941138--3/3/2006--UNISOURCE_ENERGY

related topics

{operation, natural, condition}

{debt, indebtedness, cash}

{competitive, industry, competition}

{condition, economic, financial}

{cost, operation, labor}

{cost, regulation, environmental}

Regulatory and other restrictions limit the ability of TEP, UNS Gas and UNS Electric to make distributions to UniSource Energy. TEP s retail rates are capped through 2008, which could negatively impact TEP s results of operations, net income and cash flows. Uncertainty exists as to what methodology the ACC will use to set TEP s retail rates after December 31, 2008, which could negatively impact TEP s results of operations, net income and cash flows. Restrictions on rate increases and the ability to recover fuel costs at UNS Gas could negatively impact its liquidity, cash flows and net income. Restrictions on rate increases and the ability to recover purchased power and fuel costs at UNS Electric could negatively impact its liquidity, cash flows and net income. The expiration of UNS Electric s power supply agreement will require UNS Electric to find alternate sources for its energy needs, which may not be recovered through rates. UniSource Energy s utility subsidiaries revenues, results of operations and cash flows are seasonal, and are subject to weather conditions, economic conditions and customer usage patterns, which are beyond the Company s control. Changes in federal energy regulation may affect TEP, UNS Gas and UNS Electric s results of operations, net income and cash flows. Deregulation or restructuring of the electric utility industry may result in increased competition resulting in an erosion of TEP and UNS Electric s retail customer base and reduce TEP s wholesale revenues. UniSource Energy and its subsidiaries have a substantial amount of indebtedness which could adversely affect its business and results of operations. The terms of UniSource Energy s and its subsidiaries existing debt instruments and future debt instruments may restrict UniSource Energy s current and future operations, particularly the ability to respond to changes in its business or to take certain actions. The cost of renewing or purchasing TEP s leased assets, or the cost of procuring alternate sources of generation or purchased power, could adversely affect TEP s results of operations, net income and cash flows. UniSource Energy s utility subsidiaries are subject to numerous environmental laws and regulations which may increase their cost of operations or expose them to environmentally-related litigation and liabilities. TEP may be required to redeem significant amounts of its outstanding tax-exempt bonds. TEP may not be permitted to construct a Tucson to Nogales transmission line and TEP or UNS Electric may be required to find alternate ways to improve reliability in UNS Electric s Santa Cruz service area.

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941138--3/3/2006--UNISOURCE_ENERGY_CORP