NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF PLAN
The following description of the Tucson Electric Power Company 401(k) Plan (the Plan) provides only general information. Participants should refer to the Summary Plan Description and Plan document for a more complete description of the Plan’s provisions.
General
The Plan is a defined contribution plan originally effective in 2000. The Plan has been amended to comply with tax legislation and most recently restated effective January 1, 2022. All regular employees of Tucson Electric Power Company (Plan Sponsor) and participating subsidiaries of UNS Energy Corporation (UNS Electric, Inc. and UNS Gas, Inc.), the parent company of the Plan Sponsor (collectively, the Company), who are employed by the Company on or after January 1, 1985, are eligible to participate. UNS Energy is an indirect wholly-owned subsidiary of Fortis Inc. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC), as amended.
Administration
The Company’s Pension Committee (the Plan Administrator), comprised of three or more employees, administers the Plan. Fidelity Management Trust Company (the Trustee) serves as Trustee of all Plan investments. Fidelity Workplace Services LLC serves as recordkeeper for the Plan. The Company funds the Plan’s administrative fees, except for loan administrative fees, brokerage account fees, and investment management services, which are paid directly by the participants out of their accounts. The Plan's administrative fees are recorded as Administrative Expenses on the Statement of Changes in Net Assets Available for Benefits.
Contributions
The Plan includes a salary deferral arrangement allowed under Section 401(k) of the IRC. Eligible participants are permitted to elect up to 25% (50% for participants employed by UNS Electric, Inc. or UNS Gas, Inc.) of their compensation to be contributed as pre-tax 401(k) contributions to the Plan. Participants who have attained age 50 before the end of the taxable year are eligible to make catch-up contributions. Participants are permitted to elect Roth (after-tax) contributions. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans (rollover). Contributions are subject to certain Internal Revenue Service (IRS) limitations.
Participants direct the investment of contributions into various investment options offered by the Plan. The Plan permits participants to direct up to 20% of their compensation deferral contributions into the Fortis Inc. common stock fund. Participants cannot contribute to the common stock fund if the contribution will increase the balance of common stock to greater than 20% of their account balance.
The Plan includes an auto-enrollment provision whereby all newly eligible employees, except those under certain collective bargaining agreements, are automatically enrolled in the Plan unless they affirmatively elect not to participate in the Plan. Automatically enrolled participants have their deferral rate set at 3% of eligible compensation on a pre-tax basis and their contributions invested in a designated balanced fund until changed by the participant.
The Company may, at its discretion, make matching contributions to each participant’s account in an amount equal to a percentage of the participant’s compensation as defined by the Plan for that payroll period subject to certain limitations, including the amount contributed to the Plan. For the Plan years ended December 31, 2023 and 2022, the Company made matching contributions: (i) to Tucson Electric Power Company unclassified employees of 100% of employee deferrals up to 4.5% of eligible compensation; (ii) to UNS Gas, Inc. and UNS Electric, Inc. unclassified employees of 50% of employee deferrals up to 6% of eligible compensation; and (iii) per applicable collective bargaining agreements for classified employees.
Participant Accounts
Each participant’s account is credited with the participant’s contributions, the Company’s matching contribution, and an allocation of Plan earnings or losses. Allocations are based on participant earnings, account balances, or participant transactions, as defined.
NOTES TO FINANCIAL STATEMENTS (Continued)
Vesting
Participants are 100% vested immediately in their contributions and matching contributions, plus actual earnings thereon.
Notes Receivable from Participants
Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. Note terms may not exceed five years, except notes used to purchase a principal residence, which may have a term up to 15 years. Note repayments are made every two weeks through payroll deductions and are considered to be in default if all payments are not made for any three-month period. When a participant fails to repay a note in full, the value of the participant’s account is immediately reduced by the amount of unpaid principal and interest and/or any distribution is reduced by the amount of the remaining unpaid principal and interest. Each note is secured by the balance of the participant’s account and bears a fixed rate of interest of the prime rate at note origination plus 2.00%.
Benefit Payments
Upon termination of service, death, disability, or retirement, a participant may elect to receive the value of the vested interest in his or her account in the form of a lump sum distribution. The Plan allows installment payments to participants upon severance from employment after age 55 or upon severance of employment prior to age 55 for participants that have attained age 59½ at the time of the distribution request. The Plan allows for in-service distributions when a participant reaches age 59½, as well as hardship distributions subject to Plan provisions. The Plan also allows participants to withdraw any amount from their rollover account at any time. If a participant terminates employment and the participant’s account balance does not exceed $1,000, the Plan Administrator will authorize the benefit payment without the participant’s consent.
Hardship Withdrawals
Participants may withdraw the vested portion of their individual account balance in the event of financial hardship due to an immediate and heavy financial need as defined in the Plan document.
New Accounting Standards Issued and Not Yet Adopted
New authoritative accounting guidance issued by the Financial Accounting Standards Board was assessed and either determined to not be applicable or is expected to have an insignificant impact on the Plan and disclosures.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Plan are prepared using the accrual basis of accounting and in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America applicable to employee benefit plans subject to ERISA.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures about contingent assets and liabilities, as of the dates of the financial statements. Actual results may differ from these estimates.
Investment Valuation and Income Recognition
Investments are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Plan Administrator determines the Plan’s valuation policies utilizing information provided by the investment advisors and trustees. See Note 3 for discussion of fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net Appreciation in Fair Value of Investments includes the Plan’s gains and losses on investments bought and sold as well as held during the year.
NOTES TO FINANCIAL STATEMENTS (Continued)
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Interest income is recorded on an accrual basis. Loan fees are recorded as administrative expenses when they are incurred. No allowance for credit losses has been recorded as of December 31, 2023 and 2022. If a participant ceases to make note repayments for any three-month period and the Plan Administrator deems the participant note to be in default, the participant note balance is reduced and a benefit payment is recorded based on the terms of the Plan document.
Payment of Benefits
Benefits are recorded when paid.
Administrative Expenses
Certain expenses of maintaining the Plan are paid directly by the Company and are excluded from these financial statements. Fees related to the administration of notes receivable from participants, benefit payments, and investment related expenses are charged directly to the participant’s account and are included in Administrative Expenses on the Statement of Changes in Net Assets Available for Benefits.
Subsequent Events
Management evaluated the impact of events and transactions that occurred after December 31, 2023, up to June 12, 2024, the date these financial statements were issued, for potential recognition or disclosure in the financial statements. On May 15, 2024, the Plan Administrator voted to increase the salary deferral up to 75% for all companies, effective January 1, 2025, subject to ratification and approval for classified employees.
NOTE 3. FAIR VALUE OF INVESTMENTS
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Plan has no investments categorized as Level 2 or Level 3. The three levels of the fair value hierarchy are described as follows:
•Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to access;
•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as:
–quoted prices for similar assets or liabilities in active markets;
–quoted prices for identical or similar assets or liabilities in inactive markets;
–inputs other than quoted prices that are observable for the asset or liability;
–inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
•Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair market value measurement.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets measured at fair value:
•Mutual Funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are open-end mutual funds that are registered with the SEC. These funds are required to publish their daily net asset value (NAV) and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded;
NOTES TO FINANCIAL STATEMENTS (Continued)
•Self-Directed Brokerage Accounts: Investments held in participant self-directed accounts are typically market-traded securities. As such, the statement value will be the price of the security’s last trade registered on the security’s market of record on the reporting date;
•Fortis Inc. Common Stock: Valued at the closing market price reported on the New York Stock Exchange. The Fortis Inc. common stock fund is comprised of shares of Fortis Inc. common stock as well as cash and cash equivalents to facilitate execution of daily transactions; and
•Common/Collective Trust: Valued at the NAV of units of the bank collective trust. Participant transactions (purchases and sales) may occur daily. If the Plan initiates a full redemption of the collective trust, the issuer reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations will be carried out in an orderly business manner.
The following tables set forth the Plan's assets by level within the fair value hierarchy. The Company has reclassified the Common/Collective Trust from Level 2 to NAV as a practical expedient in the prior period table below to conform with the current period presentation. Investments valued based on the NAV as a practical expedient are excluded from the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | | | NAV | | Total |
| December 31, 2023 |
| Mutual Funds | $ | 400,199 | | | | | $ | — | | | $ | 400,199 | |
| Self-Directed Brokerage Accounts | 24,125 | | | | | — | | | 24,125 | |
| Fortis Inc. Common Stock | 1,359 | | | | | — | | | 1,359 | |
| | | | | | | |
| Common/Collective Trust | — | | | | | 9,223 | | | 9,223 | |
| Total Investments at Fair Value | $ | 425,683 | | | | | $ | 9,223 | | | $ | 434,906 | |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | |
| Mutual Funds | $ | 318,991 | | | | | $ | — | | | $ | 318,991 | | |
| Self-Directed Brokerage Accounts | 20,488 | | | | | — | | | 20,488 | | |
| Fortis Inc. Common Stock | 1,131 | | | | | — | | | 1,131 | | |
| Common/Collective Trust | — | | | | | 13,319 | | | 13,319 | | |
| Total Investments at Fair Value | $ | 340,610 | | | | | $ | 13,319 | | | $ | 353,929 | | |
NOTE 4. PLAN TAX STATUS
The Plan is placing reliance on an opinion letter received from the IRS dated September 6, 2017, indicating that the Plan is qualified under Section 401 of the IRC and is, therefore, not subject to tax under current income tax law. Although the Plan has been amended since receiving the opinion letter, the Plan Administrator believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. The Plan Administrator believes that the Plan is qualified and is tax-exempt.
GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. Management does not believe any such uncertain positions exist. The Plan is subject to audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
NOTE 5. PARTY-IN-INTEREST TRANSACTIONS
Certain Plan investments are managed by Fidelity Management Trust Company. Fidelity Management Trust Company is the trustee as defined by the Plan, therefore, the investment transactions qualify as party-in-interest transactions. Fees incurred by
NOTES TO FINANCIAL STATEMENTS (Concluded)
the Plan for the investment management services are included in Administrative Expenses on the Statement of Changes in Net Assets Available for Benefits.
As of December 31, 2023, the Plan held 33,015 shares of Fortis Inc. common stock with a cost basis of $1,323,133. As of December 31, 2022, the Plan held 28,216 shares of Fortis Inc. common stock with a cost basis of $1,132,939. During the year ended December 31, 2023, the Plan recorded dividend income from Fortis Inc. common stock of $43,014, which is included in Interest and Dividends on the Statement of Changes in Net Assets Available for Benefits.
All of these party-in-interest transactions are exempt from the prohibited transaction rules of ERISA.
NOTE 6. RISKS AND UNCERTAINTIES
The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of the investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for Benefits.
NOTE 7. PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue contributions at any time and to terminate the Plan subject to the provisions of ERISA.
NOTE 8. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of Net Assets Available for Benefits from the financial statements to Form 5500: | | | | | | | | | | | |
| December 31, |
| (in thousands) | 2023 | | 2022 |
| Net Assets Available for Benefits | $ | 443,098 | | | $ | 361,720 | |
| | | |
| Deemed Distributions | (131) | | | (124) | |
| | | |
| | | |
| Net Assets Available for Benefits per Form 5500 | $ | 442,967 | | | $ | 361,596 | |
The following is a reconciliation of the Change in Net Assets Available for Benefits from the financial statements to Form 5500: | | | | | |
| Year Ended December 31, |
| (in thousands) | 2023 |
| Net Increase (Decrease) in Net Assets Available for Benefits | $ | 81,378 | |
| Deemed Distributions, Net | (7) | |
| |
| |
| |
| Net Increase (Decrease) in Net Assets Available for Benefits per Form 5500 | $ | 81,371 | |