TEP categorizes financial instruments into the three-level hierarchy based on inputs used to determine the fair value. Level 1 inputs are unadjusted quoted prices for identical assets or liabilities in an active market. Level 2 inputs include quoted prices for similar assets or liabilities, quoted prices in non-active markets, and pricing models whose inputs are observable, directly or indirectly. Level 3 inputs are unobservable and supported by little or no market activity. TEP has no financial instruments categorized as Level 3.

The following tables present, by level within the fair value hierarchy, TEP’s assets and liabilities accounted for at fair value through net income on a recurring basis classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


	Level 1		Level 2		Total
(in millions)	March 31, 2025
Assets
Cash Equivalents (1)	$	85	$	—	$	85
Restricted Cash (1)	33		—		33
Energy Derivative Contracts, Regulatory Recovery (2)	—		45		45
Energy Derivative Contracts, No Regulatory Recovery (2)	—		23		23
Total Assets	118		68		186
Liabilities
Energy Derivative Contracts, Regulatory Recovery (2)	—		(47)		(47)
Energy Derivative Contracts, No Regulatory Recovery (2)	—		(1)		(1)
Total Liabilities	—		(48)		(48)
Total Assets (Liabilities), Net	$	118	$	20	$	138


(in millions)	December 31, 2024
Assets

Restricted Cash (1)	$	35	$	—	$	35
Energy Derivative Contracts, Regulatory Recovery (2)	—		33		33
Energy Derivative Contracts, No Regulatory Recovery (2)	—		4		4
Total Assets	35		37		72
Liabilities
Energy Derivative Contracts, Regulatory Recovery (2)	—		(31)		(31)
Energy Derivative Contracts, No Regulatory Recovery (2)	—		(1)		(1)

Total Liabilities	—		(32)		(32)
Total Assets (Liabilities), Net	$	35	$	5	$	40

(1)Cash Equivalents and Restricted Cash represent amounts held in money market funds, which approximate fair market value. Cash Equivalents are included in Cash and Cash Equivalents on the Condensed Consolidated Balance Sheets. Restricted Cash is included in Investments and Other Property and in Current Assets—Other on the Condensed Consolidated Balance Sheets.

(2)Energy Derivative Contracts include gas swap agreements and forward power purchase and sale contracts entered into to reduce exposure to energy price risk. These contracts are included in Derivative Instruments on the Condensed Consolidated Balance Sheets.

All energy derivative contracts are subject to legally enforceable master netting arrangements to mitigate credit risk. TEP presents derivatives on a gross basis in the balance sheet. The tables below present the potential offset of counterparty netting and cash collateral:


	Gross Amount Recognized in the Balance Sheets		Gross Amount Not Offset in the Balance Sheets				Net Amount
			Counterparty Netting of Energy Contracts		Cash Collateral Received/Posted
(in millions)	March 31, 2025
Derivative Assets
Energy Derivative Contracts	$	68	$	23	$	—	$	45
Derivative Liabilities
Energy Derivative Contracts	(48)		(23)		—		(25)


(in millions)	December 31, 2024
Derivative Assets
Energy Derivative Contracts	$	37	$	17	$	—	$	20
Derivative Liabilities
Energy Derivative Contracts	(32)		(17)		—		(15)

TEP enters into various derivative and non-derivative contracts to reduce exposure to energy price risk associated with its natural gas and purchased power requirements. The objectives for entering into such contracts include: (i) creating price stability; (ii) meeting load and reserve requirements; and (iii) reducing exposure to price volatility that may result from delayed recovery under the PPFAC mechanism. In addition, TEP enters into derivative and non-derivative contracts to optimize the system's generation resources by selling power in the wholesale market for the benefit of TEP's retail customers.

TEP primarily applies the market approach for recurring fair value measurements. When TEP has observable inputs for substantially the full term of the asset or liability or uses quoted prices in an inactive market, it categorizes the instrument in Level 2. TEP categorizes derivatives in Level 3 when an aggregate pricing service or published prices that represent a consensus reporting of multiple brokers is used.

For both purchased power and natural gas prices, TEP obtains quotes from brokers, major market participants, exchanges, or industry publications and relies on its own price experience from active transactions in the market. TEP primarily uses one set of quotations each for purchased power and natural gas and then validates those prices using other sources. TEP believes that the market information provided is reflective of market conditions as of the time and date indicated.

Published prices for energy derivative contracts may not be available due to the nature of contract delivery terms such as non-standard time blocks and non-standard delivery points. In these cases, TEP applies adjustments based on historical price curve relationships, transmission costs, and real power line losses.

The inputs and TEP's assessments of the significance of a particular input to the fair value measurements require judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. TEP evaluates the assumptions underlying its price curves monthly.

TEP enters into energy contracts that are considered derivatives and qualify for regulatory recovery. The realized gains and losses on these energy contracts are recovered through the PPFAC mechanism and the unrealized gains and losses are deferred as a regulatory asset or liability. The table below presents the unrealized gains and losses recorded to a regulatory asset or liability in the balance sheet:


	Three Months Ended March 31,
(in millions)	2025		2024
Unrealized Net Gain (Loss)	$	(3)	$	(14)

TEP enters into certain energy contracts that are considered derivatives but do not qualify for regulatory recovery. The Company records unrealized gains and losses for these contracts in the income statement unless a normal purchase or normal sale election is made. For contracts that meet the trading definition in the PPFAC plan of administration, TEP must share 10% of any realized gains with retail customers through the PPFAC mechanism. The table below presents amounts recorded in Operating Revenues on the Condensed Consolidated Statements of Income:


	Three Months Ended March 31,
(in millions)	2025		2024
Operating Revenues	$	21	$	27

As of March 31, 2025, TEP had energy contracts that will settle on various expiration dates through 2029. The following table presents volumes associated with the energy contracts:


	March 31, 2025	December 31, 2024
Power Contracts GWh	5,747	1,634
Gas Contracts BBtu	88,838	86,070

The use of contractual arrangements to manage the risks associated with changes in energy commodity prices creates credit risk exposure resulting from the possibility of non-performance by counterparties pursuant to the terms of their contractual obligations. TEP enters into contracts for the physical delivery of power and natural gas which contain remedies in the event of non-performance by the supply counterparties. In addition, volatile energy prices can create significant credit exposure from energy market receivables and subsequent measurements at fair value.

TEP has contractual agreements for energy procurement and hedging activities that contain provisions requiring TEP and its counterparties to post collateral under certain circumstances. These circumstances include: (i) exposures in excess of unsecured credit limits due to the volume of trading activity; (ii) changes in natural gas or power prices; (iii) credit rating downgrades; or (iv) unfavorable changes in parties' assessments of each other's credit strength. If such credit events were to occur, TEP, or its counterparties, could have to provide certain credit enhancements in the form of cash, LOCs, or other acceptable security to collateralize exposure beyond the allowed amounts.

TEP considers the effect of counterparty credit risk in determining the fair value of derivative instruments that are in a net asset position, after incorporating collateral posted by counterparties, and then allocates the credit risk adjustment to individual contracts. TEP also considers the impact of its credit risk on instruments that are in a net liability position, after considering the collateral posted, and then allocates the credit risk adjustment to individual contracts.

The fair value of all derivative instruments in net liability positions under contracts with credit risk-related contingent features, including contracts under the normal purchase normal sale exception, was $35 million as of March 31, 2025, compared with $30 million as of December 31, 2024. TEP had no cash posted as collateral to provide credit enhancement as of March 31, 2025, and December 31, 2024. TEP would have been required to post $35 million and $30 million of collateral if the credit risk contingent features had been triggered on March 31, 2025, and December 31, 2024, respectively. TEP had $13 million and $15 million in outstanding net payable balances for settled positions as of March 31, 2025, and December 31, 2024, respectively.

The fair value of a financial instrument is the market price to sell an asset or transfer a liability at the measurement date. Due to the short-term nature of borrowings under revolving credit facilities approximating fair value, they have been excluded from the table below.

The use of different estimation methods and/or market assumptions may yield different estimated fair value amounts. The following table includes the net carrying value and estimated fair value of TEP's long-term debt:


	Fair Value Hierarchy	Net Carrying Value				Fair Value
(in millions)		March 31, 2025		December 31, 2024		March 31, 2025		December 31, 2024
Liabilities
Long-Term Debt, including Current Maturities	Level 2	$	2,791	$	2,495	$	2,479	$	2,153