{"url_path":"/sec/cik-0000100122/10-k/2026/item-1a","section_key":"item-1a","section_title":"Item 1A RISK FACTORS","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-02-12","source_url":"https://www.sec.gov/Archives/edgar/data/100122/0000100122-26-000006-index.html","accession_number":"0000100122-26-000006","cik":"0000100122","ticker":null,"issuer_name":"TUCSON ELECTRIC POWER CO","edgar_url":"https://www.sec.gov/Archives/edgar/data/100122/0000100122-26-000006-index.html","primary_entity_key":"0000100122","primary_entity_name":"TUCSON ELECTRIC POWER CO"},"word_count":4632,"has_tables":true,"body_markdown":"ITEM 1A. RISK FACTORS\n\nTEP's business and financial results are subject to a number of risks and uncertainties, including those set forth below. These risks and uncertainties fall primarily into five major categories: operational, regulatory, revenues, environmental, and financial. Additional risks and uncertainties that are not currently known to TEP or that are not currently believed by TEP to be material may also negatively impact TEP’s business and financial results.\n\nOPERATIONAL\n\nTEP is subject to cyber-attacks which could have a negative impact on the Company's business and results of operations.\n\nCybercrime, which includes the use of malware, ransomware attacks, computer viruses, and other means for disruption or unauthorized access has increased in frequency, scope, and potential impact in recent years due to heightened geopolitical instability, an increase in remote work, the increased threat actor use of AI, and the continued monetization of cybercrime. The Company is subject to inherent technological risk from hacking, ransomware, software viruses, and other types of data security breaches, as well as to third-party cybersecurity risk. Furthermore, the nature and sophistication of cyber-attacks continue to evolve as cyber-attackers use AI to develop malicious code and sophisticated phishing attempts and other attacks on operational\n\n11\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)\n\ncontrol systems and data. The Company's utility business requires access to and retention of sensitive customer data, including personal and credit information, in the ordinary course of business. The Company relies on the continued operation of sophisticated digital information technology systems and network infrastructure to operate the utility as part of an interconnected regional electrical grid. TEP's operations technology systems face a heightened risk of cyber-attack due to the critical nature of such infrastructure.\n\nTEP's information technology systems and network infrastructure have been subject to, and will likely continue to be subject to, cyber-attacks from foreign or domestic sources attempting to gain unauthorized access to information and/or information systems through computer viruses and phishing attempts either directly or indirectly through its vendors or related third parties. Such attempts could be motivated by a desire to disrupt utility operations or seek financial gain. A third-party or supply chain compromise may increase risk to Company systems and data in dynamic and unforeseeable ways.\n\nIf, despite TEP's security measures, a significant cybersecurity event or data breach occurred, the Company could: (i) have operations disrupted, have customer information stolen, and experience general business system and process interruption or compromise, including that which could prevent TEP from servicing customers, collecting revenues or recording, processing and/or reporting financial information correctly; (ii) experience loss of revenues, response costs, and other financial loss; and (iii) be subject to increased regulation, litigation, including class action litigation, and damage to the Company's reputation. Any of these outcomes could have a negative impact on TEP's business and results of operations. See Part I, Item 1C Cybersecurity of this Form 10-K for a discussion of cybersecurity risk management, strategy, and governance, which should be read in conjunction with this Item 1A.\n\nNew and changing technologies, including the integration of Artificial Intelligence into business operations, may expose TEP to risks related to data privacy breaches, algorithmic bias, and legal liability, which could have a negative impact on the Company's business and results of operations.\n\nTEP is increasingly integrating AI technologies into various aspects of its operations, including cybersecurity phishing protection, wildfire detection, customer analytics, and user productivity tools. While these technologies are intended to improve efficiency and customer outcomes, they present exposure to risk. AI systems are subject to dynamic inaccuracy and bias, which may not be identifiable and for which TEP may be legally liable. Additionally, our use of AI could increase cybersecurity and data protection risks. AI systems may process sensitive data, and any mismanagement of such information could result in regulatory, legal, or reputational harm. The rapid evolution of AI technologies may expose TEP to new and unforeseeable risks, including challenges in compliance, oversight, and operational reliability. If, despite risk management efforts, any of these outcomes are realized, they could have a negative impact on TEP's business and results of operations.\n\nTEP is subject to capacity shortfalls which could result in an inability for the Company to reliably serve load requirements and could negatively affect TEP’s results of operations, net income, and cash flows.\n\nIncreased capacity scarcity in the Western United States may result in TEP's inability to meet customer demand. Conditions that could cause a capacity shortfall include but are not limited to: water scarcity, fuel supply shortages related to constrained natural gas pipelines or coal delivery interruptions, increased customer demand, including, in each case, as a result of potential new large customers such as data centers, coal mine or natural gas well field outages, an extreme weather event, a wildfire, changes in regulatory policy, unplanned outages, including extensions of planned outages due to equipment failures or other complications, in-service delays of new generation and transmission resources, and/or retirement of generation resources. These conditions have and may continue to require collaboration with other regional energy providers to investigate additional resources and technologies, including nuclear and natural gas-fired generation and increased gas pipeline capacity, necessary to meet the future needs of customers. Additionally, these conditions may contribute to market price volatility and increased difficulty in procuring market energy. An inability to serve load requirements could negatively affect TEP’s results of operations, net income, and cash flows.\n\nThe operation of generation facilities, battery energy storage systems, and transmission and distribution systems and the construction of capital projects involves risks and uncertainties that could negatively affect TEP’s results of operations, net income, and cash flows.\n\nThe operation of generation facilities, battery energy storage systems, and transmission and distribution systems involves certain risks and uncertainties that could result in reduced generation capability or unplanned outages, including equipment breakdown or failures, fires and other hazards, lower than expected levels of efficiency or operational performance, and/or disruptions in operations due to union strikes or a labor shortage. Governmental actions and market trends that cause continued global supply chain challenges, including new or increased tariffs, lead time impacts, and price volatility, have and could continue to increase the risk that TEP's operations could be negatively impacted and/or TEP's capital investing could increase. If TEP’s generation facilities or transmission and distribution systems operate below expectations, TEP’s operating results could be negatively affected and/or TEP's capital expenditures could increase.\n\n12\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)\n\nFederal actions have delayed some planned coal‑fired plant retirements. However, long‑term economic and regulatory pressures on coal generation persist, and coal suppliers continue to face financial strain, as evidenced by past bankruptcies and mine closures. As a result, coal supply and pricing may remain volatile, which could adversely affect the cost and reliability of fuel for our remaining coal‑fired facilities while they remain active, which is anticipated to continue until 2032.\n\nAlso, a significant portion of TEP's capital plan includes the construction of capital projects to serve the growing demand for electricity which may result from the introduction of new large customers. These projects and plans are subject to risks and uncertainties including, among others, changes in legislation or regulation, such as environmental compliance requirements, direct and indirect trade and tariff impacts, supply chain disruptions, regulatory approvals, state and local opposition, and other events beyond TEP's control, any of which could materially affect the schedule, cost, and performance of these projects. A failure to execute these projects successfully, and on a timely basis, could negatively affect TEP's financial condition or results of operations.\n\nThe effects of climate change may create operational and financial risks for TEP that, if realized, could negatively affect TEP's results of operations, net income, and cash flows.\n\nClimate change impacts regional and global weather conditions and results in extreme weather events, including high temperatures, severe thunderstorms, and drought. Changes in weather conditions and extreme weather have and could continue to occur in the Western United States and have and could continue to affect TEP's transmission and distribution systems. In addition, extreme weather could increase the potential likelihood of wildfires. Both extreme weather events and wildfires could lead to service outages and business interruptions, either of which would increase capital expenditures and operating expenses. There can be no assurance that physical utility assets will successfully withstand severe weather conditions or wildfires. Additionally, a fire caused by our equipment could result in litigation where plaintiffs may assert claims alleging TEP is liable for resulting damages.\n\nDrought conditions in the Western United States have and may continue to lead to a regional decrease in surface water and groundwater accessibility. Drought conditions may result in: (i) additional regulation, impacting TEP's water use for generation; and (ii) regional power constraints, impacting power market prices. Regional water scarcity may also impact new and existing customers' operations and future economic development, affecting retail sales volumes and related revenue, as well as the region's ability to contain and mitigate risk from wildfires.\n\nOther potential risks associated with changes in weather conditions, extreme weather events, and wildfires, including wildfires outside of TEP's service territory, include the inability to secure sufficient insurance coverage, increased insurance costs, regulatory recovery risk, and the potential for a credit downgrade and subsequent additional costs to access capital markets. Any damage caused to our assets or disruption of service to our customers could lead to a negative impact on TEP's results of operations, net income, and cash flows.\n\nThe operation of generation facilities and transmission systems on tribal lands may create operational and financial risks for TEP that, if realized, could negatively affect TEP’s results of operations, net income, and cash flows.\n\nCertain jointly-owned facilities and portions of TEP's transmission lines are located on tribal lands pursuant to leases, land easements, or other rights-of-way that are effective for specified periods. TEP is unable to predict the final outcomes of pending and future approvals by the applicable sovereign governing bodies with respect to the cost of renewals and continued access to these leases, land easements, and rights-of-way. If pending and future approvals are not obtained and if continued access to the facilities is not granted, it could negatively affect TEP's results of operations, net income, and cash flows.\n\nTEP receives power from certain generation facilities that are jointly-owned with, or operated by, third parties. Therefore, TEP may not have the ability to affect the management or operations at such facilities which could negatively affect TEP’s results of operations, net income, and cash flows.\n\nCertain generation facilities from which TEP receives power are jointly-owned with, or operated by, third parties. TEP does not have the sole discretion to affect the management or operations at such facilities. As a result of this reliance on other operators, TEP may not be able to ensure the proper management of the operations and maintenance of such generation facilities. Further, TEP may have limited ability to determine how best to manage the changing economic conditions, more restrictive trade policies, higher tariffs, or environmental requirements that may affect such facilities. A divergence in the interests of TEP and the co-owners or operators, as applicable, of such facilities could negatively impact TEP's business and operations.\n\n13\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)\n\nTEP is subject to physical attacks which could have a negative impact on the Company's business and results of operations.\n\nTEP’s generation, transmission, and distribution assets are critical to the provision of electric service to our customers and stability of the bulk electric system. These assets also provide the framework for our service infrastructure. TEP is facing a heightened risk of physical attacks on the Company's electric assets. The Company's electric generation, transmission, and distribution assets are geographically dispersed and are often in rural or unpopulated areas which makes it especially difficult to adequately detect, defend from, and respond to such attacks. The Company relies on the continued operation of these assets, which are part of an interconnected regional electrical grid. Any significant interruption in the availability or operation of these assets could prevent the Company from fulfilling its critical business functions, including delivering energy to customers. Security threats continue to evolve and adapt. Such attempts could be motivated by a desire to disrupt utility operations or seek financial gain. TEP, the energy industry, and our third-party vendors have been subject to, and will likely continue to be subject to, attempts to disrupt operations through physical security attacks and breaches. Such events or the threat of such events may increase costs associated with heightened security requirements. Despite implementation of security measures, there can be no assurance that the Company will be able to prevent such disruptions.\n\nIf, despite TEP's security measures, a significant physical attack occurred, the Company could: (i) have operations disrupted, including a disruption to the stability of the bulk electric system, and/or property damaged; (ii) experience loss of revenues, response costs, and other financial loss; and (iii) be subject to increased regulation, litigation, and damage to the Company's reputation. Any of these outcomes could have a negative impact on TEP's business and results of operations.\n\nREGULATORY\n\nGovernment action or changes in legislation, regulation, or regulatory structure could negatively affect TEP's results of operations, net income, and cash flows.\n\nTEP incurs costs to comply with legislative and regulatory requirements. Changes to these requirements, including those relating to clean energy, have occurred and could arise again in the future through federal, state, or local actions, including ballot initiatives. Additionally, the City of Tucson is studying the feasibility of municipalization. TEP could be adversely affected if we are subject to municipalization or other related government action.\n\nTEP's ability to recover its investments and costs associated with legislative and regulatory initiatives will, in large part, depend on the final form of legislative, regulatory, or government actions and any subsequent repeal of such actions. Further increases to rates could negatively affect the affordability of rates charged to customers, which may negatively affect TEP’s results of operations, net income, and cash flows.\n\nTEP's business is significantly impacted by government legislation, regulation and oversight. TEP's inability to recover its costs, earn a reasonable return on its investments, or comply with current regulations would negatively affect its results of operations, net income, and cash flows.\n\nTEP's financial condition is influenced by how regulatory authorities, including the ACC and the FERC, establish the rates TEP can charge customers and authorize rates of return, common equity levels, and the amount of costs that may be recovered from TEP's customers. The Company's ability to timely obtain rate adjustments that provide TEP with the opportunity to earn authorized rates of return depends upon timely regulatory action under applicable statutes and regulations and cannot be guaranteed.\n\n•ACC—The ACC is a constitutionally created body composed of five elected commissioners and has jurisdiction over rates for retail customers. Commissioners are elected state-wide for staggered four-year terms and are limited to serving two consecutive terms. As a result, the composition of the ACC, and therefore its policies, are subject to change every two years.\n\n•FERC—The FERC has jurisdiction over rates for electric transmission in interstate commerce and rates for wholesale sales of electric power, including terms and prices of transmission services and sales of electricity at wholesale. Commissioners are appointed by the President of the United States, with advice and consent of the Senate, for staggered five-year terms.\n\nOwners and operators of bulk power systems, including TEP, are subject to mandatory reliability standards developed and enforced by NERC and subject to the oversight of the FERC. Compliance with modified or new reliability standards may subject TEP to higher operating costs and increased capital costs. Failure to comply with the mandatory reliability standards could subject TEP to sanctions, including substantial monetary penalties.\n\n14\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)\n\nREVENUES\n\nTEP's results of operations, net income, and cash flows could be negatively affected by various factors impacting demand for electricity.\n\nWeather Conditions and Customer Usage Patterns\n\nTEP's revenues, results of operations, and cash flows are seasonal and are subject to weather conditions and customer usage patterns, which are beyond the Company’s control.\n\nRetail Sales\n\nTEP earns the majority of its operating revenue and net income in the second and third quarters of the year because retail customers increase their air conditioning usage during the summer. Conversely, net income is limited in the first and fourth quarters of the year due to relatively mild winter weather in TEP's retail service territory. Unseasonably cool summers or warm winters may reduce customer usage, negatively affecting results of operations, net income, and cash flows by reducing sales.\n\nProduction Tax Credits\n\nElectricity generated from TEP's wind-powered facility depends heavily on wind conditions, turbine availability, and transmission capacity. If such conditions are unfavorable, or if any other operational constraints exist, the facility’s electricity generation and associated PTCs may be reduced, negatively affecting tax payments and net income.\n\nEconomic Conditions and Energy Conservation Measures\n\nA significant decrease in the demand for electricity in TEP's service area would negatively impact retail sales and adversely affect results of operations, net income, and cash flows. National and local economic conditions have a significant impact on customer growth and overall retail sales in TEP’s service area. TEP anticipates an annual customer growth rate of 1% for the next five years.\n\nResearch and development activities are ongoing for new technologies that produce power and/or reduce power consumption, such as renewable energy resources, including energy storage and customer-sited DG, energy-efficient products, and control systems. Ongoing development and use of these technologies continue to have a negative impact on TEP’s use per customer and overall retail sales. TEP's use per customer declined by an average of 1% per year from 2021 through 2025.\n\nSignificant Customers\n\nExisting Large Customers\n\nTEP is dependent on a small number of customers for a significant portion of future revenues. A reduction in the electricity sales to these customers would negatively affect results of operations, net income, and cash flows.\n\nTEP’s ten largest customers represented 11% of total revenues in 2025. TEP sells electricity to mines, military installations, and other large commercial and industrial customers. Retail sales volumes and revenues from these customers could decline as a result of, among other things: global, national, and local economic conditions; curtailments of customers' operations due to unfavorable market conditions; military base reorganization or closure decisions by the federal government; the effects of energy efficiency; or the decision by customers to self-generate all or a portion of their energy needs. A reduction in retail kWh sales to any one of TEP’s ten largest customers would negatively affect the Company's results of operations, net income, and cash flows.\n\nFuture Large Customers\n\nTEP's revenue growth projections and resource plans are based on assumed additions of a small number of customers with large load requirements. TEP could need to make significant infrastructure investments and commitments to service the associated demand growth. Meeting such demand growth may create challenges to TEP's ability to achieve its aspirational goal related to reducing carbon emissions by 2050. If these prospective customers do not ultimately locate in our service territory, or if the potential customers reduce their load projections for which TEP planned after significant investments are made, it could materially impact our financial condition. Additionally, if TEP is unable to serve these prospective customers, the Company may not be able to fully recover its infrastructure investments and could lose future growth opportunities resulting in reputational harm, including with regulators. A concentration of sales to a small number of such customers, and the scale of investment required to support those customers, intensifies this risk and the potential for a negative impact on TEP's results of operations, net income, and cash flows, as well as on its ability to achieve its carbon emission reduction goals. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Factors Affecting Results of\n\n15\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)\n\nOperations, Sales Growth and Seasonality, Energy Supply Agreement for additional information regarding our ESA and generation resources to serve a data center campus expected to be located in our service territory.\n\nENVIRONMENTAL\n\nTEP is subject to numerous environmental laws and regulations that may increase its cost of operations or expose it to environmental litigation and liabilities.\n\nNumerous federal, state, and local environmental laws and regulations affect present and future operations. Those laws and regulations include rules regarding air emissions of conventional pollutants and GHGs, water quality and water use, wastewater discharges, solid waste, hazardous waste, and management of CCR. Policy initiatives, such as environmental justice that considers disproportionately adverse environmental impacts on vulnerable communities, may also impact operations.\n\nWe have incurred costs in connection with environmental compliance, and we anticipate that we will continue to do so in the future. These laws and regulations can contribute to higher capital expenditures and operating expenses, particularly resulting from enforcement efforts focused on existing generation facilities and compliance standards related to new and existing generation facilities. These laws and regulations generally require TEP to obtain and comply with a wide variety of environmental licenses, permits, authorizations, and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations and policies. Failure to comply with applicable laws and regulations, or address certain policies, or the release of hazardous or toxic substances into the air, water, or soil, including, for example, leaking or spilled insulating fluid from electrical equipment and release of contaminants caused by the failure of battery energy storage systems may result in litigation, as well as the imposition of fines and penalties.\n\nExisting environmental laws and regulations may be revised, and new environmental laws and regulations may be adopted or become applicable to the Company's facilities. Increased compliance costs or additional operating restrictions from revised or additional regulation could have a negative effect on TEP's results of operations, particularly if those costs are not timely and fully recoverable from TEP customers. TEP’s obligation to comply with these laws and regulations as an owner or participant in regulated facilities like Springerville and Four Corners, coupled with the financial impact of future climate change legislation, other environmental regulations and policies, and other business considerations, could jeopardize the economic viability of these generation facilities, including during the conversion of certain of such units from coal-fired to natural gas-fired generation. Additionally, these regulations may jeopardize continued generation facility operations or the ability of individual participants to meet their obligations and willingness to continue their participation in these facilities, potentially resulting in increased operational costs for the remaining participants.\n\nTEP also is contractually obligated to pay a portion of the environmental reclamation costs incurred at generation facilities in which it has a minority interest and is obligated to pay similar costs at the mines that supply these generation facilities. While TEP has recorded the portion of its costs that can be determined at this time, the total costs for final reclamation at these sites are unknown and could be substantial.\n\nFINANCIAL\n\nEarly closures of coal-fired or other generation facilities, including uncertainty regarding the timing of such closures, could result in TEP recognizing regulatory impairments or incurring increased costs of operations if recovery of TEP's remaining investments in such facilities and the costs associated with early closures are not permitted through rates charged to customers.\n\nTEP's remaining coal-fired generation facilities may close before the end of their useful lives in response to our transition to a less carbon-intensive energy portfolio, economic conditions, operational considerations, and/or changes in regulation. However, future regulatory, operational, or reliability requirements could also necessitate continued operation of these facilities. TEP has previously closed coal-fired generation facilities prior to the end of their useful lives. If any additional generation facilities from which TEP obtains power, including but not limited to coal-fired units, are closed prior to the end of their useful lives, TEP may need to seek regulatory recovery of the remaining net book value and could incur added expenses relating to accelerated depreciation and amortization, decommissioning and reclamation activities, and cancellation or modification of long-term fuel supply or transportation contracts. As of December 31, 2025, the net book value of TEP's in-service coal-fired generation facilities was $1.0 billion.\n\nVolatility, disruptions, or unfavorable changes in the financial markets, changes in interest rates, or unanticipated financing needs, could increase TEP's financing costs, limit access to the credit or bank markets, affect the Company's ability to comply with financial covenants in debt agreements, and increase TEP's pension funding obligations. Such outcomes may negatively affect liquidity and TEP's ability to fund the Company's operations and carry out the Company's financial strategy.\n\n16\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)\n\nWe rely on access to bank and capital markets as a significant source of liquidity and for capital requirements not satisfied by the cash flows from TEP's operations. Market disruptions such as those experienced in the financial crises of 2008, 2009, and 2020 in the United States and abroad and the ongoing geopolitical tensions may increase the Company's cost of borrowing or negatively affect TEP's ability to access sources of liquidity needed to finance the Company's operations and satisfy its obligations as they become due. These disruptions may include turmoil in the financial services industry, including substantial uncertainty surrounding particular lending institutions with which we do business, increases in interest rates, significant volatility in the bank and capital markets, and general economic downturns in TEP's utility service territory or in the broader economy. If TEP is unable to access credit at reasonable rates, or if the Company's borrowing costs dramatically increase, TEP's ability to finance its operations, meet debt obligations, and execute its financial strategy could be negatively affected. Increases in short-term interest rates would increase the cost of borrowings under TEP's credit facility.\n\nIn addition, unfavorable market conditions have and could again negatively affect the market value of assets held in its pension and other postretirement benefit plans and may increase the amount and accelerate the timing of required future funding contributions.\n\nGENERAL RISK FACTORS\n\nEvents beyond our control, such as public health crises, geopolitical tensions, natural disasters, or other catastrophic events, could adversely affect our business, results of operations and financial condition.\n\nTEP could be negatively impacted by various events beyond our control, including, without limitation, public health crises, geopolitical tensions and other political instability, terrorist attacks, natural disasters, or other catastrophic events, whether occurring locally, nationally, or globally. Any of the forgoing events and any resulting impact, such as economic and/or trade disruptions, including the disruption of global supply chains and volatility and disruption of financial markets, labor shortages, or government-mandated actions in response to any such event could materially affect TEP’s business, results of operations, access to sources of liquidity, and financial condition, either directly or through the impact on third parties upon whom we rely.\n\nChanges in tax regulation may negatively affect the results of operations, net income, and cash flows of TEP.\n\nThe Company is subject to taxation by the various taxing authorities at the federal, state, and local levels where it does business. Legislation or regulation could be enacted, modified, or terminated by any of these governmental authorities, which could affect the Company’s tax positions, results of operations, net income, and cash flows.\n\nThe failure to attract, retain, and manage an appropriately qualified workforce could negatively impact TEP’s business and results of operations.\n\nTEP’s business is dependent on its ability to attract, retain, and manage qualified personnel, including key executive officers and skilled professional and technical employees and contractors. Certain events and conditions, such as an aging workforce without available replacements, a shift in employee expectations with respect to compensation and flexible work arrangements, the unavailability of contract resources, and the ongoing need to negotiate collective bargaining agreements with union employees, may lead to significant operating challenges, including lack of resources, loss of knowledge base, time required for skill development, and labor disruptions. If TEP is unable to successfully attract, retain, and manage an appropriately qualified workforce, its business and results of operations could be negatively affected."}