TUCSON ELECTRIC POWER CO

TUCSON ELECTRIC POWER CO Annual Report: A Look at Their Year

Considering an investment in Tucson Electric Power Co (TEP)? This summary cuts through the jargon of their latest annual report (for the fiscal year ending December 31, 2025), offering a clear view of their performance, strategy, and financial health.

1. Business Overview Tucson Electric Power Co (TEP) is a regulated electric utility that generates, distributes, and sells electricity to customers in and around Tucson, Arizona. As a regulated entity, the Arizona Corporation Commission (ACC) oversees its operations, rates, and service territory. TEP's core business is to provide reliable electricity service to residential, commercial, and industrial customers within its designated service area.

2. Financial Performance TEP experienced a strong year in 2025, showing solid growth across its operations:

• Total revenue grew by 5.6%, climbing from $1.26 billion in 2024 to $1.33 billion in 2025.
  • Retail revenue (from homes and businesses) increased by 4.7%, from $1.14 billion in 2024 to $1.19 billion in 2025. This growth stemmed from more customers and approved rate adjustments.
  • Wholesale revenue (selling power to other utilities) saw a significant 19.6% boost, rising from $112 million to $134 million, reflecting increased demand and favorable market conditions.
• This strong revenue growth led to healthy profitability. Net Income reached $185 million in 2025, an 8.8% increase from $170 million in 2024.
• Operating income improved to $310 million in 2025 from $290 million in 2024, indicating effective cost management alongside revenue growth.
• Earnings Per Share (EPS) also showed a positive trend, growing from $3.50 in 2024 to an estimated $3.80 in 2025.

3. Risk Factors As a regulated utility, TEP's operations and financial performance are significantly shaped by external factors and inherent risks:

• Regulatory Decisions: The Arizona Corporation Commission (ACC) plays a critical role in approving rates, cost recovery, and capital investments. Unfavorable decisions could hinder TEP's ability to recover costs and earn a fair return on its investments.
• Interest Rate Risk: A rising interest rate environment increases borrowing costs for new debt and can affect variable rates on existing credit facilities. This could squeeze profit margins and increase financing expenses.
• Transition to Renewables: While a strategic focus, retiring older coal-fired plants (such as commitments related to Four Corners and San Juan) and integrating significant renewable energy sources require substantial capital expenditures, present operational challenges, and may face regulatory hurdles.
• Fuel and Purchased Power Costs: Fluctuations in natural gas prices and purchased power costs can impact profitability. TEP manages these through regulatory accounts. For example, the "Over-Recovered Fuel And Purchased Energy Costs" liability of $45 million means TEP collected more from customers than it spent on fuel. The company will likely return this amount to customers through future rate adjustments, but timing differences can create financial exposure.
• Operational & Climate Risks: TEP faces risks from extreme weather events (e.g., heatwaves, storms), wildfires, and other natural disasters. These events can disrupt service, damage infrastructure, and require costly repairs. Cybersecurity threats to critical infrastructure also pose a growing concern, risking operational integrity and data security.
• Economic Conditions: A downturn in the regional economy could reduce electricity demand from residential and commercial customers. This might also affect customers' ability to pay their bills and increase bad debt expenses, thereby impacting revenue and profitability.

4. Management Discussion and Analysis (MD&A) Highlights Management emphasized several key aspects driving the company's performance and strategic direction:

• Revenue Growth Drivers: Customer growth and successful rate adjustments approved by regulators boosted retail revenue. Increased demand and favorable market conditions benefited wholesale revenue.
• Strategic Capital Investments: TEP made significant progress in modernizing its infrastructure and transitioning to cleaner energy. Investments in energy storage grew by 21% to $230 million, demonstrating a commitment to enhancing grid reliability and integrating more renewable energy. Capital additions to Electric Distribution infrastructure increased by 4.8% to $1.75 billion, underscoring ongoing efforts to upgrade and strengthen the grid.
• Energy Transition Initiatives: TEP continued significant capital investment in the "Roadrunner Reserve II" project, a new 200 MW natural gas peaker plant. This plant will provide flexible generation capacity crucial for supporting intermittent renewables and ensuring system reliability.
• Financial Management: The company successfully refinanced maturing debt, paying off a $300 million note and issuing a new $300 million senior note due in 2055. This proactive debt management ensures continued funding for operations and capital projects, though the new issuance carries a higher interest rate.
• Liquidity Management: TEP successfully extended its $300 million revolving credit facility to October 2028 (it was set to expire in October 2025). This provides continued flexibility for short-term liquidity needs and working capital management, demonstrating management's focus on maintaining financial stability.
• Operational Efficiency: The improvement in operating income to $310 million from $290 million suggests effective cost management strategies contributed to profitability alongside revenue growth.

5. Financial Health TEP maintains a stable financial position, typical for a capital-intensive utility:

• Cash & Equivalents: As of December 31, 2025, TEP held approximately $75 million in cash and cash equivalents, providing immediate liquidity.
• Debt Profile: Total unsecured senior notes amounted to approximately $2.7 billion. This debt level is common for utilities due to their capital-intensive nature. The Debt-to-Equity ratio was approximately 1.2x, indicating a balanced capital structure.
• Increased Borrowing Costs: The new $300 million debt issued in 2025 carries a higher interest rate of 5.90% compared to the 3.05% rate of the matured debt. This will lead to higher interest expenses, impacting future profitability.
• Liquidity: TEP successfully extended its $300 million revolving credit facility to October 2028, ensuring continued flexibility for short-term liquidity needs and working capital management.
• Cash Flow from Operations: The company generated $350 million in cash flow from operations in 2025. This demonstrates strong internal funding for its investments and reduces reliance on external financing for daily operations.

6. Future Outlook TEP remains focused on continued grid modernization and clean energy transition:

• Capital Expenditure Plans: The company plans significant capital expenditures of approximately $450 million for 2026. These funds will primarily enhance grid reliability, integrate more renewable energy, and expand energy storage capacity. This includes further development of the "Roadrunner Reserve II" project and other distribution system upgrades.
• Strategic Direction: TEP aims to maintain a strong balance sheet to support these investments. It will also navigate the evolving regulatory landscape and manage its cost structure to deliver reliable and affordable power to its customers.
• Earnings Guidance: The company anticipates continued stable earnings, supported by its regulated asset base and ongoing capital investments. This reflects confidence in its operational and financial strategies.

7. Competitive Position As a regulated electric utility, TEP operates as a natural monopoly within its designated service territory in and around Tucson, Arizona.

• Market Exclusivity: TEP holds an exclusive franchise to generate, transmit, and distribute electricity to its customers. This means it faces no direct competition for electricity sales to end-users within its service area.
• Regulatory Oversight: Comprehensive regulation from the Arizona Corporation Commission (ACC) balances this monopolistic position. The ACC sets rates, approves investments, and ensures service quality.
• Indirect Competition: While direct competition is absent, TEP faces indirect competitive pressures from:
  • Distributed Generation: The increasing adoption of rooftop solar and other customer-sited generation can reduce demand for grid-supplied electricity.
  • Energy Efficiency: Customer efforts to reduce energy consumption through efficiency measures can also impact sales volumes.
  • Capital Markets: TEP competes with other utilities and companies for capital in financial markets to fund its extensive infrastructure projects and operations.
• Benchmarking: TEP's performance is often compared against other utilities in terms of reliability, customer service, and rates. These comparisons can influence regulatory decisions and public perception, acting as a form of competitive pressure for operational excellence.