| COMMITMENTS AND CONTINGENCIES | COMMITMENTS AND CONTINGENCIES COMMITMENTS In addition to those reported in our 2015 Annual Report on Form 10-K, TEP entered into the following long-term commitments through September 30, 2016 : (in millions) 2016 2017 2018 2019 2020 Thereafter Total Fuel, Including Transportation $ 21 $ 26 $ 27 $ 27 $ 26 $ 26 $ 153 Transmission 2 4 4 4 4 3 21 Renewable Power Purchase Agreements 3 3 3 3 3 43 58 Total Purchase Commitments $ 26 $ 33 $ 34 $ 34 $ 33 $ 72 $ 232 TEP's transmission and fuel costs, including transportation, are recoverable from customers through the PPFAC mechanism. A portion of the cost of renewable energy is recoverable through the PPFAC, with the balance of costs recoverable through the RES tariff. See Note 2 for information on ACC approved cost recovery mechanisms. Fuel, Including Transportation TEP has long-term contracts for the purchase and delivery of coal with various expiration dates through 2031 . Amounts paid under these contracts depend on actual quantities purchased and delivered. Some of these contracts include price adjustment components that will affect the future cost. In January 2016, the existing coal supply agreement for San Juan terminated and a new Coal Supply Agreement (CSA) became effective. The new CSA is between San Juan Coal Company (SJCC) and Public Service Company of New Mexico (PNM) and continues through June 2022. TEP is not a party to the new CSA, but has minimum purchase obligations under restructured ownership agreements at San Juan. In April 2016, Peabody Energy Corp. (Peabody) filed for reorganization under Chapter 11 of the Bankruptcy Code. TEP has existing contracts with Peabody to supply coal from the El Segundo and Lee Ranch mines to Springerville and from the Kayenta mine to the Navajo Generating Station (Navajo). TEP has continued to receive its contracted coal as planned and has sufficient access to coal inventory for the near future. TEP cannot currently predict the outcome of this matter or the range of its potential impact on TEP's coal supply from Peabody. In September 2016, TEP extended the expiration date of one of its long-term pipeline transportation contracts from March 2017 to March 2022. Transmission TEP has agreements with other utilities to purchase transmission services over lines that are part of the Western Interconnection, a regional grid in the United States. These contracts expire in various years between 2017 and 2028 . In June 2016, TEP entered into a new firm point-to-point transmission service agreement. The service agreement has a start date of August 2016 and expires in July 2021. Renewable Power Purchase Agreements TEP enters into long-term renewable Power Purchase Agreements (PPA) which require TEP to purchase 100% of certain renewable energy generation facilities output once commercial operation status is achieved. In March 2016 , one of these facilities achieved commercial operation. The PPA expires in February 2036. While TEP is not required to make payments under the agreement if power is not delivered, estimated future payments are included in the table above. TEP's long-term renewable PPAs effectively transfer commodity price risk to TEP creating a variable interest. TEP has determined it is not a primary beneficiary as it lacks the power to direct the activities that most significantly impact the economic performance of the Variable Interest Entities (VIEs). TEP reconsiders whether it is a primary beneficiary of the VIEs on a quarterly basis. At September 30, 2016 , the carrying amount of assets and liabilities in our Condensed Consolidated Balance Sheets that relate to our variable interests under long-term PPAs are predominantly related to working capital accounts and generally represent the amounts owed by TEP for the deliveries associated with the current billing cycle. Our maximum exposure to loss is limited to the cost of replacing the power if the providers do not meet the production guarantee. However, our exposure is mitigated as we would likely recover these costs through cost recovery mechanisms. CONTINGENCIES Legal Matters TEP is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. TEP does not believe that such normal and routine litigation will have a material impact on its consolidated financial results. TEP is also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties, and other costs in substantial amounts and are described below. Claims Related to Springerville Generating Station Unit 1 In February 2016, TEP entered into an agreement with the Third-Party Owners for the settlement and release of asserted claims and the purchase and sale of beneficial interests in Springerville Unit 1 (Agreement). The Agreement provided that: (i) TEP would purchase the Third-Party Owners’ 50.5% undivided interest in Springerville Unit 1 for $85 million ; and (ii) the Third-Party Owners would pay TEP $12.5 million for operating costs related to Springerville Unit 1 incurred on behalf of the Third-Party Owners. In September 2016, TEP received FERC authorization to complete the transactions contemplated in the Agreement. In accordance with the Agreement, TEP purchased the undivided interest in Springerville Unit 1 for $85 million . The purchase increased TEP's total ownership interest to 100% . As also provided for in the Agreement, TEP received $12.5 million from the Third-Party Owners in full satisfaction of all previously unreimbursed operating costs, which TEP recorded in Operating Revenues – Other on the Condensed Consolidated Statements of Income. Following the purchase, all outstanding disputes, pending litigation, and arbitration proceedings between TEP and the Third-Party Owners were dismissed with prejudice. Claims Related to San Juan Generating Station WildEarth Guardians In February 2013, WildEarth Guardians (WEG) filed a Petition for Review in the U.S. District Court for the District 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 the 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 the OSM administrative actions in 2008. WEG alleges various National Environmental Policy Act (NEPA) violations against the OSM, including, but not limited to, the 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 the 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 the NEPA has been demonstrated, and enjoining operations at the seven mines. SJCC intervened in this matter. SJCC 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. On July 18, 2016, the federal defendants filed a motion asking that the matter be voluntarily remanded to the OSM so the OSM may prepare a new environmental impact statement (EIS) under the NEPA regarding the impacts of the San Juan Mine mining plan approval. On August 31, 2016, the court issued an order granting the federal defendants’ motion for remand to conduct further environmental analysis and complete an EIS by August 31, 2019. The order provided that, OSM’s decision approving the mining plan will remain in effect during this process. The order further provides that if the EIS is not completed by August 31, 2019, then an order vacating the approved mine plan will become immediately effective, absent further court order. TEP cannot currently predict the outcome of this matter or the range of its potential impact. Bureau of Land Management 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 be approximately $1 million . 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 predict the final outcome of the BLM’s proposed regulations. Claims Related to Four Corners Generating Station Endangered Species Act On April 20, 2016, several environmental groups filed a lawsuit in the U.S. District Court for the District of Arizona against the OSM and other federal agencies under the Endangered Species Act (ESA) alleging that the OSM’s reliance on the Biological Opinion and Incidental Take Statement prepared in connection with a federal environmental review were not in accordance with applicable law. The environmental review was undertaken as part of the U.S. Department of the Interior’s (DOI) review process necessary to allow for the effectiveness of lease amendments and related rights-of-way renewals for Four Corners. This review process also required separate environmental impact evaluations under the NEPA and culminated in the issuance of a Record of Decision justifying the agency action extending the life of Four Corners and the adjacent Navajo mine. In addition, the lawsuit alleges that these federal agencies violated both the ESA and the NEPA in providing the federal approvals necessary to extend operations at Four Corners and the Navajo mine past July 6, 2016. The lawsuit seeks various forms of relief, including a finding that the federal defendants violated the ESA and the NEPA by issuing the Record of Decision, setting aside and remanding the Biological Opinion and Record of Decision, and enjoining the federal defendants from authorizing any elements of the Four Corners and Navajo mine pending compliance with NEPA. In July 2016, the defendants answered the complaint and Arizona Public Service Company (APS), the operator of Four Corners, filed a motion to intervene in this matter. TEP cannot currently predict the outcome of this matter or the range of its potential impact. Navajo Generating Station Lease Amendment 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 in 2013 that would extend the lease from 2019 through 2044 . The participants in Navajo, including TEP, have not signed the lease amendment because certain participants have expressed an interest in discontinuing their participation in Navajo. Negotiations between the participants 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 DOI, and is subject to environmental reviews. Once the lease amendment becomes effective, the participants will be responsible for additional lease costs from the date the Navajo Nation signed the lease amendment. TEP owns 7.5% of Navajo. In the three and nine months ended September 30, 2016 , TEP recorded additional estimated lease expense of less than $1 million and $1 million , respectively, with the expectation that the lease amendment will become effective. TEP's Condensed Consolidated Balance Sheets reflect a total lease amendment liability recorded in Regulatory and Other Liabilities—Other of $4 million at September 30, 2016 and $3 million at December 31, 2015 . Mine Reclamation at Generating Stations Not Operated by TEP TEP pays ongoing reclamation mine costs related to coal mines that supply generating stations in which TEP has an ownership interest but does not operate. TEP is also liable for a portion of final mine reclamation costs upon closure of the mines servicing Navajo, San Juan, and Four Corners. TEP’s share of reclamation costs at all three mines is expected to be $42 million upon expiration of the coal supply agreements, which expire between 2019 and 2031 . TEP's Condensed Consolidated Balance Sheets reflect a total liability related to reclamation of $24 million at September 30, 2016 and $25 million at December 31, 2015 . Amounts recorded for final mine reclamation are subject to various assumptions, such as estimations of reclamation costs, the dates when final reclamation will occur, and the expected inflation rate. 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 mine reclamation costs, as a component of fuel costs, 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. Gila River Emissions Compliance In August 2016, Gila River Generating Station (Gila River) received a Notice of Violation from the Maricopa County Air Quality Department (MCAQD) stating the facility failed to monitor emissions during startup and to properly calibrate carbon monoxide monitors. TEP owns 75% of Gila River Unit 3. Gila River has already performed the necessary corrective actions to address the alleged violations. TEP will continue to work with the other participants at Gila River to address the notice. A response from Gila River to MCAQD was submitted in August 2016. TEP cannot currently predict the outcome of this matter or the range of potential loss or fines, if any. FERC Compliance In 2015, TEP self-reported to the FERC Office of Enforcement (OE) that TEP had not timely filed certain FERC-jurisdictional agreements. At that time, TEP conducted a comprehensive internal review of its compliance with the FERC filing requirements (Compliance Review), and made compliance filings with the FERC Office of Energy Market Regulation. This included the filing of several TSAs entered into between 2003 and 2015 that contained certain deviations from TEP’s standard form of service agreement. The results of the Compliance Review were reported to the OE, which is still reviewing the matter. The FERC could impose civil penalties on TEP as a result of the OE's review of the Compliance Review. In April 2016, the FERC issued an order relating to the late-filed TSAs, which directed TEP to issue time value refunds to the counterparties to these TSAs (FERC Refund Order). As a result, TEP accrued $13 million in March 2016 offsetting Wholesale Revenues on the Condensed Consolidated Statements of Income. As authorized in the FERC Refund Order, TEP reviewed its refund calculations including losses incurred as a result of the calculated refunds and determined the refund amount to be $3 million . TEP filed a refund report including the updated calculations with the FERC in July 2016. In October 2016, in response to TEP's filed refund report, the FERC issued an additional order (October 2016 FERC Order) which: (i) rejected the filed refund report; (ii) directed TEP to recalculate and pay additional time value refunds within 30 days; and (iii) file a revised refund report with the FERC within 30 days thereafter. TEP has the right to seek a rehearing of the October 2016 FERC Order within 30 days of issuance. As a result of the October 2016 FERC Refund Order and ongoing discussions with the OE, TEP accrued an additional $9 million in September 2016, which offsets Wholesale Revenues on the Condensed Consolidated Statements of Income. TEP paid time value refunds of $3 million in the first nine months of 2016 and an additional $14 million in October 2016. In June 2016, to preserve its rights, TEP petitioned the D.C. Circuit Court of Appeals to review the FERC Refund Order. In July 2016, TEP filed an unopposed motion to suspend the appeal, which the Court has since granted. As a result of the October 2016 FERC Order, TEP intends to pursue the appeal. At this time, TEP cannot predict the outcome of these matters or the range of possible recoveries or additional losses, if any. Performance Guarantees TEP has joint participation agreements with participants at Navajo, San Juan, Four Corners, and with Luna Energy Facility (Luna). The participants in each of the generating stations, including TEP, have guaranteed certain performance obligations. Specifically, in the event of payment default, 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 participant. At September 30, 2016 , there have been no such payment defaults under any of the participation agreements. The Navajo participation agreement expires in 2019 , San Juan in 2022, Four Corners in 2041, and Luna in 2046. Environmental Matters TEP is subject to federal, state, and local laws and regulations regarding air and water quality, renewable portfolio standards, emissions performance standards, climate change, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species, and other environmental matters that have the potential to impact TEP's current and future operations. Environmental laws and regulations are subject to a range of interpretations, which may ultimately be resolved by the courts. Because these laws and regulations continue to evolve, TEP is unable to predict the impact of the changing laws and regulations on its operations and consolidated financial results. TEP expects to recover the cost of environmental compliance from its ratepayers. TEP believes it is in material compliance with all applicable environmental laws and regulations. |
