{"url_path":"/sec/cik-0000100122/10-k/2026/item-7a","section_key":"item-7a","section_title":"Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK","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":971,"has_tables":true,"body_markdown":"ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK\n\nTEP is exposed to certain market risks that can affect asset and liability fair value, results of operations, and cash flows. TEP's significant market risks are primarily associated with commodity prices, interest rates, and extension of credit to counterparties. TEP may enter into financing transactions to manage changes in interest rates. The RMC oversees commodity price risk and credit risk related to wholesale energy marketing and power procurement activities. To limit TEP’s exposure to commodity price risk, the RMC sets trading and hedging policies and limits, which are reviewed frequently to respond to changing market conditions. To limit TEP’s exposure to credit risk, the RMC reviews counterparty credit exposure as well as credit policies and limits on a regular basis.\n\nCommodity Price Risk\n\nTEP is exposed to market fluctuations in electricity, natural gas, and coal prices as a result of its obligation to serve retail customer load in its regulated service territory and long-term wholesale contracts. Exposure to commodity prices consists primarily of variations in the price of fuel required to generate electricity that is purchased and sold in retail and wholesale markets. Commodity prices may be subject to significant price changes as supply and demand are impacted by, among other unpredictable factors, weather, market liquidity, generation facility availability, customer usage, energy storage, and transmission and transportation constraints. Under the guidance of its RMC, TEP mitigates a portion of commodity price risk using forwards, financial swaps, and other agreements, to effectively secure future supply, fix fluctuating commodity prices, or sell future production generally at fixed prices. TEP also mitigates exposure to commodity price risk with its ability to recover these costs in regulated rates through its PPFAC mechanism, which is subject to an annual review by the ACC. See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information related to the PPFAC mechanism.\n\nCertain commodity contracts qualify as derivatives and are recorded at fair value. The changes in fair value of such contracts have a high correlation to price changes in the hedged commodities. The following table shows the changes in fair value of TEP's derivative positions:\n\n(in millions)202520242023\n\nUnrealized Net Gain (Loss) Recorded to Regulatory (Assets) Liabilities$(7)$1 $(81)\n\nTEP's derivative contracts mature on various dates through 2029. The table below displays the valuation methodologies and maturities of derivative contracts by source of fair value:\n\nUnrealized Gain (Loss) of TEP’s Hedging Activities\n\nMaturity 0 – 6 monthsMaturity 6 – 12 monthsMaturity over 1 yr.Total Unrealized Gain (Loss)\n\n(in millions)December 31, 2025\n\nPrices Actively Quoted$(18)$(4)$19 $(3)\n\nSensitivity Analysis of Derivatives\n\nTEP uses sensitivity analysis to measure the potential impact of favorable and unfavorable changes in market prices on the fair value of its derivative contracts. TEP primarily records unrealized gains and losses as either a regulatory asset or liability, respectively. As contracts settle, unrealized gains and losses are reversed and realized gains or losses are recorded to the PPFAC. As of December 31, 2025, TEP did not have derivatives related to the purchase and sale of power. As a result, a 10% change in the market price of purchased power would have no effect on unrealized positions reported as a regulatory asset or liability. For derivatives related to natural gas price hedges, a 10% change in the market price of energy would affect unrealized positions reported as a regulatory asset or liability by approximately $20 million.\n\nCoal Supply Agreements\n\nTEP is subject to fuel price risk from changes in the price of coal used to fuel its coal-fired generation facilities. Risk is mitigated by using long-term coal supply agreements with limited price movement. TEP's coal supply agreements expire in 2031. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations and Note 8 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for additional information.\n\nCredit Risk\n\nTEP is exposed to credit risk in energy-related marketing activities related to potential non-performance by counterparties. Risk of counterparty default is managed by performing financial credit reviews, setting limits, monitoring exposures, requiring\n\n39\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)\n\ncollateral when needed, and using standard agreements which allow for the netting of current period exposures to and from a single counterparty. Counterparty credit exposure is calculated by adding any outstanding receivable, net of amounts payable if a netting agreement exists, to the market value of any forward contracts. If exposure exceeds credit limits or contractual collateral thresholds, TEP may request that a counterparty provide credit enhancement in the form of cash collateral or an LOC.\n\nTEP enters into short-term and long-term transactions related to wholesale marketing and natural gas hedging activities with various counterparties. As of December 31, 2025, TEP's total credit exposure was approximately $30 million including approximately $2 million of exposure to non-investment grade counterparties.\n\nAs of December 31, 2025, TEP had no cash posted as collateral to provide credit enhancement and held less than $1 million collateral from wholesale counterparties.\n\nInterest Rate Risk\n\nCredit Agreement\n\nTEP is subject to interest rate risk resulting from changes in interest rates on borrowings under the 2021 Credit Agreement. Borrowings under the credit agreement are made at a rate based on either SOFR for the respective term plus an adjustment of 0.10% and an applicable margin, or ABR plus an applicable margin. TEP may experience significant volatility in variable interest rates paid on borrowings under its credit agreement.\n\nThe 2021 Credit Agreement provides for: (i) $250 million in revolving credit commitments; (ii) a $15 million swingline sublimit; and (iii) a $50 million LOC sublimit. The agreement matures in October 2028. As of December 31, 2025, TEP had no outstanding revolver borrowings and LOCs totaling $14 million under its credit facility.\n\n40\n\n[Table of Contents](#iaa4bfb93949147c689d89e1563a40f0a_7)"}