TEXT-Fitch raises Tucson Electric Power to 'BBB-'

Sept 18 - Fitch Ratings has upgraded the Issuer Default Rating (IDR) of
Tucson Electric Power Company (TEP) one-notch to 'BBB-' from 'BB+' with a Stable
Rating Outlook. The short-term IDR and securities ratings were also upgraded
one-notch, as follows:

--First mortgage bonds to 'BBB+' from 'BBB';
--Secured bank facility to 'BBB+' from 'BBB';
--Unsecured industrial revenue bonds to 'BBB' from 'BBB-';
--Unsecured pollution control revenue bonds to 'BBB' from 'BBB-';
--Unsecured notes to 'BBB' from 'BBB-';
--Short-term IDR to 'F3' from 'B'.

Approximately $1.6 billion of debt securities are affected by the rating action.
TEP is a wholly-owned subsidiary of UNS Energy.

Key rating drivers include:
--Stable earnings and cash flows
--Pending 2012 GRC with the ACC;
--Nearing the end of a five-year non-fuel base rate freeze;
--Adoption of a more flexible leverage covenant in bank agreement;
--High leverage (including capital lease obligations); and
--Exposure to changes in environmental rules and regulations;

The ratings upgrade and Stable Outlook reflects TEP's relatively strong
performance at the end of its five-year non-fuel base rate freeze ending this
year. Fitch assumes a reasonable outcome in the utility's pending 2012 GRC which
will provide a tailwind for increased earnings in 2013 and 2014. A constructive
outcome in TEP's pending 2012 General Rate Case (GRC) should permit an adequate
rate of return on investment on recent rate base additions and recovery of
higher operating expenses incurred over the last few years.

TEP's capital structure remains burdened by high levels of debt and a large
capital expenditure program affords little opportunity to decrease leverage.
However, TEP has made progress in improving its debt profile as it has reduced
its exposure to variable rate debt. For the LTM ending June 30, 2012, TEP's
variable rate debt comprised 15.9% of total long-term debt, as compared to 26%
for 2010, including capital lease debt.

2012 GRC filed; Partial Decoupling Requested: On July 2, 2012 TEP filed its 2012
GRC with the ACC and requested a nonfuel base rate increase of $128 million
dollars predicated on an 10.75% ROE for rates effective no later than Aug. 1,
2013. Notably, TEP's filing includes a request for a Lost Fixed Cost Recovery
(LFCR) mechanism and an Environmental Compliance Adjustor (ECA). The LFCR is a
partial revenue decoupling mechanism which is designed to recover non-fuel costs
associated with the implementation of energy efficiency or distributed
generation programs. The ECA is a recovery mechanism designed to recover
compliance costs associated with environmental regulations, primarily for
pollution control upgrades on TEP's coal fired generation fleet. Fitch notes
that the LFCR is not weather normalized and expects a decision by August of next
year.

Solid Operating Performance: For the LTM period ending June 30, 2012 TEP's
EBITDA coverage ratios trended flat at 4.0x as compared to 4.1x for 2011.
Similarly, TEP's FFO coverage ratios approximated 3.9x and 3.8x over the same
time periods. Leverage for the LTM ending June 30, 2012, as measured by Debt to
EBITDA, was high at 4.4x.

Coverage Metrics Expected to Improve: Over a five-year forecast period, Fitch
projects that TEP's EBITDA coverage ratios could reach 5.9x reflecting rate base
additions and new rates. In the intermediate term, TEP is forecasted to be
modestly Free Cash Flow negative due to increased capital spending needs
associated with emissions compliance and transmission investments. Going
forward, leverage ratios are also expected to show modest improvement as TEP
amortizes its capital lease obligations. Debt to total capitalization is
expected to decline to 58% in 2014 from 65% currently. Fitch includes capital
lease obligations in its debt leverage calculations; approximately two-thirds of
TEP's capital lease obligations mature by 2015.

Increased Capital Expenditure Needs: TEP plans to spend $1.8 billion on capital
expenditures through 2016, and capital expenditures are expected to average $350
million per annum. Capital expenditures associated with environmental compliance
investments and transmission projects account for the bulk of increased capital
spending levels. Additionally, capital expenditures for solar projects are
expected to average $30 million per annum. Going forward, the majority of
capital expenditures are covered by operating cash flows and Fitch projects TEP
to be modestly FCF negative.

Manageable Maturities: Debt maturities at TEP are manageable and mainly consist
of capital lease obligations. As of June 30th 2012, TEP had $365 million of
capital lease obligations on the balance sheet of which $258 million amortizes
by 2015.

Sufficient Liquidity: TEP's $386 million secured bank facility includes a $200
million revolving credit facility used to meet day-to-day working capital
requirements and a $186 million secured letter-of-credit facility that supports
outstanding tax-exempt bonds. TEP's secured bank facility matures in November
2016 and is secured by a First Mortgage Bond indenture. As of June 30, 2012, TEP
had total available liquidity of $82 million including $32 million of cash and
cash equivalents and $50 million of available borrowing capacity under its
secured revolving credit facility.

In November of 2011, TEP amended its $200 million secured credit agreement and
extended the maturity by two years to 2016. TEP's revolving credit facility
contains a maximum debt to capitalization covenant ratio of 70%, and as of June
30, 2012 TEP was in compliance with a debt to capitalization ratio of 65.1%.
Fitch notes that TEP has limited headroom in their capital structure under their
leverage covenant.

What could lead to a credit rating upgrade?
--None anticipated in the near term.

What could lead to a credit rating downgrade?
--An outcome in the 2012 GRC which limits TEP's ability to earn an adequate and
timely return on invested capital.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Rating North American Utilities, Power, Gas and Water Companies', May 3,
2012.

Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating North American Utilities, Power, Gas, and Water Companies