SHARE-BASED COMPENSATION PLANS

Under the UNS Energy 2011 Omnibus Stock and Incentive Plan (2011 Plan), the Compensation Committee of the UNS Energy Board of Directors (Compensation Committee) may issue various types of share-based compensation, including stock options, restricted stock units, and performance shares. The total number of shares which may be awarded under the 2011 Plan cannot exceed 1.2 million shares.

STOCK OPTIONS

Stock options are granted with an exercise price equal to the fair market value of the stock on the date of grant, vest over three years, become exercisable in one-third increments on each anniversary date of the grant, and expire on the tenth anniversary of the grant. We recognize compensation expense on a straight-line basis over the service period for the total award based on the grant date fair value of the options less estimated forfeitures. For awards granted to retirement-eligible officers, we recognize compensation expense immediately. No stock options were granted by the Compensation Committee in 2013, 2012, or 2011.

See summary of stock option activity in the table below:



	2013				2012				2011
Stock Options	Shares (000s)		Weighted Average Exercise Price		Shares (000s)		Weighted Average Exercise Price		Shares (000s)		Weighted Average Exercise Price
Outstanding, Beginning of Year	409		$	29.09	581		$	29.11	921		$	27.96
Exercised	(127	)	30.12		(132	)	26.54		(319	)	25.60
Forfeited/Expired	—		—		(40	)	37.88		(21	)	31.92
Outstanding, End of Year	282		28.63		409		29.09		581		29.11
Exercisable, End of Year	282		$	28.63	409		$	29.09	508		$	29.53
Aggregate Intrinsic Value of Options Exercised ($000s)			$	2,897			$	1,878			$	3,690

See summary of stock options in the tables below:



	December 31, 2013
Aggregate Intrinsic Value for Options Outstanding ($000s)	$	8,795
Aggregate Intrinsic Value for Options Exercisable ($000s)	$	8,795
Weighted Average Remaining Contractual Term of Outstanding Options	4.1 years
Weighted Average Remaining Contractual Term of Exercisable Options	4.1 years



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares (000s)	Weighted Average Remaining Contractual Term	Weighted Average Exercise Price		Number of Shares (000s)	Weighted Average Exercise Price
$26.11—$37.88	282	4.1 years	$	28.63	282	$	28.63

RESTRICTED STOCK UNITS AND PERFORMANCE SHARES

Restricted Stock Units

In 2013, 2012, and 2011, the Compensation Committee granted restricted stock units to non-employee directors. We recognize compensation expense equal to the fair valuin the tablee on the grant date over the one-year vesting period. The grant date fair value was calculated by reducing the grant date share price by the present value of the dividends expected to be paid on the shares during the vesting period. Fully vested but undistributed non-employee director stock unit awards accrue dividend equivalent stock units based on the fair market value of common shares on the date the dividend is paid. We issue Common Stock for the vested stock units in the January following the year the person is no longer a director.

In 2013, the Compensation Committee granted restricted stock units to certain management employees. The restricted stock units vest on the third anniversary of grant and are distributed in shares of Common Stock upon vesting. We recognize compensation expense equal to the fair value on the grant date over the vesting period. The grant date fair value was the closing Common Stock market price on the date of grant. These restricted stock units accrue dividend equivalents during the vesting period, which are distributed in shares of Common Stock upon vesting.

See summary of restricted stock units awarded in the table below:



	Non-Employee Directors			Management Employees
Award Year	Restricted Stock Units	Grant Date Fair Value		Restricted Stock Units	Grant Date Fair Value
2013	8,870	$	48.99	21,560	$	46.23
2012	15,303	35.94		—	—
2011	14,655	37.53		—	—

Performance Shares

In 2013, 2012, and 2011, the Compensation Committee granted performance share awards to certain management employees. Half of the performance share awards will be paid out in Common Stock based on UNS Energy’s compound annualized Total Shareholder Return (TSR) relative to the companies included in the Edison Electric Institute Utility Index for the three-year performance period. The grant date fair values of these awards were derived based on a Monte Carlo simulation. We recognize compensation expense equal to the fair value on the grant date over the vesting period if the requisite service period is fulfilled, whether or not the threshold is achieved. The remaining half will be paid out in Common Stock based on cumulative net income (CNI) for the three-year performance period. The grant date fair values of these awards were the closing Common Stock market prices on the dates of grant. We recognize compensation expense equal to the fair value on the grant date over the requisite service period only for the awards that ultimately vest.

The performance shares vest based on the achievement of these goals by the end of the three-year performance period; any unearned awards are forfeited. Performance shares accrue dividend equivalents during the performance period, which are paid upon vesting.

See summary of performance shares awarded in the table below:



		Grant Date Fair Value
Award Year	Performance Shares	TSR-Based Award		CNI-Based Award
2013	43,120	$	45.54	$	46.23
2012	80,140	32.71		36.40
2011	80,440	33.73		36.58

At December 31, 2013, upon completion of the three-year performance period, 68,158 shares were earned and vested based on goal attainment at 150% of target for the awards based on TSR and 57.8% of target for the awards based on CNI; 28,682 shares were unearned and forfeited. The vested performance shares also earned 8,521 in dividend equivalent shares.

See summary of restricted stock units and performance shares current year activity in the table below:



	Restricted Stock Units				Performance Shares
	Shares (000s)		Weighted Average Grant Date Fair Value		Shares (000s)		Weighted Average Grant Date Fair Value
Non-vested, Beginning of Year	15		$	35.94	145		$	34.83
Granted	31		47.04		52		44.94
Vested	(16	)	36.27		(52	)	35.35
Forfeited	(2	)	46.23		(32	)	37.57
Non-vested, End of Year	28		47.12		113		38.45

The total fair value of restricted stock units and performance shares vested were as follows:



	Restricted Stock Units						Performance Shares
	2013		2012		2011		2013		2012		2011
	Thousands of Dollars
Total Fair Value of Shares Vested	$	574	$	550	$	495	$	2,387	$	2,377	$	1,069

Common Stock shares totaling 57,253 in 2013, 31,058 in 2012, and 56,705 in 2011 were issued with no additional increase in equity as the expense was previously recognized over the vesting period.

SHARE-BASED COMPENSATION EXPENSE

In 2013, UNS Energy and TEP recorded share-based compensation expense of $3 million. In 2012 and 2011, UNS Energy recorded share-based compensation expense of $3 million, $2 million of which related to TEP. No share-based compensation was capitalized as part of the cost of an asset. UNS Energy did not realize a tax deduction from the exercise of share-based payment arrangements in 2013 or 2011. In 2012, the actual tax deduction realized from the exercise of share-based payment arrangements totaled less than $0.5 million.

At December 31, 2013, the total unrecognized compensation cost related to non-vested share-based compensation was $3 million, which will be recorded as compensation expense over the remaining vesting periods through February 2016. At December 31, 2013, less than 0.5 million shares were awarded but not yet issued, including target performance shares, under the share-based compensation plans.