UniSource Energy Reports 2011 Earnings, Increases Quarterly Dividend, and Issues Earnings Guidance for 2012

TUCSON, Ariz.--(BUSINESS WIRE)--UniSource Energy Corporation (NYSE: UNS) today reported 2011 net income of $110 million, or $2.75 per share of common stock on a fully diluted basis, compared with $113 million, or $2.86 per diluted share in 2010.

“Our financial results in 2011 were consistent with our expectations”

“Our financial results in 2011 were consistent with our expectations,” said Paul Bonavia, UniSource Energy’s Chairman and CEO. “Providing safe, reliable service to our customers remains our number one priority, and we took several important steps during the year to strengthen the operational performance and improve the long-term financial position of our utility companies.”

UniSource Energy and its utility subsidiaries completed various financing activities during 2011 that strengthened the companies’ balance sheets, enhanced liquidity, and reduced exposure to variable rate debt. The companies invested in infrastructure improvements that will enhance reliability and increase operational flexibility.

“TEP is in the fourth year of a base-rate freeze,” said Bonavia. “Frozen rates and an economy in the very early stages of recovery will constrain our financial performance in 2012,” Bonavia said. “We will continue to focus on operational efficiencies to maintain tight control of our costs.”

UniSource Energy’s earnings for 2012 are estimated to be in the range of $2.05 to $2.35 per diluted share. The mid-point of the range assumes consolidated base operations and maintenance (O&M) expense of $270 million, which is the same level of base O&M expense recorded in 2011. TEP’s estimated retail kWh sales in 2012, which assume normal weather patterns, are expected to be approximately 0.7 percent below 2011 sales. Cooling degree days during 2011 were 3.7 percent above normal.

Under the terms of TEP’s last settlement agreement, approved by the Arizona Corporation Commission (ACC) in November 2008, the company can file a rate case on or after July 1, 2012. The parties to the 2008 settlement committed to using best efforts to implement new rates within 13 months of the filing date.

“We are focusing our efforts on completing TEP’s rate case application, which we intend to file with the ACC this summer. We look forward to working with the commission, its staff, and our community to reach an outcome that enhances the long-term financial and operating stability of TEP,” Bonavia said.

Common Stock Dividend

UniSource Energy’s board of directors declared a first quarter dividend for common shareholders of 43 cents per share. The dividend will be paid on March 22, 2012 to common shareholders of record as of March 12, 2012. In 2011, the company’s quarterly dividend was 42 cents per share.

The board’s long-term targeted dividend payout ratio range is 60 percent to 70 percent of UniSource Energy’s net income.

The declaration of dividend payments is at the board’s sole discretion and is subject to numerous factors that ordinarily affect dividend policy, including the results of UniSource Energy’s operations and its financial position as well as general economic and business conditions.

Tucson Electric Power

Retail kWh Sales and Revenues

TEP’s retail kilowatt-hour (kWh) sales in 2011 increased 0.4 percent from 2010 levels. Although the weather in TEP’s service area was hotter than normal, there were 1.0 percent fewer cooling degree days than in 2010. Sales volumes to residential customers increased 0.5 percent, while kWh sales to TEP’s commercial and industrial customers increased by 0.5 percent and 0.3 percent, respectively. Sales to TEP’s mining customers increased by 0.3 percent in 2011 compared with 2010. TEP’s retail customer base grew by 0.4 percent, or approximately 1,500 customers, during 2011.

Despite the increase in retail sales volumes, TEP’s retail margin revenues did not change compared with 2010. The sluggish economy led some of TEP’s large industrial customers to alter their energy usage patterns in order to reduce the demand charge on their electric bills. Retail margin revenues do not include customer surcharges used to fund renewable energy and energy efficiency programs or charges to cover fuel and purchased power costs.

Long-Term Wholesale and Transmission Revenues

In 2011, the margin on long-term wholesale sales of electricity was $13 million compared with $28 million in 2010. The decrease reflects a pricing change in TEP’s largest wholesale contract that took effect in June 2011. Wholesale revenues from the sale of transmission services were $16 million in 2011 compared with $21 million in 2010. The decrease is related to the sale of short-term transmission services in 2010 that did not recur in 2011.

Other Operating Expenses

TEP’s 2011 base O&M expense of $237 million increased by $9 million compared with 2010. Base O&M excludes costs directly offset by customer surcharges and third-party reimbursements. The increase reflects the impact of higher planned generation maintenance outage expense.

Depreciation and amortization expense increased by $8 million primarily due to new plant additions.

Other Items

TEP’s 2011 results include a $4 million after-tax gain related to the settlement of a transmission dispute.

Results in 2010 include a $2 million after-tax loss related to the settlement of a dispute over transactions with the California Power Exchange.

UNS Gas

UNS Gas reported net income of $10 million in 2011 compared with $9 million in 2010. The increase resulted from colder winter weather in 2011 as well as the full-year impact of a 2 percent non-fuel base-rate increase that took effect in April 2010.

Hearings before an ACC administrative law judge regarding UNS Gas’ pending rate case concluded in February 2012. UNS Gas supports the ACC staff’s proposal, which includes a base-rate increase of $2.7 million and a fixed-cost recovery rate mechanism designed to mitigate the erosion of revenues resulting from the ACC’s energy efficiency rules. UNS Gas expects the ACC to issue a final ruling on this case in the second quarter of this year.

UNS Electric

UNS Electric reported net income of $18 million in 2011 compared with $16 million in 2010. The increase is due primarily to the full-year impact of a 4 percent non-fuel base-rate increase that took effect October 1, 2010.

UNS Electric’s 2010 results include a $2 million after-tax gain related to a settlement with Arizona Public Service related to transactions with the California Power Exchange.

Millennium

Millennium recorded net income of approximately $2 million due in part to interest on a note receivable. In 2010, Millennium recorded a $13 million net loss related to the write-off of deferred tax assets and impairment losses related to its investments.

Seasonality of Earnings

The net income and results of operations of TEP as well as of UNS Gas and UNS Electric – operating subsidiaries of UniSource Energy Services (UES) – are seasonal in nature. TEP and UNS Electric typically record the majority of their net income during the second and third quarters when hot weather contributes to higher energy consumption. TEP’s retail prices, which include higher rates for higher levels of energy use, also shift a larger share of the company’s earnings into those periods.

Energy demand from UNS Gas customers typically peaks during the winter. Accordingly, UNS Gas records the majority of its net income during the first and fourth quarters.


Net Income and Earnings Per Share Summary
	4th Quarter						Full Year
Net Income	2011			2010			2011			2010
	-Millions-						-Millions-
Tucson Electric Power	$	1.6		$	10.1		$	85.3		$	108.3
UNS Gas		4.3			3.3			10.2			8.6
UNS Electric		3.3			3.4			17.7			15.5
Other Non-Reportable Segments and Adjustments (1)		(1.0	)		(5.5	)		(3.2	)		(19.4	)
Net Income	$	8.2		$	11.3		$	110.0		$	113.0
Avg. Basic Shares Outstanding (millions)		37.1			36.7			37.0			36.4
Avg. Diluted Shares Outstanding (millions)		37.4			41.4			41.6			41.0

	4th Quarter						Full Year
Earnings Per UniSource Energy Share	2011			2010			2011			2010
Tucson Electric Power	$	0.04		$	0.28		$	2.31		$	2.97
UNS Gas		0.12			0.09			0.27			0.24
UNS Electric		0.09			0.09			0.48			0.43
Other Non-Reportable Segments and Adjustments (1)		(0.03	)		(0.15	)		(0.08	)		(0.54	)
Net Income per Basic Share	$	0.22		$	0.31		$	2.98		$	3.10
Net Income per Diluted Share	$	0.22		$	0.30		$	2.75		$	2.86

(1) Includes: UniSource Energy on a stand-alone basis; consolidating adjustments; and results from Millennium and UniSource Energy Development.

UniSource Energy believes the presentation of TEP, UNS Gas, UNS Electric, and Millennium net income or loss on a per basic UniSource Energy share basis (which are non-GAAP financial measures) provides useful information to investors by disclosing the results of operations of its business segments on a basis consistent with UniSource Energy's reported earnings or losses.

Conference Call and Webcast

The company will host a conference call on Monday, February 27 at 11 a.m. EST to discuss the financial results and outlook. To participate in the call, please dial in 5 to 10 minutes prior to the start time.

Dial-in number: (877) 582-0446
Reference code: 55207232

The conference call can be heard live on UniSource Energy’s website. The webcast can be accessed at uns.com and will be available for replay for seven days.

Replay number: (800) 642-1687
Reference code: 55207232

In conjunction with this earnings announcement, UniSource Energy has provided detailed information on its performance during 2011 and outlook for 2012. These materials have been filed with the Securities and Exchange Commission and are also available at uns.com.

UniSource Energy is a Tucson, Arizona-based company with consolidated assets of approximately $4.0 billion. UniSource Energy's primary subsidiaries include Tucson Electric Power, which serves more than 404,000 customers in southern Arizona; and UniSource Energy Services, provider of natural gas and electric service for about 239,000 customers in northern and southern Arizona. For more information about UniSource Energy and its subsidiaries, visit uns.com.

This release contains forward-looking information that involves risks and uncertainties, including factors that could affect UniSource Energy's ability to reach 2012 earnings guidance. These factors include: state and federal regulatory and legislative decisions and actions, including environmental legislation and renewable energy requirements; regional economic and market conditions that could affect customer growth and energy usage; weather variations affecting energy usage; the cost of debt and equity capital and access to capital markets; the performance of the stock market and changing interest rate environment, which affect the value of the company's pension and other postretirement benefit plan assets and the related contribution requirements and expense; unexpected increases in O&M expense; resolution of pending litigation matters; changes in accounting standards; changes in critical accounting estimates; changes to long-term contracts; the cost of fuel and energy supplies; performance of TEP's generating plants; and other factors listed in UniSource Energy's Form 10-K and 10-Q filings with the Securities and Exchange Commission. The preceding factors may cause future results to differ materially from outcomes currently expected by UniSource Energy.


UNISOURCE ENERGY 2011 RESULTS

UniSource Energy Corporation
Consolidated Statements of Income	Years Ended
(in thousands of dollars, except per share amounts)	December 31,						Increase / (Decrease)
(UNAUDITED)	2011			2010			Amount			Percent

Operating Revenues
Electric Retail Sales	$	1,085,822		$	1,051,002		$	34,820		3.3
Electric Wholesale Sales		163,159			151,962			11,197		7.4
California Power Exchange (CPX) Provision for Wholesale Refunds		-			(2,970	)		2,970		N/M
Gas Revenue		145,053			141,036			4,017		2.8
Other Revenues		115,481			112,936			2,545		2.3
Total Operating Revenues		1,509,515			1,453,966			55,549		3.8

Operating Expenses
Fuel		324,520			295,652			28,868		9.8
Purchased Energy		307,423			307,288			135		0.0
Transmission		7,334			10,945			(3,611	)	(33.0	)
Decrease to Reflect PPFAC/PGA Recovery Treatment		(4,932	)		(29,622	)		24,690		83.4
Total Fuel and Purchased Energy		634,345			584,263			50,082		8.6
Other Operations and Maintenance		379,220			370,037			9,183		2.5
Depreciation		133,832			128,215			5,617		4.4
Amortization		30,983			28,094			2,889		10.3
Taxes Other Than Income Taxes		49,463			46,243			3,220		7.0
Total Operating Expenses		1,227,843			1,156,852			70,991		6.1
Operating Income		281,672			297,114			(15,442	)	(5.2	)

Other Income (Deductions)
Interest Income		4,568			7,779			(3,211	)	(41.3	)
Other Income		8,293			11,038			(2,745	)	(24.9	)
Other Expense		(5,249	)		(15,202	)		9,953		65.5
Total Other Income (Deductions)		7,612			3,615			3,997		N/M

Interest Expense
Long-Term Debt		73,217			65,020			8,197		12.6
Capital Leases		40,359			46,740			(6,381	)	(13.7	)
Other Interest Expense		2,535			1,651			884		53.5
Interest Capitalized		(3,753	)		(2,587	)		(1,166	)	(45.1	)
Total Interest Expense		112,358			110,824			1,534		1.4

Income Before Income Taxes		176,926			189,905			(12,979	)	(6.8	)
Income Tax Expense		66,951			76,921			(9,970	)	(13.0	)

Net Income	$	109,975		$	112,984		$	(3,009	)	(2.7	)

Weighted-Average Shares of Common Stock Outstanding (000)

Basic		36,962			36,415			547		1.5

Diluted		41,609			41,041			568		1.4

Earnings per Share

Basic	$	2.98		$	3.10		$	(0.12	)	(3.9	)

Diluted	$	2.75		$	2.86		$	(0.11	)	(3.8	)

Dividends Declared per Share	$	1.68		$	1.56		$	0.12		7.7

N/M - Not Meaningful
Reclassifications have been made to prior periods to conform to the current period's presentation.


UNISOURCE ENERGY 2011 RESULTS

UniSource Energy Corporation
Consolidated Statements of Income	Three Months Ended
(in thousands of dollars, except per share amounts)	December 31,						Increase / (Decrease)
(UNAUDITED)	2011			2010			Amount			Percent

Operating Revenues
Electric Retail Sales	$	229,606		$	226,288		$	3,318		1.5
Electric Wholesale Sales		41,653			49,565			(7,912	)	(16.0	)
Gas Revenue		46,012			44,438			1,574		3.5
Other Revenues		26,857			36,882			(10,025	)	(27.2	)
Total Operating Revenues		344,128			357,173			(13,045	)	(3.7	)

Operating Expenses
Fuel		72,417			76,460			(4,043	)	(5.3	)
Purchased Energy		74,079			64,003			10,076		15.7
Transmission		2,722			2,257			465		20.6
Increase to Reflect PPFAC/PGA Recovery Treatment		242			4,638			(4,396	)	(94.8	)
Total Fuel and Purchased Energy		149,460			147,358			2,102		1.4
Other Operations and Maintenance		97,332			111,058			(13,726	)	(12.4	)
Depreciation		34,179			32,442			1,737		5.4
Amortization		8,470			7,297			1,173		16.1
Taxes Other Than Income Taxes		12,884			10,684			2,200		20.6
Total Operating Expenses		302,325			308,839			(6,514	)	(2.1	)
Operating Income		41,803			48,334			(6,531	)	(13.5	)

Other Income (Deductions)
Interest Income		829			1,888			(1,059	)	(56.1	)
Other Income		1,138			1,704			(566	)	(33.2	)
Other Expense		(2,420	)		(5,842	)		3,422		58.6
Total Other Income (Deductions)		(453	)		(2,250	)		1,797		79.9

Interest Expense
Long-Term Debt		18,977			18,036			941		5.2
Capital Leases		10,251			11,616			(1,365	)	(11.8	)
Other Interest Expense		607			1,281			(674	)	(52.6	)
Interest Capitalized		(707	)		(1,004	)		297		29.6
Total Interest Expense		29,128			29,929			(801	)	(2.7	)

Income Before Income Taxes		12,222			16,155			(3,933	)	(24.3	)
Income Tax Expense		4,035			4,903			(868	)	(17.7	)

Net Income	$	8,187		$	11,252		$	(3,065	)	(27.2	)

Weighted-Average Shares of Common Stock Outstanding (000)

Basic		37,055			36,696			359		1.0

Diluted		37,381			41,396			(4,015	)	(9.7	)

Earnings per Share

Basic	$	0.22		$	0.31		$	(0.09	)	(29.0	)

Diluted	$	0.22		$	0.30		$	(0.08	)	(26.7	)

Dividends Declared per Share	$	0.42		$	0.39		$	0.03		7.7

N/M - Not Meaningful
Reclassifications have been made to prior periods to conform to the current period's presentation.


TUCSON ELECTRIC POWER COMPANY 2011 RESULTS

TUCSON ELECTRIC POWER COMPANY
Consolidated Statements of Income	Years Ended
(in thousands of dollars)	December 31,						Increase / (Decrease)
(UNAUDITED)	2011			2010			Amount			Percent

Operating Revenues
Electric Retail Sales	$	903,930		$	868,188		$	35,742		4.1
Electric Wholesale Sales		129,861			141,103			(11,242	)	(8.0	)
California Power Exchange (CPX) Provision for Wholesale Refunds		-			(2,970	)		2,970		N/M
Other Revenues		122,595			118,946			3,649		3.1
Total Operating Revenues		1,156,386			1,125,267			31,119		2.8

Operating Expenses
Fuel		318,268			284,744			33,524		11.8
Purchased Power		105,766			118,716			(12,950	)	(10.9	)
Transmission		(1,435	)		3,254			(4,689	)	N/M
Decrease to Reflect PPFAC Recovery Treatment		(6,165	)		(21,541	)		15,376		71.4
Total Fuel and Purchased Energy		416,434			385,173			31,261		8.1
Other Operations and Maintenance		330,801			316,625			14,176		4.5
Depreciation		104,894			99,510			5,384		5.4
Amortization		34,650			32,196			2,454		7.6
Taxes Other Than Income Taxes		40,226			37,732			2,494		6.6
Total Operating Expenses		927,005			871,236			55,769		6.4
Operating Income		229,381			254,031			(24,650	)	(9.7	)

Other Income (Deductions)
Interest Income		3,567			6,707			(3,140	)	(46.8	)
Other Income		5,693			6,629			(936	)	(14.1	)
Other Expense		(12,037	)		(11,506	)		(531	)	(4.6	)
Total Other Income (Deductions)		(2,777	)		1,830			(4,607	)	N/M

Interest Expense
Long-Term Debt		49,858			42,378			7,480		17.7
Capital Leases		40,358			46,734			(6,376	)	(13.6	)
Other Interest Expense		1,127			433			694		N/M
Interest Capitalized		(2,073	)		(1,880	)		(193	)	(10.3	)
Total Interest Expense		89,270			87,665			1,605		1.8

Income Before Income Taxes		137,334			168,196			(30,862	)	(18.3	)
Income Tax Expense		52,000			59,936			(7,936	)	(13.2	)

Net Income	$	85,334		$	108,260		$	(22,926	)	(21.2	)


Electric MWh Sales:
Retail Sales		9,332,107			9,291,788			40,319		0.4
Long-Term Wholesale Sales		902,139			987,957			(85,818	)	(8.7	)

N/M - Not Meaningful
Reclassifications have been made to prior periods to conform to the current period's presentation.


TUCSON ELECTRIC POWER COMPANY 2011 RESULTS

TUCSON ELECTRIC POWER COMPANY
Consolidated Statements of Income	Three Months Ended
(in thousands of dollars)	December 31,						Increase / (Decrease)
(UNAUDITED)	2011			2010			Amount			Percent

Operating Revenues
Electric Retail Sales	$	189,652		$	182,866		$	6,786		3.7
Electric Wholesale Sales		33,238			44,106			(10,868	)	(24.6	)
Other Revenues		28,829			37,880			(9,051	)	(23.9	)
Total Operating Revenues		251,719			264,852			(13,133	)	(5.0	)

Operating Expenses
Fuel		71,705			74,901			(3,196	)	(4.3	)
Purchased Power		21,577			12,816			8,761		68.4
Transmission		904			436			468		N/M
Increase (Decrease) to Reflect PPFAC Recovery Treatment		(1,019	)		1,482			(2,501	)	N/M
Total Fuel and Purchased Energy		93,167			89,635			3,532		3.9
Other Operations and Maintenance		84,378			96,961			(12,583	)	(13.0	)
Depreciation		26,770			25,367			1,403		5.5
Amortization		9,368			8,233			1,135		13.8
Taxes Other Than Income Taxes		10,423			8,829			1,594		18.1
Total Operating Expenses		224,106			229,025			(4,919	)	(2.1	)
Operating Income		27,613			35,827			(8,214	)	(22.9	)

Other Income (Deductions)
Interest Income		584			1,596			(1,012	)	(63.4	)
Other Income		1,096			2,278			(1,182	)	(51.9	)
Other Expense		(4,285	)		(4,154	)		(131	)	(3.2	)
Total Other Income (Deductions)		(2,605	)		(280	)		(2,325	)	N/M

Interest Expense
Long-Term Debt		13,365			12,123			1,242		10.2
Capital Leases		10,251			11,616			(1,365	)	(11.8	)
Other Interest Expense		381			867			(486	)	(56.1	)
Interest Capitalized		(446	)		(673	)		227		33.7
Total Interest Expense		23,551			23,933			(382	)	(1.6	)

Income Before Income Taxes		1,457			11,614			(10,157	)	(87.5	)
Income Tax Expense (Benefit)		(104	)		1,489			(1,593	)	N/M

Net Income	$	1,561		$	10,125		$	(8,564	)	(84.6	)


Electric MWh Sales:
Retail Sales		2,060,016			2,042,740			17,276		0.8
Long-Term Wholesale Sales		233,144			260,487			(27,343	)	(10.5	)

N/M - Not Meaningful
Reclassifications have been made to prior periods to conform to the current period's presentation.