Preliminary Settlement Agreement Term Sheet

As previously reported, Tucson Electric Power Company (TEP) has a rate case proceeding underway before the Arizona Corporation Commission (ACC).

On January 22, 2013, ACC Staff filed a preliminary settlement agreement term sheet (Term Sheet) with the ACC with respect to TEP's pending rate case. The Term Sheet is a summary of certain material terms of a proposed settlement of the rate case, including an increase in non-fuel base rates over adjusted test-year revenues of approximately $76 million and an authorized return on equity of 10.0% based on the actual test-year equity/debt capital structure of 43.5%/56.5%. TEP and ACC Staff support the provisions set forth in the Term Sheet. The Term Sheet does not address certain aspects of the rate case, such as rate design, which are still being discussed for possible inclusion in a settlement. Other parties to the rate case proceeding may or may not support the proposed settlement terms, depending on, among other things, the resolution of the remaining open issues. The Term Sheet is attached hereto as Exhibit 99.1.

TEP expects that ACC Staff will discuss the status of the settlement discussions and the Term Sheet with the ACC Commissioners at an ACC meeting on January 23, 2013. At that meeting, the ACC Commissioners may or may not provide guidance to ACC Staff on continuing with settlement discussions.

If a settlement agreement is entered, the procedural schedule would be as follows:

File settlement agreement                                         February 4, 2013
Direct testimony in support of, or in opposition to, the
settlement agreement                                              February 15, 2013
Responsive testimony in support of, or in opposition to, the
settlement agreement                                              March 1, 2013
Hearings before ACC Administrative Law Judge (ALJ) begin          March 6, 2013

If a settlement agreement is not entered, TEP would file rebuttal testimony on February 4, 2013, intervenors would file surrebuttal testimony on February 25, 2013, TEP would file rejoinder testimony on March 1, 2013, and hearings before an ACC ALJ would begin on March 6, 2013.

Whether or not a settlement is entered, an ACC ALJ will issue a recommended opinion and order following the conclusion of hearings. That recommendation is then subject to approval by the ACC.

TEP cannot predict if a settlement agreement will be entered or, if a settlement agreement is entered, whether it will be approved or modified by the ACC.