TEP's Q3 Net Income Up, Revenues Dip Amid Heavy Capex Push

TL;DR

**TEP is betting big on green infrastructure, but watch the ACC's rate case decision – it's the real power play for future profits.**

AI Summary

Tucson Electric Power Company (TEP) reported a slight increase in net income for the three months ended September 30, 2025, reaching $144.387 million, up from $140.493 million in the prior year. However, operating revenues decreased to $544.515 million from $551.632 million in the same period. For the nine months ended September 30, 2025, net income was $260.480 million, a decrease from $262.108 million in 2024, while operating revenues also declined to $1,317.495 million from $1,433.934 million. The company saw a significant increase in capital expenditures, rising to $691.277 million for the nine months ended September 30, 2025, compared to $459.635 million in the prior year, driven by investments in utility plant, which increased to $9.784 billion from $9.200 billion. Long-term debt, net, also grew to $2.792 billion from $2.494 billion. Key strategic initiatives include the 2023 Integrated Resource Plan (IRP) aiming for net zero direct greenhouse gas emissions by 2050 and the 2025 Rate Case filed with the Arizona Corporation Commission (ACC) to establish a new formula rate plan.

Why It Matters

This filing reveals TEP's aggressive capital expenditure strategy, with a 50% increase in investments, primarily in utility plant and renewable energy projects like Roadrunner Reserve I and II. This signals a strong commitment to its 2023 IRP for net-zero emissions by 2050, which could position TEP favorably in a competitive energy market increasingly focused on sustainability. For investors, the rising long-term debt to fund these projects, alongside a pending 2025 Rate Case with the ACC, introduces regulatory and financial risk, but also potential for future regulated returns. Employees and customers will see the impact of these infrastructure upgrades on service reliability and potentially on future rates, depending on ACC decisions.

Risk Assessment

Risk Level: medium — The risk level is medium due to significant capital expenditures of $691.277 million for the nine months ended September 30, 2025, a substantial increase from $459.635 million in 2024, which is largely debt-financed, increasing long-term debt to $2.792 billion. This aggressive investment strategy, coupled with a pending 2025 Rate Case with the ACC, introduces regulatory uncertainty regarding cost recovery and future profitability, as the ACC's approval of a formula rate plan with acceptable terms is crucial.

Analyst Insight

Investors should monitor the outcome of TEP's 2025 Rate Case with the Arizona Corporation Commission closely, as it will dictate the company's ability to recover its substantial capital investments and earn a reasonable return. Consider TEP's long-term decarbonization strategy as a potential growth driver, but balance it against the increased debt load and regulatory risks associated with rate approvals.

Financial Highlights

revenue

$1.317B

operating Margin

26.05%

total Assets

$9.784B

total Debt

$2.792B

net Income

$260.480M

revenue Growth

-8.1%

Revenue Breakdown

Key Numbers

• $144.387M — Net Income (Q3 2025) (Increased from $140.493M in Q3 2024)
• $544.515M — Operating Revenues (Q3 2025) (Decreased from $551.632M in Q3 2024)
• $260.480M — Net Income (9M 2025) (Decreased from $262.108M in 9M 2024)
• $1.317B — Operating Revenues (9M 2025) (Decreased from $1.433B in 9M 2024)
• $691.277M — Capital Expenditures (9M 2025) (Increased from $459.635M in 9M 2024, a 50.4% rise)
• $9.784B — Total Utility Plant (Sept 30, 2025) (Increased from $9.200B at Dec 31, 2024)
• $2.792B — Long-Term Debt, Net (Sept 30, 2025) (Increased from $2.494B at Dec 31, 2024)
• 456,000 — Retail Customers (Number of customers served by TEP)
• 2050 — Net Zero Emissions Goal (Target year for TEP's aspirational goal for direct greenhouse gas emissions)
• 2025 — Rate Case Filing Year (Year TEP filed its general rate case with the ACC)

Key Players & Entities

• TUCSON ELECTRIC POWER CO (company) — Registrant
• Fortis Inc. (company) — Indirect parent company of UNS Energy Corporation
• UNS Energy Corporation (company) — Parent company of TEP
• Arizona Corporation Commission (regulator) — Regulatory body for TEP's rates and operations
• Roadrunner Reserve I (company) — Standalone battery energy storage system facility
• Roadrunner Reserve II (company) — Standalone battery energy storage system facility expected in service in 2026
• $144.387 million (dollar_amount) — Net income for three months ended September 30, 2025
• $544.515 million (dollar_amount) — Operating revenues for three months ended September 30, 2025
• $691.277 million (dollar_amount) — Capital expenditures for nine months ended September 30, 2025
• $2.792 billion (dollar_amount) — Long-term debt, net, as of September 30, 2025

FAQ

Risk Factors

• Rate Case Outcomes [high — regulatory]: The company's financial performance is significantly influenced by rate decisions from regulatory bodies like the Arizona Corporation Commission (ACC). The 2025 Rate Case filing is crucial for establishing a new formula rate plan, which could impact future revenue and profitability. Adverse decisions or delays could negatively affect financial results.
• Utility Plant Investments and Modernization [medium — operational]: TEP is undertaking substantial capital expenditures, with investments in utility plant increasing to $9.784 billion as of September 30, 2025. These investments are necessary for modernization and meeting environmental goals but also increase the company's asset base and potential for operational disruptions during upgrades.
• Increased Debt Levels [medium — financial]: Long-term debt, net, has grown to $2.792 billion from $2.494 billion at the end of 2024. This increase, likely to fund capital expenditures, raises financial leverage and increases interest expense, which was $91.013 million for the nine months ended September 30, 2025.
• Energy Transition and Emissions Goals [high — market]: The company's 2050 net-zero emissions goal requires significant strategic shifts and investments. Failure to adapt to evolving environmental regulations and customer preferences for cleaner energy could lead to stranded assets or reduced demand for traditional energy sources.
• Fuel and Purchased Power Volatility [medium — operational]: Fluctuations in fuel and purchased power costs can impact operating expenses. While total fuel and purchased power costs decreased by 13.7% for the nine months ended September 30, 2025, compared to the prior year ($393.950M vs $511.258M), these costs remain a significant variable expense.
• PPFAC Recovery Treatment [low — regulatory]: The 'Increase (Decrease) to Reflect PPFAC Recovery Treatment' line item shows volatility, with a decrease of $3.257 million in Q3 2025 compared to an increase of $26.114 million in Q3 2024. This indicates potential complexities and uncertainties in how certain costs are recovered through customer rates.

Industry Context

The electric utility sector is undergoing a significant transformation driven by decarbonization goals, technological advancements, and evolving customer expectations. Companies like TEP face increasing pressure to invest in renewable energy sources and modernize their infrastructure while managing the costs associated with the transition. The competitive landscape is characterized by regulatory oversight, the need for substantial capital investment, and the growing importance of grid reliability and resilience.

Regulatory Implications

TEP operates under the strict regulatory framework of the Arizona Corporation Commission (ACC). The outcome of the 2025 Rate Case filing is critical, as it will determine the company's ability to recover its investments and earn a fair return. Compliance with environmental regulations and achieving ambitious emissions reduction targets are also key regulatory challenges that require ongoing strategic planning and investment.

What Investors Should Do

1. Monitor the outcome of the 2025 Rate Case filing with the ACC.
2. Analyze the impact of increased capital expenditures on future cash flows and debt levels.
3. Evaluate TEP's progress towards its 2050 net-zero emissions goal.
4. Assess the volatility of fuel and purchased power costs.

Key Dates

• 2025-09-30: End of Third Quarter 2025 — Reporting period for the latest financial results, showing mixed performance with increased net income but decreased revenues for the quarter.
• 2025-09-30: Nine Months Ended — Period for year-to-date financial comparison, highlighting a decrease in net income and revenues but a significant increase in capital expenditures.
• 2025-01-01: Start of Fiscal Year 2025 — Beginning of the period for which year-to-date financial data is reported.
• 2025-01-01: 2025 Rate Case Filing — Filed with the Arizona Corporation Commission (ACC) to establish a new formula rate plan, crucial for future revenue and profitability.
• 2050-01-01: Net Zero Emissions Goal — Aspirational target for TEP to achieve net zero direct greenhouse gas emissions, driving long-term strategic investments and operational changes.
• 2024-12-31: End of Fiscal Year 2024 — Reference point for year-end balance sheet figures, such as total utility plant and long-term debt, for comparison with 2025 figures.

Glossary

PPFAC

Power Supply Adjustment Clause, a mechanism that allows utilities to recover or refund costs associated with fuel and purchased power. (The 'Increase (Decrease) to Reflect PPFAC Recovery Treatment' line item indicates fluctuations in how these costs are being accounted for and potentially recovered from customers.)

Allowance For Borrowed Funds Used During Construction (AFB)

Interest costs incurred on borrowed funds that are capitalized as part of the cost of constructing utility plant, rather than expensed immediately. (This is a non-cash adjustment that increases net income but is added back in cash flow from operations, reflecting the financing of construction projects.)

Allowance For Equity Funds Used During Construction (AFE)

A return on the equity component of funds used during construction, recognized as income, which is also capitalized as part of the cost of utility plant. (Similar to AFB, this is a non-cash income item that impacts net income and is adjusted in cash flow from operations.)

Integrated Resource Plan (IRP)

A long-term planning process used by utilities to forecast energy demand and supply, and to identify the most reliable, cost-effective, and environmentally responsible resources to meet those needs. (TEP's 2023 IRP outlines its strategy for achieving net zero emissions by 2050, guiding future investments and operational decisions.)

Formula Rate Plan

A regulatory mechanism that allows for automatic adjustments to rates based on a pre-defined formula, often linked to specific cost components and performance metrics, reducing the need for frequent traditional rate cases. (TEP's 2025 Rate Case filing aims to establish such a plan, which could lead to more predictable revenue streams.)

Utility Plant

The tangible assets owned and operated by a utility company to generate, transmit, and distribute electricity, including power generation facilities, transmission lines, and distribution networks. (TEP's utility plant has grown significantly, indicating substantial investment in infrastructure.)

Year-Over-Year Comparison

Compared to the prior year's nine-month period, TEP experienced a decline in both operating revenues (down 8.1% to $1.317B) and net income (down 0.6% to $260.480M). However, the company significantly ramped up capital expenditures by 50.4% to $691.277M, reflecting substantial investments in utility plant. Long-term debt also increased to $2.792B. New risks related to the 2025 Rate Case filing and continued execution of the 2023 IRP are now prominent.

Key Financial Figures

• $250 million — extended in October 2025, provides for $250 million of revolving credit commitments with sw
• $15 million — nts with swingline and LOC sublimits of $15 million and $50 million, respectively, and a ma
• $50 m — ne and LOC sublimits of $15 million and $50 million, respectively, and a maturity dat

Filing Documents

• tep-20250930.htm (10-Q) — 1154KB
• tepex31a09302025.htm (EX-31.A) — 11KB
• tepex31b09302025.htm (EX-31.B) — 11KB
• tepex3209302025.htm (EX-32) — 7KB
• 0000100122-25-000026.txt ( ) — 6332KB
• tep-20250930.xsd (EX-101.SCH) — 49KB
• tep-20250930_cal.xml (EX-101.CAL) — 79KB
• tep-20250930_def.xml (EX-101.DEF) — 214KB
• tep-20250930_lab.xml (EX-101.LAB) — 526KB
• tep-20250930_pre.xml (EX-101.PRE) — 359KB
• tep-20250930_htm.xml (XML) — 985KB

Financial Statements

Item 1. Financial Statements Condensed Consolidated Statements of Income 1 Condensed Consolidated Statements of Cash Flows 2 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Changes in Stockholder's Equity 5 Notes to Condensed Consolidated Financial Statements 6

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Critical Accounting Estimates 37 New Accounting Standards Issued and Not Yet Adopted 37

Quantitative and Qualitative Disclosures about Market Risk

Item 3. Quantitative and Qualitative Disclosures about Market Risk 37

Controls and Procedures

Item 4. Controls and Procedures 37 PART II

Legal Proceedings

Item 1. Legal Proceedings 38

Risk Factors

Item 1A. Risk Factors 38

Exhibits

Item 6. Exhibits 39

Signatures

Signatures 40 ii DEFINITIONS The abbreviations and acronyms used in this Quarterly Report on Form 10-Q are defined below: INDUSTRY ACRONYMS AND CERTAIN DEFINITIONS 2020 IRP TEP's 2020 Integrated Resource Plan which outlines TEP's plan to reduce its carbon emissions by 80% (compared to 2005) by 2035 2021 Credit Agreement The unsecured 2021 Credit Agreement, as amended in June 2023 and extended in October 2025, provides for $250 million of revolving credit commitments with swingline and LOC sublimits of $15 million and $50 million, respectively, and a maturity date of October 2028 2023 IRP TEP's 2023 Integrated Resource Plan which outlines TEP's aspirational goal to reach net zero direct greenhouse gas emissions by 2050 2023 Rate Order Order issued by the ACC resulting in a new rate structure for TEP, effective on September 1, 2023 2025 Rate Case TEP's June 2025 general rate case filed with the ACC based on a test year ended December 31, 2024 ACC Arizona Corporation Commission ADEQ Arizona Department of Environmental Quality ADJ SOFR Rate Spread Adjustment AFUDC Allowance for Funds Used During Construction ARAM Annual Rate Adjustment Mechanism ASC Accounting Standards Codification BESS Battery Energy Storage System CCR Coal Combustion Residuals CEM Customer Energy Management Customer Rates Rates designed to allow a regulated utility recovery of its costs of providing services and an opportunity to earn a reasonable return on its investment DG Distributed Generation DSM Demand Side Management ECA Environmental Compliance Adjustor EE Standards Energy Efficiency Standards EPA Environmental Protection Agency EPC Engineering, Procurement, and Construction FERC Federal Energy Regulatory Commission FIP Federal Implementation Plan GAAP Generally Accepted Accounting Principles in the United States of America GHG Greenhouse Gas IRA Inflation Reduction Act of 2022, signed into law on August 16, 2022 ITC Investment Tax Credit LFCR Lost Fi

FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS TUCSON ELECTRIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2025 2024 2025 2024 Operating Revenues $ 544,515 $ 551,632 $ 1,317,495 $ 1,433,934 Operating Expenses Fuel 103,862 92,063 250,153 257,165 Purchased Power 42,092 50,703 103,904 104,373 Transmission and Other PPFAC Recoverable Costs 19,231 18,904 43,730 52,371 Increase (Decrease) to Reflect PPFAC Recovery Treatment ( 3,257 ) 26,114 ( 3,837 ) 97,349 Total Fuel and Purchased Power 161,928 187,784 393,950 511,258 Operations and Maintenance 115,526 105,877 326,712 330,143 Depreciation 59,183 56,942 175,021 168,913 Amortization 7,793 7,346 23,195 22,855 Taxes Other Than Income Taxes 18,414 17,384 55,471 53,629 Total Operating Expenses 362,844 375,333 974,349 1,086,798 Operating Income 181,671 176,299 343,146 347,136 Other Income (Expense) Interest Expense ( 29,652 ) ( 27,189 ) ( 91,013 ) ( 75,442 ) Allowance For Borrowed Funds 4,219 2,221 13,117 5,974 Allowance For Equity Funds 9,417 6,276 30,368 16,935 Unrealized Gains (Losses) on Investments 1,367 1,867 3,075 2,857 Interest Income 1,062 3,544 4,722 5,615 Other, Net ( 1,187 ) ( 1,425 ) ( 2,811 ) ( 1,780 ) Total Other Income (Expense) ( 14,774 ) ( 14,706 ) ( 42,542 ) ( 45,841 ) Income Before Income Tax Expense 166,897 161,593 300,604 301,295 Income Tax Expense 22,510 21,100 40,124 39,187 Net Income $ 144,387 $ 140,493 $ 260,480 $ 262,108 The accompanying notes are an integral part of these financial statements. 1 TUCSON ELECTRIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Nine Months Ended September 30, 2025 2024 Cash Flows from Operating Activities Net Income $ 260,480 $ 262,108 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation Expense 175,021 168,913 Amortization Expense 23,19

View Full Filing

View this 10-Q filing on SEC EDGAR