5.02


     

    Exhibit
      10.1

     

    Employment
      Agreement

    


    This
      EMPLOYMENT AGREEMENT (the “Agreement”),
      is
      entered into as of the 22nd
      day of
      December, 2006 (the “Effective
      Date”),
      by
      and between Tucson Electric Power
      Company (the “Company”),
      an
      Arizona corporation, and Dennis R. Nelson (the “Employee”).
      Company and Employee may be referred to collectively hereinafter as the
“Parties”
and
      singly as a “Party”.

    


    RECITALS

    WHEREAS,
      the Board of Directors of the Company has determined that it would be in the
      best interests of the Company, its shareholders and the Employee to enter into
      an employment agreement to retain the services of the Employee; and

    


    WHEREAS,
      the Employee agrees to the terms of the employment agreement offered by the
      Company as set forth herein. 

    


    NOW,
      THEREFORE, in consideration of the Employee’s continued service to the Company
      and the mutual agreements herein contained, and for other good and valuable
      consideration, the receipt of which are hereby acknowledged, the Company and
      the
      Employee hereby agree as follows:

    


    AGREEMENT
      

    


    ARTICLE
      1

    Term
      and Termination

    


    1.1 
       Employment
      Period.
      The
      Employee shall be employed by the Company for a term commencing as of the
      Effective Date and ending on June 1, 2007, unless sooner terminated in
      accordance with the provisions of this Agreement (the “Term”). 

     

    1.2   
      Qualifying
      Termination.
      The term
“Qualifying
      Termination”
shall
      mean the occurrence of:

     

    (a)
      the
      Company or its successor terminates the Employee’s employment, other than for
      the reasons delineated in Sections 1.6(a)(i) or 1.6(a)(ii) hereto, during the
      Term; or

     

    (b) During
      the Term, the Employee terminates employment with the Company or its successor
      for any of the reasons delineated in Sections 1.6(b)(i), 1.6(b)(ii),
      1.6(b)(iii), or 1.6(b)(iv) hereto.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1.3   
      Compensation.

     

    (a)    For
      all
      services rendered by the Employee in any capacity during the Term, including
      services as an executive, officer, director, or member of any committee of
      the
      Company or any subsidiary or affiliate thereof, the Company shall pay the
      Employee a fixed salary at a rate of not less than Employee’s salary in effect
      as of the Effective Date, subject to such periodic increases as the Board of
      Directors, or a committee designated by said Board, shall deem appropriate
      in
      accordance with the Company’s customary procedures and practices regarding the
      salaries of senior management employees. Such salary shall be payable in
      accordance with the customary payroll practices of the Company. Such periodic
      increases in salary, once granted, shall not be subject to
      revocation.

     

    (b)    Nothing
      in this Agreement shall preclude or affect any rights or benefits that may
      now
      or hereafter be provided for the Employee or for which the Employee may be
      or
      become eligible under any bonus or other form of compensation or employee
      benefit plan now existing or that may hereafter be adopted or awarded by the
      Company. Specifically, the Employee shall:

     

    
      	 	
              (i)

            	
              participate
                in the Company’s Retirement Plan and any related excess benefit or
                supplemental retirement program (hereinafter referred to collectively
                as
                the “Retirement Program”);

            


    

     

    
      	 	
              (ii)

            	
              participate
                in the Company’s Deferred Compensation
                Plan;

            


    

     

    
      	 	
              (iii)

            	
              participate
                in the Company’s 401k Plan;

            


    

     

    
      	 	
              (iv)

            	
              participate
                in any stock option, stock appreciation right, equity incentive or
                deferred compensation plan maintained by the
                Company;

            


    

     

    
      	 	
              (v)

            	
              participate
                in the Company’s death benefit
                plans;

            


    

     

    
      	 	
              (vi)

            	
              participate
                in the Company’s disability benefit
                plans;

            


    

     

    
      	 	
              (vii)

            	
              participate
                in the Company’s medical, dental and health and welfare
                plans;

            


    

     

    
      	 	
              (viii)

            	
              participate
                in the Company’s annual incentive plan;
                and

            


    

     

    
      
        
        

      

      
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              (ix)

            	
              participate
                in equivalent successor plans thereto for which senior management
                employees are eligible; provided, however, that nothing in this Agreement
                shall preclude the Company from amending or terminating any such
                plan or
                program, on the condition that such amendment or termination is applicable
                to all of the Company’s senior management employees
                generally.

            


    

     

    1.4  
      Business
      Expenses.
      The
      Company shall pay or reimburse the Employee for all
      reasonable travel or other expenses incurred in connection with the performance
      of the Employee’s duties under this Agreement in accordance with such procedures
      as the Company may from time to time establish.

     

    1.5  
      Additional
      Benefits.
      Nothing
      in this Agreement shall affect the Employee’s eligibility to participate in all
      group health, dental, hospitalization, life, travel or accident or other
      insurance plans or programs and all other perquisites, fringe benefit or
      retirement plans or additional compensation, including termination pay programs,
      which the Company may hereafter, in its sole and absolute discretion, elect
      to
      make available to its senior management employees generally, and the Employee
      shall be eligible to receive, during his employment, all benefits and emoluments
      for which key employees are eligible under every such plan, program, perquisite
      or arrange-ment to the extent permissible under the general terms and provisions
      thereof.

     

    1.6 
      Termination
      of Employment.
      Notwithstanding any other provision of this Agreement, the Employee’s employment
      with the Company may be terminated:

     

    (a) 
       by
      the
      Company:

     

    
      	 	
              (i)
                

            	
              in
                the event of the Employee’s fraud or dishonesty which has resulted or is
                likely to result in material economic damage to the Company or any
                of its
                subsidiaries, as determined by a vote of two-thirds (2/3) of the
                Directors
                of the Company at a meeting of the Board of Directors at which the
                Employee had an opportunity to be heard and such termination is based
                on
                facts and circumstances known by a majority of the non-employee Directors
                for a period of

            


    

     

    
      
        
        

      

      
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              no
                more than twelve (12) months by written notice to the Employee, specifying
                the event relied upon for such termination;
                or

            


    

     

    
      	 	
              (ii)

            	
              upon
                the Disability or death of the Employee. For purposes of this Agreement,
                the term “Disability” is defined as the inability of the Employee to
                engage in his regular occupation for twelve (12) consecutive months
                and
                the inability thereafter to engage in any occupation in which the
                Employee
                could reasonably expect to engage giving due consideration to the
                Employee’s education, training and experience. The Employee must be under
                the regular medical care of a physician in connection with treatment
                for
                such Disability.

            


    

     

    (b) by
      the
      Employee:

     

    
      	 	
              (i)

            	
              if,
                during the Term, there has been any material change by the Company
                of the
                Employee’s status, title, authority, duties or responsibilities which
                change would cause the Employee’s position with the Company to become of
                less responsibility or scope from that which the Employee held immediately
                prior to such change;

            


    

     

    
      	 	
              (ii)
                

            	
              upon
                the assignment or reassignment by the Company or by one of its
                subsidiaries of the Employee to another place of employment more
                than
                fifty (50) miles from the Employee’s current place of
                employment;

            


    

     

    
      	 	
              (iii)

            	
              upon
                the liquidation, dissolution, consolidation or merger of the Company,
                or
                transfer of all or substantially all of its assets, other than a
                transaction in which a successor corporation with a net worth at
                least
                equal to that of the Company assumes this Agreement and all obligations
                and undertakings of the Company hereunder;
                or

            


    

     

    (iv)        
      upon
      a
      reduction in the Employee’s target compensation or any component thereof during
      the Term, except as part of a salary reduction program affecting the Company’s
      management

     

    
      
        
        

      

      
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              employees
                generally, or other material breach of this Agreement by the Company
                or
                any of its subsidiaries, by written notice to the Company, specifying
                the
                event or events relied upon for such termination. For the purpose
                of this
                Agreement, “target
                compensation”
                shall include the Employee’s base salary plus the opportunity to
                participate in the Company’s annual incentive plan and the Company’s 1994
                Omnibus Stock and Incentive Plan or any successor plans thereto (the
                “Plan”),
                at the same level and terms available to the Employee as of the Effective
                Date; or 

            


    

     

    (c)
      by
      either the Company or the Employee, if the Employee accepts employment or a
      consulting position with another company.

     

    ARTICLE
      II

    Compensation
      Upon Termination

    


    2.1  
      Basic
      Severance Payment.
      In the
      event of a Qualifying Termination, the Company shall, as liquidated damages
      or
      severance pay, or both, pay to the Employee and provide the Employee and the
      dependents, beneficiaries and estate of the Employee within thirty (30) business
      days after such Qualifying Termination of employment with the a lump sum cash
      amount equal to: 

     

    
      	 	
              (a)

            	
              three
                hundred thousand dollars ($300,000), less any amount paid under Section
                2.1(b) below; and 

            


    

     

    
      	 	
              (b)

            	
              any
                annual target bonus owing but unpaid for 2006;
                and

            


    

     

    (c)         
       a
      prorated annual target bonus for the short year in which the Qualifying
      Termination occurs.  

     

    2.2
       Retiree
      Medical Plan.
      The
      Parties agree that the regardless of the actual date of Employee’s termination,
      Employee shall be entitled to participate in the Company retiree medical plan
      as
      in effect on the Effective Date.

     

    2.3  
      Service
      and Benefit Credit.
      The
      Parties agree that if the Employee is terminated before June 1, 2007, the
      Employee shall receive service credit for eligibility and benefit purposes,
      including with respect to the Retirement Program, for the period between the
      actual date of 

     

    
      
        
        

      

      
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    termination
      and June 1, 2007, as if the Employee had continued to be employed up to June
      1,
      2007. 

     

    2.4
       Tax
      Withholding.
      The
      Company may withhold from any payment made under this Agreement, all federal,
      state or other tax as required by law, government regulation or
      ruling.

     

    2.5   Source
      of Payments.
      All
      payments provided for in paragraphs 1.3 and 2.1 above shall be paid in cash
      from
      the general funds of the Company. The Company shall not be required to establish
      a special or separate fund or other segregation
      of assets to assure such payments.

     

    ARTICLE
      III

    Miscellaneous

    


    3.1  
      Litigation
      Expenses.
      In the
      event of any litigation or other proceeding between the Company and the Employee
      with respect to the subject matter of this Agreement and the enforcement of
      rights hereunder, the Company shall advance the Employee all reasonable costs
      and expenses relating to such litigation or other proceeding as they are
      incurred, including reasonable attorneys’ fees and expenses, however, if such
      litigation results in any settlement or judgment or order in favor of the
      Employer, Employee shall reimburse Employer for all such monies
      advanced.

     

    Notwithstanding
      the preceding sentence or any provision of Arizona law to the contrary, in
      no
      event shall the Employee be
      required to reimburse the Company for any of the costs and expenses incurred
      by
      the Company on its own behalf relating to such litigation or other proceeding.
      The obligation of the Company under this paragraph 3.1 shall survive the
      termination of this Agreement (whether such termination is by the Company,
      by
      the Employee, upon the expiration of this Agreement or otherwise).

     

    3.2  
      Arbitration.
      Any
      controversy or claim arising out of or relating to this Agreement or the breach
      thereof, shall be settled by arbitration. The Party desiring arbitration shall
      deliver written notice of demand for arbitration to the other Party within
      a
      reasonable time after the controversy or claim arises, but in no event after
      the
      date when institution of legal or equitable proceedings based on such
      controversy or claim would be barred by the applicable statute of limitations.
      

     

    The
      arbitration shall be heard before a single neutral arbitrator appointed by
      mutual agreement of the Parties. If the Parties fail to agree upon a single
      arbitrator within ten (10) days

     

    
      
        
        

      

      
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     of
      the referral of the dispute to arbitration, each Party shall choose one
      arbitrator who shall sit on a three-member arbitration panel. The two
      arbitrators so chosen shall within ten (10) days select a third arbitrator.
      In
      either case, the arbitrator(s) shall be knowledgeable in executive and employee
      compensation matters, and shall not have any current or past substantial
      business or financial relationships with any Party to the arbitration. The
      arbitration shall be conducted under the rules of the American Arbitration
      Association, except as modified herein, and shall take place in Tucson, Arizona.
      No discovery shall be permitted. The arbitrator shall issue a scheduling order
      that shall not be modified except by the mutual agreement of the Parties.


     

    The
      award
      of the arbitrator(s) shall be final and binding and shall be enforceable in
      any
      court of competent jurisdiction. 

     

    3.3  
      Entire
      Understanding.
      This
      Agreement contains the entire understanding between the Company and the Employee
      with respect to the subject matter hereof and supersedes any prior employment
      agreement and amendment thereto between the Company and the Employee, including,
      without limitation, any change in control agreement, except that this Agreement
      shall not affect or operate to reduce any benefit or compensation inuring to
      the
      Employee of a kind elsewhere provided and not expressly provided in this
      Agreement.

     

    3.4  
      Severability.
      If, for
      any reason, any one or more of the provisions or part of a provision contained
      in this Agreement shall be held to be invalid, illegal or unenforceable in
      any
      respect, such invalidity, illegality or unenforceability shall not affect any
      other provision or part of a provision of this Agreement not held so invalid,
      illegal or unenforceable, and each other provision or part of a provision shall,
      to the full extent consistent with law, continue in full force and effect.
      If
      this Agreement is held invalid or cannot be enforced, then to the full extent
      permitted by law, any prior agreement between the Company and the Employee
      shall
      be deemed reinstated as if this Agreement had not been executed.

     

    3.5  
      Consolidation,
      Merger, or Sale of Assets.
      Nothing
      in this Agreement shall preclude the Company from consolidating or merging
      into
      or with or transferring all or substantially all of its assets to another
      corporation with a net worth at least equal to that of the Company and which
      assumes this Agreement and all obligations and undertakings of the Company
      hereunder. Upon such a consolidation, merger or transfer of assets and
      assumption,

     

    
      
        
        

      

      
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    the
      term,
“the Company”, as used herein shall mean such other corporation and this
      Agreement shall continue in full force and effect.

     

    3.6  
      Notices.
      All
      notices, requests, demands and other communications required or permitted
      hereunder shall be given in writing and shall be deemed to have been duly given
      if delivered or mailed, postage prepaid, first class as follows:

     

    


    To
      the
      Company:                
Tucson
      Electric Power Company

                                                   
      P.O. Box
      711

                                                   
      Tucson,
      AZ 85702

                                                   
      Attention:
      Corporate Secretary

    


    To
      the
      Employee:                
Dennis
      R.
      Nelson 

    2901
      W.
      Shamrell Blvd. , Suite 110

    Flagstaff,
      Arizona 86001

    


    with
      an
      additional copy to:

    


    Dennis
      R.
      Nelson

    366
      N.
      Lakeview Drive

    Williams,
      Arizona 86046

    


    or
      to
      such other address as either Party shall have previously specified in writing
      to
      the other.

     

    3.7 
       No
      Attachment.
      Except
      as required by law, no right to receive payments under this Agreement shall
      be
      subject to anticipation, commutation, alienation, sale, assignment, encumbrance,
      charge, pledge, or hypothecation or to execution, attachment, levy, or similar
      process or assignment by operation of law, or any attempt, voluntary or
      involuntary, to effect any such action shall be null, void and of no
      effect.

     

    3.8 
       Binding
      Agreement.
      This
      Agreement shall be binding upon, and shall inure to the benefit of, the Employee
      and the Company and their respective permitted successors and
      assigns.

     

    3.9 
       Modification
      and Waiver.
      This
      Agreement may not be modified or amended except by an instrument in writing
      signed by the Parties. No term or condition of this Agreement shall be deemed
      to
      have been waived, nor shall there be any estoppel against the enforcement of
      any
      provision of this Agreement except by written instrument signed by the Party
      charged with such waiver or estoppel. No such written waiver shall be deemed
      a
      continuing waiver unless specifically stated therein, and each such waiver
      shall
      operate only as to the specific term or

     

    
      
        
        

      

      
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    condition
      waived and shall not constitute a waiver of such term or condition for the
      future or as to any act other than that specifically waived.

     

    3.10 Headings.
      The
      headings contained in this Agreement are included solely for convenience and
      shall not in any way affect the meaning or interpretation of any of the
      provisions of this Agreement.

     

    3.11 Governing
      Law.
      This
      Agreement and its validity, interpretation, performance, and enforcement shall
      be governed by the laws of the State of Arizona, without regard to the choice
      of
      law provisions thereof.

     

    IN
      WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
      officers thereunto duly authorized, and the Employee has signed this Agreement,
      all as of the date first above written.

    


    TUCSON
      ELECTRIC POWER COMPANY

     

     

    _________________________________

     

    _________________________________

    Title

    


    EMPLOYEE

    


    _____________________________
Dennis
      R.
      Nelson

     

    
      
        
        

      

      
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