded Sept. 30,
    
    
    Ended Sept. 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-
    
    
    -Millions of Dollars-Base O&M
    
    $
    52
    
    
    $
    52
    
    
    $
    173
    
    
    $
    154Reimbursed expenses
related to
Springerville Units 3
and 4
    
    
    12
    
    
    
    10
    
    
    
    30
    
    
    
    26Expenses related to
customer-funded
renewable energy and
DSM
programs(1)
    
    
    5
    
    
    
    2
    
    
    
    10
    
    
    
    4Total O&M
    
    $
    69
    
    
    $
    64
    
    
    $
    213
    
    
    $
    184
 (1)
    
    Represents expenses related to TEPs customer-funded
renewable energy programs; the offsetting funds collected from customers
are recorded in retail revenue.  
 FACTORS AFFECTING RESULTS OF OPERATIONS
 2008 TEP Rate Order
 Base Rate Increase
  Purchased Power and Fuel Adjustment Clause
  
    
    The forward component was established as of April 1, 2009 and will be updated on April
1 of each year. The forward component is based on the forecasted fuel and purchased power
costs for the 12-month period from April 1 to March 31, less the base cost of fuel and
purchased power of 2.9 cents per kWh, which is embedded in base rates. The ACC approved a
forward component of 0.18 cents per kWh, effective April 1, 2009.
 
    
    The true-up component will reconcile any over/under collected amounts from the
preceding 12 month period and will be credited to or recovered from customers in the
subsequent year.
 2
   65




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##### Table of Contents



El Paso Electric Dispute
   Pension and Postretirement Benefit Expense
 Note 9. Employee Benefit Plans
 Fair Value Measurements
    66




---



##### Table of Contents



TEPQuoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalSeptember 30, 2009-Millions of Dollars-AssetsCash Equivalents (1)
    
    $
    8
    
    
    $
    
    
    
    $
    
    
    
    $
    8Rabbi Trust Investments to support
the Deferred Compensation and SERP
Plans (2)
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Collateral Posted (5)
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Energy Contracts (3)
    
    
    
    
    
    
    1
    
    
    
    8
    
    
    
    9Total Assets
    
    $
    8
    
    
    $
    16
    
    
    $
    8
    
    
    $
    32LiabilitiesEnergy Contracts (3)
    
    $
    
    
    
    $
    (5
    )
    
    $
    (12
    )
    
    $
    (17
    )Interest Rate Swaps (4)
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Liabilities
    
    
    
    
    
    
    (13
    )
    
    
    (12
    )
    
    
    (25
    )Net Total Assets and (Liabilities)
    
    $
    8
    
    
    $
    3
    
    
    $
    (4
    )
    
    $
    7
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
Commercial Paper and Money Market Funds.(2)
    
    Level 2 investments consist of amounts held in mutual and money market funds related to
deferred compensation and Supplemental Executive Retirement Plan (SERP) benefits. The valuation is
based on quoted prices, traded in active markets. These investments are included in Investments
and Other Property  Other in the UniSource Energy and TEP balance sheets.(3)
    
    Energy contracts include gas swap agreements (Level 2); gas collars (Level 3); forward power
purchase and sales contracts (Level 3); and forward power purchase contracts indexed to gas (Level
3), entered into to take advantage of favorable market conditions and reduce exposure to energy
price risk. The valuation techniques are described below.(4)
    
    Interest Rate Swaps are valued based on either the six month LIBOR index or the SIFMA Municipal
Swap index (Level 2).(5)
    
    Collateral provided for energy contracts with counterparties to reduce credit risk exposure.     67




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 TEP Cash Flows
  Nine Months Ended September 30,
    
    2009
    
    
    2008-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    197
    
    
    $
    187Amounts from Statements of Cash Flows:Less: Capital Expenditures
    
    
    (195
    )
    
    
    (212
    )Net Cash Flows after Capital Expenditures (non-GAAP)*
    
    
    2
    
    
    
    (25
    )Amounts from Statements of Cash Flows:Less: Retirement of Capital Lease Obligations
    
    
    (24
    )
    
    
    (74
    )Plus: Proceeds from Investment in Lease Debt
    
    
    13
    
    
    
    25Net Cash Flows after Capital Expenditures and Required Payments on Debt and Capital Lease Obligations (non-GAAP)*
    
    $
    (9
    )
    
    $
    (74
    )
 Nine Months Ended September 30,
    
    2009
    
    
    2008-Millions of Dollars-Net Cash Flows  Operating Activities (GAAP)
    
    $
    197
    
    
    $
    187Net Cash Flows  Investing Activities (GAAP)
    
    
    (209
    )
    
    
    (313
    )Net Cash Flows  Financing Activities (GAAP)
    
    
    (8
    )
    
    
    133Net Cash Flows after Capital Expenditures (non-GAAP)*
    
    
    3
    
    
    
    (25
    )Net Cash Flows after Capital Expenditures and Required Payments on Debt and Capital Lease Obligations (non-GAAP)*
    
    
    (9
    )
    
    
    (74
    )
 *
    
    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
   68




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##### Table of Contents



Operating Activities
  
    
    a $56 million increase in cash receipts from retail and wholesale electric sales, less
fuel and purchased power costs, resulting from lower wholesale sales, fuel costs and
purchased power costs; and
 
    
    an $9 million decrease in total interest paid resulting from lower rates on variable
rate debt and lower capital lease interest paid; offset by
 
    
    a $33 million increase in O&M costs related primarily to extensive planned generating
plant outage and maintenance costs and general cost pressures resulting from inflation and
other economic factors;
 
    
    a $16 million increase in income taxes paid (net of refunds received) due primarily to
higher taxable income; and
 
    
    an $8 million increase in wages paid.
 Investing Activities
 Financing
Activities Investments in Springerville Lease Debt and Equity,
 Financing Activities
  TEP Credit Agreement
   TEP Letter of Credit Facility
  Capital Contribution from UniSource Energy
 Investments in Springerville Lease Debt and
Equity,
  69




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##### Table of Contents



TEP Tax-Exempt Bonds
   Interest Rate Risk
   Capital Lease Obligations
  Capital Lease ObligationBalanceLeased Asset
    
    at September 30, 2009
    
    
    Expiration
    
    
    Purchase Option-Millions of Dollars-Springerville Unit 1
    
    $
    321
    
    
    
    2015
    
    
    Fair market value purchase optionSpringerville Coal Handling Facilities
    
    
    85
    
    
    
    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
    
    $
    526
 Note. 4 Debt, Credit Facilities and Capital
Lease Obligations
  70




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##### Table of Contents



Investments in Springerville Lease Debt and Equity
  Income Tax Position
 UniSource Energy Consolidated, Liquidity and Capital Resources, Income Tax Position,
 Contractual Obligations
  2014Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    after
    
    
    Total-Millions of Dollars-Purchase Obligations:Purchased Power
    
    $
    34
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2
    
    
    $
    4
    
    
    $
    44Transmission
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    4Total Additional Contractual Cash
Obligations
    
    $
    35
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    4
    
    
    $
    48
  Dividends on Common Stock
   
 UNS GAS
 
 RESULTS OF OPERATIONS
   71




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-
    
    
    -Millions of Dollars-Gas Revenues
    
    $
    18
    
    
    $
    23
    
    
    $
    103
    
    
    $
    120Other Revenues
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    2Total Operating Revenues
    
    
    19
    
    
    
    24
    
    
    
    106
    
    
    
    122Total Purchased Gas and PGA Expense
    
    
    11
    
    
    
    15
    
    
    
    69
    
    
    
    83Other Operations and Maintenance Expense
    
    
    6
    
    
    
    6
    
    
    
    19
    
    
    
    18Depreciation and Amortization
    
    
    2
    
    
    
    2
    
    
    
    5
    
    
    
    5Taxes other than Income Taxes
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2Total Other Operating Expenses
    
    
    20
    
    
    
    24
    
    
    
    95
    
    
    
    108Operating Income (Loss)
    
    
    (1
    )
    
    
    
    
    
    
    11
    
    
    
    14Total Interest Expense
    
    
    1
    
    
    
    2
    
    
    
    5
    
    
    
    5Income Tax Expense (Benefit)
    
    
    (1
    )
    
    
    (1
    )
    
    
    2
    
    
    
    4Net Income (Loss)
    
    $
    (1
    )
    
    $
    (1
    )
    
    $
    4
    
    
    $
    5
  Increase
    
    
    (Decrease)Three Months Ended September 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    

Percent *Energy Sales, Therms (in millions)Gas Retail Sales:Residential
    
    
    5.2
    
    
    
    5.2
    
    
    
    
    
    
    
    0.1
    %Commercial
    
    
    3.9
    
    
    
    4.1
    
    
    
    (0.2
    )
    
    
    (5.0
    %)Industrial
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    41.2
    %Other
    
    
    0.4
    
    
    
    0.4
    
    
    
    
    
    
    
    (7.1
    %)Total Gas Retail Sales
    
    
    9.8
    
    
    
    9.9
    
    
    
    (0.1
    )
    
    
    (1.3
    %)Transport
    
    
    10.8
    
    
    
    9.3
    
    
    
    1.5
    
    
    
    16.9
    %Negotiated Sales Program (NSP)
    
    
    8.4
    
    
    
    7.4
    
    
    
    1.0
    
    
    
    13.4
    %Total Gas Sales
    
    
    29.0
    
    
    
    26.6
    
    
    
    2.4
    
    
    
    9.2
    %Gas Retail Revenues (in millions):Retail
Margin Revenues:Residential
    
    $
    5.0
    
    
    $
    5.1
    
    
    $
    (0.1
    )
    
    
    (7.3
    %)Commercial
    
    
    1.5
    
    
    
    1.5
    
    
    
    
    
    
    
    (4.3
    %)Industrial
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    NMOther
    
    
    0.1
    
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    (3.3
    %)Total
    
    $
    6.7
    
    
    $
    6.8
    
    
    $
    (0.1
    )
    
    
    (1.6
    %)Transport
    
    
    0.7
    
    
    
    0.7
    
    
    
    
    
    
    NMNegotiated Sales Program (NSP)
    
    
    3.0
    
    
    
    6.6
    
    
    
    (3.6
    )
    
    
    (55.5
    %)DSM Revenues Collected from Customers
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    50.5
    %Retail Fuel Revenues Recovered from Customers
    
    
    7.5
    
    
    
    8.8
    
    
    
    (1.3
    )
    
    
    (14.2
    %)Total Gas Revenues
    
    $
    18.1
    
    
    $
    23.0
    
    
    $
    (4.9
    )
    
    
    (21.6
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table   72




---



##### Table of Contents



Increase
    
    
    (Decrease)Nine Months Ended September 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    

Percent *Energy Sales, Therms (in millions)Gas Retail Sales:Residential/
    
    
    44.5
    
    
    
    49.9
    
    
    
    (5.4
    )
    
    
    (10.7
    %)Commercial
    
    
    19.6
    
    
    
    21.7
    
    
    
    (2.1
    )
    
    
    (9.6
    %)Industrial
    
    
    1.5
    
    
    
    1.3
    
    
    
    0.2
    
    
    
    12.0
    %Public Authorities
    
    
    4.1
    
    
    
    4.7
    
    
    
    (0.6
    )
    
    
    (14.8
    %)Total Gas Retail Sales
    
    
    69.7
    
    
    
    77.6
    
    
    
    (7.9
    )
    
    
    (10.3
    %)Transport
    
    
    29.3
    
    
    
    27.2
    
    
    
    2.1
    
    
    
    8.0
    %Negotiated Sales Program (NSP)
    
    
    23.9
    
    
    
    21.3
    
    
    
    2.6
    
    
    
    12.0
    %Total Gas Sales
    
    
    122.9
    
    
    
    126.1
    
    
    
    3.2
    
    
    
    2.6
    %Gas Retail Revenues (in millions):Retail
Margin Revenues:Residential
    
    $
    24.5
    
    
    $
    26.4
    
    
    $
    (1.9
    )
    
    
    (7.3
    %)Commercial
    
    
    6.5
    
    
    
    7.1
    
    
    
    (0.6
    )
    
    
    (8.4
    %)Industrial
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    0.6
    %Public Authorities
    
    
    1.1
    
    
    
    1.3
    
    
    
    (0.2
    )
    
    
    (11.9
    %)Total
    
    $
    32.3
    
    
    $
    35.0
    
    
    
    (2.7
    )
    
    
    (7.6
    %)Transport
    
    
    2.5
    
    
    
    2.5
    
    
    
    
    
    
    
    (1.1
    %)Negotiated Sales Program (NSP)
    
    
    9.6
    
    
    
    19.6
    
    
    
    (10.0
    )
    
    
    (49.4
    %)DSM Revenues Collected from Customers
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    73.6
    %Retail Fuel Revenues Recovered From Customers
    
    
    58.2
    
    
    
    63.0
    
    
    
    (4.8
    )
    
    
    (7.8
    %)Total Gas Revenues
    
    $
    103.0
    
    
    $
    120.3
    
    
    
    (17.3
    )
    
    
    (14.4
    %)
 *
    
    Percent change calculated on un-rounded data; may not
correspond to data shown in table.   73




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##### Table of Contents



FACTORS AFFECTING RESULTS OF OPERATIONS
 RATES AND REGULATION
 Energy Cost Adjustment Mechanism
     2008 General Rate Case Filing
  Fair Value Measurements
 Tucson
Electric Power Factors Affecting Results of Operations
  UNS GasSeptember 30, 2009-Millions of Dollars-Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents(1)
    
    $
    21
    
    
    $
    
    
    
    $
    
    
    
    $
    21Cash Collateral(2)
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Energy Contracts(3)
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Total
    
    $
    21
    
    
    $
    (5
    )
    
    $
    
    
    
    $
    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)
    
    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.  74




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Liquidity Outlook
  Operating Cash Flow and Capital Expenditures
  Nine Months Ended September 30,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    28
    
    
    $
    8Investing Activities
    
    
    (11
    )
    
    
    (13
    )Financing Activities
    
    
    1
    
    
    
    2Net Increase (Decrease) in Cash
    
    
    18
    
    
    
    (3
    )Beginning Cash
    
    
    7
    
    
    
    19Ending Cash
    
    $
    25
    
    
    $
    16
  UNS Gas/UNS Electric Revolver
   Interest Rate Risk
   75




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##### Table of Contents



Senior Unsecured Notes
  Contractual Obligations
  2013Payment Due in Years
    
    
    
    
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    2012
    
    
    after
    
    
    Total-Millions of Dollars-Purchase Obligations:Fuel
    
    $
    2
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
    
    
    $
    5
 Dividends on Common Stock
 Senior Unsecured Notes
 
 UNS ELECTRIC
 
 RESULTS OF OPERATIONS
    76




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-
    
    
    -Millions of Dollars-Retail Electric Revenues
    
    $
    52
    
    
    $
    62
    
    
    $
    142
    
    
    $
    142Wholesale Electric Revenues
    
    
    1
    
    
    
    5
    
    
    
    4
    
    
    
    8Other Revenues
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Total Operating Revenues
    
    
    53
    
    
    
    68
    
    
    
    147
    
    
    
    151Purchased Energy Expense
    
    
    28
    
    
    
    46
    
    
    
    73
    
    
    
    101Fuel Expense
    
    
    8
    
    
    
    4
    
    
    
    16
    
    
    
    6Transmission Expense
    
    
    3
    
    
    
    4
    
    
    
    8
    
    
    
    8Increase (Decrease) to reflect PPFAC Recovery
    
    
    (4
    )
    
    
    (2
    )
    
    
    6
    
    
    
    (3
    )Other Operations and Maintenance Expense
    
    
    6
    
    
    
    6
    
    
    
    17
    
    
    
    16Depreciation and Amortization
    
    
    4
    
    
    
    3
    
    
    
    10
    
    
    
    10Taxes other than Income Taxes
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3Total Other Operating Expenses
    
    
    46
    
    
    
    62
    
    
    
    133
    
    
    
    141Operating Income
    
    
    7
    
    
    
    6
    
    
    
    14
    
    
    
    10Other Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total Interest Expense
    
    
    1
    
    
    
    2
    
    
    
    5
    
    
    
    5Income Tax Expense
    
    
    2
    
    
    
    1
    
    
    
    3
    
    
    
    2Net Income
    
    $
    4
    
    
    $
    3
    
    
    $
    6
    
    
    $
    4
  77




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##### Table of Contents



Increase(Decrease)Three Months Ended September 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    300.9
    
    
    
    299.8
    
    
    
    1.1
    
    
    
    0.4
    %Commercial
    
    
    185.4
    
    
    
    183.4
    
    
    
    2.0
    
    
    
    1.1
    %Industrial
    
    
    56.4
    
    
    
    52.1
    
    
    
    4.3
    
    
    
    8.3
    %Mining
    
    
    43.0
    
    
    
    6.1
    
    
    
    36.9
    
    
    NMPublic Authorities
    
    
    0.5
    
    
    
    0.5
    
    
    
    
    
    
    
    1.3
    %Total Electric Retail Sales
    
    
    586.2
    
    
    
    541.9
    
    
    
    44.3
    
    
    
    8.2
    %Electric Wholesale Sales
    
    
    31.1
    
    
    
    76.8
    
    
    
    (45.7
    )
    
    
    (59.6
    %)Total Electric Sales
    
    
    617.3
    
    
    
    618.7
    
    
    
    (1.4
    )
    
    
    (0.2
    %)Electric Retail Revenues (in millions):Retail
Margin Revenues:Residential
    
    $
    7.2
    
    
    $
    7.1
    
    
    $
    0.1
    
    
    
    1.2
    %Commercial
    
    
    6.4
    
    
    
    6.2
    
    
    
    0.2
    
    
    
    2.8
    %Industrial
    
    
    1.7
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    86.1
    %Mining
    
    
    0.8
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    57.5
    %Public Authorities
    
    
    0.0
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    (3.3
    %)Total
    
    
    16.1
    
    
    
    14.8
    
    
    
    1.3
    
    
    
    (3.4
    %)Retail Fuel Revenues Recovered From Customers
    
    
    34.2
    
    
    
    46.8
    
    
    
    (12.6
    )
    
    
    (9.2
    %)DSM and REST Revenues Collected from Customers
    
    
    1.2
    
    
    
    0.5
    
    
    
    0.7
    
    
    NMTotal Retail Revenues
    
    
    51.5
    
    
    
    62.1
    
    
    
    (10.6
    )
    
    
    (17.1
    %)Electric Wholesale Revenues
    
    
    1.1
    
    
    
    5.5
    
    
    
    (4.4
    )
    
    
    (79.5
    %)Total Electric Revenues
    
    $
    52.6
    
    
    $
    67.6
    
    
    $
    (15.0
    )
    
    
    (22.2
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table Factors Affecting Results of Operations, 2008 UNS Electric Rate Order,
  78




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##### Table of Contents



Increase(Decrease)Nine Months Ended September 30,
    
    2009
    
    
    2008
    
    
    Amount
    
    
    Percent*Energy Sales, kWh (in millions)Electric Retail Sales:Residential
    
    
    651.6
    
    
    
    666.8
    
    
    
    (15.2
    )
    
    
    (2.3
    %)Commercial
    
    
    478.6
    
    
    
    485.4
    
    
    
    (6.8
    )
    
    
    (1.4
    %)Industrial
    
    
    144.3
    
    
    
    144.7
    
    
    
    (0.4
    )
    
    
    (0.3
    %)Mining
    
    
    116.6
    
    
    
    17.8
    
    
    
    98.8
    
    
    NMPublic Authorities
    
    
    1.6
    
    
    
    1.7
    
    
    
    (0.1
    )
    
    
    (5.1
    %)Total Electric Retail Sales
    
    
    1,392.7
    
    
    
    1,316.4
    
    
    
    76.3
    
    
    
    5.8
    %Electric Wholesale Sales
    
    
    105.1
    
    
    
    103.8
    
    
    
    1.3
    
    
    
    1.3
    %Total Electric Sales
    
    
    1,497.8
    
    
    
    1,420.2
    
    
    
    77.6
    
    
    
    5.5
    %Electric Retail Revenues (in millions):Retail
Margin Revenues:Residential
    
    $
    16.2
    
    
    $
    18.2
    
    
    $
    (2.0
    )
    
    
    (11.0
    %)Commercial
    
    
    17.1
    
    
    
    16.3
    
    
    
    0.8
    
    
    
    5.6
    %Industrial
    
    
    5.2
    
    
    
    1.7
    
    
    
    3.5
    
    
    NMMining
    
    
    2.0
    
    
    
    1.0
    
    
    
    1.0
    
    
    NMPublic Authorities
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    (4.1
    %)Total
    
    $
    40.7
    
    
    $
    37.4
    
    
    
    3.3
    
    
    
    9.0
    %Retail Fuel Revenues Recovered From Customers
    
    
    98.7
    
    
    
    103.9
    
    
    
    (5.2
    )
    
    
    (5.0
    %)DSM and REST Revenues Collected from Customers
    
    
    2.9
    
    
    
    0.7
    
    
    
    2.2
    
    
    NMTotal Retail Revenues
    
    
    142.3
    
    
    
    142.0
    
    
    
    0.3
    
    
    
    0.2
    %Electric Wholesale Revenues
    
    
    3.5
    
    
    
    8.0
    
    
    
    (4.5
    )
    
    
    (55.9
    %)Total Electric Revenues
    
    $
    145.8
    
    
    $
    150.0
    
    
    $
    (4.2
    )
    
    
    (2.9
    %)
 *
    
    Percent change calculated on un-rounded data; may not correspond to data shown in table Factors Affecting Results of Operations, 2008 UNS
Electric Rate Order,
  
 FACTORS AFFECTING RESULTS OF OPERATIONS
 Rates
 2008 UNS Electric Rate Order
  Purchased Power and Fuel Adjustment Clause
   79




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##### Table of Contents



2009 General Rate Case Filing
  Line Extension Policy
  Fair Value Measurements
 Tucson
Electric Power Factors Affecting Results of Operations
  UNS ElectricSeptember 30, 2009-Millions of Dollars-Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents(1)
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    10Cash Collateral(2)
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Energy Contracts(3)
    
    
    
    
    
    
    (3
    )
    
    $
    (13
    )
    
    
    (16
    )Total
    
    $
    10
    
    
    $
    (2
    )
    
    $
    (13
    )
    
    $
    (5
    )
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
Money Market Funds.(2)
    
    Collateral provided to energy contract counterparties to reduce credit risk exposure.(3)
    
    Energy contracts include gas swap agreements (Level 2), gas collars (Level 3), forward power
purchase and sales contracts (Level 3), and forward power purchase contracts indexed to gas (Level
3), entered into to take advantage of favorable market conditions and reduce exposure to energy
price risk. The amounts include current and non-current liabilities and are net of current and
non-current assets. The level 3 valuation techniques are described below.   80




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Liquidity Outlook
  UniSource Energy Consolidated, Outlook and Strategies, Economic Conditions UniSource
Energy, Liquidity and Capital Resources, Liquidity, Access to Revolving Credit Facilities
 Operating Cash Flow and Capital Expenditures
  Nine Months Ended September 30,
    
    2009
    
    
    2008-Millions of Dollars-Cash provided by (used in):Operating Activities
    
    $
    38
    
    
    $
    7Investing Activities
    
    
    (23
    )
    
    
    (20
    )Financing Activities
    
    
    (8
    )
    
    
    22Net Increase (Decrease) in Cash
    
    
    7
    
    
    
    9Beginning Cash
    
    
    9
    
    
    
    2Ending Cash
    
    $
    16
    
    
    $
    11
  UNS Gas/UNS Electric Revolver
 UNS Gas, Liquidity and Capital Resources, UNS Gas/UNS Electric Revolver
   81




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##### Table of Contents



Senior Unsecured Notes
  Contractual Obligations
  2012Payment Due in Years
    
    
    
    
    
    
    
    
    
    andEnding December 31,
    
    2010
    
    
    2011
    
    
    after
    
    
    Total-Millions of Dollars-Purchase Obligations:Purchased Power
    
    $
    30
    
    
    $
    8
    
    
    $
    
    
    
    $
    38
 Dividends on Common Stock
 Senior Unsecured Notes
 
 OTHER NON-REPORTABLE BUSINESS SEGMENTS
 
 RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008-Millions of Dollars-
    
    
    -Millions of Dollars-UED
    
    $
    1
    
    
    $
    1
    
    
    $
    3
    
    
    $
    1Millennium Investments
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    UniSource Energy Parent Company
    
    
    (1
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    (4
    )Total Other
    
    $
    
    
    
    $
    (1
    )
    
    $
    3
    
    
    $
    (3
    )
 UniSource Energy Parent Company
  UED
  UniSource Energy Consolidated, Liquidity and Capital Resources, Capital
Contributions
   82




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##### Table of Contents



Millennium Investments
  
 FACTORS AFFECTING RESULTS OF OPERATIONS
 Millennium Investments
    September 30, 2009-Millions of Dollars-Quoted Prices inActive Markets
    
    
    Significant Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalCash Equivalents(1)
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    1Equity Investments(2)
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Total Assets
    
    $
    1
    
    
    $
    
    
    
    $
    11
    
    
    $
    12
 (1)
    
    Cash Equivalents are based on observable market prices and are comprised of the fair value of
the Money Market Funds.(2)
    
    Equity Investments are, in the absence of readily ascertainable market values, based on the
investment partners valuations and comprise Millenniums equity investment in unregulated
businesses. These investments are included in Investments and Other Property  Other in the
UniSource Energy balance sheet. 
 CRITICAL ACCOUNTING ESTIMATES
  
    
    Accounting for Rate Regulation;
 
    
    Accounting for Asset Retirement Obligations;
 
    
    Pension and Other Postretirement Benefit Plan Assumptions;
 
    
    Accounting for Derivative Instruments, Trading Activities and Hedging Activities;
 
    
    Unbilled Revenue  TEP, UNS Gas and UNS Electric;
 
    
    Plant Asset Depreciable Lives  TEP, UNS Gas and UNS Electric; and
 
    
    Deferred Tax Valuation.
   83




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##### Table of Contents



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  
    
    In March 2008, the FASB revised the authoritative guidance for derivatives which
requires enhanced disclosures about an entitys derivative and hedging activity.We are
required to disclose our objectives for using derivative instruments and our underlying
risk. We are also required to disclose in the financial statements the location of
derivative balances, and gains and losses incurred during the reporting period. See Note
5.
 
    
    In November 2008, the FASB revised the authoritative guidance for equity method
investments which 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 guidance requires that
impairment testing be performed at an overall investment level. We adopted this standard
on January 1, 2009 and it did not have a material impact on our financial statements.
 
    
    In May 2009, the FASB established general standards of accounting for and disclosure of
subsequent events. These are events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. We adopted this in the
second quarter of 2009 and the relevant disclosure is included in Note 1.
 
    
    In April 2009, the FASB revised the authoritative guidance for fair value measurements
of financial instruments which expands the fair value disclosures required for all
financial instruments not measured at fair value in interim periods. The pronouncement
requires entities to disclose the method and significant assumptions used to estimate the
fair value of financial instruments in the financial statements on an interim and annual
basis. We have adopted the requirements of this pronouncement. See Note 8.
 
    
    In June 2009, the FASB established the Accounting Standards Codification (Codification)
as the source of authoritative accounting principles in the preparation of financial
statements in conformity with GAAP. We adopted this guidance in the third quarter 2009.
  
    
    The FASB issued authoritative guidance for postretirement benefit plans in December
2008, requiring more detailed disclosures about employers plan assets. This includes
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.
 
    
    The FASB issued authoritative guidance for transfers of financial assets in June 2009,
that improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a transfer
of financial assets, including, the effects of a transfer on the reporting entitys
financial position, financial performance, and cash flows; and a transferors continuing
involvement, if any, in transferred financial assets. We are assessing the impact of this
pronouncement, which will be applicable for our first quarter 2010.
 
    
    The FASB issued authoritative guidance for variable interest entities in June 2009,
requiring an analysis to determine whether the enterprises variable interest or interests
give it a controlling financial interest in a variable interest entity. We are assessing
the impact of this pronouncement, which will be applicable to us for
our first quarter 2010.
 
    
    The FASB issued authoritative guidance in October 2009 on how companies should estimate
the fair value of certain alternative investments. The guidance allows companies to
determine the fair value of such investments using Net Asset Value (NAV) as a practical
expedient, unless it is probable the investment will
be sold at something other than NAV. New disclosures are required for each major category
of alternative investments. We are assessing the impact of this pronouncement, which will
be applicable to us in our 2009 Form 10-K.
  84




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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
   
 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
    85




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##### Table of Contents



Commodity Price Risk
 TEP
  Natural Gas
   Nine Months Ended September 30,
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008-MWhs-
    
    
    % of Total ResourcesGas-Fired Generation
    
    
    829,000
    
    
    
    722,000
    
    
    
    8
    %
    
    
    6
    %Purchased Power
    
    
    2,596,000
    
    
    
    2,341,000
    
    
    
    26
    %
    
    
    21
    %
  Nine Months Ended September 30,
    
    2009
    
    
    2008-Millions of Dollars-Gain recorded in Regulatory Assets
    
    $
    14
    
    
    $
    Loss recorded in the Income Statement
    
    
    
    
    
    
    (3
    )
 Purchases and Sales of Energy
   Nine Months Ended September 30,
    
    2009
    
    
    2008-Millions of Dollars-Loss recorded in Regulatory Assets
    
    $
    (3
    )
    
    $
    Loss recorded in the Income Statement
    
    
    
    
    
    
    (2
    )Gain (Loss) recorded in AOCI
    
    
    (1
    )
    
    
    2
  86




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##### Table of Contents



Sensitivity Analysis of Derivatives
  Unrealized Gain (Loss) of TEPsHedging and Trading Activities-Millions of Dollars-TotalMaturity 0  6
    
    
    Maturity 6  12
    
    
    Maturity
    
    
    UnrealizedSource of Fair Value At September 30, 2009
    
    months
    
    
    months
    
    
    over 1 yr.
    
    
    Gain (Loss)Prices actively quoted
    
    $
    (1
    )
    
    $
    (3
    )
    
    $
    
    
    
    $
    (4
    )Prices based on models and other valuation
methods
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Total
    
    $
    (1
    )
    
    $
    (3
    )
    
    $
    (5
    )
    
    $
    (9
    )
  -Millions of Dollars-Change in Market Price As of September 30, 2009
    
    10% Increase
    
    
    10% DecreaseNon-Cash Flow HedgesForward gas contracts
    
    $
    3
    
    
    $
    (3
    )Forward power sales and purchase contracts
    
    
    (1
    )
    
    
    1Cash Flow HedgesForward power purchase contracts
    
    
    1
    
    
    
    (1
    )
 UNS Gas
  UNS Electric
    87




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##### Table of Contents



Credit Risk
    .
  
 ITEM 4.
    
     CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 1.
    
     LEGAL PROCEEDINGS
 Right of Way Matters
  Note 7 of Notes to Consolidated Financial Statements, Commitments and Contingencies and in Item
2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.
  88




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##### Table of Contents



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
  9 Months Ended
    
    
    12 Months EndedSeptember 30, 2009
    
    
    September 30, 2009UniSource Energy
    
    
    2.732
    
    
    
    2.621TEP
    
    
    2.884
    
    
    
    2.747
  Environmental Matters
  
 ITEM 6.
    
     EXHIBITS
   89




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##### Table of Contents



SIGNATURES
  UNISOURCE ENERGY CORPORATION
(Registrant)Date:  October 29, 2009
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial OfficerTUCSON ELECTRIC POWER COMPANY
(Registrant)Date:  October 29, 2009
    /s/ Kevin P. LarsonKevin P. LarsonSenior Vice President and Principal
Financial Officer  90




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##### Table of Contents



EXHIBIT INDEX
 3.1
    
    
    Bylaws of TEP, amended as of August 31, 2009.*4.1
    
    
    Indenture of Trust, dated as of October 1, 2009, between The
Industrial Development Authority of the County of Pima and U.S. Bank
Trust National Association authorizing Pollution Control Revenue
Bonds, 2009 Series A (Tucson Electric Power Company San Juan
Project) (Form 8-K dated October 13, 2009, File No. 1-13739 Exhibit
4(A)).*4.2
    
    
    Loan Agreement, dated as of October 1, 2009, between The Industrial
Development Authority of the County of Pima and TEP relating to
Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric
Power Company San Juan Project) (Form 8-K dated October 13, 2009,
File No. 1-13739 Exhibit 4(B)).*4.3
    
    
    Indenture of Trust, dated as of October 1, 2009, between Coconino
County, Arizona Pollution Control Corporation and U.S. Bank Trust
National Association authorizing Pollution Control Revenue Bonds,
2009 Series A (Tucson Electric Power Company Navajo Project) (Form
8-K dated October 13, 2009, File No. 1-13739 Exhibit 4(C)).*4.4
    
    
    Loan Agreement, dated as of October 1, 2009, between Coconino
County, Arizona Pollution Control Corporation and TEP relating to
Pollution Control Revenue Bonds, 2009 Series A (Tucson Electric
Power Company Navajo Project) (Form 8-K dated October 13, 2009, File
No. 1-13739 Exhibit 4(D)).*10.1
    
    
    Amended and Restated Officer Change in Control Agreement, dated as
of October 9, 2009, between Tucson Electric Power Company and
Michael J. DeConcini (including a schedule of other officers who are
covered by substantially identical agreements) (Form 8-K dated
October 13, 2009, File No. 1-13739 Exhibit 10(A)).*10.2
    
    
    Officer Change in Control Agreement, dated as of October 9, 2009, between UniSource Energy
Corporation and Raymond S. Heyman (Form 8-K dated October 13, 2009, File No. 1-13739 Exhibit
10(B)).12
    (a)
    
    Computation of Ratio of Earnings to Fixed Charges  UniSource Energy.12
    (b)
    
    Computation of Ratio of Earnings to Fixed Charges  TEP.15
    
    
    Letter regarding unaudited interim financial information.31
    (a)
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  UniSource Energy, by Paul
J. Bonavia.31
    (b)
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  UniSource Energy, by Kevin
P. Larson.31
    (c)
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  TEP, by Paul J. Bonavia.31
    (d)
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act  TEP, by Kevin P. Larson.**32
    
    
    Statements of Corporate Officers (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).
 *
    
    Previously filed as indicated and incorporated by reference.**
    
    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.  91