FAIR VALUE MEASUREMENTS & DERIVATIVE INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2013

Balance Sheets Carrying Value Estimated Fair Values of Financial Instruments

The carrying values recorded on the balance sheets and the estimated fair values of our financial instruments include the following:



		September 30, 2013				December 31, 2012
	Fair Value Hierarchy	Carrying Value		Fair Value		Carrying Value		Fair Value
		Millions of Dollars
Assets:
TEP Investment in Lease Debt	Level 2	$	—	$	—	$	9	$	9
TEP Investment in Lease Equity	Level 3	36		24		36		23
Liabilities:
Long-Term Debt
UNS Energy	Level 2	1,506		1,522		1,498		1,583
TEP	Level 2	1,224		1,215		1,223		1,271

Schedule of Fair Value Measurements of Financial Assets and Liabilities



	UNS Energy
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	September 30, 2013
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	31		$	31	$	—		$	—		$	—		$	31
Restricted Cash⁽¹⁾	2			2		—			—			—			2
Rabbi Trust Investments⁽²⁾	21			—		21			—			—			21
Energy Contracts - Regulatory Recovery⁽³⁾	2			—		1			1			(2		)	—
Total Assets	56			33		22			1			(2		)	54
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(11		)	—		(5		)	(6		)	2			(9		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(1		)	—		—			(1		)	—			(1		)
Interest Rate Swaps⁽⁴⁾	(8		)	—		(8		)	—			—			(8		)
Total Liabilities	(20		)	—		(13		)	(7		)	2			(18		)
Net Total Assets (Liabilities)	$	36		$	33	$	9		$	(6	)	$	—		$	36



	UNS Energy
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	December 31, 2012
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	20		$	20	$	—		$	—		$	—		$	20
Restricted Cash⁽¹⁾	7			7		—			—			—			7
Rabbi Trust Investments⁽²⁾	19			—		19			—			—			19
Energy Contracts - Regulatory Recovery⁽³⁾	7			—		2			5			(5		)	2
Total Assets	53			27		21			5			(5		)	48
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(15		)	—		(7		)	(8		)	5			(10		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(2		)	—		—			(2		)	—			(2		)
Interest Rate Swaps⁽⁴⁾	(10		)	—		(10		)	—			—			(10		)
Total Liabilities	(27		)	—		(17		)	(10		)	5			(22		)
Net Total Assets (Liabilities)	$	26		$	27	$	4		$	(5	)	$	—		$	26



	TEP
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	September 30, 2013
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	15		$	15	$	—		$	—		$	—		$	15
Restricted Cash⁽¹⁾	2			2		—			—			—			2
Rabbi Trust Investments⁽²⁾	21			—		21			—			—			21
Energy Contracts - Regulatory Recovery⁽³⁾	1			—		1			—			(1		)	—
Total Assets	39			17		22			—			(1		)	38
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(3		)	—		(2		)	(1		)	1			(2		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(1		)	—		—			(1		)	—			(1		)
Interest Rate Swaps⁽⁴⁾	(8		)	—		(8		)	—			—			(8		)
Total Liabilities	(12		)	—		(10		)	(2		)	1			(11		)
Net Total Assets (Liabilities)	$	27		$	17	$	12		$	(2	)	$	—		$	27



	TEP
	Total			Level 1		Level 2			Level 3			Counterparty Netting of Energy Contracts Not Offset on the Balance Sheets⁽⁵⁾			Net Amount
	December 31, 2012
	Millions of Dollars
Assets
Cash Equivalents⁽¹⁾	$	1		$	1	$	—		$	—		$	—		$	1
Restricted Cash⁽¹⁾	7			7		—			—			—			7
Rabbi Trust Investments⁽²⁾	19			—		19			—			—			19
Energy Contracts - Regulatory Recovery⁽³⁾	3			—		1			2			(1		)	2
Total Assets	30			8		20			2			(1		)	29
Liabilities
Energy Contracts - Regulatory Recovery⁽³⁾	(3		)	—		(3		)	—			1			(2		)
Energy Contracts - Cash Flow Hedge⁽³⁾	(2		)	—		—			(2		)	—			(2		)
Interest Rate Swaps⁽⁴⁾	(10		)	—		(10		)	—			—			(10		)
Total Liabilities	(15		)	—		(13		)	(2		)	1			(14		)
Net Total Assets (Liabilities)	$	15		$	8	$	7		$	—		$	—		$	15


⁽¹⁾	Cash Equivalents and Restricted Cash represent amounts held in money market funds and certificates of deposit valued at cost, including interest. Cash Equivalents are included in Cash and Cash Equivalents on the balance sheets. Restricted Cash is included in Investments and Other Property – Other on the balance sheets.


⁽²⁾	Rabbi Trust Investments include amounts related to deferred compensation and Supplement Executive Retirement Plan (SERP) benefits held in mutual and money market funds valued at quoted prices traded in active markets. These investments are included in Investments and Other Property – Other on the balance sheets.

⁽³⁾

Energy Contracts include gas swap agreements (Level 2), power options (Level 2), gas options (Level 3), forward power purchase and sales contracts (Level 3), and forward power purchase contracts indexed to gas (Level 3), entered into to reduce exposure to energy price risk. These contracts are included in Derivative Instruments on the UNS Energy and TEP balance sheets. The valuation techniques are described below.


(4)	Interest Rate Swaps are valued based on the 3-month or 6-month LIBOR index or the Securities Industry and Financial Markets Association municipal swap index. These interest rate swaps are included in Derivative Instruments on the balance sheets.


⁽⁵⁾	All energy contracts are subject to legally enforceable master netting arrangements to mitigate credit risk. We have presented the effect of offset by counterparty; however, we present derivatives on a gross basis on the balance sheets.

DERIVATIVE INS

Financial Impact of Energy Contracts [Table Text Block]

We record unrealized gains and losses on energy contracts that are recoverable through the PPFAC or PGA on the balance sheets as a regulatory asset or a regulatory liability rather than reporting the transaction in the income statements or in the statements of other comprehensive income, as shown in following tables:



	UNS Energy					TEP
	Three Months Ended September 30,
	2013		2012			2013		2012
	Millions of Dollars
Increase (Decrease) to Regulatory Assets/Liabilities	$	1	$	(12	)	$	1	$	(6	)



	UNS Energy					TEP
	Nine Months Ended September 30,
	2013		2012			2013		2012
	Millions of Dollars
Increase (Decrease) to Regulatory Assets/Liabilities	$	—	$	(20	)	$	2	$	(7	)

Derivative Volumes [Table Text Block]

The volumes associated with our energy contracts were as follows:



	UNS Energy		TEP
	September 30, 2013	December 31, 2012	September 30, 2013	December 31, 2012
Power Contracts GWh	1,819	2,228	856	820
Gas Contracts GBtu	29,022	17,851	8,504	7,958

Quantitative Information Regarding Unobservable Inputs

The following table provides quantitative information regarding significant unobservable inputs in UNS Energy’s Level 3 fair value measurements:



		Fair Value at
		September 30, 2013						Range of
	Valuation Approach	Assets		Liabilities			Unobservable Inputs	Unobservable Input
		Millions of Dollars
Forward Contracts⁽¹⁾	Market approach	$	1	$	(7	)	Market price per MWh	$	23.00	-	$	48.00


⁽¹⁾	TEP comprises $2 million of the forward contract liabilities.

Schedule of Reconciliation of Changes in Fair Value of Assets and Liabilities

The following tables present a reconciliation of changes in the fair value of assets and liabilities classified as Level 3 in the fair value hierarchy:



	Three Months Ended September 30, 2013
	UNS Energy			TEP
	Millions of Dollars
Balances at June 30, 2013	$	(5	)	$	(1	)
Realized/Unrealized Gains/(Losses) Recorded to:
Net Regulatory Assets/Liabilities – Derivative Instruments	(3		)	(1		)
Settlements	2			—
Balances at September 30, 2013	$	(6	)	$	(2	)

Total Gains/(Losses) Attributable to the Change in Unrealized Gains/(Losses) Relating to Assets/Liabilities Still Held at the End of the Period	$	(2	)	$	—



	Nine Months Ended September 30, 2013
	UNS Energy			TEP
	Millions of Dollars
Balances at December 31, 2012	$	(5	)	$	—
Realized/Unrealized Gains/(Losses) Recorded to:
Net Regulatory Assets/Liabilities – Derivative Instruments	(4		)	(2		)
Settlements	3			—
Balances at September 30, 2013	$	(6	)	$	(2	)

Total Gains/(Losses) Attributable to the Change in Unrealized Gains/(Losses) Relating to Assets/Liabilities Still Held at the End of the Period	$	(5	)	$	(1	)



	Three Months Ended September 30, 2012
	UNS Energy			TEP
	Millions of Dollars
Balances at June 30, 2012	$	(7	)	$	(1	)
Realized/Unrealized Gains/(Losses) Recorded to:
Net Regulatory Assets/Liabilities – Derivative Instruments	—			1
Settlements	1			—
Balances at September 30, 2012	$	(6	)	$	—

Total Gains/(Losses) Attributable to the Change in Unrealized Gains/(Losses) Relating to Assets/Liabilities Still Held at the End of the Period	$	—		$	—



	Nine Months Ended September 30, 2012
	UNS Energy			TEP
	Millions of Dollars
Balances at December 31, 2011	$	(10	)	$	—
Realized/Unrealized Gains/(Losses) Recorded to:
Net Regulatory Assets/Liabilities – Derivative Instruments	(4		)	—
Settlements	8			—
Balances at September 30, 2012	$	(6	)	$	—

Total Gains/(Losses) Attributable to the Change in Unrealized Gains/(Losses) Relating to Assets/Liabilities Still Held at the End of the Period	$	(1	)	$	—

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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- Definition

Tabular disclosure of the fair value of financial instruments, including financial assets and financial liabilities, and the measurements of those instruments, assets, and liabilities.

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