| COMMITMENTS, CONTINGENCIES, AND ENVIRONMENTAL MATTERS | COMMITMENTS, CONTINGENCIES, AND ENVIRONMENTAL MATTERS COMMITMENTS In addition to those reported in our 2014 Annual Report on Form 10-K, TEP entered into the following long-term commitments through June 30, 2015 : (in millions) 2015 2016 2017 2018 2019 Thereafter Total Fuel, Including Transportation $ 1 $ 2 $ 2 $ 2 $ 2 $ 46 $ 55 Purchased Power — 45 — — — — 45 Total Purchase Commitments $ 1 $ 47 $ 2 $ 2 $ 2 $ 46 $ 100 CONTINGENCIES Navajo Generating Station Lease Extension Navajo Generating Station (Navajo) is located on a site that is leased from the Navajo Nation with an initial lease term through 2019 . The Navajo Nation signed a lease amendment that would extend the lease from 2019 through 2044 . The participants in Navajo, including TEP, have not signed the lease amendment. Certain participants have expressed an interest in discontinuing their participation in Navajo. Negotiations are ongoing and all parties will likely agree to the terms. To become effective, this lease amendment must be signed by all of the participants, approved by the Department of the Interior, and is subject to environmental reviews. TEP owns 7.5% of Navajo. In the first six months of 2015 , TEP recorded additional estimated lease expense of less than $1 million with the expectation that the lease amendment will become effective. At June 30, 2015 , TEP's Condensed Consolidated Balance Sheets reflect a total liability related to the lease amendment of $3 million recorded in Deferred Credits and Other Liabilities—Other. Claims Related to Springerville Generating Station Unit 1 On November 7, 2014, the Springerville Unit 1 Third-Party Owners filed a complaint (FERC Action) against TEP with the FERC alleging that TEP had not agreed to wheel power and energy for the Third-Party Owners in the manner specified in the Springerville Unit 1 facility support agreement between TEP and the Third-Party Owners and for the cost specified by the Third-Party Owners. The Third-Party Owners requested an order from the FERC requiring such wheeling of the Third-Party Owners' energy from their Springerville Unit 1 interests beginning on January 1, 2015 to the Palo Verde switchyard and for the price specified by the Third-Party Owners. On December 3, 2014, TEP filed an answer to the FERC Action denying the allegations and requesting that the FERC dismiss the complaint. On February 19, 2015, the FERC issued an order denying the Third-Party Owners complaint. On March 23, 2015, the Third-Party Owners filed a request for rehearing in the FERC Action. On April 7, 2015, TEP filed an answer in response to the request for rehearing. The FERC has not yet ruled on the request for rehearing. On December 19, 2014, the Third-Party Owners filed a complaint against TEP in the Supreme Court of the State of New York, New York County (New York Action). In response to motions filed by TEP to dismiss various counts and compel arbitration of certain of the matters alleged, the Third-Party Owners have twice amended the complaint, dropping certain of the allegations and raising others in the New York Action and in the arbitration proceeding described below. As amended, the New York Action alleges, among other things, that TEP failed to properly operate, maintain, and make capital investments in Springerville Unit 1 during the term of the leases, that TEP has not agreed to wheel power and energy in the manner required as set forth in the FERC Action, that TEP has breached the lease transaction documents by refusing to pay certain of the Third-Party Owners’ claimed expenses and that TEP has breached an implied covenant of good faith and fair dealing. The amended complaint seeks $71 million in liquidated damages, direct and consequential damages in an amount to be determined at trial, and punitive damages. In the amended complaint, the Third-Party Owners agree to stay the claim that TEP has not agreed to wheel power and energy as required pending the outcome of the FERC Action. A TEP motion to dismiss the cause of action for breach of the implied covenant of good faith and fair dealing and to dismiss the punitive damages claims in the amended complaint is pending. In December 2014 and January 2015, Wilmington Trust Company, as Owner Trustees and Lessors under the leases of the Third-Party Owners, sent notices to TEP that alleged that TEP had defaulted under the Third-Party Owners’ leases. The notices demanded that TEP pay liquidated damages totaling approximately $71 million . In letters to Wilmington Trust Company, TEP denied the allegations in the notices. On April 20, 2015, TEP filed a demand for arbitration with the American Arbitration Association (AAA) seeking an award of the Third-Party Owners share of unreimbursed expense and capital expenditures for Springerville Unit 1. On June 4, 2015, the Third-Party Owners filed a separate demand for arbitration with the AAA alleging, among other things, that TEP has failed to properly operate, maintain and make capital investments in Springerville Unit 1 since the leases have expired. The Third-Party Owners' arbitration demand seeks declaratory judgments, damages in an amount to be determined by the arbitration panel and the Third-Party Owners’ fees and expenses. TEP and the Third-Party Owners have since agreed to consolidate their arbitration demands into one proceeding. The Third-Party Owners have moved to dismiss TEP's arbitration demand. As of June 30, 2015, TEP has billed the Third-Party Owners approximately $11 million for their pro-rata share of Springerville Unit 1 expenses and $1 million for their pro-rata share of capital expenditures, none of which had been paid as of July 30, 2015 . Under the Springerville Unit 1 facility support agreement, TEP is permitted to dispatch and use any of the Third-Party Owners’ unscheduled entitlement share(s) of power from Springerville Unit 1. TEP commenced such dispatch and use for TEP’s benefit in mid-June 2015. TEP cannot predict the outcome of the claims relating to Springerville Unit 1, and, due to the general and non-specific scope and nature of the claims, TEP cannot determine estimates of the range of loss, if any, at this time. TEP intends to vigorously defend itself against the claims asserted by the Third-Party Owners. Claims Related to San Juan Generating Station San Juan Coal Company (SJCC) operates an underground coal mine in an area where certain gas producers have oil and gas leases with the federal government, the State of New Mexico, and private parties. These gas producers allege that SJCC’s underground coal mine interferes with their operations, reducing the amount of natural gas they can recover. SJCC compensated certain gas producers for any remaining production from wells deemed close enough to the mine to warrant plugging and abandoning them. These settlements, however, do not resolve all potential claims by gas producers in the area. TEP owns 50% of Units 1 and 2 at San Juan, which represents approximately 20% of the total generation capacity at San Juan, and is responsible for its share of any settlements. TEP cannot estimate the impact of any future claims by these gas producers on the cost of coal at San Juan. In August 2013, the Bureau of Land Management (BLM) proposed regulations that, among other things, redefine the term “underground mine” to exclude high-wall mining operations and impose a higher surface mine coal royalty on high-wall mining. SJCC utilized high-wall mining techniques at its surface mines prior to beginning underground mining operations in January 2003. If the proposed regulations become effective, SJCC may be subject to additional royalties on coal delivered to San Juan between August 2000 and January 2003 totaling approximately $5 million of which TEP’s proportionate share would approximate $1 million . TEP cannot predict the final outcome of the BLM’s proposed regulations. In February 2013, WildEarth Guardians (WEG) filed a Petition for Review in the U.S. District Court of Colorado against the Office of Surface Mining (OSM) challenging federal administrative decisions affecting seven different mines in four states issued at various times from 2007 through 2012. In its petition, WEG challenges several unrelated mining plan modification approvals, which were each separately approved by OSM. Of the fifteen claims for relief in the WEG Petition, two concern SJCC’s San Juan mine. WEG’s allegations concerning the San Juan mine arise from OSM administrative actions in 2008. WEG alleges various National Environmental Policy Act (NEPA) violations against OSM, including, but not limited to, OSM’s alleged failure to provide requisite public notice and participation, alleged failure to analyze certain environmental impacts, and alleged reliance on outdated and insufficient documents. WEG’s petition seeks various forms of relief, including a finding that the federal defendants violated NEPA by approving the mine plans, voiding, reversing, and remanding the various mining modification approvals, enjoining the federal defendants from re-issuing the mining plan approvals for the mines until compliance with NEPA has been demonstrated, and enjoining operations at the seven mines. SJCC intervened in this matter. SJCC’s was granted its motion to sever its claims from the lawsuit and transfer venue to the U.S. District Court for the District of New Mexico, where this matter is now proceeding. The parties have agreed to stay the matter until August 21, 2015 to facilitate ongoing settlement negotiations. If WEG ultimately obtains the relief it has requested, such a ruling could require significant expenditures to reconfigure operations at the San Juan mine, impact the production of coal, and impact the economic viability of the San Juan mine and San Juan. TEP cannot currently predict the outcome of this matter or the range of its potential impact. Claims Related to Four Corners Generating Station In October 2011, EarthJustice, on behalf of several environmental organizations, filed a lawsuit in the U.S. District Court for the District of New Mexico against Arizona Public Service Company (APS) and the other Four Corners Generating Station (Four Corners) participants alleging violations of the Prevention of Significant Deterioration (PSD) provisions of the Clean Air Act at Four Corners. In January 2012, EarthJustice amended their complaint alleging violations of New Source Performance Standards resulting from equipment replacements at Four Corners. Among other things, the plaintiffs seek to have the court issue an order to cease operations at Four Corners until any required PSD permits are issued and order the payment of civil penalties, including a beneficial mitigation project. In April 2012, APS filed motions to dismiss with the court for all claims asserted by EarthJustice in the amended complaint. The parties exchanged settlement proposals in January and February 2015, and entered into a consent decree that was filed with the court. TEP owns 7% of Four Corners Units 4 and 5 and is liable for its share of any resulting liabilities. In June 2015, APS, the operator of Four Corners, announced a settlement with the Environmental Protection Agency (EPA) for outstanding environmental issues related to New Source Review provisions under the Clean Air Act. The settlement calls for environmental upgrades including Selective Catalytic Reduction (SCR) upgrades already planned for under the Regional Haze regulation (see Regional Haze Rules below), environmental mitigation projects, and civil penalties. TEP's share of the additional capital, excluding the SCR upgrades, is approximately $2 million over a three year period it will take to construct the upgrades. TEP’s share of the annual O&M expenses is approximately $1 million . In addition, TEP recorded less than $1 million for its share of the one-time charges for environmental mitigation projects and civil penalties. The settlement is subject to approval by the U.S. District Court of New Mexico. In May 2013, the New Mexico Taxation and Revenue Department (NMTRD) issued a notice of assessment for coal severance tax, penalties, and interest totaling $30 million to the coal supplier at Four Corners. In December 2013, the coal supplier and Four Corners’ operating agent filed a claim contesting the validity of the assessment on behalf of the participants in Four Corners, who will be liable for their share of any resulting liabilities. Based on its ownership of Four Corners, TEP recorded less than $1 million for its estimated share of the assessment. On June 30, 2015, the U.S. District Court of New Mexico ruled in favor of the Four Corners' participants noting that the statute is clear, and the tax exemption applies. NMTRD plans to appeal. TEP cannot predict the final outcome or timing of resolution of these claims. Mine Closure Reclamation at Generating Stations Not Operated by TEP TEP pays ongoing reclamation costs related to coal mines that supply generating stations in which TEP has an ownership interest but does not operate. TEP is liable for a portion of final reclamation costs upon closure of the mines servicing Navajo, San Juan, and Four Corners. Upon expiration of the coal supply agreements, which expire between 2017 and 2031 , TEP’s share of reclamation costs at all three mines is expected to be $37 million . The reclamation liability recorded was $23 million at June 30, 2015 and $22 million at December 31, 2014 . Amounts recorded for final reclamation are subject to various assumptions, such as estimations of reclamation costs, the dates when final reclamation will occur, and the credit-adjusted risk-free interest rate to be used to discount future liabilities. As these assumptions change, TEP will prospectively adjust the expense amounts for final reclamation over the remaining coal supply agreements’ terms. TEP does not believe that recognition of its final reclamation obligations will be material to TEP in any single year because recognition will occur over the remaining terms of its coal supply agreements. TEP’s PPFAC allows us to pass through final reclamation costs, as a component of fuel cost, to retail customers. Therefore, TEP classifies these costs as a regulatory asset by increasing the regulatory asset and the reclamation liability over the remaining life of the coal supply agreements and recovers the regulatory asset through the PPFAC as final mine reclamation costs are paid to the coal suppliers. Discontinued Transmission Project TEP and UNS Electric had initiated a project to jointly construct a 60 -mile transmission line from Tucson, Arizona to Nogales, Arizona in response to an order by the ACC to UNS Electric to improve the reliability of electric service in Nogales. At this time, TEP and UNS Electric will not proceed with the project based on the cost of the proposed 345 -kilovolt (kV) line, the difficulty in reaching agreement with the United States Forest Service on a path for the line, and concurrence by the ACC that recent transmission additions by TEP and UNS Electric support elimination of this project. TEP and UNS Electric plan to maintain the Certificate of Environmental Compatibility (CEC) previously granted by the ACC for this project in contemplation of using the route, or a portion thereof, to serve future customers and to address reliability needs. As part of the 2013 TEP Rate Order, TEP agreed to seek recovery of the project costs from the FERC before seeking rate recovery from the ACC. In 2012, TEP wrote off $5 million of the capitalized costs and recorded a regulatory asset of $5 million for the balance deemed probable of recovery in TEP's next FERC rate case. Performance Guarantees The participants in each of the remote generating stations in which TEP participates, including TEP, have guaranteed certain performance obligations of the other participants. Specifically, in the event of payment default of a participant, the non-defaulting participants have agreed to bear a proportionate share of expenses otherwise payable by the defaulting participant. In exchange, the non-defaulting participants are entitled to receive their proportionate share of the generating capacity of the defaulting participants. As of June 30, 2015 , there have been no such payment defaults under any of the remote generating station agreements. TEP's joint participation agreements for the San Juan, Navajo, Four Corners, and Luna Generating Stations expire in 2019 through 2046 . ENVIRONMENTAL MATTERS Environmental Regulation The EPA regulates the amount of sulfur dioxide (SO 2 ), nitrogen oxide (NOx), particulate matter, mercury, and other by-products produced by power plants. TEP may incur added costs to comply with future changes in federal and state environmental laws, regulations, and permit requirements at its power plants. Complying with these changes may reduce operating efficiency. TEP expects to recover the cost of environmental compliance from its ratepayers. Coal Combustion Residuals Regulation In April 2015, the EPA issued a final rule requiring all coal ash and other coal combustion residuals to be treated as a solid waste under Subtitle D of the Resource Conservation and Recovery Act while allowing for the continued recycling of coal ash. TEP is in the process of evaluating the final impacts of the rule on our coal-fired generation. TEP does not own or operate any impoundments. Under the rule, the Springerville ash landfill is classified as an existing landfill and is not subject to the lateral expansion requirements. However, TEP will incur additional costs for site preparation and monitoring at Springerville to be fully compliant with the rule. TEP’s share of the cost is not expected to exceed $2 million , the majority of which is expected to be capital expenditures. TEP is still evaluating the potential costs associated with the implementation of the Coal Combustion Residuals Regulation rule at Navajo, Four Corners, and San Juan. TEP's share of the costs is not expected to have a material impact on its results of operations, financial position, or cash flows. Hazardous Air Pollutant Requirements In February 2012, the EPA issued final rules for the control of mercury emissions and other hazardous air pollutants from power plants. Based on the EPA's final Mercury and Air Toxics Standards (MATS) rules, additional emission control equipment would have been required by April 2015. TEP, as operator of Springerville and Sundt Generating Stations, and the operator of Navajo received extensions until April 2016 to comply with the MATS rules. In June 2015, the U.S. Supreme Court reversed and remanded the D.C. Circuit Court of Appeals decision in Michigan v. EPA to uphold the MATS rules requiring power plants to control mercury and other emissions. The Supreme Court held that the EPA did not adequately consider “cost” before determining that MATS was “appropriate and necessary.” The D.C. Circuit Court of Appeals may remand the rules to the EPA or vacate the rules. At this time, the existing MATS rules remain in force and effect. TEP will proceed with its planned MATS compliance activity at each of our facilities. Additionally, Arizona has an Arizona-specific mercury rule in place that will become effective and applicable to our Arizona facilities in the event the Federal rule is struck down. Our compliance strategy ensures compliance with both the Federal and the State rule, as applicable. TEP's share of the estimated mercury emission control costs to comply with the MATS rules includes the following: (in millions) Navajo Springerville (1) Capital Expenditures $ 1 $ 5 Annual O&M Expenses 1 1 (1) Total capital expenditures and annual O&M expenses represent amounts for Springerville Units 1 and 2, with estimated costs split equally between the two units. In January 2015, TEP completed the purchase of 49.5% of Springerville Unit 1. With the completion of the purchase, the Third-Party Owners are responsible for 50.5% of environmental costs attributable to Springerville Unit 1. TEP will continue to be responsible for 100% of environmental costs attributable to Springerville Unit 2. TEP expects no additional capital expenditures or O&M expenses will be incurred to comply at Four Corners, Sundt, and San Juan. Although Sundt Generating Station (Sundt) is expected to be compliant, the MATS rules currently require installing additional monitoring equipment, at an estimated cost of less than $1 million , to continue to burn coal after the originally scheduled effective date. Regional Haze Rules The EPA's Regional Haze Rules require emission controls known as Best Available Retrofit Technology (BART) for certain industrial facilities emitting air pollutants that reduce visibility in national parks and wilderness areas. The rule calls for all states to establish goals and emission reduction strategies for improving visibility. States must submit these goals and strategies to the EPA for approval. Because Navajo and Four Corners are located on land leased from the Navajo Nation, they are not subject to state oversight; the EPA oversees regional haze planning for these power plants. In the western U.S., Regional Haze BART determinations have focused on controls for NOx, often resulting in a requirement to install SCR. Complying with the BART rule, and with other future environmental rules, may make it economically impractical to continue operating all or a portion of the Navajo, San Juan, and Four Corners power plants or for individual owners to continue to participate in these power plants. The BART provisions do not apply to Springerville Units 1 and 2 since they were constructed in the 1980s, after the time frame as designated by the rules. Other provisions of the Regional Haze Rules requiring further emission reductions are not likely to impact Springerville operations until after 2018. TEP cannot predict the ultimate outcome of these matters. TEP's estimated NOx emissions control costs involved in meeting these rules are: (in millions) Navajo San Juan Four Corners Sundt Capital Expenditures $ 28 $ 12 $ 44 $ 12 Annual O&M Expenses 1 1 2 5-6 Navajo In August 2014, the EPA published a final Federal Implementation Plan (FIP) wherein: one unit at Navajo will be shut down by 2020 ; SCR (or the equivalent) will be installed on the remaining two units by 2030 ; and conventional coal-fired generation will cease by December 2044. The final BART rule includes options that accommodate potential ownership changes at the plant. The plant has until December 2019 to notify the EPA which option will be implemented. In addition, the installation of SCR technology could increase particulates which may require that baghouses be installed. TEP owns 7.5% of Navajo. TEP's share of the capital cost of baghouses in addition to the SCR costs reflected in the table above is approximately $28 million with O&M on the baghouses expected to be less than $1 million per year. San Juan In October 2014, the EPA published a final rule approving a revised State Implementation Plan (SIP) covering BART requirements for San Juan, which includes the closure of Units 2 and 3 by December 2017 and the installation of Selective Non-Catalytic Reduction (SNCR) on Units 1 and 4 by February 2016. TEP owns 50% of Units 1 and 2 at San Juan. TEP expects its share of the cost to install SNCR technology on San Juan Unit 1 to be approximately $12 million . Additionally, the SIP approval references a New Source Review permit issued by the New Mexico Environment Department in November 2013 which, among other things, calls for balanced draft upgrades on San Juan Unit 1 to reduce particulate matter emissions. Public Service Company of New Mexico (PNM), the operator of San Juan, is currently installing SNCR. Balanced draft modifications to San Juan Unit 1were completed in June 2015. TEP’s share of the balanced draft upgrades was approximately $19 million . TEP's share of incremental annual operating costs for SNCR for San Juan Unit 1 is estimated at $1 million . Prior to the shutdown of any units at San Juan, PNM, the operator, must first obtain New Mexico Public Regulation Commission approval. At June 30, 2015 , the net book value of TEP's share in San Juan Unit 2, including construction work in progress, was $114 million . TEP submitted a depreciation study in its 2013 Rate Case which identified an excess of required generation depreciation reserves. As stipulated in the 2013 Rate Order, TEP will seek the ACC's authority to apply any excess generation depreciation reserves to the unrecovered book value of any early retirement of generation assets prior to seeking additional recovery. TEP expects the excess generation depreciation reserves to fully cover the costs associated with early retirement of San Juan Unit 2. Four Corners In December 2013, APS, on behalf of the co-owners of Four Corners, notified the EPA that they have chosen an alternative BART compliance strategy; as a result, APS closed Units 1, 2, and 3 in December 2013 and agreed to the installation of SCR on Units 4 and 5 by July 2018. TEP owns 7% of Four Corners Units 4 and 5. Sundt In June 2014, the EPA issued a final rule that would require TEP to either (i) install, by mid-2017, SNCR and dry sorbent injection if Sundt Unit 4 continues to use coal as a fuel source, or (ii) permanently eliminate coal as a fuel source as a better-than-BART alternative by the end of 2017. Under the rule, TEP is required to notify the EPA of its decision by March 2017. We expect to make a decision in 2016. At June 30, 2015 , the net book value of the Sundt coal handling facilities was $16 million . If the coal handling facilities are retired early, TEP will request ACC approval to recover all the remaining costs of the facilities. |
